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

Debt
Amount of
Understatement
Shareholders' Equity
Amount of
Overstatement
$711,000,000 $561,000,000 $685,000,000 $628,000,000
$313,000,000 $448,000,000 $833,000,000 $1,208,000,000
These partnerships – Chewco, LJM and LJM2 – were used by Enron and its management to
enter into transactions that Enron could not, or would not, do with unrelated commercial entities.
The Outside Directors knew this and were regularly given updates and reports on all three of these
entities. The significant transactions were designed to create phony profits or to improperly offset
losses. These transactions allowed Enron to conceal from the market very large losses resulting from
Enron's merchant investments by creating an appearance that those investments were hedged – that
is, that a third party was obligated to pay Enron the amount of those losses, when in fact that third
party was simply an entity in which only Enron had a substantial economic stake. The Raptors
transactions alone resulted in Enron reporting earnings from the 3rdQ 00 through the 3rdQ 01 that
were almost $1 billion higher than should have been reported! 62. Notwithstanding the write-offs
and restatement revelations of 10/01-11/01, Enron, J.P. Morgan and CitiGroup believed that they
could limit their legal exposure for participation in the scheme if they could sell Enron to another
company. So, in 11/01, as the Enron scheme began to unravel, Enron tried desperately to arrange
a salvation merger with Dynegy to avoid insolvency of Enron and the inevitable investigations and
revelations that would follow such insolvency. 64. However, the due diligence efforts of Dynegy
uncovered that the true financial condition of Enron was far worse than had been disclosed publicly
and that Enron had been engaged in a wide-ranging falsification of its financial statements over the
several prior years. Thus, Dynegy refused to acquire Enron. By 11/28/01, Enron's publicly traded
debt had been downgraded to "junk" status and on 12/2/01, Enron filed for bankruptcy – the largest
bankruptcy in history. Enron's common and preferred stock have become virtually worthless and
its publicly traded debt securities have suffered massive price declines, inflicting billions of dollars
of losses on purchasers of those securities. 66. As Newsweek has written (69):
In the late 1990s, by my count, Enron lost about $2 billion on telecom capacity, $2
billion in water investments, $2 billion in a Brazilian utility and $1 billion on a
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