JP Morgan Chase & Co’s lawyer has told federal jurors that 11 insurance companies reneged on their promise to pay $US1 billion ($A1.8 billion) on bonds they had written to guarantee delivery of oil and gas from Enron Corp.
The insurers had backed transactions between Enron and Mahonia, an offshore entity linked to JP Morgan.
When Enron defaulted after filing for bankruptcy a year ago, JP Morgan turned to the insurers to collect. They refused, claiming the trades masked loans to Enron and kept debt off its balance sheet. A trial began yesterday on JP Morgan’s lawsuit.
“The insurance companies’ refusal to pay in this case is a disgrace,” JP Morgan lawyer John Callagy said in opening arguments. “While the insurance companies got paid to share the bank’s losses, now they want to push their losses off on Chase.”
The case is expected to shed light on how Enron, once the world’s largest energy trader, did business with Wall Street banks. Any evidence of fraud by the bank that emerges in court might be useful to investors in Enron and JP Morgan, whose lawsuits accuse the bank of aiding Enron’s misstatement of billions of dollars in income.
JP Morgan shares have lost a third of their value since Enron sought bankruptcy protection after admitting it hid billions in debt in off-the-books entities.
JP Morgan wants the insurance companies to honour surety bonds they wrote to back trades involving Enron and Mahonia. The bonds covered contracts between 1998 and 2000 in which the bank funded Mahonia, which then used the money to prepay Enron for future gas and oil deliveries. Insurers covered the risk that Enron might default.
The insurers, including two then controlled by Citigroup Inc, Travelers Indemnity and Travelers Casualty & Surety, say JP Morgan lied when it promised the transactions would involve actual oil and gas deliveries.
“Our clients found out they had been tricked, deceived and defrauded,” said lawyer Alan Levine, who delivered an opening statement for the 11 insurers. “These deals were disguised loans, and the words have the nasty connotation they deserve.”
The bank was “in bed with Enron in structuring these deals in a concealed way to hide Enron’s debt”, Mr Levine said.
He said that Chase’s e-mails, documents, witness testimony and taped conversations would show that the bank never told the insurers about the true nature of the transactions. They would show that Enron agreed to send the same amount of gas and oil to Mahonia that Mahonia sent back to Enron, he said.
In his opening statement, Mr Callagy said the transactions were not “disguised loans” but “the insurance companies were fully aware of the facts, fully aware of the risks, and fully aware of their obligation to pay”.
After Mr Levine spoke, six other insurance company lawyers gave brief opening statements that incorporated his arguments.