Lawyers Gave Early Warning to Enron

Enron Corp. was aware of possible criminal liability for its trading ploys in the deregulated California energy market in late October 2000, more than a month earlier than previously disclosed, according to a newly obtained memo.

The document, written by outside lawyers for Enron, is far more specific than previously released memos about the kinds of state and federal laws Enron could have violated. Enron apparently continued to use some of the questionable practices for several weeks after receiving the legal advice.

The previously undisclosed Oct. 30, 2000, memo explored concerns that Enron’s trading strategies could result in charges including wire fraud, markets fraud and racketeering.

The eight-page memo warned that it was “imperative” that Enron understood what evidence existed concerning its California conduct as well as the intent of participants “and whether there were any redeeming purposes for the conduct in question.”

San Diego lawyer Michael Aguirre, who has filed two lawsuits against generators and traders seeking at least $41 billion, said the memo showed “that the company was fully advised” and that could make it harder for Enron to defend itself against potential litigation.

The revelations of how Enron and possibly others conducted themselves in the shadowy and lucrative world that was California’s power market during the depths of its energy crisis have intensified since May 6, when the Federal Energy Regulatory Commission released memos that discussed how Enron’s traders boosted profit in California.

California politicians have pointed to the memos as proof that Enron illegally manipulated the market, but experts said it was unclear to what degree the company’s actions violated federal law or market rules.

One memo, dated Dec. 6, 2000, discussed trading schemes that included bypassing in-state price caps by sending power outside the state and then reselling it back into the California market, creating congestion on transmission lines so the company could be paid to relieve it.

Another ploy involved submitting inflated schedules of power needs to the California Independent System Operator so that the company could reap payments when it suddenly was able to supply extra power.

The December memo also listed potential violations of market rules, and the outside lawyers who wrote it warned Enron that month that the practices might be deceptive or even illegal.

Enron lawyer Richard B. Sanders testified before a congressional panel May 15 that after he received that memo and warning in December, the practices were terminated. But the newly obtained Oct. 30 memo indicates that Enron was warned well before Dec. 6 and continued its trading practices.

The Oct. 30 memo cites specific legal cases that could be used against Enron but also notes that “if the company has profited solely because of its skill, by accident or the result of a regulatory scheme created by others, it is unlikely that these legal theories will be successful ultimately.”

The legal memo was written by Gary Fergus and Peter Meringolo, lawyers who at that time worked for Brobeck, Phleger & Harrison in San Francisco and were part of a legal team assembled by Enron to respond to investigations and lawsuits arising from its California trading activities.

Fergus also penned a memo in early 2001, which was recently released by federal regulators, that sought to explain and defend Enron’s California trading practices.

Enron spokeswoman Karen Denne said the Oct. 30 memo, which was turned over to federal and state investigators, was a broad discussion of legal issues and not a commentary on any specific trading practices.

“This was a legal analysis that the company requested in light of a number of inquiries,” Denne said. Fergus and Meringolo, who have left Brobeck Phleger, did not return calls for comment.

“What you have is a gang of people ganging up on California, and you have lawyers telling them that it is illegal,” said Aguirre, the San Diego lawyer.

Separately, other internal Enron electricity trading memos from 2000 showed that several California municipal utilities--including the Los Angeles Department of Water and Power--may have cooperated with Enron and profited financially from strategies dubbed by Enron traders as Fat Boy and Death Star, according to a state senator investigating manipulation of California’s electricity market.

Sen. Joe Dunn (D-Garden Grove) said he had obtained through subpoena Enron documents that showed that four municipal California utilities served as “counterparties” in Enron strategies that were made public in memos released May 6 by federal regulators.

Using the strategies, Enron exploited the price differences for moving electricity on different transmission lines and for electricity sold a day or mere hours in advance.

“From our review of the documents,” Dunn said, “I can’t help but conclude that the municipal utilities were knowing participants in some of the Enron strategies.”

A source who has read the memos but asked not to be identified said two of the utilities are the Los Angeles DWP and the Glendale Public Service Department.

The DWP denied any collusion with Enron, and a representative of the Glendale utility did not return a call seeking comment.

Dunn said the Enron memos referred to the involvement of the municipal utilities in a “profit-sharing agreement” and mentioned various ratios of splitting profit, such as 75% to 25%.

Dunn said the memos were written in the period from early to mid-2000.

According to the unnamed source, at least one memo mentions the DWP and Fat Boy, a strategy in which Enron took advantage of prices that were higher in California’s “real-time” market, when grid operators anxiously sought electricity to avoid disrupting power flow.

DWP spokeswoman Darlene Battle denied that the utility shared any profit with Enron. Battle said the DWP simply allowed the company to buy space on its transmission lines just as it would any other power seller.

Former DWP General Manager S. David Freeman, who now heads the California Power Authority, said the utility had no knowledge of Enron’s schemes and treated it as any other customer.

“The lines are open to anybody who wants to use them,” Freeman said. “The fact that they ran power over our lines and faked running over someone else’s lines, L.A. had no idea about that.”

Dunn, chairman of the select committee to investigate price manipulation of the wholesale energy market, was expected to release the memos Wednesday before a hearing in Sacramento that will examine the behavior of municipal utilities during the energy crisis.

Times staff writer Nancy Vogel in Sacramento contributed to this report.