UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission for its Complaint alleges as follows:
1. Defendants Canadian Imperial Bank of Commerce, Daniel Ferguson, Ian Schottlaender, and Mark Wolf aided and abetted Enron's manipulation of its reported financial results through a series of financial transactions over a period of several years preceding Enron's bankruptcy. These transactions, purported asset sales, were used by Enron to report loans from CIBC as earnings and cash from operating activities.
2. Defendants knew, or were reckless in not knowing, that the loans were structured as asset sales for accounting and financial reporting purposes. Defendants also knew, or were reckless in not knowing, that the transactions yielded another substantial benefit to Enron: they allowed Enron to hide from investors and rating agencies the true extent of its borrowings because sums borrowed in the transactions did not appear as "debt" on Enron's balance sheet.
3. Between June 1998 and October 2001, CIBC effectively loaned Enron approximately $2.66 billion in the form of purported asset sales. Defendants were willing to engage in the transactions because they generated substantial fees and as an accommodation to an important client. Enron used CIBC's disguised loans to increase earnings by more than $1 billion, to increase operating cash flows by almost $2 billion, and to avoid disclosure of more than $2.6 billion in debt on its financial statements.
4. Based on this conduct, defendants aided and abetted Enron's violations of the federal securities laws. The Commission requests that this Court permanently enjoin defendants from violating the securities laws cited herein, bar Ferguson from serving as an officer or director of any public company for five years, permanently bar Schottlaender from serving as an officer or director of any public company, order defendants to disgorge ill-gotten gains, order defendants to pay civil penalties, and order such other and further relief as the Court may deem appropriate.
JURISDICTION AND VENUE
5. The Court has jurisdiction over this action pursuant to Sections 21(d), 21(e), and 27 of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78u(d) and (e) and 78aa].
6. 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.
7. In connection with the acts, practices, and courses of business alleged herein, defendants, 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.
8. Defendants, 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.
9. Canadian Imperial Bank of Commerce is a large integrated financial services institution based in Toronto, Canada with worldwide operations. During the time period relevant to this Complaint, CIBC transacted business within the United States. As of July 31, 2003, CIBC had $283 billion in assets and a market capitalization of $19.7 billion.
10. Daniel Ferguson, 52, resides in Toronto, Canada. He has been employed at CIBC since 1977. Ferguson is currently executive vice president of CIBC's treasury, balance sheet, and risk management group. During the relevant time period, Ferguson was executive vice president, large corporate credit, risk management group. Ferguson was responsible for credit decisions in Canada and the United States. As the chairman of CIBC's credit committee, a post he assumed at approximately the end of 1999/beginning of 2000, Ferguson had veto power over all significant credit decisions, including those relating to the transactions described herein, and wrote or reviewed the minutes of the credit committee meetings. Ferguson reported to CIBC's senior executive vice president, risk management group.
11. Ian Schottlaender, 46, resides in Connecticut. He joined CIBC in 1998
as managing director in the corporate leveraged finance group, based in New York. Schottlaender was the senior person on CIBC's energy clients' underwritings, syndications, and high yield bonds, and had product management responsibility for Enron. Schottlaender holds Series 7 and 63 licenses. CIBC separated Schottlaender from his employment in October 2002. During the time period relevant to this Complaint, Schottlaender had contacts with the State of Texas, including phone calls and letters from him to Enron in Houston relating to the transactions at issue. As shown below, the SEC's cause of action arises out of or results from, among other things, Schottlaender's contacts with Houston-based Enron, and his conduct affected Enron, its employees, and shareholders located in Texas.
12. Mark Wolf, 41, resides in Houston, Texas. He was a CIBC executive director, responsible for credit management in the leveraged finance group, based in Houston, Texas. From 1992 to 1996, and 1998 forward, Wolf was involved in the Enron account at CIBC. Wolf holds Series 7 and 63 licenses. CIBC separated Wolf from his employment in December 2003.
OTHER ENTITIES INVOLVED
13. Enron Corp. is an Oregon corporation with its principal place of business in Houston. 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. During the time period relevant to this Complaint, 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 from more than $80 per share to less than $1 in less than a year.
CIBC's Desire To Do Business With Enron
14. Enron frequently engaged in transactions with counter parties that effectively manipulated Enron's reported financial results in order to meet analysts' expectations about itsperformance, increase its earnings per share, and improve its stock price. Many of these transactions involved special purpose entities ("SPEs") and were carried out at the end of reporting periods. The transactions included purported transfers of assets to SPEs to obtain sale treatment, allowing Enron to book an accounting gain and recognize cash flow from operations. This method also had the benefit of keeping Enron's liability for the assets off of its balance sheet. Enron engaged in 34 of these financing transactions with the defendants.
15. CIBC, with the active and substantial assistance of Ferguson, Schottlaender, and Wolf, engaged in the financing transactions to earn lucrative fees and to obtain and maintain status as one of Enron's "Tier I" banks. In October 1998, Schottlaender and others from CIBC met with Enron's President and COO Jeffrey Skilling and Enron's CFO Andrew Fastow. In this meeting, Enron told CIBC of its interest in making CIBC a Tier I bank if it closed two year end deals that were "critical" to Enron "meeting its year end funding requirements and maintaining its investment grade rating with S&P and Moodys." In an e-mail memorializing the meeting, sent to Schottlaender, among others, CIBC stated that with entry to Tier I status CIBC could expect "taking in excess of $10 MM in fees" per year.
16. In a CIBC memorandum dated November 12, 1998, and copied to Schottlaender, approval was sought on several transactions with Enron for a year-end close to generate millions in fees and "to become a first tier bank." In May 1999, in a meeting between a CIBC employee and Enron's senior finance officials, Enron told CIBC that its "participation in certain deals is the sine qua non of being rewarded their more lucrative transactions." A memorandum documenting the meeting was sent to Schottlaender and others. In another internal memorandum sent to Schottlaender in December 1999, Schottlaender was informed that Enron's Tier I banks routinelyearned $10 million plus in fees per year. In January 2000, a CIBC employee sent a memorandum to a senior CIBC official and others stating that Enron "promoted" CIBC to Tier I. The memorandum stated that the promotion "carries the burden and responsibility of participating in certain unattractive transactions (e.g. the revolver), and being capable of quickly underwriting large credit transactions."
Asset Sale Requirements / Structure Of Enron-CIBC Transactions
17. Between June 1998 and October 2001, Enron and CIBC, with the active and substantial participation of Ferguson, Schottlaender, and Wolf, entered into approximately 34 transactions that were purportedly asset sales but in reality were CIBC loans to Enron. The transactions were intended to qualify as asset sales under accounting standards, including standards known as "FAS 125/140." The alternative, borrowing money using the asset as collateral, would have given Enron access to cash to meet its operating expenses, but carried with it financial reporting consequences -- increased debt, no positive effect on cash flow, and no positive effect on earnings -- that would have had a detrimental impact on Enron's credit rating and stock price. In sworn testimony, Schottlaender acknowledged he was aware that one of Enron's purposes in the transactions was to raise and report cash or gains while avoiding debt.
18. As detailed below, defendants' assistance to Enron was unusual in character, scope, and degree compared to legitimate business practices. For example, unlike standard financing transactions: (a) minimal due diligence on the assets involved in the transactions was performed; (b) material terms of the transactions were deliberately kept out of the written deal documents; (c) the transactions were disguised loans but structured as purported asset sales to aid the borrower in carrying out a fraud; (d) commitments on repayment were obtained from theborrower that defendants knew, if disclosed in the deal documents, would defeat the sale accounting treatment desired by the borrower; (e) the transactions were a form of asset parking as opposed to a standard commercial transaction; (f) millions of dollars in credit was extended to a borrower whose reported earnings were financially "engineered" and dependent on accounting gains, rather than cash from operations; (g) credit decisions were fee driven; and (h) numerous last minute and/or unusually small financings were closed not on the basis of objective commercial criteria but to allow the borrower to fine tune its financial reporting.
19. Legitimate asset sales require, among other things: (a) that the transferor of the asset relinquish control of the asset, transferring the risk and rewards of the asset to the transferee; and (b) in the case of transfers to SPEs, that there be a sufficient equity contribution to the SPE that is at risk. Defendants knew, or were reckless in not knowing, that the CIBC transactions with Enron were loans, not sales, and therefore did not meet these requirements.
20. The transferees in the Enron-CIBC transactions were either qualified SPEs ("QSPEs") or SPEs, both of which CIBC capitalized in an amount equal to the purchase price of the asset to be transferred. CIBC arranged for the capitalization of the SPEs, in a ratio of 97 percent debt and three percent equity. Generally a syndicate of banks financed the debt, but CIBC retained the equity stake.
21. In most of the financings, Enron guaranteed the debt portion of the purchase price through a total return swap. Enron paid the SPE an amount equal to the interest and other sums periodically due the SPE's lenders. At the end of the term, Enron paid the SPE the principal balance due on the loan and the amount due the equity interest holders. The SPE, in turn, paid Enron any monies that the SPE had received from the asset up to the amount then due on theloan.
22. In addition to the minimum three percent equity investment requirement for the
SPE financings, accounting rules require the transferor to relinquish control of the asset in both the QSPE and SPE structures to gain sale treatment. If control of the asset is not relinquished to the transferee, the applicable rules require consolidation of the transferee with the transferor for accounting purposes.
23. Although Enron accounted for the transfers of the assets as sales, the transactions were all of a defined term. Upon a term's expiration, the structure provided for the transferee to auction the asset to effect a final disposition. Under accounting standards, the auction proceeds first pay the QSPE's or SPE's debt holders (principal and interest), and then, in the case of an SPE, the equity holders.
24. The Enron-CIBC transactions contained an additional provision with respect to any increase in asset value during the term of the financing, commonly referred to as the residual interest. Although such an increase is generally considered a return on equity, the terms of the financings specified that Enron would receive the residual interest, either directly or via the total return swap. CIBC's return on its equity stake was, like a loan, limited to its original investment and a stated yield of generally 15 percent.
25. As described below, defendants knew, or were reckless in not knowing, that the combination of Enron's retention of the residual interest if the asset increased in value and Enron's obligation to make the debt holders whole even if the asset decreased in value, among other reasons, meant that Enron retained the risks and rewards of ownership.
The CIBC-Enron Financings
26. Between June 1998 and October 2001, CIBC and Enron entered into the financings listed below:
CIBC's Equity Was Not At Risk
27. In the Enron financings that involved a CIBC equity contribution, CIBC's equity was not at risk because Enron agreed to repay the equity. Defendants knew, or were reckless in not knowing, that Enron's promise to repay CIBC's equity could not be disclosed in written deal documents between Enron and CIBC because the equity would not appear to be at risk, a requirement that Enron needed to satisfy to receive the accounting treatment that it sought in thetransactions with CIBC.
28. The existence of Enron's promises to CIBC to repay the equity is memorialized in numerous internal CIBC documents. For example, in June 1999, in connection with the Leftover/Nimitz financing, Enron's promise was documented by a senior CIBC official in his notes of the credit committee meeting on the financing, a meeting also attended by Schottlaender: "In order to comply with accounting opinions, 3% of that transaction had to be structured without the guarantee of Enron Corp. and is formally supported only by the project interest itself though we have also been provided with the minuted verbal assurances of Enron's senior staff that the company will ensure that this section is fully retired . . ."
29. In October 2000, a senior credit official at CIBC conditioned approval of the restructuring of the Hawaii vehicle on confirmation of Enron's promise to repay CIBC's equity, as memorialized in an e-mail he wrote: "I authorize the credit ... on the understandings ... that Risk Management will receive a copy of CIBCWM's memo [to] file recording the highlights of the upcoming conversation between CIBCWM and Enron's senior management relative to the company's continuing support of the equity tranches of the facility." This direction was forwarded to Schottlaender.
30. The credit applications for the CIBC-Enron financings in which CIBC contributed equity also document Enron's promise to repay CIBC's equity stake. Schottlaender was consulted in the preparation of the credit applications. All of the applications contained a recommendation for approval, as well as memorialized Enron's promise to repay CIBC:
31. Enron promised CIBC that it would repay CIBC's equity contribution in discussions between Enron's senior management, including CFO Andrew Fastow, and Schottlaender during the time period 1999-2001. According to Schottlaender's sworn testimony, a senior CIBC official directed Schottlaender to obtain Enron's promise. In discussions between Schottlaender and Enron's senior management, including Fastow, Enron promised CIBC that its equity stake would be repaid by Enron. Senior CIBC officials directed Schottlaender to obtainsuch promises from Enron as a condition to CIBC's participation in the financings.
32. Enron's promises to CIBC regarding its equity stake were also documented by Schottlaender. In an e-mail dated October 23, 2000, and circulated within CIBC, Schottlaender stated: "I met with Andy Fastow ... to get his assurance of support for our structured equity commitments. He is very aware of our commitments, acknowledges their importance to Enron and fully accepts our expectation of full repayment. While he cannot, for obvious reasons, guarantee repayment - he fully anticipates our repayment as scheduled."
33. Within CIBC, the guaranteed equity stake in the Enron transactions was referred to, among other things, as "trust me" equity. For example, in an e-mail dated June 21, 2001, circulated within CIBC, Schottlaender stated, "We agreed to take the `trust me' equity on the strongest assurance (but not guarantee) from Enron senior management that we would not incur losses. They have lived up to their word so far. .." In another e-mail of the same date Schottlaender stated: "Enron's CFO has continued to acknowledge the equity risk exposure and given his strongest assurance that the risk won't be realized ... Enron has honored their intent to keep us whole (plus very large returns) over the many transactions that we have done in the past 3 years."
34. The "trust me" equity arrangement between Enron and CIBC was also documented in an e-mail written by a CIBC employee dated June 21, 2001, after she spoke to Schottlaender about his discussions with Fastow: "Unfortunately, there can be no documented means of guaranteeing the equity or any shortfall or the sale accounting treatment is affected.... We have done many `trust me' equity transactions with Enron over the last 3 years and have sustained no losses to date." (emphasis in original). The e-mail was forwarded to Schottlaender,among others.
35. Another CIBC document confirms the "trust me" equity arrangement between Enron and CIBC. In an e-mail dated July 11, 2000, a CIBC employee relayed a conversation she had with Schottlaender regarding CIBC's equity stake: "Under no circumstances can Enron provide any documentation or make any documented undertaking that this 3% equity will be `taken out' in a reasonable period of time. As such, it was a complete `trust me.'"
36. After another conversation with Enron's senior management on October 16, 2001, Schottlaender sent an e-mail to a senior CIBC credit official, stating, "Enron's senior management stands firmly and unequivocally behind their intent to see that we fully recover our certificate and yield amounts."
Course Of Conduct Confirms Enron's Guarantees
37. Up to the date Enron filed for bankruptcy, consistent with the guarantees given by Enron to CIBC regarding its equity stake, Enron fully repaid CIBC for its equity stake in each of the financing transactions, independent of whether the asset had lost value. The course of conduct between Enron and CIBC, known to each of the defendants, further demonstrates defendants' knowledge or their reckless disregard for the fact that CIBC's equity was not at risk.
Enron Did Not Relinquish Control Of The Assets
38. Each of the Enron-CIBC financings required that Enron relinquish control over the asset. Defendants knew, or were reckless in not knowing, that Enron did not relinquish control over the assets. Enron and defendants expected that: (a) the financings would unwind before maturity, (b) an auction or sale to a third party would not occur, and (c) Enron would repurchase the asset to protect the accounting gains it had already recorded.
39. Defendants knew, or were reckless in not knowing, that the financings, although structured as sales, were a form of asset parking by which Enron would place an asset for a defined period of time and acquire cash for financial reporting purposes. Indeed, in describing the Hawaii financing to proposed debt participants, CIBC referred to the structure as a "warehouse" facility, into which Enron could place and remove assets at its own discretion.
40. The credit applications for Riverside 3 and 4, dated June 1998 and September 1998, respectively, stated that the parties expected the financings to be unwound before maturity. The June 1999 credit application for Leftover and Nimitz stated that the payment source for the equity portion would be the "liquidation of facility by Enron."
41. According to a March 2000 e-mail sent from a CIBC employee to CIBC senior credit officials, copied to Schottlaender, the auction process would not be necessary given the past course of conduct with Enron: "Note that although this is the prescribed formula, in practice Enron has generally purchased both our notes and the certificates."
42. CIBC knew that if the auction process occurred as set forth in the terms of the financings, and the asset were sold by CIBC to a third party at a price less than Enron's initial purchase price, Enron would suffer an accounting loss, a result that Enron would not permit. According to a credit application concerning Hawaii, dated October 2000, CIBC had "meaningful protection" for its equity because Enron would experience an "accounting loss" if Enron did not buy the asset and the sale price was less than the original. The same point was made in a May 2001 credit application relating to Hawaii, describing what would happen if Enron did not repurchase the asset or the asset was sold to a third party at less than Enron's initial purchase price: "Enron will take a non-cash charge reflecting this difference. This situationprovides meaningful protection from Enron not bidding (or purchasing directly) and in turn experiencing an accounting loss."
43. In the minutes of a credit committee meeting dated September 1998, a senior CIBC official acknowledged that Enron sought to refinance an asset because Enron needed additional time to dispose of the asset, despite the fact that CIBC purportedly bought the asset and was the sole party charged with disposing of the asset at maturity. In sworn testimony, a senior CIBC official stated he was not aware of CIBC undertaking or suggesting they would undertake investment banking services to work with Enron for the disposition of assets. This is further evidence that since Enron retained control of the assets, no asset "sales" from Enron to CIBC occurred.
44. Given the course of their dealings with Enron, as reflected above, defendants knew, or were reckless in not knowing, that Enron did not relinquish control of the assets involved in the transactions. Schottlaender had product management responsibility for Enron and worked through the details of each of the financings with Enron. Schottlaender routinely attended and participated in, CIBC's credit committee meetings on the Enron financings. Defendants also learned from discussions with Enron and by other means, including discussions with others at CIBC, that (a) Enron did not want CIBC to have access to the assets, (b) no asset was ever sold to a true third party, much less pursuant to the specified auction process, (c) Enron would receive the residual interest resulting from any increase in the asset value whereas CIBC's return was capped at 15 percent (d) if Enron did not repurchase the asset at a price above its initial purchase price it would not retain the primary benefit of the financing - to allow Enron to book a gain on the "sale" of the asset, and (e) Enron retained both the upside potential and thedownside risk of the asset value.
Defendants Treated The Equity As Debt
45. Defendants were aware that CIBC considered its equity contributions to be debt. For example, in the minutes of a credit committee meeting dated December 1999, CIBC referred to its equity stake in Alchemy as a "Term Loan" with a "maturity" date. In another document dated January 2002, reviewed by Schottlaender and others, CIBC acknowledged that its equity stake in Hawaii was junior debt made to look like equity to meet Enron's accounting objectives. In March 2000 and October 2000, a request was made within CIBC that the equity stake in Hawaii be booked as debt. Credit applications, and corresponding credit committee agenda and minutes, listed the "maturity" dates for each such "term loan."
46. The lack of due diligence by defendants on the assets also confirms that defendants treated the transactions as loans. Defendants did not look to the asset value for repayment but to Enron's creditworthiness, and Enron's commitments to repay CIBC's equity stake.
Defendants Knew The Purpose Of The Transactions Was To Manipulate Enron's Financial Results
47. As set forth above, defendants knew, or were reckless in not knowing, that the transactions were sham asset sales designed solely to improve Enron's financial picture. Defendants knew, or were reckless in not knowing, that the purpose of the sham financings was to obtain sale treatment for the assets so as to book an accounting gain, generally by the end of a reporting period, and to keep debt off Enron's balance sheet.
48. From the beginning of their relationship with Enron, defendants knew they weredealing with an entity whose reported financial results were dependent on accounting gains, rather than earnings from operations. Defendants' knowledge was not obtained from reviewing Enron's financial reports, but from Enron itself, and Enron made clear that CIBC was to keep such information confidential. For example, in December 1998, a senior CIBC official expressed concern within CIBC over the amount of "financially engineered" earnings recognized by Enron from financing transactions and inquired as to how much of Enron's earnings were "real," i.e., derived from commercial operating activities. Schottlaender responded to the inquiry by stating that approximately one-fifth of Enron's reported earnings in 1998 "was from various accounting gains." Schottlaender also noted that "Enron has asked that we keep the following information confidential as they consider it very `sensitive.'"
49. Credit applications also memorialized Enron's financing goals:
50. Other CIBC documents record Enron's financing goals:
51. In credit committee minutes dated June 1998, September 1998, and March 2000, CIBC recognized Enron's goal of timing financial outcomes, noting that credits were expected to terminate upon completion of a reporting period rather than the later contractual maturity dates. CIBC had recognized, once again, that the actual terms of the deals were not reflected in the written deal documentation.
Defendants Did Not Rely On Accounting Or Legal Advice
52. Defendants had no engagement, contractual relationship, or retainer with Enron's outside lawyers or accountants. Enron's lawyers and accountants, internal or external, did not provide legal or accounting analysis or advice to defendants regarding the propriety of the transactions, including the propriety of the oral guarantees Enron had provided defendants. Defendants did not disclose to Enron's lawyers and accountants, internal or external, all facts about the transactions, including the oral guarantees Enron had provided defendants. Defendants did not know whether Enron had fully disclosed to Enron's lawyers or accountants all facts about the transactions, and in fact defendants assisted Enron in keeping material terms of the transactions, such as the guarantees, out of the deal documentation and thus, apparently, out of view of the lawyers and accountants.
53. Defendants did not seek legal or accounting advice regarding Enron's oral guarantees, nor did defendants disclose all facts about the transactions, including Enron's oral guarantees, to CIBC's internal or external lawyers or accountants for the purpose of seeking legal or accounting advice.
Effect of the Sham Transactions on Enron's Earnings and CIBC's Fees
54. Enron's fraudulent scheme, aided and abetted by defendants, resulted in Enron's
recognition of approximately $1.1 billion in pretax income for the period from the second quarter of 1998 through the third quarter of 2001. The fraudulent transactions also increased Enron's earnings per share for the same time period by $1.22. The fraudulent earnings were publicly reported in Enron's Forms 10-K for 1998, 1999, and 2000 and reflected in Enron's Forms 10-Q for the second and third quarters of 1998, the first and second quarters of 1999, the first three quarters of 2000, and the first and second quarters of 2001, the results of which were later distributed and published by Enron numerous times. Since the fraudulent earnings enabled Enron to meet its earnings targets, they had a favorable impact on Enron's stock price and the amount of bonuses for Enron's senior management, and enabled Enron to raise millions of dollars.
55. CIBC earned approximately $18,066,627 million in fees from the transactions. Defendants' substantial participation in Enron's fraud resulted in continued business and fees for CIBC on other Enron engagements.
56. CIBC handsomely compensated Schottlaender, and his efforts in the financing transactions with Enron were a factor in determining the amount of this compensation.
CLAIMS FOR RELIEF
|Dated: December ___, 2003||Respectfully submitted,
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)
Jody Tabner Thayer
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