The Enron saga continues with the prosecutions of the "NatWest Three," the three British bankers from Greenwich National Westminster who were extradicted to the U.S. to stand trial on seven counts of wire fraud connected with

a scheme to defraud NatWest and GNW (Greenwich NatWest, the subsidiary) and deprive them of money and their right to honest services by recommending to GNW that it sell its interest in Swap Sub for only $1 million, when the defendants knew GNW's interest was worth far more, and when the defendants were planning fraudulently to convert the balance of GNW's interest to themselves and others.

The only problem is that the Fifth Circuit has now cut off at the knees the "theft of honest services" theory of fraud in connection with the reversed convictions of four Merrill Lynch employees in the so-called Nigerian Barge cases.   (Peter Henning at White Collar Crime here.)  This development has caused prosecutors to reconsider the conviction of another Enron employee in the Broadband case.  Defense attorneys in the NatWest Three case have asked for the indictment to be dismissed.  In response, prosecutors have amended the indicment, although "[t]he United States continues to believe that the Defendants' arguments regarding the honest services allegations are without merit."

The new indictment reads

a scheme to defraud NatWest and GNW (Greenwich NatWest, the subsidiary) and deprive them of money and their right to honest services by recommending to GNW that it sell its interest in Swap Sub for only $1 million, when the defendants knew GNW's interest was worth far more, and when the defendants were planning fraudulently to convert the balance of GNW's interest to themselves and others.

So, what did the bankers do?  This London Observer article has much of the backstory, and the necessary facts are in the indictment (linked above).  Enron employed GNW to create derivatives to help Enron hedge some of its portfolio risk, including restricted shares in an IPO that could not be sold.  To do this, Enron (through LJM Cayman) created Swap Sub, and GNW purchased an interest in that entity.  (CSFB also had an interest in this entity.)  This entity entered into offsetting derivatives contracts with Enron.  At the time, the bankers complained to others that GNW got no value out of that arrangement.  In fact, GNW recorded the value of its interest in Swap Sub as zero.  Then, when it looked like the bankers would all be seeking other employment because of the Royal Bank of Scotland acquiring NatWest and selling off GNW, the bankers entered into a "final period" with all the problems inherent therewith.

The bankers met with Fastow and Kopper in Houston and proposed letting the three bankers in on spinning straw out of gold.  Swap Sub was not necessary any more, so Enron would disburse money to Fastow to buy back the Enron stock in the subsidiary and liquidate it.  First, however, Enron would purchase GNW's interest for $1 million, creating a profit for GNW where none was before.  Then, Enron would sell the three bankers an interest in the sub (through two partnerships) for $250.  Ten days later, Enron would buy that interest back for $7.3 million, split three ways.  Fastow and Kopper also received $12.3 million from the deal.

So, did the bankers defraud GNW of money?  The prosecutors' theory is that the bankers fraudulently misrepresented the $1 million purchase price of Swap Sub as a good price.  The fraud would be that the bankers know that the entire sub will be liquidated by Enron for $30 million and that they will have the opportunity to buy a 50% interest for $250k that will turn into $7.3 million.  (Yes, I understand that the numbers don't work out quite right!)  I can't tell from the pleadings what GNW's interest in Swap Sub was.  I would assume that CSFB's and GNW's investment was probably the minimum required for Swap Sub to be considered a third-party to Enron, but I don't know.  So, the issues would be (1) what the value of GNW's interest would have been (that GNW considered to be worth $0) and if it would have been over $1 million under the liquidation plan and (2) would the liquidation plan have occurred without buying out GNW first.  In other words, the plan seems to have been spearheaded by the bankers under the assumption that GNW was out of the picture.  Could GNW ever have participated in more profits?

As the title suggests, what this scenario looks like to this business law professor is an usurption of a business opportunity.  The bankers used the relationship between GNW and Enron to invite themselves to participate in a structured finance deal much like the ones that GNW participated in without offering the opportunity to GNW.  GNW apparently had conflict of interest rules in place, and the bankers violated those private rules and the rules surrounding fiduciary duties.  GNW certainly seems to have a cause of action against the bankers for violating those duties.  Whether a foreign government will be able to prosecute this scheme criminally is another question.

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