UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
UNITED STATES SECURITIES
AND EXCHANGE COMMISSION,
J.P. MORGAN CHASE & CO.,
Civil Action No.|
Plaintiff Securities and Exchange Commission (the "Commission") for its Complaint alleges as follows:
- J.P. Morgan Chase & Co. ("Chase") aided and abetted Enron Corp.'s ("Enron") manipulation of its reported financial results through a series of complex structured-finance transactions, called "prepays," over a period of several years preceding Enron's bankruptcy. These transactions were used by Enron to report loans from Chase as cash from operating activities. Indeed, the structural complexity of these transactions had no business purpose aside from masking the fact that, in substance, they were loans from Chase to Enron.
- Chase knew, because it helped Enron structure these transactions, that prepays were loans structured as a series of commodity trades for accounting and financial reporting purposes. As Chase knew, Enron engaged in prepays to match its so-called mark-to-market earnings (paper earnings based on changes in the market value of certain assets held by Enron) with cash flow from operating activities. By matching mark-to-market earnings with cash flow from operating activities, Enron sought to convince analysts and credit rating agencies that its reported mark-to-market earnings were real, i.e., that the value of the underlying assets would ultimately be converted into cash.
- As Chase also knew, prepays yielded another substantial benefit to Enron: they allowed Enron to hide the true extent of its borrowings from investors and rating agencies because sums borrowed in prepay transactions appeared as "price risk management liabilities" rather than "debt" on Enron's balance sheet. In addition, Enron's obligation to repay those sums was not otherwise disclosed. Significantly, Chase considered prepays to be unsecured loans to Enron, rather than commodity trading contracts, and based its decisions to participate in these transactions primarily on its assessment of Enron's credit.
- Between December 1997 and September 2001, Chase effectively loaned Enron a total of approximately $2.6 billion in the form of seven prepay transactions. Chase was willing to engage in the transactions because they generated substantial fees and as an accommodation to an important client.
- Based on this conduct, Chase aided and abetted Enron's violations of the antifraud provisions of the federal securities laws. The Commission requests that this Court permanently enjoin Chase from violating Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rule 10b-5, order Chase to disgorge ill-gotten gains, order Chase to pay civil penalties, and order such other and further relief as the Court may deem appropriate.
JURISDICTION AND VENUE
- 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].
- 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.
- In connection with the acts, practices, and courses of business alleged herein, Chase, 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.
- Chase, unless restrained and enjoined by this Court, will continue to engage in transactions, acts, practices, and courses of business as set forth in this Complaint or in similar illegal acts and practices.
- J.P. Morgan Chase & Co., a Delaware corporation headquartered in New York, New York, is a financial holding company created by the December 31, 2000, merger of J.P. Morgan & Co. Incorporated with The Chase Manhattan Corporation. As of December 31, 2002, Chase had $759 billion in assets and $42 billion in stockholders' equity. At all relevant times, Chase's common stock was registered with the Commission pursuant to Section 12(b) of the Exchange Act and was listed for trading on the New York Stock Exchange (symbol "JPM").
- 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 (symbol "ENE"). Between 1997 and 2001, Enron raised billions in the public debt and equity markets. Until its bankruptcy filing in December 2001, Enron was number seven on the Fortune 500 list of largest corporations in the United States based on reported revenue. In the previous ten years, Enron had evolved from a regional natural gas provider to a commodity trader of natural gas, electricity, and other physical commodities with retail operations in energy and other products. The Company also created and traded financial products. 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.
PREPAYS WERE STRUCTURED TO DISGUISE THE FACT THAT THEY WERE LOANS.
- The clearest indication that Chase/Enron prepays were disguised loans was their structure. In general, in a prepay transaction (also known as a prepaid forward sale contract) the purchaser pays for a commodity upfront, in full, at the time the contract is made, and the seller agrees to deliver the subject commodity on future dates, often over the course of several years. In effect, the seller bets that the market price of the subject commodity would be lower at the time of delivery than at the time the contract is made. The purchaser bets the opposite way: that the market price of the commodity at the time of delivery will exceed the price it paid at the time of contracting. In a typical prepay transaction, therefore, each side assumes commodity price risk.
- The critical difference in the Chase/Enron prepays -- and the reason that these transactions were in substance loans -- was that they employed a structure that passed the counter-party commodity price risk back to Enron, thus eliminating all commodity risk from the transaction. As in typical prepays, Enron received cash upfront. In contrast to typical prepays, however, with all elements of the structure taken together, if all parties performed as expected, Enron's future obligations were distilled to repayment of that cash with negotiated interest. The interest amount was set at the time of the contract and was independent of any changes in the price of the underlying commodity. This was accomplished through a series of simultaneous trades whereby Enron passed the counter-party commodity price risk to a Chase-sponsored special purpose vehicle ("SPV"), which passed the risk to Chase, which, in turn, passed the risk back to Enron.
- Generally, the SPV was one of two Isle of Jersey companies, collectively known as Mahonia. (Unless a specific entity is named, the name "Mahonia" is used here to refer to two entities named Mahonia Limited and Mahonia Natural Gas Limited. All but one of the transactions described here used Mahonia Limited as the third participant, the remaining transaction used Mahonia Natural Gas Limited. These SPVs were essentially identical in format and operation and were functionally interchangeable.) Mahonia was controlled by Chase and was directed by Chase to participate in the transactions ostensibly as a separate, independent, commodities-trading entity. In fact, however, the SPV had no independent reason to participate in these transactions; as Chase knew, Mahonia was included in the structure solely to effectuate Enron's accounting and financial reporting goals.
- Generally, Chase/Enron prepay transactions consisted of four sets of simultaneously executed contracts. These transactions allowed for large payments by Chase to Enron and an obligation by Enron to pay the money back with interest -- a classic loan. To wit:
- ENRON - MAHONIA PREPAID FORWARD SALE CONTRACT
MAHONIA - CHASE PREPAID FORWARD SALE CONTRACT
- Pursuant to this contract, Enron received a large, upfront payment from Mahonia and was obligated to make future, monthly deliveries to Mahonia of specified volumes of a commodity at specified locations. (Enron's obligation to begin delivering the commodity usually began three months after the contract's execution and lasted for three to five years from the execution date.) Viewed in isolation, this contract exposed Mahonia to commodity price risk
SALE OF COMMODITY BY CHASE TO ENRON
- Pursuant to this contract, Mahonia received an upfront payment from Chase and was obligated to make future, monthly deliveries to Chase of specified volumes of a commodity at specified locations. The amount that Chase paid Mahonia pursuant to this contract was essentially the same as Mahonia's payment to Enron. (Chase's payment to Mahonia usually exceeded Mahonia's payment to Enron by the amount of Mahonia's fee for participating in the transaction; typically $5,000 to $12,000.) In essence, Chase funded Mahonia's upfront payment to Enron.
- In all material respects, the prepaid forward contract between Mahonia and Chase contained the same terms as the Enron/Mahonia prepaid forward contract, i.e., the same delivery dates, delivery points, and volumes. Thus, Mahonia's commodity price risk was passed through to Chase.
CHASE - ENRON SWAP
- Pursuant to this contract, Chase obligated itself to deliver the same commodity back to Enron on the same delivery dates at the same delivery points specified in the Enron/Mahonia and Mahonia/Chase forward contracts.
- In exchange, Enron agreed to make periodic payments to Chase that varied (floated) with the changes in the price of the subject commodity because they were calculated with reference to a specified commodity index at the time of delivery. Since payments to Chase were based on an index of a commodity, Chase continued to be subjected to commodity price risk.
The volumes specified in the agreements had nothing to do with commodity trading. Instead they were based on the amounts Enron wanted to borrow. To arrive at the volume of the referenced commodity to be specified in a prepay contract, Enron and Chase divided the sum of the borrowed amount and interest by a negotiated per-unit price of the referenced commodity. As a Chase e-mail explained, "[a]s before, assume we will tweak either the volume or the price to hit the [desired] $350MM [loan amount]."
- Chase passed its commodity price risk back to Enron by entering into a variable for fixed swap agreement. The swap agreement obligated Chase to make future, variable (or floating) payments to Enron. The floating payments under the swap agreement were always equal to the payments that Enron made to Chase in connection with its sale of the commodity back to Enron. In effect, the two payments cancelled each other out. In exchange, Enron was obligated to make fixed installment payments to Chase. The fixed payments were calculated to provide Chase with the return of its principal (i.e., the upfront payment to Mahonia which was passed to Enron) plus an agreed upon interest amount.
Four of the seven prepay transactions that are the subject of this complaint used the structure set out above. The other three used structures that were variants of the same concept; all structures achieved the same result by passing the counter-party commodity price risk back to Enron.
One of the other structures, the first prepay transaction executed by the parties during the relevant time period, was the same as the structure set out above except that it contemplated that Chase would sell the commodity in the open market. (Despite the contemplation of a sale in the open market, Chase still passed its commodity price risk to Enron by operation of a swap whereby, in effect, Chase passed the open market price to Enron in exchange for fixed payments.) However, Enron's appetite for additional cash from operating activities created a risk that Chase would not be able to sell efficiently the commodities it received in prepay transactions. In part for that reason, in subsequent prepay transactions, the parties agreed to have Chase deliver the commodities back to Enron, thus effectively eliminating the need for any actual commodity transport to take place. (In commodities trading, delivery is deemed to take place when title to the specified amount of a commodity passes.) For example, in a taped conversation, Enron and Chase employees discussed the fact that it did not matter if the volumes to be delivered actually exceeded the total capacity of the pipeline at a specified delivery point "because [Enron was] going to get [the commodity] back from [Chase]" at the same time. However, they agreed that it would be best to avoid such a circumstance because it might "raise a red flag." (This and all other recordings of conversations referenced in this complaint were made in the normal course of recording trading desk telephone conversations.)
Another prepay transaction employed a structure that used two SPVs, Mahonia Natural Gas Limited and Stoneville Aegean Limited ("Stoneville"). Like Mahonia, Stoneville was created by a Jersey law firm, Mourant du Feu & Jeune ("Mourant"), and controlled by Chase. In this structure, as in the structure detailed above, Chase sent the upfront payment to Enron via Mahonia and was to receive future delivery of the commodity also via Mahonia. To eliminate its price risk, Chase entered into a forward sale of the same volume of the commodity, on the same delivery dates, at the same delivery points to Stoneville. Stoneville, in turn, sold back to Enron the same volume of the commodity, on the same delivery dates, at the same delivery points. The payment from Enron to Chase via Stoneville was greater than the amount sent from Chase to Enron via Mahonia. The difference in those amounts was the equivalent of interest on a loan.
In a final iteration of the prepay structure, employed in the last Chase/Enron prepay transaction, physically-settled forward sales contracts were replaced with financially-settled swap agreements between Enron and Mahonia, Mahonia and Chase, and Chase and Enron. Here, Chase again made an upfront payment to Enron via Mahonia. But, instead of Enron agreeing to make a future delivery of a commodity to Chase (via Mahonia), Enron agreed to make future cash payments to Chase (via Mahonia) in amounts representing the value of a given volume of a designated commodity at a given time. As in the structure detailed in the schematics above, Chase returned its price risk back to Enron by operation of a swap with Enron. This swap replaced Chase's stream of floating payments from Enron (via Mahonia) with a stream of fixed payments directly from Enron representing repayment of principal and interest.
In sum, in these seven prepay transactions with Chase, Enron received large, upfront payments from Chase via Mahonia; Enron was obligated to make periodic payments to Chase to repay principal and interest; the interest was calculated with reference to LIBOR, and all price risk and, in certain transactions, even the obligation to transport a commodity were eliminated. The only risk in the transactions was Chase's risk that Enron would not make its payments when due, i.e., credit risk. In short, these prepays were in substance loans.
Internally, Chase viewed Enron prepays as disguised loans. For example, a Chase employee wrote in an August 17, 1999 memorandum, "[j]ust to fill you in, a few things have occurred since we booked the recent Prepaid Forward deals, . . . [l]oans disguised as derivatives are now known as 'Derivatives Based Funding' ('DBFs') . . . Prepaid Forward Trades [are on] the list of DFBs [sic]." A Chase approval document describing the "Principal Characteristics" of a prepay transaction stated, "[a]mortization begins April 6, 2002 . . . with interest capitalized until that payment." In audiotaped discussions regarding this transaction, Chase officials sometimes referred to the transaction as a "loan." Even Chase's own auditors described one of the prepay transactions as follows: "The combined effect of the entire structure is similar to a lending transaction where Chase grants Enron (indirectly through Mahonia) a $500 million loan on June 29, 1999 and the repayments of principal and interests [sic] will take place in a 5-year period that begins in October 1999."
In an internal Chase e-mail, one of Chase's most senior officers referred to certain structured transactions, including prepays similar to the prepays with Enron, as disguised loans. He said:
WE ARE MAKING DISGUISED LOANS, USUALLY BURIED IN COMMODITIES OR EQUITIES DERIVATIVES (AND I'M SURE IN OTHER AREAS). WITH AFEW [sic] EXCEPTIONS, THEY ARE UNDERSTOOD TO BE DISGUISED LOANS AND APPROVED AS SUCH.
(Capitalization in the original.)
Notably, however, this executive was not concerned that he was addressing transactions that were different substantively from what they appeared to be. His concern was only that disguised loans be treated as loans internally at Chase, for approval and tracking purposes:
I THINK WE NEED A POLICY TASK FORCE TO NOT ELIMINATE DISGUISED LOANS BUT TO MAKE SURE THEY ARE DONE RIGHT, THAT THEY ARE TRANSPARENT [internally at Chase] AND DON'T DISAPPEAR FROM OUR RADAR SCREEN.
(Capitalization in the original, emphasis added.)
Through these seven prepay transactions between December 1997 and September 2001, unbeknownst to investors, analysts, and rating agencies, Chase effectively loaned Enron a total of approximately $2.6 billion.
CHASE KNEW THAT ENRON WAS USING PREPAYS TO INFLATE ITS FINANCIAL RESULTS.
- Enron used fair value accounting (sometimes referred to as mark-to-market accounting) for certain contracts and financial instruments related to its trading activities; for hedging related to non-trading activities; and for investments in businesses seeking debt or equity financing. Using fair value accounting, Enron recorded certain types of assets and liabilities at their current fair value rather than their historical cost, such that any changes in the fair value of those assets and liabilities were reflected as gains or losses for the reporting period in which the changes occurred. Increases in the fair value of assets accounted for by Enron on a fair value basis generated current period earnings without generating any associated cash flow from operating activities.
- As Chase knew, Enron engaged in prepays to match its reported fair value earnings with reported cash flow from operating activities to convince analysts and credit rating agencies that Enron's fair value earnings were real, i.e., that the reported fair value earnings represented gains that could and, eventually would, be turned into cash.
- As Chase knew, because prepays were disguised loans, Enron not only overstated its cash flow from operating activities, but it understated its cash flow from financing activities and understated debt on its balance sheet. Chase knew that, as a result, analysts and credit rating agencies were being misled.
- For example, in a November 25, 1998 e-mail, a Chase employee explained to a colleague, "Enron loves [prepays] as they are able to hide funded debt from their equity analysts because they (at the very least) book it as deferred [revenue] or (better yet) bury it in their trading liabilities." (Emphasis in the original.)
- In December 1998, Chase met with Enron's Treasurer and other Enron officials to discuss possible ways of refinancing prepays along with certain other transactions in a manner that would shift Chase's credit exposure to other parties. A Chase memorandum summarizing the meeting explained that "[a]lthough there are a myriad of issues [regarding a potential repackaging of some of this exposure], an initial list would include: … Rating agency knowledge of existing deals. Some deals that are less know [sic] to the agancies [sic] may come to light if they are placed in newly formed rated vehicles. This could well cause some heartburn for Enron."
- Similarly, in a November 13, 2000 memorandum regarding Enron's desire to execute a $500 million year-end prepay to "fill [Enron's] liquidity gap" [i.e., mismatch between earnings and cash flow from operating activities] and Chase's desire to fill that gap without taking on additional exposure to Enron credit risk, a Chase employee wrote, "[w]e concluded that there were probably three funding alternatives beyond our usual execution [including a commercial paper] conduit - the challenge here is disclosure in the public domain." (Emphasis added.)
- During a September 13, 2001 audio-taped phone call between Chase employees, one Chase employee described another contemplated prepay transaction as "discreetly get[ting Enron] you know several hundred million dollars and hav[ing] no market knowledge of what's going on."
- Significantly, Chase knew exactly how Enron treated prepay proceeds on its financial statements. For example, a May 1999 Chase letter to Enron written in advance of a meeting to review Enron's debt and cash flows attached excerpts of Enron's 1998 financial statements. Chase made notations on the excerpted statements to reflect its understanding of the way prepays and certain other transactions would (or would not) be reflected in Enron's financial reporting. The word "Prepays" had been typed on the balance sheet and on the statement of cash flows with arrows pointing to the balance sheet line for "Liabilities from price risk management activities" and to the statement of cash flows line for "Net assets from price risk management activities." In other words, Chase knew that prepays did not appear as funded debt and that they increased reported net cash flow from transactions involving mark-to-market assets.
CHASE KNOWINGLY ASSISTED ENRON IN DISGUISING THE TRUE CHARACTERISTICS OF THE TRANSACTIONS FOR ENRON'S ACCOUNTING PURPOSES.
- Enron's auditor, Arthur Andersen LLP ("Andersen") developed certain criteria that it used to justify Enron's accounting treatment of the prepay transactions. These criteria included:
Mahonia was not an independent, third-party entity with substantive business operations. Although Mahonia was legally separate from Chase, it was created at the direction of Chase and was completely controlled by Chase. Enron told Chase it needed Mahonia in the transactions for its own accounting reasons. Chase used Mahonia to help Enron achieve its accounting objectives.
- The existence of an independent, third-party entity in the transaction structure -- this entity was supposed to be a "substantive" business with operations independent of the other parties and could not be an SPV sponsored by one of the other parties;
- a true commercial purpose for the transactions and documentation that was "standard" for commodity trades; and
- actual risk for the parties related to fluctuations in the price of the commodity.
When the first Mahonia entity, Mahonia Limited, was formed in 1992, the Mourant law firm described it in formation documents as a "finance company." Subsequently, in formation documents for Mahonia Natural Gas Limited, filed in 2000, Mourant represented that Mahonia's purpose was "to assist in transactions arranged by Chase Bank" and explained further:
[Mahonia] will be invited from time to time to enter into arrangements that will assist the Chase Manhattan Bank in providing finance for major US Oil and Gas companies. The arrangements in each case will involve [Mahonia] entering into a Forward Purchase Contract with a US Oil or Gas company . . . [Mahonia] will also at the same time enter into a Forward Sale Contract with Chase . . . The overall effect of these arrangements will be that Chase will be providing finance to the relevant US Oil or Gas company on the security of the inventory of Oil or Gas but without [Mahonia] taking any exposure to the Oil and Gas market.
(Emphasis added.) (The words Natural Gas Limited were specifically added to the name of the new Mahonia entity to make it sound like a substantive commodities trading company.)
Mahonia had no business operations other than to facilitate Chase's accounting-driven transactions with its clients. In fact, it had no employees and no offices. Mourant employees performed limited administrative functions on its behalf. Chase employees performed all substantive functions (i.e., negotiating with Enron, drafting contracts, and handling payments). For example, a Company Formation Questionnaire that was prepared by Mourant in December 2000 for filing with the Jersey regulatory authority was sent to a Chase in-house lawyer for his "approval and signature" and listed two Chase employees as the contact persons for Mahonia.
Mahonia was completely controlled by Chase. Mahonia never entered into a commercial transaction in which Chase was not involved. (Conversely, Mahonia never refused a request by Chase to enter into a prepay transaction.) In each of the prepay transactions described here, Mahonia and Chase executed Security Agreements as part of the prepay transactions that gave Chase an interest in "any assets Mahonia then owned or thereafter acquired" and contained covenants that Mahonia "would 'exercise its rights, authorities and discretions under or in respect of' . . . all current and subsequently obtained assets 'in such manner as [Chase] may from time to time require.'" Effectively, it would have been necessary for Mahonia to obtain Chase's consent before entering into any transaction not involving Chase.
Chase prepared and reviewed transaction documents on behalf of Mahonia and forwarded the documents to Mourant attorneys for Mahonia to sign. Chase also edited Mourant's legal opinions and drafts of Mahonia's Board minutes. In one instance, Chase wrote Mourant, "You will only be required to have the forms signed for Mahonia. . . . For the time being, you should hold [the documentation] until further instructed."
Chase paid all administrative and regulatory fees incurred by Mahonia and also paid Mourant's legal fees. All of Mahonia's bank accounts used to funnel the payments between the parties were held at Chase; Chase had full control over all Mahonia cash inflows and outflows relating to the prepay transactions.
Despite its relationship with Mahonia, Chase helped Enron maintain an illusion that Mahonia was an independent, third party engaged in the commodities business. While Chase and Enron were working on the September 2001 prepay transaction, Andersen requested a letter from Mahonia containing certain representations regarding its status. Chase and Enron worked together to craft a letter that would satisfy Andersen without revealing the relationship between Chase and Mahonia. In an audio-taped conversation on September 13, 2001, among Chase and Enron employees, Enron employees told Chase of the need to make Mahonia seem independent for Enron's accounting purposes:
[1st Enron employee]: You're talking about the rep letter from Mahonia …. Basically, … before what we've done is just looked at the actual [Mahonia] charter and use that as information [to establish that Mahonia was independent] but now Andersen is pushing back and saying hey we need to have a specific rep letter, that [a] representative of Mahonia signed, that reps certain point.
[2nd Enron employee]: Which is [that Mahonia is] separate from Chase, doesn't have Chase showing up anywhere on the fax letterhead or anything along those lines except for fax number, etc.
[3rd Enron employee]: … From [Chase's] side, you also want to make sure that Mahonia seems independent.
Further promoting the illusion that Mahonia was a real entity for Enron's accounting purposes, each of the forward sale contracts between Enron and Mahonia contained a representation by Mahonia that it "entered into this transaction for commercial purposes related to its business as a producer, processor, or merchandiser of Natural Gas or natural gas liquids" and that it had "the capacity, and intends, to take delivery of the Natural Gas to be delivered hereunder."
Chase reviewed and specifically considered and approved this representation in-house. This representation was false and misleading. As previously discussed, the first Mahonia entity was described as a "finance company" in its formation documents, whereas the formation documents for Mahonia Natural Gas Limited stated, "[t]he overall effect of these arrangements will be that Chase will be providing finance to the relevant US Oil or Gas company on the security of the inventory of Oil or Gas but without [Mahonia] taking any exposure to the Oil and Gas market." In any event, as Chase knew, Mahonia participated in transactions with Enron for one reason only: it was used by Chase to accomplish Enron's accounting objectives.
The false and misleading nature of the representations that Mahonia was an independent merchandiser of natural gas became further evident when Enron was on the brink of defaulting on its prepay obligations just before it filed for bankruptcy protection. Initially, Chase had not included cross-default provisions in its prepay contracts with Mahonia. Accordingly, even if Enron defaulted on its obligation to deliver a commodity to Mahonia, ostensibly Mahonia would be obligated still to deliver commodity to Chase.
Under the terms of the various prepays, in case of an Enron default, Mahonia was entitled to receive a fixed sum consisting of certain insurance proceeds and cash collateral. Mahonia's obligation to make future commodity deliveries to Chase would therefore expose Mahonia to commodity price risk, i.e., the risk that the fixed sum it received as a result of Enron's default would be insufficient to fulfill its future obligations to Chase. Mahonia could not be exposed to this risk (because of the representations it made to the Jersey authorities that it was in the business of providing finance) and it could not hedge it.
Acknowledging the reality that prepays were transactions solely between Chase and Enron, immediately prior to Enron's bankruptcy, Chase took unilateral action to amend the original agreements with Mahonia to add cross-default provisions in order to be able to terminate the prepays if Enron defaulted.
CHASE AIDED AND ABETTED ENRON'S FRAUD.
- Enron prepared its statements of cash flows using a method that reconciled net income to the amount of net cash generated by (or used in) operations that indicated whether, on a net basis, Enron's cash inflows and outflows from operations were positive or negative; i.e., generating or using up cash. Enron's prepay transactions had the effect of overstating this balance - either by causing net cash generated by operating activities (a positive cash flow) to be higher or by causing net cash used in operating activities (a negative cash flow) to be less than what should have been reported.
- For the year ended December 31, 1997, a prepay transaction totaling approximately $300 million increased reported net cash purportedly generated by operating activities from $201 million to $501 million. For the second quarter of 1998, a prepay transaction totaling approximately $250 million reduced reported net cash purportedly used in operating activities from ($381) million to ($131) million. For the year ended December 31, 1998, a prepay transaction totaling approximately $250 million increased reported net cash purportedly generated by operating activities from $1.39 billion to $1.64 billion. For the second quarter of 1999, a prepay transaction totaling approximately $500 million reduced reported net cash purportedly used in operating activities from ($538) million to ($38) million. For the second quarter of 2000, a prepay transaction totaling approximately $650 million reduced net cash purportedly used in operating activities from ($1.197) billion to ($547) million. For the year ended December 31, 2000, a prepay transaction totaling approximately $330 million increased reported net cash purportedly generated by operating activities from $4.45 billion to $4.78 billion. For the third quarter of 2001, a prepay transaction totaling approximately $350 million reduced reported net cash purportedly used in operating activities from ($1.103) billion to ($753) million.
- As a result of the conduct described in Paragraphs 1 through 52, Enron materially overstated its reported net cash flow from operating activities, materially understated its reported net cash flow from financing activities, and misrepresented the amount it borrowed. As more fully alleged in Paragraphs 1 through 52, Chase knowingly provided substantial assistance to Enron in this conduct, thereby aiding and abetting Enron's fraud.
CLAIMS FOR RELIEF
Aiding and Abetting Violations of Section 10(b) of the Exchange Act
[15 U.S.C. § 78j(b)] and Exchange Act Rule 10b-5 [17 C.F.R. § 240.10b-5]
- Paragraphs 1 through 53 are re-alleged and incorporated by reference herein.
- As set forth more fully above, Enron, 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: has employed devices, schemes, or artifices to defraud, has 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 has engaged in acts, practices, or courses of business which operate or would operate as a fraud or deceit upon any person.
- As detailed above, Chase knowingly provided substantial assistance to Enron in violation of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Exchange Act Rule 10b-5 [17 C.F.R. § 240.10b-5].
- Based on the foregoing, Chase aided and abetted violations of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Exchange Act Rule 10b-5 [17 C.F.R. § 240.10b-5].
- The Commission demands a jury in this matter.
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that this Court:
- Grant a Permanent Injunction restraining and enjoining Chase from violating the statutory provisions set forth herein; ordering Chase to pay disgorgement of illegal gains, and ordering Chase to pay civil penalties;
- Pursuant to Section 308 of the Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204 (2002), enter an order providing that the amount of civil penalties ordered against Chase be added to and become part of a disgorgement fund for the benefit of the victims of the violations alleged herein; and
- Grant such other and additional relief as this Court may deem just and proper.
| Dated: July ___, 2003
Stephen M. Cutler
Director, Division of Enforcement
Linda Chatman Thomsen
Deputy Director, Division of Enforcement
Charles J. Clark
Assistant Director, Division of Enforcement
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)|
James David Fielder