“In the last year, more than 50 mutual funds and insurance companies, including some of the largest and best known in America, invested in a trust created by Enron in 1997 to finance the operations of several of the energy company’s shadowy partnerships. As a result, many individual investors — through these funds — unwittingly owned a piece of an entity that was used to finance some of the partnerships that contributed to Enron’s failure,” writes Gretchen Morgenson in today’s New York Times.

“In September 2000 the trust, called the Osprey Trust, raised $2.4 billion from institutional investors in a so-called private placement of notes due in January 2003. Within the last year, mutual fund and financial services companies like Putnam Investments, the Vanguard Group, Travelers and Prudential have bought Osprey debt.”

“By last fall, when Enron’s troubles started to surface, prices on the Osprey debt began to drop. Since they were ultimately backed by Enron shares, the securities appear to have lost 60 percent of their value for any fund or investor still holding them.”

“Osprey seems to have been a central fund-raising entity for several of Enron’s partnerships, including LJM and Whitewing L.P., a partnership created by Enron that invested in energy- related projects in Europe and South America, including an electric distribution company in Brazil. Whitewing allowed Enron to realize cash from the partnership’s investments, while keeping the partnership’s debt obligations — including the $2.4 billion it raised from large investors — off Enron’s balance sheet.”

“Enron had included Whitewing in its consolidated financial statements in 1998 but removed it in March 1999, arguing that since it was owned jointly by Enron and Osprey it no longer belonged in Enron’s reports. But when Enron’s fortunes started to decline last autumn, it became clear that Enron’s shareholders were ultimately responsible for the debt raised by Osprey. In a conference call with analysts and investors on Nov. 14, Jeffrey McMahon, who had only recently been appointed Enron’s chief financial officer, disclosed that Osprey’s assets, which had carried a book value of $4.7 billion, had declined in value by $600 million.”

“Mr. McMahon also disclosed for the first time that the Osprey debt was backed by 50 million shares of Enron common stock and that the company had an additional obligation to issue more shares if the assets held in Osprey and the common shares were insufficient to repay the debtholders in 2003.”

“Robert McCullough, a consultant to the electric utility industry at McCullough Research in Portland, Ore., calculated that the value of Osprey today is roughly 60 percent lower than its $4.7 billion book value stated last fall. His calculation takes into account the $600 million write-down disclosed by Mr. McMahon last November as well as the fact that the Enron stock backing the assets is now practically worthless.”

” ‘That means exposing the Osprey owners to a large discount from book value as well,’ Mr. McCullough said.”