Senate investigators examining a series of complex, multimillion-dollar transactions involving Enron’s pulp and paper business said Monday that financial giants Citigroup and J.P. Morgan Chase knowingly helped Enron deceive the investing public.
The two investment banks rejected the assertions by Sen. Carl Levin, D-Mich., and his staff investigators and insisted that their executives believed they were engaging in lawful deals with Enron. However, Citibank and J.P. Morgan said they would not engage in the same sort of transactions today.
The bipartisan investigative panel of the Senate Governmental Affairs Committee has been examining the four related transactions, which investigators say helped the now-bankrupt energy company disguise its true financial condition in 2000 and 2001. Enron reported transactions that were really loans as revenue-generating sales, the investigators say. They have previously alleged that the two big investment banks actively aided Enron in its deceptive accounting in return for big fees and favors in other deals.
In some cases, internal Citigroup memos appear to indicate that the bank’s investment was protected from risk in the deals, which would mean that Enron would have been required to report the transaction in its financial statements.
The subcommittee’s new report on the transactions allegedly designed to inflate Enron’s cash flow and, in one case, evade Canadian taxes, is being provided to the Justice Department and the Securities and Exchange Commission which have been investigating Enron’s collapse. But it was not immediately clear whether the law enforcement agencies were looking into the four transactions.
Executives of the banks and federal agency officials are scheduled to testify on the issue Wednesday at a hearing by the panel.
“By concocting elaborate schemes with no legitimate business purpose other than tax and accounting manipulation, Citigroup and J.P. Morgan Chase helped Enron deceive the investing public as well as Enron employees and stockholders,” Levin said in a statement.
The investigators said Citigroup allowed one of the deals to go forward over the objections of some bank officials who warned that it was too risky.
He said the transaction aimed at avoiding millions of dollars in Canadian taxes, called “Slapshot” by bank officials, was “designed and peddled by Chase to Enron and other companies.”
Said Kristin Lemkau, a spokeswoman in New York for J.P. Morgan Chase: “Each country has its own tax laws. We were advised by two Canadian law firms that this transaction was legal and appropriate under Canadian tax laws.
“While we don’t think we did anything illegal or unethical, from the standpoint of reputation risk, we would not do this transaction today,” she said.
New York-based Citigroup, the nation’s largest financial institution, said its executives “acted at all times in the good-faith belief that these transactions complied with existing law and standards. Any suggestion to the contrary is unfair and unfounded.”
Nonetheless, Citigroup said, it would not approve such deals today because it tightened its policy in August the month after the subcommittee held hearings on the investment banks’ transactions with Enron.
The four transactions, as described by the subcommittee investigators, were:
Fishtail: In December 2000, Enron put its electronic trading business in pulp and paper into a 50-50 joint venture with another investor, called Annapurna, to establish its value as an equity investment. LJM2, a partnership run by former Enron chief financial officer Andrew Fastow â€” who pleaded innocent to a 78-count federal indictment last month â€” received $8.5 million to “sell” its interest in Annapurna, making a 15 percent return on its investment.
Chase received $500,000 in fees.
Bacchus: A week after the Fishtail transaction, Enron used the Bacchus deal to declare that an asset had been sold for $200 million and to record a $112 million gain on its financial statements for 2000. Citigroup invested 3 percent of the equity in the deal, or $6 million, after receiving a verbal commitment from Fastow that Enron would support the bank’s investment. Citigroup also made a $194 million loan.
The transaction was “steeped in deceptive accounting, if not outright accounting fraud,” the investigators said in their report.
Sundance: Six months later, the Sundance transaction, a joint venture between Enron and Citigroup, was set up to create a more long-term entity off Enron books that it could use to hold its pulp and paper business assets. It provided the appearance but not the reality of having more than one investor, the investigators said. Enron contributed assets valued at about $750 million and Citigroup is believed to have contributed $188.5 million, including cash and shares. The bank has not located any signed approval forms for the transaction.
Slapshot: In June 2001, this transaction used what investigators called a one-day, $1 billion sham loan from Chase to produce about $60 million in Canadian tax deductions and $65 million in benefits to Enron’s financial results. The transaction involved several affiliates of Chase and Enron as well as off-the-books partnerships.
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