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

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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 - 332 -
JEDI's non-consolidation depended upon Chewco's non-consolidation status, JEDI also should have been consolidated beginning in 11/97. A simplified diagram of the Chewco transaction is as follows: Enron Debt Guarantee General Partner Guarantee Fee Limited Partner JEDI Limited Partnership Note Barclays Chewco Investments L.P. $383MM $240MM Loan $132MM Advance - 333 - Note $11.4MM "Equity Loan" LP $115K $6.6MM Reserve Accounts Kopper/Dodson 441. The problems with the purported independent "equity" in Chewco were known and openly discussed within Enron. Barclays clearly knew about the manipulation since it helped structure the $11.4 million loan to appear as equity, and Vinson & Elkins knew due to their involvement in setting up the paperwork for the transaction. 442. Beginning in 12/97, Enron improperly recognized revenues arising from the JEDI partnership (in which Chewco was supposedly the independent partner). The revenue recognition was improper since Chewco was not an unrelated third party. This revenue included fees paid to Enron by JEDI and Chewco that had no business purpose other than accelerating Enron's ability to recognize revenue.
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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
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growth in '98, 18% growth in '99 an
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conference calls and in follow-up c
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stated: 332. On 7/12/01, Skilling a
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337. On 7/25/01, Bloomberg News rep
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financial condition and liquidity -
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equipment, a significant portion of
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million up-front cash just to sign
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(i) Enron entered into dark-fiber s
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intermediation. Even worse, Enron g
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sense, to "just drink more Enron Ko
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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 312 and 313: DEFENDANTS' SCHEME AND FRAUDULENT C
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 334 and 335: SPEs, under any accounting machinat
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
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Page 348 and 349: gathering system in the Gulf of Mex
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
Page 358 and 359: Skilling, knew of the decline, by w
Page 360 and 361: (2) the transferred assets were not
Page 362 and 363: S-K required the disclosure of the
Page 364 and 365: Even though a misstatement of an in
Page 366 and 367: 522. In order for Enron to accrue r
Page 368 and 369: engaged in swapping capacity of thi
Page 370 and 371: earnings and separately disclosed i
Page 372 and 373: practice was common in all trading
Page 374 and 375: What made it all work, Dickson said
Page 376 and 377: 14 Securities that are bought and h
Page 378 and 379: (4) Quaker Oats 557. Under one of i
Page 380 and 381: supplied by Enron under the terms o
Page 382 and 383: (2) Prepaid Swaps with CitiGroup an
Page 384 and 385: 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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