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

e less than the pre-paid price made by the purchaser). Here, however, JP Morgan assumed no
economic risk in price changes of the natural gas because it (or its related companies) was
simultaneously buying and selling the same quantities of gas, at pre-arranged prices to the same party
(Enron). Thus, since the market price of gas and/or the existence of gas was irrelevant to JP Morgan
– the transaction represented a loan, rather than a pre-paid forward sales contract.
563. On 12/7/01, the insurer's requested that Mahonia and JP Morgan provide information
to verify that the surety bonds secured actual forward sales contracts for which there was actual
deliveries of oil and natural gas. To date, JP Morgan has refused to provide any of the requested
information. U.S. District Judge Jed S. Rakoff in Manhattan has cited evidence in a 3/2/02 ruling
that appears to show that Enron agreed to purchase $394 million in gas from an entity called
Stoneville Aegean Ltd. on the same day it agreed to sell the same quantities of gas to Mahonia. The
court could not possibly grant judgment to J.P. Morgan because "'taken together, then, these
arrangements now appear to be nothing but a disguised loan.'"
564. Enron overstated revenues and earnings before taxes by recording contracts worth
approximately $2.2 billion of "back to back" transactions between 12/97 and 12/00 by recording
loans received from JP Morgan as forward sales contracts. As The New York Times noted on
2/19/02:
The transaction records, many of which were held overseas and have never
before been disclosed, indicate that many of the trades would not have involved any
delivery of gas; experts said the pattern of trading suggested the purpose of the deals
was to disguise bank loans.
In all, Enron took advantage of accounting rules to avoid reporting as much
as $3.9 billion in loans on its balance sheet in the decade before its collapse last fall,
thus improving its financial picture in the eyes of credit rating agencies and Wall
Street.
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