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

and more of the stock issuance "triggers" would begin to be hit, and a vicious fatal down-cycle would
kick in. Therefore, with the participation of Andersen, Vinson & Elkins and certain of Enron's
banks, Enron restructured and capitalized the Raptor SPEs at year-end 00 via artificial transactions
which transferred rights to even more shares of Enron stock to these entities in exchange for notes,
creating ever-increasing pressure on Enron and the other participants in the scheme to support
Enron's stock price. This artifice enabled Enron to avoid recording a huge credit reserve for the year
ending 12/31/00.
E. Abuse of Mark-to-Market Accounting
36. In addition to falsifying its financial results by engaging in transactions with SPEs
that it secretly controlled, Enron engaged in several other accounting tricks and manipulations to
falsify its financial results during the Class Period. Chief among these was the misuse and abuse of
"mark-to-market accounting" (also known as "fair value accounting") whereby Enron would
compute the purported economic value or profit it would ultimately obtain on a multi-year contract,
discount that to present value and recognize the entire "mark-to-market" profit in the current period.
Unless Enron's expected profit on the transaction was truly hedged, Enron was required in each
following quarter to recompute or readjust the profit computation to adjust for changing economic
values. "Mark-to-market" accounting was appropriate only where Enron had a long-term track
record which gave it the ability to accurately estimate and forecast future values (as was true with
certain aspects of Enron's wholesale energy business). However, Enron misused and abused mark-
to-market accounting throughout its entire business to grossly inflate its reported revenues and
profits during the Class Period, a tactic furthered by the fact that Enron managers willing to engage
in such falsifications were able to obtain larger bonuses based on the inflated values. In Enron's
wholesale energy business this was done by assigning unrealistic values to wholesale energy
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