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