Banks Agree to Pay $300 Million for Alleged Enron-Related Misconduct

The Securities and Exchange Commission on Monday alleged the two banks enabled Enron to mislead its investors by characterizing “what were essentially loan proceeds as cash from operating activities.”

Such transactions allowed Enron to inflate its reported cash earnings and present investors with a false picture of its “financial health and results of operations,” the SEC said in a press statement.

The SEC furthermore charged “both financial institutions knew that Enron engaged in these transactions specifically to allay investor, analyst, and rating agency concerns about its cash flow from operating activities and outstanding debt.”

Without admitting or denying the commission’s allegations, J.P. Morgan Chase agreed to pay $135 million and Citigroup agreed to pay $101 million as part of the settlement, the SEC said in a press statement. Additionally, the SEC said that Citigroup, as part of the same settlement, will pay another $19 million to resolve similar charges the bank helped Dynegy Inc., another Texas-based energy firm, manipulate the company’s financial statements.

“These two cases serve as yet another reminder that you can’t turn a blind eye to the consequences of your actions — if you know or have reason to know that you are helping a company mislead its investors, you are in violation of the federal securities laws,” Stephen M. Cutler, the director of the SEC’s enforcement division, said in a press statement.

The commission said $236 million would be distributed to defrauded Enron investors, and the $19 million would go to Dynegy investors who lost money because of fraudulent finances, as mandated by the 2002 Sarbanes-Oxley Act.

The payments will be held in bank accounts supervised by federal courts until authorities can verify all investor claims, Charles Clark, assistant director for the enforcement division, told the Online NewsHour. Clark could not provide a timeline when he expected the money to be distributed to defrauded investors.

The SEC brought its actions against the two major financial institutions in coordination with the New York County District Attorney’s Office, which also reached settlement agreements with J.P. Morgan Chase and Citigroup on Monday.

The Manhattan district attorney’s office announced the two firms each agreed to pay a total of $50 million to New York State and New York City to resolve similar charges regarding their business transactions with Enron.

Each bank also incurs penalties of $12.5 million to New York State and $12.5 million to New York City, as well as the costs of the investigation, Manhattan District Attorney Robert Morgenthau said Monday. Citigroup will reimburse the district attorney’s office $2.5 million for investigation expenses; J.P. Morgan Chase will pay $500,000, according to court documents.

As a result of the settlements, the district attorney’s office will not criminally prosecute J.P. Morgan Chase or Citigroup or their employees for their roles in Enron’s fraudulent financial practices.

The two banking firms also settled with the Federal Reserve Bank of New York, the Office of the Comptroller of the Currency, and New York State’s banking department in connection with the Enron-related charges. As part of these agreements, the banks agreed to improve their risk-management programs and internal controls to reduce the risks of similar misconduct from happening again.

To date, the SEC has concluded six enforcement actions against firms for Enron-related matters, raising $324 million “for the benefit of the victims of the Enron fraud.”

The commission also said other investigations into Enron and Dynegy matters are still underway.