- The Washington Times - Monday, July 28, 2003

J.P. Morgan Chase & Co. and Citigroup, the nation’s two largest banks, yesterday agreed to pay $236 million to settle charges that they helped Enron Corp. hide debts and defraud investors.

The settlement with the Securities and Exchange Commission will add to the funds being funneled into restitution for investors who lost an estimated $60 billion in stock value as a result of Enron’s deceptions from 1999 to 2001 and its consequent bankruptcy.

The agreement with the SEC is expected to expedite settlement of $25 billion in investor lawsuits that name the banks along with Enron in the massive securities fraud.

The banks also agreed to pay $50 million to New York City and New York state to settle similar charges levied by Manhattan District Attorney Robert M. Morgenthau.

“These two cases serve as yet another reminder that you can’t turn a blind eye to the consequences of your actions,” said Stephen M. Cutler, director of the SEC’s enforcement division.

The two banks should have known better than to assist Enron, an important client, he said. Both were aware that the complex third-party transactions they helped arrange for the energy giant were intended to make its balance sheets look better and win the confidence of investors and ratings agencies, he said.

Merely assisting in the deception, which was instigated by Enron, was no excuse for the banks, he said. “If you know or have reason to know that you are helping the company mislead its investors, you are in violation of the securities laws.”

The SEC charged that Citigroup engaged in the same types of bogus transactions with Dynegy Inc., one of Enron’s rivals. Citigroup agreed to pay $19 million to settle those charges. It is paying $101 million in the Enron settlement and J.P. Morgan is paying $135 million.

Both energy companies were highly leveraged and central players in the energy-trading business. To hide some of their debts and make their balance sheets look better, the banks helped disguise loans as complicated “prepay transactions” that appeared to provide the company with cash rather than debt.

“We have made mistakes,” J.P. Morgan Vice Chairman Marc Shapiro told Mr. Morgenthau in a letter released yesterday. “We cannot undo what has been done, but we can express genuine regret and learn from the past.”

The settlements come four months after another U.S. banking titan, Merrill Lynch & Co., agreed to pay $80 million to settle charges that it helped Enron inflate profits and deceive investors.

Separately, Citigroup, J.P. Morgan and four other investment banks with $5 billion in claims against Enron may lose their priority as creditors because they contributed to its collapse, bankruptcy examiner Neal Batson said.

“There is sufficient evidence of inequitable conduct” by the six banks for a court to determine that their claims against Enron “may be equitably subordinated to the claims of other creditors,” Mr. Batson said in a 92-page report filed in bankruptcy court in New York.

The banks identified in the report are Enron’s principal creditors, including Merrill Lynch, Deutsche Bank AG, Barclays PLC and Canadian Imperial Bank of Commerce.

The bankruptcy examiner’s findings are expected to assist Enron investors in settling their class-action lawsuits against the banks.

This article is based in part on wire service reports.


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