Several Cedar Rapids-based insurance companies are among the AEGON N.V. subsidiaries taking the nation’s largest investment banks to court in Cedar Rapids.
They are seeking the return of an undisclosed amount that AEGON companies invested in financial products exposed to Enron’s collapse.
The 132-page lawsuit alleges a pattern of fraud to hide Enron’s debt by failing to disclose the true nature of the complex financial instruments Wall Street investment banks sold to institutional investors.
The insurance companies said they relied on the credibility of the highly regulated investment banks when they invested.
“These banks designed and provided financing with the specific purpose of making Enron appear to be on a track of high and stable growth through expanding energy trading operations, when the truth was very different,” said the lawsuit filed Oct. 15.
Named in the lawsuit are Citigroup, Credit Suisse First Boston Inc., Salomon Smith Barney Inc., Donaldson Lufkin & Jenrette, Deutsche Banc Alex Brown, Lehman Brothers, Bear Stearns, UBS Warburg, and J.P. Morgan Chase & Co. and some of their subsidiaries.
Representatives of several of the defendants said they were unfamiliar with the case and could not comment.
Liz Schmid, spokeswoman for the AEGON companies, said, “It is unfortunate that we must pursue this action against the firms that we’ve relied upon and trusted. All investors must have clear and accurate information on which to base their decisions.”
AEGON announced its $300 million exposure to Enron’s collapse last November as the story of the energy trading firm’s concealment of debt was unfolding. Much of that story has since been told.
AEGON’s U.S. shares are trading at $12.62, down more than 60 percent from their 52-week high. A note of caution issued by the company’s chairman recently prompted an outcry from a Dutch investors group worried that AEGON would cut its dividend.
The insurance companies are asking that their purchases of millions of dollars worth of investments through the investment banks be rescinded, essentially voided. They ask for unspecified punitive damages.
“Each defendant betrayed the trust and confidence of institutional investors in exchange for receiving from Enron and Enron-related entities hundreds of millions in fees, above-market interest rates, and partnership profits,” said the lawsuit filed by Cedar Rapids attorney Patrick Roby.
Among the fraudulent strategies alleged were the creation of phony “prepaid commodities transactions” that actually acted as loans to Enron. The AEGON companies allege that by disguising the loans as prepaid commodities transactions, the banks intentionally distorted the financial criteria by which ratings agencies evaluated Enron and its investments.
The case relies in part on sworn testimony of Robert Roach, chief investigator of the Senate Permanent Committee on Investigations, before Congress in July on the role of financial institutions in Enron’s collapse.
Roach said that Enron’s year 2000 financial statement’s would have shown about $14 billion of debt, 40 percent more than actually shown, and would have credited about $1.7 billion of funds from operations, about 50 percent less than credited, if Enron had properly accounted for the prepaid commodities transactions.
The Cedar Rapids-based insurance companies filing the lawsuit include Peoples Benefit Life Insurance Co., Life Investors Insurance Company of America and Transamerica Life Insurance Co. Other plaintiffs include AUSA Life Insurance Co. and Monumental Life Insurance Co.
The insurance companies are joined in the lawsuit by several investment funds, including the IDEX Transamerica Conservative High Yield Bond Fund.