Institutional Investors Suing Citigroup Over Enron

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The New York Sun

Citigroup Inc., the world’s biggest financial services company, was sued by a group of institutional investors who contend the bank defrauded them in selling $2.4 billion of notes linked to the creditworthiness of Enron Corp.


The suit was filed in state Supreme Court in New York by Bank of New York Co., acting on behalf of investor groups that include Angelo, Gordon & Co. The investors contend that Citigroup’s Citibank unit aided Enron in artificially maintaining the former energy trader’s creditworthiness from 1999 until it declared bankruptcy in December 2001.


The suit follows others filed against Citigroup and rival investment banks over their dealings with Enron and World-Com Inc., which filed the two biggest bankruptcies in American history.


Citigroup set aside $6.7 billion to pay for legal costs, and in May paid $2.65 billion to settle a WorldCom investor suit.


“Whether or not Citigroup will have to raise its reserves level is still a big question for investors,” said Hilary Hayes of New York-based Victory SBSF Capital Management, which has $4 billion in assets and about 2 million Citigroup shares. “We will need to see some more settlements before this becomes more of a factor.”


The investor lawsuit filed this week alleges that Enron used phony “prepay” transactions for the sale of commodities such natural gas and oil to hide debt.


In of July last year, Citigroup and JPMorgan Chase & Co. agreed to pay $308 million to end state and federal regulators’ investigations of the so-called Mahonia transactions. Regulators had charged that the banks disguised the loans as energy trades in overseas special-purpose entities.


“As Citibank knew, the purpose of these sham pre-pay transactions was to create the appearance of increased cash flows from operations on Enron’s consolidated financial statements and to obscure the reality of Enron’s ever-increasing debt,” the investors said in a complaint filed late Monday.


Enron investors are already seeking more than $30 billion from financial institutions such as Citigroup and JPMorgan for damage allegedly caused by the Houston-based company’s manipulation of its finances, including disguising billions of dollars in bank loans as energy trades.


“The purchasers of these notes are among the largest and most sophisticated financial institutions in the world, and we complied fully with all of our obligations in dealing with them,” said Citigroup spokesman Duncan King.


Borrowing from a report issued by Enron bankruptcy examiner Neal Batson, the suit contends Citigroup participated in the pre-pay transactions and knew of Enron’s precarious financial situation when it began selling the credit default swaps in 1999.The bank sought to lessen its risk in the event of an Enron default by selling the notes, known as “Yosemite” securities, the suit contends.


“As Citibank knew, an Enron bankruptcy was highly probable, if not inevitable,” the suit says. “Citibank thus knew and expected all along that a credit event – in which Citibank could seize the trusts’ investments in exchange for Enron debt – would occur.”


In the event of a bankruptcy, the investors – now holding Enron bonds – were supposed to be among the creditors with the highest priority claims, the suit contends.


Enron has challenged that with a lawsuit filed in bankruptcy court in which the company says the note holders should have lower priority in bankruptcy court because Citigroup “facilitated” the “massive fraud” of the prepay transactions, according to the investors’ suit.


On May 24, a bankruptcy court judge ruled the investors would have no right to vote on a reorganization plan for the company based on their ownership of those notes.


The New York Sun

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