Enron Corp. - University of California | Office of The President

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illions of dollars while concealing billions of dollars of debt that should have been on its balance sheet. As a result, Enron's true financial structure was extremely fragile. (r) As a result of the foregoing, the forecasts for strong continued revenue and earnings growth for Enron's wholesale and retail energy operations were completely false, in part, because the historical financial performance and condition of those operations had been materially falsified – thus there was no real basis upon which to forecast such further growth – and because neither of those businesses had the current strengths or success to justify the forecasts and claims for future growth that were being made. (s) As a result of the foregoing, the revenue and EPS forecasts being made by and for Enron going forward were also grossly false because historical earnings, upon which those forecasts were based, were falsified and the result of improper accounting manipulation. In truth, Enron's various business operations not only had huge concealed losses, which would have to be recognized and would very adversely impact Enron's financial results, but those core business operations simply did not have the strength or success necessary for them to generate anywhere near the kind of revenue and profit growth being forecast for them. 301. On 3/9/01, Enron suddenly revealed it had terminated its Blockbuster VOD joint venture which it had been telling investors for months was a great success and which would lead to huge profits. Bloomberg News reported: Enron Corp. ... said Blockbuster didn't provide the "quantity and quality" of movies needed to drive the service.... "We were able to obtain some content which was adequate for the trial but wouldn't be enough when we move forward on a commercial basis," said Kelly Kimberly, senior vice president of Enron's Broadband Services unit. As Enron's stock fell sharply in the wake of this revelation, Enron and Enron's bankers rushed to try to support the stock and minimize the impact of the termination of the Blockbuster deal. - 246 -
302. On 3/12/01, JP Morgan issued a report on Enron. It rated Enron a "Buy," continued to forecast 01 and 02 EPS of $1.77 and $2.08 for Enron and stated: We view the termination of the Enron/Blockbuster deal as a mild negative.... We are not guiding down our numbers at this point because we feel that the content-delivery story still remains the same. Enron will most likely be able to shop its technology around and ink another $1 billion worth of contracts in 2001. In addition, the content volumes anticipated under the 20-year Blockbuster deal will most likely be picked up with another provider, now that Enron can shop around. 303. On 3/12/01, Lehman Brothers issued a report on Enron. It rated Enron a "Strong Buy," continued to forecast 01 and 02 EPS of $1.75 and $2.05 and a 20% five-year EPS growth rate for Enron and stated: • Termination of agreement with Blockbuster more bark than bite as delivery platform technically sound .... No change in ... fundamental outlook. Overreaction has created attractive entry point. Reiterate 1 – Strong Buy, Target Price $100. * * * • Enron has proven the technical viability of the platform .... 304. On 3/12/01, CitiGroup issued a report on Enron. It rated Enron a "Buy," with a $100 price target, and forecast 01 and 02 EPS of $1.73 and $2.05, with a 20% long-term EPS growth rate for Enron. It also stated: Enron announced a mutual decision to terminate their agreement with Blockbuster.... ... [W]e still maintain our bullish view on Enron. We are not recommending Enron because of the potential for Content Delivery.... Instead, we see three reasons for owning Enron: Wholesale (Merchant) Energy, Retail Energy, and Bandwidth Trading. The first two are actuals, while the last is a very robust potential, in our view.... WHOLESALE (MERCHANT) ENERGY: KEY DELIVER FOR 3-5 YEARS First, and most important, is Wholesale Energy .... This business, which now accounts for 80% of Enron's earnings, grew at approximately 50% CAGR for the past - 247 -
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KEN L. HARRISON, STEVEN J. KEAN, RE
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TABLE OF CONTENTS - i - Page PREAMB
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... hiding losses/SEC violations)..
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2 Certain defendants named herein,
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to do so would incriminate them. Wh
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y Enron to keep high-debt assets li
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in JEDI, making it possible for tra
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continued to accelerate, ultimately
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financial condition and investment
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it controlled, and was doing phony
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Bobcat Raptor-IV Marlin Trust I Mar
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to be utilized to engage in transac
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facilitate and finance LJM2's illic
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unnoticed: 30. This blatant self-de
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LJM1 and LJM2 in transactions struc
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and more of the stock issuance "tri
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dollar contracts which allowed it t
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41. Just eight months after announc
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Dollars Per Share 30 25 20 15 10 5
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Enron's financial condition to make
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Enron's finances, but very likely w
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Merrill Lynch CitiGroup Banks Named
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CitiGroup Barclays Banks Named As D
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The employee adds that anyone who q
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of the SPEs Enron did business with
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destroying millions of pages of doc
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- Statement of Financial Accounting
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eporting earnings from the 3rdQ 00
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disclosures were crafted and approv
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falsify its financial results and t
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72. On 2/26/02, Dow Jones News Serv
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A. Lead Plaintiff PARTIES 79. Court
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(g) Plaintiff Amalgamated Bank, as
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D. Defendants and Related Parties (
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Enron Corp. Defendant J. Skilling's
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Dollars per Share Enron Corp. Defen
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Enron Corp. Defendant S. Horton's Q
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Ms. Olson [told] employees in Decem
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(dd) Defendants John Mendelsohn ("M
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(ii) The Marlin Water and Atlantic
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public information, pocketing over
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Dollars per Share $100 $80 $60 $40
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As of 3/98 Executive Committee Comp
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Steven J. KeanSenior Vice President
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Kevin P. Hannon Chief Operating Off
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shortly after their issuance and/or
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(b) Defendant Thomas H. Bauer ("Bau
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(l) Defendant Richard R. Petersen (
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(4) Investment Banks 99.1 Each of t
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Notes due 7/15/06 and 6.95% Notes d
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devised, implemented and financed (
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6.19% Senior Secured Notes due 03;
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of and controlled by Bank of Americ
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fraudulent scheme by disguising deb
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fraudulent scheme by repeatedly iss
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BACKGROUND TO THE CLASS PERIOD 109.
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"Enron's water subsidiary initially
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• Enron just had a great, great q
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loans to the SPEs and Barclays had
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without any adequate feasibility st
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Registration Statement was signed b
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• Wholesale Energy Operations and
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... Together, our business units re
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10-K report. The Form 10-K containe
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performance and all of the indicati
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150. On 5/7/99, Lehman Brothers iss
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Communications Is Running Faster an
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costs. For example, Enron picked th
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(k) Under Mark-Jusbasche, Enron Int
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(p) As a result of the foregoing, t
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160. On 7/14/99, The Houston Chroni
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In discussing the most recent decli
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• Enron expects this sector ... t
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178. On 10/12/99, Bloomberg reporte
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three times the $850 million contra
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Enron Corp. had a 12.5% increase in
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months there was speculation of a c
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* * * ECI has two new and related b
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198. On 1/18/00, CS First Boston is
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• This is a huge step forward for
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208. On 1/21/00, Merrill Lynch issu
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The company hopes to capture 10 per
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of mark-to-market accounting by ado
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(ii) EES entered into demand-side-m
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(j) To inflate the purported revenu
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(q) As a result of the foregoing, t
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Andersen: 218. With respect to EES,
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Fastow also appeared at the Enron A
Page 200 and 201: 227. On 4/12/00, CitiGroup issued a
Page 202 and 203: communications segment. The wholesa
Page 204 and 205: TRADING GROWING FASTER THAN EXPECTE
Page 206 and 207: Enron and Blockbuster plan to intro
Page 210 and 211: • The bandwidth trading component
Page 212 and 213: Broadband Services In our view, Enr
Page 214 and 215: • ENE reported 2Q00 EPS of $0.34,
Page 216 and 217: • ... Enron Broadband Services ..
Page 218 and 219: • In terms of content, Enron Broa
Page 220 and 221: It also had over 10 additional tran
Page 222 and 223: • Impressive wholesale energy res
Page 224 and 225: 271. As a result of defendants' fal
Page 226 and 227: let alone continue to engage in sim
Page 228 and 229: Retail Energy Services: ... Enron E
Page 230 and 231: Well, we were up, 1998, we were up,
Page 232 and 233: • Growth Targets Lifted .... * *
Page 234 and 235: acceleration of growth and creation
Page 236 and 237: Our talented people ... financial s
Page 238 and 239: stock, selling 1.1 million shares i
Page 240 and 241: evenue. Even though Enron could not
Page 242 and 243: ecognized a multi-million dollar pr
Page 244 and 245: exchange for orders by Enron in 99
Page 246 and 247: streaming content because the EIN a
Page 248 and 249: not have the legal right to electro
Page 252 and 253: 4 years .... We are projecting mini
Page 256 and 257: and Content Delivery which remain s
Page 258 and 259: • a 281 percent increase in reven
Page 260 and 261: [W]e ... said to investors, as long
Page 262 and 263: growth in '98, 18% growth in '99 an
Page 266 and 267: conference calls and in follow-up c
Page 268 and 269: stated: 332. On 7/12/01, Skilling a
Page 270 and 271: 337. On 7/25/01, Bloomberg News rep
Page 272 and 273: financial condition and liquidity -
Page 274 and 275: equipment, a significant portion of
Page 276 and 277: million up-front cash just to sign
Page 278 and 279: (i) Enron entered into dark-fiber s
Page 280 and 281: intermediation. Even worse, Enron g
Page 282 and 283: sense, to "just drink more Enron Ko
Page 284 and 285: Dear Mr. Lay, * * * Skilling's abru
Page 286 and 287: . Cliff Baxter complained mightily
Page 288 and 289: is up 40%, earnings per share up ab
Page 290 and 291: CEO Jeff Skilling Resigns; A Negati
Page 292 and 293: 356. On 8/28/01, Lay was interviewe
Page 294 and 295: ... But all of the problems I have
Page 296 and 297: 362. On 10/9/01, Merrill Lynch issu
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income, to about $400 million and a
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Enron Corporation (BUY) Third Quart
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of things - the LJM transactions we
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Enron Continues As Market-Maker of
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failing to eliminate additional hun
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391. Rubin's and Harrison's effort
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DEFENDANTS' SCHEME AND FRAUDULENT C
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Enron Defendants had permitted Enro
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Derrick 230,660 $ 12,563,928 John D
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Dollars per Share $100 $80 $60 $40
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executives will be generally hesita
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and 99.9%. This level of certainty
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ENRON'S FALSE FINANCIAL STATEMENTS
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$12,000,000,000 $10,000,000,000 $8,
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50.00% 45.00% 40.00% 35.00% 30.00%
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8 Debt to equity is calculated usin
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executed in accordance with managem
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SPEs, under any accounting machinat
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439. However, even after employing
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(a) Enron Guarantee Fee 443. Enron
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(2) LJM Partnerships 448. Enron als
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comparable securities in the market
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CS First Boston, Merrill Lynch, JP
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hedged through traditional transact
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gathering system in the Gulf of Mex
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(b) Raptors (i) Raptor I 477. The f
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only entered to avoid recognition o
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million, giving LJM2 its specified
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y a total of $1 billion in the unau
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Skilling, knew of the decline, by w
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(2) the transferred assets were not
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S-K required the disclosure of the
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Even though a misstatement of an in
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522. In order for Enron to accrue r
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engaged in swapping capacity of thi
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earnings and separately disclosed i
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practice was common in all trading
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What made it all work, Dickson said
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14 Securities that are bought and h
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(4) Quaker Oats 557. Under one of i
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supplied by Enron under the terms o
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(2) Prepaid Swaps with CitiGroup an
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In essence, his report concluded, E
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Project Name Description Contract V
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earnings below expectations. By 97,
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content services business. In fact,
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593. Enron also failed to disclose
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Enron arrived in India in the early
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holdings for $700 million. It is no
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investment and credit decisions ref
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Date of Offering Effective Date of
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created in Enron, the Offering Docu
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621. The true effect of "early sett
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FINANCIAL RISK MANAGEMENT * * * Enr
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Vinson & Elkins also knew because t
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could connect. Enron's BOS was to b
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not even make a broadband connectio
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05/17/01 Enron Euro Credit Linked N
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usiness is the management of certai
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Yosemite Securities Trust I Offerin
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Communications Enron is developing
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(a) Annual Report on Form 10-K for
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ENRON HISTORICAL CONSOLIDATED FINAN
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Business of Enron DESCRIPTION OF EN
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Income Statement Data: SELECTED HIS
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• the transportation of natural g
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Balance Sheet Data (at end of perio
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wholesale customers to view Enron's
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ENRON HISTORICAL CONSOLIDATED FINAN
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Marlin Water Trust II/Marlin Water
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Retail Energy Services Enron Energy
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Cumulative effect of accounting cha
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A. General INVOLVEMENT OF THE BANKS
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manage such conflicts of interests.
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privately held entity created by En
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caused its stock to plunge and impa
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its financial results. Thus, the ba
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something each of the banks named a
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7/01 Marlin Water Trust II, Marlin
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default puts" on Enron's publicly t
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were fraudulent and used to conceal
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667. These phony commodity transact
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anging falsification of its financi
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DATE SECURITY 11/93 8 million share
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8/01 $3 billion Enron credit facili
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a year in interest payments, and sy
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participation in the scheme to defr
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illicit partnerships or SPEs, and h
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698. In 6/99, CS First Boston acted
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703. In addition to the foregoing,
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These transactions included Marlin,
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of the firm, invested $22.5 million
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the CIBC legal entity, as its knowl
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sales where CIBC was one of the und
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not a true investor and was not at
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"It was nothing but a pilot project
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Tilney's wife was a Managing Direct
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otherwise to outside investors'" an
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an effort spearheaded by Schuyler M
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Barry S. Friedberg, $500,000 Chairm
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Flash Report" for 12/23/99 identifi
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• Currently pitching to become En
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Concurrently, Enron advised Merrill
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742.19 Internally, Merrill Lynch co
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if Enron defaulted within a given t
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748. By the beginning of the Class
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- something that Barclays was in a
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length transactions with to generat
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Brothers legal entity, as its knowl
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5/99 $500 million 7-3/8% Enron note
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financial information as Enron's le
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instance: 5/00 $500 million 8.375%
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and condition of Enron's business o
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eturn for Deutsche Bank's participa
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DATE TRANSACTION 7/98 $252 million
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797. Deutsche Bank also actively en
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would pay it a large fee for the ea
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797.8 The Washington Post further f
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797.12 Bankers Trust's role in Proj
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797.17 In the words of the Joint Co
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797.25 Project Tomas was structured
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emaining from Bankers Trust to Enro
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INVOLVEMENT OF VINSON & ELKINS 800.
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accommodated Enron's desire for one
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The document ... sharply criticizes
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to "close," i.e., take place, and t
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806. However, Enron could not find
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810. During 12/97, Vinson & Elkins
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day-to-day activities would be mana
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equired to pay Enron on the "hedge"
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these SPEs, Enron would have to tak
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Vinson & Elkins Concealed the Phony
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In March 2001, Enron acquired the l
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ecause it participated in the negot
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839. The related-party disclosures
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846. The "disclosures" above are fa
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The Attempted Coverup 850. In mid-8
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3. There is a veil of secrecy aroun
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854. The result of this letter - la
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standpoint. In this regard, AA cons
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A. General INVOLVEMENT OF ARTHUR AN
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Andersen also consented to the use
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905. Andersen's reports were false
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investors that would hold assets an
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915. Andersen also performed certai
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ing to light documents illustrating
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he was aware of many of the company
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Andersen employees destroyed incrim
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departments, knew about the excessi
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a blind eye to the numerous red fla
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• How Enron could, with its own c
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Tallying all expected profits immed
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c. Determine whether the transactio
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keep the Chewco deal off the books.
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improper accounting was corrected).
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in order for the financial statemen
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959. As detailed herein, Enron's di
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connection with an SEC investigatio
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eached by David Duncan and other ac
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. Fails to correct an entity's fina
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(j) The fourth standard of reportin
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Professional Standards Group has fi
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headquarters are located at 33 West
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STATUTORY SAFE HARBOR 985. The stat
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988. Plaintiffs' claims are typical
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- 628 - Michael M. Lowther* Benjami
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1000. This Claim is brought by the
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Type of Offering Enron Corp. 7.875%
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day of the offering. day of the off
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liable as detailed herein. Defendan
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08/17/00 Enron Credit Linked Notes
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subdivisions thereof and/or State P
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JP Morgan and Lehman Brothers had a
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1016.26 This Claim is brought pursu
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Plaintiffs hereby demand a trial by
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SHAPIRO HABER & URMY LLP THOMAS G.
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