Enron at the Margin

• Published in: The Business Lawyer 2003-05, Vol.58 (3), p.961-1002
• Main Author: Widen, William H.
• Format: Article
• Language: English
• Subjects: Accounting; Attorneys; Birds of prey; Boards of directors; Business structures; Capitalism; Commercial law; Compliance; Corporate directors; Credit; Criminal law; Criminal liability; Criminals; Deception; Disclosure (Securities law); Disclosure statements (Accounting); Energy industry; Financial investments; Financial margins; Financial reporting; Financial transactions; Fraud; Laws, regulations and rules; Margins (Security trading); Scandals; Securities regulations; Stock shares
• ISSN: 0007-6899; 2164-1838

This Article explains how Enron's officers, directors, and lawyers orchestrated violations of the margin regulations when they structured and implemented the now infamous Raptor transactions. Thus, the oft-repeated mantra Enron technically complied with existing law in structuring these transactions is exposed as false. This Article analyzes the Raptor transactions against the standard of conduct required by the Securities Exchange Act of 1934 and the margin regulations promulgated by the Federal Reserve Board under that Act. Significantly, a violation of the margin regulations does not require proof of scienter. Existing law and regulations are reviewed to outline possible criminal liability for the identified margin violations that do not rely on proof of scienter. The identified violations are linked to the harm that contributed to Enron's downfall. Although the Raptor transaction structures were, in detail and purpose, novel, they failed for traditional and foreseeable credit quality reasons. The over-leverage and resulting unstable credit of the Raptor structure, supplemented by a general purpose to deceive, emerge as the real culprits. Enron violated disclosure laws by falsely claiming high credit standing for its derivatives transactions (although the details of determining liability for disclosure violations are left to others). The Article concludes by suggesting that a decision to prosecute Enron and its enablers for technical criminal violations of law would signal a return to traditional notions of criminal liability. Such a return to basic principles of criminal law might be very effective medicine for what ails existing corporate and legal culture. By insisting that ignorance of law is no defense, even to technical violations of law, society directs that the business and legal communities should seek ethical standards for their communities elsewhere rather than in technical compliance with law.