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Feb 16

Andrew Hall's conflict of interest looks much like Andy Fastow's

Posted by Ron F in TradingRegulationObama AdministrationEnronenergycomplianceCitigroupCFOBanksBanking

Ron F

Does anybody else have problems with the fact that the head of the energy trading unit that Citigroup sold to Occidental last year is setting up a hedge fund?

It would be an entirely different situation if Andrew Hall were leaving Occidental to do this, but he isn't. Instead, he will wear both hats simultaneously.

That sure sounds like a clear conflict of interest to us. After all, fee structure of a hedge fund clearly incentivizes Hall to favor its investors over Occidental's, though the oil company has a 20 percent equity stake in the fund.

The FT doesn't explore this issue for some reason, referring merely to the fact that the two companies will be run "separately" and that the trades will be done "in parallel," whatever that means.

And the article's point about this deal having an air of history about it seems woefully misplaced.

Forget the fact that Hall's hedge fund, Astenbeck, is named after a village near the historic German castle he owns. The more telling historical reference has to do with the conflict of interest. Indeed, the last time we saw a conflict this clear-cut was when Andrew Fastow ran some of Enron's key off-balance-sheet partnerships while serving simultaneously as its CFO.

It was the disclosure of that particular factoid in a footnote that helped prompt short seller James Chanos to question Enron's financial results back in early 2001.

And maybe this is just a coincidence, but Enron was an energy trading company as well. Remember Get Shorty?

As a side note, my colleague Matt Quinn wonders if Hall's hedge fund will attract a lot of Citigroup's former fund investors, and even draw Citigroup itself as an investor. That way, they could skirt the ban on proprietary trading that the Obama administration is proposing. Plus the bank would get to benefit from trading without having to reflect the risk on its balance sheet.

But the big question is, would Citi and its investors be treated better than Occidental's shareholders?

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