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(2) the transferred assets were not bankruptcy remote; and (3) Enron never relinquished effective control of the assets. B. Enron Failed to Disclose Related-Party Transactions 506. In order for Enron's accounting scheme to work, the parties involved had to be controlled by Enron. But this control and affiliation had to be concealed. Accordingly, the Enron Defendants caused Enron's financial statement disclosures to be materially false and misleading during the Class Period because they failed to disclose Enron's related-party transactions as required by GAAP. Defendants knew that if they properly disclosed Enron's related-party transactions as alleged herein, it would uncover Enron's scheme to hide the massive debt it was keeping off its books. 507. Pursuant to GAAP, as set forth in SFAS No. 57, Related Party Disclosures, financial statements are required to include disclosures of material related-party transactions. SFAS No. 57 defines related parties to include the principal owner of an enterprise and its management, as well as their affiliates. SFAS No. 57 requires that companies disclose the following about material related party transactions: (a) the nature of the relationship(s) involved; (b) a description of the transactions ... for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; (c) the dollar amounts of transactions for each of the periods for which income statements are presented; and (d) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement. Pursuant to SFAS No. 57, 3, related-party transactions cannot be presumed to be carried out on an arm's-length basis. 508. Item 404 of SEC Regulation S-K also sets out the requirements for disclosing related- party transactions in the non-financial statement portions of SEC filings, including proxy statements - 356 -
and the annual reports on Form 10-K. Item 404(a) requires disclosure of, among other things, transactions exceeding $60,000 in which an executive officer of the company has a material interest, naming such person and indicating the person's relationship to the registrant, the nature of such person's interest in the transaction(s), the amount of such transaction(s) and, where practicable, the amount of such person's interest in the transaction(s). The instructions to this section provide: The materiality of any interest is to be determined on the basis of the significance of the information to investors in light of all the circumstances of the particular case. The importance of the interest to the person having the interest, the relationship of the parties to the transaction with each other and the amount involved in the transactions are among the factors to be considered in determining the significance of the information to investors. 509. According to GAAP, financial statements are complete only when they contain all material information necessary to represent validly the underlying events and conditions. See Statement of Financial Accounting Concepts 2, 79. Financial statements must disclose the financial effects of transactions and events that already have happened. See Statement of Financial Accounting Concepts 1, 21. 510. The Enron Defendants failed to disclose Chewco and JEDI as related parties during the Class Period. In fact, no related parties were disclosed in Enron's 97 or 98 10-Ks. Enron's 00 Form 10-K merely stated that it had "entered into transactions with limited partnerships (the Related Party) whose general partner's managing member is a senior officer of Enron." This statement was misleading. There was no disclosure of Fastow as managing member of the general partners of LJM1 and LJM2 or that he received more than $30 million relating to his management and investment activities. This was in violation of the disclosure requirements of SFAS No. 57. 511. The failure to set forth Fastow's compensation from the LJM transactions and the process leading to that decision was a violation of GAAP and SEC rules. Item 404 of Regulation - 357 -
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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
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. Cliff Baxter complained mightily
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is up 40%, earnings per share up ab
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CEO Jeff Skilling Resigns; A Negati
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356. On 8/28/01, Lay was interviewe
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... But all of the problems I have
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362. On 10/9/01, Merrill Lynch issu
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- $180 million associated with the
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income, to about $400 million and a
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Enron Corporation (BUY) Third Quart
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of things - the LJM transactions we
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Enron Continues As Market-Maker of
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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
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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
Page 346 and 347: hedged through traditional transact
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 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
Page 386 and 387: Project Name Description Contract V
Page 388 and 389: earnings below expectations. By 97,
Page 390 and 391: content services business. In fact,
Page 392 and 393: 593. Enron also failed to disclose
Page 394 and 395: Enron arrived in India in the early
Page 396 and 397: holdings for $700 million. It is no
Page 398 and 399: investment and credit decisions ref
Page 400 and 401: Date of Offering Effective Date of
Page 402 and 403: created in Enron, the Offering Docu
Page 404 and 405: 621. The true effect of "early sett
Page 406 and 407: FINANCIAL RISK MANAGEMENT * * * Enr
Page 408 and 409: 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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