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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Rap<strong>to</strong>rs were capitalized with Enron s<strong>to</strong>ck, and actual knowledge that, by recogniz<strong>in</strong>g revenue from<br />
hedges with a counterparty capitalized with Enron s<strong>to</strong>ck, Enron would be <strong>in</strong> reality recogniz<strong>in</strong>g<br />
revenue based on the appreciation <strong>of</strong> its own s<strong>to</strong>ck, <strong>in</strong> violation <strong>of</strong> GAAP. Ex. 26. In the last two<br />
quarters <strong>of</strong> 00, Enron recognized pre-tax earn<strong>in</strong>gs <strong>of</strong> $530 million on several transactions with the<br />
Rap<strong>to</strong>r entities out <strong>of</strong> reported pre-tax earn<strong>in</strong>gs <strong>of</strong> $650 million. These false earn<strong>in</strong>gs from the<br />
Rap<strong>to</strong>rs' manipulative and deceptive contrivances accounted for more than 80% <strong>of</strong> the <strong>to</strong>tal! 33.<br />
Hedg<strong>in</strong>g Enron's <strong>in</strong>vestments with the value <strong>of</strong> Enron's s<strong>to</strong>ck created an enormous and<br />
unusual motive for the participants <strong>in</strong> the scheme <strong>to</strong> keep Enron s<strong>to</strong>ck trad<strong>in</strong>g at <strong>in</strong>flated price levels.<br />
This was because if the value <strong>of</strong> Enron s<strong>to</strong>ck fell, the SPEs would be unable <strong>to</strong> meet their obligations<br />
and the "hedges" would fail. This happened <strong>in</strong> late 00 and early 01. In 12/00, Enron's ga<strong>in</strong> on these<br />
transactions was over $500 million. Enron could recognize these ga<strong>in</strong>s – <strong>of</strong>fsett<strong>in</strong>g correspond<strong>in</strong>g<br />
losses on the <strong>in</strong>vestments <strong>in</strong> its merchant portfolio – only if the Rap<strong>to</strong>rs had the capacity <strong>to</strong> make<br />
good on their debt <strong>to</strong> Enron. If they did not, Enron would be required <strong>to</strong> record a "credit reserve,"<br />
a loss that would defeat the very purpose <strong>of</strong> the Rap<strong>to</strong>rs, which was <strong>to</strong> shield Enron from reflect<strong>in</strong>g<br />
the decl<strong>in</strong>e <strong>in</strong> value <strong>of</strong> its merchant <strong>in</strong>vestments. 34.<br />
As year-end 00 approached, two <strong>of</strong> Enron's LJM2-f<strong>in</strong>anced Rap<strong>to</strong>r SPEs were <strong>in</strong> danger <strong>of</strong><br />
com<strong>in</strong>g unwound as they lacked sufficient credit capacity <strong>to</strong> support their obligations. If someth<strong>in</strong>g<br />
were not done <strong>to</strong> prevent the unw<strong>in</strong>d<strong>in</strong>g <strong>of</strong> these SPEs, Enron would have <strong>to</strong> take a multi-milliondollar<br />
charge aga<strong>in</strong>st earn<strong>in</strong>gs, which would expose the prior falsification <strong>of</strong> Enron's f<strong>in</strong>ancial results<br />
and result <strong>in</strong> Enron's s<strong>to</strong>ck price plung<strong>in</strong>g, more and more <strong>of</strong> the s<strong>to</strong>ck-issuance price "triggers"<br />
would be hit, and a vicious death-spiral would kick <strong>in</strong>. 35. The Board had notice <strong>of</strong> this potential<br />
crisis: Treasurer Ben Glisan <strong>in</strong>formed the F<strong>in</strong>ance Committee <strong>of</strong> the "significant <strong>in</strong>crease <strong>in</strong> the<br />
Company's guarantee portfolio." Ex. 27; 2/7/02 Committee Hear<strong>in</strong>g. Consequently, Enron<br />
restructured and capitalized the LJM2-f<strong>in</strong>anced Rap<strong>to</strong>r SPEs at year-end 00 by transferr<strong>in</strong>g <strong>to</strong> them<br />
rights <strong>to</strong> receive even more shares <strong>of</strong> Enron s<strong>to</strong>ck, creat<strong>in</strong>g ever-<strong>in</strong>creas<strong>in</strong>g pressure on Enron and<br />
the other participants <strong>in</strong> the scheme <strong>to</strong> support Enron's s<strong>to</strong>ck price. This artifice enabled Enron <strong>to</strong><br />
avoid record<strong>in</strong>g a huge credit reserve for the year ended 12/31/00. 35. Aga<strong>in</strong>, each <strong>of</strong> Enron's<br />
Outside Direc<strong>to</strong>rs knew about or had access <strong>to</strong> full <strong>in</strong>formation and was complicit <strong>in</strong> the scheme and<br />
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