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

433. Thus, in accordance with GAAP, to the extent an Enron investment entity was even
qualified as an SPE, a party unrelated to Enron had to be independent, had to control the SPE and
must have maintained the risks and rewards of ownership. The defendants knew however, that for
many of Enron's SPEs, it directly or indirectly maintained control over the SPE, and knew that such
entities did not qualify as SPEs under SFAS No. 125. In order to improperly keep these entities off
Enron's books, the Enron Defendants focused on language from EITF No. 90-15 regarding leasing
transactions. Here, consolidation could be avoided if the initial substantive residual equity
investment, on behalf of the lessor, was at least 3%. 9 Notwithstanding that EITF No. 90-15 states
that a greater percentage might well be necessary depending on circumstances and that this standard
regarding leased assets did not even apply to the SPEs Enron had created, the financial management
of Enron, with the participation of Andersen, Enron's lawyers and the banking defendants,
inappropriately used this provision as the overriding rule to avoid consolidating certain SPEs.
Moreover, many of Enron's SPEs did not even meet the 3% minimum standard. Accordingly, these
9
Although not applicable to the transactions alleged herein, additional guidance for SPEs is
described in FASB Emerging Issues Task Force Abstracts ("EITF"). The EITF guidance which the
Enron Defendants relied on as to whether an SPE should be consolidated was derived from EITF
Issue No. 90-15, Impact of Nonsubstantive Lessors, Residual Value Guarantees, and Other
Provisions in Leasing Transactions; EITF Topic No. D-14, Transactions Involving Special-Purpose
Entities; and EITF Issue No. 96-21, Implementation Issues in Accounting for Leasing Transactions
Involving Special-Purpose Entitles. Furthermore, EITF Topic No. D-14 provides the general
guidance for non-consolidation of an SPE:
Generally, the SEC staff believes that for nonconsolidation and sales recognition by
the sponsor or transferor to be appropriate, the majority owner (or owners) of the SPE
must be an independent third party who has made a substantive capital investment
in the SPE, has control of the SPE, and has substantive risks and rewards of
ownership of the assets of the SPE (including residuals). Conversely, the SEC staff
believes that nonconsolidation and sales recognition are not appropriate by the
sponsor or transferor when the majority owner of the SPE makes only a nominal
capital investment, the activities of the SPE are virtually all on the sponsor's or
transferor's behalf, and the substantive risks and rewards of the assets or the debt of
the SPE rest directly or indirectly with the sponsor or transferor.
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