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Citigroup, J.P. Morgan Marketed Enron-Type Deals To Other Firms

Jul 23, 2002 | Dow Jones Citigroup Inc. and J.P. Morgan Chase & Co . , already facing scrutiny for devising allegedly deceptive transactions for Enron Corp., marketed similarly structured deals to a slew of other companies, Tuesday's Wall Street Journal reported, citing testimony that a senior congressional investigator will give at hearings that start today.

The names of the other companies weren't disclosed.

The hearings, part of a Senate investigation into the role banks played in Enron's troubled finances, are the latest in a series of investigations into the two banks regarding their ties to Enron, which filed for bankruptcy-court protection late last year. The investigations include separate probes conducted by the Securities and Exchange Commission and the office of Manhattan District Attorney Robert Morgenthau.

Now, a person familiar with the matter says, the Justice Department's Enron Task Force also is looking into the roles that financial institutions, including Citigroup, J.P. Morgan , Merrill Lynch & Co . and National Westminster Bank, now a unit of Royal Bank of Scotland PLC, may have played in Enron's demise.

Citigroup and J.P. Morgan declined to comment on the hearings or the investigations. Merrill and Royal Bank of Scotland couldn't be reached for a comment.

The deals under congressional scrutiny include arrangements known as Yosemite, devised by Citigroup, and Mahonia, devised by J.P. Morgan , both of which were designed to make Enron's public disclosures more appealing to investors, according to the testimony.

An official familiar with the investigation will testify at today's hearings before that panel that Yosemite, Mahonia and other deals allowed Enron to understate its debt by 40% while overstating cash flow by as much as 50%, according to a draft of his statement. Cash flow is a crucial measure of financial health for energy companies such as Enron.

"The evidence indicates that Enron would not have been able to engage in the extent of the accounting deception it did, involving billions of dollars, were it not for the active participation of major financial institutions," says a copy of the testimony.

Banks such as J.P. Morgan and Citigroup were "willing to go along with and even expand upon Enron's activities."

J.P. Morgan , in fact, had a "pitch book" to sell other companies on similar financing vehicles, according to a copy of the testimony. J.P. Morgan entered into similar transactions with seven other companies, while Citigroup shopped such deals around to as many as 14, with at least three entering into such relationships, the testimony says.

The hearings will focus on a commodity-trading vehicle known as a prepay, in which a financier gives money in exchange for future delivery of a commodity such as gas, gold or oil. Such arrangements are common, but in the hands of Citigroup and J.P. Morgan , they became the building blocks for extremely complex transactions that Enron used to disguise debt as trades and create the appearance the company was generating cash, people familiar with the matter said.

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