When Enron imploded in late 2001, the word out was that it was the ‘Raptors’, the ‘Chewcos’, and the ‘LJMs,’ those special purpose entities that were used to offload debts from Enron’s books, that did Enron in. It was explained that a transaction with a special purpose entity could only be legitimate if a third party, unrelated to Enron, owned a 3% equity interest in such entity, and that due to certain guarantees given by Enron, such third party never assumed any risk and therefore never really owned any equity at all. Accordingly, the special purpose entities were unwound and all that debt and all those ailing assets were re-transferred to Enron, which then sunk under the weight of it all.
Try to explain that to a Texas jury. I remember asking the former managing partner of one of the big four accounting firms whether he understood why the special purpose entities were improper. He responded that, to the present day, he still did not understand it.
