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

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DEFENDANTS' SCHEME AND FRAUDULENT COURSE OF BUSINESS 394. Each defendant is liable for (i) making false statements, or for failing to disclose adverse facts while selling Enron securities, and/or (ii) participating in a scheme to defraud and/or a course of business that operated as a fraud or deceit on purchasers of Enron's public securities during the Class Period (the "Wrongful Conduct"). This Wrongful Conduct enabled the Enron Defendants to sell or dispose of over 20.8 million shares of Enron stock at artificially inflated prices for almost $1.2 billion in illegal insider trading proceeds, plus an additional $1+ billion in cash bonuses based on Enron's false earnings and inflated stock price and enabled defendants to raise over $1.8 billion for Enron from the sale of newly issued Enron securities during the Class Period. The Wrongful Conduct also allowed Enron's accountant, law firm and banks to pocket billions of dollars in fees, commissions and other charges as detailed herein. - 308 -
ENRON DEFENDANTS' SCIENTER ALLEGATIONS 395. As pleaded in this Complaint, the financial fraud and fraudulent course of business at Enron permeated virtually all aspects of Enron's operations, including all of its three major business operations WEOS, EES and EBS. In addition, the fraud was not only widespread throughout Enron but involved the frequent manipulation of Enron's public disclosures and financial reports via huge transactions – many of which were entered into at or near the end of reporting periods, a circumstance, especially when it is repeated quarter after quarter as it was at Enron, which is a significant red flag. Further, not only were these transactions large, frequent, widespread and often at quarter-end, they were also highly structured and complex, requiring the personal attention of several top executives of Enron, especially those sitting on the Enron Management Committee, and the review and approval of board members, especially those sitting on the Enron Board's Executive, Finance and Audit Committees, which had direct jurisdiction over these types of corporate transactions and activities. Thus, it is logical, if not obvious, that all of Enron's officers and directors knew of, or at a minimum acted in reckless disregard of, the falsification of Enron's financial reports and the other false and misleading statements being made about its business operations. 396. In addition, every Enron Defendant sued for fraud had a strong motive to engage and participate in the scheme to defraud and to conduct Enron's business in a manner that operated as a fraud or deceit on purchasers of Enron's publicly traded securities. Every Enron Defendant sued for fraudulent misconduct sold substantial amounts, either in absolute or relative terms, of his or her Enron stock, pocketing significant proceeds from his or her illegal insider trading. In addition, Enron's officers were in a position to also pocket huge cash bonuses if, but only if, Enron achieved certain preset earnings targets and its stock advanced to certain targeted trading levels. Also, the - 309 -
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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
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227. On 4/12/00, CitiGroup issued a
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communications segment. The wholesa
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TRADING GROWING FASTER THAN EXPECTE
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Enron and Blockbuster plan to intro
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• The bandwidth trading component
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Broadband Services In our view, Enr
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• ENE reported 2Q00 EPS of $0.34,
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• ... Enron Broadband Services ..
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• In terms of content, Enron Broa
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It also had over 10 additional tran
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• Impressive wholesale energy res
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271. As a result of defendants' fal
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let alone continue to engage in sim
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Retail Energy Services: ... Enron E
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Well, we were up, 1998, we were up,
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• Growth Targets Lifted .... * *
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acceleration of growth and creation
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Our talented people ... financial s
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stock, selling 1.1 million shares i
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evenue. Even though Enron could not
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ecognized a multi-million dollar pr
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exchange for orders by Enron in 99
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streaming content because the EIN a
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not have the legal right to electro
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illions of dollars while concealing
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4 years .... We are projecting mini
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and Content Delivery which remain s
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• a 281 percent increase in reven
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[W]e ... said to investors, as long
Page 262 and 263: growth in '98, 18% growth in '99 an
Page 264 and 265: 326. On 5/18/01, CitiGroup issued a
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
Page 298 and 299: - $180 million associated with the
Page 300 and 301: income, to about $400 million and a
Page 302 and 303: Enron Corporation (BUY) Third Quart
Page 304 and 305: of things - the LJM transactions we
Page 306 and 307: Enron Continues As Market-Maker of
Page 308 and 309: failing to eliminate additional hun
Page 310 and 311: 391. Rubin's and Harrison's effort
Page 314 and 315: Enron Defendants had permitted Enro
Page 316 and 317: Derrick 230,660 $ 12,563,928 John D
Page 318 and 319: Dollars per Share $100 $80 $60 $40
Page 320 and 321: executives will be generally hesita
Page 322 and 323: and 99.9%. This level of certainty
Page 324 and 325: ENRON'S FALSE FINANCIAL STATEMENTS
Page 326 and 327: $12,000,000,000 $10,000,000,000 $8,
Page 328 and 329: 50.00% 45.00% 40.00% 35.00% 30.00%
Page 330 and 331: 8 Debt to equity is calculated usin
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Page 338 and 339: (a) Enron Guarantee Fee 443. Enron
Page 340 and 341: (2) LJM Partnerships 448. Enron als
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Page 344 and 345: CS First Boston, Merrill Lynch, JP
Page 346 and 347: hedged through traditional transact
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Page 350 and 351: (b) Raptors (i) Raptor I 477. The f
Page 352 and 353: only entered to avoid recognition o
Page 354 and 355: million, giving LJM2 its specified
Page 356 and 357: y a total of $1 billion in the unau
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Page 360 and 361: (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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