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J.P. Morgan Questions Underwriters on Enron Deals

Dec 13, 2002 | Wall Street Journal

A court battle between J.P. Morgan Chase & Co. and 11 insurance companies has focused on whether the underwriters properly investigated oil and gas transactions involving Enron Corp. before backing them with surety bonds.

Over the last few days in Manhattan federal court, J.P. Morgan's lawyers questioned three underwriters at Travelers Property Casualty Corp. as the bank attempted to counter the insurers' claim that J.P. Morgan tricked them into guaranteeing loans disguised in the form of oil and gas transactions.

The second-largest U.S. bank sued the insurance companies after they refused to pay out on about $1 billion in surety bonds written against paid-forward commodity trades between Enron and an offshore company sponsored by J.P. Morgan named Mahonia.

The issuers said while they knew Enron sold oil or gas to Mahonia, which got its financing from J.P. Morgan, the bank never revealed that Mahonia then sold the same amount of oil or gas to the bank, which eventually sold the commodities back to Enron.

J.P. Morgan's attorneys questioned the three Travelers underwriters in an effort to show to the eight jurors that between 1998 and 2000, when the six surety bonds were written, few questions were actually posed by the insurers about to whom Mahonia would sell the commodity it got from Enron.

In a 1999 memo to his boss, which was shown to the jury Thursday, Brian Steele, head of Traverles's commercial surety division, wrote "There is a certain amount of 'secrecy' about Mahonia, which is not to imply any illegitimacy, but that Chase doesn't disclose much about them."

Mr. Steele testified that Travelers knew Mahonia was an entity set up by Chase Manhattan Bank in the British Channel Islands for the special purpose of marketing oil and gas. Chase Manhattan merged with J.P. Morgan & Co. in 2000 to become J.P. Morgan Chase & Co.

That knowledge, Mr. Steele said, was enough for his company to make underwriting decisions for the six oil and gas transactions now in dispute. "It was not necessary for us to get into all the details," he said.

Two other witnesses from Travelers Patricia Osburn, an underwriter based in Houston, and her boss, Paul Wicks also testified that their knowledge about Mahonia at the time was enough for them to underwrite the bonds. Ms. Osburn said she was told back in 1998 that Mahonia was a "large oil company" in the Channel Islands.

J.P. Morgan's lawyers claim that the insurers' lack of curiosity about the oil and gas Mahonia received from Enron was because they understood the transactions they were getting into and were lured by the high premiums on surety bonds.

In the week ahead, U.S. District Judge Jed Rakoff, who presides over the surety dispute, is expected to rule on whether to include as evidence in the trial some notes written by an Enron in-house lawyer, Thereasa Bushmann. The notes were written during a 2000 conversation among Jeffrey Dellapina, managing director in J.P. Morgan's Credit and Rates Group, some Enron officials, and an agent for insurance companies, Philip Baer.

The conversation occurred in the course of negotiations over the issuance of the last of the six surety bonds now in dispute. That bond, whose underwriters include Safeco Insurance Co. and Travelers, was issued in December 2000 against a $330-million prepaid natural gas transaction between Enron and Mahonia.

J.P. Morgan attorneys say Ms. Bushmann's notes, which include a part that says "Chase sells the gas back to us," could show the insurance companies' knowledge about the nature of the transaction at the time when they were considering the surety bond.

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