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

CS First Boston, Merrill Lynch, JP Morgan and CitiGroup participated in setting up or were early
investors in LJM2. Merrill Lynch and JP Morgan were the main lenders to LJM2 entities.
461. LJM2 solicited prospective investors as limited partners using a confidential Private
Placement Memorandum ("PPM") detailing, among other things, the "unusually attractive
investment opportunity" resulting from the partnership's connection to Enron. The favorable terms
of the early LJM2 investors were an opportunity for some of Enron's bankers to be regarded with
extremely high risk fee returns. Thus, JP Morgan, Merrill Lynch, CIBC and CitiGroup were early
investors in LJM2. The PPM emphasized Fastow's position as Enron's CFO, and that LJM2's day-to-
day activities would be managed by Fastow, Kopper and Glisan. It explained that "[t]he Partnership
expects that Enron will be the Partnership's primary source of investment opportunities" and that it
"expects to benefit from having the opportunity to invest in Enron-generated investment
opportunities that would not be available otherwise to outside investors." The PPM specifically
noted that Fastow's "access to Enron's information pertaining to potential investments will contribute
to superior returns." Merrill Lynch was the Placement Agent of the PPM and Kirkland & Ellis was
legal counsel to LJM2.
462. The transactions between Enron and LJM2 that most misstated Enron's financial
statements involved four SPEs known as the "Raptors." Similar to the Rhythms transaction, Enron
improperly used the value of its own equity to counteract declines in the value of certain of its
merchant investments, violating a basic accounting principle. See APB No. 9, 28. Enron used the
Raptors to avoid reflecting losses in the value of some of its investments on the Company's income
statement. If the value of the investments declined, the Raptors were designed so that the value of
the corresponding hedge would increase by an equal amount. Consequently, the decline – which was
recorded each quarter on Enron's income statement – would be offset by an increase in income from
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