There can be no better example than the Enron Corporation Chapter 11 proceeding, now entering its final phases. U.S. District Judge Arthur Gonzalez, who presides over this immensely complex litigation, has signaled he may rule on Enron’s oft-amended plan of reorganization as soon as mid-July.

The reorganization will leave behind a much smaller enterprise than that which existed when the case began in December 2001. A holding company, called Prisma Energy International, will be all that remains of the former Enron behemoth. The few valuable hard assets, including the Portland General Electric utility and the CrossCountry Energy natural gas pipeline company, will be sold off to generate about $5 billion for repayment to Enron’s creditors.

On average, creditors will see only about seventeen cents per dollar of the debts they initially claimed. A small class of secured creditors will realize up to 70 percent of their claims, but most—particularly Enron’s stockholders—will receive nothing. Certain creditor classes will receive stock in the new Prisma Energy corporation, according to the plan. Some $50 billion has seemingly vanished. Several creditors have complained that, rather than the Chapter 11 financial restructuring, this case ought to have been filed as a liquidation, so as to eke out a few more pennies per dollar of recovery.

Among the few clear winners in the case will be lawyers, who each month invoice the court for reimbursement of their professional fees. Enron’s bankruptcy is, by all accounts, the most expensive Chapter 11 ever litigated, with over $650 million in legal and professional fees already billed and another $300 million to $500 million anticipated before the case is finally concluded.

In contrast, Pacific Gas & Electric’s recently concluded Chapter 11 proceeding generated about $200 million in professional fees, while the WorldCom case—the biggest bankruptcy in terms of total actual corporate assets—topped $150 million.

Among the Enron expenses is a nearly $90 million invoice from Neal Batson, the Special Examiner appointed by the court to investigate the conduct of Enron’s top executives, directors, and outside advisors with respect to the now legendary “special purpose entities” (SPEs) established off the corporation’s books.

Batson, of the Atlanta law firm of Alston & Bird, has justified his expensive investigation with the production of four reports that exhaustively documented the SPE transactions, numerous accounting manipulations and multiple executive breaches of financial duties. What Batson found was that the SPE ventures were little more than houses made of sand and fog, whose “special purpose” was merely to mask illegal and highly questionable business transactions for the benefit of those who created them.

The reports focused on the actions of former chief financial officer Andrew Fastow and several Enron staff attorneys who set up the SPEs. Batson found that “sufficient evidence” that Fastow and others breached their fiduciary duties. Additionally, the Batson reports identify specific law firms and financial institutions that were involved in the transactions, suggesting strongly that these forms “aided and abetted” Fastow in the SPE deceptions, “had actual knowledge” of wrongful conduct, and “gave substantial assistance” to Fastow and the others.

Legal actions against those involved in these financial transactions and transfers might result in recovering as much as $5 billion for Enron’s creditors, Batson indicated. At the very least, further actions taken against those legal and financial firms could result in having billions of dollars of claims they had filed as creditors in the bankruptcy case subordinated—that is, sent to the back of the line—in favor of prioritizing payments to other creditors.

The intensive investigations of the Special Examiner brought to light aspects of Enron’s operations that may not have been revealed, even as part of parallel federal prosecutions, regulatory proceedings or Congressional hearings. Also, importantly, Batson ruled out overt illegality by certain players, although the outside directors did come in for criticism for not better controlling the company’s management.

The Special Examiner was able to delve so deeply into Enron’s affairs because of the bankruptcy court allowed him the power to pierce the usually sacrosanct attorney-client privilege. It is also within the judge’s authority to appoint a prosecutor to go after criminal activity that has been unearthed. Or, the U.S. Trustee, which oversees bankruptcy cases on behalf of the Justice Department, might refer information that’s been unearthed to the U.S. Attorney’s Office for prosecution.

“If a company has done something criminal, bankruptcy is not the place you want to be,” observes Jason Watson, a bankruptcy law specialist who also works for Alston & Bird, but who was not directly involved with either Batson’s investigations or the Enron case.

Even in instances that do not involve criminal activities, bankruptcy court affords access to financial information not usually available, Watson notes. For instance, the required statements of financial affairs must list all assets, such as stock ownership in other companies or any payments over $600 made to creditors in the 90 days prior to filing. “It really opens the books,” Watson says.

To date, the Enron judge appears willing to defer to the creditors and the estate to seek particular actions against the entities named in Batson’s investigation, but that does not lessen the value of the inquiry or the prospects for employing a bankruptcy court’s special powers in the future.

The matter of Enron’s reorganization has largely been eclipsed in the public’s mind by the continuing civil and criminal suits being pursued against Enron executives and others associated with its activities.

Last week, a multi-count indictment was brought against Enron’s former chairman and CEO Ken Lay, making him the 30th individual charged with criminal conduct in Enron-related matters, along with the company’s ex-president Jeff Skilling.

So far, ten people have entered guilty pleas. Shortly after the Batson report was finalized, Fastow admitted guilt to federal charges of wire fraud and conspiracy to commit wire and securities fraud. As a result of the plea bargain that will put him on the witness stand to testify against his former colleagues, Fastow could serve up to 10 years in prison and forfeit almost $30 million of ill-gotten gains.

We don’t know whether the findings of the Special Examiner would have come into play in court had Fastow not entered a plea bargain arrangement with prosecutors, but his involvement in the SPEs comprised a substantial portion of the 98 counts originally raised against him.

It’s probably less likely that information from the Batson investigations will have a major a role in the cases against Lay and Skilling. The Examiner’s report noted that while Lay appeared for one day of interviews, the session was not conducted under oath, and Skilling invoked the Fifth Amendment against self-incrimination and would not appear before the Examiner.

Still, Batson found “sufficient evidence from which a fact-finder could conclude” that Lay and Skilling “in their capacities as officers, breached their fiduciary duties under applicable law by failing to provide adequate oversight of Enron’s use of SPEs.” The SPE ventures appear to be only a minor part of the case against these executives; charges will focus on stock manipulations, conspiracy to commit securities fraud and insider trading activities, according to early reports.

Batson did indicate that when Lay repaid a $94 million loan with soon-to-be worthless Enron stock, the Enron board of directors had not authorized it, and Lay might be forced to repay the loan with cash.

Bottom Line: That would certainly leave Ken Lay unable to afford his criminal defense bills. Maybe he can float a loan from Neal Batson.

Arthur O’Donnell is Energy Central’s Editorial Director, Newsletters. The Business Electric is found exclusively on Energy Central.

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