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Enron's Banks to Pay $308M

Citigroup, Chase settle charges

Jul 29, 2003 | Newsday More shockwaves from the collapse of Enron Corp. hit Wall Street yesterday as the nation's two largest banks agreed to pay a total of $308 million to settle federal and state charges that they helped Enron manipulate financial statements.

Most of yesterday's settlement was to end investigations into $8.3 billion in disputed loans made to Enron by Citigroup Inc., the largest bank by assets in the United States, and J.P. Morgan Chase & Co., the second-largest bank.

In essence, the world's two biggest financial services companies were charged with "helping Enron commit fraud," Stephen M. Cutler, director of the Securities and Exchange Commission's enforcement division, said at a news conference in Manhattan. Yesterday's enforcement actions showed, he said, that such institutions "may not take the view they are not responsible for financial disclosure made by others. They may not hide behind accountants and lawyers. They may not say, 'Everybody does it.'"

Last March, Merrill Lynch & Co. paid $80 million to settle SEC charges that Merrill and four of its executives helped Enron fraudulently book income.

Yesterday's agreements ended probes by the SEC and Manhattan District Attorney Robert Morgenthau of what regulators said were loans to Enron that were falsely booked as complicated commodities transactions. The disguise, they said, allowed Enron to fraudulently account for the money as cash flow from operations, and hide billions of dollars in debt from investors, regulators and credit- rating agencies.

In the settlement, J.P. Morgan Chase settled a civil injunctive action by the SEC in U.S. District Court in Texas by agreeing to pay $135 million and being permanently enjoined from violating the anti-fraud provisions of the federal securities laws. Citigroup settled an SEC administrative proceeding by saying it would pay $120 million, and stop violating those same laws. Of Citigroup's payment, $19 million pertains to conduct in the case of Dynegy Inc., which in September 2002 paid $3 million to settle an SEC investigation of its transactions with Citigroup.

SEC officials said the fines and penalties from both banks would be returned to victims of the respective frauds. Yesterday's settlements with the commission earmarks $19 million for Dynegy fraud victims. The other $236 million will go into an escrow account with about $324 million that the SEC has already collected in Enron-related actions, and "at some time, there will be a plan to distribute it," Cutler said.

In their agreements with Morgenthau's office, each bank agreed to pay $12.5 million to New York State and $12.5 million to New York City, as well as the costs of the investigation. Those costs amount to $2.5 million for J.P. Morgan Chase and $500,000 for Citigroup, Morgenthau's office said. The settlements also include promises by the banks to comply with pacts they reached with banking regulators yesterday that require them to strengthen risk-management practices, especially those associated with the type of deals done with Enron.

As part of the settlements, the banks neither admitted nor denied wrongdoing. In a letter to Morgenthau, Mark J. Shapiro, vice chairman of J.P. Morgan Chase, said, "We have made mistakes, we have learned from them, and we are taking steps to avoid repeating them." Charles Prince, chairman and CEO of Citigroup's global corporate and investment bank, said the Enron transactions would not happen under new policies that the bank instituted in August 2002.

As its credit collapsed amid disclosures of the massive amount of debt on its books, Enron declared bankruptcy in December 2001. Thousands of its workers lost their jobs and retirement savings, and investors lost their shirts as the stock plunged from as much as $90 to pennies per share. Morgenthau and SEC officials said that memos and e-mails showed both banks knew that their transactions with Enron were helping Enron hide debt.

Both Morgenthau and the SEC said that Citigroup cooperated with their investigations and made "timely efforts" to resolve the matter. By contrast, J.P. Morgan Chase "for a considerable period of time took the position that everything they did was proper and appropriate," Morgenthau said.

Enron and J.P. Morgan, the two biggest lenders to Enron, are the company's largest creditors in the bankruptcy case, claiming a total of $6 billion in losses, Morgenthau said. Asked if the two banks will be among the victims allowed to collect restitution, Cutler said, "The answer is no."

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