Risk & Compliance

Enron: Citigroup Muzzles Employees

Bankruptcy court papers charge the bank with holding severance agreements over ex-staffers' heads to intimidate them into not testifying about Enron.
Stephen TaubOctober 3, 2007

Enron has accused Citigroup of preventing its former employees from testifying on what they know about the bank’s involvement with the former energy giant before it plunged into bankruptcy in late 2001.

A lawyer representing Enron’s creditors filed a letter on Monday with the U.S. Bankruptcy Court in Manhattan alleging that Citigroup is using severance agreements to “intimidate former employees into silence, thereby impairing Enron’s ability to obtain information for use at trial.”

In his letter to Judge Arthur Gonzalez, attorney William McSherry explained that clauses in some Citi severance agreements attempt to bar former employees from “disparaging” the bank. “As a result, former Citi employees with information relevant to the case are unwilling to talk because they are concerned that if they give testimony unfavorable to Citi, Citi will assert that they have breached this clause.”

McSherry asked the judge to prohibit Citigroup from using severance agreements to silence the ex-employees, noting that Enron is pursuing “only non-confidential, non-privileged information pertinent to the litigation.” He told CFO.com that although he does not have the Citigroup severance agreements, he understands that their confidentiality clauses are “punitive in nature.” He did not elaborate further.

Citigroup spokesperson Shannon Bell told CFO.com, “To date, almost 50 current and former Citi employees have provided sworn testimony during various Enron proceedings. The current claim is completely absurd and we will seek its prompt dismissal.”

A lawsuit filed in 2003 and referred to as the Enron MegaClaims case charges that some of the largest Wall Street banks “participated with a small group of senior officers and managers of Enron in a multiyear scheme to manipulate and misstate Enron’s financial condition,” reported the Associated Press.

Enron, now called Enron Creditors Recovery Corp., has returned nearly $14 billion to the company’s creditors to date, according to the wire service. A victory over Citicorp could result in Enron receiving billions of dollars to pay creditors, John Ray, the company’s chief executive, told the AP.

UBS AG agreed in June to pay $115 million to settle legal claims by Enron stemming from equity derivative contract payments that Enron creditors sought to recover from the investment bank. In August 2005, JPMorgan Chase agreed to pay $350 million to Enron, and to drop its own claims against the company to settle MegaClaims litigation relating to Enron’s bankruptcy.

Two months earlier, JP Morgan agreed to pay $2.2 billion as part of a broad settlement with investors arising from its role as an investment banker to Enron. That deal came less than a week after Citigroup agreed to pay $2 billion to settle Enron shareholder claims.

The Board of Regents of the University of California, the lead plaintiff in the JPMorgan case, alleged that JPMorgan and other defendants set up false investments in clandestinely controlled Enron partnerships and used offshore companies to disguise loans and facilitate phony sales of phantom Enron assets. As a result, the university claimed, Enron executives were able to deceive investors by reporting increased cash flow from operations and by moving billions of dollars of debt off Enron’s balance sheet, thereby artificially inflating securities prices.