For those already exhausted by the torrent of Enron disclosures, I would not recommend reading the “Consolidated Complaint” filed by defrauded investors for a literary experience. The class-action lawsuit is 500 pages long, not counting appendixes, and dense with tedious legal repetitions and the mind-numbing complexities of Enron’s financial transactions, most already known. On the other hand, this document tells an eye-popping story of how the Wall Street system really works, and it resonates with political significance because the plaintiffs’ lawyers are redirecting public outrage–and multibillion-dollar damage claims–at the best and most powerful names in American finance. Nine leading banks and financial houses have been added as defendants and depicted as intimate insiders in what the lawsuit calls the “Enron Ponzi scheme.” They were the engineers, it is asserted, who devised manipulative deals concealing the truth. They were also principal beneficiaries of this massive scam.
The “Enron Nine” (if we may call them that) are J.P. Morgan Chase, Citigroup, Credit Suisse First Boston, Canadian Imperial Bank of Commerce, Bank of America, Merrill Lynch, Barclays, Deutsche Bank and Lehman Brothers. These financial institutions collaborated with the now-bankrupt energy company in its financial sleight of hand–the deals that enabled Enron to inflate its profits, conceal its burgeoning debts and push its stock price higher and higher. Together and individually, the banks and brokerages raised at least $6 billion for Enron through the debt or stock issues sold to unsuspecting investors from 1996 through 2001, when the Enron illusion finally expired. Another $4 billion or more was channeled into Enron’s “partnerships” like Jedi, Chewco and LJM1 and LJM2, which became the principal mechanism for hoodwinking shareholders. These deals were often hurriedly arranged at year’s end to paper over the company’s true condition and keep the fraud from collapsing.
Enron was “the golden goose of Wall Street,” according to the investors’ complaint. The banks “earned” hundreds of millions, billions altogether, in securities commissions and consulting fees as well as from the inflated interest rates they charged Enron on disguised loans. In fact, selected senior managers at Morgan, Citigroup, Merrill and others even invested millions of their own money in Enron’s secretive “special entities,” promised extraordinary returns of 1,000 percent or more. As one reads through these financial intricacies, the gut question is the same one asked about Richard Nixon during the Watergate scandal: What did the bankers know and when did they know it? If they were not ringleaders, then they must be as gullible as the shareholders who were bilked. And, if these allegations are true, why isn’t there also a federal grand jury looking into the possibility of criminal fraud?
At this point, these are only allegations. Though most of the supporting facts are already established, the legal risk of launching this bold foray against the financial establishment is considerable. It might lose, because the plaintiffs must prove not simply that the banks aided and abetted Enron’s deceptions but that they were also principal authors. The banks are somewhat shielded from liability by Supreme Court rulings and the “tort reform” law that Congress enacted for the financial industry back in 1995 [see Greider, “Enron Democrats,” April 8 and “Enron: Crime in the Suites,” February 4]. They also have deep pockets. As a practical matter, Enron itself is not going to have much left for compensating shareholders after the bankruptcy court gets through with it. Indeed, in bankruptcy proceedings, the creditors standing first in line with claims on the carcass are the same banks–led by J.P. Morgan and Citigroup–accused by this lawsuit of fueling the fraud. Other, less privileged creditors may decide to challenge the legitimacy of the banks’ claims, using a similar argument that Morgan, Citigroup and others were actually Enron insiders, not arms-length lenders.