Citigroup Said to Mold Deal to Help Enron Skirt Rules

New York Times ^ | 7/22/02 | RICHARD A. OPPEL Jr. and KURT EICHENWALD

[kattracks]

enior credit officers of Citigroup misrepresented the full nature of a 1999 transaction with Enron in the records of the deal so that the energy company 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."

[1Old Pro]

Yep, not all big corporations have crooks as CEO's, just the ones that give generously to Demorats.

[Dog Gone]

Citigroup is one of the 30 stocks in the DJIA, isn't it?

Yep. And, without a doubt, it is considered "too big to fail," meaning preventing that would be considered a matter of national security.

[aristeides]

Well, then, maybe a word I just saw on lucianne.com is not appropriate: Citicorpse.

[aristeides]

Is there a way to preserve it but to force the dismissal of the current management?

[Miss Marple]

That is a good question. The new WorldCom guy seems to be a straight arrow. I am wondering if they could force the removal of RUBIN and the rest of the crooks.

Does the SEC have any say in this? Harvey Pitt is pretty gutsy; he might push some people out...especially after the way the democrats like Lieberman dumped on him.

[gridlock]

Bumpa

[connectthedots]

Looks like Citi Group can open up its checkbook, sign a blank check and hand it to the bankruptcy court to fill in later when the scope of its fraud is determined.

[Dog Gone]

Is there a way to preserve it but to force the dismissal of the current management?

Sure. If it comes to that (and I'm not at all sure that it will), the government intervention would have to be negotiated. The Administration could impose any terms, including management change, that it wanted.

Of course, the government is constrained by the fact that if Citigroup refused, and the bank failed, it would take down the entire banking industry, and presumably most of the world, with it. The Administration isn't going to let that happen.

Those certainly would be interesting negotiations to hear.

[El Sordo]

Bah..

All we'll see from the media is: Houston, Houston, Houston, Houston, Houston, Houston, Houston, Houston, Houston. Houston, which is in Texas, you know.... Why was GWB not paying attention to what was happening in his own state... etc....

ad nauseum

[Mo1]

Does the SEC have any say in this? Harvey Pitt is pretty gutsy; he might push some people out...especially after the way the democrats like Lieberman dumped on him.

Possible I guess .. If true this may explain why they are all screaming for Pitt to resign

[connectthedots]

Your comments would be appreciated.

[Fracas]

These guys usually have CYA plans in stone and blood - the corporate version of 'plausible deniability'. The B of D will have insurance.

I've been too busy this morning to look up the answer to a big question: who's the auditor? Could it be Arthur Andersen?

I also wonder if one of the Enron people can assist the investigators by relating other 'oral agreements'. IMHO, the focus on shredding was a red herring to keep investigators from looking at the other issues w/r/t Enron. The Citibank tie is a perfect example.

[Mike Darancette]

Mash here to find Contributions for Candidates which can be looked up by name, company worked for or recipient. Many surprises look up Actor under Occupation/Employer.

[MJY1288]

" The new WorldCom guy seems to be a straight arrow"

From what I understand! He's not new, he has been with the company for a while

[FryingPan101]

Somewhere, amidst the legal but scummy antics, will sit Mr. Rubin.

[Political Junkie Too]

In my opinion, what we're seeing is the collapse of what was supposed to be a 16-year plan. Remember, Gore was supposed to win in 2000, thereby propping up the Clinton machine for another eight years. Since Bush won, the wheels came out from under the machine, and the markets that Clinton manipulated (through a lax SEC and insider dealing) are now correcting.

-PJ

[USA21]

Citigroup, J.P. Morgan Marketed Enron-Type Deals to Other Firms

Tue Jul 23, 1:07 AM ET

Citigroup Inc. (NYSE: C - News) and J.P. Morgan (NYSE: JPM - News) Chase & Co . , already facing scrutiny for devising allegedly deceptive transactions for Enron Corp., marketed similarly structured deals to a slew of other companies, Tuesday's Wall Street Journal reported, citing testimony that a senior congressional investigator will give at hearings that start today.

The names of the other companies weren't disclosed.

The hearings, part of a Senate investigation into the role banks played in Enron's troubled finances, are the latest in a series of investigations into the two banks regarding their ties to Enron, which filed for bankruptcy-court protection late last year. The investigations include separate probes conducted by the Securities and Exchange Commission ( news - web sites) and the office of Manhattan District Attorney Robert Morgenthau.

Now, a person familiar with the matter says, the Justice Department ( news - web sites)'s Enron Task Force also is looking into the roles that financial institutions, including Citigroup, J.P. Morgan , Merrill Lynch & Co . and National Westminster Bank, now a unit of Royal Bank of Scotland PLC, may have played in Enron's demise.

Citigroup and J.P. Morgan declined to comment on the hearings or the investigations. Merrill and Royal Bank of Scotland couldn't be reached for a comment.

The deals under congressional scrutiny include arrangements known as Yosemite, devised by Citigroup, and Mahonia, devised by J.P. Morgan , both of which were designed to make Enron's public disclosures more appealing to investors, according to the testimony.

An official familiar with the investigation will testify at today's hearings before that panel that Yosemite, Mahonia and other deals allowed Enron to understate its debt by 40% while overstating cash flow by as much as 50%, according to a draft of his statement. Cash flow is a crucial measure of financial health for energy companies such as Enron.

"The evidence indicates that Enron would not have been able to engage in the extent of the accounting deception it did, involving billions of dollars, were it not for the active participation of major financial institutions," says a copy of the testimony.

Banks such as J.P. Morgan and Citigroup were "willing to go along with and even expand upon Enron's activities."

J.P. Morgan , in fact, had a "pitch book" to sell other companies on similar financing vehicles, according to a copy of the testimony. J.P. Morgan entered into similar transactions with seven other companies, while Citigroup shopped such deals around to as many as 14, with at least three entering into such relationships, the testimony says.

The hearings will focus on a commodity-trading vehicle known as a prepay, in which a financier gives money in exchange for future delivery of a commodity such as gas, gold or oil. Such arrangements are common, but in the hands of Citigroup and J.P. Morgan , they became the building blocks for extremely complex transactions that Enron used to disguise debt as trades and create the appearance the company was generating cash, people familiar with the matter said.

Wall Street Journal Staff Reporters Jathon Sapsford and Paul Beckett contributed to this report.

[Political Junkie Too]

The executives that bailed out before the crash, are left with tens of Millions of cashed out stock options. Most still own their big homes, fancy cars and jets. None of them has paid any price. What makes us think that any of the other executives will? Nothing. The little people get hurt, Republicans and Democrats...to them, it isn't a political issue, its all about their investments...shrinking or gone.

On the Today show this morning, Katie Couric was interviewing "average" people who lost big-time money in the stock market (e.g., a college professor who saw his investment go from $750,000 to $40,000, a retired grandmother who saw here grandchildren's college fund go from $100,000 to $4,500). I wanted to see the stories about the people who turned $100,000 into $18,000,000. I suspect that this is where much of the grandmother's & professor's investment loss went.

-PJ

[drjimmy]

Since 1998, Citigroup's soft money donations have totalled about $1.31 million to Democrats and about $1.97 million to Republicans. This includes official company contributions as well as contributions by individual employees of the company.

[Dog Gone]

On the Today show this morning, Katie Couric was interviewing "average" people who lost big-time money in the stock market (e.g., a college professor who saw his investment go from $750,000 to $40,000, a retired grandmother who saw here grandchildren's college fund go from $100,000 to $4,500).

Who forced those morons to stay in the market? This didn't happen overnight.