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

Enron's business this was done by assigning unrealistic values to wholesale energy transactions,
which inflated current-period income. 36.
In its EES business, where Enron had no long-term track record to justify the use of
mark-to-market accounting, Enron nevertheless consistently utilized mark-to-market accounting to
record huge current period profits on long-term, highly speculative retail energy risk-management
contracts which, in fact, Enron had no basis to project a profit on and, in fact, knew would likely
result in losses. Finally, in Enron's EBS business – also a new business where Enron had absolutely
no track record which would justify the use of mark-to-market accounting – Enron abused
mark-to-market accounting to generate hundreds of millions of dollars of phony current period
profits in several transactions. Enron not only abused mark-to-market accounting to initially value
multi-year transactions to generate inflated current period profits, it also, when reviewing those
computations on a quarterly basis as it was required to do, consistently increased the estimated value
of the transaction even though subsequent data revealed a reduction of the estimated value of the
transaction was appropriate, a practice known within Enron as "moving the curve." 36.
In at least two meetings of the Audit Committee in 2/99 and 5/00, the Board received actual
notice of the high-risk nature of such practices, their highly judgmental and subjective nature, and
their enormous consequences on Enron's reported earnings. Ex. 16.
Yet to continue to report growing profits, Enron was forced not only to continue to engage
in such transactions and accounting abuses, but to accelerate the number and size of such
transactions it engaged in. These reckless transactions and practices were routinely presented and
repeatedly approved by the Board without further inquiry, or putting in place controls. 18. See,
e.g., Ex. 24.
To make matters worse, Enron had capitalized certain controlled entities it was doing phony
deals with using shares of Enron stock and had agreed to issue millions of additional shares to these
entities if Enron's stock price declined below certain "trigger prices," i.e., $83, $81, $79, $68, $60,
$57, $52, $48, $34 and $19 per share, and to become liable for the debt of those entities if Enron lost
its investment grade credit rating. Because of the stock-price triggers and the way Enron capitalized
these entities, it was absolutely vital to Enron, and the other participants in the fraudulent scheme
- 11 -