WASHINGTON - Citigroup Inc. and J.P. Morgan Chase & Co. knowingly aided Enron Corp. in hiding debt and avoiding taxes by using previously undisclosed "sham" transactions, the head of the Senate Permanent Subcommittee on Investigations said yesterday.
The two financial institutions "helped Enron deceive the investing public as well as Enron employees and stockholders," Democratic Sen. Carl Levin of Michigan said in a statement outlining the issues to be explored during a hearing tomorrow.
The companies used "sham contrivances ... to make Enron look more financially healthy than it really was, violating accounting standards."
The panel, a subcommittee of the Governmental Affairs Committee, has been scrutinizing the factors that led to the energy company's financial collapse since it filed for bankruptcy a year ago. In July, Citigroup and J.P. Morgan were criticized during another Enron hearing for allegedly doing too little to alert investors to Enron's condition.
But subcommittee investigators, meeting privately with reporters, said the evidence now shows the two financial institutions actively aided Enron by falsely inflating earnings by about 11 percent in 2000.
The Securities and Exchange Commission potentially could pursue fraud charges against the financial institutions for aiding and abetting accounting fraud. An SEC spokesman said the agency does not comment on its investigations.
The two companies admitted to no wrongdoing, but conceded yesterday that the deals they did with Enron in 2000 no longer would be acceptable.
Adam Castellani, a J.P. Morgan spokesman, said that "while we don't think we did anything illegal or unethical, from the standpoint of reputation risk, we would not do this transaction today."
Citigroup said it "would not approve the transactions" because of "a new policy Citigroup initiated in August."
The four deals examined by the subcommittee involved the assets in Enron's pulp and paper commodity-trading operations. The investigators said Enron engaged in the extraordinarily complex transactions to disguise loans as commodity trades and dodge securities laws and accounting rules.
As was the custom at Enron, each of the deals was given a strange name: "Fishtale"; "Bacchus"; "Sundance" and "Slapshot."
The three deals done with Citigroup allegedly were intended to improve the appearance of Enron's balance sheet and were masterminded by Enron's chief financial officer, Andrew S. Fastow.
Fastow, who no longer works for Enron, is facing numerous criminal charges for various transactions. He denies any wrongdoing.
The deal involving J.P. Morgan was designed by and sold to Enron by the bank itself.
The transaction exploited a tax break under which debt-interest payments are deductible expenses, but principal payments aren't. The so-called "Slapshot" deal made principal payments appear to be interest, and thus tax-free.
Defenders of J.P. Morgan say there is nothing illegal about advising a company to use existing loopholes to reduce taxes.
But Levin called Slapshot "a tax scam" that "had no other purpose than to create a baseless tax deduction and to create a false impression on Enron's books."
Sources involved with the congressional investigation said Citigroup and J.P. Morgan earned fees of several million dollars for the transactions. But more importantly, the transactions allowed the parties to increase goodwill with each other through a "relationship deal."
At tomorrow's hearing, the subcommittee will explore "whether these major financial institutions have mended their ways," Levin said.