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

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CitiGroup Barclays Banks Named As Defendants CitiGroup Lehman Brothers Deutsche Bank CS First Boston Deutsche Bank Lehman Brothers CS First Boston CitiGroup CIBC Date of Offering Security Sold 2/15/00 ^200,000,000 8.75% Yosemite Securities Co. Ltd. Series 2000-A Linked Enron Obligations due 07 8/17/00 $500,000,000 8% Enron Credit Linked Notes Trust Notes due 05 9/28/00 $750,000,000 7.797% Osprey Trust, Osprey I, Inc. Senior Secured Notes due 2003; and i315,000,000 6.375% Senior Secured Notes due 2003 10/00 27.6 million shares New Power at $21 per share CitiGroup 5/17/01 $500,000,000 7.375% Enron Credit Linked Notes Trust II Notes due 06 CitiGroup 5/17/01 i200,000,000 6.5% Enron Euro Credit Linked Notes Trust Notes due 06 CitiGroup 5/17/01 ^125,000,000 7.25% Enron Sterling Credit Linked Notes Trust Notes due 06 CS First Boston Deutsche Bank Bank America CIBC JP Morgan L. Enron's Corporate Culture 7/12/01 $475,000,000 6.31% Marlin Water Trust II, Marlin Water Capital Corp. II Senior Secured Notes due 03; and i515,000,000 6.19% Senior Secured Notes due 03 50. Inside Enron there was a fixation on the price of Enron stock and doing whatever was necessary to generate the financial results necessary to push the stock ever higher. For instance, throughout Enron's corporate headquarters in Houston were TV monitors that constantly displayed the price of Enron stock. Inside Enron there was a saying that managers were to always be "ABCing," meaning to "always be closing" deals to generate revenues and profits, even if the economics of the deal were suspect – a practice facilitated by a compensation system inside Enron - 42 -
for corporate managers and executives that directly rewarded them financially for closing transactions and placing a high (i.e., inflated) value on them, regardless of the true economic substance of the deal, so long as the deal generated an apparent profit when "marked to market." 51. Inside Enron, the pressures applied to corporate managers by the top executives to do anything necessary to enable Enron to make its numbers was widespread, as was the knowledge that Enron's revenues and earnings were being falsified at the direction of top executives who rewarded the lower level managers who engaged in such conduct with bonuses in larger amounts to those who were willing to facilitate what had become a Company-wide fraudulent pattern of behavior. Former insiders have been quoted as saying "[y]ou don't object to anything" and "[t]he whole culture at the vice-president level and above just became a yes-man culture." But that culture had a negative side beyond the inbred arrogance. Greed was evident, even in the early days. "More than anywhere else, they talked about how much money we would make," says someone who worked for Skilling. Compensation plans often seemed oriented toward enriching executives rather than generating profits for shareholders. For instance, in Enron's energy services division, which managed the energy needs of large companies like Eli Lilly, executives were compensated based on a market valuation formula that relied on internal estimates. As a result, says one former executive, there was pressure to, in effect, inflate the value of the contracts – even though it had no impact on the actual cash that was generated. Fortune, 12/24/01. "If your boss was [fudging], and you have never worked anywhere else, you just assume that everybody fudges earnings," says one young Enron control person. "Once you get there and you realized how it was, do you stand up and lose your job? It was scary. It was easy to get into 'Well, everybody else is doing it, so maybe it isn't so bad.'" * * * The flaw only grew more pronounced as Enron struggled to meet the wildly optimistic expectations for growth it had set for itself. "You've got someone at the top saying the stock price is the most important thing, which is driven by earnings," says one insider. "Whoever could provide earnings quickly would be promoted." - 43 -
Page 2 and 3: KEN L. HARRISON, STEVEN J. KEAN, RE
Page 4 and 5: TABLE OF CONTENTS - i - Page PREAMB
Page 6 and 7: ... hiding losses/SEC violations)..
Page 8 and 9: 2 Certain defendants named herein,
Page 10 and 11: to do so would incriminate them. Wh
Page 12 and 13: y Enron to keep high-debt assets li
Page 14 and 15: in JEDI, making it possible for tra
Page 16 and 17: continued to accelerate, ultimately
Page 18 and 19: financial condition and investment
Page 20 and 21: it controlled, and was doing phony
Page 22 and 23: Bobcat Raptor-IV Marlin Trust I Mar
Page 24 and 25: to be utilized to engage in transac
Page 26 and 27: facilitate and finance LJM2's illic
Page 28 and 29: unnoticed: 30. This blatant self-de
Page 30 and 31: LJM1 and LJM2 in transactions struc
Page 32 and 33: and more of the stock issuance "tri
Page 34 and 35: dollar contracts which allowed it t
Page 36 and 37: 41. Just eight months after announc
Page 38 and 39: Dollars Per Share 30 25 20 15 10 5
Page 40 and 41: Enron's financial condition to make
Page 42 and 43: Enron's finances, but very likely w
Page 44 and 45: Merrill Lynch CitiGroup Banks Named
Page 48 and 49: The employee adds that anyone who q
Page 50 and 51: of the SPEs Enron did business with
Page 52 and 53: destroying millions of pages of doc
Page 54 and 55: - Statement of Financial Accounting
Page 56 and 57: eporting earnings from the 3rdQ 00
Page 58 and 59: disclosures were crafted and approv
Page 60 and 61: falsify its financial results and t
Page 62 and 63: 72. On 2/26/02, Dow Jones News Serv
Page 64 and 65: Dollars Per Share 100 90 80 70 60 5
Page 66 and 67: A. Lead Plaintiff PARTIES 79. Court
Page 68 and 69: (g) Plaintiff Amalgamated Bank, as
Page 70 and 71: D. Defendants and Related Parties (
Page 72 and 73: Enron Corp. Defendant J. Skilling's
Page 74 and 75: Dollars per Share Enron Corp. Defen
Page 76 and 77: Enron Corp. Defendant S. Horton's Q
Page 86 and 87: Ms. Olson [told] employees in Decem
Page 96 and 97:
Dollars per Share Enron Corp. Defen
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Dollars per Share Enron Corp. Defen
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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
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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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Dollars Per Share 30 25 20 15 10 5
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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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