Plaintiffs' Memorandum of Law in Opposition to Motions to Dismiss ...
Plaintiffs' Memorandum of Law in Opposition to Motions to Dismiss ...
Plaintiffs' Memorandum of Law in Opposition to Motions to Dismiss ...
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Enron's bus<strong>in</strong>ess this was done by assign<strong>in</strong>g unrealistic values <strong>to</strong> wholesale energy transactions,<br />
which <strong>in</strong>flated current-period <strong>in</strong>come. 36.<br />
In its EES bus<strong>in</strong>ess, where Enron had no long-term track record <strong>to</strong> justify the use <strong>of</strong><br />
mark-<strong>to</strong>-market account<strong>in</strong>g, Enron nevertheless consistently utilized mark-<strong>to</strong>-market account<strong>in</strong>g <strong>to</strong><br />
record huge current period pr<strong>of</strong>its on long-term, highly speculative retail energy risk-management<br />
contracts which, <strong>in</strong> fact, Enron had no basis <strong>to</strong> project a pr<strong>of</strong>it on and, <strong>in</strong> fact, knew would likely<br />
result <strong>in</strong> losses. F<strong>in</strong>ally, <strong>in</strong> Enron's EBS bus<strong>in</strong>ess – also a new bus<strong>in</strong>ess where Enron had absolutely<br />
no track record which would justify the use <strong>of</strong> mark-<strong>to</strong>-market account<strong>in</strong>g – Enron abused<br />
mark-<strong>to</strong>-market account<strong>in</strong>g <strong>to</strong> generate hundreds <strong>of</strong> millions <strong>of</strong> dollars <strong>of</strong> phony current period<br />
pr<strong>of</strong>its <strong>in</strong> several transactions. Enron not only abused mark-<strong>to</strong>-market account<strong>in</strong>g <strong>to</strong> <strong>in</strong>itially value<br />
multi-year transactions <strong>to</strong> generate <strong>in</strong>flated current period pr<strong>of</strong>its, it also, when review<strong>in</strong>g those<br />
computations on a quarterly basis as it was required <strong>to</strong> do, consistently <strong>in</strong>creased the estimated value<br />
<strong>of</strong> the transaction even though subsequent data revealed a reduction <strong>of</strong> the estimated value <strong>of</strong> the<br />
transaction was appropriate, a practice known with<strong>in</strong> Enron as "mov<strong>in</strong>g the curve." 36.<br />
In at least two meet<strong>in</strong>gs <strong>of</strong> the Audit Committee <strong>in</strong> 2/99 and 5/00, the Board received actual<br />
notice <strong>of</strong> the high-risk nature <strong>of</strong> such practices, their highly judgmental and subjective nature, and<br />
their enormous consequences on Enron's reported earn<strong>in</strong>gs. Ex. 16.<br />
Yet <strong>to</strong> cont<strong>in</strong>ue <strong>to</strong> report grow<strong>in</strong>g pr<strong>of</strong>its, Enron was forced not only <strong>to</strong> cont<strong>in</strong>ue <strong>to</strong> engage<br />
<strong>in</strong> such transactions and account<strong>in</strong>g abuses, but <strong>to</strong> accelerate the number and size <strong>of</strong> such<br />
transactions it engaged <strong>in</strong>. These reckless transactions and practices were rout<strong>in</strong>ely presented and<br />
repeatedly approved by the Board without further <strong>in</strong>quiry, or putt<strong>in</strong>g <strong>in</strong> place controls. 18. See,<br />
e.g., Ex. 24.<br />
To make matters worse, Enron had capitalized certa<strong>in</strong> controlled entities it was do<strong>in</strong>g phony<br />
deals with us<strong>in</strong>g shares <strong>of</strong> Enron s<strong>to</strong>ck and had agreed <strong>to</strong> issue millions <strong>of</strong> additional shares <strong>to</strong> these<br />
entities if Enron's s<strong>to</strong>ck price decl<strong>in</strong>ed below certa<strong>in</strong> "trigger prices," i.e., $83, $81, $79, $68, $60,<br />
$57, $52, $48, $34 and $19 per share, and <strong>to</strong> become liable for the debt <strong>of</strong> those entities if Enron lost<br />
its <strong>in</strong>vestment grade credit rat<strong>in</strong>g. Because <strong>of</strong> the s<strong>to</strong>ck-price triggers and the way Enron capitalized<br />
these entities, it was absolutely vital <strong>to</strong> Enron, and the other participants <strong>in</strong> the fraudulent scheme<br />
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