[NY Times article below]
NEW YORK—J.P. Morgan Chase and Citigroup agreed Monday to pay more than $300 million for their roles in Enron's manipulation of its financial statements.
J.P. Morgan will pay $135 million and Citigroup will pay $120 million as part of the settlement, the Securities and Exchange Commission said.
In addition to the federal payments, the two banks agreed to pay $50 million total to New York state and New York City to settle a similar investigation, the Manhattan district attorney's office announced shortly afterward.
JP Morgan and Citigroup did not immediately respond to calls seeking comment.
The SEC said most of the money would go to victims of Enron's massive corporate fraud -- the first in a string of scandals that have tainted corporate America since 2001. The commission said the settlement brings to $324 million the amount of money it has won from companies for Enron fraud victims.
The government had accused J.P. Morgan and Citigroup of helping Enron design complex transactions that allowed it to underreport its debt.
"If you know or have reason to know that you are helping a company mislead its investors, you are in violation of federal securities laws," SEC enforcement chief Stephen Cutler said in a statement.
In December, Citigroup and J.P. Morgan officials told an investigative panel of the Senate Governmental Affairs Committee that they believed they were engaging in lawful deals with Enron.
Citigroup's settlement includes $19 million to settle charges that it helped Dynegy Inc. commit fraud.
Manhattan District Attorney Robert Morgenthau said he would not criminally prosecute J.P. Morgan or Citigroup or their employees for any activities related to Enron. Instead, the banks each will pay $12.5 million to the state of New York and $12.5 million to the city of New York, as well as the cost of the investigation.
"It is important that two major banks have committed to reform their internal procedures to help ensure transparency in financial transactions," Morgenthau said in a statement. "Other financial institutions would be well-advised to follow suit, as there is no place in free and fair markets for players who think they can continue to conduct risky business under a cloud of deception and secrecy," Morgenthau said.
The district attorney said the banks structured $8.3 billion in loans to Enron as complex commodities transactions, which enabled Enron to hide billions of dollars of debt from investors and other parties. Under the settlement with the district attorney, J.P. Morgan and Citigroup have agreed to abide by reforms they have initiated regarding procedures related to structured finance, such as the Enron transaction.
The banks have also reached agreements with the Federal Reserve Bank of New York, the Office of the Comptroller of Currency and the New York State Banking Department.
J.P. Morgan and Citigroup are among 11 banks and brokerages negotiating a possible settlement with plaintiffs in a consolidation of shareholder lawsuits in Houston seeking at least $25 billion.
In May, U.S. District Judge Melinda Harmon in Houston and U.S. Bankruptcy Judge Arthur Gonzalez in New York ordered the banks, Enron and plaintiffs to start settlement talks with help from a mediator.
In January, an investigative panel of the Senate Governmental Affairs Committee concluded that J.P. Morgan and Citigroup helped Enron deceive the investing public in a series of complicated, multimillion-dollar transactions involving Enron's pulp and paper business.
The subcommittee examined four related transactions -- known as Fishtail, Bacchus, Sundance and Slapshot -- which investigators allege helped Enron disguise its true financial condition in 2000 and 2001 by reporting loans as revenue-generating sales.
Settlement of the cases will help put to rest one of the longest-running headaches for the nation's two biggest banks.
Soon after Enron filed for bankruptcy protection in December 2001, it became clear that J.P. Morgan had been helping to finance the Houston-based energy trader through a series of so-called gas prepay contracts.
Using these contracts, the bank channeled money to Enron, which returned those payments through the future delivery of gas through several offshore vehicles, including one with the name Mahonia Ltd. The bank defrayed the risk of financing Enron with the help of insurance firms that issued surety bonds to guarantee the delivery of the gas. But when Enron failed, the insurers refused to pay, saying the gas trades were a trick to disguise loans, leading to a lawsuit in which the sides settled in January, days before a jury was to start deliberations.
A number of other Wall Street firms, including Merrill Lynch & Co., also have come under regulatory scrutiny for their roles in helping Enron manage its books. Merrill in February settled an Enron-related dispute with the SEC for $80 million.
The Securities and Exchange Commission announced today that J.P. Morgan Chase and Citigroup had agreed to pay a total of $255 million to settle S.E.C. allegations that they helped Enron, the collapsed energy-trading company, to fraudulently mislead investors on its financial condition.
In addition, the two banking companies agreed to pay a total of $50 million to New York State and New York City to settle a similar allegations about their dealings with Enron, the Manhattan district attorney's office announced this afternoon.
Without admitting or denying the commission's allegations, J.P. Morgan Chase agreed to pay $135 million and and Citigroup $120 million. The settlement also resolves the commission's charges stemming from the assistance that Citigroup provided to Dynegy, another energy-trading company, to manipulate its financial statements.
"These two cases serve as yet another reminder that you can't turn a blind eye to the consequences of your actions — 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," Stephen M. Cutler, the director of the S.E.C.'s enforcement division, said in a statement.
The S.E.C. said $236 million of the money would go to Enron investors who experienced losses because of the fraudulent finances, while $19 million would go to Dynegy investors.
The Securities and Exchange Commission accused J.P. Morgan Chase and Citigroup of helping their clients to set up complex financial transactions to cover up what were in essence loans.
These financial transactions, the S.E.C. said, enabled Enron and Dynegy to inflate reported cash flow from their operating activities, underreport cash flow from financing activities, and underreport debt.
As a result, the S.E.C. said, Enron and Dynegy presented false and misleading pictures of their financial health and results of operations.
The commission asserted that both financial institutions knew that Enron was engaging in these transactions specifically to allay concerns among investors, Wall Street analysts and credit-rating agencies about its cash flow from operating activities and outstanding debt.
It also asserted that Citigroup knew that Dynegy had similar motives for its structured finance transaction.
Under the agreement with the Manhattan district attorney's office, J.P. Morgan Chase and Citigroup will each pay $12.5 million to New York State and $12.5 million to New York City, as well as the costs of the investigation.
As a result of these settlements, the Manhattan district attorney's office said it would not prosecute J.P. Morgan Chase or Citigroup or their employees for their involvement with Enron's financial transactions.
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