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

gathering system in the Gulf of Mexico. Enron had attempted to sell this interest to another party
to avoid consolidating the asset for year-end financial reporting purposes, but was unable to close
that transaction by year-end. LJM2 purchased a $23.2 million note of MEGS for $25.6 million and
an equity interest in MEGS for $743,000. The parties expected to find a permanent buyer within 90
days. On 3/6/00, Enron repurchased LJM2's interests. It paid LJM2 an amount necessary to give
it the maximum allowed return. Subsequently, in 01, Enron recorded an impairment on the gas wells
due to diminished performance. The decision to buy back LJM2's interests in MEGS was reflected
on a document which McMahon, then Enron's Treasurer, at first declined to sign. Under the
signature block he wrote: "'There were no economics run to demonstrate this investment makes
sense. Therefore, we cannot opine on its marketability or ability to syndicate.'"
(v) Yosemite
473. In 11/99, Enron paid $37.5 million to purchase half of all the certificates issued by
a trust called "Yosemite." In late December, Enron determined that it needed to reduce its holdings
of the Yosemite certificates from 50% to 10% before the end of the year to avoid disclosing its
ownership of the certificates in its "unconsolidated affiliates" footnote to its 99 financial statements.
Enron, working with the underwriters of Yosemite-CitiGroup and Barclays, needed to find an
intermediate owner of the certificates. That buyer was LJM2.
474. This transaction itself is improper in several respects. First, it was widely understood
within Enron that LJM2 was involved simply to temporarily hold the Yosemite certificates before
selling them to another entity. The LJM2 Approval Sheet (which was not prepared until 2/00) states
that "'LJM2 intends to sell this investment to Condor within one week of purchase.'" Second, the
legal documents show Enron selling the certificates to LJM2 on 12/29/99, and then LJM2 selling the
certificates to Condor the next day, 12/30/99 – thus disposing of the certificates before year-end.
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