Fraud, plain and simple
March 14, 2002
There is one point of law on which Jeffrey Skilling has tripped and it is doubtful he can ever recover his equilibrium.
Returning for a moment to the limited partnership, this is a business organization with two kinds of partners – a general partner, who has full and complete control of the partnership business and is personally liable for partnership obligations; and limited partners, who invest in the business but have no voice in the conduct of the business and no liability for partnership obligations.
What matters most is how the partners conduct themselves. A limited partner who acts like a general partner with regard to a particular transaction can be held personally liable for partnership obligations growing out of that transaction. (Martindale-Hubbell Law Directory, Uniform Limited Partnership Act, Volume VIII, Article 3, Page 161.)
In his testimony before a House Subcommittee early in February, and before a Senate Subcommittee last week, Skilling made it a great point to say that when the Enron board met to create one of the 4,000 limited partnerships (this one named LJM1) it was proposed to name Andrew Fastow as the general partner.
Fastow was then a senior finance officer of Enron, and someone pointed out that he could not occupy both positions without suffering a serious conflict of interest.
The board undertook to meet the problem by adopting a series of “controls.” The essence of these “controls” was that whenever Fastow had a proposal on the table as the general partner, his proposal would be subject to review (and or reversal) by certain named officers of Enron to determine that the proposal was in the best interest of Enron.
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The “controls” were treated with utmost seriousness. Skilling testified that they were raised and discussed “at almost every meeting of the board and the finance committee” and that they were “the most invasive controls” he had ever seen.
The net result was that everyone who did business with LJM1 was being deceived – deceived into believing that Fastow was a true general partner when he wasn’t, and deceived into believing that Enron was a true passive investor when it had Fastow on a short leash.
This was fraud, plain and simple, and every officer and director who participated in fostering it was guilty of a conspiracy to defraud, and this is punishable as a federal crime.
Three different people tried to alert Skilling to the problem (McMahon, Watkins and Mintz) but he wasn’t paying attention.
Skilling professed to rely upon opinions of the attorneys and the auditors for Enron that the “structure” was “appropriate.” We must now wait with bated breath to see if they back him up.