Energy Deals Made $200 FACKING Million In Fees for Citigroup, J.P. Morgan
By PAUL BECKETT and JATHON SAPSFORD
Staff Reporters of THE WALL STREET JOURNAL
WASHINGTON -- Citigroup Inc. and J.P. Morgan Chase & Co. made more than $200 million in fees for transactions that helped Enron Corp. and other energy companies boost their cash flow and hide debt, according to congressional investigators and others.
In a congressional hearing Tuesday, investigators also laid out evidence from company documents that suggested the bankers knew of Enron's aim to avoid scrutiny through the deals. Along with the banks' acknowledgment that they marketed such schemes to other energy companies, some legal specialists said the evidence raised the specter of possible criminal or civil liability for the nation's two largest financial institutions.
QUESTIONS OVER ENRON
• Banks Pitched Enron-Type Deals
• Citigroup Deals Helped Enron to Disguise Its Debts as Trades
07/22/02
• J.P. Morgan and Citigroup Face Fresh Scrutiny Over Enron Work
07/02/02
• Wall Street Firms Marketed Deals to Burnish Energy Firms' Results
06/26/02
• Insurers' Filing Says J.P. Morgan Burnished Enron Financial Status
06/24/02
• Citigroup Is Drawn Into SEC Probe Over Dynegy, Firm's 'Project Alpha'
05/31/02
SPECIAL REPORT
• See the Called to Account page.
Both banks defended the transactions as legitimate Tuesday, often in the face of hostile questioning from the Senate Permanent Subcommittee on Investigations. The banks contend that none of the transactions broke any laws, and that it was not their job to audit how the energy company booked the transactions.
The hearing aimed to determine how much Wall Street enabled the complex arrangements that helped fuel the spectacular rise and swoon of the energy industry. As it went on, shares in both banks plunged.
In 4 p.m. New York Stock Exchange composite trading, Citigroup shares sank 15.7%, or $5.04, to $27. Its high, in September 2000 was $59. J.P. Morgan stock was off 18.1%, or $4.44, at $20.08 a share -- down from a March 2000 high of $67.
"If it looks like the banks gave companies intricate instruction on how to do all this, the banks are going to face a significant chance of being indicted," said Christopher J. Bebel, a partner with Shepherd, Smith & Bebel. Mr. Bebel is a former consultant for the Department of Justice and a former Securities and Exchange Commission investigator.
The structures the banks were promoting to Enron and energy companies involve prepaid oil and gas contracts, in which money is paid up front for future delivery of the commodity. Those are common in the industry. But energy companies employed complex circular trades among an offshore entity, the banks and themselves, enabling them to book that cash as part of their trading operations -- instead of as debt -- and also keep investors in the dark.
To help sell these financing deals, according to new documents released Tuesday, Citigroup and J.P. Morgan developed pitch books about how companies could use their services. Critics allege the strategies deceived investors by masking a company's true financial health.
One Citigroup presentation from last year, for instance, touts how using such an arrangement "eliminates the need for Capital Markets disclosure, keeping structure mechanics private" and that "ratings agencies will not view the proceeds raised ... as company debt." For its part, J.P. Morgan, in a July 1998 presentation, noted that such structures were "balance sheet 'friendly.' "
In one February 1999 e-mail disclosed Tuesday, Adam Kulick, a Citigroup vice president, told colleagues that "the client does not wish to have to explain the details of many of the assets to investors or rating agencies." The e-mail went to Citigroup's working group for the biggest of the Enron transactions, a series of deals dubbed "Yosemite." Neither bank commented on the individual documents.
Officials at ratings agencies Moody's Investors Service and Standard & Poor's said at the hearing that if they had known how Enron was boosting cash flow and hiding debt they would have given the company a much lower credit rating than the investment grade it enjoyed until just before its collapse.
In addition to Citigroup's 10 transactions with Enron through June 2001, the bank disclosed for the first time that it engaged in earlier prepaid trades involving special-purpose vehicles with other firms -- Arkla Exploration Co. in 1992 and Amerada Hess Corp. in 1993. A spokesman for Amerada Hess said all of the trades were accounted for properly. A spokeswoman for Arkla couldn't immediately comment.
Citigroup also said it had made presentations on financing arrangements similar to Yosemite to many of the best-known players in the energy business -- including Williams Cos., El Paso Corp., Reliant, Dynegy Inc., and Duke Energy. Citigroup said none of those companies took the bank up on its offer. Duke, Williams, Dynegy, Reliant and El Paso declined to comment.
J.P. Morgan said that besides Enron seven other companies used the same offshore vehicle it established, called Mahonia Ltd., or a successor. The bank named Columbia Natural Resources Inc., now part of NiSource Inc., Occidental Petroleum Co.; Ocean Energy Inc.; Santa Fe Snyder Corp., which is now part of Devon Energy Corp.; and Tom Brown Inc. Spokesmen for those companies said the transactions with J.P. Morgan were all accounted for properly.
J.P. Morgan said the widespread use of prepaid contracts bolstered the bank's contention that they were both legal and in accordance with accounting principles. "Prepaid forwards are widely used deals by a large number of companies," the bank said in a statement. "The fact that they were widespread demonstrates that several outside firms found that they were legal and appropriate."
In their testimony, the banks, both of which ultimately lost huge sums by lending to Enron, struck a similar theme: that it is not the banks' duty to scrutinize how their clients account for deals.
"Once we are satisfied that a client's proposed tax and accounting treatment seems reasonable, the accounting judgments are left to the client and its accounting professionals who have access to complete information," said David Bushnell, managing director Citigroup's Global Corporate and Investment Bank.
Jeffrey Dellapina, managing director in J.P. Morgan's Credit and Rates Group, said, "The manner in which Enron accounted for these transactions on its books of account and in its financial statements was a matter for Enron and its management and auditors."
But Lynn Turner, former chief accountant at the SEC, said banks "can't just stick their heads in the sand like ostriches" if they become aware that there may be something improper in a client's financial statements but must conduct their own due diligence to avoid misleading investors.
Citigroup and J.P. Morgan already are being investigated by criminal prosecutors at both the Justice Department and the Office of Manhattan District Attorney Robert Morgenthau, as well as the SEC, which handles civil cases.
But some specialists said a criminal case would be difficult to bring, if it centered on allegations of aiding and abetting Enron's deception or conspiring in it. Much of what is alleged falls into a gray area, they said. "It's not as if the banks had an accountant's duty to vet these transactions," said Robert Bostrom, head of the financial institutions business for law firm Winston & Strawn.
According to congressional investigators, Citigroup received about $167 million between 1997 and 2001 from arranging such trades for Enron. The transactions themselves totaled about $4.8 billion in prepaid contracts. They allowed the bank to reduce its own exposure to the Enron debacle because the deals placed much of that exposure onto investors. People familiar with the matter say J.P. Morgan's fees for its Mahonia transactions totaled about $40 million, as much as $30 million of that from Enron alone.
A stream of documents uncovered in the congressional investigation provided new details about the extent to which both banks knew Enron was seeking to use the transactions to mask debt as trades. "Enron loves these deals as they are able to hide funded debt from their equity analysts because they [at the very least] book it as deferred rev or [better yet] bury it in their trading liabilities," one J.P. Morgan executive said in a 1998 e-mail to colleagues.
In an e-mail about Enron paying down what it owed in a smaller transaction called Roosevelt, James Reilly, a senior Citigroup banker, told colleagues that the paperwork "cannot stipulate that as it would require recategorizing the prepaid as simple debt," which Enron wanted to avoid.
Citigroup officials also were aware that Enron wanted to keep information about the financial underpinnings of such transactions out of investors' view. On Nov. 14, 2001, Enron executive Doug McDowell sent an e-mail to Richard Caplan, co-head of credit derivatives at Citigroup's Salomon Smith Barney investment banking unit, saying: "Apparently an investor spoke to someone at citi and received info on delta." Delta was the special-purpose vehicle involved in the Yosemite transactions. "We need to shut this down," he added.
Ten minutes later, he wrote again to Mr. Caplan. "By the way -- not blaming you guys just trying to figure out how to shut it down."
Central to the banks' dealings with Enron was the role of Arthur Andersen, then Enron's accountant, which gave opinions blessing all the transactions. Andersen gave guidelines about how prepaid transactions could be booked as trades not debt -- though congressional investigators said the banks and Enron violated the guidelines by setting up offshore vehicles that they, in effect, controlled.
Andersen appears also to have become wary. Last fall, people familiar with the matter say, Andersen was seeking to ensure that its opinions condoning J.P. Morgan's Mahonia transactions were backed up, particularly regarding the independence of Mahonia from J.P. Morgan.
In a conference call Sept. 13 between Enron and J.P. Morgan officials, one Enron executive said: "Now Andersen is pushing back ..." Another Enron official then told J.P. Morgan's Mr. Dellapina: "That goes to the same point you were raising earlier, Jeff, that from your side, you also want to make sure that Mahonia seems independent."
Michigan Democrat Sen. Carl Levin, who co-chaired Tuesday's hearing, grilled Mr. Dellapina and two other J.P. Morgan managers on how independent Mahonia really was. Sen. Levin noted that J.P. Morgan was involved in its set-up and administration and paid many of its costs.
"I don't believe that we controlled Mahonia," Mr. Dellapina said. Replied Sen. Levin: "It's a shell game and Chase should own up to it."
-- Tom Hamburger and Randall Smith contributed to this article.
Write to Paul Beckett at paul.beckett@wsj.com and Jathon Sapsford at jathon.sapsford@wsj.com
Updated July 24, 2002 |
