Enron court investigator warns banks

A court-appointed investigator has reminded banks that helped Enron set up and finance its off-balance-sheet partnerships that they might be liable to lawsuits from the bankrupt energy trader's creditors.

In a 160-page report filed to the New York bankruptcy court, Mr Neal Batson, partner with Atlanta law firm Alston & Bird, stressed he was still looking into many of the special-purpose entities in which banks such as JP Morgan Chase, Citigroup, and Barclays played a part.

But as part of his study of the network of special purpose entities, he said he was now examining whether the these structures could be legally challenged, and whether Enron used the entities to manipulate its financial statements. If so, he wrote, one significant question was whether "the officers, directors, professional or other third parties involved in such transactions \ liable".

Mr Batson, whose official title is court-appointed examiner, identified six structured finance deals that he said made it clear that special purpose entities had "dramatic effects on both the balance sheet and income statement portions of Enron's financial statements".

The six deals were not among the best-known of Enron's partnership transactions, such as those carried out by the LJM2 and the Raptor vehicles. But Mr Batson estimated that in aggregate they still provided Enron with $1.38 billion (€1.40 billion) of cash, starting in 1997, and that they were all loans not asset sales, as Enron described them. If reclassified as loans, about $500 million would be added to the Enron assets that creditors are fighting over.

Mr Batson's report is the first stage in a long process set in motion in April. His conclusions on some of the larger off-balance-sheet deals could pave the way for a broadening of the process of recovering assets from Enron and third parties. But some of the 200 or so institutions from which Mr Batson has sought information say his demands are excessive.

The six deals studied in his first report include the Hawaii 125-O deals, the Nikita transaction, and the "Cerberus" transactions. Royal Bank of Canada and Rabobank of the Netherlands were involved in the Cerberus deals, according to the report. Mr Batson also focused on a deal, struck only weeks before Enron's December bankruptcy, involving the transfer of sulphur dioxide emission credits. Barclays participated in that deal. -