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Enron Mail |
Cc: bryan.seyfried@enron.com, jeffrey.hodge@enron.com, julia.murray@enron.com,
mark.taylor@enron.com, michael.brown@enron.com, jeffrey.hodge@enron.com, edmund.cooper@enron.com, justin.boyd@enron.com, rod.sayers@enron.com, janine.juggins@enron.com, mark.frevert@enron.com, rick.buy@enron.com, steve.young@enron.com, shirley.hudler@enron.com, david.weekes@enron.com, david.forster@enron.com, elena.kapralova@enron.com Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit Bcc: bryan.seyfried@enron.com, jeffrey.hodge@enron.com, julia.murray@enron.com, mark.taylor@enron.com, michael.brown@enron.com, jeffrey.hodge@enron.com, edmund.cooper@enron.com, justin.boyd@enron.com, rod.sayers@enron.com, janine.juggins@enron.com, mark.frevert@enron.com, rick.buy@enron.com, steve.young@enron.com, shirley.hudler@enron.com, david.weekes@enron.com, david.forster@enron.com, elena.kapralova@enron.com X-From: Paul Simons X-To: John Sherriff, Louise Kitchen X-cc: Bryan Seyfried, Jeffrey T Hodge, Julia Murray, Mark Taylor, Michael R Brown, Jeffrey T Hodge, Edmund Cooper, Justin Boyd, Rod Sayers, Janine Juggins, Mark Frevert, Rick Buy, Steve W Young, Shirley A Hudler, David Weekes, David Forster, Elena Kapralova X-bcc: X-Folder: \Mark_Taylor _Dec_2000\Notes Folders\Notes inbox X-Origin: Taylor-M X-FileName: mtaylor.nsf NOTE - GIVEN THE PROPOSED LAUNCH DATE OF 24 JANUARY 2000 FOR THIS PRODUCT, THIS NOTE IS INTENDED TO SERVE BOTH AS A SUMMARY OF THE RESULTS OF OUR LEGAL DUE DILIGENCE AND AS A RISK MEMO As you know, we have carried out legal due diligence in the eight countries where it was intended the credit product would initially be traded via EnronOnLine - namely, the UK, the US, Canada, Finland, Germany, Norway, Sweden and Switzerland. Under the terms of the credit product, on the occurrence of a bankruptcy with respect to a specified third party (the Reference Entity) the Seller of the product (which could be either Enron or its online counterparty) will pay a fixed, pre-agreed cash sum in an agreed currency to the Buyer. (It should be borne in mind that this product differs in a number of ways from the more conventional credit derivatives traded in the international markets. This means that a change in the nature or terms of our product or the introduction of alternative credit products will likely change the analysis below.) Set out below is an overview of where we have come out on the more significant legal issues. I am also attaching a two page "Executive Summary of Legal Advice" prepared by outside counsel which highlights the significant legal issues/risks in each country and which should be read in conjunction with this note mail. As you will see, the Executive Summary does not focus on issues we raised which are "all clear" from a legal perspective, so as to keep the summary to a sensible length (but there was plenty of good news too!). Where a legal issue has been identified, I have either set out below what action is to be taken, or not addressed it further on the basis that, on the advice of foreign counsel, the risk is not very substantial or unlikely to materialise. Therefore, where no comment is made below in relation to a risk highlighted in the attached summary, please assume that the legal risk is one which, in our view, it is reasonable to take. A. Countries in which the credit product can be traded in January 2000 Finland, Norway, Sweden, Switzerland, UK, US B. Countries in which launch of the product via EnronOnline will need to be delayed Canada, Germany (reasons set out below) C. General Issues (applicable in all countries) The credit product is fundamentally different from the usual energy and related products we trade and so gives rise to new or increased legal risks of a general nature: (i) Capacity - We will not be able to assume generally that our counterparties will have the legal power and authority necessary to trade the product and so will need to check each counterparty's constitutional documents before allowing them to trade the product online. This applies to almost all entities (eg corporates, municipalities, insurance companies) in all countries. Some entities may lack the power to trade under the general law (in which case we will not be able to deal with them at all) or under their constitutional documents (in which case they will need to amend their constitutional documents if they wish to trade). The check need only be made once at the beginning of the credit trading relationship and so can be added to our procedures. It is not a particularly onerous job and will increase the cost of this business only incrementally. (ii) Confidentiality - We will need to put in place procedures to ensure that we are not misusing confidential information about our business counterparties on whom we are offering credit protection. Misuse can occur both in pricing the product and trading it. The procedures will not include formal Chinese Walls separating the credit traders from our other traders or the credit department (a point we have managed to agree with both UK and US counsel following very detailed discussions). The procedures will include (a) the use of a Restricted List in both the US and Europe (similar to the procedure currently used in Houston); and (b) practical steps to ensure that confidential information derived from other areas of our business and which we are not entitled to use (eg because it is the subject of a confidentiality agreement) is not imparted to the credit traders. In addition, where Enron has an especially close relationship with a prospective reference entity, or otherwise has confidential information relating to such an entity, we will need its written consent before offering protection on that entity. Without such consent, there will be an unjustifiably high risk of being sued by that entity for breach of confidence. D. Country Specific Issues (i) Canada - There is a substantial risk that the product will constitute insurance business, constituting an offence and rendering contracts in the product unenforceable against our counterparties. We should try to resolve this issue with the Canadian authorities before launching the product in Canada. Timeframe for clearance is highly uncertain since it is not clear which Canadian authority would take jurisdiction of the matter. (ii) Germany - Again the issue is insurance. The risk is higher than in Canada and so Germany should be excluded initially. (iii) Norway - There is a material risk that the credit product could be regarded as gaming in Norway, in which case trades would be void and unenforceable. The normal way to mitigate this risk in Norway is by using a "substantial professional effort" to satisfy ourselves that a trade is being entered into for valid commercial purposes (normally hedging) by our counterparty. Clearly, it will not be possible to take such steps on a trade by trade basis in the context of EnronOnline. At a minimum, we should therefore ensure at the outset of the online trading relationship in this product with each Norwegian counterparty that there is a commercial logic behind its trading this product type. (iv) Switzerland - If the credit product is the main purpose of our trading relationship with a counterparty, we should check with the Swiss supervisory authority whether the product constitutes insurance (the position being unclear). If a trade is insurance, it can be terminated by the counterparty (which is obviously of greater concern if Enron is the Buyer) and an offence will be committed since Enron is not authorised as a Swiss insurer. However, I understand that the initial group of counterparties will be existing business relationships, in which case we can parallel path this issue. (v) US (New York Law) (a) CFTC regulation - by structuring the product either as a swap or an option (and meeting certain other conditions) we can rely on exemptions under the US Commodities Exchange Act. (b) US securities laws - there is a small chance that the credit product constitutes a "security" under US securities laws (please see attached Executive Summary). However, SEC regulations allow the public offering of securities to "accredited investors" which will allow us to deal with investors having at least US$5 million in assets. Since most of our counterparties will be fairly large, sophisticated players, this test should not impede the business. © Insider trading - US counsel have advised that the risk of insider trading occurring as a result of the product being characterised as security (see (b) above) is relatively remote. ------------------------------------------------------------------------------ -------------------- Please feel free to call me on x36566 if you would like to discuss this project further. Best regards Paul
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