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

818. Effective 9/99, Enron sold LJM1 a 13% stake in a company building the power plant
in Cuiaba, Brazil for $11.3 billion. This reduced Enron's ownership to the point where Enron
purportedly did not control the entity and therefore did not have to consolidate its interest. This sale
enabled Enron to improperly realize $34 million of mark-to-market income in the 3rdQ 99, and
another $31 million of mark-to-market income in the 4thQ 99. In 8/01, Enron repurchased
LJM1's interest in Cuiaba for $14.4 million! LJM1's equity investment in Cuiaba, however, was
never "at risk" because Enron had agreed to make LJM1 whole for its investment. Thus, Enron was
required to consolidate the SPE Vinson & Elkins created for this deal but did not.
819. As Vinson & Elkins knew, hedging Enron's investments with the value of Enron's
stock created an enormous and unusual motive to keep Enron stock trading at inflated levels. This
was because if the value of the investments fell at the same time as the value of Enron stock fell, the
SPEs would be unable to meet their obligations and the "hedges" would fail. This happened in late
00 and early 01 and the Raptor SPEs lacked sufficient credit capacity to pay Enron on the "hedges."
By 11/00, Enron had entered into derivative transactions with the Raptors with a notional value of
over $1.5 billion. In 12/00, Enron's net gain (and the Raptors' corresponding net loss) on these
transactions was over $500 million. Enron could recognize these gains – offsetting corresponding
losses on the investments in its merchant portfolio – only if the Raptors had the capacity to make
good on their debt to Enron. If they did not, Enron would be required to record a "credit reserve."
Such a loss would defeat the very purpose of the Raptors, which was to shield Enron's financial
statements from reflecting the change in value of its merchant investments.
820. As year-end 00 approached, two of Enron's Raptor SPEs were in danger of coming
unwound as they lacked sufficient credit capacity to support their obligations, let alone continue to
engage in similar transactions with Enron. If something were not done to prevent the unwinding of
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