Enron Criminal Investigation Is Said to Expand to Bankers
By KURT EICHENWALD and DAVID BARBOZA
The New York Times
June 26, 2002
Criminal investigators examining the Enron debacle have expanded their inquiry to focus on activities at the commercial banks that provided billions of dollars in loans and other financial services to the company, according to current and former Enron executives and others involved in the investigation.
Federal prosecutors are investigating whether individual bankers illegally benefited from deals involving Enron-related entities, potentially at the expense of their employers, people involved in the case said. A number of bankers have been questioned about such self-dealing, lawyers said, and the government is said to be weighing whether to bring charges in one such matter.
The government has also stepped up its examination of an Enron-related partnership called Chewco. The financing for the partnership included loans from Barclays Bank structured in ways that hid them from Enron's auditors, according to Congressional testimony. The discovery of the hidden loans ultimately played a central role in the financial crisis last fall that led to Enron's collapse.
The Manhattan district attorney's office, meanwhile, working independently of the federal Enron task force, has opened its own inquiry into an array of transactions and financial institutions tied to Enron. According to current and former Enron executives who have been questioned by the Manhattan investigators, these include a series of deals between Enron and J. P. Morgan Chase that have been described in private lawsuits as disguised loans to the energy company.
While investigators for the district attorney, Robert Morgenthau, have begun interviewing witnesses in Houston, where Enron is based, and overseas, the Manhattan prosecutors do not appear to be close to bringing any charges, people involved in the case said. There is no indication that the banks themselves are targets of the inquiry.
Combined with the recent conviction of Enron's former accountant, Arthur Andersen, these latest lines of inquiry signal that investigators are putting the conduct of the company's financial advisers under a harsh light, even as they consider bringing charges of fraud and related crimes against Enron's former top executives.
Banks had complex financial relationships with Enron, and the full details of those only began to emerge amid the debris of the collapsed company. Like most companies, Enron borrowed money to finance its operations. But banks also provided cash for the company's off-the-books partnerships and for outside investors in those entities. Some financial institutions and bankers were themselves investors in the partnerships.
Major New York banks, meanwhile, engaged in circular trades with Enron that allowed the company to obtain billions of dollars in loans without disclosing them to shareholders, according to trading records and court documents.
The federal investigation of banking matters related to Enron stepped up in recent weeks, even as much of the Justice Department's task force on the scandal was occupied with the long-running criminal prosecution of Andersen.
According to people involved in the case, some of that effort was handled behind the scenes by William Kimball, a task force prosecutor who specializes in securities-related cases. Mr. Kimball, an assistant United States attorney in San Francisco, has long worked with Leslie Caldwell, the head of the Washington-based task force.
Mr. Kimball was said to be focusing on matters related to Chewco, which was formed by an Enron financial executive in 1997 to engage in transactions with Enron. Under accounting rules, at least 3 percent of Chewco's capital had to come from independent investors for Enron to keep the partnership's financial results off the company's books.
At least part of the outside equity for Chewco purportedly came from Barclays through an entity called Big River, whose sole member was another entity called Little River. But Andersen learned that the money from Barclays was actually a loan secured by $6.6 million in cash collateral.
Since the supposed equity investment was actually a loan, Andersen insisted that Chewco failed the 3 percent test and its finances had to be consolidated with those of Enron — a decision that was a big factor in a huge restatement of Enron's financial results last November.
In recent weeks, Mr. Kimball, the prosecutor, was said to have been interviewing numerous participants involved in the structuring of the Chewco transaction, including bankers from Barclays. Telephone calls to a bank spokesman went unanswered late yesterday. However, a spokesman for the bank had previously said that it did not believe that there was "any basis" for a claim against it. Bank officials have also said there was no personal investment by Barclays executives in the deal.
Separately, according to people involved in the case, bankers interviewed by the government have repeatedly been pressed about whether they enriched themselves in dealings with people or entities related to Enron.
In an instance involving at least one American bank, these people said, prosecutors have discovered evidence of such self-dealing, and were said to be deciding whether to bring indictments. The identity of the bank and the employees involved could not be immediately determined.
The investigation by the Manhattan district attorney's office has been proceeding for at least several weeks. Witnesses said that they had been questioned about transactions between Enron and Morgan that involved an off-shore entity known as Mahonia Ltd. In addition, at least two witnesses were asked by investigators about a transaction that involved Citigroup and an off-shore entity called Delta.
Kristin Lemkau, a spokeswoman for Morgan, declined to comment, as did Daniel Noonan, a spokesman for Citigroup.
Mr. Morgenthau, who has a long-established reputation for fierce independence, has frequently investigated both banking matters and cases involving off-shore financial maneuvers. At this stage, people involved in the case said, his investigation appeared to be completely independent of the federal inquiry.
In the Mahonia deals, according to records of the transactions and energy industry experts, Enron appears to have used natural gas trades with a series of offshore companies linked to Morgan to move hundreds of millions of dollars in loans off its books.
The gas-trading transactions have led to charges in bankruptcy court that Enron and Morgan intentionally misrepresented the nature of the deals to obtain surety bonds from insurance companies. With Enron's collapse, the insurers, including the St. Paul Companies and Liberty Mutual, are balking at making payment.
The transactions involved a web of corporations — several of them based in the Channel Islands — including Mahonia and Stoneville Aegean Ltd. that at first blush seem independent but whose records show are linked companies with ties to Morgan.
The companies traded gas in a circle, with Enron both being required to deliver the commodity on a future date and being owed the same amount of gas for delivery on the same date at the same price.
The transactions involving Citigroup and Delta, which is based in the Cayman Islands, functioned in a similar way, according to a lawsuit filed by Enron shareholders. According to that suit, Citigroup used Delta to carry out $2.4 billion of financial "swaps" with Enron that "perfectly replicated loans and were, in fact, loans," but were not disclosed on Enron's books.
One current Enron official who reviewed the deal said that it was done to improve the company's cash flow through a transaction that appeared on the books as a trading liability rather than as debt. That helped Enron in its dealings with the rating agencies, the official said.
The Manhattan investigators have obtained documents related to both the Mahonia and Delta transactions, according to current and former Enron executives who have been interviewed.
Some of those witnesses have also recently been interviewed by investigators from the Senate Permanent Subcommittee on Investigations.
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