JP Morgan Chase suffered a damaging blow on Monday in its billion-dollar battle with a group of insurers over Enron liabilities.
Jed Rakoff, the US district judge presiding over the case, ruled that e-mails written by a senior executive at the banking group that describe derivatives transactions as “disguised loans” can be used by insurers in their fight to avoid payment on disputed policies.
Eleven insurers say the US bank used complex commodities deals forward contracts to deliver oil and gas to hide loans to Enron, the energy trader, between 1998 and 2000. The bank argues that the insurers are trying to evade payment of about $1bn in guarantees that covered those deals.
Judge Rakoff said in a ruling that insurers may present e-mails, written by Donald Layton, a JP Morgan Chase vice-president, in the case to a jury. The judge said the description of “disguised loans” was highly relevant. Insurers in the case include Chubb and Allianz.
JP Morgan said on Monday that it believed “Mr Layton’s comments have nothing to do with the issues being argued in this case”. Mr Layton himself has argued that the e-mails did not refer to the deals at issue, which were conducted through a Jersey-registered entity called Mahonia, but to a 1999 internal review of equities derivative transactions.
He wrote in one e-mail: “We are making disguised loans, usually buried in commodities or equities derivatives. They are understood to be disguised loans and approved as such. But I am queasy about the process.”
The Mahonia case, which the judge hoped to complete within four weeks, looks set to drag on over Christmas and into the new year. There is also a risk of a mistrial if any more jurors drop out. Three have already been excused, leaving a jury of six, the statutory minimum for such a civil trial.
JP Morgan has sought to prove that the insurers knew all along that they were participating in the financing of Enron.