bankers aiding and abetting...
quote.bloomberg.com
/23 09:50
Citigroup, J.P. Morgan-Chase Offered Enron Packages (Correct)
By William Roberts
Citigroup, J.P. Morgan-Chase Offered Enron Packages (Correct)
(Corrects type in first paragraph.)
Washington, July 23 (Bloomberg) -- Citigroup Inc. and J.P. Morgan Chase & Co. marketed prepay financings -- techniques used by Enron Corp. to make debt look like cash flow -- to other energy companies, according to congressional investigators.
J.P. Morgan Chase made presentations to Equitable Resources Inc., Kerr-McGee Corp., PG&E Corp., Devon Energy Corp., Dominion Resources Inc./VA, Duke Energy Corp. and Phillips Petroleum Co., according to the Senate's Permanent Subcommittee on Investigations.
``These banks not only worked these phony prepay transactions for Enron, they promoted them to other companies and made fees from promoting that,'' Democratic Senator Carl Levin, subcommittee chairman, said in a statement from his office.
Enron used so-called prepay transactions to obtain more than $4.8 billion from Citibank and $3.7 billion in loans from Chase in six years, investigators say. Prepaid commodity trades are used often in the energy business. At Enron, the loans showed up as cash flow from trading operations, Levin said.
``If they were being marketed to other companies, it's because they were perfectly legal transactions in accordance with generally accepted accounting principles,'' said Kristin Lemkau, a spokesman for J.P. Morgan Chase.
Kerr-McGee Chief Financial Officer Bob Wohleber said the company received sales pitches from J.P. Morgan and other banks. ``Did we receive a pitch? Yes. Did we do a financing? Absolutely not,'' Wohleber said.
Accounting Legislation
Kerr-McGee, an oil and natural gas exploration company, considered the transactions as a way of setting the price for its production and ``borrowing from the future to improve a current situation,'' Wohleber said.
Congress is close to final passage of a bill creating a new national board to oversee corporate accounting after disclosures of irregularities by companies such as Enron, WorldCom Inc. and Adelphia Communications Corp. The legislation would impose tougher criminal penalties on corporate executives guilty of defrauding shareholders.
House and Senate leaders are seeking to pass the bill by Thursday. President George W. Bush has said he wants legislation on his desk before Congress adjourns for its August recess.
Levin's subcommittee meets today to discuss a seven-month investigation into Citibank and J.P. Morgan Chase's relationships with Enron.
Donald H. McCree, managing director, J.P. Morgan Securities Inc.; Jeffery W. Dellapina, managing director, J.P. Morgan Chase Bank in New York; and Robert W. Traband, vice president J.P. Morgan Chase Bank in Houston, are scheduled to testify.
Executives Testify
``Prepays are supposed to be the payment of cash now for the delivery of a commodity later, except in this case there was never intended to be a commodity to be delivered later,'' Levin said Monday in an interview on Bloomberg Television.
Four Citigroup executives are scheduled to testify. They are: David C. Bushnell, managing director, global risk management, Citigroup/Salomon Smith Barney; James F. Reilly Jr., managing director Salomon's global power & energy group; Richard Caplan, managing director and co-head, Salomon's credit derivatives group; and Maureen Hendricks, senior advisory director, Salomon.
Yosemite, Mahonia
``These were just simply loans from these two banks that were covered up through a series of transactions,'' Levin said. ``These were phony prepays. They were not real.''
Levin said the transactions with Enron weren't proper because there was no independent entity buying oil or gas from Enron.
In Citigroup's financing, investors gave their money to Wilmington, Delaware-based trusts and a Channel Islands company called Yosemite Securities Company Ltd., created by Enron and Citibank. J.P. Morgan Chase and Enron used a company called Mahonia Ltd. as a counter party.
``These transactions were on J.P. Morgan Chase's balance sheet and they were designed to be on Enron's balance sheet,'' Lemkau said. ``It is the client's responsibility to run each transaction by their inside auditors and outside auditors and decide whether they want to go ahead with it.''
Levin's subcommittee found that Citibank and Chase offered similar financing techniques to other companies.
Chase developed a ``pitch book'' to sell the Enron-style transactions, according to investigators. Chase's presentation described the arrangements as ``balance-sheet friendly.''
Equitable Resources Inc., a natural gas producer based in Pittsburgh, used two prepay financings in 2000 to convert debt into $209 million unrecognized income, according to Patrick Kane, Equitable's investor relations manager.
`Hide Things'
``Where people got into trouble was they tried to hide things,'' Kane said. ``We've been proactive on disclosure of this from the beginning.''
Kane said the financings let Equitable eliminate counter- party risk by borrowing funds and locking in natural gas sales volume with a hedge against price fluctuations.
Executives for other companies that accepted prepay deals with J.P. Morgan Chase couldn't be reached for comment.
Citigroup's Salomon Smith Barney division proposed similar Enron-style financings to Williams Companies Inc., El Paso Corp., Mirant Corp., Dynegy Inc., American Electric Power Co. Inc. and Reliant Energy Inc. among others, investigators say.
Citigroup told Levin's subcommittee staff none of the firms bought into the same type of prepay structures at Enron. Citibank had successfully sold the prepay structures to Amerada Hess Corp. in 1993. |
