J.P. Morgan, Citigroup Settle in Enron Probe
Citigroup Inc. and J.P. Morgan Chase & Co. agreed Monday to pay more than $300 million to settle government charges that they helped Enron Corp. and another energy company defraud investors.
The Securities and Exchange Commission charged that the banks concocted complex transactions that masked Enron’s debt and inflated its reported cash flow. Enron recorded the transactions as commodity contracts when in reality they were loans with fixed repayment terms, regulators said.
The banks agreed to pay $255 million to the SEC and $25 million each to the city and state of New York.
“Financial institutions may not look the other way while their clients use them to manipulate their reported results,” Stephen Cutler, head of the SEC’s enforcement division, said at a news conference in downtown Manhattan.
The SEC charges represented a sharp rebuke and an embarrassment for the companies, said Henry Hu, a professor of corporate and securities law at the University of Texas at Austin.
“The officers of J.P. Morgan Chase and Citigroup ought to be ashamed of themselves,” Hu said. “Especially given their status, they should be terribly ashamed of what the SEC says they did.”
Along with scandals involving stock analysts and initial public stock offerings, the Enron-financing saga has battered the image of Wall Street’s premier investment banks and is causing them to pay hundreds of millions of dollars to resolve multiple probes of their activities in the late 1990s.
Earlier this year, Merrill Lynch & Co. agreed to pay $80 million to settle SEC charges that it aided Enron in two transactions allegedly done only to boost the energy company’s reported earnings.
Wall Street firms have also agreed to pay to resolve probes of analyst conflicts of interest, the handling of initial public stock offerings and other issues.
Regulators alleged that the banks were well aware that the Enron transactions had no legitimate business purpose, and that the Houston-based energy company sought them only to portray its financial condition as much stronger than it was.
To disguise their true nature, the deals were funneled through shadowy financing vehicles known as special-purpose entities. Enron sought the transactions in part so that its cash on hand would match the cash it was supposedly earning on certain assets, regulators alleged.
In separate statements released Monday, the banks said they were happy that the probes are completed. Citigroup also said it has taken measures to prevent improper financial dealings in the future.
“Put simply, the transactions addressed in these settlements would not happen now at Citigroup,” said Charles Prince, the head of the company’s investment-banking unit who is slated to become chief executive by year-end.
Citigroup agreed to pay $101 million to settle with the SEC, while J.P. Morgan agreed to pay $135 million. Citigroup is shelling out an additional $19 million to resolve a separate investigation into similar financing it did for Dynegy Inc. The banks neither admitted nor denied guilt.
The money will be put into restitution funds for aggrieved Enron and Dynegy shareholders.
The settlement helps to remove a cloud that has hung over the two big banks since Enron filed for bankruptcy protection in December 2001, at the time the biggest bankruptcy ever.
However, the banks still face a bevy of private lawsuits from investors who have targeted Enron’s investment bankers and lawyers. The California Board of Regents is the lead plaintiff in a huge class-action lawsuit against the banks.
Hu said the settlement may strengthen the investor lawsuits.
“In a sense, the core claim of the shareholders is what the SEC alleged and got the banks to pay a not-insignificant amount on,” Hu said.
William B. Harrison, J.P. Morgan’s chief executive, alluded to those suits Monday.
“We still have various Enron-related civil suits pending,” he said, “and we intend to pursue our rights and defenses in those cases vigorously.”
Manhattan Dist. Atty. Robert Morgenthau, whose office also investigated the financings, said no executives would be prosecuted because there was not enough evidence to prove that individual bankers intended to defraud investors. J.P. Morgan agreed to pay $2.5 million and Citigroup agreed to pay $500,000 to reimburse Morgenthau’s office for the costs of the investigation.
Citigroup’s stock rose 7 cents to $45.80 on Monday and J.P Morgan shares rose 2 cents to $35.49, both in New York Stock Exchange trading.
J.P. Morgan announced in January that it would take a charge of about $400 million to cover losses on dealings with Enron over commodity contracts.
