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

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In March 2001, Enron acquired the limited partner's interests in an unconsolidated equity affiliate, Joint Energy Development Investments Limited Partnership (JEDI), for $35 million. As a result of the acquisition, JEDI has been consolidated. JEDI's balance sheet as of the date of acquisition consisted of net assets of approximately $500 million, including an investment of 12 million shares of Enron common stock valued at approximately $785 million, merchant investments and other assets of approximately $670 million and third-party debt and debt owed to Enron of approximately $950 million. Enron repaid the third-party debt of approximately $620 million prior to March 31, 2001. 828. That the Chewco buyout was a deal between Enron, Kopper, and Fastow was never disclosed. That the buyout included a $2.6 million gift to Kopper and Dodson was never disclosed, despite Vinson & Elkins's opinion that Enron was not obligated to pay the $2.6 million. And, the existence of Chewco, that Chewco was not independent, was not capitalized with outside equity at risk but instead was capitalized by JEDI and an Enron guaranty, or that Chewco was a limited partner of JEDI was never disclosed until Enron announced its massive restatement on 11/8/01. 829. Nor was the true substance and effect of the JEDI buyout on Enron and the Company's financial statements disclosed. To the contrary, the buyout was characterized as having a net positive effect on Enron's financial statements. In truth, the consolidation of JEDI resulted in a massive reduction in Enron's reported net income and shareholders' equity and massive increase in Enron's reported debt. Vinson & Elkins's False and Misleading "Disclosures" Concerning LJM and Raptors 830. The related-party disclosures drafted and approved as adequate by Vinson & Elkins were in fact not. As the Powers report stated: [T]hese disclosures were obtuse, did not communicate the essence of the transactions completely or clearly, and failed to convey the substance of what was going on between Enron and the partnerships. The disclosures also did not communicate the nature or extent of Fastow's financial interest in the LJM partnerships. This was the result of an effort to avoid disclosing Fastow's financial interest and to downplay the significance of the related-party transactions and, in some respects, to disguise their substance and import. - 562 -
831. Common to each of Enron's related-party disclosures, which Vinson & Elkins drafted and approved is that the "disclosures" conceal and/or misrepresent material matters known to Vinson & Elkins, such as: (i) that the related-party transactions were not true commercial, economic transactions, comparable to transactions with independent third parties (e.g., the purpose or bogus nature of the transactions); (ii) the substance and effect of related-party transactions on Enron and the Company's financial statements (e.g., the transactions should have been consolidated in Enron's financial statements); and (iii) Fastow's true financial interest in or compensation from the LJM partnerships. Vinson & Elkins Concealed the Phony Nature of the LJM and Raptors Transactions By Suggesting the Deals Were Fair and Legitimate, i.e., Comparable To Similar Transactions With Unrelated Third Parties 832. In each of the related-party disclosures drafted and approved as adequate by Vinson & Elkins, assertions were made to give the impression that each of the transactions referenced were fair to the Company, not contrived, but instead were made at arm's length, like transactions with independent third parties. In Enron's Report on Form 10-Q filed 8/16/99, Vinson & Elkins drafted and approved the adequacy of such a statement: "[m]anagement believes that the terms of the transactions were reasonable and no less favorable than the terms of similar arrangements with unrelated third parties." Although the wording changed slightly in this "disclosure" repeatedly drafted and approved by Vinson & Elkins in Enron's other SEC filings until the end of the Class Period, the substance of the representation was the same. 833. But the transactions were bogus, contrived to enrich individual defendants and, as Enron's Special Investigative Committee stated, "to accomplish favorable financial statement results, not to achieve bona fide economic objectives or to transfer risk." Vinson & Elkins knew this - 563 -
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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
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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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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%
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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 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 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
Page 606 and 607: c. Determine whether the transactio
Page 608 and 609: keep the Chewco deal off the books.
Page 610 and 611: improper accounting was corrected).
Page 612 and 613: in order for the financial statemen
Page 614 and 615: 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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