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

439. However, even after employing the bogus transfer to Dodson, the Enron Defendants
could not get the 3% equity needed to avoid consolidation because Kopper indirectly invested
approximately $125,000 in Chewco before transferring his interest to Dodson. However, no third-
party investors were willing to provide outside equity. To obtain the remaining $11.4 million needed
to reach 3%, Barclays agreed to provide what were described as "equity loans" to entities investing
in Chewco. Barclays and the Enron Defendants prepared the documentation to allow Barclays to
characterize the advances as loans (for business and regulatory reasons), while allowing Enron and
Chewco simultaneously to mischaracterize them as equity contributions in order to approach the 3%
equity investment. The Barclays loans were reflected in documents that resembled promissory notes
and loan agreements, but were labeled "certificates" and "funding agreements." The Barclays
documents required the borrowers to pay "yield" at a specified percentage rate, i.e., interest.
Barclays, however, threw a wrench into the scheme by requiring the borrowers to establish cash
"reserve accounts" of $6.6 million in cash that would secure repayment of the $11.4 million. The
reserve account was funded when JEDI wired $6.58 million to Barclays on 12/30/97. The agreement
was prepared by Vinson & Elkins. This transfer cut Chewco's purported 3% at risk, independent
"equity" in half.
440. Thus, even the illusory "equity" of 3% was not achieved since Barclays received the
reserve of $6.6 million to secure what was clearly a loan and therefore did not qualify as outside
equity "at risk." Consequently, even under Enron's contorted interpretation of qualifying SPEs,
Chewco did not have the required equity at risk and did not qualify as an adequately capitalized SPE.
As a result, under EITF No. 90-15 and Topic D-14, Chewco was required to be, but improperly was
not, consolidated into Enron's consolidated financial statements from the outset. Further, because
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