Investors who put at least US$300 million into an Enron Corp partnership used to cordon off debt from its books are battling in court to bar a former Enron executive from running the venture.
Eleven investors in LJM2 Co-Investment LP, including Citigroup Inc and The Travelers Indemnity Co, have sued in Delaware Chancery Court in Wilmington to remove Michael Kopper as general partner. Kopper, former head of Enron's North American division, took over in July as the partnership's head from former Enron Chief Financial Officer Andrew Fastow.
The LJM2 partnership is a target of a dozen government investigations into the collapse of Enron, which filed the largest Chapter 11 bankruptcy in December. Enron's disclosure in November that Fastow made US$30 million managing two off-book partnerships, including LJM2, hastened Enron's collapse.
Control of more than US$300 million may be at stake in the suit to remove Kopper. The court papers don't say, and lawyers on both sides declined to comment. Investors could be left with nothing if the partnership's assets are pulled into Enron's bankruptcy case, lawyers said.
"Creditors are likely to make a move on anything left in this partnership in which Enron has an interest," said Chuck Tatelbaum, a Naples, Florida, attorney representing two Enron companies with claims against Enron in the bankruptcy case.
Fastow set up dozens of private partnerships to buy and sell Enron assets. Kopper worked with Fastow at Enron to help market some of the partnerships to investors and left the company to run LJM2, according to company filings and court records.
Fastow formed LJM2 in 1999, and the partnership acquired energy and telecommunications assets from Enron, including an 30,000km fiber-optic network it bought in June 2000 in a transaction that resulted in a US$67 million profit for Enron.
LJM2 sold the network six months later for a US$53 million profit, according to documents Enron filed with the US Securities and Exchange Commission.
"Mr. Fastow and Mr. Kopper are the architects of controversies that led to" Enron's bankruptcy, Michael Goldman, a Wilmington lawyer representing the suing LJM2 limited partners, said at a Jan. 10 hearing in the case.
"Mr. Kopper has interests that are in conflict with both the partnership and the limited partners," Goldman told Chancery Court Judge Jack Jacobs in seeking to bar Kopper from controlling the partnership while the case is litigated.
Jacobs ordered Kopper on Jan. 15 to hand over the partnership's reins to turnaround specialist Jay Alix & Associates and make all "books, papers and records" available to the firm pending a trial due to begin Feb. 25. Kopper and his lawyers didn't return calls seeking comment on the suit.
In court papers, Kopper said the investors who are trying to remove him violated the partnership agreement.
He said investors like Citigroup Inc's Citicorp and The Travelers Indemnity Co, which agreed to invest US$10 million and US$3.1 million in LJM2 respectively, missed a Jan. 4 deadline for providing funds owed the partnership. That included their share of a US$70 million interest payment, he said. The loan is now in default, he said.
The partnership agreement prevents them from banding together to force out the general partner because they defaulted on those payments, Kopper said.
"We intend to continue serving as the general partner of the partnership with the goal, as always, of maximizing asset value for the partners," Kopper said in a Jan. 7 letter to the partners. A copy was included in the court file.
Lawyers for the partners suing Kopper said in court papers that they've complied with the partnership agreement's requirements for ousting the general partner. Limited partners with a combined investment of more than 66 percent of the partnership voted to remove Kopper, the lawyers said.
"Kopper has refused to acknowledge his removal and has taken numerous acts to jeopardize the partnership and the limited partners," Goldman said at the Jan. 10 hearing before Jacobs, according to a transcript.
For example, Kopper is trying to direct defense lawyers representing LJM2 in a dozen suits in Texas state court over deals involving the partnership, Enron and other Enron-related units, Joseph McLaughlin, a New York-based lawyer representing limited partners, noted in court papers.
"Plaintiffs believe that immediate removal of Michael Kopper is needed to ensure that the partnership and its limited partners receive adequate and conflict-free representation" in the suits, McLaughlin said in the filing.
Kopper also raided the partnership's accounts after learning of the bid to remove him, partners allege in court papers.
The day before limited partners voted to force him out, Kopper transferred US$4 million from the partnership to pay half his annual management fee though he was only owed about US$70,000, the partners alleged. He also took improper steps to disqualify the partners, they said.
"The limited partners, including some of the largest financial institutions in this country, want to stop the bleeding and the threats of Mr. Kopper," Goldman told Jacobs.
Among other investors who agreed to invest in LMJ2 are the American Home Assurance Co, US$22.7 million; the Arkansas Teachers Retirement System, US$30 million; AIG Private Equity Portfolio, US$7.2 million; the John D. and Catherine T. MacArthur Foundation, US$15 million; CIBC Capital Corp, US$15 million; Merrill Lynch LP Holdings Inc, US$16.6 million, and RHO Fund Investors II LLC, US$15 million, according to court filings.
Merrill Lynch is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News. Kopper had US$6.9 million invested in the partnership, which amounted to 1.75 percent of the total, his lawyers said in court last month. A total of 52 investors agreed to put up US$387 million for stakes of the LJM2 partnership, Kopper's lawyers added in the papers.
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