Enron’s SPEs: Can Banks Have It Both Ways?

According to court records, JP MorganChase was apparently skilled at having its cake and eating it, too -- that is, keeping special purpose entitie...
Tim ReasonJuly 25, 2002

At the heart of the recent storm over allegations that Citigroup and JP MorganChase extended off-balance-sheet loans to Enron by disguising them as gas trades are Yosemite and Mahonia — the special-purpose entities used as middlemen in the transactions.

Enron, of course, made SPEs infamous with its earlier Chewco, which under accounting rules should have been consolidated on Enron’s books because that SPE did not have the requisite 3 percent outside ownership to be considered independent of Enron.

The banks, however, were apparently far more skilled at having it both ways — that is, keeping the SPEs technically independent, yet still exercising effective control.

Take JP MorganChase and Mahonia. According to court records and JP MorganChase’s testimony before the Senate on Tuesday, the bank appears to have tapped into a sort of pool of SPEs available in Jersey, in the Channel Islands.

Mahonia, in fact, is owned by a charitable trust. According to Senate testimony by JP MorganChase managing director Jeffrey Dellapina, “neither Chase nor Enron has any ownership interest in Mahonia.”

He added that Mahonia’s officers are not appointed nor controlled by Chase or Enron. However, JP MorganChase spokesman Adam Castellani says the funds that Mahonia was using to pay Enron came from JP MorganChase and were recorded on JP MorganChase’s balance sheet — apparently as financing — under “Other Assets.”

Despite these arrangements, JP MorganChase has consistently maintained that Mahonia — and another SPE conveniently named Mahonia Natural Gas — were totally independent.

Back in February, that arrangement puzzled the judge in the pending case between JP MorganChase and 11 insurance companies that have refused to pay the bank for surety bonds that backed the gas trades between Enron and Mahonia. His effort to get JP MorganChase attorneys to explain who owns Mahonia sounds something like an Abbott and Costello routine:

SOUTHERN DISTRICT OF NEW YORK COURT JUDGE JED S. RAKOFF: I couldn’t tell from the record, and I don’t know if it’s part of the record how Mahonia came to you?

JP MORGANCHASE ATTORNEY JOHN M. CALLAGY: How it came to me, your Honor?


JP MORGANCHASE: Mahonia is an entity under Jersey law in the Channel Islands.

JUDGE: Who set it up?

JP MORGANCHASE: It was set up by the law firm of Morant & Co., which is a Jersey law firm.

JUDGE: At whose request?

JP MORGANCHASE: I believe it was set up at the request of East Laws Trust, which actually owns the shares in Mahonia, [which] are owned beneficially by a company called East Laws Trust, which is a charitable trust. I think this law firm sets up companies like Mahonia as special-purpose entities.

JUDGE: What I’m trying to get at is: Was it set up for the purpose of these particular transactions [with Enron]?

JP MORGANCHASE: I believe it was set up in 1992 for the purposes of these particular transactions, yes.

JUDGE: Was that at the behest of Chase Bank?

JP MORGANCHASE: No, your Honor. As I said, they contacted the Morant — I believe that they contacted Morant & Co. and asked for — because they’ve used special-purpose vehicles before, in other transactions.

The judge apparently accepted the argument that because it used a Jersey law firm as an intermediary, JP MorganChase did not “set up” Mahonia itself. But his next question also drew a surprising answer:

JUDGE: Does the Plaintiff have any interest, direct or indirect in Mahonia?

JP MORGANCHASE: None, your Honor, and nor does Enron for that matter.

That’s an assertion that can only be maintained within the narrowest confines of corporate law. While JP MorganChase claims it doesn’t have an ownership interest in Mahonia, it certainly has direct financial interest.

In fact, it is Mahonia, not JP MorganChase, that is the obligee on the $956 million in unpaid surety bonds. Yet that money — if it’s ever recovered — will go to JP MorganChase. And it is JP MorganChase’s high-priced attorneys who are pursuing it.

Indeed, the plaintiff in the case is officially listed as “JP Morgan Chase Bank, for itself and for and on behalf of Mahonia Limited and Mahonia Natural Gas Limited.” Not counting the attorneys from JP MorganChase, no attorneys from East Law Trust or Mahonia were present at the hearing.