Footnote 8

[T]he Bacchus transaction was steeped in deceptive accounting, if not outrightaccounting fraud. The evidence shows that Enron guaranteed both the debt andequity “investment” in the Caymus Trust, thereby eliminating all risk associated withthe “sale” of the Fishtail assets to the Trust. Without risk, the transaction fails toqualify as a sale under SFAS 140. The fact that Enron’s guarantee of the $6 millionequity “investment” was never placed in writing, but was kept as an oral sideagreement with Citigroup, demonstrates that both parties understood its significanceand potential for invalidating the entire transaction. Citigroup neverthelessproceeded with the deal, knowing that a key component, Enron’s guarantee of the$6 million, rested on an unwritten and undisclosed oral agreement.323. Neither Citigroup nor Salomon Holding treated the $28.5 million contribution, plusthe $160 million unfunded commitment, to Sundance Industrial as a real equity investment. TheInsiders were able to secure Salomon Holding’s cash investment only by requiring the SundanceIndustrial partnership to hold a $28.5 million cash reserve at all times, and by givingCitigroup/Salomon Holding the ability to unilaterally terminate the partnership and thus ensure thatits unfunded commitment could never be drawn. Other indicia that Salomon Holding’s contributionwas not an equity investment are that (1) it received a preferred return of LIBOR plus 6.62% peryear, paid prior to distributions to other partners, and (2) an excess income sweep provision cappedCitigroup’s return at the preferred return, thus depriving Citigroup of participating in the upside ofthe business.324. Citigroup also purchased a third-party credit default swap for Salomon Holding’s$28.5 million investment. Moreover, Salomon Holding/Citigroup’s unfunded commitment wasprotected from being called. By its terms, the commitment could be called only if the partnershiplost more than $747 million. But if there were any indication that might occur, SalomonHolding/Citigroup could exercise its unilateral right to terminate the partnership and thus avoidfunding the obligation. In the words of Citigroup: “It is ‘unimaginable’ how our principal is notreturned.” CITI-B 0301369 (quoted in Exam. III, App. D at 129).604041v1/007457-105-