Offshore Activities Gave ‘Lifeblood’ to Enron
Offshore commodities transactions involving the US banks JP Morgan Chase and Citigroup provided “lifeblood” to Enron as the energy trader tried to maintain its credit rating in the late 1990s.
The deals were the most effective of the accounting techniques Enron used to improve its cash position, according to a report from a court-appointed investigator into the bankrupt company’s off-balance-sheet transactions.
The report, which runs to more than 2,000 pages, was published on March 5, and estimates that some $5 billion could be recovered by Enron creditors from the special-purpose entities that it set up, some officers of the company, and legal advisers.
Neal Batson, the lawyer who was appointed “examiner” by the bankruptcy court last year, singles out the “prepays”—commodities transactions conducted via offshore vehicles—as the most important way Enron disguised its weak cashflow and poor quality of earnings.
“Perhaps more than any of the six techniques, prepays were the quarter-to-quarter cash flow lifeblood of Enron,” Batson wrote in the introduction to the report, which includes a nearly 200-page analysis of the transactions.
Both JP Morgan Chase and Citigroup have already come under heavy fire for their involvement in the deals. A group of insurers settled a court case with JP Morgan in January over about $1 billion that the bank claimed it was owed in the form of bonds used to guarantee the offshore commodities deals. The bank expected to collect about $600 million from the insurers, which had accused it of providing “disguised loans” to help Enron cover up holes in its balance sheet.
Batson’s report says that the deals—carried out through offshore vehicles called Mahonia, in JP Morgan’s case, and Yosemite, in Citigroup’s—“accounted for virtually all of Enron’s net cash flow from operating activities in 1999 and 32 percent of its net operating cash flow in 2000. Yet, of the $5 billion outstanding from the prepay transactions on June 30, 2001, Enron reflected only $148.2 million as debt on its balance sheet.”
The accounting method “significantly understated Enron’s true debt obligations and favourably affected Enron’s key financial ratios,” the report stated, helping the group to maintain its credit rating.
Both JP Morgan and Citigroup have pointed out that they were not responsible for the way in which Enron accounted for the deals.
Citigroup said in a statement on Thursday that the report “shows the scope and size of the fraud perpetrated by Enron, and condemns the techniques repeatedly approved by Arthur Andersen [then Enron’s auditor] and Enron’s other advisors.” Both banks have since adopted more prudent approaches to structure finance, to improve transparency.
Batson’s report makes no judgement on the culpability of any third party advisors to Enron, although later reports may focus on whether creditors can recover money from the institutions that helped set up the offshore vehicles.
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This story was published on April 5, 2003.