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

946. As described in 435-447, Enron created the Chewco SPE with Barclays' help in late
97 for the purpose of buying out an institutional investor's 50% stake in JEDI so that JEDI could still
ostensibly be considered independent. Significant red flags surrounded the creation of this SPE,
raising significant questions regarding the substance or legitimate business purpose of the
transaction. Andersen provided significant assistance in structuring and reviewing the transaction,
and billed Enron $80,000 for its review of the Chewco deal. This amounted to approximately 400
hours of examination on Chewco (assuming an average hourly rate of $200 per hour) during a short
period at the end of 97. During Andersen's examination, including its review of Enron's 11/97 and
12/97 board minutes, Andersen recognized or should have recognized that virtually every aspect of
the deal carried a red flag that raised questions about Enron control, or the legitimacy of the business
purpose and substance of the investment. For example, even on its face the details surrounding the
formation of Chewco were red flags:
employees at Enron;
(a) Andersen knew that Chewco's general partners were senior financial
(b) A 3% minimum of independent, at risk, controlling capital was not met, as
Barclays required a reserve account deposit of $6.6 million to collateralize the loans. According to
former Enron employees, Andersen was given documentation showing the reserve; and
(c) The Barclays funding to Chewco that purportedly made up the "equity part"
of the investment actually was more like a loan.
947. In sum, as a result of Andersen's involvement in the creation and review of the
Chewco deal, Andersen knew that practically every feature of Chewco's creation, funding, structure
and wind-down raised red flags, yet Andersen ignored them. By ignoring these related-party
connections and Enron's constructive control in the Chewco deal, Andersen helped Enron improperly
- 603 -