Of all the answers a witness can proffer when faced with a lawyer's grilling, "I don't recall" is the limpest.

But that was the response a J.P. Morgan Chase ( JPM) vice chairman repeatedly gave Monday, during a critical phase in the bank's suit trying to force insurers to cough up $1 billion under a policy they wrote against Morgan's Enron exposure.

Donald Layton, the fourth highest-ranking executive at J.P. Morgan, appeared to suffer a memory lapse when questioned by a lawyer for the insurers about several emails in which he appears to voice concern about prepaid oil and gas deals between the bank and Enron.

While Layton never mentions Enron by name in the May 1999 emails, he refers generally to the $3.7 billion in prepaid energy deals the bank participated in as looking like "disguised loans." He added that the process left him feeling "queasy." Layton sent the emails to a number of bank officials and asked them to look into the deals and "make sure they are done right."

Dark Side of the Moon

But Layton, in a blistering cross-examination, said he couldn't recall whether he was specifically referring to the bank's now-controversial oil and gas deals with Enron when he wrote the emails. Nor did he recall receiving another email some six months earlier, in which a bank official provided Layton with a lengthy description of those oil and gas transactions.

Excerpts from several emails Don Layton, a J.P. Morgan Chase vice chairman, wrote to other bank officials about J.P. Morgan's participation in so-called prepaid transactions.
"This is as much a loan as a commodity transaction. It is like the old 'hidden' loans in interest rate swaps." - Nov. 24, 1998

"There is a category of "disguised loan'' that shows up in many units of global markets. This is just one such example. I understand the credit has been laid off with insurance companies. That of course is just another form of reimbursement agreement."
- May 10, 1999

"We are making disguised loans, usually buried in commodities or equities derivatives (and I'm sure in other areas). With a few exceptions, they are understood to be disguised loans and approved as such. But I am queasy about the process." - May 12, 1999

"I have asked ... to coordinate a top level review of our disguised loans, and to work on developing a policy that meets all our needs, both technical and strategic." - May 21, 1999

"Disguised loans. This is a pejorative phrase, even if generally accurate." - May 24, 1999

"I don't recall what I had in mind," Layton testified at one point, when asked about the May 1999 emails by defense lawyer Alan Levine of Kronish Lieb Wiener & Hellman.

The emails were shown to the jury and a packed courtroom on a large projection screen.

Layton said he didn't mean to imply there was anything deceptive about the transactions by calling them "disguised loans." He called the phrase a "colloquial expression."

Layton's testimony and the introduction of the emails could have a major impact on the outcome of the trial, which began three weeks ago in a Manhattan federal courtroom. Testimony is expected to wrap up tomorrow, with the case going to a jury of five men and one woman later this week.

J.P. Morgan brought the suit after the insurers, which include Chubb ( CB), Travelers Property & Casualty and Safeco Insurance ( SAFC), refused to honor a $1 billion policy they had written to reimburse the bank if Enron failed to fulfill its end of the oil and gas deals.

The insurers contend the policy is unenforceable because the prepaid transactions involving J.P. Morgan, Enron and an offshore company called Mahonia were really "disguised" bank loans to Enron and not actual contracts to transfer energy shipments. The insurers contend Layton's own emails are evidence of the bank's deception.

Hot Ashes for Trees

For its part, J.P. Morgan contends the prepaid deals with Enron were not unusual and the insurers knew all along that the bank would not actually take possession to any oil or gas shipments from Enron.

If the jury rules for the insurers, J.P. Morgan could be forced to take a $1 billion charge against earnings to write down the proceeds as uncollectable.

But this legal battle is much more than a dispute over the validity of a $1 billion insurance policy.

Already in many investors' minds, the Mahonia transactions have tarnished J.P. Morgan's reputation and raised questions about the bank's risk-management strategies and corporate governance procedures. This summer, lawmakers on Capitol Hill, during a highly publicized Senate subcommittee hearing, denounced the Mahonia deals as "sham" transactions and accused J.P. Morgan of helping Enron improperly inflate its revenues.

J.P. Morgan repeatedly has denied the lawmakers' allegations and steadfastly maintained that all of its business dealings with Enron were legitimate. Still, the Securities and Exchange Commission is believed to be looking into the dealings as part of its ongoing Enron investigation.

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