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

only if it does not control the SPE. And, at a bare minimum, two other conditions must be met: (i)
an independent party must make an equity investment of at least 3% of the SPE's assets, which must
remain at risk throughout the transaction; and (ii) the independent party must exercise control of the
SPE. 21. Because of the material size of these structured transactions and their vital importance
to Enron's earnings and entire financial structure, the Board had full knowledge of and approved
these transactions. 395, 398. Moreover, it was apparent and obvious that Enron, in fact, exercised
real control over these SPEs, at the very least because CFO Fastow was their general partner. See,
e.g., Exs. 21, 24.
In 99, Enron created two LJM partnerships (LJM and LJM2), which Enron secretly
controlled. Enron then engaged in numerous transactions – in fact, manipulative and deceptive
contrivances – with LJM2 and associated SPEs, which inflated Enron's reported profits by more than
a billion dollars, at the same time enriching Fastow and his friends and all of Enron's banks. The
reason for establishing LJM2 was that it would permit Enron to accomplish transactions it could not
otherwise accomplish with an independent entity, by providing Enron with a buyer of assets that
Enron wanted to sell. 23. This was explicitly stated to the Board and was, in fact, the supposed
justification given to the Board for why it should waive Fastow's duty of undivided loyalty to Enron's
shareholders in order to allow his participation in the SPEs. Ex. 24. To do so the Board waived
Enron's Business Conduct Policy, but it could not waive the obvious fact that real financial control
of LJM2 rested with Fastow and thus with Enron. Indeed, LJM2 was one of the primary vehicles
used to falsify Enron's financial results during 99-01. LJM2 was secretly controlled by Enron and
used to create numerous SPEs, including the infamous Raptor vehicles, which engaged in numerous
non-arm's-length fraudulent transactions with Enron, to artificially inflate Enron's profits while
concealing billions of dollars of its debt on terms so unfair to Enron that the deals would provide
huge returns to the LJM2 investors. Simply stated, the Board approved the establishment of LJM2
and its structure, including waiving CFO Fastow's conflict-of-interest participation. Moreover, the
fiction of outside control of LJM and LJM2 is clearly belied in board and committee minutes. CFO
Fastow would update Enron's Board on the benefits and transactions of the LJM entities, making it
clear that their financial control was with Enron. See, e.g., Exs. 23, 24; Hearing of the Oversight and
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