Proposed London Equity Trading Desk

---------------------- Forwarded by Mark - ECT Legal Taylor/HOU/ECT on
02/08/99 09:17 AM ---------------------------

Mark Elliott
02/03/99 05:43 AM
To: Mark - ECT Legal Taylor/HOU/ECT@ECT
cc:
Subject: Proposed London Equity Trading Desk

Mark,

Further to Mark Haedicke's e-mails, for your information please see below my
e-mail of yesterday evening to Mark Haedicke and Scott Sefton re the impact
of English law on a potential Equity trading desk based in London.

Kind regards

Mark
---------------------- Forwarded by Mark Elliott/LON/ECT on 02/03/99 11:41 AM
---------------------------

Mark Elliott
02/02/99 06:33 PM
To: Mark E Haedicke/HOU/ECT@ECT, Scott Sefton/LON/ECT@ECT
cc:
Subject: Proposed London Equity Trading Desk

I have reviewed the above proposal (which includes having had some in-depth
conference calls with Slaughter & May, London) and conclude that the project
is technically and legally viable provided that the points listed below are
dealt with. Mark, once you have read this note, if you would like to discuss
the contents with Scott and me, please do not hesitate to give us a call.

SFA Authorisation and Structure

On account of the potential frequency and size of trading (even on an
execution-only basis for ECT Investments Inc), the London Desk should be
authorised by the SFA. The personnel involved in the activity should be
registered with the SFA as, at least, Securities Representatives, and
preferably as General Representatives.

Accordingly, subject to Tax Department's input, the London traders should be
located in EEFT (already SFA-regulated) which would act as arranger or agent
for the existing Houston-based equity trading corporation, ECT Investments,
Inc (the latter as principal).

Subject to Tax and other internal considerations, it would also be possible
for EEFT to act as agent to do this business for, as principal, either
ECTRIC, the proposed replacement vehicle for ECTRIC, or a new UK unregulated
entity (the latter would apply if a UK book was required). A UK entity, as
principal, would be "unregulated" if it was a purely passive booking company.

Provided that the ultimate principal is either ECT Investments, Inc., ECTRIC
or an unregulated UK principal, there should not be any UK regulatory capital
requirements.

The SFA would need to be informed in advance of our intention to have an
equity trading capability in London and EEFT's SFA business profile would
need to be extended to cover both arranging and dealing as agent in respect
of equities.

Transaction Reporting

As the business would be SFA regulated per the above, SFA Rule 5-49 would
require all transactions to be "Transaction Reported" - for pure cash equity
business (wherever the equities are listed) this would be accomplished by
computer-entry of trade details which would then download to one of the
London Stock Exchange's ("LSE's") systems known as either "SEQUAL" or
"CHECKING".

The purpose of such reporting is not only to enable the LSE and SFA to
establish daily market volumes, etc., but also, for example, to provide the
relevant information to the LSE's surveillance unit which actively monitors
all trades for signs of Insider Dealing.

Systems' impact

On the above structure, there should be no extra systems' requirements,
except:-

PC screens for the traders having feeds of market quotes / market
information (e.g., Reuters, Telerate, etc):

potentially a computer-link for settlement purposes

a computer-link for the Transaction Reporting of executed deals to the LSE
(see above)

a computer-link to produce exception reports of executed deals to enable a
Compliance Department to monitor for Disclosable Interests in Shares (see
below)

a computer-link to produce reports of executed deals for monitoring against
the Watch and Restricted Lists (see Insider Dealing below)

Accountants, e.g., Arthur Andersen, would be the best placed to advise on the
correct form of computer-links, especially those for Transaction Reporting
purposes.

Disclosure of Interests in shares

Re UK listed companies there are the following disclosures to be made of
equity interests:-

S. 198 Companies Act '85 - acquisition of 3 % interest or more, or disposal
to below a 3% interest, or acquisition of each whole % above a 3% interest of
a UK Public Co's voting capital requires to be disclosed to the company.
Group interests / concert party interests are aggregated to arrive at the
thresholds and "interest" includes a right or option to acquire shares.

Substantial Acquisition Rules - acquisition of over 15% interest in a UK
public company requires separate disclosure to the Company and, if listed, to
the LSE.

Rule 9 Takeover Code - acquisition of 30 % or more of UK public company's
voting shares leads to a requirement to make a cash offer for the remainder.

S. 212 Companies Act '85 - UK public companies can request at any time an
entity to disclose to the company particulars of their, and other persons',
interests in the company's share capital, including such details for the last
three years.

Rule 8.3 Takeover Code - during an "offer period" relating to a UK public
company (and the offer is a "securities exchange offer"), persons owning or
controlling directly or indirectly 1% or more of relevant securities of that
company (including cash-settled derivatives) must disclose such interests to
the Take-Over Panel.

Please note that there may be similar rules in other jurisdictions, depending
on where the relevant equities are listed - indeed in some jurisdictions
there may be prohibitions on foreign ownership of equities.

Insider Dealing

Looking just to the UK legislation (The Criminal Justice Act 1993), the
various criminal offences of Insider Dealing are committed, basically, when
an individual has Inside Information (meaning unpublished price-sensitive
information) concerning the securities of an entity or entities (whether UK
or non-UK) which are officially listed in any State within the European
Economic Area or admitted to dealing, or quoted, on a "Regulated Market"
(e.g., including the major European markets, NASDAQ, etc). Please note that
"price-sensitive" means likely to have a significant effect on the price of
any securities - not just those of the entity or entities in respect of which
one has the knowledge; and "securities" includes shares, debentures, options
to subscribe for shares / debentures, depository receipts, futures and CFDs.
Once in knowledgeable possession of insider information, the offences are
commited if one deals in price-affected securities in relation to that
information, or encourages another to so deal or discloses the information.
The offence is punishable by imprisonment and / or fines.

The offences are highly technical and there are certain defences
available.

The manner in which to try to prevent the internal commission of the offences
is to put in place, simply, "established and effective" Chinese Walls between
those individuals who would be involved in the Equity Trading facility and
others in within the Enron Group who may have such inside information, to
prevent the potential flows of Inside Information between those with such
information and the Equity Traders in London. Both I and Slaughter & May
feel that potentially replicating in London the Enron Chinese Wall policy
actively followed in Houston could suffice in this respect as it is generally
felt that the US requirements should be at least as stringent as those
required in the UK. Alan Aronowitz is in the process of sending me
Houston's policy in this regard for review and upon receipt that policy will
be reviewed accordingly.

However, the relevant Chinese Walls would need to be put in place for Insider
Dealing purposes between, in my and Slaughters' views, (a) on the one side,
the Equity Traders and (b) on the other side, originators and traders, and
persons involved in any corporate finance, M&A, Joint Venture, and financing
activity.

Not only would the Chinese Walls need to be implemented, but also they would
need to be actively monitored by a Compliance Department in London to ensure
that they were being observed and effective.

In addition to the Houston Chinese Wall policy, there should be implemented
both a "Watch List" and a "Restricted List" procedure (I understand the
latter already exists and would need to be combined with additions to such
list in London ) - the Watch List does not actively prevent trading in
relevant securities, but is an intermediate step before a stock is placed on
the Restricted List: i.e., companies in which Enron is involved in sensitive
transactions would be placed on such a list and an internal Compliance
Department should then actively monitor for any unusual deals by the Equity
Traders (e.g., by volume etc) in stocks of the Companies on such list. If
any irregular trading activity is then spotted - it could be internally
investigated. Obviously, an internal procedure would need to be established
to gather information on sensitive transactions so that they could be placed
on the Watch / Restricted Lists as appropriate.

Other Confidential Information

In addition to any specific Insider Information, various Enron Group entities
will be party to specific Confidentiality Agreements (or other forms of
Agreement, e.g., Master Agreements, containing confidentiality clauses) with
third parties, pursuant to which the Enron entities may have confidentiality
obligations to those third parties and which may prevent the contracting
Enron entities from disclosing certain information to affiliated Enron
entities.

Obviously, in order to comply with our various obligations in this regard we
would need either to check each contract or ensure that Enron personnel were
aware of their obligations in this regard and never disclosed to the London
Equity traders any information covered by the confidentiality obligations.
The Watch List could be used to log, for monitoring purposes, companies to
whom Enron owes confidentiality obligations.

Both with regard to Insider Information and this form of confidential
information, employees would need to be actively trained to ensure that only
generally available market sentiment on a third party could be passed on to
the London Equity traders and not more specific information.

Compliance Department

If this proposal moves ahead, my suggestion is that Enron in London would
need to hire an experienced Compliance professional for the following
purposes:-

active implementation of, review of, and consistent monitoring of, the
Chinese Wall policy;

active monitoring of executed deals against Watch and Restricted Lists;

active monitoring of executed deals for Disclosable Interests in Shares in
the UK and similar rules and prohibitions in other jurisdictions;

handling SFA and LSE queries on Transaction Reporting;

handling potential LSE and Takeover Panel queries on executed Transactions;
and

running continuous training courses for Enron personnel on Insider Dealing,
confidentiality obligations, etc.

In addition, such person could have responsibility for the implementation of,
monitoring of, and ensuring compliance with, SFA Conduct of Business Rules
and Moneylaundering compliance, and any relevant exchange rules, firm-wide in
London across all of Enron's business - e.g., its OTC Derivatives'
business.
Kind regards

Mark

---------------------- Forwarded by Mark - ECT Legal Taylor/HOU/ECT on
02/08/99 09:17 AM ---------------------------

Mark Elliott
02/05/99 04:15 AM
To: Mark E Haedicke/HOU/ECT@ECT, Mark - ECT Legal Taylor/HOU/ECT@ECT, Scott
Sefton/LON/ECT@ECT
cc:
Subject: London Equities Trading Desk - US legal advice

Further to my Questionnaire to Maureen Bartlett at Cadwalader on the
applicability of U.S. securities' laws in the context of a London Equities'
Desk, I received Maureen's responses in a lengthy telephone call yesterday
afternoon. I shall only comment where according to Maureen we shall have to
be mindful of an issue - where I do not comment, Maureen said the answer to
the Question was "no" (i.e., good news for us). Hence, Maureen's advice:-

Q 6 - Generally, ECTII would only bear responsibility to US regulatory
authorities for EEFT's acts and omissions if ECTII was a "knowing
co-conspirator" in an EEFT act or omission which violated US securities'
laws. EEFT would not have any responsibility for its acts and omissions to
any US regulatory authority. EEFT would not have any responsibility to US
regulatory authorities for any acts or omissions of ECTII except again only
to the extent that it may have colluded with ECTII. The only exceptions to
these positions are set out below.

Q 7 - U.S. disclosure requirements re interests in equities - where initially
EEFT acts as pure arranger without any discretion for ECTII (i.e., pure
execution-only facility in London), the U.S. disclosure requirements will be
down to ECTII to comply with (as the principal). This will still be the case
if EEFT moves to having agency authority (i.e., having discretion) to book
trades to ECTII - the only difference here is that there will need to be
extra careful monitoring to ensure that EEFT does not do a deal in a stock
out of London which, when aggregated with other Enron Group interests in that
stock, take us over a disclosable amount (e.g., under s 13d SEA '34, a 5 %
holding of a stock registered under s 12 SEA '34; and 10 % under s 16a SEA
'34). This will mean that we shall need extra careful use and monitoring of
Watch and Restricted Lists between London and Houston and may be London
having a policy preventing acquisition by the London desk of a large block of
stock (to be defined) in any U.S. entity without Houston's consent.

Q 8 + Q 9 - U.S. Insider Dealing laws apply to (a) stock of U.S. issuers and
(b) stock of non-U.S. issuers listed in the U.S.. EEFT would not be liable
under U.S. Insider Dealing laws unless it knew that it had price-sensitive
information (as defined under U.S. laws) and dealt in either (a) or (b) or
encouraged another to deal, etc. ECTII would not be liable vicariously to
the US authorities for EEFT in this respect - ECTII would have to have
committed the offence itself, e.g. by having the knowledge then dealing etc
or colluding with EEFT. Vice versa applies re ECTII - EEFT. Basically this
comes down, once again, to having adequate. and well monitored Chinese Walls,
procedures, education of staff re what they can and cannot do etc. As well
as other Chinese Walls, obviously ECTII staff would not be able to pass
price-sensitive information which is not publicly known to EEFT staff and
vice versa.

Q 10 + 11 - Re Reg S new issues. As ECTII would be the principal and is in
the US, not only is ECTII directly prevented from buying a Reg S offering
within the lock-out period but so would EEFT as ECTII's arranger / agent. If
EEFT purchased a Reg S offering within the lock-out period, ECTII would have
broken the rules. Obviously this would have to go into the compliance manual
governing EEFT's conduct and again London trading would need to be actively
monitored for compliance.

I still firmly believe that there is nothing in the above advice which makes
a London equities' facility for Houston legally and technically difficult -
it comes down to Chinese Walls, policies and procedures and active daily
monitoring by a compliance department of the activities of the London desk.

Maureen will shortly be sending me her written confirmation of the advice
which she gave me over the telephone.

Kind regards

Mark