Enron Versus Wall Street

A Brief Summary

While the filed complaint (279 pages with 53 separate counts against multiple defendants) raises many complex facts, to summarize, generally: Enron entered into business relationships with “special purpose” partnerships, in which insiders were managers and investors. These partnerships were generally set up as special purpose entities (SPEs) designed to give Enron the appearance of a healthier financial condition, by removing from Enron's balance sheet assets that lost or were at risk of losing value. SPEs are commonly used financial structures, and serve legitimate goals of enhancing liquidity and reducing credit risk. However, in the Enron litigation, the debtors allege that the SPEs were created to misstate Enron's true financial health. The debtors also allege that while the bank defendants appeared to make “at risk” investments in the SPEs, as required by applicable accounting regulations, insiders gave “secret assurances” to the defendants that these investments would be repaid. In fact, is alleged that the bank defendants often “insisted” these investments be repaid, thereby violating accounting rules for SPEs. The complaint alleges that, with knowledge by the defendants, insiders of Enron treated the proceeds received under the SPE transactions as operating cash flow, rather than as financing activities. Given such improper accounting and false and misleading financial disclosures surrounding these off balance sheet partnerships, the SPEs were tainted, credit rating agencies were duped, and the rest, as they say, is history.