“I’ve never commented much about my experience at Enron except to say, when I was there, it was a much more pipeline and asset-oriented company.” – Rich Kinder, former President of Enron and founder of Kinder Morgan
Mr. Kinder is referring to Enron’s adoption of an “asset-light” business strategy in the late 1990s. The implication is that Enron’s story might have ended differently. Could an asset-heavy Enron have survived the accounting fraud? Sure its stock would have plummeted, but the pipelines and oil fields would have continued to flow. In contrast, Enron’s new strategy was dependent on trading wholesale electricity and natural gas. Traders are particularly vulnerable to reputational injury. Even the suspicion of fraud can cause a trader’s counterparties to evaporate. Once trading stops, so does a firm’s cash flow. Such was the case for Enron in 2001.
A decade and a half later, where are Enron’s former assets?
- Domestic Pipelines. Kinder Morgan started its business by purchasing several pipelines from Enron for ~$40 MM. Even in the wake of its recent stock decline, Kinder Morgan has a market cap of ~$40 billion. Rich Kinder is now a billionaire many times over.
- Domestic Oil and Gas. Mark Papa was running Enron’s Oil and Gas unit when Enron sought to divest it. Papa orchestrated the spinoff, acquiring Enron’s stake for ~$600 MM. Today we know that company as EOG Resources – an abbreviation of its original name, Enron Oil and Gas. EOG’s market cap is ~$40 billion, and it’s widely recognized as an industry leader.
- International Projects. Even Enron’s international projects have achieved some success. Consider, for example, the Dolphin Project, a 2 BCF per day integrated natural gas development in the Persian Gulf. Enron’s 24.5% Dolphin stake was subsequently acquired by Occidental Petroleum. Those gas wells and pipelines now satisfy almost one-third of the United Arab Emirates’ energy requirements. Rebecca Mark (former CEO of Enron International) was responsible for the company’s international portfolio. When Enron shifted its focus to trading, Ms. Mark was shown the door. In hindsight, it was the best thing that could have happened to her. She sold her stock for ~$90 MM and was branded by Fortune as one of the “luckiest people in Houston.”
- Enron’s Traders. Enron’s traders also have done well for themselves. John Arnold founded Centaurus Advisors with his last bonus from Enron – ~$8 million. He retired from the hedge fund in 2012 and now has a personal net worth of $3 billion. Greg Whalley went on to found his own successful fund. Vince Kaminski, Enron’s chief quantitative modeler, teaches at Rice University’s Graduate School of Business and is the author of several books on risk management. Gary Hickerson – former Chairman of Enron’s Traders’ Roundtable – now trades exclusively for his own account.
- Enron’s Lawyers. Enron’s principal outside counsel was Vinson & Elkins, and many of its in-house lawyers were V&E alumni. The post-Enron years have been kind to V&E. It’s now the largest law firm in Houston (based on local lawyers), with average profits per partner approaching $2 MM – almost tripling what partners earned back in 2001.
- Jeff Skilling. The architect of Enron’s asset-light business plan currently resides at the Federal Prison Camp in Montgomery, Alabama, a minimum security facility where he shared time with Jesse Jackson, Jr. The best news for Mr. Skilling came as a result of Sri Srinivasan’s successful appeal of his convictions to the United States Supreme Court (Gaille Energy Blog Issue 18 Justice Scalia, Justice-in-Waiting Srinivasan, and Senator Cruz). Srinivasan succeeded in knocking a decade off Mr. Skilling’s 24-year sentence, and he is eligible for release next year. The price tag from Sri’s firm (O’Melveny & Myers) exceeded $20 million. That’s about $2 million per year of freedom.
- Andy Fastow. The former CFO of Enron has already completed his six-year prison sentence. Mr. Fastow occasionally speaks on business ethics, doing so as recently as last week. Here’s a quote from one of his talks: “There are people who look at the rules and find ways to structure around them. The more complex the rules, the more opportunity. The question I should have asked is not what is the rule, but what is the principle.”
- Ken Lay. Mr. Lay died from a heart attack on July 5, 2006. What most people don’t realize is that he died an innocent man. Following his death, Mr. Lay’s lawyers “moved to invoke a Fifth Circuit precedent that calls for the vacation of the conviction of any defendant who dies before having an opportunity to pursue an appeal. The doctrine is called abatement ab initio, or simply ‘abatement.’ Its effect is to stop all proceedings ab initio (from the beginning) and render the defendant as if he or she had never been charged” (Timothy A. Razel, Dying To Get Away With It, 75 Fordham L. Rev. 2193 (2007)). As the Fifth Circuit explained, when “death has deprived the accused of his right to our decision, the interests of justice ordinarily require that he not stand convicted.”
- Ken Lay’s Assets. Ken Lay made as much as $40 MM a year as Enron’s CEO, and sold at least $300 MM of Enron stock. Upon his criminal conviction, the United States expected to seize whatever was left of his wealth. However, his death and the abatement rule ended any chance of criminal forfeiture – effectively leaving Mr. Lay’s estate to his family. To this day, the Government continues to pursue the Lay assets under a theory of civil forfeiture (see the DOJ web page: “$13 million civil forfeiture action is pending against Lay’s estate seeking to recover property that constitutes proceeds of the fraud proven in the criminal case”).
While I never met Mr. Lay, I did work with his daughter at Vinson & Elkins in the late 1990s, and we even shared neighboring offices for a time. Although I was in V&E’s Energy Section, young lawyers were encouraged by the firm to take pro bono appeals to the Fifth Circuit. From 1998 to 2000, I handled a pro bono criminal appeal, eventually giving oral argument before a three-judge panel chaired by Judge Edith Jones. Not long after argument, my client died (prior to his appeal being decided). Although not as wealthy as Mr. Lay, my client also faced the prospect of criminal forfeiture. The Fifth Circuit requested briefing on the issue of what should happen to his assets. Like Mr. Lay’s attorneys, I argued that my client’s convictions should be abated ab initio. The court agreed, and my client’s family received his estate.
Pondering almost 15 years of litigation over the Lay fortune makes me recall Charles Dickens’ Bleak House. Its characters were trapped in unending litigation over an estate – Jarndyce and Jarndyce. His fictional case may have been modeled after Jennens v. Jennens. It commenced in 1798 and did not end until 1915, when the estate was rendered bankrupt by a century of legal fees. Bleak House has many great lines, including this one: “What connection can there have been between many people in the innumerable histories of this world, who, from opposite sides of great gulfs, have, nevertheless, been very curiously brought together!”
About the Gaille Energy Blog. The Gaille Energy Blog discusses proposals in the field of energy law, with a new issue being posted each Friday at http://www.gaillelaw.com. Scott Gaille is a Lecturer in Law at the University of Chicago Law School, an Adjunct Professor in Management at Rice University’s Graduate School of Business, and the author of two books on energy law (Shale Energy Development and International Energy Development).