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    Enron: The Florida connections

    While Florida was putting money from its pension fund in Enron, Enron was putting money into the campaigns of Florida politicians. In the end, neither investment paid off.


    © St. Petersburg Times
    published February 3, 2002

    Robert Trigaux
    Lay's rise to power, fall from grace elicit little sympathy

    Special Enron chat, Tuesday at 1:30 p.m.

    On Sept. 26, 2001, Enron's chief executive officer Kenneth Lay urged employees to buy more shares in the Houston energy firm. "The third quarter is looking great," he said.

    Managers of part of Florida's pension fund shared that optimism, buying about 540,000 shares in late September for about $14-million.

    Less than a month later, Lay's predictions proved dead wrong. Enron was losing millions and the Securities and Exchange Commission was investigating its thicket of partnerships.

    So what did Alliance Capital, managers of Florida's pension fund, do next?

    The New York firm sunk another $7-million of Florida's money into Enron shares on the very day Enron disclosed the SEC investigation.

    The stock price continued to tumble, from highs of more than $80 a share to lows of $9 in November. Alliance kept buying, adding $28-million in shares.

    Alliance didn't cash out of the Enron stock until it traded at 28 cents a share, two days before the company filed for bankruptcy.

    Altogether, the retirement fund ended up losing $325-million on Enron stock and an additional $9-million on Enron bonds, most of it at the hands of Alliance.

    That made Florida's pension fund the biggest loser in the nation's biggest business collapse.

    While the loss is just one-third of 1 percent of Florida's $93-billion fund, it raises big questions about the money manager's bad calls, possible conflicts of interest and the state's loose guidelines for investing the retirement funds of 213,169 retirees and 612,391 active workers.

    The fund has close ties to Gov. Jeb Bush's administration. For instance, its deputy executive director is Coleman Stipanovich, brother of J.M. "Mac" Stipanovich, a top adviser in Bush's first gubernatorial campaign.

    Bush is one of three elected officials overseeing the Board of Administration, which picks the money managers. The board is supposed to monitor them, but no one in the state told Alliance to bail, even as the stock did a free fall over four months.

    "In retrospect, I wish we had," board director Tom Herndon said last month. Herndon was chief of staff to former Gov. Lawton Chiles.

    Alliance officials didn't return phone calls seeking comment. But vice chairman Alfred Harrison defended the purchases in a letter to state officials in December. One reason: Alliance believed Enron's planned merger with rival Dynegy would boost the share price. But that deal collapsed. "Even as the share price declined, the basic business appeared to be unaffected and standing alone could more than justify the lower price of the stock," Harrison said.

    Click here for a larger version of this graphic
    How could a money manager continue to buy Enron shares as most investors were dumping it?

    Amateurs and pros can get burned when they try to guess if a stock has really hit bottom and will rebound to greater gains. Gerald Perritt, a Largo money manager and newsletter publisher, likens it to an invasion of cockroaches.

    The theory is that corporate bad news is equivalent to spotting one roach on the kitchen floor. You know there are probably more, so it's time to exterminate. Money managers who believe in the cockroach theory sell on the first bit of bad news. Those who take a chance that it's just one roach, or just one blip of bad news, may end up screaming.

    Alliance officials "are not dumb people," Perritt said. "They were operating on ideas, theories, a chronology of events that they thought, when it unfolded, would make them a lot of money in this stock."

    Others question if it was more than a hunch about the stock's rebound. Was there an insider influencing Alliance to buy Enron shares?

    One of Alliance's former executives, Frank Savage, served as an Enron director. While Alliance has said Savage didn't influence the Enron investment, Alliance was fired by state officials. Florida Attorney General Bob Butterworth has issued a subpoena for documents as part of a criminal investigation.

    Regents for the University of California, whose pension funds lost $145-million, say that as a board member Savage would have approved some of Enron's suspect transactions and signed some of its false and misleading documents. They say this presumed knowledge of what was going on at the company could even weaken Florida's case for damages against the auditors and others involved.

    One thing is for sure: This episode illustrates how much leeway the state gives its money managers. Alliance's purchases apparently fit within the guidelines issued to the 70 firms employed to manage pieces of the fund. The state's directive to Alliance was to buy large U.S. growth stocks and put no more than 3 percent of the fund's assets in a single stock.

    When Alliance was fired, it managed $3.4-billion of the fund's money, or 6.4 percent of the fund's total U.S. stock portfolio. It had a 15-year track record with the state fund.

    Alliance wasn't alone in buying Enron shares. Two of the state's other money managers held the stock because their funds mimic the Standard & Poor's 500 Index, which included Enron until Nov. 29. Two other active money managers, Smith Barney Capital Management and INTECH (Enhanced Investment Technologies), also owned shares. But Alliance held the most -- 7.6-million of the 9.7-million Enron shares owned by the fund.

    Now state officials have hired lawyers to try to recover some of the fund's losses in court. Paul Bradshaw, partner at one of the law firms, Entwistle & Cappucci, is married to Bush's former chief of staff and campaign manager.

    The full extent of the fallout from the Enron mess is unclear. The retirement system is a defined benefit plan, which means it promises to pay a set amount to a retiree regardless of market fluctuations. The loss on Enron shares is no more than the fund might absorb on a bad day in the stock market. But too many bad days or too many debacles like Enron and the fund might not have enough money to pay promised benefits.

    Contribution controversy

    • While Enron was sending money to the state's political arena, what it got back was mainly frustration.

    Few Floridians ever heard of Enron back in 1995. But it was a familiar name to Jeb Bush.

    That year, Bush invested nearly $92,000 in Enron Liquids Pipeline, an Enron affiliate, and sold it 10 months later. His profit: $7,100.

    But he enjoyed far greater returns when Enron doled out campaign contributions. Enron, its subsidiaries and employees gave about $420,000 in Florida political contributions from 1995 to 2001, according to an analysis by the St. Petersburg Times.

    More than 80 percent of that went to Republicans; $10,500 went directly to Bush. Bush donors included Enron executives, such as chairman Kenneth Lay. Enron executive John Clifford Baxter, who recently committed suicide, also gave money.

    Lay also gave money to Bush's nonprofit Foundation for Florida's Future, the think tank Bush founded as he prepared for a second bid for governor.

    Once friendly with Lay, many politicians are now clamoring to return Enron contributions. Sen. Bob Graham sent $8,000 to a charity for Enron employees, and Sen. Bill Nelson sent $1,000. The Florida Democratic Party plans to donate the $5,000 it received during the 2000 election cycle.

    Meanwhile, Democrats would love to hang the Enron ties around Bush's neck as he runs for re-election.

    While Bush benefited from Enron's largesse, it appears Enron's heavy investment to influence Florida's energy policies paid off only slightly better than Enron shares.

    "At the state level, I don't think they got anything," said Bill Bryant, a Tallahassee lawyer who lobbied for Enron. "Some of the senior people were very frustrated."

    Enron's greatest interest was Florida's wholesale power market. As a growth state needing more power generation, Florida promised great profit potential to outside companies hoping that deregulation would open up Florida to out-of-state power companies.

    Jeb Bush was an early supporter of deregulation and in 2000 created a special commission to look at devising a long-term energy strategy for Florida.

    The commission's chairman, Miami businessman Walter Revell, is a longtime friend of Kenneth Lay. Their friendship dates back more than two decades when Lay worked for a gas company in Winter Park and was active in the Council of 100, a group of Florida's top business leaders. Lay called Revell about the time the commission's work was getting under way. He wanted Revell to help his daughter find a job in Miami.

    But Revell said he never spoke to Lay, or other Enron officials, about the energy commission's work. In fact, he said Enron kept a lower profile in the energy debates, compared to Duke Energy and others. Still, Enron's advocacy was made clear by its donations: Enron gave nearly $120,000 in contributions that year, $99,000 of it going to the state GOP and Republican candidates and the rest to Democrats.

    "They were doing those kinds of contributions at a time when it looked like there would be a strong push for deregulation in Florida," said Al Malmsjo of R.W. Beck, an Orlando utilities consulting firm.

    The momentum for restructuring Florida's wholesale power market halted when rolling blackouts in deregulated California starting to make people wary of overhauling Florida's energy market. Some lawmakers still hope to open Florida's market for out-of-state companies to build so-called "merchant plants," but the issue lately appears to be off the governor's radar screen.

    "Opponents of restructuring in Florida used California (power outages) last year . . . and this year they'll say, "Look at Enron,' " said Mike Green, vice president of Florida operations for Duke Energy, a big merchant plant developer. "My only hope is the decisionmakers will look past that first salvo."

    Last year, former Montana Gov. Marc Racicot, an Enron lobbyist who is now Republican National Committee chairman, contacted Bush about the legislation concerning power plants in Florida. The governor's office said a staffer called back and told Racicot the legislation wasn't going anywhere.

    Racicot said that while he was working for Enron at the time, his e-mail inquiry to Bush was not on behalf of Enron; he was merely trying to educate himself about energy issues, and he'd heard of a proposal for public financing of power plants in Florida.

    "This had absolutely nothing to do with the work I was doing for Enron," he said. "I was interested. I was interested to understand and know as much about the energy situation" as possible.

    Another former Enron subsidiary, Azurix, looked to Florida water for potential profits. The company inquired about financing part of the $7.8-billion Everglades restoration project, in exchange for a chance to sell water.

    Critics decried the talk of privatizing Florida water. Bush met with Azurix officials, and initially his administration sounded receptive. Department of Environmental Protection Secretary David Struhs in 2000 embraced the concept of creative new approaches and "creating more market-oriented behavior" with water.

    "I heard there were numerous meetings with the governor and the governor's staff on this issue. But nothing was really pushed as the governor's position on the issue," said state Sen. Skip Campbell, D-Tamarac, who filed a bill that would thwart privatizing water.

    Azurix wound up floundering financially, and its Everglades interest never went anywhere.

    Saving the subsidiaries

    • As the company was falling apart, those on the periphery were scrambling to make sure their interests were covered.

    When Enron filed for bankruptcy in December, executives at TECO Energy of Tampa deployed a team of about a half dozen engineers, financial experts and lawyers to assess the ripple effects.

    Their biggest concern: An Enron subsidiary was building four new TECO power plants outside Florida.

    The TECO team descended on the suburban Seattle headquarters of Enron's National Energy Production Corp., known as NEPCO.

    They pored over invoices and other documents to get a precise fix on NEPCO's progress on each project and make sure bills from subcontractors were paid. Attorneys pushed for details on the financial connections between NEPCO and its parent in Houston.

    They wanted to make sure Enron's collapse wouldn't bring down NEPCO.

    Across the state, community activists who have dueled with Enron wonder how the company's financial collapse will affect plans for new electric plants and natural gas pipelines. Enron has an intricate network of partnerships and subsidiaries.

    It could take a while to untangle what gets sold or what is kept by a slimmed-down Enron. In some cases, Enron may have to sell project rights to pay off its lengthy list of creditors.

    In the case of TECO, finding a new contractor would mean costly delays in the plants, in Mississippi, Arkansas and Arizona.

    By week's end, it was clear NEPCO would remain solvent, said Mark Kane, TECO's director of investor relations. But there was still plenty of work left to fix the mess.

    First, the two sides negotiated new contracts. TECO became responsible for paying vendors. Instead of working for a fixed price, NEPCO would get paid only for time and materials with no markup. The company also had to keep all key supervisors on the projects.

    Meanwhile, TECO worked to reassure a syndicate of banks that was financing two of the plants, a $2.5-billion joint venture with Panda Energy.

    Eventually, TECO agreed to replace Enron as guarantor for an estimated $63-million in cost overruns on the two plants and speed up its equity investment in the project. Citing increased financial pressure on TECO, Moody's Investors Service downgraded the company's long-term debt.

    In other cases, Enron maintains it will keep its Florida projects on track, despite the bankruptcy filing.

    For instance, Enron plans to go ahead on controversial power plants in Broward and St. Lucie counties, said spokesman Eric Thode.

    Hundreds of protesters objected last spring to plans for a 510-megawatt plant behind a Pompano Beach flea market. They feared the plant would create more air pollution. The company also has plans for a plant in nearby Deerfield Beach.

    In St. Lucie, residents unsuccessfully argued that Enron plans for a 510-megawatt plant in an orange grove would spoil the neighborhood's rural character. Enron also wants to continue with plans to build a new plant in Fort Pierce and provide steam to run generators for the local municipal utility.

    "These projects all continue to move forward," Thode said. "We could end up building them or selling them to another entity to build."

    Strapped for cash, Enron is trying to sell a subsidiary that was planning to build a natural gas pipeline in the Atlantic Ocean from the Bahamas to Fort Lauderdale. The company asked the Federal Energy Regulatory Commission in December to stop work on an environmental impact statement.

    Subsidiary Calypso Pipeline LLC spent millions on engineering, surveys and environmental permitting, said Enron spokesman John Ambler. El Paso Energy and AES Corp. also have plans to build gas pipelines from islands off the coast to South Florida.

    Along with El Paso, Enron owns 50 percent of the company that operates Florida's only existing natural gas pipeline.

    But Florida Gas Transmission Co. is a separate entity with its own credit rating, said spokeswoman Gina Taylor. Two expansion projects connecting the pipeline to gas suppliers and utilities, worth about $540-million, are still on track, she said.

    Leading the lawsuits

    • Florida wants to be part of the lead team in the suits against Enron, but there may not be much to go after.

    Enron's shares closed at 39 1/2 cents Friday. A new CEO pledges to get the company back on track, despite bankruptcy and myriad lawsuits against Enron and its accounting firm, Arthur Andersen LLP.

    Florida has already petitioned the federal court in Houston to team up with New York for status as lead plaintiff in the investor lawsuits. But there's bickering among other big pension funds on who gets that role, which delivers control over the direction of the case. The University of California Regents say they are more deserving partly because of the way Florida managed its Enron investments.

    The regents note that Florida was buying millions of shares "while most of the public was dumping Enron's stock upon the news of this fraud." This means Florida's situation isn't typical of injured investors as a group.

    Michael Pucillo, a West Palm Beach lawyer representing Florida, said Enron's bankruptcy means it will likely be dropped from the lawsuits as a defendant. Instead, investors are hoping to collect from Andersen and from Enron's liability insurance. Another target: the personal assets of Kenneth Lay, along with other officers and directors.

    Big losers like the Florida pension fund aren't likely to get much by suing Enron. And federal law makes it very difficult to win a lawsuit regarding accounting firms' audits. And there are a lot of Enron investors, creditors and former employees going after the same pot of money.

    "They'll be lucky to get back 10 cents on the dollar," said Tampa lawyer Jonathan Alpert, veteran of many class-action lawsuits, but not this one. "I'll be surprised if they get that much."

    -- Times researcher Kitty Bennett contributed to this report, which used information from Times wires.

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