Delaware plays role in Enron's unfolding drama

685 subsidiaries in state among corporation's 3,200 tax havens

February 03, 2002|By Joseph N. DiStefano | Joseph N. DiStefano,KNIGHT RIDDER/TRIBUNE

PHILADELPHIA - To manage its far-flung financial interests, avoid local taxes, and shroud high-stakes deals from investor scrutiny, Enron Corp. organized a sprawling network of 2,000 corporate subsidiaries in 62 countries and 23 U.S. states.

Hundreds of Enron units were set up in offshore tax havens such as the Cayman Islands; others, under the laws of Brazil, England, and other places where Enron did business, according to the bankrupt energy trading company's annual report.

But the largest number of Enron subsidiaries - 685, not counting duplicate names - were set up in Delaware, where the creation and care of corporate entities is big business.

The speed, secrecy, and state tax exemptions offered by Delaware, along with its business-friendly courts, have long enticed everyone from blue-chip corporations to international gangsters. State officials say more than half the Fortune 500 and the companies on the New York Stock Exchange are chartered there, and the General Accounting Office has cited Delaware as a haven for foreign money launderers.

No need to visit

You can start a Delaware company without ever going there. First, pick a Delaware-registered corporation agent. (They advertise in magazines and on the Web.) For just $85 in fees, you're in business. You don't need to open a bank account; disclose your profits, sales or purpose; or even give your name. Yearly fees of $50 to Delaware and another $100 or so to your agent keep you there.

The government agencies investigating Enron, and the outraged investors and ex-employees who are suing the company's former management, have not alleged wrongdoing by the Delawareans who helped Enron set up hundreds of subsidiaries. But Delaware-chartered Enron subsidiaries feature prominently in the massive losses the company reported last fall before filing for bankruptcy Dec. 2.

Those losses included more than $400 million suffered over the past four years by Enron's Joint Energy Development Investments L.P., a Delaware-chartered business that invested in foreign power plants.

Enron also acknowledged $1 billion in what it called "equity adjustments" due to prior "accounting errors" that had concealed losses from Raptor L.P., another Enron Delaware partnership, whose investments included New Power Co., an aggressive Enron electricity-sales company that tried to compete with regional power providers such as Philadelphia's Peco Energy.

Delaware is no stranger to notorious companies. A 2000 report on money laundering by the GAO said that Delaware's permissive incorporation rules invited abuse.

"We routinely and legitimately criticize foreign countries that allow the creation of corporations with secret ownership for the purpose of hiding money. Yet, in states in our own country, we are basically doing the same thing," U.S. Sen. Carl I. Levin, D-Mich., said at that time, citing Delaware's example.

Delawareans protest

But Delawareans call that attention unfair. "We're victims of our own renown," Richard Geisenberger head of the state Division of Corporations, said. "There is no state in the country that requires [company] to disclose" its owners or finances, he added. "Nonpublic companies have very good reasons why they don't want to disclose who the owners of their business are. It's one of the things that makes our economy run well."

Lawrence A. Hamermesh, a professor at the Widener School of Law and a member of Delaware's influential Corporation Law Council, added: "It is only at the federal level that enforcement and administration [of corporation law]makes any sense."

In all, 525,000 corporations, companies and partnerships are chartered in Delaware, mostly in Wilmington, where businesses outnumber people.

Since the early 20th century, giant companies such as General Motors Corp. and Coca-Cola Co. have operated under Delaware charters, although they are based in distant states. The government in Dover relies on corporate fees for 27 percent of its $2.3 billion in yearly revenue.

Even companies incorporated in other states often set up their subsidiaries in Delaware.

Enron, though based in Texas, is incorporated in Oregon, home of one of its more substantial subsidiaries, Portland General Electric.

The most valuable U.S. company, General Electric Co., is a New York corporation - but 12 of its 24 major subsidiaries are set up under Delaware law. Comcast Corp., a Pennsylvania corporation with a famously complex legal structure, incorporated two-thirds of its nearly 400 subsidiaries in Delaware.

What's the attraction? "Delaware does not impose its corporate tax on passive income" such as royalties or license fees, enabling corporations to legally avoid paying state income taxes on some of their operations in other states, Hamermesh, the Widener law professor, said.

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