NEW YORK (AP)–The Securities and Exchange Commission says the banks–two of the largest in the nation–helped Enron create complex financial transactions designed to beef up reported cash flow and hide debt.
The SEC contends the banks knew Enron was intentionally trying to make its financial picture seem rosy when the company was actually riddled with debt.
Under deals announced Monday, J.P. Morgan will pay $135 million to the SEC and Citigroup will pay $101 million. All of that money will eventually be used to pay back the victims of Enron’s spectacular fraud, the SEC said.
“If you know or have reason to know that you are helping a company mislead its investors, you are in violation of the federal securities laws,” SEC enforcement chief Stephen Cutler said.
Also Monday, the court-appointed examiner in Enron’s bankruptcy said he found evidence that four other banks that did finance deals with Enron knew of the company’s financial machinations. Still, all allowed the deals to proceed, Atlanta attorney Neal Batson said in his third report to the U.S. Bankruptcy Court in Manhattan.
The report also said the banks–which Enron owes at least $5 billion–could lose their place among the sizable collection of creditors to be repaid because of their role in the financial schemes.
Batson examined the roles of Barclays PLC, Canadian Imperial Bank of Commerce, Deutsche Bank AG and Merrill Lynch. Messages left for the four additional banks were not returned late Monday.
The money, $236 million in all, has already been wired from the banks to a court-supervised account. The SEC gave no timetable for when the money would be doled out to investors.
The SEC said J.P. Morgan and Citigroup helped Enron design transactions that were essentially loans, but were made extremely complex so they would appear to represent cash flow from operations.
Some of them were “prepay transactions,” loans that were designed as commodity trades and provided Enron cash up front at no risk to the energy trader.
In March, Merrill Lynch & Co. agreed to pay $80 million to settle charges it helped Enron inflate profits and deceive investors.
J.P. Morgan Chase and Citigroup will also pay a total of $50 million to New York state and New York City to settle similar Enron charges, plus $3 million more to reimburse expenses by the office of Manhattan District Attorney Robert Morgenthau.
In exchange, Morgenthau said he would not pursue charges against the banks or their employees.
“We have made mistakes,” J.P. Morgan Vice Chairman Marc Shapiro wrote in a letter to Morgenthau. “We cannot undo what has been done, but we can express genuine regret and learn from the past.”
In addition to the Enron settlement, Citigroup agreed Monday to pay $19 million to settle allegations by the SEC that it helped Dynegy Inc., another energy trader, create false financial statements.
Last year, both banks instituted reforms designed to make sure they evaluate their transactions for possible ethics risks–and to make sure the banks’ clients disclose any potential for its investors to be misled.
In a statement, Citigroup stressed its self-imposed reforms and said it was pleased the settlements would bring the investigations to a close. Citigroup was among the most active Enron banker, with more than 60 transactions in the five years before its bankruptcy, according to the examiner’s report.
“We are committed to assuring compliance and continually scrutinizing our practices in order to adhere to the highest standards as our business evolves,” said Charles Prince, head of corporate and investment banking for Citigroup.
The collapse of Houston-based Enron, in 2001, destroyed the retirement savings of thousands of employees and damaged outside investors and pension funds across the nation.
J.P. Morgan and Citigroup are among 11 banks and brokerages negotiating a possible settlement with plaintiffs in a conglomerate of shareholder lawsuits in Houston seeking at least $25 billion.
By Erin McClam, Associated Press Writer
