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Banks Settle In Enron Case

Jul 29, 2003 | Washington Post

Two of the nation's largest banks, J.P. Morgan Chase & Co. and Citigroup Inc., agreed Monday to pay more than $300 million to settle charges that they helped bankrupt energy trader Enron Corp. deceive investors by hiding billions of dollars in loans.

The agreement includes $255 million in payments to settle cases brought by the Securities and Exchange Commission and $50 million to settle allegations lodged by the Manhattan district attorney's office. The charges cover some $8.5 billion that Enron raised through complicated offshore transactions with the banks in the six years before its collapse in late 2001 which cost shareholders $60 billion.

The deals, which were really disguised loans, enabled Enron to conceal its growing debt burden and make shareholders believe the company was bringing in much more cash than it was actually receiving, the SEC said.

In announcing the agreements, Manhattan District Attorney Robert Morgenthau said he stopped short of pursuing criminal charges against bankers at Citigroup or J.P. Morgan because it would have been difficult to prove that any individual acted with intent to commit fraud. He also said he took into account the fact that the banks are Enron's two biggest creditors.

Enron owes Citigroup $2.4 billion and J.P. Morgan Chase $1.8 billion, according to bankruptcy court records.

A Justice Department task force also has had trouble pursuing criminal charges against top Enron officials. It has filed fraud charges against Andrew Fastow, the company's chief financial officer, and Kenneth Rice, head of Enron's broadband division. Enron's former chairman, Kenneth Lay, and former chief executive officer, Jeffrey Skilling, have not been charged with any criminal conduct.

University of Texas at Austin law professor Henry Hu said that despite the fact that the banks did not admit wrongdoing, the settlement could strengthen the case of shareholders suing Wall Street banks over their work for Enron.

"The shareholders' claim is that the various banks, including these two, were doing exactly what the SEC says they were doing in this action. The banks are not paying this amount of money for charity purposes; it is not chump change. It tends to give credence to the shareholder allegations. … This settlement, complete with the SEC's harsh language, will be materially helpful to the massive shareholder lawsuit."

Another headache for the banks could be a report by bankruptcy court examiner R. Neal Batson, which was made public Monday. He argued that J.P. Morgan and Citigroup's dealings with Enron may be so tainted that the bankruptcy court could downgrade the banks' claims to recover what the Houston company owes them. That could push the banks to the bottom of the list of claimants seeking to recover $200 billion from Enron, which currently has about $12 billion in assets.

Batson, an Atlanta attorney seeking to increase recovery for creditors, has issued three reports, covering several thousand pages. They are a roadmap for federal prosecutors and attorneys representing Enron shareholders and employees in class-action suits, attorneys said.

The new report cites evidence of undisclosed verbal agreements by senior Enron executives and J.P. Morgan and Citigroup officers to protect the banks against losses. Executives of the financial firms have testified that the verbal assurances were not enforceable guarantees of repayment. Batson said, however, that there is evidence that some financial firms demanded the verbal promises before going forward with the deals. Such unwritten agreements are legally enforceable in Texas and New York, Batson said.

Internal bank correspondence indicates that senior officials were aware their deals with Enron were deceptive, Batson said, citing a Citigroup executive's comment that Enron was "simply manipulating cash flows."

Under Monday's settlement with the SEC and the district attorney, $236 million will eventually be distributed to "victims" of Enron's fraud. Exactly who will be eligible for restitution has not been determined.

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