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parties were linked – contracts associated with the trades were designed so that adefault in one trade affected the other trades; there was no price risk – except for feesand interest payments, the final impact of the trades was a wash; neither the banksnor the banks’ special purpose entities had a legitimate business reason forpurchasing the commodities used in the trades.Roach Testimony at 15-16.192. Both the Enron Examiner and District Attorney Morgenthau reached the sameconclusion, as a result of their respective investigations. The Enron Examiner concluded:Pursuant to an application of existing GAAP, the commercially interdependent stepsin the transactions should have been viewed together, and Enron should haverecorded the proceeds of these borrowings as cash flow from financing activities andits repayment obligations as debt. As a result of its accounting for the PrepayTransactions, Enron materially (i) understated its debt, (ii) overstated its cash flowfrom operating activities and (iii) overstated its price risk management liability.Exam. II at 66. In District Attorney Morgenthau’s ’s words, “Structuring these transactions ascommodities trades . . . enabled Enron unfairly to account for the funds it received as cash flow fromoperations, rather than as the proceeds of bank or credit financing.” Morgenthau Letter at 2.193. The violations were particularly egregious because – as the Bank Defendantsknew – the Insiders used the Enron prepay transactions as a tool to satisfy the rating agencies’expectations. The tool was effective because the ratings agencies understood neither the nature ofthe prepays nor the fact that they violated GAAP. On July 23, 2002, Ronald Barone, the ManagingDirector of S&P’s Utilities, Energy & Project Finance Group testified at the PSI Hearings. Withrespect to the Enron prepays, he stated:It now appears . . . [that] Enron may have incurred approximately $4 billion in debtlikeobligations structured as prepaid forward transactions and swap transactions.. . . While Enron did not provide specific details about these particular transactions,the generalized information it did provide, which underpinned our analysis, led usto conclude that the funds from these transactions were more akin to operational cashflow than new debt-like obligations.Despite our repeated requests for complete, timely and reliable information, Enrondid not disclose any information revealing a link between the prepaid forwardtransactions and the swap transactions. . . . While our knowledge about the full604041v1/007457-52-