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

Morgan. Vinson & Elkins issued opinions to Enron, Mahonia and JP Morgan representing that
billions of dollars in forward sales contracts of natural gas and oil by Enron were legitimate
commodities trades when, in fact, as Vinson & Elkins knew, the trades were bogus – manipulative
devices to disguise loans from JP Morgan to Enron so those loans would not have to be shown as
debt on Enron's balance sheet. No physical delivery of product was required or contemplated.
Rather, the transactions were disguised loans through Mahonia, an entity set up by and controlled
by JP Morgan. Mahonia and the bogus trades were an artifice to allow Enron to keep some $3.9
billion in debt off its balance sheet.
Vinson & Elkins's Role in the SPEs
804. Vinson & Elkins knew that Enron was using phony SPEs to inflate the Company's
financial statements because of its role in the formation of, and transactions with, each of those
entities. For example, Vinson & Elkins was intimately involved in the last-minute formation of
Chewco at year-end 97.
805. In late 97, Enron learned that JEDI had to be restructured, as JEDI's outside investor
was going to withdraw. This created a crisis. Because of the involvement of the outside investor
in JEDI, JEDI had been treated as independent of Enron and had not been consolidated into Enron's
financial statements and results. Thus, Enron had been able to engage in transactions with JEDI as
an independent third party, recognize revenue and profits from those transactions and not carry
JEDI's debt on Enron's books. However, in late 97, unless JEDI could be quickly restructured by
having a new, independent investor come forward, Enron would have to wipe out all of the
profitable transactions it had done with JEDI in 97 – 40% of that year's profits – put millions of
dollars of JEDI's debt on Enron's balance sheet and lose the ability to generate profits from
similar such deals with JEDI or its successor going forward.
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