Enron Bankruptcy Examiner Also Lays Much Blame With Banks

Neal Batson says six financial firms were guilty of 'aiding and abetting.'
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Updated from 5:06 p.m. EDT

In a much-anticipated report, a court-appointed examiner in the

Enron

bankruptcy proceeding concluded that six Wall Street firms, including

Citigroup

(C) - Get Report

,

J.P. Morgan Chase

(JPM) - Get Report

,

Merrill Lynch

(MER)

and

Canadian Imperial Bank of Commerce

, "aided and abetted" Enron in some of its dubious accounting schemes.

The voluminous report, filed late Monday with the bankruptcy court, comes the same day that Citigroup and J.P. Morgan

agreed to pay a combined $305 million in fines and restitution to settle several regulatory and criminal investigations over their role in the Enron mess.

The findings of the Enron examiner, coupled with the actions taken by the

Securities and Exchange Commission

and New York prosecutors against Citigroup and J.P. Morgan, should strengthen the hand of Enron's shareholders, who seek to hold the company's bankers liable for the company's collapse.

The other financial institutions cited by Atlanta attorney Neal Batson as aiding and abetting Enron's wrongful activities include

Deutsche Bank

and

Barclay's Bank

.

Batson was appointed last year by U.S. Bankruptcy Judge Arthur Gonzalez to unravel and analyze some 80 different off balance sheet partnerships and structured finance deals that Enron used to inflate its revenue, hide billions of dollars in debt and deceive investors about its economic vitality. Specifically, he spent much of his time analyzing the mechanics of the so-called special-purpose entities Enron used to move assets and debts off its balance sheet.

One reason the examiner found that the banks had aided and abetted Enron was that the banks entered into many of the deals on the assumption that they weren't putting actual money at risk. Batson said in most instances that the banks, before investing in a SPE, "sought and obtained'' assurances from Enron that they wouldn't lose money in the deals.

And what Batson found is that Enron's former officers had a lot of assistance from its bankers in using sophisticated financial deals and dubious accounting techniques to defraud investors.

"There is sufficient evidence from which a fact-finder could conclude that ... certain financial institutions that were involved in Enron's SPE transactions had actual knowledge of the wrongful conduct of these officers," said the report. "As a result, a fact-finder could conclude that certain of these financial institutions aided and abetted these officers in breaching their fiduciary duties."

This is the examiner's third lengthy report, but the first to draw any conclusions about the culpability of Enron's bankers in the energy company's collapse. But the examiner's work isn't done. A subsequent report will assess the potential liability of other financial institutions in the Enron mess.

Part of Batson's mandate was to determine whether any of Enron's bankers, many of which are creditors in the bankruptcy proceeding, should be barred from recouping some of their losses because they had a hand in structuring many of those deals.

The six banks that are the focus of the examiner's report have more than $5 billion in claims against Enron. But the report may make it difficult for the banks to collect any of that money because other Enron creditors will now be able to argue that their claims should take precedence.

Indeed, Batson said the claims of the six banks could be "subordinated" to claims of other creditors if Enron's bond holders, for instance, can show that they were injured by the banks' activities.

The examiner's report is likely to have its biggest ramifications in the Enron shareholder class action because it adds ammunition to investor claims that Enron's bankers were active participants in the company's fraudulent activities. The federal judge overseeing the Enron class action has ordered the company's bank to try to mediate an end to the dispute with Enron's shareholders.

Some have estimated that Enron's banks may have to pay out billions of dollars to settle the Enron shareholder litigation, which is being led by the big plaintiffs' firm Milberg Weiss Bershad Hynes and Lerach.

In his last report, Batson found that Enron's structured finance transactions were used to improperly transfer more than $11 billion in debt off Enron's balance sheet -- a move that enabled Enron to report just $10 billion in debt rather than the $22 billion in debt it actually owed. The deception enabled Enron to paint a false picture for investors and help the Houston-based company maintain its lofty credit rating.