Canadian Imperial Bank of Commerce has agreed to pay $80-million (U.S.) and adopt "sweeping reforms" as part of a series of settlements with U.S. and Canadian regulators over allegations the bank aided and abetted the massive accounting fraud at Enron Corp.
The bank agreed in a settlement with the U.S. Securities and Exchange Commission to pay $37.5-million in so-called disgorgement fees, $37.5-million in penalties and $5-million in interest.
The SEC was one of four regulators, including the U.S. Department of Justice, the U.S. Federal Reserve Board and Canada's Office of the Superintendent of Financial Institutions, to strike settlements with CIBC yesterday over the bank's financial dealings with the disgraced energy trader. As a result, the bank agreed to a number of measures, including a three-year ban on most structured finance transactions in the United States, independent monitoring of its compliance practices, and the adoption of new policies designed to firm up its internal controls.
In a civil lawsuit filed in Texas, the SEC claimed that CIBC pocketed roughly $18-million in fees from 34 "fraudulent financings" the bank structured with Enron between June, 1998, and October, 2001.
Although these deals were classified as asset sales, the SEC alleges they were in fact disguised loans that enabled the Houston-based energy company to inflate its pretax profit by approximately $1.1-billion, increase cash flows by almost $2-billion, and hide more than $2.6-billion worth of debt.
Enron's share price climbed $1.22 in that span, according to the SEC charges.
CIBC did not admit or deny the allegations as part of the settlement.
"Today's action demonstrates that neither financial institutions nor their executives can hide behind the technical complexities of structured transactions to avoid responsibility for contributing to fraudulent accounting and manipulated financial results," Steve Cutler, director of the SEC's enforcement division, said in a statement.
The securities watchdog, which has already struck similar settlements with a number of major U.S. brokerage firms, including J.P. Morgan and Citigroup, also filed civil charges against three CIBC executives, two of whom have settled.
Daniel Ferguson, 52, formerly executive vice-president of CIBC's treasury, balance sheet and risk management group, has agreed to pay $563,000 in penalties and disgorged fees to settle the allegations. Mr. Ferguson also submitted to a five-year ban preventing him from acting as an officer or director of a public company. CIBC officials said Mr. Ferguson recently left the company, but did not elaborate.
Lawrence Zweifach, a New York-based lawyer for Mr. Ferguson, declined to comment.
Mark Wolf, 41, a former CIBC executive director based in Houston, has also settled charges and will pay $60,000 in penalties. Neither Mr. Ferguson nor Mr. Wolf admitted the allegations.
A third executive, Ian Schottlaender, is fighting the charges. Mr. Schottlaender, 46, is a former managing director at the bank's corporate leveraged finance group in New York.
"These resolutions conclude the investigations of the Department of Justice and the SEC into Enron-related matters for CIBC, closing an unpleasant and painful chapter in our company's history," the bank's chief executive officer John Hunkin said during a conference call with media yesterday. "As many of you know, we have already implemented strict policies and procedures to ensure that these types of actions will not happen again."
Even with the regulatory settlements, CIBC is still embroiled in litigation stemming from its involvement with Enron. Enron's shareholders have filed a class-action lawsuit against several major financial institutions, including CIBC and Toronto-Dominion Bank, alleging they were complicit in the energy trader's unprecedented downfall. The lawsuit is attempting to recover $25-billion in losses.
Mr. Hunkin said the bank believes the suits are "without merit" and will "vigorously" contest them. Nevertheless, the bank said it decided against fighting the SEC allegations.
"I don't think you will find anyone who thinks litigating against the Securities and Exchange Commission and the Department of Justice is something you do lightly, and it was our determination that settling this matter, putting it behind us and permitting us to move forward was the best course of action for our shareholders," said Michael Capatides, a lawyer for the bank.
Shareholders clearly welcomed an end to the uncertainty dogging the bank, and responded by driving CIBC shares up 55 cents to $64.05 on the Toronto Stock Exchange.
The SEC claims in its lawsuit that the assistance provided to Enron by CIBC and the three executives was "unusual in character, scope, and degree compared to legitimate business practices." The regulator also alleged that in sworn testimony, Mr. Schottlaender said he knew that one of the reasons Enron entered into these transactions with CIBC was to raise cash without reporting debt.
The defendants "knew, or were reckless in not knowing, that the transactions were sham asset sales designed solely to improve Enron's financial picture," the SEC claimed.
The SEC complaint insists that even though some banking officials were concerned that Enron may have "financially engineered" some of its financial statements, CIBC was "determined to achieve status as one of Enron's elite 'Tier 1' of banks."
The Justice Department, meanwhile, said CIBC has accepted responsibility for the "criminal conduct" of its employees in connection with a series of Enron transactions. It added that its settlement with the bank includes a factual statement of how CIBC "aided and abetted Enron's fraudulent practices," but said it will not prosecute the bank as long as it abides by terms of the settlement.
"We've seen recently that corporate corruption extends far beyond cooking one's own books," deputy attorney-general James Comey said in a statement. "Third-party facilitators have played a critical role in allowing corporate misconduct to happen, whether it be outside counsel, accountants, advisers, or as we see in this case, a bank whose financing schemes fuelled Enron's misdeeds and damaged the integrity of the financial marketplace."
The Justice Department said off-balance-sheet transactions between Enron and CIBC moved assets off the energy trader's books and created "massive" amounts of cash flow. According to its calculations, these deals generated between 75 and 100 per cent of profit at subsidiary Enron Broadband Services in fiscal 2000 and the first half of 2001.
OSFI and the board of governors of the U.S. Federal Reserve Board reached a separate agreement with CIBC that closely mirrors that of the Justice Department settlement. The two regulators said CIBC has agreed to adopt various new policies and procedures -- some of which are already in place -- by Feb. 27, 2004. The bank will hire an independent auditor to monitor its compliance with the new policies and issue reports to the bank's board of directors twice a year.
The bank will create a Financial Transaction Oversight Committee, responsible for reviewing complex structured financing deals and transactions with third parties occurring at quarter-end and year-end. It will also create an "ethics hotline" where people can anonymously report inappropriate behaviour.
Margaret Pearcy, a spokeswoman for OSFI, said the regulator was asked to become involved last month by both the Federal Reserve and the Justice Department.
Many of the SEC's allegations against CIBC echo a recent report by Neal Batson, Enron's court-appointed examiner. Mr. Batson also alleged that CIBC was one of a number of banks that "aided and abetted" Enron officials in manipulating the company's notorious financial statements.
Mr. Batson's report has also singled out TD for allegedly aiding in the financial engineering of the company's books. Harrison Goldin, another examiner, made similar allegations against Royal Bank of Canada. A spokesman for TD declined to comment on whether it was in settlement discussions with U.S. regulators over its involvement with Enron. Paul Wilson, a spokesman for RBC, said he was unaware of any discussions between the bank and the SEC.
CIBC has already booked $109-million (Canadian) worth of Enron-related charges in the past two quarters to cover the settlements, and said it will not incur further reserves relating to the regulatory actions. The bank said its profitability will be reduced by less than 10 cents a share by abandoning certain structured financings.
ANATOMY OF THE SETTLEMENTS
The U.S. Securities and Exchange Commission has charged CIBC and three executives with 'having helped Enron to mislead its investors through a series of complex structured finance transactions over a period of several years.'
SECURITIES AND EXCHANGE COMMISSION:
CIBC agreed to pay $80-million; $37.5-million in disgorgement, a $37.5-million penalty, and $5-million in prejudgment interest.
Daniel Ferguson, former executive vice-president of treasury, balance sheet and risk management group, agreed to pay $663,000.
Mark Wolf, former executive director based in Houston, agreed to pay a total of $60,000.
OFFICE OF THE SUPERINTENDENT OF FINANCIAL INSTITUTIONS, N.Y. FEDERAL RESERVE BANK & U.S. DEPARTMENT OF JUSTICE:
CIBC agreed to adopt new policies and procedures by Feb. 27, 2004.
Agreed to create an "ethics hotline" for reporting inappropriate behaviour.
Agreed to three-year ban on most structured finance transactions in U.S.
Will establish Financial Transaction Oversight Committee, to review quarter-end and year-end transactions with third parties.
Will pay for a monitor, Connecticut-based law firm Day Berry and Howard, to oversee the bank's compliance with the settlement.
Accepts responsibility for the criminal conduct of its employees and pledges to co-operate with the Department of Justice probe.
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