U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20058 / March 28, 2007
Accounting and Auditing Enforcement Release No. 2584 / March 28, 2007
SEC v. Jordan H. Mintz and Rex R. Rogers, Civil Action No. 07-1027 (SDTX) (March 28, 2007)
SEC Charges Two Former Enron In-House Lawyers With Securities Fraud And Related Violations
On March 28, 2007, the Securities and Exchange Commission charged two former in-house attorneys of Enron Corp., Jordan H. Mintz, a former Enron Vice President and General Counsel of Enron's Global Finance group (EGF) and Rex R. Rogers, a former Enron Vice President and Associate General Counsel, in connection with a fraudulent scheme to make material misrepresentations in, and to omit material disclosures from, Enron's public filings. The Commission's complaint charges Mintz and Rogers with violating the antifraud and other provisions of the federal securities laws, and aiding and abetting Enron's violations of the antifraud and periodic reporting provisions. In addition, the complaint charges Mintz with violating the books and records and lying to auditors provisions, and Rogers with aiding and abetting violations of the insider stock sale reporting provision by Enron's then Chairman, Kenneth Lay. Mintz, as General Counsel of EGF, was responsible for managing the related party disclosures in Enron's 2000 Proxy Statement (incorporated in its 2000 Form 10-K) and second quarter 2001 Form 10-Q, and closing a fraudulent related party transaction while knowingly or recklessly disregarding that the transaction was in fulfillment of a secret oral side agreement. Rogers, as Enron's top securities lawyer, was responsible for the timing and content of all Enron's SEC filings, including Enron's 2000 Proxy Statement, second quarter 2001 Form 10-Q and relevant 2001 Form 4 filings.
The Commission's complaint alleges the following: In 1999, Enron sold an interest in a troubled power project in Cuiaba, Brazil to a related party called LJM1, a partnership controlled by Enron's then Chief Financial Officer, Andrew Fastow, to deconsolidate the project (to take the asset off of its balance sheet) and recognize related earnings. (Fastow also controlled a second related party, a partnership called LJM2.) In conformity with relevant accounting rules, deconsolidation and earnings recognition were not appropriate because the seller (Enron) did not transfer to the buyer (LJM1) the usual risks and rewards of ownership, in that the sale included an oral side agreement that LJM1 would not lose money. The oral side agreement was neither memorialized in the deal documents nor disclosed to Enron's auditor. In 2001, Enron bought back LJM1's Cuiaba interest in satisfaction of the oral side agreement. Under the terms of the buyback, Enron paid LJM1 a profit despite the fact that LJM1's investment had decreased in value. The complaint alleges that Mintz knew, or was reckless in not knowing, of the oral side agreement and knowingly or recklessly directed the documenting and closing of the buyback in fulfillment of the oral side agreement.
The complaint further alleges that Mintz knowingly or recklessly failed to disclose Enron's buyback of LJM1's Cuiaba interest as a "currently proposed" transaction in Enron's 2000 Proxy Statement (filed March 27, 2001), when he knew of, and was responsible for, the execution of the buyback agreement on March 28, 2001, the day after Enron's 2000 Proxy Statement was filed. The complaint also alleges that Mintz and Rogers knowingly or recklessly failed to disclose in Enron's 2000 Proxy Statement the monetary amount of Fastow's earnings from LJM1 and LJM2 (more than $18 million), including management fees and distributions, resulting from Enron-LJM transactions. According to the complaint, Mintz and Rogers further knowingly or recklessly made a materially false and/or misleading statement in Enron's second quarter 2001 Form 10-Q (filed August 14, 2001) when stating in that filing that Fastow sold his interests in the LJM partnerships and those partnerships were no longer related parties to Enron. Mintz and Rogers knew, or were reckless in not knowing, that this statement was materially false and/or misleading because (a) the Cuiaba repurchase was pending (it closed on August 15, 2001, the day after the Form 10-Q was filed), (b) the Cuiaba repurchase was negotiated and agreed to while Fastow controlled LJM1, and (c) Enron continued to provide the LJM partnerships with the use of Enron employees, facilities and equipment during the third and fourth quarters of 2001. The complaint further alleges that Rogers knowingly or recklessly failed to disclose in Enron's 2000 Proxy Statement that during 2000, Lay sold $16 million of Enron stock to Enron to repay Lay's Enron line of credit. According to the complaint, Rogers also knowingly or recklessly authorized Lay and others to fail to disclose in Lay's 2001 monthly SEC Form 4 filings that during 2001, Lay sold an additional $70 million of Enron stock to Enron to repay his Enron line of credit.
The complaint also alleges that Mintz directly or indirectly made, or caused to be made, materially false and/or misleading representations to Enron's auditor concerning Enron's second quarter 2001 Form 10-Q. The complaint alleges that Mintz reviewed and approved misrepresentations to be made to Enron's auditor so the auditor would sign off on the statement in the Form 10-Q that Fastow sold his interests in the LJM partnerships and those partnerships were no longer related parties to Enron. The specific misrepresentations were that there were no unfulfilled obligations, commitments, contingencies or special arrangements between Enron and the LJM entities related to the sale of Fastow's LJM interests, and there were no pending transactions between the LJM entities and Enron for which the terms were negotiated and agreed to prior to the effective date of the sale of Fastow's LJM interests. Mintz knew, or was reckless in not knowing, that these representations were materially false and/or misleading because, among other reasons, Mintz knew (a) from documenting and closing the Cuiaba buyback, that the Cuiaba buyback had been pending since, and its terms were negotiated and agreed to, in March 2001, and (b) the LJM entities continued to have a commitment or special arrangement with Enron whereby the LJM entities used Enron employees, equipment and facilities to conduct LJM business during the third and fourth quarters of 2001.
According to the complaint, by engaging in this conduct, Mintz and Rogers violated Section 17(a) of the Securities Act of 1933, Sections 10(b) and 14(a) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rules 10b-5 and 14a-9. In addition, the complaint alleges that Mintz violated Exchange Act Section 13(b)(5) and Exchange Act Rules 13b2-1 and 13b2-2, and aided and abetted Enron's violations of Exchange Act Section 13(b)(2)(A). The complaint further alleges that through their conduct, Mintz and Rogers also aided and abetted violations of Exchange Act Sections 10(b), 13(a) and 14(a) and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-13 and 14a-9. According to the complaint, Rogers also aided and abetted Lay's violations of Exchange Act Section 16(a) and Exchange Act Rules 16a-2 and 16a-3.
The complaint seeks permanent injunctions, disgorgement with prejudgment interest and civil money penalties from both defendants, as well as orders barring them from serving as an officer or director of a publicly-traded company.
The Commission's investigation is continuing.
Details concerning the fraudulent Cuiaba transaction, which has been the subject of other civil actions brought by the Commission against other former Enron employees, are at: http://www.sec.gov/litigation/litreleases/2006/lr19865.htm and http://www.sec.gov/litigation/litreleases/lr18543.htm