Citigroup Said to Mold Deal to Help Enron Skirt Rules
By RICHARD A. OPPEL Jr. and KURT EICHENWALD
enior credit officers of Citigroup misrepresented the full nature of a 1999 transaction with Enron in the records of the deal so that Enron could ignore accounting requirements and hide its true financial condition, according to internal bank documents and government investigators.
The records and interviews with investigators demonstrate for the first time that bankers intentionally manipulated the written record of their dealings with Enron to allow the company to improperly avoid the requirements of accounting rules and the law, thus keeping $125 million in debt off its books.
In the 1999 deal, the records show, the bankers knew that a secret oral agreement they had reached with Enron required that the accounting for the transaction be changed. Instead, investigators said, Citigroup left that side deal out of the written record and allowed Enron to account for the transaction in a way that the bankers knew was improper. In other words, the full terms of the deal were left out of the paperwork, with the result being that anyone reviewing it would have no idea that the accounting treatment being used by Enron was not proper.
The relationship between Enron and its bankers has been a focus of investigative efforts since the company collapsed amid an accounting scandal last December. For months, both Citigroup and J. P. Morgan Chase have been repeatedly criticized by investigators and shareholders' lawyers for structuring billions of dollars of transactions for Enron involving entities with names like Mahonia, Yosemite, Delta and Stoneville Aegean.
The banks have responded that those transactions — which critics say allowed Enron to disguise loans as trading liabilities — properly followed accounting rules, and were the workaday product of a widely used business known as structured finance.
But the latest transaction — a previously undisclosed deal called Roosevelt — is far different. In this case, the determination of the proper way to account for the deal is not coming from outside critics but from internal Citigroup e-mail messages among bankers expressing deep concern about revealing the oral agreement with Enron in the written record of the transaction.
"The paperwork cannot reflect their agreement," according to one e-mail message written by James F. Reilly, a senior Citigroup loan executive in Houston, "as it would unfavorably alter the accounting."
A spokesman for Citigroup declined to comment, but he stressed that the bank believed that its dealings with Enron were "entirely appropriate."
A lawyer for Enron, Robert S. Bennett, said tonight that he was unfamiliar with the Roosevelt transaction, but he said that he was "unaware that those financial institutions did anything wrong."
The Roosevelt transaction and other deals between Enron and the banks are expected to be examined today at a hearing before the Senate Permanent Subcommittee on Investigations. Already, some members of the committee have concluded that the Roosevelt transaction violated accounting rules.
"Citibank was a participant in this accounting deception," said Senator Carl Levin, Democrat of Michigan and the panel's chairman.
The subcommittee's ranking Republican, Susan M. Collins of Maine, said the investigation had found that Citigroup was willing to risk its reputation "to keep Enron, an important client, happy."
Such transactions between the banks and Enron — including Roosevelt, Mahonia and Delta — were structured to have all the appearance of commodity trades, but ultimately served the same purpose as a loan. Money flows from the bank to the company, cash is paid back months later along with the equivalent of interest, and actual commodities rarely change hands. Technically, experts have said, such transactions — known as prepays — follow the requirements of the accounting rules, even if ultimately they can disguise the total debt held by a corporation.
But, for such transactions to be treated as prepays, one agreement must stay in force: the company must maintain its commitment to deliver a commodity — like natural gas — at some point in the future. If, instead, the company commits itself simply to return the cash, the transaction has been transformed from a prepay into a loan, pure and simple.
That is what happened in the Roosevelt transaction, documents and interviews show. In that deal, Citigroup agreed in late 1998 to transfer to Enron $500 million for six months as part of a prepay, with the company committing itself to deliver natural gas and oil at a future date. Terms of the deal called for portions of the debt to be sold off by May 1999 in chunks to other banks, to help spread Citigroup's risk — unless the commodity was delivered or the money advanced was repaid.
As that date approached, Enron asked Citigroup to extend the time in which it was allowed to make good on its side of the transaction, according to e-mail messages between senior Citigroup loan executives. Under the company's proposal, it would repay Citigroup $310 million — roughly the amount owed under the natural gas portion of the transaction. The remaining amount of roughly $190 million — which corresponded with the value of the crude oil prepay — would be paid back by Enron sometime in the fall.
"Enron characterizes this as a `favor' — they do not wish to repay Roosevelt without full corresponding refinancing," according to an April 19, 1999, e-mail message from Mr. Reilly. In other words, Enron did not want to repay the $500 million until it could find another way to get similar financing. But, according to the e-mail message, Enron had failed to do so.
Officials in the loan department of Citigroup were "very negative" on the proposal, the internal records show. Rather than extending the time and allowing Enron to pay in the future, they suggested several alternatives under which Enron would pay the $310 million, while the rest of the debt would be sold off to other banks.
Within days, the records show, a new deal was reached, sidestepping the concerns of the loan department. Under its terms, Enron would pay $310 million in early May. At the same time, oil deliveries required to be made each month from May to September would be pushed back to begin on Oct. 1. But, under the secret oral agreement, Enron committed itself to prepay the full amount by Sept. 30 — a commitment that bankers knew transformed the potential oil deliveries into a fiction, thus changing the deal from a structured financing into a loan.
Enron has "agreed to prepay by 9/30," Mr. Reilly, the Houston banker, wrote in an April 27 e-mail message. "The papers cannot stipulate that as it would require recategorizing the prepaid as simple debt."
Ultimately, Enron paid $375 million in May, leaving $125 million of the oil transaction still outstanding. The loan approval documents for the revisions, submitted to senior banking officials, disclosed that Enron had "verbally agreed to repay the remaining $125 million by Sept. 30, 1999." However, according to people who have reviewed the paperwork for the transaction itself, there is no mention of that oral commitment.
Mr. Bennett, the Enron lawyer, said the current criticisms by Congress were a result of political pressure to crack down on the appearance of corporate wrongdoing. "What we have here is an incredible amount of revisionist history, which is motivated by the upcoming election," he said. "Most of the problems — not all of them — are things that have been legal and have been acceptable."