JP Morgan, Citigroup pay $255 million in Enron, Dynegy settlement

The Securities and Exchange Commission (SEC) today settled enforcement proceedings brought against JP Morgan Chase and Citigroup. Both firms’ settlements pertain to Enron-related proceedings brought by the SEC. Under the agreements, JP Morgan Chase will pay $135 million. Citigroup will pay $120 million; $19 million of this settlement is related to Citigroup’s business with Dynegy.

The SEC said it “intends to direct the money paid by JP Morgan Chase and Citigroup to fraud victims”, $236 million to Enron fraud victims and $19 million to Dynegy fraud victims, pursuant of specific provisions of the Sarbanes-Oxley Act 2002.

"We intend to continue to hold counterparties 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," said Linda Chatman Thomsen, deputy director in the SEC's enforcement division.

In its statement, the SEC claimed “each institution helped Enron mislead its investors by characterising what were essentially loan proceeds as cash from operating activities. The proceeding against Citigroup also resolves [the SEC’s] charges stemming from the assistance Citigroup provided Dynegy in manipulating that company's financial statements through similar conduct”.

The main thrust of the SEC’s allegations were that JP Morgan Chase and Citigroup engaged in, and helped design, structured finance transactions that misled investors, analysts and rating agencies as to Enron and Dynegy’s true financial health.

In relation to JP Morgan Chase’s Enron-related activities, the Federal Reserve Bank of New York and the New York State Banking Department entered into a written agreement with JP Morgan Chase, whereby the US bank undertook to enhance its risk management programs and internal controls.

JP Morgan Chase and Citigroup will also pay a total of $27.5 million to the District Attorney’s office, $2.5 million of which is to reimburse the office’s expenses. Under this agreement, the District Attorney will not prosecute either of the US firms’ officers or employees.

In reaching the settlement, both JP Morgan Chase and Citigroup neither admitted, nor denied, the SEC’s allegations. William Harrison, JP Morgan Chase’s chairman and chief executive said his firm was “glad” to put a major portion of the “Enron matter” behind it.