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

I. Enron's Access to the Capital Markets
Enron required constant access to huge amounts of capital. For Enron to continue to appear
to succeed it had to keep its investment grade credit rating and keep its stock price high. Enron's
investment grade credit rating and high stock price could only be maintained by (i) limiting the
amount of debt shown on Enron's balance sheet; (ii) reporting strong current period earnings; and
(iii) forecasting strong future revenue and earnings growth. Yet Enron was able to achieve these
ends only by pursuing an increasing number of phony transactions, many of which were
accomplished by increasing the number and size of transaction entities which were supposedly
independent of Enron but which, in fact, Enron controlled through a series of secret understandings
and illicit financing arrangements, including the Chewco, LJM and LJM2 partnerships, all presented
to the Outside Directors at various meetings, either of the complete Board or of its Finance, Audit
or Executive Committees. As a result of reporting strong earnings, the apparent success of its
business and its future earnings growth forecasts, Enron had unlimited access to the capital markets,
borrowing billions of dollars in the commercial paper markets and selling billions of dollars of Enron
securities to the public. Enron and its bankers, with the approval of the Outside Directors, raised
billions in new debt and equity capital from public investors for Enron or associated entities through
numerous securities offerings, thus raising the capital necessary to allow Enron to repay or pay down
its short-term debt and continue to operate. 48.
J. Late 00/Early 01 Prop-Up
In late 00/early 01, Enron's financial results began to come under scrutiny from a few
accounting sleuths and short-sellers, who began to question the quality of Enron's reported financial
results. While Enron, its top insiders and its bankers assured investors of the correctness of Enron's
accounting and the high quality of Enron's reported earnings, the success and strength of its business
and its solid prospects for continued strong profit growth, in part because of this increasing
controversy, Enron's stock began to decline. As this price decline accelerated, it put pressure on
Enron's top executives to do something – anything – to halt the decline in the price of the stock as
they knew that if that price decline continued and the stock fell to lower levels, more and more of
the Enron stock "triggers" contained in agreements for deals with entities controlled by LJM2 would
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