From tomorrow's Wall Street Journal:
PIGEONS COMING HOME TO ROOST
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HEARD ON THE STREET
• 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
• Congress Is Pushing J.P. Morgan for Data on Enron Transactions
04/16/02
J.P. Morgan and Citigroup Face
Fresh Scrutiny Over Enron Work
By PAUL BECKETT and JATHON SAPSFORD
Staff Reporters of THE WALL STREET JOURNAL
NEW YORK -- New York Attorney General Eliot Spitzer used an arcane state law to win a settlement from Merrill Lynch & Co. Now, that same law could make life difficult for the nation's two biggest banks.
The office of Manhattan District Attorney Robert Morgenthau has been making inquiries into financing arrangements that J.P. Morgan Chase & Co. and Citigroup Inc. pursued with Enron Corp., the fallen Houston energy company, people familiar with the matter say.
The probe is in its early stages and quite possibly could lead to no action at all. But if Mr. Morgenthau decides to pounce, his vehicle most likely will be the same wide-ranging New York securities-fraud law Mr. Spitzer recently used in pursuing an inquiry into conflict of interest involving Merrill's analysts -- a probe that ended with Merrill agreeing to pay $100 million in settlement costs.
Legal experts say a prosecution by Mr. Morgenthau based on New York's 1921 Martin Act could conceivably pose a more serious threat to the two banks than even a civil Securities and Exchange Commission probe, which already is under way. In part, that is because the state law's archaic nature could play against the banks, which have much more experience in defending themselves against federal law.
"The banks have something to be worried about," said Jeffrey Haas, professor of securities law at New York Law School. "Mr. Morgenthau and his folks have a lot of experience in New York state courts, with judges on the bench and a lot of clout, and they would go in there with the upper hand."
A spokeswoman for the Manhattan district attorney's office declined to comment. J.P. Morgan and Citigroup deny any wrongdoing.
Any prosecution, even if it did happen, would be no slam dunk, of course. The federal government's razor-thin victory against Arthur Andersen LLP last month proved how complex and vexing financial matters relating to Enron can be.
But Martin Act prosecutions generally don't require as high a degree of intent as do those under federal law, experts say, making them potentially easier to prove. In the words of a New York Court of Appeals decision in 1926, fraud under the law includes "all acts, although not originating in any actual evil design or contrivance" that deceive or mislead the investing public. It remains unclear whether the banks' involvement might be sufficient to sustain a possible charge as primary violators or whether they would be viewed as alleged aiders and abettors.
"In many respects, the Martin Act is more flexible than federal securities law," said Thomas Lee Hazen, law professor at the University of North Carolina at Chapel Hill. "And it's at least as powerful as the federal and possibly more so because of some lessened intent requirements."
Moreover, if Mr. Morgenthau decides to pursue a criminal case against J.P. Morgan, he need look no further than the U.S. District Court around the corner from his office in downtown Manhattan. There, Morgan is fighting a separate case that legal experts say could provide the basis of a Martin Act prosecution. The issue: a complex financing arrangement established by J.P. Morgan Chase for Enron.
In that case, J.P. Morgan has sued 11 insurance companies it claims should be on the hook for more than $1 billion in bad Enron debt held by Morgan. Many of the insurance companies claim they had no idea the debt was anything but financing for trades and have refused to make good on a series of "surety bonds" the insurers underwrote to guarantee the delivery of natural gas.
J.P. Morgan filed an amendment to its position in the case, including documents that provide evidence that the insurance companies knew the financing wasn't for the delivery of gas but for Enron's corporate purposes.
The irony: J.P. Morgan, to get its money from the insurers, has had to state in court documents that it, too, knew some of the money it was providing Enron wasn't being used the way it appeared to investors.
"The surety bonds were part of financing transactions in which the funds advanced by J.P. Morgan Chase to Mahonia were ultimately used by Enron for general corporate purposes, not to secure future sources of oil and gas to be delivered," the amended claim says.
Mr. Morgenthau's office will likely have little interest in whether the insurance companies wind up being on the hook for the bonds. Instead, the office will be looking into whether the arrangements, which allowed Enron to book hundreds of millions of dollars in debt as trade financing, deceived investors.
J.P. Morgan says its arrangements with Enron were proper and that it didn't make efforts to help Enron hide debt. "Not all financings are loans," a spokesman says, noting that corporations also enter into arrangements with leases, repurchase agreements, stock and other forms of financing. "The proper accounting of these transactions is not the same. Calling a prepaid [natural gas] contract a disguised loan is like calling an auto lease a disguised auto loan."
People familiar with the matter say Mr. Morgenthau's office also has been looking into six Citigroup trusts arranged for Enron which have received less attention. The exact level of interest by Mr. Morgenthau's office in these trusts remains unclear.
But legal experts say that, if the district attorney ever did bring a case, it could conceivably lead to a more aggressive prosecution. Martin Act cases can be either felonies or misdemeanors, depending on the level of intent established. A felony Martin Act violation can form the basis of a racketeering charge under state law, if a pattern of willful fraud among several players is established. The chances of any eventual racketeering charge against Citigroup or any of its units or part of a unit are viewed as slim but possible, legal experts say.
"This type of speculation is irresponsible, and as we've said previously, our practice is to cooperate fully in any investigation," Citigroup said in a statement.
The six Citigroup deals drawing scrutiny all were set up for Enron, including two called Yosemite, which invested in a series of transactions between Enron, Citigroup and a special-purpose vehicle known as Delta. The transactions, according to former Enron officials and others familiar with the deals, were similar to those by J.P. Morgan in that they helped make financing look like trade liabilities instead of debts on the balance sheets.
The Yosemite transactions also had the effect of making Enron appear to be generating more cash than it was generating in its core trading operations. It did this by raising money from a slew of investors through the sale of credit-linked notes, which analysts say was the first in a series of such transactions that Citigroup marketed to a number of energy firms. |
