The very same day, a mountain of fresh evidence arrived indicating that Citi and J.P. Morgan Chase execs knew exactly what games Enron was playing. In a nearly 1,000-page report, bankruptcy examiner Neal Batson concluded that both banks "had actual knowledge of the wrongful conduct in these transactions." Adding to the already rich library of smoking-gun documents in the case, Batson quoted from two bankers in Citi's commodities and derivatives groups who were chatting over e-mail about how they both basically did the same job for Enron: "manipulating cash flows."
So how come these characters aren't being prosecuted? Because putting bankers in jail for securities fraud is very, very hard in the U.S. Government lawyers would have had to prove the Citi and J.P. Morgan Chase hotshots committed willful fraud. That means they knew all about Enron's schemes and actually wanted to mislead Enron shareholders -- as opposed to, say, knowing that shareholder deception was likely and simply wanting to earn big fees. Proving that a particular banker was "a bystander who knows that the fraud is going to happen," wouldn't have sufficed, says John C. Coffee, a securities law professor at Columbia University School of Law.
This may sound like a lot of semantic nonsense. But it has a big impact on securities markets. Because enforcers have a hard time putting bankers, lawyers, accountants, and other "aiders and abettors" behind bars, they're generally forced to fine them for wrongdoing. That means there's a risk that the penalties, however large, will be treated as a cost of doing business. "The message being sent by the regulators is 'write a big enough check and you can get away with anything,"' says Jacob H. Zamanksy, a Manhattan attorney who represents investors.
Certainly Citigroup and J.P. Morgan are writing very big checks. The fines announced by Morgenthau and Securities & Exchange Commission Enforcement Director Stephen M. Cutler are among the biggest ever levied in this type of case. The two financial institutions are likely to shell out more money in private shareholder litigation -- and may even lose their rights as creditors to claim unpaid bills of $1.8 billion (J.P. Morgan) and $2.4 billion (Citigroup) from Enron. "You have to take into consideration that the banks ended up to be enormous creditors," says James Kindler, chief assistant district attorney at the Manhattan D.A.'s office. "There's no indication that they knew what kind of shape Enron was in."
Moreover, individual bankers at both firms are not out of the woods. The Justice Dept. still has Enron criminal investigations under way, and the SEC is holding out the option of filing civil charges against some of the company's financial partners -- which could lead to penalties and banishment from the business. "We're still working through the issues" with individual bankers, says a source familiar with the investigation. "We have not closed the door."
But nothing concentrates the mind like the possibility of a cell mate. The fact is that the recent fines represent roughly a week's profit to the banks. Because a portion of the payments will be credited against any liability the banks face in private securities litigation, under a new provision of the Sarbanes-Oxley law, "I don't think there was deterrence in these settlements," says Coffee. "The same money would have gone to the plaintiffs' lawyers."
It's high time to take a closer look at tightening the rules against white-collar crime. If the evidence in the Batson report is not strong enough to lock up some of Enron's bankers, then the legal standards should be revisited. This is a long-term, complex project. But as things now stand, it feels as if Charles Ponzi himself probably wouldn't do time. By Emily Thornton and Mike France
With Mara Der Hovanesian in New York, Mike McNamee and Lorraine Woellert in Washington