Banks 'knew of Enron Scam'

Citigroup and JP Morgan Chase constructed $8bn (£5bn) of "complex, phoney" transactions for Enron which helped hide the debt that led to the energy firm's collapse, a senate committee said yesterday.

The accusations knocked more than 10% off the stock market value of the two financial firms.

The committee added that Citigroup and JP Morgan Chase - which are expected to tell investigators they did nothing wrong - had pitched the financing method to other companies under the marketing names of Yosemite and Mohania respectively.

After a seven-month investigation and more than 1m pages of documents, Robert Roach, chief investigator for the committee on investigations, said: "The evidence we reviewed showed that, in some cases, the financial institutions were aware that Enron was using questionable accounting."

Barclays and Royal Bank of Scotland were among five other banks to participate in more than $1bn of trades that the committee described as questionable.

Senators learned that internal emails appeared to prove that Citigroup and JP Morgan Chase knew the transactions - known as pre-pays - were used by Enron to manipulate its financial statements rather than meet business objectives. Pre-pays are arrangements in which one party pays in advance for a service or product.

Carl Levin, who chairs the committee, said: "I think most will conclude that Enron's use of these pre-pays to disguise debt was an accounting sham, and to carry out the deceptions Enron had the help and knowing assistance of some of the biggest financial institutions in our country - including JP Morgan Chase and Citigroup."

Had the transactions been accounted for properly, the committee said, Enron's debt would have increased by a "dramatic" 40% to $14bn in 2000.