Citigroup and J.P. Morgan Chase today paid more than $300 million to settle charges that they helped Enron cheat investors out of billions of dollars.
The settlement with the US Securities and Exchange Commission and Manhattan District Attorney Mr Robert Morgenthau ends an 18-month investigation and lets the two largest US banks avoid criminal prosecution for securities fraud.
The probe found that Citigroup and J.P. Morgan Chase structured complex deals that allowed energy trader Enron to hide debt and inflate its cash flow before it filed for bankruptcy protection in late 2001.
"No more phony baloney," Mr Morgenthau said in announcing the settlement, while warning that companies and banks must make complicated deals more transparent or risk raising "a red flag" for authorities.
Enron's collapse was the first in a flood of high-profile corporate meltdowns that shook the public's faith in financial markets, drove lawmakers to clamp down on big business and sparked countless investor lawsuits.
Now, Citigroup and J.P. Morgan Chase are among Enron's creditors in bankruptcy court and their role in arranging the complex loans may cost them some of the money they had hoped to recover.
In a bankruptcy report issued shortly after the settlement was announced, a court appointed examiner cited the role of J.P. Morgan, Citigroup and four other investment banks in helping Enron defraud investors. The report recommends the banks lose their place at the top of the line of Enron's creditors, putting at risk $5 billion they stand to recover.
Both J.P. Morgan and Citigroup said they would change their business practices, but the banks neither admitted nor denied wrongdoing in the settlement.
"These two cases serve as yet another reminder that you can't turn a blind eye to the consequences of your actions," Mr Stephen Cutler, the SEC's enforcement director, said at a news conference in New York.
Under the agreement, J.P. Morgan paid regulators $135 million to close out the SEC's investigation. Citigroup said it paid $120 million, which also included about $19 million to settle charges it manipulated Dynegy Inc.'s financial statements. The payments will go to a victims fund.
In addition to the SEC payments, the banks will each pay another $25 million to be split between New York State and New York City and pay investigation costs.