Man Without Qualities

Sunday, July 14, 2002

Why WorldCom?

The New York Times reports that a group of 25 banks that the Times says includes Citigroup (Citigroup, a bank holding company, is not a bank, but this is New York Times financial coverage, so allowances must be made) charged in a lawsuit filed Friday that WorldCom Inc. defrauded them out of nearly $2.5 billion six weeks before publicly disclosing a $4 billion accounting coverup.

Curiously, although Citigroup has never confessed to being aware of the various shenanigans that occurred and are alleged to have occurred (some with Citibank help) at Enron, Citigroup is not reported to have filed a comparable fraud suit against that company.

Why has Citigroup sued WorldCom for fraud but not reportedly sued Enron for fraud? Citigroup is certinly claiming it has substantial losses attributable to the Enron matter. Doesn't Citigroup want to recoup those? [Perhaps Citigroup has sued Enron for fraud, but the Man Without Qualities hasn't seen the press release. In that case, I would appreciate any reader sending me the relevant information.]

That Enron is functioning under Chapter 11 protection is, of course, no answer. While the popular media often suggests that lawsuits cannot be brought against such companies because of the so-called "automatic stay" activated by a Chapter 11 filing, that is an incorrect understanding of federal bankruptcy law. What Chapter 11 does require is that all lawsuits against a bankrupt company be brought only in the bankruptcy court. Further, Citigroup could sue the reportedly ultra-liquid ex-officers of Enron if they perpetrated the fraud. After all, as a corproation, Enron could not have defrauded Citigroup without some human doing the dirty work. Where is Citigroup's fraud suit against Mr. Lay and company, as rich individuals. [Perhaps those suits have been quietly filed, too without knowledge of the Man Without Qualities. In which case, I make the same request as above.]

There is more than one possible reason why Citigroup might not sue Enron and its officers and directors for fraud - and not all of those reasons are insidious. But one very good reason for not suing for fraud is that one was not in fact defrauded because one knew just what was happening all along.

Another possible reason for not bringing the suit is that in order to show Enron committed fraud, Citigroup would have to show that the very "structured finance" gimmicks Citigroup helped to create and market were fraudulent.

Did Citigroup and, in particular, Robert Rubin, know all about Enron's alleged misuse of all those "structured finance" gimmicks that Citigroup invented at the time of Mr. Rubin's notorious call to his former underling at the Treasury Department reportedly urging that the Department put the squeeze on the Enron credit rating agencies to forestall a downgrading of Enron debt? There's more and more evidence suggesting that to be the case. But somehow the well-connected Mr. Rubin is not being hounded quite the way one might imagine would be the case, especially given all the scrutiny and hostility now being directed at fast-talking upper corporate management.

The Times, which has been running many savage articles attacking upper corporate management, has maintained a curious detachment from Mr. Rubin's antics. Citigroup is one of the Times biggest advertisers and Mr. Rubin is reported to have rather friendly, personal relationships with the higher-ups at the paper. That's not proof that the Times is acting badly, of course.

But here's a suggestion for the members of all those Congressional committees obsessed with Martha Stewart. Put all the Stewart toys away, send some subpoenas to Mr. Rubin and various other Citigroup officers to appear before your committee, put them all under oath and ask them why Citigroup is not suing Enron or any of its rich officers for fraud but has elected to sue WorldCom.

The current suit against WorldCom and the somewhat peculiar nature of the WorldCom credit agreement on which this suit is based will be the topic of a future update.

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