Chase, Citigroup aided Enron in deceptions, senator charges
By Carrie Johnson
The Washington Post
WASHINGTON — JP Morgan Chase & Co. and Citigroup Inc., two of the world's largest banks, helped Enron Corp. arrange billions of dollars in loans that disguised its deteriorating financial condition, and worked to hide the details of some deals from investors, Senate investigators said yesterday.
Associated Press
The transactions, known as prepays, brought Enron more than $8.5 billion in the six years before it collapsed last fall. Had Enron properly accounted for the loans, its debt obligations would have increased by more than 40 percent, to $14 billion in 2000, according to an analysis by the staff of the Senate Governmental Affairs investigations subcommittee.
JP Morgan Chase vice president Robert Traband, left, and Jeffrey Dellapina, bank managing director, went before the Senate investigations subcommittee yesterday.
That would have led to lower credit ratings, officials of debt-rating agencies testified.
Subcommittee Chairman Carl Levin, D-Mich., called Enron's use of the prepays to disguise debt "an accounting sham" and said the company had "the help and knowing assistance of some of the biggest financial institutions in our country."
"Chase and Citicorp knew what Enron was doing, assisted in the deceptions, and profited from their actions," he said.
The banks collected large fees and were given consideration for more deals with Enron, in addition to interest payments, for structuring the deals, senators said. Enron, for example, paid $167 million to Citigroup from 1997 to 2001.
Chase and Citigroup also sold the prepay structures to at least 10 other clients.
"JP Morgan Chase and Citigroup are two of the nation's most prestigious financial institutions," said Sen. Susan Collins, R-Maine. "That's why I find their involvement so shocking. It appears as though they were willing to risk their reputation to keep an important client, Enron, happy."
JP Morgan Chase officials testified that Enron, not the bank, is responsible for how Enron treated the prepays on its books. They said the bank has suffered mightily from its relationship with Enron, losing $2.6 billion in the bankruptcy, including $600 million in unsecured debt.
Citigroup officials said that they believed the prepay transactions to be appropriate and that they relied on Enron's outside accountants from Arthur Andersen LLP.
"We believed that Enron was making good-faith accounting judgments that were reviewed by Arthur Andersen, ... and that the audit committee of Enron's board exercised meaningful supervision over the company's accounting policies and procedures," said David Bushnell, a risk-management official for Citigroup.
The banks' stocks have been battered in recent days. Citigroup closed at $27 a share yesterday, down $5.04. JP Morgan Chase closed at $20.08, down $4.44.
Prepays are arrangements in which companies are paid to deliver a product — in Enron's case, oil and natural gas — at a later date. But Enron and several large banks structured the deals in ways that compromised the independence of the transactions, making them loans rather than sales for accounting purposes, the Senate investigation found.
Enron did not reveal that to its shareholders, investigators said, and instead booked the deals as cash from operations, making its finances look better than they were.
Chase and Citigroup engaged in the deals by using secretive offshore entities named Mahonia, Delta and Yosemite. Senate investigators said the groups, based on the Isle of Jersey, in the English Channel, and in the Cayman Islands, are not legally tied to the banks, but are, in essence, controlled by them through lawyers and charitable trusts.
The banks deny that they control the offshore firms.
Senate investigators testified that the banks took pains not to use "requirements or descriptive language in the prepay documentation that would disclose the true nature of the transaction," according to a report prepared by Senate investigator Robert Roach.
An April 1999 Citigroup memo said the documentation for a deal known as Roosevelt could not reflect an agreement under which Enron would repay $190 million, "as it would unfavorably alter the accounting."
James Reilly, the Houston-based employee who wrote the e-mail message, testified that the agreement was "not in any way binding" and that he did not intend to hide information or to keep it secret.
In November 2001, when an institutional investor asked questions about another entity Citigroup created for use in the prepay transactions, an Enron staffer responded by sending an e-mail to Citigroup saying "we need to shut this down."
So few people knew about the extent of the prepays that when one Chase employee found out last October, he expressed shock. "$5B in prepays!!!!!!!!!" he wrote.
Another Chase worker involved in the deal replied: "... Shutup and delete this email." Chase officials said the company preserves its e-mail for a long time, so the reply must have been a joke.
