The Wall Street Journal

July 28, 2003 12:29 p.m. EDT

SEC Settles Actions Vs JP Morgan, Citigroup Over Enron


Corrected July 28, 2003 12:42 ET (1642 GMT)

   By Colleen DeBaise


NEW YORK -- The Securities and Exchange Commission said it settled enforcement proceedings against two of the nation's largest banks, J.P. Morgan Chase & Co. (JPM) and Citigroup Inc. (C), for their alleged roles in Enron Corp.'s (ENRNQ) manipulation of financial statements.

J.P. Morgan agreed to pay $135 million to settle the SEC charges; Citigroup agreed to pay $120 million.

Citigroup's settlement also includes an allegation that it helped Dynegy Inc. (DYN) commit fraud.

The banks allegedly helped Enron mislead investors by characterizing loan proceeds as cash from operating activities, according to the SEC.

J.P. Morgan Chase & Co. (JPM) and Citigroup Inc. (C) will each pay $25 million under a pact with Manhattan District Attorney Robert Morgenthau, divided equally between the city and state of New York.

(A headline at 12:23 p.m. EDT misstated the amount.)

In an important development, Manhattan District Attorney Robert Morgenthau said he would not criminally prosecute JP 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.

The DA 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 DA, JP Morgan and Citigroup have agreed to abide by reforms they have initiated regarding procedures related to structured finance, like 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.

A J.P. Morgan Chase spokesman said he had no immediate comment. A spokeswoman for Citigroup did not immediately return a telephone call seeking comment.

Money paid by the banks will be directed to fraud victims through the "Fair Fund," with $236 million headed to Enron fraud victims and $19 million to Dynegy fraud victims, the SEC said.

Congress created the so-called Fair Fund last summer in a sweeping reform package prompted by corporate scandals at Enron and elsewhere. The SEC has so far brought six Enron-related lawsuits and sued nine former executives, including former Chief Financial Officer Andrew Fastow. Investigations into wrongdoing at Enron and Dynegy are continuing, the SEC said.

"As today's actions illustrate, we intend to continue to hold counterparties responsible for helping companies manipulate their reported results," SEC deputy enforcement director Linda Chatman Thomsen said in a statement announcing the settlement with the banks.

Citigroup and J.P. Morgan Chase allegedly used complex, structured financings that helped Enron and Dynergy inflate cash flow reported from operations while lowering reported debt and cash flow from financing.

Both banks knew Enron undertook the deals to reassure investors, analysts and credit rating agencies about the energy trading firm's finances, the SEC said.

Enron went bankrupt in 2001 after announcing it had overstated earnings for years.

Houston-based Enron was able to conceal the extent of its borrowing with the deals, which showed up as "minority interests" or "price risk management liabilities," rather than debt, the SEC said. Regulators said Enron's obligation to repay the borrowings also got left out of the picture.

Citigroup's deals for Enron included Project Nahanni, which the SEC said helped Enron generate cash by selling Treasury bills bought with loan proceeds.

Another deal, known as Project Bacchus, allowed Enron to sell an interest in some of its pulp and paper businesses to a special purpose entity backed by Citigroup. The SEC said Citigroup didn't have any equity investment at risk and the deal was really a $200 million financing.

Project Alpha, a $300 million financing for Dynergy, was also named in the SEC's case against Citigroup.

In deciding to settle the matter, the SEC said it took into account Citigroup's "cooperation" with the SEC investigation and "its timely efforts to resolve the matter."

The Senate Permanent Subcommittee on Investigations held hearings last year on the role of Citigroup and JP Morgan Chase in helping Enron inflate its financial results. Sen. Carl Levin, D-Mich., the ranking Democrat on the panel, said he's pleased regulators took action against the two banks.

"Citigroup and JP Morgan Chase were not the only financial institutions to participate in Enron's chiseling, and these settlements are only the latest in what will likely be a long series of enforcement actions arising from the financial scandals of the last two years," he said in a statement.

Levin said Monday's settlements show bankers, brokers, accountants and lawyers who use deceptive structured finance deals "will be punished."

House Capital Markets subcommittee chairman Richard Baker, R-La., who launched the Fair Fund, welcomed news that Enron and Dynegy investors will receive millions from the SEC settlement.

New York City and state should "do right by investors as well, and give up their shares for distribution through the Fair Fund," rather than keeping the money for other purposes, Baker said.

Baker suffered a setback last week in promoting legislation that would enhance the SEC's enforcement powers and expand use of the Fair Fund. The bill cleared a House subcommittee but Baker announced it will not be put to a vote by the full House Financial Services Committee until September at the earliest.

State regulators blasted the bill as a direct attack on New York Attorney General Eliot Spitzer, who played a key role in a $1.4 billion settlement with 10 Wall Street firms for alleged conflicts of interest.

-By Colleen DeBaise, Dow Jones Newswires, 212-227-2017;

-By Judith Burns, Dow Jones Newswires; 202-862-6692;

(Cheryl Winokur Munk and Tara Siegel Bernard contributed to this story.)

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Updated July 28, 2003 12:29 p.m.

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