Footnote 8

evidence of that knowledge: When Citigroup’s commodities desk asked for a share of the fees thatthe phony prepays generated, the Derivatives Group at Citigroup resisted. The Derivatives Grouphad created the prepays, and argued that the prepays involved no commodities exposure at all. Asthe head of the Derivatives Group said, “[If] much of what you do does not involve management ofcommodities exposures at all, but is simply manipulating cash flows, there may be a much greateroverlap in our businesses than I have been lead to believe” (quoted in Exam. III, App. D at 77-78).296. Citigroup knew the Insiders were manipulating Enron’s financial statements in orderto maintain the company’s much-needed credit ratings. Internal Citigroup documents candidly statethat the prepays provided “favorable accounting treatment” for Enron – meaning that “[a]lthoughthe deal is effectively a loan, the form of the transaction would allow [Enron] to reflect it as‘liabilities from price risk management activity’ on their balance sheet and also provide favorableimpact on reported cash flow from operations.” CITI-B 0260171-172 (quoted in Exam. III, App. Dat 70). Indeed, when Enron began its tumble in the fall of 2001, the head of Citigroup’s DerivativesGroup wrote a colleague stating, “Want to get your confirmation that (apart from the fact we putdeals together for Enron which we knew confused the rating agencies) there is no skellington [sic]in the closet.” CITI-B 00910235 (quoted in Exam. III, App. D at 78).297. Both Citigroup documents and Citigroup employees acknowledge that the Insidersused the prepay structures to keep Enron’s credit ratings from falling. One Citigroup documentexplained:Enron has used contract monetizations and prepaids to address two issues whichhave been raised by the rating agencies. One of the agencies’ issues was thatearnings which Enron recognized when mark-to-marking its trading book producea commensurate cash inflow on a timely basis. Another issue was the tenormismatch between trading assets and trading liabilities. Enron used to deal withthese issues through monetizations, that is effectively selling a given cash flowstream arising from a commodity contract. This produced up-front cash equal to thenet present value of the profit in the transaction, and removed the asset and liabilityfrom the trading book. However due to certain accounting changes, contract604041v1/007457-92-