UNITED STATES DISTRICT COURT
Securities and Exchange Commission,
JEFFREY K. SKILLING,
Civil Action No. H-04-0284 (Harmon)
Plaintiff Securities and Exchange Commission (the "Commission") for its First Amended Complaint alleges as follows:
1. Jeffrey K. Skilling, the former President and Chief Executive Officer of Enron, Richard A. Causey, the former Chief Accounting Officer of Enron, and others at Enron engaged in a scheme to defraud in violation of the federal securities laws. From at least 1999 through late 2001, Skilling, Causey, and others manipulated Enron’s publicly reported financial results and made false and misleading public statements about Enron’s financial condition and its actual performance. As a result of their scheme to defraud, Skilling, Causey, and others made millions of dollars, by unlawful insider trading and other means, at the expense of Enron shareholders, the investing public, and Enron employees.
2. The Commission requests that this Court permanently enjoin Skilling and Causey from violating the federal securities laws cited herein, prohibit each permanently and unconditionally from acting as an officer or director of any issuer of securities that has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 ("Exchange Act") or that is required to file reports pursuant to Section 15(d) of such Act, order each to disgorge all ill-gotten gains, to pay civil penalties, to have the amount of such penalties added to and become part of a disgorgement fund for the benefit of the victims of their unlawful conduct, and order such other and further relief as the Court may deem appropriate.
3. The Court has jurisdiction over this action pursuant to Sections 21(d), 21(e), and 27 of the Exchange Act [15 U.S.C. §§ 78u(d) and (e) and 78aa].
4. Venue lies in this District pursuant to Section 27 of the Exchange Act [15 U.S.C. § 78aa] because certain acts or transactions constituting the violations occurred in this District.
5. In connection with the acts, practices, and courses of business alleged herein, Skilling and Causey, directly or indirectly, made use of the means and instruments of transportation and communication in interstate commerce, and of the mails and of the facilities of a national securities exchange.
6. Skilling and Causey, unless restrained and enjoined by this Court, will continue to engage in transactions, acts, practices, and courses of business as set forth in this First Amended Complaint or in similar illegal acts and practices.
7. Jeffrey A. Skilling resides in Houston, Texas. He was employed by or acted as a consultant to Enron from at least the late 1980s through early December 2001. From 1979 to 1990, Skilling was employed by the consulting firm of McKinsey & Co., where he provided consulting services to Enron. In August 1990, Enron hired Skilling. He held various positions at Enron and in December 1996, Enron promoted Skilling to President and COO of the entire company, reporting directly to Enron’s Chief Executive Officer ("CEO") and Chairman. In February 2001, Skilling became CEO of Enron and retained his position as COO. On August 14, 2001, with no forewarning to the public, Skilling resigned from Enron. As COO and CEO of Enron, Skilling was the senior manager of the company’s commercial operations and finances and one of its principal spokespersons with the investing public. Skilling closely supervised on a day-to-day basis the activities of each of Enron’s business units and the heads of those business units, as well as the activities of the senior Enron managers who conducted the company’s financial and accounting activities. He signed Enron’s annual reports filed on Form 10-K with the SEC and he signed quarterly and annual representation letters to Enron’s auditors.
8. Richard A. Causey resides in Houston Texas. He was a certified public accountant and worked for Enron from 1991 through early 2002. From 1986 to 1991, while an employee of the accounting firm Arthur Andersen LLP ("Andersen"), Causey provided audit services to Enron on behalf of Andersen, which served as Enron’s outside auditor. In 1991, Enron hired Causey as Assistant Controller of Enron Gas Services Group. From 1992 to 1997, Causey served in various positions in Enron Capital and Trade Resources ("ECT"), including as Vice-President and Managing Director. In 1998, Causey was made Chief Accounting Officer ("CAO") of Enron and an Executive Vice-President. As Enron’s CAO, Causey managed Enron’s accounting practices. Causey reported to Enron’s Chairman and CEO, including to Skilling. Skilling and Causey, along with Enron’s Chief Financial Officer ("CFO") Andrew S. Fastow, its Treasurer and others were the principal managers of Enron’s finances. Causey also was a principal manager of Enron’s disclosures and representations to the investing public. He signed Enron’s annual reports on Form 10-K and its quarterly reports on Form 10-Q filed with the SEC and he signed quarterly and annual representation letters to Enron’s auditors.
9. Enron Corp. is an Oregon corporation with its principal place of business in Houston, Texas. During the relevant time period, the common stock of Enron was registered with the Commission pursuant to Section 12(b) of the Exchange Act and traded on the New York Stock Exchange. Because it was a public company, Enron and its directors, officers, and employees were required to comply with federal securities laws, including rules and regulations requiring the filing of true and accurate financial information. Enron’s stock price was influenced by factors such as its reported financial information, credit rating, and its ability to meet revenue and earnings targets and forecasts. Investors considered this information important in making investment decisions. Likewise, the information was important to credit rating agencies and influenced the investment grade ratings for Enron’s debt, ratings critical to Enron’s ongoing business operations and ability to secure loans. During the time that Skilling and Causey engaged in the fraudulent conduct alleged herein, Enron raised millions in the public debt and equity markets. Among other operations, Enron was the nation’s largest natural gas and electric marketer with reported annual revenue of more than $150 billion. Enron rose to number seven on the Fortune 500 list of companies. By December 2, 2001, when it filed for bankruptcy, Enron’s stock price had dropped in less than a year from more than $80 per share to less than $1.
10. Skilling, Causey, and numerous other Enron executives and senior managers engaged in the scheme to defraud. The others included, but were not limited to, former Enron employees named as defendants in other Enron-related cases by the SEC in the Southern District of Texas: Fastow, who was a supervisor of such matters as Enron’s structured finance, cash flow, and debt management activities (SEC v. Fastow, H-02-3666); former Enron Treasurer Ben F. Glisan, Jr., who reported to Skilling and, at times, Fastow and also was a supervisor of Enron’s structured finance, cash flow, and debt management activities (SEC v. Glisan, H-03-3628); former Enron North America ("ENA") and Enron Energy Services ("EES") CEO David W. Delainey, who reported to Skilling and was a supervisor of the largest part of Enron’s wholesale energy business and, later, of its retail energy business (SEC v. Delainey, H-03-4883); former ENA CAO Wesley Colwell, who reported to Causey and Delainey and managed the accounting for Enron’s wholesale energy business (SEC v. Colwell, H-03-4308); and former Enron Global Finance Managing Director Michael Kopper, who reported to Fastow and conducted structured finance activities for Enron (SEC v. Kopper, H-02-3127).
11. The objectives of the scheme to defraud carried out by Skilling, Causey, and others were, among other things, to produce reported recurring earnings that grew smoothly by approximately 15 to 20 percent annually; to meet or exceed the published expectations of industry analysts forecasting Enron’s reported earnings-per-share and other results; to avoid publicly reporting any large "write-downs" or losses; to persuade investors that Enron’s profitability would continue to grow; to maintain an investment-grade credit rating; to deceive the investing public and credit rating agencies about the true magnitude of growing debt and other obligations; to make proceeds from borrowing transactions appear as cash from operating activities and thereby mask an imbalance between its earnings and its cash flow from operating activities; and to artificially inflate the share price of Enron’s stock. Due to the efforts of Skilling, Causey, and others, Enron’s publicly reported financial results and filings and its public descriptions of itself were false and misleading, and bore no resemblance to its actual performance.
12. Skilling and Causey set annual and quarterly earnings and cash flow targets ("budget targets") for the company and each of its business units. They did so by determining the numbers necessary to meet analysts’ expectations, rather than what could be realistically achieved by legitimate business operations. On a quarterly and year-end basis, Skilling, Causey, and others assessed Enron’s progress toward its budget targets. When the budget targets were not met through actual results from business operations, the desired targets were achieved through the use of various earnings and cash flow "levers," including but not limited to those described below. These levers were designed to manipulate Enron’s finances and prop up its stock price by, among other things, filling earnings and cash flow shortfalls that were at times in the hundreds of millions of dollars. These shortfalls were referred to within Enron variously as the "gap," "stretch," or "overview."
13. The levers relied on by Skilling, Causey, and others to manipulate Enron’s reported financial results included fraudulent accounting devices. These devices, coupled with false and misleading public statements about Enron’s business performance by Skilling, Causey, and others, enabled Enron to appear as a healthy and growing company. In fact, as Skilling and Causey well knew, beginning at least in the fourth quarter of 1999, Enron consistently failed to meet budget targets through normal business operations and was able to appear successful only because of the scheme to defraud.
14. For a time, the scheme to defraud succeeded, and supported Enron’s stock price and its credit rating. In early 1998, Enron’s stock traded at approximately $30 per share. By January 2001, even after a 1999 stock split, Enron’s stock had risen to over $80 per share and Enron had become the seventh-ranked company in the United States, according to the leading index of the "Fortune 500." Until late 2001, Enron maintained an investment grade credit rating.
15. At the same time, the rise in Enron’s stock price enriched Skilling, Causey, and others at Enron in the form of salary, bonuses, stock options, grants of artificially appreciating stock, and prestige within their professions and communities. Between 1998 and 2001, Skilling received approximately $200 million from the sale of Enron stock netting over $89 million in profit, and received more than $14 million in salary and bonuses. Between 1998 and 2001, Causey received more than $14 million from the sale of Enron stock, netting over $5 million in profit, and received more than $4 million in salary and bonuses. Enron’s other executives and senior managers also sold hundreds of millions of dollars worth of Enron stock at artificially inflated prices.
16. Skilling, Causey, and others employed various devices in furtherance of this fraudulent scheme, including but not limited to:
a. manufacturing and manipulating earnings through improper use of reserve accounts to mask volatility in Enron’s wholesale energy trading earnings and conceal and retain large amounts of those trading earnings for later use in order to achieve desired earnings results;
b. manufacturing earnings and artificially improving Enron’s balance sheet through over-valuation of assets in Enron’s merchant investment portfolio;
c. concealing large losses and failures in Enron’s two highly-touted new businesses, Enron Broadband Services ("EBS") and EES, by manipulating Enron’s "segment reporting" and using its reserved energy trading earnings to hide EES’s losses, and by manipulating expense accounting to hide the extent of EBS’s losses;
d. manufacturing earnings by falsely touting Enron’s EBS business to drive up Enron’s stock price, then misleadingly presenting earnings from the stock price increase as recurring earnings from energy operations;
e. structuring financial transactions in a misleading manner in order to achieve earnings objectives, avoid booking of large losses in asset values, and conceal debt, including through the use of an allegedly third-party investment entity that in fact was not truly independent from Enron and which was used only to achieve Enron’s financial reporting objectives and to enrich Enron executives and senior managers;
f. structuring financial transactions in a misleading manner in order to report smaller amounts of debt and to create the appearance of greater cash flows, including through alleged energy transactions between Enron and large banks that were not reported as debt but in reality only a means for Enron to borrow billions of dollars; and
g. presenting and describing Enron’s financial results in a false and misleading manner in conferences with Wall Street investment analysts, press releases, media statements, filings with the SEC, and other forms of communication with the investing public.
17. Third Quarter 2000 through Third Quarter 2001: During 2000 and 2001, the profitability of Enron’s wholesale energy trading business, primarily based in its Enron Wholesale business unit, dramatically increased for various reasons including rapidly rising energy prices in the western United States, especially in California. This sudden and large increase in trading profits, which exceeded $1 billion, threatened to undermine Enron’s description and presentation of itself as the dominant "intermediator" in the energy markets, rather than as a speculative (and therefore risky) trading company whose stock would trade at a much lower price-to-earnings ratio.
18. From the third quarter of 2000 through the third quarter of 2001, Skilling, Causey, and others used energy trading profits generated in excess of internal budget targets to create a "cookie jar" of unreported earnings for use in future periods. Using reserve accounts within Enron Wholesale to mask the extent and volatility of Enron Wholesale’s windfall trading profits, particularly its profits from the California energy markets, Skilling, Causey, and others preserved the earnings for use in later quarters in which Enron could use them to meet analysts’ expectations and avoided reporting large losses in other areas of Enron’s business. By early 2001, undisclosed reserve accounts within Enron Wholesale, which prior to mid-2000 had held only tens of millions of dollars of Enron’s energy trading earnings, contained over $1 billion in unreported earnings. Skilling, Causey, and others improperly planned to and did use hundreds of millions of dollars from the undisclosed reserve accounts to, among other things, ensure that budget targets were met and to conceal hundreds of millions of dollars in losses within Enron’s EES business unit from the investing public.
19. Second Quarter 2000: For example, in mid-July 2000, well after the end of the second quarter 2000, Skilling and Causey decided that they wanted Enron to beat Wall Street analysts’ quarterly expectations by publicly reporting an earnings-per-share figure of 34 cents, as opposed to the 32 cents per share that analysts predicted Enron would report. Skilling and Causey were aware that Enron’s performance for the quarter, even after Enron’s use of earnings levers and manipulation of its budget targets, did not support an earnings per share figure of 34 cents.
20. In order to help achieve the earnings-per-share target that Skilling and Causey wanted to report publicly, Skilling, Causey, and others caused a senior Enron executive to improperly release into earnings millions of dollars from a "prudency" reserve account in Enron’s energy trading business. This release of millions of dollars from the prudency reserve account had no legitimate business purpose. It was done solely to accomplish Skilling’s and Causey’s desire to publicly report a higher earnings per share number than expected by Wall Street analysts for the second quarter 2000.
21. In presentations to the investing public, Skilling, Causey, and others heavily emphasized the performance and potential of EBS and EES as major reasons for past and projected increases in the value of Enron’s stock, attributing as much as half of Enron’s total stock value to those two business units. To support what Enron had already said about EES, Skilling, Causey, and others concealed massive losses in EES’s business through fraudulently manipulating Enron’s "business segment reporting."
22. They accomplished this at the close of the first quarter of 2001 through a reorganization designed to conceal the magnitude of EES’s business failure. With the approval of Skilling, Causey, and others, Enron hid that failure from the investing public by moving large portions of EES’s business – which Skilling, Causey, and others knew at the time otherwise would have to report hundreds of millions of dollars in losses – into Enron Wholesale, which was the Enron business segment housing most of the company’s wholesale energy trading operations and income. As Skilling, Causey, and others knew, Enron Wholesale would have ample earnings, including in the reserve accounts described above, to ensure that Enron Wholesale could absorb the losses that, in fact, were attributable to EES while at the same time continuing to meet Enron’s budget targets. Skilling, Causey, and others explained the change in segment reporting solely as a means to improve efficiency. They omitted to disclose that the alleged "efficiency" maneuver in fact concealed from the public and others the poor performance of the heavily touted EES business unit. Instead, Skilling, Causey, and others stated publicly that EES was continuing to perform profitably and as expected.
23. Beginning in 1999, Skilling and others sought to provide Enron’s stock price with "dot-com luster." To achieve this objective, Enron heavily promoted EBS, a costly telecommunications business that ultimately failed. A centerpiece of this strategy was a dramatic presentation about EBS that was scheduled for Enron’s annual presentation to Wall Street investment analysts on January 20, 2000.
24. Knowing that Enron’s presentation about its new EBS business at the January 20, 2000 conference was designed to, and likely would, cause an immediate increase in Enron’s stock price, Skilling, Causey, and others constructed and approved a scheme to allow Enron to record and report as earnings from operations approximately $85 million of that very increase in stock value. Through its energy trading and assets business, Enron recorded earnings from a partnership interest it held in a large energy investment named JEDI. When the JEDI partnership recorded income from the increase in the value of its investment holdings, the portion of that increase that represented Enron’s share of JEDI’s income was recorded and reported as income by Enron.
25. The investment holdings of the JEDI partnership consisted, in part, of Enron stock. In September 1999, JEDI hedged its Enron stock holdings through a transaction with Enron that fixed the value of the Enron stock held by JEDI at a set price. As a result of this hedge, an increase in the value of Enron stock held by JEDI did not increase JEDI’s income, and therefore did not generate a corresponding increase in Enron’s share of JEDI’s income.
26. In connection with the January 20, 2000 analyst conference, however, Enron executed a series of transactions, known as "Project Grayhawk," that altered this hedge to allow JEDI’s income to increase if the price of Enron’s stock increased. After the price of Enron stock rose following the analyst conference, Enron and JEDI – through a new hedging arrangement – once again fixed the value of Enron stock held by JEDI, this time at a higher price.
27. The purpose and effect of altering the original hedge, and later replacing it with a similar new hedging arrangement at a higher price, was to enable Enron to recognize income brought about by the dramatic increase in Enron’s stock price as a result of its January 2000 analyst conference. Enron then improperly reported this gain as recurring operating income in its energy business without providing material information concerning the nature and amount, and failed to disclose to the investing public the manipulative manner in which it had been able to recognize income from the increase in its own stock price. This scheme was planned and approved by Skilling, Causey, and others.
28. At the January 20, 2000 analyst conference, Skilling and others knowingly made false and misleading statements about EBS. Skilling stated, among other things, that EBS "has already established the superior broadband delivery network"; that EBS has "built this network . . . and we are turning on the switch"; that the critical "network control software" was in Enron’s possession and incorporated and used in its network; and that Enron valued the business at $30 billion, which Skilling called a "conservative" valuation. In Skilling’s presence, EBS’s co-CEO Joseph Hirko stated that EBS possessed advance network control software and that it was no "pipe dream." In reality, EBS had neither the claimed broadband network in place, nor the critical proprietary network control software to run it. The claims about EBS remained only unproven concepts and laboratory demonstrations, and Skilling was advised before the analyst conference that the network he publicly described would take years to complete and might never be realized. In addition, the valuation of the business not only was not conservative, it was inflated by billions of dollars over what internal and external valuations had advised might be supportable.
29. Skilling’s and others’ plan to boost Enron’s stock price by aggressively touting EBS, and to record earnings from that boost, succeeded. On January 11, 2000, the date on which Enron purportedly altered the original hedge on the Enron stock in JEDI as part of "Project Grayhawk," Enron stock traded at approximately $47 per share. After the analyst conference on January 20, 2000, Enron stock rose to approximately $67 per share. The "Project Grayhawk" maneuver allowed Enron to recognize, through JEDI, approximately $85 million in earnings as a result of the manufactured bounce in the stock from the false and misleading presentation to analysts about EBS. Enron then misleadingly described these earnings in later presentations to analysts and in SEC filings as ordinary and recurring operating earnings from its energy business. Enron did not disclose its manipulation of the hedge on the Enron stock in JEDI to the investing public, nor did it disclose that approximately 20-percent of the earnings of Enron’s largest business segment and the unit in which major Enron energy businesses were housed resulted not from business operations but solely from an increase in Enron’s own stock price.
30. By late 2000, Enron executives and senior managers well knew that EBS was a struggling business that was hemorrhaging money. However, they took steps to ensure that EBS’s financial results did not publicly reveal its problems. For example, during 2000, Enron structured a series of misleading, one-time financial transactions in EBS that were designed to manufacture earnings that Enron used to present the false impression that EBS was progressing towards generating operating profits. Even with these transactions, EBS still was facing much larger than expected losses during the first quarter of 2001. In order to ensure that EBS did not record in the first quarter of 2001 losses that exceeded Enron’s annual budgeted loss target for EBS, and in order to ensure that the quarterly budgeted loss target dictated by Skilling and Causey for the first quarter 2001 was met, Causey and others fraudulently reduced, and caused to be fraudulently reduced, EBS’s expenses for the first quarter of 2001.
31. Enron executives and senior managers, including Causey, engaged in a pattern of fraudulent conduct designed to generate earnings needed to meet budget targets by artificially increasing the book value of certain assets in Enron’s large "merchant asset portfolio." This portfolio included many interests in energy-related businesses that were not publicly traded and, therefore, were valued by Enron according to its own internal accounting "models." Enron at times manipulated these models in order to produce results desired to meet budget targets. For example, in the fourth quarter of 2000, under the direction of Causey and others, Enron personnel fraudulently increased the value of one of the largest of Enron’s merchant assets, Mariner Energy, by $100 million in order to help close a budget gap.
32. One of the levers by which Skilling, Causey, and others ensured that Enron met financial reporting targets was the creation and use of Special Purpose Entities ("SPEs"). Enron transferred assets and liabilities to SPEs so that those business activities were "deconsolidated" or "off-balance-sheet." Under then applicable accounting rules, Enron did not need to consolidate the SPE on its balance sheet if an independent investor had made a substantive investment in the SPE (at least 3% of the SPE’s equity), had control of the SPE, and had the risks and rewards of owning the SPE assets. Through the use of SPEs, Enron would, among other things, record earnings and cash flows while hiding debt. This, along with the other fraudulent devices described here, enabled Enron to present itself more attractively as measured by criteria favored by Wall Street, credit rating agencies, and others.
33. In June 1999, in order to have an allegedly independent third party available to provide this outside equity funding so that Enron could more easily create and use SPEs to achieve its desired financial reporting results, Skilling, Causey, and others sought and obtained the approval of Enron’s Board of Directors (the "Board") for Fastow to create and serve as the managing partner of an investment partnership named LJM Cayman, L.P. that would invest in SPEs for Enron. The Board later approved Fastow’s participation in another even larger entity used to fund SPEs by Enron, LJM2 Co-Investment, L.P. (the LJM entities are collectively referred to as "LJM" unless otherwise noted). LJM’s business activity principally involved transactions with Enron and Enron affiliates.
34. As Skilling, Causey, and others well knew, LJM was not a legitimate third party acting independently from Enron. Instead, LJM was controlled by Fastow acting simultaneously in his capacity both as Enron’s CFO and as an equity partner in LJM. Skilling, Causey, Fastow, and others then exploited Fastow’s dual role as a means to ensure that LJM did not act as a truly independent third party investor would have, but rather as Enron’s own vehicle to achieve its financial reporting objectives and as a means for Fastow and others to be heavily compensated for contributing to Enron’s success in meeting its financial reporting objectives.
35. From approximately July 1999 through October 2001, Enron entered into transactions with LJM that defrauded Enron, its shareholders, the SEC, credit rating agencies, and others. The transactions with LJM enabled Enron, among other things, to: (a) manipulate its reported financial results by moving poorly performing assets off balance sheet, when in fact such off-balance-sheet treatment was improper; (b) conceal Enron’s poor operating performance by engaging in transactions designed to close gaps between Enron’s actual business results and its stated financial reporting goals; (c) manufacture earnings through sham transactions when Enron was having trouble otherwise meeting its goals for a quarter or year; and (d) improperly inflate the value of Enron’s investment portfolio by backdating documents when advantageous to Enron.
36. Beginning in the spring of 2000, Enron and LJM engaged in a series of financial transactions with four SPEs called Raptor I, Raptor II, Raptor III and Raptor IV (collectively referred to as the "Raptors"). Skilling, Causey, Fastow, Glisan, and others used the Raptors to manipulate fraudulently Enron’s reported financial results. They designed and approved Raptor I to protect Enron from having to report publicly in its financial results decreases in value in large portions of its energy merchant asset portfolio and technology investments by hedging the value of those investments with an allegedly independent third party created by Enron, known as Talon.
37. The Raptor I structure, however, was invalid under applicable accounting rules because Talon was not independent from Enron, and LJM’s investment in Talon was not sufficiently at risk to qualify as outside equity. Causey and Fastow had an oral side deal that LJM2 would receive its initial investment in Talon plus a profit of $11 million from Enron, all prior to Talon engaging in any of the hedging transactions for which it was created. As a quid pro quo for this payment to LJM2, Fastow agreed with Causey that Enron employees could use Raptor I to manipulate Enron’s financial statements, including by allowing Enron employees, without negotiation or due diligence on behalf of LJM2, to select the values at which the Enron assets were hedged with Talon. Skilling was informed of and approved Fastow’s deal with Causey in order to ensure that Enron achieved the financial reporting goals for which Raptor I was designed, even though it was clear that the Raptor I structure was not properly off Enron’s balance sheet.
38. The side deal between Causey and Fastow was satisfied by Causey, Fastow, Glisan, and others manufacturing a transaction between Enron and Talon that generated a $41 million payment to LJM2. Causey and others caused Enron to purchase a "put" on its own stock from an entity involved in the "Raptor" structure, which had no business purpose for Enron but ensured that LJM2 received, without risk, the complete return of its $30 million investment in the first "Raptor" structure, together with a profit of $11 million on that investment. After satisfying the conditions of the side deal by providing LJM2 with a guaranteed return of and on its investment, Enron began to use Raptor I to hedge the value of Enron’s assets. Enron employees manipulated the book values of Enron assets, many of which were expected to decline in value, before they were hedged, knowing that the Raptor I structure ensured that Enron would not suffer the financial reporting consequences of subsequent declines or large fluctuations in the value of those assets. Causey and Fastow further used Raptor I fraudulently to promote Enron’s financial position by back-dating the effective date of the Raptor hedge to Enron’s advantage, capturing the all-time high stock value of one of the Enron assets, stock in a company named AVICI, at a time when they knew that value already had declined. The basic structure used in Raptor I, including Causey’s and Fastow’s oral side deal, was repeated in the three successor fraudulent hedging devices known as Raptors II, III and IV.
39. In addition to the fraudulent Raptor hedging devices, Skilling, Causey, and other Enron senior managers used LJM to conduct other transactions in order to achieve financial reporting objectives, usually purported asset sales that yielded reported earnings and cash flow and moved poorly performing assets temporarily off Enron’s balance sheet. Skilling, Causey, Fastow, and others made undisclosed side agreements that guaranteed LJM against risk in certain of its transactions with Enron. These included side agreements that Causey, Fastow, and others termed "Global Galactic," pursuant to which Causey and Fastow rigged Enron-LJM transactions to safeguard Enron’s scheme to manipulate its reported financial results.
40. One such transaction involved LJM’s "purchase" of Enron’s interest in a company that was building a power plant in Cuiaba, Brazil (the "Cuiaba project"). On September 30, 1999, when no true third-party buyer could be found, Skilling, Causey, and others caused Enron to "sell" a portion of Enron’s interest in the Cuiaba project to LJM for $11.3 million. LJM agreed to "buy" this interest only because Skilling, Causey, Fastow and others, in an undisclosed side deal, agreed that Enron would buy back the interest, if necessary, at a profit to LJM. Based on this purported "sale," which was in fact an asset parking or warehousing arrangement, Enron improperly recognized approximately $65 million in income in the third and fourth quarters of 1999, when it was straining to meet budget targets designed to ensure that it achieved its earnings-per-share goals.
41. By 2001, the Cuiaba project was approximately $200 million over budget. Nonetheless, in the spring of 2001, Skilling, Causey, and Fastow caused Enron to agree to buy back LJM’s interest in the Cuiaba project at a considerable profit to LJM, in keeping with the undisclosed oral side deal. After agreeing to execute the repurchase, Skilling, Causey, Fastow, and others decided to delay publicly consummating the deal until Fastow sold his interest in LJM so that Fastow’s role in the transaction would not be disclosed. Because Fastow’s role at LJM was coming under increased scrutiny, Skilling, Causey, Fastow, and others sought ways to circumvent public disclosures about Fastow’s dual roles in LJM and as Enron’s CFO. Consequently, the repurchase was not effected until after Enron filed its second quarter 2001 financial reports, in which no repurchase or agreement to repurchase was disclosed. In fact, Enron had agreed to the repurchase all along and, just weeks after the second quarter filing with the SEC, it was accomplished on terms identical to those agreed upon earlier.
42. In the fourth quarter 1999 Enron pushed through several end-of-the-quarter transactions that were designed solely to achieve budget targets at a time when the company was struggling to produce earnings sufficient to ensure that Enron met analysts’ predictions for earnings growth. One transaction used by Enron to ensure that its target was met in the fourth quarter of 1999 was a deal, which Skilling, Causey, and others caused to be committed, whereby Enron "sold" Merrill Lynch an interest in electricity-generating power barges moored off the coast of Nigeria. When Enron was unable to find a true buyer for the barges by December 1999, it parked the barges with Merrill Lynch so that Enron could record $12 million in earnings and $28 million in cash flow needed to meet budget targets.
43. Enron was able to induce Merrill Lynch to enter into the Nigerian barges transaction by promising that Merrill Lynch would receive a return of its investment plus an agreed-upon profit within six months. Enron conveyed this promise in the form of an oral "handshake" side-deal with Merrill Lynch that was concealed from Enron’s auditors and the public. Because Merrill Lynch’s supposed equity investment was not sufficiently "at risk," Enron should not have treated the transaction as a sale from which it could record earnings and cash flow. In June 2000, Enron in fact delivered on its "handshake" promise to Merrill Lynch by producing LJM as a buyer for the Nigerian barges. Causey and Fastow agreed to include LJM’s repurchase of the Nigerian barges from Merrill Lynch at the agreed-upon profit to Merrill Lynch in their "Global Galactic" agreement concerning LJM deals designed to assist Enron in achieving its financial reporting objectives. In turn, Causey assured that LJM would be bought out at a profit and paid a large fee for taking Merrill Lynch out of the transaction by the agreed-upon June 30, 2000 deadline. The Nigerian Barge transaction is the subject of the SEC’s action in this District against former Merrill Lynch executives involved in the transaction, SEC v. Merrill Lynch et al., No. H-03-0946.
44. In furtherance of the scheme to manipulate Enron’s financial results and inflate its stock price, Skilling, Causey, and others presented and participated in the presentation of knowingly false and misleading statements about Enron’s financial results, the performance of its businesses, and the manner in which its stock was and should be valued. These statements were disseminated to the investing public in conferences, conference calls, press releases, interviews, and statements to members of the media. They included, but were not limited to, those described in paragraphs 45 through 59 below.
45. On April 12, 2000, Enron held its quarterly conference call to discuss its earnings for the first quarter of 2000. Skilling and Causey were among the senior Enron managers who participated in the call and Enron’s preparation for the call. Skilling knowingly made false and misleading statements about Enron’s operating earnings for the quarter and omitted to disclose facts necessary to make his statements not misleading. Skilling stated that Enron’s wholesale energy "assets and investments" business recorded earnings of $220 million for the quarter; that those earnings were "attributable to increased earnings from Enron’s portfolio of energy-related and other investments"; that "this was a pretty good quarter for the energy-related investment business in contrast to the drag it was over the last year"; and that the upswing in earnings in that portion of Enron’s business was "basically the performance of the existing asset portfolios." In reality, which Skilling omitted to disclose, approximately $85 million of the $220 million in earnings were unrelated to the operating performance of Enron’s energy business. Rather, through "Project Grayhawk," they were solely attributable to a scheme to generate earnings by manufacturing an increase in Enron’s own stock price by heavily touting EBS at Enron’s January 20, 2000 analyst conference.
46. On January 22, 2001, Enron held its quarterly conference call with Wall Street analysts to discuss its earnings for the fourth quarter of 2000. Skilling and Causey were among the senior Enron managers who participated in the call and Enron’s preparation for the call. Skilling knowingly made false and misleading statements about Enron’s wholesale and retail energy trading businesses and omitted to disclose facts necessary to make his statements not misleading, including that "for Enron, the situation in California had little impact on fourth quarter results. Let me repeat that. For Enron, the situation in California had little impact on fourth quarter results." He further stated that "nothing can happen in California that would jeopardize" Enron’s earnings targets for 2001 and that California business was "small" for Enron. In reality, Enron reaped huge profits in 2000 from energy trading in California and concealed hundreds of millions of dollars of those earnings in undisclosed reserve accounts for later use. Also, by late January 2001, California utilities owed EES hundreds of millions of dollars that EES could not collect and the large reserves that Enron was forced to book for those uncollectible receivables had been concealed within Enron Wholesale’s books.
47. In support of Enron’s claims that EBS continued to be successful and a major positive factor contributing to Enron’s current and future stock price, a senior Enron manager misled analysts during the call about the source of EBS’s earnings in the fourth quarter of 2000. After being directed by Skilling to answer a question about the source of EBS’s earnings, the senior manager said that one-time, nonrecurring transactions such as sales of "dark fiber" and a "monetization," or sale, of part of EBS’s nascent video-on-demand venture with the Blockbuster company accounted for only "a fairly small amount" of EBS’s earnings. In truth, as Enron executives and senior managers including Causey well knew, the sale of projected future revenues from the Blockbuster video-on-demand venture, which Enron abandoned just two quarters later, accounted for $53 million of EBS’s $63 million in fourth quarter 2000 earnings.
48. Enron held its annual conference in Houston with Wall Street investment analysts on January 25, 2001. At that conference, Skilling and others under his supervision, as a focal point of Enron’s case for an increased stock value, knowingly made false and misleading presentations about the performance and potential of EBS and EES and omitted to disclose facts necessary to make the statements not misleading. Skilling called all of Enron’s major businesses, including EBS and EES, "strong franchises with sustainable high earnings power." He said of EBS that "our network’s in place." He asserted that Enron’s stock, which was then trading at over $80 per share, should be valued at $126 per share, attributing $63 of that alleged stock value to EBS and EES. He stated Enron was "not a trading business."
49. These statements were false and misleading and omitted facts necessary to make them not misleading. In reality, EBS was performing very poorly and had made little commercial progress in 2000; EBS personnel had recommended shutting down or selling EBS’s network; EBS had few revenue prospects for the upcoming year; and EBS had an unsupportable cost structure that, without correction, could potentially lead to substantial losses well in excess of those Enron had publicly forecast. EES also was an unsuccessful business. Its modest earnings during 2000 largely resulted from one-time sales of investments unrelated to its retail energy contracting business; its existing retail energy contracts were overvalued by hundreds of millions of dollars; and it was owed hundreds of millions of dollars by the California utilities that it could not collect and that Enron was concealing within Enron Wholesale. In addition, Enron had made huge, volatile profits from speculative wholesale energy trading during 2000, particularly in the western United States, and had concealed hundreds of millions of dollars of those earnings in reserve accounts.
50. Enron held a special conference call with Wall Street analysts on March 23, 2001 in an effort to dispel growing public concerns about Enron’s stock, which had fallen from over $80 per share to under $60 per share in less than two months. Skilling and Causey were among the senior Enron managers who participated in the call and Enron’s preparation for the call. Skilling knowingly made false and misleading statements, and omitted to disclose facts necessary to make his statements not misleading, in an effort to prop up Enron’s stock. Among other things, he stated that "Enron’s business is in great shape" and "I know this is a bad stock market but Enron’s in good shape," even though both of Enron’s showpiece new businesses, EBS and EES, were failing. He stated that Enron was "highly confident" of its income target of $225 million for the year for EES, and that EES was seeing the "positive effect" of "the chaos that’s going on out in California." In reality, even EES’s existing contracts were overvalued by hundreds of millions of dollars. EES was also owed hundreds of millions of dollars by the California utilities that it could not collect and Enron had concealed reserves it was forced to book for those receivables within Enron Wholesale. EES’s new management was predicting internally that it would take a year or more for EES to become profitable.
51. Skilling further stated that EBS "is coming along just fine" and that the company was "very comfortable with the volumes and targets and the benchmarks that we set for EBS." He said that EBS’s two profit-and-loss centers, intermediation and content services, were "growing fast" and that EBS was not laying off employees but rather "moving people around inside EBS" and that this was "very good news." In reality, EBS was continuing to fail. Senior personnel at EBS had reported internally that the unit had an unsupportable cost structure and unproven revenue model. One senior EBS executive estimated that Enron would need to write-off (that is, record as a loss) approximately half of EBS’s $875 million book value. EBS was laying off employees and Skilling had told employees based in Portland, Oregon that EBS would be centralized in Houston and jobs would be cut because of a "total meltdown" in the broadband industry.
52. Enron held its conference call with Wall Street analysts to discuss its first quarter 2001 results on April 17, 2001. Skilling and Causey were among the senior Enron managers who participated in the call and Enron’s preparation for the call. Skilling made false and misleading statements in the call and omitted to disclose facts necessary to make his statements not misleading. Skilling talked about continued "big, big numbers" in EES’s energy contracting business. He falsely explained Enron’s movement of EES’s energy contract portfolio into Enron Wholesale, omitting any reference to EES’s large losses or their transfer to Enron Wholesale and stated, "[W]e have such capability in our wholesale business that we were -- we just weren’t taking advantage of that in managing our portfolio at the retail side. And this retail portfolio has gotten so big so fast that we needed to get the best -- the best hands working risk management there." While Enron reported modest first quarter earnings for EES of $40 million, in reality, EES was facing losses approaching one billion dollars, including overvalued contracts, uncollectible receivables with the California utilities, and huge losses from an increased California regulatory surcharge. Enron had moved EES’s energy trading portfolio into Enron Wholesale to conceal those losses.
53. Skilling made further knowingly false and misleading statements about Enron’s wholesale energy trading business, and omitted to disclose facts necessary to make his statements not misleading, including that "we remain confident that the situation in California will have no material impact on our financial condition and no adverse impact on 2001 earnings." He refused, when pressed by analysts, to provide any detail or specific numbers regarding Enron’s reserves and to explain how Enron’s reserves were allotted between EES and Enron Wholesale, stating only that "we have adequate reserves and other credit offsets in place" to cover any exposure in California. In reality, Enron had concealed for later use hundreds of millions of dollars of year 2000 energy trading profits, much of them from the California market, in reserve accounts within Enron Wholesale that exceeded $1 billion, and had used those reserves to conceal hundreds of millions of dollars of potential losses to EES, much of them also attributable to the California market.
54. Skilling also made knowingly false and misleading statements, and omitted to disclose facts necessary to make his statements not misleading, about the success of EBS. He stated that "[o]ur network is now substantially complete" and that it "is just not the case" that Enron was reducing staff of EBS because it was getting out of the content services business. Skilling also stressed that the reported losses in the unit were on target and "anticipated" and that the unit’s capital expenditures were being reduced because it was "able to get access to connectivity without having to build it." In reality, the cost-cutting measures at EBS were instituted because the unit was continuing to fail and to lay off employees rather than redeploy them, and was incurring much larger than expected losses that could not be offset with projected future revenues.
55. A senior Enron manager made further false and misleading statements about EBS in the call, and omitted to disclose facts necessary to make his statements not misleading, including that revenues from selling portions of EBS’s content business, as opposed to recurring earnings from operations, were only "about a third" of EBS’s overall earnings and that EBS had only done "a little bit" of such sales in the past two quarters. In reality, the sale of a portion of EBS’s content business was the principal mechanism by which the unit had generated revenue in the last two quarters and accounted for the majority of EBS’s earnings for the first quarter of 2001. Only a very small percentage of the unit’s revenues in either quarter was due to operations that could be expected to recur. Moreover, EBS had only been able to meet its target of $35 million in losses for the first quarter of 2001 through the combined efforts of the sale of portions of its content services business and the manipulation of the accounting for many of its expenses and allocations under the supervision of Causey.
56. Enron held its conference call with Wall Street analysts to discuss its second quarter 2001 results on July 12, 2001. Skilling and Causey were among the senior Enron managers who participated in the call and Enron’s preparation for the call. Skilling made further knowingly false and misleading statements about the condition of Enron, and omitted to disclose facts necessary to make his statements not misleading, including that Enron had a "great quarter." He further stated that EES "had an outstanding second quarter" and was "firmly on track to achieve our 2001 target of $225 million" in earnings; that losses in EBS were due to "industry conditions" and "dried up" revenue opportunities; and that Enron’s "new businesses are expanding and adding to our earnings power and valuation, and we are well positioned for future growth." A senior Enron manager also misled analysts about the movement of EES’s losses into Enron Wholesale, stating, "We just took the risk management functions and combined them because we just -- we were trying to get some more efficiency out of management of the overall risk management function."
57. In reality, by the close of the second quarter of 2001, EBS had failed and its increased losses were because it had stopped the one-time sales of portions of its business that had previously been the only significant source of its earnings. EES was facing hundreds of millions of dollars in concealed losses and was a year or more away from any prospect of success. As a whole, Enron was less than five months from bankruptcy.
58. Enron held its quarterly conference call to discuss its third quarter 2001 earnings results with Wall Street analysts on October 16, 2001. Causey was among the senior Enron managers who participated in the call and Enron’s preparation for the call. For the first time during the duration of the scheme to manipulate its reported financial results, Enron conceded that it had suffered large losses, totaling approximately $1 billion, in certain segments of its business. These areas included many declining assets that had been concealed in the "Raptor" hedges as well as EBS. However, Causey and others knowingly attempted to mislead the investing public about these losses in order to prevent the bad news from further devaluing Enron’s stock price.
59. Enron misleadingly described the hundreds of millions of dollars in losses stemming from the "unwind," or abandonment, of the "Raptors" as "nonrecurring" losses, that is, a one-time or unusual earnings event. However, over the course of prior quarters, Enron had characterized the positive earnings that it previously recognized, and then hedged, from these same assets as ordinary operating earnings that could be expected to recur. In addition, Enron did not disclose in its third quarter press release a substantial reduction in shareholder equity. Instead, Enron’s Chairman/CEO only briefly mentioned in the call that "[i]n connection with the early termination [of the Raptor structures], shareholders’ equity will be reduced approximately $1.2 billion." In reality and as Causey well knew, this disclosure, which immediately alarmed Wall Street investment analysts because of its size and abnormality, resulted not from the termination of the "Raptor" structures, but principally from a huge accounting error by Enron in prior earnings results that Enron shortly would be forced to concede and correct.
60. In furtherance of the scheme to manipulate Enron’s financial results and inflate its stock price, Skilling, Causey, and others filed and caused to be filed with the SEC false and misleading annual and quarterly reports of Enron, including:
Form 10-K for the Fiscal Year 1999 (filed on or about March 30, 2000);
Form 10-Q for the First Quarter 2000 (filed on or about May 15, 2000);
Form 10-Q for the Second Quarter 2000 (filed on or about August 14, 2000);
Form 10-Q for the Third Quarter 2000 (filed on or about November 14, 2000);
Form 10-K for Fiscal Year 2000 (filed on or about April 2, 2001);
Form 10-Q for the First Quarter 2001 (filed on or about May 15, 2001); and
Form 10-Q for the Second Quarter 2001 (filed on or about August 14, 2001)
These reports, among other things, contained materially false and misleading financial statements that overstated Enron’s actual revenues and earnings, understated Enron’s actual debt and expenses, and materially false and misleading management descriptions and analysis of Enron’s business. In addition, in furtherance of the scheme, Skilling, Causey, and others misrepresented, concealed, and hid, and caused to be misrepresented, concealed, and hidden, the purposes and acts done in furtherance of the scheme, including by providing false, misleading, and inaccurate information and making false representations to, among others, the investing public, Enron’s outside auditors, various rating agencies, and the SEC.
61. On August 14, 2001, Skilling unexpectedly resigned from Enron, according to Skilling and Enron, for "personal reasons." Enron’s stock price, which had been declining since January 2001, fell sharply. On October 16, 2001, Enron announced allegedly "nonrecurring" losses of approximately $1 billion. Enron’s stock price declined further. On October 29 and November 1, 2001, the two leading credit rating agencies downgraded Enron’s credit rating. On November 8, 2001, Enron announced its intention to restate its financial statements for 1997 through 2000 and the first and second quarters of 2001 to reduce previously reported net income by an aggregate of $586 million. On November 21, 2001, Enron’s credit rating was downgraded to "junk" status. On December 2, 2001, Enron filed for bankruptcy, making its stock, which less than a year earlier had been trading at over $80 per share, virtually worthless.
62. Skilling and Causey signed employment and consulting agreements with Enron in which they acknowledged and agreed that they owed a duty of trust and confidence to Enron and that personal use of confidential information of Enron was prohibited. Skilling and Causey agreed they owed a fiduciary duty to act only in the best interests of Enron and its shareholders. The employment and consulting agreements signed by Skilling and Causey were in effect during the time period relevant to the First Amended Complaint.
63. Skilling, Causey, and others profited from the scheme to defraud by selling large amounts of Enron stock at the inflated prices. These trades also occurred while Skilling, Causey, and others were in possession of material non-public information, including information about Enron’s actual financial position and the performance of its business units as described above, that the stock price was inflated, and that Enron and its executives and senior managers, including Skilling and Causey, had supplied and were continuing to supply materially false and misleading information to the investing public, including but not limited to Enron’s publicly reported financial results and public statements of Enron’s executives and senior managers.
64. Skilling sold shares of Enron stock and generated total proceeds of $62,626,401.90 as follows:
|A||April 25, 2000||10,000||$73.875
|B||April 26, 2000||86,217||$74.00
|C||August 30, 2000||15,000||$86.125||$1,291,875.00|
|D||September 1, 2000||60,000||$87.00
|E||September 5, 2000||11,441||$85.00||$972,485.00|
|F||November 1, 2000||72,600||$83.2406
|G||November 2, 2000||20,000||$82.3381||$1,646,762.00|
|H||November 7, 2000||46,068||$82.5872||$3,804,627.13|
|I||November 15, 2000-June 19, 2001||10,000 per week, 31 weeks per sales plan||$84.00 to
|J||September 17, 2001||500,000||$31.5061
65. Causey sold shares of Enron stock and generated total proceeds of $10,316,807.83 as follows:
|Trade||Date||Shares||Sale Price(s)||Gross Proceeds|
|A||January 21, 2000||45,000||$72.00
|B||September 28, 2000||80,753||$87.8829||$7,096,807.83|
66. On or about the dates set forth below, Skilling, Causey, and others, while agreeing that they were "responsible for the fair presentation of the financial statements," falsely represented to Enron’s accountants that, among other things, (a) the statements and representations made in Enron’s financial statements were true; (b) Enron properly recorded or disclosed in its financial statements all agreements to repurchase assets previously sold; (c) Enron properly recorded or disclosed in its financial statements guarantees, whether written or oral, under which Enron was contingently liable; (d) Enron’s unaudited quarterly financial data fairly summarized, among other things, the operating revenues, net income and per share data based upon that income for each quarter; (e) there was no material fraud or any other irregularities that, although not material, involved management or other employees who had a significant role in Enron’s system of internal control, or fraud involving other employees that could have a material effect on the financial statements; (f) there were no material liabilities or gain or loss contingencies (including those that might exist relating to oral guarantees) that were required to be disclosed in accordance with SFAS No. 5; (g) all related party transactions, including sales, were properly recorded and disclosed; (h) no events occurred subsequent to the balance sheet date that had a material effect on the financial statements and that should have been disclosed in order to keep those financial statements from being misleading; (i) Enron made available to the accountants all financial records and related data; (j) Enron’s system of internal controls was adequate and had no significant deficiencies; and (k) the accounting records underlying Enron’s financial statements accurately and fairly reflected, in reasonable detail, the transactions of Enron, well knowing that these statements were false. Skilling, Causey, and others made the false representations in representation letters to Enron’s accountants as follows:
|Count||Defendant(s)||Date||Statement to Auditors|
|A||JEFFREY K. SKILLING
RICHARD A. CAUSEY
|March 13, 2000||Annual Representation Letter in Connection with Enron Form 10-K for Year 1999|
|B||JEFFREY K. SKILLING
RICHARD A CAUSEY
|May 12, 2000||Quarterly Representation Letter in Connection with Enron Form 10-Q for First Quarter 2000|
|C||JEFFREY K. SKILLING
RICHARD A. CAUSEY
|August 11, 2000||Quarterly Representation Letter in Connection with Enron Form 10-Q for Second Quarter 2000|
|D||JEFFREY K. SKILLING
RICHARD A. CAUSEY
|November 13, 2000||Quarterly Representation Letter in Connection with Enron Form 10-Q for Third Quarter 2000|
|E||JEFFREY K. SKILLING
RICHARD A. CAUSEY
|February 23, 2001||Annual Representation Letter in Connection with Enron Form 10-K for Year 2000|
|F||JEFFREY K. SKILLING
RICHARD A. CAUSEY
|May 15, 2001||Quarterly Representation Letter in Connection with Enron Form 10-Q for First Quarter 2001|
|G||RICHARD A. CAUSEY||August 14, 2001||Quarterly Representation Letter in Connection with Enron Form 10-Q for Second Quarter 2001|
67. Paragraphs 1 through 66 are realleged and incorporated by reference herein.
68. As set forth more fully above, Skilling and Causey, directly or indirectly, by use of the means or instrumentalities of interstate commerce, or by the use of the mails and of the facilities of a national securities exchange, in connection with the purchase or sale of securities: have employed devices, schemes, or artifices to defraud, have made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or have engaged in acts, practices, or courses of business which operate or would operate as a fraud or deceit upon any person.
69. By reason of the foregoing, Skilling and Causey violated and aided and abetted violations of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)], and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5].
70. Paragraphs 1 through 69 are realleged and incorporated by reference herein.
71. By engaging in the conduct described above, Skilling and Causey knowingly and substantially caused Enron to file materially false and misleading annual reports on Form 10-K and materially false and misleading quarterly reports on Form 10-Q with the Commission.
72. By reason of the foregoing, Skilling and Causey aided and abetted violations by Enron of Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20 and 13a-1, and Causey also aided and abetted violations by Enron of Exchange Act Rule 13a-13.
73. Paragraphs 1 through 72 are realleged and incorporated by reference herein.
74. By engaging in the conduct described above, Skilling and Causey aided and abetted Enron’s failures to make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflected Enron’s transactions and dispositions of its assets, in violation of Section 13(b)(2)(A) of the Exchange Act, and further aided and abetted failures to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that Enron’s corporate transactions were executed in accordance with management’s authorization and in a manner to permit the preparation of financial statements in conformity with generally accepted accounting principles in violation of Section 13(b)(2)(B) of the Exchange Act.
75. By engaging in the conduct described above, Skilling and Causey, directly or indirectly, falsified and caused to be falsified Enron’s books, records, and accounts subject to Section 13(b)(2)(A) of the Exchange Act in violation of Rule 13b2-1 thereunder.
76. By reason of the foregoing, Skilling and Causey aided and abetted violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and violated Rule 13b2-1 thereunder.
77. Paragraphs 1 through 76 are realleged and incorporated by reference herein.
78. By engaging in the conduct described above, Skilling and Causey knowingly circumvented or knowingly failed to implement a system of internal financial controls at Enron, and knowingly falsified books, records, and accounts of Enron.
79. By reason of the foregoing, Skilling and Causey violated and aided and abetted violations of Section 13(b)(5) of the Exchange Act.
80. Paragraphs 1 through 79 are realleged and incorporated by reference herein.
81. By engaging in the conduct described above, Skilling and Causey, directly or indirectly, made or caused to be made false and misleading statements or omitted or caused others to omit to state material facts necessary in order to make statements made, in light of the circumstances under which such statements were made, not misleading to Enron’s independent accountants and Enron’s auditors in connection with audits and examinations of Enron’s required financial statements and in connection with the preparation and filing of documents and reports required to be filed with the Commission, in violation of Exchange Act Rule 13b2-2.
82. By reason of the foregoing, Skilling and Causey violated and aided and abetted violations of the Exchange Act Rule 13b2-2.
83. The Commission demands a jury in this matter.
WHEREFORE, the Commission respectfully requests that this Court:
A. Grant a Permanent Injunction restraining and enjoining Skilling and Causey from violating the statutory provisions set forth herein; prohibiting each permanently and unconditionally from acting as an officer or director of any issuer of securities that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of such Act; and ordering each to pay disgorgement of illegal gains, and civil penalties;
B. Pursuant to Section 308 of the Sarbanes-Oxley Act of 2002, enter an order providing that the amount of civil penalties ordered against Skilling and Causey be added to and become part of a disgorgement fund for the benefit of the victims of the violations alleged herein; and
C. Grant such other and additional relief as this Court may deem just and proper.
Dated: February ___, 2004
Stephen M. Cutler
Director, Enforcement Division
Linda Chatman Thomsen
Deputy Director, Enforcement Division
Charles J. Clark
Assistant Director, Enforcement Division
Luis R. Mejia
Assistant Chief Litigation Counsel
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0911
Phone: (202) 942-4744 (Mejia)
Fax: (202) 942-9569 (Mejia)
Douglas B. Paul
Kurt G. Gresenz
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