Final Exam review

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Management (MGS)
Konstantine Zakzanis

Case Name EnronMain Topic Hedging against its own losses lying to the public auditing scamSummary of important factsChewcoLimited liability partnership created in Nov 1997 to buy CalPERS ownership in JEDI without needing to have Enron report losses from JEDI on its financial statements Enron wanted to keep JEDI afloat but needed an outside partner to have at least a 3 stake in the company or it would be consolidated Chewco was a Special Purpose Entity SPE and would need to meet 3 criteria to keep JEDI in nonconsolidation 1 Continuously invest at least 3 of the SPEs assets2 Exercise control and assume risk of the SPE3 Provide real economic benefits to Enron Fastow wanted to be appointed manager but Enrons legal team advised against it Michael Kopperwho worked for Fastow but this fact was only known to Jeffrey Skilling on the BoDwas appointed manager of Chewco In NovDec of 1997 Enron and Kopper created a new financial structure for Chewco 1 240 million unsecured loan from Barclays which Enron would guarantee This was funded through Enron shares owned by Enron2 132 million advance from JEDI to Chewco under revolving credit agreement Normal credit system in which amounts repaid are added back to your limit3 115 million in equity 3 of total capital from Chewco Kopper only invested about 125000 into Chewco The remaining 114 million of equity came from a loan by Barclays through a company owned by Kopper 66 million was required to be held in reserve meaning Chewco didnt really meet the 3 rule Once investigation occurred and facts about Chewco were brought to the BoD and Andersen they reported that JEDI and Chewco should have been reconsolidated in Nov 1997 and announced that they would restate prior financial statements to reflect this Chewcos net effect was 400 million of fake profits and 600 million of hidden debt LJM1 June 28 1999 Enron board approved Fastows proposal that he invest 1million and become the sole managinggeneral partner of LJM1 LJM Cayman LP The purpose of LJM1 was to raise funds from outside investors that could be used to hedge the possible loss of market value of Enrons investment in Rhythms NetConnections Inc Fastow was the sole and managing member of LJM Partners LLc which was the general partner of LJM Partners LP which was the general partner of LJM1 LJM1 ultimately did 3 things for Enron
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