Federal securities regulators have settled enforcement proceedings with the nations two biggest investment banks for their roles in the Enron accounting scandal.
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The companies allegedly used complex structured finance transactions to inflate reported cash from operations, underreport cash flow from financing activities and underreport debt. Both firms agreed to the terms of the deal without admitting or denying any wrongdoing. The SEC plans to use the proceeds of the settlement to compensate defrauded investors in accordance with the Fair Fund provisions of the Sarbanes-Oxley Act.
"As todays actions illustrate, we intend to continue to hold counter-parties responsible for helping companies manipulate their reported results," said Linda Chatman Thomsen, deputy director of the SECs enforcement division, at a press conference. "Financial institutions in particular should know better than to enter into structured transactions where the structure is determined solely by accounting and reporting wishes of a public company."
Separately, Manhattan District Attorney Robert Morgenthau imposed an additional $25 million in fines against each company. J.P. Morgan has agreed to the order sought by the SEC enjoining the company from future violations of the antifraud provisions of the securities laws and requiring it to pay a total of $135 million, including $65 million for disgorgement of revenue, $5 million in interest, and $65 million in penalties.
The agreement with the District Attorneys Office ruled that neither J.P. Morgan nor any of its officers or employees will be prosecuted and that the firm will pay a total of $27.5 million, consisting of $25 million in penalties and $2.5 million in reimbursement of the DAs expenses. J.P. Morgan has also committed to take certain measures to improve its handling of structured finance transactions.
Citigroup will pay the $120 million in disgorgement, penalties and interest, including $101.25 million related to Enron and $18.75 million related to Dynegy. Under the terms of the agreement with the Manhattan DA, Citigroup will pay $12.5 million to New York State and $12.5 million to New York City, plus $500,000 for the costs of the DAs investigation. The company said it previously set aside cash in anticipation of the settlement; therefore it will have no financial impact on income in the quarter.
The settlement brings the total number of SEC enforcement actions to six during the twenty months since Enron collapsed.