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

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797.8 The Washington Post further focused upon the Joint Committee Report's finding that Bankers Trust had a strong motive to sell tax schemes that artificially inflated Enron's earnings. The article stated: William B. Boyle, a vice president for Bankers Trust -- a key partner in Enron's tax deals -- noted in a 1997 memo that clients would pay "little, if any fee" for a deal that produced a large reduction in actual taxes paid. But clients would be "extremely interested" and pay "a substantial fee" for a deal that combined tax savings with a large increase in earnings on their income statements, he said. 797.9 While some of the fraudulent tax transactions devised by Bankers Trust/Deutsche Bank were created before the Class Period, each transaction resulted in the artificial inflation of Enron's reported financial results during the Class Period because each transaction resulted in the fraudulent recognition of income and purported tax savings going forward, resulting in the accrual of benefits years after the actual transaction closed. Indeed, Bankers Trust/Deutsche Bank had an additional motive to continue to conceal the truth (while making positive statements about the value of Enron's publicly traded securities) because Bankers Trust was paid for creating the fraudulent tax schemes in installments that went beyond the Class Period and because Bankers Trust knew that if Enron filed for bankruptcy these payments (in addition to Bankers Trust's tax schemes and Enron's financial statements) would be scrutinized and exposed as frauds. In fact, the court appointed bankruptcy examiner, Neil Batson, has done exactly that in his second interim report. 797.10 Six of the fraudulent tax transactions involving Enron and Bankers Trust/Deutsche Bank are detailed below and in the following chart, which also demonstrates the collective impact of the transactions upon Enron's reported financial results: - 532 -
Project Name Steele (1997) Teresa (1997) Cochise (1998) Tomas (1998) Renegade (1998) Valhalla (2000) Benefits and Fees of Enron's Various Structured Transactions with Bankers Trust/Deutsche Bank (97-01) (in millions) Financial Accounting Income through 2001 Total Projected Financial Accounting Income - 533 - Federal Tax Savings Through 2001 Total Projected Federal Tax Savings Project Fees to Bankers Trust 65 83 39 78 10 226 257 (76) 263 11 101 143 --- 141 15 37 113 95 109 11.875 1 1 0 0 --- 16 64 0 0 --- TOTALS 446 661 58 591 47.875 Project Steele 797.11 Project Steele's beginnings can be traced to an 4/97 pitch by Bankers Trust of three alternative schemes to Enron. According to a Bankers Trust memorandum dated 6/2/97, the alternative versions of Project Steele enabled Enron to recognize tax benefits solely, or tax benefits coupled with financial accounting benefits. The two alternatives providing for both accounting and tax savings benefits provided for the largest fees to Bankers Trust. Enron and Bankers Trust signed an engagement letter on 7/17/97 and, after discussions in the Summer and Fall of 97, Enron and Bankers Trust decided to proceed with the version of Project Steele that both artificially inflated Enron's immediate (and near future) earnings and limited Enron's future tax payments. A more concrete agreement was signed 10/28/97 and the transaction was completed on 10/31/97.
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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
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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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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
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Page 506 and 507: Concurrently, Enron advised Merrill
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Page 512 and 513: 748. By the beginning of the Class
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Page 516 and 517: length transactions with to generat
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Page 520 and 521: 5/99 $500 million 7-3/8% Enron note
Page 522 and 523: financial information as Enron's le
Page 524 and 525: instance: 5/00 $500 million 8.375%
Page 526 and 527: and condition of Enron's business o
Page 528 and 529: eturn for Deutsche Bank's participa
Page 530 and 531: DATE TRANSACTION 7/98 $252 million
Page 532 and 533: 797. Deutsche Bank also actively en
Page 534 and 535: would pay it a large fee for the ea
Page 538 and 539: 797.12 Bankers Trust's role in Proj
Page 540 and 541: 797.17 In the words of the Joint Co
Page 542 and 543: 797.25 Project Tomas was structured
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Page 546 and 547: INVOLVEMENT OF VINSON & ELKINS 800.
Page 548 and 549: accommodated Enron's desire for one
Page 550 and 551: The document ... sharply criticizes
Page 552 and 553: to "close," i.e., take place, and t
Page 554 and 555: 806. However, Enron could not find
Page 556 and 557: 810. During 12/97, Vinson & Elkins
Page 558 and 559: day-to-day activities would be mana
Page 560 and 561: equired to pay Enron on the "hedge"
Page 562 and 563: these SPEs, Enron would have to tak
Page 564 and 565: Vinson & Elkins Concealed the Phony
Page 566 and 567: In March 2001, Enron acquired the l
Page 568 and 569: ecause it participated in the negot
Page 570 and 571: 839. The related-party disclosures
Page 572 and 573: 846. The "disclosures" above are fa
Page 574 and 575: The Attempted Coverup 850. In mid-8
Page 576 and 577: 3. There is a veil of secrecy aroun
Page 578 and 579: 854. The result of this letter - la
Page 580 and 581: standpoint. In this regard, AA cons
Page 582 and 583: A. General INVOLVEMENT OF ARTHUR AN
Page 584 and 585: 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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