At Center of Enron Bankruptcy, Dispute Over Big Bank Creditors
By LESLIE WAYNE
The New York Times
April 30, 2002
In a Manhattan bankruptcy court, where hundreds of lawyers are trying to carve up what remains of Enron, the first order of business is finger-pointing — and many of the fingers are pointing at J. P. Morgan Chase and Citigroup.
With billions of dollars at stake, many creditors question whether the two Wall Street giants can represent their interests when, they contend, the banks helped cause many of Enron's financial problems in the first place. Some are even asking that the banks be thrown off the 15-member committee responsible for determining what is owed to Enron shareholders, lenders, employees and thousands of others left in the lurch by Enron's collapse.
The banks are the subject of government investigations and private lawsuits over their role in structuring off-balance-sheet partnerships that helped sink Enron. Some creditors say the banks are in hopeless conflict, and the Securities and Exchange Commission has expressed concern, as well.
In addition, a Wall Street law firm, Milbank, Tweed, Hadley & McCloy, is being drawn into the battle. Milbank has been hired, at more than $1 million a month, to represent the creditors committee in its negotiations with Enron.
But many creditors ask how effectively Milbank can represent them after having received more than $17 million in fees from Enron and its affiliates in the last five years.
"These Wall Street firms have very big mouths," said Lowell Peterson, a lawyer representing Enron employees who are still waiting for their severance payments. "They have lots of influence, and everyone is worried about them. They are trying to keep everyone else from getting money, so they can get money, when in fact they probably owe money."
Spokesmen for J. P. Morgan Chase and Citigroup, which each say they are owed hundreds of millions of dollars by Enron, would not comment, citing confidentiality agreements with the creditors' committee.
Luc Despins, the partner at Milbank, Tweed who represents the committee, said conflicts are nothing new in bankruptcies — especially large ones, like Enron's.
"This is just not an issue," Mr. Despins said. "The concept that some members of the creditors' committee may have more influence than others is ridiculous."
Despite their size, J. P. Morgan Chase and Citigroup have just one vote each on the committee, he said, the same as everyone else, including Enron investors and trading partners who are claiming much less. As for the complaint about Milbank's conflicts, Mr. Despins said, "Frankly, we don't think it has any merit."
This is not a battle about principles or personalities, but about hard cash. One of the biggest hopes that creditors have for receiving payment is to bring lawsuits against deep-pocketed bankers, brokers, accountants and lawyers who were involved in Enron's finances. Many critics doubt that J. P. Morgan Chase and Citigroup, as members of the creditors' committee, would be likely to bring lawsuits against themselves.
"You have got the ultimate conflict of interest," said Elizabeth Warren, a Harvard Law School professor and expert in bankruptcy law. "What are the biggest assets of Enron now? Its lawsuits against everyone who participated in Enron's fraudulent activity. In their capacity as representing Enron creditors, these firms should be initiating lawsuits against those who injured creditors and shareholders. But the lawsuits they would be initiating would be against themselves."
To guard against conflicts, Milbank has hired another law firm to take over when issues come up involving its previous dealings with Enron.
In addition, the firm filed an 80-page disclosure statement with the bankruptcy court listing more than 125 Enron matters it handled before the company's bankruptcy filing on Dec. 2, including advising on off-balance-sheet partnerships. Milbank has also represented J. P. Morgan and Citigroup in non-Enron matters, as well as nearly half a dozen others on the creditors' committee.
While Mr. Despins thinks that this disclosure should clear the air, others disagree. One creditor, Exco Resources, a Dallas-based energy company that says it is owed $16 million, has called for Milbank's ouster and the removal of Citigroup and J. P. Morgan from the creditors' committee.
Judge Arthur J. Gonzalez, who is overseeing the Enron bankruptcy, has scheduled a hearing on May 15 on whether to disqualify Milbank. The challenge to J. P. Morgan and Citigroup is before Carolyn Schwartz, the United States trustee in the case, who has the power to remove members of the creditors' committee and to refer matters for investigation or criminal prosecution. Experts say a decision to oust the banks would be unusual.
"In our view, Milbank is hopelessly conflicted," said Richard Miller, a lawyer for Exco. "And without question, J. P. Morgan and Citigroup should be off because they caused the problem. They were active participants in everything that was happening, and I don't even see how they got on the committee."
With Enron's former auditor, Arthur Andersen, on shaky ground and questions growing about just how much Enron has in assets, Wall Street firms like J. P. Morgan and Citigroup are looming ever larger as potential targets for the creditors.
"The conflicts that were always there are more manifest now than three months ago, when Andersen was a lot more healthy," said Henry T. C. Hu, a securities law professor at the University of Texas law school.
J. P. Morgan and Citigroup were both among Enron's biggest lenders, and both helped structure, and invested in, some of the off-balance-sheet partnerships that critics say helped the company disguise its financial condition.
Mr. Despins declined to comment on whether the creditors committee would, or should, bring litigation against the two banks. Ms. Schwartz, the trustee, declined to comment about any potential conflict involving the banks and addressed the issue of law firm conflicts only in general.
"Any evidence that a professional has a conflict of interest in a bankruptcy case is of great concern to me," she said in a written statement. "There are few hard and fast rules in this area, beyond what is spelled out in the bankruptcy code. I handle each situation on a case-by-case basis. In some cases, it may be appropriate to deal with the conflict with an information barrier. In other cases, it may be necessary to object to a firm's retention."
Small creditors have been angry with some of the decisions being made by the creditors' committee, particularly about money transfers from Enron affiliates to Enron itself and aspects of a recently approved employee-retention plan.
But they have been most upset about the committee's reluctance to pursue litigation.
"Look, do I think the creditors committee has been dysfunctional? Absolutely," said Davis Bennett, a Dallas lawyer representing the Dunhill Group, a group of 20 independent energy companies with $100 million in claims against Enron.
"Do I think the banks' concern about their own personal liability is coloring their decisions? Of course," he said. "Do I think it is appropriate to have a creditors' committee run by these kinds of people with potential liabilities? No. Our prospects for recovery from Enron are dimmed because the banks are the only potential pockets."
The Securities and Exchange Commission recently encouraged the bankruptcy court to appoint an independent examiner to look into the ties between Enron and Wall Street — an information-gathering exercise that could provide a road map for whom the creditors' committee might sue. Judge Gonzalez has agreed to appoint an examiner, but has not yet named one. Once he does, the examiner will have three months to report findings.
"The S.E.C. is very concerned about the allegations of conflict," said Alistaire Bambach, assistant enforcement director for the S.E.C. in New York, "and we were very concerned that the creditors' committee may not be the proper entity to investigate claims involving its own members or, potentially, its own legal counsel."
Yet even the pending appointment of an examiner has not quelled concerns. "An independent examiner is a good thing," said Ms. Warren, the Harvard law professor. "But it's not a substitute. It's not the job of the independent examiner to bring actions against the parties who helped create this fraud."
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