Banks May Lose Creditor Priority on Enron Claims

Citigroup Inc., J.P. Morgan Chase & Co. and four other investment banks with $5 billion in claims against Enron Corp. may lose their priority as creditors because they contributed to Enron’s collapse, bankruptcy examiner Neal Batson said Monday.

“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,” Batson said in a 92-page report filed in U.S. Bankruptcy Court in New York.

Batson’s findings, based on his reading of bankruptcy law and supported with hundreds of pages of appendices, might help shareholders suing the banks and Houston-based Enron prove their securities fraud case or to extract a settlement, investor lawyers said.

Investors allege that Enron’s financial misstatements were the cause of an estimated $25 billion in stock losses.

The banks, which include Merrill Lynch & Co., Deutsche Bank, Barclays and Canadian Imperial Bank of Commerce, are among Enron’s principal creditors. They are being sued by Enron shareholders and bondholders for allegedly helping the energy trader hide debt and inflate reported profit to prop up the company’s share price.

Enron, at one time the seventh-largest U.S. company by sales, filed for bankruptcy protection in December 2001 after disclosing its misstatements and losing $68 billion in market value from its share price high in August 2000.

Batson found that there was evidence that Citigroup, which completed 60 loans or other financings with Enron in the five years before the former energy trader filed for Chapter 11, “had actual knowledge of the wrongful conduct in these transactions.”

Barclays and CIBC could not be reached for comment.

Representatives for Deutsche Bank, Merrill Lynch and Citigroup declined to comment because they had not read the Batson report.