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

LJM1 and LJM2 in transactions structured, reviewed and approved by Andersen, Vinson & Elkins
and certain of Enron's banks. The transactions permitted Enron to conceal its true debt levels by
removing the assets from Enron's balance sheet and, at the same time, record large gains.
However, (i) as it had agreed in advance it would do, Enron bought back five of the seven assets
after the close of the financial reporting period; (ii) the LJM partnerships made large profits on
every transaction, even when the asset they had purchased actually declined in market value; and
(iii) those transactions generated "earnings" for Enron of $229 million in the second half of 99
out of total earnings for that period of $549 million. In three of these transactions where Enron
ultimately bought back LJM's interest, Enron had agreed in advance to protect the LJM
partnerships against any loss. Thus, the LJM partnerships functioned only as vehicles to
accommodate defendants in the manipulation, falsification and artificial inflation of Enron's
reported financial results, while enriching the LJM investors.
33. One "hedging" transaction with LJM1 in 6/99 involved Rhythms NetConnections
("Rhythms") stock owned by Enron, to "hedge" Enron's huge gains in Rhythms stock and enable
Enron to create a huge profit. Enron transferred its own stock to the SPE in exchange for a note.
But if the SPE were required to pay Enron on the "hedge," the Enron stock would be the source
of payment. Other "hedging" transactions occurred in 00 and 01 and involved SPEs known as
the "Raptor" vehicles. These were also structures, funded principally with Enron's own stock,
that were intended to "hedge" against declines in the value of certain of Enron's merchant
investments. These transactions were not economic hedges. They actually were manipulative
devices devised to circumvent accounting rules. The economic reality was that Enron never
escaped the risk of loss, because it had provided the bulk of the capital with which the SPEs would
pay Enron. The Enron Defendants, Andersen, Vinson & Elkins and Enron's banks used these
contrivances and manipulative devices to inflate Enron's reported financial results. In 99, Enron
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