Following international tendencies? The role of SPEs in a Hungarian corporate scandal

Written by:Dr. habil. Kecskés András PhD

Posted on:Apr 3,2018

1. Introduction

Special purpose legal entities, legal institutions created for a specific purpose, have pursued a flourishing career in articles of legal journals on corporate scandals. Especially the Enron scandal and the securitization of mortgage obligations, i.e. mortgage-backed securities (MBS) exerted a massive impact on investors, mainly on the victims of the said abuses, during the financial crisis of 2007-2009. The use of this legal institution stained by abuses gained followers in the United States and also in Western Europe, for instance the Italian Parmalat and the Dutch Royal Ahold, just to mention two examples. However, little has been said so far about the use of SPE on the Central European markets, in particular about the bad faith application of this instrument, which is a special form of corporate abuse. This study article aims to compare the SPE schemes applied by Enron with the SPE form applied in the Quaestor scandal in Hungary, the role Quaestor Financial Hruria Kft. played within the Quaestor group. First an overview of certain types and operational features of SPEs is provided and then the similarities between two series of abuse inducing a rumbling echo and regulatory changes are analyzed.

2. The objectives of establishing an SPE and its types

The use of a Special Purpose Entity (SPE) is basically tied to achieving two aims. The primary goal of founding an SPE is to establish a legally independent business entity or one which is independent for accounting purposes. The goal of legal independence can be to ensure an off-balance sheet status due to tax or regulatory considerations. An SPE can also be used to become bankruptcy remote¹ from the sponsor establishing it, ensuring that the separate legal entity insulated from the risks (mainly the risks of bankruptcy and liquidation) of the founding (sponsor) corporation can issue higher rated securities in the form of the newly established business entity.

Business objectives can include performing business activities separately in the course of purchasing property or rights, for example in the case of establishing joint ventures or synthetic leasing companies or by securitizing existing vehicles or off-balance sheet refinancing². In this way the sponsor company can show a more favorable financial status to the outside world in its tax and accounting statements, thus creating about itself an investor sentiment steadily more favorable than its status is in reality.

SPEs are further used for exploiting the differences in national tax regulations. This latter arbitrage activity can also be tax arbitrage³, for example when royalty and license fees are channeled into a separate company which is later registered in a country with more favorable taxation from where such amounts are channeled to the parent company as export revenue.⁴

Real estate transactions effected in the form of separate real estate companies (SPEs) are made attractive by the differences in the taxation on real estates in the case of private individuals and enterprises and also by the more favorable cost accounting possibilities to enterprises.

The compulsory use of a separate entity engaging exclusively in concession activities can be typical at the level of national economy in the case of concession activities too.

However, in the case of these latter three examples, legal and business separation is not necessary and is not realized either, economic profit is realized in the form of a subsidiary under the full scope legal and business control exercised by the owner company or private individual. In this case legal separation is realized in the form of an independent company, nevertheless, the owner retains full control.

The three typical forms, joint venture, synthetic leasing company and securitization, off-balance refinancing will be examined in terms of their legal separation and their separation from the establishing sponsor company supported by legal means, since the quality and the mere fact of compliance with the legal regulation shows the actual separation of the particular SPEs and, as we can see, compliance with these regulatory delimitations determine whether the more favorable tax and financial perceptions created by SPEs can be turned into reality.

2.1. Joint ventures as SPEs

In the case of joint ventures, the purpose of separation is to perform the new activity in the newly established company separately from the activities of the founding enterprises and also from the current market perception of those activities. In this case, the goal of establishing an SPE is to attain a level of exclusiveness, where what is important is the exclusiveness of the activity and the formal but not full separation of the activity from the owner enterprises. An enterprise performing a traditional activity with a declining growth potential and thus declining profitability will expediently establish an SPE for performing an activity with a huge growth potential together with a partner experienced in that activity. In this case the new company enjoys the capital strength of the traditional company but its activity with a declining market potential will not be perceived negatively in the market sentiment. For the appropriate operation, these advantages can be further enhanced by the well-structured constitutional document and internal by-laws of the joint venture SPE. These legal documents should define the appropriate rights to decision making (including the right to veto) of the partner operating in the new branch of industry and the flexible regulation of the appropriate cooperation of the owner partners ensuring the continuous operation of the SPE and allowing for the quick exit of the owner partner if needed.

2.2 Synthetic leasing as a form of SPE

In the case of an SPE established for synthetic leasing, the separation from the establishing company is important because of the differences in the regulation of the financial and operational leasing⁵. If these two types of leasing have a different financial effect on the results of the companies, this can yield a substantial difference in profits – due to the inappropriate choice between the two types or to a negative decision taken by the tax authority.

Operational leasing can be accounted for as an expense in the United States. In contrast, the leased item is included among the assets of the company and the lease payments as liabilities among the resources in the case of financial leasing. In the case of the former, due to the item qualifying as an own asset, the item is to be depreciated and the outstanding lease payments are to be booked as liabilities in the balance sheet of the company, which substantially increases the indebtedness indicators of the company, also increasing the cost of raising further outside funds. In contrast, in the case of financial leasing, the market price or the value of the item calculated on the basis of the lease payments appears neither among the assets of the company, nor among its liabilities. In order for the company to achieve the classification of an operational leasing producing a more favorable financial situation instead of a financial leasing by involving an SPE established by it, the company must avoid any of the four features based on the GAAP⁶ principles. These accounting principles are as follows according to Statement No. 13 FASB⁷ (Statement of Financial Accounting Standards – SFAS 13):⁸ 1) title to the leased item can pass to the lessee at the end of the lease term, 2) the lessee has an option to purchase the real estate for substantially less than the expected fair market value of the asset, 3) the lease term is equal to or exceeds 75% of the economic life of the asset, 4) the present value at the beginning of the lease term of the minimum lease payments reaches 90 % of the market price of the asset. These accounting principles perceptibly allude to the realization of a purchase, while the operational leasing is a long-term type of leasing not ending in a purchase.

However, all economic and financial advantages of an SPE transaction qualifying as an operational leasing for avoiding all four of the above principles can disappear if the SPE needs to be consolidated. This is why the FASB Statement determines the principles of consolidation; if any one of the following principles is realized, the leasing transaction of the company can be consolidated in the case of real property.⁹ According to it 1) lessee residual value guarantees and participations in both risks and rewards associated with ownership of the leased property, 2) the contract contains purchase options, 3) the lessor SPE is not engaged in real economic activities, 4) the property is constructed to lessee’s specifications, 5) lease payments have been adjusted for final construction costs. Consolidation is also needed if 1) all the assets of an SPE exclusively serve a single lessee’s leasing transactions, 2) the expected residual risks and rewards are exclusively linked to the lessee, 3) the creator of the SPE has not made any capital investment which is at risk during the entire term of the lease. This latter condition raises the extremely sensitive issue of the minimum amount of capital investment. Under the GAAP regulation, it must be at least 3 % of the SPE’s resources, but obviously it may be higher depending on real needs, although it has typically remained under 10 % of all the assets of an SPE.¹⁰

It can be seen from the above that in the case of a synthetic leasing the separation from the sponsor company is of outstanding importance in respect of the economic activity (the connection with the lessee cannot be exclusive), the risk bearing (in the case of the end of the lease agreement and a capital investment bearing risk) and the exercise of certain management rights (the real property was constructed to the lessee’s specifications). Special emphasis should be placed on the fact that a leasing transaction effected through the involvement of an SPE can be treated by the company in a different way in its tax and financial statements (balance sheet, income statement, cash-flow report). This can be possible since the tax authority and the system of accounting rules (GAAP) qualify leasing transactions on the basis of different criteria. It is more expedient to classify a leasing transaction as a financial leasing for the tax authority as the tax burden can be best reduced in this way, while in financial statements the operational leasing is undoubtedly the noticeably more favorable type. Thus the company can enjoy both the financial and the tax advantages on the basis of the possibility of the joint definition of both types.¹¹

2.3. The SPE aspects of securitization

In the course of securitization, the sponsor company purchases certain obligations in order to place them into or sell them to an SPE. A company possessing a credit institution license can sell or place its own obligations to an SPE. The SPE issues securities backed by the obligations which provide the cash collateral for the timely payment of obligations deriving from securities bearing various risks. Securities issued by the SPE are asset-backed securities (ABS). If the obligation is only mortgage, the SPE issues mortgage-based securities (MBS). If the portfolio of the SPE includes other obligations (auto loans, student loans, credit card receivables or trade receivables) besides mortgage credits, the SPE decides on issuing collateralized debt obligations (CDO). The particular securities issued by the SPE in this way may carry different risks. The issuing SPE can achieve this by placing assets with different risks behind securities with different risks. Thus there are senior, junior and mezzazine securities (mixed: containing debt and membership) and securities involving only membership. These securities carry higher and higher risks in the order of this listing since assets with smaller and smaller chances of repayment (carrying higher risks of non-payment) are placed behind the different types of security. This process is called division into tranches or slices.¹²

It should be noted that in the United States following the crisis of 2007-2009, this slicing induced a new regulatory solution to the problem of asset-backed commercial papers (ABCP) most saturated with SPE abuses – with good justification as this case lacked transparency towards investors the most. Since the adoption of the Dodd-Frank Act¹³, this has been the legal framework for all this. The provisions pertaining to SPEs of this otherwise quite stringent and comprehensive regulation can basically be approached from two directions. On the one hand, the financial institution originating the SPE or performing administrative tasks must obtain at least 5 % of the SPE obligations in the course of the issue of the commercial papers.¹⁴ On the other hand, the financial institution originating the SPE or performing administrative tasks must also obtain a share of the particular tranches of the portfolio¹⁵.

SPEs play a multifold role in the course of securitization. On the one hand, an SPE is applied if the originator of the SPE wants to have access to the present value of the obligations prior to their maturity. A reason for this can be the compulsion of liquidity, in other words to increase the amount of cash necessary to retain liquidity, however, the utilization of a favorable market situation and thus making capital available for investments in further obligations stand typically in the background of such a realization of obligations. In this way, the amounts of commission projected to the particular portfolios can be realized as profit in the case of each bought and sold portfolio when transferring further portfolios to the SPE. In this way, an effect of leverage is produced by the same credit institution source yielding multiple portfolio income. The amount of leverage corresponds to the number of times this capital can be negotiated by purchasing the obligation and placing it into an SPE. In the case of an SPE not created with the purpose of securitization, the creator is a sponsor, while in the course of securitization the creator is an originator, which well indicates the double role of the creator of an SPE. This legal distinguishing is even more important in the course of securitization, this is why in several cases the firstly created SPE transfers the obligations to another SPE to make their original owners as remote as possible. This fact is important for two reasons, on the one hand, to keep the obligations placed in the SPE intact from the bankruptcy or liquidation of the creator, on the other hand, to make them as remote as possible for the company so as not to be included in its financial statements. This latter reason is important again for two reasons, on the one hand it improves the company’s indebtedness indicators by not having to continuously finance the obligations from the financial market and for the very same reason it does not run the interest rate risk, in other words it will not suffer any surplus costs in the future due to negative changes in the interest rates since it has transferred such risks borne by the obligations to the owners of the securities issued by the SPE. On the other hand, for the creating company, which has transferred its obligations in this way, making provisions is not obligatory in respect of the obligations of debtors defaulting on or delaying payments.

In order for a new and unknown company, the obligations of which are secured by a third party which intends to be as remote from the obligations portfolio as possible, to be attractive for investors the opinion of an independent but reliable person is needed. This independent person is the legal institution of the credit insurer. The role of credit rating agencies is so complex that it should be treated in a separate study. This study covers only the aspects and criteria of rating and the documents necessary for that purpose.

2.3.1. The role of credit rating agencies in the course of securitization in respect of SPE independence

Credit rating agencies examine first of all the independence of the SPE in respect of the full delimitation of the assets of the SPE from the creating company in the case of bankruptcy and liquidation. This independence concerning the commencement of bankruptcy or liquidation proceedings is guaranteed by the person of the director who is independent of the company as without the consent of this member of the Board of Directors the SPE cannot lawfully decide on initiating the bankruptcy or liquidation proceedings. A further guarantee is the double nature of SPEs, which has already been referred to, according to which when the first SPE places obligations into a new, second SPE, the second SPE issues securities as collaterals for the obligations. Improved safety against the concealment of assets is provided for investors by the fact that the particular SPEs perform their activities as exclusive activities, which substantially diminishes the risk of bankruptcy and liquidation since the activities are restricted to securitizing obligations, thus late debt payments cannot be generated by any other activity.

The other essential aspect of the scrutiny by credit rating agencies is to examine the genuineness of the sale of the securities, in other words to check whether the obligations actually part from their transferor. This true sales certificate is issued by the legal advisor of the transaction.¹⁶ Such a certificate is issued on condition that the residual obligations and the securities issued by the SPE embodying the obligations purchased back cannot be possessed by the creator of the SPE. For issuing the appropriate rating, the credit rating agency also needs to be satisfied that a non-consolidation opinion is also issued by the legal advisor.

It is clearly perceivable from the above that material, contentual delimitation entrenched by legal tools is also of utmost importance in the case of SPEs created in the course of securitization. For if the obligations in the securities were involved in the process of bankruptcy or liquidation as the collateral for the obligations against the creating company or the issuing SPE in the case of the bankruptcy or liquidation of the creator of the SPE, then the collateral for the securities issued by the SPE would fully or partially cease to legally function as secured collateral.

In what follows, first the SPE characteristics of the Quaestor scandal and then those of the Enron scandal will be analyzed.

3. The role of SPEs in the Quaestor scandal¹⁷

The series of events becoming infamous as the broker scandals of 2015 in Hungary highlighted the fact that Quaestor Financial Hrurira and Quaestor Értékpapír Zrt. were SPEs similar to the SPEs in the American corporate scandals and played a role in creating it. This role is well delimitable in so far as the injured investors subscribed to the bonds from Quaestor Financial Hrurira as the issuer and not directly from Quaestor Pénzügyi Tanácsadó Zrt. as the parent company and the bonds were marketed by Quaestor Értékpapír Zrt. The special purpose entity nature of Quaestor Financial Hrurira is referred to in the prospectus of the bonds, which defines the enterprise as a business entity with a special purpose. The situation of Quaestor Értékpapír Zrt. is somewhat different from it since it dealt with marketing securities since 1993, in a broader sense with the issuing, marketing and agency activities of the group. Although its sphere of activities is less specific compared to that of Quaestor Financial Hrurira, and is not an operation exclusively projected to a single group of transactions, it constitutes a well delimitable unit. Its SPE character cannot be called into question as the international practice of the operation of special purposes entities offers a wide range in respect of broader and narrower aspects. The designation special purpose entity can justifiably and rightly be used from legal persons created for a single group of hedging transactions to companies established for managing long-term (even several-year-long) losing positions.

In our view, the prime characteristic of a special purpose entity is neither the fact whether the creators of the legal entity states the SPE nature of the undertaking, nor the fact whether it realizes a single, exclusive purpose within the activities of the group, but the fact that it realizes one well delimitable group of the strategic objectives of the parent company in the form of an operative undertaking separate in its legal entity.

The question as to whether there might be legal or ethical aversions to or criticisms of the application of SPEs is frequently raised in connection with the above SPE formation of the Quaestor group as well as in connection with the European (e.g. Parmalat) and American (e.g. Enron) corporate scandals and economic abuses. Concerning the said abuses, it is true that public opinion seems to show a distrust of SPEs in Western Europe and in the United States. Can the very same be said about the application of special purpose entities in Hungary too? This is a question posed by the case of the Quaestor group.

1) SPEs in respect of accounting independence¹⁸

As it has been analyzed in the foregoing, in the United States before 2007, the basis of the application of SPEs as companies with a separate legal personality was independence taken in an accounting sense. The American accounting principles (Generally Accepted Accounting Principles – GAAP) afforded a broad opportunity for not having to consolidate the financial reports of the SPE into the financial statement of the parent company. The companies of the dotcom sector basically relied on this opportunity before 2002, when they had their losses managed by subsidiaries; and also the companies owning the beneficiary positions of subprime loans constituting the basis of the crisis of 2007-2009, when they publicly offered the very same loans as obligations in the form of securities to investors.

In Hungary Act C of 2000 on Accounting defines the concepts related to consolidation and provides for the cases in which the financial reports of undertakings are not to be consolidated.

It can clearly be seen from the prospectus of Quaestor Financial Hrurira issued in 2015 that this undertaking was a subsidiary owned by Quaestor Pénzügyi Tanácsadó Zrt. in 100 %, while Quaestor Értékpapír Zrt. was a subsidiary owned by Quaestor Pénzügyi Tanácsadó Zrt. in 85,79 % and at the same time were both undertakings involved in the consolidation of the parent company. Accordingly, the chance of applying SPEs induced exclusively by the motive for accounting independence can clearly be excluded.

2) SPEs in respect of prospectus liability¹⁹

It is clearly seen in respect of the Quaestor issuance that besides accounting independence, the application of an SPE may have liability aspects entailed by the separate legal personality of the SPE as an independent issuer.

Section 29 (1) of Act CXX of 2001 on the Capital Market (hereinafter CMA) provides for the issue of prospectus liability in line with Directive 2003/71/EC amending Directive 2001/34/EC. Under this provision, the issuer, the dealer in securities, the person providing guarantees²⁰ and the offeror or the person requesting admission of the securities for trading on a regulated market will be liable for the damage caused to the holder of the security by the misleading contents of the prospectus or by concealing information.

Under the provisions of the CMA, in the case of the Quaestor group, liability for the prospectus is borne by Quaestor Financial Hrurira Kft. as the issuer and Quaestor Értékpapír Zrt. as the dealer. The prospectus meets these formal requirements as the declaration of liability clearly specifies the person of the issuer and the dealer. However, it is of importance that while in Hungary prospectus liability is not joint and several but is subject to the agreement of the participants under the CMA, in respect of the issuance of the Quaestor bonds Quaestor Financial Hrurira Kft. and Quaestor Értékpapír Zrt. as issuer and dealer assumed joint and several liability. The agreement – considering that the two legal entities can be jointly and severally obliged – does not violate the interests of the investors. At the same time, Section 29 (1) of the CMA prescribes that somebody must assume liability for all the information contained (or for the lack of information) in the prospectus even in the case of a valid agreement.

By contrast, the parent company, Quaestor Pénzügyi Tanácsadó Zrt. avoided liability as it did not participate in the issuance either as an issuer or as a dealer, neither did it undertake surety (guarantee) for the rights inherent in the securities.

However, the question raised as to whether the fact that the data contained in the consolidated balance sheet of the parent company contradicted the data contained in the balance sheet submitted to Companies House and contained in the prospectus could be deemed only a technical fault or not. For while the annual balance sheet accounts of Quaestor Pénzügyi Tanácsadó Zrt. for 2013 contained HUF 10.397 billion equity and HUF 58.289 billion balance sheet total, the balance sheet data for 2013 (that is the same year) pertaining to the parent company in the prospectus of the HUF 70 billion bond issue of 2014-15 contained HUF 6.446 billion equity and HUF 102.711 billion balance sheet total, which difference may have been caused by the capital reserve since unfortunately the prospectus did not detail the capital structure in such a depth. This mistake gained special importance when there were changes in the ownership in 2015 as in this case it was clear that equity and within it capital reserve functioned as a kind of reserve in the course of restructuring the assets of the company.

Due to the movement of capital, the relationship between the SPE and the parent company noticeably changed as according to the minutes taken at the general meeting of Quaestor Pénzügyi Tanácsadó Zrt. held on March 16 2015, the consideration for the bonds issued by Quaestor Financial Hrurira Kft. was used for raising the capital of Quaestor Pénzügyi Tanácsadó Zrt. in the manner that out of the HUF 57.2 billion bond debt HUF 5.2 billion was used for subscribed capital increase and HUF 52 billion was placed into capital reserve in the balance sheet of Quaestor Pénzügyi Tanácsadó Zrt.²¹

What is even more conspicuous is the fact that at the level of consolidated balance sheet data the prospectus did not contain the amount of HUF 17 billion granted by MFB (Hungarian Development Bank) as loans between 2003 and 2008. In the case of a group with equity of HUF 10 billion, it certainly reached a substantial measure as the amount of the loan was nearly twice as much as the equity and almost four times more than the subscribed capital (HUF 4.5 billion). Thus it is quite understandable why the group refrained from assuming prospectus liability in the name of the whole group and why it created Quaestor Financial Hrurira Kft. established in 2007. However, in this case the interests of the investors were severely injured as in the case of an operating group, past data²² are the best indicators of future performance in respect of expected results and cash-flow, which might later be collaterals for an issue of securities.

3) The relations of Quaestor Financial Hrurira Kft. (SPE) and Quaestor Pénzügyi Tanácsadó Zrt. (parent company)

In respect of Quaestor Pénzügyi Tanácsadó Zrt. and the SPEs participating in Quaestor transactions it is continuously noticeable that the spheres of activity delimited and separated from each other are performed by separate legal entities. Both the nature of the transactions and the contents of the prospectuses (with special regard to prospectus liability) seem to verify that the delimitation of the SPEs as regards liability was not among the objectives of the group. The fact that the prospectus defines their liability as joint and several is indicative of it. At the same time, in respect of the parent company and the SPEs, the operative processes of the issue of securities were totally separated and liability was entirely borne by the undertakings participating in the issue and marketing of the papers.

Nevertheless, Quaestor Pénzügyi Tanácsadó Zrt. made the decisions concerning the assets deriving from the issuance and actually exclusively by using them for the benefit of other undertakings of the group. Although the nominal capital of Quaestor Financial Hrurira Kft. never exceeded HUF 10 million, its capital was never raised in proportion to the volume of the securities issued. The financial statements of the company showed that it was only slightly profitable between 2007 and 2014, thus its profit was not sufficient to cover the surplus risks originating from the increased volume of the issuance.

The situation was different in the case of Quaestor Értékpapír Zrt. marketing the securities as it had over HUF 1 billion issued capital²³. In this case there would have been no need for collateral for the whole volume of the issue, only for the exchange differences deriving from the marketed portfolio and the own-account transactions.²⁴

It is an economic contradiction that concerning the two companies, it is the issuer whose capital condition is markedly weaker, and this can lead to the conclusion that it was established with a view to avoid possible pecuniary liability.

Finally, it should be claimed that the capital history of neither company reflects the increasing historic volume of the issues, which is as follows, between 2001 and 2004 approximately HUF 10 billion, in 2007 HUF 50 billion and since 2013 HUF 70 billion.

It appears that our original question is answered by the Quaestor case, namely the application of special purpose entities cannot be free from legal and ethical concerns in Hungary either and they may become subjects of abuses in the current regulatory circumstances.

The role of SPEs in the Enron scandal²⁵

A special purpose entity – Most of the companies that became infamous in connection with the Enron case were so called special purpose entities (SPE). A special purpose entity is a legal entity created for a special purpose – for example to bear risk. The most important question that arose with regard to the sphere of activity of the Enron subsidiaries as special purpose entities was how they could operate independently of their parent company in respect of accounting. This was needed because Enron transferred substantial amounts of loss to these companies, through which these were not included in its own balance sheet. This was the key to Enron permanently, from time to time producing excellent financial indicators.

Concerning the use of SPEs, it should be mentioned that since the infamous scandals of the Enron case, the term special purpose entity has been used with an unpleasant taste in the mouth and with an increasing distrust in American business terminology. For there is a noticeable contradiction in the functioning of the SPEs playing a central role in the scenario of Enron frauds, which is highlighted also by David A. Westbrook in his study analyzing the consequences of and lessons to learn from the Enron case: SPEs are created for the particular, specific purposes of their creators, nonetheless, their independence in accounting issues is of outstanding importance.²⁶ As we will see later, this issue was decisive in some of the fraudulent transactions of Enron.

In many respects, the JEDI–Chewco case²⁷ may be perceived as a pattern among the fraudulent transactions of the Enron subsidiaries. Later the JEDI scheme served as a model for the creation and operation of several other subsidiaries used for face-lifting the financial indicators of Enron and concealing its losses.²⁸

The story of JEDI LP began in 1993, when Enron and California Public Employees’ Retirement System (CalPERS) established a limited partnership worth of USD 500 million under this name.²⁹

JEDI is an acronym standing for Joint Energy Development Investment. Enron, as a general partner and CalPERS, as a limited partner both contributed USD 250 million, the capital contribution on the side of Enron took the form of providing its own shares. JEDI was a special purpose entity, in other words a legal entity with a special purpose, like many other Enron subsidiaries.³⁰

Since JEDI was regarded independent to a sufficient extent –considering the relevant provisions of GAAP – its accounting was separate from that of Enron and the revenues and losses generated in the sphere of activity of JEDI did not have to be included in the quarterly balance sheet of Enron.³¹

Due to this, JEDI was the first so called “off the balance sheet” SPE, in other words a special purpose legal entity the financial indicators of which were separate from those of Enron, through which it was suitable for concealing the financial losses of Enron as its losses did not appear in the balance sheet of Enron.³²

The key to this accounting independence is to be found in the relevant provisions of GAAP. Under the Securities Act of 1933 and the Securities and Exchange Act of 1934, listed joint stock corporations have to make a declaration on their financial status in the form of quarterly reports. These quarterly statements must be made in line with the guidelines of GAAP. Under the provisions of GAAP, if a joint stock corporation – in our case Enron – has an interest in the operation of another legal entity – in our case in JEDI – and this other legal entity is sufficiently independent of the joint stock corporation having an interest in it, then its balance sheet does not have to be included in the quarterly report of the joint stock corporation.³³

JEDI, 50 % of which was under the ownership of CalPERS, satisfied these criteria. Although Enron was the general partner, it granted a greater space to CalPERS in directing JEDI by a bilateral agreement. Due to this, in the beginning Enron lawfully separated the financial indicators of JEDI from its own quarterly reports.³⁴

The operation and the financial independence of JEDI were suitable for becoming one of the schemes for frauds applied by Enron. The scenario was as follows – simplified to the extreme – Enron entered only the revenues but not the losses deriving from dealings with its subsidiaries into its books. Accordingly, Enron did not include the expenditures and losses of JEDI into its own balance sheet. However, the revenues originating from its interest in JEDI were entered into its books, thus improving the financial indicators of the company. With this method Enron could enter as receipt a substantial “fictitious” capital, which actually did not exist, still was capable of enhancing the investors’ trust. Everything ran smoothly in the next four years.

However, in 1997 the situation of JEDI LP dramatically changed. Enron wanted to create a new investment of USD 1 billion under the name JEDI II. Enron would have liked CalPERS to invest in JEDI II, but at the same time it knew that the financial situation of CalPERS would not allow CalPERS to remain an investor in JEDI as well. To this end, CalPERS first of all had to dispose of its holding in JEDI.³⁵

Thus a purchaser was need who would buy the holding of CalPERS. However, no external buyer turned up. This caused a problem because Enron could not buy out CalPERS as in this case JEDI – getting under the 100% ownership of Enron – would have lost its former independence under the provisions of GAAP and its losses would have been included also in the balance sheet of Enron. This was what Enron wanted to avoid by all means. In this case it would have lost 40 % of its revenues of 1997 and the extra expenditure of USD 711 million appearing in its balance sheet in this way would have markedly limited the dividends of shareholders: they would have received around USD 311 million less.³⁶

It was easy to predict the consequences: the trust of the investors would have been eroded, resulting in the mass sales of Enron shares. There would have been a substantial oversupply of the securities of the company causing their rate to plunge in flash crash.

Enron decided to create an investor which could buy out the holding of CalPERS in JEDI and at the same time to retain the semblance of independence.

For this purpose Enron created an SPE the independence of which was only pretense. Consequently, the independence of JEDI LP of Enron could only be pretense from 1997 too.³⁷

The new SPE was established under the name Chewco, with the single purpose of being the partner of Enron in JEDI. The gatekeepers of Enron, Vinson & Elkins as a law firm, Barclays Bank as the investment bank and Arthur Andersen as an accountant also actively participated in the series of fraud necessary to create Chewco.³⁸

Chewco was established in 1997. Being an SPE itself, it had to meet two conditions to avoid its accounting being consolidated with that of Enron. These conditions were the requirements of accounting independence. On the one hand, an independent owner partner was needed who would be fully separate in person from the sponsor, that is from Enron.³⁹

On the other hand, the independent partner had to effect a 3 % capital contribution. According to Securities and Exchange Commission (SEC) directions, this 3% contribution had to be a genuine 3 % risk taking, in other words no guarantees could be requested to secure it.⁴⁰

However, Chewco did not meet either of the requirements. The “independent” partners were partnerships and limited liability companies the activities of which were coordinated by one of the employees of Enron, Michael Kopper. Kopper and the ownership structure under his direction operated according to the directions of Andrew Fastow, the chief financial officer of Enron, for which they were generously rewarded.⁴¹

At its foundation – in November 1997 – Chewco did not have a capital contribution which had been effected by an independent partner. Its assets comprised bank loans, the repayment of which was guaranteed by Enron. Consequently, no actual risk was assumed by the independent partners.⁴²

Barclays investment bank granted a loan of USD 240 million to Chewco to enable it to buy out the holding of CalPERS in JEDI LP. However, the repayment of this loan was guaranteed by Enron.⁴³

Since Enron was aware of the fact that Chewco did not meet the requirements of accounting independence on the basis of the situation upon foundation, it several times attempted to restructure its assets. A substantial part of the assets of Chewco still originated from bank loans guaranteed by Enron. In addition, JEDI itself also lent money to Chewco, and the partners also effected further contributions. Barclays provided loans for paying these contributions, the repayment of which was again guaranteed by Enron. It is also remarkable that while Barclays granted a loan of USD 11.4 million for the contribution of the investors, it took back USD 6.58 million, as collateral for the repayment of the loan from JEDI in secret.⁴⁴

In conclusion it can be claimed that Chewco never possessed the required 3 % independent investment, actually Enron guaranteed the repayment of the loans serving as the basis of the investments, creating a situation as if they had been effected from its own money.⁴⁵

After all this, Chewco was nothing else than “Enron wearing a mustache.”⁴⁶

The JEDI–Chewco model later served as a model for the creation of several SPEs. These, as it has been mentioned, were used by Enron to over-evaluate its profits and conceal its expenditures in its quarterly reports. These rosy financial indicators made stock exchange analysts rate Enron shares to be worth buying.⁴⁷

The Enron–JEDI–Chewco triangle itself served as the framework of numerous fraudulent financial transactions. William Powers named several of them in the Powers Report, the following is a non-exhaustive list:⁴⁸

–
Both Enron and JEDI made amounts of money available to Chewco and personally to Kopper.

–
Chewco payed amounts of money to Enron, possibly in consideration of Enron guaranteeing the debts of Chewco to Barclays. Amounts received in this way were immediately marked as profits by Enron.

– JEDI effected payments as organizational fees to Enron.

–
An increase in the current price of Enron shares owned by JEDI was entered as revenue in the books of Enron.

JEDI–Chewco transactions came to an end in 2001, when Enron decided that the construction created in such a way no longer served its financial purposes. Accordingly, it bought out the holding of Chewco in JEDI – under quite preferential terms – what’s more, it paid the tax after the income of the investors deriving from this.⁴⁹

However, in October 2001 – due to the growing interest of the media and the Securities and Exchange Commission – the leadership of Enron dealt with the case of Chewco again. The transactions of Chewco were reviewed once more and it was established that Chewco actually did not have independent owners. Consequently, JEDI was not independent either, given that it had no other owners besides Enron and Chewco. For this reason Enron made its financial statements again with retroactive effect as from November 8 1997 but this time the financial indicators of JEDI–Chewco were also built in. According to the new statements, the revenue side got thinner by USD 1.048 billion, while expenditures grew by USD 2.585 billion. This greatly contributed to the fact that investors’ trust in Enron eroded and the stock price of the Enron shares collapsed. Within a month, Enron declared bankruptcy.⁵⁰

b) The collateral case of LJM1

The SPE called LJM Cayman LP⁵¹ was created in 1999. As regards its form, it was a limited partnership. As regards its function, it was established to secure the stock exchange investments of Enron. The assets of LJM1 consisted of Enron shares deriving from Enron itself thus its capital strength depended on the fluctuation of the current price of the Enron shares. It follows from this, the collateral acts entered into with them actually meant pretense collateral. Three major financial transactions are linked to LJM1. In what follows, only the most widely known hedging transaction, Rythms Netconnection⁵² is treated.⁵³

The antecedents of the case date back to March 1998, when Enron decided to buy 5.4 million Rythms shares. At that time Rythms Netconnection was a – formerly privately owned – limited liability internet provider company right about to enter into open trading on the stock exchange. Enron could acquire shares at USD 1.85 each. The acquisition cost almost USD 10 million. Enron could realize a huge price-earning on Rythms Netconnection block of shares on the first day: the shares purchased at USD 1.85 were worth USD 69 at the end of the day.⁵⁴

Nevertheless, for the time being Enron could not realize the price earnings made on the Rythms shares. Its reason was that it had formerly entered into an agreement with Rythms Netconnection, under which Enron was obliged to hold the shares until the end of 1999 and was allowed to sell them only afterwards. However, according to GAAP rules, such investments – a holding in another public limited company – could not be booked as profit in the balance sheet due to the uncertainty of the future price development of the shares concerned.⁵⁵

In addition, Enron assumed an obligation by forward contracts to buy Enron shares at a fixed price from an investment bank. The price of the Enron shares was well above the fixed price thus the dealing promised to be good. The only problem was, a stock company basically could not recognize profits through the price increase of its own shares.⁵⁶

On June 18 1999, a group of the executive officers of Enron, Andrew Fastow, Kenneth Lay and Jeffery Skilling decided to settle the two said problems simultaneously by the method well-known from the scenario of Enron frauds, by the help of an SPE. This SPE was LJM1, by the help of which Enron could realize the profit originating from the said forward contracts and at the same time could conduct a hedging transaction to secure the price fluctuation of the Rythms shares.⁵⁷

Enron provided LJM1 with the Enron shares involved in the forward contracts. The task of the newly formed LJM1, whose assets comprised mainly Enron shares, was to conclude a purchase option for the collateral of the profit originating from the increase in the price of the Rythms shares.⁵⁸

The terms of the purchase option concluded for the packet consisting of Rythms shares were favorable for Enron, as LJM1 assumed an obligation to by the Rythms shares at USD 56 each upon expiration of the deadline stipulated, regardless of their actual price on the stock exchange. Through this agreement Enron ensured a substantial part of the huge profit made on the Rythms transaction.⁵⁹

A closer examination reveals that this hedging transaction showed serious weaknesses. LJM1 was not well-capitalized enough to bear the risks deriving from the transaction. As the assets of LJM1 consisted of Enron shares, in the case of an incidental fall in their price it might not have had the necessary wealth to perform the assumed obligation. In the case of the price of Enron and Rythms shares both falling, Enron could have been at best partly hedged by this purchase option.

Neither could this option hedge further profits on the price of Rythms shares as it was concluded for a pre-determined fixed price. Enron and LJM1 concluded further hedging transactions with each other to cope with the situation, though with a modest success. Finally, in the first half of 2000, upon the expiry of the agreement entered into with Rythms Netconnection for holding the shares, Enron disposed of the Rythms shares, the price of which was decreasing.⁶⁰

After this, Enron did not need the hedging transactions any longer. In the course of their termination Andrew Fastow and other Enron employees obtained substantial profits through their interests.⁶¹

c) LJM2 and Raptor transactions

The SPE called LJM2 was established on 11 October 1999 upon the advice of Andrew Fastow. The act was based on the unanimous resolution of the board, by which it actually declared that Fastow’s participation in the operation of LJM2 did not jeopardize the interests of Enron.⁶²

The operation of LJM2 was based on the scheme we have already become familiar with – in the sphere of operation of JEDI and LJM1. The external investors of LJM2 were mainly economic organizations but the actual direction was in the hands of Fastow, who was aware of the internal affairs of Enron and LJM2. The two entities could manage more efficient business mechanisms through his direction than they could have if they had been entirely independent business partners.

The financial transactions tied to LJM2 – reprehensible in several cases from a legal point of view – are the so called “Raptor” transactions. “Raptor” enterprises mean legal entities which were created and operated by LJM2 for arranging these financial transactions. Knowing the fraudulent transactions of JEDI and LJM1, it is no surprise that three out of the four Raptors were established by a capital contribution comprising Enron shares.⁶³

Raptor I – The first such Raptor company was an enterprise established on 18 April 2000 under the name Talon. The two parties to the foundation were LJM2, which effected a USD 30 million cash contribution and Enron, which contributed to the foundation with USD 1,000 in cash and other obligations – mainly shares – worth USD 50 million. Talon was used by Enron for concluding hedging transactions – according to the scheme already described.⁶⁴

The problem was that Talon assumed the obligation to pay USD 41 million in cash to LJM2, which may have been the consequence of an oral agreement between Enron and LJM2. The problem was caused by the fact that – as we have seen at the foundation – Talon did not have such an amount in cash. So it had to get hold of money to be able to pay LJM2. In the end the cash was raised by selling a purchase option pertaining to Enron shares for USD 41 million to Enron. Thus, what actually happened was that Enron paid Talon to enable it to pay LJM2.⁶⁵

Raptor II and IV – Transactions which became known as Raptor II and IV – like the hedging transactions of Enron and Talon – were based on a total return swap. The essence of a total return swap is easy to understand, the parties promise to pay each other depending on the quoted value of an investment. Taking the Enron–Talon model as an example, such a collateral agreement looked like as follows: the total return swap concerned the shares under the ownership of Enron. If their price had increased, Enron would have had to pay cash to Talon, in the opposite case Talon would have been obliged to pay Enron. Transactions Raptor II and IV followed this procedure. Enron wanted to ensure the value of its investments.⁶⁶

However, these agreements were ungrounded in practice, taken into consideration the actual amounts of capital Raptors had. Enron arranged transactions Raptor I, II and IV with companies whose assets mainly consisted of Enron shares. In this case, the possibility of a simultaneous fall in the quoted value of investments had by Enron and the quoted value of the Enron shares had to be taken into account. In such a case, neither Talon, nor other Raptor companies would have had sufficient amount of assets to satisfy the well-grounded claim of Enron. Their liquidity decisively depended on the quoted value of Enron shares.⁶⁷

Raptor III – This transaction, as a hedging transaction was even shakier than the former ones were. Enron created Raptor III to cover the risks originating from the fluctuation of the quoted value of one of its major investments by a total return swap concluded with it. This investment was a substantial holding in The New Power Company (TNPC).⁶⁸

However, the assets of Raptor III mainly comprised TNPC shares, meaning that if the quoted value of TNPC shares declined, the value Raptor III assets inevitably declined too. This may have entailed the consequence that Raptor III could not perform its obligation under the total return swap either.⁶⁹

Good luck avoided Enron and in order to ground the liquidity of the Raptors unable to pay, it needed to create several almost “byzantine” financial structures lacking transparency in the hope of the Raptors’ economic situation changing for the better. However, this never happened.

4. Conclusion

In conclusion in can be claimed that the wide-spread use of SPEs made SPEs one of the acknowledged fundamental institutions of international company law. Nevertheless, the use of SPEs allows for a wide scope of possible interpretations both for its creators and those applying the law, including in particular tax authorities and authorities regulating accounting and financial reports.

Dr. habil. Kecskés András PhD
Associate professor
University of Pécs
Faculty of Law
Department of Business and Commercial Law

Bibliography

ABRAMS Charles: FASB’s Failure to Regulate Off-balance Sheet Special Purpose Entities and The Downfall of Securitization 12 Asper Rev. Int’l. Bus. Trade L. 39 2012 p.45.

ADRIAN Tobias: Dodd-Frank One Year On: Implications for Shadow Banking Federal Reserve Bank of New York Staff Reports, no. 533 2011 December pp.4-5.

AGUIRRE, Garry J., The Enron Decision: Closing the Fraud-free Zone on Errant Gatekeepers, Delaware Journal of Corporate Law (2003) Vol. 28. pp.453–459.

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FASB, Emerging Issues Task Force Issue 90-15 (1991)

FISCH, Jill E.: Rethinking the regulations of Securities Intermediaries, 158 U. Pa. L. Rev. 1961 2009-2010 p.1970.

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Footnotes

1. NEWMAN Neal: Enron And The Special Purpose Entities – Use or Abuse? – The Real Problem – The Real Focus 13 LAW & BUS. REV. AM. 97 2007 pp.98-112.

2. NEWMAN, Neal: Enron and the Special Purpose Entities Use or Abuse? – The Real Problem – The Real Focus 13 Law & Bus. Rev. Am. 97 2007 p 99.

3. In its original meaning arbitrage means taking advantage of the price discrepancies of financial products available on different markets by their simultaneous and thus risk-free buying and selling. In this way the investor immediately ensures the exchange rate difference of the two markets less the transaction cost as profit without the possibility of future changes in the exchange rate affecting this profit. In the course of regulation, the application of arbitrage includes the group of phenomena in which companies choose an activity or a venue for an activity with a more favorable regulation instead of one with a less favorable or more costly regulation.

4. ABRAMS Charles: FASB’s Failure to Regulate Off-balance Sheet Special Purpose Entities and The Downfall of Securitization 12 Asper Rev. Int’l. Bus. Trade L. 39 2012 p.45.

5. Operational leasing typically works on the basis of the features of a rental agreement. Its purpose is the long term rental of equipment or right. In the case of financial leasing, following the expiration of the lease agreement the lessee either purchases the leased item under its market value (closed-end lease) or he has the right of first refusal, in other words he has the option to purchase the leased item but the lessee can decide whether he wants to exercise this right or not (open-ended lease).

6. Generally Accepted Accounting Procedures – GAAP accounting principles accepted in the United States and also used internationally.

7. FASB (Financial Accounting Standards Board) is a professional body of for-profit and not-for-profit organizations which determines and renews the internationally accepted and used accounting principles of GAAP (Generally Accepted Accounting Rules).

8. NEWMAN, Neal: Enron and the Special Purpose Entities Use or Abuse? – The Real Problem – The Real Focus 13 Law & Bus. Rev. Am. 97 2007 p.102.

9. FASB, Emerging Issues Task Force Issue 90-15 (1991)

10. FASB, Emerging Issues Task Force Issue 90-15 (1991)

11. NEWMAN, Neal: Enron and the Special Purpose Entities Use or Abuse? – The Real Problem – The Real Focus 13 Law & Bus. Rev. Am. 97 2007 p.105.

12. In the course of division into slices or tranches, the particular securities issued by the SPE got a portion of the obligations in a prescribed order, in other words they were awarded a prescribed share of the interest and principal payment returns on the securities portfolio of the SPE. During this process the obligations were first grouped into classes through classifying debtors with like credit ratings into groups considered homogenous. Then such groups were divided into smaller slices, tranches to ensure the given issue of securities the desired predictable cash-flow satisfying pre-determined criteria. In practice, the issue of securities could be tailored to the needs of investors or issuers in this way.

13. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) came into effect on July 20 2010. The primary objective of the act was to avoid interventions financed by taxpayers. The Dodd-Frank Act introduced new agencies in order to systematically map risks and increase oversight of financial institutions. The Dodd-Frank Act also played an important role in extending shareholders’ rights, for example concerning the remuneration of executive officers. On this issue see KECSKÉS András – HALÁSZ Vendel: A siker díja vagy a bukás ára? A vállalati vezetôk javadalmazásának elmélete a pénzügyi válság tükrében. In: Jogtudományi Közlöny vol. LX 4 pp.180-191; KECSKÉS András: “Say on Pay” – Részvényesi szavazás a vállalati vezetôk javadalmazásáról az Egyesült Államokban. In: JURA vol. XXI 1 pp.59-64; KECSKÉS András – CSEH Balázs: Elsöpörte-e e az alpesi fôn a vállalati vezetôk javadalmazásának korábbi kereteit Svájcban? In: JURA vol. XXI 1 pp.224-235.

14. ADRIAN Tobias: Dodd-Frank One Year On: Implications for Shadow Banking Federal Reserve Bank of New York Staff Reports, no. 533 2011 December pp.4-5.

15. In the course of division into slices or tranches, the particular commercial securities got a prescribed share of the interest and principal payment returns on the loan portfolio of the SPE. During this process the loans were first grouped into classes through classifying debtors with like credit ratings into groups considered homogenous. Then such groups were divided into smaller slices, tranches to ensure the given issuance of commercial securities the desired predictable cash-flow satisfying pre-determined criteria. In practice, the issuance of commercial securities could be tailored to the needs of investors or issuers in this way.

16. DOLAN Patrick L.: Lender’s Guide to the Securitization of Commercial Mortgage Loans 115 L.J 597 1998 pp.602-603.

17. KECSKÉS András- BUJTÁR Zsolt: Merre tart a gazdasági jogi szabályozás a Quaestor-botrány után I. Gazdaság és Jog 2015 November pp.5-8.

18. KECSKÉS András- BUJTÁR Zsolt: Merre tart a gazdasági jogi szabályozás a Quaestor-botrány után I. Gazdaság és Jog 2015 November pp.5-8.

19. KECSKÉS András- BUJTÁR Zsolt: Merre tart a gazdasági jogi szabályozás a Quaestor-botrány után I. Gazdaság és Jog 2015 November pp.5-8.

20. The person undertaking surety (guarantee) for the rights embodied in the security.

21. Cf.: PEARCE II, John A. – LIPIN, Ilya A.: Special Purpose Vehicles in Bankruptcy Litigation, 40 Hofstra L. Rev. 177 2011-2012 pp.177-233.

22. See FISCH, Jill E.: Rethinking the regulations of Securities Intermediaries, 158 U. Pa. L. Rev. 1961 2009-2010 p.1970.

23. According to the prospectus of the bond issue of 2014-2015 by Quaestor Financial Hrurira, it was HUF 1.047.671.000.

24. Companies marketing securities may suffer losses when the market price of the securities owned by the company and held for trading purposes moves to the negative direction compared to their purchase value. In the case of own-account transactions, the company tries to continuously make profit by utilizing its equity but if the market moves towards the opposite direction, the company may suffer losses in this way too, especially in the case of derivative transactions.

25. KECSKÉS, András: Felelôs társaságirányítás HVG-ORAC Lap és Könyvkiadó Kft Budapest 2011 pp.53-62.

26. See WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal, (2003–2004) Vol. 92. pp.76–77.

27. See POWERS, William C. Jr.–TROUBH, Raymond S.–WINOKUR, Herbert S. Jr., Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp (2002) February 1. Source: http://fl1.findlaw.com/news.findlaw.com/wp/docs/enron/specinv020102rpt1.pdf. pp.41–66.

See also AGUIRRE, Garry J., The Enron Decision: Closing the Fraud-free Zone on Errant Gatekeepers, Delaware Journal of Corporate Law (2003) Vol. 28. pp.453–459.

28. See AGUIRRE, Garry J., The Enron Decision: Closing the Fraud-free Zone on Errant Gatekeepers, Delaware Journal of Corporate Law (2003) Vol. 28. pp.453–460.

29. See WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal (2003–2004) Vol. 92. p.73.

30. See AGUIRRE, Garry J., The Enron Decision: Closing the Fraud-free Zone on Errant Gatekeepers, Delaware Journal of Corporate Law (2003) Vol. 28. pp.453–460.

31. See WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal (2003–2004) Vol. 92. p.73.

32. See WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal (2003–2004) Vol. 92. p.73.

33. See WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal (2003–2004) Vol. 92. p.74.

See also AGUIRRE, Garry J., The Enron Decision: Closing the Fraud-free Zone on Errant Gatekeepers, Delaware Journal of Corporate Law (2003) Vol. 28. pp.454–455.

34. See WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal (2003–2004) Vol. 92. p.74.

35. See AGUIRRE, Garry J., The Enron Decision: Closing the Fraud-free Zone on Errant Gatekeepers, Delaware Journal of Corporate Law (2003) Vol. 28. p.454.

See also WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal (2003–2004) Vol. 92. pp.77–78.

36. See AGUIRRE, Garry J., The Enron Decision: Closing the Fraud-free Zone on Errant Gatekeepers, Delaware Journal of Corporate Law (2003) Vol. 28. p.454.

See also WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal (2003–2004) Vol. 92. p.75.

37. See POWERS, William C. Jr.–TROUBH, Raymond S.–WINOKUR, Herbert S. Jr., Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp (2002) February 1. Source: http://fl1.findlaw.com/news.findlaw.com/wp/docs/enron/specinv020102rpt1.pdf. pp.43–46.

See also AGUIRRE, Garry J., The Enron Decision: Closing the Fraud-free Zone on Errant Gatekeepers, Delaware Journal of Corporate Law (2003) Vol. 28. pp.454–455.

38. See POWERS, William C. Jr.–TROUBH, Raymond S.–WINOKUR, Herbert S. Jr., Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp (2002) February 1. Source: http://fl1.findlaw.com/news.findlaw.com/wp/docs/enron/specinv020102rpt1.pdf. pp.43–46.

See also AGUIRRE, Garry J., The Enron Decision: Closing the Fraud-free Zone on Errant Gatekeepers, Delaware Journal of Corporate Law (2003) Vol. 28. p.454.

39. See POWERS, William C. Jr.–TROUBH, Raymond S.–WINOKUR, Herbert S. Jr., Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp (2002) February 1. Source: http://fl1.findlaw.com/news.findlaw.com/wp/docs/enron/specinv020102rpt1.pdf. pp.47–54.

See also AGUIRRE, Garry J., The Enron Decision: Closing the Fraud-free Zone on Errant Gatekeepers, Delaware Journal of Corporate Law (2003) Vol. 28. pp.454–455.

See also WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal (2003–2004) Vol. 92. pp.76–78.

40. See POWERS, William C. Jr.–TROUBH, Raymond S.–WINOKUR, Herbert S. Jr., Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp (2002) February 1. Source: http://fl1.findlaw.com/news.findlaw.com/wp/docs/enron/specinv020102rpt1.pdf. pp.47–54.

See also AGUIRRE, Garry J., The Enron Decision: Closing the Fraud-free Zone on Errant Gatekeepers, Delaware Journal of Corporate Law (2003) Vol. 28. pp.454–455.

See also WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal (2003–2004) Vol. 92. p.77.

41. SeePOWERS, William C. Jr.–TROUBH, Raymond S.–WINOKUR, Herbert S. Jr., Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp (2002) February 1. Source: http://fl1.findlaw.com/news.findlaw.com/wp/docs/enron/specinv020102rpt1.pdf. pp.47–54.

See also AGUIRRE, Garry J., The Enron Decision: Closing the Fraud-free Zone on Errant Gatekeepers, Delaware Journal of Corporate Law (2003) Vol. 28. pp.454–455.

See also WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal (2003–2004) Vol. 92. pp.77–78.

42. See POWERS, William C. Jr.–TROUBH, Raymond S.–WINOKUR, Herbert S. Jr., Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp (2002) February 1. Source: http://fl1.findlaw.com/news.findlaw.com/wp/docs/enron/specinv020102rpt1.pdf. pp.47–54.

See also WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal (2003–2004) Vol. 92. pp.78.

43. See POWERS, William C. Jr.–TROUBH, Raymond S.–WINOKUR, Herbert S. Jr., Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp (2002) February 1. Source: http://fl1.findlaw.com/news.findlaw.com/wp/docs/enron/specinv020102rpt1.pdf. p.49.

44. See AGUIRRE, Garry J., The Enron Decision: Closing the Fraud-free Zone on Errant Gatekeepers, Delaware Journal of Corporate Law (2003) Vol. 28. p.455.

45. See POWERS, William C. Jr.–TROUBH, Raymond S.–WINOKUR, Herbert S. Jr., Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp (2002) February 1. Source: http://fl1.findlaw.com/news.findlaw.com/wp/docs/enron/specinv020102rpt1.pdf.pp. 47–54.

See also WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal (2003–2004) Vol. 92. p.78.

46. See AGUIRRE, Garry J., The Enron Decision: Closing the Fraud-free Zone on Errant Gatekeepers, Delaware Journal of Corporate Law (2003) Vol. 28. p.455.

47. See AGUIRRE, Garry J., The Enron Decision: Closing the Fraud-free Zone on Errant Gatekeepers, Delaware Journal of Corporate Law (2003) Vol. 28. pp.455–456.

48. See WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal (2003–2004) Vol. 92. p.78.

49. See also WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal (2003–2004) Vol. 92. p.78.

50. See AGUIRRE, Garry J., The Enron Decision: Closing the Fraud-free Zone on Errant Gatekeepers, Delaware Journal of Corporate Law (2003) Vol. 28. p.456.

51. See POWERS, William C. Jr.–TROUBH, Raymond S.–WINOKUR, Herbert S. Jr., Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp (2002) February 1. Source: http://fl1.findlaw.com/news.findlaw.com/wp/docs/enron/specinv020102rpt1.pdf. p.68.

52. See POWERS, William C. Jr.–TROUBH, Raymond S.–WINOKUR, Herbert S. Jr., Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp (2002) February 1. Source: http://fl1.findlaw.com/news.findlaw.com/wp/docs/enron/specinv020102rpt1.pdf. p.77.

53. See WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal (2003–2004) Vol. 92. p.79.

54. See WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal (2003–2004) Vol. 92. pp.79–81.

55. See POWERS, William C. Jr.–TROUBH, Raymond S.–WINOKUR, Herbert S. Jr., Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp (2002) February 1. Source: http://fl1.findlaw.com/news.findlaw.com/wp/docs/enron/specinv020102rpt1.pdf. pp.77–84.

See also WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal (2003–2004) Vol. 92. pp.79–81.

56. See WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal (2003–2004) Vol. 92. p.80.

57. see POWERS, William C. Jr.–TROUBH, Raymond S.–WINOKUR, Herbert S. Jr., Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp (2002) February 1. Source: http://fl1.findlaw.com/news.findlaw.com/wp/docs/enron/specinv020102rpt1.pdf. pp.77–84.

See also WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal (2003–2004) Vol. 92. pp.79–81.

58. See WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal (2003–2004) Vol. 92. pp.79–81.

59. See POWERS, William C. Jr.–TROUBH, Raymond S.–WINOKUR, Herbert S. Jr., Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp (2002) February 1. Source: http://fl1.findlaw.com/news.findlaw.com/wp/docs/enron/specinv020102rpt1.pdf. p.81.

See also WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal (2003–2004) Vol. 92. p.80.

60. See POWERS, William C. Jr.–TROUBH, Raymond S.–WINOKUR, Herbert S. Jr., Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp (2002) February 1. Source: http://fl1.findlaw.com/news.findlaw.com/wp/docs/enron/specinv020102rpt1.pdf. p.87.

See also WESTBROOK, David A., Corporation Law After Enron: Possibility of a Capitalist Reimagination, Georgetown Law Journal (2003–2004) Vol. 92. pp.80–81.

61. See POWERS, William C. Jr.–TROUBH, Raymond S.–WINOKUR, Herbert S. Jr., Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp (2002) February 1. Source: http://fl1.findlaw.com/news.findlaw.com/wp/docs/enron/specinv020102rpt1.pdf. pp.87–92.