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Citigroup and J.P. Morgan Chase’s Involvement in the Enron Scandal
AAER 1821 and AAER 1820
In 2001, Enron filed chapter 11 bankruptcy due to a serious of unethical accounting practices. We are all aware of Enron’s actions. There were other players involved as well. J.P. Morgan Chase and Citigroup were also involved in the largest bankruptcy this country had seen to date.
Since 1997, Enron had been hiding liabilities on their balance sheets from their investors. They also made cash from financing activities appear to be cash from continuing operation activities. The goal was obviously to boost their stock price and increase the amount of capitol paid to them through stockholders. They used these two banks to finance their
Citigroup’s involvement was rather complicated. Citigroup set up a partnership with Enron were they would sell Treasury bills (“T-bills”) financed by loans The proceeds from the sale of “T-bills” where then reported as cash from operations activities on the cash flow statement. The problem being the majority of the proceeds should have been reported as financing activities. These were still loans, just not in its direct form. The two corporations called this Project Nahnni. Citigroup capitalized $485 million dollars and $15 million from a third party. By December 29, 1999 Enron increased its cash from operation activities by $500 million.
Citigroup also misrepresented other loans in the form of “Prepayments” These were supposed to be prepayments for commodities. They ended up being just another way for Citigroup to finance Enron without it being reported on Enron’s balance sheet. They way these prepayments were supposed to work is Enron was to make payments back to Citigroup based on the spot price of the given commodity multiplied by the contract volume. If the prepayments were executed correctly, Citigroup would have received their prepayment back and an interest payment. However these prepayments had no associated...