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

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Raptors were capitalized with Enron stock, and actual knowledge that, by recognizing revenue from hedges with a counterparty capitalized with Enron stock, Enron would be in reality recognizing revenue based on the appreciation of its own stock, in violation of GAAP. Ex. 26. In the last two quarters of 00, Enron recognized pre-tax earnings of $530 million on several transactions with the Raptor entities out of reported pre-tax earnings of $650 million. These false earnings from the Raptors' manipulative and deceptive contrivances accounted for more than 80% of the total! 33. Hedging Enron's investments with the value of Enron's stock created an enormous and unusual motive for the participants in the scheme to keep Enron stock trading at inflated price levels. This was because if the value of Enron stock fell, the SPEs would be unable to meet their obligations and the "hedges" would fail. This happened in late 00 and early 01. In 12/00, Enron's gain on these transactions was over $500 million. Enron could recognize these gains – offsetting corresponding losses on the investments in its merchant portfolio – only if the Raptors had the capacity to make good on their debt to Enron. If they did not, Enron would be required to record a "credit reserve," a loss that would defeat the very purpose of the Raptors, which was to shield Enron from reflecting the decline in value of its merchant investments. 34. As year-end 00 approached, two of Enron's LJM2-financed Raptor SPEs were in danger of coming unwound as they lacked sufficient credit capacity to support their obligations. If something were not done to prevent the unwinding of these SPEs, Enron would have to take a multi-milliondollar charge against earnings, which would expose the prior falsification of Enron's financial results and result in Enron's stock price plunging, more and more of the stock-issuance price "triggers" would be hit, and a vicious death-spiral would kick in. 35. The Board had notice of this potential crisis: Treasurer Ben Glisan informed the Finance Committee of the "significant increase in the Company's guarantee portfolio." Ex. 27; 2/7/02 Committee Hearing. Consequently, Enron restructured and capitalized the LJM2-financed Raptor SPEs at year-end 00 by transferring to them rights to receive even more shares of Enron stock, creating ever-increasing pressure on Enron and the other participants in the scheme to support Enron's stock price. This artifice enabled Enron to avoid recording a huge credit reserve for the year ended 12/31/00. 35. Again, each of Enron's Outside Directors knew about or had access to full information and was complicit in the scheme and - 17 -
fraudulent course of business by approving and implementing these manipulative and deceptive structures. D. Enron Energy Services ("EES") The falsification of Enron's financial results was not limited to non-arm's-length fraudulent partnership and SPE transactions. While Enron's wholesale energy business was the largest single contributor to its profits, Enron was also telling investors that an area of tremendous growth for Enron was its retail energy services business – EES – whereby Enron purportedly undertook to manage the energy needs of corporate consumers for multi-year periods in return for fees to be paid over a number of years. Enron and its banks presented this business as achieving tremendous success by constantly signing new multi-million or even billion dollar contracts, which allowed EES to exceed internal forecasts, and that this division had turned profitable in the 4thQ 99 and was achieving substantial gains in its profitability. 37. The CC alleges that the Board had knowledge of the EES operations because of its enormous impact on Enron's revenues. 395, 398. In fact, at an October 6, 2000 board meeting, Skilling informed the Finance Committee that EES's project implementation was lagging behind original projections, that EES had substantial capital expenditures, and that the slow down in project implementation would have a negative effect on earnings. Ex. 27. In fact, EES was losing hundreds of millions of dollars. To induce large enterprises to sign long-term energy management contracts and jumpstart this business, so it could appear to obtain huge contract volumes, Enron entered into EES management contracts that it knew would likely result in huge losses. By abusing mark-to-market accounting, Enron grossly overvalued the ultimate value of these contracts and created greatly inflated current-period profits from transactions that generated little, if any, current-period cash, and which would likely actually result in long-term cashout plans and losses. 38. E. More Explicit Actual Notice of Wrongdoing A letter written in 8/01 to Enron's Board, just after Skilling "resigned," by an EES manager stated (38): - 18 -
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 and 22: • No other company offered such i
Page 23 and 24: of dollars to maintain its liquidit
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: LJM's interest, Enron had agreed in
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
Page 75 and 76: approval of them was necessary, and
Page 77 and 78: These are distinct liability theori
Page 79 and 80: Thus, Enron's Board had continuous
Page 81 and 82: of a mere $13 million (an almost 10
Page 83 and 84:
is an issue of fact that is inappro
Page 85 and 86:
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.;
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IV. Conclusion Accordingly, based o
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Plaintiffs' Memorandum of Law in Opposition to Motions to Dismiss ...

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