Jul. 29–Six major creditors of Enron, including J.P. Morgan Chase and Citigroup, could be moved to the back of the payout line because of their complicity in deceptive transactions that led to thecompany’s demise, a court-appointed examiner said in a report released Monday.
The six financial institutions could find their $5 billion in claims against the bankrupt company “equitably subordinated to the claims of other creditors” because they knew the transactions were inappropriate, according to examiner Neal Batson.
The report also singles out Enron executives it says were aware of the company’s deceptive accounting and finance practices, but none higher up the corporate ladder than Chief Financial Officer Andrew Fastow. Chairman Ken Lay and Chief Executive Officer Jeff Skilling are mentioned only in passing.
Batson says Fastow, former Chief Accounting Officer Rick Causey, and former treasurers Ben Glisan and Jeff McMahon “and perhaps others, cultivated and instilled a highly refined and carefully implemented strategy to limit the disclosure” of its off-the-books transactions.
Monday’s report is the third from the examiner, who has spent nearly $75 million on his investigation to date.
The other Batson reports analyzed the special purpose entities or SPEs funded by the investment banks that Enron used to hide debt and boost revenue.
Batson’s findings could help shareholders suing the banks and Enron prove their securities fraud cases or force a settlement.
The banks — J.P. Morgan, Citigroup, Merrill Lynch & Co., Deutsche Bank, Barclays and Canadian Imperial Bank of Commerce — are already participating in court-ordered mediation with those plaintiffs.
Citigroup is Enron’s largest creditor, with about $2.4 billion in claims, followed by J.P. Morgan with about $1.5 billion. Barclays claims it is owed $371 million, Deutsche Bank more than $227 million, CIBC $205 million and Merrill Lynch $53 million.
Batson cited numerous examples of how the banks had “actual knowledge of the wrongful conduct in these transactions.” J.P. Morgan officials acknowledged in e-mails that purported commodity transactions with Enron were little more than loans, and highly lucrative to the bank.
“These transactions are balance-sheet advantaged and are used as a year-end management tool,” wrote J.P. Morgan employee George Serice, vice president for syndicated finance, to Susan F. Stevens, on Oct. 29, 1997, the report said. “Enron is thus enticed to pay a premium for these transactions.”
The report quotes a statement Merrill Lynch employee James Brown gave to Batson’s staff this year in which he said there were discussions at the bank about how a 1999 transaction involving two power generation barges in Nigeria could somehow “create reputational risk for Merrill.”
Batson also cites a Barclays 1999 e-mail from director John Meyer to a colleague, Jonathan Taylor, to support his conclusions about the bank.
“Don’t for a second think that Enron is satisfying an operating need by selling these commodities forward,” Meyer wrote, according to the report. “In actual fact they are only borrowing money.”
Batson’s report also notes that Enron officials routinely withheld details of the transactions from the company’s auditing firm, Arthur Andersen, and its public financial reports. The report cites numerous e-mails and interviews where employees discussed how they worked around accounting rules to avoid disclosing details that, if revealed, could have changed the view that credit rating agencies, investors and analysts had of the firm.
For example, Kevin Jordan, an employee in the transaction support group under the office of the Chief Accounting Officer, praises his colleague Clint Walden for his work “creating the ‘failed FAS 124 sale’ accounting that made that transaction both invisible to analysts and investors while creating an off-balance sheet hedge fund for Enron’s use.”
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