Two major banks knew Enron Corp. was misrepresenting its financial condition by disguising billions of dollars in loans as income in the years leading to its collapse, a court-appointed examiner said.
Citibank and J.P. Morgan Chase & Co. helped devise accounting techniques known as “prepay transactions” that Enron used to inappropriately count $5 billion in loans to itself as income, attorney Neil Batson said in an interim report.
“Both lenders recognized that the prepay transactions were essentially loans,” wrote Batson, who was appointed by a U.S. bankruptcy court to probe Enron’s finances.
Neither bank acknowledged any wrongdoing. Citibank’s parent, Citigroup, released a statement Thursday that blamed Enron and its former accounting firm, Arthur Andersen LLP.
“In Citigroup’s transactions with Enron, Citigroup relied on Enron, its accountants and advisers, to report these transactions properly,” Citigroup said.
A J.P. Morgan Chase spokesman in New York declined comment on the Batson report.
Merrill Lynch & Co. also has been implicated in the Enron scandal. Although it too admitted no wrongdoing, it reached an $80 million settlement this year with the Securities and Exchange Commission that concluded an investigation into two 1999 transactions with Enron.
Batson’s report also concluded that more than $2.9 billion could possibly be recovered by Enron to pay back creditors by voiding unethical asset transfers, such as those made to former executives.
The report said Enron could seek to recover more than $74 million from former chairman and chief executive Kenneth Lay. Batson said Lay received the money in loans from the company, which he repaid with Enron stock “at a time when Enron was presumed to be insolvent.”
Lay’s spokeswoman, Kelly Kimberly, did not immediately return a telephone message seeking comment.
Batson said Enron might also be able to get back $53 million in deferred compensation paid to “certain employees” in the month leading to its December 2001 bankruptcy filing.
The only former top Enron executive charged with a crime so far is one-time chief financial officer Andrew Fastow, who prosecutors said masterminded the accounting sleight-of-hand that brought down the Houston-based company.
Arthur Andersen LLP was convicted last summer of obstruction of justice in the Enron investigation, and essentially dissolved afterward.