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[ThatHawaiiGuy]

Citigroup, JP Morgan Settle Enron Charges
Monday July 28, 7:48 pm ET
By Chris Sanders and Paul Thomasch


NEW YORK (Reuters) - Citigroup Inc. and J.P. Morgan Chase & Co. on Monday paid more than $300 million to settle charges that they helped Enron Corp. cheat investors out of billions of dollars.

[Not a bad ROI, huh...?]


The settlement with the U.S. Securities and Exchange Commission (News - Websites) and Manhattan District Attorney Robert Morgenthau ends an 18-month investigation and lets the two largest U.S. banks avoid criminal prosecution for securities fraud.

The probe found that Citigroup and J.P. Morgan Chase structured complex deals that allowed energy trader Enron to hide debt and inflate its cash flow before it filed for bankruptcy protection in late 2001.

"No more phony baloney," Morgenthau said in announcing the settlement, while warning that companies and banks must make complicated deals more transparent or risk raising "a red flag" for authorities.

Enron's collapse was the first in a flood of high-profile corporate meltdowns that shook the public's faith in financial markets, drove lawmakers to clamp down on big business and sparked countless investor lawsuits.

Now, Citigroup and J.P. Morgan Chase are among Enron's creditors in bankruptcy court and their role in arranging the complex loans may cost them some of the money they had hoped to recover.

In a bankruptcy report issued shortly after the settlement was announced, a court appointed examiner cited the role of J.P. Morgan, Citigroup and four other investment banks in helping Enron defraud investors. The report recommends the banks lose their place at the top of the line of Enron's creditors, putting at risk $5 billion they stand to recover.

Both J.P. Morgan and Citigroup said they would change their business practices, but the banks neither admitted nor denied wrongdoing in the settlement.

"These two cases serve as yet another reminder that you can't turn a blind eye to the consequences of your actions," Stephen Cutler, the SEC's enforcement director, said at a news conference in New York.

Under the agreement, J.P. Morgan paid regulators $135 million to close out the SEC's investigation. Citigroup said it paid $120 million, which also included about $19 million to settle charges it manipulated Dynegy Inc.'s financial statements. The payments will go to a victims fund.

In addition to the SEC payments, the banks will each pay another $25 million to be split between New York State and New York City and pay investigation costs.

DAMAGING E-MAILS

The SEC has announced four previous settlements relating to Enron investigations, including an $80 million payout from Merrill Lynch & Co. in March, and said the Enron investigation remains very active,

Cutler declined to name any other potential targets. But three large international banks -- Barclays Plc, CIBC and Deutsche Bank -- were all involved in similarly complex loans to Enron. The report from Enron's bankruptcy examiner charged that the banks knew of "wrongful conduct" relating to the transactions.

Perhaps the most damaging evidence in the investigations into the loans came from internal e-mails -- as was the case during the probe of biased stock research on Wall Street. To settle that case, Citigroup and J.P. Morgan agreed earlier this year to pay $400 million and $80 million, respectively.

This time investigators turned up e-mails that indicated the banks issued loans that made it appear Enron had more cash coming in from its day-to-day business than was really the case.

In one such e-mail, a senior executive at J.P. Morgan Chase wrote to a co-worker: "We are making disguised loans, usually buried in commodities or equities derivatives ... With a few exceptions, they are understood to be disguised loans and approved as such."

Both Citigroup and J.P. Morgan have established reserves to cover legal costs, including those potentially arising from Enron matters. J.P. Morgan said earlier this month it increased its reserve by $100 million in anticipation of a settlement in the Enron case.

Shares of Citigroup rose 7 cents to $45.80, while J.P. Morgan's stock added 2 cents to close at $35.49 on the New York Stock Exchange (News - Websites) on Monday. (Additional reporting by Kevin Drawbaugh in Washington)


http://biz.yahoo.com/rb/030728/financial_sec_settlement_8.html