A US Senate committee grilled Citigroup and J P Morgan Chase executives on Wednesday on their involvement in deals that it alleges allowed Enron to engage in tax deception and manipulation of financial statements.
The committee accused the banks of using complex structured finance deals named Fishtail, Bacchus, Sundance and Slapshot to help Enron mislead investors and regulators.
“Citigroup and [J P Morgan] Chase actively aided Enron in these transactions despite knowing they employed deceptive accounting and tax strategies and were being used by Enron to manipulate its financial statements,” said Senator Carl Levin, who heads the senate committee investigating the role of financial institutions in the Enron collapse.
The Bacchus deal involved the $200m sale of part of Enron’s paper and pulp business to a shell company it had established, allowing Enron to book $112m in income. The shell company, Caymus Trust, obtained the funds to buy the assets through a $194m loan from Citigroup and another $6m cash investment from Fleet Boston Finance that was also guaranteed by Citigroup.
Mr Levin charged that Enron had “guaranteed” the $6m investment, which under accounting rules would preclude it from booking the transaction as a “sale”.
In defending the deal as a sale, William Fox, managing director of Citigroup’s Global Power and Energy Group, said “verbal assurances” he received from Andrew Fastow, Enron’s former chief financial officer, that Citigroup’s money would not be at risk did not amount to a “guarantee” despite internal Citigroup e-mails suggesting the contrary.
Charles Prince, chief executive of Citigroup’s Global Corporate and Investment Bank, admitted the transactions would not be approved under policies Citigroup implemented in August. But he said the transactions had been undertaken in good faith and were not illegal.
Mr Levin accused J P Morgan Chase of helping Enron to reduce its tax obligations in Canada through a transaction called Slapshot. The company claimed the transaction was not illegal and had been approved by its Canadian lawyers. But Mr Levin said the bankers had created a structure designed to hide transactions from the Canadian authorities.