A Senate committee chairman told Citigroup and J.P. Morgan Chase executives Thursday that they broke the law by helping Enron artificially inflate revenue, hide debt and avoid taxes in sham deals.
”You helped them perpetrate a fiction,” Sen. Carl Levin, D-Mich., chairman of the Permanent Subcommittee on Investigations, told J.P. Morgan Chase executives at a hearing.
”I take exception to that,” said J.P. Morgan Vice President Eric Peiffer.
Levin said after the hearing that he would refer the deals to the Securities and Exchange Commission and Justice Department for possible investigation.
The rancor marked the committee’s third hearing spotlighting Wall Street’s role in Enron’s collapse.
Executives of both banks say their policies have been overhauled and they likely would not take part in such deals today. But they said they relied on assurances from Enron’s executives and auditors, and they insisted they followed the letter of the law.
Levin, however, said the banks broke SEC rules that bar firms from ”aiding and abetting a deception.” He called on the SEC to more clearly apply those rules to banks, and on banking regulators to enforce those rules.
In the first deal, in December 2000, Enron sold its interest in an off-the-books pulp and paper trading business to a shell company it created called Caymus Trust. It booked $200 million in revenue and $112 million in profit.
To ensure it was recorded as a sale, Citigroup provided Enron a $194 million loan and $6 million equity investment. But former Enron CFO Andrew Fastow assured Citigroup it would recoup the investment. The committee released a raft of e-mails to show Citigroup effectively regarded the $6 million investment as more of a loan. If no independent investor had money at risk, Enron should have included the venture in its accounting records.
One document says ”verbal guarantee 100%.” Citigroup Managing Director William Fox told Levin, ”(Fastow) did not give me a verbal guarantee. It was a businessman’s understanding.”
”You can split hairs, but it is hair-splitting,” Levin said.
In the second deal, in June 2001, Enron and Citigroup set up a venture to pay off the $200 million.
Citibank put up $28.5 million in stock and cash. But in reality, its money was never at risk — a requirement for Enron to keep the venture off its books — investigators say. It was kept in a separate liquid account earmarked for Citigroup, and the bank could recoup it at will.
In an e-mail, a Citibank executive called it a ”funky” deal, saying a colleague ”is amazed that they can get it off balance sheet.” Another executive said it was ”unimaginable” that the bank would not recoup its money.
”This structure was presented to us by Enron executives in this form,’ said Citigroup’s Richard Caplan.