Almost to the end, J.P. Morgan Chase & Co. held to its argument that the structured finance deals it set up for Enron Corp. were legitimate transactions, not disguised loans, as regulators contended.
Though perhaps a shrewd legal strategy, it nevertheless cost the New York banking company on Monday, when it was slapped with a civil injunctive action that, if violated, could lead to criminal charges. The injunction, ordered because J.P. Morgan Chase was "uncooperative" with regulators during the investigation, is meant to "send a signal" to others who would do likewise, according to an official with the Securities and Exchange Commission.
Last year the company took the stance that the transactions were an accepted method of structured finance and that the blame should be put on Enron rather than the financiers. Meanwhile, another Enron banker, Citigroup Inc. (which was dealing with a host of other high-profile investigations simultaneously), attempted to portray itself as a contrite reformer.
Though both companies made very similar changes to their compliance monitoring, risk management, and business practices, Citi's more compliant attitude appears to have been rewarded. Announcing a broad Enron-related settlement and enforcement action against both companies Monday, state and federal regulators went out of their way to contrast the companies' attitudes.
Linda Chatman Thomsen, the SEC's deputy director of enforcement, said that it "took into account Citigroup's cooperation" with the investigation, as well as its "timely effort" to resolve the issues, when determining its penalty. Citi is not subject to the same civil injunctive order, though the SEC ordered it to "cease and desist" from causing or committing any violation of federal antifraud provisions.
On the other hand, Manhattan District Attorney Robert Morgenthau singled out J.P. Morgan Chase for being less than cooperative. "For a certain period of time [it] took the position that everything it did was proper and appropriate," he said.
The SEC, the Manhattan District Attorney's Office, and other banking regulators had accused the two banks of helping Enron manipulate its financial assets to "mislead" investors and commit fraud.
"J.P. Morgan Chase and Citigroup entered into transactions with Enron whose sole purpose was to allow Enron to characterize and account for its borrowing as cash from operating activity," Stephen M. Cutler, the director of the SEC's enforcement division, said at a press conference. "The SEC has charged the two companies with having helped Enron commit fraud."
Ms. Chatman Thomsen from the SEC said that, "as a result of their respected conduct, J.P. Morgan Chase and Citigroup helped Enron overreport cash from operations, underreport cash from financing, and underreport debt." This enabled Enron to give "a more positive picture of its financial health and result of operations than was the case."
The two banking companies neither admitted nor denied the charges, but both agreed to pay substantial fines and adopt programs to strengthen risk management practices, particularly those associated with complex structured finance. J.P. Morgan Chase agreed to pay $135 million to the SEC, and Citi will pay it $120 million. The money will go into a fund to help those hurt by fraud at Enron and another energy trader, Dynegy Inc.
Each company will also pay $25 million to be split by New York State and New York City.
Mr. Morgenthau ruled out criminal prosecutions of the companies or any employees.
Adam Pritchard, a professor at the University of Michigan Law School, said the apparently stiffer punishment for J.P. Morgan Chase is emblematic of an "agenda to encourage cooperation" that the SEC started last year. Before the corporate scandals of the last two years, the SEC would not have reacted this way, he said.
During the investigation, J.P. Morgan Chase was involved in a bitter dispute with a number of companies that insured the Enron transactions. The insurers took the position that the deals were disguised loans and that they were not required to honor the policies. Eventually, the insurance firms coughed up $600 million of the $1 billion the New York bank had sought in court.
The civil injunction means that if J.P. Morgan Chase is found to have engaged in Enron-type transactions with any company in the future, it would effectively be violating a court order, committing a criminal infraction. "It raises the stakes a lot," said an SEC official, because Arthur Andersen's violation of a similar injunction in its dealings with Enron led to the criminal case that effectively dissolved the accounting firm.
A J.P. Morgan Chase spokesman would not address the regulators' contention that it was uncooperative. William B. Harrison, its chairman and chief executive, said in a press that it "is glad to put a major portion of the Enron matter behind us." Meanwhile, "we still have various Enron-related civil suits pending, and we intend to pursue our rights and defenses in those cases vigorously."
Charles O. Prince, the chairman and CEO of Citi's Global Corporate and Investment Bank, and the company's future CEO, said in a press release: "We are pleased this settlement brings to a close the investigations of Citigroup … into these matters. We are pleased that we have been able to respond promptly and effectively to the problems that underlay this investigation. Put simply, the transactions addressed in these settlements would not happen now at Citigroup."
Mr. Morgenthau also stressed that the transparency and "understandability" of transactions lay at the heart of the deal and that he and the SEC are pushing for new rules.
Bankers, and the lawyers and accountants they employ, need to "take off the blinders in assessing the legality and propriety of complex structured financial transactions," he said. "They must evaluate these transactions as a whole … and must take into account the use or misuse that the client intended to make."
Also on Monday the two banks entered into Enron-related written agreements with the Office of the Comptroller of the Currency, the Federal Reserve Bank of New York, and the New York Banking Department. Citi is nationally chartered, while J.P. Morgan Chase has a state charter.
