JP Morgan Chase & Co. and Citigroup Inc. agreed Monday to pay a total of $255 million to settle enforcement proceedings with the Securities and Exchange Commission (SEC) concerning their roles in Enron Corp.’s financial deception. The proceeding also resolved charges that Citigroup had manipulated Dynegy Inc.’s financial statements in connection with its Project Alpha financing.

Chase will pay $135 million, and Citigroup agreed to pay $120 million. Of Citigroup’s penalty, $101 million was for the Enron settlement; $19 million pertained to the Dynegy settlement. Of the total, $236 million will be directed to Enron fraud victims and $19 million to Dynegy fraud victims under the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002.

Earlier this year, Merrill Lynch agreed to pay the SEC $80 million for two questionable Enron transactions conducted in 1999 (see Daily GPI, Feb. 24).

Neither Chase nor Citigroup admitted to any wrongdoing. In the Chase settlement, the SEC filed a civil injunctive action in U.S. District Court in Texas. As to Citigroup, the SEC instituted an administrative proceeding and issued an order making findings and imposing sanctions.

“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,” said Stephen M. Cutler, director of SEC’s Enforcement Division.

According to the SEC, the two institutions helped Enron and Dynegy (1) inflate reported cash flow from operating activities; (2) underreport cash flow from financing activities; and (3) underreport debt.

“As a result, Enron and Dynegy presented false and misleading pictures of their financial health and results of operations,” the SEC said in a statement. “Significantly, with respect to Enron, 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. Citigroup knew that Dynegy had similar motives for its structured finance transaction.”

The banks, said the SEC, “knew that Enron engaged in the structured finance transactions … to match its so-called mark-to-market earnings (paper earnings based on changes in the market value of certain assets held by Enron) with cash flow from operating activities. As alleged, by matching mark-to-market earnings with cash flow from operating activities, Enron sought to convince analysts and credit rating agencies that its reported mark-to-market earnings were real, i.e., that the value of the underlying assets would ultimately be converted into cash.”

The SEC also said that the structured finance transactions “yielded another substantial benefit to Enron: they allowed Enron to hide the true extent of its borrowings from investors and rating agencies because sums borrowed in these structured finance transactions did not appear as ‘debt’ on Enron’s balance sheet. Instead they appeared as ‘price risk management liabilities,’ ‘minority interest,’ or otherwise. In addition, Enron’s obligation to repay those sums was not otherwise disclosed.”

The Citigroup settlement included the bank’s dealings with Dynegy on Project Alpha, a complex financing that Dynegy used to borrow $300 million. Three former Dynegy employees have pleaded innocent in June after being indicted by the SEC and the U.S. Attorney’s Office in Houston in connection with Project Alpha; their case is set for trial in early August (see Daily GPI, July 2).

Dynegy last year paid $3 million to settle an SEC complaint involving Project Alpha (see Daily GPI, Sept. 25, 2002). The SEC had alleged that Dynegy engaged in securities and accounting fraud because it told investors after Project Alpha was disclosed in April 2002 that the project was set up to secure a stable natural gas supply.

According to the SEC, “Citigroup knew that Dynegy implemented Alpha to address the mismatch between its mark-to-market earnings and operating cash flow, and that it characterized as cash from operations what was essentially a loan transaction. As Citigroup knew, Dynegy, too, was concerned that the mismatch between earnings and cash flow from operations would raise questions about the quality of Dynegy’s earnings and its ability to sustain those earnings.”

In determining its Citigroup settlement, the SEC said it took into account the bank’s cooperation with the investigation and “its timely efforts to resolve the matter.”

Including the latest settlements, the SEC has brought six separate actions concerning Enron since the energy marketer declared bankruptcy 20 months ago. The SEC still has cases pending against Enron’s former CFO Andrew Fastow and eight other former senior Enron executives, and has indicated its investigations are ongoing against both Enron and Dynegy. So far, the SEC has garnered $324 million, which it indicated was “for the benefit of the victims of the Enron fraud.”

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