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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I. Enron's Access <strong>to</strong> the Capital Markets<br />
Enron required constant access <strong>to</strong> huge amounts <strong>of</strong> capital. For Enron <strong>to</strong> cont<strong>in</strong>ue <strong>to</strong> appear<br />
<strong>to</strong> succeed it had <strong>to</strong> keep its <strong>in</strong>vestment grade credit rat<strong>in</strong>g and keep its s<strong>to</strong>ck price high. Enron's<br />
<strong>in</strong>vestment grade credit rat<strong>in</strong>g and high s<strong>to</strong>ck price could only be ma<strong>in</strong>ta<strong>in</strong>ed by (i) limit<strong>in</strong>g the<br />
amount <strong>of</strong> debt shown on Enron's balance sheet; (ii) report<strong>in</strong>g strong current period earn<strong>in</strong>gs; and<br />
(iii) forecast<strong>in</strong>g strong future revenue and earn<strong>in</strong>gs growth. Yet Enron was able <strong>to</strong> achieve these<br />
ends only by pursu<strong>in</strong>g an <strong>in</strong>creas<strong>in</strong>g number <strong>of</strong> phony transactions, many <strong>of</strong> which were<br />
accomplished by <strong>in</strong>creas<strong>in</strong>g the number and size <strong>of</strong> transaction entities which were supposedly<br />
<strong>in</strong>dependent <strong>of</strong> Enron but which, <strong>in</strong> fact, Enron controlled through a series <strong>of</strong> secret understand<strong>in</strong>gs<br />
and illicit f<strong>in</strong>anc<strong>in</strong>g arrangements, <strong>in</strong>clud<strong>in</strong>g the Chewco, LJM and LJM2 partnerships, all presented<br />
<strong>to</strong> the Outside Direc<strong>to</strong>rs at various meet<strong>in</strong>gs, either <strong>of</strong> the complete Board or <strong>of</strong> its F<strong>in</strong>ance, Audit<br />
or Executive Committees. As a result <strong>of</strong> report<strong>in</strong>g strong earn<strong>in</strong>gs, the apparent success <strong>of</strong> its<br />
bus<strong>in</strong>ess and its future earn<strong>in</strong>gs growth forecasts, Enron had unlimited access <strong>to</strong> the capital markets,<br />
borrow<strong>in</strong>g billions <strong>of</strong> dollars <strong>in</strong> the commercial paper markets and sell<strong>in</strong>g billions <strong>of</strong> dollars <strong>of</strong> Enron<br />
securities <strong>to</strong> the public. Enron and its bankers, with the approval <strong>of</strong> the Outside Direc<strong>to</strong>rs, raised<br />
billions <strong>in</strong> new debt and equity capital from public <strong>in</strong>ves<strong>to</strong>rs for Enron or associated entities through<br />
numerous securities <strong>of</strong>fer<strong>in</strong>gs, thus rais<strong>in</strong>g the capital necessary <strong>to</strong> allow Enron <strong>to</strong> repay or pay down<br />
its short-term debt and cont<strong>in</strong>ue <strong>to</strong> operate. 48.<br />
J. Late 00/Early 01 Prop-Up<br />
In late 00/early 01, Enron's f<strong>in</strong>ancial results began <strong>to</strong> come under scrut<strong>in</strong>y from a few<br />
account<strong>in</strong>g sleuths and short-sellers, who began <strong>to</strong> question the quality <strong>of</strong> Enron's reported f<strong>in</strong>ancial<br />
results. While Enron, its <strong>to</strong>p <strong>in</strong>siders and its bankers assured <strong>in</strong>ves<strong>to</strong>rs <strong>of</strong> the correctness <strong>of</strong> Enron's<br />
account<strong>in</strong>g and the high quality <strong>of</strong> Enron's reported earn<strong>in</strong>gs, the success and strength <strong>of</strong> its bus<strong>in</strong>ess<br />
and its solid prospects for cont<strong>in</strong>ued strong pr<strong>of</strong>it growth, <strong>in</strong> part because <strong>of</strong> this <strong>in</strong>creas<strong>in</strong>g<br />
controversy, Enron's s<strong>to</strong>ck began <strong>to</strong> decl<strong>in</strong>e. As this price decl<strong>in</strong>e accelerated, it put pressure on<br />
Enron's <strong>to</strong>p executives <strong>to</strong> do someth<strong>in</strong>g – anyth<strong>in</strong>g – <strong>to</strong> halt the decl<strong>in</strong>e <strong>in</strong> the price <strong>of</strong> the s<strong>to</strong>ck as<br />
they knew that if that price decl<strong>in</strong>e cont<strong>in</strong>ued and the s<strong>to</strong>ck fell <strong>to</strong> lower levels, more and more <strong>of</strong><br />
the Enron s<strong>to</strong>ck "triggers" conta<strong>in</strong>ed <strong>in</strong> agreements for deals with entities controlled by LJM2 would<br />
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