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shares, Enron’s 5.2 million Rhythms shares represented the float for Rhythms in the market. Enron,therefore, began looking for a way to lock in its $250 million gain.232. Fastow contended that a commercial hedge was not viable. Any fund willing tohedge Enron’s investment would have demanded an enormous premium for taking on such a largeexposure. So Fastow came up with a different idea. On June 28, 1999, during a Special Meetingof the Enron Board of Directors, Fastow proposed that Enron establish a private equity fundspecifically to hedge the Rhythms shares. More particularly, Fastow suggested the formation of twoentities, both of which he personally would control: LJM1 and its subsidiary, LJM1 Swap Sub, L.P.(“LJM1 Swap Sub”).233. The Board approved Fastow’s plan but, recognizing the conflict position in whichthe plan placed Fastow, only on conditions made part of LJM1’s partnership agreement. First wasthat Fastow not receive, directly or indirectly, distributions or allocations resulting from LJM1’sEnron stock. Second was that Fastow not receive, directly or indirectly, any proceeds from LJM1Swap Sub’s Enron stock. Third was that Fastow’s management fee be calculated by reference toassets in LJM1 other than the Enron shares or any proceeds resulting from those shares (the “EnronConditions”).234. Through a complicated series of transactions, Fastow caused Enron to transfer over3 million shares of its common stock – worth approximately $276 million – to LJM1 which, in turn,transferred approximately one-half of the Enron shares to LJM Swap Sub, to purchase the RhythmsHedge. The stock came with restrictions. A June 30, 1999 letter agreement restricted LJM1 andLJM1 Swap Sub’s right to dispose of the shares for four years without Enron’s consent, subject tocertain exceptions. Exam. II, App. L. at 8. The letter agreement also prohibited both entities fromentering into any transaction that hedged their exposure on their respective portions of the Enronshares for one year without Enron’s consent. Id.604041v1/007457-66-