Chewco
Encyclopedia
Chewco Investments L. P., was a limited partnership
associated with the Enron scandal
, which resulted in the bankruptcy of Enron
. It was named after the Star Wars
character Chewbacca
, because it was created to hide losses from the Joint Energy Development Investment Limited, known by its acronym "JEDI". Like Chewbacca, the Jedi Knights
were prominent characters in Star Wars.
Enron created Chewco as a limited partnership which would help keep the JEDI project off its books. It wanted to buy out the California Public Employees’ Retirement System
’s interest in JEDI, but it did not want to be forced, by accepted accounting principles, to consolidate
JEDI in the Enron financial statements and thus reflect debt and/or financial losses. Enron wanted to keep JEDI afloat, but it needed a partner to take at least a 3% stake, or the partnership's results would have to be included in Enron's financial statements. Chewco was created to be that partner.
The Chewco structure did not meet the SPE
consolidation rules. The three basic rules for nonconsolidation of an SPE require that the independent equity investor—
Chewco appeared to meet these tests, because it was financed by an unsecured loan from Barclay's Bank; in reality, however, the loan had been guaranteed by Enron stock held by Enron itself. Additionally, as investors became more wary of Chewco, Michael Kopper, an Enron employee who reported to CFO Andrew Fastow
, took over the titular management role and was used to hide actual ownership. With Enron thus assuming practical control over Chewco, the structure did not meet an additional requirement for a non-consolidated SPE. More prosaically, this was one of many ways in which Enron "cooked the books", failing to disclose corporate debt that SEC regulations require to be disclosed.
Over the course of three years, Kopper received between $1.5 and $2 million in management fees from Chewco, some of which was kicked back to Fastow in the form of checks written to members of his family. According to the Powers Report (the report of the investigative committee chaired by William Powers, Jr) Kopper did little actual work, aside from time spent manipulating the books. Chewco itself did little actual work other than moving funds from one account to another, and that was done with minor expenditure of labor by lower-level employees.
After all was said and done, Enron used Chewco to report roughly $400 million in profits which did not exist, while concealing $600 million in debt. Enron's requirement to restate its earnings to remove this fake $400 million profit was a primary catalyst of Enron's downfall.
Limited partnership
A limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners , there are one or more limited partners . It is a partnership in which only one partner is required to be a general partner.The GPs are, in all major respects,...
associated with the Enron scandal
Enron scandal
The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world...
, which resulted in the bankruptcy of Enron
Enron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 22,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with...
. It was named after the Star Wars
Star Wars
Star Wars is an American epic space opera film series created by George Lucas. The first film in the series was originally released on May 25, 1977, under the title Star Wars, by 20th Century Fox, and became a worldwide pop culture phenomenon, followed by two sequels, released at three-year...
character Chewbacca
Chewbacca
Chewbacca, also known as Chewie, is a character in the Star Wars franchise, portrayed by Peter Mayhew. In the series' narrative chronology, he appears in Episode III: Revenge of the Sith, Episode IV: A New Hope, Episode V: The Empire Strikes Back and Episode VI: Return of the Jedi...
, because it was created to hide losses from the Joint Energy Development Investment Limited, known by its acronym "JEDI". Like Chewbacca, the Jedi Knights
Jedi
The Jedi are characters in the Star Wars universe and the series's main protagonists. The Jedi use a power called the Force and weapons called lightsabers, which emit a controlled energy flow in the shape of a sword, in order to serve and protect the Republic and the galaxy at large from conflict...
were prominent characters in Star Wars.
Enron created Chewco as a limited partnership which would help keep the JEDI project off its books. It wanted to buy out the California Public Employees’ Retirement System
CalPERS
The California Public Employees' Retirement System or CalPERS is an agency in the California executive branch that "manages pension and health benefits for more than 1.6 million California public employees, retirees, and their families"...
’s interest in JEDI, but it did not want to be forced, by accepted accounting principles, to consolidate
Consolidation (business)
Consolidation or amalgamation is the act of merging many things into one. In business, it often refers to the mergers and acquisitions of many smaller companies into much larger ones. In the context of financial accounting, consolidation refers to the aggregation of financial statements of a group...
JEDI in the Enron financial statements and thus reflect debt and/or financial losses. Enron wanted to keep JEDI afloat, but it needed a partner to take at least a 3% stake, or the partnership's results would have to be included in Enron's financial statements. Chewco was created to be that partner.
The Chewco structure did not meet the SPE
Special purpose entity
A special purpose entity is a legal entity created to fulfill narrow, specific or temporary objectives...
consolidation rules. The three basic rules for nonconsolidation of an SPE require that the independent equity investor—
- continuously invest at least 3% of the SPE’s assets;
- exercise control of and assume risks of the SPE; and
- like all other transactions, provide real (potential) economic benefits to Enron.
Chewco appeared to meet these tests, because it was financed by an unsecured loan from Barclay's Bank; in reality, however, the loan had been guaranteed by Enron stock held by Enron itself. Additionally, as investors became more wary of Chewco, Michael Kopper, an Enron employee who reported to CFO Andrew Fastow
Andrew Fastow
Andrew Stuart Fastow was the chief financial officer of Enron Corporation that was based in Houston, Texas until the U.S. Securities and Exchange Commission opened an investigation into his and the company's conduct in 2001...
, took over the titular management role and was used to hide actual ownership. With Enron thus assuming practical control over Chewco, the structure did not meet an additional requirement for a non-consolidated SPE. More prosaically, this was one of many ways in which Enron "cooked the books", failing to disclose corporate debt that SEC regulations require to be disclosed.
Over the course of three years, Kopper received between $1.5 and $2 million in management fees from Chewco, some of which was kicked back to Fastow in the form of checks written to members of his family. According to the Powers Report (the report of the investigative committee chaired by William Powers, Jr) Kopper did little actual work, aside from time spent manipulating the books. Chewco itself did little actual work other than moving funds from one account to another, and that was done with minor expenditure of labor by lower-level employees.
After all was said and done, Enron used Chewco to report roughly $400 million in profits which did not exist, while concealing $600 million in debt. Enron's requirement to restate its earnings to remove this fake $400 million profit was a primary catalyst of Enron's downfall.