In legal documents filed June 21, 11 insurance companies allege J.P. Morgan Chase & Co. conspired to make Enron Corp. look healthier than it was to cover up J.P. Morgan’s exposure to the company. The allegations are to be the insurance companies’ defense in the legal dispute over who should bear the cost of more than $1 billion in former Enron financing: J.P. Morgan or the insurers.

J.P. Morgan has stated the insurers should pay because they guaranteed a series of failed natural gas transactions between Enron, J.P. Morgan and an offshore J.P. Morgan company called Mahonia with surety bonds. The companies have refused to pay because they note that the arrangements were actually loans disguised as trades. J.P. Morgan has repeatedly denied any wrongdoing.

The documents allege that through Mahonia, J.P. Morgan conducted a “round-trip” transaction, which involved buying gas from Enron, and then selling it back to Enron at a slightly higher price. The difference in price represented an “effective interest payment” for a J.P. Morgan loan, the documents state.

The insurers, which include Liberty Mutual Insurance Co., Safeco Insurance Co., St. Paul Fire & Marine Insurance Co. and Citigroup’s Travelers unit, allege that J.P. Morgan had “dark motives” for entering into the Enron gas transactions, and used the round-trip transactions to boost Enron’s finances. The filing alleges that J.P. Morgan conducted the transactions because it knew Enron was in trouble, and required new financing to remain healthy and continue its payments to J.P. Morgan for the money it owed.

J.P. Morgan “knew that unless something was done to bolster or otherwise support Enron’s precarious financial condition, of which [J.P. Morgan] had knowledge, it would never be able to recover those loans,” the documents allege. “One way to accomplish this goal was for [J.P. Morgan] to provide additional loans to Enron disguised as commodity trades, which were secured through surety bonds to protect” the bank, the document says.

The new financing allowed “Enron to continue to maintain its investment-grade rating, report strong current financial results, and forecast continued strong results,” the documents allege. In turn, the transactions “allowed Enron to continue to raise large sums of fresh capital from investors and other lenders which it could use to repay its indebtedness to [J.P. Morgan].”

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