Enron veterans flourish due to 'mystique'

Ann DavisWall Street JournalNov. 14, 2006 11:19 AM

Enron is dead. Long live Enron.Five years after the Texas energy-trading giant collapsed, the traders behind some of Enron Corp.'s brashest efforts to carve out new markets are pushing further into those frontiers.Enron alumni have joined hedge funds and trading operations capitalizing on fast-growing commodity markets that the company once dominated or helped develop, from its stronghold of natural-gas and power trading to experimental futures markets in pollution-emission credits and weather contracts. A few Enron refugees have even joined industrial or consumer-goods firms, where they negotiate contracts to reduce the risks of volatile energy, food and raw-materials prices. The growth of commodity markets popularized by Enron, and the ability of its veterans to raise money in budding areas, is to some a validation of at least part of the company's model: trading commodities of all kinds."In the general population, there is an Enron stigma. In the trading community, there is Enron mystique," says Vince Kaminski, a former quantitative expert at Enron. After Enron's Chapter 11 bankruptcy filing five years ago next month, the sought-after risk guru moved to hedge-fund giant Citadel Group, and then to Citigroup Inc.'s commodities desk. He now teaches prospective energy traders at Rice University.Before imploding amid accounting-fraud accusations, Enron plowed big sums and talent into markets criticized after its fall as quixotic or a distraction from its core business of transporting and selling energy. It even had investigated whether it could launch movie-box-office futures as a way for studios to manage the risks of a big flop, a former Enron executive who panned the idea recalls.While most markets besides gas and power weren't big moneymakers for Enron, ex-traders today are piggybacking on the company's early investments in everything from pulp-and-paper products to coal trading. And they are finding their background a selling point, much as the collapse and bankruptcy of junk-bond pioneer Drexel Burnham Lambert launched dozens of careers elsewhere in the 1990s."Employers look at having worked at Enron as a risk-management experience, and they think people might have learned from the Enron mistake and those traders might have become better," says Michael Karp, chief executive of Options Group, an executive-search firm that works for many banks and hedge funds. The traders' renaissance comes as some Enron executives from other areas of the company have forfeited assets and begun serving prison terms. Even Enron trading veterans whose reputations were tarnished by criminal and civil probes are making inroads.Former high-ranking executive Lou Pai, who oversaw Enron's efforts to push into a number of new trading markets, has put some of his Enron-related earnings to work as a silent backer of a Houston-area firm prominent in brokering pollution-emission credits, Element Markets LLC, court documents show.Pai left Enron before its troubles came to light, selling hundreds of millions of dollars of stock to meet a divorce settlement, according to interviews and legal records and proceedings. He still faces civil litigation and potential regulatory scrutiny for his role in Enron's financial management, lawyers following Enron matters say.His affiliation with Element Markets emerged after he attempted this spring to buy a portfolio of emissions credits from an Enron unit operating in bankruptcy protection. Officials of the Enron estate overseeing the sale alleged that Mr. Pai failed to disclose his identity as a former company insider in an auction. They said selling to a former insider posed a conflict and sold to another buyer.Pai nonetheless landed the assets; he repurchased them from the winning bidder without Enron's knowledge, according to a consultant advising the Enron estate. Now Pai is working to break into trading carbon-dioxide emissions, several Enron veterans familiar with his plans say. Pai didn't return calls to his home or office.David Delainey, a former high-ranking trading executive, pleaded guilty to insider trading in connection with Enron's collapse. Nevertheless, Louis Dreyfus Energy Services, an arm of privately owned global commodity merchant Louis Dreyfus, hired him to oversee a trading operation in Calgary, Alberta. Delainey was sentenced last month by a federal judge in Houston to 2 1/2 years in prison. He didn't respond to interview requests before his sentencing.Citigroup snapped up Stuart Staley, a successful coal trader at Enron. Staley, 40 years old, now runs the gas- and power-trading operations of Citigroup from Houston, where traders he sought to hire already resided or wanted to return. Lehman Brothers Holdings Inc. and Bear Stearns Cos. are building energy-trading operations in Houston, among other cities, with former Enron traders. Barclays PLC's Barclays Capital unit and Deutsche Bank AG employ former high-level Enron traders.Constellation Energy Group Inc., a large energy merchant, is ramping up its trading of coal and emissions credits in the U.S. and Europe with former Enron traders. Tyson Foods Inc., the meat and poultry producer, hired an Enron trader to run its commodity-trading and risk-management operations.Nowhere is the Enron "mystique" stronger than with 32-year-old trader John Arnold, who founded hedge fund Centaurus Energy LP in Houston with $8 million a few years ago and employs other Enron alumni. The firm now has an estimated $3 billion in assets and would be larger if Mr. Arnold hadn't returned many investors' cash and winnings to keep his fund from growing unwieldy, investors and traders say.Primarily a natural-gas trader, Arnold did well last month in volatile markets even as rival Brian Hunter at Amaranth Advisors LLC suffered multibillion-dollar trading losses, commodities players familiar with Centaurus's performance say.Investors are rushing to back other Enron veterans. A Chicago-based fund of hedge funds has invested in a firm called Top Shelf Capital in Calgary, operated by senior former Enron trader John Lavorato and an Enron colleague, Jonathan McKay. They declined interview requests.A former colleague of Hunter at now-liquidating Amaranth, Harry Arora, also was an Enron trader. Arora founded a new hedge fund, ARCIM Advisors LLC, this summer while Amaranth was still doing well.Also hanging out a shingle: Jeff Shankman, the former president and chief operating officer of Enron's second-largest trading division. He is launching his energy-focused hedge fund, Trident Asset Management, this week.Enron "created a fantastic alumni network," says Mr. Shankman, 39. "The thing I regret most at Enron is having to defend my tenure there," when "most of us were hardworking, decent people who did our best for a company we believed in."Mark Tawney and another Enron alumnus, Bill Windle, were involved in Enron's early efforts to structure weather instruments for energy companies and other firms with payouts based on precipitation and temperature that affect their businesses. They moved on to insurance giant Swiss Re to build up its weather desk and then left to form a weather-derivatives-trading hedge fund in Houston last year. After finding that the capital-intensive transactions worked best with a large financial institution as a credit partner, they returned investors' money and have just launched a weather-risk-management desk in Houston for a unit of RenaissanceRe Holdings Ltd., a Bermuda reinsurer.Some days, it almost feels like they are still trading for Enron: The Tawney-Windle group bought 10 of Enron's actual trading desks from a used-furniture vendor.