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

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default puts" on Enron's publicly traded debt securities, especially Enron's zero coupon convertible notes, which JP Morgan helped Enron sell in 01. These "puts" required JP Morgan to make good on Enron's publicly traded debt if Enron defaulted within a given time period, exposing JP Morgan to potentially large losses. Thus, JP Morgan wanted to help Enron keep its financial condition looking strong and its investment and credit rating in place so Enron's access to the credit and capital markets would continue. 662. In addition, JP Morgan also engaged and participated in the scheme to defraud by the additional actions set forth below. First of all, the Registration Statements and Prospectuses for the Enron securities sales where JP Morgan was one of the lead underwriters contained false and misleading statements – which are statements made by JP Morgan as an underwriter – including false interim and annual financial statements, and false statements concerning the structures of and Enron's relationship to SPEs and related parties, as well as the value and condition of Enron's business operations and assets. JP Morgan has liability for its participation in Enron's 2/99 27.6 million share common stock offering and for its resale of Enron zero coupon convertible notes on and after 7/18/01. 663. In addition, throughout the Class Period, JP Morgan issued analysts' reports on Enron which contained false and misleading statements concerning Enron's business, finances and financial condition and prospects, including, but not limited to, those dated 6/9/99, 7/15/99, 9/23/99, 11/26/99, 1/21/00, 2/9/00, 5/3/00, 5/15/00, 7/3/00, 7/19/00, 9/15/00, 9/27/00, 3/13/01, 3/23/01, 5/18/01, 6/15/01, 7/10/01, 7/12/01, 8/15/01, 8/17/01, 10/17/01, 10/20/01, 10/23/01 and 11/2/01, as pleaded herein. These were all statements by JP Morgan to the securities markets which helped artificially inflate the trading prices of Enron's publicly traded securities. Keeping Enron's stock price inflated was also important to JP Morgan as it knew that if the stock price fell below various "trigger" prices, - 454 -
Enron would be required to issue millions of additional Enron shares, which would reduce Enron's shareholders' equity by hundreds of millions, if not billions, of dollars, endanger its investment-grade credit rating, likely cut off its access to the capital markets, and thus endanger the ongoing scheme from which JP Morgan and its top partners were profiting. 664. In addition to its own direct liability for making false and misleading statements, JP Morgan also engaged and participated in and furthered the fraudulent scheme by helping to finance or otherwise participate in manipulative devices and illicit transactions with Enron which it knew would contribute materially to Enron's ability to continue to falsify its financial condition. During the Class Period, JP Morgan and Enron engaged in fraudulent transactions utilizing an entity which JP Morgan secretly controlled, known as Mahonia Ltd., located in the Channel Islands between England and France. These transactions, which involved over $5 billion, were structured to appear as natural gas futures contracts, i.e., commodity trades, between Enron and the Mahonia entity, which JP Morgan actively controlled. However, these transactions were contrivances. The parties to those transactions never intended in fact to close out any of the natural gas futures contracts. These transactions were, in reality, disguised loans from JP Morgan to Enron, a contrivance JP Morgan created to get cash to Enron to boost its apparent liquidity while concealing over $3.9 billion in debt that should have been reported on Enron's balance sheet. 665. JP Morgan knew these transactions were manipulative devices and contrivances and that, given the true financial condition of Enron, there was a risk Enron would default and JP Morgan would suffer a loss. Therefore, JP Morgan attempted to protect itself against such loss by insuring the contracts. When Enron went bankrupt, JP Morgan attempted to collect on the insurance. However, the insurance carriers that issued surety bonds covering the "commodities trades" between JP Morgan-controlled entities and Enron have refused to pay JP Morgan's losses, asserting the trades - 455 -
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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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Dollars Per Share 100 90 80 70 60 5
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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
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391. Rubin's and Harrison's effort
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DEFENDANTS' SCHEME AND FRAUDULENT C
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Enron Defendants had permitted Enro
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Derrick 230,660 $ 12,563,928 John D
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Dollars per Share $100 $80 $60 $40
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executives will be generally hesita
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and 99.9%. This level of certainty
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ENRON'S FALSE FINANCIAL STATEMENTS
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$12,000,000,000 $10,000,000,000 $8,
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50.00% 45.00% 40.00% 35.00% 30.00%
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8 Debt to equity is calculated usin
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executed in accordance with managem
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SPEs, under any accounting machinat
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439. However, even after employing
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(a) Enron Guarantee Fee 443. Enron
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(2) LJM Partnerships 448. Enron als
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comparable securities in the market
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CS First Boston, Merrill Lynch, JP
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hedged through traditional transact
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gathering system in the Gulf of Mex
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(b) Raptors (i) Raptor I 477. The f
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only entered to avoid recognition o
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million, giving LJM2 its specified
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y a total of $1 billion in the unau
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Skilling, knew of the decline, by w
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(2) the transferred assets were not
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S-K required the disclosure of the
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Even though a misstatement of an in
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522. In order for Enron to accrue r
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engaged in swapping capacity of thi
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earnings and separately disclosed i
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practice was common in all trading
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What made it all work, Dickson said
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14 Securities that are bought and h
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(4) Quaker Oats 557. Under one of i
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supplied by Enron under the terms o
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(2) Prepaid Swaps with CitiGroup an
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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
Page 408 and 409: Vinson & Elkins also knew because t
Page 410 and 411: could connect. Enron's BOS was to b
Page 412 and 413: not even make a broadband connectio
Page 414 and 415: 05/17/01 Enron Euro Credit Linked N
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Page 418 and 419: Yosemite Securities Trust I Offerin
Page 420 and 421: Communications Enron is developing
Page 422 and 423: (a) Annual Report on Form 10-K for
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Page 426 and 427: Business of Enron DESCRIPTION OF EN
Page 428 and 429: Income Statement Data: SELECTED HIS
Page 430 and 431: • the transportation of natural g
Page 432 and 433: Balance Sheet Data (at end of perio
Page 434 and 435: wholesale customers to view Enron's
Page 436 and 437: ENRON HISTORICAL CONSOLIDATED FINAN
Page 438 and 439: Marlin Water Trust II/Marlin Water
Page 440 and 441: Retail Energy Services Enron Energy
Page 442 and 443: Cumulative effect of accounting cha
Page 444 and 445: A. General INVOLVEMENT OF THE BANKS
Page 446 and 447: manage such conflicts of interests.
Page 448 and 449: privately held entity created by En
Page 450 and 451: caused its stock to plunge and impa
Page 452 and 453: its financial results. Thus, the ba
Page 454 and 455: something each of the banks named a
Page 456 and 457: 7/01 Marlin Water Trust II, Marlin
Page 460 and 461: were fraudulent and used to conceal
Page 462 and 463: 667. These phony commodity transact
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Page 466 and 467: DATE SECURITY 11/93 8 million share
Page 468 and 469: 8/01 $3 billion Enron credit facili
Page 470 and 471: a year in interest payments, and sy
Page 472 and 473: participation in the scheme to defr
Page 474 and 475: illicit partnerships or SPEs, and h
Page 476 and 477: 698. In 6/99, CS First Boston acted
Page 478 and 479: 703. In addition to the foregoing,
Page 480 and 481: These transactions included Marlin,
Page 482 and 483: of the firm, invested $22.5 million
Page 484 and 485: the CIBC legal entity, as its knowl
Page 486 and 487: sales where CIBC was one of the und
Page 488 and 489: not a true investor and was not at
Page 490 and 491: "It was nothing but a pilot project
Page 492 and 493: Dollars Per Share 30 25 20 15 10 5
Page 494 and 495: Tilney's wife was a Managing Direct
Page 496 and 497: otherwise to outside investors'" an
Page 498 and 499: an effort spearheaded by Schuyler M
Page 500 and 501: Barry S. Friedberg, $500,000 Chairm
Page 502 and 503: Flash Report" for 12/23/99 identifi
Page 504 and 505: • Currently pitching to become En
Page 506 and 507: 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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