Lead Plaintiff's Opposition to CSFB MSJ 11/13/06 - The ENRON Fraud

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
In re ENRON CORPORATION SECURITIES
LITIGATION
This Document Relates To:
MARK NEWBY, et al., Individually and On
Behalf of All Others Similarly Situated,
vs.
ENRON CORP., et al.,
Plaintiffs,
Defendants.
THE REGENTS OF THE UNIVERSITY OF
CALIFORNIA, et al., Individually and On Behalf
of All Others Similarly Situated,
vs.
KENNETH L. LAY, et al.,
Plaintiffs,
Defendants.
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Civil Action No. H-01-3624
(Consolidated)
CLASS ACTION
LEAD PLAINTIFF’S OPPOSITION TO THE CSFB DEFENDANTS’ MOTION AND
MEMORANDUM OF LAW IN SUPPORT OF THEIR MOTION FOR SUMMARY
JUDGMENT (DOCKET NOS. 4824 AND 4825)

TABLE OF CONTENTS
Page
I. INTRODUCTION ...............................................................................................................1
A. CSFB Transactions ..................................................................................................2
B. CSFB’s Actions Subject It to Primary Liability ......................................................4
C. CSFB Acted with Scienter.......................................................................................6
D. Red Herrings ............................................................................................................8
1. CSFB’s Laurence Nath ................................................................................8
2. LJM2 and New Power Allegations............................................................12
E. Summary Description of Lead Plaintiff’s Legal Claims Against CSFB ...............15
II.
ARGUMENT.....................................................................................................................16
A. The Summary Judgment Standard.........................................................................16
B. There Is a Genuine Issue of Material Fact Concerning Whether CSFB
Violated Rule 10b-5(a) and (c) ..............................................................................19
1. The Standard for Primary Scheme Liability Under Rule 10b-5(a)
and (c) ........................................................................................................19
2. CSFB’s Engagement in and Structuring of the Fraudulent
Transactions Subjects It to Primary Liability ............................................34
a. Related-Party Transactions ............................................................35
(1) LJM1 – The Illusory Rhythms “Hedge”............................35
(2) LJM1 – CSFB’s Bridge Loan Masked as an
“Investment” ......................................................................57
b. Prepays...........................................................................................62
(1) Year 2000 Fake Oil “Prepay” Transaction ........................62
(2) Year 2001 Fake Oil “Prepay” Transaction ........................91
c. FAS 125/140 Transactions.............................................................96
(1) Iguana: Fake “Sale” of Assets............................................96
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Page
(2) Nile: Fake “Sale” of Assets..............................................112
(3) Nikita: Fake “Sale” of Assets ..........................................131
d. Minority-Interest Transaction: Rawhide.....................................139
e. Share-Trust Transactions .............................................................146
(1) Osprey I & II....................................................................146
(i)
Osprey I................................................................146
(ii) Osprey II ..............................................................165
(2) Marlin I & II.....................................................................175
3. There Is a Genuine Issue of Material Fact Concerning Whether
CSFB Acted with Scienter.......................................................................186
a. The Scienter Standard on Summary Judgment............................186
b. CSFB’s Desire to Maintain and Enhance Its Relationship
with Enron to Earn Lucrative Investment Banking Fees.............190
c. CSFB Acted with Scienter in Engaging in Inherently
Deceptive Transactions with Enron.............................................192
(1) Year 2000 Fake Oil “Prepay” Transaction ......................192
(2) Year 2001 Fake Oil “Prepay” Transaction ......................194
(3) Iguana: Fake “Sale” of Assets..........................................194
(4) Nile: Fake “Sale” of Assets..............................................194
(5) Nikita: Fake “Sale” of Assets ..........................................196
(6) Rawhide ...........................................................................196
(7) LJM1 – The Illusory Rhythms “Hedge”..........................200
(8) LJM1 – CSFB’s Bridge Loan Masked as an
“Investment” ....................................................................201
(9) Project Firefly ..................................................................201
(10) LJM2................................................................................203
- ii -

- iii -
Page
(11) LJM3................................................................................206
(12) Osprey I and II .................................................................207
(13) Marlin I and II..................................................................208
C. Should the Court Require Additional Facts, Lead Plaintiff Requests
Further Discovery Under Fed. R. Civ. Pro. 56(f) ................................................210
D. There Is a Genuine Issue of Material Fact Concerning Whether CSFB
Violated Rule 10b-5(b) ........................................................................................211
1. CSFB Issued False and Misleading Analyst Reports Concerning
Enron........................................................................................................212
2. CSFB Breached Its Duty to Disclose Created by Its Issuance of
Analyst Reports on Enron........................................................................232
3. CSFB Breached Its Duty to Disclose Created by CSFB’s
Underwriting of Enron Securities Offerings............................................235
4. CSFB Made False and Misleading Statements and Omissions in
Offering Circulars ....................................................................................236
a. The Osprey I Offering Circular Concealed Osprey I Was
Designed to Repay Nighthawk ....................................................237
b. The Osprey I Offering Circular Concealed that Whitewing
Was Buying Troubled and Non-transferable Assets from
Enron............................................................................................239
(1) DLJ Bankers Knew Whitewing Was Using Osprey
Funds to Buy Two Distressed Enron Merchant
Assets, Trakya and Sarlux................................................239
(2) Before Osprey Closed, DLJ Bankers Learn the
Sarlux and Trakya Assets Were Subject to Transfer
and Consent Restrictions, Prohibiting Their
Transfer to Whitewing .....................................................240
c. DLJ Bankers Learn Enron’s Merchant Assets Were
Monetized in Prior Bogus Transactions by Enron’s Other
Tier One Banks ............................................................................240
d. DLJ Omitted from the Osprey I Offering Circular that
Enron Was Selling Impaired Assets to Whitewing......................242

Page
(1) DLJ Concealed Transfer Restrictions ..............................242
(2) DLJ Concealed Bogus Asset Valuation “Write Ups”......244
(3) DLJ Concealed the Fact Enron Needed to Refinance
Fraudulent FAS 125 Deals Involving Sarlux and
Trakya that Were Maturing..............................................245
e. DLJ Knew Enron’s Asset Sales to Whitewing Were Not
Made at Arm’s Length.................................................................246
f. The Osprey II Offering Circular Omitted Information
Showing Whitewing Was a Dumping Ground for Troubled
Assets ...........................................................................................247
(1) DLJ and CSFB Concealed Transfer Restrictions
Placed on Assets Enron Transferred to Whitewing .........250
g. DLJ/CSFB Concealed LJM1 and LJM2’s Role in Osprey..........253
(1) DLJ Knew the LJM Entities Were Substantial
Osprey Participants ..........................................................253
(i) False Osprey I and II Offering Circulars .............253
(ii)
DLJ Knew LJM Controlled Osprey.....................253
(iii) Misleading “Conflict of Interest” Disclosure ......254
(iv)
Circular Funds Flow Omitted from Osprey
Offering Circulars ................................................254
(2) DLJ Knew Osprey Investors Had to Be Independent......255
(3) The Osprey Offering Circulars Concealed DLJ’s
Efforts to Clandestinely Transfer Control of Osprey
Certificates to LJM2 Using a DLJ Shell Entity ...............256
h. The Marlin II Offering Circular Concealed Enron Debt .............256
i. Lead Plaintiff Has Sufficiently Identified Misstatements in
the Offering Memoranda..............................................................257
j. DLJ and CSFB Are Liable for Misstatements and
Omissions in the Offering Documents.........................................258
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Page
(1) DLJ and CSFB Are Responsible for the Offering
Circulars...........................................................................258
(2) Individual DLJ and CSFB Bankers Acted with
Scienter ............................................................................259
k. Plaintiffs Have Standing to Assert Section 10(b) Claims
Arising from the False and Misleading Offering Circulars .........261
l. Reliance and Loss Causation Are Satisfied .................................262
(1) Plaintiffs Are Entitled to a Reliance Presumption ...........262
(2) Price Movement Is Established........................................262
(3) Osprey and Marlin Were Deceptive ................................263
m. Incorporation of Enron’s False Financials...................................264
E. CSFB’s Conduct Was “In Connection With” the Purchase and Sale of
Enron Securities...................................................................................................267
F. There Is a Genuine Issue of Material Fact Concerning Loss Causation..............269
1. CSFB’s Conduct Concealed Enron’s True Financial Condition .............271
2. The Truth Concealed by CSFB’s Conduct Materialized .........................276
G. CSFB (USA) Is Liable as a Control Person.........................................................282
1. Lead Plaintiff’s Section 20(a) Control Person Liability Claim Is
Sustainable Against CSFB.......................................................................282
2. Lead Plaintiff Need Only Show the Abstract Power to Control..............283
3. Lead Plaintiff Has Established CSFB (USA) Had the Power to
Control Wholly-Owned Subsidiaries CSFB LLC and Pershing
LLC..........................................................................................................284
a. CSFB’s Subsidiaries ....................................................................284
b. CSFB’s Overlapping Officers......................................................284
c. CSFB Admits Control..................................................................286
d. CSFB Utilized Its Global Resources to Manage the Enron
Account........................................................................................286
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Page
4. CSFB’s Control Over Its Subsidiaries Is a Fact Issue for the Jury..........287
5. CSFB’s Mistaken Formulation of Control...............................................288
III.
CONCLUSION................................................................................................................289
- vi -

TABLE OF AUTHORITIES
- vii -
Page
ABC Arbitrage Plaintiffs Group v. Tchuruk,
291 F.3d 336 (5th Cir. 2002) ...........................................................................................283
Abbott v. Equity Group,
2 F.3d 613 (5th Cir. 1993) .......................................................................................287, 288
Affiliated Ute Citizens of Utah v. United States,
406 U.S. 128 (1972).............................................................................................20, 21, 262
Anderson v. Liberty Lobby, Inc.,
477 U.S. 242 (1986)................................................................................................... passim
Barrie v. Intervoice-Brite, Inc.,
409 F. 3d 653 (5th Cir. 2005) ..........................................................................................260
Bateman Eichler, Hill Richards, Inc. v. Berner,
472 U.S. 299 (1985)...........................................................................................................16
Bennett v. Calabrian Chems. Corp.,
324 F. Supp. 2d 815 (E.D. Tex. 2004)...............................................................................17
Bieghler v. Kleppe,
633 F.2d 531 (9th Cir. 1980) .............................................................................86, 175, 281
Black v. J.I. Case Co.,
22 F.3d 568 (5th Cir. 1994) ...............................................................................................18
Blue Chip Stamps v. Manor Drug Stores,
421 U.S. 723 (1975)...........................................................................................................16
Canova v. Shell Pipeline Co.,
290 F.3d 753 (5th Cir. 2002) .............................................................................................17
Carson v. Dynegy, Inc.,
344 F.3d 446 (5th Cir. 2003) .............................................................................................17
Celotex Corp. v. Catrett,
477 U.S. 317 (1986).....................................................................................................17, 18
Central Bank, N.A. v. First Interstate Bank, N.A.,
511 U.S. 164 (1994)................................................................................................... passim
Chiarella v. United States,
445 U.S. 222 (1980).........................................................................................................235

- viii -
Page
City of Monroe Emps. Ret. Sys. v. Bridgestone Corp.,
399 F.3d 651 (6th Cir. 2005), cert. denied, 126 S. Ct. 423 (2005)..................................213
Colson v. Grohman,
174 F.3d 498 (5th Cir. 1999) .............................................................................................17
DeMarco v. Robertson Stephens Inc.,
318 F. Supp. 2d 110 (S.D.N.Y. 2004)..............................................................212, 227, 228
Dirks v. SEC,
463 U.S. 646 (1983).................................................................................................235, 265
Do v. Wal-Mart Stores,
162 F.3d 1010 (8th Cir. 1998) .................................................................................105, 189
Dura Pharm., Inc. v. Broudo,
544 U.S. 336 (2005).........................................................................................270, 276, 278
Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc.,
343 F.3d 189 (2d Cir. 2003).............................................................................................269
EP Medsystems, Inc. v. Echocath, Inc.,
235 F.3d 865 (3d Cir. 2000).............................................................................................269
Fin. Acquisition Ptnrs. v. Blackwell,
440 F.3d 278 (5th Cir. 2006) ...........................................................................................189
Finkel v. Docutel/Olivetti Corp.,
817 F.2d 356 (5th Cir. 1987) ...........................................................................................262
First Virginia Bankshares v. Benson,
559 F.2d 1307 (5th Cir. 1977) .................................................................232, 233, 234, 260
Flock v. Scripto-Tokai Corp.,
319 F.3d 231 (5th Cir. 2003) .......................................................................................17, 34
G.A. Thompson & Co. v. Partridge,
636 F.2d 945 (5th Cir. 1981) ...................................................................................283, 288
Giancarlo v. UBS Financial Services, Inc.,
H-03-4359 (S.D. Tex. Feb. 15, 2005)..............................................................................231
Goldstein v. MCI Worldcom,
340 F.3d 238 (5th Cir. 2003) ...................................................................................188, 189

Page
Greenberg v. Crossroads Sys.,
364 F.3d 657 (5th Cir. 2004) ...........................................................................................262
Helwig v. Vencor Inc.,
251 F.3d 540 (6th Cir. 2001) ...........................................................................................212
Herman & MacLean v. Huddleston,
459 U.S. 375 (1983).............................................................................................18, 21, 189
Howard v. Everex Sys.,
228 F.3d 1057 (9th Cir. 2000) .........................................................................................212
Hoxworth v. Blinder, Robinson & Co.,
903 F.2d 186 (3d Cir. 1990).............................................................................................233
Huddleston v. Herman & MacLean,
640 F.2d 534 (5th Cir. 1981) ...............................................................................18, 21, 269
In re Apple Computer Sec. Litig.,
886 F.2d 1109, 1113 (9th Cir. 1989) ...............................................................................212
In re Cerner Corp. Secs. Litig.,
425 F.3d 1079 (8th Cir. 2005) .........................................................................................187
In re Charter Commc'ns, Inc.,
443 F.3d 987 (8th Cir. 2006) .......................................................................................22, 23
In re Compaq Sec. Litig.,
848 F. Supp. 1307 (S.D. Tex. 1993) ..................................................................................17
In re Convergent Techs. Sec. Litig.,
948 F.2d 507 (9th Cir 1991) ............................................................................................233
In re Credit Suisse First Boston Corp. Analyst Reports Sec. Litig.,
431 F.3d 36 (1st Cir. 2005)..............................................................................................212
In re Dynegy, Inc. Sec. Litig.,
339 F. Supp. 2d 804 (S.D. Tex. 2004) .............................................................................283
In re Enron Corp. Sec. Derivative & ERISA Litig.,
235 F. Supp. 2d 549 (S.D. Tex. 2002) .......................................................22, 358, 265, 267
- ix -

- x -
Page
In re Enron Corp. Sec. Derivative & "ERISA" Litig.,
No. H-01-3624, 2006 U.S. Dist. LEXIS 43146
(S.D. Tex. June 5, 2006) ............................................................................................ passim
In re Enron Corp. Sec. Litig.,
No. H-01-3624, 2003 U.S. Dist. LEXIS 1668
(S.D. Tex. Jan. 28, 2003) .................................................................................................288
In re Enron Corp. Sec. Litig.,
310 F. Supp. 2d 819 (S.D. Tex. 2004) ...........................................................................5, 25
In re Enron Corp. Sec. Litig.,
236 F.R.D. 313 (S.D. Tex. 2006).......................................................................................20
In re Enron Corp. Sec. Litig.,
No. H-04-0088, 2005 U.S. Dist. LEXIS 39927
(S.D. Tex. Dec. 5, 2005) ..................................................................................................244
In re Enron Corp. Sec. Litig.,
No. H-04-0087, 2005 U.S. Dist. LEXIS 41240
(S.D. Tex. Dec. 22, 2005) .......................................................................................... passim
In re Enron Corp. Sec. Litig.,
439 F. Supp. 2d 692 (S.D. Tex. 2006) ....................................................................... passim
In re Fleming Cos. Sec. & Derivative Litig.,
No. 5-03-MD-1530 (TJW), 2004 U.S. Dist. LEXIS 26488
(E.D. Tex. June 10, 2004)................................................................................105, 190, 227
In re Global Crossing, Ltd. Sec. Litig.,
322 F. Supp. 2d 319 (S.D.N.Y. 2004)..........................................................................33. 96
In re Homestore.com, Inc. Sec. Litig.,
252 F. Supp. 2d 1018 (C.D. Cal. 2003),
aff'd, 452 F.3d 1040 (9th Cir. 2006) ..............................................................................5, 30
In re Homestore.com Sec. Litig.,
347 F. Supp. 2d 790 (C.D. Cal. 2004) .............................................................................188
In re Landry's Seafood Restaurant, Inc. Sec. Litig.,
No. H-99-1948 (S.D. Tex. Feb. 20, 2001) ..............................................................283, 288
In re Lernout & Hauspie Sec. Litig.,
236 F. Supp. 2d 161 (D. Mass. 2003) ........................................................................ passim

Page
In re MTC Elec. Techs. Shareholder Litig.,
993 F. Supp. 160 (E.D.N.Y. 1997) ..................................................................259, 265, 266
In re Paracelsus Corp.,
6 F. Supp. 2d 626 (S.D. Tex. 1998) .................................................................................287
In re Parmalat Sec. Litig. ("Parmalat I"),
376 F. Supp. 2d 472 (S.D.N.Y. 2005)........................................................................ passim
In re Parmalat Sec. Litig. ("Parmalat II"),
383 F. Supp. 2d 616 (S.D.N.Y. 2005)........................................................................ passim
In re Parmalat Sec. Litig. ("Parmalat III"),
414 F. Supp. 2d 428 (S.D.N.Y. 2006)........................................................................ passim
In re Sec. Litig. BMC Software, Inc.,
183 F. Supp. 2d 860 (S.D. Tex. 2001) .............................................................................283
In re Suprema Specialities, Inc. Sec. Litig.,
438 F.3d 256 (3d Cir. 2006).....................................................................................259, 265
In re Worldcom, Inc. Sec. Litig.,
352 F. Supp. 2d 472 (S.D.N.Y. 2005)................................................................86, 175, 281
In re Zonagen Sec. Litig.,
322 F. Supp. 2d 764 (S.D. Tex. 2003) .............................................................................187
Int'l Shortstop, Inc. v. Rally's, Inc.,
939 F.2d 1257 (5th Cir. 1991) .........................................................................................211
Isquith ex rel. Isquith v. Middle Utils.,
847 F.2d 186 (5th Cir. 1988) .............................................................................................18
J.I. Case Co. v. Borak,
377 U.S. 426 (1964)...........................................................................................................16
Johnson v. Stewart & Stevenson Servs.,
No. H-03-4055, 2005 U.S. Dist. LEXIS 25593
(S.D. Tex. Oct. 20, 2005).............................................................................................17, 18
Klapmeier v. Telecheck Intern., Inc.,
315 F. Supp. 1360 (D. Minn. 1970).................................................................................288
- xi -

Page
Kunin v. Feofanov,
69 F.3d 59 (5th Cir. 1995) .................................................................................................18
Kunzweiler v. Zero.net, Inc.,
No. 3:00-CV-2553-P, 2002 U.S. Dist. LEXIS 12080
(N.D. Tex. July 3, 2002) ..................................................................................................233
Kurtzman v. Compaq Computer Corp.,
No. H-99-779, 2000 U.S. Dist. LEXIS 22476
(S.D. Tex. Dec. 12, 2000) ........................................................................................233, 260
Lentell v. Merrill Lynch & Co.,
396 F.3d 161 (2d Cir. 2005), cert. denied, 126 S. Ct. 421 (2005)...........................270, 280
Linville v. Hawaii,
874 F. Supp. 1095 (D. Haw. 1994)..................................................................................189
Little v. Liquid Air Corp.,
37 F.3d 1069 (5th Cir. 1994) .............................................................................................17
Makor Issues & Rights, Ltd. v. Tellabs, Inc.,
437 F.3d 588 (7th Cir. 2006) ...........................................................................................187
McNamara v. Bre-X Minerals Ltd.,
46 F. Supp. 2d 628 (E.D. Tex. 1999).......................................................................283, 285
Nathenson v. Zonagen,
267 F.3d 400 (5th Cir. 2001) ..................................................................................... passim
Owens v. Ford Motor Co.,
297 F. Supp. 2d 1099 (S.D. Ind. 2003)..............................................................86, 175, 281
Paul F. Newton & Co. v. Texas Commerce Bank,
630 F.2d 1111 (5th Cir. 1980) .........................................................................................288
Phillips v. Kidder, Peabody & Co.,
933 F. Supp. 303 (S.D.N.Y. 1996)...................................................................................266
Pinter v. Dahl,
486 U.S. 622 (1988)...........................................................................................................21
Podany v. Robertson Stephens,
318 F. Supp. 2d 146 (S.D.N.Y. 2004)..............................................................................209
- xii -

Page
Press v. Chemical Inv. Servs. Corp.,
166 F.3d 529 (2d Cir. 1999).............................................................................................187
Priester v. Lowndes County,
354 F.3d 414 (5th Cir. 2004) .............................................................................................18
Provenz v. Miller,
102 F.3d 1478 (9th Cir. 1996) ...................................................................86, 175, 187, 281
Quaak v. Dexia S.A.,
357 F. Supp. 2d 330 (D. Mass. 2005) ..........................................................................33, 96
Rodriguez v. ConAgra Grocery Prods. Co.,
436 F.3d 468 (5th Cir. 2006) .............................................................................................18
Rubinstein v. Collins,
20 F.3d 160 (5th Cir. 1994) .....................................................................................234, 260
SEC v. Canadian Imperial Bank of Commerce, et al.,
No. 03-5785 (S.D. Tex. 2003). ..........................................................................................97
SEC v. Capital Gains Research Bureau, Inc.,
375 U.S. 180 (1963)...........................................................................................................21
SEC v. Fox,
855 F.2d 247 (5th Cir. 1988) ...........................................................................................235
SEC v. Hopper,
No. H-04-1054, 2006 U.S. Dist. LEXIS 17772
(S.D. Tex. Mar. 24, 2006).......................................................................................... passim
SEC v. Terry's Tips, Inc.,
409 F. Supp. 2d 526 (D. Vt. 2006)...................................................................................267
Santa Fe Indus., Inc. v. Green,
430 U.S. 462 (1977).....................................................................................................20, 21
Shores v. M.E. Ratliff Inv. Co.,
No. CA 77-G-0604-5, 1982 U.S. Dist. LEXIS 10653
(N.D. Ala. Jan. 18, 1982).................................................................................................236
Sightsound.com, Inc. v. N2K, Inc.,
391 F. Supp. 2d 321 (W.D. Pa. 2003)................................................................86, 175, 281
- xiii -

Page
Simpson v. AOL Time Warner Inc. ("Homestore"),
452 F.3d 1040 (9th Cir. 2006) ................................................................................... passim
Songbyrd, Inc. v. Bearsville Records,
No. 96-30670, 1997 U.S. App. LEXIS 12684
(5th Cir. Feb. 4, 1997)........................................................................................17, 130, 138
Southland Sec. Corp. v. INSpire Ins. Solutions,
365 F.3d 353 (5th Cir. 2004) ...........................................................................................260
Stearns Airport Equip. Co. v. FMC Corp.,
170 F.3d 518 (5th Cir. 1999) ..................................................................................... 210-11
Superintendent of Ins. v. Bankers Life & Cas. Co.,
404 U.S. 6 (1971)...................................................................................................20, 21, 33
Thompson v. Johns-Manville Sales Corp.,
714 F.2d 581 (5th Cir. 1983) ...........................................................................................281
Trust Co. v. N.N.P. Inc.,
104 F.3d 1478 (5th Cir. 1997) .................................................................................186, 190
Tuchman v. DSC Communications Corp.,
14 F.3d 1061 (5th Cir. 1994) ...................................................................................188, 190
United States v. Jon-T Chemicals, Inc.,
768 F.2d 686 (5th Cir. 1985) ...........................................................................................286
United States v. Kung-Shou Ho,
311 F.3d 589 (5th Cir. 2002) ...........................................................................................187
United States v. O'Hagan,
521 U.S. 642 (1997)...........................................................................................20, 235, 267
Veillon v. Exploration Servs. Inc.,
876 F.2d 1197 (5th Cir. 1989) ...........................................................................................18
Virginia Bankshares Inc. v. Sandberg,
501 U.S. 1083 (1991).......................................................................................212, 213, 233
Wortley v. Camplin,
333 F.3d 284 (1st Cir. 2003)............................................................................................269
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Page
SEC v. Zandford,
535 U.S. 813 (2002).............................................................................................21, 89, 267
STATUTES, RULES AND REGULATIONS
15 U.S.C.
§78j(b)........................................................................................................................ passim
§78t(a)........................................................................................................................15, 283
§78u-4(b)(2).....................................................................................................................187
Federal Rules of Civil Procedure
Rule 12(b) ..................................................................................................................30, 288
Rule 56(c)...........................................................................................................................16
Rule 56(f).........................................................................................................................210
17 C.F.R.
§230.405...........................................................................................................................283
§240.10b-5 ................................................................................................................. passim
§240.10b-5(a)............................................................................................................. passim
§240.10b-5(b)............................................................................................................. passim
§240.10b-5(c)............................................................................................................. passim
SECONDARY AUTHORITIES
Conference Report on Securities Litigation Reform, H.R. Rep. No. 369,
104th Cong., 1st Sess. 31 (1995) .......................................................................................16
Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67 ........................................16
4-74 Modern Federal Jury Instructions-Civil (2001)
74.01.......................................................................................................................105, 189
5C Arnold S. Jacobs, Disclosure and Remedies Under the Securities Laws
(West Group 2003)
§12:2 .......................................................................................................................... 232-33
§12:118 ...........................................................................................................................236
11 James Wm. Moore et al., Moore's Federal Practice (3d ed. 1997)
56.32 ................................................................................................................................19
- xv -

Lead Plaintiff The Regents of the University of California (“Lead Plaintiff”) respectfully
submits the following Opposition to the CSFB Defendants’ Motion for Summary Judgment
(Docket Nos. 4824 and 4825). 1
I. INTRODUCTION
CSFB structured and engaged in many of the transactions at the heart of the Ponzi
scheme that was Enron. From 1999 onward, CSFB was one of Enron’s top Tier One Banks,
earning more in fees than any other Tier One Bank in 1999, and had earned the dubious label as
Enron’s “Best Bank” in North America by 2001. The depth and breadth of CSFB’s involvement
in Enron’s operations and finances from 1997 onward is staggering in that CSFB underwrote 30
Enron-related transactions, participated in 54 revolving-credit facilities, was engaged by Enron
to sell significant assets and otherwise engaged in deceptive transactions, including: (1) relatedparty
transactions; (2) prepays; (3) FAS 125/140 transactions; (4) share trusts; and (5) minorityinterest
transactions.
As a result, CSFB had a comprehensive understanding of Enron’s operations and
finances – one unparalleled even compared to other Tier One Banks. CSFB’s liability here runs
from its deceptive activities in the questioned transactions which lacked a true business purpose
– the primary purposes being to engineer a positive impact on Enron’s financials and the false
appearance of strength and liquidity in its operations. Key measures used by the market,
1
The moving CSFB defendants identify themselves as Credit Suisse First Boston LLC
(now Credit Suisse Securities (USA) LLC), Credit Suisse First Boston (USA), Inc. (“CSFB
(USA)”) (now Credit Suisse (USA), Inc.) and Pershing LLC. See Memorandum of Law in
Support of CSFB Defendants’ Motion for Summary Judgment (“Defs’ Mem.” or “Motion”) at 1.
Herein Lead Plaintiff will refer to these entities collectively as “CSFB” or the “Bank.” Lead
Plaintiff will use this designation to encompass also Donaldson, Lufkin & Jenrette (“DLJ”),
which merged into Credit Suisse First Boston on November 3, 2000, though quotes from
evidence will preserve the speaker’s use of “DLJ.” Enron Corporation is referred to as “Enron”
or the “Company.”
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including debt/equity ratios and coverage ratios, were all manipulated in Enron’s favor. Through
use of the transactions, Enron’s financials understated its debt, overstated cash flow from
operations, understated financing cash flow and overstated equity and income. In addition, the
majority of the transactions CSFB engaged in were executed at or near the end of Enron’s
reporting periods – positively, but falsely, impacting Enron’s financials as publicly reported.
Specifically, CSFB deceptively structured, designed, funded and/or otherwise engaged in the
following transactions:
A. CSFB Transactions
• Related-Party Transactions: CSFB, as one of only two limited partners,
structured and capitalized through a sham entity, CSFB’s Enron Rhythms
Netconnections Bet (“ENRB”), the now notorious LJM1 partnership, designing it
specifically to falsify Enron’s financial statements by allowing the Company to
establish a fake hedge against a position in a volatile Internet stock – Rhythms
Netconnections. 2 This fake hedge alone was used by Enron to avoid a $135.5
million writedown in FY99. Even CSFB’s supposed status as an “investor” in
LJM1 was itself a fiction – as the Bank’s purported “investment” in LJM1 was in
reality not “at risk,” but only appeared to be. 3 CSFB also provided a bridge loan
to LJM LP to complete the sham Cuiaba purchase and fund Osprey, which CSFB
internally identified as a vehicle to “raise disguised debt for Enron” and “an off
balance sheet parking lot for certain assets.”
2
CSFB’s involvement in LJM2, as defendants have argued, was vastly different than
LJM1. CSFB committed funds to LJM2 and extended additional credit to allow LJM2 to engage
in sham asset “sales.” While these activities help establish scienter, plaintiffs are not asserting a
stand-alone primary violation for CSFB’s involvement in LJM2.
3
As CSFB’s Ivers testified, the “[p]rimary objective was the hedging of a long position
that Enron owned in a then public company called Rhythms Netconnections” and “CSFB over
time negotiated certain changes in structure, documentation and so forth.” 12/1/04 Deposition
Transcript of Richard Ivers (“12/1/04 Ivers Depo. Tr.”) at 56:5-8, 87:8-10. All deposition
transcripts, deposition exhibits, and other exhibits to this opposition are attached to Lead
Plaintiff’s Appendix in Support Lead Plaintiff’s Opposition to the CSFB Defendants’ Motion for
Summary Judgment and Memorandum of Law in Support of CSFB Defendants’ Motion for
Summary Judgment (Docket Nos. 4824 and 4825) filed concurrently herewith. Enron’s Fastow
explained to the CSFB and Royal Bank of Scotland (“RBS”) bankers that their investment did
not have equity risk. Rather, it had credit risk analogous to that of a Reg-U loan. Declaration of
Andrew S. Fastow (“Fastow Decl.”) (Docket No. 5048), 51.
- 2 -

• Prepays: These were loans CSFB disguised as commodity transactions, which
Enron reported as “price risk management liabilities” (Enron’s term for trading
liabilities) on its balance sheet instead of debt. CSFB engaged in two prepays. In
December 2000, CSFB itself created the false appearance of a legitimate $150
million commodity trade running it through CSFB’s trading operation. In
September 2001, CSFB renewed the December 2000 Prepay, noting on the credit
memo “but it is really a loan to ENE.” 4 Internally CSFB traders questioned
whether 5 it was “ok” for CSFB to be “entering into such an ‘obvious loan’
transaction.” 6
• FAS 125/140 Transactions: CSFB and DLJ structured three FAS 125/140
transactions for Enron – Nile, Nikita and Iguana. CSFB structured Nile to make
it appear to meet the FAS 125/140 sale requirement, financing the transaction
with a $24 million loan and $1 million in purported equity. For Nikita, CSFB
jumped in to provide the entire $32 million equity funding overnight to earn a
one-day fee of a million dollars. In Iguana, DLJ controlled the bogus “Red
Salamander” SPE to close out this year-end 4Q99 deal, allowing Enron to report
$202 million from operations versus what it truly was – debt.
• Share-Trust Transactions: Through deceptive share-trust transactions Enron
was able to avoid recording $4.3 billion in debt on its balance sheet. CSFB and
DLJ engaged in and worked to structure three of these transactions, Marlin I,
Firefly and Osprey. DLJ structured the fraudulent Marlin I transaction issuing
Marlin certificates that were never “at risk,” allowing Enron to acquire Wessex
Water in 1998 for $2.4 billion without impacting Enron’s financial statements.
DLJ structured Firefly to shift $400 million of debt off Enron’s books. Finally,
DLJ structured Osprey and underwrote the Osprey notes raising $2.6 billion
which flowed through Whitewing, an Enron-related entity that purchased
distressed Enron assets at inflated figures. DLJ and CSFB were fully aware of
the impact of their deceptive actions, noting in 2000: “As you probably know,
Osprey is a vehicle enabling Enron to raise disguised debt which appears as
4
See Ex. 50098 at ERN0124469.
5
Ex. 1 at CSFBLLC000044022-026 (12/12/00 email from Ian Emmett (CSFB) to Geoff
Smailes (CSFB)).
6
Ex. 2 at AB050700064 (12/12/00 email from Ian Emmett, CSFB, to Steven Wootton,
Director, CSFB) (“Is it OK for us to be entering into such an ‘obvious’ loan transaction?”).
CSFB on prepays: “I am being asked to quote on a structure for Enron that enables Enron to
borrow USD that are treated as price risk management rather than debt on balance sheet.” Ex.
50092 at CSFBLLC0000440025.001.
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equity on Enron’s balance sheet. . . . Osprey serves the added purpose for Enron
of being an off-balance sheet parking lot for certain assets.” 7
• Minority-Interest Transactions: CSFB was a co-lead bank on the Rawhide
transaction, a bogus financing transaction which allowed Enron to raise $750
million of off-balance-sheet debt. CSFB undertook the due diligence on the
Rawhide structure and on the supporting Rawhide assets. CSFB was fully aware
its deceptive activities were intended to deceive the credit-rating agencies.
Key to these transactions, and to CSFB’s liability, is, as detailed herein, that CSFB’s own
conduct in these transactions was deceptive and manipulative – thus satisfying any standard for
primary liability for one engaging in a scheme to defraud.
B. CSFB’s Actions Subject It to Primary Liability
As a result of CSFB’s deceptive actions in engaging in the above transactions, 8 there is
no question CSFB is liable as a primary violator. Under this Court’s recently refined scheme
(Rule 10b-5(a) and (c)) liability rulings, which adopted the SEC’s test: “‘Where a wrongdoer,
intending to deceive investors, engages in a deceptive act as part of a scheme to defraud, he can
cause the same injury to investors, and the same deleterious effects on the market regardless of
whether he designed the scheme.’” In re Enron Corp. Sec. Derivative & “ERISA” Litig., No. H-
01-3624, 2006 U.S. Dist. LEXIS 43146, at *164-*165 (S.D. Tex. June 5, 2006). 9 As this Court
explained further, it is unnecessary that CSFB actually structured or designed the transaction at
issue, although it did in many instances, as long as CSFB itself committed a deceptive act.
7
Ex. 10264 (9/16/99 email from Wesley Jones to Jonathan Yellen, Osmar Abib and
forwarded to others).
8
Even “legitimate transactions” undertaken in a deceptive manner that present a false
appearance can give rise to liability. See SEC v. Hopper, No. H-04-1054, 2006 U.S. Dist. LEXIS
17772, at *36-*37 (S.D. Tex. Mar. 24, 2006) (round-trip electricity trades not proscribed by
regulatory scheme nevertheless created a false appearance of revenues giving rise to a violation
of the securities laws).
9
Citations and footnotes are omitted and emphasis is added unless otherwise noted.
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“‘Wrongdoers could studiously avoid engaging in any design activity, and effectively immunize
their conduct . . . . Liability should be available against any person who engages in a deceptive
act within the meaning of Section 10(b) as part of a scheme to defraud, regardless of who
designed the scheme.’” Id. 10
Finally, the Court reiterated that it was not just representational
conduct that subjects a primary actor to liability under the securities laws: “‘deceptive acts under
Section 10(b) include conduct beyond the making of false statements or misleading omissions,
for facts effectively can be misrepresented by action as well as words. For example, if an
investment bank falsely states that a client company has sound credit, there is no dispute that it
can be primarily liable. If the bank creates an off-balance-sheet sham entity that has the
purpose and effect of hiding the company debt, it has achieved the same deception, and
liability should be equally available.’” Enron, 2006 U.S. Dist. LEXIS 43146, at *165. 11
Here, CSFB worked on structuring one of the main related-party transactions at issue in
the litigation, LJM1, creating a sham entity to carry out a phony hedge. CSFB deceptively
executed the prepays through its trading operations despite knowing that these prepays were
loans and engaged in sham FAS 125/140 transactions creating phony SPEs such as “Red
10
The “use or employ” statutory language in Section 10(b) does not require that a defendant
be the originator or mastermind of the scheme – even though CSFB was in many of the
transactions at issue. See Simpson v. AOL Time Warner Inc. (“Homestore”), 452 F.3d 1040,
1051 (9th Cir. 2006); Brief of the Securities and Exchange Commission, Amicus Curiae, in
Support of Positions that Favor Appellant (submitted on appeal of In re Homestore.com, Inc.
Sec. Litig., 252 F. Supp. 2d 1018 (C.D. Cal. 2003), aff’d, 452 F.3d 1040 (9th Cir. 2006)) (“SEC
Brief”) (Ex. 3) at 11.
11
As this Court has held, the fact that Enron ultimately published the misleading numbers
arising from the deceptive transactions does not break the causal chain as to secondary actors. In
re Enron Corp. Sec. Litig., 310 F. Supp. 2d 819, 830 (S.D. Tex. 2004). The SEC agrees, noting
“[c]ertainly where the making of the false statements by one participant in the scheme is an
objective of the scheme, the making of the statements should not be viewed as breaking the chain
of causation.” SEC Brief (Ex. 3) at 22.
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Salamander.” CSFB deceptively structured share trusts to make it appear monies and/or
certificates were at risk, deceiving the credit-rating agencies and hiding billions in debt. Finally,
CSFB structured the deceptive Rawhide minority-interest transaction which concealed an
additional $750 million in debt from the credit-rating agencies and the investing public. Indeed,
because CSFB “was among the very best at structured finance,” it was a “go-to” bank for Enron.
10/24/06 Deposition Transcript of Andrew S. Fastow (“10/24/06 Fastow Depo. Tr.”) at 433:1-21.
Aside from undertaking deceptive actions subjecting it to primary scheme liability, there is no
question that CSFB undertook these activities with scienter, deceiving investors and at times
Enron’s own auditors, Arthur Andersen.
C. CSFB Acted with Scienter
Through its investments in LJM1 and LJM2, CSFB was aware of Enron’s use of noneconomic
hedges, such as those in the LJM1/Rhythms Hedging Transaction and the
LJM2/Raptor Hedging Transactions, and asset warehousing transactions such a Cuiaba, and how
these transactions impacted Enron’s reported financials. Through its involvement in Enron’s
many failed asset sales, CSFB had first-hand knowledge that many of Enron’s assets could not
be sold at prices that would avoid requiring Enron to record a loss. Through its participation in
the share-trust transactions and its knowledge of Enron’s use of non-economic hedges, CSFB
also was aware of the severely negative consequences that a decline in Enron’s common stock
price would have.
Through its participation in the share-trust transactions, the FAS 125/140 transactions and
the CSFB Prepays, CSFB knew that Enron’s financial statements did not reflect billions in debt
improperly treated as off-balance sheet obligations. Moreover, CSFB was aware that many of
these transactions were exceedingly complex and not transparent to the marketplace, noting
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internally that Enron’s reporting was as “clear as mud.” Ex. 15918 (11/22/00 email from Salles
to Launer).
CSFB’s understanding of Enron’s true financial condition is also illustrated by CSFB’s
conduct in the final months leading up to Enron’s bankruptcy. While maintaining a strong buy
recommendation and proposing to Fastow that Enron divide into two companies – one regulated
and one unregulated – CSFB bought large amounts of credit protection, accelerated the process
of reducing its Enron exposure to $500 million and then to $300 million (and in fact reduced it to
$167 million) and, in September and November of 2001, completed the Nile transaction and
renewed the CSFB Prepay without incurring additional credit exposure to Enron; and reduced its
holdings of Enron debt.
Finally, mindful of this Court’s earlier rulings as to liability arising from false and
misleading analysts’ reports, Lead Plaintiff asserts the actions and knowledge of CSFB’s
analysts and investment bankers present a different situation. Here we have specific knowledge
by the analysts issuing the reports that the reports were false and misleading. Further, reports
were reviewed and revised by CSFB’s investment bankers. Thus, scienter is clearly established
and the reports give rise to representational Rule 10b-5(b) liability in addition to scheme liability
under Rule 10b-5(a) and (c).
Specifically, the evidence is that CSFB equity analysts, while maintaining a strong buy to
the investing public on the stock, noted internally that Enron could not seem to tell the truth and
recommended that friends and family avoid the stock. In addition, when CSFB analyst Jill Sakol
wanted to lower her “attractive” rating on Enron debt, CSFB prevented her from doing so. 12
As
12
These false and misleading statements are deceptive acts in furtherance of the scheme
and should be considered in determining CSFB’s overall role, which, as noted above, went above
and beyond even their brethren Tier One Banks.
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a result, the analyst reports themselves are actionable as well as predicate acts in furtherance of
the overall scheme.
D. Red Herrings
1. CSFB’s Laurence Nath
In response to all of the above, CSFB sets up a series of red herrings or straw men to
knock down or divert the Court’s attention from the hard facts demonstrating primary liability.
Specifically, CSFB spends an extraordinary amount of time attacking plaintiffs’ allegations
regarding Laurence Nath, asserting there is not a shred of evidence to support the Nath
allegations and flat out asserting the allegations are false. Defs’ Mem. at 2. The recent
declaration provided by Andrew Fastow puts this repeated attack to rest – at least until a jury
decides the level of Nath’s engagement.
In this regard, Fastow viewed certain banks as “problem solvers” – i.e., the banks,
including CSFB, “worked to solve certain of [Enron’s] financial problems.” Fastow Decl., 6,
8. “In many instances, the banks primarily devised the financial structures, which contributed
to Enron achieving its financial reporting objectives.” Id., 6. 13
Fastow and certain of Enron’s
banks “worked together, intentionally and knowingly, to engage in transactions that would
affect Enron’s financial statements” (Fastow Decl., 7):
We told certain banks of our financial objectives and they, in many instances,
created solutions utilizing complex financial structures, including prepays, FAS
125/140 deals, share trusts, minority interests, and synthetic leases. I believe that
the manner in which some of these deals were reflected in Enron’s financial
statements might make it difficult for an investor to understand Enron’s true
financial condition and was deceptive. I believe that the banks presented these
structured-finance transactions in response to the problems we described to
them. We paid a premium – in the aggregate, hundreds of millions of dollars – in
13
See also, e.g., 10/23/06 Fastow Depo. Tr. at 53:24-54:7 (“In many cases, the banks
brought us these structures, and we executed the transactions with the banks.”).
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order to engage in structured-finance transactions that contributed to causing
Enron to report its financial statements in the desired manner.
Id., 8. 14 As Fastow confirmed in his deposition, the transactions engaged in by banks such as
CSFB were done specifically for the purpose of falsifying Enron’s financial statements, and the
transactions “created that deception”:
As a general rule and for most of the – related to most of the structured
finance transactions in which I was engaged or involved or directed at Enron, they
were done for one simple reason.
When you boil it all down, Enron wanted to paint a picture of itself to the
outside world that was different from the reality inside Enron. And these
structured finance transactions, along with other things that Enron did, created
that deception.
11/1/06 Deposition Transcript of Andrew Fastow (“11/1/06 Fastow Depo. Tr.”) at 1895:4-13; see
also 10/23/06 Fastow Depo. Tr. at 45:11-46:7, 52:12-20.
Fastow recounts that CSFB executives Robert Furst, Osmar Abib, Adebayo Ogunlesi and
Bob Jeffe “aggressively solicited Enron’s business.” Fastow Decl., 47. This included inviting
Enron to engage in transactions that affected the Company’s reported financial results. CSFB –
including its banker Laurence Nath – played a key role in structuring the transactions to do this:
“I viewed Larry Nath as the person most responsible for developing and executing the
following transaction structures: Marlin, Whitewing, Osprey, and Firefly.” Id., 48. See also
10/23/06 Fastow Depo. Tr. at 192:10-14 (Fastow identifies Nath as the person associated with
DLJ’s structuring capability). Indeed when, prior to joining CSFB, Nath was at Citibank, he
“presented” to Fastow the Nighthawk transaction, which “had a material impact on Enron’s
14
See also 10/23/06 Fastow Depo. Tr. at 75:17-76:1 (Enron’s reported financial condition
was improved “through prepays, financial prepays, share trust structures, FAS 125/140 deals,
LJM-related deals, as well as others.”).
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financial statements.” Fastow Decl., 10. Other than financial reporting benefits, Fastow “can
recall no real business purpose associated with” Nighthawk. Id.
In compelling detail, Fastow describes that, in fact, CSFB’s Nath pitched transactions to
Enron by detailing the reporting effect they would achieve for the Company:
I attended several meetings in which Mr. Nath presented transaction structures
to Enron. In my opinion, Mr. Nath’s presentations were exemplary because they
contained four elements: (1) an articulation of how the transaction would
contribute to Enron meeting its financial reporting objectives; (2) an explanation
that Mr. Nath had shown his structure to outside counsel and that the counsel had
indicated the type of opinion it would render (“would,” “could,” “should”); (3) a
description of the accounting for the transaction, based upon his discussions with
his accountants; and (4) a description of how much “credit” that the rating
agencies would give to the effect of the transaction when they evaluated Enron’s
financial statements.
Id., 48. In one instance, Nath felt so strongly about his ownership of a particular transaction
structure that he insisted Fastow sign a confidentiality agreement before disclosing it. 10/23/06
Fastow Depo. Tr. at 115:11-22.
These deals routinely involved material deception:
I am aware that I, or other Enron executives, provided Merrill, Barclays, CSFB,
RBS, and other Enron banks with oral assurances or structural features that I
believe would have assured them of the following in certain structured-finance
transactions: (1) a return of their investment capital; (2) a return on capital at a
specified rate; and (3) an exit from investments within a defined period of time. I
believe that without these assurances or structural features, the banks would not
have entered into all of these transactions. Based on conversations I had with
certain bankers, I believe that they understood that the assurances and certain
other features would have caused the accounting and financial-reporting to be
different than if it were documented.
Fastow Decl., 13. In his recent deposition, Fastow confirmed that banks, including CSFB,
structured and engaged in transactions that had the purpose and effect of falsifying Enron’s
reported financial and operational condition. As one example of this testimony:
Q. What do you mean when you say “solve Enron’s financial reporting
problems”?
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A. Well, Enron had a problem in that its – the results it would otherwise have
published from just its business operations were usually insufficient in order for
Enron to maintain its investment grade credit rating or to meet its earnings targets.
And we were looking with banks who could help us solve this problem, meaning
doing transactions that would, as we described internally, fill the gap between
what was really happening inside Enron and what – the way we wanted Enron to
appear to the outside world.
10/23/06 Fastow Depo. Tr. at 23:19-24:7. CSFB was among the three banks “most important to
Enron in getting structured finance deals done.” 10/25/06 Deposition Transcript of Andrew S.
Fastow (“10/25/06 Fastow Depo. Tr.”) at 670:16-20. Enron ranked its investment banks
according to “tiers” – i.e., “Tier One,” “Tier Two,” etc. As Fastow testified, one important
criteria Enron used in ranking a bank as Tier One was whether the bank “could come up with
structures and transactions” that would “fill the gap between what was really happening inside
Enron and what – the way we wanted Enron to appear to the outside world.” 10/23/06 Fastow
Depo. Tr. at 23:3-24:7. This was because the true results of Enron’s operations were “usually
insufficient in order for Enron to maintain its investment grade credit rating or to meet its
earnings targets.” Id. These Tier One banks “were typically devising the structures and bringing
them to Enron to help us solve these problems.” 10/23/06 Fastow Depo. Tr. at 24:18-19.
Fastow provides corroboration for Lead Plaintiff’s allegations and evidence concerning
CSFB’s inherently deceptive transactions with Enron, declaring:
• With regard to LJM1, CSFB worked to structure the transaction, and the Bank
knew LJM1’s Rhythms Hedge transaction “would likely have a material impact
upon Enron’s reported earnings” (Fastow Decl., 52-53); CSFB “structured,
presented, and executed the SAILS transaction” (id., 54);
• CSFB’s prepay transactions with Enron “were done so that Enron could report
funds flow from operations rather than funds flow from financings” (Fastow
Decl., 26). CSFB understood that “the primary purpose of these transactions
was to cause Enron to report higher funds flow from operations” (id., 56);
• CSFB’s FAS 140 deals with Enron, “including Nile and Nikita,” “created the
false appearance of earnings and funds flow from operations, and reduced
reported debt” (id., 6, 55); and
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• CSFB understood, inter alia, that the share-trust transactions it did with Enron
“were a way to finance assets and were not true operating companies” (id., 50).
2. LJM2 and New Power Allegations
In a further attempt to divert the Court’s attention from the merits, CSFB next accuses
Lead Plaintiff of making false allegations about its role in the deceptive LJM2 vehicle. Defs’
Mem. at 16-17. CSFB challenges the allegation that “‘[CSFB], or senior executives of the firm,
invested $22.5 million in equity money to facilitate the financing of LJM2’” and claims “[n]ot a
single CSFB or DLJ executive made a personal investment in LJM2, let alone the $22.5 million
alleged in the Complaint.” Id. at 16 (quoting FACC 712). 15
Plaintiffs never claimed CSFB
executives invested $22.5 million in LJM2, but instead pleaded “CS First Boston, or senior
executives of the firm, invested $22.5 million in [LJM2] . . . [by] using DLJ Fund Investing
Trust Partners and Merchant Capital . . . .” See FACC 712; see also FACC 102(a) (defining
“CS First Boston” to include CSFB and DLJ). Merchant Capital and DLJ Fund Investment did
invest in LJM2, as plaintiffs alleged (with slight misnomer for the DLJ Fund) and as CSFB
admitted on page 16 of its Motion. CSFB, however, omitted these entities from the very
sentence it now claims was false. And DLJ Fund did invest monies of DLJ “executives” in
LJM2. CSFBSJ Ex. 2, 2 16 (DLJ Fund “managed approximately $575 million invested by over
600 employees of Donaldson, Lufkin & Jenrette . . . and its affiliates.”). 17
15
All “FACC _” or “FACC _” references refer to the First Amended Consolidated
Complaint (“FACC”) (Docket No. 1388).
16
All references to “CSFBSJ Ex. __” refer to the exhibits attached to the Declaration of
Odean L. Volker (Docket No. 4825).
17
CSFB emphasizes it and DLJ “committed” to investing in LJM2 – in contrast to having
actually invested – only $15 million. Defs’ Mem. at 16. Commitment to invest versus actual
investment is just semantics and in no way evidences any intent to mislead the Court. As for the
$22.5 million number, CSFB invested $15 million in LJM2 plus the $7.5 million the Bank
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CSFB denies making exorbitant returns on its LJM2 investments and even claims to have
lost money. Defs’ Mem. at 17. But as of November 29, 2000, CSFB had realized $33.1 million
on its $7.5 million LJM1 investment and was earning and internal rate of return of 225% on
LJM1 and a projected 51% on LJM2. Ex. 11295 at CSFBLLC000019426. These were
exorbitant returns. 18
Further, CSFB complains about Lead Plaintiff’s New Power allegations. Lead Plaintiff
makes a single, specific allegation about CSFB and DLJ: the banks that underwrote the “huge
New Power IPO – 27.6 million shares at $21 per share in October 2000.” FACC 42. This
allegation is true, as CSFB concedes in its Motion and in its interrogatory responses. Defs’
Mem. at 15 (“CSFB and DLJ . . . served as underwriters for the NewPower IPO”); Ex. 4 at 47
(denoting CSFB and DLJ as “co-lead underwriters” of the October 2000 New Power common
stock offering). CSFB then insinuates Lead Plaintiff made an additional allegation – CSFB and
DLJ “made a loan to Hawaii 125-0” that was “secured” by New Power warrants, an allegation
CSFB says is false. Defs’ Mem. at 15. But Lead Plaintiff made no such specific allegation
against CSFB. To the contrary, FACC 42 specifically identifies only CIBC, along with “other”
Enron banks, as having made a Hawaii 125-0 loan.
invested in LJM1. See Ex. 50260 at CSFBCO000545978 (amount of investments); FACC
102(a) (defining CSFB).
18
CSFB also contends Lead Plaintiff misled the Court by asserting the Bank “loaned more
than $120 million to LJM2.” Defs’ Mem. at 17. Lead Plaintiff only alleged CSFB “was a major
lender to LJM2 via a $120+ million credit line . . . .” FACC 712. As a $30 million participant
in the LJM2 revolver (8/24/04 Deposition Transcript of Mary Beth Mandanas (“8/24/04
Mandanas Depo. Tr.”) at 567:7-568:9), CSFB certainly “was a major lender to LJM2” (FACC
712). And even if an “affiliate of CSFB” made the loan to LJM2 (see Defs’ Mem. at 17)
CSFB’s bankers drove the transaction. See Ex. 10235; Ex. 10197 at DPOEX00009786 (Osmar
Abib “gave Andy F. the good news” about LJM2’s credit application).
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In this Opposition, Lead Plaintiff demonstrates that its substantial evidence creates
genuine issues of material fact, and that its claims against CSFB are unquestionably cognizable
under the law, rendering the Bank unable to satisfy its heavy burden in seeking summary
judgment. Lead Plaintiff establishes that:
• Under this Court’s rulings concerning the scope of primary liability under Rule
10b-5(a) and (c), Lead Plaintiff’s claims that CSFB is liable for engaging in
inherently deceptive activity in regards to the transactions at issue are legally
cognizable (and strongly supported by the evidence);
• CSFB violated Rule 10b-5(b) by issuing false and misleading analyst reports
concerning Enron, with scienter and by otherwise breaching its duty to disclose
the adverse facts it knew about the Company;
• CSFB’s conduct was “in connection with” trading in Enron’s securities;
• Loss causation exists for CSFB’s conduct; and
• CSFB (USA) is liable as a control person.
During the Class Period, CSFB garnered significant fees directly from engaging in
inherently deceptive activities in regard to the identified transactions with Enron. It earned
multi-millions more from the investment banking business Enron gave it as a reward for the
Bank’s critical role in the Ponzi scheme. The evidence chronicled below discloses an unsettling
tale of CSFB’s morally flexible investment bankers and management – driven by sheer avarice in
the blind pursuit of these investment banking fees from Enron – knowingly and willingly
deceiving the Company’s investors through sham transactions and false analyst reports, shutting
out and simply avoiding the few conscientious Bank employees who resisted them. After
Enron’s collapse, internally CSFB was unregenerate and deceptive to the end, with one
employee joking that Enron’s collapse was “amazingly eloquent and almost FUNNY!” (Ex.
11178 at CSFBLLC05019537), and another employee remarking that his testimony to
congressional investigators concerning the Bank’s role in the Enron scheme would be “sanitized”
(Ex. 74 at CSFBC006057889.001). With the record more fully developed, the deceptive
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activities of one of the banks at the heart of the fraud can no longer be whitewashed by the
Banks’ strident denials.
E. Summary Description of Lead Plaintiff’s Legal Claims Against CSFB
Lead Plaintiff asserts claims against CSFB under §10(b) of the Securities Exchange Act
of 1934 (“Section 10(b)”), 15 U.S.C. §78j(b), and SEC Rule 10b-5 (“Rule 10b-5”), 17 C.F.R.
§240.10b-5, promulgated thereunder. 19
See FACC 993(d). Lead Plaintiff also asserts that
CSFB (USA) is liable for the acts of its subsidiaries under §20(a) of the Securities Exchange Act
of 1934 (“Section 20(a)”), 15 U.S.C. §78t(a). See FACC 993(d).
This Court has ruled that:
19
Section 10(b) provides in pertinent part:
§78j. Manipulative and deceptive devices
It shall be unlawful for any person, directly or indirectly . . .
* * *
(b) To use or employ, in connection with the purchase or sale of any security . . . ,
any manipulative or deceptive device or contrivance in contravention of such
rules and regulations as the Commission may prescribe as necessary or
appropriate in the public interest or for the protection of investors.
Rule 10b-5 provides in pertinent part:
§240.10b-5 Employment of manipulative and deceptive devices.
It shall be unlawful for any person, directly or indirectly . . . ,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material
fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would
operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
- 15 -

To state a claim on conduct that violates Rule 10b-5(a) and (c), plaintiff must
assert that the defendant (1) committed a deceptive or manipulative act, (2) with
scienter, that (3) the act affected the market for securities or was otherwise in
connection with their purchase of sale, and (4) that the defendant’s actions caused
the plaintiff’s injuries.
Enron, 2006 U.S. Dist. LEXIS 43146, at *88 n.45. And that:
Id. at *87.
To establish a claim under . . . Rule 10b-5(b), a plaintiff must ultimately prove (1)
a material misrepresentation or omission; (2) scienter; (3) a connection between
the purchase or sale of the security and the material misrepresentation or
omission; (4) reliance (or “transaction causation” in fraud-on-the-market cases);
(5) economic loss; and (6) loss causation, i.e., causal connection between the
material misrepresentation or omission and the plaintiff’s actual loss.
As the SEC has emphasized – notably in the context of shareholder lawsuits against third
parties alleged to have engaged in fraudulent transactions with the issuer –
Meritorious private actions under the federal securities laws serve an
important role, both because they provide compensation for investors who have
been harmed by violations of the securities laws and because, as the Supreme
Court has repeatedly recognized, they “provide ‘a most effective weapon in the
enforcement’ of the securities laws and are ‘a necessary supplement to
Commission action.’” Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S.
299, 310 (1985) (quoting J.I. Case Co. v. Borak, 377 U.S. 426, 432 (1964)). See
also Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730 (1975).
Congress, in adopting the Private Securities Litigation Reform Act of 1995, Pub.
L. No. 104-67, reaffirmed that “[p]rivate securities litigation is an indispensable
tool with which defrauded investors can recover their losses” and that private
lawsuits “promote public and global confidence in our capital markets and help to
deter wrongdoing and guarantee that corporate officers, auditors, directors,
lawyers and others properly perform their jobs.” Conference Report on Securities
Litigation Reform, H.R. Rep. No. 369, 104th Cong., 1st Sess. 31 (1995).
SEC Brief (Ex. 3) at 2.
II.
ARGUMENT
A. The Summary Judgment Standard
A motion for summary judgment may only be granted where “there is no genuine issue
as to any material fact and . . . the moving party is entitled to a judgment as a matter of law.”
Fed. R. Civ. P. 56(c). “The party moving for summary judgment has the initial burden of
- 16 -

‘informing the district court of the basis for its motion, and identifying those portions of [the
summary judgment record] which it believes demonstrate the absence of a genuine issue of
material fact.’” Colson v. Grohman, 174 F.3d 498, 506 (5th Cir. 1999) (citing Celotex Corp. v.
Catrett, 477 U.S. 317, 323 (1986)); accord Carson v. Dynegy, Inc., 344 F.3d 446, 451 (5th Cir.
2003). “If the moving party fails to meet its initial burden, the motion must be denied,
regardless of the non-movant’s response.” Johnson v. Stewart & Stevenson Servs., No. H-03-
4055, 2005 U.S. Dist. LEXIS 25593, at *3 (S.D. Tex. Oct. 20, 2005) (citing Little v. Liquid Air
Corp., 37 F.3d 1069, 1075 (5th Cir. 1994)).
In determining whether there is any genuine issue of material fact, the court will “view[]
the evidence in the light most favorable to the nonmoving party.” Flock v. Scripto-Tokai Corp.,
319 F.3d 231, 236 (5th Cir. 2003) (citing Canova v. Shell Pipeline Co., 290 F.3d 753, 755 (5th
Cir. 2002)). Likewise, the court will “draw all reasonable inferences in favor of the nonmoving
party.” Flock, 319 F.3d at 236; accord Johnson, 2005 U.S. Dist. LEXIS 25593, at *1-*4.
As the Supreme Court has held:
Credibility determinations, the weighing of the evidence, and the drawing of
legitimate inferences from the facts are jury functions, not those of a judge . . .
ruling on a motion for summary judgment.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). 20
Moreover, “[t]he evidence of the
nonmovant is to be believed.” Anderson, 477 U.S. at 255; see also Bennett v. Calabrian Chems.
Corp., 324 F. Supp. 2d 815, 822 (E.D. Tex. 2004) (same quote); accord In re Compaq Sec.
Litig., 848 F. Supp. 1307, 1313 (S.D. Tex. 1993). Thus, the court should “construe all
evidence . . . without . . . resolving any factual disputes.” Songbyrd, Inc. v. Bearsville Records,
20
See also Flock, 319 F.3d at 236 (“In determining whether there is a dispute as to any
material fact, we consider all of the evidence in the record, but we do not make credibility
determinations or weigh evidence.”).
- 17 -

No. 96-30670, 1997 U.S. App. LEXIS 12684, at *8 (5th Cir. Feb. 4, 1997). “If reasonable minds
could differ as to the import of the evidence,” summary judgment must be denied. Anderson,
477 U.S. at 250. All “[d]oubts are to be resolved in favor of the nonmoving party.” Priester v.
Lowndes County, 354 F.3d 414, 419 (5th Cir. 2004); accord Rodriguez v. ConAgra Grocery
Prods. Co., 436 F.3d 468, 473 (5th Cir. 2006).
In opposing the motion, “the non-movant does not . . . have to present its own evidence,
but may point out genuine issues of fact extant in the summary judgment evidence produced by
the movant, if any.” Johnson, 2005 U.S. Dist. LEXIS 25593, at *4 (citing Isquith ex rel. Isquith
v. Middle Utils., 847 F.2d 186, 198-200 (5th Cir. 1988)). Thus the non-moving party need only
“designate ‘specific facts showing that there is a genuine issue for trial.’” Celotex, 477 U.S. at
324. 21 A court should consider granting summary judgment only “with caution.” Anderson, 477
U.S. at 255. The Fifth Circuit has repeatedly held that a District Court has discretion to deny
even a proper motion for summary judgment. See Kunin v. Feofanov, 69 F.3d 59, 62 (5th Cir.
1995) (court has discretion to deny summary judgment “even if the standards of Rule 56 are
met”); Black v. J.I. Case Co., 22 F.3d 568, 572 (5th Cir. 1994) (“[t]o review pretrial denials of
summary judgment motions would also diminish the discretion of the district court”); Veillon v.
Exploration Servs. Inc., 876 F.2d 1197, 1200 (5th Cir. 1989) (court may deny summary
judgment “even if the movant otherwise successfully carries its burden of proof if the judge has
doubt as to the wisdom of terminating the case before full trial”). As one prominent
commentator observes:
21
In this case, the governing standard of proof is that of a “preponderance of the evidence.”
Herman & MacLean v. Huddleston, 459 U.S. 375, 387 (1983) (private civil class action under
Rule 10b-5).
- 18 -

There is long-established doctrine holding that a court may deny summary
judgment if it believes further pretrial activity or trial adjudication will sharpen
the facts and law at issue and lead to a more accurate or just decision, or where
further development of the facts may enhance the court’s legal analysis.
11 James Wm. Moore et al., Moore’s Federal Practice 56.32 (3d ed. 1997).
B. There Is a Genuine Issue of Material Fact Concerning Whether CSFB
Violated Rule 10b-5(a) and (c) 22
1. The Standard for Primary Scheme Liability Under Rule 10b-
5(a) and (c)
In Central Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994), the Supreme
Court held that private actions under Section 10(b) and Rule 10b-5 can only be brought against
persons who are “primary violators” of that statue and rule, and not against those who merely aid
and abet another’s primary violation. In so holding, the High Court took pains to establish that
anyone – i.e., even those considered merely “secondary actors” – can nevertheless be liable
under Rule 10b-5 if they engage in prohibited conduct:
The absence of §10(b) aiding and abetting liability does not mean that secondary
actors in the securities markets are always free from liability under the securities
Acts. Any person or entity, including a lawyer, accountant, or bank, who
employs a manipulative device or makes a material misstatement (or omission) on
which a purchaser or seller of securities relies may be liable as a primary violator
under 10b-5, assuming all of the requirements for primary liability under Rule
10b-5 are met.
Id. at 191 (emphasis in original). The Court also recognized that “[i]n any complex securities
fraud, moreover, there are likely to be multiple violators.” Id.
22
This Court has ruled “[t]o state a claim on conduct that violates Rule 10b-5(a) and (c),
plaintiff must assert that the defendant (1) committed a deceptive or manipulative act, (2) with
scienter, that (3) the act affected the market for securities or was otherwise in connection with
their purchase of sale, and (4) that the defendant’s actions caused the plaintiff’s injuries.” Enron,
2006 U.S. Dist. LEXIS 43146, at *88 n.45. This section (i.e., §III.B.) demonstrates CSFB
“committed a deceptive or manipulative act.” Issues of scienter, connection with securities and
causation are discussed infra at §§II.3., II.E., II.F., respectively.
- 19 -

These pronouncements must be read in conjunction with the Supreme Court’s
longstanding and consistent recognition that liability under Rule 10b-5 is not limited to the
making of a false statement or omission. Because Rule 10b-5(a) and (c) render it actionable to
“‘employ any device, scheme, or artifice to defraud’” and/or to “‘engage in any act, practice, or
course of business which operates or would operate as a fraud or deceit upon any person,’”
liability may be found under these subsections notwithstanding the absence of an actionable
misstatement or omission. 23
Enron, 2006 U.S. Dist. LEXIS 43146, at *157. Claims for
nonrepresentational conduct 24 under subsections (a) and (c) of the Rule are commonly referred to
as those for “scheme liability.” See Enron, 2006 U.S. Dist. LEXIS 43146, at *155-*174.
In determining precisely what conduct warrants the imposition of scheme liability, it
should be noted that “the Supreme Court has emphasized repeatedly that Section 10(b) ‘should
23
See, e.g., Affiliated Ute Citizens v. United States, 406 U.S. 128, 152-53 (1972) (“To be
sure, the second subparagraph of the rule specifies the making of an untrue statement of a
material fact and the omission to state a material fact. The first and third subparagraphs are not
so restricted.”). This Court has rightly and repeatedly acknowledge that liability exists under
Rule 10b-5(a) and (c) for conduct not amounting to misstatements or omissions. See, e.g., In re
Enron Corp. Sec. Litig., 236 F.R.D. 313 (S.D. Tex. 2006) (“deceptive acts under Section 10(b)
include conduct beyond the making of false statements or misleading omissions, for facts
effectively can be misrepresented by action as well as words”) (quoting SEC Brief (Ex. 3) at 8).
24
As the SEC has noted and courts have routinely held, both Section 10(b) and Rule 10b-5
cover (among other things) deceptive conduct, acts, and practices beyond mere false statements
or market manipulation:
It has long been accepted that Section 10(b), and Rule 10b-5(a) and (c)
thereunder, cover conduct beyond the making of false statements and misleading
omissions, which are covered by Rule 10b-5(b). The Supreme Court has stated
that Section 10(b) encompasses deceptive “practices,” Santa Fe Indus., Inc. v.
Green, 430 U.S. 462, 475-76 (1977), deceptive “conduct,” id. at 475 n.15;
O’Hagan, 521 U.S. 659, and deceptive “acts,” Central Bank, 511 U.S. at 173; see
Bankers Life, 404 U.S. at 9.
SEC Brief (Ex. 3) at 13-14.
- 20 -

e “construed not technically and restrictively, but flexibly to effectuate its remedial
purposes.’”” 25
Also:
The Supreme Court has given instruction on the meaning of the relevant
terms in Section 10(b). The key phrase for present purposes is “directly or
indirectly . . . to use or employ . . . any . . . deceptive device or contrivance.”
“Device,” according to the Supreme Court, should be understood to mean “that
which is devised, or formed by design; a contrivance; an invention; project;
scheme; often, a scheme to deceive; a stratagem; an artifice.” Contrivance, the
Court noted, means “a thing contrived or used in contriving; a scheme, plan, or
artifice.” The same dictionary used by the Supreme Court defines “deceptive” as
“tending to deceive; having power to mislead.” 26
Thus in SEC v. Zandford, 535 U.S. 813 (2002), the Supreme Court reaffirmed the validity
of, and expansively construed scheme liability, overturning the Fourth Circuit’s reversal of a
grant of summary judgment for the SEC, which alleged that the defendant stock broker had
engaged in a scheme to defraud by selling his customer’s securities and using the proceeds for
his own benefit without the customer’s knowledge or consent. Again stressing that Section 10(b)
should be construed “flexibly to effectuate its remedial purposes” (id. at 819), it ruled that the
broker faced liability despite the fact that he did not make false statements or omissions: “each
time respondent ‘exercised his power of disposition for his own benefit,’ that conduct, ‘without
more,’ was a fraud.” Id. at 821. The lack of a misrepresentation was immaterial, as “neither the
SEC nor this Court has ever held that there must be a misrepresentation about the value of a
particular security in order to run afoul of the Act.” Zandford, 535 U.S. at 820.
25
In re Parmalat Sec. Litig. (“Parmalat I”), 376 F. Supp. 2d 472, 501 (S.D.N.Y. 2005)
(citing Zandford, 535 U.S. at 819) (quoting Affiliated Ute, 406 U.S. at 151); accord Pinter v.
Dahl, 486 U.S. 622, 653 (1988); Herman & MacLean, 459 U.S. 375; Santa Fe Indus., Inc. v.
Green, 430 U.S. 462, 475-76 (1977); Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S.
6, 12 (1971); SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195 (1963).
26
Parmalat I, 376 F. Supp. 2d at 502.
- 21 -

This Court has repeatedly upheld Lead Plaintiff’s allegations of scheme liability in this
case. See, e.g., In re Enron Corp. Sec. Derivative & ERISA Litig., 235 F. Supp. 2d 549, 698-701
(S.D. Tex. 2002) (upholding allegations that CSFB committed a primary violation of Rule 10b-
5(a) and (c)). Yet this Court recently observed that, in the wake of Central Bank, concerning
scheme liability “the relevant law has evolved and been modified and clarified, often in different
ways by different courts, and the Court has attempted to address the problem.” In re Enron
Corp. Sec. Litig., 439 F. Supp. 2d 692, 713 (S.D. Tex. 2006) (or “7/20/06 Order”).
In its Opinion and Order Re Class Certification of June 5, 2006 (“6/5/06 Order”), this
Court examined the SEC’s position on the issue as stated in the SEC Brief, and ruled that the
Court “adopts its approach.” Enron, 2006 U.S. Dist. LEXIS 43146, at *174. The SEC’s position
is that:
Any person who directly or indirectly engages in a manipulative or deceptive act
as part of a scheme to defraud can be a primary violator of Section 10(b) and Rule
10b-5(a); any person who provides assistance to other participants in a scheme but
does not himself engage in a manipulative or deceptive act can only be an aider
and abettor.
SEC Brief (Ex. 3) at 16. Under this test, liability follows for “engaging in a transaction whose
principal purpose and effect is to create a false appearance of revenues.” Id. at 18. The SEC
offered several examples of conduct that would be actionable, and alternatively non-actionable,
under its test (see id. at 20-21), which this Court noted (see Enron, 2006 U.S. Dist. LEXIS
43146, at *166-*169). 27
27
In adopting the SEC’s approach, this Court declined to follow the holding of In re
Charter Commc’ns, Inc., 443 F.3d 987 (8th Cir. 2006), which held that a seller of goods to a
public company in a legitimate arm’s-length business transaction cannot be held liable for
participating in a scheme to falsify that company’s financial statements where that seller had not
engaged in any contrivance or committed any deceptive or manipulative act. This Court noted
that the SEC’s position stands in “contrast” to the Charter court’s “narrow reading of the term”
“manipulative or deceptive act.” Enron, 2006 U.S. Dist. LEXIS 43146, at *166-*168. CSFB,
- 22 -

CSFB argues throughout its brief that the majority of the transactions were legitimate and
CSFB merely underwrote (Defs’ Mem. at 15), committed to invest (id. at 16), or provided
standard banking services (id. at 26-27). However, primary liability in a scheme to defraud lies
even if the transaction within the scheme was arguably legitimate, so long as defendants’
conduct had the principal purpose and effect to deceive. In Hopper, 2006 U.S. Dist. LEXIS
17772, defendants engineered “round-trip” energy trades that involved the simultaneous
purchase and sale of electric power or natural gas. The SEC asserted that these transactions were
illegitimate shams. In response, defendants asserted that no scheme liability could exist as a
matter of law because the “round-trip” transactions at issue were not illegal and, in fact, were
permitted under certain federal statutes. Id. at *36-*37. Rejecting defendants’ argument, the
court found:
Id. at *37.
The fact that individual round-trip trades may not have been proscribed by the
regulatory scheme governing the electric power and natural gas markets . . . does
not mean that the series of huge bogus trades did not violate the securities laws’
proscription against schemes to defraud and practices that operate as a fraud or
deceit upon any person.
Moreover, the “use or employ” statutory language in Section 10(b) does not require that a
defendant be the originator or mastermind of the scheme – even though CSFB was in many of
the transactions at issue. Homestore, 452 F.3d at 1051; SEC Brief (Ex. 3) at 11 (“The district
court [in Homestore] held that the primary violators in a scheme to defraud are the ‘primary
while not rearguing the issue, incorporates its own and its co-defendants’ briefing regarding the
Charter decision into the Motion. See Defs’ Mem. at 9 n.19. Accordingly, Lead Plaintiff
likewise incorporates its briefing regarding the Charter case. CSFB also incorporates into the
Motion “any other legal arguments . . . that, if accepted by the Court, would have a case-wide
impact and/or also result in dismissal of, or summary judgment for, CSFB.” Id. Lead Plaintiff
thus likewise incorporates all of its previous arguments responsive to the same issues.
- 23 -

architects’ of the scheme who ‘designed and carried [it] out.’ The ‘use or employ’ language of
Section 10(b), however, suggests no such requirement.”). Thus, even if Enron and/or Fastow,
Skilling or Lay were the originator or mastermind, CSFB’s own deceptive conduct subjects it to
primary liability.
Nor do the securities laws require that a third party whose conduct comes within the
proscriptions of the statute have a special relationship with the subject corporation in order to be
deemed a primary violator under §10(b). In Homestore, the Ninth Circuit rejected the district
court’s prohibition against scheme liability beyond corporate officers and those with a special
relationship with the corporation. 452 F.3d at 1053. The SEC agrees: “[T]o require a special
relationship with the corporation . . . would allow a person who is not in such a relationship to
accomplish the same fraud, with the same state of mind, and the same effect on investors as a
person in such a relationship, and nonetheless escape liability.” SEC Brief (Ex. 3) at 7.
In addition, a defendant like CSFB is not immunized from liability in a scheme to defraud
by claiming simply that the deception did not occur until the issuer of the financial statements
fraudulently accounted for the transactions. In Parmalat I, Judge Kaplan held:
The defendants’ argument that they were at most aiders and abettors of a
program pursuant to which Parmalat made misrepresentations on its financial
statements misses the mark. The transactions in which the defendants engaged
were by nature deceptive. They depended on a fiction, namely that the invoices
had value. It is impossible to separate the deceptive nature of the transactions
from the deception actually practiced upon Parmalat’s investors. Neither the
statute nor the rule requires such a distinction.
376 F. Supp. 2d at 504. Similarly, as this Court earlier noted:
Although Merrill Lynch argues its actions were not unlawful and that they were
merely business transactions later misrepresented by Enron in its financial
statements, the factual allegations suggest knowingly deceptive conduct . . . .
Sham business transactions with no legitimate business purpose that are actually
guaranteed “loans” employed to inflate Enron’s financial image are not aboveboard
business practices. This Court disagrees with Merrill Lynch’s contention
that the alleged “‘deception’ did not occur until Enron allegedly misreported” the
transactions.
- 24 -

Enron, 310 F. Supp. 2d at 830.
The SEC agrees:
Thus, a prior deceptive act, from which the making of the false statements
follows as a natural consequence, can constitute a sufficient step in the causal
chain to support a finding of reliance. Certainly where the making of the false
statements by one participant in the scheme is an objective of the scheme, the
making of the statements should not be viewed as breaking the chain of causation.
SEC Brief (Ex. 3) at 22.
The above-discussed case law rejects CSFB’s suggestion that no liability lies because
Enron, not CSFB, falsified its financials. In doing so, these cases logically embrace the
following premise: Of necessity, in any public-company fraud involving a scheme with multiple
participants, the financial statements ultimately issued to investors remain those of the issuer,
primarily created by it. Seldom will a third party involved in the scheme have the ability or the
responsibility to formally account for any transaction on the issuers’ financial statements. But
perfecting the ultimate deceit on investors by issuing false financial statements is not the only
point at which acts of deception are important in a complex securities fraud. Earlier acts of
deception in the chain of conduct must occur. In short, the issuer is unable to misaccount for the
transaction unless, earlier, the third party acts deceptively – i.e., designs or structures transactions
that were by their nature inherently deceptive – so that other actors participating in the
transactions without knowledge of their deceptive nature (as well as investors) will see a fiction,
not reality, if and when they look. See Homestore, 452 F.3d at 1049 (“We see no justification to
limit liability under Section 10(b) to only those who draft or edit the statements released to the
public.”).
There will never be scheme liability if the issuer’s ultimate misaccounting, without more,
was enough to shield those actors who engaged in deceit in the underlying fraudulent financial
transactions by creating or funding transactions designed to perpetrate a fraud and/or structuring
- 25 -

illegitimate deals and the like, which deprive the transactions of economic substance or risk or
cause them to be non-GAAP compliant. Each actor, no matter how manipulative, deceptive or
contrived its conduct may be, will be shielded because it always will be the issuer that later
formally misaccounts for the bogus deal. Thus, the rule cannot be that the issuer who ultimately
misaccounts for a transaction provides immunity to sophisticated banks who engage in the fraud
with scienter, using manipulation, deception or contrivances with the primary purpose and effect
of deceiving investors under Rule 10b-5(a) or (c).
In the 7/20/06 Order, the Court relied extensively on the scheme liability analysis
employed by Judge Kaplan in Parmalat I. See, e.g., Enron, 439 F. Supp. 2d at 721-24. At the
same time, though, this Court made clear its understanding that the SEC’s position “appears to
be in accord with Judge Kaplan’s analysis in Parmalat.” Id. at 715.
In Parmalat I, the plaintiffs alleged that defendant Citigroup violated Rule 10b-5(a) and
(c) when it securitized certain of Parmalat’s invoices that were known to the bank to be
worthless. 376 F. Supp. 2d at 481-82. The plaintiffs also claimed that defendant Banca
Nazionale del Lavoro (“BNL”) violated Rule 10b-5(a) and (c) by factoring Parmalat’s invoices
which BNL knew to be without value. In the scheme, BNL paid Parmalat cash for the
assignment of the bad invoices. But unlike a legitimate factoring, where “one party purchases at
a discount, receivables from the party that issued them and then attempts to collect the face
amount of the invoices” (id. at 488), “Parmalat had guaranteed to BNL . . . and the other banks,
payment of the full face value of the invoices” (id.). As such, the so-called “factoring” and
“securitization” arrangements were simply loans to Parmalat; the invoices “played no economic
role in the transaction; they were simply a device or excuse that permitted Parmalat to record
the revenue and to conceal the liability on the guarantees.” Id.
- 26 -

Judge Kaplan rejected the defendants’ argument that in the deals they purportedly only
aided and abetted Parmalat’s misrepresentations in its financial statements, holding that these
allegations stated a claim under Rule 10b-5(a) and (c):
The Court concludes that the arrangements involving the regular factoring
and securitization of worthless invoices were deceptive devices or contrivances
for purposes of Section 10(b). These were inventions, projects, or schemes with
the tendency to deceive because they created the appearance of a conventional
factoring or securitization operation when, in fact, the reality was quite
different. BNL knew when it paid Parmalat for the invoices that they were worth
nothing and were in fact a trick to disguise its loan to Parmalat. The same is true
of Citigroup’s purchase of certain invoices. . . .
The defendants’ argument that they were at most aiders and abettors of a
program pursuant to which Parmalat made misrepresentations on its financial
statements misses the mark. The transactions in which the defendants engaged
were by nature deceptive. They depended on a fiction, namely that the invoices
had value. It is impossible to separate the deceptive nature of the transactions
from the deception actually practiced upon Parmalat’s investors. Neither the
statute nor the rule requires such a distinction.
Parmalat I, 376 F. Supp. 2d at 504.
Also in Parmalat I, the plaintiffs alleged that defendant Credit Suisse First Boston (the
defendant herein) “designed and participated in a set of transactions . . . that CSFB knew
Parmalat would use to conceal debt on its financial statements.” Id. at 489. Specifically and in
short, in the alleged transaction (among other things) CSFB paid Parmalat Participacoes do
Brasile (“PB”) for the entirety of a PB bond issue (convertible into equity) underwritten by
CSFB. At the same time, Parmalat and CSFB transferred back to Parmalat the right of
conversion, pricing it at half the value of the entire bond issue – a suspiciously high valuation.
Parmalat raised the funds to pay CSFB through a separate bond issue underwritten by CSFB and
others. Parmalat then recorded both the conversion “right” it had purchased from CSFB, and the
proceeds of the PB bond issue, as assets. This accounting treatment was allegedly improper, as it
allowed Parmalat to improperly obtain financing, manufacture assets and conceal debt. Id.
- 27 -

The court held that these allegations stated a claim under Rule 10b-5(a) and (c), finding
that, similar to the invoices in the schemes described above, the overstatement of the conversion
right’s value constituted a deception in the deal that allowed Parmalat to falsify its financial
statements:
On the one hand, CSFB’s relinquishment of the conversion right presumably had
some value to Parmalat. On the other hand, if the allegations are given the
interpretation most generous to the plaintiffs, the parties grossly overstated that
value and did so for the purpose of inflating Parmalat’s assets on its financial
statements. The conversion right thus may well have played a role similar to that
of the invoices in the BNL arrangement. The Court is obligated so to assume at
this stage, where reasonable inferences are to be drawn in the plaintiffs’ favor.
Nor can there be any dispute that if this was a deceptive device or contrivance,
then CSFB used it or engaged in a course of business that would operate as a
fraud or deceit.
Parmalat I, 376 F. Supp. 2d. at 505.
Given this Court’s reliance on Parmalat I in the 7/20/06 Order, Lead Plaintiff thinks it
critical to point out that Judge Kaplan issued two subsequent opinions in the case, which upheld
certain other allegations as stating claims under Rule 10b-5(a) and (c). In In re Parmalat Sec.
Litig. (“Parmalat II”), 383 F. Supp. 2d 616 (S.D.N.Y. 2005), the court upheld such claims
against outside lawyers for their role in the Parmalat fraud. The relevant allegations concerned
two bad deals. In the first, when Parmalat was unable to find a legitimate buyer for certain
brands and trademarks it needed to sell, it faked their sale to an uncapitalized shell corporation
(“Newlat”) formed by the law firm. Parmalat booked a receivable for the sale, despite
knowledge that the shell would never pay it. Id. at 620.
In the second scheme, the law firm again created a shell company (“Web Holdings”),
from which Parmalat booked receivables by reporting that it had purchased bonds from the shell.
In reality, Parmalat’s ostensible “loan” to the shell was embezzled by the family of Parmalat’s
CEO. Id. at 625-26. At the same time, the booking of the receivable “made Parmalat appear
healthier than it was.” Id. at 626.
- 28 -

Id. at 625-26.
The Court upheld the allegations:
The complaint alleges in substance that Parmalat sold assets and lent
money to Newlat and Web Holdings, shell companies created and controlled by
[the lawyers]. In the case of Newlat, the sale was a fiction designed to allow
Parmalat to book as receivables obligations that it knew would not be paid. In the
case of Web Holdings, the loan from Parmalat was not a loan at all, but rather a
payment to the Tanzi family. . . .
Like the factoring and securitization of worthless invoices reviewed in
[Parmalat I], these transactions were “inventions, projects, or schemes with the
tendency to deceive because they created the appearance of a conventional” sale
and loan “when, in fact, the reality was quite different.”
And in In re Parmalat Sec. Litig. (“Parmalat III”), 414 F. Supp. 2d 428 (S.D.N.Y. 2006),
Judge Kaplan ruled the plaintiffs’ allegations that Bank of America (“BoA”) engaged in a
transaction with Parmalat that “in substance was a loan” but was portrayed as an “outside equity
investment” stated a claim under Rule 10b-5(a) and (c). Id. at 434.
According to the allegations, BoA designed a transaction in which two BoA-controlled
SPEs purported to purchase an equity stake in Parmalat’s Brazilian arm (“PA”), which was
failing. In setting the purchase price of the purported equity stake, Parmalat and BoA relied on
an accountant’s valuation of PA that they knew to be “‘completely obsolete,’” because it was so
outdated it failed to represent the true, lower value of PA. (Reporting a supposed equity
“purchase” priced according to this valuation, as was done, implied a valuation of PA that was
favorable for Parmalat.). Id. at 434. But BoA’s “purchase” was not “equity” at all, but instead
was in substance a loan, because the deal featured a “put agreement” which operated to
effectively guarantee Parmalat’s repurchase from BoA of its “equity” stake. Id. at 433.
The Parmalat court held BoA’s conduct in masking the loan as an equity investment, to
permit Parmalat to report a favorable valuation of PA, stated a claim under Rule 10b-5(a) and
(c):
- 29 -

[R]ead in the light most favorable to plaintiffs, the SAC alleges that BoA
knowingly used the outdated . . . valuation to place an inflated price on the PA
private placement. This caused the two SPEs to overpay for their investment in
PA, a fact that was irrelevant to BoA because BoA knew that PA would not
become publicly listed and that the two SPEs therefore would be able to put their
entire investment back to Parmalat at a profit [via the put agreement]. The
combination of the overvaluation and the put agreement, then, created the
appearance that BoA believed that PA was worth the full $1.6 billion and was
willing to invest its own money based on that valuation, when in fact BoA knew
that PA was worth far less and was willing to invest only because the put
guaranteed that BoA would be repaid at a premium. Accordingly, plaintiffs’
allegations regarding the PA transaction state a claim under Rule 10b-5 (a) and
(c).
Parmalat III, 414 F. Supp. 2d at 435.
Also in the 7/20/06 Order, this Court examined the Ninth Circuit’s decision in the appeal
of Homestore.com, 252 F. Supp. 2d 1018. See Enron, 439 F. Supp. 2d at 719 n.33 (discussing
Homestore, 452 F.3d 1040). In Homestore, the Ninth Circuit affirmed the existence of scheme
liability under Rule 10b-5(a) and (c), favorably citing this Court’s original 12(b)(6) order
regarding Barclays and other banks and subsequent Merrill Lynch opinion as correctly decided.
452 F.3d at 1050. The court, agreeing with the SEC in large part, ruled that “[i]f a defendant’s
conduct or role in an illegitimate transaction has the principal purpose and effect of creating a
false appearance of fact in the furtherance of a scheme to defraud, then the defendant is using or
employing a deceptive device within the meaning of §10(b).” Id.
Lead Plaintiff is the party who submitted the SEC Brief to the Court. See Enron, 2006
U.S. Dist. LEXIS 43146, at *161-*164. And Lead Plaintiff continues to believe that the SEC
Brief presents the proper standard for scheme liability in this case, and that the evidence
concerning CSFB’s role in the Enron fraud is clearly sufficient for the imposition of scheme
liability under the SEC’s test.
Yet Lead Plaintiff can also easily demonstrate that CSFB’s conduct renders it liable as a
primary violator of Rule 10b-5(a) and (c) under Parmalat I, and thus under this Court’s 7/20/06
- 30 -

Order. And because of this Court’s reliance on the SEC Brief and Parmalat I, and due to
CSFB’s attempts to argue that Homestore and Parmalat I each supposedly render certain of its
conduct inactionable, 28 Lead Plaintiff thinks it helpful for the purpose of resolving CSFB’s
Motion to highlight and summarize to the Court that, under these authorities, the following
conduct is actionable under Rule 10b-5(a) and (c):
• if a “third party engages with the corporation in a transaction whose principal
purpose and effect is to create a false appearance of revenues.” SEC Brief (Ex.
3) at 20;
• where an “investment bank engages in the creation of a sham entity as part of . . .
services to arrange . . . financing” that the client will use to commit securities
fraud (id.); 29
• engaging in deceptive conduct which operates to disguise a transaction as
something other than what it in substance truly is – such as disguising a loan as
an equity investment 30 or as a non-lending transaction in the issuer’s business. 31
This deception can be practiced by, for example:
28
See Notice of New Authority in Support of CSFB Defendants’ Motion for Summary
Judgment (Docket No. 4845) (discussing Homestore) (“Defs’ Notice”), and The CSFB
Defendants’ Supplemental Memorandum Applying the Court’s July 20, 2006 Opinion to the
CSFB Defendants’ Pending Motion for Summary Judgment (Docket No. 4893) (“Defs’ Supp.
Mem.”) (discussing Parmalat I).
29
Notably, in that part of the Motion where CSFB purports to catalogue “the SEC’s
examples of conduct that might give rise to a primary violation,” the Bank fails to mention that
the SEC includes using a “sham entity” to provide financing used for fraud as one of its
examples of actionable conduct. See Defs’ Mem. at 8.
30
See Parmalat III, 414 F. Supp. 2d at 435 (transaction that was in substance a loan
“created the appearance that BoA believed that PA was worth the full $1.6 billion and was
willing to invest its own money”).
31
See Parmalat I, 376 F. Supp. 2d at 504 (“the arrangements involving the regular factoring
and securitization of worthless invoices . . . were inventions, projects, or schemes with the
tendency to deceive because they created the appearance of a conventional factoring or
securitization operation when, in fact, the reality was quite different”); Parmalat II, 383 F.
Supp. 2d at 625-26 (same conclusion with regard to the Newlat and Web Holdings deals).
- 31 -

• establishing and/or operating a shell entity used to permit the issuer to
mischaracterize the economic reality of the transactions with those
entities; 32
• transaction features that “play[] no economic role in the transaction,” or
that otherwise operate as “a device or excuse” to “permit[]” the issuer to
misaccount for the transaction; 33
• using any other pretextual, dummy element in the transaction to permit
mischaracterization by the company, such as knowing employment of an
inaccurate or overstated valuation to establish an ostensible but insincere
assessment of value; 34 or
• use of a guarantee of repayment (via, for example, a put agreement) from
the issuer to render a purported non-lending transaction, in substance, a
loan. 35
It is equally clear that structuring or designing a transaction which has the principal
purpose and effect of creating the false appearance of fact is likewise actionable under Rule 10b-
5(a) and (c). Directly on point is this Court’s very recent ruling in the 6/5/06 Order that Lead
Plaintiff’s allegations:
32
See Parmalat II, 383 F. Supp. 2d at 625 (“Parmalat sold assets and lent money to Newlat
and Web Holdings, shell companies created and controlled by [defendants].”); Homestore, 452
F.3d at 1050 (“the invention of sham corporate entities to misrepresent the flow of income, may
have a principal purpose of creating a false appearance”).
33
Parmalat I, 376 F. Supp. 2d at 488 (discussing securitization/factoring or worthless
invoices).
34
See Parmalat I, 376 F. Supp. 2d at 505 (“[CSFB and Parmalat] grossly overstated that
value [of the conversion right] and did so for the purpose of inflating Parmalat’s assets on its
financial statements.”); Parmalat III, 414 F. Supp. 2d at 435 (“the SAC alleges that BoA
knowingly used the outdated . . . valuation to place an inflated price on the PA private
placement”).
35
See Parmalat III, 414 F. Supp. 2d at 433 (“Even the 18.18 percent equity stake purchased
by the two SPEs, in plaintiffs’ view, was not really an equity investment because BoA knew that
PA would never become publicly listed and that Parmalat therefore would have to buy back the
stake [via the put agreement] at a premium.”).
- 32 -

[R]egarding Credit Suisse First Boston (“CSFB”) and Laurence Nath’s repeated
involvement in structuring SPEs for Enron . . . satisfy the requirements for
pleading primary violations of the statutes.
Enron, 2006 U.S. Dist. LEXIS 43146, at *170. This Court’s holding here is strongly supported
by Homestore, where the Ninth Circuit approvingly noted that the “principal purpose and effect”
test it adopted was found satisfied in cases where the secondary actor “designed” or
“masterminded” the scheme. 36
In applying the standard described above, Lead Plaintiff respectfully submits that the
Court should be guided by the following observations. First, the Supreme Court has repeatedly
ruled that Section 10(b) and Rule 10b-5 are imbued with sufficient breadth and flexibility to
reach even unique and unprecedented forms of fraud. 37
Thus while the Court may find
instructive the specific conduct described as actionable in the SEC Brief and the Parmalat cases,
36
In Homestore:
Trial courts which have imposed liability under a “scheme to defraud” theory
have often required that the defendant’s actions in fraudulent transactions have a
principal purpose and effect of creating a false appearance of fact in furtherance
of the scheme to defraud. See Quaak v. Dexia S.A., 357 F. Supp. 2d 330, 342 (D.
Mass. 2005) (finding sufficient allegations for primary liability under §10(b)
when “defendant was a primary architect of the scheme to finance the sham
entities”); In re Global Crossing, Ltd. Sec. Litig., 322 F. Supp. 2d 319, 336-37
(S.D.N.Y. 2004) (allowing claims of primary liability to go forward where
auditors “masterminded” company’s misleading accounting practices); In re
Lernout & Hauspie Sec. Litig., 236 F. Supp. 2d 161, 173 (D. Mass. 2003)
(denying a motion to dismiss for outside business partners who invented sham
corporate entities that allowed a corporation “to hide research and development
expenses, create fictitious revenue, and ultimately overstate profits in [its]
financial reports”).
452 F.3d at 1049.
37
See, e.g., Bankers Life, 404 U.S. at 11 (“We believe that §10(b) and Rule 10b-5 prohibit
all fraudulent schemes in connection with the purchase or sale of securities, whether the artifices
employed involve a garden type variety of fraud, or present a unique form of deception.”)
(emphasis in original).
- 33 -

if CSFB’s conduct here presents the requisite deception, factual variations from the cases should
not insulate it from liability.
Second, conduct which yields deception only indirectly is nevertheless actionable under
Rule 10b-5(a) and (c). 38
Third, in determining whether conduct or transactions disclose the
requisite deception, this Court should construe all reasonable inferences to that effect in Lead
Plaintiff’s favor. 39
Finally, as demonstrated below, under these authorities and all of the Court’s relevant
Orders, Lead Plaintiff’s evidence concerning CSFB’s role in the Enron fraud create a genuine
issue of material fact as to whether CSFB is liable under Rule 10b-5(a) and (c).
2. CSFB’s Engagement in and Structuring of the Fraudulent
Transactions Subjects It to Primary Liability
Discovery in this case has produced exceedingly powerful evidence establishing that
CSFB played a major role in the Enron scheme, engaging in transactions which had the purpose
and effect of creating the false appearance of fact. CSFB’s own conduct in these transactions
constituted manipulative and deceptive acts in furtherance of that scheme.
38
As the SEC stated: “We do not believe that direct conduct should be a requirement for
primary scheme liability. Section 10(b) and Rule 10b-5 expressly cover ‘indirect’ conduct. Thus,
a defendant should be primarily liable where he either directly or indirectly engages in a
manipulative or deceptive act as part of a scheme to defraud.” SEC Brief (Ex. 3) at 18 n.4.
39
See Parmalat I, 376 F. Supp. 2d at 483 (“The Court accepts the allegation of a guarantee
because all reasonable inferences are to be drawn in plaintiffs’ favor at this stage.); id. at 504
n.160 (“the Court is obliged to draw from the complaint all reasonable inferences in the
plaintiffs’ favor and therefore assumes for present purposes that Citigroup securitized worthless
invoices”); id. at 505 (“The conversion right thus may well have played a role similar to that of
the invoices in the BNL arrangement. The Court is obligated so to assume at this stage, where
reasonable inferences are to be drawn in the plaintiffs’ favor.”). While Judge Kaplan operated
under the observation that “all reasonable inferences are to be drawn in plaintiffs’ favor” on a
motion to dismiss (id. at 483), similarly on summary judgment the court will “draw all
reasonable inferences in favor of the nonmoving party.” Flock, 319 F.3d at 236.
- 34 -

a. Related-Party Transactions
(1) LJM1 – The Illusory Rhythms “Hedge” 40
In the Motion, CSFB attempts to distance itself from the now notorious LJM1
partnership. The Bank disclaims virtually all responsibility for LJM1, casting itself as a mere
“investor” in it. Defs’ Mem. at 20; Defs’ Notice at 5. CSFB is far too modest.
As the evidence described below establishes, CSFB structured and capitalized through a
sham entity the now notorious LJM1 partnership, designing it specifically to falsify Enron’s
financial statements by allowing the Company to establish a fake hedge against a position in a
volatile Internet stock. CSFB accomplished this in its structure by presenting the fiction that the
hedge was held by an entity independent from Enron using its own funds when, in reality, the
entity should have been considered as part of Enron, and the putative “hedge” was supported by
Enron’s own stock. The Bank itself worked to fashion the deceptive elements of the structure it
financed, and LJM1’s general partner – having a fiduciary duty to CSFB – acted on CSFB’s
behalf in what it did. Even CSFB’s supposed status as an “investor” in LJM1 was itself a fiction
– as the Bank’s purported “investment” in LJM1 was in reality not “at risk,” but only appeared to
be.
CSFB’s handiwork in orchestrating the deception in LJM1 paid off. As Enron was
crumbling, one of the Bank’s analysts bragged privately to a friend that CSFB “made a bundle”
in the LJM partnerships. Ex. 15660 at CSFBLLC006303944. CSFB’s Bayo Ogunlesi told
Fastow that he “loved the LJM structures.” 10/23/06 Fastow Depo. Tr. at 222:11.
40
The LJM1 partnership was originally called “LJM Cayman,” only later being termed
“LJM1” after LJM2 was conceived.
- 35 -

The story of LJM1 begins in March of 1998, when Enron acquired 5.4 million shares of
stock in Internet company Rhythms NetConnections (“Rhythms”) for $10 million. 41
Rhythms
completed an IPO on April 12, 1999. 42
Rhythms stock closed the first day of trading at
$69.13/share, and between the IPO and June 22, 1999, the stock had traded between $42.50 and
$111.50 per share – far in excess of what Enron paid. 43 Thus, after the Rhythms IPO, Enron’s
5.4 million Rhythms shares (the “Rhythms Stock”) represented an asset with substantially
increased value.
Because, however, Enron accounted for the Rhythms Stock using mark-to-market
accounting, price swings in the Rhythms Stock it continued to hold caused significant volatility
in Enron’s income statement. 44
At the same time, Enron could not simply sell the shares to
realize the gain on them, for two main reasons. First, as CSFB knew, the Rhythms Stock was
subject to a “lock up” agreement that prohibited Enron’s sale of it for a certain time period. 45
Second, because Enron’s Rhythms Stock comprised such a large portion of the total outstanding
41
See 1/17/06 Expert Report of Saul Solomon (“Solomon Report”) at 95 (Solomon is Lead
Plaintiff’s expert witness regarding the accounting for Enron’s transactions with the defendant
banks, and other and related matters. See Solomon Report at §I.); see Solomon Report at 95; Ex.
11277 at CSFBLLC006359208 (invested $10 million); Ex. 14 at ECv000335026-027
(Background of LJM/Rhythms Transaction, undated draft).
42
See Ex. 5 at EVE04665-670 (Investment in Rhythms NetConnections Inc. Overview).
43
See Ex. 11277 at CSFBLLC006359208 (“Its 52-week high and low is $111.50 and
$42.50 respectively.”); ECv000335026-027 (Background of LJM/Rhythms Transaction, undated
draft).
44
See Solomon Report at 95.
45
See 12/6/04 Deposition Transcript of Adebayo Ogunlesi (“12/6/04 Ogunlesi Depo. Tr.”)
at 371:15-21; 12/1/04 Ivers Depo. Tr. at 58:13-59:2; see also Solomon Report at 95; 1/17/06
Expert Report of Professor Bernard Black (“Black Report”) at 88-89 (“We wanted to sell, but
couldn’t because a lock-up agreement barred us from selling or hedging our position until
December 1999.”).
- 36 -

Rhythms Stock, and trading was thin, the Company’s sale of the Rhythms Stock would have
most likely caused a sharp drop in the trading price. 46
Under valid application of accounting rules at the time, had Enron been able to procure a
legitimate hedge against the Rhythms Stock, this would have at least permitted the Company to
neutralize the volatility in Enron’s income statement wrought by the price swings in Rhythms
Stock. Such a legitimate hedge could conceivably have been in the form of a “put,” where Enron
would secure a valid agreement from an independent party to purchase the Rhythms Stock from
the Company at a set price. This put would safeguard Enron’s gain in the value of the Rhythms
Stock, and thus release the Company from the obligation of adjusting its income statement to
reflect the swings in the value of the Rhythms Stock.
But Enron was precluded from procuring a legitimate hedge for several reasons. The
same lockup agreement that prohibited Enron’s sale of Rhythms Stock also prohibited the
Company from hedging against it. 47
Because the Rhythms Stock amounted to such a large
portion of the public float, which was thinly traded, even just hedging it threatened to sink its
value. As CSFB banker Richard Ivers explained:
A. When a public option is created, there’s either a buyer or seller whom
initiates it but there’s got to be the other side of the trade, so there’s got to be a
market, and at that particular point in time there was not enough volume to have
sold or hedged or otherwise that dollar amount of stock without annihilating the
price of Rhythms.
46
See 12/2/04 Deposition Transcript of Richard Ivers (“12/2/04 Ivers Depo. Tr.”) at 456:23-
458:15 (“To have done a huge trade like that would have probably crushed the value of
Rhythms.”); see also Black Report at 89 (“Also, we owned about 10% of Rhythms – about equal
to the public float. Even after the lockup expired, if we dumped that many shares on the open
market quickly, the price would surely drop.”).
47
Black Report at 12, 88-89; 4/20/06 Deposition Transcript of Bernard Black (“4/20/06
Black Depo. Tr.”) at 195:23-196:17. See also Solomon Report at 95 (precluded from selling).
- 37 -

12/2/04 Ivers Depo. Tr. at 457:8-15. Further, these market conditions made the chances of
procuring from an independent party a put for the price Enron desired highly unlikely:
A. Well, as I just said over the last few minutes, there was no volume so
whoever would just do a put would be taking a risk that would be virtually
incalculable . . . .
12/2/04 Ivers Depo. Tr. at 460:9-12. An internal CSFB document confirms the practical
impossibility of securing a legitimate put at the price Enron wanted: “[W]e would not purchase
this entire put at any price (nearly 10% of the float, very risky stock). If [Enron] really needed
to sell it, they would have to take a significant discount . . . .” Ex. 16064 at
CSFBLLC000045413.
For Enron – which desperately wanted to somehow use the Rhythms Stock to burnish its
reported financial condition – this was a problem. And as Fastow declares, he viewed the
defendant banks in this case “as problem solvers.” Fastow Decl., 6. CSFB acted to solve
Enron’s “problem” with the Rhythms Stock.
The LJM1 partnership was formed in June 1999 for the purpose of creating an ostensible
“hedge” of Enron’s Rhythms Stock (see Ex. 11277 at CSFBLLC006359207-08; Ex. 50239 at
DPOEX00006080-81; Ex. 11232 at CSFBLLC006359808; 12/1/04 Ivers Depo. Tr. at 56:5-8) by
writing a put on it. Ivers admitted that Enron needed LJM for this because of the abovedescribed
“problems” presented by “buying such a put in the open market or from a true third
party.” 12/2/04 Ivers Depo. Tr. at 460:17-22. LJM would be a partnership with one general
partner and two limited partners. Its general partner was called “LJM Partners, L.P.” 48 – an
entity controlled by Fastow. One limited partner was “Campsie, Ltd.,” an entity controlled by
48
Ex. 6 at EVE04251-649 (6/21/99 LJM Cayman, L.P., Statement by the General Partner
for Registration as an Exempted Limited Partnership, contained in Closing Document binder).
- 38 -

NatWest. 49 The remaining limited partner was named “ERNB, Ltd.” (“ERNB”). 50 ERNB was a
shell company created and controlled by CSFB (see discussion below).
In its Motion, CSFB makes the claim with regard to LJM1 that “CSFB . . . did not
structure or execute any of the partnership’s transactions with Enron (including the Rhythms
hedge).” Defs’ Mem. at 20. Fastow, however, has a radically different recollection. With
regard to LJM1 and the Rhythms Hedge, he declares: “Mr. Ivers, a CSFB banker, helped
structure the transaction . . . .” Fastow Decl., 52. CSFB’s carefully crafted denial here is also
contradicted by the testimony of its own witnesses. Ivers was forced to admit in deposition that
he worked on structuring LJM1:
At that point in time my role was to advise on some of the issues and to make
recommendations on the final structure.
12/1/04 Ivers Depo. Tr. at 55:21-23.
A. My understanding was that CSFB had reacted to a proposal from either
Mr. Fastow or one or more of his associates to invest in a project – in a financing,
in what became – what was LJM Cayman and that there was a specific request
from the client, and we – I’m sorry – CSFB over time negotiated certain changes
in structure, documentation and so forth.
12/1/04 Ivers Depo Tr. at 87:2-10. But Ivers also testified that in performing his structuring
work, he understood what he was structuring LJM1 for:
Q. And what was to be accomplished?
A. Primary objective was the hedging of a long position that Enron owned in
a then public company called Rhythms NetConnections.
49
Ex. 6 at EVE004251-649 (6/30/99 Amended and Restated Agreement of Limited
Partnership of LJM Cayman, L.P., contained in Closing Document binder). NatWest was later
acquired by defendant Royal Bank of Scotland.
50
Id.
- 39 -

Id. at 56:5-8. That is, CSFB structured LJM1 to execute the Rhythms Hedge. 51
See also
10/23/06 Fastow Depo. Tr. at 200:2-7 (CSFB understood that the primary purpose of LJM1 was
to effectuate the Rhythms Hedge).
The structure devised in part by CSFB for the LJM1 Rhythms Hedge was as follows: 52
LJM Partners made an initial capital contribution of $1.0 million to LJM1. 53
Campsie and
ERNB each made initial capital contributions to LJM LP of $7.5 million. (This provided LJM
LP with a total of $16 million in initial capitalization.) LJM LP had a wholly owned subsidiary
called LJM Swap Sub, L.P. (“Swap Sub”). 12/6/04 Ogunlesi Depo. Tr. at 344:14-16. Swap Sub
had a general partner called LJM SwapCo (“SwapCo”), which was 100% owned by LJM LP.
Ex. 50281; 8/24/04 Mandanas Depo. Tr. at 392:24-393:4. Ultimately, Swap Sub would write the
put to Enron – that is, an agreement to be obligated, should Enron exercise the right, to purchase
the 5.4 million shares of Rhythms Stock from Enron at a specific price per share. See 12/6/04
51
CSFB’s work on structuring LJM1 actually went beyond its formation for the Rhythms
Hedge. CSFB banker Mary Beth Mandanas acknowledged in an email that CSFB bankers and
lawyers endeavored to solve structuring and other issues concerning LJM1:
Legal/regulatory issues – When LJM was put in place in June, there were several
issues that were not fully addressed at the time. We are currently learning about
these issues and will have to attempt to rectify them. We are still in the process of
determining the best way to modify the existing partnership agreement. I am
speaking with Bayo [Ogunlesi] and our internal legal counsel on these issues
tomorrow (Wed.). We want to determine the answers before approaching Andy
for any changes.
Ex. 50244 at CSFBCO000049183. And later CSFB speaks of it working “on the current
structure” of SAILS. Id.
52
Hereafter, in this Opposition the LJM1 partnership entity is called “LJM LP,” while the
cluster of entities described in this paragraph is referred to collectively as “LJM1.” See Solomon
Report at 95 (diagram of LJM1 at 97).
53
Ex. 6 at EVE004251-649 (6/30/99 Amended and Restated Agreement of Limited
Partnership of LJM Cayman, L.P., contained in Closing Document binder).
- 40 -

Ogunlesi Depo. Tr. at 294:25-295:15, 344:17-19 (“the agreement was that Swap Sub would enter
into this put agreement with Enron”); Solomon Report at 95. CSFB itself engaged in the
structuring work that placed the put in Swap Sub:
Q. Okay. Do you have an understanding that CSFB people actually made
the decision that Swap Sub would write the put to Enron?
A. I don’t know if they made the decision, but I certainly I believe they were
involved in the discussions on the structure of the transaction.
12/6/04 Ogunlesi Depo. Tr. at 345:14-21.
But to write a legitimate put to cover the value of Enron’s Rhythms Stock – worth
approximately $358.8 million as of July 8, 1999 (see Ex. 11232 at CSFBLLC006359808) –
obviously required access to a similarly large amount of funds. And as discussed above, Enron
and CSFB both knew Enron could not secure the funds for such a put from a truly independent
party; this would be in violation of the lockup agreement covering the Rhythms Stock,
detrimental to its value and simply unattractive to any real independent party.
CSFB’s LJM1 solved this “problem” by tapping the only entity willing to write the put:
Enron itself. Indeed, the LJM1 structure called for Enron to contribute its own stock to LJM1,
and that stock would ostensibly support the put Swap Sub wrote to Enron. So Enron contributed
an amount of its treasury stock – consisting of 6.8 million shares – to LJM LP. See Solomon
Report at 97; Ex. 11232 at CSFBLLC006359808 (amount of shares on pre-split basis). 54
In
exchange, Enron received a promissory note (the “Note”) from LJM LP. The amount of the
54
Enron had redeemed a number of its own shares pursuant to a forward sale contract with
investment bank UBS. Ex. 11277 at CSFBLLC006359207; Ex. 50239 at DPOEX00006080;
Solomon Report at 293. Because the shares were Enron’s own and had been redeemed, they
were properly considered “treasury stock.” See Solomon Report at 293. This treasury stock had
experienced a substantial increase in value. Ex. 11277 at CSFBLLC006359207; Ex. 50239 at
DPOEX00006080 (“Enron entered into a forward purchase contract with UBS to purchase
7,803,073 shares of Enron Corp.’s stock that has an accreted value of $44.44 per share (current
market value price $77.31).”).
- 41 -

Note was initially $50 million, but was later increased to $64 million. See 1/17/06 Expert Report
of Joel Finard (“Finard Report”) at 95 n.172. Enron had laden the treasury stock sent to LJM LP
with restrictions (the “Restrictions”), which prevented its sale for four years and hedge for two
years. See Ex. 11235 at CSFBLLC006032320; Ex. 50238 at DPOEX00006090; 8/23/04
Deposition Transcript of Mary Beth Mandanas (“8/23/04 Mandanas Depo. Tr.”) at 37:12-38:16,
72:22-73:2. Because of these restrictions, Enron priced the Treasury Stock sent to LJM LP at a
discounted value of only $168 million. The $168 million price represented “a significant
discount” off market value. Ex. 21146 at PWC-X008876; and see generally 8/23/04 Mandanas
Depo. Tr. at 76:3-5 (“Restricted shares generally that, you know, the price is discounted.”).
Having received the treasury stock from Enron, LJM LP distributed 3.11 million shares
of it to Swap Sub (see Solomon Report at 97; see also Ex. 11232 at CSFBLLC006359808
(amount of shares on pre-split basis)), along with $3.75 million. 55 LJM LP then shuffled 32,050
shares of its remaining treasury stock to SwapCo, which then immediately passed it on to Swap
Sub. See Ex. 50281; Solomon Report at 97. Swap Sub was thus left with 3,142,050 shares of
the treasury stock (“Treasury Stock”) and $3.75 million in cash. These holdings purported to
support Swap Sub’s put option on the Rhythms Stock (the “Rhythms Put”), which was valued at
$104 million in the deal.
55
This $3.75 million was the proceeds of the sale of some of the treasury stock LJM LP
received from Enron. Ex. 7 at 38 n.139.
- 42 -

Diagrammatically, the transaction appears as follows:
LJM Partners, L.P.
General Partner
ERNB, Ltd.
(CSFB)
Limited Partner
Campsie Ltd.
(NatWest)
Limited Partner
$1 M
6.8 M Shares
Enron Stock
($168 M Disc. Value)
$7.5 M
$7.5 M
Enron Corp.
$64 M Note
LJM Cayman, L.P.
(LJM1)
32,050 Shares
of Enron Stock
3.11 M Shares
Enron Stock
+
$3.75 M Cash
Put Option on 5.4 M
Shares of Rhythms Stock
($104 M Value)
LJM Swap Sub, L.P.
(Swap Sub)
32,050 Shares
of Enron Stock
LJM SwapCo
(SwapCo)
See Solomon Report at 97; see also Ex. 50281; 8/24/04 Mandanas Depo. Tr. at 391:21-392:4,
392:25-393:4.
The Rhythms Put gave Enron the right, but not the obligation, to sell its Rhythms Stock
to Swap Sub at $56 per share, which was later increased to $65 per share. Ex. 11233; Ex. 11238
at CSFBLLC006359257; Solomon Report at 95-96; Finard Report at 95 n.173. But also built
into the structure was the feature that Swap Sub’s liability on the Rhythms Put was non-recourse
to LJM LP. See Ex. 11233; Ex. 11238 at CSFBLLC006359257; Solomon Report at 97; 12/1/04
Ivers Depo. Tr. at 100:14-101:2. In other words, Swap Sub could not tap any funds or stock in
LJM LP should Enron exercise the Rhythms Put.
The Rhythms Hedge enabled Enron to avoid having to take an approximate $116.6
million writedown of the Rhythms Stock in 3Q99, and an additional approximate $18.9 million
in 4Q99, for a total writedown avoided in F99 of approximately $135.5 million.
- 43 -

This was improper. The Rhythms Hedge yielded the desired – but unjustified –
accounting effects for Enron only through an elaborate interrelationship of fictions that made the
transaction inherently deceptive. The “hedge” supposedly presented by LJM1’s carrying of the
Rhythms Put was merely an illusion. While the Rhythms Put purported to be an economically
valid put with the financial means to support its obligation to purchase the Rhythms Stock, held
by an independent party, this was true in appearance only, for several reasons.
First, the main support for the Rhythms Hedge (i.e., the Treasury Stock) came from
Enron itself. As Lead Plaintiff’s expert witness Professor Black opines, a hedge with one’s own
money does not truly constitute a hedge: “In effect, we were hedging with ourselves, which is no
hedge at all.” 1/17/06 Expert Report of Bernard Black (“Black Report”) at 43; see also id. at
45. 56 Enron could not validly secure itself from a loss of the Rhythms Stock value when such
“security” was being provided by itself.
In LJM1, the fact that Enron was hedging the Rhythms Stock with Enron’s own Treasury
Stock was concealed by two key fictions: (1) the transfer of the Treasury Stock to LJM LP for
the Note; and (2) the purported independence from Enron of both LJM LP and Swap Sub.
First, because, as stated above, a hedge with one’s self is no hedge at all, the entire
Rhythms Hedge deal required that the Treasury Stock not simply be Enron’s own property. One
way the Treasury Stock could be imbued with the appearance of having been alienated from
Enron would be if it was transferred from the Company for fair consideration. To this end,
Enron exchanged the Treasury Stock with LJM LP for the Note.
56
Professor Black is Lead Plaintiff’s Expert witness concerning the true nature of Enron’s
financial condition and results of operations and other topics. See Black Report at §I.
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This transfer, however, was a sham. As CSFB notes in its Motion, accounting firm
PricewaterhouseCoopers (“PwC”) “opined on the fairness” of the transaction. Defs’ Mem. at 22-
23. But PwC’s fairness opinion was contrived – based on knowingly illusory premises. In the
above diagram, it can be observed that the transaction is structured so that the value of the
Treasury Stock ($168 million) is exactly equivalent to the value of what Enron receives in return:
The Note for $64 million plus the Rhythms Put (worth, supposedly, $104 million), totaling an
ostensible $168 million. But these values placed on the assets in question were knowingly
falsified.
PwC valued the Treasury Stock at a discount by considering the unfavorable Restrictions
Enron placed on it. See Ex. 50286 at PWC0004564. LJM LP and Swap Sub agreed to the
Restrictions. See Ex. 50238; 8/23/04 Mandanas Depo. Tr. at 37:12-19. But these Restrictions
were illusory – Enron could remove them at any time. Ivers admitted in deposition his
understanding that the Restrictions could be lifted with “the permission of Enron.” See 12/2/04
Ivers Depo. Tr. 542:17-543:24. This is also shown by the fact that later, Enron (through Fastow)
offered to just lift the restrictions in exchange for CSFB’s making a certain loan to LJM2. See
6/17/04 Deposition Transcript of Osmar Abib (“6/17/04 Abib Depo. Tr.”) at 536:7-16; Ex. 10194
at DPOEX00009794. Thus the Restrictions were simply a ruse to depress the assessed price of
the Treasury Stock. This way, the Note and the Rhythms Put would falsely appear to be
adequate consideration for the Treasury Stock – in turn falsely indicating that the Treasury Stock
was no longer Enron’s own property.
But there was deception on the other end of the equation as well. Despite the fact that
LJM1 and Enron treated the Rhythms Put as being worth $104 million, it was not worth
anywhere near this value – and CSFB knew it. As discussed, because of the volatility of the
Rhythms Stock and its thinly traded volume, no true independent party would have taken the
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Rhythms Put on its stated terms. 57
CSFB – a sophisticated investment bank – absolutely knew
this. In a November 1999 email to Mandanas, Shad Stasney of CSFB’s derivatives group wrote
of the Rhythms Put:
I can confidently say there is no “fair market value” for this put, since we [CSFB]
would not purchase this entire put at any price (nearly 10% of the float, very
risky stock). If [Enron] really needed to sell it, they would have to take a
significant discount . . . .
Ex. 16064 at CSFBLLC000045413. “Other internal [CSFB] sources” support the conclusion
“that there is no ‘fair market value’ for these options.” Ex. 16064 at CSFBLLC000045413.
The PwC opinion and the inflated valuation of the Rhythms Put made the Rhythms
Hedge inherently deceptive. To fabricate the false appearance that Enron was hedging its
Rhythms Stock with something other than its own Treasury Stock, the transaction gave the
appearance of a “fair” transfer of the Treasury Stock, when such was not the case because the
value of that stock was artificially depressed and the value of the Rhythms Put was artificially
inflated.
Second, there existed further deception structured into LJM1. The illicit accounting
benefits yielded from the LJM1 structure depended on LJM LP and Swap Sub not being
“consolidated” with Enron. As Solomon explains, legitimately avoiding consolidation for these
entities required that they each present a minimum 3% “equity” investment that is “at risk.”
Neither LJM LP or Swap Sub had the requisite equity, though. 58
They only appeared to have it.
57
Indeed, such is the reason why CSFB and Enron had to engage in the Rhythms Hedge
scheme in the first place.
58
See Solomon Report at 292-93. In fact, as Solomon discusses, Enron admitted that Swap
Sub required but did not have the requisite equity when on November 8, 2001, the Company
indicated its intention to restate its financial statements for effects of Swap Sub. Also on
December 12, 2001, Andersen admitted that both LJM LP and Swap Sub lacked the required 3%
equity. Id.
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As to LJM LP, CSFB contributed $7.5 million in capitalizing funds, which purported to
form part of the 3% “at risk” “equity” held by LJM LP. But while LJM1 presented this money
as “at risk,” it secretly was not. As Fastow states under oath, CSFB received an assurance that
its “equity” would be repaid. With regard to LJM1, he declares:
I explained to CSFB and RBS bankers that their investment, in my opinion, did
not have equity risk. Rather, we discussed that it had credit risk analogous to that
of a Reg-U loan.
Fastow Decl., 51. In fact, CSFB took a belt-and-suspenders approach to this aspect of the deal.
CSFB’s Ivers’ actually structured LJM1 to be overcollateralized, further ensuring that CSFB’s
“equity” would face no risk:
Mr. Ivers, a CSFB banker, helped structure the transaction so that it would be
overcollateralized; this helped to reduce the equity risk for the Limited Partners.
Id., 52. In addition, CSFB structured in the feature that Swap Sub would not have recourse to
LJM LP to support the exercise of the Rhythms Put to further ensure that the “equity” was not
truly “at risk”:
Q. And that was part of your goal of protecting CSFB’s investment of seven
and a half million dollars to make sure that LJM SwapSub was separate from LJM
Cayman?
A. That was one of the objectives.
Q. So that was something that you wanted to achieve when it was being set
up, correct?
A. Yes.
12/1/04 Ivers Depo. Tr. at 100:18-101:2.
Thus CSFB’s “equity” in LJM1 was not “at risk.” As such, even CSFB’s stated role as
an “investor” in LJM1 was itself a fiction. The Bank’s contribution was really just a loan.
Like LJM LP, Swap Sub did not present the requisite 3% “at risk” equity. This was
because Swap Sub had no equity at all – in fact, it had a negative capital balance. As Solomon
explains, at the time of capitalization Swap Sub did receive assets of $81.4 million, consisting of
- 47 -

the $3.75 million cash and about $77.7 million in Treasury Stock. See Solomon Report at 292.
But receipt of these assets was conditional on acceptance of the obligation to write the Rhythms
Put. Id. And the cost to Swap Sub should the Rhythms Put have been exercised was over $303
million. See Solomon Report at 95-96 (describing put as obligation to purchase 5.4 million
shares of Rhythms stock for $56.125 per share). Solomon concludes that because Swap Sub’s
liabilities exceeded its assets, “Swap Sub did not have the required minimum of 3% independent,
outside equity at risk and should have been consolidated with Enron.” Solomon Report at 292. 59
Even Andersen belatedly agreed that “‘Swap Sub did not qualify for nonconsolidation treatment
because of inadequate capitalization.’” Solomon Report at 292-93. 60
CSFB knew Swap Sub had negative equity. Mandanas confirmed her understanding that
Swap Sub had a $24.5 million “negative equity” position at the time the Rhythms Hedge was
executed. 8/24/04 Mandanas Depo. Tr. at 538:16-539:15; see Ex. 50277 at
CSFBLLC006359351.
Without a doubt, CSFB is liable under Rule 10b-5(a) and (c) for spinning the elaborate
and deceptive web of the Rhythms Hedge transaction. There can be no challenging the fact that
the Rhythms Hedge was a transaction whose “principal purpose and effect” was to “create the
59
Swap Sub could not look to LJM LP for financial assistance in satisfying the Rhythms
Put, as CSFB had structured the transaction to isolate it from LJM LP, so as to render CSFB’s
equity further not “at risk.” 12/1/04 Ivers Depo. Tr. at 100:11-101:2.
60
That CSFB’s “equity” in LJM1 was never “at risk” is further confirmed by the Bank’s
return of it through the Southampton deal. Through this deal, which closed March 22, 2000,
CSFB sold its remaining interest in Swap Sub to Enron for $10 million. See Ex. 50277 at
CSFBLLC006359350. This $10 million sale price was “negotiated” between Messrs. Fastow
and Ivers. 8/24/04 Mandanas Depo. Tr. at 369:10-21. But this “sale” was a sham. Only five
days earlier, all of the “equity” in Swap Sub (not just CSFB’s portion) was valued by the Bank
as just $5.8 million. See Ex. 50277 at CSFBLLC006359352. Southhampton was just a way for
CSFB to effectuate the guaranteed return of its “investment” in LJM1.
- 48 -

false appearance of fact.” Homestore, 452 F.3d at 1048 (describing its own and SEC’s test).
Enron’s avoidance of writedowns on the Rhythms Stock necessarily implied and depended on
the existence of a legitimate, economically valid hedge. But as established above, the Rhythms
Put purporting to be this hedge was fake – it was supported only by Enron’s own property
(concealed by the sham Restrictions/”fairness opinion”) and was held by entities (Swap Sub and
LJM LP) that did not possess the requisite 3% “equity” “at risk” (concealed by CSFB’s
ostensible role as an LJM1 “investor”).
In a stunning internal communication, CSFB’s managing director/head of monetizations
Carmen Marino actually called the Rhythms Hedge transaction a “convoluted financing
scheme,” joking about Swap Sub’s true inability to support the Rhythms Put. Marino writes in a
July 28, 1999 email entitled, “LJM Partners: What Enron is Getting For All This Stock”:
Ivers’ tells me that Enron . . . also gets the put on 5.2 million RTHM shares,
struck at $57/share, which was written by the Put Sub (whoops! stock is now at
$46 1/2 – too bad for the Put Sub).
Both Ivers and Enron assure me that the Put Sub has no recourse to other
parts/assets of LJM if it goes belly up (the only thing securing the Put Sub’s
obligations under the written put is about 1.7mm shares of ENE). . . .
PS By the way, I now assume that running a pipeline business can’t take much
time – Enron seems to spend all its available man hours on various convoluted
financing schemes.
Ex. 11233. CSFB can now hardly deny that the Rhythms Hedge was a “financing scheme.” And
as Fastow declares, CSFB knew of the reporting effects of the transaction: “I discussed with
CSFB and RBS bankers that Swap Sub, a subsidiary of LJM1, would likely have a material
impact upon Enron’s reported earnings.” Fastow Decl., 53.
Also, as discussed above, there is substantial evidence establishing that CSFB actively
structured LJM1 to execute the Rhythms Hedge. Fastow declares that CSFB banker Ivers helped
“structure” the transaction. Id., 52. Ivers admitted in deposition both that CSFB worked on the
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structure and obtained lasting changes to it. 12/1/04 Ivers Depo. Tr. at 55:21-24, 87:2-10. Ivers
also admitted specifically that he structured LJM1 to execute the Rhythms Hedge. Id. at 56:5-8.
In fact, much of this evidence establishes the Bank’s structuring specifically of major
deceptive features of the transaction. CSFB set up LJM1 so that the bank’s ostensible role
would be that of an “investor.” See Ex. 18204 (LJM1 Subscription Agreement). This gave the
appearance that that the equity was “at risk.” But this was deceptive because the $7.5 million
supposed “investment” was not truly at risk, as Fastow declares. Fastow Decl., 51. CSFB also
“structure[d]” the transaction to be overcollateralized, to render its equity not truly “at risk.” Id.,
52. Ogunlesi admitted that CSFB worked on structuring the placement of the Rhythms Put in
Swap Sub (12/6/04 Ogunlesi Depo. Tr. at 345:14-21) and Ivers admitted it was again CSFB that
structured in Swab Sub’s inability to seek recourse to LJM LP, specifically to prevent the equity
from being really “at risk” (12/1/04 Ivers Depo. Tr. at 100:11-101:2). This structuring of LJM1
to execute the Rhythms Hedge – especially the structuring of its inherently deceptive features –
is plainly actionable under Rule 10b-5(a) and (c), under both this Court’s 6/5/06 Order that Lead
Plaintiff’s allegations regarding CSFB’s “structuring” “satisfy the requirements for pleading
primary violations of the statutes” (Enron, 2006 U.S. Dist. LEXIS 43146, at *170) and
Homestore, 452 F.3d at 1049.
It is equally clear that CSFB is liable under the Parmalat cases – in manifold ways. The
Rhythms Hedge transaction was not a valid hedge; it only appeared to be such. The existence of
a valid hedge depended, among other things, on both LJM LP and Swap Sub each having 3%
“equity” “at risk.” While CSFB’s calling itself an “investor” in LJM LP represented that such
risk was present, it was in fact not (for the reasons discussed above). Thus the Rhythms Hedge
- 50 -

transaction “created the appearance” of true hedge when “the reality was quite different.”
Parmalat I, 376 F. Supp. 2d at 504. 61
The same species of deception was present in the transaction’s use of the PwC “fairness
opinion” regarding the exchange of the Treasury Stock for the Note and Rhythms Put. The
opinion was a sham, because it was based on the fake Restrictions that Enron imposed but could
lift at any time. The Restrictions were “simply a device or excuse that permitted [Enron]”
(Parmalat I, 376 F. Supp. 2d at 488) to artificially depress the price of the Treasury Stock, thus
making its transfer appear to be for adequate consideration – yielding the false appearance the
Enron had validly alienated the stock that would support the Rhythms Put. The transaction thus
“depended on a fiction, namely” (id.) that the Treasury stock held by Swap Sub was not really
Enron’s own property.
And as discussed, this ruse employed the further deception that the Rhythms Put received
by Enron was supposedly worth the claimed $104 million. CSFB knew and acknowledged this
was simply a fiction, stating internally that “there is no ‘fair market value’ for this put” because
of the risk and particular strike price. Ex. 16064 at CSFBLLC000045413. Thus here, the
Restrictions, PwC “fairness opinion” and assessed $104 million value for the Rhythms Put
functioned similarly to the knowingly false valuation of assets in Parmalat III, 414 F. Supp. 2d
at 428. Just like BoA in Parmalat III, CSFB did not care that the valuation had been falsified –
because its “equity” was not truly “at risk,” for the reasons discussed. Here too, the Rhythms
Hedge transaction “depended on a fiction, namely” (Parmalat I, 376 F. Supp. 2d at 504) that the
Rhythms Put was really worth the assessed $104 million value. CSFB’s conduct of acquiescing
61
See also Parmalat II, 383 F. Supp. 2d at 622-26 (holding that transactions with shell
entity formed by law firm “‘created the appearance of a conventional’ sale and loan ‘when, in
fact, the reality was quite different’”).
- 51 -

in the false valuation of the Rhythms Put was also similar to CSFB’s alleged conduct held
actionable in Parmalat I, i.e., that of overstating the value of the bond conversion right. Id. at
505.
And although it hardly need be added, CSFB is further liable under Parmalat because it
funded LJM1 through a shell entity – ERNB. In Parmalat I, Judge Kaplan expressed his
agreement (with one minor exception not applicable here) with the holding of Lernout, 236 F.
Supp. at 170-71, that upheld as actionable under Rule 10b-5(a) and (c) “allegations that an
issuer’s business partners had created shell companies, knowing that the issuer intended to enter
into bogus licensing agreements with them and thus to inflate its bottom line.” Parmalat I, 376
F. Supp. 2d at 502. Also, Parmalat II upheld claims against outside lawyers because they
“created and controlled” “shell companies” to consummate a “sale” that was really “a fiction”
designed to permit Parmalat to misreport it. 383 F. Supp. 2d at 625-26.
ERNB – the conduit through which CSFB funded LJM1 – was a shell. CSFB created
ERNB. 12/1/04 Ivers Depo Tr. at 49:2-18. As testament to its ad hoc creation by CSFB for the
crooked Rhythms Hedge transaction is the fact that ERNB is an acronym for “Enron Rhythms
NetConnections Bet.” 12/1/04 Ivers Depo. Tr. 65:12-18. Ivers also testified:
Q. What was the purpose of setting up ERNB?
A. To make an investment.
Q. What investment?
A. Investment in LJM Cayman.
Q. And was that the sole purpose of setting up ERNB?
A. To the best of my knowledge.
Q. And where was the money coming from to make that investment?
A. That I really don’t know in a technical sense.
Q. It was $7.5 million, correct?
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A. Yes.
Q. It came from CSFB or an affiliate of CSFB?
A. I believe so.
Q. It was CSFB’s money?
A. Substantively.
Q. And by substantively, you mean that’s where it came from?
A. My recollection is that the investment was approved by employees of
CSFB.
Q. And, in fact, you had to get approval from CSFB employees in order for
ERNB to make the investment, correct?
A. Correct.
12/1/04 Ivers Depo. Tr. 50:2-51:4.
CSFB worked to give the false impression that ERNB was not a shell. Bankers including
Ivers, Abib and Ogunlesi served as ERNB “directors.” See Ex. 11235 at CSFBLLC006032321;
Ex. 11290; 12/1/04 Ivers Depo Tr. at 44:21-25, 45:23-25, 302:10-19; 6/16/04 Deposition
Transcript of Osmar Abib (“6/16/04 Abib Depo. Tr.”) at 21:10-15; 12/7/04 Deposition Transcript
of Adebayo Ogunlesi (“12/7/04 Ogunlesi Depo. Tr.”) at 464:3-18. Ivers selected CSFB
employees to serve on ERNB’s Board. 12/1/04 Ivers Depo. Tr. 46:20:-48:8. But in deposition
these bankers could recall virtually nothing about ERNB or what they supposedly did as
directors and officers of the entity:
Q. Were you ever paid by ERNB Limited?
A. No.
Q. Ever have a business card for ERNB Limited?
A. No.
Q. Ever have an office?
A. No.
- 53 -

Q. Did you ever attend a board of directors meeting?
A. Yes.
Q. How many?
A. I don’t remember.
Q. As vice-president what were your job responsibilities and duties at ERNB?
A. They were unspecified.
Q. Who was your boss at ERNB?
A. Nobody comes to mind.
12/1/04 Ivers Depo. Tr. 45:2-18.
Q. Were you ever a member of the board of ERNB?
A. I was for a brief period.
Q. And how did you become a member of the board of ERNB?
A. Somebody put my name on it.
Q. Do you know who?
A. I don’t recall.
Q. Did you know you’d become a member of the board?
A. I think they told me they were considering me for that, but I never
performed any official duties as a board member and was subsequently taken off
the board in a very short period of time.
Q. Who’s “they”?
A. I don’t recall specifically who it was.
* * *
Q. Do you know who the other directors of ERNB were?
A. I have – I don’t recall specifically who they were, no.
Q. Did ERNB have officers?
* * *
A. I don’t know.
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Q. How were ERNB’s activities conducted? Who determined what it would
do?
A. As I mentioned, there was at least one individual responsible for managing
the affairs of that entity, Mr. Ivers, but how it conducted its affairs, I don’t know.
6/16/04 Abib Depo. Tr. at 21:10-22:3, 22:19-23, 23:10-19. Ogunlesi took only two actions as an
ERNB “director”: electing some directors and sending an email related to the SAILS
transaction. 12/7/04 Ogunlesi Depo. Tr. at 472:15-19; Ex. 11290.
It is also clear that ERNB was a sham entity. As indicated, ERNB purported to make an
“investment” in LJM LP, but this was a ruse because this so-called “investment” was never truly
at risk (for the various reasons discussed). Thus, ERNB purported to be an “investor” in LJM
LP, when it was truly not – i.e., ERNB’s status as “investor” was a sham. CSFB is liable in this
way as well. As stated, under the SEC’s test, it is a primary violation of Rule 10b-5(a) and (c)
where an “investment bank engages in the creation of a sham entity as part of . . . services to
arrange . . . financing” that the client will use to commit securities fraud. SEC Brief (Ex. 3) at
18. And under the Ninth Circuit’s test, “the invention of sham corporate entities to misrepresent
the flow of income, may have a principal purpose of creating a false appearance.” Homestore,
452 F.3d at 1050.
Finally, CSFB’s arguments that it is supposedly not liable for the LJM1 Rhythms Hedge
are unavailing. In its Motion, the Bank essentially makes five contentions regarding LJM1.
First, it claims it “did not create or structure the LJM 1 partnership” and “did not structure or
execute any of the partnership’s transactions with Enron (including the Rhythms hedge).” Defs’
Mem. at 20. This claim, as indicated, is sharply contradicted by Fastow, and by CSFB’s own
witnesses Ivers and Ogunlesi, who conceded CSFB’s work on structuring LJM1 for the Rhythms
Hedge. Also, the Bank’s claim it did not “execute” the transaction is mere wordplay. Again,
CSFB set up and structured LJM1 for the purpose of executing the Rhythms Hedge. The Bank’s
- 55 -

attempt to separate its orchestration of the transaction as somehow falling short of execution is
mere semantics: CSFB designed the transaction knowing it would be executed.
This reality also disposes of CSFB’s second point, that it supposedly “was not involved
in the operation” of LJM1. Id. CSFB worked to structure it knowing how it would be operated.
(For example, CSFB structured LJM1 so that Swap Sub would write the Rhythms Put without
recourse to LJM LP.) And further, to the extent Fastow made partnership decisions (as CSFB
highlights), these were done for the benefit of CSFB. 62
Thus, the Bank cannot distance itself
from these decisions. In any event, a CSFB witness admitted in deposition that it was not
Fastow’s decisions but the structure of LJM1 that effectuated the Rhythms Hedge:
Q. Correct? Andy Fastow controlled LJM Swap Sub?
A. Well, I don’t know that there were any decisions that Andy Fastow could
or couldn’t make in the context of what Swap Sub was asked to do. I mean Swap
Sub had the specific obligation with respect to a put that was quite – you know, I
think that was documented in the arrangements and, you know, if Enron chose to
exercise the put, Swap Sub had to live up to its obligations. I’m not quite sure
what else Andy Fastow could or couldn’t have done.
12/6/04 Ogunlesi Depo. Tr. at 343:16-344:4. 63 Because CSFB engaged in the structuring of
LJM1 to execute the Rhythms Hedge, the Bank is responsible for its operation, and cannot hide
behind Fastow.
Third, CSFB claims it was “assured” that Fastow’s role in LJM1 was “approved” by
Enron’s attorneys and others. See Defs’ Mem. at 20-21. But this does nothing to erase the
62
See Finard Report at 94 (“Indeed, Fastow had a fiduciary duty to CSFB and the other
bank to get the best possible deal from Enron for LJM1 . . . .”).
63
This testimony reflects the obvious fact that LJM1 was not some operating company. As
Ogunlesi establishes, LJM1 effected the Rhythms Hedge through its particular structure and
financing, not through daily decision making. Because CSFB worked on structuring, and
financed, LJM1 for the Rhythms Hedge, the Bank is responsible for it. The assertion that CSFB
“was not involved in the operation” of LJM1 is just a red herring.
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inherently deceptive nature of the Rhythms Hedge transaction that CSFB structured – known to
CSFB as a “convoluted financing scheme.”
Fourth, the Bank also attempts to rely on the PwC “fairness opinion” to justify the deal.
See id. at 22-23. This does nothing to erase the inherently deceptive nature of the transaction.
Moreover, CSFB was fully aware that the PwC opinion was based on a false premise, as the
Bank knew the Restrictions could simply be lifted with “the permission of Enron.” See 12/2/04
Ivers Depo. Tr. at 543:6-544:19.
Fifth, as mentioned, CSFB claims it was a mere “investor” in LJM1. Defs’ Mem. at 20.
But once more, this was itself a deception, as CSFB’s “investment” was really akin to a “loan”
(Fastow Decl., 51) because it was not “at risk.” Thus CSFB’s argument in the Motion that it
was only an “investor,” when considered in conjunction with the evidence, actually helps to
establish Lead Plaintiff’s claim – to wit, that what appeared as an “investment” was actually
not. 64 (2) LJM1 – CSFB’s Bridge Loan Masked as an
“Investment”
In the third quarter of 1999, Enron wanted LJM1 to purchase a piece of the Company’s
interest in a Brazilian power plant, called “Cuiaba,” and certificates in a deal called “Osprey,”
both to polish the Company’s reported financial results in that quarter. CSFB had structured a
transaction called “SAILS” to supply the requisite funding for these deals, but SAILS was not
expected to close until October 1999, a month after quarter-end. See Ex. 50243 at
DPOEX0006132; Ex. 50242 at CSFBLLC000010772 (Condor “equity investment must be
64
While CSFB points out that ex post facto Andersen spun the admittedly improper
accounting for LJM LP and Swap Sub as non-consolidated entities as the result of some
supposed “error” (Defs’ Mem. at 45-46), the jury is not required to accept this self-serving claim
of one of CSFB’s co-defendants.
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funded September 22, 1999.”). So CSFB extended a $25 million bridge loan to LJM LP through
ERNB, to fund the Cuiaba and Osprey transactions until SAILS closed. See 8/23/04 Mandanas
Depo Tr. at 84:21-85:9 (bridge loan used to make Cuiaba and Osprey acquisitions); Ex. 50242 at
CSFBLLC000010772.
Before CSFB funneled the bridge loan to LJM LP, CSFB understood, as Mandanas
testified, that the partnership would use the $25 million to complete sham investments in Cuiaba
($11-12 million) and Osprey ($15 million) before Enron’s September 30, 1999 reporting period
closed. See 8/23/04 Mandanas Depo. Tr. at 85:3-9, 21-24; 8/24/04 Mandanas Depo. Tr. at
454:13-21; see also Ex. 50242 at CSFBLLC000010772; Ex. 50243 at DPOEX0006132 (stating
bridge loan would provide interim financing for purchases “that needed to be closed prior the
completion” of the SAILS transaction in October 1999). CSFB expected the bridge loan to be
repaid from the “monetization of Enron shares held by LJM Cayman” through the SAILS
transaction. 12/1/04 Ivers Depo Tr. at 179:17-21.
Cuiaba was a Brazilian power plant Enron and two other commercial entities owned.
8/25/04 Deposition Transcript of Mary Beth Mandanas (“8/25/04 Mandanas Depo. Tr.”) at
635:21-24; Ex. 11277 at CSFBLLC006359208. Enron had Cuiaba consolidated on the
Company’s balance sheet, and wished to deconsolidate it to apply advantageous “mark-tomarket”
accounting for a Cuiaba gas supply contract and to avoid recording $200 million in
project-related debt on its financial statements. See Solomon Report at 98, 295-96; Ex. 11277 at
CSFBLLC006359208. But because Enron owned more than half of Cuiaba, as CSFB bankers
Jeffe, Ogunlesi, and Furst understood, the Company could not use mark-to-market accounting.
See Ex. 11277 at CSFBLLC006359207-08. It first had to reduce its ownership stake in Cuiaba
to less than 50%. Ex. 11277 at CSFBLLC006359208.
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To give the appearance that Enron was reducing its percentage holding in Cuiaba, LJM
LP bought a piece of Enron’s Cuiaba interest for $11.3 million, and as part of the deal received
the right to appoint one director for the project. See 8/25/04 Mandanas Depo Tr. at 635:21-
636:4, 744:22-24, 745:17-23, 748:3-8; Solomon Report at 98, 295-96. Enron treated the transfer
of the one board seat to LJM1 as a sufficient relinquishment of control over Cuiaba, and on this
basis deconsolidated it. See Solomon Report at 296. The Company then applied mark-to-market
accounting to the gas supply contract, recognizing $34 million in income and an additional $31
million related to the purchase of a gas turbine for an adjacent project. It also did not recognize
the $200 million of debt on its financial statements. See Solomon Report at 296.
This was unjustified. As Solomon explains, LJM1 was a “related party” to Enron
because of Fastow’s position as controlling LJM Partners, L.P, the general partner of LJM LP.
Id. at 89, 296. Thus, even though LJM1 received the one board seat, because of its true status as
a related party, that one board seat would be attributed back to Enron. Id. at 296.
Also, CSFB (through ERNB) received its loan funds back from the Cuiaba deal. In
August 2001, LJM1 resold its Cuiaba stake to Enron at a profit, for around $13.8 million. See
8/23/04 Mandanas Depo. Tr. at 195:21-196:21; 8/25/04 Mandanas Depo. Tr. at 638:4-14; Ex.
50260 at CSFBLLC0000545981; Solomon Report at 296. CSFB was thus made whole plus a
substantial yield. See Ex. 50260 at CSFBLLC0000545981; 8/23/04 Mandanas Depo. Tr. at
195:21-196:21. But this was sham – CSFB knew LJM LP’s Cuiaba stake was not worth as much
as it had received, because the Cuiaba plant did not have a valuation to justify it. Kathy Lynn, an
LJM employee, described the plant “as being ‘snake-bit’ since day 1.” See Ex. 50316 at
CSFBLLC000239799; Ex. 10200 at CSFBCO000239799; see 8/25/04 Mandanas Depo. Tr. at
620:10-16. Mandanas undertook due diligence of Cuiaba in September 2000, and thus must
have discovered this herself as well. 8/25/04 Mandanas Depo Tr. at 638:23-639:11. The return
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of CSFB’s loan for Cuiaba further demonstrates that CSFB was not an “investor” in LJM1 as
the Bank now claims, as the Bank received for its investment much more than it was truly worth.
CSFB is liable under Rule 10b-5(a) and (c) for extending the bridge loan for Cuiaba.
Because Enron paid LJM1 back its contribution plus a yield when the value of the Cuiaba stake
did not justify it, it is clear that such was just the result of a guarantee of repayment to CSFB of
the bridge loan. Thus, CSFB’s ostensible status as just an “investor” in LJM1 was itself
deceptive. This deception gave the false appearance that LJM LP was an entity independent
from Enron, when it was not. This false appearance of independence allowed Enron improperly
to consider its transfer of the Cuiaba stake to LJM LP as justifying the conclusion that Enron
owned less than half of Cuiaba.
Also, CSFB is liable for using ERNB to funnel the loan to Enron for the fraudulent
Cuiaba transaction. As discussed above, ERNB was a shell entity. As such, providing secretly
guaranteed funds to LJM1 through ERNB renders it liable under Rule 10b-5(a) and (c). See
Parmalat II, 383 F. Supp. 2d at 625 (“Parmalat sold assets and lent money to Newlat and Web
Holdings, shell companies created and controlled by [defendants].”). And ERNB was also a
sham entity because it purported to be an investor when it was actually guaranteed its money
back, as indicated by the return of its contribution to the Cuiaba deal plus a profit when the
valuation of Cuiaba clearly did not justify such. In this way too is CSFB liable. See SEC Brief
(Ex. 3) at 20 (finding liability where an “investment bank engages in the creation of a sham
entity as part of . . . services to arrange . . . financing” that the client will use to commit
securities fraud); Homestore, 452 F.3d at 1050 (“the invention of sham corporate entities to
misrepresent the flow of income, may have a principal purpose of creating a false appearance”).
The Cuiaba deal was also a transaction that had the “the principal purpose and effect of
creating a false appearance of fact.” Homestore, 452 F.3d at 1048 (describing its own and SEC’s
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test). LJM LP was considered a separate party from Enron in order to achieve a desired
accounting effect, but it was really a “related party” to the Company. CSFB’s ostensible role as
an investor in LJM LP gave only the false appearance that a piece of Enron’s Cuiaba holding
was purchased by an independent party, when the reality was different, as CSFB was guaranteed
a return of its “investment” – having been paid in full, plus profit, through the sham resale of the
Cuiaba stake to Enron for a price it did not justify. This is actionable. See Parmalat I, 376 F.
Supp. 2d at 504 (invoice schemes actionable because they made transactions appear to be
something they were not).
The remainder of the bridge loan, i.e., that for Osprey, was similarly earmarked and used
for fraud. The CSFB credit memorandum submitted for approval of the bridge loan stated that
LJM1 intended to use the loan “to fund a $15 million equity investment in Condor, an offbalance
sheet structured finance entity of Enron. This equity investment must be funded
September 22, 1999.” Ex. 50242 at CSFBLLC000010772; Ex. 11238 at CSFBLLC006359257.
It was clearly explained to CSFB that: “As you probably know, Osprey is a vehicle enabling
Enron to raise disguised debt which appears as equity on Enron’s balance sheet.” Exs. 10264,
14078 at CSFBCO005107202. Added Jones: “The merchant banking assets in Osprey are not
the source of credit support, but Osprey serves the added purpose for Enron of being an offbalance
sheet parking lot for certain assets.” Exs. 10264, 14078 at CSFBCO005107202.
As explained and described infra at §II.B.2.e.1., Osprey was an inherently deceptive
transaction that had “the principal purpose and effect of creating a false appearance of fact.”
Homestore, 452 F.3d at 1048 (describing its own and SEC’s test). Thus, just like with funding
Cuiaba through the bridge loan, CSFB is liable for funding Osprey through the sham and shell
entity ERNB.
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. Prepays
(1) Year 2000 Fake Oil “Prepay” Transaction
It is difficult to imagine a type of transaction that more patently constitutes a
manipulative and deceptive device violative of Rule 10b-5(a) and (c) – especially as construed
by Judge Kaplan in Parmalat – than the prepay transactions that CSFB engaged in with Enron.
At the outset, it should be noted that Lead Plaintiff is hardly alone in asserting that the prepays
were an outright fraudulent device used to defraud Enron’s investors. Enron’s own former
Assistant Treasurer, Timothy DeSpain, explained the prepays’ fraudulent nature:
Another mechanism by which Enron achieved the artificial cash flow
targets it set for itself was through transactions commonly referred to within the
company as “prepays.” The reporting of the cash received from these transactions
was a means of demonstrating to the rating agencies Enron’s ability to recognize
cash from its mark-to-market trading book. Although the prepay transactions
were accounted for as commodity transactions and reflected on Enron’s books as
a trading liability, the transactions in substance created debt-like obligations to
the financial institutions that advanced funds to Enron through the transactions. I
and others told the rating agencies that the cash generated from Enron’s trading
operations was from the sale or “monetization” of trading contracts or the future
cash flow streams from those contracts. Fundamentally, the agencies were led to
believe that Enron was generating cash by selling an asset, when in fact Enron
was generating cash by incurring a future obligation that operated as debt. Over
the course of my time as Assistant Treasurer, Enron’s obligations under the
“prepay” transactions grew to approximately $5 billion. I was directed by
Enron’s Treasurers not to reveal to, or discuss with, the credit rating agencies, the
nature and extent of the prepay transactions entered into by Enron, and I
complied with this direction. I and the Treasurers recognized that if the rating
agencies knew about the nature and extent of Enron’s prepay transactions, such
information would have had a materially negative effect on Enron’s credit rating.
Ex. 21328, Statement at 2-3. 65
The highlighted words in this excerpt adumbrate what the powerful – indeed, conclusive
– evidence discussed below irrefragably establishes, to wit: In order to meet cash flow targets
65
In October, 2004, DeSpain pled guilty to one count of conspiracy to commit securities
fraud. See Ex. 21328, Sentence Data at 1-2. Fastow states that DeSpain’s explanation here “is a
fair description of our prepays generally.” Fastow Decl., 27.
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and to disguise debt, Enron engaged in two prepay transactions with CSFB. While these two
transactions were in substance loans, the counterparties to them – including CSFB – created the
false appearance that they were instead a series of a legitimate commodity trades. Such conduct
was itself deceptive, as it created the appearance of a legitimate commodity transaction when the
reality of the deal was a loan to Enron. See 10/24/06 Fastow Depo. Tr. at 343:10-345:9.
Lead Plaintiff has presented expert testimony in this case establishing that the prepay
transactions were used to falsify Enron’s reported financial condition. 66
Solomon explains that a
legitimate prepay commodity transaction is typically structured as follows:
For example, a natural gas producer in need of cash might elect to sell currently to
a purchaser a portion of its future production in return for an upfront payment. In
return, the producer agrees to deliver the subject commodity in the future to the
purchaser, usually over the course of several years. This typical two-party swap
transaction provides the gas producer with cash, while allowing the gas purchaser
to lock in a known price of the commodity at the time the transaction was
effected.
Solomon Report at 13-14. Solomon also points out that by nature in a legitimate prepay
transaction, the parties seek to profit, and face risk, from unknown future movements in the
market price of the commodity that is the subject of the transaction:
Id. at 14.
The gas producer is betting that in the future, as the commodity is delivered, the
price of gas will be lower than when the contract was executed. The purchaser is
betting just the opposite – the future price of the gas will be higher. As a result,
one of the underlying tenets of a [legitimate] Prepay Transaction is that each
party assumes commodity price risk, as neither party knows what the future price
of that commodity will be at the time the swap is consummated.
CSFB’s prepays with Enron, however, were notably different. Unlike the example given
above, the 2000 Prepay involved not two – but three – parties: Enron, Morgan Stanley Capital
66
See, e.g., Solomon Report at §§VI.A. and VII.A.; 4/13/06 Rebuttal Expert Report of Saul
Solomon (“Solomon Rebuttal Report”) at §C; Black Report at 11, 31-32, 54-58, 61-62.
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Group Inc. (“Morgan Stanley”) and CSFB. And the deal consisted of three constituent steps,
forming a circle which led back to Enron, as follows:
• Step 1: In 12/00, Enron and CSFB entered into a swap agreement requiring CSFB
to pay Enron a lump-sum of $150,000,000. In return, Enron agreed to make
quarterly floating payments to CSFB based on 97,955 barrels of oil and a final
floating payment at maturity based on 5,570,243 barrels of oil. 67
• Step 2: CSFB entered into a swap with Morgan Stanley, requiring CSFB to make
quarterly floating rate payments to Morgan Stanley based on 97,955 barrels of oil
and a final floating payment at maturity based on 5,570,243 barrels of oil. In
return, Morgan Stanley promised to pay CSFB a fixed amount of approximately
$2.622 million each quarter and a final payment of approximately $152.622
million. 68
• Step 3: Then Morgan Stanley entered into a swap with Enron requiring Morgan
Stanley to make quarterly floating rate payments to Enron based on 97,955 barrels
of oil and a final floating payment at maturity based on 5,570,243 barrels of oil.
In return, Enron agreed to pay Morgan Stanley a fixed amount of approximately
$2.624 million each quarter and a final payment at maturity of approximately
$152.765 million. 69
Expressed diagrammatically:
67
Ex. 14067.
68
Ex. 14069 ($2.622 million based on 97,955 barrels of oil times a fixed price of $26.77 per
barrel; $152.622 million based on 5,701,243 barrels of oil times a fixed price of $26.77 per
barrel).
69
Ex. 14068 ($2.624 million based on 97,955 barrels of oil times a fixed price of $26.795
per barrel; $152.765 million based on 5,701,243 barrels of oil times a fixed price of $26.795 per
barrel).
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CSFB 2000 Prepay
Morgan Stanley
$152,764,806 at maturity
$2,622,255 quarterly
Value of 97,955 bbls of oil quarterly
Value of 5,701,243 bbls of oil at maturity
$152,622,275 at maturity
$2,622,255 quarterly
Value of 97,955 barrels quarterly
Value of 5,701,243 barrels at maturity
ENA
Value of 5,701,243 bbls of oil at maturity
Value of 97,955 bbls of oil quarterly
$150 million upfront
CSFB
Each of these component steps – when viewed artificially in isolation – appears to be a
legitimate transaction. But their net effect was that: (1) Enron got a lump-sum from CSFB; (2)
Morgan Stanley paid back CSFB, with interest; and (3) Enron was obligated to pay back Morgan
Stanley, with interest. 70
Moreover, despite the deals’ appearance as a series of three commodity
prepays, there was in fact no commodity price risk to any party in the transaction. With the
addition of a third party in the deal, the resulting “circular nature of the transaction eliminated
the participants’ commodity price risk.” Solomon Report at 20-21. 71
As indicated in the above
70
See Appendix to Expert Report of Saul Solomon (“Solomon App.”) at 106.
71
See also Ex. 7 at 67 (“The quarterly payments based on the market price of the specified
number of barrels payable among the parties under all three swap agreements effectively
cancelled each other out.”).
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diagram, the quarterly and maturity payments based on the value of barrels of oil (indicated in
dashed-line arrows) moved in a circle back to Enron, resulting in a wash. 72
Thus, comprising in effect a payment to Enron repayable with interest, lacking
commodity risk for any party, “the true economic substance of the transaction was clearly that of
a fixed term loan from the Financial Institution to Enron.” Solomon Report at 20. Bankruptcy
Examiner Batson makes the same conclusion: “With the oil-price-based swaps netted out, the
CSFB Prepay thus operated as a loan between CSFB and ENA . . . .” Ex. 7 at 67. 73
But the point is not simply that the prepays were loans to Enron. Rather, what is
significant is that they “were in substance loans that were being cloaked inside commodity
trades.” Solomon Report at 187. In other words, the counterparties practiced deception by
masking a loan as three ostensible commodity swaps – making a loan appear as commodity
trades when, in fact, it was not. As Andrew Fastow testified, “in substance, [the prepays] were
like loans, but they were structured intentionally to not appear as loans. They were structured to
appear like Enron was engaging in arm’s-length commodity trades.” 10/23/06 Fastow Depo. Tr.
at 60:20-24. That the prepays involved this inherent deception was recognized by the SEC, in
speaking of Enron’s prepays with another bank:
[T]he structural complexity of these transactions had no business purpose aside
from masking the fact that, in substance, they were loans . . . .
72
This was quite deliberate. See Solomon Report at 14 (the prepays were “designed” “to
eliminate price risk from the structure”); Ex. 7 at 64 (“The CSFB Prepay was structured to
eliminate the commodity risk by virtue of the offsetting swaps.”). See also 10/23/06 Fastow
Depo. Tr. at 227:11-15 and 10/24/06 Fastow Depo. Tr. at 343:16-23 (prepay transactions did not
present commodity price risk).
73
For this loan to Enron CSFB received a fee of $0.87 million. See Solomon App. at 103;
Ex. 4 at 113. CSFB also received from the 2000 and 2001 Prepays interest of $5,475,869.
Solomon App. at 103.
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Ex. 40330 (12/30/01 SEC Complaint against J.P. Morgan Chase & Co. at 1). The same was
acknowledged by the United States Congress of Enron’s prepays in general:
[T]he prepays constructed by Enron and banks like Chase and Citigroup were
phony prepays. There was an appearance of a product to be delivered at a later
date, but the reality was different.
The Role of Financial Institutions in Enron’s Collapse – Vol. 2, Opening Statement of Senator
Levin (Ex. 8) at 2.
As the evidence discussed below demonstrates, in the case of CSFB, this deception was
practiced by the Bank executing the prepays in the steps described above – deceptively passing a
loan deal off as “three individual oil-based swaps.” 74
In fact, CSFB even insisted upon
executing the 2000 Prepay through its oil trading desk solely to give it the false appearance of a
series of true commodity trades – despite the protestations of the oil desk that the deal did not
belong there because it was simply a loan to Enron!
The point of masking the prepays as commodity trades is clear. If the prepays appeared
as a series of legitimate commodity trades presenting ostensible commodity price risk, one of the
component steps could then favorably be accounted for as an energy trading contract under
Emerging Issues Task Force Issue No. 98-10 (“EITF 98-10”). Employing EITF 98-10,
Enron used a version of the Prepay Transactions to borrow money from a lending
source (typically a Financial Institution) without reporting the borrowed proceeds
as either debt or financing cash flows on the Company’s consolidated financial
statements. Rather, Enron utilized the Prepay Transactions to mischaracterize and
misreport the borrowed funds as Price Risk Management liabilities on the balance
sheet (i.e., as a trading liability as opposed to debt), and as operating cash flows
on the statement of cash flow (as opposed to financing cash flows).
74
Ex. 10259 at CSFBLLC000200777; see also Solomon Report at 187 (“the Prepay
Transactions were structured to appear as a series of energy trading contracts”).
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Solomon Report at 16. 75
As Solomon opines, the application of EITF 98-10 is only appropriate for contracts
“entered into with the objective of generating profits on or from exposure to shifts or changes in
market prices.” Solomon Report at 24. The circular nature of the CSFB Prepays eliminated all
commodity price risk from the deal. As such, there was no possible intent to profit from any
such risk. 76 EITF 98-10 accounting was thus inappropriate. Id. at 24ff. 77
In short, the 2000 Prepay was not a legitimate transaction, but instead was a “deceptive
device or contrivance” (Section 10(b)) that – to use the words of Judge Kaplan in Parmalat I –
“permitted [Enron] to record the [operational cash flow] and to conceal the liability” on the loan.
376 F. Supp. 2d at 488, 490. A stated purpose of the precise manner in which the prepay
transactions were executed was to produce ostensible funds flow from operations but conceal
from investors that such funds flow came from prepays. 10/24/06 Fastow Depo. Tr. at 457:16-
24. Indeed, because the very deception wrought by CSFB (i.e., masking a loan as a series of
commodity trades) “permitted” the improper accounting treatment, CSFB’s conduct lies at the
heart of how the prepays harmed Enron investors.
Lead Plaintiff has uncovered substantial, damning evidence establishing that CSFB fully
understood that the 2000 Prepay was a loan masked as a series of commodity trades, with no oil
75
“During the Class Period, Enron’s financial statements were impacted by Prepay
Transactions with the Defendant Banks totaling at least $7.497 billion.” Solomon Report at 15.
76
See Solomon Report at 25 (“the intent of the individual parties entering into the Prepay
Transactions was not to generate profit from shifts or changes in market prices – the parties
intended to make interest-bearing loans to Enron that would not be reported as debt”).
77
Solomon opines also that refusing to acknowledge that the combined effect of the
component steps yields simply a loan to Enron with no commodity price risk to any party
violated the accounting principle that “‘financial statements should recognize the substance,
rather than the legal form, of particular transactions . . . .’” Solomon Report at 187-89.
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price risk for the counterparties, used to falsify Enron’s financials. Much of this evidence is
astonishingly direct and conclusive. CSFB’s internal communications and testimony feature its
bankers frankly admitting that the Bank entered into what it knew was a loan transaction, but
made it falsely appear as a series of commodity trades.
Geoff Smailes, the senior energy trader at CSFB’s London oil desk who executed the
actual swaps in the 2000 Prepay, repeatedly acknowledged his understanding that the deal was
really just a loan from CSFB to Enron. Smailes wrote of the 2000 Prepay:
• “I will require an email from a senior IBD product manager (ogunlesi or
designate) to tell me he is guaranteeing this loan . . . .” December 14, 2000, Ex.
50057 at CSFBLLC000200050.
• “I then also explained [to Bruce Garner at Enron] how we worked with Enron in
the US gas market and that I had lent 150M$ to them off my books. He was
much more keen to discuss business opportunities thereafter.” June 6, 2001, Ex.
11752.
• “Osmar, our $150MM oil-linked loan to Enron matures on the 12th of this
month.” September 4, 2001, Ex. 50094.
• “IBD is looking to roll over a 150M$ oil-linked loan to Enron, booked in my
books.” September 10, 2001, Ex. 11750.
• “We presently have vey [sic] low exposure to this account [Enron] in Energy
trading – apart from the oil linked loan that IBD instructed us to execute on their
behalf . . . .” August 28, 2001, Ex. 11751.
Smailes was not alone at CSFB in his understanding of the transaction. No one at CSFB
ever criticized Smailes’ characterization of the prepay transaction as a loan:
Q. Did anyone at CSFB ever take issue with or criticize your characterization
of the December 2000 prepay as an oil-linked loan?
* * *
A. I don’t believe I received any criticism in that regard, no.
11/8/05 Deposition Transcript of Geoff Smailes (“11/8/05 Smailes Depo. Tr.”) at 28:12-17.
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CSFB banker James Moran also understood that the transaction actually allows Enron to
borrow $150 million “off-balance . . . sheet” and “not treated it debt.” 78
Moran testified to
CSFB’s knowledge that the transaction was really a loan to Enron:
Q. And at this time, Enron had told CSFB that it would receive its money
back from the prepay transaction along with interest, correct?
* * *
A. The net effect of the transaction [was] that CSFB would receive its
principal back and an interest component.
* * *
Q. [Tresa Kirby] told you that CSFB would receive quarterly interest
payments, correct?
A. Correct.
Q. And a principal repayment in the final quarter, correct?
A. Correct.
7/22/04 Deposition Transcript of James Moran (“7/22/04 Moran Depo. Tr.”) at 383:6-20,
384:14-19.
As CSFB knew, the interest payments were “embedded” in the prepay’s trade
confirmations, with “principal repayment” due “in the final quarter.” Ex. 50084 at
CSFBLLC000044706; see also 7/22/04 Moran Depo. Tr. at 383:15-17 (“The net effect of the
[prepay] that CSFB would receive its principal back and an interest component.”). In fact, CSFB
actually booked the 2000 Prepay as a loan. CSFB banker Dave Maletta admitted to CSFB vice
president of communications Pen Pendleton: “[W]e [CSFB] did a loan for $150mm whose rate
78
Ex. 50056. See also Ex. 10260 at ERN0118819; Ex. 14066 (“Enron basically wants to
move a loan that is on-balance sheet, off-balance sheet usiung[sic] the below described
transaction . . . .”).
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fluctuated with the price of oil. Unlike Chase, we [CSFB] booked the transaction as a loan.”
Ex. 13942. Maletta confirmed this fact in his deposition:
Q. And how was it [the CSFB prepay transaction] booked?
A. I learned at that time that a portion or all of this had been booked as a loan.
Q. And it had been booked as a loan to Enron, correct?
A. I believe so.
6/16/05 Deposition Transcript of Dave Maletta (“6/16/05 Maletta Depo Tr.”) at 258:6-11.
CSFB’s understanding that the 2000 Prepay was really a loan is also confirmed by the
simple fact that Moran was even involved in the transaction. Moran was at the time CSFB’s
Director of Credit Products – i.e., charged with reviewing and approving loans. During his
tenure in the credit department, Moran had never before engaged in an oil prepay transaction.
7/21/04 Deposition Transcript of James Moran (“7/21/04 Moran Depo. Tr.”) at 208:15-17. 79
Significantly, though, CSFB understood not only that the 2000 Prepay was a loan, but
that it was a loan that appeared to be something else. As Moran testified:
Q. Is it correct that you understood that Enron did not want to account for the
proceeds of this deal that they received from CSFB as debt on its financial
statements?
A. They told me they wanted to have it appear as a swap, and have it
accounted for in their price risk management book.
7/21/04 Moran Depo. Tr. at 218:20-219:2. This was hardly routine:
79
Fastow agrees that the prepays were really just loans, declaring that they were “reported
on [the Company’s] financial statements as commodity trades when, in fact, they were
financings.” Fastow Decl., 56. As he testified “if Enron had borrowed this money, it would
have been recorded as cash flow from financing. The way this transaction was structured,
instead, it was recorded as funds flow from operations.” 10/23/06 Fastow Depo. Tr. at 60:22-
62:3.
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Q. Throughout your time at CSFB, was there any transaction with the client
other than Enron that you recall being referred to as a “obvious” loan transaction
that was not simply a plain vanilla loan?
* * *
A. I don’t recollect that language in any other situation.
11/8/05 Smailes Depo. Tr. at 42:23-43:6.
Standing as additional evidence that CSFB understood the 2000 Prepay to be a loan that
appeared to be a commodity trade is the fact that CSFB banker Ed Devine, after reviewing a
description of the 2000 Prepay, felt compelled to make the handwritten note: “but it is really a
loan to [Enron].” Ex. 50098 at ERN0124469. 80
In other words, despite the appearance of the
transaction as a series of commodity swaps, it was “really” a loan! Devine would have never
needed to note that the 2000 Prepay was “really” a loan had it appeared to be such. 81
Understandably, Smailes and other CSFB employees, including another CSFB London
energy trader, Ian Emmett, questioned the propriety of entering into the 2000 Prepay. For
example, Emmet pointedly questioned: “Is it OK for us to be entering into such an ‘obvious’
loan transaction?” Ex. 10260 at ERN0118815; Ex. 50092 at CSFBLLC000044024.001. See
also 10/24/06 Fastow Depo. Tr. at 343:16-18 (prepays were not “traditional commodity
transactions”).
In addition to knowing that the 2000 Prepay was not a commodity trade but was a loan,
CSFB also understood the main reason why this was so: That despite the appearance of a series
80
In deposition, Devine confirmed that he did indeed make the handwritten note. 3/17/05
Deposition Transcript of Edward Devine (“3/17/05 Devine Depo Tr.”) at 306:14-24; 10/23/06
Fastow Depo. Tr. at 63:10-24.
81
In this exhibit, Devine is presented with proposed structure of the 2001 Prepay with the
understanding that it would track that of the 2000 Prepay. See id. Thus, his comments are
applicable to both prepays.
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of commodity swaps, commodity price risk had no economic role in the transaction because its
circular nature removed all such risk from the deal. As Smailes testified:
Q. But it’s your understanding based on Mr. Emmett’s characterization of the
Enron prepay as a circular transaction that the risk inherent in the transaction
would flow from Enron back to Enron through a circle?
* * *
A. As a first order analysis, that would be correct, yeah.
11/8/05 Smailes Depo. Tr. at 158:15-22. Thus no counterparty faced commodity price risk:
Q. Is it correct to say that in your understanding, if all parties performed as
promised under the swaps, no party had any commodity price risk?
A. That’s correct.
Id. at 83:21-25. CSFB trader Nicolas Tjandramaga also understood there was no commodity
price risk in the transaction:
Q. But as you understood the transaction there was no commodity risk as part
of the proposed prepay transaction, correct?
A. There was no commodity risk.
8/16/05 Deposition Transcript of Nicholas Tjandramaga (“8/16/05 Tjandramaga Depo. Tr.”) at
183:25-184:5. 82
Yet, despite the 2000 Prepay’s status as a loan disguised as a commodity trade, CSFB
further understood the point of the charade – to wit, that Enron would account for the deal as an
energy trading contract by considering it “price risk management” liability. Ex. 50092 at
CSFBLLC000044025.001. Emmet advised Smailes that he was “being asked to quote on a
structure for Enron that enables Enron to borrow USD that are treated as price risk management
82
Fastow also confirmed that there was no actual commodity price risk in the prepays. See
10/24/06 Fastow Depo. Tr. at 341:15-342:4; 10/23/06 Fastow Depo. Tr. at 63:10-24.
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ather than debt on balance sheet.” Ex. 50092 at CSFBLLC000044025.001; Ex. 14059 at
CSFBLLC009682091. Moran had the same understanding:
Q. Is it correct that you understood that Enron did not want to account for the
proceeds of this deal that they received from CSFB as debt on its financial
statements?
A. They told me they wanted to have it appear as a swap, and have it
accounted for in their price risk management book.
7/21/04 Moran Depo. Tr. at 218:20-219:2. 83 This was unprecedented:
Q. In your entire career at CSFB, did you ever hear, with respect to any client
other than Enron, that it would borrow money but be treated as price risk
management rather than debt on balance sheet?
A. No.
11/8/05 Smailes Depo. Tr. at 35:19-25.
* * *
Implicit in all of this evidence is CSFB’s acknowledgement that, despite its structure as
three ostensibly independent commodity trades, the true substance of the 2000 Prepay required
acknowledging the net effect of all three component steps of the deal. 84
In fact, CSFB
employees openly admitted their understanding that the three supposedly “independent”
“commodity trades” were all, in reality, part of the same deal that would not be complete unless
all three were consummated. As Moran testified:
83
In its Motion, CSFB concedes it “was aware of Enron’s intention to treat the transaction
as a short-term liability in its price risk management book.” Defs’ Mem. at 36.
84
This is so due to the holistic circularity of the deal – apparent when the three component
steps are considered together – that eliminates commodity risk (and ultimately yields only a loan
to Enron). Solomon opines that accounting for the prepay must consider all of its components
(see Solomon Report at §§VI.A. and VII.A), and even Andersen’s expert is forced to concede
that “[i]f each party considered the contracts it was a party to in combination [e.g., as CSFB did],
and if all of the parties to each contract performed as required in the contract, generally the
party’s combined price risks would offset.” 3/17/06 Expert Report of John M. Foster (“Foster
Report”) at 41.
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Q. So the transaction being completed required all three swaps; correct?
A. That’s what we were told.
7/22/04 Moran Depo. Tr. at 396:7-9.
Q. So going into this transaction with the three swaps, as long as everybody
did what they were supposed to do, CSFB would get their 150 million plus the
expected return from Enron?
A. That was the expectation.
6/16/05 Maletta Depo. Tr. 256:17-22. The prepay credit memorandum, which Moran sent to
Maletta and others also shows CSFB’s knowledge that the three swaps functioned as one. See
Ex. 10259 at CSFBLLC000200777; Ex. 10203 at CSFBLLC006062387. Enron never intended
the swaps to exist independent of each other: “Swap 3 – To complete the transaction, Enron
pays the dollar value equal to, [3]-month LIBOR + 75 bps and a notional amount of $150 million
to MS.” Ex. 10259 at CSFBLLC000200777; Ex. 10203 at CSFBCO006062387. The three
swaps were a package deal: “there is another trade that ENA insist we enter into with Morgan
Stanley . . . [t]his effectively takes us out of our oil exposure and leaves us with a USD 150mm
loan against any USD fixed (equivalent of L + 0.75% for nine months or OBS).” Ex. 14056 at
CSFBLLC009765710-11. Just one of Emmet’s emails alone says it all:
The reason for this second trade can be seen if we complete the circular
transaction and look at the third transaction of the structure between MS and
ENA . . . . [T]he net effect to ENA is they borrow USD 150mm . . . [and] the net
effect for us (the oil book) is we lend USD 150mm to ENA . . . .
Ex. 50092 at CSFBLLC000044025.001; Ex. 14059 at CSFBLLC009682092; Ex. 14056 at
CSFBLLC009765711. CSFB’s own witnesses thus establish that the structure of the deal as
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three supposedly independent trades was just a ruse – mere window dressing that masked the
transaction’s true character. 85
And not to be overlooked in examining the evidence discussed above is the significance
of the combined facts that, despite CSFB’s understanding that the transaction was simply a loan
with no commodity price risk, it still insisted on forcing the deal through its trading desk. 86
Indeed, CSFB could have achieved the exact same net result in the 2000 Prepay (extension of a
$150 million loan to Enron) without involving the trading desk, but did so anyway solely to give
the 2000 Prepay the false appearance of a commodity trade.
That running the 2000 Prepay through the trading desk served no legitimate purpose is
confirmed by the fact that, when first approached, the London oil desk refused to engage in the
transaction. See 8/16/05 Tjandramaga Depo Tr. at 126:25-127:5. Investment banking pressured
them to do the deal. Ex. 50058 at DPOEX00000418; Ex. 50057 at CSFBCO000200050. As
Smailes testified, the “2000 prepay transaction was driven by investment banking.” 11/8/05
Smailes Depo. Tr. at 186:3-7. 87
In fact, masking the 2000 Prepay as a commodity trade by running it through the oil desk
yielded the bizarre result that investment banking was forced to guarantee the trading desk
85
See also Solomon App. at 104 (“[I]t is clear that no one leg of the [CSFB 2000] Prepay
structure would have been entered into without the execution of the other two legs.”).
86
Trading and investment banking were different divisions within CSFB. 7/21/04 Moran
Depo. Tr. at 257:25-258:12.
87
Also, in an August 28, 2001 email, Smailes acknowledged the London oil trading desk
engaged in the “oil linked loan” because “IBD instructed [the desk] to execute on their behalf.”
Ex. 11751.
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against any credit loss on the deal. 88 As Smailes explained, this was because the 2000 Prepay –
a loan deal, not a commodity one –simply did not belong on the trading desk:
Q. And why have you asked for a guarantee from investment banking?
A. Because it wasn’t the business of the London oil desk to underwrite such
a large amount of credit risk to one counterparty. It wasn’t our business. That’s
all. It was something we didn’t want to do.
11/8/05 Smailes Depo. Tr. at 171:12-18.
All of the foregoing evidence conclusively establishes that, in the 2000 Prepay, CSFB
knowingly executed deal documents which made a loan appear as a series of independent,
legitimate commodity prepay transactions, in order to fraudulently obtain a desired accounting
treatment for Enron. Also, in deposition Fastow confirmed that the prepays were inherently
deceptive in that their structure disguised what were loans as transactions producing cash flow
from operations:
The structure of the prepays, however, made it look like something other than
loans, so that when it was reflected in Enron’s financial statements, it looked like
it wasn’t a financing. It looked like it was Enron receiving the cash from a
normal business operation.
10/23/06 Fastow Depo. Tr. at 56:23-57:3.
Q. (BY MR. HOWES) Was the apparent economic substance of a prepay
different from its actual substance, in your view?
88
Investment banking first proposed the guarantee to get the trading desk’s cooperation.
Initially, investment banking “informally said that they would swallow any credit event loss,
which was later formalized through an email.” 8/16/05 Tjandramaga Depo. Tr. at 127:13-19.
On December 18, 2000, Smailes was notified that “IBD (Enron coverage team) is confirming our
willingness to take the credit risk associated with this transaction [the December 2000 prepay].”
Ex. 11748 at CSFBLLC009682096. Smailes required that Adrian Cooper, the Chief Operating
Officer of investment banking, be “on board” with the guarantee. Ex. 11748 at
CSFBLLC009682096; see also Ex. 10262 (Cooper asks what CSFB’s investment bankers are
“receiving” for covering the credit risk on the oil-liked loan). Cooper responded that “IBD will
assume the credit risk from FID and your book for this nine-month exposure to Enron arising
from this oil-linked loan.” Ex. 11748 at CSFBLLC009682096.
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A. I believe there was a difference.
Q. What was it?
A. Well, my view is that, in substance, these were like loans, but they were
structured intentionally to not appear as loans. They were structured to appear
like Enron was engaging in arm’s-length commodity trades.
Id. at 60:15-24; see also id. at 74:2-21 (“we would look to do transactions, financial transactions,
that would, as we described it, fill the gap between reality and what we wanted the outside world
to see”).
CSFB’s liability for this conduct under Rule 10b-5(a) and (c) is clear. As discussed
supra at §II.B.1, in Parmalat I Judge Kaplan upheld the allegations regarding the banks’
securitization and factoring of worthless invoices because the schemes “created the appearance
of a conventional factoring or securitization operation when, in fact, the reality was quite
different.” 376 F. Supp. 2d at 504. 89
The 2000 Prepay had precisely the same salient effect – it
“created the appearance” of a legitimate oil prepay with true commodity price risk when, in fact,
“the reality was quite different” in that the transaction was really a loan to Enron. Moran
testified that regarding the deal, Enron “wanted to have it appear as a swap.” 7/21/04 Moran
Depo. Tr. at 218:24-219:2. Like Parmalat I’s invoice scheme, the 2000 Prepay was a transaction
that appeared as something else.
Concerning the same invoice schemes, Judge Kaplan also rejected the banks’ argument
that their conduct was at most aiding and abetting, reasoning that the schemes “depended on a
fiction, namely that the invoices had value.” Parmalat I, 376 F. Supp. 2d at 504. The same is
true with the 2000 Prepay. As discussed above, accounting for the transactions under EITF 98-
89
See also Parmalat II, 383 F. Supp. 2d at 626 (holding that transactions with shell entity
formed by law firm “‘created the appearance of a conventional’ sale and loan ‘when, in fact, the
reality was quite different’”).
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10 required that there existed “the objective of generating profits on or from exposure to shifts or
changes in market prices.” Solomon Report at 24. But treatment of the 2000 Prepay as such
“depended on [the] fiction” that the deal had actual commodity price risk when in fact – as even
CSFB’s witnesses admit – it did not.
Here it should also be observed that Judge Kaplan, noting with regard to the invoice
schemes that because Parmalat “guaranteed to BNL . . . and the other banks, payment of the full
face value of the invoices,” the invoices “played no economic role in the transaction; they were
simply a device or excuse that permitted Parmalat to record the revenue and to conceal the
liability on the guarantees.” Parmalat I, 376 F. Supp. 2d at 488. The same is true with the
phantom commodity price risk in the 2000 Prepay – it too “played no economic role” in the deal
because the circular nature of the transaction eliminated its significance. To falsely indicate the
existence of commodity price risk by presenting what was in substance a single loan transaction
as three purportedly independent commodity trades was “simply a device or excuse that
permitted [Enron] to record” cash flow from operations and conceal a loan. Id.
The same significance attaches to CSFB’s sham of running the 2000 Prepay across its
trading desk. As Smailes testified, the deal simply did not belong, but was sent there anyway by
investment banking. And as the jury could easily infer, this was done to create “a fiction” on
which the deal “depended” (id. at 504) – to wit, that it was a legitimate commodity trade.
Without a doubt, for this conduct CSFB is liable under Rule 10b-5(a) and (c), as
construed by Parmalat and this Court’s 7/20/06 Order.
This evidence also conclusively establishes that the 2000 Prepay renders CSFB liable
under the SEC’s test, and that of the Ninth Circuit in Homestore. As described in detail above,
CSFB itself understood and admitted that through the 2000 Prepay, Enron was obtaining a loan –
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ut not reporting it as such. 90
For example, Emmet advised Smailes that he was “being asked to
quote on a structure for Enron that enables Enron to borrow USD that are treated as price risk
management rather than debt on balance sheet.” Ex. 50092 at CSFBLLC000044025.001; Ex.
14059 at CSFBLLC009682091. This was unprecedented:
Q. In your entire career at CSFB, did you ever hear, with respect to any client
other than Enron, that it would borrow money but be treated as price risk
management rather than debt on balance sheet?
A. No.
* * *
11/8/05 Smailes Depo. Tr. at 35:19-25. Banks such as CSFB were fully informed that prepays
falsified Enron’s cash flow from operations:
I talked explicitly with senior bankers about the fact that we were doing – we
were – we were, in essence, borrowing money in the form of a commodity prepay
so that we could report more funds flow from operations than Enron actually
had.
10/24/06 Fastow Depo. Tr. at 345:5-9. 91
Accordingly, the testimony of CSFB’s own witnesses (and that of Fastow) entitles a jury
to conclude that the “principal purpose and effect” (SEC Brief (Ex. 3) at 18; Homestore, 452
F.3d at 1048) of the 2000 Prepay was to have a loan to Enron appear as a price risk management
liability and as cash flow from operating activities – creating the false appearance of cash flow
from operations and lack of debt from the deal (see Solomon Report at 16ff). 92
In fact, CSFB
90
See also 10/23/06 Fastow Depo. Tr. at 65:3-7 (prepays resulted in the understatement of
Enron’s debt).
91
Also, Bankruptcy Examiner Batson concludes that “a factfinder could infer that CSFB
understood that Enron accounted for the cash proceeds from the CSFB Prepay as cash flow from
operating activities.” Ex. 7 at 73.
92
Bankruptcy Examiner Batson concluded that CSFB also “understood Enron’s accounting
treatment for the CSFB Prepay differed from its economic reality.” Ex. 7 at 72. This too equates
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employees who worked on the 2000 Prepay saw it as an “accounting trade” – a term to indicate
the deal “was a trade in which accounting objectives were central to the transaction.” See
11/8/05 Smailes Depo Tr. at 167:7-13; Ex. 50092 at CSFBLLC000044022.001. They called the
deal “an accounting-driven transaction.” Ex. 50053 at DPOEX00000419; see Ex. 50058 at
DPOEX00000417. Tjandramaga understood “an accounting driven transaction” to be one “not
driven by oil price or market price risk”:
Q. What is your understanding as a trader of an accounting driven
transaction?
* * *
A. Anything that’s not driven by oil price or market price risk for me would
classify as like, well, of not much interest to me to be really honest at that stage.
So whether it’s accounting, whether it’s balance sheet or whatever, tax, I – yes, it
would just classify as being noncrucial to my business at that time.
8/16/05 Tjandramaga Depo Tr. at 156:2-14. Thus, CSFB’s own witnesses establish that the
“principal purpose and effect” of the 2000 Prepay was to manipulate Enron’s financial
statements. 93
Also, as an accounting driven transaction, internal CSFB policies required examination of
the “reputational risk” from the 2000 Prepay. See Ex. 50092 at CSFBLLC000044022.001-
23.001; Ex. 50058 at DPOEX00000418; Ex. 50053 at DPOEX00000419. Compliance officer
Marc Steglitz and lawyer Steve Wootton reviewed the transaction for reputational risk issues.
Steglitz demanded CFO Fastow or Treasurer Ben Glisan sign the deal on behalf of Enron, which
with understanding that the 2000 Prepay had the principal purpose and effect of creating a false
appearance of fact, as “Enron should have accounted for these transactions in accordance with
their economic reality.” Solomon Report at 186.
93
Fastow understands the prepays as a “contrivance” stating that “the transaction was done
this way only to – in my mind, only to achieve a certain accounting result.” 10/24/06 Fastow
Depo. Tr. at 342:5-12; see also id. at 511:23-512:5.
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Enron agreed to. See Ex. 50058 at DPOEX00000418; Ex. 50057 at CSFBCO000200050.
Steglitz and Wootton also were “adamant” the swap confirmations contain CSFB’s six “standard
representations for accounting driven transactions.” See Ex. 50053 at DPOEX00000419,
DPOEX00000421; 8/16/05 Tjandramaga Depo. Tr. at 167:22-168:14. 94
At first, Enron agreed to include the six disclosures in the trade confirmations but later
refused. See Ex. 14057; 8/16/05 Tjandramaga Depo. Tr. at 159:23-160:15, 167:22-168:24.
Enron later told trader Tjandramaga it is “very important for them” that the trade confirmations
are “as standard as possible and DO NOT include any representations on accounting driven
transactions.” Ex. 50058 at DPOEX00000417. Enron did not want any indication that the deal
was not really a series of legitimate commodity trades.
Ultimately, the 2000 Prepay documents never included CSFB’s “standard representations
for accounting driven transactions.” CSFB accepted – over Steglitiz’s and Wootton’s strong
objection – Enron’s mere verbal assurances of the representations. See 8/16/05 Tjandramaga
Depo. Tr. at 160:7-15, 167:22-168:14; Ex. 50053 at DPOEX00000419; Ex. 50058 at
DPOEX00000417 (Steglitz and Wootton “definitely want the rep risk stuff in the confirms”). 95
Tjandramaga explained:
94
As memorialized by Bankruptcy Examiner Batson, these representations “included
assurances that: (i) Enron had discussed the CSFB Prepay with its external auditors; (ii) those
auditors had confirmed that the accounting treatment was appropriate; (iii) Enron’s senior
management was aware of, familiar with and had approved the CSFB Prepay; (iv) the CSFB
Prepay and Enron’s accounting therefore were consistent with all applicable laws and
regulations; (v) Enron had not relied on CSFB ‘in respect of the accounting treatment [or] the
overall suitability’ of the CSFB Prepay; and (vi) the CSFB Prepay, and its accounting and tax
treatment, are consistent with regulatory requirements, and Enron ‘will ensure that such
accounting and tax treatment is appropriately reflected, if required, with the proper regulatory
authorities in the applicable jurisdiction.’” Ex. 7 at 70 & n.296.
95
Bankruptcy Examiner Batson too chronicles that CSFB settled for merely verbal
representations. See Ex. 7 at 69-71.
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Q. And Mr. Wootton was adamant that the reputational risk disclosures that
he had provided to you be included in the confirmation, correct?
A. That is correct.
* * *
Q. . . . Mr. Steglitz was also adamant that the reputational risk disclosures
that Mr. Wootton provided to you be included in the confirmations, as well,
correct?
A. Yes, that’s correct.
* * *
Q. And in the end they were not [included], correct?
A. That’s correct.
Q. Do you know why they were not, the six reputational risk clauses were not
included in the final confirmations?
* * *
A. Because Enron did not want to do that.
8/16/05 Tjandramaga Depo. Tr. at 167:22-168:24.
Thus, in addition to all that has been said above, it is further true that CSFB’s agreement
to execute deal documents without the “standard representations for accounting driven
transactions,” but to conceal those representations by having them made only as oral assurances,
also operated to conceal the true accounting-driven nature of the transaction. This conduct itself
was inherently deceptive and thus actionable under Rule 10b-5(a) and (c).
In light of all described above, CSFB’s arguments that it is somehow not liable for the
2000 Prepay are meritless. CSFB refers to the fact that, in the 6/5/06 Order, this Court ruled that
Lead Plaintiff’s allegations regarding the Delta and Mahonia prepays executed by Citibank and
JP Morgan Chase, respectively, state a claim for primary liability under the securities laws.
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Defs’ Mem. at 33. 96
But CSFB argues that its prepays were somehow materially different from
those, in five ways. Defs’ Mem. at 33-39.
First (id. at 33), CSFB – truly grasping at straws – points out that the 2000 Prepay did not
involve an SPE, but rather Morgan Stanley as one of the counterparties. This, however, is a
distinction without a difference. As Solomon explains, what is important is that because three
parties were involved in the transaction’s particular structure, commodity price risk was
eliminated, resulting in a loan. Solomon Report at 20-21. This obviously would be true whether
the third entity was the bank’s SPE or the bank itself. The use of a bank in place of an SPE made
no difference in the substance of a prepay. See 10/23/06 Fastow Depo. Tr. at 222:25-223:22.
Indeed, in analyzing the 2000 Prepay, Bankruptcy Examiner Batson noted himself that “the SEC
indicated that it sees no distinction between the Prepays entered into by Citigroup that involved
an SPE as the conduit entity and those in which another financial institution served as the conduit
entity.” Ex. 7 at 63 n.266. 97
96
Disturbingly, CSFB employs terminology that attempts to distort the Court’s ruling in
this regard. It states that the Court “noted” that these allegations “might” state a primary
violation. Defs’ Mem. at 33. But in reality, this Court ruled that these allegations “satisfy the
requirements for pleading primary violations of the statutes.” Enron, 2006 U.S. Dist. LEXIS
43146, at *170.
97
Notably without citation to any source, CSFB claims that Lead Plaintiff views “the
existence of an SPE” in the prepay as some “key element” of the fraud. Defs’ Mem. at 34. This
is not true. For example, in condemning the banks’ prepays with Enron, Solomon notes that only
“in most cases” was the third party an SPE. Solomon Report at 17. And despite CSFB’s citation
to Solomon’s deposition (Defs’ Mem. at 34 n.111), he then made it clear that he agrees with the
SEC that absence of an SPE from the deal does not vitiate its overall fraudulent character: “[M]y
opinions are based partly on the SEC’s interpretation and their views on the prepay transactions.
The SEC didn’t – clearly states, specifically states, that some of the prepays involved non-SPEs,
banks, and they viewed the bank that was participating in the place of the SPE as basically being
in the same position as the SPE with the same issues.” 5/2/06 Deposition Transcript of Saul
Solomon (“5/2/06 Solomon Depo. Tr.”) at 357:11-19. It should also be noted that defendant
Andersen’s expert witness, in discussing the parties to the prepays, concludes that “[s]ome of the
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Equally unavailing is CSFB’s observation that Morgan Stanley “has never been accused
of wrongdoing” by Lead Plaintiff and other certain civil litigants. Defs’ Mem. at 33-34. This
assertion is simply irrelevant. As indicated above, Lead Plaintiff has evidence establishing that
CSFB’s conduct in the 2000 Prepay was improper.
Strangely, while conceding that the CSFB prepay “involved” the three constituent parts
described above (i.e., between Enron and CSFB, CSFB and Morgan Stanley, and then Morgan
Stanley and Enron) (id. at 33), CSFB argues that these “commodity swaps” were nevertheless
supposedly “independent” (id.). As discussed above, however, the evidence from CSFB’s own
witnesses tells a completely different story. They considered the net effect of the 2000 Prepay as
being produced by all three component steps, and recognized their interdependence and
relatedness. 98
But also, the significance of CSFB’s own assertion that the three component legs of the
2000 Prepay were “commodity swaps” (Defs’ Mem. at 33) should not be overlooked. In so
asserting, CSFB is required to concede that the transaction’s documents made them at the least
appear as such. CSFB’s own witnesses admitted the transaction was really a loan. Thus,
CSFB’s own evidence and litigation position establish that the 2000 Prepay was a loan that
appeared to be a series of commodity swaps! CSFB simply cannot escape the inexorable
Prepay Transactions had features that others did not, but the basic structure of the transactions
was the same.” Foster Report at 40 n.40.
98
Also, despite its litigation position that the steps in the prepays were purportedly
“independent,” CSFB repeatedly (and tellingly) slips in the Motion, referring to the 2000 Prepay
as a single transaction. See, e.g., Defs’ Mem. at 36 (CSFB supposedly “played no role in
structuring the transaction”; CSFB “was aware of Enron’s intention to treat the transaction as a
short-term liability in its price risk management book”).
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conclusion that the 2000 Prepay was a transaction disguised to be something it was not, and thus
was inherently deceptive under Parmalat.
Second, relying in part on the opinions of certain expert witnesses, CSFB asserts the 2000
Prepay was supposedly “fully vetted” by Andersen, and defends the transaction’s accounting.
Defs’ Mem. at 34-35. As described above, Solomon concludes in opposition that the accounting
was improper. Summary judgment is thus precluded on this issue, as a jury will have to
determine which expert’s analysis is more persuasive. 99
Third, CSFB argues it played no role in structuring the transaction. Defs’ Mem. at 35.
But even if true, this is no free pass for CSFB; primary liability under Rule 10b-5(a) and (c) does
not require that the perpetrator have structured the transaction. This Court adopted the SEC’s
test for primary liability (see Enron, 2006 U.S. Dist. LEXIS 43146, at *173-*175), and it is the
SEC’s position that:
99
See Owens v. Ford Motor Co., 297 F. Supp. 2d 1099, 1110 (S.D. Ind. 2003) (“The court’s
role on summary judgment is not to choose the better expert . . . .”); Bieghler v. Kleppe, 633 F.2d
531, 534 (9th Cir. 1980) (“At trial, after the expert has been cross-examined on the facts and data
underlying his opinion and his method of arriving at it, the trier of fact may find the evidence
insufficiently persuasive of causation to allow a verdict for plaintiffs. Nevertheless, that
determination is not to be made on a motion for summary judgment, even if the trial judge is
convinced plaintiffs will eventually lose.”); Provenz v. Miller, 102 F.3d 1478, 1490 (9th Cir.
1996) (“‘As a general rule, summary judgment is inappropriate where an expert’s testimony
supports the non-moving party’s case.’”); In re Worldcom, Inc. Sec. Litig., 352 F. Supp. 2d 472,
500 (S.D.N.Y. 2005) (“‘where, as here, there are conflicting expert reports presented, courts are
wary of granting summary judgment’”); Sightsound.com, Inc. v. N2K, Inc., 391 F. Supp. 2d 321,
330, 354 (W.D. Pa. 2003) (citing Anderson, 477 U.S. at 255) (“Both parties rely heavily on the
testimony of experts to support their positions. Where there is ‘specific, plausible and detailed
testimony by dueling expert witnesses,’ summary judgment is often inappropriate;” “Conflicts in
the evidence on factual issues are not to be resolved on summary judgment, particularly where
those conflicts arise from competing expert opinions, the resolution of which is a matter reserved
to the jury.”). Also, Andersen’s expert qualifies his conclusions on the prepays by stating that
they consider only “what Andersen knew at the time” (Foster Report at 42), and that “it has since
been revealed that important information regarding certain of these transactions was concealed
from Andersen.” Id. at 40.
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Where a wrongdoer, intending to deceive investors, engages in a deceptive act as
part of a scheme to defraud, he can cause the same injury to investors, and the
same deleterious effects on the markets, regardless of whether he designed the
scheme. . . . Liability should be available against any person who engages in a
deceptive act within the meaning of Section 10(b) as part of a scheme to defraud,
regardless of who designed the scheme.
SEC Brief (Ex. 3) at 7-8.
CSFB also discusses that it received representations from Enron regarding the 2000
Prepay’s accounting. Defs’ Mem. at 36. But, as discussed above, Enron refused CSFB’s request
to put those representations in the deal documents – a clear signal to CSFB that the truth of those
representations was highly suspect. From this, a jury could reasonably conclude that CSFB’s
purported reliance on the representations was pretextual and insincere or at the least,
unreasonable.
Fourth, CSFB claims there is “nothing nefarious” in the fact that the 2000 Prepay was
financially settled. Defs’ Mem. at 37. But even if it is accepted that commodity trades are
“commonly” settled financially (id.), this does not alter the fact that CSFB’s own witnesses
admit that there was no commodity price risk in the deal when it was structured to appear as a
series of commodity trades. This made the deal inherently deceptive.
Fifth, CSFB cavils that the 2000 Prepay purportedly did not result in a “‘false appearance
of revenues,’” because the funds given to Enron were “real.” Id. at 37-38. This argument
thoroughly misses the point. That Enron received a “real” $150 million loan does not erase the
fact that it booked that loan not as debt, but improperly as operating cash flows on the statement
of cash flow (as opposed to financing cash flows). Solomon Report at 16. This was undoubtedly
deceptive, as it fooled investors into believing that Enron was earning “operating income from
recurring, real, generally cash-producing transactions with real customers” (Black Report at
10), when in fact that money – despite being “real” – was simply a loan that Enron had to pay
back. Also, falsifying operating cash flows, in fact, had a fraudulent impact on reported
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evenues. By overstating cash flow from operations with the prepays, Enron gave the false
picture that more of its reported revenues were derived from activities related to customers,
fraudulently enhancing the perceived quality of the revenues. See Black Report at 8 (“Investors
are interested not only in the amounts of a company’s earnings and cash flows, but also in their
quality. The concept of ‘quality of earnings’ includes whether reported earnings correspond to
cash flows from ordinary operations . . . .”) (emphasis in original). 100
CSFB also tries to distance itself from the wrongful nature of the transaction, arguing that
it had no role in “accounting” for it. Defs’ Mem. at 39. This argument fails. As demonstrated
above, the deception here was achieved by CSFB’s masking of a loan as a series of commodity
trades by entering into three purportedly independent “commodity swaps” whose purpose and
net effect was simply a loan with only illusory commodity risk, and by running this loan through
its trading desk. CSFB performed these actions to “create[] the appearance of a conventional
[commodity trade] when, in fact, the reality was quite different.” Parmalat I, 376 F. Supp. 2d at
504. Thus, the 2000 Prepay was not some innocuous, run-of-the-mill deal that was not deceptive
until misaccounted for by Enron. CSFB’s actions themselves were deceptive. 101
Also, even if
100
To the extent CSFB suggests by its argument here that the SEC would find actionable
only conduct that produces the false appearance of “revenues” – as opposed to other financial
metrics or material facts – this desperate argument must fail. Recognizing that conduct that
deceives investors as to any material fact is actionable, the Ninth Circuit rightly understood the
SEC’s test to encompass not just the manipulation of reported revenues, but the creation of any
false appearance “of fact.” Homestore, 452 F.3d at 1048 (“We agree with the SEC that
engaging in a transaction, the principal purpose and effect of which is to create the false
appearance of fact, constitutes a ‘deceptive act.’”).
101
When all this evidence is considered, the conclusion that CSFB’s conduct violated Rule
10b-5(a) and (c) is corroborated by the decision of this Court by Judge Werlein in Hopper, 2006
U.S. Dist. LEXIS 17772. In Hopper, the defendant was alleged to have engaged in “round-trip
trades,” which “were massive, prearranged transactions each involving simultaneous purchases
and sales of electric power or natural gas, between the same counterparties, for the same volume
at the same price, with no contemplation of delivery and no possibility of profit for either party.
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CSFB never directly misrepresented Enron’s financial condition (and thus the value of its
securities) to investors, this would not insulate the Bank from liability. See Zandford, 535 U.S.
at 819-20 (“neither the SEC nor this Court has ever held that there must be a misrepresentation
about the value of a particular security in order to run afoul of the Act”).
These observations also dispose of CSFB’s argument that the 2000 Prepay is supposedly
inactionable under Homestore because, purportedly, “the dispute over the CSFB oil swap is
whether Enron accounted for the transaction properly.” See Defs’ Notice at 5-6. As established
above, CSFB’s own conduct of entering into a loan transaction structured to appear as three
separate commodity swaps, with only the illusion of price risk, and pushing that transaction
through its trading desk solely to give it the false appearance of commodity swaps, itself yielded
deception. As CSFB recognized, the Ninth Circuit ruled that deception may be lacking for
conduct “‘that is consistent with the defendants’ normal course of business.’” Id. at 2. But the
evidence above clearly demonstrates that the 2000 Prepay was not such a transaction for CSFB.
Trader Smailes resisted the request to execute the 2000 Prepay specifically because “[i]t wasn’t
our business.” 11/8/05 Smailes Depo. Tr. at 171:12-18. And Emmet openly questioned whether
it was proper to do the deal. Ex. 10260 at ERN0118815; Ex. 50092 at CSFBLLC000044024.001
(“Is it OK for us to be entering into such an ‘obvious’ loan transaction?”). CSFB also
understood the deal was done for accounting, not operational reasons. Ex. 50053 at
The round-trip trades had no economic substance and no impact on net income; instead, their
purpose was” to give a false picture of the company’s operational and financial health. Id. at *5.
Applying Parmalat I, Judge Werlein ruled that such allegations stated a claim under Rule 10b-
5(a) and (c): “Because the round-trip trades were sham transactions, and therefore had an
inherent tendency to deceive, it cannot be said that the alleged fraud or deception only
occurred when the trades were misreported in the companies’ SEC filings.” Id. at *38 (citing
Parmalat I, et al.).
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DPOEX00000419. Thus, the 2000 Prepay was thus not some legitimate transaction that Enron
misaccounted for – it was deceptive in itself.
Similarly unavailing is CSFB’s argument that, under the 7/20/06 Order, the 2000 Prepay
is equally inactionable. See Defs’ Supp. Mem. at 5. In the 7/20/06 Order, this Court ruled on
Lead Plaintiff’s allegations of defendant Barclays’ role in prepay transactions. See Enron, 439
F. Supp. 2d at 722. It found these allegations to be “conclusory and vague.” Id. And while
CSFB now submits that the Court’s ruling should be applied to Lead Plaintiff’s “allegations”
concerning CSFB’s role in prepays (Defs’ Supp. Mem. at 5), having filed a motion for summary
judgment, CSFB must now contend with Lead Plaintiff’s substantial evidence, described above,
that CSFB violated Rule 10b-5(a) and (c) in the prepays.
Lead Plaintiff has amassed substantial evidence establishing that in the 2000 Prepay,
CSFB knowingly engaged in an illegitimate transaction whose principal purpose and effect was
to create the false appearance of fact in Enron’s financial statements. CSFB’s own conduct in
the transaction was deceptive, in that it made the deal appear to be a legitimate oil prepay with
commodity price risk, when in fact it was simply a loan. CSFB is thus liable under Rule 10b-
5(a) and (c). See Enron, 2006 U.S. Dist. LEXIS 43146, at *155-*158; Enron, 439 F. Supp. 2d at
721-24; SEC Brief (Ex. 3) at 16; Parmalat I, 376 F. Supp. 2d at 504; Parmalat II, 383 F. Supp.
2d at 625-26; Homestore, 452 F.3d at 1048; Hopper, 2006 U.S. Dist. LEXIS 17772, at *37-
*38. 102
102
CFSB also argues that the 2000 Prepay was supposedly not “‘in connection with’”
security sales under Section 10(b) and Rule 10b-5. See Defs’ Mem. at 40. Lead Plaintiff
addresses this argument infra at §III.D.
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(2) Year 2001 Fake Oil “Prepay” Transaction
The 2001 Prepay was simply a renewal of the 2000 Prepay, with Barclays taking the
position formerly occupied by Morgan Stanley. 103
Thus, the transaction proceeded in the same
basic manner as the 2000 Prepay, but with Barclays involved, as follows:
• Step 1: In September 2001, Enron and CSFB entered into a swap agreement
requiring CSFB to pay Enron a lump-sum of $150,000,000. In return, Enron
agreed to make quarterly floating payments to CSFB based on the spot price of
59,521 barrels of oil and a final floating payment at maturity based on 6,581,260
barrels of oil. 104
• Step 2: CSFB entered into a swap with Barclays requiring CSFB to make
quarterly floating rate payments to Barclays based on the spot price of 59,521
barrels of oil and a final floating payment at maturity based on 6,581,260 barrels
of oil. In return, Barclays promised to pay CSFB a fixed amount of $1,368,983
each quarter and a final payment of $151,368,980. 105
• Step 3: Then Barclays entered into a swap with Enron requiring Barclays to make
quarterly floating rate payments to Enron based on the spot price of 59,521 barrels
of oil and a final floating payment at maturity based on 6,581,260 barrels of oil.
In return, Enron agreed to pay Barclays a fixed rate of $1,372,554 each quarter
and a final payment at maturity of $151,763,855. 106
Diagrammatically:
103
104
105
106
Ex. 11761; Solomon App. at 104; see also Defs’ Supp. Mem. at 5.
Solomon App. at 104-05; see also Ex. 9 at ERN0118780-785.
Solomon App. at 105; see also Ex. 10 at ERN0118791-802.
Solomon App. at 105; see also Ex. 11 at BARC000005130-34.
- 91 -

CSFB 2001 Prepay
Barclays
$151,763,856 at maturity
$1,372,554 quarterly
Value of 59,521 bbls of oil quarterly
Value of 6.581,260 bbls of oil at maturity
$151,368,980 at maturity
$1,368,983 quarterly
Value of 59,521 barrels quarterly
Value of 6,581,260 barrels at maturity
ENA
Value of 6,581,260 bbls of oil at maturity
Value of 59,521 bbls of oil quarterly
$150 million upfront
CSFB
Thus, the net effect was that: (1) Enron got a lump-sum from CSFB; (2) Barclays paid back
CSFB (with interest); and (3) Enron was obligated to pay back Barclays, with interest. As with
the 2000 Prepay, the quarterly and maturity payments based on the value of barrels of oil
(indicated as dashed-line arrows in the diagram) moved in a circle back to Enron, resulting in a
wash.
The 2001 Prepay is amenable to same analysis as the 2000 Prepay – it too was a
deceptive contrivance rendering CSFB liable under Rule 10b-5(a) and (c), for all of the same
reasons as the 2000 Prepay. Once more, CSFB and the counterparties fraudulently masked what
was in substance a loan to Enron as a series of commodity trades, in order to achieve an
unwarranted accounting treatment and thus defraud Enron shareholders. The 2001 Prepay
allowed Enron to continue to conceal its $150 million in debt from the 2000 Prepay, and avoid
borrowing $150 million to repay the December 2000 Prepay and reversing the $150 million in
operating cash flow from it. See Solomon App. at 103.
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As with the 2000 Prepay, the evidence concerning the 2001 Prepay unequivocally
establishes that CSFB understood the transaction to actually be a loan to Enron. Just like the
2000 Prepay, the 2001 Prepay was presented for approval to CSFB’s credit risk managers
Devine, Maletta and Bob O’Brien, evincing the Bank’s understanding that the 2001 Prepay was
really a loan. See Ex. 50098 at ERN0124465; 7/21/04 Moran Depo Tr. 278:2-5 (renewal of
prepay “approved by credit risk management”).
Internal CSFB emails among bankers and traders, between the close of the December
2000 Prepay and its renewal in September 2001, demonstrate the same understanding. On
August 23, CSFB energy trading and risk management employee Mansoor Sheikh notified
Moran, with copy to Smailes, that the London oil desk understood it had “a $150m loan rolling
off with Enron in early September.” Ex. 11751. Smailes, on September 4, advised Enron
relationship manager Osmar Abib that “our 150m$ oil-linked loan to Enron matures on the 12th
this month” and asked him to “confirm that no extensions/restructures of this loan will occur.”
Exs. 11749, 50094. In an email the next day to Moran and another, Smailes described, in the
subject line of an email, the proposed 2001 Prepay as an “Enron loan rollover.” Ex. 50095.
Smailes also, on September 10, wrote to CSFB investment banking COO Adrian Cooper,
copying Moran and another, that “IBD is looking to roll over a 150M$ oil-linked loan to Enron”
and requested authorization “that IBD takes all credit risk on this trade.” Ex. 11750.
CSFB also knew there was no true commodity price risk presented by the 2001 Prepay:
Q. Setting the credit risk aside, CSFB had no market risk in the September
2001 prepay, is that accurate?
A. That is accurate.
* * *
Q. Setting the credit risk aside, CSFB had no commodity price risk in the
September 2001 [renewal of the] prepay; is that right?
* * *
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A. Setting aside the dynamic credit risk that it had to both counterparties, that
is correct.
11/8/05 Smailes Depo. Tr. at 132:11-22. 107
CSFB understood the 2001 Prepay was not simply a loan – but was a loan disguised as a
series of commodity trades. Relevant here as well is Devine’s note to himself regarding the 2001
Prepay: “but it is really a loan to [Enron].” Ex. 50098 at ERN0124469. In other words, despite
the false appearance of the transaction as a series of commodity swaps, it was “really” a loan.
Devine would have never needed to note that the 2001 Prepay was “really” a loan had it
appeared to be such.
Just like the 2000 Prepay, CSFB ran the 2001 Prepay – a loan deal from the investment
banking department – through its trading desk to give it the false appearance of being a
commodity trade. As Smailes confirmed in an email to the COO of investment banking Adrian
Cooper: “IBD [i.e., CSFB investment banking] is looking to roll over a 150m$ oil-linked loan to
Enron, booked in my books.” Ex. 11750.
This intentional misrouting of the prepay yielded the bizarre feature that investment
banking was required to assume all credit risk from 2001 Prepay. Smailes continues: “I will
need your authorisation, that IBD takes all credit risk on this trade and that FID is used simply
for booking purposes due to the derivative nature of the deal.” Ex. 11750. Adebayo Ogunlesi,
the head of CSFB’s Global Energy Banking Group, recommended, and Cooper authorized,
investment banking to “underwr[i]te the $150m of credit risk.” Ex. 11772; see also 7/22/04
Moran Depo. Tr. at 425:19-426:24; Ex. 50100 at CSFBLLC000551802.
107
The absence of commodity price risk from the 2001 Prepay is further apparent from the
evidence concerning the 2000 Prepay. As discussed, the circular nature of the transaction
eliminates such risk, and CSFB concedes that both prepays operated in the same manner. See
Defs’ Supp. Mem. at 5.
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Thus, just as with the 2000 Prepay, CSFB is liable under this Court’s Orders and the
relevant case law for its deceptive conduct in masking the 2001 Prepay as a series of commodity
trades. Enron’s treatment of the 2000 Prepay “depended on [the] fiction” (Parmalat I, 376 F.
Supp. 2d 504) by CSFB that the deal had actual commodity price risk when in fact it did not.
Commodity price risk again “played no economic role” (id. at 488) in the deal because the
circular nature of the transaction eliminated its significance. Falsely indicating the existence of
commodity price risk by presenting what was in substance a single loan transaction as three
purportedly independent commodity trades was “simply a device or excuse that permitted
[Enron] to record” income and conceal a loan. Id. And CSFB’s sham of running the 2001
Prepay across its trading desk was done to create “a fiction” on which the deal “depended” (id. at
504) – i.e., that it was a legitimate commodity trade. Thus CSFB is liable under Rule 10b-5(a)
and (c), as construed by Parmalat and this Court’s 7/20/06 Order, for its conduct in the 2001
Prepay as well.
But there is yet another separate and independent reason why CSFB is liable under Rule
10b-5(a) and (c) for the 2001 Prepay: CSFB structured the deal. In fact, for its efforts in this
regard, CSFB requested and received a $375,000 “Structuring Fee” for executing the renewal of
the 2000 Prepay. See Ex. 11775 at CSFBLLC000729677, CSFBLLC000729679.
Structuring or designing a transaction that has the principal purpose and effect of creating
the false appearance of fact is sufficient for primary liability under Rule 10b-5(a) and (c). The
Court recognized this in its very recent ruling in the 6/5/06 Order that Lead Plaintiff’s allegations
regarding Credit Suisse First Boston (“CSFB”) and Laurence Nath’s repeated
involvement in structuring SPEs for Enron . . . satisfy the requirements for
pleading primary violations of the statutes.
Enron, 2006 U.S. Dist. LEXIS 43146, at *170.
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This ruling by the Court is strongly supported by Homestore, 452 F.3d at 1049, where the
Ninth Circuit justified its holding in part by noting that liability had been found in other cases
where the “‘defendant was a primary architect of the scheme to finance the sham entities’”
(citing Quaak, 357 F. Supp. 2d at 342); “where auditors ‘masterminded’ company’s misleading
accounting practices” (id. (citing Global Crossing, 322 F. Supp. 2d at 336-37)); or defendant
“invented sham corporate entities” (id. at 1050 (citing Lernout, 236 F. Supp. 2d at 173)). Thus,
apparently, such activity satisfies the Ninth Circuit’s requirement that the defendant’s conduct
have the “purpose and effect” of creating a false appearance of fact, and thus in turn would
clearly satisfy the SEC’s test as well. Accordingly, CSFB is liable under Rule 10b-5(a) and (c)
for its conduct in the 2001 Prepay. 108
c. FAS 125/140 Transactions
(1) Iguana: Fake “Sale” of Assets
Throughout the Class Period, CSFB engaged in three transactions with Enron that have
been referred to as “FAS 125/140” deals. See, e.g., Lead Plaintiff’s Trial Plan Pursuant to Court
Order (Docket No. 4706) (Docket No. 4729) at 7; Solomon Report at §§VI.B. and VII.B. “FAS
125/140” refers to the main accounting rules relevant to the deals: Financial Accounting
Standard Nos. 125 and 140, which governed “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities.” 109
108
CSFB argues that the Court’s ruling in the 7/20/06 Order regarding Barclays’ role in the
2001 Prepay purportedly renders the 2001 Prepay inactionable as to CSFB. See Defs’ Supp.
Mem. at 5. But, for the same reason that this result does not follow for the 2000 Prepay (as
discussed supra at §II.B.2.b.(1).), that Order does not dispose of Lead Plaintiff’s claim against
CSFB for the 2001 Prepay.
109
See Solomon Report at 26 n.46 (detailing that “FAS 125 was effective for sales of
financial assets from January 1, 1997 through March 31, 2001, replaced by FAS 140 for sales
subsequent to March 31, 2001”).
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Under these Standards, an issuer could qualify the disposition of an asset as a “sale” – as
opposed to, say, mere hypothecation of the asset to obtain financing (i.e., a loan) – if certain
conditions were met. But Enron and, in this case, CSFB, entered into what were essentially loan
transactions that falsely appeared to satisfy the criteria required for treatment as a sale under
FAS 125/140. Through CSFB’s and Enron’s conduct in fraudulently making these loan
transactions appear as sales, Enron was able to improperly benefit from the transactions in
myriad ways:
Enron’s FAS 125/140 transactions (1) provided the Company with immediate
cash flow without recording the cash receipt as either debt or other obligations;
(2) allowed Enron to record the proceeds from the sale as cash flow from
operations rather than cash flow from financing; and (3) allowed Enron to record
income from the gain on the sale of the asset. Enron’s alternative – borrowing
money and using the asset as collateral – would have provided access to cash to
meet its operating expenses, but carried with it negative financial reporting
consequences such as increased debt, no positive effect on cash flow from
operations, and no positive effect on earnings.
Solomon Report at 28.
As with the prepays described above, Lead Plaintiff is hardly alone in asserting that the
FAS 125/140 deals were fraudulent devices used to deceive Enron investors about the
Company’s true financial condition. The SEC has alleged that Enron and another bank engaged
in fraudulent FAS 125/140 deals for the same reasons outlined above. See Ex. 500472 (SEC v.
Canadian Imperial Bank of Commerce, et al., No. 03-5785, Complaint (S.D. Tex. 2003)). And
in deposition Fastow confirmed that the FAS 125/140 transactions banks such as CSFB did with
Enron created the false appearance of funds flow from operations. 10/23/06 Fastow Depo. Tr. at
58:10-25; see also id. at 64:20-23 (FAS 125/140 transactions created “the false appearance of
earnings”).
Enron’s FAS 125/140 transactions did not truly justify the treatment they received as
sales under those Standards. As Solomon opines, properly accounting for a transaction as a sale
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under FAS 125/140 requires, among other things, that “[t]he transferor [Enron] of the asset must
surrender control of the asset.” Solomon Report at 28. 110
Also, in the case of transfers to an
SPE, there must be a sufficient at risk equity contribution (interpreted as a minimum 3% of the
total assets) by an independent third party investor. Id. at 32. CSFB’s FAS 125/140 deals with
Enron did not meet these requirements.
One such bad deal was “Iguana” – CSFB’s FAS 125/140 transaction with Enron in
December 1999. As the evidence discussed directly below establishes, this transaction failed to
truly qualify for accounting as a sale under FAS 125, 111 but was accounted for as such anyway.
Moreover, the deal was inherently deceptive, as CSFB’s own conduct in Iguana imbued the
transaction with the false appearance of qualification under FAS 125, allowing Enron to
fraudulently obtain the improper accounting treatment for it, thus deceiving the Company’s
investors. In doing the Iguana deal, CSFB enabled Enron in 1999 to understate its debt by
$208.4 million, and to overstate its cash flow from operations by $208.4 million. See Solomon
Report at 27.
In simplified terms, the complex Iguana deal was structured and operated as follows:
Enron, through a subsidiary, contributed approximately $232.2 million of financial assets to
Chuckwalla Limited Company (“Chuckwalla”), receiving in return 100% of a “Class A” voting
interest and right to an initial cash distribution of $208.4 million. 112
Chuckwalla acquired these
110
Here, “control is considered surrendered if (i) the transferred assets have been isolated
from the transferor, (ii) the transferee has the right to pledge or exchange the transferred assets or
interests, (iii) the transferor does not maintain effective control over the transferred assets.” Id.
111
FAS 125 is the relevant Standard due to Iguana’s date of 12/99. See Solomon Report at
26 n.46.
112
See Ex. 12 at CSFBLLC000006088-130 (12/14/99 Iguana Limited Company $202
million Offering Memorandum); Ex. 11076 (12/17/99 Memorandum from Dwight Scott, Larry
- 98 -

funds from an SPE called Salamander Trust (“Salamander”), which paid Chuckwalla $208.4
million (through an entity called the “Bearded Dragon Trust”), in return receiving a “Class B”
interest in Chuckwalla. 113
Salamander raised 97% of the assets’ purchase price ($202 million)
from the issuance (through another entity) of Notes. It also raised the remaining 3% of the price
($6.8 million) through the issuance of Certificates; this was the purported minimum 3% “at risk”
“equity” required for FAS 125 treatment of the deal as a sale. See Solomon App. at 173-75.
Expressed diagrammatically:
Nath, Tim Perry, Paul Davis and Bill Jukes to Bill Spiro); Ex. 11077 (12/8/99 Memorandum
from Energy & Power: Dwight Scott, Paul Davis and Bill Jukes and Structured Products: Larry
Nath and Peter Woodbury to Banking Review Committee).
113
Ex. 12 at CSFBLLC000006088-130 (12/14/99 Iguana Limited Company $202 million
Offering Memorandum); Ex. 11076 (12/17/99 Memorandum from Dwight Scott, Larry Nath,
Tim Perry, Paul Davis and Bill Jukes to Bill Spiro); Ex. 13 at CSFBLLC000023897-923
(12/20/99 Red Salamander Limited Company Certificate Purchase Agreement).
- 99 -

Enron Corp.
100%
Swap
Agreement
Note Holders
$202.0 M
Iguana Trust
Assets
($232 M)
Enron North
America.
Special Distribution
($208.4 M)
Class A voting interest
Put on Assets
$202.0 M Promissory
Note
Chuckwalla
Trust
$208.4 M
Class B Interest
Bearded
Dragon Trust
$208.4 M
Class B Interest
Salamander
Trust
$6.4 M
Certificate
Holder (DLJ)
This Byzantine arrangement, however, was a mere Potemkin village. Iguana’s skein of
entities and relationships was in reality simply a loan to Enron – with CSFB as the lender. The
SPE in Iguana – Salamander – was really just a shell entity created and controlled by CSFB.
Internal CSFB documents acknowledge the Bank as “Red Salamander’s beneficial owner.” Ex.
11079 at CSFBLLC000125536. Dwight Scott, a CSFB relationship manager for Enron,
confirmed that CSFB controlled Salamander, and used that control to purchase the Certificates
representing the supposed 3% “at risk” “equity”:
Q. DLJ bought them [$6.4 MM in Certificates] all through its Red
Salamander Limited Company?
* * *
A. That is what this says and that’s consistent with my recollection of the
transaction.
- 100 -

10/29/04 Deposition Transcript of D. Dwight Scott (“10/29/04 Scott Depo. Tr.”) at 708:6-11; Ex.
11076. 114
Hardly consistent with the “sale” of assets – and quite consistent with a loan – the Iguana
deal had a term; its maturity was set for June 20, 2000. See Solomon App. at 175. Thus, despite
being styled as a sale of assets with CSFB’s Salamander as the “buyer,” the deal contemplated
that Salamander would not keep those assets. Further demonstrating CSFB was making a loan
(not an equity investment) was a “ceiling” placed on CSFB’s return from the deal. As CSFB’s
own Iguana Offering Memorandum states, the “Class B” – which included the supposed “equity”
portion – is entitled to distributions, but only “up to a certain fixed amount.” See Ex. 12 at
CSFBLLC000006097. This was far more akin to interest on a loan than an investment.
Further, the requisite 3% “equity” in the deal from an “independent” “third Party” (the
Certificates) was not “at risk,” precluding legitimate treatment of Iguana as a sale (and not a
loan) under FAS 125. From the beginning of the deal, CSFB always understood that this
supposed “equity” would certainly be repaid to it, along with a so-called “return”:
Q. From the beginning when DLJ purchased the equity certificates, DLJ had
an expectation of a certain amount of return?
A. Yes, I believe we did.
Q. Thought you would get your principal back plus a return?
A. Yes.
10/29/04 Scott Depo. Tr. at 725:16-23. CSFB, however, engaged in conduct which cleverly
disguised the guaranteed nature of its 3% “equity” through an elaborate ruse that employed the
114
CSFB also underwrote the Notes issued by Iguana. See Ex. 11076; 10/29/04 Scott Depo.
Tr. at 708:12-25; Solomon App. at 173-75.
- 101 -

fictions of a “fair market value” put agreement, a “failed auction” scenario and “appraisal” rights
concerning the Iguana assets.
In Iguana, there existed a put agreement which could entitle CSFB to require Enron to
repurchase the Iguana assets at “fair market value.” See Ex. 11078 (described below); see also
10/29/04 Scott Depo. Tr. at 724:3-6. 115 While the notion that the assets would be repurchased at
“fair market value” indicated that the Certificates were “at risk” because the assets’ value
theoretically could change, this was merely an illusion.
CSFB and Enron colluded in agreeing that “fair market value” would be determined by
an auction and appraisal process that was, in actuality, rigged to ensure that CSFB would have
the Certificates repaid, plus a “return” (that is, effectively interest on its loan to Enron). The
auction and appraisal process was a pretext – a fiction calculated to guarantee the repayment of
the Certificates while appearing to have placed them at risk.
The “auction” had the ostensible purpose of finding a buyer for the Iguana assets when
the deal matured. But this supposed auction was preordained to fail. A May 24, 2000, CSFB
email states that the “auction of the assets related to the Iguana transaction began on April 27,
2000,” but that “no bids were received, so technically a failed auction occurred.” Ex. 11078.
But months before the “auction” began, a CSFB memorandum concerning another deal already
refers to the Iguana auction as presenting “a failed auction scenario.” Ex. 11075 at
115
While Lead Plaintiff speaks of the fact that Enron would “repurchase” the assets, it notes
that this aspect of the deal is only part of the fiction employed by the parties to Iguana because,
again, no actual “sale” of the assets had occurred as, inter alia, it was contemplated that CSFB
would not keep those assets.
- 102 -

EC35628A0051089. CSFB knew the Iguana “auction” was not calculated to attract any actual
bidders for the assets, but was planned to fail from the start. 116
This failed auction scenario triggered the put agreement, which entitled CSFB, through
Salamander, to require Enron to repurchase the Iguana assets at “fair market value.” Ex. 11078;
Ex. 11079 at CSFBLLC000125537. Repurchase of the assets at a certain value would operate to
repay CSFB’s ostensible “equity” investment in the Certificates. See 10/29/04 Scott Depo. Tr. at
721:10-13 (“If Enron were the buyer of the assets from Iguana then that would be the source of
the cash [for the Certificates].”).
Under the put agreement, Salamander was entitled to select three independent appraisers,
and pick the highest of the three. Ex. 11078. But, contrary to the economic interest of a true
equity investor in an arm’s-length transaction, CSFB obtained only one appraisal, performed by
a non-independent party. See 10/29/04 Scott Depo. Tr. at 726:14-729:10. The appraiser chosen
was recommended by Enron – the purchaser of the assets from CSFB! 117
Scott (although
troubled by recurring memory lapses) admitted:
Q. And DLJ could pick up to three appraisers and use the highest appraisal,
correct?
A. I don’t recall that from the time but I’ve seen that as we prepared for this
deposition.
Q. And DLJ only picked one appraiser, correct?
116
This is corroborated by the common-sense fact that, had Enron believed it could have
sold the Iguana assets at fair market value to a true independent third party, it would have simply
done so instead of entering into the elaborate FAS 125 structure with CSFB, which contemplated
that the assets would ultimately be repurchased from CSFB!
117
The sole appraiser was recommended by Brian Kerrigan, an Enron employee. Ex. 11078;
10/29/04 Scott Depo. Tr. at 726:6-728:20. Prior to recommending this appraiser, Kerrigan
“spok[e] to [H&H Energy Consultants, the appraisers] about this particular transaction” and told
CSFB that Enron had used them for prior FAS 125/140 appraisals. Ex. 11078.
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A. I don’t recall that from the time, but that’s consistent with what I’ve seen
preparing for this deposition.
10/29/04 Scott Depo. Tr. at 727:3-13.
Scott also admitted that the appraisal CSFB procured assessed value at the exact amount
CSFB needed to recover its “equity” and expected return:
Q. And why didn’t DLJ pick three appraisers and use the highest of the three?
* * *
A. I don’t know. I don’t recall why we chose who we chose.
Q. I’m asking you to assume that DLJ only picked one. Why wouldn’t DLJ
pick three appraisers when you get to use the highest of the three?
* * *
A. I don’t recall from the time. We may have been satisfied with the answer
we got from the first appraiser.
Q. Because you got everything you expected to get from Enron, correct?
* * *
A. I believe we did, though I can’t remember today.
10/29/04 Scott Depo. Tr. at 728:16-729:10; see also id. at 723:21-724:14 (“I think we got our
principal back and our expected return.”). 118
In fact, the appraisal itself confirms that CSFB
received the exact amount it wanted out of the deal, observing: “[p]roceeds from auction . . . are
to be distributed to Salamander . . . up to the principal and interest on the Salamander Note, plus
the amount of the equity contribution made by Salamander’s equity holder and a stated yield
thereon.” Ex. 11080 at CSFBLLC000125543.
A preordained “failed auction”; CSFB acting contrary to its economic interests by
refusing to exercise its rights; and an appraisal that results in exact repayment of CSFB’s
118
CSFB received $6.82 million for the Certificates. Ex. 11082. The spread between this
and the $6.4 million paid for them functioned effectively as interest on CSFB’s loan to Enron.
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expected return on the deal – even describing it as such! This is strong circumstantial evidence
from which a jury could easily infer that CSFB’s 3% “equity” was not truly “at risk” in Iguana,
but was only made to appear that way by CSFB’s purchase of the Certificates, agreement to the
failed auction and exercise of the put agreement. 119
This conduct by CSFB was itself inherently deceptive, rendering the Bank liable under
Rule 10b-5(a) and (c). As described supra at §II.B.1., in Parmalat III, Judge Kaplan held that
the plaintiff’s allegations that BoA masked a loan to Parmalat as an equity investment stated a
claim for relief under Rule 10b-5(a) and (c). The concealment lay in the fact that, while BoA
purported to supply an “equity” contribution, such was really a loan because BoA had a “put
agreement” which operated to “guarantee” repayment of this “equity.” Also, BoA acquiesced
in a dummy valuation of the assets supposedly purchased by the “equity.” Parmalat III, 414 F.
Supp. 2d at 433. Judge Kaplan held that such conduct was actionable, because “[t]he
combination of the overvaluation and the put agreement” “created the appearance” among other
things, “that BoA . . . was willing to invest its own money” – i.e., made an equity investment. Id.
at 435.
While there are slight factual variations between CSFB’s conduct in Iguana and Parmalat
III, the latter’s substantive analysis and conclusion is fully applicable to the former. CSFB here
practiced the same deception as did BoA in Parmalat III, by virtually the same means. CSFB
119
Circumstantial evidence is clearly sufficient here. Judge Sand’s Jury Instruction (Civil)
related to the issue provides that: “Circumstantial evidence is of no less value than direct
evidence . . . .” 4-74 Modern Federal Jury Instructions-Civil, 74.01 (Matthew Bender) (2001).
It should always be remembered that “there will rarely be direct evidence of intent to defraud.”
In re Fleming Cos. Sec. & Derivative Litig., No. 5-03-MD-1530 (TJW), 2004 U.S. Dist. LEXIS
26488, at *33 (E.D. Tex. June 10, 2004). See also Do v. Wal-Mart Stores, 162 F.3d 1010, 1013
(8th Cir. 1998) (“Several cases highlighted by the Supreme Court demonstrate that the
nonmoving party may draw upon favorable inferences from circumstance evidence to defeat
summary judgment.”).
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used a rigged valuation of the Iguana assets and a put agreement guaranteeing repayment of the
Certificates to mask its loan to Enron as an equity investment, just as BoA used the fake
valuation and put agreement to mask its loan to Parmalat. Precisely this deception by CSFB
resulted in the improper accounting for Iguana as a sale under FAS 125. 120
As such, CSFB’s
conduct in the transaction operated as a fraud on Enron investors, and thus violated Rule 10b-
5(a) and (c).
While hardly necessary, further analysis of CSFB’s role in Iguana under Parmalat
additionally requires the conclusion that CSFB is liable under Rule 10b-5(a) and (c). Because
the Certificates were not truly “at risk,” but only appeared to be under the illusory “fair market
value” term of the put agreement, Iguana resembled in substance the invoice schemes held
actionable in Parmalat I. CSFB’s conduct in Iguana “created the appearance” of an equity
investment yielding a true sale of assets, when “the reality was quite different” in that the
transaction was really a loan to Enron. Parmalat I, 376 F. Supp. 2d at 504. 121
Also, like the invoices in Parmalat I, the “fair market value” term in the Iguana put
agreement actually had “no economic role” in the transaction (376 F. Supp. 2d at 488) because
CSFB and Enron knew the assets would be repurchased at a price not determined by such, but
only at a price prearranged to provide CSFB with the guaranteed repayment amount it
anticipated. The “fair market value” term was “simply a device or excuse that permitted
[Enron]” (id.) to improperly treat Iguana as a sale under FAS 125. Such treatment “depended on
120
See Solomon App. at 175 (“The Iguana transaction failed to meet the requirements for
sale treatment because,” among other things, “the 3% outside equity investment in Salamander
Trust was not at risk due to the put agreement between ENA and Chuckwalla Trust.”).
121
See also Parmalat II, 383 F. Supp. 2d at 625-26 (holding that transactions with shell
entity formed by law firm “‘created the appearance of a conventional’ sale and loan ‘when, in
fact, the reality was quite different’”).
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a fiction, namely” (id. at 504) that the “fair market value” term would be honored, when it was
never intended to be. Parmalat thus again establishes that CSFB is liable here under Rule 10b-
5(a) and (c).
Also significant is the fact that in providing this disguised loan to Enron, CSFB
established and used a shell SPE, Salamander. In Parmalat I, Judge Kaplan expressed his
agreement (with one minor exception not applicable here) with the holding of Lernout, 236 F.
Supp. 2d at 170-71, that upheld as actionable under Rule 10b-5(a) and (c) “allegations that an
issuer’s business partners had created shell companies, knowing that the issuer intended to enter
into bogus licensing agreements with them and thus to inflate its bottom line.” Parmalat I, 376
F. Supp. 2d at 502. Also, in Parmalat II, Judge Kaplan upheld claims against outside lawyers
because they “created and controlled” “shell companies” to consummate a “sale” that was
really “a fiction” designed to permit Parmalat to misreport it. 383 F. Supp. 2d at 625.
This same analysis applies here. Again, CSFB created and controlled the shell
Salamander SPE to consummate the fake sale of the Iguana assets to Enron; CSFB understood
itself as “Red Salamander’s beneficial owner” (Ex. 11079 at CSFBLLC000125536) and used its
control of Salamander to purchase the Certificates (10/29/04 Scott Depo. Tr. at 708:6-11). Scott
confirmed in deposition that Salamander had no operating history, and he suspiciously had no
explanation for how it was created:
Q. Had you ever tried to sell anything to a Red Salamander Limited Company
prior to the Iguana transaction?
A. Not that I recall.
Q. And do you know whether DLJ had owned a Red Salamander Limited
Company prior to the Iguana transaction?
A. Not that I recall.
Q. Did you have an understanding that DLJ created Red Salamander Limited
Company specifically for the purposes of buying Iguana certificates?
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* * *
A. I just don’t recall how the entity was created.
10/29/04 Scott Depo. Tr. at 707:10-24.
Iguana was also a sham SPE because it purported to be an entity supplying
“independent” 3% “at risk” “equity” when, in fact as established above, this “equity” was not
truly “at risk,” nor was it “independent,” as Salamander (CSFB) colluded with Enron to
acquiesce in a preordained “failed auction” and “appraisal” process that was really a stratagem to
obtain guaranteed repayment of the Certificates. CSFB – through Salamander – really supplied
Enron with just financing (i.e., a loan). This renders CSFB liable under the SEC’s test as well,
which visits liability when an “investment bank engages in the creation of a sham entity as part
of . . . services to arrange . . . financing” that the client will use to commit securities fraud. SEC
Brief (Ex. 3) at 20.
Iguana was also clearly a transaction whose “principal purpose and effect” was to create
the false appearance of fact, under the purview of the SEC test and Homestore. With the
expectation of the complete return of the full amount of the Certificates plus a yield, and having
orchestrated the “failed auction” and dummy “appraisal” ruse, CSFB knew that the 3% “at risk”
requirement for FAS 125 treatment was not met, and thus there was no “sale” of the Iguana
assets. At the same time, CSFB knew that Enron would not carry the Iguana proceeds as debt on
its balance sheet, fraudulently treating the transaction as a sale under FAS 125.
Scott indicated CSFB’s understanding that the bonds issued by Salamander were a loan
that Enron had to repay:
Q. And at least for the senior secured notes, $202 million from the proceeds
of the sale of senior secured notes goes to Enron North America, correct?
A. I think that’s what this says.
Q. And senior secured notes, is that another term for a bond?
- 108 -

A. I think in this case it wasn’t a bond, I think it was short – well, it was a
short-term bond, so yes, I guess that is another way to say that.
Q. Another way to say a bond is a loan?
* * *
A. It’s the senior secured notes of Iguana Limited, so that is another way to
say a loan.
Q. And this is money that has to be paid back?
A. Yes, I believe so.
10/29/04 Scott Depo. Tr. at 708:21-709:16.
Q. Didn’t Iguana owe the 200 plus million dollars in the bond proceeding
from the debt?
A. I don’t recall specifically.
* * *
Q. Isn’t it Iguana, the limited company, that DLJ owns the trust certificates in
that issued the bonds?
* * *
A. I believe from looking at this memo that seems to be the case.
Q. So as the owner of the entity that issued the bonds, is DLJ on the hook for
the 200 million in bonds that need to be repaid?
A. I do not believe that DLJ was.
Q. Why not?
* * *
A. As I recall, the bonds were guaranteed by Enron.
Q. So Enron’s on the hook for the bonds?
A. I believe so. I’d have – I don’t have the structure here in front of me, but I
believe that’s the case.
10/29/04 Scott Depo. Tr. at 720:3-721:3.
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CSFB also understood that despite the status of the Notes as creating a loan obligation for
Enron, Enron would not account for the proceeds as a loan, using FAS 125, and that this was the
purpose and effect of executing Iguana in the manner that it was:
Q. Now, Enron North America which received the $202 million from the sale
of these bonds, did they carry the $202 million of debt on their books?
* * *
A. I don’t know for sure. I don’t believe they did.
Q. And why don’t you believe that they did?
A. Because my recollection is this was done in a transaction that was not
treated as debt on the books.
Q. And why do you have that understanding?
A. Because I believe that that is why Project Iguana was structured the way
it was as a FAS 125 transaction so that they would get a certain accounting
treatment.
* * *
Q. And you knew that Iguana was being structured in such a way as to keep
this $200 million of proceeds from appearing on Enron’s books, correct?
* * *
A. I think the 200 million of proceeds would appear. I mean the cash that
they received would appear on their books.
Q. The cash would appear. Would the debt appear?
A. I don’t – I don’t – no, I don’t believe it would have . . . .
10/29/04 Scott Depo. Tr. at 709:17-710:10, 711:20-712:9. This purpose and effect of Iguana was
deliberate:
Q. Was one of the reasons that Iguana was structured the way it was was so
that Enron could receive 200 million plus dollars from the sale of bonds without
the obligation to repay those bonds showing up on Enron’s books?
* * *
A. That may have been one of the goals that Enron had on this transaction.
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Id. at 710:25-711:9.
Thus, one clear purpose and effect of Iguana was to allow CSFB to supply Enron with
financing, but permit the Company not to report it as such, creating the “false appearance of fact”
(Homestore, 452 F.3d at 1048 (describing its own and SEC’s test)) that Enron’s debt
commitments were less than they actually were. CSFB is in this way too liable under Rule 10b-
5(a) and (c). 122
Finally, CSFB’s assertion with regard to FAS 125/140 transactions that the Bank
supposedly was never given an “oral side agreement” (Defs’ Mem. at 40), is unavailing as
irrelevant – just a red herring to distract this Court. As established above, the Iguana deal was
inherently deceptive because it presented a “market value” put agreement, but in reality the deal
offered guaranteed, no-risk repayment of the Certificates. Whether one labels this arrangement
as the product of an “oral side agreement” or not is mere semantics – ultimately, the transaction’s
features were deceptively disguised. Regardless of the label employed, the same species of
actionable deception is present in the deal. 123
122
The fraudulent “purpose and effect” of the Iguana deal is also established by the fact that
Enron guaranteed repayment of the Notes through what was called a “total return swap”
(“TRS”). See Ex. 11077 at CSFBLLC000025083 (12/8/99 Memorandum from Energy & Power:
Dwight Scott, Paul Davis and Bill Jukes and Structured Products: Larry Nath and Peter
Woodbury to Banking Review Committee, December 8, 1999) (“The Notes will be
unconditionally and irrevocably supported by Enron through a total return swap which will
effectively guarantee the payment of principal and interest on the Notes.”). The TRS separately
and independently disqualified Iguana for legitimate FAS 125 treatment because it vitiated
Enron’s ostensible relinquishment of control over the Iguana assets. See Solomon Report at 30
n.58 (“Using a TRS in the FAS 125/140 transactions, Enron would effectively guarantee the
repayment of the SPE’s debt by agreeing to pay the principal and interest obligations of the SPE
while remaining entitled to all the benefits of the asset.”). Having entered into the TRS with
Enron, CSFB was obviously aware of this reality.
123
This same observation applies to the Nile and Nikita deals, discussed infra. Each of these
deals were inherently deceptive. As such, CSFB’s claimed lack of an “oral side agreement” is
irrelevant.
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(2) Nile: Fake “Sale” of Assets
The September 2001 transaction referred to as “Nile” was another of CSFB’s FAS
125/140 deals with Enron – a purported “sale” of assets to a third party – similar in basic
operation to Iguana. As such, it was subject to the same requirement that the entity purporting to
purchase the assets be independent, and have 3% of the purchase price composed of “equity” that
was “at risk” at all times – i.e., not simply be debt. See Solomon Report at 28, 32. But also like
Iguana, this 3% equity requirement was not met in Nile. CSFB understood this was the case, and
that Nile was thus simply a loan to Enron – but once more, CSFB acted to conceal this fact. Nile
was really a loan to Enron that falsely appeared as a sale of assets.
In simplified terms, Nile operated as follows: The assets purportedly sold in the deal
were 24.1 million shares of common stock in an Enron subsidiary named ServiceCo Holdings,
Inc. (“ServiceCo”). 124
Enron (through a holding company) contributed the ServiceCo shares to
Pyramid I, LLC (“Pyramid”), receiving in exchange a Class A interest of 100% of the voting
interest and .01% of the economic interest in Pyramid. 125
Pyramid transferred its Class B
interest, entitled to 99.99% economic interest in Pyramid and no voting rights, to Sphinx Trust
(“Sphinx”) in exchange for $25 million cash. 126 The $25 million was distributed to Enron. 127
Sphinx financed the purchase price of the Class B interest by obtaining a $24 million loan from
124
Ex. 15 at AB112800092-097 (10/1/01 Project Nile/ServiceCo Monetization); Solomon
App. at 235.
125
Ex. 16 at AB112800098-101 (11/7/01 Project Nile – FAS 140 Financing Involving EES’
Newco); Ex. 17 at CSFBCO006052296-336 (9/28/01 Amended and Restated Limited Liability
Company Agreement of Pyramid I Asset, LLC).
126
Ex. 16 at AB112800098-101 (11/7/01 Project Nile – FAS 140 Financing Involving EES’
Newco).
127
Ex. 17 at CSFBCO006052296-336 (Amended and Restated Limited Liability Company
Agreement of Pyramid I Asset, LLC); see also Solomon. App. at 235-37.
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CSFB and issuing $1 million of Certificates (“Certificates”) to CSFB. 128
Thus the arrangement
appeared as follows:
Enron Corp.
Enron North
America
24.1 M
Shares of
ServiceCo
EES Service
Holdings, Inc.
$25 M and
Pyramid Class A Interest
(0.01% economic interest
and voting control)
Total Return Swap
(guaranteed by Enron)
$24 M Loan
CSFB
Pyramid I,
LLC
$25 M
Pyramid Class B Interest
99.99% economic interest
and no voting
Sphinx Trust
Equity Investment
$1 Million
CSFB
The Certificates purported to be the 3% “at risk” “equity” from an “independent” party in
the deal. But they were not truly “at risk,” as Enron guaranteed that it would repurchase the
ServiceCo shares from CSFB at full value.
CSFB, however, disguised the fact that the 3% “equity” was not truly at risk. In Nile, the
Bank secured a put agreement from Enron that the Company would repurchase the ServiceCo
shares back from CSFB at “par” value – i.e., full value. This guaranteed complete repayment of
the Certificates to CSFB, thus eliminating the requisite “at risk” character of the Certificates.
CSFB concealed this fact by labeling the put agreement in the deal documents as one for
128
Ex. 18 at CSFBCO006052270-71 (9/28/01 Asset Notice).
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“market” value – falsely indicating that there was some risk because, theoretically, the value of
the ServiceCo shares could change. This deception operated to mask Nile as a “sale” of assets,
when its reality was that of a loan to Enron.
CSFB practiced further deception in Nile by presenting a valuation of the ServiceCo
shares it knew was inflated. (CSFB was unconcerned the Nile assets were overvalued because
the Bank was not truly buying them, just making it appear as such.) CSFB’s conduct
misrepresented the true value of the proceeds of the asset “sale” reported by Enron, making the
Nile transaction inherently deceptive.
Lead Plaintiff has uncovered a large body of evidence demonstrating CSFB’s deception
in Nile. CSFB’s own documents establish that the Bank understood Nile to be really just a loan
to Enron. Just as was the case with the 2000 and 2001 Prepays, Nile was presented for approval
to CSFB’s credit risk management department – which reviews loans – not equity:
Q. Now, credit risk management is your group, correct?
A. Correct.
Q. Was there a separate group that dealt with when CSFB was going to buy
an asset?
A. We have, I believe, more than one group that’s involved in buying assets.
We participate in buying equity and leveraged buyouts or management buyouts.
Q. Is that your group if there’s going – if CSFB is going to buy equity in a
leveraged buyout, would that go to your group?
A. No. We may pass judgment on a debt but not the equity.
Q. So if it’s equity, it’s not your group?
* * *
A. Generally speaking, it’s not our – it’s not our responsibility to pass
judgment on equity.
3/17/05 Devine Depo. Tr. at 125:5-126:16; see also id. at 126:16-127:9; Ex. 50047 (Moran email
dated September 26, 2001: “Credit has already approved this transaction [Project Nile].”). In
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fact, both aspects of the Nile transaction (both the debt and the supposed “equity” funding) were
presented to CSFB’s credit risk management group. See Ex. 50044 at CSFBCO005292627-28.
CSFB’s Ogunlesi testified that true equity investments in SPE transactions would not
need approval from the credit risk management group. See 12/6/04 Ogunlesi Depo. Tr. at 78:23-
79:4.
Indeed, in deposition Devine was unable to recall a single instance where credit risk
management reviewed an equity investment:
Q. Can you think of any instance where credit risk management was asked to
look over equity versus looking over debt, to pass on equity versus passing on
debt?
A. I cannot recall a meeting where we were specifically asked to look at
equity as opposed to looking at debt.
Q. Because equity is not your area?
A. It’s not my area.
3/17/05 Devine Depo. Tr. at 126:25-127:9.
Moreover, memoranda submitted to the credit department repeatedly identify CSFB’s
funding of the Nile transaction – even the supposed “equity” portion – as a loan. For example,
the Nile deal was funded in two tranches, with “Tranche A” corresponding to the 97% debt, and
“Tranche B” for the supposed 3% “equity.” See Ex. 50098 at ERN0124468 (September 19, 2001
credit memorandum). But in the credit documents, even Tranche B is identified as a loan: “The
Company plans to issue the debt in two tranches – Tranche A (97% or $135.8 million) and
Tranche B (3% or $4.5 million) . . . .” Id.
And Tranche B was a loan because the Nile deal contained a put agreement that allowed
CSFB to retransfer the assets (i.e., the ServiceCo shares) at “par” value – that is, guaranteeing
CSFB that it would receive back 100% of the amount it paid for the Certificates: “Tranche B
debt [i.e., the supposed 3% “equity”] is supported by an Enron put which requires Enron to
- 115 -

purchase at par the principal and interest of Tranche B (CSFB will be the calculation agent).”
Id. CSFB’s VP of investment banking at the time, Brian McCabe (who worked to structure
Nile), was forced to concede that “to put an investment back at par means . . . to sell it back at
100 percent.” 2/18/05 Deposition Transcript of Brian McCabe (“2/18/05 McCabe Depo Tr.”) at
365:17-19. Thus, far from being an “equity” investment, the CSFB’s exposure on the
Certificates was “Credit Risk” “100% Enron via put” – a simple loan guaranteed by Enron. Ex.
50098 at ERN0124469.
The evidence that CSFB intended and understood that all of the Nile financing was a loan
to Enron, with even the “equity” guaranteed by a put “at par,” is both clear and abundant. The
above-discussed September 19, 2001 credit memorandum also states that:
• “Project Nile. Enron has asked CSFB to agent and underwrite 50% of $140
million of debt securities with a tenor of two years . . . .”
• “Facility”: “FAS 140 financing in the form of a two-year loan.”
Ex. 50098 at ERN0124468-69. Credit memoranda dated September 18, 24 and 28, 2001,
contained these same provisions, along with ones that “Tranche B debt is supported by an
Enron put which requires Enron to purchase at ‘par’ the principal and interest of Tranche B
(CSFB will be the calculation agent)” and that Tranche B “Credit Risk” is “100% Enron via
put.”
See Ex. 50853A at CSFBCO000214321, CSFBCO000214323; Ex. 50854A at
CSFBCO006011362-63; Ex. 50855A at CSFBCO0005423761-62.
Another Nile credit
memorandum states:
• “Enron Corp. . . . has asked CSFB to place approximately $140 million of debt in
two tranches – Tranche A ($136 million) and Tranche B ($4 million) . . . .”
• “The Tranche B debt will allow CSFB to put the debt back to Enron at ‘par’ and
the interest component will be covered by the TRS [total return swap].”
• “Tranche B will offer the ability to put the debt back to Enron at ‘par.’”
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Ex. 10211 at CSFBCO0005423523 (August 21, 2001 credit memorandum). And the October 10,
2001 credit memoranda, prepared after Nile closed, confirms the transaction was “a two-year
term loan” – the “Tranche B debt,” which CSFB bought, was supported by a put “at par” and
CSFB’s “credit risk” in the structure was “100% Enron via put.”
Ex. 50049 at
DPOEX00000372-73. Devine confirmed that the credit memoranda presented the put as a 100%
guarantee of the Tranche B debt:
Q. So Enron was on the hook for a hundred percent of traunch[sic] B. Would
that be a layman’s terms way of interpreting that?
* * *
A. This appears to be saying that there is a hundred percent Enron put, a put
to Enron for one hundred percent of traunch[sic]B.
Q. Meaning that CSFB would be able to recover a hundred percent of the
value of traunch[sic] B from Enron by use of the put, correct?
* * *
A. On a quick read of this, what you’re asking me to look at, that’s what it
appears to be saying.
3/17/05 Devine Depo. Tr. at 299:15-300:4.
Thus, at least five credit memoranda, sent to and reviewed by senior credit risk managers,
including Chief Credit Officer Bob O’Brien, described the Nile put in terms of a loan in four
different ways. 129
Also, the New Bank Opportunities Form for Nile, submitted by Abib on
September 26, 2001, described Nile as a “2-year fully funded loan.” Ex. 13128A at
CSFBLLC005019430. And every credit memorandum regarding Nile – from CSFB’s initial
129
That is: (1) Enron “plans to issue the debt in two tranches”; (2) “an Enron put which
requires Enron to purchase at par the principal and interest of Tranche B”; (3) “FAS 140
financing in the form of a two-year term loan”; and (4) credit risk is “100% Enron via put.” See
Ex. 50049 at DPOEX00000372-73; Ex. 50098 at ERN0124468-69; Ex. 50853A at
CSFBCO000214321, CSFBCO0000214323; Ex. 50854A at CSFBCO006011362-63; Ex.
50855A at CSFBCO0005423761-62.
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work on the structure to one prepared almost two weeks after the transaction closed – identified
CSFB’s Nile “equity” interest as protected by a put “at par.”
But while CSFB’s internal documents establish that the Nile “equity” was actually
guaranteed by a put “at par,” CSFB acted to conceal this fact by executing final deal documents
that identified the put as being “FMV,” of fair market value” (see Ex. 32307 at
CSFBLLC006052311) – again, indicating that the 3% “equity” was at risk because, theoretically,
the market value of the ServiceCo shares could change. Thus, on paper CSFB presented the Nile
transaction as a legitimate FAS 140 deal with 3% “equity” “at risk,” when the reality was that of
a loan with the 3% fully guaranteed. 130
The deception wrought by CSFB’s disguising of the
transaction allowed Enron to understate debt and financing cash flow each by $25 million, and
overstate cash from operating activities by $22.2 million and income by $18.9 million. Solomon
App. at 235.
This inherently deceptive conduct by CSFB clearly renders it liable under Rule 10b-5(a)
and (c). Because CSFB’s final deal documents presented the put as being “at market” when the
actual, concealed agreement with Enron was that the put would be “at par,” CSFB presented the
Nile transaction as a legitimate FAS 140 deal with 3% “equity” “at risk,” when the reality was
that of a loan with the 3% fully guaranteed. Thus, CSFB’s conduct in Nile resembled in
substance the invoice schemes held actionable in Parmalat I, as CSFB “created the appearance”
of an equity investment yielding a true sale of assets, when “the reality was quite different” in
130
There exists evidence suggesting that CSFB’s deception here was calculated to deceive
Andersen. This goal is suggested by the fact that at one point, CSFB asked Enron to increase the
yield on the tranches “to make the cash flow an Enron risk.” But Enron rejected the idea because
“Arthur Andersen would look right through that gross up as Enron risk” 7/21/04 Moran Depo.
Tr. at 140:6-13, 142:2-5.
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that the transaction was really a loan to Enron. Parmalat I, 376 F. Supp. 2d at 504. 131
Just like
the invoicing schemes, Nile was an inherently deceptive transaction because it appeared to be
something it was not. Also, like the invoices in Parmalat I, the “fair market value” term of the
put agreement in the Nile deal documents actually had “no economic role” in the transaction
(376 F. Supp. 2d at 488) because the true agreement was that Enron would repurchase the assets
“at par.” The “fair market value” term was “simply a device or excuse that permitted [Enron]”
(id.) to improperly treat Nile as a sale under FAS 140. Such treatment “depended on a fiction,
namely” (id. at 504) that the “fair market value” term was the true agreement of the parties, when
it was not. Parmalat thus again establishes CSFB’s liability under Rule 10b-5(a) and (c).
These observations also establish CSFB’s liability for Nile under the SEC’s test and that
of Homestore. Nile was clearly a transaction whose “principal purpose and effect” was to create
the false appearance of fact. The parties’ true agreement was that of a complete return of the full
amount of the Certificates to CSFB given the put “at par,” but the final deal documents executed
by CSFB deceptively concealed this by presenting the put as being at “fair market.” It is
precisely this deception that enabled the improper accounting treatment of Nile under FAS 140,
directly resulting in the fraudulent overstatement of cash flow from operations and income, and
the understatement of debt and cash flow from financing activities. Solomon App. at 235. 132
131
See also Parmalat II, 383 F. Supp. 2d at 626 (holding that transactions with shell entity
formed by law firm “‘created the appearance of a conventional’ sale and loan ‘when, in fact, the
reality was quite different’”).
132
Also like Iguana, the fraudulent purpose and effect of Nile is established on the separate
and independent ground that Enron entered into a TRS with Sphinx, obligating Enron to pay an
amount equal to the interest and principal due to CSFB under the loan to Sphinx. In return,
Sphinx agreed to pay Enron all monies received from the interest in the ServiceCo shares other
than amounts distributable to CSFB, Sphinx’s “equity” investor. The TRS ensured that the
interest and principal due CSFB on the loan would be paid irrespective of the actual cash flows
derived from the underlying asset (i.e., ServiceCo). See Ex. 19 at CSFBLLC006052247-57
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In fact, the evidence establishes that CSFB’s fraudulent conduct in Nile actually deceived
Andersen, directly resulting in the improper accounting treatment for the deal. As John Stewart
testified: 133
Q. Is it your belief that since you were at Andersen you have learned of
information which suggests information was knowingly concealed from Andersen
by Enron and Credit Suisse First Boston?
A. Yes.
* * *
9/29/05 Stewart Depo. Tr. at 1200:16-21. Stewart and other former Andersen accountants and
auditors have testified that neither they nor anyone at Andersen to their knowledge was aware of
any side agreement that Enron had agreed to repurchase the equity of a 3% equity investor in any
FAS 125/140 transaction. See, e.g., 9/29/05 Stewart Depo. Tr. at 1179:4-14; 7/18/06 Deposition
Transcript of Carl Bass (“7/18/06 Bass Depo. Tr.”) at 333:7-21; 7/6/06 Deposition Transcript of
Michael Odom (“7/6/06 Odom Depo. Tr.”) at 284:17-286:15, 288:10-20.
For example, Stewart testified:
Q. While you were at Andersen, did you ever become aware that in a side
agreement, Enron had agreed to repurchase the equity of a purported 3 percent
equity investor in an Enron FAS 140 transaction through an at par put?
* * *
(9/28/01 TRS Confirmation Relating to Sphinx Trust Series A). Thus, Nile failed to meet the
requirements for sale treatment because “Enron maintained the risks and rewards of ownership
of the asset through the TRS.” Solomon App. at 236. And in addition, Nile was further not
entitled to sale treatment for the third independent reason that Enron had not relinquished control
over the asset due to the voting control it maintained over Pyramid through the Class A interest.
Id.
133
Stewart was the head of the Accounting Principles section of Andersen’s Professional
Standards Group and was the top expert with whom the Enron engagement team regularly
consulted in evaluating Enron’s accounting. 9/29/05 Deposition Transcript of John Stewart
(“9/29/05 Stewart Depo. Tr.”) at 1187:23-1188:8.
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A. No.
Q. To your knowledge, did anyone at Andersen become aware of that?
* * *
A. No.
Q. Andersen should have been told about that, correct?
* * *
A. That’s correct.
9/29/05 Stewart Depo. Tr. at 1179:4-18. Had Andersen become aware of such a side agreement
or verbal assurances concerning the repayment of equity in an SPE, it would not have approved
the accounting for the transaction, as that “would have caused the accounting to change
dramatically.” 9/29/05 Stewart Depo. Tr. at 1109:12-1111:13. See also 9/29/05 Stewart Depo.
Tr. at 1182:7-12; 7/18/06 Bass Depo. Tr. at 334:14-21; 7/6/06 Odom Depo. Tr. at 288:21-289:14.
It would not have mattered whether or not the verbal assurances were legally enforceable or the
side agreements were strictly verbal. See, e.g., 9/29/05 Stewart Depo. Tr. at 1183:15-1184:4;
7/18/06 Bass Depo. Tr. at 337:14-338:13; 7/6/06 Odom Depo. Tr. at 290:5-291:15.
CSFB’s conduct in concealing the “at par” put falsified Enron’s accounting and financial
reporting because proper reporting would have required consolidation of the SPE in Nile. See
9/29/05 Stewart Depo. Tr. at 1180:11-13; 7/18/06 Bass Depo. Tr. at 335:7-13. Consequently, the
proceeds received by Enron would have been “shown as a borrowing debt as opposed to a sale.”
9/29/05 Stewart Depo. Tr. at 1111:5. And the transfers of financial assets would have been
eliminated in consolidation and no sales (revenues), gains on the transfers (profits), or proceeds
from the sales (operating cash flow) would have been reported in Enron’s consolidated financial
statements. See, e.g., 7/18/06 Bass Depo. Tr. at 335:18-336:2.
John Stewart testified about the change to the accounting as a result of the “at par” put in
Nile as follows:
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Q. Now, if, as stated in the description of the Nile transaction that I’ve read to
you from Mr. Batson’s report Enron agreed to repurchase CSFB’s 3 percent
equity with an at par put, would that have affected the accounting treatment?
* * *
A. Yes. That would have meant, again that the equity, 3 percent equity put
in by the third party would not have been at risk. Had the assets owned by the
SPE gone down in value, the equity investor was protected by Enron; and,
therefore, their equity was not at risk and, therefore, it would have failed the EITF
issued 90-15 for non-consolidation treatment. . . .
So the accounting would have been very different and not achieved nonconsolidation.
9/29/05 Stewart Depo. Tr. at 1179:19-1180:13. Stewart explained his understanding of the “atpar”
put and its effect on risk in the SPE:
Let’s have a hypothetical that the SPE has $100 of assets, $97 of debt and
$3 of equity. Time goes by, values of the assets change, up, down, let’s say they
go down. That’s, I think, what most people are concerned about is the risk. That
the holder of the 3 percent, the $3 certificate, equity certificate, if they are an
owner of an at par put, they would have the ability to take their $3 equity
certificate and no matter what the value of the assets that support that could put
that certificate back to Enron for $3, even if it were worth on a fair value basis
ignoring the put a number substantially less than that. So they, in effect, they’re
protected I’m taking the $3 – the par to be $3 in my simple example.
9/29/05 Stewart Depo. Tr. at 1180:18-1181:7. Former Andersen auditor Carl Bass confirmed
this, testifying, “in essence, . . . they’re guaranteeing them their equity return – or guaranteeing
that the principal of the equity will be returned to them,” and the “at-par” put is the type of
impermissible verbal assurance that the SEC has said must be disclosed to auditors. 7/18/06
Bass Depo. Tr. at 381:18-382:13.
Indeed, as testified by Michael Odom, the Andersen Practice Director on the Enron
engagement team during 2000-2001, if a side agreement or verbal assurance in a FAS 125/140
transaction such as the “at-par” put in Nile were discovered, “Certainly, I would have been
concerned that we had more than an accounting issue. . . . [W]e would have a potential
situation where a fraud is involved.” 7/6/06 Odom Depo. Tr. at 289:12-19. See also 7/18/06
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Bass Depo. Tr. at 433:6-434:1; 11/30/05 Deposition Transcript of Gary Goolsby (“11/30/05
Goolsby Depo. Tr.”) at 469:7-471:7.
Side agreements (verbal assurances, verbal understandings, oral guarantees, etc.,) such as
the ones that are prevalent in this case between Enron and certain of its banks (including CSFB)
are material facts because they evidence such a perilous form of deception. 134 Such deception –
collusion – is widely recognized as extremely dangerous to a company’s financial statements and
the auditing of those financial statements. 135
For example, audit standard AU §230 states:
Because of the characteristics of fraud, a properly planned and performed
audit may not detect a material misstatement. Characteristics of fraud include (a)
concealment through collusion among management, employees, or third parties;
(b) withheld, misrepresented, or falsified documentation . . . . For example,
auditing procedures may be ineffective for detecting an intentional misstatement
that is concealed through collusion among personnel within the entity and third
parties or among management or employees of the entity. Collusion may cause
the auditor who has properly performed the audit to conclude that evidence
provided is persuasive when it is, in fact, false. . . . Furthermore, an auditor may
not discover the existence of a modification of documentation through a side
agreement that management or a third party has not disclosed.
Drott Depo. Ex. 46 at §12. See also 12/7/04 Deposition Transcript of Debra Cash (“12/7/04
Cash Depo. Tr.”) at 1649:24-1650:7. As former Andersen audit partner Debra Cash testified
with respect to verbal assurances by Enron concerning the repayment of equity to SPE investors
134
It does not matter what one calls the communication between the parties for purposes of
determining whether the communications at issue between Enron and certain of its banks in this
case evaded accounting requirements. See 7/17/06 Deposition Transcript of Carl Bass (“7/17/06
Bass Depo. Tr.”) at 304:8-305:16; 5/15/06 Deposition Transcript of John Foster (“5/15/06 Foster
Depo. Tr.”) at 54:4-22; 5/17/06 Deposition Transcript of Stephen McEachern (“5/17/06
McEachern Depo. Tr.”) at 221:16-222:9.
135
Experts and fact witnesses in this case agree that “collusion,” a term of art in the
accounting and auditing profession, is deceptive conduct by parties to a transaction that impacts
the accounting for the transaction. See, e.g., 1/17/06 Expert Report of Charles R. Drott (“Drott
Report”) at §2.11; 5/15/06 Foster Depo. Tr. at 279:13-19; 5/17/06 McEachern Depo. Tr. at
229:17-230:1; 5/23/06 Deposition Transcript of Mark Murovitz (“5/23/06 Murovitz Depo. Tr.”)
at 117:1-6; 7/5/06 Deposition Transcript of Michael Odom (“7/5/06 Odom Depo. Tr.”) at 237:3-
16; 7/17/06 Bass Depo. Tr. at 291:4-15.
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in FAS 125/140 transactions, “the fact that this arrangement exists is material to Enron’s
financial statements.” 12/7/04 Cash Depo. Tr. at 1664:5-6, 1664:22-24 . See also id. at 1663:2-
1665:15.
But CSFB committed additional acts of deception in Nile. As indicated, CSFB also
manufactured a knowingly inflated valuation of the Nile assets (the ServiceCo shares). Enron
had asked CSFB to fabricate a justification for the Company’s desired $500 million valuation for
ServiceCo. As CSFB’s McCabe stated, CSFB’s job was to “craft a story which defends the
valuation of ServiceCo.” Ex. 13105A at CSFBLLC000088742. At the outset, CSFB understood
that ServiceCo was not worth the $500 million valuation Enron wanted.
McCabe, in an email to CSFB Enron relationship manager Abib, openly criticized
ServiceCo’s $500 million target valuation as “ very aggressive”:
EES (Mark Muller and his team) have a company that they own and are creating
another New Power type story . . . .
* * *
They gave us a model a week or so ago with (in my view) a very aggressive
valuation ($500mm pre-money). I have told them their valuation is too
aggressive and have been drilling them on the model assumptions over the past
week.
Ex. 13106A. McCabe went on to tell Abib he planned to “deliver some disappointing news to
Muller on our view of the [ServiceCo] valuation,” and that he doubts there will be interest in an
investment “at this valuation level.” Id. In fact, in discussing the valuation, McCabe labeled the
ServiceCo business as a “pipe dream.” Ex. 13107A; see 2/17/05 Deposition Transcript of Brian
McCabe (“2/17/05 McCabe Depo. Tr.”) at 277:25-280:22 (McCabe could not recall labelling any
of his other client’s businesses as “pipe dreams.”).
CSFB’s internal acknowledgment of the valuation as unsupportable is corroborated in an
email entitled “ServiceCo,” where CSFB’s William Byers demands that the bankers “cut the
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crap” from the ServiceCo valuation, calling out certain ServiceCo revenue estimates as just
“fluff”:
Ex. 13109A.
Handwritten plan of attack.
* * *
[E]xisting business (time to cut the crap and lay it out concisely by moving from
anecdotes and snippets to a comprehensive view/buildup)
Entrust Revenue Estimates
* * *
Talking to Brandon, I got very little comfort that these numbers are no more
than fluff.
But in the same document, Byers plainly reveals CSFB’s “plan”: to nevertheless find
“justification for the model” (id.) – that is, despite knowledge that Enron’s desired justification
was unsupportable, CSFB would manufacture a case to support it. The Bank jumped at the
chance to please its favored client by falsifying the valuation for the Company. Despite CSFB
bankers’ serious reservations about the valuation, CSFB’s John Glazer wrote that the Bank
would be “happy to work with [Enron] to structure something with downside protection and give
them whatever valuation they want. I will try to make sure we get the chance to say it directly
to Mark [Mueller of Enron], if Brian [McCabe] lets us.” Ex. 13116A. 136
136
CSFB is in no position to assert that this email indicates something other than the Bank’s
willingness to falsify the valuation. In deposition, McCabe responded with only an implausible
mixture of amnesia and confusion at the exceptionally clear statement of “whatever valuation
they want”:
Q. Do you know what that means, giving them whatever valuation they want?
A. I don’t recall.
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CSFB ultimately carried out this deception, somehow concluding that McCabe’s “pipe
dream” would generate “$4 [billion] in revenues in six years.” Ex. 13108A; see also Ex.
13107A. Although hardly needed, additional evidence that the valuation was known to be
unsupportable is found in McCabe’s complete inability to state what due diligence CSFB
supposedly did to justify the valuation. When queried about the internal CSFB document that
requested McCabe provide support for such things as the assumption of “$4 [billion] in revenues
in six years,” McCabe had nothing of substance to say:
Q. Mr. McCabe, who answered these questions?
A. I don’t know.
Q. Did you answer them?
A. These are questions that – well, I don’t know who answered them.
Q. Did you endeavor to answer them, sir?
A. I’m assuming that I did if all this was written out.
Q. And what did you do to answer these questions, sir?
A. I don’t know.
2/17/05 McCabe Depo. Tr. 281:24-282:12.
McCabe internally acknowledged the skill of CSFB’s bankers in falsifying the valuation.
In the very same email where he conceded that ServiceCo was a “pipe dream,” he offers the
accolade: “With respect to the valuation work, I think it turned out awesome.” Ex. 13107A.
Q. Is that a service that CSFB would provide to its clients, give them
whatever valuation they want if they use structuring?
A. I’m not sure.
2/17/05 McCabe Depo. Tr. at 322:2-9.
* * *
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Such deceptive conduct as well clearly renders CSFB liable under Rule 10b-5(a) and (c).
As described supra at §II.B.1., in Parmalat III, Judge Kaplan ruled actionable the plaintiff’s
allegations that BoA masked a loan to Parmalat because, while BoA purported to supply an
“equity” contribution, BoA had a “put agreement” which “guarantee[d]” repayment of this
“equity,” and BoA acquiesced in a dummy valuation of the assets supposedly purchased by the
“equity.” 414 F. Supp. 2d at 433. “The combination of the overvaluation and the put
agreement” “created the appearance” of an equity investment at a desired value. Id. at 435. The
same is true of CSFB’s conduct in Nile, given the put agreement “at par” and CSFB’s own
deceptive conduct in presenting a knowingly false overvaluation of ServiceCo. A similarly
felicitous analogy can be drawn between CSFB’s conduct in Nile and its alleged conduct in
Parmalat I, where Judge Kaplan held that the plaintiff’s allegations that CSFB overstated the
value of a bond conversion right “for the purpose of inflating Parmalat’s assets on its financial
statements” was actionable under Rule 10b-5(a) and (c). Parmalat I, 376 F. Supp. 2d at 505.
But CSFB is liable under Rule 10b-5(a) and (c) for Nile in yet an additional way. The
evidence establishes that CSFB structured Nile: A September 18, 2001 CSFB credit
memorandum includes McCabe’s handwritten changes to the Nile structure, evincing his input in
structuring the deal. See Ex. 13119A at CSFBLLC009703782; 2/18/05 McCabe Depo Tr. at
343:18-346:23. Among other things, McCabe identified certain vehicles in the structure as
“Asset LLC Pyramid One” and another as “Sphinx Trust.” Ex. 13119A at
CSFBLLC009703782; 2/18/05 McCabe Depo Tr. at 346:8-17. McCabe labeled other parts of
the proposed Nile structure and directed David Koczan, a subordinate of CSFB banker James
Moran, that CSFB “essentially need[ed] to remove SPV2.” Ex. 13119A at
CSFBLLC009703782.
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McCabe’s work here manifested itself in the final Nile structure. Compare Ex. 13119A
at CSFBLLC009703782 with Ex. 50049 at DPOEX00000372. In deposition, while hardly
forthcoming, McCabe could not bring himself to issue an outright denial that he structured Nile:
Q. Let me ask it this way: You have, for example, a line pointing to Sphinx
Trust. Do you see that?
A. Yes.
Q. And Sphinx Trust ultimately became part of the Nile transaction; did it
not?
A. I believe so.
* * *
Q. You wrote here on page 2 of this exhibit Sphinx Trust?
A. Yes.
* * *
Q. And doesn’t that indicate that your comments went into the final structure
of the Nile transaction?
A. It might.
* * *
2/18/05 McCabe Depo. Tr. at 497:19-25, 498:13-15, 499:3-7.
Structuring or designing a transaction which has the principal purpose and effect of
creating the false appearance of fact is sufficient for primary liability under Rule 10b-5(a) and
(c). The Court recognized this in its very recent ruling in the 6/5/06 Order that Lead Plaintiff’s
allegations regarding CSFB’s “structuring” “satisfy the requirements for pleading primary
violations of the statutes.” Enron, 2006 U.S. Dist. LEXIS 43146, at *170. Structuring is
sufficient for liability under Homestore, 452 F.3d at 1049. CSFB is thus liable in this manner as
well for Nile.
Finally, CSFB’s arguments that it is somehow not liable for Nile are meritless. CSFB
claims there is supposedly no “evidence” of an “oral side agreement” “to protect CSFB’s equity”
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in the deal. Defs’ Mem. at 40. This claim simply ignores the mountain of evidence discussed
above that CSFB’s understanding of the true agreement between it and Enron was that the Bank
had its equity guaranteed by the put “at par.” Because the deal documents falsely represented
that the put was “at market,” this is sufficient evidence of deception. 137
Enron’s court-appointed
examiner Batson similarly concluded that the evidence indicates the existence of a put “‘at par’”:
[E]vidence suggests that CSFB received risk protection for its 3% equity position
in the form of the right to put its 3% equity to Enron at par value. This put
prevents the equity from being at risk, which CSFB understood was required for
Enron to achieve its desired accounting results.
Ex. 7 at 74. Batson further found that “[a]lthough CSFB understood that its equity position in
the Sphinx trust ‘needed to be at risk’ to satisfy the accounting treatment that Enron gave the
overall transaction, the evidence indicates that Enron agreed to repurchase CSFB’s 3% equity in
project Nile ‘at par.’” Ex. 7 at 77.
CSFB claims that the credit memoranda references to the put being “at par” represent an
“an error” in the documents. Defs’ Mem. at 42 n.137. But a jury could reasonably resolve this
factual dispute in Lead Plaintiff’s favor, given the substantial evidence outlined above of
references to the put being actually “at par,” presented by and to numerous CSFB employees. 138
Moreover, that the language of the put being “at par” is not an error is strongly supported by the
evidence of CSFB personnel calling the deal a “loan” or “debt.”
137
This observation also disposes of CSFB’s contention that Nile is inactionable because the
Bank supposedly had “no fault” in the deal’s fraud. Defs’ Notice at 6. CSFB’s own actions in
falsely representing that the put was “at market” and presenting a false valuation of ServiceCo
were themselves deceptive conduct, and yielded the improper accounting treatment.
138
Indeed, Lead Plaintiff’s evidence is quite strong. For example, a credit memoranda,
prepared after Nile closed, also confirms in the transaction that the “Tranche B debt” was
supported by a put “at par.” Ex. 50049 at DPOEX00000372-73.
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CSFB’s contention here is further belied by the fact that there literally is nothing in the
record about CSFB correcting its supposedly erroneous Nile documents and communications.
No emails, no corrected Nile memos – not a shred of evidence these so-called errors were
reconciled by CSFB – despite the fact these memoranda were heavily vetted by CSFB bankers.
See, e.g., Exs. 50102, 50103 (circulating Nile draft memoranda for comments from CSFB
bankers). 139
And immediately before Nile closed, banker Abib specifically asked CSFB bankers
working under him to “better explain” in the Nile memos what was “meant by Enron’s
agreement to repurchase Tranche B debt at ‘par’ – what does this really mean?” Ex. 50045.
Such scrutiny would have smoked out any supposed “error.”
In any event, CSFB’s factual contention here cannot be used to obtain summary
judgment. See Songbyrd, 1997 U.S. App. LEXIS 12684, at *8 (the court should “construe all
evidence . . . without . . . resolving any factual disputes”). Neither is Lead Plaintiff bound by
any dismissal of Enron’s allegations concerning Nile in a bankruptcy proceeding, as CSFB
erroneously suggests. See Defs’ Mem. at 41-42.
Finally, CSFB simply ducks the issue in arguing that even if Nile had a put “at par,” the
transaction is inactionable under Parmalat I as a loan that only Enron disguised as an equity
investment. See Defs’ Mem. Supp. at 7. Once more, CSFB’s executing deal documents with the
put “at market” and presenting a knowingly false valuation of ServiceCo were deceptive acts by
139
Moran testified that if he had seen errors in the Nile memoranda, he would have corrected
them, including the terms for the equity portion of Nile and the “put-at-par,” because CSFB
officers rely on the accuracy of the memoranda. 7/21/04 Moran Depo. Tr. at 135:16-18; 7/22/04
Moran Depo. Tr. at 435:21-436:8. Asked if he corrected any errors in the Nile documents,
Moran’s replied: “No.” 7/21/04 Moran Depo. Tr. at 191:19-25; accord 7/21/04 Moran Depo. Tr.
at 116:9-12. And O’Brien testified that no one ever alerted him to any errors in the Nile credit
memos. 1/24/05 Deposition Transcript of Robert O’Brien (“1/24/05 O’Brien Depo. Tr.”) at
130:11-132:13.
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CSFB that “permitted [Enron] to record the [operational cash flow] and to conceal the liability”
on the deal. Parmalat I, 376 F. Supp. 2d at 488. They are thus actionable under Parmalat I.
(3) Nikita: Fake “Sale” of Assets
Nikita, another FAS 125/140 deal, operated in similar fashion to Iguana and Nile. Nikita
was a one-day transaction that netted CSFB a $1 million structuring fee for designing the deal.
As with Iguana and Nile, a 3% “at risk” “equity” contribution was required for FAS 125/140
treatment, but again, despite the fact that it only appeared to be present, but was not, Enron
treated the deal as a sale of assets. Nikita was consummated on or about September 28, 2001, to
falsify Enron’s 3Q01 financial results.
The subject assets in Nikita were Enron’s limited partnership interests in EOTT Energy
Partners, LP (“EOTT”), which was engaged in business concerning petroleum and natural gas. 140
Enron, through Nikita LLC, contributed its interest in EOTT to Timber I L.L.C. (“Timber”) in
exchange for a Class A 100% voting and .01% economic interest in Timber. 141
The Class A
interest entitled Enron to a special distribution from Timber in the amount of $80 million. 142
Timber sold its Class B 99.9% economic interest to Besson Trust for $80 million. 143
Besson
Trust obtained the $80 million by issuing an $8.1 million certificate of beneficial ownership to
CSFB and a $71.9 million note to Barclays. 144
140
Ex. 20 at AB000123311-316 (10/1/01 Enron Interoffice Memorandum to the files).
141
Ex. 21 at BARC000087323-64 (9/27/01 Amended and Restated Limited Liability
Company Agreement of Timber I, L.L.C.).
142
143
Id.
Id.
144
Ex. 22 at BARC000168492-99 (9/28/01 Certificate of Beneficial Ownership); Ex. 23 at
BARC000168604-625 (9/28/01 Facility Agreement).
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Barclays was to provide the requisite 3% “equity” in the deal. Barclays demanded, and
got, a secret promise – not reflected in the formal deal documents – from senior Enron officers
that Enron would “ensure repayment” of Barclays’ 3% “equity.” See Ex. 10491. 145
Shortly
before closing, however, Barclays determined it could not take the “equity” certificates due to
regulatory concerns. 146
CSFB then rescued the deal by agreeing to provide the fake “equity”
funding for Barclays. But as a condition, CSFB required Barclays to enter into a “Total Return
Swap” (“TRS”). 147
Pursuant to the TRS, Barclays agreed to pay to CSFB its original
“investment” plus interest. In turn, CSFB agreed to pay to Barclays the actual return it received
from its interest in Besson Trust. 148
The TRS resulted in Barclays essentially guaranteeing to
CSFB the return of its “equity.” 149
Diagrammatically:
145
See also 10/23/06 Fastow Depo. Tr. at 155:23-156:2 (“With respect to the methanol plant
and the EOTT transaction, I can say that I recall discussions with Rich Williams of Barclays
regarding the valuations of those assets, and I recall giving him assurances that they’d be
okay.”). Fastow testified that in FAS 125/140 transactions, he often gave oral assurances to
banks that operated to eliminate the equity risk, resulting in “the false appearance of – of
earnings and funds flow at Enron.” 10/24/06 Fastow Depo. Tr. at 513:6-24.
146
Ex. 10151 at 44 (4/22/03 John Meyer (Barclays) Sworn Statement to Enron Corp.
Bankruptcy Examiner); see also 7/21/04 Moran Depo. Tr. at 172:5-25; Ex. 50051 at
CSFBCO000097185; 2/18/05 McCabe Depo Tr. at 535:24-536:6.
147
Ex. 10470 at 436 (5/19/03 Richard Williams Sworn Statement to Enron Corp.
Bankruptcy Examiner); Ex. 50049 at DPOEX00000373.
148
Ex. 24 at CSFBCO000097185-86 (10/15/01 CSFB email from James Moran).
149
In order to secure the debt, Enron and Besson Trust also entered into a TRS. See Ex. 25
at BARC000087262-75 (9/28/01 TRS Confirmation between Besson Trust and Enron North
America) and Ex. 26 at BARC000087277-85 (9/28/01 Enron Guaranty between Enron Corp. and
Besson Trust). Pursuant to this agreement, Enron would pay to Besson Trust the principal and
interest due to Barclays under the $80 million loan agreement, and in exchange Besson Trust
would pay to Enron any funds it received in regards to its interest in EOTT. See Ex. 25 at
BARC000087262-75 (9/28/01 TRS Confirmation between Besson Trust and Enron North
America).
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As with Iguana and Nile, Nikita failed truly to meet the requirements for sale treatment
because the 3% outside “equity” was not “at risk” due to Enron’s guarantee that the investment
would be repaid. Solomon App. at 232. 150
Because this promise to guarantee repayment was
kept secret, Nikita only appeared to present the required “equity” at risk. Nikita directly resulted
in Enron understating its debt by $80 million and cash flow from financing by the same amount,
and overstating income by $10 million and cash flow from investing by $80 million. See
Solomon App. at 230.
Nikita was thus a transaction that had the “principal purpose and effect” of creating the
“false appearance of fact.” Homestore, 452 F.3d at 1048; see also SEC Brief (Ex. 3) at 18.
CSFB fully understood this.
150
Nikita further failed to warrant sale treatment for the additional reasons that Enron had
not relinquished control over the assets due to the voting control it maintained, and Enron
maintained the risks and rewards of ownership of the asset through the TRS into which it
entered. Id.
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As with Iguana and Nile, CSFB’s bankers presented Nikita for approval to the Bank’s
credit – not equity –committee. See Ex. 10214 at CSFBCO0005423759. The Nikita credit
memorandum went to senior credit risk managers O’Brien, Maletta and Devine. See id. As
discussed, Devine confirmed that true equity transactions were not submitted for credit approval.
3/17/05 Devine Depo Tr. at 125:17-24-127:9. Ogunlesi, who received the Nikita credit
memorandum, also confirmed that actual “equity investments” in SPE transactions needed no
approval from O’Brien’s credit risk group. 12/6/04 Ogunlesi Depo. Tr. at 78:23-79:4. Pursuant
to his duties to review proposed credit deals, O’Brien approved Nikita. See Ex. 10214 at
CSFBCO0005423759; Ex. 50051 at CSFBCO000097185 (Moran notes O’Brien’s approval).
CSFB knew its $8.1 million “equity” investment in Nikita was never at risk. Moran (a
Nikita deal team member) characterized CSFB’s “equity” investment as “our loan.” Ex. 50108.
He later again described Nikita as a disguised debt transaction. See Ex. 50051. Moran also
understood that Nikita was “structured ‘identical’” to Nile, with only two exceptions. Ex. 50051
at CSFBCO000097185. These exceptions were that Barclays, not CSFB, was funding the
Tranche A debt (see id.), and that “CSFB is taking Barclay’s Bank risk, as opposed to Enron
risk, under Tranche-B [the supposed “equity”] via a Total Return Swap.” Ex. 50051 at
CSFBCO000097185. Thus, because Moran knew that in Nile the 3% “equity” would only
appear to be “at risk,” 151 he knew the same was true with regard to Nikita. 152
Moreover, CSFB’s trade confirmation for Nikita used lending terms and concepts for the
“equity” part of the deal, such as “Interest Rate: 15% current pay,” and “Interest Rate Periods:
151
See Ex. 50098 at ERNB0124468 (Nile credit memorandum sent from, et al., Moran)
(identifying supposed 3% “equity” of Tranche B as actually being “debt.”).
152
See also 1/24/05 O’Brien Depo Tr. at 123:3-4 (“I understood Nikita was a transaction
that had similar characteristics to Nile”).
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Last business day of each calendar quarter with the first payment due on December 31, 2001 and
the last due on the Termination Date.” Ex. 50051 at CSFBCO000097185. The wiring
instructions in the trade confirmation required the depositing of funds in the account name of
“CSFB Loan Clearing.” Ex. 50051 at CSFBCO000097186.
CSFB bankers understood that any risk for it in the deal was solely the credit risk of a
loan, not the risk presented by a legitimate equity investment. Moran testified:
Q. Did you consider the equity investment that CSFB made in the Nikita deal
to be at risk?
* * *
A. It was an equity investment that we had that was supported by a Barclays
total return swap.
Q. Did you consider it to be at risk?
A. The risk of Barclays Bank.
* * *
Q. The risk being that Barclays might not pay on the total return swap?
A. Yes.
7/21/04 Moran Depo. Tr. at 269:2-14. McCabe added:
Q. And was it your understanding that as a result of [the TRS], CSFB had no
risk in the transaction other than Barclays credit risk?
* * *
A. Though it’s difficult to recollect the details around a transaction that
happened so long ago as I sit here today, I think that’s accurate . . . .
2/18/05 McCabe Depo. Tr. at 535:15-23.
That CSFB’s “equity” knowingly was not “at risk” is further confirmed by the fact that
the Bank conducted virtually no due diligence on the Nikita assets:
Q. What due diligence did CSFB perform with respect to the equity
investment made in the Nikita deal?
A. Very limited.
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* * *
Q. What did you do?
A. We had a conversation with Bill Brown, Jodi Coulter on the transaction.
And discussed what they were asking us to do.
7/21/04 Moran Depo Tr. at 168:11-20. Despite not performing any real due diligence, CSFB
was nevertheless content to put up $8.1 million for Nikita – only because it knew it was not
“equity” “at risk,” but was instead guaranteed to be repaid.
CSFB is liable for its conduct in Nikita under Rule 10b-5(a) and (c). Because there was a
secret agreement for Enron to repay Barclays’ supposed equity, Nikita “created the appearance”
of an equity investment yielding a true sale of assets, when “the reality was quite different” in
that the transaction was really a loan to Enron. Parmalat I, 376 F. Supp. 2d at 504. 153
CSFB
(with Barclays) had a role in this deception, as its supposed “equity” in the deal was protected by
the secret repayment agreement, as that agreement protected the “equity” of Barclays – the party
that CSFB looked to for repayment of its “equity.”
Also, as mentioned above, Nikita was certainly a transaction that had the “principal
purpose and effect” of creating the “false appearance of fact.” Homestore, 452 F.3d at 1048; see
also SEC Brief (Ex. 3) at 18. The secret guarantee made it appear as a “sale” of assets when in
fact it was a loan, but Enron treated it as a sale anyway. CSFB is thus liable for engaging in the
transaction. 154
153
See also Parmalat II, 383 F. Supp. 2d at 625 (holding that transactions with shell entity
formed by law firm “‘created the appearance of a conventional’ sale and loan ‘when, in fact, the
reality was quite different’”).
154
See SEC Brief (Ex. 3) at 18 (“It is reasonable to construe Section 10(b) as encompassing,
within the rubric of engaging in a deceptive act, engaging in a transaction whose principal
purpose and effect is to create a false appearance of revenues.”). CSFB knew Nikita would be
given FAS 125/140 treatment because Moran and O’Brien both understood Nikita was in
substance the same as Nile. Ex. 50051 at CSFBCO000097185.
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But also, CSFB is additionally liable under Rule 10b-5(a) and (c) for structuring the
Nikita transaction. For its role in the Nikita transaction, CSFB received a substantial “structuring
fee.” Indeed, a November 30, 2001 email from Moran to Abib and McCabe acknowledges that
CSFB’s “$1MM up front fee [was] a structuring fee.” Ex. 13133A. An internal document from
McCabe features him stating he was “Awarded mandate due to knowledge of assets and creative
structure . . . .” Ex. 13130A at CSFBLLC006834598. Abib identifies CSFB bankers as being
responsible for masterminding at least some important aspect of the deal: “It looks like the
McCabe/Moran team came up with a great solution for the latest Enron emergency.” Ex.
13132A. Once more, structuring or designing a transaction that has the principal purpose and
effect of creating the false appearance of fact is sufficient for primary liability under Rule 10b-
5(a) and (c). See Enron, 2006 U.S. Dist. LEXIS 43146, at *170 (Lead Plaintiff’s allegations
regarding CSFB’s “structuring” “satisfy the requirements for pleading primary violations of the
statutes.”); Homestore, 452 F.3d at 1049.
CSFB’s arguments that it is not liable for the Nikita deal are unavailing. In the Motion,
CSFB’s only argument to this effect is its ipse dixit that because Barclays and CSFB witnesses
testified that CSFB was not made aware of the secret agreement between Enron and Barclays,
there is “no claim” concerning Nikita. Defs’ Mem. at 42-43. This argument fails.
Simply because witnesses for the defendant banks in this case deny that CSFB knew
about the secret agreement does not mean the jury is unable to reasonably infer to the contrary
from other evidence. For example, as described above, both Moran and O’Brien knew Nikita
operated in substance like the Nile transaction. Thus, CSFB must have known that Barclays’
equity in Nikita was guaranteed in some fashion, as CSFB had its equity guaranteed in Nile, and,
in fact, had worked on the transaction’s structure which required such a feature. Also, CSFB
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performed work on Nikita’s structure, which most likely required knowledge of the parties’
agreements and understandings.
Further, Fastow also helps to establish that CSFB knew about the guarantee. He declares
that he, or “other Enron executives, provided Merrill, Barclays, CSFB, RBS, and other Enron
banks with oral assurances or structural features that I believe would have assured them of the …
return of their investment capital,” and that “without these assurances or structural features, the
banks would not have entered into all of these transactions.” Fastow Decl., 13. 155
Because the
giving of guarantees in the banks’ deals with Enron was de rigueur, the jury could easily infer
that CSFB knew of Barclays’ guarantee.
In addition, because CSFB had its Nikita “equity” guaranteed by Barclays, CSFB
imaginably investigated and discovered that Barclays’ “equity” was in turn guaranteed by Enron
– given that Barclays was the source of repayment for CSFB. This is suggested in the fact that
CSFB performed virtually no due diligence on the Nikita assets. CSFB did not worry about the
return of its money because it was guaranteed by Barclays, and further had no concern if the
Nikita assets really would result in a full return for Barclays so it could pay back CSFB, because
CSFB most likely knew that Barclays was guaranteed a return by Enron. But in any event, this
factual dispute cannot be resolved here. See Songbyrd, 1997 U.S. App. LEXIS 12684, at *8 (the
court should “construe all evidence . . . without . . . resolving any factual disputes”).
Also, CSFB misses the point in making its argument here. CSFB need not have known
that Barclays’ “equity” was guaranteed to be liable. By purporting to contribute 3% “equity” it
155
See also 10/23/06 Fastow Depo. Tr. at 145:1-8 (“What I would typically say to bankers,
Barclays included, was that it’s just not – the way they should look at those investments and the
three percent equity is that it is not in Enron’s interest to have the bankers lose any money on
such a small dollar amount, because I understood, as CFO of Enron, that if they lost money in
those, they wouldn’t do any more of those types of transactions.”). See also id. at 238:3-10.
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knew was truly not at risk it, as discussed above, engaged a transaction that had the “principal
purpose and effect” of creating the “false appearance of fact.” Homestore, 452 F.3d at 1048; see
also SEC Brief (Ex. 3) at 18. Also, CSFB structured Nikita, and is in this way liable as well.
See Enron, 2006 U.S. Dist. LEXIS 43146, at *170; Homestore, 452 F.3d at 1049. 156
d. Minority-Interest Transaction: Rawhide
“Rawhide” was a CSFB deal with Enron of a species of transaction called “minority
interest.” See Solomon Report at §§VI.C. and VII.C. “The purpose of the structure was to raise
funds for Enron in a manner such that the liability was recorded as a minority interest, not debt.”
Id. at 37. Indeed, “the only reason” minority-interest transactions were done was “to simply
make Enron look as if it had less debt, to improve its debt-to-capitalization ratio for credit rating
agency evaluation purposes.” 10/23/06 Fastow Depo. Tr. at 66:8-13. Minority-interest
transactions such as CSFB’s Rawhide favorably impacted Enron’s “debt to equity ratio” – a key
metric for analysts – by fraudulently increasing the equity, and decreasing the debt, portions of
the ratio. See Solomon Report at 11, 37. A major objective of the Rawhide transaction was to
support a representation Enron made to the rating agencies that the Company would raise a
significant amount of financing by year end 1998, in a manner that would not adversely impact
its credit rating. Solomon App. at 245.
CSFB acted as one of four co-lead banks in Rawhide. Each bank committed to
underwrite more than $180 million of the structure’s backstop facility. Ex. 11273 at
156
These observations are also dispositive of CSFB’s claim that it is not liable for Nikita
under Homestore (see Defs’ Notice at 6), which simply rehashes the Bank’s argument that there
is supposedly “no evidence” that it had “any knowledge” of Barclays’ secret guarantee. And as
discussed above, CSFB is liable under Homestore for Nikita, as the deal had the “principal
purpose and effect “ of creating a “false appearance of fact,” and CSFB itself contributed 3% of
fake “equity.”
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CSFBLLC005535525. CSFB twice approved renewing Rawhide, first in March 2000 and a
second time in March 2001. Exs. 13366, 13880.
The very structure of Rawhide was itself a deception – and an exceedingly elaborate one
at that. Indeed, the baroque tangle of entities, transfers and relationships of Rawhide was
calculated to obscure the simple loan that was the economic reality of the transaction. CSFB’s
internal documents refer to Rawhide as just a “loan” to Enron. See Ex. 11273 at
CSFBLLC005535527; Ex. 50267 at CSFBLLC005535527 (CSFB Rawhide credit memoranda).
But this “loan,” as structured, appeared as follows:
Enron
Hoss
$750 million
ENA
Other Enron
Entities
LP Interest
$2.4 bil
Project Assets
GP Interest
EPMH
BSCS
Class C
ENA
Class B
Little Joe
$10 million Equity
Class A
$12.5 million Equity Class A
Ponderosa
Rawhide
$750
million
$858 million
Project Assets
GP Interest
$750
million
LP Interest
$727.5
million
loan
Sundance
CXC
See Solomon Report at 250.
- 140 -

Solomon explains 157 that in the Rawhide deal, Enron Ponderosa Management Holdings,
Inc. (“EPMH”) as the general partner, and other Enron-related entities as the limited partners,
formed Ponderosa LP (“Ponderosa”). 158 The limited partners contributed approximately $2.4
billion of merchant investments in return for their interest. 159
Shortly thereafter, Rawhide
Investors, LP (“Rawhide”) was formed. 160
Hoss L.L.C. (“Hoss”) and Little Joe L.L.C. (“Little
Joe”) provided the requisite, purported 3% “equity” for the deal by contributing $12.5 million
and $10 million respectively in exchange for a Class A interest. ENA, an Enron affiliate, was the
Class B member and BSCS I, Inc. was the Class C member. CXC Inc. (“CXC”), an affiliate of
Citibank, provided $727.5 million of debt which was supported by a syndicate of banks, which
included CSFB. 161
As part of the formation and continued maintenance of Rawhide, Enron paid
certain transaction costs on behalf of the “equity” holders, totaling approximately $25 million. 162
At around the same time, Sundance Assets L.P. (“Sundance”) was formed. Ponderosa
contributed to Sundance $858 million of the approximately $2.4 billion in merchant investments,
157
Solomon’s detailed explanation of the Rawhide deal is contained in Solomon App. at
245-50.
158
Ex. 27 at CITINEWBY00866265-413 (12/18/98 Amended and Restated Ponderosa
Assets, L.P. Limited Partnership Agreement).
159
Ex. 28 at ECv000442647-70 (Liquidity Backstop Facility Presentation for Rawhide
Investors L.L.C.); Ex. 27 at CITINEWBY00866265-413 (12/18/98 Amended and Restated
Ponderosa Assets, L.P. Limited Partnership Agreement).
160
Ex. 29 at AB000064922-24 (12/18/98 Certificate of Formation of Rawhide Investors,
L.L.C.).
161
Ex. 30 at AB000063815-907 (12/18/98 Rawhide Investors L.L.C. Amended and Restated
Company Agreement); Ex. 31 at CITINEWBY00635860-970 (12/18/98 Credit and Security
Agreement).
162
Ex. 32 at AASDTEX000365227 (3/31/99 Analysis of Deferred Debits, Arthur Andersen
workpapers).
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in exchange for its controlling general partner interest in Sundance. 163
Rawhide contributed
$750 million of cash in return for its limited partner interest. 164 The investment return Sundance
agreed to pay Rawhide investors was a guaranteed payment calculated to provide a LIBORbased
return to the Rawhide equity holders plus the amount needed to pay interest due on the
loan from CXC. 165
These payments were funded by Ponderosa’s payments to Sundance on the
loan from Sundance to Ponderosa, which, in turn, were funded by ENA’s payments to Ponderosa
on the loan from Ponderosa to ENA. As a source of payments for the principal of the $727.5
million loan to Rawhide, Enron executed a Purchase Option, under which it could repurchase the
Project Assets for an amount which would, effectively, retire the principal balance due on the
Rawhide loan. 166
Enron also executed a Guaranty Agreement, which indirectly through
Sundance guaranteed repayment of the Rawhide loan. 167
Sundance had recourse against Enron
with regard to the principal due by virtue of a guaranty between Enron and Ponderosa and
collateral assignment by Ponderosa to Sundance of Ponderosa’s rights thereunder. 168
Sundance
loaned the $750 million contributed by Rawhide to Ponderosa and then Ponderosa loaned these
163
Ex. 33 at AB000063093-255 (12/18/98 Amended and Restated Ponderosa Assets, L.P.
Limited Partnership Agreement ($608 million of merchant investments)); Ex. 34 at
AB01360710-16 (2/4/99 Assignment and Acknowledgement between Enron Corp. and East
Coast Power L.L.C. ($250 million note by ECP)).
164
Ex. 35 at AB000063908-4069 (12/18/98 Sundance Assets, L.P. Amended and Restated
Limited Partnership Agreement).
165
Ex. 35 at AB000063908-4069 (12/18/98 Sundance Assets, L.P. Amended and Restated
Limited Partnership Agreement).
166
167
Ex. 36 at CITINEWBY01318946-67 (12/18/98 Purchase Option Agreement).
Ex. 37 at CITINEWBY00172237-45 (12/18/98 Guaranty Agreement).
168
Id.; Ex. 38 at CITINEWBY01318924-38 (12/18/99 Security and Pledge Agreement
between Ponderosa and Sundance).
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funds to ENA. The loan between Sundance and Ponderosa required that a debt service reserve
account be set up with an initial balance of $50 million. 169
All proceeds from sales of the
merchant investments held by Ponderosa and Sundance were placed in the debt service reserve
account. 170
Funds in this reserve could be invested in Enron Demand Loans. Id.
As indicated, beneath all this commotion, Rawhide really was just a loan to Enron.
Because of the balance in the debt service reserve, Citibank looked to Enron’s obligation to
repay the Enron Demand Loans as the source of repayment for the Rawhide loans:
The deal has now become a purely Enron deal . . . . The reason this has become
an Enron deal is because amounts in the [debt service reserve account] are loaned
to Enron, which then provides a demand note in the amount of the loan. As
pointed out above, the amount in the [debt service reserve account] (and hence
demand loans to Enron) is more than sufficient to pay the Rawhide Debt. As a
result we now have recourse to Enron in an amount of 100% of the Rawhide
debt.
Ex. 40 at CITINEWBY01258358-62 (1/6/00 Citi Memorandum to Pete Dillon, from Bob
Dewing and Nasir Khan, regarding Rawhide Amendment). See also Black Report at 77-80
(“equity” investors held debt claims on Enron). The elaborate interconnection of entities and
relationships in Rawhide was merely a deception calculated to disguise the lending nature of the
transaction as one of minority interest. CSFB acknowledged that the structure of Rawhide was
“designed to achieve the desired minority interest accounting treatment” for the deal. See Ex.
11273 at CSFBLLC005535526.
169
The debt service reserve was funded with a $50 million demand loan. Ex. 39 at
CITINEWBY01259196-297 (12/18/98 Loan Agreement among Ponderosa Assets, L.P.,
Sundance Assets, L.P. and Wilmington Trust Company).
170
Id.
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CSFB knew Rawhide to be a loan to Enron. Credit committee member Ed Devine, who
together with Dave Maletta and others authorized CSFB to engage in the Rawhide transaction
(see Ex. 11299), testified:
Q. Question was: Is it fair to say that Enron is not just borrowing $750
million and using the assets as collateral?
A. It appears to me Enron is borrowing 750 million and using the assets as
collateral.
3/17/05 Devine Depo. Tr. at 152:10-14. Maletta added:
Q. Because it was your understanding at this time that the $750 million was
going to end up in the hands of Enron, correct?
A. I recollect that, yes.
Q. And what is the security for the $750 million in Rawhide?
A. The memo says it’s the assets in the portfolio.
6/16/05 Maletta Depo. Tr. at 124:18-25; see also 8/23/04 Mandanas Depo. Tr. at 268:4-12. Even
CSFB’s Credit Request/Approval for Project Rawhide, which identifies Rawhide LLC as the
counterparty, recognized Enron as the “Group” recipient of a $181 million loan in the
transaction. See Ex. 11299.
As indicated above, CSFB extended its participation in the Rawhide loan on two separate
occasions, first in March 2000 and once again in March 2001. See Exs. 13366, 50071, 13487.
Each time, the extension request went to Ed Devine, who admitted Rawhide was a device for
Enron to “borrow[] 750 million.” 3/17/05 Devine Depo. Tr. at 152:13-14; see Exs. 13366,
50071, 13487.
The March 23, 2000 request to recapitalize Rawhide for an additional year advised
Devine, “Over the last 12-months, Enron has liquidated approximately $850 million of assets
that were contained in the Rawhide transaction . . . . With the Enron loan note contained in our
asset package, we no longer need to look to the $1.6 billion of other assets discussed below, as
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our credit risk is now directly 100% Enron.” Ex. 13366 at CSFBLLC006040004; Ex. 50071 at
CSFBCO000238071.
A year later, Devine learned the bulk of Rawhide’s assets were liquidated. The March
20, 2001 Rawhide extension request informed Devine: “Enron has liquidated approximately
$1.8 billion of assets that were contained in the Rawhide transaction,” and thus CSFB’s
extension of credit was “100% Enron.” Ex. 13487 at CSFBLLC005423737. Hence CSFB knew
Rawhide, a structure designed to reduce Enron’s debt, was now 100% Enron credit risk. CSFB
agreed to recapitalize its part of Rawhide. See Exs. 13366, 50071, 13487.
CSFB is liable under Rule 10b-5(a) and (c) for its conduct in Rawhide. CSFB worked on
structuring the Rawhide deal as part of its duties as a Rawhide co-lead bank (which also included
performing due diligence on the transaction). Nath designed the minority-interest structure.
10/23/06 Fastow Depo. Tr. at 117:9-12. Mandanas, one of CSFB’S main bankers on the project,
testified, “On Rawhide, I worked on the initial structuring of the transaction.” 8/23/04
Mandanas Depo. Tr. at 270:16-17; see also 11/10/04 Deposition Transcript of Jamie Welch
(“11/10/04 Welch Depo Tr.”) at 223:20-23. Mandanas and other CSFB bankers also conducted
due diligence into the Rawhide structure and supporting assets. 8/23/04 Mandanas Depo. Tr. at
217:18-24.
Contemporaneous documents indicate CSFB discussed “structural improvements” to the
Rawhide “transaction structure” at a bank meeting. See Ex. 50265 at CSFBLLC005545002.
Regarding this document, CSFB banker Jamie Welch testified: “They [CSFB] were going to
discuss the [Rawhide] transaction structure, yes. This looks like this is the agenda for the bank
meeting.” 11/10/04 Welch Depo. Tr. at 197:11-13. CSFB had a “Project Rawhide Team” and,
in a memorandum directed to all CSFB managing directors and directors (as well as its global
power and finance groups), CSFB identified several bankers who could provide “more
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information about the Project structure” and attached the Rawhide credit application. Ex. 50267
at CSFBLLC005535520. This structuring of Rawhide is plainly actionable under both this
Court’s 6/5/06 Order that Lead Plaintiff’s allegations regarding CSFB’s “structuring” “satisfy the
requirements for pleading primary violations of the statutes” (Enron, 2006 U.S. Dist. LEXIS
43146, at *170) and Homestore, 452 F.3d at 1049.
Rawhide was clearly a transaction that had the “principal purpose and effect” to “create
the false appearance of fact.” Homestore, 452 F.3d at 1048 (describing its own and SEC’s test).
As a result of the Rawhide transaction, Enron reported in its December 31, 1998 financial
statements $750 million as minority interest (rather than as debt). Solomon App. at 250. As
discussed, CSFB understood the deal to be simply a loan to Enron, but which was “designed to
achieve the desired minority interest accounting treatment” for the deal. See Ex. 11273 at
CSFBLLC005535526. This deception was built in to the structure of the deal. As Solomon
describes, while transactions such as Rawhide were “in substance loans,” “the Minority Interest
transactions were structured to appear as minority interests on the balance sheet.” Solomon
Report at 237. This renders CSFB liable under the SEC and Homestore tests.
It is equally apparent that CSFB is liable for its role in Rawhide under the Parmalat
cases. Just like the invoicing schemes held actionable in Parmalat I, Rawhide was a transaction
that appeared to be something it was not – to wit, a loan masked to appear as a minority interest.
e. Share-Trust Transactions
(1) Osprey I & II
(i)
Osprey I
CSFB engaged in three other inherently deceptive deals with Enron classed as “sharetrust”
transactions. See Solomon Report at §§VI.D. and VII.D. The purpose and substance of
the share-trust transactions was to “simply reduce reported debt for Enron.” 10/23/06 Fastow
- 146 -

Depo. Tr. at 67:4-7. These three deals went by the names of “Firefly,” “Marlin” and
“Osprey.” 171
Osprey improperly removed certain assets from Enron’s balance sheet and
permitted the Company to illicitly reflect the proceeds as cash flow from operations, not from
financing. See Solomon Report at 42. The share-trust transactions had a substantial fraudulent
impact on Enron’s reported financial condition. It was eventually revealed that CSFB’s Osprey
alone resulted in Enron improperly underreporting $1.7 billion of losses. See Enron September
30, 2001 10-Q (Ex. 41) at 33. 172
“The share trust structure was originally designed and marketed to Enron by DLJ.”
Solomon Report at 43. See also 10/23/06 Fastow Depo. Tr. at 67:25-68:4 (the share-trust
transactions were devised by Larry Nath and “presented to Enron” by Nath or his team). In
general, the share-trust transactions involved the following steps: Enron and an entity known as
the “issuing trust” (“Issuer”) formed a holding company (“HoldCo”). Enron contributed
mandatorily convertible preferred stock (“MCPS”) and demand notes to HoldCo, which in turn
contributed both to a share-trust entity (“Share Trust”). The Issuer issued debt (the “Notes”) and
equity (the “Certificates”) into the institutional market, and contributed the proceeds raised to
HoldCo. HoldCo then used the funds to purchase assets from Enron, which were held in various
investment entities, 100% owned by HoldCo (“Investment Entities”). Id. The basic share trust
form appeared as follows:
171
Marlin is discussed infra at §II.B.2.e.(2).; Firefly is discussed infra at §II.B.3.c.(a).
These two share-trust transactions resulted in the improper removal of debt from Enron’s balance
sheet.
172
See also 10/23/06 Fastow Depo. Tr. at 243:17-23 (share-trust transactions impacted
Enron’s reported debt “at least in excess of a billion dollars”).
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Enron
(through whollyowned
subsidiaries)
Via Member
Interests and
Various LP Interests
50%
Via Member Interests
and Preferred LP
Interests
50%
Notes and
Certificates
Issuer
HoldCo
Share Trust
Enron MCPS (Stock)
Enron Demand Notes
100%
100%
Various
Investment
Entities
Assets
Solomon Report at 44.
The structure was designed to (1) funnel financing to Enron that it would report as cash
flow from operations, not financing, while at the same time (2) allow the Company to move
assets off its balance sheet, often at inflated values. The (fraudulent) benefits of this were
substantial and many. Enron could obtain a loan, without having to report it as such, and also,
the reported increase in cash flow from operations would fool investors into believing that Enron
was earning “operating income from recurring, real, generally cash-producing transactions with
real customers.” Black Report at 10. In deposition Fastow confirmed that the share-trust
transactions banks such as CSFB did with Enron resulted in the Company obtaining funds that
would not be reported as debt, and created the false appearance of funds flow from operations.
10/23/06 Fastow Depo. Tr. at 57:4-58:9; 10/24/06 Fastow Depo. Tr. at 438:13-22.
In addition, Enron could move off balance sheet certain assets that had sunk in value. In
a legitimate deal, Enron could sell the assets to a real third party, but because of their reduced
value, this would force the Company to take an unfavorable writedown on them. By using the
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share-trust structure, Enron could “park” the assets in the HoldCo entity, and they would falsely
appear to have been sold – at any “price” Enron wanted. Indeed, because this transaction was
phony, CSFB and Enron could overvalue the assets in the deal, to allow the Company to report a
favorable return on the assets.
The term “Osprey” was used originally to refer to a share-trust structure which closed in
September 1999. This transaction featured the issuance of $1.4 billion of Notes and $100
million of Certificates. See Solomon App. at 278. 173
A July 2000 transaction raised an
additional $70 million for the structure by issuing Certificates in that amount. See id. at 286-88.
An additional financing, featuring the issuance of $750 million of Notes, €315 million of Euro
Notes and $50 million of Certificates, closed in October 2000. See id. at 288ff. 174
That CSFB used Osprey to commit fraud was not surprising. Osprey was born of fraud.
The Osprey structures originated from Enron’s desire to “expand the balance sheet capacity” of
an entity called “Whitewing” involved in the Nighthawk transaction, 175 which was used to
fraudulently understate Enron’s debt by $500 million in 1997 (see Solomon App. at 239). 176
As
Mr. Fastow declares, Nighthawk was “presented to me by Citi’s Larry Nath before he moved to
DLJ/CSFB.” Fastow Decl., 10. This transaction “had a material impact on Enron’s financial
statements” by “enabl[ing] Enron to report a healthier balance sheet than it otherwise would
173
Herein, this transaction is referred to as “Osprey I.” DLJ’s name for Osprey I was
“Condor.”
174
Herein, this transaction is referred to as “Osprey II.” All three of these transactions (i.e.,
Osprey I, the July 2000 financing, and Osprey II) are referred to collectively as “Osprey.”
175
Ex. 42 at AB000373399-406 (3/26/99 Letter Amendment between the Class A and Class
B members of Whitewing LLC).
176
Nighthawk was a “minority-interest” transaction, similar to Rawhide discussed supra at
§II.B.2.d.
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have.” Id. Nighthawk was hardly legitimate: “I can recall no real business purpose associated
with . . . Nighthawk.” Id.
With Osprey, Nath (now at DLJ) again used his talent at structuring fraudulent
transactions for Enron. At a breakfast meeting in Houston, Nath met with Enron’s Ray Bowen.
1/12/05 Deposition Transcript of Laurence Nath (“1/12/05 Nath Depo. Tr.”) at 143:3-21. Bowen
inquired how Enron could repay and thus close Nighthawk, as it was approaching maturity. Id.
at 137:17-138:20. It was floated that Nath’s “Marlin” structure could be used to complete the
Nighthawk repayment. Id. at 138:7-20. This ultimately became the Osprey I transaction. Id. at
142:15-24. DLJ received a $1.875 million Osprey I “Structuring Fee” for making $1.5 billion
available to Enron. Ex. 33011 at CSFBLLC000031911.
DLJ, who would serve as the lead underwriter of the Osprey I Notes and marketer of the
certificates, understood that Enron “wanted to raise financing” through the Osprey transaction
which would not appear on the Company’s balance sheet. See 7/14/05 Deposition Transcript of
Brian Herman (“7/14/05 Herman Depo. Tr.”) at 305:7-306:3.
The wildly complex Osprey I appeared as follows:
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Solomon App. at 279. 177
The Osprey Trust (the “Issuer” entity) was formed primarily to issue the Notes and
Certificates. 178
Osprey Trust had no ongoing business, no employees, and existed only as an
SPE and a conduit between the lenders and “equity” investors and Whitewing. Solomon App. at
282. As indicated in the diagram, Osprey Trust issued $1.4 billion of Osprey Notes and $100
177
The transaction diagram for Osprey I contained in Ex. 50826 at CSFBLLC006360930-
31, also shows the original design complexity.
178
Ex. 43 at AB000056001-41 (9/24/99 Osprey Trust Amend and Restated Trust
Agreement).
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million of Osprey Certificates. The Certificates earned yield at a fixed rate of 12.75% payable
semi-annually. 179 $15 million worth of the Certificates were purchased by LJM1. 180
Osprey Trust contributed $500.00 (of the $1.5 billion raised through the issuance of the
Notes and Certificates) to Whitewing Management LLC (“WW Mgmt LLC”) for a 50% Class B
member interest. 181
Enron, through its wholly owned subsidiary, Egret I LLC (“Egret”),
contributed $500.00 to WW Mgmt LLC for a 50% Class A member interest. 182
Whitewing LLC
thus had two members, Egret and Osprey Trust. See also Ex. 50826 at CSFBLLC006360931.
WW Mgmt LLC held the sole general partner interest in Whitewing Associates LP
(“WW LP”) (the “HoldCo” entity). 183
(WW LP was the same entity as Whitewing Associates
LLC in the Nighthawk transaction. See Solomon App. at 281.) Enron, through Egret, effectively
controlled WW Mgmt LLC, and through its general partner interest, controlled WW LP. See
Solomon Report at 270. WW LP’s role in the structure was to funnel money from the financing
to Enron, in exchange for assets. See 1/12/05 Nath Depo. Tr. at 184:12-15.
Nighthawk’s membership interest in the old Whitewing Associates LLC was redeemed
using the Osprey funds for approximately $576 million. Solomon App. at 281. This
accomplished the refinancing of Nighthawk.
179
See Ex. 44 at 72 (9/16/99 Offering Memorandum, Plan of Distribution).
180
Ex. 45 at AB000055733-55 (9/16/99 Certificate Purchase Agreement – Osprey Trust).
See also Ex. 46 at DBN-382705 (LJM1-held Certificates on closing of Osprey I were 15% of
equity).
181
Ex. 47 at AB000056367-405 (Amended and Restated Limited Liability Company
Agreement of Whitewing Management LLC).
182
Id. §3.02(a) and §4.01.
183
Ex. 48 at AB000056414-82 (9/24/99 Limited Partnership Agreement of Whitewing
Associates LP).
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The Condor Share Trust (“Condor”) (the “Share Trust” entity) was set up to hold the
assets contributed by WW LP in exchange for WW LP’s sole beneficial interest in the trust. 184
WW LP contributed to Condor the Enron MCPS, a previously extant $54 million Nighthawkrelated
Enron demand note, a new demand note of $85 million, and an overfund amount of
$115,702,299. 185 (The overfund amount represented a prepayment of interest and was
contributed in cash by WW LP. See Solomon App. at 282.) Condor then loaned the cash to
Enron in exchange for a demand note. See id.
Osprey I succeeded in raising $1.5 billion for Enron. Ex. 33011 at CSFBLLC000031908
(showing net proceeds to Enron of $1.5 billion). As indicated, $578 million was used to close
Nighthawk. The remaining $900+ million was funneled through Osprey to Whitewing, and then
to Enron through asset sales.
An internal CSFB email was quite candid about what was going on here – i.e., that
Osprey I made a loan appear to be something it was not:
As you probably know, Osprey is a vehicle enabling Enron to raise disguised debt
which appears as equity on Enron’s balance sheet. . . . Osprey serves the added
purpose for Enron of being an off-balance-sheet parking lot for certain assets.
Ex. 10264 (September 16, 1999 email from CSFB’s Wesley Jones to Jonathan Yellen and
forwarded to Ogunlesi, Abib, and other bankers). Banker Capolongo of DLJ and later CSFB
agreed that Osprey was a “parking lot for distressed assets”:
Q. Did you determine that Osprey was going to be used as a parking lot for
distressed assets?
* * *
A. I think that is a fair way to describe it in a generic term, that’s fair.
184
185
See Solomon App. at 282.
Id.
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8/1/05 Deposition Transcript of Dominic Capolongo (“8/1/05 Capolongo Depo. Tr.”) at 181:4-
9. 186 Nath effectively made the same admission that Osprey I appeared to be something other
than the loan it was. In deposition, he described what the Osprey I transaction gave the
appearance of:
Q. What was Whitewing going to do with the money it got from Osprey?
* * *
A. Our understanding was that it was going to – it was going to repay
Nighthawk, it was going to set up some interest reserves, and it was going to use
the rest of the capital over time to purchase assets from Enron.
1/12/05 Nath Depo. Tr. at 183:14-21; see also Ex. 10264; 8/1/05 Capolongo Depo. Tr. at 181:4-
9. But he was forced to concede that, in reality, Osprey was just a loan to Enron:
Q. Would you agree that Osprey was a financing?
A. Yes.
1/12/05 Nath Depo. Tr. at 195:9-11. See also Ex. 33011 at CSFBLLC000031908 (denoting the
entire $1.5 billion raised in Osprey I as “Net Proceeds to Enron”); 10/23/06 Fastow Depo. Tr. at
245:8-17 (CSFB knew Osprey was a way to finance assets).
In Osprey I, not reporting the financing as a loan required, among other things, that
Osprey Trust not be “consolidated” on Enron’s balance sheet. See Solomon Report at 269.
Legitimate non-consolidation necessitated at least that there exist an independent third party’s
“equity” investment in the deal, equal to a minimum 3% of the entity’s total assets (plus any fees
186
Capolongo confirmed that he understood this term of “parking” to mean temporary
placement of the assets until they would be sold “off at a later date” (8/1/05 Capolongo Depo. Tr.
at 181:4-17), or recycled through the issuance of “new debt” (1/6/05 Deposition Transcript of
Dominic Capolongo (“1/6/05 Capolongo Depo. Tr.”) at 426:4-19). Fastow testified the share
trusts provided a “parking lot” or “warehouse” and Enron controlled the assets in them. 10/23/06
Fastow Depo. Tr. at 246:17-248:3.
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paid to the outside investor by the transferor), which was “at risk” for the entire term of the deal.
See id. at 32. Not considering the transferred assets as still Enron’s required that the Company
not control WW LP. It also required that the minimum 3% equity test be satisfied with regard to
WW LP.
But Osprey I met none of these requirements. As to Osprey Trust, the minimum 3% “at
risk” equity was not present. The Notes were Enron credit risk because Enron had an obligation
to issue Enron convertible stock to fully support the Notes.
See Ex. 50826 at
CSFBLLC006360945-46; 1/13/05 Deposition Transcript of Laurence Nath (“1/13/05 Nath Depo.
Tr.”) at 513:7-19. And neither were the Certificates at risk. The “structure underlying Osprey
[was] designed to protect investors and maximize the likelihood of repayment.” Ex. 20533 at
DBI05134. Among the protections Osprey I afforded to equity investors was that “[u]nder all
circumstances, no less than 85% of the Osprey Certificates principal is supported by Enron.” Id.
Nath confirmed this guarantee of the “equity”:
Q. Then there is a bullet point, “under all circumstances, no less than 85
percent of the Osprey certificates’ principal is supported by Enron.” Do you see
that?
A. Yes.
Q. Is that a correct statement?
A. I believe so, yes.
1/13/05 Nath Depo. Tr. at 358:2-8, 360:6-19.
As Mr. Solomon opines, this guarantee of 85% actually operated to guarantee 100% of
the Certificates. At the closing of Osprey I, Enron entered into a promissory note totaling $85
million. 187
This note was available at maturity to support repayment of the Certificates. In fact,
187
Solomon Report at 274 n.508; see also Ex. 49 at EC001020659-60 (9/24/99 Promissory
Note in the amount of $85 million).
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a model prepared by CSFB in January 2000 shows the $85 million note outstanding at January
15, 2003, thus available for payment to the Certificate holders. 188 “The model demonstrates that
when you include the 12.75% yield earned on the certificates with the $85 million payment at
maturity, the certificate holders receive their equity back.” Solomon Report at 275. Thus, the
equity supposedly presented by the Certificates was not truly “at risk.” 189
Also, while WW LP purported to be an entity independent from, and not controlled by,
Enron, this was truly not the case. Though Osprey I presented a convoluted array of limited
partnerships, limited liability companies, shell entities, and subsidiaries, none of these actually
served a true business purpose; Enron effectively controlled WW LP. As Mr. Fastow declares,
in the share-trust transactions “Enron effectively controlled the vehicles.” Fastow Decl., 50.
And as Mr. Solomon opines, despite the fact that WW Mgmt LLC was purportedly owned 50/50
between Enron (through Egret) and Osprey Trust, in fact “Enron, through Egret, effectively
controlled WW Mgmt, and through its general partner interest, controlled WW LP.” Solomon
Report at 270. Indeed, rights Osprey Trust ostensibly had to effect control over WW LP were
“largely circumvented” by the presence of Enron employees as managers in the Whitewing
investment entities. Id. at 272. Enron could act through these employees to control the subject
assets. Thus, WW LP should have been consolidated with Enron, and the assets transferred
should have remained on the Company’s balance sheet. Id. at 269. There was no true transfer of
188
Solomon Report at 274-75; see also Ex. 50 at ECTe007092985-98 (1/7/00 Project
Condor, model provided by Brian Herman (CSFB) to Stuart Schardin and Anne Yaeger
(Enron)).
189
See also Ex. 11060 at CSFBLLC006016876 (A memorandum where Nath and
Capolongo stress, in a section entitled “Credit Considerations,” that the Osprey “structure will be
significantly overcollateralized at closing” because, among others things, the “non-amortizing
Enron Note, after giving effect to this offering, will have a principal value of $187 million,
representing direct Enron support of 85% of the Certificate holders capital.”).
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the assets from Enron. Enron had buyback rights for assets transferred to Whitewing, and the
Company retained control of the assets transferred. See Ex. 21290 at AB000468957.
DLJ bankers knew Whitewing was a dummy entity. Nath had no interaction with any
Whitewing representatives, and never interacted with anyone independent from Enron. 1/12/05
Nath Depo. Tr. at 150:11-16, 150:22-151:2. Nor was Nath aware whether Whitewing had
offices or employees. Id. at 150:17-21. Whitewing’s only purpose was to acquire assets from
Enron, and Nath admitted that personnel making Whitewing’s decisions regarding the assets
were actually Enron employees:
Q. And the people at Whitewing that were going to make the decisions as to
what assets to buy and how much to pay for them, were Enron employees;
correct?
A. That was our understanding.
1/12/05 Nath Depo. Tr. at 184:16-20. He conceded that Enron controlled Whitewing:
Q. And Enron controlled Whitewing and could make [a decision to purchase
an asset for $20 million or less] without any approval or [consent] from anyone;
correct?
A. I believe so.
1/12/05 Nath Depo. Tr. at 153:2-6. And Nath admitted that Enron controlled the asset “sales”:
Q. If the regional limitation doesn’t apply, the asset size doesn’t apply,
Whitewing, as controlled by Enron, can purchase an asset without consent or
approval from anyone. And this is as of the close of Osprey I in September of
1999.
A. I believe so . . . .
1/12/05 Nath Depo. Tr. at 153:22-154:8.
* * *
DLJ bankers, including Nath, also knew the transfer of assets from Enron to Whitewing
involved only Enron personnel:
Q. So Osprey is giving money to Whitewing that’s going to buy assets from
Enron; correct?
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A. Yes.
Q. And the people at Whitewing that were going to make decisions as to what
assets to buy and how much to pay for them, were Enron employees; correct?
A. That was our understanding.
* * *
Q. And the people that were going to decide to sell assets from Enron to
Whitewing and how much to sell them for, were also Enron employees; correct?
A. Correct.
Q. Fair to say Enron employees are on both sides of that purchase/sale?
A. Yes.
1/12/05 Nath Depo. Tr. at 184:12-185:7. And while Nath disclaimed knowledge about
Whitewing’s creators, he admitted, “I would have thought that Enron set it up.” 1/12/05 Nath
Depo. Tr. at 184:5-9.
At the same time, the supposed “equity” for WW LP was not “at risk,” because it was
funded by non-recourse debt and some of the equity came from related parties like LJM1. See
Solomon Report at 273. See also Ex. 33011 at CSFBLLC000031907. 190
CSFB knew this was
improper. From the time the Osprey transactions first commenced, DLJ understood a certain
percentage of the Osprey structure needed to be funded with Certificates, and third-parties,
unaffiliated with Enron, needed to own this equity. Former DLJ banker Brian Herman, for
example, testified:
Q. You knew at the time you did Osprey I and II that a certain percentage of
the structure had to be certificates, it couldn’t all be notes, correct?
* * *
190
CSFB internally recognized the LJM entities were “related to,” “affiliates of,” and in the
same family, as Enron. See 6/16/05 Maletta Depo. Tr. at 82:7-83:8, 175:23-176:8; Ex. 50074 at
DPOEX00000331 (loan to LJM2 listed as commitment to Enron).
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A. Yes. That was part of the structure.
Q. And that the struc – and that the certificates had to be held by third parties
to Enron, correct?
* * *
A. Yeah, I mean, you needed third parties as investors.
7/14/05 Herman Depo Tr. at 353:11-21. In fact, the LJM1 funding for the certificates came from
CSFB. As mentioned above, $15 million worth of the Certificates were purchased by LJM1. 191
This $15 million came from CSFB’s bridge loan to LJM1, discussed supra at §II.B.2.a.(2).
Thus while Osprey I presented itself as a share-trust transaction, in reality the
requirements for the desired accounting treatment were not met. Because, as just described, (1)
the “equity” in Osprey Trust was not “at risk,” (2) Enron controlled WW LP, and (3) the equity
in WW LP was not “at risk” (the presence of any one of these conditions being sufficient to
invalidate the structure), the accounting benefits from Osprey were improperly utilized.
CSFB is liable under Rule 10b-5(a) and (c) for its conduct in Osprey I. Osprey I was
clearly a transaction that had the “principal purpose and effect” to “create the false appearance of
fact.” Homestore, 452 F.3d at 1048 (describing its own and SEC’s test). As a result of the
Osprey I transaction, Enron was able to obtain $1.3 billion in financing in 1999 that it did not
report as debt. See 2/22/06 Supplement to the January 17, 2006 Expert Report of Saul Solomon
(“Solomon Supplemental Report”), Schedule 6 at 11. The Company also improperly considered
$745 million of these funds (i.e., that portion not used to repay Nighthawk) as cash flow from
191
Ex. 45 at AB000055733-55 (9/16/99 Certificate Purchase Agreement – Osprey Trust).
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operations, not financing for 1999. See id., Schedule 5 at 9. 192
Further, Osprey I allowed Enron
illicitly to move illiquid assets off its balance sheet.
CSFB is also liable for its work in structuring Osprey I. As discussed above, Osprey I
arose from Nath’s application of his Marlin structure. 193
And the Bank cannot not now deny that
it played this role, having received a $1.875 million Osprey 1 “Structuring Fee.” See Ex. 33011
at CSFBLLC000031911. CSFB’s structuring of Osprey I is plainly actionable under both this
Court’s 6/5/06 Order that Lead Plaintiff’s allegations regarding CSFB’s “structuring” “satisfy the
requirements for pleading primary violations of the statutes” (Enron, 2006 U.S. Dist. LEXIS
43146, at *170) and Homestore, 452 F.3d at 1049.
CSFB is liable for Osprey I also under the Parmalat cases. Like the invoice
securitization and factoring schemes held actionable in Parmalat I, Osprey I “created the
appearance” of an equity investment in Osprey Trust/WW LP and the purchase of Enron’s assets
by an independent entity, when “the reality was quite different.” Parmalat I, 376 F. Supp. 2d at
504. 194 As discussed, while the Certificates issued by Osprey Trust purported to represent the
minimum 3% equity “at risk,” they were in fact guaranteed by Enron. Also, because $15 million
of the “equity” for WW LP came from LJM1 (funneled to it through CSFB’s bridge loan), a
192
See also Fastow Decl., 6 (“some of the share-trust transactions created the false
appearance of funds flow from operations”).
193
Nath structured Marlin I. See Fastow Decl., 48 (“Larry Nath [w]as the person most
responsible for developing and executing . . . Marlin . . . .”); 1/12/05 Nath Depo. Tr. at 119:11-16
(“We worked on, certainly we worked on elements of the – primarily the credit structure [of
Marlin]. Again, the box and arrows, if you will.”).
194
See also Parmalat II, 383 F. Supp. 2d at 625-26 (holding that transactions with shell
entity formed by law firm “‘created the appearance of a conventional’ sale and loan ‘when, in
fact, the reality was quite different’”).
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elated party to Enron, this “equity” lacked the requisite independent character. 195
That Osprey I
needed to conceal the fact that LJM1 bought some of the Certificates is further confirmed by
CSFB’s false and misleading statements in the Osprey offering documents that concealed
LJM1’s purchase. The Osprey I Offering Circular stated that the Certificates will be offered for
sale “to institutional investors” and those Certificate holders would have the right to “direct the
management of the business and affairs of Osprey.” Ex. 33304 at CSFBLLC006214792. The
Osprey II Offering Circular included similar language. Ex. 33305 at CSFBLLC005707135. But
because of its involvement in LJM1, CSFB knew LJM1 was not an institutional investor.
The very complexity of the Osprey I transaction was itself inherently deceptive. As
indicated, the clutter of entities and relationships served no true business purpose. This much is
established by Nath’s frank deposition testimony that Osprey I was just a financing:
Q. Would you agree that Osprey was a financing?
A. Yes.
1/12/05 Nath Depo. Tr. at 195:9-11. Thus, the only purpose of Osprey I’s complex of
relationships and entities was simply to disguise its status as a financing, and the fact that Enron
was simply shuffling around assets to itself.
While WW LP masqueraded as an entity independent from Enron, as discussed above,
Enron controlled it (through Egret), given the fact that Osprey Trust’s rights were phantom and
the presence of Enron employees on both sides of the asset transactions. This was inherently
deceptive, as the Osprey I structure presented WW LP as an entity independent from Enron, but
this was not the case.
195
Again, CSFB internally recognized the LJM entities were “related to,” “affiliates of,” and
in the same family, as Enron. See 6/16/05 Maletta Depo. Tr. at 82:7-83:8, 175:23-176:8; Ex.
50074 at DPOEX00000331 (loan to LJM2 listed as commitment to Enron).
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But there was even more deception in the asset sales than that mentioned. One of the key
attributes of CSFB’s Osprey I structure was that it allowed Enron not simply to improperly move
assets off its balance sheet, but to move them at inflated values. 196
This is confirmed by the fact
that eventually, when Enron was required to repay the Osprey Notes, the assets in Whitewing
were substantially impaired and of little value as collateral to the Note holders. After Enron filed
for bankruptcy, WW LP estimated the value of its assets at between $724 million and $1.039
billion – far less than the $2.62 billion in notes and certificates sold to fund WW LP. See Ex.
51 at AB025202991. Enron revealed in its September 30, 2001 10-Q there were $1.7 billion of
losses buried in Osprey. Ex. 41 at 33. An October 29, 2001 Merrill Lynch analyst report states
that the value of the assets in the Osprey and Marlin Water Trust “was approximately $1 billion
less than the amount of debt from those structures.” Ex. 52 at MLNBY01062258-59.
In deposition Fastow confirmed that CSFB was fully aware that the assets placed into
Osprey (and Marlin and Firefly) were carried at inflated values:
Q. (BY MR. HOWES) Did you have a view as to the value of the assets in
Marlin and Osprey, Whitewing and Firefly?
* * *
A. I had a view as to some of the values – or the values of some of the assets.
Q. (BY MR. HOWES) And what was that view?
A. Well, I’d have to look at a list of the assets to – to address that accurately.
Some of the assets I believed to be worth less than the book value.
Q. Did you discuss that with anybody at CSFB?
* * *
196
Indeed, Enron wanted to move the assets off-balance sheet at inflated values because the
“book value of the assets” was “in excess of the market value.” See Fastow Decl., 50. This
disparity meant the Company could not sell the assets in a legitimate transaction at a favorable
price.
- 162 -

A. Yes, I did.
Q. (BY MR. HOWES) And what did you tell them?
A. I recall discussing with Bob Jaffe that I thought some of the assets’ value –
the values of some of the assets in these entities were significantly – the market
value was significant – significantly less than the value at which they had been
placed into those entities.
Q. Did Mr. Jaffe have any comment or response?
A. My recollection is that he agreed with me.
10/23/06 Fastow Depo. Tr. at 248:4-249:5.
For example, one of the assets shuffled over to WW LP would be “Sarlux,” an Enron
power plant asset in Italy. 8/1/05 Capolongo Depo. Tr. at 55:25-56:15. 197
A document states
that “Sarlux and Trakya [were] written up to $380 and $230 million respectively through FAS
125 prior to transfer” into Osprey I. See Ex. 21261A at AB000504619. 198
The use of false valuations on the assets placed in Osprey I renders CSFB liable under the
Parmalat cases. The false valuations in Osprey I functioned similarly to the knowingly false
197
Enron wanted to park Sarlux and another plant (in Turkey), Trakya, in Osprey I to pay off
certain financings that were coming due. See 10/27/04 Deposition Transcript of D. Dwight Scott
(“10/27/04 Scott Depo. Tr.”) at 217:23-218:20. DLJ and Enron had originally intended to use
these assets in a FAS 125 transaction called “Margaux.” See 8/1/05 Capolongo Depo. Tr. at
76:19-77:18. These assets were ultimately not used for Margaux though, because (as DLJ knew)
their transfer was prohibited by restrictions. See 7/13/05 Deposition Transcript of Brian Herman
(“7/13/05 Herman Depo. Tr.”) (a DLJ banker) at 138:9-13. But despite the transfer restrictions
(see Ex. 11032 at CSFBLLC006296213, CSFBLLC006296231), the Sarlux and Trakya assets
were parked in Osprey I (see 8/1/05 Capolongo Depo. Tr. at 55:25-56:15) – demonstrating yet
another way that the Osprey I transaction was illegitimate.
198
DLJ of course had knowledge of the true value of Sarlux, as it had performed due
diligence in the Osprey I transaction (see Ex. 21275 at 6-7 (Interrogatory Response Nos. 5 & 6);
1/6/05 Capolongo Depo. Tr. at 169:11-19), and had been informed about a FAS 140 transaction
involving Sarlux (see Ex. 11028). As Mr. Fastow declares: “Because [of] the amount and type
of business CSFB did for Enron, and based upon my conversations with Mr. Jeffe, it was my
impression that CSFB was one of the banks most familiar with Enron’s assets.” Fastow Decl.,
47.
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valuation of assets in Parmalat III, 414 F. Supp. 2d at 428. Just like BoA in Parmalat III, DLJ
and CSFB did not care that the valuation had been falsified – because Enron was not truly
transferring assets to a party independent of itself and the “equity” in the deal was actually
guaranteed. Here too, the Osprey I transaction “depended on a fiction, namely” (Parmalat I,
376 F. Supp. 2d at 504) that assets such as Sarlux were really worth the assessed value. CSFB’s
conduct of acquiescing in the false valuations of assets was also similar to CSFB’s alleged
conduct held actionable in Parmalat I, i.e., that of overstating the value of the bond conversion
right. 376 F. Supp. 2d at 505.
CSFB is further liable for Osprey I under Parmalat because it funded LJM1 through a
shell entity. In Parmalat I, Judge Kaplan expressed his agreement (with one minor exception
not applicable here) with the holding of Lernout, 236 F. Supp. 2d at 170-71, that upheld as
actionable under Rule 10b-5(a) and (c) “allegations that an issuer’s business partners had created
shell companies, knowing that the issuer intended to enter into bogus licensing agreements with
them and thus to inflate its bottom line.” Parmalat I, 376 F. Supp. 2d at 502. Also, Parmalat II
upheld claims against outside lawyers because they “created and controlled” “shell companies”
to consummate a “sale” that was really “a fiction” designed to permit Parmalat to misreport it.
Parmalat II, 383 F. Supp. 2d at 625. As discussed, $15 million of the Osprey Certificates were
purchased by LJM1; LJM1 obtained the funds for this from CSFB in the bridge loan (discussed
supra at §II.B.2.a.(2)), which was funneled to LJM1 through ERNB. As established in the
discussion of the Rhythms Hedge, supra §II.B.2.a.(1), ERNB was a shell entity CSFB created
and controlled.
CSFB is further liable for this same conduct (of funneling LJM1 the money for the $15
million in Osprey I Certificates) in another way, to wit, because ERNB was a sham entity. As
also established in the discussion concerning the Rhythms Hedge, supra §II.B.2.a.(1)., ERNB
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was a sham entity because it purported to make an “investment” in LJM LP, but this was a ruse
because this so-called “investment” was never truly at risk. As stated, under the SEC’s test, it is
a primary violation of Rule 10b-5(a) and (c) where an “investment bank engages in the creation
of a sham entity as part of . . . services to arrange . . . financing” that the client will use to
commit securities fraud. SEC Brief (Ex. 3) at 20. And under the Ninth Circuit’s test, “the
invention of sham corporate entities to misrepresent the flow of income, may have a principal
purpose of creating a false appearance.” Homestore, 452 F.3d at 1050.
(ii)
Osprey II
As mentioned, this transaction featured the issuance of $750 million of Notes, €315
million of Euro Notes and $50 million of Certificates. 199
The initial Note purchasers and
underwriters in Osprey II included DLJ and CSFB. Osprey II closed on October 5, 2000. See
Solomon App. at 289. 200 See Ex. 20517; 1/6/05 Capolongo Depo. Tr. at 240:12-15.
The $50 million of certificates issued in Osprey II were acquired by a single purchaser –
Osprey Associates II LLC (“OAII”), which was originally formed on September 27, 2000 by
DLJ (with DLJ Capital Corporation as its sole member). Solomon App. at 290. OAII received
the $50 million for the purchase from another entity called OA Investments LLC (“OA”). OA
was capitalized with $7.5 million of equity and $42.5 million of nonrecourse debt, for a total
capitalization of $50 million. The $42.5 million of debt was funded by another special purpose
199
Osprey executed an exchange agreement with Enron that fixed the U.S. dollar equivalent
for the Euro note at approximately $286 million. See Ex. 53 at AB000054294-303 (10/5/00
Enron Agreement).
200
At this point, the total capitalization of Osprey, $2.436 billion in Notes, plus $220 million
of Certificates, totaled $2.656 billion. This was supported by Enron MCPS, Enron demand and
amortizing notes of $538.1 million, rights of Osprey in the WW LP partnership agreements, and
the right to foreclose on and liquidate WW LP’s ownership interests in the lower tier investment
entities, gaining control of the assets held therein. See Solomon App. at 289-90.
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entity called Parrothead II LLC. 201
(Parrothead’s $42.5 million loan to OA was funded by DLJ.
See 1/12/05 Nath Depo. Tr. at 214:23-25, 215:4-9.) The $7.5 million of equity was contributed
by DLJ Capital Corp. ($6.5 million; see Ex. 11060 at CSFBLLC006016873) and by DLJ bankers
on the Osprey/Whitewing deal team ($1 million; see Ex. 11060 at CSFBLLC006016873).
OA used the $50 million to purchase a sole membership in OAII, 202 which in turn
purchased the $50 million of Osprey Certificates. DLJ Capital Corp. assigned its member
interest in OAII to OA. 203
DLJ Capital Corp. subsequently resigned as manager of OA and
appointed an entity called LJM2-Osprey II, LLC as manager 204 and sold its $6.5 million equity
investment to LJM2 at the same time. 205
This Certificate purchase thus appeared as follows:
201
See Ex. 54 at SS000034717-63 (10/5/00 Note Purchase Agreement among OA
Investments LLC and Parrothead II LLC).
202
On October 5, 2000, its LLC agreement was amended and restated to admit OA
Investments LLC as sole member and manager, in exchange for its $50 million investment.
203
See Ex. 55 at SS000034620-59 (10/5/00 Amended and Restated LLC Agreement of
Osprey Associates II LLC).
204
See Ex. 56 at DP LJM2034130-42 (10/00 Resignation and Appointment of Manager and
Amendment to the OA Investments LLC Agreement).
205
See Ex. 57 at AB000054013-16 (10/4/00 DLJ Osprey II Closing Steps memo).
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DLJ Employees
DLJ Capital Corp
LJM2 Osprey II
LLC
$1.0 M
$6.5 M 5 days after
closing
Managing Member
OA Investments
LLC
$50.0 M
Parrothead II LLC
$42.5 M $42.5 M
Notes
DLJ
Osprey
Associates II
LLC
$50.0 M
Osprey Trust
Solomon App. at 291. 206
In this way, DLJ delivered all $50 million in Osprey Certificates to LJM2. See 1/12/05
Nath Depo. Tr. at 211:6-213:9, 215:10-14. As Nath confirmed:
Q. And all 50 million or so, 1 million yours and other individuals at DLJ, 6-
1/2 million LJM, 42-1/2 million borrowed from DLJ, was used to purchase equity
certificates from Osprey [II]; correct?
A. Correct.
Q. And that 50 million in Osprey [II] certificates were controlled through a
general partnership by LJM?
A. Correct.
* * *
Q. And due to an earlier agreement that 50 million or so had no consent rights
to any purchases over – by Whitewing of assets from Enron; correct?
* * *
206
A diagram of the larger Osprey II transaction can be seen at Ex. 21283 at INTO1504436.
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A. That was my recollection. I don’t know if that’s correct. That’s my
recollection, yes.
Q. And was that 50 million the only new equity certificates issued in Osprey
[II]?
A. To my recollection, yes.
Q. So the only new equity issued in Osprey [II] was equity which became
controlled by LJM2?
A. Yes.
* * *
1/12/05 Nath Depo. Tr. at 215:4-216:6; see also 1/12/05 Nath Depo. Tr. at 211:6-13.
Just why DLJ manufactured the entities OA and OAII to purchase and then flip the
Osprey II Certificates to LJM2 is clear: “The insertion of OA into the structure appears to have
been done solely for accounting purposes to disguise the leveraging of the $50 million equity
investment.” Solomon App. at 291. Enron told DLJ bankers LJM2 could not buy Certificates
directly from Osprey without invalidating the structure; they needed to be purchased from the
“open market”:
Q. You inquired of Enron, is it okay with the accounting for the structure to
let LJM2 own equity certificates in Osprey III?
A. Correct.
Q. And were you told by Enron that LJM2 could not buy it directly?
* * *
A. My understanding was that that is correct, yes.
Q. Were you told as part of your due diligence why LJM2 could not purchase
the equity certificates directly?
A. No. All I know is that they couldn’t purchase them directly. They had to
purchase them on the open market.
8/1/05 Capolongo Depo. Tr. at 365:7-21.
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So DLJ would furnish the false appearance that LJM2 had purchased the Certificates on
the “open market” by selling them to LJM2 through OA in an orchestrated, prearranged deal.
This was DLJ’s intent from the very start. Nath, Scott, and Capolongo described the proposed
transaction as follows: 207
We are seeking approval for a $7.5 million bridge investment in a DLJstructured
LLC (“New LLC”) that will own an equity interest in the Osprey
Certificates. New LLC will also issue $42.5 million in debt securities to DLJ’s
proprietary trading desk. Together, these two transactions will fund an
acquisition of $50 million of Osprey Certificates. Within approximately one
week of closing, LJM II, an investment fund managed by Andy Fastow, CFO of
Enron, in his individual capacity and not as CFO, will purchase $6.5 million of
the New LLC equity with the deal team acquiring the remaining $1 million.
Ex. 11060 at CSFBLLC006016873. The same document confirms the intent and purpose behind
DLJ’s creation of OAII, stating that DLJ bankers received approval for a “DLJ-structured LLC”
to acquire all $50 million in Osprey II Certificates, which would then be controlled by LJM2
partnership. See id.
CSFB is liable under Rule 10b-5(a) and (c) for the outright deception it practiced in
Osprey II. The Bank’s documents and the testimony of its witnesses clearly establish that DLJ
created a web of shell and sham entities (i.e., OA, OA II, Parrothead) solely to give the false
appearance that LJM2 acquired the Osprey II Certificates on the “open market” – in an effort to
fraudulently obtain a desired accounting treatment for the deal.
This type of deception is clearly actionable under the Parmalat cases. DLJ’s use of these
dummy entities “created the appearance” that LJM2 purchased the Certificates on the open
market when “the reality was quite different” (Parmalat I, 376 F. Supp. 2d at 504 (discussing
207
The entity referred to here as “New LLC” eventually became OAII.
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invoice schemes)), 208 as DLJ orchestrated the entire purchase transaction with the intent of
reselling them to LJM2. DLJ’s dummy entities were “simply a device or excuse that permitted
[Enron]” (Parmalat I, 376 F. Supp. 2d at 488) to consider LJM2 as having purchased the
Certificates as required. The transaction “depended on a fiction, namely” (id. at 504) that LJM2
had bought the Certificates on the open market – and this fiction was created by DLJ.
Also, Osprey II was a transaction that had the “principal purpose and effect” to “create
the false appearance of fact.” Homestore, 452 F.3d at 1048 (describing its own and SEC’s test).
Osprey II kept the Osprey fraud afloat, resulting in Enron, as of December 31, 2000, improperly
understating debt by $2.646 billion (see Solomon Supplemental Report, Schedule 6 at 11) and
overstating cash flow from operations by $548 million (see id., Schedule 5 at 9). This was the
direct result of DLJ’s deception in creating the false appearance that the transaction complied
with accounting requirements.
Further, CSFB is liable for DLJ’s structuring of the transaction. Osprey II worked off of
Nath’s original Osprey I structure (discussed above). DLJ received a hefty $1.875 million
“structuring fee” for Osprey II. Ex. 33011 at CSFBLLC000031911. And as indicated by the
above testimony and documentary evidence, DLJ was informed by Enron of LJM2’s need to
purchase on the open market, and DLJ’s solution was to route the certificates through OAII. See
Ex. 11060 at CSFBLLC006016873. Indeed, DLJ referred to OAII as a “DLJ-structured LLC”
for the deal. See id.
And CSFB is liable as well because OAII, OA and Parrothead were shell and sham
entities used to commit fraud. As indicated above, DLJ funded both the $7.5 million of equity
208
See also Parmalat II, 383 F. Supp. 2d at 625-26 (holding that transactions with shell
entity formed by law firm “‘created the appearance of a conventional’ sale and loan ‘when, in
fact, the reality was quite different’”).
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and $42.5 million of debt for the $50 million in Certificates, and did so through OAII, OA and
Parrothead – entities created solely to give the false appearance that LJM2 was buying on the
open market. This is actionable conduct. 209
But also, CSFB engaged in further actionable conduct by employing false asset
valuations in Osprey II, just like in Osprey I. Proof of this is presented by the fact that
eventually the Osprey Note holders were left with asset collateral over a billion dollars short of
the debt raised. See, e.g., Enron September 30, 2001 10-Q (Ex. 41) at 33 (Osprey alone resulted
in Enron improperly underreporting $1.7 billion of losses).
This is further indicated by the fact that on numerous occasions significant impairments
to the assets were described in drafts of the Osprey I offering materials, but all description of
those assets were excised in the final version. While this shows falsity and deception in the
offering materials, it also demonstrates that these assets had such impairments but were being put
into Osprey at inflated values that did not reflect them – hence the need to eliminate all mention
209
Under the SEC’s test, it is a primary violation of Rule 10b-5(a) and (c) where an
“investment bank engages in the creation of a sham entity as part of . . . services to arrange . . .
financing” that the client will use to commit securities fraud. See SEC Brief (Ex. 3) at 20. And
under the Ninth Circuit’s test, “the invention of sham corporate entities to misrepresent the flow
of income, may have a principal purpose of creating a false appearance.” Homestore, 452 F.3d
at 1050. In Parmalat I, Judge Kaplan expressed his agreement (with one minor exception not
applicable here) with the holding of Lernout, 236 F. Supp. 2d at 170-71, that upheld as
actionable under Rule 10b-5(a) and (c) “allegations that an issuer’s business partners had created
shell companies, knowing that the issuer intended to enter into bogus licensing agreements with
them and thus to inflate its bottom line.” Parmalat I, 376 F. Supp. 2d at 502. Also, Parmalat II
upheld claims against outside lawyers because they “created and controlled” “shell companies”
to consummate a “sale” that was really “a fiction” designed to permit Parmalat to misreport it.
383 F. Supp. 2d at 625.
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of them, to prevent discovery of the inflated nature of the valuations. DLJ was aware of all this –
it worked on drafts of the Offering Circular for Osprey II. 210
For example, one of the overvalued assets in Osprey II was an equity interest in
“Heartland Steel.” A draft of the Offering Circular described that “Heartland is in technical
default of its senior and subordinated loans,” and is incurring a “liquidity crisis.” Ex. 20523 at
LBP0095876. Yet no description of Heartland Steel was provided in the final Osprey II Offering
Circular. See Ex. 20517 at DBI012379. Similarly, a draft disclosed Whitewing’s investment in
a trust called “ENA CLO,” and described that certain loans of the trust had defaulted. See Ex.
20523 at LBP0095876-77. But no description of the ENA CLO investment was included in the
final Osprey II Offering Circular. Ex. 20517 at DBI012379-80.
In deposition, DLJ banker Capolongo could offer no explanation for why the Osprey II
Offering Circular was sanitized of all mention of these assets, other than simply that attorneys
advised their removal:
Q. There were a number of these assets and I can read them off, you can
compare them, the documents if you wish, but they are the Polish asset, Heartland
Steel, ENA CLO and Yosemite certificates that were included in the preliminary
draft that the underwriters reviewed but were not included in the final document
sent to the investors.
A. Uh huh.
* * *
Q. Okay. So other than communications with counsel, being Milbank –
A. Uh-huh.
Q. – there is no other reason why these assets were included in the
preliminary but not included in the final.
210
Compare Ex. 20523 at LBP0095876 with Ex. 20517 at DBI012379; 8/1/05 Capolongo
Depo. Tr. at 142:25-143:12 (DLJ reviewed and commented on the Osprey II Offering Circular
and “[p]articipated in joint drafting discussions and meetings with Enron and others.”).
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A. None that I recall.
8/1/05 Capolongo Depo. Tr. at 147:22-148:21. As discussed above, DLJ’s conduct of
acquiescing in the false valuations renders CSFB liable under Rule 10b-5(a) and (c). See
Parmalat III, 414 F. Supp. 2d at 428; Parmalat I, 376 F. Supp. 2d at 505.
Finally, there is an additional, powerful piece of evidence that establishes that the entire
Osprey II transaction was inherently fraudulent. An October 14, 2000 DLJ Osprey II “Closing
Steps” memo (describing the funding of the Osprey II proceeds) provides that the funds would
be transferred directly to Enron – not to Osprey or Whitewing. 211
As Mr. Solomon rightly
concludes, “This demonstrates that Osprey/Whitewing was a sham – a structure formed only to
perpetrate an accounting fiction, while the substance was a loan to Enron.” Solomon App. at
292. Thus, without a doubt, Osprey II was a transaction that had the “principal purpose and
effect” to “create the false appearance of fact.” Homestore, 452 F.3d at 1048; see SEC Brief
(Ex. 3) at 18.
This Court should reject CSFB’s arguments that it is not liable for the Osprey
transactions. CSFB claims that this Court “specifically ruled in its Class Certification Opinion”
that Osprey and Marlin “‘were not ‘inherently deceptive.’” Defs’ Mem. at 12 (quoting Enron,
2006 U.S. Dist LEXIS 43146, at *389). This, however, is simply not true. In reality, the Court
ruled that Lead Plaintiff’s allegations regarding these deals did “not explain specifically what
was inherently deceptive in these structurings.” Enron, 2006 U.S. Dist LEXIS 43146, at *389.
As demonstrated by the discussion above, Lead Plaintiff here explains how the Osprey
transactions were inherently deceptive and are otherwise actionable under Rule 10b-5(a) and (c).
Lead Plaintiff does the same for the Marlin transaction. See infra, at §II.B.2.e.(2).
211
See Ex. 57 at AB000054013-16 (10/4/00 DLJ Osprey II Closing Steps memo).
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While the Bank claims that the Osprey (and Marlin) transactions were “widely reported
to investors and the public” (Defs’ Mem. at 23), this is hardly dispositive. Regarding Osprey,
Solomon concludes that the disclosures made were “clearly inadequate.” Solomon Report at
277. Among other things, the deceptive features of Osprey were never disclosed to investors.
Regarding the third quarter 1999 Form 10-Q, Solomon observes that:
The disclosure also fails to mention the i) preferred shares are pledged as
collateral supporting $1.5 billion of notes and certificates issued by Osprey, ii)
$15 million of the equity certificates were owned by LJM, an Enron related party,
and iii) the $922 million is intended to be invested by Whitewing in Enron
merchant assets at prices intended to be fair market value or prices that would be
reached in a simulation of arm’s length negotiation but in which Enron has the
exclusive right to set the purchase price.
Id. 212
Thus, this simple fact that the transactions were disclosed does not insulate CSFB from
liability.
CSFB also claims that Osprey (and Marlin) were approved by Enron’s Board (and
others), and that the Bank supposedly believed that the Company accounted for the transactions
correctly. Defs’ Mem. at 23-25. But none of these factual assertions erase the evidence that the
Osprey transactions were inherently deceptive because they were mere financings disguised to
appear as share-trust transactions, the 3% minimum “at risk” equity was not present, Enron
actually controlled WW LP’s asset sales through the Company’s employees, the asset sales were
at inflated values, and CSFB knowingly used OAII to circumvent accounting rules. In the face
of this evidence, Board approval is irrelevant, and CSFB’s supposed belief that no accounting
212
Fastow also erases any doubt that disclosures concerning Osprey and Marlin (or any
other disclosures) were inadequate to inform investors of the true nature of Enron’s financial
condition: “A. I can’t speak for all investors, but I cannot understand, from looking at the
financials today, how someone could have discerned our true financial condition by looking at
the financial statements.” 10/23/06 Fastow Depo. Tr. at 76:11-15.
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ules were violated is sharply contradicted. In any event, any question of CSFB’s belief is for
the jury to consider.
The Bank also claims that CSFB’s accounting expert and others “all disagree” with
Solomon’s conclusion that the accounting for Osprey was incorrect. See Defs’ Mem. at 26 &
n.81. But this is ground for denying CSFB’s Motion, not granting it. Competing expert
testimony warrants the denial of summary judgment. 213
CSFB’s assertion that “Lead Plaintiff has no evidence that CSFB or DLJ specifically
‘designed’ Osprey or Marlin to violate GAAP or to mislead investors” (Defs’ Mem. at 26
(emphasis in original)) is utterly false. As discussed, Fastow identifies Larry Nath as “the person
most responsible for developing and executing . . . Marlin [and] Osprey.” Fastow Decl., 48.
Nath’s Marlin structure ultimately became the Osprey I transaction. 1/12/05 Nath Depo. Tr. at
137-138, 142:15-24. A jury could easily infer that Osprey and Marlin were structured to violate
GAAP and/or deceive investors based on the CSFB email stating that “Osprey is a vehicle
enabling Enron to raise disguised debt which appears as equity on Enron’s balance sheet” and
that “Osprey serves the added purpose for Enron of being an off-balance-sheet parking lot for
certain assets.” Ex. 10264. The same inference flows from Nath’s admission that while Osprey
ostensibly presented asset sales, in reality the deal “was a financing.” 1/12/05 Nath Depo. Tr. at
195:9-11.
(2) Marlin I & II
Marlin I and II were CSFB deals with Enron of the same basic “share trust” variety as
Osprey. And as with Osprey, the Marlin transactions resulted in Enron removing assets from,
213
See Owens, 297 F. Supp. 2d at 1110; Bieghler, 633 F.2d at 534; Provenz, 102 F.3d at
1490; Worldcom, 352 F. Supp. 2d at 500; Sightsound.com, 391 F. Supp. 2d at 354.
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and avoiding the need to record debt on, its balance sheet. Marlin I was used in December 1998
to move off balance sheet Company debt incurred in acquiring a water services company. Enron
had intended to repay Marlin I’s debt and certificate obligations through the initial public
offering of the entity that held the water services company, but the IPO raised only enough
money to repay just 20% of the debt. See 1/12/05 Nath Depo. Tr. at 223:12-22. Thus Marlin II
was used in July 2001 to refinance Marlin I without having to sell Enron stock and to retain the
benefits obtained from the initial Marlin transaction. See Solomon App. at 300.
The story of Marlin I and II begins in 1998, with Enron’s formation of Azurix Corp.
(“Azurix”) to own and operate strategic water and wastewater assets and to develop related
infrastructure. One of Azurix’s first acquisitions was Wessex Water Plc (“Wessex”), a water and
wastewater services company based in southwestern England. The approximately $2.4 billion
purchase was completed in November 1998, which Enron financed though a $522 million cash
infusion from itself, Company debt of $1.1 billion, Enron loans of $246 million to Azurix
subsidiaries, and $542 million in debt at the Azurix level. 214
Marlin I was closed in December
1998 to refinance the $1.1 billion in debt.
Marlin I proceeded as follows: 215
In December 1998, Enron formed Atlantic Water Trust
(“Atlantic”) (the HoldCo entity) and contributed to it (1) ownership of Azurix (including
Wessex); and (2) a £73 million ($125 million) debt obligation (“AEL Debt”) issued by Azurix
Europe Ltd. (a subsidiary of Azurix) (“Azurix Europe”), in exchange for a 50% voting interest
and a Class B beneficial interest. At the same time, the Marlin Water Trust (“Marlin Trust”) (the
214
See Ex. 58 at CSFBLLC000020912-1119 (12/8/98 Marlin Water Trust Offering
Memorandum).
215
Solomon explains the Marlin I transaction in Solomon App. at 300-04.
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Issuer entity) issued $1.024 billion of notes (“Marlin I Notes”) 216 and $125 million of certificates
(“Marlin I Certificates”), 217 and contributed these proceeds to Atlantic in exchange for a 50%
voting interest and a Class A beneficial interest. See also Solomon App. at 300-01. The Marlin I
Certificates purported to be the requisite “at risk” “equity” in the deal. See Solomon Report at
261-63.
Atlantic used $900 million of the $1.149 billion contributed by Marlin Trust to repay a
portion of the debt Enron incurred to acquire Wessex. Atlantic contributed the remaining $249
million in cash and the AEL Debt to Bristol Water Trust (“Bristol”). Bristol invested the $249
million cash in Enron notes, which were structured to cover payments of the interest on the notes
in Marlin II, and the yield on the Marlin I Certificates. See also Solomon App. at 301.
Enron contributed 204,800 shares of its preferred stock (“Preferred Stock”) to establish a
Preferred Share Trust. Enron was the sole beneficial owner of the Preferred Share Trust. The
stock provided credit support for the Marlin I Note holders. 218 See also Solomon App. at 301.
In addition, Enron entered into a Remarketing Agreement which contained mechanisms
to reset the Preferred Stock at a conversion and dividend rate designed to generate net proceeds
at least equal to the Marlin I Notes repayment amount. If the proceeds from the issuance of the
216
Deutsche Bank and DLJ were the initial purchasers of the Marlin Notes. See Ex. 59 at
CSFBLLC005710002-34 (12/8/98 Marlin Water Trust Note Purchase Agreement, Schedule A).
217
Ex. 60 at CSFBLLC005709989-10000 (12/8/98 Marlin Water Trust Certificate Purchase
Agreement, Schedule I).
218
The Trustee for the Preferred Share Trust was obligated to sell these shares upon the
occurrence of certain “Trigger Events,” and use the proceeds to repay the Marlin lenders. The
Marlin Note Trigger Events that required repayment of the debt were: (1) an event of default
with respect to the Marlin Notes; (2) an amount sufficient to repay the Marlin Notes (the
Repayment Amounts) had not been deposited with the Marlin Indenture Trustee at least 120 days
prior to the maturity date of the Marlin Notes; or (3) both (a) a downgrade of the Enron senior
debt to below Baa3 by Moody’s or BBB- by Fitch and (b) a decline in Enron’s common stock
price to $34.13 (subject to specified adjustments).
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Enron Preferred Stock were insufficient to redeem the Marlin I Notes in full, their holders would
look to proceeds from the Azurix Europe Indebtedness. 219
In the event the proceeds from these
sources were insufficient, Enron was to purchase a portion of Marlin Trust’s beneficial interest in
Atlantic to provide funds for the repayment of the Marlin I Notes. 220
However, the Indenture
Trustee was allowed to sell Marlin Trust’s interest in Atlantic only to the extent the sale price
was sufficient to discharge the Marlin I Notes and the Indenture, and to distribute to the Marlin I
Certificate holders all amounts owed to them. 221 See also Solomon App. at 302.
219
But the need for recourse to the Azurix Europe Indebtedness was deemed unlikely,
“given Enron’s obligation to reset the stock at a conversion and dividend rate designed to
generate proceeds equal to the amount due on the Marlin Notes.” Ex. 61 at
JPMNBY2002296154 (10/98 Presentation to Investors, $125,000,000 Certificates of Beneficial
Ownership in Marlin Trust).
220
Ex. 62 at CSFBLLC005710944-82 (12/17/98 Enron Preferred Stock Remarketing and
Registration Rights Agreement, Section 8(h)); Ex. 63 at CSFBLLC000035750-97 (7/19/01
Remarketing and Registration Rights Agreement, Section 8(h)).
221
Ex. 64 at CITINEWBY0006000-208 (12/8/98 Marlin Water Trust Offering
Memorandum).
- 178 -

Diagrammatically, Marlin I appeared as follows:
Enron (through
wholly owned
subsidiaries
$1.024 mm
Notes
$125 mm
Certificates
Class B
50% Vote
MCPS 100% Class A
50% Vote
Marlin Water
Trust
Voting Trust
(Share Trust)
MCPS
Excess funds to
retire debt
Atlantic Water
Trust
$1,150 mm
$249 MM cash
for Overfund Amt
100% 100%
$249 mm
Bristol Water
Trust
$249 mm Overfund
Amounts
$125 mm AEL Debt
Azurix Ltd /
Azurix Europe Ltd.
Wessex
Solomon App. at 304.
This structure of Marlin I was deceptive. While Marlin Trust purported to bring the
minimum “at risk” “equity” investment to justify its nonconsolidation with Enron, such “equity’
did not truly exist, because it was guaranteed repayment. As Solomon notes, a Marlin I
presentation to potential investors stated that:
The Marlin Certificate holders will look to the following . . .: (i) proceeds in
excess of $180 million from an initial public offering [“IPO”] . . . (ii) proceeds
from repayment/maturity of $125 million senior unsecured loans to Azurix
Europe Ltd [the “AEL Debt”] . . ., and (iii) the sale of [Atlantic Water Trust’s]
stock in Azurix through the liquidation of [Atlantic Water Trust].
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Solomon Report at 261. 222
But also, CSFB noted internally that:
In addition . . . Enron will provide additional interest and principal support to
Marlin. Enron will effectively guarantee the interest and yield requirements on
the Senior Notes and the Certificates. $125 million Azurix Europe indebtedness
contributed by Enron will support Marlin.
Solomon Report at 261. 223
As Solomon explains, in the deal Enron wrote an option to Bristol
that would ultimately permit Marlin Trust to use the AEL Debt as a guarantee of repayment for
the Marlin I Certificates. See Solomon Report at 262.
Thus, because Marlin Trust did not in fact present the requisite “at risk” “equity”
contribution, Marlin Trust “should have been consolidated, causing Enron to record as much as
$1,149 million as additional debt beginning with year-end 1998.” Solomon Report at 263.
Marlin I, however, was structured to avoid this result. In fact, CSFB knowingly effected
this deception, as it structured the Marlin I transaction precisely to move the subject debt off
Enron’s balance sheet. Larry Nath and his structured-finance group at DLJ “work[ed] closely
with Enron to structure Marlin appropriately.” Ex. 50821 at CSFBLLC006360870. At
deposition, Nath confirmed DLJ worked on the Marlin structure:
Q. Did DLJ work on the structuring?
* * *
A. We worked on, certainly we worked on elements of the – primarily the
credit structure. Again, the box and arrows, if you will.
1/12/05 Nath Depo. Tr. at 119:11-16. Fastow considers “Larry Nath as the person most
responsible for developing and executing” “Marlin.” Fastow Decl., 48.
222
Ex. 50844 (quoting from Presentation to Investors – $125,000,000 Certificates of
Beneficial Ownership in Marlin Trust, October 1998, prepared by CSFB and Deutsche).
223
Ex. 65 at CSFBLLC005709802-73 (12/98 Quoting Overview of Pricing for Marlin Water
Trust, Azurix, prepared by CSFB).
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DLJ knew the purpose of its Marlin I structure – to hide Enron’s debt from the Wessex
acquisition. As DLJ’s own Project Marlin due diligence packet explicitly states, “Marlin’s
purpose is to fund the take out of $888.5 million of temporary financing in the Wessex
acquisition, and to replace it with a structured sale of equity . . . .” Ex. 14014 at
CSFBLLC000032500. DLJ plainly was concerned about the propriety of Marlin, pointedly
asking in its due diligence materials, “how public do we want to go with Marlin?” Id. And DLJ
knew Marlin had to be in place by year-end to distort Enron’s financials: “The structure must be
in place by year-end at the latest . . . . Timing is critical in bringing Enron’s debt off balance
sheet for year-end reporting purposes.” Id. at CSFBLLC000032501.
DLJ’s internal due diligence materials square with Fastow’s declaration, in which he said
the “primary purpose that Enron entered into the share-trust structure was to lower its reported
debt and, in some cases to increase reported funds flow from operations.” Fastow Decl., 49.
Nath and other DLJ bankers identified “Enron’s key objectives [addressed by the Marlin
financing] (i) obtaining ‘equity’ treatment from the rating agencies for the Marlin structure, thus
limiting Enron bondholders’ exposure to additional capital investments in the water sector; (ii)
equity accounting for Enron’s investments (Wessex is the first investment) in its new water
utility investment vehicle, Azurix LLC, and (iii) debt-like after tax funding costs for the Marlin
portion of the investment.” Ex. 50821 at CSFBLLC006360870; 1/13/05 Nath Depo. Tr. at
306:23-307:17. Nath and others explained: “Effectively, the [Marlin] structure provides Enron
with a leveraged equity co-investor at debt rates of return and capped upside.” Ex. 50821 at
CSFBLLC006360870; 1/13/05 Nath Depo. Tr. at 306:23-307:17.
The purpose in labeling it “equity” was to deconsolidate the chain of companies below
Marlin – Atlantic Water Trust, Azurix, and Wessex – and hide the debt, interest expense, and
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embedded losses. See Solomon App. at 300 (Marlin allowed deconsolidation without having the
financing show up on Enron’s financial statements). As Nath testified:
Q. But the Marlin transaction you did know was to either keep the financing
off of Enron’s balance sheet or to move it off Enron’s balance sheet, if it was
already on?
* * *
A. I understood that was one of their objectives, yes.
1/12/05 Nath Depo. Tr. at 105:16-22. Fastow provides corroboration for the fact that CSFB
knew exactly what it was doing in Marlin I:
Based on my conversations with CSFB executives, both Enron and CSFB
understood that: (a) these vehicles were a way to finance assets and were not true
operating companies; (b) Enron effectively controlled the vehicles; and (c) the
book value of the assets in the vehicles was, in some instances, in excess of the
market value of the assets.
Fastow Decl., 50.
CSFB/DLJ personnel understood that the supposed “equity” in Marlin I was not “at risk.”
These persons knew the mechanics of the Marlin I structure. As CSFB banker Dominic
Capolongo testified:
Q. So you had, DLJ as a company had to understand the structure of Marlin
I?
A. Correct.
Q. You had to understand where the proceeds were going to go?
A. Yes. I agree.
* * *
8/1/05 Capolongo Depo. Tr. at 222:18-24. This meant understanding that the “equity” was not
truly “at risk”:
Q. In the discussions that DLJ was involved with with the potential certificate
investors [in Marlin], did the subject of how the certificate investors were going to
get their money back come up?
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A. Structurally, yes, absolutely, correct.
* * *
Q. How were the certificate investors going to be repaid in the Marlin I
structure?
* * *
A. Through one of a number of methods. Either by Enron paying them back
out of their pocket. Ultimately this was an Enron credit. So either one, Enron
basically put, forked over a billion dollars.
8/1/05 Capolongo Depo. Tr. at 259:4-23. A document prepared by CSFB states that “Enron will
effectively guarantee the interest and yield requirements on the Senior Notes and the
Certificates.” 224
And it was CSFB who was responsible for invalidating the Marlin I structure in this
manner, as the Bank, in structuring the transaction, built in the guaranteed recourse for the
Certificate holders. A CSFB pitch document for the Marlin I Certificates, dated June 2001, notes
of the structure:
• Strong sources of principal repayment for Marlin Certificate Proceeds from $125
million Azurix Europe Ltd. Note (Azurix Europe is currently rated Baal/BBB+ by
Moody’s and Fitch.
• No change in underlying collateral for Marlin Certificate Holders (i.e., Azurix
Europe Ltd. note).
Ex. 50832 at CSFBLLC006361167, CSFBLLC006361171; see also Solomon Rebuttal Report at
41-42 (identifying “numerous emails and documents provid[ing] anecdotal evidence that AEL
Note was support for the [Marlin] equity”).
Marlin I was set to mature in December 2001, and under the transaction’s terms, Enron
needed to deposit more than $1 billion by August 2001. Solomon Report at 259. Since Enron
224
Ex. 65 at CSFBLLC005709835 (12/98 Overview of Pricing for Marlin Water Trust,
Azurix, prepared by CSFB).
- 183 -

wished to avoid issuing more equity by selling the convertible preferred shares within Marlin I,
and lacked the cash to repay the Marlin I security holders, Marlin II was consummated, which
effectively repaid Marlin I and extended its maturity to July 15, 2003. Solomon Report at 259-
60.
Marlin II was just as invalid as Marlin I. 225
Like its predecessor, in Marlin II the
supposed “at risk” “equity” was not present because the certificates were guaranteed repayment
by the AEL Debt. A CSFB “Presentation to Investors” regarding Marlin II certificates discloses,
“No material changes in structure other than to permit refinancing of Marlin Notes – No changes
in underlying collateral for Marlin Certificateholders (i.e., Azurix Europe Ltd. Note).” Ex.
50832 at CSFBLLC006361167. The availability of the AEL Debt to guarantee the certificates
rendered the supposed “equity” not “at risk,” requiring the consolidation of Marlin Trust. See
Solomon Report at 261-63.
CSFB, who bought $7.5 million in Marlin II “equity” certificates (see Ex. 33037), knew
this. See Ex. 13384 at CSFBLLC006011426-27; 4/7/05 Deposition Transcript of David Koczan
(“4/7/05 Koczan Depo. Tr.”) at 233:23-234:14; 3/17/05 Devine Depo. Tr. at 286:19-287:15.
Evincing clear knowledge of the guarantee, in the credit memorandum for the “equity” purchase,
Moran described the “Facility” as a “Term Loan” to Devine, a managing director in credit risk
management. See Ex. 13489 at CSFBLLC006011427; 4/7/05 Koczan Depo. Tr. at 233:23-
234:14; 3/17/05 Devine Depo. Tr. at 286:19-287:15, 288:10-18. CSFB’s purported Marlin
equity commitment was also protected by the $3.3 million in fees CSFB expected from the
transaction. See Ex. 13384 at CSFBLLC006011438.
225
A diagram of Marlin II is featured in Solomon App. at 304.
- 184 -

CSFB further worked to execute Marlin II because the Bank’s bankers Capolongo and
Nath served as directors of Atlantic in the Marlin II structure.
Ex. 21301 at
CSFBLLC000205112. Controlling two of the three directors who voted on the Marlin II
offering, CSFB (via bankers Capolongo and Nath) determined whether the transaction went
forward. See id. at CSFBLLC000205112-13. Nath agreed to serve as an Atlantic director
“because it was a request . . . made by Enron,” and “it was going to be helpful to Enron for
[him] to be on the board of directors of” Atlantic. See 1/12/05 Nath Depo. Tr. at 239:14-240:7.
CSFB is liable under Rule 10b-5(a) and (c) for its conduct in Marlin I and II. As
indicated, CSFB structured the Marlin I transaction, which was essentially unchanged in Marlin
II. This structuring of Marlin I and II is plainly actionable under both this Court’s 6/5/06 Order
that Lead Plaintiff’s allegations regarding CSFB’s “structuring” “satisfy the requirements for
pleading primary violations of the statutes” (Enron, 2006 U.S. Dist. LEXIS 43146, at *170) and
Homestore, 452 F.3d at 1049.
Marlin I and II were also transactions that had the “principal purpose and effect” to
“create the false appearance of fact.” Homestore, 452 F.3d at 1048 (describing its own and
SEC’s test). As a result of the Marlin I and II transactions, Enron improperly avoided having to
record as much as $1.149 billion of debt in its financial statements. Solomon Report at 263.
And as indicated above, substantial evidence demonstrates that CSFB/DLJ understood that this
was the very purpose of the transaction it structured. For example, Nath testified:
Q. But the Marlin transaction you did know was to either keep the financing
off of Enron’s balance sheet or to move it off Enron’s balance sheet, if it was
already on?
* * *
A. I understood that was one of their objectives, yes.
- 185 -

1/12/05 Nath Depo. Tr. at 105:16-22. DLJ acknowledged that Marlin I was needed “for year-end
reporting purposes.” Ex. 14014 at CSFBLLC000032501. And Fastow declares that a “primary
purpose” of share-trust transactions was for Enron “to lower its reported debt.” Fastow Decl.,
49. This renders CSFB liable under the SEC and Homestore tests.
It is equally apparent that CSFB is liable for its role in Marlin I and II under the Parmalat
cases. Just like the invoicing schemes held actionable in Parmalat I, Marlin I and II were
transactions that appeared to be something they were not – a purported transfer of assets that was
really just a loan to Enron. Further, the assets placed in Marlin were carried at inflated values,
and CSFB knew this. See 10/23/06 Fastow Depo. Tr. at 248:4-249:5.
Also, as mentioned, CSFB knew that the assets in Marlin were overvalued. See 10/23/06
Fastow Depo. Tr. at 248:4-249:5. This renders CSFB liable as well, in the same manner as it is
liable for asset overvaluations in Osprey discussed supra.
3. There Is a Genuine Issue of Material Fact Concerning
Whether CSFB Acted with Scienter
It is clear that, in engaging in the conduct established above as actionable under Rule
10b-5(a) and (c), CSFB acted with scienter.
a. The Scienter Standard on Summary Judgment
Scienter encompasses “‘a mental state embracing intent to deceive, manipulate, or
defraud.’” Nathenson v. Zonagen, 267 F.3d 400, 408 (5th Cir. 2001). But:
Strict intentional misconduct is not required to show scienter, it is sufficient to
prove conduct that is an extreme departure from the standards of ordinary care
and presents a danger of misleading buyers or sellers, as well as either knowledge
of that danger, or a danger so obvious that the actor must be aware of it.
Trust Co. v. N.N.P. Inc., 104 F.3d 1478, 1490 (5th Cir. 1997). This is often formulated as a
standard of “severe recklessness.” Nathenson, 267 F.3d at 408. Thus, in order to establish
CSFB’s scienter in engaging in the inherently deceptive transactions with Enron, it is sufficient
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to demonstrate simply that CSFB knew, or was severely reckless in not knowing, that the
transactions presented a danger of misleading Enron’s investors. 226
Given the procedural posture of this case as being at the summary judgment stage, a few
other considerations apply. Initially, it must be observed that the fact-specific nature of the
scienter inquiry renders it normally inappropriate for resolution on a motion for summary
judgment: “Scienter is an inherently fact-specific issue that should ordinarily be left to the trier
of fact.” In re Zonagen Sec. Litig., 322 F. Supp. 2d 764, 774 (S.D. Tex. 2003). 227
Thus if Lead
Plaintiff’s evidence establishes a genuine issue of fact as to CSFB’s scienter (which it does), this
Court should submit it to the jury.
Also, it is clear that in examining Lead Plaintiff’s evidence of CSFB’s scienter, the
strictures of the Private Securities Litigation Reform Act of 1995 (“PSLRA”) concerning scienter
do not apply. As this Court is aware, at the motion to dismiss stage the PSLRA requires that the
plaintiff’s allegations yield a “strong” inference of scienter. 15 U.S.C. §78u-4(b)(2). The
PSLRA, however, operates only to alter the pleading requirements for scienter – but does not
alter the substantive standard of scienter. See Nathenson, 267 F.3d at 408 (“It seems clear to us
226
It should be stressed here that, to be liable, CSFB need not have known it was violating
the securities laws, but only have known, or been severely reckless in not knowing, the
underlying facts of that violation. See United States v. Kung-Shou Ho, 311 F.3d 589, 605 (5th
Cir. 2002) (“‘[T]he term “knowingly” does not necessarily have any reference to a culpable state
of mind or to knowledge of the law . . . . “The knowledge requisite to knowing violation of a
statute is factual knowledge as distinguished from knowledge of the law.”’”) (quoting Bryan v.
United States, 524 U.S. 184, 192 (1998)).
227
See also Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588, 602 (7th Cir. 2006)
(“‘Scienter is normally a factual question to be decided by a jury . . . .’”); In re Cerner Corp.
Secs. Litig., 425 F.3d 1079, 1084-1085 (8th Cir. 2005) (same quote); Press v. Chemical Inv.
Servs. Corp., 166 F.3d 529, 538 (2d Cir. 1999) (“‘Whether a given intent existed is generally a
question of fact, appropriate for resolution by the trier of fact.’”); (discussing scienter under
Section 10(b) and Rule 10b-5)); Provenz, 102 F.3d at 1489-90 (“Generally, scienter should not
be resolved by summary judgment.”) (emphasis in original).
- 187 -

that the PSLRA has not generally altered the substantive scienter requirement for claims brought
under section 10(b) and Rule 10b-5 . . . .”); Goldstein v. MCI Worldcom, 340 F.3d 238, 245 (5th
Cir. 2003) (same quote).
As such, at this stage of the proceedings Lead Plaintiff’s evidence of scienter need not
disclose a “strong” inference of scienter to be sufficient. Instead, it need only present an
inference of scienter. As the Fifth Circuit has recognized, outside the purview of the PSLRA, a
mere inference of scienter is sufficient:
In Nathenson, we stated that the plain language of the PSLRA makes clear that
our previous rule, which required that a plaintiff plead facts that merely “support
an inference of fraud,” had been supplanted by the PSLRA’s “strong inference”
requirement.
Goldstein, 340 F.3d at 245.
And further, because the PSLRA does not control the scienter inquiry here, the jury in
this case may properly draw from the evidence scienter inferences that may not necessarily be
cognizable under the PSLRA. 228
It should be noted in this regard that “[t]he factual background
adequate for an inference of fraudulent intent can be satisfied by alleging facts that show a
defendant’s motive to commit securities fraud.” Tuchman v. DSC Communications Corp., 14
228
See, e.g., Howard v. Everex Sys., 228 F.3d 1057, 1064 (9th Cir. 2000) (holding that
“[b]ecause the PSLRA did not alter the substantive requirements for scienter under §10(b),” the
standard on summary judgment or JMOL remains unaltered by cases applying the PSLRA’s
scienter pleading requirements); In re Homestore.com Sec. Litig., 347 F. Supp. 2d 790, 804 (C.D.
Cal. 2004) (“unlike the high pleading burden established by the [PSLRA] under which a plaintiff
must plead sufficient specific facts evincing a strong inference of ‘deliberately reckless or
conscious misconduct,’ a plaintiff opposing a motion for summary judgment may rely on
evidence of motive and opportunity to show an inference of scienter”).
- 188 -

F.3d 1061, 1068 (5th Cir. 1994); and see Nathenson, 267 F.3d at 409 (recognizing Tuchman as a
pre-PSLRA case accepting allegations of motive as sufficient to plead scienter). 229
Also, Lead Plaintiff’s evidence of CSFB’s scienter may permissibly be of the
circumstantial variety. As the Supreme Court observed in Herman & MacLean, 459 U.S. 375:
The Court of Appeals also noted that the proof of scienter required in
fraud cases is often a matter of inference from circumstantial evidence. If
anything, the difficulty of proving the defendant’s state of mind supports a lower
standard of proof. In any event, we have noted elsewhere that circumstantial
evidence can be more than sufficient.
Id. at 391 n.30. 230
In fact, circumstantial evidence is sufficient even under the PSLRA. See Fin.
Acquisition Ptnrs. v. Blackwell, 440 F.3d 278, 287 (5th Cir. 2006) (“Circumstantial evidence can
support a scienter inference.”) (10b-5 action under PSLRA); Goldstein, 340 F.3d at 246
(“‘[T]here does not appear to be any question that under the PSLRA circumstantial evidence can
support a strong inference of scienter.’”). 231
Accordingly, to prevail on this point, Lead Plaintiff need not present any direct evidence
of CSFB’s scienter. See Linville v. Hawaii, 874 F. Supp. 1095, 1108 (D. Haw. 1994)
(“Circumstantial evidence is evidence which, if believed, establishes the existence of a fact not
directly proved through inferences drawn from those facts that are directly proved.”). Finally, it
229
In any event, even under the PLSRA, “[a]ppropriate allegations of motive and
opportunity may meaningfully enhance the strength of the inference of scienter.” Nathenson,
267 F.3d at 412.
230
“Circumstantial evidence is of no less value than direct evidence; for, it is a general rule
that the law makes no distinction between direct evidence and circumstantial evidence but
simply requires that your verdict must be based on (e.g., a preponderance of) all the evidence
presented.” 4-74 Modern Federal Jury Instructions-Civil 74.01.
231
See also Do, 162 F.3d at 1013 (“Several cases highlighted by the Supreme Court
demonstrate that the nonmoving party may draw upon favorable inferences from circumstance
evidence to defeat summary judgment.”).
- 189 -

should again be remembered that “there will rarely be direct evidence of intent to defraud.”
Fleming, 2004 U.S. Dist. LEXIS 26488, at *33.
b. CSFB’s Desire to Maintain and Enhance Its
Relationship with Enron to Earn Lucrative Investment
Banking Fees
While, as discussed, Lead Plaintiff’s evidence establishing that CSFB understood the
effect of its transactions on Enron investors is fully sufficient to establish scienter (see Trust Co.,
104 F.3d at 1490), Lead Plaintiff also possesses substantial evidence establishing that CSFB had
a powerful motive (and opportunity) to engage in a scheme to defraud with Enron. This is
additional proof of scienter. See Tuchman, 14 F.3d at 1068 (motive); Nathenson, 267 F.3d at
412 (motive and opportunity).
CSFB obviously was motivated to engage in each of the described deals because of the
fees it earned specific to those transactions. 232
But that is only a small part of the story.
For CSFB, Enron was an exceptionally important investment banking client. From 1997
until Enron’s demise, CSFB provided substantial investment banking services for the Company,
including work on numerous public offerings, private placements, lending transactions and
M&A deals. See Ex. 4 at 38-86, 99-113. These transactions alone netted CSFB at least
$130,097,234 and ₤500,000 in fees from the Company. See id. 233 Considered with other
transactions, the combined fees to CSFB exceeded $139,832,818.
232
Again, e.g., for the 2000 Prepay CSFB received a fee of $0.87 million plus interest of
$5,475,869. See Solomon App. at 103. As noted in Parmalat I, there the plaintiffs alleged that
“CSFB received millions of dollars in commissions and fees from these transactions.” 376 F.
Supp. 2d at 490.
233
The total fees breakdown as $63,371,410 from public offerings; $30,266,133 and
₤500,000 from private placements; $8,947,761 from lending transactions; and $27,511,950 from
M&A advisory work. See Ex. 4 at 38-86, 99-113.
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CSFB was no doubt highly interested in pleasing Enron to ensure continued opportunities
to earn these fees. As CSFB’s Managing Director Robert Jeffe testified:
Q. Was Enron a priority one account for CSFB?
A. I believe so.
Q. What does that mean, priority one account?
A. It was – these terminologies and these phrases change over time – but it
was to indicate it was one of the important relationships.
Q. Was there a level more important than priority one in terms of CSFB?
A. I don’t think so.
10/6/04 Deposition Transcript of Robert Jeffe (“10/6/04 Jeffe Depo. Tr.”) at 41:8-16.
Enron ranked its investment banks according to “tiers” – i.e., “Tier One,” “Tier Two,”
etc. See Ex. 21249A at AB000538542. By early in the Class Period, CSFB had become one of
Enron’s Tier One banks. 234
CSFB was most likely aware of one very important criterion for
ranking a bank Tier One: having a “Relationship-driven philosophy vs. transactional.” Ex.
21249A at AB000538542. In other words, a Tier One bank would not hesitate to engage in only
moderately attractive transactions with Enron, understanding that doing so would strengthen its
overall relationship with the Company. As Fastow declares, “CSFB was a Tier-1 Bank for
Enron, as was DLJ before their merger, because of its deal structuring, as well as other
capabilities.” Fastow Decl., 47.
The value of Enron’s business to CSFB – and the need for CSFB to please Enron to get it
– would easily permit a jury to infer scienter by concluding that the promise of those exorbitant
fees formed a powerful motive for CSFB to engage in deals with Enron which it knew to be
234
See Ex. 66 at ECv000557560 (Enron’s Kelly Boots recommends to then-COO Skilling
and CFO Fastow that CSFB be ranked Tier One; several months later, CSFB attends an Enron
bank “outing” on behalf of the Company’s Tier One institutions (Ex. 11225)).
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fraudulent. 235
Lead Plaintiff is hardly in need of inferences to establish this fact. The evidence
discussed below shows CSFB’s avarice for Enron business infected virtually every crooked
transaction it did with the Company, serving as strong motivation to engage in them despite
knowledge of the resulting harm to Enron shareholders.
c. CSFB Acted with Scienter in Engaging in Inherently
Deceptive Transactions with Enron
CSFB knew each of these transactions presented the danger of misleading Enron’s
investors, or was severely reckless with regard thereto, as the Bank was aware of how the
transactions operated, what made them deceptive and how that conduct resulted in falsifying
Enron’s financial statements. 236
CSFB agreed to engage in them nevertheless, to maintain and
enhance CSFB’s relationship with Enron.
(1) Year 2000 Fake Oil “Prepay” Transaction
Moran acknowledged his understanding that the transaction that would become the 2000
Prepay “was important to Enron” (7/21/04 Moran Depo. Tr. at 216:24-25) because “one of the
objectives that Enron had for the quarter was to finance this position” (id. at 217:8-10). Enron
was in a bind because another bank, Toronto Dominion, had backed out of the deal at the last
minute. Ex. 10258. It was known to CSFB that Glisan was “pissed” about this and made this
prepay his “pet project” after Toronto Dominion “whiffed” on it. Exs. 10258, 10261, 10223;
235
It was noted as well in Parmalat I that the plaintiffs alleged “that as a reward for
designing and participating in the scheme, CSFB received lucrative underwriting roles for at
least three debt offerings during the Class Period.” 376 F. Supp. 2d at 490.
236
Knowing simply the reality of the deal engaged in is sufficient to establish scienter in
scheme liability cases. See, e.g., Parmalat I, 376 F. Supp. 2d at 506 (allegations that banks in
invoicing scheme knew that invoices were worthless presented a strong inference of scienter:
“BNL and Ifitalia’s very participation in the factoring arrangement, which depended on the
recycling of stale invoices, if proven, would constitute strong circumstantial evidence that BNL
or Ifitalia understood exactly what they were receiving in exchange for their loans to Parmalat.”).
- 192 -

7/21/04 Moran Depo. Tr. at 209:4-10. Despite a tight timeline to close the deal, CSFB scurried
to engage in it because Enron was a “Priority 1 client” and the 2000 Prepay would be a “key to
maintaining the relationship.” Ex. 10203 at CSFBLLC006062389. In fact, CSFB bankers,
including Moran, “stressed” to trader Tjandramaga “on several occasions that CSFB had a very .
. . important relationship with Enron.” 8/16/05 Tjandramaga Depo. Tr. at 178:20-25.
Tjandramaga recounted to other traders that Moran, discussing the “relational importance” of the
2000 Prepay, stated that “IBD [(i.e., investment banking)] is working on a few deals for Enron
and they would find it EXTREMELY important for this pre-paid deal to happen on Friday.” Ex.
50058 at DPOEX00000418. In discussing the deal, Moran emphasized to Smailes that “Enron is
one of [the] Firm’s top accounts, if not the number one relationship.” Ex. 50057 at
CSFBCO000200050. For doing the deal CSFB directly received a fee of $0.87 million plus
interest of $5,475,869. Solomon App. at 103.
CSFB fully understood the purpose and effect of the 2000 Prepay. As established by the
evidence described supra at §II.B.2.b – too voluminous to recount here – CSFB knew the deal
was really a loan to Enron with no commodity price risk, only appearing to have such, but that it
would be accounted for as a commodity trade with no debt being reported on Enron’s balance
sheet. 237
After all, the evidence permits a jury to infer that CSFB acted to give the deal the false
appearance of a commodity trade by running it through its trading operations. Thus CSFB
absolutely knew that the 2000 Prepay presented a danger of misleading Enron’s investors.
237
Fastow declares that: “Based on my conversations with certain CSFB bankers, and
bankers at certain other banks that did prepays with Enron, I believe that they understood that the
primary purpose of these transactions was to cause Enron to report higher funds flow from
operations.” Fastow Decl., 56.
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(2) Year 2001 Fake Oil “Prepay” Transaction
Because the 2001 Prepay was a renewal of the 2000 Prepay, CSFB obviously had the
same understanding of the deal’s purpose and effect. The evidence described supra at
§II.B.2.b.(2). establishes CSFB’s knowledge that the deal was really a loan disguised and
accounted for as a commodity trade. But also, CSFB’s knowledge of its purpose and effect is
fully confirmed by the fact that CSFB structured the deal to operate as it did. See supra at
§II.B.2.b.(2).
(3) Iguana: Fake “Sale” of Assets
The offering for the Iguana Notes and Certificates closed on December 20, 1999 – just
days before the end of Enron’s reporting quarter and end of the fiscal year. See Ex. 11076;
10/29/04 Scott Depo. Tr. at 739:15-24; Solomon App. at 173-75. Even though “last minute,” it
was done to continue “[DLJ’s] extremely active banking relationship with Enron” and remain
one of “Enron’s lead relationship investment banks.” Exs. 11081, 11077. In short, CSFB
pushed the deal through knowing Enron needed it within days for financial reporting effect.
And obviously, as described supra at §II.B.2.c.(1)., CSFB knew Iguana was a not a true
“sale” of assets – most notably because it had a term, thus contemplating that CSFB would not
keep the assets, and because CSFB always understood it would get its money back through the
put agreement. Because CSFB also knew the proceeds would not be reported as debt (see id.),
its scienter is established for Iguana.
(4) Nile: Fake “Sale” of Assets
CSFB’s scienter is clearly present for the Nile deal. As the evidence described supra at
§II.B.2.c.(2). establishes, CSFB knew the agreement with Enron regarding the put agreement
was that it would be “at par,” and also obviously knew the final deal documents would say
instead that the put was at “market value.” The Bank also knew it overinflated the valuation of
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ServiceCo – what it acknowledged as a “pipe dream” – to give Enron “whatever valuation they
want.” Ex. 13107A.
Despite knowing Nile was not entitled to FAS 140 treatment, CSFB also knew Enron
intended to use Nile to monetize its ServiceCo shares and have the transaction treated as a FAS
125/140 off-balance-sheet structure. 7/21/04 Moran Depo. Tr. at 100:16-101:6. According to
CSFB banker Jamie Welch, a managing director in Project Finance, to monetize something
means “to take capital out to – but keep the risk of the asset. Unlike a sale, where you sell off the
asset and all of the benefits and liabilities of that particular asset.” 11/10/04 Welch Depo. Tr. at
59:25-60:7. CSFB knew the ramifications of having the put agreement “at par.” Welch added:
“[I]f it is simply just a securitization or monetization where you don’t have a transfer of risk, it’s
really just a financing.” 11/10/04 Welch Depo. Tr. at 144:13-16. CSFB knew Nile would
benefit Enron’s funds flow from operations: “one of the objectives that would be achieved . . .
would be a benefit to [Enron’s] FF&O number.” 7/21/04 Moran Depo. Tr. at 126:4-12. Moran
agreed that “[c]ash from the financing would be treated as funds flow from operations.” Id. at
126:18-20.
But CSFB was motivated to do the fraudulent Nile deal in part for the fees it would earn.
See 2/17/05 McCabe Depo. Tr. at 271:13-272:13 (testifying that in discussing a “$20mm fee
potential” in Ex. 13106A, “I’m assuming that what I was referring to was the fee and role that we
might have in this type of transaction”). CSFB agreed to do Nile to preserve its Tier One rank.
In response to the question, “why are prospects for future investment banking business enhanced
by the [Nile] transaction,” Abib wrote:
Enron is a firmwide CSFB priority and CSFB is viewed by Enron as a Tier
1 relationship bank. The provision of credit by CSFB is viewed extremely
important by Enron in order for CSFB to maintain its Tier 1 status. As a result,
Enron fully expects our support in this transaction.
Ex. 13128A at CSFBLLC005019431.
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(5) Nikita: Fake “Sale” of Assets
CSFB’s scienter for the Nikita deal is plain. As the evidence described supra at
§II.B.2.c.(3). establishes, CSFB knew its “equity” was simply a loan in Nikita. Also, the Bank
knew the Nikita deal operated like the Nile transaction. As such, CSFB was aware that this loan
would be reported as an equity investment. CSFB knew the deal was accounting driven, as it
acknowledged that Enron “needs two different parties in order to achieve certain accounting
requirements. Ex. 50047. Also, because CSFB structured the Nikita deal, it also obviously
knew its reporting effects.
The Bank was motivated to do this deal to please Enron:
Q. And why was CSFB willing to do this deal?
A. They were willing to do the deal based on the overall relationship we had
with Enron, and the credit risk at Barclays.
Q. How did the Enron relationship play into your calculation of whether to do
this deal or not?
A. They asked us.
7/21/04 Moran Depo. Tr. at 173:2-10.
(6) Rawhide
CSFB clearly acted with scienter in the Rawhide deal. It recognized the transaction was
“designed to achieve the desired minority interest accounting treatment” for the deal. See Ex.
11273 at CSFBLLC00535526. CSFB understood Rawhide operated to deceive the credit-rating
agencies about Enron. As the Bank stated, Rawhide allowed the Company “to meet balance
sheet targets that they have negotiated with the rating agencies.” Id. at CSFBLLC005535525. A
memorandum from CSFB bankers to credit committee member Maletta reads, “Enron is looking
to optimize its year-end balance sheet by raising US$750 million through a 2-year bank
facility . . . . The purpose of the transaction is to alleviate rating agency pressure since the
transaction is structured to add book equity to the balance sheet and reduce debt.” Ex. 11169 at
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CSFBCO005534606; Ex. 13923 at CSFBLLC005534606. When deposed, Maletta agreed “the
purpose behind [Rawhide] was to get $750 million to Enron without the debt showing up on
Enron’s books.” 6/16/06 Maletta Depo. Tr. at 139:7-12.
The credit memorandum explained the “Rationale” for Project Rawhide as follows:
“Enron has indicated to its investors and the rating agencies that it plans to reduce debt by US
$1.8 billion by 1998 FYE. The Rawhide transaction accounts for a large portion of this debt
reduction.” Ex. 11273 at CSFBLLC005535530; Ex. 50267 at CSFBLLC005535530. But it was
debt reduction on paper alone, as CSFB knew and intended, having recognized the transaction as
a “loan” to Enron.
Solomon opines that Rawhide failed to justify treating the debt as minority interest
mainly because the required minimum 3% equity contribution was not present. This was
because LJM2 – a related party to Enron – purported to hold some of this “equity.” Also, the
equity holders held debt claims on Enron. 238
CSFB knew both these facts, and that they
invalidated the Rawhide structure.
CSFB understood the Rawhide structure required at least 3% outside equity to receive
minority-interest treatment. 239
Maletta testified as to his understanding of the application of the
3% equity rule to the deal:
238
See Black Report at 80 (explaining that 3% rule was not met in Rawhide also because
“The supposedly ‘equity’ investors held debt claims against Enron . . . .” because Sundance, an
Enron consolidated subsidiary, “was obliged to make a single quarterly payment to Rawhide,
sufficient to cover Rawhide’s obligation to pay the return it had promised to . . . its equity
investors”); Solomon App. at 247 (Sundance provided “a guaranteed payment calculated to
provide a LIBOR-based return to the Rawhide equity holders.”).
239
See, e.g., Ex. 11273 (stating Rawhide is a “structure” to achieve the “desired minority
interest accounting treatment,” and identifying the 97% or $727.5 million as debt, and the 3% or
22.5 million as an “equity investment in Rawhide LLC,” a “bankruptcy remote” SPE); see also
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Q. Did you have an understanding of why there needed to be 3 percent equity
in this transaction?
A. My general understanding of these structures was that you needed to have
at least 3 percent equity from an accounting point of view to get it off balance
sheet.
Q. What else did you know about that 3 percent?
* * *
A. That it couldn’t be owned by Enron.
Q. Did it also have to be at risk throughout the transaction?
A. Yes, it had to have equity risk.
Q. And you knew that from the ‘98 time frame all the way through 2001?
A. That is correct.
Q. And you knew that if the 3 percent equity wasn’t really at risk, that it
wasn’t a valid structure?
A. That is correct.
6/16/05 Maletta Depo. Tr. at 145:21-146:17. Mary Beth Mandanas, who engaged in the
structuring of Project Rawhide, acknowledged having a working knowledge of the 3% equity
rule at the time of the transaction, including the requirement that a third party own at least 3% of
the equity. 8/23/04 Mandanas Depo. Tr. at 220:18-222:4.
CSFB knew the Rawhide equity holders had debt claims on Enron – given the Bank’s
structuring work in the transaction – eliminating the required risk. CSFB also knew that it was
LJM2 that acquired $12.5 million of Rawhide “equity” in March 2000. See Ex. 50198 at
FFPTP000000053 (informing CSFB and other LJM2 limited partners that LJM2 had purchased
6/16/05 Maletta Depo. Tr. at 145:21-146:17; 8/23/04 Mandanas Depo. Tr. at 220:18-222:4
(noting their familiarly with FAS 140’s minimum 3% outside equity requirement).
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“55.6% of the equity in Rawhide Investors, LLC” for $12.5 million). 240 CSFB considered LJM2
as part of Enron’s related “family”:
Q. And [the LJM entities] were considered part of the Enron related family?
A. In a general sense. From an informational sense, yes.
* * *
Q. And through the whole time that LJM was in existence, the two entities,
they were considered part of Enron related – a related family.
* * *
A. From an informational – internal informational point of view, that’s the
way we accounted for them.
Q. I don’t understand what you mean “from an internal informational point of
view.” What does that matter?
A. That’s the way we looked at it internally.
6/16/05 Maletta Depo. Tr. at 83:5-85:8. Thus CSFB knew a member of Enron’s “family,”
LJM2, had purchased Rawhide equity certificates – violating the minimum 3% outside equity
required for the Rawhide structure to remain off Enron’s balance sheet. See Solomon Report at
39 (Rawhide’s 3% equity was not at risk because LJM2 “was a related party and therefore would
not be considered an independent third party.”).
But once again, CSFB was willing to commit fraud in order to please Enron. In urging
the credit committee to approve CSFB’s participation in the Rawhide transaction, investment
bankers emphasized the Bank’s “strong relationship with Enron.”
Ex. 11273 at
CSFBLLC005535559; Ex. 50267 at CSFBLLC005535559 (“My recollection is that [equity] was
240
8/23/04 Mandanas Depo. Tr. at 269:6-12 (“My recollection is that [equity] was sold into
LJM2.”). Mandanas knew this at the time because she and others at CSFB “maintained an active
dialogue regarding the underlying investments in” the LJM partnerships. Ex. 50260 at
CSFBCO000545982; see 8/24/04 Mandanas Depo. Tr. at 339:24-340:4 (testifying to following
LJM2 transactions as they were reported).
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sold into LJM2.”). When CSFB extended the loan in 2001, the bank noted that “Enron is a
Firmwide CSFB priority and CSFB, in turn, is viewed by Enron as a Tier 1 relationship bank.”
Ex. 13487 at CSFBLLC005423743. Bankers noted CSFB had generated more than $70 million
in fees from Enron from 1998-2000 and expected to earn an additional $40-$50 million in 2001.
Ex. 13487 at CSFBLLC005423743.
(7) LJM1 – The Illusory Rhythms “Hedge”
Little need be said to highlight the obvious existence of CSFB’s scienter in the Rhythms
Hedge transaction. After all, CSFB’s Marino classed the deal as one of many “convoluted
financing schemes.” Ex. 11233. And Fastow declares that he “discussed with CSFB and RBS
bankers that Swap Sub, a subsidiary of LJM1, would likely have a material impact upon Enron’s
reported earnings.” Fastow Decl., 53. Thus, CSFB knew the effects of the Rhythms Hedge,
and that such effects were the product of a mere “financing scheme[].” Ex. 11233.
CSFB also knew other important facts in the transaction. As the evidence discussed
supra at §II.B.2.a.(1). establishes, CSFB knew that Enron could lift the Restrictions, that, as
Fastow told the Bank, its equity was not “at risk,” and that CSFB itself overcollateralized LJM
LP and barred Swap Sub’s recourse to LJM LP specifically for the purpose making the equity
not “at risk.” In the face of this evidence, scienter cannot be denied.
CSFB engaged in the illicit LJM1 structure “to preserve the relationship CSFB had
developed with Enron and Mr. Fastow in particular.” 10/6/04 Jeffe Depo. Tr. at 100:19-24.
Despite deep reservations about the propriety of LJM1, the Bank agreed nevertheless to do it to
please Enron and thus “solidify” its relationship with the Company:
Q. Did you have any basis to disagree with Mr. Furst’s belief that [investing
in LJM1] would help solidify the relationship between CSFB and Enron?
A. Well, generally speaking, a bank or investment bank who is doing what
their clients are asking of them, one could presume that you would be improving
your relationship.
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Q. And the client was Enron?
A. Yes.
12/1/04 Ivers Depo. Tr. at 294:20-295:5.
(8) LJM1 – CSFB’s Bridge Loan Masked as an
“Investment”
In extending the bridge loan, CSFB bankers Jeffe, Ogunlesi, and Furst knew Enron was
intending to use LJM1 as a means to transact quarter-end deals, as Cuiaba proved. See Ex.
11277 at CSFBLLC006359208 (discussing proposed Cuiaba transaction). Moreover, CSFB
knew its ostensible status as an “investor” in LJM LP was a sham, because the Bank received far
more for its “investment” in Cuiaba than it was worth.
(9) Project Firefly
Project Firefly was another of CSFB’s “share trust” transactions, similar to Osprey
(described supra at §II.B.2.e.(1).). Firefly enabled Enron improperly to move $2.24 billion of
assets and $900 million in debt off Enron’s balance sheet, and obtain $475 million in financing
without having to record the proceeds as debt. See Solomon App. at 271.
In December 1998, DLJ employed its Marlin “technology” in Firefly to move a Brazilian
electricity company named “Elektro,” and $400 million in accompanying debt, off Enron’s
balance sheet. See Ex. 21294 at CSFBLLC006361011; Ex. 11083 at CSFBLLC006361016,
CSFBLLC006361018; Ex. 50824 at CSFBLLC006004451, CSFBLLC00604453; 1/13/05 Nath
Depo. Tr. at 340:8-341:18. In deposition, Nath admitted DLJ structured Firefly, and understood
the transaction would shift $400 million in Enron debt off-balance sheet. See 1/13/05 Nath
Depo. Tr. at 340:16-341:18; see also Ex. 21294 at CSFBLLC006361011; Ex. 11083 at
CSFBLLC006361016. Fastow declares that Nath structured Firefly for DLJ. See Fastow Decl.,
48.
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In summary, in Firefly, Enron reported $475 million of debt and equity as “Minority
Interest” on it balance sheet, though the transaction was really just a loan to Enron (see Solomon
Report at 42, 251; Solomon App. at 272), falsely making the Company appear to have less debt
than it in fact had. This was improper. The accounting treatment used for Firefly required that
there existed an equity investment that was “at risk.” No such risk existed, however, because the
holders of the supposed “equity” were guaranteed repayment of their investment. See Solomon
Rebuttal Report at 43 nn.108-110; see also Solomon Report at 252-53 n.488.
There is abundant evidence establishing DLJ’s knowledge that Firefly was simply a loan
to Enron that the Company would not report as debt on its balance sheet. As Nath admitted:
Q. And through the Firefly structure, that obligation of Enron to pay back the
money to the banks did not appear on Enron’s balance sheet; correct?
* * *
A. I do not – I do not believe it did appear on their balance sheet.
Q. In fact, that was one of the objectives of the Firefly structure; correct?
A. To my understanding, yes.
1/12/05 Nath Depo. Tr. at 130:4-14. 241
* * *
241
See also, e.g., Ex. 11083 at CSFBLLC006361016 (“The Structured Products and the
Energy Group have been approached by Enron Corp. . . . to structure and place an off-balance
sheet financing . . . for Enron’s acquisition of Elektro . . . .”); Ex. 21294 at CSFBLLC006361011
(DLJ’s Structured Products and Energy group approached by Enron “to structure and place an
off-balance sheet financing”); Ex. 11083 at CSFBLLC006361016 (DLJ will use the “Project
Marlin” structure to implement Firefly’s off-balance-sheet treatment, yet from DLJ’s “credit
perspective,” the Firefly loans “effectively represent two-year structured Enron risk”); Ex. 50824
at CSFBLLC006004451 (DLJ understands the importance of completing Firefly by “year-end,”
and DLJ’s purchasing the Firefly “equity” would help meet this financial reporting “objective”);
1/13/05 Nath Depo. Tr. at 340:8-341:18.
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The Firefly transaction is further evidence of CSFB’s scienter. It shows the Bank’s
willingness to structure and execute inherently deceptive transactions for Enron that had the
principal purpose and effect of falsifying the Company’s reported financial condition. DLJ was
motivated to do Firefly to enhance its relationship with Enron. DLJ bankers, including Enron
relationship manager Ralph Eads and Dwight Scott, advised the bank’s credit committee that
engaging in Firefly “will substantially enhance our relationship with Enron and that we will
continue to be well remunerated by the Company for our efforts in 1999.” Ex. 11083 at
CSFBLLC006361016.
(10) LJM2
LJM2, another partnership for fraudulent transactions, was used by Enron to manufacture
income, create the false appearance of funds flow from operations, and lower debt. See Fastow
Decl., 42. In August 1999, CSFB and DLJ received an LJM2 presentation that described the
“Opportunity” to contribute funds to LJM2. See id.; Ex. 11066 at CSFBLLC005718264. The
presentation stated that LJM2 would be used to “Manage balance sheet” and “Manage income
statement.” Fastow Decl., 42; Ex. 11066 at CSFBLLC005718264. According to Fastow,
“Managing” was understood to mean making the numbers what Enron desired
them to be. Managing its earnings and balance sheet allowed Enron to create the
false appearance of earnings and funds flow, and lower debt, thereby obfuscating
the true underlying economic performance and health of the Company.
Fastow Decl., 42. The LJM2 “Strategy” was to “invest in assets currently owned or controlled
by Enron or similar companies.” Ex. 11066 at CSFBLLC005718267.
Despite the clearly stated fraudulent purpose of LJM2, CSFB and DLJ both jumped at the
chance to make funding available for it. CSFB committed $10 million to LJM2 (Ex. 10175 at
CSFBCO000009960; Ex. 11255 at CSFBLLC005718914; Ex. 13941), and DLJ committed $5
million (10/29/04 Scott Depo. Tr. at 750:20-25; see also Ex. 50260 at CSFBCO000545978
(“CSFB and DLJ, combined, invested $15 million in LJM2.”); Ex. 67 at CSFBLLC005717042).
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CSFB and DLJ were happy to do so in order to strengthen their professional relationships
with Enron. In preparing Tony James for a meeting with Fastow regarding LJM2, DLJ banker
Dwight Scott notified James that “Enron has told us that we have the #1 market share for
Enron’s business in 1998 and 1999.” Ex. 11066 at CSFBLLC005718260; 10/28/04 Deposition
Transcript of D. Dwight Scott (“10/28/04 Scott Depo. Tr.”) at 418:25-419:7. For Scott and
others, LJM2 meant increased banking fees. See Ex. 11066 at CSFBLLC005718260.
CSFB bankers agreed. The LJM2 authorization request, sent by Ogunlesi, Ivers, and
Mandanas, described the “Rationale for Investment in LJM2” as follows:
The LJM1 investment has provided significant returns to CSFB over a short time
period. Investing in LJM2 should solidify the relationship with Enron, enable
Enron to continue its aggressive growth with off-balance sheet capital, and garner
appropriate returns on CSFB capital.
Ex. 10175 at CSFBCO000009961. Ogunlesi agreed that CSFB was strengthening its Enron
relationship by engaging in the LJM2 partnership:
Q. Did you agree that investing in LJM2 should solidify the relationship with
Enron?
A. I believe that’s right, yes.
12/7/04 Ogunlesi Depo. Tr. at 474:25-475:17.
CSFB and DLJ were not bothered in the least that LJM2 would be used for blatant fraud.
Solomon opines that any occasion where LJM2 provided the outside equity in an Enronsponsored
SPE should have invalidated the structure because LJM2 was a “related party” to
Enron:
In several of the transactions between Enron and LJM2, LJM2 provided all of or a
majority of the required 3% outside equity to capitalize an Enron-sponsored SPE.
In some instances Enron sold down a portion of its equity to effect a
deconsolidation (i.e., Bob West, Nowa Sarzyna, Megs). Enron should have
consolidated these SPEs because LJM2 is a related party under FAS 57 and
cannot be considered to have provided the independent outside equity.
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Solomon Report at 301. CSFB knew that LJM2 was actually a related party to Enron. A credit
approval from CSFB managing director Ed Devine included LJM2 with the Enron “Group” of
companies. Ex. 13373. And Devine explained:
Q. So CSFB considered LJM2 to be part of the Enron Corp. group at this
time?
A. A group, family, related entities.
* * *
3/17/05 Devine Depo. Tr. at 246:13-16. Also, CSFB employee David Koczan characterized
LJM2 as “a subsidiary of Enron Corp.” Ex. 13483 at CSFBLLC000208484. CSFB counted
LJM2 loans as part of Enron’s outstanding credit exposure in calculating Enron’s credit
exposure. 4/7/05 Koczan Depo. Tr. at 206:23-207:3. Thus, CSFB knew very well that LJM2 was
being used to commit accounting fraud.
CSFB also monitored LJM2’s transactions, received updates on the partnership’s
performance, and attended a due diligence meeting in September 2000 in which all LJM2
investments were discussed. See Ex. 50012; 8/25/04 Mandanas Depo. Tr. at 668:6-19. An
LJM2 “Supplement Number One to Private Placement Memorandum,” sent to, for instance,
Ivers (Ex. 11257 at CSFBLLC000006794), identified five Enron deals, scheduled to close by
year-end, and contained a capital call for 15% of committed capital to fund these specific
transactions. Ex. 11257 at CSFBLLC000006794-97.
These documents and testimony provide powerful evidence of CSFB’s scienter in
engaging in the transactions discussed supra at §II.B.2. CSFB and DLJ were fully aware of the
use of LJM2 for fraud, monitored that use along the way, but were nevertheless completely
willing to fund and thus be involved in LJM2’s deals. The banks were motivated by a desire to
enhance their professional relationships with Enron.
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(11) LJM3
In August 2000, Fastow advised CSFB’s Ogunlesi that he was considering forming an
LJM3 partnership. Ex. 11261. As with LJM2, Fastow “anticipate[d] to source deal flow from
and in conjunction with Enron Corp.” Ex. 11295 at CSFBLLC000019425; see also 8/24/04
Mandanas Depo. Tr. at 328:15-22 (“My recollection is the purpose [of LJM3] was similar to
LJM2.”). In November 2000, CSFB committed $25 million for LJM3. Exs. 50474, 10275.
The rationale for investing $25 million, explained by Ogunlesi, Ivers and Mandanas, was
that LJM1 and LJM2 had “provided significant returns on capital over a short time period and
ha[d] further solidified the relationship with Enron Corp.” Ex. 11295 at CSFBLLC000019425;
12/7/04 Ogunlesi Depo. Tr. at 533:3-11. Ogunlesi explained:
Q. Was this LJM3 also something that Enron wanted?
A. To the best of my knowledge, yes.
Q. And is that why CSFB was considering committing funds to LJM3?
A. That’s correct.
Q. As an accommodation to an important client, Enron?
A. That, plus the fact that we hoped to make a return on it.
Q. And you also wanted to maintain a good relationship with Andy Fastow?
A. I wanted to maintain a good relationship with Fastow who was the CFO of
an important client.
12/7/04 Ogunlesi Depo. Tr. at 526:8-24. As of November 29, 2001, CSFB had realized a 225%
internal rate of return from LJM1 and 51% for LJM2. Ex. 11295 at CSFBLLC000019426.
CSFB also sought a “side letter relating to [its] investment in LJM3.” Ex. 50273.
CSFB’s willingness to commit capital in LJM3 further demonstrates it scienter. Once
more, the Bank had absolutely no problem being involved in deals that would operate as a fraud
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on Enron’s investors – as long as they would result in fees for CSFB and help it solidify its
relationship with Enron.
(12) Osprey I and II
CSFB obviously acted with scienter in these transactions, which it structured and
orchestrated specifically for their fraudulent purposes. DLJ knew the purpose and effect of the
transactions. DLJ banker Brian Herman testified:
Q. So you wanted to raise $1.5 billion for Enron?
A. Yes.
Q. Have it be off Enron’s balance sheet?
A. Yes.
* * *
Q. Now, anything else? Any other goal, reason, for using what became the
Osprey structure?
* * *
A. They wanted to, you know, purchase assets with the financing. But that
was, you know, the impetus behind the structure.
Q. Well, who were they – when you say “they,” who is the “they”?
A. Enron.
7/14/05 Herman Depo. Tr. at 306:15-307:5. But despite knowledge of this purpose and effect,
Nath admitted that he understood Osprey was really just a financing:
Q. Would you agree that Osprey was a financing?
A. Yes.
1/12/05 Nath Depo. Tr. at 195:9-11. Thus CSFB knew that Osprey’s structure (that DLJ
designed) was only window dressing – fashioned by it simply to cloak this admitted “financing”
as something else.
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CSFB also knew that in Osprey I, the requisite “equity” was not truly “at risk” or from
independent parties because, as discussed, CSFB’s own model demonstrated that their holders
will “receive their equity back” (Solomon Report at 275), and the Bank knew LJM1 was a
related party to Enron. The Bank further understood that Enron controlled WW LP and the
terms of the assets sales, as Nath admitted his knowledge that “Enron employees” would be on
“both sides” of the asset transactions. See 1/12/05 Nath Depo. Tr. at 184:12-185:7.
As to Osprey II, CSFB obviously knew it formed OA, OAII and Parrothead to funnel
LJM2 the Certificates, as the discussed DLJ memo describes this as being the Bank’s stated
purpose in forming them. See Ex. 11060 at CSFBLLC006016873. Also, CSFB knew its
conduct was deceptive in this regard, as Capolongo admitted that Enron informed DLJ of the
requirement that LJM2 purchase the Certificates on the open market. See 8/1/05 Capolongo
Depo. Tr. at 365:7-21. Finally, CSFB knew about the false valuation of assets in Osprey II, as it
worked on the Offering Circular and participated in the decision to excise the discussion of
impaired assets. See 8/1/05 Capolongo Depo. Tr. at 143:10-12, 238:20-23. See also 10/23/06
Fastow Depo. Tr. at 248:4-249:5 (CSFB knew assets in Osprey overvalued).
(13) Marlin I and II
CSFB acted with scienter in Marlin I and II. As discussed, DLJ structured the
transaction, so it obviously knew how it worked (and CSFB’s Capolongo admitted as much in
his deposition). Nath understood that the objective in Marlin I was to move financing “off
Enron’s balance sheet” (1/12/05 Nath Depo. Tr. at 105:16-22), and DLJ knew this was done “for
year-end reporting purposes” (Ex. 14014 at CSFBLLC000032501). CSFB also knew the
requisite “equity” in Marlin I was not truly “at risk,” as, among other things, CSFB’s own
internal document acknowledged that “Enron will effectively guarantee the interest and yield
requirements on the Senior Notes and the Certificates.” See Ex. 65 at CSFBLLC005709802-73
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(Overview of Pricing for Marlin Water Trust, Azurix, December 1998, prepared by CSFB). This
was also true for Marlin II. See Ex. 50832 at CSFBLLC006361167 (“No change in underlying
collateral for Marlin Certificateholders (i.e., Azurix Europe Ltd. Note).”). Thus, CSFB knew
that Marlin I and II had the “principal purpose and effect” to “create the false appearance of
fact.” Homestore, 452 F.3d at 1048. CSFB also knew the assets in Marlin were overvalued. See
10/23/06 Fastow Depo. Tr. at 248:4-249:5.
CSFB was motivated to do the Marlin transaction for the fees involved. DLJ earned
more than $6 million for its Marlin I work (1/12/05 Nath Depo. Tr. at 118:21-119:4) and $2.7
million for Marlin II. See Ex. 4 at 64. This comports with Fastow’s statements that “Enron paid
significant fees to CSFB related to” Marlin and other share-trust transactions. Fastow Decl., 50.
CSFB was no doubt also motivated to do the transactions because of the general desire to
enhance its relationship with Enron, as discussed above. 242
242
CSFB’s claim that Lead Plaintiff has no evidence the Bank knew Enron’s true financial
condition (Defs’ Mem. at 13-14) is simply not true. The truth known to CSFB included the fact
that Enron’s reported financial and operational condition was being materially misrepresented
by, inter alia, CSFB’s fraudulent transactions with the Company. As discussed supra, at
§II.B.2., CSFB engaged in transactions with Enron that had the purpose and effect of falsifying
Enron’s reported financial condition. Also, a CSFB analyst indicated his belief internally that
“all these partnerships” – i.e., including LJM1 and 2 – made Enron “all smoke and mirrors
accounting.” Ex. 15660. CSFB’s Enron relationship manager internally shared his knowledge
that Enron was a “house of cards” that “may some day collapse.” Ex. 10270. And in the same
internal CSFB memorandum where Brian McCabe helped structure Nile to disguise Enron debt,
McCabe questioned whether CSFB had adequately identified Enron’s “[s]ignificant off-balance
sheet liabilities.” Ex. 13119A at CSFBLLC009703799. McCabe asked, “Is this all of their off
b/s stuff.?” Ex. 13119A at CSFBLLC009703799. CSFB’s claim that it supposedly was ignorant
of Enron’s true financial condition because it lost money extended to the Company when it went
bankrupt (see Defs’ Mem. at 47 & n.156), is unavailing. A jury could easily refuse to conclude
that this supposed fact establishes that CSFB was a “victim” in the Enron scheme – as the Bank
outrageously claims (id. at 47) – but instead indicates only that the scheme was unable to
continue for as long as CSFB planned. Just because a scheme does not ultimately succeed hardly
means it never existed; even schemes that fail are nevertheless actionable: “[T]here is no
requirement under §10(b) that defendants actually profit from the fraudulent scheme . . . .”
Podany v. Robertson Stephens, 318 F. Supp. 2d 146, 155 n.13 (S.D.N.Y. 2004).
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C. Should the Court Require Additional Facts, Lead Plaintiff Requests
Further Discovery Under Fed. R. Civ. Pro. 56(f)
As indicated above, Lead Plaintiff submits that it has (more than) sufficient evidence
supporting all of its claims against CSFB, thus creating a genuine issue of material fact as to
those claims, rendering summary judgment for CSFB improper. In this regard, no further
discovery is necessary in order to defeat CSFB’s Motion.
Should this Court be inclined to grant CSFB’s Motion concerning the claims against it
under Rule 10b-5(a) and (c), however, Lead Plaintiff requests that it be permitted to conduct
additional discovery concerning those claims. As discussed, this Court only very recently
refined its standard for primary liability under Rule 10b-5(a) and (c). See Enron, 2006 U.S. Dist.
LEXIS 43146, at *155-*158; Enron, 439 F. Supp. 2d at 713-14. This refinement comes after
Lead Plaintiff was required to complete much of its discovery concerning CSFB’s role in the
Enron fraud. Thus, to the extent this Court may require additional facts to satisfy its new, refined
standard for primary liability concerning CSFB, Lead Plaintiff should be allowed to conduct
additional discovery to uncover those facts. Justice obviously requires that a litigant be informed
of the legal standard under which its claims will be judged before it is required to conduct
discovery, so it has fair notice of what facts it should seek.
A request for additional discovery in response to a motion for summary judgment
implicates Fed. R. Civ. P. 56(f). This subsection provides that a court may deny or defer ruling
on a motion for summary judgment to permit the opposing part to obtain further facts essential to
opposing the motion. Requests for additional discovery under Fed. R. Civ. P. 56(f) “are
generally favored, and should be liberally granted.” Stearns Airport Equip. Co. v. FMC Corp.,
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170 F.3d 518, 534 (5th Cir. 1999). 243 Thus, if this Court requires of Lead Plaintiff additional
facts to support its claims under Rule 10b-5(a) and (c), it should deny CSFB’s Motion and give
Lead Plaintiff a fair opportunity to uncover such facts. 244
D. There Is a Genuine Issue of Material Fact Concerning Whether CSFB
Violated Rule 10b-5(b) 245
The securities laws render it actionable:
To make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading.
Rule 10b-5(b). CSFB violated this interdiction in four major ways, by: (1) issuing false and
misleading analyst reports concerning Enron; (2) otherwise failing to reveal the adverse facts it
knew about the Company’s financial condition, in breach of a duty to disclose created by CSFB
making positive statements about Enron in its analyst reports; (3) underwriting the issuance of
243
See also Int’l Shortstop, Inc. v. Rally’s, Inc., 939 F.2d 1257, 1267 (5th Cir. 1991) (“The
Supreme Court itself has cautioned against granting summary judgment prematurely. In
Anderson, 477 U.S. at 255, the Court indicated that the nonmoving party’s obligation to respond
to a motion for summary judgment ‘is qualified by Rule 56(f)’s provision that summary
judgment be refused where the nonmoving party has not had the opportunity to discover
information that is essential to his opposition.’”).
244
Lead Plaintiff’s entitlement to this additional discovery is demonstrated in the
Declaration of Helen J. Hodges Pursuant to F.R.C.P. 56(f) filed concurrently with this
Opposition.
245
Again, this Court has held that “[t]o establish a claim under . . . Rule 10b-5(b), a plaintiff
must ultimately prove (1) a material misrepresentation or omission; (2) scienter; (3) a connection
between the purchase or sale of the security and the material misrepresentation or omission; (4)
reliance (or ‘transaction causation’ in fraud-on-the-market cases); (5) economic loss; and (6) loss
causation, i.e., causal connection between the material misrepresentation or omission and the
plaintiff’s actual loss.” Enron, 2006 U.S. Dist. LEXIS 43146, at *87. This section demonstrates
that CSFB made “a material misrepresentation or omission” and did so with “scienter.” The
issues of causation and connection with securities for the Rule 10b-5(b) claims are discussed
infra at §§II.F., II.E., respectively, together with analysis of these issues for the Rule 10b-5(a)
and (c) claims.
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Enron securities; and (4) making false and misleading statements and omissions in offering
circulars.
1. CSFB Issued False and Misleading Analyst Reports
Concerning Enron 246
Statements of belief or opinion in analyst reports are actionable under Rule 10b-5 if they
do not accurately reflect the belief truly held. See DeMarco v. Robertson Stephens Inc., 318 F.
Supp. 2d 110, 117 (S.D.N.Y. 2004) (upholding allegations that analysts violated Rule 10b-5
when “the research reports ‘did not reflect defendants’ true beliefs’ about Corvis stock”). Thus,
in the context of analyst reports, “[c]lassifying [stock] ratings as opinions does not automatically
shield them from liability under the securities laws.” In re Credit Suisse First Boston Corp.
Analyst Reports Sec. Litig., 431 F.3d 36, 47 (1st Cir. 2005) (citing Virginia Bankshares Inc. v.
Sandberg, 501 U.S. 1083, 1095 (1991)).
Beyond being actionable for lack of genuine belief, opinions in analyst reports are also
actionable if they are false or misleading in two additional ways:
[O]pinions contain “at least three implicit factual assertions: (1) that the
statement is genuinely believed, (2) that there is a reasonable basis for that belief,
and (3) that the speaker is not aware of any undisclosed facts tending to seriously
undermine the accuracy of the statement.”
Helwig v. Vencor Inc., 251 F.3d 540, 557 (6th Cir. 2001) (en banc) (quoting In re Apple
Computer Sec. Litig., 886 F.2d 1109, 1113 (9th Cir. 1989). 247
CSFB’s analyst reports
246
While this Court concluded that Lead Plaintiff’s claims against CSFB concerning the
Bank’s analyst reports should be dismissed, this was on the ground that Lead Plaintiff had “not
identified nor provided the necessary facts” to establish scienter as to the specific analysts in
question. Enron, 2006 U.S. Dist LEXIS 43146, at *282. But as demonstrated below, Lead
Plaintiff does present substantial evidence supporting an inference of scienter as to the subject
analysts.
247
See generally Virginia Bankshares, 501 U.S. at 1095-96. In Virginia Bankshares, the
Supreme Court held that an opinion expressed by a corporation’s board members to its minority
stockholders that the stock price of $42.00 for the purchase of the company’s shares was a “high
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concerning Enron during the Class Period – which were replete with the Bank’s favorable ratings
and recommendations – knowingly misled investors with regard to all three of these factual
assertions.
On December 20, 2002, New York Attorney General Eliot Spitzer (“NYAG”) announced
that several Wall Street investment banks – including CSFB – entered into a global settlement
with the NYAG, the SEC, and others, to conclude a joint investigation into “the undue influence
of investment banking interests on securities research at brokerage firms.” 248
That is, the
investigation targeted whether banks such as CSFB, among other things, issued positive analyst
reports on certain companies with knowledge that such opinions were unwarranted, in order to
obtain investment banking business from the companies. Terms of the settlement included that
CSFB and the other firms would take steps to ensure “the insulation of research analysts from
investment banking pressure” to “help ensure that stock recommendations are not tainted by
efforts to obtain investment banking fees.” CSFB also paid $200 million as part of the
settlement – money spent to make the investigation stop. Thakor Ex. 7.
CSFB settled for good reason. During the Class Period, CSFB consistently issued analyst
reports on Enron that were overwhelmingly positive, featuring emphatic recommendations that
value” and represented a “fair” transaction could be actionable as both factual and material. Id.
at 1091. This was because such “‘conclusory terms in a commercial context are reasonably
understood to rest on a factual basis that justifies them as accurate, the absence of which renders
them misleading.’” Although in Virginia Bankshares the Supreme Court construed Exchange
Act §14, subsequent courts have consistently applied its holding in actions under Section 10(b).
See, e.g., City of Monroe Emps. Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 674 & n.20 (6th
Cir. 2005), cert. denied, 126 S. Ct. 423 (2005).
248
Thakor Ex. 7 (12/20/02 Press Release, Office of New York State Attorney General Elliot
Spitzer, SEC, NY Attorney General, NASD, NASAA, NYSE and State Regulators Announce
Historic Agreement to Reform Investment Practices, $1.4 Billion Global Settlement Includes
Penalties and Funds for Investors).
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investors purchase Enron stock. This no doubt pleased Enron, CSFB’s “priority one account.”
10/6/04 Jeffe Depo. Tr. at 41:8-16. But internally and in truth, CSFB analysts had and shared a
radically different opinion on Enron stock.
CSFB knew the reality of Enron’s financial and operational condition. The Bank worked
to falsify Enron’s reported condition by engaging in transactions that had the purpose and effect
of manipulating Enron’s reported financial condition. See supra at §II.B.2. In fact, CSFB
structured many of those transactions specifically to have that effect. See id. This evidence
alone establishes that CSFB’s bullish analyst reports on Enron were false and misleading, as they
repeated Enron’s reported financial metrics, which CSFB knew were fraudulently burnished by
the Bank’s own deceptive conduct in the transactions discussed, and made positive
recommendations based on that reported financial condition which it knew to be materially
inaccurate.
But there exists an additional layer of direct evidence – as conclusive as it is deeply
disturbing – that CSFB’s analysts themselves understood Enron’s true financial and operational
condition, but nevertheless issued rosy opinions on the Company that they personally did not
hold. And one CSFB analyst who suggested that the Bank issue more accurate information on
Enron (itself a recognition that CSFB was “misleading” investors with its analyst reports) was
prevented from doing so by CSFB management. The Bank perpetrated this conflicted and
manipulative course of conduct to preserve and maintain its investment banking relationship with
Enron.
One of CSFB’s most loyal and vocal Enron cheerleaders was analyst Curt Launer.
Launer maintained a “strong buy” recommendation on Enron’s stock from 1999 to 2001. For
example, a CSFB January 2, 2000 analyst report issued by Launer and CSFB’s Andy DeVries
identifies Enron as a “Strong Buy.” Ex. 68 at CSFBLLC005074840. Launer and DeVries
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emained strongly bullish until Enron’s bitter end. In a November 18, 2001 analyst report –
issued just two weeks before Enron declared bankruptcy – Enron’s common shares were trading
at $9.00, yet Launer and DeVries maintained their “Strong Buy” rating notwithstanding their true
opinion about Enron’s financial condition and its false financial statements. See Ex. 70 at
CSFBLLC006809137 (November 19, 2001 CSFB analyst report issued by Launer and DeVries).
In fact, Launer maintained his “strong buy” recommendation on Enron’s stock until November
29, 2001, just days before Enron filed for bankruptcy. He never publicly recommended investors
get out of Enron:
Q. Do you recall during the time period that you covered Enron, ever having
a sell recommendation on the stock?
A. No, I don’t recall ever having a sell recommendation on the stock.
5/10/05 Deposition Transcript of Curt Launer (“5/10/05 Launer Depo. Tr.”) at 69:15-70:25.
Launer was one of the last Wall Street research analysts to downgrade the Company. In
addition to CSFB’s awarding Enron its highest rating of “strong buy” (5/10/05 Launer Depo. Tr.
at 60:11-12), Launer issued explosive target prices for Enron stock. In January 2000, for
example, Launer issued a research report with an Enron share price target of $115. Ex. 68 at
CSFBLLC005074842 (Launer and DeVries January 2, 2000 analyst report publicly issuing
“Strong Buy” rating and $115 per share price target on Enron common stock); see also Ex. 71 at
CSFBLLC006884669 (Launer and DeVries October 12, 2000 analyst report publicly issuing a
“Strong Buy” rating and $115 price target on Enron common stock); 5/10/05 Launer Depo. Tr. at
126:2-13.
One year later, in January 2001, Launer and DeVries issued another analyst report raising
their already lofty target price for Enron common stock from $115 to an incredible $128 per
share. Ex. 69 at CSFBLLC006796699700 (January 26, 2001 CSFB analyst report). CSFB,
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Launer and DeVries maintained this inflated target price until July 2001. Compare Ex. 72 at
CSFBLLC006888291-93 with Ex. 73 at CSFBLLC006888606, CSFBLLC006888608.
After Enron’s demise, stock research analysts from Wall Street banks (including CSFB)
were called to testify under oath before Congress. In preparing to appear before Congress,
Launer assured his CSFB colleagues that he would “sanitize[]” his testimony about what
happened inside CSFB concerning Enron. 249
Ex. 74 at CSFBC006057889.001. For the Bank’s
sake, there was much to disinfect.
Internal CSFB documents and deposition testimony demonstrate the analysts’ knowledge
of Enron’s true financial condition, and concomitant actual (but undisclosed) belief that the stock
was not worth the market price it commanded during the Class Period. Launer himself knew
Enron was a big lie. He received an email from CSFB vice president and research analyst Philip
Salles: “ENE just could never tell the truth.” Ex. 13698 at DPOEX00006001. And at the same
time Launer had a $115 target price and “strong buy” rating on Enron, Andy DeVries, a CSFB
associate analyst covering Enron, was privately telling his relatives to steer clear of Enron stock,
because it was truly not worth that much. Ex. 15651. As DeVries testified:
Q. So your father – you are saying to your father in October of 2000 to not
buy Enron?
A. Yes.
* * *
Q. You’re telling your father to stay away from Enron in October of – on
October 10th of 2000 because you don’t want him to lose money on the Enron
stock, correct?
249
Launer’s contemporaneous notes reveal also that CSFB’s CEO instructed him to
obfuscate. See 5/12/05 Deposition Transcript of Curt Launer (“5/12/05 Launer Depo. Tr.”) at
709:14-23 (“You indicate in here, ‘our CEO told me to be as “unnewsworthy as possible” and
never volunteer to answer a question.’ Were those goals for your Senate testimony?”).
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* * *
A. I think I’m just saying it’s a little pricey now. Maybe you can get in later
or something.
Q. Did you ever tell him to get into Enron later?
A. Never.
* * *
Q. And you’re also telling him to stay away from New Power, correct?
A. Yes.
* * *
5/25/05 Deposition Transcript of Peter Andrew DeVries (“5/25/05 DeVries Depo. Tr.”) at
286:25-287:15, 287:21-288:4. What DeVries told his father in October 2000 concerning Enron
shares directly contradicted the “Strong Buy” rating DeVries and Launer maintained in an
analyst report they published that same month. Ex. 71 at CSFBLLC006884668.
In June 2001, DeVries advised his friends to steer clear of Enron shares – despite issuing
a report that same month where DeVries maintained the “strong buy” rating and stated CSFB
had a $110 target price on Enron’s common stock. 5/25/05 DeVries Depo. Tr. at 306:12-21; Ex.
72 at CSFBLLC006888291-93. Later that year, despite having a “strong buy” rating on Enron’s
stock, DeVries privately wrote to a friend that Enron “DEFINITELY [is] going to take some
more charges next quarter and they still aren’t fully disclosing things, investors feel duped. I
wouldn’t touch it. Reiterate HOLD. And that’s a real hold.” Ex. 15659. As DeVries
confirmed:
Q. And investors feel duped?
A. Yes.
Q. And by duped you meant misled?
* * *
* * *
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A. Yes.
Q. And you’re again, telling your friends to stay away from it?
A. Do I? Yes.
* * *
Q. In fact you give them a buy rating – you give them a rating which is rated
HOLD in all caps?
A. Yes.
* * *
Q. That means definitely don’t buy the stock, right?
A. Yes.
5/25/05 DeVries Depo. Tr. at 311:23-312:19.
* * *
Thus, CSFB’s public posture was that Enron stock was a “Strong Buy,” maintaining a
target price of over $100 per share until July 2001, when they eventually lowered it to $84 per
share. Compare Ex. 72 at CSFBLLC006888291, CSFBLLC006888293 with Ex. 73 at
CSFBLLC006888606, CSFBLLC006888608. Its private belief, however, was that it was an
absolute “don’t buy.” 5/25/05 DeVries Depo. Tr. at 311:23-312:19. Accord Exs. 15643
(DeVries email stating “I wouldn’t touch” Enron shares); Ex. 15647 (email communications
evidencing DeVries personal “sell” recommendation to friends saved them money).
In an October 2001 email from CSFB analyst Brian Gibbons to analyst DeVries, Gibbons
derided the illicit Enron partnerships as “basic money laundering operations in essence.” Ex.
15637. Immediately thereafter, with Enron shares trading at $35, Launer and DeVries issued an
October 2001 analyst report rating Enron a “Strong Buy” and issued a target price of $54. Ex. 75
at CSFBLLC006844639, CSFBLLC006844641. DeVries acknowledges that while he told his
friend Wade Suki not to pay even $35 a share for Enron, he told one of CSFB’s clients
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(“Sicoardi”) it was a great buy: “I feel bad, I told Wade not to touch the thing at $35, but . . .
told Siocardi we loved it.” Ex. 15637. In deposition DeVries admitted his advice was
duplicitous:
Q. Would it be fair to say that you told Wade Suki and Jim Siocardi two
different things at about the same time with regard to Enron stock?
A. Yes.
Q. Why did you feel bad?
* * *
* * *
A. Because they were two different things.
Q. And you felt bad because Jim Siocardi’s clients took a bath on the stock,
right?
A. If he bought it.
* * *
5/25/05 DeVries Depo. Tr. at 233:22-234:3, 238:9-16.
This caused even DeVries’s friend Suki to condemn CSFB’s conduct. Suki remarked:
“hey how has your rating helped clients??? you’re telling me one thing but clients a different
story??? a little shady if you ask me.” Ex. 15663. DeVries could not dispute the basis of Suki’s
condemnation:
Q. [Suki] was accurate in that you were telling him one thing and CSFB was
telling the clients a different story, correct?
A. Yes.
5/25/05 DeVries Depo. Tr. at 324:21-325:2.
* * *
On numerous other occasions Devries – in sharp contrast to CSFB’s formal public
position of being bullish on Enron stock – privately discouraged friends and family from buying
it:
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• “[Enron] could definitely go lower. I wouldn’t buy it yet.” Ex. 15642.
• “I wouldn’t touch it.” Ex. 15643.
• “I said to avoid both [Enron and another company, EPG]! I said if you HAD to
buy one, go with EPG but I definitely said to AVOID BOTH citing regulatory
risk.” Ex. 15657.
• “Wade, you still pissed about me telling you to hold off on ENE and EPG? Or
would you have bailed by now?” Ex. 15656.
• “You have no idea how many people I literally had to fight to keep them from
buying it . . . .” Ex. 15647.
Customers fortunate enough to receive DeVries’s true opinion about Enron were spared
losses:
[Q.] When you refer to “people I literally had to fight to keep them from
buying it,” that’s Enron stock, right?
A. Yes.
* * *
Q. He [(Jeffreys)] followed your advice, that’s why he’s thanking you,
correct?
A. Yes.
* * *
Q. And you saved him a lot of money?
A. That’s what he says, yes.
5/25/05 DeVries Depo. Tr. at 272:6-9, 273:6-8.
* * *
CSFB analysts personally held a negative opinion on Enron stock because they knew the
Company’s reported financial condition was being falsified. CSFB understood Enron’s financial
statements only obscured the truth about the Company. Enron’s financials were “as clear as
mud” wrote CSFB Enron analyst Phillip Salles to Launer in November 2000. Ex. 15918. In July
of 2001, Salles joked to Launer and others of the impenetrability of Enron’s publicly reported
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financials: “I should have taken ‘Enron’ instead of Spanish in High School.” Ex. 13732. On
October 22, 2001, in the wake of recent shocking disclosures revealing the Enron fraud and the
day the Company announced an SEC investigation into it, Devries sent Suki an email with the
subject header “I hope you listened to me on ENE . . . .” Ex. 15660 at CSFBLLC006303944
(ellipses in original). In the email string, DeVries admitted his knowledge that “all these
partnerships” – i.e., including LJM1 and 2 – made Enron “all smoke [and] mirrors accounting.”
Id. As DeVries testified about his statements in the document:
Q. What does smoke and mirrors accounting refer to?
A. Very hard to figure out.
Q. Hard to figure out accounting?
A. Oh, yes.
Q. And hiding, illusion, making illusions?
A. Sure.
* * *
Q. Hiding the reality through accounting?
A. Or making it harder to figure out.
5/25/05 DeVries Depo. Tr. at 314:16-315:4.
* * *
In the same email, Devries insouciantly admits that CSFB engaged in this conduct of
“making illusions” – and boasts that it made a handsome profit:
CSFB was a actually an investor in all these partnerships in questions [(sic)],
percentagewise we made a bundle.
Ex. 15660 at CSFBLLC006303944.
Knowing that CSFB’s rating on ENE was a sham, DeVries tried to distance himself from
the wrongdoing, stating to Suki: “will you give me some credit for saying NO to buying
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ENE . . . .? And don’t give me any [expletive] about our rating on it.” Ex. 15666. But as Suki
knew, even CSFB’s analysts had known,
man you guys are the ones that helped set up these partnerships . . . not to mention
you guys as analysts knew about it and didn’t say a word to clients in your
research . . . who’s hiding what???
Ex. 15670 at CSFBLLC006362849.
But those CSFB analysts who were not comfortable issuing false and misleading analyst
reports on the Company were nevertheless blocked by CSFB from telling the truth the Bank
knew about Enron. With refreshing candor, in deposition CSFB vice president and fixed income
securities analyst covering Enron Jill Sakol testified that CSFB’s failure to downgrade its rating
on Enron was misleading:
Q. Were you concerned [that CSFB’s “attractive” rating on Enron] was
misleading investor – potential investors in Enron securities?
A. Yes, I felt like they didn’t have the most current information.
8/25/05 Deposition Transcript of Jill Sakol (“8/25/05 Sakol Depo. Tr.”) at 175:21-25.
Sakol explained that CSFB executives prevented her from disseminating “useful” but
negative information about Enron to investors. This was because, as she knew and understood,
disclosing any negative information about Enron would anger CSFB’s managers and investment
bankers, resulting in a “messy situation.” Ex. 31750 at 95:8-97:4. As Sakol testified:
Q. And why would that cause a messy situation?
A. Because I wanted to be able to provide useful information to investors, but
I also didn’t want to upset people that I worked with.
Q. Why would providing useful information to investors upset people that
you were working with?
A. Because my understanding was that Enron was an important client.
Ex. 31750 at 95:8-15.
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According to Sakol, “there was an expectation that the research – that there was a
sensitivity to research that might be critical of [CSFB’s] important banking clients.” 8/25/05
Sakol Depo. Tr. at 161:16-20. Sakol knew an Enron downgrade would infuriate CSFB’s
investment banking and capital markets group:
Q. Was there an expectation that research would be sensitive to the desire of
the investment banking and capital markets to not offend a large, important
client?
* * *
A. Yes, I think they didn’t want to offend their clients.
Q. And that the culture of the research group was that to be sensitive, you
would check with the investment banking and capital markets before you took an
action which might offend a large, important client?
* * *
A. I think I felt that I needed to talk to my managers and let them decide if
that was appropriate in the situation because I wasn’t really sure what to do.
8/25/05 Sakol Depo. Tr. at 162:1-17; see also Ex. 31751 at 225:12-19 (CSFB was loath to
publish true information about Enron because the Company was an important CSFB client).
Sakol testified that CSFB’s management and investment bankers were obstacles to
telling the truth about Enron:
Q. Who were those people? People within CSFB?
A. Yes.
Q. Which people within CSFB?
A. My manager, the capital markets people that I worked with, investment
bankers.
Q. Is what you’re telling me that you wanted to tell the investors one thing,
and that you felt some constraints in that regard because of the way others –
because of the way you thought others within CSFB might react to that?
A. I think so.
* * *
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Ex. 31750 at 96:15-97:4.
CSFB’s investment bankers did not simply pressure analysts into not disclosing the truth
about Enron; they even directly interfered with the analysts’ writing of their reports. CSFB
investment banker Michael Davis edited an October 2001 “Market Flash” that Sakol wrote
concerning Enron and certain questionable share-trust deals. The “unusual” changes made to the
flash report disturbed Sakol:
Q. In the e-mail at the bottom of 512, Mr. Davis tells you that, apparently,
Mr. Mallett had asked Mr. Davis to take a look at the research that you had done
on Enron, and that he, Mr. Davis, added two paragraphs to your research. Do you
see that?
A. Yes.
Q. Had that sort of editing to your research with regard to Enron happened
prior to this on any occasion that you can recall?
A. No, not that I recall.
Q. And Mr. Davis says that his two paragraphs “may help accounts both in
the U.S. and Europe get more comfortable with the share trust deals? Do you see
that?
A. Yes.
* * *
Q. But he wasn’t an analyst, was he?
A. No, he was not.
Ex. 31750 at 79:19-80:9, 80:18-19.
At a critical time for Enron, CSFB stayed loyal to the Company by misrepresenting its
analysts’ true opinions on it. After Enron announced its $1+ billion shareholder equity
writedown in October 2001, Sakol believed CSFB should issue a negative rating on Enron. But
Sakol was ordered by her superiors to hold off on publishing the downgrade:
Q. Okay. And before you even wrote the report, you went to your managers?
A. Yes.
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Q. And you said to them, I want to downgrade Enron?
* * *
A. I said something to the effect of that I was uncomfortable with our rating
and that I thought the situation had changed.
Q. And did you indicate that you were uncomfortable with that rating staying
out there right now?
* * *
A. As I said, I was uncomfortable with the attractive rating.
Q. You wanted it changed to what rating?
A. I wanted to lower the rating and I wanted to find out how to go about
doing that.
8/25/05 Sakol Depo. Tr. at 164:24-165:16. But Sakol was ordered to refrain from publishing the
downgrade:
Q. Okay. And when you went to Mr. Morley, what did you tell him?
A. I told him the same thing that I told Tony Smith.
Q. That you were not comfortable with the Enron rating and you wanted to
downgrade the company?
A. Yes.
Q. What did he say?
A. He said he would talk to the – certain people and that I shouldn’t publish
anything else until I heard back from him.
* * *
Q. And did you take what he said to be an – a directive or an order?
A. Yes.
8/25/05 Sakol Depo. Tr. at 172:13-24, 173:22-24. Thus CSFB publicly maintained the
“attractive” rating when such was not the true opinion of its analyst:
Q. You know that you told him that – you told [CSFB analyst] Patrick
Hughes that you were not comfortable with the attractive rating even though it
was the official rating?
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* * *
A. Yes.
8/25/05 Sakol Depo. Tr. at 176:9:-178:3.
Sakol knew this was wrong.
Q. And was – was it also part of your role to keep the investing public aware
of your current thoughts, especially if there’s been a change?
A. I thought so. That was why I wanted to get a report out.
8/25/05 Sakol Depo. Tr. at 179:13-17. As such, CSFB preventing her from lowering the
“attractive” rating was admittedly misleading:
Q. Were you concerned that it was misleading investor – potential investors
in Enron securities?
* * *
A. Yes, I felt like they didn’t have the most current information.
8/25/05 Sakol Depo. Tr. at 174:4-175:25. Investment banking should not have interfered in her
communicating her ratings to the public:
Q. Are you sending a draft copy of a research report on Dynegy and energy –
I’m sorry, on Dynegy and Enron to Lee Mallett, Osmar Abib, Paul Davis, and
Peter O’Malley?
A. Yes.
Q. Are any of them in the research department?
A. No.
* * *
Q. Did you think that this was appropriate for you to do?
A. I think I thought the report needed to go out.
Q. Did you think that you should have to get clearance from Lee Mallett,
Osmar Abib, Paul Davis, and Peter O’Malley before you could lower your rating
on Enron?
* * *
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A. No.
8/26/05 Deposition Transcript of Jill Sakol (“8/26/05 Sakol Depo. Tr.”) at 397:2-398:2.
This conduct by CSFB violated Rule 10b-5(b). Certain of the Bank’s analysts issued
bullish reports on Enron stock that they themselves in reality did not hold, and CSFB
misrepresented the true negative opinions of analysts like Sakol. That such is actionable could
not be more clear.
Rule 10b-5 proscribes the issuance of analyst reports that do not reflect the true opinion
held. See DeMarco, 318 F. Supp. 2d at 117 (upholding allegations that “the research reports ‘did
not reflect defendants’ true beliefs’ about Corvis stock”). An archetypal example of this is found
in CSFB having a “strong buy” rating on Enron while DeVries’s actual opinion (expressed
privately to friends) was “don’t buy.” 5/25/05 DeVries Depo. Tr. at 311:23-312:19.
DeVries in deposition admitted his duplicity:
Q. [Suki] was accurate in that you were telling him one thing and CSFB was
telling the clients a different story, correct?
A. Yes.
5/25/05 DeVries Depo. Tr. at 324:21-325:2. 250
* * *
The same fraud is found in Sakol having the true belief that the “attractive” rating should
be immediately lowered, but CSFB maintaining it nonetheless. Even Sakol insisted this was
“misleading.” And it also was a lie for CSFB to maintain Launer’s outrageous $115 price target
on Enron when the jury could easily infer Launer had no actual belief that the stock was worth
250
Because “there will rarely be direct evidence of intent to defraud” (Fleming, 2004 U.S.
Dist. LEXIS 26488, at *33), DeVries’ emails and candid deposition testimony here represent
pretty much the most direct evidence of falsity and scienter one can reasonably expect to find.
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that much, as he knew Enron had financials that were “as clear as mud” because the Company
“could just never tell the truth.” 251
This evidence establishes CSFB and its analysts acted with scienter. 252
The evidence
directly shows these analysts understood CSFB’s public Enron rating differed wildly from their
true, personal rating. CSFB’s investment bankers brazenly overstepped their bounds and
interfered with the research division – to prevent CSFB from publishing the true views of their
analysts – and thus the bankers knew CSFB was issuing analyst reports that failed to disclose
their analysts’ true opinions. This was done to maintain and enhance CSFB’s healthy investment
banking relationship with Enron. 253
Additional scienter support is found in the Bank’s
knowledge that it was itself manipulating Enron’s reported financial condition via the inherently
deceptive transactions it engaged in with the Company. See supra at §II.B.2.
More scienter evidence is found in the details of the motive and opportunity CSFB
analysts had to falsify their analyst reports, and how the Bank made clear its willingness to
falsify their ratings to please Enron. More than CSFB’s investment banking relationship with
Enron was on the line. Launer’s compensation included a portion of fees from investment
banking business from companies that he covered – including Enron:
251
In DeMarco, 318 F. Supp. 2d at 117, the court sustained the plaintiff’s allegations that
Rule 10b-5 was violated by the defendant analysts in issuing a report on a stock with a buy price
of $23.94, and then shortly thereafter telling a special audience that they valued it at only $12 to
$14 per share.
252
The substantive standard of scienter concerning Lead Plaintiff’s Rule 10b-5(a) and (c)
claims discussed supra at §II.3.a. (i.e., that of not being under the purview of the PSLRA),
applies here as well.
253
In this regard, the scienter evidence described supra at §II.3.b. (“CSFB’s Desire to
Maintain and Enhance its Professional Relationship with Enron to Earn Lucrative Investment
Banking Fees”) applies here.
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Q. But you knew at the time, in 1998, that you were writing research reports
on Enron, that you were going to get 3 percent or up to 3 percent of the fees that
DLJ was going to earn on investment banking business from Enron?
A. Yes.
* * *
Q. And you knew that throughout the year 1999 as well?
A. Yes.
Q. And you knew that for nine months of 2000?
A. Yes.
* * *
A. I received investment banking fees from DLJ under the banking fee
payment plan that DLJ had in place, through the first part of the year 2000. When
I joined CSFB, I had a provision in my contract that included investment banking
fee – included preference to future investment banking fees for which I would be
paid under certain terms.
Q. And what were the certain terms? What had to occur so that you would
get the money?
A. I believe the provisions were that I would receive 4 percent of investment
banking fees received by CSFB for the companies I followed above a certain
threshold, which I believe was $100 million.
Q. So for every million dollars over 100 million, that CSFB got in investment
banking fees from the companies you covered, you got $40,000?
A. Yes.
5/11/05 Deposition Transcript of Curt Launer (“5/11/05 Launer Depo. Tr.”) at 537:24-541:13. 254
Thus, CSFB could readily expect Launer would be strongly inclined to be less than
forthcoming in his research reports on Enron, to please the Company and earn its investment
banking business. This was the case. In Launer’s year-end 1998 self evaluation, he lauds
254
In his deposition, Launer could not “recall” whether this compensation arrangement was
disclosed in any of his Enron research reports. 5/12/05 Launer Depo Tr. at 627:19-628:12.
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himself for achieving his goal for the year: “to use my research product, poll rankings and CEO
relationships to expand our banking activity” (Ex. 13690 at CSFBLLC006304083) – that is, to
use his analyst reports to gain investment banking business for CSFB! In the same memo,
Launer states “our first priority is to maintain our leadership position at ENE.” Id. at
CSFBLLC006304084. Launer wrote CSFB’s research reports should not cause the Bank to
“lose business with lower estimate and ratings.” Ex. 13701 at CSFBLLC006906073; 5/12/05
Launer Depo. Tr. at 619:18-21.
Even more shocking is Launer’s outright cooperation with Enron executives to assist in
crafting the Company’ image to investors. In April 2001, CSFB analysts knew Enron was
having credibility problems. Salles wrote to Launer on April 13, 2001: “ENE has created big
credibility problem for themselves currently being reflected in the share price. Questions the
legitimacy of the company comments.” Ex. 13696. Launer writes back to Salles: “No question
about it – [Enron’s Mark Koenig is] not a happy camper. We’re going to try to help, but it won’t
be easy.” Ex. 13696.
One way Launer would “help” Enron at times would be by refraining from asking tough
questions about the Company. Enron executive Mark Koenig asked Launer to help ease Enron
through a conference call by asking softball questions. Exs. 13693, 13694. Koenig requested
Launer “que up a question early,” as it would give Enron “time to get our act together.” Ex.
13693. Launer obliged: “We’ll ask about ongoing trading activity . . . ok?” Ex. 13694. This
type of cooperation (and more direct “help” from CSFB analysts) was not a one-time occurrence.
On another occasion, Salles wrote to Launer and others that, concerning poor performance at the
Company’s New Power spin-off, a “scripted conference call and press release” would “go a
long way.” Ex. 15916. In February 2001, CSFB’s banker McCabe drafted “questions for the
management team at New Power as they prepared for their Valentine’s Day earnings call.” Ex.
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13097A. The questions were sent not only to CSFB analysts Launer and Salles, but also to the
management of New Power. “[H]opefully love will be in the air,” McCabe said in his email to
the analysts. Id. After the Valentine’s Day call, Launer wrote back to banker McCabe, “[c]all
going well. Numbers look good. They’re learning . . . glad you took the initiative and ‘directed’
the thinking.” Ex. 13098A. CSFB’s investment bankers and analysts worked together with
Enron personnel to polish New Power’s public image.
CSFB analysts also would provide Enron executives advance copies of CSFB research
reports – and even invited Enron executives to make changes to the report. See Ex. 15911
(January 20, 2000 email from Phil Salles to Jeff Skilling and Mark Koenig, inviting Skilling and
Koenig to call Launer with “comments” or “changes” to a research report to be issued). All of
the above is powerful evidence from which a jury could easily infer the scienter of Launer, other
CSFB analysts and CSFB. 255
Very strong support for Lead Plaintiff’s claims concerning CSFB’s analyst reports is
found in this Court’s recent Order upholding similar claims in a coordinated case. See Giancarlo
v. UBS Financial Services, Inc., H-03-4359, Memorandum and Order (S.D. Tex. Feb. 18, 2005).
In Giancarlo, the plaintiff alleged that a group of related investment banking and brokerage
entities violated Rule 10b-5 by issuing positive analyst reports on Enron despite indications of
adverse facts concerning the Company’s financial condition that rendered such recommendations
unwarranted. See id. at 18-37; 45-46. The Court upheld as actionable an analyst’s “unwavering
255
Other scienter evidence concerning Launer and CSFB is found in the SEC’s allegations
that “CSFB created and fostered an environment with conflicts of interest that, in some
circumstances, undermined the independence of research analysts and affected the objectivity of
the reports they issued.” Thakor Depo. Ex. 8, 2. Concerning Enron, the SEC alleged that
Launer had an undisclosed proprietary interest in an Enron-owned spinoff called New Power.
Id., 7. This too created a strong motive for Launer to falsify his research reports on Enron.
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position of recommending Enron stock as a ‘STRONG BUY’” (id. at 26-27) during “an
increasingly precarious period for Enron’s financial stability” (id. at 27; see also id. at 32) –
allegations very similar to Lead Plaintiff’s evidence of Launer’s maintenance of the same rating
on Enron stock while the Company began to deteriorate. In upholding the complaint, the Court
also considered allegations that the same analyst’s compensation was related to investment
banking business generated from Enron (id. at 35), just as was Launer’s. The Court further noted
allegations that brokers were pressured not to present negative opinions on Enron (id. at 37 n.22)
– precisely as CSFB did with analyst Sakol – and that the defendant entities were motivated to
falsely recommend Enron stock to protect their “considerable fees for services to and profits
from business with Enron” (id. at 30), just as Lead Plaintiff’s evidence establishes CSFB did.
The Court held that the plaintiff's allegations stated a claim under Rule 10b-5. Id. at 46.
The above evidence establishes that CSFB issued false and/or misleading analysts reports
concerning Enron with scienter. As such, CSFB is liable under Rule 10b-5(b) for this conduct.
2. CSFB Breached Its Duty to Disclose Created by Its Issuance of
Analyst Reports on Enron
As discussed directly above, CSFB issued analyst reports on Enron that contained false
and misleading statements, including that CSFB’s analysts held positive views on the Company
and its current and target stock price that were not sincerely held. But even if these statements
were true (which they were not), CSFB is liable for the analyst reports under Rule 10b-5(b) in
another separate and independent way.
Rule 10b-5 does not proscribe only outright lies and actionable omissions of complete
silence. Also under the Rule, “a defendant may not deal in half-truths.” First Virginia
Bankshares v. Benson, 559 F.2d 1307, 1314 (5th Cir. 1977). “A half truth is a statement which
accurately discloses some facts, but misleads the listener or reader by concealing other data
necessary for a true understanding.” 5C Arnold S. Jacobs, Disclosure and Remedies Under the
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Securities Laws §12:2 at 12-9–12-10 (West Group 2003) (citing Hoxworth v. Blinder, Robinson
& Co., 903 F.2d 186 (3d Cir. 1990)). In Hoxworth, the Third Circuit confirmed that “misleading
half-truths” – which it defined as “failures to disclose sufficient information to render statements
actually made not misleading” – are actionable under Rule 10b-5. 903 F.2d at 200 n.19. The
Ninth Circuit agrees:
“Some statements, although literally accurate, can become, through their context
and manner of presentation, devices which mislead investors. For that reason, the
disclosure required by the securities laws is measured not by literal truth, but by
the ability of the material to accurately inform rather than mislead prospective
buyers.”
In re Convergent Techs. Sec. Litig., 948 F.2d 507, 512 (9th Cir 1991).
As such, where a defendant volunteers information, it creates for itself a duty to disclose
the full truth on the subject that was known (or knowable) to it. See Rubinstein v. Collins, 20
F.3d 160, 170 (5th Cir. 1994) (“As we have long held under Rule 10b-5, ‘a duty to speak the full
truth arises when a defendant undertakes a duty to say anything’”); Virginia Bankshares, 559
F.2d at 1317 (“[Under Rule 10b-5], a duty to speak the full truth arises when a defendant
undertakes to say anything.”); Kurtzman v. Compaq Computer Corp., No. H-99-779, 2000 U.S.
Dist. LEXIS 22476, at *189 (S.D. Tex. Dec. 12, 2000) (“The duty to disclose information exists
when such disclosure is necessary to make defendants’ statements, whether mandatory or
volunteered, not misleading.”); Kunzweiler v. Zero.net, Inc., No. 3:00-CV-2553-P, 2002 U.S.
Dist. LEXIS 12080, at *36 (N.D. Tex. July 3, 2002) (“A defendant must speak the full truth
when he undertakes to say anything in the first place.”).
Thus, under Rule 10b-5(b), “where the defendant has revealed some relevant, material
information even though he [otherwise] had no duty,” he breaches a duty to disclose by any
refusal “to speak the full truth.” First Virginia Bankshares, 559 F.2d at 1314, 1317. CSFB is so
liable.
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As discussed, while the Enron scheme was in operation, CSFB was constantly speaking
about Enron’s financial and operational condition, issuing numerous analyst reports on the
Company. 256
Making these statements triggered for CSFB “a duty to speak the full truth” about
what it knew of Enron’s true financial and operational condition. Rubinstein, 20 F.3d at 170;
First Virginia Bankshares, 559 F.2d at 1317.
The “full truth” known to CSFB included the fact that Enron’s reported financial and
operational condition was being materially misrepresented by, inter alia, CSFB’s fraudulent
transactions with the Company. As discussed supra at §II.B.2., CSFB engaged in transactions
with Enron that had the purpose and effect of falsifying Enron’s reported financial condition –
and CSFB knew it. But CSFB never disclosed this “truth” known to it. Thus, even if the analyst
reports described supra at §II.D.1., did not contain any outright false statements about Enron’s
financial or operational condition, CSFB nevertheless violated Rule 10b-5(b) by breaching its
“duty to speak the full truth” known to it.
256
During the Class Period, CSFB issued analyst reports (or other written communications
to the market) about Enron on at least the following dates: 06/09/99; 06/11/99; 07/06/99;
07/13/99; 07/14/99; 07/21/99; 08/16/99; 08/20/99; 08/23/99; 09/02/99; 09/10/99; 09/22/99;
10/08/99; 10/12/99; 11/24/99; 11/29/99; 11/30/99; 12/16/99; 12/17/99; 01/02/00; 01/10/00;
01/13/00; 01/14/00; 01/18/00; 01/21/00; 01/24/00; 02/28/00; 03/07/00; 04/12/00; 04/13/00;
05/22/00; 07/24/00; 10/12/00; 10/16/00; 10/17/00; 10/18/00; 10/20/00; 10/23/00; 11/06/00;
11/13/00; 12/04/00; 12/11/00; 01/12/01; 01/22/01; 01/26/01; 01/29/01; 02/05/01; 02/20/01;
03/05/01; 03/12/01; 03/19/01; 03/22/01; 03/26/01; 04/16/01; 04/17/01; 04/18/01; 04/23/01;
04/26/01; 05/18/01; 05/21/01; 05/29/01; 06/11/01; 06/25/01; 06/27/01; 07/09/01; 07/12/01;
07/16/01; 07/26/01; 08/14/01; 08/15/01; 08/17/01; 08/20/01; 08/27/01; 09/04/01; 09/10/01;
09/17/01; 10/01/01; 10/08/01; 10/09/01; 10/15/01; 10/16/01; 10/17/01; 10/19/01; 10/22/01;
10/23/01; 10/24/01; 10/25/01; 10/26/01; 10/29/01; 11/05/01; 11/12/01; 11/16/01; 11/19/01;
11/20/01; 11/21/01; 11/23/01 and 11/26/01. See Ex. 76.
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3. CSFB Breached Its Duty to Disclose Created by CSFB’s
Underwriting of Enron Securities Offerings
It is well established that an “insider,” such as a corporate officer, who possesses material
non-public information about the company, is subject to a duty to “disclose or abstain” – i.e.,
either disseminate the information to the investing public before trading in the company’s
securities or refrain from trading until the information has been publicized. See, e.g., Chiarella
v. United States, 445 U.S. 222, 227, 229 (1980). The Fifth Circuit has recognized this duty to
“disclose or abstain.” See SEC v. Fox, 855 F.2d 247, 252 (5th Cir. 1988) (“Rule 10b-5 imposes a
duty to disclose, or abstain from trading on the basis of non-public material corporate
information.”). This duty is obviously breached by trading without disclosure.
The duty emanates from:
“[A] relationship of trust and confidence [that] exists between the shareholders of
a corporation and those insiders who have obtained confidential information by
reason of their position with that corporation.”
United States v. O’Hagan, 521 U.S. 642, 652 (1997). But not only corporate officers can acquire
this duty. Others who obtain information from the company – such as underwriters – may as
well. As the Supreme Court has further held:
Under certain circumstances, such as where corporate information is
revealed legitimately to an underwriter, accountant, lawyer, or consultant
working for the corporation, these outsiders may become fiduciaries of the
shareholders. The basis for recognizing this fiduciary duty is not simply that
such persons acquired nonpublic corporate information, but rather that they have
entered into a special confidential relationship in the conduct of the business of
the enterprise and are given access to information solely for corporate purposes.
Dirks v. SEC, 463 U.S. 646, 655 n.14 (1983).
During the Class Period, CSFB acted as an underwriter for Enron securities. Ex. 4 at 38-
67. By underwriting the issuance of Enron securities with such knowledge, CSFB assumed this
fiduciary duty to abstain or disclose. As was held in one case:
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As an underwriter, Ratliff was under a duty to the investing public to make
a reasonable investigation of the issuer of the bonds and to disclose material facts
that he knew or that were readily ascertainable.
Shores v. M.E. Ratliff Inv. Co., No. CA 77-G-0604-5, 1982 U.S. Dist. LEXIS 10653, at *7 (N.D.
Ala. Jan. 18, 1982). As one commentator observes, underwriters have the same duty to disclose
or abstain as a corporate officer:
Officers, directors, and 10 percent stockholders who are insiders are sometimes
dubbed “inside-insiders” to distinguish them from other insiders who are
occasionally called “access insiders” or “quasi-insiders.” An example of an
inside-insider is a company’s president learning of a new discovery from his vice
president of research and development. In contrast, a company might reveal
material inside information to an underwriter during a due diligence investigation
preceding a public offering. Since the underwriter received the facts in its
business capacity and had a legitimate business reason for knowing them, it
would be an access insider. The obligations of inside-insiders and access
insiders are identical.
5C Jacobs, Disclosure and Remedies Under the Securities Laws §12:118 at 12-552.
The truth CSFB thus needed to disclose when acting as an underwriter included the fact
that Enron’s reported financial and operational condition was being materially misrepresented
by, inter alia, CSFB’s fraudulent transactions with the Company. As discussed supra at §II.B.2.,
CSFB engaged in transactions with Enron that had the purpose and effect of falsifying Enron’s
reported financial condition – and CSFB knew it. But CSFB, or course, never disclosed this
“truth” known to it. As such, it violated this duty to disclose as well, and is liable under Rule
10b-5(b).
4. CSFB Made False and Misleading Statements and Omissions
in Offering Circulars
The Osprey I and Osprey II Offering Circulars, and Marlin II Offering Circular, made
numerous misrepresentations about the transactions and about Enron. The Osprey Offering
Circulars concealed that proceeds from the Osprey transaction were being funneled to
Nighthawk – a material fact that would have alerted Enron security purchasers about disguised
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debt within the Nighthawk structure. DLJ and CSFB also concealed that Whitewing, recipient of
substantial funds from the Osprey offering, was a mere dumping ground for troubled, nontransferable
assets. This would have alerted Enron investors to significant problems in Enron’s
merchant asset portfolio – problems that DLJ and CSFB bankers knew, but concealed. DLJ
falsely represented in the Offering Circulars that “independent” third-party investors were
purchasing Enron’s merchant assets, when in truth the transactions were not at arm’s length.
And DLJ concealed the fact LJM1 and LJM2 invested in Osprey I and Osprey II, material facts
that would have alerted investors that Enron’s insiders and financiers were manipulating Enron’s
financials by purchasing distressed assets at inflated prices. CSFB’s actions in this regard
violated Rule 10b-5(b).
a. The Osprey I Offering Circular Concealed Osprey I
Was Designed to Repay Nighthawk
Of the initial $1.5 billion Osprey raised in September 1999, $578 million purchased an
existing investor’s interest in Whitewing. The Osprey I Offering Circular disclosed that a
portion of the initial proceeds would “redeem an existing unaffiliated equity investor in
Whitewing LP.” Ex. 33304 at CSFBLLC006214750. The so-called “unaffiliated” entity was
Nighthawk, a Citigroup-funded deal, which Larry Nath structured and “presented” to Enron CFO
Andy Fastow before Nath joined DLJ. Fastow Decl., 10; Ex. 21554 at CITINEWBY00248639-
40 (Citi presentation describing Nighthawk as a “financing” with “minimal public disclosure”);
Ex. 77 at AB000056995-98. DLJ’s Capolongo also knew about Nighthawk, since he “did due
diligence” on how Osprey’s proceeds were destined to pay off Citi. 8/1/05 Capolongo Depo. Tr.
at 290:9-21.
Contrary to the Osprey I Offering Circular representation, Bankrutpcy Examiner Batson
and Lead Plaintiff’s experts conclude Nighthawk was not “unaffiliated.” Enron bore nearly all
the risk of repaying Nighthawk’s debt – “the Nighthawk equity was not at risk” – and thus
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Nighthawk should have been consolidated with Enron. Ex. 78 at 12, 14-15. Citigroup’s internal
accounting advisory office recognized the Nighthawk equity “was not at risk” because Citi
purchased a “collar put option” to protect its Nighthawk equity, and Citi’s own accountant wrote
Enron should consolidate the transaction. Third Interim Report of Neal Batson, Appendix D
(Ex. 79) at 97, 101; Ex. 20073 at 3. Accord Solomon App. at 241. Yet the Osprey I Offering
Circular did not disclose these facts, though, from the beginning, Osprey’s intended purpose was
repayment of Nighthawk, as DLJ’s Nath and Enron’s Bowen discussed at Osprey’s inception.
1/12/05 Nath Depo. Tr. at 137:17-138:20, 142:15-24, 143:3-13. Nor did the Osprey I Offering
Circular disclose Citigroup, one of the underwriters/initial purchasers in the Osprey offering,
would receive the bulk of the $578 million raised for Nighthawk’s repayment. Ex. 33304. That
an underwriter would receive proceeds of the offering posed a material conflict of interest
concealed by CSFB/DLJ.
As Larry Nath knew, and explained to Andy Fastow, “the purpose of Nighthawk was to
convert debt into minority interest.” Fastow Decl., 10. There was “no real business purpose
associated with . . . Nighthawk.” Id. This information, too, was excluded from the Osprey I
Offering Circular. See Ex. 33304. Though Nath reviewed the Circular – even conceding he
“may have looked at” the Offering Circular before it was finalized (1/13/05 Nath Depo. Tr. at
487:2-6), he never demanded an accurate description of Nighthawk and its purpose be revealed
to investors.
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. The Osprey I Offering Circular Concealed that
Whitewing Was Buying Troubled and Non-transferable
Assets from Enron
(1) DLJ Bankers Knew Whitewing Was Using
Osprey Funds to Buy Two Distressed Enron
Merchant Assets, Trakya and Sarlux
The Osprey I Offering Circular noted Whitewing would use a portion of the Osprey funds
to acquire Sarlux and Trakya, two distressed international power generators, from Enron. See
Ex. 33304 at CSFBLLC006214763; see also 10/27/04 Scott Depo. Tr. at 126:16-22, 173:6-18;
10/28/04 Scott Depo. Tr. at 427:4-11; 8/1/05 Capolongo Depo. Tr. at 55:25-56:15. Dominic
Capolongo, for example, testified:
Q. Okay. The potential assets going in and you referred to two of them, were
Sarlux and Trakya?
A. Correct.
Q. Those were two power assets that Enron owned, one of which was in
Turkey, one of which was in Italy; correct?
A. Correct.
Q. CSFB understood that these were intended to be purchased by Whitewing
in connection with Osprey I?
A. Correct.
Q. You understood that before the transaction closed?
A. Correct.
8/1/05 Capolongo Depo. Tr. at 55:25-56:15.
Larry Nath and Brian Herman, among others, also knew Whitewing was going to
purchase Enron interests in Sarlux and Trakya with Osprey I funds. On September 14, 1999, for
instance, Herman sent to DLJ clients, as part of “Condor Asset Purchase Disclosure,”
“information concerning the Whitewing Investment Proposal concerning the Sarlux and Trakya
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Power Plants,” including pictures. Ex. 40367 at DBN-IBI412. Herman copied senior bankers
Larry Nath and Dom Capolongo on his email. See id.
(2) Before Osprey Closed, DLJ Bankers Learn the
Sarlux and Trakya Assets Were Subject to
Transfer and Consent Restrictions, Prohibiting
Their Transfer to Whitewing
DLJ bankers who worked on Osprey I admit they knew Sarlux and Trakya were subject
to disclosure, transfer, and consent restrictions, but concealed this material information from
investors. See 8/1/05 Capolongo Depo. Tr. at 132:3-10; 7/13/05 Herman Depo. Tr. at 138:9-13;
Ex. 33304 at CSFBLLC006214763.
DLJ learned of the transfer, disclosure, and consent restrictions on Sarlux and Trakya
long before Osprey I closed. Prior to Osprey’s closing, DLJ and Enron had attempted to place
the two power plants into the Project Margaux structure. A Project Margaux “due diligence
document,” produced from CSFB’s files and bearing the facsimile identification “DLJ Houston
Banking” and “July 28, 1999,” asks as part of the “SARLUX COMMENTARY,” whether “there
[are] any prohibitions on equity transfers” and then answers, “[y]es.” Ex. 11032 at
CSFBLLC006296231; see also 10/27/04 Scott Depo. Tr. at 200:2-3, 201:25-202:5. Page 213 of
DLJ’s Margaux due diligence document also identifies the “consent” restrictions applicable to
the Trakya plant. Ex. 11032 at CSFBLLC006296213. Thus DLJ knew Enron sold assets to
Whitewing – assets that Enron was unable to sell and assets that Whitewing could not liquidate
to repay bond holders.
c. DLJ Bankers Learn Enron’s Merchant Assets Were
Monetized in Prior Bogus Transactions by Enron’s
Other Tier One Banks
DLJ’s work on Project Margaux alerted DLJ bankers Capolongo, Scott and others that
Enron had sold the same Osprey merchant assets more than once, evidencing the structured
financings were bogus. DLJ’s Project Margaux due diligence documents make specific
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eference to “Project Leftover,” a fraudulent FAS 140 transaction involving CIBC. 257
DLJ notes
the “Leftover loans” need to be “[r]eplace[d].” Id. at CSFBLLC006296218. What’s more, DLJ
incorporated Project Leftover diagrams in its due diligence packet, calling Leftover a “FASB
125” transaction. Id. at CSFBLLC006296218-23. Similarly, DLJ’s due diligence document
establishes DLJ knew the Nowa Sarzyna asset also had equity transfer restrictions. Id. at
CSFBLLC006296248.
DLJ knew Osprey monetized – sold – Enron assets that had already been “sold” in earlier
structured finance deals. This is inherently fraudulent. DLJ banker Scott was a “principal”
member of DLJ’s Osprey I team. 8/1/05 Capolongo Depo. Tr. at 77:8-12. As part of their work
on Margaux, on August 10, 1999, DLJ’s Scott sent an email to Capolongo entitled “Project
Leftover,” and attached due diligence materials concerning Leftover, a fraudulent FAS 140
transaction involving CIBC that monetized the Trakya asset.
See Ex. 11028 at
CSFBLLC005295718. The email specifically referenced the materials as “Turkey [Trakya]
monetization documents.” Id. That same day, Scott also emailed Capolongo about “Project
Nimitz,” another fraudulent FAS 140 transaction involving CIBC that monetized the Sarlux
asset. Ex. 11024 at CSFBLLC005296000. This email specifically identified the attached
materials as “Sarlux monetization documents.” Id. Capolongo feigned ignorance about why he
was sent the Sarlux and Trakya due diligence materials:
257
CIBC participated in certain FAS 125 transactions, including Projects Leftover, Nimitz,
Riverside, Alchemy and Discovery. Notably, certain of these Enron-CIBC transactions involve
the very same assets purchased by Whitewing/Osprey – and DLJ bankers knew it. CIBC entered
into a December 22, 2003 settlement with the Department of Justice because, like
Whitewing/Osprey, CIBC’s transactions “removed” the assets from Enron’s balance sheet (and
also generated bogus “earnings and/or cash flow at quarter and year-end”). Ex. 10084, App. A,
3.
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Q. Can you think of any other reason why you would be receiving actually a
total of about four or five inches’ worth of documents from Mr. Scott related to
these two transactions other than Osprey I?
A. It’s possible Dwight thought that they were important to me. Doesn’t
necessarily mean that they were. But I don’t know.
* * *
Q. So sitting here today it’s a mystery why you possibly received this four or
five inches of documents from Mr. Scott?
A. Correct.
1/6/05 Capolongo Depo. Tr. at 213:16-24, 215:19-22.
d. DLJ Omitted from the Osprey I Offering Circular that
Enron Was Selling Impaired Assets to Whitewing
(1) DLJ Concealed Transfer Restrictions
DLJ bankers concealed from readers of the Osprey I Offering Circular that Enron was
parking impaired merchant assets in Whitewing via the proceeds the Osprey offering raised. See
1/6/05 Capolongo Depo. Tr. at 54:7-14 (DLJ “participated in the printing and production of the
offering documents”; “we reviewed and commented on the marketing materials as well as the
offering memorandum”). DLJ knew this information was material, as its draft Osprey Offering
Circulars contained this information.
For example, a DLJ draft Osprey I offering document states, “equity interests in
infrastructure projects typically have substantial transfer restrictions.” Ex. 20503 at DBG-
000792. Brian Herman, who worked on due diligence issues regarding Osprey, knew the
“transfer restrictions in connection with the Sarlux and Trakya assets” were “an issue” (7/13/05
Herman Depo. Tr. at 138:9-13), yet Herman never put this fact into the Osprey I Offering
Circular. See Ex. 33304 at CSFBLLC006214763. Dominic Capolongo, a senior member of
DLJ’s Osprey due diligence team, admits the Bank had concluded Enron could “not transfer” its
Sarlux interest into Osprey I. 8/1/05 Capolongo Depo. Tr. at 113:9-22; see Ex. 21275 at 6-7
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(Interrogatory Response Nos. 5 & 6). Just like Herman, Capolongo failed, despite participating
in about “a dozen drafting sessions” and suggesting changes and additions to the Osprey I
Offering Circular, to insert disclosures about the Sarlux restrictions in the Circular. See 8/1/05
Capolongo Depo. Tr. at 238:20-23; 1/6/05 Capolongo Depo. Tr. at 56:12-15; Ex. 33304.
And Capolongo, whom CSFB designated as a 30(b)(6) witness concerning Osprey due
diligence, and identified as the senior officer involved in DLJ’s Osprey due diligence efforts,
concedes he cannot point to any warnings given to Osprey I investors about the transfer
restrictions applicable to Sarlux and Trakya:
[Q.] Is there any communication of any sort you could direct me to in which
members of the due diligence team, either directly or indirectly apprised potential
investors in either the notes or certificates for Osprey I of potential risks for
Sarlux and Trakya regarding disclosure, transfer or consent?
A. No.
8/1/05 Capolongo Depo. Tr. at 132:3-10; see Ex. 21275 at 6-7 (Interrogatory Response Nos. 5 &
6); 1/6/05 Capolongo Depo. Tr. at 169:11-19.
As former DLJ banker Brian Herman admits, this information was “important” to
investors in Osprey as well as Enron securities, who had substantial interest in “know[ing]
accurate facts” about Enron’s merchant assets and the value and quality of the assets that
supported the Osprey I Notes and Certificates:
Q. You’d agree that it’s important for the investors to know accurate facts in
connection with Sarlux and Trakya projects, wouldn’t you?
* * *
A. I would expect investors to want to know information about what they’re
investing in, yes.
Q. And that the information that’s being provided to them is accurate,
correct?
A. If I was an investor, I’d want to know that, yes.
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Q. Is it reasonable, in your mind, for the investors that you were
communicating with to rely on representations that were being conveyed
to them by you?
* * *
A. By – I believe they could make their own opinion about the
representations that we were making.
Q. Are you saying that they can’t rely on what you are telling them?
* * *
A. No. I mean, I think most investors did rely on what we told them, but I
believe a lot of them also relied on other information to confirm what
we’re saying.
7/13/05 Herman Depo. Tr. at 112:15-113:13. Herman’s testimony squares with the Court’s
holding that the Offering Circulars “did reach investors and were intended to solicit investors.”
In re Enron Corp. Sec. Litig., No. H-04-0088, 2005 U.S. Dist. LEXIS 39927, at *30 (S.D. Tex.
Dec. 5, 2005).
(2) DLJ Concealed Bogus Asset Valuation “Write
Ups”
Transfer and consent restrictions were not the only problems plaguing Enron merchant
assets. As DLJ knew, Whitewing was planning to “buy” from Enron with the Osprey proceeds.
Enron had “written up” Sarlux and Trakya “to $380 and $230 million respectively through FAS
125 prior to transfer” into Whitewing. See Ex. 21261A at AB000504619. A subsequent Enron
valuation of Sarlux “show[ed] a minimum of $100 million shortfall.” Id. If banker Dwight Scott
and other DLJ bankers did not know of these dramatic inflations in values from their asset due
diligence in Margaux (see 8/1/05 Capolongo Depo. Tr. at 76:19-77:12), DLJ certainly would
have discovered these inflated values and the intended parking of overvalued assets in
Whitewing had DLJ’s bankers conducted any due diligence on Sarlux and Trakya as part of the
Osprey transaction as DLJ was required to do by law. See 8/1/05 Capolongo Depo. Tr. at 76:6-
11.
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(3) DLJ Concealed the Fact Enron Needed to
Refinance Fraudulent FAS 125 Deals Involving
Sarlux and Trakya that Were Maturing
Nor did the Osprey I Offering Circular disclose, as DLJ knew, that Enron needed to
“sell” Sarlux and Trakya to Whitewing so Enron could repay earlier off-balance sheet financings
that used the plants and were now coming due. DLJ had tried to solve this problem with Project
Margaux, but Margaux was experiencing delays. 10/27/04 Scott Depo. Tr. at 215:2-21, 233:9-
19. The “[e]xpir[ing] of the two FASB 125 transactions (Sarlux and Trakya) required repayment
of $450 million to banks,” and presented the “[p]otential for $450 million of debt to come back
on-balance sheet at an incremental cost of $65 million/yr” and “$450 million of associated
negative funds flow.” Ex. 21261A at AB000504620.
Enron secured the funding it needed to repay the amounts Enron owed CIBC by dumping
Sarlux and Trakya into the Whitewing/Osprey parking lot. See Ex. 10264; Ex. 14078 at
CSFBCO005107202 (“Osprey serves the added purpose for Enron of being an off-balance sheet
parking lot for certain assets.”); 8/1/05 Capolongo Depo. Tr. at 181:4-9. Former DLJ banker
Dwight Scott testified:
Q. Enron, to your knowledge, however, did pay off those financings, didn’t
they?
A. I believe they did.
* * *
Q. They paid off those financings out of the proceeds that they received when
the Sarlux and Trakya assets were place in the Osprey structure, correct?
* * *
A. I’m aware of that preparing for this meeting.
Q. And that’s correct, isn’t it?
A. It is correct.
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10/27/04 Scott Depo. Tr. at 218:7-20. The “[e]xpiring FAS 125 deals [were] ‘bridged’ by offbalance
sheet, syndication structure (Whitewing).” Ex. 21261A at AB000504621.
e. DLJ Knew Enron’s Asset Sales to Whitewing Were Not
Made at Arm’s Length
Similarly, DLJ misrepresented Whitewing was buying assets from Enron on the basis of
arm’s-length negotiations, which DLJ knew was untrue. At page 13, the Osprey I Offering
Circular states: “Enron intends that each acquisition of Whitewing Assets will be at a price and
on other terms determined by internal Enron negotiations conducted on an arms length
basis . . . .” Ex. 33304 at CSFBLLC006214753. At page 15 and elsewhere, the Osprey II
Offering Circular states the negotiations for assets bought by Whitewing “will be at a price and
on other terms determined by internal Enron negotiations conducted on an arms length basis, and
the holders of the Osprey Trust Certificates . . . will have certain consent rights with respect to
such acquisitions.” Ex. 33305 at CSFBLLC005707083.
These statements were false and misleading. The statements misled investors to believe
the acquisitions would be undertaken at fair prices and on reasonable terms. Contrary to the
representations, Whitewing acquired the assets from Enron at exorbitant prices – prices that had
nothing to do with the asset’s value, but with the amount of cash Enron needed at that time. The
assets Whitewing acquired from Enron were at prices unilaterally set by Enron absent any
legitimate “arm’s-length” negotiations.
During Osprey I’s consummation, CSFB banker Nath knew Whitewing would buy assets
from Enron – with Enron employees acting on both sides of the transaction. 1/12/05 Nath Depo.
Tr. at 184:12-185:7. This was the structure behind the so-called “arm’s-length negotiations.”
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f. The Osprey II Offering Circular Omitted Information
Showing Whitewing Was a Dumping Ground for
Troubled Assets
Fastow testified both he and CSFB were in agreement that Osprey was an off-balance
sheet “parking lot” for distressed Enron assets. 10/26/06 Fastow Depo. Tr. at 977:20-978:3.
This is confirmed by CSFB bankers’ own documents and testimony describing Osprey as such.
See Ex. 10264 (email among CSFB bankers saying “Osprey serves the added purpose for Enron
of being an off-balance sheet parking lot for certain assets”); 8/1/05 Capolongo Depo. Tr. at
181:4-9. But this was concealed from investors. DLJ and CSFB excised from the Osprey II
offering memorandum information showing Whitewing was a dumping ground for distressed
Enron assets and Enron assets that could not be sold due to transfer restrictions. The failure to
disclose the transfer and consent restrictions, on top of removing information that Whitewing
was a dumping ground for distressed Enron assets, is deceptive conduct.
The exclusion of this information from the offering documents was intentional, for as part
of its work on Osprey II, DLJ and CSFB received and reviewed several drafts of the Offering
Circular. Banker Dominic Capolongo testified that DLJ reviewed and commented on the Osprey
II offering memorandum and “[p]articipated in joint drafting discussions and meetings with
Enron and others.” 8/1/05 Capolongo Depo. Tr. at 143:10-12. DLJ’s due diligence efforts
included reviewing the assets Whitewing had purchased since its formation in connection with
the Osprey I offering. 8/1/05 Capolongo Depo. Tr. at 146:12-147:13. Capolongo testified:
Q. DLJ participated in connection with its due diligence efforts in the final
decision regarding the language and assets that were contained in [the Whitewing
description] of the Offering Memorandum; did it not?
A. Broadly speaking including all of the relevant advisors to DLJ, yes.
8/1/05 Capolongo Depo. Tr. at 147:7-13.
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Through its due diligence efforts, DLJ bankers Nath, Scott, and Capolongo knew
information about troubled Whitewing assets was intentionally excluded from the final Osprey II
offering documents. See, e.g., Ex. 20525 at DBI045745 (“Osprey II – Due Diligence Conference
Call Schedule” to “discuss the Whitewing Assets”). Draft Offering Circulars for Osprey II
revealed the distressed assets Enron parked in Whitewing, but this negative language was
excised from the final version of the Offering Circular. Compare Ex. 20523 at LBP0095876
with Ex. 20517 at DBI012379.
Among the overvalued assets was Whitewing’s Heartland Steel interest. A draft Osprey
II Offering Circular disclosed Heartland Steel was in default:
On December 29, 1999, Whitewing LP indirectly acquired a 9.5% equity
interest in Heartland Steel, Inc. . . .
Heartland is in technical default of its senior and subordinated loans,
and the senior and subordinated lenders have entered into a forbearance
agreement that expires September 30, 2000. Heartland is also experiencing
liquidity constraints, and it is currently unclear that Heartland will be able to cure
its technical defaults or resolve its liquidity crisis, and that the value of the equity
could be impaired as a result.
Ex. 20523 at LBP0095876. The final Osprey II Offering Circular, released to the public, omitted
this crucial information about Whitewing’s Heartland interest and in turn the financial condition
of Enron’s merchant assets. See Ex. 20517 at DBI012379.
DLJ excluded a description of severe problems with other Whitewing assets from the
Osprey II Offering Circular too. As with Heartland Steel, a draft Osprey II Offering Circular
disclosed Whitewing’s investment in the troubled ENA CLO:
On December 22, 1999, Whitewing LP indirectly invested $23.5 million
in “BBB” and “BB” rated securities in ENA CLO I Trust. The securities have
July 2014 maturities. ENA CLO I Trust is a bankruptcy-remote, special purpose
vehicle established to issue notes and to acquire the limited partnership interest in
ENA CLO I Holding Co. I LP (“Holding I LP”), a Delaware limited partnership,
the assets of which are 22 loans originated by Enron North America Corp. . . .
Certain of these loans have defaulted. As a result, certain over-collateralization
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atios were not met and the “BBB” and “BB” noteholders did not receive interest
payments on July 15, 2000.
Ex. 20523 at LBP0095876-77. DLJ and CSFB removed this information from the final Osprey
II offering documents and concealed this information from the investing public. See Ex. 20517
at DBI012379-80.
Banker Capolongo provided no explanation why DLJ omitted these asset descriptions
from the final Osprey II offering documents:
Q. Do you know why [Heartland Steel] was excluded from the final offering
memorandum?
A. I don’t remember. I don’t know.
Q. Okay. What was the process by which DLJ decided that it was okay to
have some of the assets described in the final offering memorandum and it was
okay to have others omitted completely?
A. I don’t remember the process. Some portion of the process would have
incorp – would have included con – conferring with our counsel as to materiality.
1/6/05 Capolongo Depo. Tr. at 247:23-248:10. Capolongo reaffirmed this testimony at his
30(b)(6) deposition and again could offer no reason, other than pointing to lawyers, for DLJ and
CSFB to remove disclosures about troubled Whitewing assets from the final Osprey II offering
documents:
Q. There were a number of these assets and I can read them off, you can
compare them, the documents if you wish, but they are the Polish asset, Heartland
Steel, ENA CLO and Yosemite certificates that were included in the preliminary
draft that the underwriters reviewed but were not included in the final document
sent to the investors.
A. Uh huh.
* * *
Q. Okay. So other than communications with counsel, being Milbank –
A. Uh-huh.
Q. – there is no other reason why these assets were included in the
preliminary but not included in the final.
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A. None that I can recall.
8/1/05 Capolongo Depo. Tr. at 147:22-148:21.
Whitewing’s ownership in the Nowa Sarzyna (Poland) power plant and certificates of
Yosemite, the off-balance-sheet entity Enron and Citigroup created to finance deceptive prepay
transactions for purposes of inflating Enron’s cash flows from operations, were also excluded
from the final Osprey II offering memorandum. Compare Ex. 20517 at DBI012379-80 with Ex.
20523 at LBP0095875-77; see also 8/1/05 Capolongo Depo. Tr. at 137:11-20 (identifying Ex.
20523 as a draft Osprey II offering memorandum). As Andy Fastow states, “the prepays . . .
created the false appearance of funds flow from operations.” Fastow Decl., 6. By removing
material information about Whitewing’s assets, such as Heartland Steel, ENA CLO, Nowa
Sarzyna, and Yosemite, DLJ and CSFB rendered the Osprey II Offering Circular false and
misleading in violation of Rule 10b-5(b).
(1) DLJ and CSFB Concealed Transfer Restrictions
Placed on Assets Enron Transferred to
Whitewing
Along these lines, draft Osprey II Offering Circulars disclosed the transfer restrictions on
investments Whitewing parked for Enron, but the final Offering Circular omitted this
information. A draft offering memorandum, which co-lead underwriter Deutsche Bank
produced, informs that “equity interests in infrastructure projects typically have substantial
transfer restrictions.” Ex. 20503 at DBG-000792; see also 8/1/05 Capolongo Depo. Tr. at
237:25-239:9 (stating DLJ/CSFB destroyed drafts of offering documents once the offering
memoranda were complete and finding no draft Osprey offering memoranda). The draft
Offering Circular also discloses, “[t]here can be no assurance that a foreclosure on the
Whitewing’s Operating Subsidiaries will give Osprey a priority [or perfected] claim against the
underlying project assets in the Whitewing Operating Subsidiaries.” Ex. 20503 at DBG-000792.
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These statements were removed from the final Osprey II offering documents and were absent
from the offering memorandum’s section describing Whitewing assets. See Ex. 20517 at
DBI012362, DBI012379; see also 1/6/05 Capolongo Depo. Tr. at 237:25-238:6, 240:12-15
(stating Ex. 20517 is final Osprey II memorandum, also referred to as “Osprey III.”).
DLJ and CSFB removed the transfer-restriction disclosures from the final Osprey II
Offering Circular because Enron had transferred its interest in the Sarlux and Trakya power
plants to Whitewing, even though those assets had substantial transfer restrictions which should
have prohibited their sale, a fact DLJ knew from its Margaux work, and were material to
investors. See 7/13/05 Herman Depo. Tr. at 112:15-113:13.
Further, the draft Offering Circular stated: “There can be no assurance that a foreclosure
on the Whitewing’s Operating Subsidiaries will give Osprey a priority [or perfected] claim
against the underlying project assets in the Whitewing Operating Subsidiaries.” Ex. 20503 at
DBG000792. Yet Enron had transferred its interest in both Sarlux and Trakya to Whitewing
even though those assets had substantial transfer restrictions that prohibited sale of the assets,
again, a fact well-known to DLJ from its Osprey and Margaux work. By excising cautionary
language concerning these transfer restrictions from the final Offering Circular, DLJ made it
false and misleading.
The false and misleading description of the Whitewing assets was material. When Enron
hit the Trigger Events causing repayment of the Osprey Notes, the assets in Whitewing were
substantially impaired and of little collateral value to Notes holders. After Enron filed for
bankruptcy, Whitewing estimated the value of its assets at between $724 million and $1.039
billion – far less than the $2.62 billion in Notes and Certificates sold to fund Whitewing. See Ex.
51 at AB025202991. In its September 30, 2001 10-Q, Enron revealed $1.7 billion in hidden
Osprey losses. Via Osprey, Enron hid at least $1 billion in losses through September 30, 2001,
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which it disclosed as a “reduction of revenues.” See Ex. 41 at 33 (Enron 9/30/01 10-Q). Enron
also disclosed it had $700 million of additional, unrecognized losses after 3Q01 closed. Id.
There was minimal collateral to pay off the Osprey Note holders. If this were not enough, the
Court need only turn to the testimony of former DLJ banker Brian Herman, who concluded, “I
would expect investors to want to know information about what they’re in” such as “accurate
facts” about Sarlux and Trakya. 7/13/05 Herman Depo. Tr. at 112:15-113:13.
DLJ/CSFB received and reviewed drafts of the Offering Circular for Osprey II, drafts of
which indicated that certain Whitewing assets were impaired, but this negative language was
excised from the final version of the Offering Circular. CSFB attended the session where the
information was excised, and CSFB agreed to remove it. See 5/3/06 Deposition Transcript of
Trayton Davis (“5/3/06 Davis Depo. Tr.”) at 32:2-24.
Q. Now you indicated on Osprey you went to maybe a dozen drafting
sessions?
A. Probably about that many, I’d say that is about fair.
8/1/05 Capolongo Depo. Tr. at 238:20-23. Capolongo further testified “[W]e reviewed and
commented on the marketing materials as well as the offering memorandum.” 1/6/05 Capolongo
Depo. Tr. at 54:7-14; compare Ex. 20523 at LBP0095876 with Ex. 20517 at DBI012379
(confirming DLJ excised material information from the final Offering Circular). DLJ/CSFB
participated in and approved the decision to excise the critical language. See Ex. 20525 at
DBI045745.
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g. DLJ/CSFB Concealed LJM1 and LJM2’s Role in
Osprey
(1) DLJ Knew the LJM Entities Were Substantial
Osprey Participants
(i)
False Osprey I and II Offering Circulars
DLJ and CSFB concealed the fact LJM entities were substantial investors in Osprey
equity Certificates. The Osprey I Offering Circular said the Certificates would be offered for
sale “to institutional investors,” and those Certificate holders would have the right to “direct the
management of the business and affairs of Osprey.” Ex. 33304 at CSFBLLC006214792. The
Osprey II Offering Circular included similar language. Ex. 33305 at CSFBLLC005707135.
This simply was not true, for the LJM partnerships were significant purchasers of Osprey
“equity” Certificates.
(ii)
DLJ Knew LJM Controlled Osprey
Contrary to the representations in the Offering Circular that institutional investors owned
and controlled Osprey, a large percentage of Certificates were sold to the LJM entities. CSFB
managing director David Maletta internally recognized the LJM entities as “related to,” the
“affiliates of,” and in the same family, as Enron. 6/16/05 Maletta Depo. Tr. at 82:7-83:8,
175:23-176:8. An internal CSFB memo identifies money loaned to LJM2 as a CSFB
“commitment[] to Enron.” Ex. 50074 at CSFBCO005702969.
Through its involvement as limited partner, investor, lender, and structurer of LJM1,
CSFB knew LJM1 was neither an institutional investor nor an independent third party. For
example, in a CSFB memoranda seeking approval of a $25 million “bridge loan” to LJM,
bankers Rick Ivers and Marybeth Mandanas state $15 million of this money will go to the
September 1999 closing of “Condor,” i.e. Osprey, “an off-balance sheet structured finance entity
of Enron.” Ex. 50242 at CSFBLLC000010772. In July 2000, DLJ bankers Capolongo and
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Herman prepared a memo entitled “Osprey Part II Closing” that identifies LJM2 investing $26
million in Osprey II Interim Certificates. Ex. 33030 at CSFBLLC006292815.
Similarly, a September 19, 2000 CSFB Osprey II memorandum explains how DLJ will
control, through a $7.5 million “equity” investment and $42.5 million loan, $50 million in
Osprey II Certificates – only to be bought out within one week by LJM2, with $1 million of the
Certificates going to DLJ insiders, referred to as the DLJ “deal team,” earning DLJ a 46.1%
return. Ex. 11060 at CSFBLLC006016873. As DLJ wrote, the “primary risk exposures” were
“Enron bankruptcy risk,” Enron stock volatility, and LJM2’s failure to perform. Id. These facts
confirm DLJ and CSFB knew Osprey would be controlled by the LJM entities – not independent
institutional owners as falsely described in Osprey offering memoranda. These are material facts
that would have been important to Enron’s stock purchasers.
(iii)
Misleading “Conflict of Interest”
Disclosure
Including the $50 million Certificate sales to LJM2 in the second Osprey offering, LJM’s
combined ownership of Osprey Certificates was approximately 40%. But LJM’s Certificate
ownership was not disclosed to investors. Notably, the Osprey I and II Offering Circulars
warned investors about potential “Conflicts of Interest,” yet failed to disclose LJM’s actual
conflicted involvement as a purported independent equity investor. See Ex. 33304 at
CSFBLLC006214754; Ex. 33305 at CSFBLLC005707084.
(iv)
Circular Funds Flow Omitted from
Osprey Offering Circulars
DLJ/CSFB not only concealed the fact LJM was a substantial Osprey participant, but by
doing so DLJ/CSFB concealed that Osprey, Whitewing and LJM – three off-balance-sheet
entities Enron created – funded one another in a circular flow of financing. A February 2000
DLJ document, sent to DLJ’s Nath, Capolongo, Scott, and others, reveals one of Whitewing’s
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“Permitted Investments to Date” was a $38.5 million “Loan to LJM2 to fund general acquisitions
by LJM2.” Ex. 15054 at EVEE00666669. This loan was not disclosed in the Osprey II Offering
Circular. LJM2 used the Whitewing loan to buy $26 million in Osprey equity Certificates. See
Ex. 80 at DBN-382706 (“Osprey Certificate Schedule” showing “LJMII – Osprey II LLC”
purchased $26 million in Certificates). Osprey then used proceeds from the Osprey debt and
Certificates offerings to fund Whitewing. Enron caused money to flow from Whitewing to
LJM2 (loan), LJM2 to Osprey (Certificates investment) and then back to Whitewing (Osprey
funds Whitewing) which Whitewing, in turn, sent to Enron. All this was known to DLJ/CSFB,
as their internal documents reveal. The Offering Circulars disclosed none of this.
(2) DLJ Knew Osprey Investors Had to Be
Independent
DLJ knew Osprey “certificates had to be owned by third parties,” 7/14/05 Herman Depo.
Tr. at 318:23-319:3, yet market disinterest forced DLJ and Enron to dump $26 million of Osprey
Certificates into the LJM2 partnership, almost 40% of the follow-on Certificates. See 7/14/05
Herman Depo. Tr. at 353:11-354:25; Solomon Report at 273. And at the time LJM2 was buying
the Osprey Certificates, DLJ, including bankers Nath, Scott, Capolongo and Herman, knew
Whitewing had already loaned LJM2 $38.5 million, money used to “purchase” the Certificates.
See Ex. 15054 at EVEE00666663, EVEE00666669 (document disclosing Whitewing “[l]oan” to
LJM2).
From the beginning, DLJ understood a certain percentage of the Osprey structure
required independent, arm’s-length equity funding. 7/14/05 Herman Depo. Tr. at 321:12-22,
353:11-21. Former DLJ banker Brian Herman testified:
Q. You knew at the time you did Osprey I and II that a certain percentage of
the structure had to be certificates, it couldn’t all be notes, correct?
* * *
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A. Yes. That was part of the structure.
Q. And that the struc – and that the certificates had to be held by third parties
to Enron, correct?
* * *
A. Yeah, I mean, you needed third parties as investors.
7/14/05 Herman Depo. Tr. at 353:11-21. CSFB managing director David Maletta internally
recognized the LJM entities as “related to,” the “affiliates of,” and in the same family as, Enron.
6/16/05 Maletta Depo. Tr. at 82:7-83:8, 175:23-176:8. Thus, DLJ knew it was improper to sell
the follow-on Certificates to LJM2, but did so anyway.
(3) The Osprey Offering Circulars Concealed DLJ’s
Efforts to Clandestinely Transfer Control of
Osprey Certificates to LJM2 Using a DLJ Shell
Entity
DLJ’s one-week sham ownership of Osprey II certificates is significant because DLJ’s
actions resulted in the nonconsolidation of Osprey. See supra, at §II.B.2.e.(1). As Exhibit 11060
makes plain, DLJ accomplished this by purchasing $50 million in Osprey II Certificates, and
then selling control of the Certificates to LJM2 one week later, while DLJ employees retained a
$1 million interest in the Certificates. Absent DLJ’s purchase, Osprey would have appeared on
Enron’s balance sheet. As Mr. Solomon’s expert report explains, DLJ’s Osprey II “Closing
Steps” memo stated the funds would be transferred directly to Enron, demonstrating
Osprey/Whitewing “was a sham – a structure formed only to perpetrate an accounting fiction,
while the substance was a loan to Enron.” Solomon App. at 292.
h. The Marlin II Offering Circular Concealed Enron Debt
Lead Plaintiff’s accounting expert, Saul Solomon, has concluded Marlin violated GAAP
in several respects. See Solomon Report at 42-47, 258-69. As a result of these violations of
GAAP, Marlin resulted in Enron’s reported debt levels being understated by $1.149 billion in
1998, $0.955 billion in 1999, $0.955 billion in 2000 and $1.04 billion at September 30, 2001.
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Solomon Supplemental Report, Schedule 6 at 11. Not only was Project Marlin critical to
providing Enron with cash to finance the Ponzi scheme, but Project Marlin was critical to
Enron’s ability to maintain the perception that it was growing its business without jeopardizing
its credit rating. Keeping the debt raised in Marlin off Enron’s balance sheet was “critical to
Enron” because “‘[i]f Enron put another couple of billion on its own balance sheet it would put
its own credit rating at risk.’” Ex. 60018 at 1. Andy Fastow confirms this: “The primary
purpose that Enron entered into the share-trust structures was to lower its reported debt . . . .”
Fastow Decl., 49.
By keeping Marlin off Enron’s balance sheet, Enron could hide the facts concealed by
CSFB/DLJ in the Marlin Offering Circulars. Whereas Marlin II closed on July 12, 2001, by
September 30, 2001, Enron estimated the Marlin assets were so distressed it had $855 million of
exposure to Marlin. Ex. 16217 at ERN0000742. Marlin should have been consolidated on
Enron’s balance sheet (see Solomon Report at 263), which would have revealed the assets were
impaired.
Dominic Capolongo and Brian Herman were principal members of CSFB’s Marlin II due
diligence team and performed diligence on the Marlin II structure and the underlying Marlin
assets. See 8/1/05 Capolongo Depo. Tr. at 296:16-20, 299:12-24. They knew, or were severely
reckless in not knowing, about these problems from their Marlin II work, as were Nath and Scott,
also members of CSFB’s Marlin II due diligence team. See 8/1/05 Capolongo Depo. Tr. at
296:16-25.
i. Lead Plaintiff Has Sufficiently Identified Misstatements
in the Offering Memoranda
CSFB argues Lead Plaintiff has failed to identify a single alleged false and misleading
statement in the offering materials for transactions that DLJ or CSFB underwrote. Defs’ Mem.
at 29. But Lead Plaintiff has done precisely that in this Opposition. The false and misleading
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statements and omissions in the offering circulars have been identified and explained. See supra
§II.D.4.a.-h. These facts should come as no surprise to CSFB. For example, in an August 14,
2000 Osprey presentation to Enron, DLJ bragged its structuring team and research analysts could
“create[] and execute[]” structured transactions enabling companies “to achieve certain financing
objectives while maintaining positive accounting . . . and rating agency treatment,” and further
bragged DLJ had “expanded the buyer base” for “share trust deals,” thereby “creating a
commoditized product in the eyes of investors.” Ex. 81 at E23337, E23339. DLJ kept its word
and did indeed expand the buyer base for Enron’s distressed assets – using materially false and
misleading Osprey Offering Circulars to accomplish DLJ’s stated objectives.
j. DLJ and CSFB Are Liable for Misstatements and
Omissions in the Offering Documents
CSFB argues Lead Plaintiff fails to satisfy the scienter requirements of Southland, 365
F.3d at 366, because there is no evidence CSFB or DLJ employees “actually created any
statement in the offering documents” they knew was false or misleading. Defs’ Mem. at 29.
CSFB is wrong. As a matter of law, CSFB bears responsibility for the false and misleading
statements contained in the offering memoranda. And Lead Plaintiff has proffered sufficient
evidence of DLJ’s and CSFB’s scienter.
(1) DLJ and CSFB Are Responsible for the Offering
Circulars
The federal securities laws impose liability upon underwriters for selling securities to the
public via false offering documents, regardless of who authored the specific false statements at
issue. The Court has stated underwriters like DLJ and CSFB risk “liability under § 10(b) for any
material misstatements or omissions in the registration statement made with scienter, and thus
ha[ve] a duty to investigate an issuer and the securities that the underwriter offers to investors.”
Enron, 235 F. Supp. 2d at 612. CSFB and DLJ are responsible for the language in the Osprey
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Offering Circulars because the “representations in a . . . prospectus are [the underwriter’s] own.”
In re MTC Elec. Techs. Shareholder Litig., 993 F. Supp. 160, 162 (E.D.N.Y. 1997). See also In
re Suprema Specialities, Inc. Sec. Litig., 438 F.3d 256, 282 (3d Cir. 2006) (“a reckless failure to
investigate an issuer of securities can give rise to liability under Section 10(b)”). CSFB’s motion
cites nothing to the contrary.
The evidence shows individual bankers reviewed the Offering Circulars which they knew
omitted material information. If the jury finds misstatements and omissions contained within the
Offering Circulars were made with scienter, DLJ and CSFB will properly be held liable for the
misstatements or omissions under §10(b).
(2) Individual DLJ and CSFB Bankers Acted with
Scienter
The deceptive actions of DLJ/CSFB bankers, as detailed above, provide sufficient
scienter evidence to defeat summary judgment. Bankers Nath, Capolongo, Herman and Scott
reviewed the Offering Circulars on multiple occasions, and bankers Scott and Capolongo
received numerous due diligence materials concerning Osprey and its assets. See supra at
§II.D.4.b.-f. Nath and Capolongo falsely represented Nighthawk was “unaffiliated” from Enron
– which simply was not true – and, as DLJ’s Nath and Capolongo knew, Osprey’s purpose was
to repay Nighthawk. See supra at §II.D.4.a. Nath, Herman, Scott and Capolongo, members of
Osprey II’s due diligence team, acted with scienter when they excised from the Osprey II
offering documents descriptions of assets that were clearly distressed and grossly overvalued.
Supra at §II.D.4.b.-f.; 8/1/05 Capolongo Depo. Tr. at 141:7-15, 142:25-143:20. DLJ bankers,
including Nath, Herman, Scott and Capolongo, acted with scienter when they excised material
information about transfer restrictions prohibiting sales of the assets that had been transferred to
Whitewing. Supra at §§II.D.4.b.-d., II.D.4.f.(1).; 8/1/05 Capolongo Depo. Tr. at 95:6-14.
Capolongo’s testimony was particularly disingenuous, feigning ignorance concerning his receipt
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of detailed due diligence information on certain Osprey assets. Supra at §II.D.4.c. And DLJ
bankers, including Herman, Scott, Nath and Capolongo, concealed the fact that LJM entities
controlled Osprey, participated in the sham one-week purchase of Osprey Certificates before
funneling them to LJM2 (and used a sham DLJ corporate shell to make the purchase and sale),
and concealed the fact Osprey was little more than a “parking lot” for distressed Enron assets.
Supra at §II.D.4.f.-g.
The evidence is more than sufficient to present to the jury. DLJ and CSFB bankers who
reviewed and participated in the drafting of the Osprey offering materials, including Nath,
Capolongo, Scott and Herman, incurred a duty to disclose the true material facts then known to
them, but they failed to do so. “As we have long held under Rule 10b-5, ‘a duty to speak the full
truth arises when a defendant undertakes a duty to say anything.’” Rubinstein, 20 F.3d at 170.
See also First Virginia Bankshares, 559 F.2d at 1317 (under Rule 10b-5, “a duty to speak the full
truth arises when a defendant undertakes to say anything”); Kurtzman, 2000 U.S. Dist. LEXIS
22476, at *189 (“The duty to disclose information exists when such disclosure is necessary to
make defendants’ statements, whether mandatory or volunteered, not misleading.”).
A reasonable jury could conclude individual DLJ/CSFB bankers acted with scienter, for
the bankers are equally liable if they actually made a misstatement or omission in the Offering
Circular, or failed to correct a known misstatement or omission. All may be held responsible
when
one defendant knowingly uttered a false statement and the other defendant failed
to correct it . . . the fraud is sufficiently pleaded as to each defendant.
Barrie v. Intervoice-Brite, Inc., 409 F. 3d 653, 656 (5th Cir. 2005) (citing Southland Sec. Corp.
v. INSpire Ins. Solutions, 365 F.3d 353, 363 (5th Cir. 2004)).
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k. Plaintiffs Have Standing to Assert Section 10(b) Claims
Arising from the False and Misleading Offering
Circulars
CSFB contends Lead Plaintiff cannot pursue Section 10(b) claims based on any
fraudulent statements in the Offering Circulars for the Foreign Debt Securities, including the
Osprey I and II offering memoranda. Defs’ Mem. at 29-30 & n.92. CSFB first argues Lead
Plaintiff cannot pursue Section 10(b) claims without a class representative who actually
purchased a Foreign Debt Security. Id. at 30 n.92. This argument misses the mark, for Lead
Plaintiff is pursuing Section 10(b) class claims on behalf of the certified class, not the Foreign
Debt Security purchasers, for CSFB’s false statements in offering memoranda affected the price
of Enron securities in general.
CSFB next argues if Whitewing/Osprey paid “inflated prices to purchase assets from
Enron,” the purchases purportedly “benefited Enron security holders and hurt Osprey note
holders,” resulting in conflicts of interest between Foreign Debt Securities purchasers and Enron
securities purchasers. Defs’ Mem. at 30 n.92. This argument is similarly misplaced.
Osprey I, Osprey II and Marlin II were fraudulent transactions that perpetuated the Enron
fraud. Lead Plaintiff’s expert, Dr. Nye, opines that revelations about Osprey and Marlin led
Enron security purchasers to lose money. See, e.g., 1/17/06 Report of Blaine F. Nye, Ph.D.
(“Nye Report”), 145-156. The Osprey and Marlin notes also were backstopped by Enron
common shares. DLJ banker Capolongo testified the Osprey and Marlin transactions “derived
their support from an Enron credit.” 8/1/05 Capolongo Depo. Tr. at 303:17-24. Thus DLJ’s own
bankers concede Osprey and Marlin materially affected Enron’s security purchasers.
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l. Reliance and Loss Causation Are Satisfied
(1) Plaintiffs Are Entitled to a Reliance Presumption
CSFB argues its false Offering Circulars had no inflationary impact on the market price
for Enron securities and, as a consequence, Lead Plaintiff fails to establish reliance under
Greenberg v. Crossroads Sys., 364 F.3d 657 (5th Cir. 2004), or loss causation. Defs’ Mem. at
31. Plaintiffs need not meet the Greenberg test to proceed with their claims on the fraudulent
Offering Circulars, for they are entitled to the presumption of reliance articulated in Affiliated
Ute Citizens of Utah v. United States, 406 U.S. 128, 153-54 (1972), based on the numerous
material facts CSFB omitted – as shown above – from the offering documents. See Enron, 2006
U.S. Dist. LEXIS 43146, at *274. This is in accord with Fifth Circuit law. See Finkel v.
Docutel/Olivetti Corp., 817 F.2d 356, 363 (5th Cir. 1987) (holding plaintiffs need not plead a
“pure” omissions case to achieve the Affiliated Ute presumption).
(2) Price Movement Is Established
Even if Lead Plaintiff were not entitled to Affiliated Ute’s presumption of reliance, it has
shown price movement and therefore meets Greenberg. Revelations concerning Osprey and
Marlin led investors in Enron securities to lose money. See, e.g., Nye Report, 145-146. An
October 24, 2001 article in The Wall Street Journal, entitled “Enron May Issue More Stock to
Cover Obligations,” disclosed to investors that Osprey and Marlin notes would soon come due
and would likely require “issuing additional Enron shares, diluting the position of current
shareholders.” See Rebecca Smith and John R. Emshwillr, Enron May Issue More Stock to
Cover Obligation, Wall St. J., Oct. 24, 2001 (Ex. 81) at A2; Nye Report, 145. Enron’s
exemplar bond fell 11.6% on the news, and Enron stock plunged 17.1% on October 23, 2001.
See Nye Report, 145. In Greenberg, the Fifth Circuit approved the price-deflation method for
showing reliance. 364 F.3d at 666.
- 262 -

CSFB argues “Dr. Nye admits that his event study does not attribute any stock price
inflation to statements made in the offering documents for Enron-related securities underwritten
by CSFB and/or DLJ.” Defs’ Mem. at 31 (emphasis in original). CSFB makes too much of
Nye’s testimony. Although he “assumed . . . a scheme to defraud and the offering documents
didn’t represent the truth” (5/4/06 Deposition Transcript of Blaine Nye (“5/4/06 Nye Depo. Tr.”)
at 678:1-4), Dr. Nye has identified specific market reaction to information revealing the truth
about Osprey and Marlin. See Nye Report, 145-146. The Court has never ruled “there is no
loss causation” for the Osprey and Marlin offering documents, as CSFB claims. Defs’ Mem. at
45. The Court instead found Lead Plaintiff failed to “allege and show loss causation.” Enron,
2006 U.S. Dist. LEXIS 43146, at *380. Here plaintiffs “show loss causation” through Dr. Nye’s
report.
(3) Osprey and Marlin Were Deceptive
Concerning Osprey and Marlin, CSFB contends there was nothing “‘inherently deceptive
about these well-publicized, off-balance sheet structures.’” Defs’ Mem. at 31. 258
To the
contrary, the Offering Circulars were deceptive, as were the underlying transactions. CSFB has
provided no evidence even suggesting that investors knew, as did CSFB’s Larry Nath and other
bankers, that the “primary purpose [for] Enron enter[ing] into the share-trust structures was to
lower its reported debt and, in some cases to increase reported funds flow from operations.”
Fastow Decl., 48-50. Nor has CSFB adduced any evidence indicating investors knew, as did
CSFB’s Larry Nath and other bankers, that Osprey and Marlin together “lowered Enron’s
258
CSFB thus concedes the Offering Circulars were widely disseminated, consistent with the
Declaration of Blaine F. Nye, Ph.D. in Support of Lead Plaintiff’s Amended Motion for Class
Certification (Docket No. 4390), 129, and consistent with Lead Plaintiff’s contention the
Offering Circulars affected the price of Enron securities.
- 263 -

eported debt by billions of dollars and increased reported funds flow from operations by billions
of dollars.” Id.
CSFB quibbles with Lead Plaintiff’s allegation that Osprey and Marlin were “critical”
transactions, but Fastow agrees Osprey and Marlin were important. Compare Fastow Decl.,
48-50 with Defs’ Mem. at 31. Fastow testified it was CSFB who came up with the “share trust
structures,” i.e., Osprey and Marlin, which “generated funds flow from operations for Enron.”
10/23/06 Fastow Depo. Tr. at 224:22-225:4. In fact Fastow’s subordinates credited CSFB’s Nath
for developing the Osprey, Whitewing and Marlin structures. 10/23/06 Fastow Depo. Tr. at
242:10-24. Yet “there was no business purpose” to the Marlin and Osprey transactions, their
only substance being “simply [to] reduce reported debt” and “generate funds flow from
operations.” 10/23/06 Fastow Depo. Tr. at 67:2-21.
Lead Plaintiff has provided ample evidence of the CSFB and DLJ bankers’ scienter. For
these reasons and those explained above, CSFB’s actions in preparing the Osprey and Marlin
transactions offering documents were inherently deceptive and provide a strong basis for CSFB’s
liability for making materially false statements pursuant to Rule 10b-5(b).
m. Incorporation of Enron’s False Financials
DLJ and CSFB disclaim liability for Enron’s false financials incorporated in the offering
memoranda. The banks say they did not “approve” Enron’s financial statements incorporated in
the offering memoranda. Defs’ Mem. at 31; see also id. at 45 (arguing the Court has ruled there
is no loss causation resulting from the offering memoranda). CSFB argues the financial
statements were “prepared by Enron,” and further argues underwriters like CSFB are entitled to
rely on “expertised portions of offering documents,” including Enron’s certified financial
statements. Defs’ Mem. at 31-32. Additionally, CSFB says it and DLJ received “comfort
letters” from Andersen concerning Enron’s financial statements incorporated by reference in the
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Marlin and Osprey offering memoranda. Id. at 32. And even if DLJ and CSFB did approve
them, CSFB says the Court has already ruled the financial statements are, at most, merely
confirmatory information. Id.
CSFB attempts to redirect the Court’s attention away from the myriad misstatements and
omissions within the offering documents created by individual DLJ and CSFB bankers,
including payoffs to interested parties, involvement of the LJM entities, excising of information
about impaired assets, transfer restrictions, and other falsities identified herein. See supra at
§II.D.4. These false statements can in no way be labeled “confirmatory”; this information was
concealed from the rating agencies and from Andersen, and these facts place culpability squarely
where it belongs – on bankers at DLJ and CSFB who had a duty to provide, but failed to furnish,
accurate and complete information to investors. Dirks, 463 U.S. at 655 n.14 (1983)
(underwriters who receive corporate information “may become fiduciaries” to security
purchasers).
Underwriters are precluded from knowingly selling securities to the public via false
offering documents, no matter who authored the false statements in issue. Central Bank does not
change this fact. As the Court has stated, underwriters risk “liability under § 10(b) for any
material misstatements or omissions in the registration statement made with scienter, and thus
ha[ve] a duty to investigate an issuer and the securities that the underwriter offers to investors.”
Enron, 235 F. Supp. 2d at 612. Under the law CSFB/DLJ is liable for incorporating false
financial statements, especially where, as here, CSFB’s conduct led to their falsity. See, e.g., In
re MTC Elec. Techs. Shareholder Litig., 993 F. Supp. 160, 162 (E.D.N.Y. 1997) (“the
underwriter’s role in a public offering is such that the representations in a registration statement
or prospectus are its own”); Suprema, 438 F.3d at 282 (Underwriters have an “‘obligation to
- 265 -

investigate the securities he or she offers to customers.’ [A] reckless failure to investigate an
issuer of securities can give rise to liability under Section 10(b).”).
A court in the Southern District of New York has rejected the same argument CSFB
makes here. Originally Judge Gleeson of the Southern District of New York held Central Bank
barred liability against an underwriter who disclaimed authorship. But Judge Gleeson reversed
himself and upheld plaintiffs’ claims:
I am persuaded that the court’s reasoning [in Chris-Craft Industries, Inc. v. Piper
Aircraft, Corp., 480 F.2d 341 (2d Cir. 1973) – that the underwriter’s role in a
public offering is such that the representations in a registration statement or
prospectus are its own – supports primary liability.
My earlier decision mistakenly equates the role of underwriters in public
offerings with that of other, secondary professionals. While I remain convinced
that those other participants must literally “make” the allegedly false statements in
order to be liable under Rule 10b-5(b), I conclude on reconsideration that the
statements in the 1991 prospectus must be deemed to be those of [the underwriter]
as much as they are those of [the issuer].
MTC, 993 F. Supp. at 162-63 (holding Central Bank does not alter the fundamental legal
standards applicable to underwriters). 259
Finally, CSFB can cite to nothing permitting them to knowingly issue false and
misleading offering documents merely because an auditor may have issued a comfort letter. DLJ
and CSFB’s offering documents incorporate Enron’s false interim financials on Form 10-Q,
which were not expertised, hence Andersen is irrelevant. See, e.g., Ex. 20517 at DBI012346
(Osprey I offering memorandum incorporating by reference Enron’s quarterly reports for the
2Q00 and 3Q00).
259
See also Phillips v. Kidder, Peabody & Co., 933 F. Supp. 303, 316-17 (S.D.N.Y. 1996)
(“The defendant urges an interpretation of Central Bank that would impose primary liability on
the underwriters only for the statements that are directly attributable to them, or, put more
simply, signed by them. . . . [S]uch a test would virtually always absolve the underwriters from
liability under 10b-5. This is clearly not a result anticipated by the Court in Central Bank.”).
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E. CSFB’s Conduct Was “In Connection With” the Purchase and Sale of
Enron Securities
CSFB argues that the 2000 Prepay transaction was not “in connection with” the purchase
or sale of securities. 260
See Defs’ Mem. at 39-40. But it is clear that the 2000 Prepay and all of
CSFB’s transactions with Enron discussed supra at §II.B.2., patently satisfy the “in connection
with” requirement of Rule 10b-5.
As this Court recognized, the Supreme Court has held that:
[T]he phrase “in connection with the purchase or sale of any security” must be
construed broadly and flexibly to effectuate Congress’ remedial goal in enacting
the statute of insuring honest securities markets and promoting investor
confidence.
Enron, 235 F. Supp. 2d at 693 (citing United States v. O’Hagan, 521 U.S. 642, 658 (1997) and
Zandford, 535 U.S. at 819-20). Under Zandford, for the “in connection with” requirement to be
satisfied, “‘[i]t is enough that the scheme to defraud and the sale of securities coincide.’” In re
Enron Corp. Sec. Litig., No. H-04-0087, 2005 U.S. Dist. LEXIS 41240, at *49-*50 (S.D. Tex.
Dec. 22, 2005).
The liberal ethos of the Supreme Court’s “coincide” test finds application in the decision
of this Court by Judge Werlein that the “‘in connection with’” requirement is satisfied “‘when
the defendants’ deceptive conduct affects a market for securities.’” Hopper, 2006 U.S. Dist.
LEXIS 17772, at *38. Judge Werlein approvingly quoted the holding of SEC v. Terry’s Tips,
Inc., 409 F. Supp. 2d 526, 533 (D. Vt. 2006), that “[t]he ‘in connection with’ element is satisfied
when the misrepresentation or omission or use of a device would be the sort of conduct on which
a reasonable investor would rely, and, so relying, would purchase or sell securities.”
260
While CSFB discusses the Marlin, Osprey and Firefly transactions, arguing that no
claims purportedly lie for their conduct in them, it does not challenge satisfaction of the “in
connection with” requirement for these transactions. See Defs’ Mem. at §III.B.
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Lead Plaintiff’s expert witness Dr. Nye opines Enron’s investors would have found
material the Company’s “reports of current revenues, expenses, earnings, debt levels, and cash
flows.” See Nye Report, 26. 261
Thus clearly, any conduct that would have falsified such reports
– i.e., Enron’s financial statements – “affect[ed]” the market for Enron’s securities (Hopper,
2006 U.S. Dist. LEXIS 17772, at *39). 262 Such conduct plainly includes the inherently deceptive
transactions CSFB engaged in with Enron because, as established supra at §II.B.2., the
transactions had the (purpose and) effect of altering Enron’s reported financial statements. 263
As
discussed, CSFB knew that Enron was entering into the transactions precisely to achieve a
desired reporting effect, and CSFB structured many of them precisely to have such effect.
The same is true for CSFB’s issuance of false and misleading analyst reports, breach of
its duty to disclose all material facts concerning Enron’s true financial and operational condition
and fraudulent Offering Circulars. As discussed supra at §II.D.1., these misstatements and
omissions bore directly on the subject of Enron’s “reports of current revenues, expenses,
earnings, debt levels, and cash flows,” and undisclosed reality behind them. As such, they
“affect[ed]” the market for Enron’s securities and thus were “in connection with” trading in those
securities.
261
Dr. Nye is Lead Plaintiff’s expert witness in this case concerning the issues of loss
causation, materiality, and the damages incurred by acquirers of certain publicly traded securities
of Enron. See Nye Report, 3.
262
This Court has basically adopted this formulation. See Enron, 2006 U.S. Dist. LEXIS
43146, at *88 n.45 (“plaintiff must assert that . . . (3) the act affected the market for securities or
was otherwise in connection with their purchase of sale”).
263
See Parmalat I, 376 F. Supp. 2d at 506 (finding “in connection with” requirement met
because “[t]he alleged factoring and securitization schemes would have created the appearance
of revenue or assets where there was none and thus distorted the prices of Parmalat’s securities”).
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F. There Is a Genuine Issue of Material Fact Concerning Loss Causation
CSFB challenges the existence of loss causation for the 2000 Prepay, the Marlin and
Osprey offering memoranda, and one aspect of LJM1. See Defs’ Mem. at §VI.
These
challenges are wholly meritless, based only on CSFB’s distortion of the facts and attempt to
impose on Lead Plaintiff legal requirements that simply do not exist. CSFB also disregards the
relevant authorities and the Court’s rulings concerning the loss causation issue. It is hard to
believe that CSFB seriously asserts that its substantial role in the Enron scheme, encompassing
numerous critical transactions that had the purpose and effect of falsifying Enron’s reported
financials, and the issuance of false and misleading analyst reports – perpetrated over the course
of several years – supposedly had no part in harming Enron investors.
At the outset, Lead Plaintiff notes that the loss causation issue is particularly ill-suited for
resolution on a motion for summary judgment. As many Circuit Courts have concluded, the
issue is better left for trial. See EP Medsystems, Inc. v. Echocath, Inc., 235 F.3d 865, 884 (3d
Cir. 2000) (citing Huddleston v. Herman & MacLean, 640 F.2d 534, 549-50 (5th Cir. 1981))
(“Whether the plaintiff has proven causation is usually reserved for the trier of fact.”); Emergent
Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189, 197 (2d Cir. 2003) (Whether
“the loss was caused by an intervening event . . . is a matter of proof at trial.”); Wortley v.
Camplin, 333 F.3d 284, 295 (1st Cir. 2003) (“Proximate causation and intervening cause are
usually issues for the jury to resolve.”).
But even if the loss causation issue is examined here, it should be resolved in Lead
Plaintiff’s favor. CSFB’s analysis of the issue is fatally flawed.
For example, CSFB argues that with regard to the 2000 Prepay, Lead Plaintiff supposedly
cannot demonstrate that Enron’s misreporting of “cash flows” “led to any change in Enron’s
securities prices.” Defs’ Mem. at 45 (emphasis in original). CSFB here misstates both the facts
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and the law. The 2000 Prepay had more of a fraudulent effect than simply the misstatement of
operational cash flows; it also understated Enron’s debt and financing cash flows (see Solomon
App. at 103) – two highly significant financial metrics for Enron that CSFB may understandably
want to ignore, but cannot. Moreover, the law does not require Lead Plaintiff to demonstrate
that the 2000 Prepay caused Enron’s stock price to “change.” Loss causation requires merely
some form of “economic loss” and “proximate cause” thereof. Dura Pharm., Inc. v. Broudo, 544
U.S. 336, 347 (2005). Price inflation (not necessarily resulting in a “change” of stock price) and
its subsequent removal suffice to make this showing. See Enron, 439 F. Supp. 2d at 700-01 &
n.10 (discussing Dura, 544 U.S. 336).
CSFB is equally misguided in challenging loss causation for the 2000 Prepay on the basis
that “news about that transaction” “was [purportedly] first reported in 2002, well after Enron
declared bankruptcy.” Defs’ Mem. at 45. As this Court has correctly ruled, loss causation may
exist for the conduct of defendants in this case notwithstanding its disclosure only after Enron’s
collapse. See Enron, 439 F. Supp. 2d at 724 (discussed below).
When CSFB’s distortions are cleared away, it is apparent that the evidence establishes
that there exists loss causation for the Bank’s conduct. This Court has adopted the loss causation
analysis of Lentell v. Merrill Lynch & Co., 396 F.3d 161, 171 (2d Cir. 2005), cert. denied, 126 S.
Ct. 421 (2005). See Enron, 2005 U.S. Dist. LEXIS 41240 (denying motion to dismiss filed by
defendant Royal Bank of Canada and six of its subsidiaries) (“12/22/05 Order”); Enron, 439 F.
Supp. 2d at 705-06). Pursuant to this adoption, “‘the loss causation requirement will be satisfied
if [the defendant’s] conduct had the effect of concealing the circumstances that bore on the
ultimate loss’” – in the context of this case – if the conduct “‘created the appearance of assets or
revenue where there was none and therefore concealed, among other things, the risks that
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[Enron] would be unable to service its debt and consequently suffer financial collapse,’” and
“‘that risk materialized.’” Enron, 439 F. Supp. at 724.
Loss causation concerning CSFB plainly exists under this standard: (1) CSFB’s conduct
in engaging the inherently deceptive transactions discussed above “concealed” the risk that
Enron would be unable to service its debt by creating the false appearance of assets, revenue and
income, and the false appearance of the lack of other debt; and (2) that risk “materialized” when
Enron’s true financial condition (i.e., what was concealed by CSFB’s conduct) was gradually
disclosed, resulting in the Company’s “financial collapse” at the end of 2001. The same is true
for CSFB’s issuance of false and misleading analyst reports concerning Enron, and breach of its
duties to disclose adverse facts it knew about Enron.
1. CSFB’s Conduct Concealed Enron’s True Financial Condition
As discussed in detail supra at §II.B.2., CSFB engaged in numerous transactions with
Enron that had the (purpose and) effect of falsifying Enron’s publicly disseminated financial
statements. See also, e.g., 10/25/06 Fastow Tr. at 822:18-832:21 (structured finance transactions
such as prepays rendered Enron’s 2000 reported financial results misleading). CSFB does not
dispute in its Motion that these transactions had impact on Enron’s financial statements. And it
could hardly make such a contention. The above-described evidence demonstrates’ CSFB’s
knowledge that the transactions had an accounting effect for Enron, and CSFB structured many
of them precisely to have that effect. 264
264
Knowledge of the transactions’ reporting effect can also be inferred from CSFB’s
understanding that Enron urgently needed certain deals to be completed by reporting deadlines.
See, e.g., Ex. 50058 at CSFBCO000044039.001 (“IBD is working on a few deals for Enron and
they would find it EXTREMELY important for this pre-paid deal to happen on Friday”).
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The impact of these transactions was not only palpable, but quite substantial. They
enhanced Enron’s financial results by the following amounts, for the following quarters:
Financial
Reporting
Quarter
CSFB Transactions
Debt
Understated
Cash Flow
From
Operations
Overstated
Cash Flow From
Financing
Understated
4Q-1998 Rawhide/Firefly Marlin $2,374.00 265 $0.00 $0.00 $0.00
1Q–1999 Rawhide/Firefly Marlin $2,374.00 $0.00 $0.00 $0.00
Income
Overstated
2Q–1999 Rawhide/Firefly Marlin $2,374.00 $0.00 $0.00 $14.80
3Q–1999 Rawhide/Firefly
Marlin/Osprey
4Q–1999 Rawhide/Firefly
Marlin/Osprey
Iguana/LJM1&2
1Q–2000 Rawhide/Marlin
Osprey/Firefly LJM1&2
2Q–2000 Rawhide/Firefly
Marlin/Osprey
Iguana/LJM1&2
3Q–2000 Rawhide/Marlin
Osprey/Iguana LJM1&2
4Q–2000 Rawhide/Marlin
Osprey/Iguana LJM1&2
2000 Prepay
1Q–2001 Rawhide/Marlin;
Osprey/LJM1&2
2Q–2001 Rawhide/Marlin
Osprey/LJM1&2
3Q–2001 Rawhide/Marlin
Osprey/LJM1&2/
Nile/Nikita
$3,106.20 $345.00 $345.00 $158.00
$4,020.70 $1,154.10 $1,154.10 $226.70
$4,041.50 $30.60 $30.60 $24.40
$3,780.60 $60.60 $60.60 $95.00
$4,461.40 $93.40 $93.40 $111.60
$4,796.20 $825.70 $825.70 $147.80
$4,430.10 $82.90 $82.90 $16.60
$4,550.40 $236.9 $236.9 $33.20
$4,441.80 $320.9 $320.9 $78.70
And according to Solomon (as described transaction by transaction above), this was fraudulent –
the favorable impact of these transactions on Enron’s reported financial condition was
undeserved. They operated to “conceal” Enron’s true financial condition by making it appear far
better than it was. As Fastow testified, for example, the structured finance transactions engaged
in by Enron’s banks and the Company were done to conceal from investors the fact that Enron
had negative funds flow from operations. 10/23/06 Fastow Depo. Tr. at 87:6-12.
This also resulted in the factitious inflation of the price of Enron securities. As opined by
Lead Plaintiff’s expert witness Dr. Nye, the price of Enron securities was influenced by the
265
All dollar figures are in millions.
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Company’s “reports of current revenues, expenses, earnings, debt levels, and cash flows.” See
Nye Report, 26. As such, falsifying any of the those metrics would cause Enron securities to be
valued at levels higher that what was justified.
The 2000 Prepay is illustrative. This transaction resulted in Enron in 4Q00 understating
its debt by $150 million, understating its financing cash flow by $150 million, and overstating its
cash from operating activities by $150 million. Solomon App. at 103. 266
The reported financial
results distorted by this included those of the year-end 2000, first released to the market on
January 22, 2001. On this date Enron stock closed at $75.06, up 5.9% from the previous trading
day’s close of $70.875. Nye Report, 91. Dr. Nye opines that, “[n]et of market and industry
effects, this was a 4.7% increase, and was statistically significant.” Id. From these facts, a jury
could reasonably conclude that the 2000 Prepay artificially boosted the price of Enron stock. 267
But the effect of CSFB’s fraudulent transactions such as the 2000 Prepay is more
involved. Not only did these transactions cause Enron’s stock price to rise, they also prevented
that price from falling – again yielding price inflation. During the Class Period, Enron had a
track record not simply of meeting analyst expectations of its financial results, but of exceeding
them. See Nye Report, 48 (“For each quarter of the Class Period through the second quarter of
2001, Enron purported to meet or, more often, exceed security analysts’ consensus forecasts for
the Company’s quarterly earnings per share . . . .”). The Company’s reported year-end 2000
financial results “exceed[ed] expectations” (Nye Report, 90) – boosted by the fraudulent effects
266
As Fastow testified, certain of Enron’s reported funds flow from operations came from
prepay transactions was concealed from investors (10/24/06 Fastow Depo. Tr. at 457:16-24) and
the prepays resulted in the understatement of Enron’s debt (10/23/06 Fastow Depo. Tr. at 65:3-
7).
267
Thus while, as explained above, Lead Plaintiff need not demonstrate that the 2000 Prepay
caused Enron’s stock price to “change” (Defs’ Mem. at 45), it can.
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of the 2000 Prepay. A jury could conclude that without this, Enron’s share price would have
gone down. It is not only Lead Plaintiff who finds this conclusion reasonable; as a Goldman
Sachs analyst testified who covered Enron:
Q. Do you have any opinion as to what would have happened to Enron’s
stock price if it did not report financial earnings or other financial metrics in line
with its projections during the period between 1997 and the second quarter of
2001?
* * *
A. I believe the stock would have been punished.
11/9/04 Deposition Transcript of David Fleischer (“11/9/04 Fleischer Depo. Tr.”) at 55:20-56:10.
As similarly acknowledged by defendant Barclays’ expert witness concerning damages:
Q. When you have a company that quarter after quarter announces that it has
met or beaten expectations, and that year after year it announces that it has grown
and expects to grow at a significant pace, in your experience, looking to that
1999-2000 time frame, what would the effect be of a, say, a 50 percent earnings
miss that surprised the market?
A. I would expect the price of the stock to obviously go down, and maybe by
a substantial amount.
5/23/06 Deposition Transcript of Michael Gibbons (“5/23/06 Gibbons Depo. Tr.”) at 127:24-
128:10. Thus, without a doubt, transactions such as the 2000 Prepay operated to inflate the price
of Enron securities.
But the transactions also “concealed” the fact that Enron was truly “unable to service its
debt.” Enron, 439 F. Supp. 2d at 724. The 2000 Prepay is illustrative in that it allowed Enron to
borrow $150 million without reporting the cash infusion as a loan, masking just how much debt
Enron was truly on the hook for – a fact which, if known, would have caused the Company to
“suffer financial collapse.” Id. This was so because had it been disclosed that Enron had far
more debt than it appeared to have, the Company would have lost its investment-grade credit
rating. “Maintaining an investment-grade credit rating was essential to Enron,” primarily to
allow the Company’s Wholesale segment to maintain credit with, and confidence of, its trading
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counterparties. Nye Report, 51. But more to the point here, the loss of such a credit rating was
one event that could potentially trigger an Enron “death spiral” – spelling financial collapse for
the Company. See id.
As considered by Dr. Nye, former Enron risk management employee David J. Port
explained that losing the investment-grade credit rating by, for example, Enron’s loss of ability
to continue to hide its debt, would rapidly lead to the end of Enron:
Q. Okay. The next step in this death spiral is a credit downgrade . . . . What
would cause that?
A. Well, when the rating agencies see the profit warning, the stock selloff,
read the earnings release that talks about suddenly all this debt coming back on to
the balance sheet, inevitably they would have to think about downgrading the
company’s bonds.
Q. The next step in this death spiral is headed “positions unwind.” It says
“Trading losses realized. Margin calls.” What do those items refer to?
A. That refers to the trading business which if there was a credit downgrade
that means that we would suddenly have to post more collateral against our
positions because our counterparties would be unwilling to accept our credit. …
Q. . . . The next step in this death spiral is headed, “Liquidity dries up,”
“banks call lines, refinance necessary, for example, Xerox.” What do those items
refer to?
A. That simply refers to the process of trying to recapitalize the company
because the banks would cut off the lines and you’d have to try and find other
ways of raising finance . . . .
See Nye Report, 51. As Fastow candidly admits, transactions such as CSFB’s prevented this
death spiral from starting:
[T]he financial transactions in which I engaged related to Enron, were done with
the knowledge of senior management, some of Enron’s banks, and others, and
were done primarily to meet Enron’s financial reporting and credit-rating targets.
Fastow Decl., 5. The 2000 Prepay, for example, was intended to “cause the Company to
financially report cash flow from financing activities as funds flow from operations. In so doing,
Enron presented a deceptively positive credit profile.” Id., 27.
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Thus, CSFB’s transactions such as the prepays concealed Enron’s true inability to service
its debt, and in doing so, literally kept the Company afloat when it would otherwise sink. It is
almost impossible to conceive of a more textbook instance of price inflation (and satisfaction of
this Court’s 7/20/06 Order) than what CSFB did here: Concealing the basically worthless
financial and operational status of a company pitched to investors as a robust going concern.
The same analysis here applies to the other inherently deceptive transactions engaged in
by CSFB described supra at §II.B.2. As discussed, just like the 2000 Prepay, they each operated
to falsify Enron’s reported financial condition, thus concealing Enron’s true ability to service its
debt and undoubtedly creating fraudulent price inflation. 268
Such is especially the case with
regard to LJM1 – the vehicle through which CSFB and Enron actively and significantly obscured
the Company’s true financial condition.
2. The Truth Concealed by CSFB’s Conduct Materialized
Having thus established price inflation and CSFB’s concealment of Enron’s true financial
condition, it is equally clear that this condition was eventually revealed to the public, and the risk
concealed “materialized” (Enron, 439 F. Supp. 2d at 723-24), thus causing the inflation to “come
out” (id. at 701 & n.10 (discussing Dura, 544 U.S. 336)). Port, continuing from what was quoted
above from his deposition, says it all:
Q. . . . “This death spiral . . . is it your view that this is what happened to
Enron?
A. . . . Pretty much.”
See Nye Report, 51.
268
This is true as well with regard to CSFB’s false and misleading analyst reports and
breach of its duties to disclose. As discussed supra at §II.D.1., these reports presented a false
picture of Enron’s financial and operational health, and thus had the same effect as Enron’s
falsified financial statements.
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As documented and considered by Dr. Nye, in 2001 there issued a series of disclosures
that began to reveal the reality of Enron’s financial condition – i.e., that which was concealed by,
inter alia, CSFB’s conduct. For example, on Sunday, May 6, 2001, the Off Wall Street
Consulting Group issued a report (the “OWS Report”) concerning Enron featuring a new “sell”
recommendation on the Company’s stock, citing concerns with Enron’s financial condition and
reporting. The OWS Report, raising questions about Enron’s “mark-to-market” accounting and
“securitization of financial assets” (Nye Report, 108-109), “anticipated the major aspects of
Defendants’ scheme” (id., 111), partially disclosing the reality of Enron’s financial condition:
deceptive reported earnings (achieved through transactions with Defendant
banks and through transactions with related parties); inadequate cash flow as
well as rising debt; management predictions of improvement in apparent capital
structure to be achieved with substantial proceeds of asset sales.
Id. Following publication of the OWS Report, on May 7 and 10, 2001, Dr. Nye determined that
Enron’s share price experienced statistically significant price drops (net of market and industry
factors) of 2.42% and 2.74%, respectively. Id., 111-112.
Many other partial disclosures of Enron’s true financial condition followed, such as the
resignation of CEO Skilling, which in its wake “caused Enron stock to decline sharply on both
August 15 and 16, 2001, because it aroused speculation that there were undisclosed problems at
Enron.” Id., 119; see also id., 118-122. The share price declines on August 15 and 16, net of
market and industry, were statistically significant, amounting to 6.7% and 8.8%. Id., 119.
On, Monday, October 22, 2001, “Enron announced that the SEC had ‘requested that
Enron voluntarily provide information regarding certain related party transactions.’” Id., 142.
As Dr. Nye determined, “[n]ews of the SEC inquiry . . . continued to fuel market suspicions
about Enron’s condition and the validity of its financial reporting. Enron’s share price fell from
the prior closing price of $26.05 to $20.65 at close, a decline of 20.7%, or 21.3% net of market
and industry, a statistically significant decline.” Id., 142.
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And on November 8, 2001, Enron’s share price fell again, representing a statistically
significant 7.1% decline (net of market and industry effects) from $9.05 to $8.41. Id., 158.
This decline was caused in part by confirmation from the Company that Enron had misstated its
financial results and financial condition for years. Id.
These and other disclosures considered by Dr. Nye began to reveal Enron’s true financial
condition of, among other things, being unable to service its debt – again, that which was
concealed by CSFB’s transactions with the Company. Indeed, disclosures such as the November
8, 2001 restatement relate directly to CSFB’s conduct in engaging in deceptive transactions with
Enron to falsify the Company’s reported financial condition. 269
These disclosures are thus
sufficient to establish the risk concealed “materialized” (Enron, 439 F. Supp. 2d at 723-24) and
that inflation was beginning to “come out” (id. at 701 & n.10 (discussing Dura, 544 U.S. 336)).
Nor, contrary to what CSFB implies, is the existence of loss causation here diminished in
the least by the fact that precise details about the 2000 Prepay purportedly became public only
after Enron filed for bankruptcy protection. See Defs’ Mem. at 45. This Court has already – and
quite correctly – ruled that loss causation does not require the “formal corrective disclosure by a
defendant followed by a steep drop in the price of stock” (Enron, 439 F. Supp. 2d at 701; see
also Enron, 2005 U.S. Dist. LEXIS 41240, at *63-*64) that CSFB demands for the 2000 Prepay.
Instead, “the market may learn of possible fraud through a number of sources: e.g., from
whistleblowers, analysts’ questioning of financial results [e.g., the OWS Report], resignations of
CFOs or auditors, announcements by the company of changes in accounting treatment going
forward, newspapers and journals, etc.” (Enron, 439 F. Supp. 2d at 701; see also Enron, 2005
269
It also obviously establishes loss causation for CSFB’s false and misleading analyst
reports concerning Enron, and for CSFB’s breach of its duties to disclose, discussed supra at
§II.D.1.-3.
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U.S. Dist. LEXIS 41240, at *63-*64), as considered by Dr. Nye. 270
Thus, the disclosures
discussed above are sufficient to establish loss causation for CSFB’s conduct such as that in the
2000 Prepay because they revealed that which was concealed by such conduct, even though they
do not mention CSFB or describe the mechanics of the transactions.
In fact, even disclosures about the conduct of other actors in the Enron scheme are
sufficient to establish loss causation for CSFB’s conduct:
[T]his Court concludes a disclosure of the wrongful conduct in an alleged
securities fraud scheme with the same purpose, i.e., overstating revenue and
concealing debt, committed by some defendants in the alleged securities fraud
scheme that is a substantial cause of plaintiffs’ loss is sufficient to plead loss
causation; the identity of a particular participant/defendant’s primary [violation]
need not have been revealed if the same type of primary violations by other
defendants with the same purpose, here of creating a picture of financial success
when the reality was the opposite to defraud investors, is leaked or disclosed to
the market and causes a steep decline in the price of Enron’s stock, injuring
plaintiff investors.
Enron, 439 F. Supp. 2d at 724. 271
Thus, in this case, even if the disclosures identified above
were limited to revealing the conduct only of defendants in this case other than CSFB (which is
not the case), because those other defendants committed primary violations with the same result
as CSFB’s – i.e., falsifying Enron’s reported financial statements – they establish loss causation
for CSFB’s conduct as well:
Questioning of Enron as a “black box” with “impenetrable financial
statements” commenced early in 2001, and began to peak on October 16, 2001,
270
Also, disclosure of the relevant truth can be “gradual and partial.” Enron, 439 F. Supp.
2d at 724.
271
This ruling by the Court also completely disposes of CSFB’s entire argument that the loss
causation issue cannot be considered in light of Lead Plaintiff’s allegations of a larger Enron
scheme engaged in by multiple defendants. See Defs’ Mem. at 46-47. As indicated, this Court
has ruled that if the conduct of different scheme actors shared the same purpose, disclosures
regarding the conduct of some of them are sufficient to establish loss causation for others. Also,
in so ruling this Court did not require proving that defendants such as CSFB had knowledge of
the conduct of other banks, as CSFB baselessly demands. See id.
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when Enron revealed a $1 billion charge, surged by its disclosure a few weeks
later that it was restating its financial results for 1997, 1998, 1999, and 2000 to
eliminate $600 million in previously reported profits and approximately $1.2
billion in shareholders’ equity, succeeded next by Dynegy’s rejection of a
“saving” merger with Enron after it performed a due diligence review of Enron’s
finances, and ultimately Enron’s filing for bankruptcy on December 2, 2001.
Disclosure of the roles of some primary violators in a multi-defendant scheme to
defraud investors by creating the appearance of assets or revenue that did not exist
and concealing debt and increasing risks of financial collapse, reflected in
“cooking the books,” should be viewed as sufficient to show loss causation for
later-disclosed actions constituting primary violations of §10(b) of other
defendants substantially contributing to that fabrication of Enron assets and that
hiding of debt in the same scheme.
Enron, 439 F. Supp. 2d at 724.
In addition, CSFB’s argument that causation for transactions such as the 2000 Prepay is
lacking because of their specific revelation only after the Enron bankruptcy essentially posits that
the bankruptcy was an intervening event that purportedly broke the chain of causation.
Summary judgment is not available on this point because, as this Court has ruled, questions
concerning intervening causes are reserved for trial. 272
Finally, CSFB states that Lead Plaintiff’s
FACC 448 and 450 supposedly “cite[]” a “corrective disclosure” of a supposed “accounting
error committed by Andersen” regarding LJM1, arguing that such fails to “establish loss
causation as to CSFB.” Defs’ Mem. at 45-46. This is both misleading and unavailing. The
referenced portions of the Complaint do not in fact mention Andersen at all, or call anything an
innocent “error.” (And the jury is hardly required to accept the self-serving claim of one of
CSFB’s co-defendants that it innocently made an “error” in Enron’s accounting.) In fact, those
paragraphs of the Complaint state that through LJM1, Enron “improperly recorded income from
these entities and concealed debt” (FACC 448) and that “the results of LJM1” were restated
272
See Enron, 2005 U.S. Dist. LEXIS 41240, at *64-*65; Enron, 439 F. Supp. 2d at 704 (“If
there was an intervening event . . . the issue becomes ‘a matter of proof at trial and not to be
decided on a Rule 12(b)(6) motion to dismiss.’”) (quoting Lentell, 396 F.3d at 174).
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(FACC 450). These allegations sketch the exact theory of loss causation described above, to
wit, that CSFB’s transactions with Enron (some done through LJM1) falsified Enron’s reported
financial condition, and this was revealed when, among other things, Enron was forced to
publicly state that those financial results were false. This establishes loss causation. 273
Finally, because Lead Plaintiff establishes loss causation for CSFB’s conduct under this
Court’s rulings, the Bank’s claim that “there is simply no evidence that CSFB participated in a
massive, Wall Street-wide conspiracy to defraud Enron investors” (Defs’ Mem. at 46) should be
rejected as irrelevant. As discussed directly above, Lead Plaintiff is not required to make any
such showing to establish loss causation for CSFB’s conduct. Furthermore, the Court has held
Lead Plaintiff need not prove a defendant participated in the entire overarching scheme for joint
and several liability to attach. See Enron, 2006 U.S. Dist LEXIS 43146, at *222 (defendants
may be held “jointly and severally liable for the loss caused by the entire overarching scheme,
including conduct of other scheme participants about which it knew nothing”); see also
Thompson v. Johns-Manville Sales Corp., 714 F.2d 581, 582 (5th Cir. 1983) (the case law
273
In any event, the loss causation issue should not be decided on CSFB’s Motion, as the
Bank has retained its own expert witness to evaluate “possible damages that might be attributable
to actions by CSFB.” 3/17/06 Expert Report of G. William Schwert, 3. A jury will have to
decide between Dr. Nye’s and Schwert’s respective analyses. See Owens, 297 F. Supp. 2d at
1110 (“The court’s role on summary judgment is not to choose the better expert . . . .”); Bieghler,
633 F.2d at 534 (“At trial, after the expert has been cross-examined on the facts and data
underlying his opinion and his method of arriving at it, the trier of fact may find the evidence
insufficiently persuasive of causation to allow a verdict for plaintiffs. Nevertheless, that
determination is not to be made on a motion for summary judgment, even if the trial judge is
convinced plaintiffs will eventually lose.”); Provenz, 102 F.3d at 1490 (‘“As a general rule,
summary judgment is inappropriate where an expert’s testimony supports the non-moving
party’s case.’”); Worldcom, 352 F. Supp. 2d at 500 (“‘where, as here, there are conflicting expert
reports presented, courts are wary of granting summary judgment’”); Sightsound.com, 391 F.
Supp. 2d at 354 (citing Anderson, 477 U.S. at 255) (“Conflicts in the evidence on factual issues
are not to be resolved on summary judgment, particularly where those conflicts arise from
competing expert opinions, the resolution of which is a matter reserved to the jury.”).
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permits the “imposition of joint and several liability on persons whose separate wrongful actions,
not done in concert, contribute in unknown proportions to cause an indivisible injury”).
G. CSFB (USA) Is Liable as a Control Person
Lead Plaintiff’s Section 20(a) claim against CSFB (USA) purportedly fails because, as
CSFB believes it had demonstrated, “there is no viable ‘predicate’ claim against CSFB for a
primary violation” of Section 10(b) or Rule 10b-5. Defs’ Mem. at 48.
CSFB further argues Lead Plaintiff has no evidence establishing CSFB (USA) Inc. had
the power to directly or indirectly control or influence corporate policy over subsidiaries CSFB
LLC or Pershing LLC. Id. at 49. Even if predicate Section 10(b) claims exist, CSFB asserts
Lead Plaintiff lacks the requisite evidence to demonstrate CSFB (USA), the parent company, had
the power to control subsidiaries Pershing and CSFB LLC. Id.
1. Lead Plaintiff’s Section 20(a) Control Person Liability Claim Is
Sustainable Against CSFB
CSFB fails to elicit any argument defeating Lead Plaintiff’s Section 20(a) claim. Instead,
CSFB makes a conclusory statement, “there is no viable ‘predicate’ claim against CSFB for a
primary violation of Section 10(b) or any part of Rule 10b-5 . . . the Section 20(a) claim also
fails.” Id. at 48.
Throughout this Opposition, Lead Plaintiff has shown viable Section 10(b) and Rule 10b-
5 claims against CSFB. Discovery has produced a mountain of damning documents and
deposition testimony that would allow a jury to conclude CSFB violated Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) – even a cursory review of the
record confirms this. CSFB’s throwaway argument, unsupported by the record or by the
briefing, should be rejected.
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2. Lead Plaintiff Need Only Show the Abstract Power to Control
To succeed on a Section 20(a) claim, plaintiffs need only show a “primary violation was
committed and that the defendants directly or indirectly controlled the violator.” In re Dynegy,
Inc. Sec. Litig., 339 F. Supp. 2d 804, 885 (S.D. Tex. 2004) (citing ABC Arbitrage Plaintiffs
Group v. Tchuruk, 291 F.3d 336, 348 n.57, 362 n.123 (5th Cir. 2002)); see also In re Sec. Litig.
BMC Software, Inc., 183 F. Supp. 2d 860, 869 n.17 (S.D. Tex. 2001). Section 20(a) imposes
liability on “[e]very person who, directly or indirectly, controls any person liable under any
provision of this title . . . unless the controlling person acted in good faith.” 15 U.S.C. §78t(a).
“Control,” as defined by the Fifth Circuit, is “‘the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a person, whether
through the ownership of voting securities, by contract, or otherwise.’” G.A. Thompson & Co. v.
Partridge, 636 F.2d 945, 957 (5th Cir. 1981) (accepting the SEC’s definition as promulgated in
17 C.F.R. §230.405). And this Court found “control” may be established by:
[D]emonstrating that the defendant possessed the power to direct or cause the
direction of the management and policies of a person through ownership of voting
securities, by contract, business relationships, interlocking directors, family
relations ships[sic], and the power to influence and control the activities of
another.
In re Landry’s Seafood Restaurant, Inc. Sec. Litig., No. H-99-1948, Order at 12 n.14 (S.D. Tex.
Feb. 20, 2001) (Ex. 82). The Eastern District of Texas, elaborating on the meaning of control,
stated “‘[e]ven “indirect means of discipline or influence short of actual direction” fulfill the
statutory requirement . . . .’ [I]t is enough if the Defendant simply had the abstract power to
control. Actual exercise of that power is not required.” McNamara v. Bre-X Minerals Ltd., 46
F. Supp. 2d 628, 635, 638 (E.D. Tex. 1999).
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3. Lead Plaintiff Has Established CSFB (USA) Had the Power to
Control Wholly-Owned Subsidiaries CSFB LLC and Pershing
LLC
a. CSFB’s Subsidiaries
In accordance with established precedent, Lead Plaintiff has ample evidence CSFB
(USA) had the “power to directly or indirectly control or influence the corporate policy” of its
subsidiaries, i.e., CSFB LLC and Pershing LLC. In re Enron Corp. Sec. Litig., No. H-01-3624,
2004 U.S. Dist. LEXIS 29668, at *15. Discovery reveals Credit Suisse LLC, and its predecessor
CSFB Corp., is a wholly-owned subsidiary of CSFB (USA). Ex. 4 at 35. Pershing LLC also is a
wholly-owned subsidiary of CSFB (USA). Id
b. CSFB’s Overlapping Officers
In addition to being wholly-owned subsidiaries, discovery shows an extensive amount of
overlap between the parent and its subsidiaries’ officers. This Opposition provides direct
evidence of Adebayo Ogunlesi’s and Robert O’Brien’s direct knowledge of and involvement in
several of CSFB’s Enron-related transactions – and both are either directors or officers at CSFB
(USA) and its subsidiaries. CSFB (USA) employee Carlos Onis was a managing director of all
three entities. CSFB (USA) employee Lewis Wirshba was the managing director or treasurer of
all three, and CSFB (USA) employee Jeffrey Salzman was either a managing director or on the
executive board of all three. Ex. 4 at 118-19. In all, a whopping 29 CSFB executives had dual
roles as officers for CSFB (USA), CSFB LLC and Pershing LLC. The following table illustrates
the firmwide, overlapping managerial roles by CSFB executives.
NAME
Title at
CSFB (USA)
Title at
CSFB LLC
Title at
Pershing LLC
Gregory W. Burnes Bank Account Officer Director Bank Account
Officer
Raymond M. Disco Assistant Treasurer Managing Director Assistant Treasurer
Brady W. Dougan
Head of the Securities Executive Board Managing Director
Division
D. Wilson Ervin Head of Strategic Risk Managing Director Managing Director
Management
Andrew B. Federbusch Managing Director Managing Director Managing Director
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NAME
Title at
CSFB (USA)
Title at
CSFB LLC
Title at
Pershing LLC
Brian D. Finn Executive Board Chief Executive Officer N/A
David C. Fischer
Chief Financial and
Accounting Officer
Managing Director Chief Financial
Officer and Manager
Edward W. Flynn Deputy Director of Taxes Director Deputy Director of
Taxes
Zev A. Kindler Assistant Treasurer Director N/A
Gary G. Lynch Managing Director Executive Board Managing Director
Rhonda G. Matty Assistant Secretary Vice President Assistant Secretary
Neil Moskowitz Managing Director Managing Director N/A
Eileen K. Murray Managing Director Managing Director N/A
Peter J. Murray Bank Account Officer Unknown Bank Account
Officer
Robert C. O’Brien Chief Credit Officer Managing Director Managing Director
Adebayo O. Ogunlesi Managing Director Managing Director N/A
Carlos Onis Managing Director Managing Director Managing Director
Jeffrey M. Peek Executive Board Managing Director Manager
Thomas Prevost Director of Taxes Managing Director Director of Taxes
Neil Radey Managing Director Managing Director N/A
Laura Raftery Assistant Treasurer Director N/A
Lori M. Russo Secretary Director Secretary
Jeffrey H. Salzman Executive Board Managing Director Managing Director
Lawrence M.v.D. Schloss Executive Board Managing Director N/A
Luther L. Terry, Jr. Managing Director Managing Director N/A
Stephen R. Volk Executive Board Managing Director N/A
Lewis H. Wirshaba Treasurer Managing Director Managing Director
Mary Kate Wynperle Assistant Secretary Vice President Assistant Secretary
Barbara A. Yastine Executive Board Managing Director N/A
This evidence is analogous to McNamara, 46 F. Supp. 2d at 636-37, where the district
court found a prima facie case was established under Section 20(a) when the controlling entity
(Bresea) owned 25% of the controlled entity’s (Bre-X’s) stock, members of Bresea’s board
comprised a significant amount of Bre-X’s board, and there was extensive officer overlap. Id.
McNamara held a showing of share ownership and interlocking directors was sufficient in
establishing an ““‘indirect means of discipline or influence.”’” Id. In the instant case, the facts
are even more skewed in favor of Lead Plaintiff: CSFB (USA) owns 100% of CSFB LLC and
Pershing LLC, and CSFB has 29 officers in dual roles between the three entities – including two
who are directly involved in fraudulent Enron transactions. One wonders whether any positions
at the three CSFB entities are not filled by overlapping executives.
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This evidence is sufficient to go to the jury. The Fifth Circuit holds, “[w]hen the
directors and officers of the subsidiary are also directors and officers of the parent, it makes little
sense to ask whether they take orders from the parent since they themselves constitute the
parent’s decision making body and are duty-bound to act in the parent’s interest.” United States
v. Jon-T Chemicals, Inc., 768 F.2d 686, 692 (5th Cir. 1985). Jon-T further recognized when “a
subsidiary is wholly-owned by the parent and has the same . . . officers, operating the subsidiary
independently of the parent” has little practical meaning. Jon-T Chem., 768 F.2d at 691.
c. CSFB Admits Control
Complete ownership and officer overlap is more than sufficient to raise a genuine issue of
material fact. But there is more establishing CSFB’s control over its subsidiaries. CSFB (USA)
consolidates CSFB LLC and Pershing LLC’s financial statements into its own. See Credit Suisse
Group Annual Report 2000/2001 (“CSG Annual Report”) (Ex. 83) at 52-58 (showing CS Group
consolidated CSFB (USA), and by incorporation their subsidiaries, i.e., CSFB LLC and Pershing
LLC, into their financial statements). The Annual Report states unequivocally:
The consolidated financial statements include the accounts of Credit
Suisse Group and its subsidiaries. The Group consolidates subsidiaries in which
it holds, directly or indirectly, more than 50% of the voting rights of an entity or
where it has the ability to exercise control over an entity.
Ex. 83 at 59. The Annual Report, therefore, establishes in CSFB’s own words that CSFB (USA)
had the power to influence and control CSFB LLC and Pershing LLC’s activities pursuant to
operational and corporate policy. CSFB’s own words simply destroy its argument that Lead
Plaintiff has “no such evidence” of CSFB (USA)’s control over its subsidiaries.
d. CSFB Utilized Its Global Resources to Manage the
Enron Account
In determining control person liability, the jury is entitled to hear the lengths to which
CSFB used its resources to violate the federal securities laws. CSFB investment bankers and
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structuring specialists in New York and Houston serviced Enron – it was their top client. See
supra at pp. 1-2, 14. CSFB’s London-based energy traders were roped in on the bogus oil
prepays. See supra at §II.B.2.b.(1). CSFB’s managing directors were informed CSFB
transactions falsified Enron’s financials. See supra at §II.B.2.a.(2). And all during this time,
CSFB’s equity and debt research analysts pumped the stock and told the public to buy (while
telling friends and family to avoid the stock). See supra at §II.D.1.
4. CSFB’s Control Over Its Subsidiaries Is a Fact Issue for the
Jury
The evidence demonstrates CSFB (USA) had the power, either directly or indirectly, to
control its subsidiaries through its ownership and the presence of overlapping officers. Lead
Plaintiff need not demonstrate CSFB (USA) actually exercised that power at the summary
judgment stage, because the Fifth Circuit has stated plaintiffs need only show the power to
control, “not the actual exercise of that power.” Abbott v. Equity Group, 2 F.3d 613, 620 (5th
Cir. 1993) (emphasis in original).
The evidence, along with the predicate Section 10(b) and Rule 10b-5 claims, raises a
genuine issue of material fact whether CSFB (USA) had the power to influence and control
CSFB LLC and Pershing LLC through ownership and officer overlap. Where, as here, a genuine
issue of material fact exists concerning the power to control, the issue whether CSFB exercised
that power is a fact-laden inquiry for the jury’s determination. See, e.g., In re Paracelsus Corp.,
6 F. Supp. 2d 626, 633 (S.D. Tex. 1998) (question of control under §15 of the Securities Act of
1933, an analogous counterpart to Section 20(a) under the Exchange Act, is generally a factintensive
question).
In denying BoA’s and CIBC’s summary judgment motions, the Court recognized control
person liability is fact-intensive. May 22, 2003 Order at 2 (Docket No. 1392). Just as the Court
noted Lead Plaintiff raised “issues of fact about the control exerted by the parent company over
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the subsidiaries” with regard to BoA and CIBC, Lead Plaintiff has raised issues of material fact
about the control CSFB (USA) had over its subsidiaries. Id.
To grant CSFB summary judgment on Lead Plaintiff’s control person claims “would be a
determination of the ultimate fact question,” which should be left for the jury’s consideration.
Klapmeier v. Telecheck Intern., Inc., 315 F. Supp. 1360, 1361 (D. Minn. 1970). This is
consistent with the Court’s prior holding at the Rule 12(b) stage, “whether a defendant is a
control person is usually a question of fact.” In re Landry’s Seafood Restaurant, Inc. Sec. Litig.,
No. H-99-1948, Order at 12 n.14 (Ex. 82).
5. CSFB’s Mistaken Formulation of Control
Citing Abbott, CSFB mistakenly argues Lead Plaintiff “bears the burden” to show actual
power or influence, or knowledge of the primary violation. Defs’ Mem. at 49. This is wrong.
Lead Plaintiff does not have to show CSFB (USA) participated in CSFB LLC’s and
Pershing LLC’s fraud. The Court has held “the Fifth Circuit has rejected the requirement that a
plaintiff must show that the controlling person actually participated in the underlying violation.”
In re Enron Corp. Sec. Litig., No. H-01-3624, 2003 U.S. Dist. LEXIS 1668, at *41 (S.D. Tex.
Jan. 28, 2003). This holding is on all fours with G.A. Thompson, where the Fifth Circuit held,
“neither th[e] definition [of control] nor the statute appears to require participation in the
wrongful transaction. Fifth Circuit case law appears to follow the plain meaning of the statute in
this respect.” G.A. Thompson, 636 F.2d at 958.
What’s more, the Fifth Circuit has ruled it is error for a district court to grant directed
verdict on a finding the “[controlling person] neither participated in nor had knowledge of the
fraudulent activities of its employees . . . in the absence of evidence establishing as a matter of
law that [the controlling person] adequately supervised [the controlled person’s] activities.”
Paul F. Newton & Co. v. Texas Commerce Bank, 630 F.2d 1111, 1120 (5th Cir. 1980). CSFB
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WOLF POPPER LLP
ROBERT C. FINKEL
845 Third Avenue
New York, NY 10022
Telephone: 212/759-4600
SHAPIRO HABER & URMY LLP
THOMAS G. SHAPIRO
MATTHEW L. TUCCILLO
53 State Street
Boston, MA 02109
Telephone: 617/439-3939
Attorneys for Nathaniel Pulsifer
SCOTT + SCOTT, LLC
DAVID R. SCOTT
108 Norwich Avenue
Colchester, CT 06415
Telephone: 860/537-3818
Attorneys for the Archdiocese of Milwaukee
Supporting Fund, Inc.
CUNEO GILBERT & LaDUCA, L.L.P.
JONATHAN W. CUNEO
MICHAEL G. LENETT
507 C Street, N.E.
Washington, DC 20002
Telephone: 202/789-3960
202/789-1813 (fax)
Washington Counsel
CICCARELLO DEL GIUDICE & LAFON
MICHAEL J. DEL GIUDICE
1219 Virginia Street, East, Suite 100
Charleston, WV 25301
Telephone: 304/343-4440
304/343-4464 (fax)
Additional Counsel for Plaintiffs
S:\CasesSD\Enron\Summary Judgment\CSFB\operative opp csfb msj.doc
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CERTIFICATE OF SERVICE
I hereby certify that a copy of the foregoing LEAD PLAINTIFF’S OPPOSITION TO
THE CSFB DEFENDANTS’ MOTION AND MEMORANDUM OF LAW IN SUPPORT OF
THEIR MOTION FOR SUMMARY JUDGMENT (DOCKET NOS. 4824 AND 4825)
document has been served by sending a copy via electronic mail to serve@ESL3624.com on
November 13, 2006.
I further certify that a copy of the foregoing document has been served via overnight mail
on the following parties, who do not accept service by electronic mail on November 13, 2006.
Carolyn S. Schwartz
United States Trustee, Region 2
33 Whitehall Street, 21st Floor
New York, NY 10004
Tom P. Allen
McDaniel & Allen
1001 McKinney St., 21st Fl
Houston, TX 77002
Mo Maloney