Citigroup: Adhered to Law in Enron DealDec 11, 2002 | AP
A Citigroup official insisted that the bank adhered to the law in a multimillion-dollar deal with Enron's pulp and paper business, even though an Enron official's verbal remarks and internal bank documents raise questions about the transaction.
At issue is whether money Citigroup put up for the deal was a genuine at-risk investment or whether it was guaranteed by Enron, as suggested in verbal assurances from former Enron finance chief Andrew Fastow and in internal bank documents citing Fastow's statements as guarantees.
Executives of the financial giant told a Senate hearing Wednesday that Enron lied to them about its accounting for the deals. Officials of Citigroup and J.P. Morgan Chase, another big investment bank, rebuffed lawmakers' assertions that they knowingly helped now-bankrupt Enron deceive investors when it inflated its revenues and masked its true financial condition in 2000 and 2001.
A trove of internal bank documents released by the Senate Governmental Affairs Committee's investigative panel appeared to bolster the lawmakers' allegations that Citigroup and J.P. Morgan Chase were active participants in Enron's deceptive accounting helping it disguise loans as revenue-producing sales of assets. Sen. Carl Levin, D-Mich., the subcommittee's chairman, and others have said the Wall Street institutions aided Enron in return for big fees and favors in other deals.
"Sounds like we made a lot of exceptions to our standard policies," a Citigroup executive wrote in a December 2000 message referring to the bank's role in a transaction with Enron known as Bacchus. "I am sure we have gone out of our way to let them know that we are bending over backwards for them. Let's remember to collect this IOU when it really counts."
The Citigroup and J.P. Morgan Chase officials who testified under oath at the hearing said they believed they were engaging in lawful deals with Enron. They also said, however, that their companies would not engage in the same sort of transactions today.
Under questioning, J.P. Morgan Chase executives acknowledged that the bank designed a transaction called Slapshot, in which Enron allegedly used a one-day, $1 billion sham loan from J.P. Morgan Chase to produce about $60 million in Canadian tax deductions and $65 million in benefits to Enron's financial results.
"We do not pitch this transaction today" to other companies, testified Andrew Feldstein, a managing director in finance at J.P. Morgan Chase. Neither would the bank enter into such a deal today, he said.
"Even assuming that these transactions were entered into in good faith and were entirely lawful, they do not reflect our standards and they would not happen now at Citigroup," said Charles Prince, chairman and chief executive officer of Citigroup's Global Corporate and Investment Bank.
But Sen. Susan Collins of Maine, the panel's senior Republican, said some of the executives' statements didn't appear to square with the documents and the executives' actions.
"The evidence strongly suggests that Citigroup and Chase were not innocent pawns in these transactions," Collins said. "Warning flags were abundant."
She cited, for example, a memo written by a senior Citigroup official strongly objecting to some of the deals and warning that Enron's accounting was "aggressive and a franchise risk to us if there is publicity."
Why, Collins asked William Fox, managing director of Citigroup's Global Power and Energy Group, did he travel to Houston to meet with Fastow to get his assurances of a recouped investment, if not to eliminate the bank's risk? Collins also pointed to the loan approval document for the Bacchus deal that included the words "verbal guarantee," referring to Fastow's pledge.
Fastow pleaded innocent to a 78-count federal indictment last month charging him with masterminding complex financial schemes that enriched him and members of his family and helped bring down the energy-trading company.
Enron is said to have used the Bacchus deal to declare that an asset had been sold for $200 million and to record a $112 million gain on its financial statements for 2000. Citigroup invested 3 percent of the equity in the deal, or $6 million, after receiving a verbal commitment from Fastow that Enron would support the bank's investment. Citigroup also made a $194 million loan.
"It was verbal support and assurance to us," Fox said under extensive grilling by the lawmakers. "We did not view that as a guarantee. We viewed ourselves as being at risk."
If Citigroup were sheltered from risk in the deal, it would mean that Enron would have been required to report the transaction in its financial statements rather than keeping it off its books.
Fox said he later was "shocked" to learn after Enron Treasurer Ben Glisan confirmed to Citigroup officials that there wouldn't be an impact on the company's revenue that Enron had claimed the $112 million profit from the transaction.
"We were lied to," he testified. "We relied on Enron's word. They were a highly respected company."
Representatives of Enron couldn't immediately be reached for comment. Responding to similar allegations, the company's attorneys have said it has been cooperating with investigations by Congress, the Justice Department and the Securities and Exchange Commission, and that people shouldn't rush to judgment.
Houston-based Enron filed for bankruptcy about a year ago, taking the investments of millions of people with it. The company used a web of thousands of off-balance-sheet partnerships like the pulp and paper deals to hide billions of dollars in debt from investors and federal regulators.