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these restrictions, a 39% discount rate was applied in valuing the shares. LJM1 then contributedapproximately one-half the Enron shares to Swap Sub, a hedging vehicle it had formed to enter intothe Rhythms Hedge. In return for the shares it transferred to LJM1, Enron received $50 million(later $64 million) in promissory notes from LJM1 and a put right (valued at $104 million) thatEnron could exercise, in the future, to force Swap Sub to purchase the Rhythms shares. However,Swap Sub’s only asset was the Enron shares it had received from LJM1. See Exam. IV, App. E at31-32, 42-44. As the Examiner concluded: “Thus, Enron did not transfer any of its true economicrisk in the Rhythms investment to any third party with assets other than assets provided by Enron.”Exam. IV, App. E at 32. RBS was well aware that the Rhythms Hedging transaction did not actuallytransfer the risk of the Rhythms stock away from Enron. As the Examiner concluded, “RBS wasaware that the LJM1/Rhythms Hedging transaction was a non-economic hedge.” Exam. IV, App. Eat 36.643. Because of the LJM1/Rhythms Hedging transaction, the Insiders inappropriatelycaused Enron to recognize $95 million of income in 1999 – 10.6% of Enron’s originally reportednet income for the year. See Exam. IV, at 67. RBS participated in the formation and funding ofLJM1 with full knowledge that the key transaction – the Rhythms Hedge – was a non-economichedge, and therefore would not be accounted for accurately on Enron’s financial statements. AnRBS executive later explained that the purported “hedging” transaction with the Rhythms stockactually “enabled the smoothing of earnings” on Enron’s financial statements. Sworn Statement ofKevin Howard, at 256, lines 7-9 (quoted in Exam. IV, App. E at 36 n.129).(b)RBS’s total return swap with AIG644. After the Rhythms Hedging transaction, RBS began searching for ways to extract theupside value of the Enron shares in LJM1 and protect itself from downside risk. See Exam. IV, App.E at 43, 46. On November 29, 1999, RBS and CSFB each made a $45.1 million additional capital604041v1/007457-221-