Enron creditors might get hidden assets

Examiner says lawsuits may trace shifted billions

February 13, 2003|By BLOOMBERG NEWS

NEW YORK - Creditors of Enron Corp., which filed the second-largest U.S. bankruptcy, stand to recover up to $5 billion in assets that may have been illegally moved off the company's books, according to a government-appointed examiner's report.

"Enron so engineered its reported financial position and results of operations that its financial statements bore little resemblance to its actual financial condition or performance," R. Neal Batson, an Atlanta attorney hired by the U.S. Justice Department to investigate the company on behalf of the judge in charge of the bankruptcy proceeding, said yesterday.

The report was filed Jan. 21 and is to be made public this month after possible revisions.

Creditors filed $50 billion in claims after Enron, then the seventh-largest U.S. company by sales, filed for bankruptcy protection Dec. 2, 2001.

Citigroup Inc., J.P. Morgan Chase & Co. and other Enron creditors would have more money to satisfy their claims should unidentified "individuals, institutions and professionals" be sued to recover assets that were improperly transferred to secret partnerships to hide the former energy trader's debt from investors, the report said.

Houston-based Enron has already recovered more than $2 billion in other assets since filing for Chapter 11, said Karen Denne, a company spokeswoman. She declined to comment on the report, which is subject to a U.S. Bankruptcy Court gag order.

J.P. Morgan spokesman Michael Dorfsman declined to comment. Citigroup spokeswoman Leah C. Johnson did not return calls seeking comment.

The assets transferred to the partnerships include gas, oil, power plants and pipelines worth as much as $2.1 billion, the report says. Unspecified assets worth $2.9 billion might be recovered as well, because they were transferred too close to Enron's bankruptcy filing, the report says.

Two creditors, Citigroup and J.P. Morgan, may be liable for some of the $25 billion in damages investors claim because of the company's collapse. Enron shareholders allege that the banks helped Enron hide debt in the partnerships by disguising loans as energy trades.

Use of the partnerships and six improper accounting techniques enabled Enron to state its debt as $10.2 billion as of Dec. 31, 2000, rather than an actual indebtedness of $22.1 billion, the Batson report says.

The report by Batson, who declined to comment, does not say whether any of the $2.1 billion allegedly transferred to the partnerships through improper accounting was included in calculating the $2.9 billion in assets that may have been sold within a restricted period before Enron filed for bankruptcy.

The report focuses on legal opinions that enabled Enron to create off-the-books partnerships known as special purpose entities. The opinions, called true sale letters, gave Enron legal justification to use the entities in purported arms-length deals to move assets.

Enron obtained revenue for oil, gas and other assets while decreasing its liability for them as they depreciated, Batson says in his report.

The transfers were loans, not sales, because of agreements by Enron to buy back the assets from the partnerships should their value decrease below agreed levels, investors allege in their suit.

"Like most purported true sales, they wanted cash today and no corresponding asset and liability," said bankruptcy expert Jonathan C. Lipson of the University of Baltimore School of Law. "If there's no true sale, the bankruptcy estate of Enron retains an interest in whatever it was that was sold."

The law firms that issued those opinions would be liable for damages if it were proved that they knew the loans were part of a fraud, Lipson said.

Citigroup, J.P. Morgan and other bank creditors that participated in the partnerships may lose their place in line for Enron's assets if it's proved that they knew of any fraud, he said.

The court "could say that the banks have unclean hands" and the banks "could be prevented from benefiting from the fruits of their fraud," Lipson said.

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