Wall Street's Enron Gut Check

A group of Wall Street banks and brokerages got some bad news a few days ago when a federal judge ruled that the firms could be on the hook for billions of dollars in damages to Enron's shareholders.

But the ruling by U.S. District Judge Melinda Harmon also could prove embarrassing for dozens of Wall Street executives who are believed to have been investors in a partnership that played a key role in Enron's off balance sheet shenanigans.

Lawyers for Enron's shareholders intend to explore which Wall Street power brokers sank money into LJM2, the $390 million partnership that Enron used to remove billions of dollars in ailing assets from its balance sheet.

It's no secret that several Wall Street firms that did investment banking for Enron -- Merrill Lynch ( MER), Citigroup ( C), J.P. Morgan Chase ( JPM), Credit Suisse First Boston and CIBC -- were also investors in LJM2.

The identity of most of the Wall Street executives who individually invested in LJM2 has, however, been cloaked behind private funds and partnerships that are the actual named investors, or limited partners, in LJM2.

Asset Management

To date, the only Wall Street executives publicly identified as having invested their own money in LJM2 are 100 executives from Merrill Lynch -- the firm retained by Andrew Fastow, Enron's former chief financial officer, to market the fund to institutional investors. The Merrill investors sank a combined $16 million into LJM2. A handful of executives at Germany's Dresdner Bank also are known to have put $1 million of their own money into the partnership.

The veil of secrecy could lift now that the plaintiffs in the shareholder suit can begin seeking documentary evidence and testimony from Enron's bankers about all of their dealings with the fallen energy-trading firm. William Lerach, the lead lawyer for Enron's shareholders, said he suspects that the list of Wall Street executives investing in LJM2 could include top-level people at the banks and brokerages Enron turned to for financing.

Indeed, just as many on Wall Street were hoping the Enron debacle would fade into the background, the court ruling threatens to rekindle the furor over the role Wall Street firms played in allegedly helping Enron deceive the investing public.

"One of the things this does is highlight the role of individuals within financial services companies and the complexities of those relationships," said Beth Young, a director with the Corporate Library, an organization that supports increased shareholder rights and promotes corporate governance reforms. "One of the perils of full-service financial institutions is that it's very difficult to reconcile conflict of interest."

Chutes and Ladders

In fact, new areas of potential scrutiny over Wall Street's behind-the-scenes role in Enron keep cropping up.

TheStreet.com, for instance, has learned from several sources that Citigroup, in the summer of 2001, provided Michael Kopper with a loan to buy out Fastow's interest in LJM2, just months before the wheels started to come off Enron. Kopper, a former Enron executive and Fastow's right-hand man in running LJM2, pleaded guilty in August to fraud charges in the Enron investigation. Kopper is believed to have provided prosecutors with much of the evidence that led to the filing of a 78-count fraud indictment against Fastow in October.

Citigroup officials were unavailable for comment.

Meanwhile, one potential high-profile Wall Street person who could feel some heat in the coming weeks over Enron is William Donaldson, the man President Bush chose to succeed Harvey Pitt as chairman of the Securities and Exchange Commission.

As a senior adviser to Donaldson Lufkin & Jenrette from 1995 to early 2000, Donaldson would have been eligible to invest in a number of private funds the New York investment bank established for the benefit of its employees. These funds invested in companies that were either DLJ investment banking clients or potential clients, and one such fund -- DLJ Fund Investment Partners III -- invested $5 million in the LJM2 partnership in December 1999.

DLJ, which Donaldson helped found, was acquired by CSFB in November 2000, a few months after Donaldson left the investment bank to become chief executive of Aetna ( AET), the health care insurer. A similar CSFB-sponsored fund, meanwhile, invested $10 million in LJM2.

A CSFB spokeswoman declined to comment on the DLJ fund and the fund's investment in LJM2. Citing privacy rights, the spokeswoman said the firm could neither confirm nor deny whether Donaldson was an investor.

Donaldson's New York office, meanwhile, referred all calls on the matter to the White House, which was unavailable for comment.

Bad Taste

Even if Donaldson were an investor in the DLJ-sponsored fund, it's doubtful he would have been in a position to know anything about Enron's shady accounting.

But with the Senate Banking Committee slated to hold confirmation hearings on his appointment early next year, it's likely that some lawmakers will want to inquire about Donaldson's views on the Enron mess, especially since DLJ and CSFB were two of Enron's primary investment bankers during the 1990s.

A dozen DLJ investment bankers, many of whom are now at CSFB, were the chief architects behind many of Enron's biggest off balance sheet ventures. One of the deals the DLJ team put together was the Osprey Trust, a corporate entity that bought more than $1 billion in ailing assets from Enron by selling now-worthless bonds to institutional investors.

The DLJ team, including current CSFB managing directors Laurence Nath and Dominic Capolongo, invested $1 million of their own money into a venture they set up specifically for LJM2 called OA Investments, according to a source and documents.

A number of these so-called structured finance deals engineered by the DLJ team are now the subject of the Enron class action and the basis for some of the claims shareholders have raised against CSFB.

Again, there's no evidence Donaldson played any part in the sophisticated structured finance deals and bond offerings that DLJ arranged for Enron in the late 1990s. Nevertheless, the last thing the White House surely wants is anyone mentioning Donaldson's name and Enron in the same breath.

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