Enron and Arnold: What Lies Behind Schwarzenegger's 2001 Meeting with Enron's Ken Lay? by Gar Smith
Arnold and City National Bank: A $4 Million Crime? by Gar Smith

October 24, 2003

Enron and Arnold: What Lies behind Schwarzenegger's 2001 Meeting with Enron's Ken Lay?
Gar Smith / The-Edge

Do you think that the governor-elect should explain why he was meeting with the man the Foundation for Taxpayer and Consumer Rights (www.consumerwatchdog.org) calls "the progenitor of deregulation and the head of the gang stealing billions from our businesses, consumers and taxpayers"? Do you think that, as governor, he should demand a full refund of the billions that Enron and other energy criminals stole from California? You can share your views with the governor-elect at: www.joinarnold.com/en/agenda/shareyourviews.php ©Computer graphic by The-Edge
The week before California's recall election, reporter Greg Palast penned a head-spinning article for the The Observer (London). "It's not what Arnold Schwarzenegger did to the girls a decade back that should raise an eyebrow," Palast declared, "it's his dalliance with the boys in a hotel room just two years ago that's the real scandal."

What Palast was referring to was a meeting that Schwarzenegger attended at the Beverly Hills Pennisula Hotel in Los Angeles on May 17, 2001. It was at that little-reported tyrst, Palast wrote, that Arnold "had consensual political intercourse with Enron chieftain Kenneth Lay [and]... convicted stock swindler Mike Milken."

Palast's scoop came from 34 pages of leaked Enron documents that spelled out the purpose of a meeting that was held in the midst of the state's energy crisis and only ten days after Enron and other out-of-state energy suppliers conspired to trigger a 48-blackout. The Enron e-mails confirm that Schwarzenegger was among the elite group that met with Lay. Asked for comment, Schwarzenegger now claims that he does not recall the meeting.

According to Palast, "Schwarzenegger knowingly joined the hush-hush encounter as part of a campaign to sabotage a [Governor Gray] Davis-Bustamante plan to make Enron and other power pirates then ravaging California pay back... $9 billion in illicit profits."

In 2002, California Lieutenant Governor Cruz Bustamante sued the Power Re-arrangers under California's "Unfair Business Practices Act." The lawsuit would force Enron and the other Power Barons to refund the $9 billion in illicit profits that they scammed from California's utility customers.

The Enron-Arnold meeting was called just one month after Bustamante filed his public-interest lawsuit. Palast provides the following scenario.

"While Bustamante's kicking Enron butt in court, the Davis Administration is simultaneously demanding that George Bush's energy regulators order the $9 billion refund. Don't hold your breath: Bush's Federal Energy Regulatory Commission is headed by a guy proposed by... Ken Lay.

"But Bush's boys on the commission have a problem. The evidence against the electricity barons is rock solid: fraudulent reporting of sales transactions, megawatt 'laundering,' fake power-delivery scheduling and straight-out conspiracy....

"So the Bush commissioners cook up a terrific scheme: charge the companies with conspiracy but offer them, behind closed doors, deals in which they have to pay only two cents on each dollar they filched.

"Problem: the slap-on-the-wrist refunds won't sail if the Governor of California won't play along. Solution: Re-call the Governor."

This, of course, leads to another problem. Davis' successor would be Cruz Bustamante. Solution? A recall candidate with name recognition, charisma and millions of dollars in campaign funds. In a word: Arnold.

"The pay-off?" Palast continues: "Once Arnold is Governor, he blesses the sweetheart settlements with the power companies. When that happens, Bustamante's court cases are probably lost. There aren't many judges who will let a case go to trial to protect a state if that a governor has already allowed the matter to be 'settled' by a regulatory agency."

Ironically, Palast notes, while "the $8 billion deficit is the hanging rope California's right wing is using to lynch Governor Davis," Davis and Bustamante were the only ones that stood a chance at balancing the budget by legally reclaiming the billions that were "vacuumed out of the state by Enron, Reliant, Dynegy, Williams Company and the other Texas bandits who squeezed the state by the bulbs."

With Arnold in Sacramento, Palast predicts, "it's 'hasta la vista' to the $9 billion."

When Palast called Schwarzenegger's campaign for a response to the disclosure of the Enron memos, they declined to comment.

Although candidate Schwarzenegger claimed that he had no memory of his 2001 meeting with Ken Lay, Governor-elect Schwarzenegger seems to have experienced "total recall."

Three days after the election, Schwarzenegger announced that one of his first acts as governor would be to reinstitute the disastrous policy of energy deregulation -- a business-friendly policy concocted by former Republican Governor Pete Wilson (now a Schwarzenegger advisor) that triggered the blackouts, bankruptcies and budget-busting deficits that plagued the Davis administration.

As a candidate, Schwarzenegger never mentioned returning the state to the untrammeled anarchy of energy deregulation. While Gray Davis had won points with the public for putting the breaks on the deregulated "free market" in oil, gas and electricity, the governor-elect was moving to cast off his populist cape and reveal his hidden identity as "The Deregulator."

There was another matter that candidate Schwarzenegger never mentioned that now became a priority for the governor-elect. As governor, Schwarzenegger hinted, he would act to terminate the troublesome Davis-Bustamante lawsuit against the energy pirates.

"It's time to settle and move on," a Schwarzenegger spokesperson stated. "We don't want to inherit litigation." (Not even if it means recouping $9 billion in stolen revenue.)

The Enron Emails have been posted online by the Foundation for Taxpayer and Consumer Rights: www.ConsumerWatchdog.org. Greg Palast's complete report, "Arnold Unplugged," may be accessed at: www.gregpalast.com.

Arnold and City National Bank: The $4 Million Crime
Gar Smith / The-Edge

The Golden State’s new house band Twisted Sister. When Arnold sang "I Ain’t Gonna Take It," he wasn’t referring to campaign donations from big business.
At 9:30 in the morning of October 2, a lawsuit was filed in Department 53 of the Superior Court of the State of California. The lawsuit asked for a Temporary Restraining Order and was directed against Arnold Schwarzenegger, Californians for Schwarzenegger and the City National Bank (CNB).

The plaintiff, Bill Camp the executive director of California's Central Labor Council, filed the complaint in a desperate effort to stop Schwarzenegger from spending more than $4 million in the last week of what appeared to be a very close recall race.

As Camp and his attorneys saw it, Schwarzenegger was guilty of two offenses: he had broken his word and he had broken the law -- Proposition 34, to be precise.

Proposition 34, the 2000 Political Reform Act initiative, was designed to close "loopholes for wealthy candidates" by placing a $100,000 limit on the amount of money rich office-seekers could lend to their political campaigns. Prop. 34 also capped third-party loans to gubernatorial candidates at $21,200.

What raised eyebrows (and hackles) was the discovery that Schwarzenegger -- who had repeatedly stated that he didn't need any outside money and, consequently, "couldn't be bought" -- had arranged to accept $4.5 million in campaign loans from City National Bank.

Had Arnold spent $4.5 million of his own money on his campaign, that would have been legal under the US Supreme Court's controversial "Buckley v. Valeo" Decision that holds political contributions to be a protected exercise of "free speech."

Camp's lawsuit notes that Prop. 34 "does not allow a wealthy candidate to leverage that wealth by obtaining huge loans on unreasonably favorable terms that can later be repaid by the special interests that he claims to be avoiding by using his personal wealth." When candidates use loans "to gain an immediate cash advantage over competitors," they are committing the very crime that Prop. 34 "is meant to prevent."

The Loan Arranger
Campaign filing reports reveal that, on September 10, 2003, Schwarzenegger loaned his committee $1.5 million. But that money was loaned to Schwarzenegger by CNB. On September 29, Schwarzenegger reported that he had loaned another $2.5 million to his campaign.

The legal challenge notes that Schwarzenegger's campaign "subsequently admitted that the $4 million loaned to the campaign was part of a total of $4.5 million in loans obtained from [CNB]." Camp's lawsuit charges that Schwarzenegger's reliance on massive bank loans meant that his campaign would be saddled with a huge post-election debt that would have to be paid off by a major fund-raising effort.

"Here's how it works," candidate Schwarzenegger famously explained to a circle of schoolchildren in one of his early TV ads: "Money comes in: favors go out." That equation is worth recalling in light of the fact that CNB "has its own political 'agenda' and its own lobbyist in Sacramento."

Among those left quietly seething in the wake of Schwarzenegger's loan-shark domination of the fiscal food-chain is Republican challenger Tom McClintock. While Schwarzenegger raked in million-dollar loans, McClintock struggled to raise $2 million through thousands of small -- and perfectly legal -- contributions.

"These people who have their own money assume the law does not apply to them," McClintock groused.

Of course, there is a simple way for Governor Schwarzenegger to cleave to his campaign promise to rely on his own wealth and eschew the entrapments of speicial interests: He can simply repay the City National Bank loan out of his own well-lined pockets.

The solution can be summed up in the following statement: "Governor, put your money where your mouth is."

Just a 'Regular Commercial Loan'
Schwarzenegger's managers insist that Prop. 34 does not apply to them because of a "quirk" in the law that exempts commercial loans made "in the lender's ordinary course of business on terms available to members of the general public."

But just how ordinary was CNB's loan to Schwarzenegger? Camp's lawsuit notes that the windfall was handed over as an unsecured loan at a lowly four percent interest (well below prevailing market rates of 10.25 to 15 percent).

A condition of Schwarzenegger's $4.5 million loan is that it must be repaid by February 2004 and this, the legal brief observes means that Schwarzenegger "will have to raise almost $5 million in approximately five months."

Loans exceeding $21,200 are permitted only when payment is made "for purposes unrelated to [the candidate's] candidacy for elective office" (Gov. Code § 82015; 82044). In this case, Camp argues, the loan was made "specifically for the purpose of furthering that candidacy by a Bank that is a sophisticated political player with its own lobbyists in Sacramento."

To be legal, "commercial loans" to a candidate must be made "in the lender's regular course of business on terms available to members of the general public" (Gov. Code § 85307(a)). Camp wonders how many members of the general public could obtain an unsecured five-month loan of $4.5 million at four percent interest.

Prop. 34 was designed, among other things, to prohibit office-seekers from colluding with lending institutions in the solicitation of funds. By asking the court to impose a restraining order on the use of the questionable loan, the legal brief made what would seem to be a compelling argument. "Once the campaign laws are violated and one candidate is given an unfair advantage, especially one week before the election, that advantage cannot be remedied effectively by any action after the election is over."

The Court Rules
Unfortunately Sacramento Superior Court Judge Loren E. McMaster thought otherwise. On October 2, 2003, only five days before the election, he denied the application for a TRO. McMaster ruled that the plaintiffs had failed to prove that CNB's loan was unusual. Besides, McMaster noted, CNB bank officer Chris Warmuth testified under oath that the loan was in compliance with § 85307.

Still, Judge McMaster apparently felt it necessary to provide himself some tactical cover. "While the Court may question whether a multi-million dollar loan at the prime rate with no security is a loan made in the regular course of business...," he wrote, "the court has no evidentiary basis to disbelieve or disregard Mr. Warmuth's statement under oath. The Court does note," Judge McMaster continued, "that Mr. Warmuth does not state anywhere in his declaration that the bank has made such a loan in the past."

Had McMaster granted the TRO, it would have brought Schwarzenegger's campaign juggernaut to a grinding halt. Instead, the judge instructed the Schwarzenegger campaign "to show cause why the Court should not grant a preliminary injunction." McMaster then set the hearing on the show-cause order for December 2, thereby rendering the challenge moot.

With the election over, the plantiffs are now free to begin the discovery process to compel the release of documents from the Schwarzenegger campaign and from the candidate himself. Depositions of CNB officials are to start no later than October 30 and depositions from Schwarzenegger are set for no later than November 10.

Applying the 'Schwarzenegger Exemption'
In the meantime, the Schwarzenegger Exemption invites emulation. Perhaps Independent Ariana Huffington and Green Candidate Peter Camejo (a savvy businessman who founded Progressive Assets Management) could apply for similar $4.5 million unsecured loans. With a little bit of investing acumen, they could well realize a 10 percent net gain on this four-percent loan. That would allow them to return the principal with interest and walk away with a cool quarter-million -- which they could then donate to the state's tattered social services.

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