A secret Enron partnership that engineered the bogus sale of wind farms in California--and escaped detection for five years--now looks to be a critical piece of evidence in the expected prosecution of former Enron executives.
The partnership, called RADR, was the handiwork of former Enron finance executive Michael J. Kopper and his mentor, fired Enron Chief Financial Officer Andrew S. Fastow, according to court documents filed Wednesday.
Kopper pleaded guilty Wednesday to two felony counts related to his investments in and management of RADR and two other partnerships, Chewco and Southampton. Fastow has not been charged.
Enron Corp., the highflying energy trader that collapsed into bankruptcy in December, used a murky web of off-balance-sheet partnerships to hide debt and other liabilities so that its financial performance would continue to please Wall Street. Prosecutors said Kopper, Fastow and others enriched themselves from these partnerships at the expense of Enron, its employees and shareholders.
RADR's task was simple. In May 1997, Enron needed to sell some wind farms in California because it was buying a utility, Portland General Electric. Under California utility regulations, an alternative energy provider cannot be owned by a utility if it wants to qualify for special, higher energy payments.
But Enron did not want to lose control of the wind farms with the purchase of Portland General, the court documents show, so a putatively independent partnership was formed to buy them. Enron retained secret control through Fastow and Kopper, who were the primary investors in the partnership, according to the documents filed by the Justice Department and the Securities and Exchange Commission.
In addition, RADR, which stands for Risk Adjusted Discount Rate, was funded with a $16.4-million loan from an Enron subsidiary, not an outside lender as required by law to qualify as an independent partnership.
Fastow and Kopper also parceled out pieces of the RADR partnership to their relatives and friends. In the end, after Enron repurchased the wind assets in July 2000, RADR generated about $4.5 million in profit for the investors. Of that, $2.2 million went to Kopper and his domestic partner, William Dodson, the SEC said in its civil complaint against Kopper.
RADR also highlights the role of a group known in Houston as "The Friends of Enron." These were wealthy Houstonians tapped again and again by Fastow and Kopper to invest in these partnerships. RADR was an early venture.
Some members of the group invested in RADR, but they used money that was lent to them by Fastow through Kopper, the SEC complaint said. The money was repaid with later distributions from RADR.
"RADR never showed up in the financials or the subsidiary list or the bankruptcy filing. We're talking a step more stealthy than anything else," said Robert McCullough, a Portland, Ore., energy consultant who has closely followed the Enron saga.
McCullough said he suspects that many more schemes will come to light as the probe continues. For example, the complaints by the Justice Department and the SEC detail fraudulent gains for Kopper, Fastow and others from a partnership known as Southampton totaling $12.3 million, but no mention is made of 3.7 million Enron shares that the partnership held but were never recovered, he said.