Plaintiffs' Memorandum of Law in Opposition to Motions to Dismiss ...

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Enron Corporation Daily Share Prices From 1/2/97 - 11/10/00 400 100 90 350 Dollars Per Share [adjusted for 8/13/99 2 for 1 stock split] 80 70 60 50 40 30 Enron Peer Group 300 250 200 150 100 10/19/98=100 20 10/19/98 Start of Class Period 01/02/1997 07/21/1997 02/05/1998 08/24/1998 03/12/1999 09/28/1999 04/13/2000 11/10/2000 04/11/1997 10/27/1997 05/15/1998 12/01/1998 06/21/1999 01/05/2000 07/24/2000 50 But the apparent success of Enron was an illusion – a false picture created by manipulative and deceptive devices and contrivances – a fraudulent scheme and course of business by defendants that operated as a fraud and deceit on the purchasers of Enron's publicly traded securities. 17. The fraudulent scheme was accomplished with the full knowledge of the Board on which the Outside Directors sat. The Board members, especially Belfer, Blake, Chan, Duncan, Foy, Gramm, Jaedicke, LeMaistre and Mendelsohn, who were on one or more of the Executive, Finance, and Audit Committees knew of and approved every large transaction by which Enron hid debt and falsified profits. 395. 4 Enron's investment grade credit rating was indispensable to enabling it to get counterparties to do huge trading transactions with it – transactions others would not do unless assured of Enron's creditworthiness. Since Enron's trading of energy resources was the core of its WEOS business, any downgrade of its credit rating would have disastrous consequences for its core business operation. This investment grade credit rating gave Enron access to the commercial paper market – a market reserved for America's largest and most creditworthy corporations – so that it could borrow billions 4 See, e.g., Exs. 21, 24 and 26. - 7 -
of dollars to maintain its liquidity and finance its capital-intensive business. Enron's access to the commercial paper market also meant that Enron's $3 billion commercial paper back-up credit line, arranged by the lead banks (J.P. Morgan and CitiGroup) with participating banks, would not be drawn down upon, thus limiting those banks' financial exposure to Enron. It also meant that Enron and its banks could easily sell debt securities to public investors to raise long-term capital, using the proceeds to reduce its short-term commercial paper and other bank debt. Finally, Enron's investment grade credit rating was critical to the scheme, as only Enron's insiders and its banks knew, because under the terms of the partnerships/SPE deals, if Enron's debt was downgraded to below investment grade, the debt of those entities that they had told the securities markets was non-recourse as to Enron would become recourse to Enron, which could cause the house of cards to topple. As Enron's CFO stated in a 10/01 conference call: "We understand that our credit rating is critical to both the capital markets as well as our counterparties." Earlier, Fastow stated to CFO Magazine: "My credit rating is strategically critical." In 10/99, Skilling said, "Retaining a high investment-grade rating is critical to the success of our energy franchises .... If we were downgraded, we could lose critical market share in North America." 19. Inside Enron there was a fixation on Enron's stock and doing whatever was necessary to generate the financial results necessary to push the stock ever higher. Throughout Enron's corporate headquarters in Houston were TV monitors that constantly displayed the price of Enron stock. Inside there was a saying that managers were to always be "ABCing," meaning to "always be closing" deals to generate revenues and profits, even if the economics of the deal were suspect – a practice facilitated by a compensation system inside Enron for corporate managers and executives that directly rewarded them financially for closing transactions and placing a high (i.e., inflated) value on them, regardless of the true economic substance of the deal, so long as the deal generated an apparent profit when "marked to market." 50. It was Enron's Board that knew of and approved this executive compensation structure, as evidenced by its creation of a Compensation and Management Development Committee. Inside Enron, the pressures applied to corporate managers by the top executives to do anything necessary to enable Enron to make its numbers was widespread, as was the knowledge that - 8 -
Page 1 and 2: UNITED STATES DISTRICT COURT SOUTHE
Page 3 and 4: Page c. The Outside Directors Who S
Page 5 and 6: Page 5. Defendants Claim They Can A
Page 7 and 8: Page Chiarella v. United States, 44
Page 9 and 10: Page In re AST Research Sec. Litig.
Page 11 and 12: Page Krim v. BancTexas Group, 989 F
Page 13 and 14: Page Santa Fe Indus., Inc. v. Green
Page 15 and 16: Page LEGISLATIVE HISTORY H.R. Rep.
Page 17 and 18: in various elements of Enron's sche
Page 19 and 20: to generate 40% of the profits Enro
Page 21: • No other company offered such i
Page 25 and 26: In fact, in mid-8/01, an Enron exec
Page 27 and 28: and course of business, that Enron'
Page 29 and 30: Investigations Subcommittee of the
Page 31 and 32: LJM's interest, Enron had agreed in
Page 33 and 34: fraudulent course of business by ap
Page 35 and 36: As stated above, the Board received
Page 37 and 38: deceptive device, J.P. Morgan and E
Page 39 and 40: e triggered, which would require En
Page 41 and 42: I realize that we have had a lot of
Page 43 and 44: Debt Amount of Understatement Share
Page 45 and 46: 100 90 80 Total Shares Sold By Defe
Page 47 and 48: year and make any recommendations t
Page 49 and 50: • Committee receives a document f
Page 51 and 52: 1996) (it is improper to isolate "t
Page 53 and 54: defendants' alleged securities frau
Page 55 and 56: The CC specifies precisely what sta
Page 57 and 58: Date Statement Outside Director Sig
Page 59 and 60: Robertson, 32 F. Supp. 2d. 443. The
Page 61 and 62: facts that affect the validity or p
Page 63 and 64: provides: deceptive device or contr
Page 65 and 66: Id. at 363-64. Accord Heller v. Am.
Page 67 and 68: The Court said: "[T]he text of the
Page 69 and 70: 3. The CC Alleges Facts Giving Rise
Page 71 and 72: These actions alone are enough to d
Page 73 and 74:
would have resulted in a $0.4 milli
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approval of them was necessary, and
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These are distinct liability theori
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Thus, Enron's Board had continuous
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of a mere $13 million (an almost 10
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is an issue of fact that is inappro
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100 times those in prior periods. 4
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a considerable number of shares aft
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(g) Norman Blake Although Blake onl
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This inquiry into contemporaneity p
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puts and calls); see also Dau v. Ce
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unequivocally hold Rule 9(b) does n
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offending registration statement. S
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arguments are nothing more than a c
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occurred via the LJM2 partnership's
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Enron provides premium broadband de
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actually hedging with itself, not r
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For example, the 00-01 Registration
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illion as of 7/01. And, contrary to
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also incorporated all documents fil
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possession, direct or indirect, of
Page 115 and 116:
Anheuser-Busch Cos. v. Summit Coffe
Page 117 and 118:
made by the primary violator." Id.;
Page 119 and 120:
IV. Conclusion Accordingly, based o
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Plaintiffs' Memorandum of Law in Opposition to Motions to Dismiss ...

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