LJM Partnerships

LJM1 and LJM2 were special purpose entities created and managed by Enron Chief Financial Officer Andrew Fastow in 1999 and 2000. Ostensibly designed to serve as independent counterparties for Enron’s hedging transactions and asset sales, the partnerships instead became vehicles for manipulating the company’s financial statements, hiding debt, and enriching Fastow and his associates at Enron’s expense. The LJM structures enabled Enron to move assets and liabilities off its balance sheet while maintaining effective control over them, a practice that eventually required billions of dollars in restatements and contributed directly to the company’s collapse.

The Enron email corpus contains 539 LJM-related messages spanning December 1999 to November 2002, documenting the partnerships’ creation, major transactions, internal concerns about valuations and conflicts of interest, and the eventual unraveling. Key personnel most frequently discussing LJM in the correspondence included Kay Mann (55 emails), Vince Kaminski (54 emails), Jeff Skilling (46 emails), and Rick Buy (43 emails), reflecting the partnerships’ significance across legal, risk management, and executive functions.

Origins and Structure

LJM1: The First Partnership

In June 1999, Enron’s Board of Directors approved Fastow’s request to create and serve as managing partner of LJM1, formally known as LJM Cayman, L.P. The initial capital commitments totaled $16 million. This represented an extraordinary arrangement: Enron’s CFO would personally manage an outside entity that would conduct significant financial transactions with Enron itself, creating an inherent conflict of interest between his fiduciary duties to Enron shareholders and his financial interest in LJM’s profits.

The partnership was presented to the Board as serving legitimate corporate purposes: providing a source of capital for asset purchases, acting as an equity partner in joint ventures, and serving as a counterparty for hedging transactions. In practice, LJM1 became a mechanism for Enron to engage in transactions that allowed it to avoid consolidating debt and recognize gains that were not economically genuine.

The first documented LJM activity in the email corpus was an investor meeting on December 14, 1999, with Michael Kopper, an Enron employee who would become central to the LJM operations. A calendar entry from Rick Buy’s inbox shows the meeting with “LJM Investor in conf room by M Kopper,” indicating that even at this early stage, Enron employees were directly involved in LJM fundraising and operations.

LJM2: Scaling the Model

By early 2000, Fastow was already working to create a larger version of the structure. On January 5, 2000, Jeff Skilling’s calendar shows a meeting described as “Andy Fastow, Cory Pulfrey (Weyerhauser) - 15 minute intro; Pulfrey here for funding of LJM2,” demonstrating that LJM2 fundraising was reaching out to major institutional investors within months of LJM1’s creation.

Throughout January and February 2000, LJM2 investor presentations continued at a rapid pace. Rick Buy’s calendar entries reveal meetings with American General on January 17, RHO Management on January 21, Kresge Foundation on January 25, and the University of Chicago on February 14. These meetings took place on the 27th floor of Enron’s headquarters, with J. Timmons coordinating the presentations. The aggressive fundraising paid off: LJM2 ultimately raised $394 million in aggregate capital commitments, more than 24 times the initial capitalization of LJM1.

Fastow’s Dual Role Conflict

The fundamental problem with the LJM structure was Fastow’s position on both sides of every transaction. As Enron’s CFO, he was responsible for protecting shareholder interests and ensuring the company received fair value in its dealings. As LJM’s managing partner, he had a direct financial interest in maximizing the profits LJM extracted from those same dealings. This conflict was not theoretical; it manifested in concrete ways throughout the partnerships’ existence.

The Board’s approval of this arrangement, granted with the understanding that internal controls would protect against abuse, became a central focus of subsequent congressional investigations. The Senate investigation later documented the Board’s repeated approval of Raptor transactions despite ongoing accounting concerns, concluding that the oversight mechanisms had failed to prevent the conflicts from corrupting the transactions.

Michael Kopper’s role illustrated the blurred lines between Enron and LJM. When Louise Kitchen asked in March 2001 whether “Michael Kopper [is] Enron or LJM employee,” David Oxley responded: “Kopper isn’t EWS but I understood he was Enron. I’ll check.” Kopper was indeed an Enron employee, yet he was deeply involved in LJM operations and pleaded guilty to money laundering and conspiracy charges related to his role in the partnerships.

Major Transactions

The Raptor Structures

The most significant use of LJM was funding the Raptor hedging structures. Project Raptor launched in early 2000 with intensive structuring work. On February 1, 2000, an “ALL HANDS MEETING FOR PROJECT RAPTOR IN 27C2, LUNCH PROVIDED” brought together the working group, followed by additional meetings on February 8 and February 16. By March 30, the structuring had moved to the Vinson & Elkins law offices for a “PROJECT RAPTOR MEETING W/GLISAN AT V&E IN CONF ROOM 36WEST,” with Ben Glisan leading the legal structuring.

The Raptor entities were designed to hedge Enron’s exposure to investments in technology companies and other volatile assets. LJM2 provided initial capital to the Raptor vehicles, which then entered into hedging arrangements with Enron. A Raptor closing dinner on June 12, 2000, marked the completion of the initial structuring.

Once operational, Raptor generated daily position reports that were distributed to senior management. An email from Dave Dellaney to Vince Kaminski on March 12, 2001, shows that these reports went to Ben Glisan, Andrew Fastow, Richard Causey, Rick Buy, and Greg Whalley, with copies to Michael Kopper and several others — including an LJM Investments email address. The inclusion of an LJM address on Enron’s internal position reporting underscored the entanglement between the entities.

The structure’s fundamental problem emerged clearly in internal discussions. David Delainey raised concerns about Raptor being used as a dumping ground for troubled positions. In May 2000, he asked: “How do we immunize ourselves from the workouts being shed into Raptor?” In a follow-up message, he elaborated: “That may work - I don’t want to end up with an equity position I just worked hard to eliminate. Further, raptor may be a good accounting hedge but if we took back JEDI’s share at existing marks we would be destroying significant real value.” His concern that Raptor provided only “accounting hedge” benefits while destroying “real value” identified the core problem: the structures were designed to improve Enron’s reported results, not to manage genuine economic risk.

The Raptor vehicles also connected to other problematic structures. A September 2000 email from Sara Shackleton warned that “Chewco Investments purchased a position in JEDI I. Chewco is owned in part by an Enron entity. The result is that Enron entities now have a 96.12% interest in JEDI I (60% ENA + 36.12% EGF based upon Chewco).” This concentration of Enron ownership in structures that were supposed to be independent counterparties undermined the accounting rationale for the arrangements.

The Cuiaba Transaction

One of the earliest and clearest examples of LJM’s misuse was the Cuiaba transaction. To avoid consolidating debt related to a power plant project in Cuiaba, Brazil, Enron entered into what the Department of Justice later characterized as a “sham sale” with LJM1. The email corpus shows extensive activity around the Cuiaba project, with Rob Gay’s calendar containing numerous recurring entries for “Cuiaba Finance Daily Call” and “Cuiaba Global Task List Conf. Call” throughout 2000 and 2001.

The transaction allowed Enron to keep the Cuiaba debt off its balance sheet by transferring ownership to LJM, even though Enron retained effective economic control and the risks associated with the project. This was not a genuine arm’s-length sale but rather a structured transaction designed to achieve a specific accounting result.

Turbine Transactions

LJM also participated in equipment transactions with Enron. The Blue Dog transaction in June 2000 was documented in an email from Cheryl Costa to Kay Mann with the subject “BLUE DOG” and the note: “This is are first LJM document.” The misspelling notwithstanding, the email marked LJM’s entry into equipment financing.

By November 2000, the turbine transactions had expanded significantly. LJM2-Turbine, LLC was created to purchase turbines from Enron, with Westinghouse requesting that “NEPCO, EEPC and LJM2-Turbine, LLC sign the agreement.” The transactions required mid-November extensions, and “EECC assigned their option and agency role to ENA,” demonstrating the complexity of the arrangements and the shuffling of assets between Enron entities and LJM.

Nigerian Barge Transaction

The Nigerian barge transaction became one of the most consequential LJM-related deals, though its connection to LJM is less extensively documented in the email corpus than other transactions. Emails show the “Nigerian Barge Project” was discussed in connection with LJM in mid-2000, with Mark Schroeder forwarding information to Steven Kean in June 2000. This transaction later resulted in criminal convictions of Merrill Lynch bankers and became a prominent element of the government’s case against Enron executives, illustrating how LJM transactions exposed not only Enron employees but also counterparties to criminal liability.

Internal Concerns and Red Flags

The Research Group’s Analysis

The Research Group under Vince Kaminski identified significant problems with LJM valuations early in the partnerships’ existence. By late December 1999, Research Group staff were working on LJM put valuations. An email from Stinson Gibner to Kaminski on December 27, 1999, with the subject “LJM put valuation,” contained spreadsheet analysis for RTHM put position valuation.

By February 2000, the Research Group’s analysis had identified a $100 million credit loss on the LJM position. Paulo Issler wrote to Kaminski on February 17, 2000: “At year-end the difference on both valuations - without and with credit risk - indicates a credit loss of about 100 MM.” This was a substantial discrepancy that, if recognized, would have materially affected Enron’s financial statements.

Accounting Pressure

The response to the Research Group’s analysis revealed troubling dynamics within Enron. Rather than addressing the identified credit loss, Accounting pressured the Research Group not to disclose its sophisticated credit risk modeling. Issler wrote to Kaminski on February 24, 2000: “From my understanding, Accounting argues that we should not make any credit reserve because we could not liquidate our position by year-end.” He continued: “At a certain point Jintendra suggested me to use a two factor MC-simulation for calculating the position with credit risk. The approach is actually a more simplified version of the model we have. I and nobody mentioned the results we got from our 2-factor model.”

The implication was clear: the Research Group had developed rigorous analytical tools that produced uncomfortable results, and Accounting preferred that those results not be documented or disclosed. This suppression of internal analysis became evidence of the company’s broader pattern of manipulating its financial reporting.

Kaminski’s Refusal

As concerns about LJM and Raptor mounted in late 2001, Kaminski took the extraordinary step of refusing to certify the valuations his group had produced. On November 6, 2001, he wrote to Ryan Siurek: “I feel strongly that I cannot support the valuations my group has produced so far for the LJM/Raptor related transactions without examination of all the related legal documents. I feel that we did solid work based on verbal information, but I cannot guarantee the quality of the final product without looking at the contracts. These transactions are too complex and controversial to bypass due diligence requirements that you would expect from any professional.”

This statement encapsulated the problem: even Enron’s own quantitative analysts could not fully understand the structures because they were not given access to the underlying legal documentation. The transactions had become so complex and opaque that professional standards of analysis could not be applied.

Internal Controls and Oversight

Risk Management

Rick Buy, who headed Enron’s risk management function, was involved in LJM oversight from the beginning. His calendar shows him scheduling calls regarding “Enron internal Cks & Balances for LJM” as early as December 2000, suggesting awareness that the arrangements required monitoring. A December 7, 2000, entry shows a phone call with Amin Hariri specifically about internal checks and balances for LJM.

Board Oversight

The Board received regular updates on finance matters involving Fastow. An email from Kelly Johnson on July 30, 2001, asked Rick Buy and Andrew Fastow to review an excerpt from the May 1, 2001, Board of Directors meeting by August 6. Board resolutions authorized Fastow to handle brokerage accounts and fund transfers for Enron Corp., with a July 31, 2001, email noting that “Andy Fastow when documents need to be signed or written or oral instructions need to be given to brokers.”

A Board Book Review meeting on August 7, 2001, included “Pug Winokur, Andy Fastow, Ben Glisan, Tim DeSpain, Rick Buy,” demonstrating that LJM-related personnel were present when Board materials were reviewed. However, congressional investigations concluded that the Board’s oversight was inadequate given the magnitude of the conflicts and the complexity of the transactions.

Collapse and Aftermath

October 2001 Unraveling

By October 2001, the problems with the LJM and related structures could no longer be contained. Board discussions expanded to include Chewco alongside the other problematic entities. James Derrick wrote on October 26, 2001, after discussion with Jeff McMahon, that “Ben Glisan is the most appropriate person to provide brief summaries to the BoD on Chewco, Whitewing and Marlin, if Ken would like these topics presented to the BoD.”

External parties were also seeking information. An email to Tris Jones on October 26, 2001, promised: “I will have a better answer for you regarding the structures of Enron’s LJM and Chewco investment vehicles as soon as possible.” The company was now fielding inquiries from outsiders trying to understand structures that even insiders found impenetrable.

Removing Fastow

After Fastow’s departure from the CFO position, the company moved to remove his control over financial accounts. Sara Shackleton wrote on November 19, 2001: “We are trying to change the signature card for the Enron Corp. Morgan Stanley account to eliminate Fastow and Glisan and replace with others.” This administrative detail reflected the broader reality: Fastow’s unprecedented dual role had given him control over both sides of transactions, and unwinding that control required changing account authorizations across the organization.

Chewco Consolidation

The Chewco structure, which had similar characteristics to LJM and involved overlapping personnel, required consolidation in late 2001 due to improper accounting years earlier. This consolidation resulted in a $500 million loss for Enron, demonstrating the magnitude of the problems that had been hidden through the special purpose entity structures.

Criminal and Regulatory Consequences

Federal Charges

In October 2002, the Department of Justice charged Andrew Fastow with fraud, money laundering, and conspiracy related to his management of LJM. The criminal complaint stated that “Fastow unlawfully enriched himself and others using the off-balance-sheet partnership he controlled called LJM Cayman, L.P. (‘LJM1’). Fastow and others devised a scheme to defraud Enron and its shareholders through transactions with Special Purpose Entities that allowed Enron to manipulate its financial results and enrich themselves at Enron’s expense.”

The SEC filed civil charges as well, documenting how the LJM partnerships had been described to the Board as legitimate business tools while actually serving as vehicles for fraud.

Congressional Investigation

The Senate investigation produced a detailed report titled “THE ROLE OF THE BOARD OF DIRECTORS IN ENRON’S COLLAPSE,” which documented the Board’s approval of Raptor transactions three times in 2000 despite ongoing risk and accounting concerns. The investigation concluded that internal oversight mechanisms had failed to prevent the conflicts of interest from corrupting transactions between Enron and the partnerships.

References

This article draws on 539 LJM-related emails in the Enron corpus spanning December 1999 to November 2002, including correspondence from the archives of Vince Kaminski, Rick Buy, Kay Mann, Sara Shackleton, Carol St. Clair, and others. Secondary sources include the SEC litigation releases and complaint against Andrew Fastow (https://www.sec.gov/litigation/complaints/comp17762.htm), Department of Justice press release on Fastow charges (https://www.justice.gov/archive/opa/pr/2002/October/02_crm_568.htm), and the Senate investigation report “The Role of the Board of Directors in Enron’s Collapse” (https://www.govinfo.gov/content/pkg/CPRT-107SPRT80393/pdf/CPRT-107SPRT80393.pdf).