As the lead plaintiff in the Enron Corp. shareholders lawsuit, the University of California filed today (Jan. 9) complaints in the U.S. District Court for the Southern District Court of Texas in Houston, adding Royal Bank of Canada and two prominent law firms to a growing list of defendants accused of securities fraud in connection with the Enron debacle, defendants which already include 11 financial institutions, former Enron directors and executives, Arthur Andersen LLP and the law firm of Vinson & Elkins.
Also included in the complaints, Goldman Sachs is alleged to have violated Section 11 of the Securities Act of 1933, which is not a fraud claim. Under Section 11, underwriters of securities may be liable without proof of knowing or reckless conduct if they sign a registration statement that contains false statements.
"The new complaints lay out a detailed scheme of fraud pursuant to Section 10(b) of the Securities Exchange Act of 1934 naming the Royal Bank of Canada as well as Houston-based Andrews & Kurth and New York-based Milbank, Tweed, Hadley & McCloy as major players in a series of fraudulent transactions that ultimately cost Enron investors many billions of dollars," said James E. Holst, University of California general counsel.
As alleged in the complaint, the Royal Bank of Canada, much like Citigroup, J.P. Morgan Chase and other financial institutions previously named in the class action suit, structured and participated in transactions that enabled Enron Corp. to inflate its financial results by overstating its income and underreporting its debt. Andrews & Kurth wrote false opinion letters that allowed the transactions to be accounted for as Enron wished, while Milbank Tweed documented the false transactions and worked with both Enron and the banks in furthering the scheme.
Milbank Tweed helped structure Enron's Ponzi scheme
Milbank Tweed worked with Enron and the banks to structure manipulative transactions that furthered a "Ponzi scheme," while helping Enron raise billions of dollars from investors to keep the scheme going. Andrews & Kurth wrote false opinion letters that further enabled Enron to manipulate its accounting for these transactions.
According to the complaint, Milbank Tweed represented Enron and Enron's commercial banks and securities underwriters in an extraordinarily large number of matters, including (I.) almost all of Enron's significant off-balance-sheet-financing transactions, which were structured by Milbank Tweed, and hid billions of dollars of Enron's true debt levels, distorted its balance sheet, created artificial income, and inflated its results from operations; and (II.) the sale of billions of dollars of Enron and Enron-related securities to investors via false and misleading offering circulars that were written by Milbank Tweed.
The law firm's involvement in Enron's improper transactions was extensive: Milbank Tweed represented defendant banks, including Citigroup, J.P. Morgan Chase, Credit Suisse First Boston, Canadian Imperial Bank of Commerce, Deutsche Bank, Toronto Dominion Bank, Royal Bank of Scotland, and Barclays Bank in more than 50 Enron transactions involving $18 billion of off-balance-sheet financings.
During 1999-2001, Enron also orchestrated a series of nine securities offerings by related entities that raised cash for Enron or entities it controlled. In the case of so-called credit linked notes, these offerings shifted to unsuspecting purchasers the credit risk of billions of dollars in disguised loans to Enron. Enron insisted that the underwriters agree to use Milbank Tweed as their counsel and arranged for the law firm to be paid, not by the underwriters or initial purchasers, but directly by Enron or out of the offering proceeds. Milbank Tweed participated in the drafting of offering circulars that contained false statements about Enron's finances.
At the same time, Milbank Tweed was also representing Enron (and 30 Enron-related and controlled entities) in more than 125 matters. For its Enron-related work -- direct representation of Enron and its affiliates, banks and other clients included in Enron-related matters -- Milbank Tweed received in excess of $150 million.
Andrews & Kurth provided cover for Enron to falsify transactions
On Nov. 24, 2003, the final report filed by Enron's bankruptcy examiner, Neal Batson, was made public. Batson concluded that substantial evidence showed that Andrews & Kurth knew Enron's so-called FAS 125/140 transactions were false, but nonetheless wrote opinion letters hiding the false nature of the transactions from Enron's auditor and investors. The examiner also referenced "examples in the documentary evidence that Andrews & Kurth was on notice that Enron was characterizing the proceeds received through the FAS 140 transactions as cash flow from operating activities." Andrews & Kurth "knew that the transactions were being used...to manipulate [Enron's] financial statements."
Transactions in which Andrews & Kurth participated falsely inflated Enron's reported net income and shareholder equity approximately $350 million and cash flow $1.2 billion, and falsely decreased Enron's reported debt approximately $1.1 billion. The bankruptcy examiner concluded the bogus FAS 140 transactions were in fact loans and not sales of assets -- as Andrews & Kurth made them appear to be for Enron's desired accounting treatment.
Royal Bank of Canada enabled Enron to inflate its financial results
Royal Bank of Canada provided "structured finance" services to Enron. In 1995-99, Royal Bank of Canada (RBC) structured, funded and executed numerous deceptive transactions. Enron North America's examiner has concluded that some of these transactions were manipulative devices used to distort Enron's financial statements. By 1995, according to the examiner, "RBC knew (in connection with the Caribou transaction) that Enron was using a prepay structure to obtain off-balance-sheet financing. In 1996, RBC knew (in connection with the State Street transaction) that Enron desired to monetize assets by removing them from its balance sheet and using them as security for off-balance-sheet financings, with substantial recourse against Enron Corp."
The examiner concluded: "By early October 2000, RBC knew that (I.) there had been issues between Enron and its auditors for some time; (II.) Enron's auditors wanted to maintain the appearance that they were adhering to appropriate accounting conventions; and (III.) Enron was a major global user of off-balance-sheet financing. There are also indications that RBC believed Enron's auditors were not closely examining Enron's activities and that the US$800 million JEDI I refinancing RBC was looking to become involved in would not involve true equity. RBC also thought Enron would be looking to RBC 'to support them over their year end.'"
New complaint expands list of defendants
Previously named in the investors' lawsuit were the financial institutions of J. P. Morgan Chase, Citigroup, Merrill Lynch, Credit Suisse First Boston, Canadian Imperial Bank of Commerce, Bank America, Barclays Bank, Deutsche Bank, Lehman Brothers, Toronto-Dominion Bank and the Royal Bank of Scotland (the last two added in Dec. 2003) considered key players in a series of fraudulent transactions that ultimately cost Enron Corp. investors many billions of dollars. Other defendants include various Enron former officers and directors, its accountants, Arthur Andersen LLP, and its Houston-based corporate counsel, Vinson & Elkins.
These banks set up false investments in clandestinely controlled Enron partnerships, used offshore companies to disguise loans and facilitated the phony sale of phantom Enron assets. As a result, Enron executives were able to deceive investors by moving billions of dollars of debt off their balance sheets and artificially inflating stock values.
In February 2002, the University of California was named lead plaintiff in the Enron shareholders' class action suit previously filed against 29 top executives of Enron Corp. and its accounting firm, Arthur Andersen LLP. UC filed a consolidated complaint on April 8, 2002, adding the nine banks and two law firms as defendants in the case.
In April 2003, U.S. District Court Judge Melinda Harmon completed her rulings on the various defendants' motions to dismiss and lifted the stay on discovery. Following those rulings, UC filed a second amended complaint on May 14, 2003.
A copy of the 75-page complaint against Andrews & Kurth, Milbank Tweed and Goldman Sachs is available at http://www.universityofcalifornia.edu/news/enron/jan04complaint.pdf and the 30-page Royal Bank complaint is available at http://www.universityofcalifornia.edu/news/enron/royalbank.pdf.
More background on the Enron lawsuit is available at http://www.universityofcalifornia.edu/news/enron/welcome.html
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