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Witness says banks knew of deception

Major investment banks gave Enron Corp. multimillion-dollar loans that helped the now-bankrupt company disguise its true financial condition and, in some cases, they knew that Enron was using deceptive accounting for the loans, a Senate investigator testified Tuesday.

The bipartisan investigative subcommittee of the Senate Governmental Affairs Committee reviewed a million pages of documents, most of them subpoenaed, and interviewed dozens of witnesses from Enron and its Wall Street investment banks.

It found some banks actively aided Enron in its dodgy accounting in return for big fees and favors in other deals, investigator Robert Roach told a hearing before the panel.

"The evidence indicates that Enron would not have been able to engage in the extent of the accounting deceptions it did, involving billions of dollars, were it not for the active participation of major financial institutions willing to go along with and even expand upon Enron's activities," Roach said at the hearing.

There also is evidence that some of the banks allowed investors to rely on Enron financial statements they knew were misleading, Roach said.

The banks used complex financial transactions to boost Enron's anemic cash flow to match its profit growth on paper, according to lawmakers.

The energy-trading company recorded the money from the bank loans _ said to total $8-billion _ as prepaid trades of natural gas and other commodities with an entity based in the Channel Islands off Britain.

He said that Citigroup Inc., the nation's largest financial institution, and J.P. Morgan Chase & Co., also pitched the deals to other companies.

Citigroup "shopped" the Enron-style deals to 14 companies, successfully selling it to at least three, Roach testified.

Houston-based Enron, which filed for bankruptcy in December, taking the investments of millions of people with it, used a web of thousands of off-balance-sheet partnerships to hide some $1-billion in debt from investors and federal regulators.

If not for the deals with the banks, Enron's debt would have been $14-billion in 2000 rather than the $10-billion the company reported, and its cash flow would have been half of the $3.2-billion it reported, according to subcommittee investigators.

If the true picture had been known, it would have put downward pressure on Enron's stock price and credit ratings from agencies such as Moody's Investors Service and Standard & Poor's.

Officials of those agencies, testifying at Tuesday's hearing, said they were unaware of the transactions with the banks and that Enron misled them and withheld information.

"Why didn't the watchdogs bark?" Sen. Joseph Lieberman, D-Conn., asked of the credit-rating officials.

In a 1998 e-mail, a J.P. Morgan Chase executive in Houston wrote that "Enron loves these deals."

Enron officials "are able to hide . . . debt" from Wall Street analysts, he wrote.

Jeffrey Dellapina, a managing director of J.P. Morgan Chase at its New York headquarters, testified at Tuesday's hearing that the e-mail was "inaccurate."

Officials of the two financial companies denied any wrongdoing, saying lenders shouldn't be held responsible for how borrowers such as Enron recorded their loans.

Bank officials stressed at the hearing that Enron's former auditor Arthur Andersen had reviewed the company's accounting for the transactions and approved it.

Before senators heard the testimony, they decried the wave of accounting scandals rocking investors' confidence and the markets. Telecom giant WorldCom Inc. filed the biggest bankruptcy in U.S. history on Sunday, less than a month after it disclosed that it hid nearly $4-billion in expenses through deceptive accounting.

"It's clear that Enron was not alone in shady financial dealings," said Sen. Jim Bunning, R-Ky. "Americans across this country are watching their savings and their pensions dwindle."

Citigroup has called the transactions with Enron "entirely appropriate at the time based on what we knew and what we were told by Enron."

Enron's Washington attorney, Robert Bennett, has said the company would continue to cooperate with investigations by Congress, the Justice Department and the Securities and Exchange Commission, and that people should not "rush to judgment."

In April, Enron shareholders who had sued the company for allegedly defrauding them added nine investment banks, including Citigroup and J.P. Morgan Chase, that financed the deals to their lawsuit in federal court in Houston.

The shareholders said the banks' knowledge of Enron's questionable partnerships and other transactions gave them an inside view of the company's financial condition as they sold Enron securities to investors.

Other banks named in the lawsuit were Credit Suisse First Boston USA Inc., Canadian Imperial Bank of Commerce, Bank of America Corp., Merrill Lynch & Co., Lehman Brothers Holding Inc., Britain's Barclays Bank PLC and Germany's Deutsche Bank AG.