In re Enron Corporation Securities, Derivative & ERISA Litigation

Facts

A class action brought on behalf of purchasers of Enron Corp. securities claimed that numerous banks, lawyers, and accountant/auditors violated securities laws by making false statements or failing to disclose adverse facts while selling Enron securities, and/or that they were involved in a scheme to defraud and/or a course of business that operated as a fraud. The scheme that these secondary actors were allegedly involved in was claimed to be “an enormous Ponzi scheme, the largest in history” involving illusory profits generated by phony, non-arm’s-length transactions with Enron-controlled entities and improper accounting for the purpose of inflating Enron’s reported revenues and profits, hiding its rising debt, maintaining its artificially high stock prices and credit ratings, as well as allowing the secondary actor defendants to personally enrich themselves by looting the corporation, while continuing to raise money from public offerings of Enron or related securities. The scheme allegedly involved an elaborate network of off-the-books illicit partnerships, secretly controlled by Enron, and established to conceal Enron’s actual financial status. These entities would typically purchase troubled assets from Enron by means of sham swaps, hedges, and transfers so that debt would not be reflected on Enron’s balance sheet. All of the secondary actor defendants were alleged to have been “rubber stamps” for these deceitful transactions because they were all beneficiaries of enormous fees and increasing business. The defendants allegedly violated GAAP (Generally Accepted Accounting Principles) and SEC rules, and caused Enron to present materially misleading statements in Enron’s financial statements, press releases, and SEC filings, such as Form 10-Qs and 10-Ks. Enron also allegedly made misrepresentations regarding the second party defendants’ manipulations, all concealed by numerous accounting ploys. (III.B.1) The Banks—Most of the allegations applied, with few exceptions, to all the banks: Canadian Imperial Bank of Commerce (CIBC), CitiGroup Inc., J.P. Morgan Chase & Co., Barclays PLC, Credit Suisse First Boston, Bank of America Corp., Merrill Lynch & Co., Lehman Bros. Holdings Inc., and Deutsche Bank AG. The general claims were that the banks participated in the scheme to enrich themselves through huge fees and continuing business, as well as to protect their interests once involved. The banks allegedly advanced funds to SPEs (Special Purpose Entities) at key times so that they and Enron could complete bogus transactions to create fake profits and hide billions of dollars of Enron debt. Supposedly aware of Enron’s true dire financial state, the banks also made loans to Enron to ensure its liquidity, while at the same time helping Enron sell its securities and keep the scheme going. In addition, the banks allegedly supported the inflated price of these securities through glowing research reports that contained misleading information about Enron. Some of the banks also allegedly disguised billions of dollars in loans to Enron as sales transactions. (III.B.1.b.) CitiGroup—CitiGroup, along with the other banks, allegedly enjoyed spectacular underwriting, advisory, and transactional fees, interest, and commitment charges, and some of its executives participated in the illicit partnerships for lucrative returns. It loaned over $4 billion to Enron, helped Enron raise $2 billion in securities sales, and helped Enron structure and refinance the illicit partnerships and SPEs that Enron used to inflate earnings and conceal debt. Its executives were in contact with Enron executives daily and discussed its business in detail. CitiGroup also purportedly made false and misleading statements in registration statements and prospectuses, as well as issued numerous analysts’ reports that contained false and misleading statements about Enron’s financial condition. (III.B.2) Law Firms—Vinson & Elkins (V & E), Enron’s outside counsel, participated in writing, reviewing, and approving Enron’s SEC filings, shareholder reports, and financial press releases, and in creating various SPEs and handling related transactions. Allegedly V & E knew that Enron insiders were on both sides of some of these transactions, to virtually ensure lucrative returns for the entities’ partners, and that the illicit entities were manipulative devices. V & E allegedly provided “true sales” and other opinions that were false and that were indispensable for the sham deals. Given V & E’s intimate involvement in the formation of and transaction with these blatantly fraudulent entities, V & E allegedly had to know that they were created solely to “cook Enron’s books.” Although Sherron Watkins, an Enron employee and whistle-blower, warned Enron’s CEO, Ken Lay, that V & E was involved in the fraud and had a clear conflict of interest, Lay still turned to top V & E partners to find out how to cover up the allegations. Despite this obvious conflict, V & E agreed to conduct an investigation into the charges of its own misconduct, and issue a letter dismissing the allegations. V & E also agreed not to review the accounting work of judgment of Arthur Andersen (Enron’s auditor). Allegedly, during its investigation, V & E interviewed only top-level executives that it knew were involved in the fraud and would deny it. Also, V & E advised that Watkins should not be fired, for fear that a wrongful termination suit would disclose her allegations, and she was shifted to another position where should have less exposure to information damaging to Enron. (III.B.3) The Accountant/Auditor: Arthur Andersen LLP—Allegedly, Arthur Andersen abandoned its responsibilities to Enron investors and violated professional standards in perpetrating a massive accounting fraud. Enron was Arthur Andersen’s second largest client and the auditing firm was economically dependent on Enron, which provided it with $50 million in annual fees. Partners at the accounting firm were pressured to generate more fees, which created a conflict of interest for auditors and caused them to abandon their integrity and independence. Even though Arthur Andersen was aware that the critical factor to increasing its fees was to maintain Enron’s high credit rating, it decided that the possibility of doubling the fees it received from Enron to $100 million was worth maintaining Enron as a client, despite the risk this would entail. When partner Bass opposed Enron’s improper accounting practices, he was removed from his oversight role on the Enron audits. Arthur Andersen allegedly helped structure hundreds of complicated partnerships, many with no purpose other than to hide losses and debt. In many of the transactions, Enron maintained control of the entities and deliberately and improperly did not consolidate them. Andersen knew that Enron used at least 600 offshore tax shelters to shift income, minimize taxation, circumvent laws, and maintain secrecy. Even Andersen’s tax and consulting departments knew that Enron was using such entities excessively and without business justification. Andersen documents revealed that it knew, was concerned about, yet covered up or ignored fraudulent accounting practices by Enron. Minutes of a teleconference meeting of Andersen partners revealed that they knew of the accounting issues that ultimately caused the collapse of Enron. In spite of this knowledge, they decided to retain Enron as a client and then issued a “clean” audit opinion on Enron’s financial statements. In the audits of Enron’s 1997 financial statements, Andersen identified $51 million of adjustments where the accounting was improper, and that these accounted for almost 50 percent of Enron’s net income for that year. Nevertheless, Andersen consented to Enron’s request not to make those adjustments—which would radically reduce the net income that would be reported.