Today In Enron History

Today in 1999, Enron completed the final process of setting up LJM1. Fastow gave a presentation at a board meeting attended by Skilling, Dr. Lay, Rick Buy and David Duncan at Arthur Andersen. Fastow explained how he could hedge its Rhythms Net stock with a put option offered by LJM. It was, of course, later approved.

Also today, in 2002, three lovely men referred to here as the Natwest Three, were charged with one count of wire fraud.

Gary Mulgrew, Gilles Darby, and David John Birmingham were all employees of NatWest. They were accused of being involved in a series of financial transactions involving an investment in Enron. The pay off, the Task Force alleged, should have gone to NatWest and not to the men personally.

These three, like the Broadband Three, are great men who did nothing wrong. The legal case of the Natwest Three is fascinating to me because they were pursued under certain of the new terrorism laws that had been put into place after 9/11. They are three British subjects who worked for a British bank – IN BRITAIN – and ended up in a Texas courtroom.

Just another crazy incident in the Enron prosecutions, I guess.

NatWest Three: British Hotties

What is it about men from Britain? They are born with the ability to rock a suit. I’ve never seen any of these guys look anything less than spectacular.

They occasionally wears suits where the print is visible, like so:

Gary Mulgrew looks terrific in that overcoat. They all look terrific. David Bermingham is the Ken Rice of the Natwest Three. He just looks amazing in everything.

The Strange Silence In The Natwest Three Case

[Again, it was written over a year ago.]

During the ordinary course of my Enron googlings, I found this Guardian article about the NatWest Three, dated Monday, August 6, 2007. The NatWest Three – David Bermingham, Giles Darby and Gary Mulgrew – are all former NatWest bankers who have been accused of doing a dirty deal with Enron, and profiting from that deal. In 2006, they were extradited to the US to face trial for illegally profiting to the tune of $7.3M. As usual, no evidence exists to prove that the three did anything wrong at all. And as the Guardian story recounts, the NatWest Three had great difficulty in getting any witnesses to speak on their behalf because the prosecutors were using the exact same strategy against them as they were against Jeff Skilling and Ken Lay. They silenced witnesses with threats of arrest (or indictment). And exactly like in the case of Skilling and Lay, virtually no witnesses were willing to step up and face that kind of pressure to defend their friends and coworkers.

The only defendants who have had any luck in witnesses defying the prosecution are the Broadband executives. In that case, five former executives were fortunate enough to have witnesses come forward, despite being labeled unindicted co-conspirators, and despite repeated threats from prosecutors not to testify on behalf of the five Broadband defendants. Several other also risked themselves, their families and their very freedom to tell the truth about Enron Broadband Services.

But, oddly, that was the only Enron trial where such courage was commonplace.

Again, the obvious question presents itself: is this the best path to justice? Is this a valid way to determine if something untoward or illegal really occurred? Silencing witnesses doesn’t sound like the most noble way of acquiring a conviction. But where Enron is concerned, nothing about the DOJ is noble.

Today In Enron History

Today in 2002, the NatWest Three were charged with wire fraud in a transaction involving Enron. The three former employees of National Westminster Bank (Gary Mulgrew, Giles Darby and David Bermingham) were accused of secretly investing in an Enron special purpose entity, Southampton, and siphoning off $7.3 that belonged to National Westminster Bank. The criminal complaint, filed in Houston Texas, alleged that Mulgrew, Darby and Bermingham recommended that an interest in an Enron-related partnership held by Nat West should be sold for $1 million at a time when the defendants were scheming with Enron executives to purchase that interest for themselves for only $250,000, and then liquidating it only weeks later for over $7.3 million. The complaint alleges that the defendants: (i) knew the details of Nat West’s interest because they helped structure it; (ii) were aware that the investment had a minimal value of between $7 million and $9 million in February 2000; (iii) represented to Nat West that $1 million was a fair price; (iv) secretly negotiated their own purchase of Nat West’s interest while still employed at Nat West; (v) along with Enron executives, set up a series of offshore entities to carry out their scheme; and (vi) all the while, were employees of Nat West that had fiduciary duties to Nat West and were subject to its compliance policies.

This was, of course, nonsense.

The NatWest bankers became aware through news reports that the transaction – one of Fastow’s deals – was being investigated for fraud. They did the only conscionable thing to do, and alerted the UK authorities. The UK authorities contacted the SEC, and before even a single US investigator had talked with them, they were named in a criminal complaint.

(If you ever wonder if you should speak up when you believe yourself to have been an unwitting partner in something nefarious, that is your answer.)

Tom Kirkendall has a succinct summary of the transaction:

the case against the NatWest Three is fairly straightforward, at least as Enron-related criminal cases go. The Task Force alleges that the three defrauded their former employer by conspiring with Fastow and Kopper to underpay NatWest for its interest in an entity named Swap Sub, an affiliate of LJM1, the Fastow/Kopper-managed special purpose entity that was created in 1999 to hedge Enron’s valuable but highly volatile interest in a technology company called Rhythms.

Fastow arranged to have an entity called Southhampton that was owned by his family, Kopper and several other Fastow underlings at Enron (including Ben Glisan) buy NatWest’s interest in Swap Sub in March, 2000 for $1 million, which was substantially more than NatWest had that interest valued at the time. After NatWest sold out, Fastow sold a portion of the old NatWest interest in Swap Sub through Southhampton to the three bankers personally for $250,000. About a month and a half later, Fastow and Kopper arranged to have Enron and Swap Sub unwind the hedge on the Rhythms stock, which resulted in Enron purchasing a large chunk of Enron stock from Swap Sub. The NatWest Three’s net share of the Enron stock sales proceeds was $7.3 million.

In short, the Task Force alleges that the NatWest Three’s making $7.3 million on an investment of $250,000 a month and a half earlier violates the “too good to be true” rule. Presumably, Fastow and Kopper are prepared to testify that the NatWest Three knew that Fastow and Kopper had arranged with Enron to unwind the hedge on Rhythms stock with Swap Sub, knew that such unwinding would make Swap Sub worth much more than NatWest had it valued at the time, and that neither Fastow nor the NatWest Three disclosed the situation to NatWest before the bank sold its interest in Swap Sub to Southhampton for a measly $1 million.

For their part, Bermingham, Mulgrew and Darby contend that they knew nothing about Fastow and Kopper’s plan to unwind the Rhythms hedge with Enron, that the $1 million price that Southhampton paid for NatWest’s interest in Swap Sub was substantially more than it was worth at the time, that the $250,000 price they paid for an interest in Swap Sub was similarly reasonable given the risk of the investment, and that they were as pleasantly surprised as anyone on the big return on their investment when Enron and Swap Sub unwound the hedge a month and a half later (remember, all this took place before the bursting of the stock market bubble on tech stocks). Interestingly, despite the fact that all of the foregoing information has been well-known to NatWest for several years now, the bank did not pursue either a civil case or criminal prosecution of the NatWest Three in the UK.

By the way, colorful Houston-based criminal defense attorney Dan Cogdell, who successfully defended former Enron in-house accountant Sheila Kahanek in the Nigerian Barge case, is defending Bermingham. Cogdell’s involvement ratchets up the entertainment value of any case, so stay tuned.

Today the NatWest Three are serving their sentences in prison. Gary Mulgrew is projected to be released on 01-02-2011, Giles Darby on 01-09-2011, and David Bermingham on 01-11-2011. However, with a 15% reduction for good behavior, we can expect them out in the summer of 2010.

Calendar Of Release Dates For Enron Defendants

Michael Kopper, Managing Director Global Equity Markets Group, 01/01/2009

Kenneth D. Rice, CEO Enron Broadband Services, 02/03/2009

Kevin Hannon, COO Enron Broadband Services, 04/20/2009

Gary Mulgrew, Managing Director of Greenwich NatWest, 01/02/2011

Giles Darby, managing director and oil and gas specialist at Greenwich NatWest, 01/09/2011

David Bermingham, Finance Specialist at Greenwich NatWest, 01/11/2011

Andrew Fastow, CFO, Enron Corp., 02/17/2011

Richard Causey, CAO Enron Corp., 10/16/2011

Jeffrey K. Skilling, CEO Enron Corp., 02/21/2028

Gary Mulgrew of the NatWest Three Reports To Prison

Gary Mulgrew, one of the “NatWest 3,” the British former bankers who pleaded guilty in a U.S. court to a $20 million Enron Corp.-related fraud, became the first of the men to enter a federal prison.

Mulgrew, 46, entered the Federal Correctional Institution in Big Spring this afternoon, according to his lawyer, Reid Figel.

“He reported in accordance with the court order,” said Figel, a lawyer based in Washington, who declined to comment further. He said he went to the prison today with his client.

Last week, U.S. District Judge Ewing Werlein in Houston ordered co-defendant Giles Darby, 45, to surrender at the Allenwood federal prison in White Deer, Pa., on May 7, and David Bermingham, 45, to enter a federal prison facility in Lompoc, Calif., on May 9.

NatWest Three To Report To Prison

Bloomberg reports that Giles Darby, David Bermingham and Gary Mulgrew, three British former bankers who pleaded guilty in a “$20 million Enron Corp.-related fraud” – were each ordered to surrender to prison during the next three weeks.

Those quotation marks are mine. It is not true that it was “Enron related” fraud – if there was any fraud, then Enron was the victim of the fraud. The allegation is that the NatWest Three conspired with Andy Fastow to skim millions from a deal with Enron.

Background on the alleged fraud

The deal with Enron which is in question involves Swap Sub – the hedging structure that was originally in place to protect Enron against a decline in Rhythms Net stock. Enron had an option to force Swap Sub to buy Enron’s investment in Rhythms for a predetermined amount (I believe it was $41 per share) in the year 2004.

In March 2000, Enron terminated the hedging arrangement with Swap Sub. As the hedge was being unwound, Andy Fastow offered to buy NatWest’s share of the investment (NatWest, Credit Suisse and Andy Fastow’s LJM were the investors.) Fastow created Southampton in order to buy the interest. After the NatWest interest was bought out, Andy Fastow then sold the bankers a personal put option on NatWest’s interest. One of the bankers exercised his option and made a profit of about 7 million dollars, which he split with the others.

Tom Kirkendall has a lavish and expansive NatWest Three archive for more details if you want them. One particulaly good synopsis of the events in question can be found here.

If there was a crime in all this, it wasn’t evidenced from their eventual plea agreement: one count of wire fraud. They were then sentenced to 37 months in prison.

The men will serve their time in different federal prisons, according to orders signed yesterday by U.S. District Judge Ewing Werlein in Houston. Gary Mulgrew was ordered to surrender to the facility in Big Spring, Texas, on April 30*; Giles Darby to the Allenwood facility in White Deer, Pennsylvania, on May 7; and David Bermingham to the prison in Lompoc, California, on May 9.

This is just absurd.

*Mr. Mulgrew will be housed in the same prison as Michael Kopper, Andy Fastow’s assistant and one of the people with whom the NatWest Three did the original Swap Sub deal.