|Man Without Qualities|
Tuesday, July 29, 2003
The New York Times eats crow - excuse me - reports:
After more than a year of criminal and regulatory investigations, the nation's two largest banks agreed yesterday to pay almost $300 million in fines and penalties to settle accusations that they aided Enron in misrepresenting its true financial condition for years before the company collapsed.
The settlements, with J. P. Morgan Chase and Citigroup, are the broadest to date reached with advisers that played roles in the financing and structuring of the off-the-books partnerships and transactions that contributed significantly to the collapse of Enron in December 2001. ... But the bank settlements — reached with the Securities and Exchange Commission and the Manhattan district attorney's office — have significance far beyond the issues in the Enron case. That is because, for the most part, the transactions between Enron and the banks met legal and accounting requirements but still led to what regulators said was misleading information in the company's financial reports. ...
Under their settlements, the banks neither admitted nor denied any wrongdoing. ....
The district attorney's office said it would not prosecute individual employees of J. P. Morgan Chase or Citigroup for their conduct related to Enron. The S.E.C., though, said in a statement that its "investigations relating to Enron and Dynegy are continuing." A spokesman for the S.E.C., John Heine, declined to comment on whether that would include investigations of individuals at the banks.
Legal experts said the banks could hardly have refused the settlement offer because both still face lawsuits from Enron shareholders who lost money in the collapse. Under the securities laws adopted in the wake of the corporate scandals since 2001, settlement money that goes to investors through the government can be counted against any final settlement of class-action suits.
"From the defendants' perspective, this is a no-brainer," said John C. Coffee Jr., a professor at Columbia University Law School. "This money is going to do double duty. It settles all charges and it is going to go as a credit against the private class action." ....
Although the regulators extracted fines, the complexity of the deals made it difficult to prove that the banks had knowingly committed fraud, Mr. Morgenthau said, after a reporter asked why he had not prosecuted the banks. "We'd have to show intent to defraud, but we didn't feel we could show that here."
But Mr. Cutler said that the S.E.C. had filed a complaint in United States District Court in Houston contending that J. P. Morgan "aided and abetted" Enron's financial manipulations. "We thought we could prove they were at least reckless," he said.
The investigations have gone on for over a year. Where we are in the Enron game? Well, this pretty much sums up the legal status of the cases: Under their settlements, the banks neither admitted nor denied any wrongdoing.
Does that read like a big win for the governments in a case the New York Times has often and violently asserted manifests the most open and obvious fraud? In announcing the settlements, the various government employees involved do say nasty things about the banks, and how meaningful the settlement really is. That way, the regulators show how meaningful they really are. As the Wall Street Journal puts it:
Morgan ... issued a statement yesterday that insisted it "neither admitted nor denied the SEC's allegations." So the bank's official position is that it did nothing wrong but swears not to do it again. This is hardly reassuring about the bank's sense of responsibility, especially because the settlement depends on the bank's willingness to consider its lending decisions in the light of more than the letter of the law.
Simply put: settlements like these that do not require the defendants to admit any wrongdoing whatsoever are not meaningful no matter what the defeated regulator says. These are settlements by regulators who have nothing, nothing at all, and know it.
For example, the regulators imply that the banks "knew" that Enron was engaging in fraud - but that the governments can't prove that the banks intended to facilitate those frauds. The Journal is remarkably obtuse on this point:
On this evidence, the banks should consider themselves fortunate to have avoided criminal sanctions. One reason is because the law distinguishes between knowledge and intent. While the banks knew they were helping Enron cloak its books, it's more difficult to prove that they intended to commit fraud. The banks are also huge companies, with cross-cutting responsibilities, in which it is difficult to prove individual culpability beyond a reasonable doubt.
Really? These regulatory lawyers slice the baloney at least as thin as any of Enron's financial professionals they criticize. The decision not to prosecute or even bring a civil action against the banks is all predicated on the difference between the banks "knowing" they were facilitating fraud and "intending" to facilitate that fraud? If that were true, then why don't the banks admit in the settlement that they knew they were facilitating fraud? Why didn't the regulators require that the banks make that admission? And remember that this is a settlement of civil claims - meaning, contrary to the Journal's insistence, that the regulators would not have been held to a "reasonable doubt" standard at all, only a "preponderance of the evidence" standard. And criminal procedural safeguards like the exclusionary rule would not have applied, making proof all the easier for the government. Yet the governments decided not to go forward.
The settlement does change the banks accountability with respect to future transactions. But even with respect to those changed standards, the banks are making no admissions as to how the law (as opposed to the banks' "current standards)" would have applied to the supposedly fraudulent Enron deals:
Charles O. Prince, chairman and chief executive of Citigroup's corporate and investment bank, wrote, "The Enron transactions do not reflect our current standards and they would not happen now -- and will not happen in the future -- at Citigroup." .... Some lawyers viewed the proposed changes as toothless, because they don't carry any enforcement threats if the banks fail to comply.
It took a year for the government to get to this point? I noted long ago, that the banks obviously "knew" about those transactions and their effects when I asked with disbelief:
We are then further asked to assume that Citibank and JP Morgan (and the investment banks employing the financial analysts who were supposedly “misled” by Enron’s “opaque" financial statements), banks which maintain large staffs creating “off balance sheet” products these banks sell on a regular basis didn’t know how to analyze them or realize the risks they created.
Of course the banks knew about those “off balance sheet” products and the risks they created. But, lest it pass by like a blur, one should note the admission (apparently on the part of the Times and the governments) that the transactions between Enron and the banks met legal and accounting requirements. My, my, my. The transactions met legal and accounting requirements. So what if those transactions "still led to what regulators said was misleading information in the company's financial reports" - the banks don't admit that in the settlements. Morgan's press release denies it.
And, even if the banks did admit that, the financial incentives the banks have to settle obliterates any attempt to construe these settlements as admissions of significant wrongdoing by the banks:
Legal experts said the banks could hardly have refused the settlement offer because both still face lawsuits from Enron shareholders who lost money in the collapse. Under the securities laws adopted in the wake of the corporate scandals since 2001, settlement money that goes to investors through the government can be counted against any final settlement of class-action suits. "From the defendants' perspective, this is a no-brainer."
Amazingly, state prosecutors frankly admit they could not show any intent to defraud, while the feds say that they thought they could prove that the banks were at least "reckless" - which for these purposes is high negligence while being aware of the risk one is creating. So the feds are admitting that they couldn't prove "fraudulent intent" either.
Think about that.
As I noted in one of my prior posts on this topic:
Could it be – O heresy of heresies! – that Enron did not fail because of fraud? Could it be that the worst its accountants, attorneys and related professionals – and perhaps even its officers and directors – are guilty of is lack of imagination or maybe mere negligence? It’s very hard to say from most of the media coverage. But, unfortunately for the orthodox, the most likely outcome is that exactly this heresy is the truth.
No senior Enron officer has agreed to plead guilty - not even Mr. Fastow, who has been indicted on charges only marginally related to the alleged central "fraud" he perpetrated at Enron. Mr. Fastow's former assistant (finance executive Michael J. Kopper) has pleaded guilty to some crimes and cut a deal only after an apparent nervous breakdown resulting from government pressure - which will in all likelihood seriously undermine his effectiveness as a witness, by the same principle that causes juries to discount testimony by witnesses who have been tortured.
Other than Mr. Fastow, no senior officer or member of the Enron board has been charged with any crime, not even Ken Lay or Jeff Skilling.
Enron's main bankers who created, marketed and financed the very structured finance transactions that were supposedly so openly and obviously fraudulent are essentially off the hook for a pittance. Citigroup, with about One Trillion Dollars in assets, will pay $135 million - far less than what it earned from facilitating Enron's actions. Morgan will pay about $100 million.
Enron's accounting firm has been "convicted" only through a bizarre and exceedingly dangerous misreading of the law which will be eventually overturned, by a jury which refused to accept the confession of the Andersen partner and rejected as a joke the government’s assertion that the Enron paper shredding was an obstruction of justice.
The settlements impose a higher degree of intrusiveness on the part of the banks in a borrower's financial reporting, which some lawyers view as toothless, because they don't carry any enforcement threats if the banks fail to comply. So, in the future, the SEC can expect to get little memos from commercial banks saying something like "We have just completed a transaction with our client, X-corp which meets all legal and accounting requirements, but we thought we would tell you about it because it might nevertheless still lead to misleading information in the X-corp financial reports." Huh?
And, by the way, if Citigroup had all that copious "knowledge" of how bad they and Enron had been, and how hopeless the Enron financial situation was - what does that say about Robert Rubin when he called his former Treasury subordinate to ask for federal intervention to save Enron? Did he share all that "knowledge" when he attempted to induce highly material actions on the part of that government operative - as Mr. Rubin was required by federal law to do? And is it really true, as the Journal says, that Sandy Weill's recently announced decision to retire as CEO also removes the issue of responsibility at the top - even setting aside the fact that Mr. Weill will remain Citigroup's Chairman of the Board for at least two years?
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