Showing posts with label Wachovia. Show all posts
Showing posts with label Wachovia. Show all posts
Tuesday, October 7, 2008
JPMorgan, AIG, Citigroup,Wells Fargo,Wachovia
Why are these thieves still allowed to do business at all?J.P. Morgan Chase and Citigroup engaged in, and indeed helped their clients design, complex structured finance transactions. The structural complexity of these transactions had no business purpose aside from masking the fact that, in substance, they were loans. As alleged in the charging documents, by engaging in certain structural contortions, these financial institutions helped their clients: (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. 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.
payments to health care providers weren't always backed with debts the company could collect
However, prosecutors contend that unbeknownst to investors, National Century's payments to health care providers weren't always backed with debts the company could collect.
Witness: Faked numbers hid risky investments on National Century's books
Monday, October 6, 2008 1:19 PM
By Jodi Andes
THE COLUMBUS DISPATCH
Faked numbers hid the way National Century Financial Enterprises actually worked, a former associate vice president for the company testified this morning in the fraud trial of CEO Lance K. Poulsen.
Federal prosecutors called Jessica Bily, their third witness in the trial against Poulsen, to explain the differences between the way the books were supposed to be balanced and the way officials hid high-risk financial transactions. Bily became the company's associate vice president of funding, after starting as a data analyst in 1994.
National Century Financial Enterprises bought debts owed to health care providers and collected them for a fee. The company received financial backing from investors who believed that only debts with a high-likelihood of being repaid would be purchased.
However, prosecutors contend that unbeknownst to investors, National Century's payments to health care providers weren't always backed with debts the company could collect.
Bily said some company officials began giving health care providers loans without there being debts to collect upon. She said their term for that was "regular receivables."
To make the company's books balance, Biley said, National Century employees had to use false or "plugged" numbers.
Earlier in the morning, Pete Anderson, a defense attorney for Poulsen, questioned Jon Beacham, National Century's former director of securitizations, to show that Poulsen was concerned about the company being in compliance.
Anderson contended that advancing money to health care providers without taking over collection of debts owed to them - a practice he called "over-advancing" - helped National Century's investors.
"If health care providers go under, that puts note holders in a worse position?" Anderson asked Beacham, who agreed. "The reserves that he took, he didn't pocket it himself he used the money to help the health care providers."
Department of Justice Trial Attorney Kathleen McGovern was to continue her questioning of Bily when court resumes at 1:15 p.m.
The case is being tried in U.S. District Court in Columbus in front of Judge Algenon L. Marbley.
Witness: Faked numbers hid risky investments on National Century's books
Monday, October 6, 2008 1:19 PM
By Jodi Andes
THE COLUMBUS DISPATCH
Faked numbers hid the way National Century Financial Enterprises actually worked, a former associate vice president for the company testified this morning in the fraud trial of CEO Lance K. Poulsen.
Federal prosecutors called Jessica Bily, their third witness in the trial against Poulsen, to explain the differences between the way the books were supposed to be balanced and the way officials hid high-risk financial transactions. Bily became the company's associate vice president of funding, after starting as a data analyst in 1994.
National Century Financial Enterprises bought debts owed to health care providers and collected them for a fee. The company received financial backing from investors who believed that only debts with a high-likelihood of being repaid would be purchased.
However, prosecutors contend that unbeknownst to investors, National Century's payments to health care providers weren't always backed with debts the company could collect.
Bily said some company officials began giving health care providers loans without there being debts to collect upon. She said their term for that was "regular receivables."
To make the company's books balance, Biley said, National Century employees had to use false or "plugged" numbers.
Earlier in the morning, Pete Anderson, a defense attorney for Poulsen, questioned Jon Beacham, National Century's former director of securitizations, to show that Poulsen was concerned about the company being in compliance.
Anderson contended that advancing money to health care providers without taking over collection of debts owed to them - a practice he called "over-advancing" - helped National Century's investors.
"If health care providers go under, that puts note holders in a worse position?" Anderson asked Beacham, who agreed. "The reserves that he took, he didn't pocket it himself he used the money to help the health care providers."
Department of Justice Trial Attorney Kathleen McGovern was to continue her questioning of Bily when court resumes at 1:15 p.m.
The case is being tried in U.S. District Court in Columbus in front of Judge Algenon L. Marbley.
Look at NCFE not Fannie or Freddie for the root of the financial corruption!
"...that he never completely told the truth to the government until he signed a plea agreement in 2007."
"...Dublin-based health-care financing firm, it was funding businesses owned by National Century CEO Lance Poulsen and others without getting the businesses’ accounts receivable in return."
"...For some companies, however, National Century didn’t actually purchase receivables, Bily said. It just advanced funds."
"...National Century Financial Enterprises Inc. was advancing money to health-care providers without getting any collateral as far back as 1994, a witness testified Monday."
Monday, October 6, 2008 - 1:58 PM EDT
Witness: Alleged fraud at National Century stretched back to '94
Business First of Columbus - by Kevin Kemper
National Century Financial Enterprises Inc. was advancing money to health-care providers without getting any collateral as far back as 1994, a witness testified Monday.
Jessica Bily, a former data analyst who worked her way up to become associate vice president of funding at National Century, testified that from nearly the beginning of her days at the Dublin-based health-care financing firm, it was funding businesses owned by National Century CEO Lance Poulsen and others without getting the businesses’ accounts receivable in return.
Poulsen, 65, is standing trial in U.S. District Court in Columbus on charges of securities fraud, wire fraud and money laundering relating to the firm’s 2002 collapse into bankruptcy. The government has alleged as much as $2.84 billion in investor money was missing when National Century collapsed, a result of alleged self-dealing on the part of Poulsen and other National Century executives.
Considered a lender of last resort, National Century purchased accounts receivable from health-care providers at a discount in exchange for quick cash the provider could use to pay bills. National Century then packaged the receivables as bonds to sell to investors. For some companies, however, National Century didn’t actually purchase receivables, Bily said. It just advanced funds. Six companies that were either owned completely or partially by Poulsen and National Century’s two other owners often received such advances, Bily said.
The government has alleged National Century over-funded health-care companies owned by Poulsen and other company principals in a ploy to enrich themselves.
When National Century advanced cash to a health-care company without collateral, Bily said her department made sure to process the requests just as it would legitimate ones so as not to “raise any red flags” with bank trustees who oversaw reserve accounts designed to protect investors. By late 1999 and early 2000, Bily said Poulsen directed her finance department to plug fake numbers into a National Century mainframe computer to make sure that the company’s books remained balanced.
Earlier testimony
Earlier in the morning, both the prosecution and defense finished questioning Jon Beacham, National Century’s former director of securitization.
In testimony last week, Beacham told the jury that he discovered in July 2001 that National Century was advancing cash to health-care providers without buying accounts receivable. That was a violation of the company’s governing documents, and investors were never told that the practice went on, Beacham said.
Under cross-examination Monday morning, Beacham admitted to William Anderson, Poulsen’s attorney, that he never completely told the truth to the government until he signed a plea agreement in 2007. Beacham also acknowledged that when the government indicted him in May 2006, he faced the possibility of serving 30 years or more in prison if found guilty. Because he signed a plea agreement and agreed to cooperate with investigators, Beacham said he now faces 10 years maximum imprisonment, though that time could be reduced further.
“You’re hoping to serve no jail time, is that right?” Anderson asked.
“Of course,” Beacham answered.
Anderson alleged that to have his jail time reduced, Beacham would have to say what the government wanted, a charge Beacham denied.
“I’m here to tell the truth,” he said.
"...Dublin-based health-care financing firm, it was funding businesses owned by National Century CEO Lance Poulsen and others without getting the businesses’ accounts receivable in return."
"...For some companies, however, National Century didn’t actually purchase receivables, Bily said. It just advanced funds."
"...National Century Financial Enterprises Inc. was advancing money to health-care providers without getting any collateral as far back as 1994, a witness testified Monday."
Monday, October 6, 2008 - 1:58 PM EDT
Witness: Alleged fraud at National Century stretched back to '94
Business First of Columbus - by Kevin Kemper
National Century Financial Enterprises Inc. was advancing money to health-care providers without getting any collateral as far back as 1994, a witness testified Monday.
Jessica Bily, a former data analyst who worked her way up to become associate vice president of funding at National Century, testified that from nearly the beginning of her days at the Dublin-based health-care financing firm, it was funding businesses owned by National Century CEO Lance Poulsen and others without getting the businesses’ accounts receivable in return.
Poulsen, 65, is standing trial in U.S. District Court in Columbus on charges of securities fraud, wire fraud and money laundering relating to the firm’s 2002 collapse into bankruptcy. The government has alleged as much as $2.84 billion in investor money was missing when National Century collapsed, a result of alleged self-dealing on the part of Poulsen and other National Century executives.
Considered a lender of last resort, National Century purchased accounts receivable from health-care providers at a discount in exchange for quick cash the provider could use to pay bills. National Century then packaged the receivables as bonds to sell to investors. For some companies, however, National Century didn’t actually purchase receivables, Bily said. It just advanced funds. Six companies that were either owned completely or partially by Poulsen and National Century’s two other owners often received such advances, Bily said.
The government has alleged National Century over-funded health-care companies owned by Poulsen and other company principals in a ploy to enrich themselves.
When National Century advanced cash to a health-care company without collateral, Bily said her department made sure to process the requests just as it would legitimate ones so as not to “raise any red flags” with bank trustees who oversaw reserve accounts designed to protect investors. By late 1999 and early 2000, Bily said Poulsen directed her finance department to plug fake numbers into a National Century mainframe computer to make sure that the company’s books remained balanced.
Earlier testimony
Earlier in the morning, both the prosecution and defense finished questioning Jon Beacham, National Century’s former director of securitization.
In testimony last week, Beacham told the jury that he discovered in July 2001 that National Century was advancing cash to health-care providers without buying accounts receivable. That was a violation of the company’s governing documents, and investors were never told that the practice went on, Beacham said.
Under cross-examination Monday morning, Beacham admitted to William Anderson, Poulsen’s attorney, that he never completely told the truth to the government until he signed a plea agreement in 2007. Beacham also acknowledged that when the government indicted him in May 2006, he faced the possibility of serving 30 years or more in prison if found guilty. Because he signed a plea agreement and agreed to cooperate with investigators, Beacham said he now faces 10 years maximum imprisonment, though that time could be reduced further.
“You’re hoping to serve no jail time, is that right?” Anderson asked.
“Of course,” Beacham answered.
Anderson alleged that to have his jail time reduced, Beacham would have to say what the government wanted, a charge Beacham denied.
“I’m here to tell the truth,” he said.
Will the House of Rep especially Mica (From FL) go beyond Freddie and Fannie?
The stage was being set for the November 2, 2002 NCFE bankruptcy and the subsequent massive losses of Medicaid funds by the state of Arizona long before the actual event.
“Why was Arizona the ONLY state entity to invest money in a company, called by the National Securities Commission, ‘the lender of last resort?’” And the question, “Why did NCFE maintain a headquarters in Phoenix, Arizona?’
SEC Settles Enforcement Proceedings against J.P. Morgan Chase and Citigroup
FOR IMMEDIATE RELEASE
2003-87
J.P. Morgan Chase Agrees to Pay $135 Million to Settle SEC Allegations that It Helped Enron Commit Fraud
Citigroup Agrees to Pay $120 Million to Settle SEC Allegations that It Helped Enron and Dynegy Commit Fraud
Washington, D.C., July 28, 2003 -- The Securities and Exchange Commission today instituted and settled enforcement proceedings against two major financial institutions, J.P. Morgan Chase & Co. and Citigroup, Inc., for their roles in Enron Corp.'s manipulation of its financial statements. Each institution helped Enron mislead its investors by characterizing what were essentially loan proceeds as cash from operating activities. The proceeding against Citigroup also resolves the Commission's charges stemming from the assistance Citigroup provided Dynegy Inc. in manipulating that company's financial statements through similar conduct.
As to J.P. Morgan Chase, the Commission filed a civil injunctive action in U.S. District Court in Texas. Without admitting or denying the Commission's allegations, J.P. Morgan Chase consented to the entry of a final judgment in that action that would (i) permanently enjoin J.P. Morgan Chase from violating the antifraud provisions of the federal securities laws, and (ii) order J.P. Morgan Chase to pay $135 million as disgorgement, penalty, and interest.
As to Citigroup, the Commission instituted an administrative proceeding and issued an order making findings and imposing sanctions. Without admitting or denying the Commission's findings, Citigroup consented to the issuance of the Commission's Order whereby Citigroup (i) was ordered to cease and desist from committing or causing any violation of the antifraud provisions of the federal securities laws, and (ii) agreed to pay $120 million as disgorgement, interest, and penalty. Of that amount, $101 million pertains to Citigroup's Enron-related conduct and $19 million pertains to the Dynegy conduct.
The Commission intends to direct the money paid by J.P. Morgan Chase and Citigroup to fraud victims ($236 million to Enron fraud victims and $19 million to Dynegy fraud victims) pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002.
"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. His deputy, Linda Chatman Thomsen, added: "As today's actions illustrate, we intend to continue to hold counter-parties responsible for helping companies manipulate their reported results. Financial institutions in particular should know better than to enter into structured transactions where the structure is determined solely by accounting and reporting wishes of a public company."
J.P. Morgan Chase and Citigroup engaged in, and indeed helped their clients design, complex structured finance transactions. The structural complexity of these transactions had no business purpose aside from masking the fact that, in substance, they were loans. As alleged in the charging documents, by engaging in certain structural contortions, these financial institutions helped their clients: (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. 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.
As alleged by the Commission, these institutions knew that Enron engaged in the structured finance transactions that are the subject of today's Commission actions 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 Commission further alleges that these institutions also knew that these 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.
Specifically as to J.P. Morgan Chase, the Commission's allegations stem from J.P. Morgan Chase's participation in so-called prepay transactions with Enron which were loans disguised as commodity trades to achieve Enron's reporting and accounting objectives. These prepays were in substance loans because their structure eliminated all commodity price risk that would normally exist in commodity trades. This was accomplished through a series of trades whereby Enron passed the commodity price risk to a J.P. Morgan Chase-sponsored special purpose vehicle, which passed the risk to J.P. Morgan Chase, which, in turn, passed the risk back to Enron. While each step of this structure appeared to be a commodity trade, with all elements of the structure taken together, Enron received cash upfront and agreed to future repayment of that cash with negotiated interest. The interest amount was set at the time of the contract, was calculated with reference to LIBOR, and was independent of any changes in the price of the underlying commodity. The only risk in the transactions was J.P. Morgan Chase's risk that Enron would not make its payments when due, i.e., credit risk.
The Commission's action with respect to Citigroup also stems from certain prepay transactions with Enron that, while structured somewhat differently than the Chase transactions, had the same overall purpose and effect. Like the J.P. Morgan Chase prepays, the Citigroup prepays passed the commodity price risk from Enron to a Citigroup-sponsored special purpose vehicle to Citigroup and back to Enron. As in the J.P. Morgan Chase prepays, Enron's future obligations under the Citigroup prepays consisted of repayments of principal and interest that were independent of any changes in the price of the underlying commodity.
Additionally, the Commission's action against Citigroup is based on two other transactions with Enron, Project Nahanni and Project Bacchus, each of which was also a structure that transformed cash from financing into cash from operations. As the Commission found, in project Nahanni, Citigroup knowingly helped Enron structure a transaction that allowed Enron to generate cash from operating activities by selling Treasury bills bought with the proceeds of a loan. Project Bacchus was structured by Enron as a sale of an interest in certain of its pulp and paper businesses to a special purpose entity capitalized by Citigroup with a $194 million loan and $6 million in equity. According to the Commission, however, in substance, Project Bacchus was a $200 million financing from Citigroup, because Citigroup was not at risk for its equity investment in the project.
The Citigroup action also contains findings relating to a transaction with Dynegy — Project Alpha — which was a complex financing that Dynegy used to borrow $300 million. According to the Commission's findings, 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 to settle its action against Citigroup, the Commission took into account Citigroup's cooperation with the Commission's investigation, as well as its timely efforts to resolve the matter.
The Commission brought its Enron-related actions in coordination with the New York County District Attorney's Office, which, also today, entered into settlement agreements with J.P. Morgan Chase and Citigroup.
The Commission also acknowledges the assistance of the Federal Reserve Bank of New York, the Office of the Comptroller of the Currency, and the New York State Banking Department in connection with today's Enron-related actions. Today, the Federal Reserve Bank of New York and the Office of the Comptroller of the Currency entered into separate written agreements with Citigroup. The Federal Reserve Bank of New York and the New York State Banking Department entered into a written agreement with J.P. Morgan Chase. These agreements, between the institutions and their primary banking regulators, obligate them to enhance their risk management programs and internal controls so as to reduce the risk of similar misconduct.
With these two actions, the Securities and Exchange Commission has raised to six the total number of separate actions it has brought in connection with the Enron matter in the twenty months since Enron declared bankruptcy. The various defendants and respondents include three major financial institutions, Enron's former Chief Financial Officer, and eight other former senior Enron executives. The commission has so far garnered $324 million for the benefit of the victims of the Enron fraud.
The Commission's investigations relating to Enron and Dynegy are continuing.
For further information contact:
Linda Chatman Thomsen, Deputy Director, Division of Enforcement — (202) 942-4501
Harold F. Degenhardt, District Administrator, Fort Worth District Office — (817) 978-6469
Charles J. Clark, Assistant Director, Division of Enforcement — (202) 942-4731
Additional Materials Available at www.sec.gov
"J.P. Morgan Makes $800 Billion Pledge," by Jennifer Harmon, National Mortgage News, April 19, 2004, Pg. 2; "Critics Voice Concerns on Takeover of Bank One," by Leon Lazaroff, Chicago Tribune, April 16, 2004; "Banks Make $800 Billion Promise: Bank One, J.P. Morgan Chase unveil community aid; merger hearings start," by Ken Stammen, Columbus Dispatch, April 16. 2004; "JPM Chase Makes CRA Pledge; Faces Merger Scrutiny," by Liz Moyer, American Banker, April 16, 2004, Pg. 18; "JP Morgan, Bank One To Help Poor Communities," Associated Press, April 15, 2004; "Fed Urged to Block JP Morgan/Bank One Merger," by Victoria Thieberger, Reuters, April 15, 2004; "Group Opposes Bank One Sale: Business with Predatory Lenders a Concern," by Ken Stammen, Columbus (Ohio) Dispatch, April 15, 2004; "J.P. Morgan Merger Slammed," by Nancy Dillon, New York Daily News, February 24, 2004, Pg. 67; "Grievance Against JPM / Bank One Deal," American Banker, January 23, 2004, Pg. 3; "Consumer Group Protests Bank Deal; Cites concerns for minority and low-income customers," by Kelly Quigley, Crain's Chicago Business, January 22, 2004. On February 23, 2004, ICP filed even more detailed comments. J.P. Morgan Chase, which is a top-ten subprime lender and securitizer, began quietly in August 2003 seeking to preempt all states' anti-predatory lending laws, by shifting its nationside consumer finance lending into a federally-regulated savings bank. Later, Chase shifted from a New York State-chartered bank to a national bank. ICP, long concerned with Chase's disparate lending, began an inquiry into complaints filed against Chase with state regulators -- a venue that Chase now seeks to escape. Some of these complaints are summarized below on this page, and are now being raised by ICP in opposition to Morgan Chase's April 2006 proposal to acquire 338 branches from Bank of New York. For or with more information, contact us.
they asked us for the past payments since we had a request in with them for assistance. The sale fell through after Chase contacted the renters.
In September/October we went to the realtor and we had brokered a deal to have the house sold outright for the payoff of the note ($69K on a $79K house). This time Chase called the buyers and told them we were filling bankruptcy and the house would be tied up for years - you might wonder how we know this: When Chase called in October to let us know that our request had been denied for the third time they told my wife they had called the buyers and informed them we were filling bankruptcy (this is not a he said she said - we were by that time recording all our calls from Chase and have the tape to back it up). This caused the sale to fall through and this was the second sale Chase purposefully caused to fall through.
We continued to try working with them until January 2004 - at that time the renters moved out due to the harassment from Chase (they had gone out to inspect the property and force their way in telling the occupants that the police would be called if they were not allowed in at that time) they had called them for payments - this is hearsay because our realtor told us what happened; just a note we at no time saw or spoke to the renters all communication was through the realtor.
With the loss of the renters and with Chase's determination to prevent a sale of the house we filled for bankruptcy on January 12, 2004 - Chase continued to try to collect from us through June 2004 even though the bankruptcy was finalized on 4 April 2004. We would receive certified letters from Chase which we would turn copies over to our attorney for future use. Our lawyer would not file against Chase as he was too small and the house was in Texas not Oklahoma.
In the end we lost the house and had to file bankruptcy over just a few months worth of mortgage payments - even the VA was in disbelief of how Chase was operating but they did not have the authority to force co-operation. The VA approved our request for reworking the loan and Chase would not work with us at all. Yes I can believe any of the items I read about Chase...And this story does not include their credit card, I have on tape where they admit calling me ten minutes apart and disclosing my account information to my brother.
Update of October 24, 2005: Much was made last week of the moving-up of D-Day (Dimon Day) to the end of this year, from mid-2006. The Times quoted the D-Man: “Obviously, there is a difference in being the CEO or not being the CEO. You are either flying the plane or you're not." Well, we’ll see how he flies it: and if the flight plan continues to contain support for payday lenders, for example...
Update of October 17, 2005: We must of course note the U.S. District Court’s decisions in the cases by the OCC and the Clearing House banks -- including JPM Chase --against the NY Attorney General, to avoid providing the credit score information they say would justify the racial disparities in their lending. Why should the public believe a defense that they go to court to conceal? Whether or not an appeal is taken, and whether or not it’s successful, the public must demand that the OCC bring enforcement action(s) on JPM Chase’s disparities, and must separately pursue them, far and wide and ceaseless...
Update of October 10, 2005: What did the hype environmental announcement mean? Last week it emerged that JPMorgan Partners is collaborating with Cub Energy LLC to acquire gas processing and gathering assets from Hanover Compressor Co. for $50 million, and then expand capacity at the site.
Update of October 3, 2005: From a first-person report in the September 30 Slate: “My conversation with Chase Home Finance was even less reassuring. When I ventured, delicately, to suggest that Chase might forgive its debtors who were ruined by Katrina, or perhaps cooperate with FEMA to that effect, my interlocutor became strident, as though I'd borrowed the money from him personally. Sir, you owe that money. Chase has given you that money and now you have to pay it back!” Great...
“Why was Arizona the ONLY state entity to invest money in a company, called by the National Securities Commission, ‘the lender of last resort?’” And the question, “Why did NCFE maintain a headquarters in Phoenix, Arizona?’
SEC Settles Enforcement Proceedings against J.P. Morgan Chase and Citigroup
FOR IMMEDIATE RELEASE
2003-87
J.P. Morgan Chase Agrees to Pay $135 Million to Settle SEC Allegations that It Helped Enron Commit Fraud
Citigroup Agrees to Pay $120 Million to Settle SEC Allegations that It Helped Enron and Dynegy Commit Fraud
Washington, D.C., July 28, 2003 -- The Securities and Exchange Commission today instituted and settled enforcement proceedings against two major financial institutions, J.P. Morgan Chase & Co. and Citigroup, Inc., for their roles in Enron Corp.'s manipulation of its financial statements. Each institution helped Enron mislead its investors by characterizing what were essentially loan proceeds as cash from operating activities. The proceeding against Citigroup also resolves the Commission's charges stemming from the assistance Citigroup provided Dynegy Inc. in manipulating that company's financial statements through similar conduct.
As to J.P. Morgan Chase, the Commission filed a civil injunctive action in U.S. District Court in Texas. Without admitting or denying the Commission's allegations, J.P. Morgan Chase consented to the entry of a final judgment in that action that would (i) permanently enjoin J.P. Morgan Chase from violating the antifraud provisions of the federal securities laws, and (ii) order J.P. Morgan Chase to pay $135 million as disgorgement, penalty, and interest.
As to Citigroup, the Commission instituted an administrative proceeding and issued an order making findings and imposing sanctions. Without admitting or denying the Commission's findings, Citigroup consented to the issuance of the Commission's Order whereby Citigroup (i) was ordered to cease and desist from committing or causing any violation of the antifraud provisions of the federal securities laws, and (ii) agreed to pay $120 million as disgorgement, interest, and penalty. Of that amount, $101 million pertains to Citigroup's Enron-related conduct and $19 million pertains to the Dynegy conduct.
The Commission intends to direct the money paid by J.P. Morgan Chase and Citigroup to fraud victims ($236 million to Enron fraud victims and $19 million to Dynegy fraud victims) pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002.
"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. His deputy, Linda Chatman Thomsen, added: "As today's actions illustrate, we intend to continue to hold counter-parties responsible for helping companies manipulate their reported results. Financial institutions in particular should know better than to enter into structured transactions where the structure is determined solely by accounting and reporting wishes of a public company."
J.P. Morgan Chase and Citigroup engaged in, and indeed helped their clients design, complex structured finance transactions. The structural complexity of these transactions had no business purpose aside from masking the fact that, in substance, they were loans. As alleged in the charging documents, by engaging in certain structural contortions, these financial institutions helped their clients: (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. 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.
As alleged by the Commission, these institutions knew that Enron engaged in the structured finance transactions that are the subject of today's Commission actions 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 Commission further alleges that these institutions also knew that these 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.
Specifically as to J.P. Morgan Chase, the Commission's allegations stem from J.P. Morgan Chase's participation in so-called prepay transactions with Enron which were loans disguised as commodity trades to achieve Enron's reporting and accounting objectives. These prepays were in substance loans because their structure eliminated all commodity price risk that would normally exist in commodity trades. This was accomplished through a series of trades whereby Enron passed the commodity price risk to a J.P. Morgan Chase-sponsored special purpose vehicle, which passed the risk to J.P. Morgan Chase, which, in turn, passed the risk back to Enron. While each step of this structure appeared to be a commodity trade, with all elements of the structure taken together, Enron received cash upfront and agreed to future repayment of that cash with negotiated interest. The interest amount was set at the time of the contract, was calculated with reference to LIBOR, and was independent of any changes in the price of the underlying commodity. The only risk in the transactions was J.P. Morgan Chase's risk that Enron would not make its payments when due, i.e., credit risk.
The Commission's action with respect to Citigroup also stems from certain prepay transactions with Enron that, while structured somewhat differently than the Chase transactions, had the same overall purpose and effect. Like the J.P. Morgan Chase prepays, the Citigroup prepays passed the commodity price risk from Enron to a Citigroup-sponsored special purpose vehicle to Citigroup and back to Enron. As in the J.P. Morgan Chase prepays, Enron's future obligations under the Citigroup prepays consisted of repayments of principal and interest that were independent of any changes in the price of the underlying commodity.
Additionally, the Commission's action against Citigroup is based on two other transactions with Enron, Project Nahanni and Project Bacchus, each of which was also a structure that transformed cash from financing into cash from operations. As the Commission found, in project Nahanni, Citigroup knowingly helped Enron structure a transaction that allowed Enron to generate cash from operating activities by selling Treasury bills bought with the proceeds of a loan. Project Bacchus was structured by Enron as a sale of an interest in certain of its pulp and paper businesses to a special purpose entity capitalized by Citigroup with a $194 million loan and $6 million in equity. According to the Commission, however, in substance, Project Bacchus was a $200 million financing from Citigroup, because Citigroup was not at risk for its equity investment in the project.
The Citigroup action also contains findings relating to a transaction with Dynegy — Project Alpha — which was a complex financing that Dynegy used to borrow $300 million. According to the Commission's findings, 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 to settle its action against Citigroup, the Commission took into account Citigroup's cooperation with the Commission's investigation, as well as its timely efforts to resolve the matter.
The Commission brought its Enron-related actions in coordination with the New York County District Attorney's Office, which, also today, entered into settlement agreements with J.P. Morgan Chase and Citigroup.
The Commission also acknowledges the assistance of the Federal Reserve Bank of New York, the Office of the Comptroller of the Currency, and the New York State Banking Department in connection with today's Enron-related actions. Today, the Federal Reserve Bank of New York and the Office of the Comptroller of the Currency entered into separate written agreements with Citigroup. The Federal Reserve Bank of New York and the New York State Banking Department entered into a written agreement with J.P. Morgan Chase. These agreements, between the institutions and their primary banking regulators, obligate them to enhance their risk management programs and internal controls so as to reduce the risk of similar misconduct.
With these two actions, the Securities and Exchange Commission has raised to six the total number of separate actions it has brought in connection with the Enron matter in the twenty months since Enron declared bankruptcy. The various defendants and respondents include three major financial institutions, Enron's former Chief Financial Officer, and eight other former senior Enron executives. The commission has so far garnered $324 million for the benefit of the victims of the Enron fraud.
The Commission's investigations relating to Enron and Dynegy are continuing.
For further information contact:
Linda Chatman Thomsen, Deputy Director, Division of Enforcement — (202) 942-4501
Harold F. Degenhardt, District Administrator, Fort Worth District Office — (817) 978-6469
Charles J. Clark, Assistant Director, Division of Enforcement — (202) 942-4731
Additional Materials Available at www.sec.gov
"J.P. Morgan Makes $800 Billion Pledge," by Jennifer Harmon, National Mortgage News, April 19, 2004, Pg. 2; "Critics Voice Concerns on Takeover of Bank One," by Leon Lazaroff, Chicago Tribune, April 16, 2004; "Banks Make $800 Billion Promise: Bank One, J.P. Morgan Chase unveil community aid; merger hearings start," by Ken Stammen, Columbus Dispatch, April 16. 2004; "JPM Chase Makes CRA Pledge; Faces Merger Scrutiny," by Liz Moyer, American Banker, April 16, 2004, Pg. 18; "JP Morgan, Bank One To Help Poor Communities," Associated Press, April 15, 2004; "Fed Urged to Block JP Morgan/Bank One Merger," by Victoria Thieberger, Reuters, April 15, 2004; "Group Opposes Bank One Sale: Business with Predatory Lenders a Concern," by Ken Stammen, Columbus (Ohio) Dispatch, April 15, 2004; "J.P. Morgan Merger Slammed," by Nancy Dillon, New York Daily News, February 24, 2004, Pg. 67; "Grievance Against JPM / Bank One Deal," American Banker, January 23, 2004, Pg. 3; "Consumer Group Protests Bank Deal; Cites concerns for minority and low-income customers," by Kelly Quigley, Crain's Chicago Business, January 22, 2004. On February 23, 2004, ICP filed even more detailed comments. J.P. Morgan Chase, which is a top-ten subprime lender and securitizer, began quietly in August 2003 seeking to preempt all states' anti-predatory lending laws, by shifting its nationside consumer finance lending into a federally-regulated savings bank. Later, Chase shifted from a New York State-chartered bank to a national bank. ICP, long concerned with Chase's disparate lending, began an inquiry into complaints filed against Chase with state regulators -- a venue that Chase now seeks to escape. Some of these complaints are summarized below on this page, and are now being raised by ICP in opposition to Morgan Chase's April 2006 proposal to acquire 338 branches from Bank of New York. For or with more information, contact us.
they asked us for the past payments since we had a request in with them for assistance. The sale fell through after Chase contacted the renters.
In September/October we went to the realtor and we had brokered a deal to have the house sold outright for the payoff of the note ($69K on a $79K house). This time Chase called the buyers and told them we were filling bankruptcy and the house would be tied up for years - you might wonder how we know this: When Chase called in October to let us know that our request had been denied for the third time they told my wife they had called the buyers and informed them we were filling bankruptcy (this is not a he said she said - we were by that time recording all our calls from Chase and have the tape to back it up). This caused the sale to fall through and this was the second sale Chase purposefully caused to fall through.
We continued to try working with them until January 2004 - at that time the renters moved out due to the harassment from Chase (they had gone out to inspect the property and force their way in telling the occupants that the police would be called if they were not allowed in at that time) they had called them for payments - this is hearsay because our realtor told us what happened; just a note we at no time saw or spoke to the renters all communication was through the realtor.
With the loss of the renters and with Chase's determination to prevent a sale of the house we filled for bankruptcy on January 12, 2004 - Chase continued to try to collect from us through June 2004 even though the bankruptcy was finalized on 4 April 2004. We would receive certified letters from Chase which we would turn copies over to our attorney for future use. Our lawyer would not file against Chase as he was too small and the house was in Texas not Oklahoma.
In the end we lost the house and had to file bankruptcy over just a few months worth of mortgage payments - even the VA was in disbelief of how Chase was operating but they did not have the authority to force co-operation. The VA approved our request for reworking the loan and Chase would not work with us at all. Yes I can believe any of the items I read about Chase...And this story does not include their credit card, I have on tape where they admit calling me ten minutes apart and disclosing my account information to my brother.
Update of October 24, 2005: Much was made last week of the moving-up of D-Day (Dimon Day) to the end of this year, from mid-2006. The Times quoted the D-Man: “Obviously, there is a difference in being the CEO or not being the CEO. You are either flying the plane or you're not." Well, we’ll see how he flies it: and if the flight plan continues to contain support for payday lenders, for example...
Update of October 17, 2005: We must of course note the U.S. District Court’s decisions in the cases by the OCC and the Clearing House banks -- including JPM Chase --against the NY Attorney General, to avoid providing the credit score information they say would justify the racial disparities in their lending. Why should the public believe a defense that they go to court to conceal? Whether or not an appeal is taken, and whether or not it’s successful, the public must demand that the OCC bring enforcement action(s) on JPM Chase’s disparities, and must separately pursue them, far and wide and ceaseless...
Update of October 10, 2005: What did the hype environmental announcement mean? Last week it emerged that JPMorgan Partners is collaborating with Cub Energy LLC to acquire gas processing and gathering assets from Hanover Compressor Co. for $50 million, and then expand capacity at the site.
Update of October 3, 2005: From a first-person report in the September 30 Slate: “My conversation with Chase Home Finance was even less reassuring. When I ventured, delicately, to suggest that Chase might forgive its debtors who were ruined by Katrina, or perhaps cooperate with FEMA to that effect, my interlocutor became strident, as though I'd borrowed the money from him personally. Sir, you owe that money. Chase has given you that money and now you have to pay it back!” Great...
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