Enron Suit Flags Execs’ Stakes in Partnerships

By most accounts, the addition of some of the globe’s deepest-pocketed investment banks to a lawsuit against Enron Corp. is a legal long shot.

Perhaps with that in mind, the plaintiffs in the case have made what appears to be a monumental effort to portray the new defendants — both the institutions and their top executives — as having played much more than a minor role in the complicated dealing behind the eventual collapse.

One element of the case likely to get the most attention, at least in the court of public opinion, is the lawsuit’s assertion that senior executives of J.P. Morgan Chase & Co., Citigroup Inc., Credit Suisse First Boston Corp., Canadian Imperial Bank of Commerce, Lehman Brothers Inc., Merrill Lynch & Co., Bank of America Corp., and Deutsche Bank AG sank $164.5 million of their own money into controversial partnerships that allegedly were used to artificially inflate Enron’s profits.

Many firms have formal investment programs for senior executives as part of their annual compensation plans and many contacted for this story said their executives did not actively invest in any of the partnerships in question. Still, the investments in the Enron partnership, LJM2 Co-Investment LP, have raised some eyebrows over at least the potential for conflicts of interest.

The initial read from securities lawyers made it clear that the plaintiffs will have a hard time winning their case. But by going to the issue of personal investments, the plaintiffs attorneys clearly are hoping to extract some advantage out of the perception of a conflict of interest — a sore point on Wall Street, where the role of analysts is still under public debate.

For example, the lawsuit contends that without the injection of personal funds by executives at the end of 1999, plus investments by the banks themselves, LJM2 would not have gotten off the ground in time to help Enron improve its financial condition through a series of complex off-balance-sheet transactions. These banks stood to benefit if Enron succeeded. All of them looked to Enron as a client, collecting fees for underwriting, advisory, and lending services.

At J.P. Morgan, the lawsuit alleges, senior executives were permitted to invest at $25 million of their own money. The suit says Citigroup executives put in $15 million, Credit Suisse First Boston executives $22.5 million, CIBC executives $15 million, Lehman executives $10 million, Merrill Lynch executives $22 million, Bank of America executives $45 million, and Deutsche Bank executives $10 million.

Banks approach the issue differently, and many deny that their executives made any direct investments in LJM2. Instead, many of these companies say, investments by senior executives in client firms are generally done on a blind basis — that is, funds are raised and later invested without telling the executive-investors specifically what they are getting.

J.P. Morgan said there were three components to the $25 million investment and that most of it was not executive money. The company said $10 million came from Chase Capital Partners, and another $12 million from J.P. Morgan Capital, the private equity arms of predecessor companies Chase Manhattan Corp. and J.P. Morgan & Co. Just $3 million of the total was employee money from an employee fund, the Sixty Wall Street Fund.

Investments in the Sixty Wall Street Fund were done blindly. After the merger of J.P. Morgan and Chase in December 2000, the fund began to phase out, and it is no longer active.

This year, J.P. Morgan disclosed in its proxy, the firm’s 15 senior-most executives are not allowed to participate in limited partnership investing.

A Lehman Brothers spokesman said no executives from that firm directly invested in LJM2 and added that the firm had made “hundreds” of similar investments in clients over the years. A CSFB spokesman also said no direct employee investments were made but said executives could have invested indirectly through one of the investment funds established on their behalf. A spokeswoman for Deutsche Bank declined to comment.

Bank of America spokeswoman Shirley Norton said the Charlotte, N.C., company had a policy against senior executives’ investing in private equity or other deals being arranged by the bank itself.

“No Bank of America executive has invested in any Enron partnership,” Ms. Norton said.

Bill Halldin, a spokesman for Merrill Lynch, said there was no basis for the claim in the lawsuit and added that his company would “vigorously defend” itself. Merrill was the placement agent for LJM2 and made the investment opportunity available to institutional investors and high-net-worth individuals, as well as senior-level executives. Some 97 senior Merrill executives directly invested a total $16.6 million. The company invested $5 million on top of that.

Mr. Halldin said it’s common industry practice for these opportunities to be made available to senior executives when the firm is acting as a placement agent. Mr. Halldin said direct investments by senior executives did not constitute a conflict of interest, real or perceived. “It actually aligns the interest of the firm with the interest of the investors who are presenting this opportunity.”

Steven Hall, a managing director at Pearl Meyer & Partners, said that the question of allowing senior executives to make direct private equity investments in deals arranged by the bank is one of “damned if you do, damned if you don’t.” He said for the past decade banks have let executives make investments as a way to link them with the bank and shareholders.

“It’s good to have them locked in step,” he said. “If they’re recommending we take on an investment that they’re going to take a part of themselves and also be at risk,” that’s a positive thing.

Alan Johnson at Johnson Associates in New York said that if the executives are investing on the same terms as the banks, he doesn’t see a conflict of interest. “It’s actually a reaffirmation that this is a good idea,” he said. “You’re making the executives put their money where their mouth is. That is a good idea.”

What may trouble some is that the clout that came with backing from bank investors may have made Enron seem more attractive as an investment to those who were further removed from the company. Steve Wharton, an analyst for Loomis Sayles, said he “would generally prefer not to see” such investment activities by bank executives but that if the investing is blind “you can’t penalize them too much.”