Sara:

    As promised, this email discusses the securities laws issues involved
with equity derivatives, I
then make a few observations about the relationship between the securities
and commodities laws, and I
then makes some comments on the confirmations you sent me (both securities
laws comments and other
comments.

The principal securities laws issues relate to the fact that the equity
derivative itself is a security and to the
issue of whether and to what extent a counterparty,s activities in
establishing or unwinding a hedge are
attributable to the issuer.  When Enron enters into a derivative and the
counterparty goes out into the
market to make a purchase, is that purchase attributable to Enron?  When it
unwinds its hedge by making
a sale, is the counterparty,s sale attributable to Enron and therefore
required to be registered?  Here are
the principal issues:

1)  Rule 10b-5.  When Enron enters into a derivative, it must be sure it
does
not have undisclosed
material inside information regarding its affairs.  It is my understanding
that the traders are
supposed to check with Rex Rogers on the issue of whether Enron possesses
such information.
Although it could discharge its obligations under Rule 10b-5 by disclosing
the information to the
counterparty, that would probably be unacceptable since the counterparty
would then be in
possession of material inside information and could not engage in a market
transaction to hedge.
Thus, each time it enters into an equity derivative in its own stock, Enron
must be confident that
the public has available to it all material information regarding Enron.

2)  Rule 10b-18.  This rule permits issuers and persons acting in concert
with issuers to repurchase
the issuer,s  shares under a &safe harbor8 that says in effect that if
purchases are made pursuant
to the rule they won,t be deemed to be manipulative by reason of the timing
and amounts of the
bids or purchases.  It is typical for an issuer to require its counterparty
to make purchases
pursuant to the rule.  Sometimes this is a contractual undertaking in the
confirmation, and in
some cases the issuer will simply obtain an oral commitment from the
counterparty to engage in
its hedges pursuant to the rule.  Obviously, it is better to have it in
writing.

3)  Registration of Sales.  If Enron decides to net share settle and issues
shares to the counterparty,
those are obviously restricted securities that cannot be sold by the
counterparty in the absence of a
registration statement.  But what about the resales by the issuer when it
unwinds its hedge that it
has put on by buying shares in the open market?  Are those sales
attributable
to the issuer so
therefore required to be registered?  I have seen lots of counterparties,
based on advice of their
law firms, take different positions on this:

a)  Some counterparties say that they want registration rights covering
resales of shares
purchased in the open market to hedge a derivative with the issuer.  If the
economics of
the derivative are determined based on the net proceeds from the sales, it,s

a more
difficult case because the issuer itself is realizing benefits and
detriments
from the sales.
b)  Some counterparties say they want registration rights covering resales
of
shares
purchased in the open market to hedge a derivative with the issuer only if
there is a
strong correlation at the onset of the contract between the terms of the
derivative and the
hedge.  It it,s a total return swap, for example, there will be a 1:1
correspondence (i.e.
the economics will tell you that the counterparty will buy 100% of the
shares
covered by
the swap immediately upon entering into the swap); but if it,s something
like
a collar
with divergent strike prices and involves dynamic hedging where it,s not
clear whether
and to what extent the counterparty will make purchases or sales in the open

market,
then it,s not as easy to attribute the counterparty,s actions to the issuer.

 In those cases
these counterparties look at the correlation and if it,s not that great they

don,t ask for
registration rights.
c)  Some counterparties say they don,t want registration rights for resales
of stock
purchased in the open market to hedge their position.

Credit Suisse First Boston falls in category c) with respect to the May 2000

confirmation you sent
me. Even though there is a strong correlation between the deal and the hedge

( i.e. even though
in that case they will no doubt immediately purchase 100% of the shares
covered by the
transaction) they are only asking for registration rights with respect to
the
shares that are
delivered by Enron on net share settlement.

4)  Commodities Laws.  Under the commodities laws there are some risks in
doing equity swaps in
that one has to rely on the swaps policy statement rather than the swaps
exemption, but those
risks are probably minimal enough that Enron is willing to take them.  (The
swaps exemption
does not cover equity swaps.)  With respect to equity options, they are
outside the CFTC,s
jurisdiction altogether.  Forward contracts present the most difficult
issues
in that there is a lot of
case law and CFTC lore about the distinction between forwards and futures,
and a key distinction
is that forwards are physical delivery contracts that bind the parties to
make and take delivery.
State bucket shop laws outlaw contracts that purport to be contracts for
sale
of a security that are
to be settled based on market price quotations.  So I would counsel Enron
not
to enter into any
forward contract that has a cash settlement alternative.  Although one can
argue that net share
settlement has the same defects, I don,t feel as strongly about that because

you could get to where
you want to get by physically delivering the  shares and issuing  new shares

in payment; the
theory is that you actually delivered shares and just netted them out; that
is not quite as bad as
flying in the face of the case law and CFTC lore on net cash settlement.

The Bear Stearns Confirmation and Cancellation.  I really don,t have any
comments on this; I think the
cancellation was effective to cancel the parties obligations.  The
confirmation did not present any
registration issues.  I guess I would say that if you do something precisely

like this you might get them to
agree to make any hedge purchases pursuant to Rule 10b-18, but that,s it.

The Credit Suisse First Boston Confirmation.  This is an extremely well
written document.  For the
reasons discussed above, I would counsel against entering into this kind of
transaction with the cash
settlement feature, in light of the risk that it could be characterized as
an
illegal, unenforceable futures
contract.  A few other comments: They say automatic early termination
applies, but I think that is a really
bad idea.  Enron had an agreement with a counterparty that took bankruptcy
and Enron did not find out
about it until a few days later, after the market had moved; since Enron did

not know of the termination it
did not unwind its hedge, yet the ISDA said that the amounts payable on
termination would depend on the
termination date pricing.  So Enron took a loss.  You ought to always have
within your control the right to
terminate.  This is especially true of U.S. parties, but I would think the
same would apply to foreign
parties unless there is something peculiar about the law of the jurisdiction

you are dealing with.

Both Confirmations  Both confirmations have language that says that if the
parties have not entered into
an ISDA Master then the counterparties, standard form controls.  I think it
is not a good idea to agree to
such language because you are agreeing to something you know nothing about.

Additional Comment.  I think that whenever a counterparty requests
registration rights Rex should be
involved.  I think the CSFB confirmation,s provisions relating to
registration are fine, and of course they
can,t force us to register because the choice of net share settling is
purely
our choice.  Nevertheless, I
think that Rex needs to be involved so you and Rex need to get this point
across to the business people that
they shouldn,t just sign a confirmation and then send it to you and ask if
it
is ok.

But my bottom line is the only change I would make would be eliminating the
net cash settlement feature
in the CSFB confirmation.