Citigroup is in advanced talks with US regulators to settle allegations that it helped Enron massage its finances.
The world’s most profitable financial services group stands accused of disguising loans to the collapsed energy trader as commodities trades, allowing Enron to book the revenue from the transactions and mask the true state of its finances.
A settlement with the Securities and Exchange Commission, the US’s chief financial regulator, could still fall through and is a few weeks away, people close to the talks said. An SEC deal with Citigroup would follow that announced by Merrill Lynch last week, when the largest US brokerage group agreed to pay $80m to settle an investigation into two transactions it engineered for Enron in 1999 that helped polish year-end earnings.
That settlement is not finalised but is expected to be concluded within two or three weeks.
A third bank, JP Morgan Chase, is also being investigated for disguising loans to Enron as commodities trades but negotiations are not advanced. JP Morgan declined comment, citing the confidentiality of its discussions with the SEC.
Both the Citigroup and Merrill investigations have opened up new avenues of regulatory inquiry that could have a profound effect on Wall Street.
Unlike Enron’s auditor, the banks had no special responsibility under the law to check that the company’s finances were correct. Regulators think they may struggle even to argue that the banks were Enron’s advisers in the deals, rather than mere counterparties to transactions. Nonetheless, investigators have taken the view that the banks helped Enron to commit fraud and Citigroup said last year it would stop doing deals that camouflaged a client’s debt.
Neither Citigroup nor Merrill will admit or deny wrongdoing in an SEC settlement, as is usual in such cases. The SEC and Citigroup declined to comment.
Citigroup and JP Morgan both recently established reserves of more than $1bn to cover litigation costs from matters including Enron. Citigroup specifically said some money would cover regulatory action.
Merrill was one of six investment banks that was paid $20m or more in fees by Enron in 2000. Merrill helped boost Enron’s reported profits by $12m in 1999 after it purchased electricity-generating Nigerian barges from the company. A congressional subcommittee alleged the deal was a sham to boost Enron’s reported earnings, and that Merrill only undertook the transaction after receiving assurances the energy company would repurchase the barges six months later at a set price.
Merrill, according to regulators, was paid $9m in fees for its work on the transactions.
Citigroup, JP Morgan and Merrill were grilled in congressional hearings last year for allegedly arranging deceptive transactions for the energy company.
Separately, a group of law firms, accountants and investment banks were blasted two weeks ago in a congressional report for helping Enron to avoid paying taxes despite the billons of dollars it was reporting in profits. The firms singled out included the law firm Vinson & Elkins, accountants Deloitte Touche Tohmatsu and Bankers Trust, now owned by Deutsche Bank.