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

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810. During 12/97, Vinson & Elkins also made changes to the structure of the transaction to allow Enron to avoid disclosing the existence of Enron's financial relationship with Chewco. Vinson & Elkins converted the General Partner of Chewco from a limited liability company to a limited partnership, and put Kopper in instead of Fastow as the owner of Chewco's general partner. The sole purpose for this structural change was to allow non-disclosure of the Chewco/JEDI transactions at year end 97. However, prior to the closing of Chewco, Kopper expressed concern over his improper conflict of interest since he was an Enron employee and would act as the owner of both the general partner of Chewco and the owner of the equity of limited partner, Big River Funding. Notwithstanding the fact Kopper complained to Vinson & Elkins about the sham transaction, it went ahead and structured the transaction as proposed. Vinson & Elkins never withdrew from its involvement in the scheme or insisted on disclosure of this conflict of interest in Enron's SEC filings – despite this clear red flag of its impropriety. Vinson & Elkins Participated In Structuring the Illicit Partnership and SPE Deals 811. Then, in 99, Enron and Vinson & Elkins engaged and participated in the creation of the two LJM partnerships for Enron that Enron and its CFO Fastow controlled. Over the next few years, Enron engaged in a series of transactions – which were, in fact, manipulative devices – between Enron and the LJM partnerships and LJM SPEs which resulted in Enron inflating its reported financial results by more than a billion dollars – at the same time enriching Fastow and his friends and several of Enron's bankers who were allowed to invest in the LJM2 partnership – by tens of millions of dollars. Vinson & Elkins knew that the reason for establishing these partnerships was that they would permit Enron to accomplish transactions it could not otherwise accomplish with an independent entity, by providing Enron with a buyer of assets that Enron - 552 -
wanted to sell. The LJM1 and LJM2 transactions were structured, reviewed and approved by Vinson & Elkins. 812. One of the primary manipulative devices to falsify Enron's financial results was LJM2, which was supposedly formed in 12/99. It was secretly controlled by Enron and was used to help create numerous SPEs (including the "Raptors") – used to engage in transactions to artificially inflate Enron's profits while concealing billions of dollars in debt that should have been included on Enron's balance sheet. Vinson & Elkins knew that because LJM2 was going to be utilized to engage in transactions with Enron where Enron insiders would be on both sides of the transactions and that the LJM2 partnership would be extremely lucrative – a deal that was virtually guaranteed to provide huge returns to LJM2's investors as the Enron Ponzi scheme went forward. In fact, Fastow's dual role by which he could self-deal on behalf of the LJM2 partnership with Enron's assets was so important that investors in LJM2 were assured (in documents Vinson & Elkins participated in drafting) that they did not have to make any additional capital contributions if Fastow's dual role ended. 813. Because the LJM2 partnership was potentially so lucrative to investors in that private entity, it was decided that certain favored investment banks and high-level officers of those investment banks and other favored Merrill Lynch clients were going to be permitted to invest in LJM2 because the participants in the scheme knew the LJM2 investment was virtually guaranteed to produce exceptional returns as the Enron Ponzi scheme continued. In fact, the offering memorandum for the LJM2 partnership which Vinson & Elkins participated in writing – which was not a public document – contained an invitation to benefit from the insider self-dealing transactions that LJM2 would engage in. It stressed the "unusually attractive investment opportunity" resulting from LJM's connection to Enron. It emphasized Fastow's position as Enron's CFO, and that LJM2's - 553 -
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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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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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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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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
Page 506 and 507: Concurrently, Enron advised Merrill
Page 508 and 509: 742.19 Internally, Merrill Lynch co
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Page 512 and 513: 748. By the beginning of the Class
Page 514 and 515: - something that Barclays was in a
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 536 and 537: 797.8 The Washington Post further f
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 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
Page 586 and 587: 905. Andersen's reports were false
Page 588 and 589: investors that would hold assets an
Page 590 and 591: 915. Andersen also performed certai
Page 592 and 593: ing to light documents illustrating
Page 594 and 595: he was aware of many of the company
Page 596 and 597: Andersen employees destroyed incrim
Page 598 and 599: departments, knew about the excessi
Page 600 and 601: a blind eye to the numerous red fla
Page 602 and 603: • How Enron could, with its own c
Page 604 and 605: 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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