Skeptical CIBC still did Enron deals

Canadian Imperial Bank of Commerce continued to structure doz­ens of deals with Enron Corp. even after bank officials privately expressed skepticism about the company's financial reporting, a report by a court-appointed exam­iner concludes.

CIBC also approved some Enron transactions on the basis that the bank would quietly reduce its exposure to the energy trading com­pany, which peaked at $800-million (U.S.) in early 2000, through the use of credit deriva­tives, the report by Atlanta lawyer Neal Batson says.

"Enron does not know we have done this," said a briefing note written by a bank official and quoted in the hefty document released late Monday.

"CIBC knew that Enron was sensitive to how much of its risk its financial institutions were willing to hold; the more a financial insti­tution would hold, the more busi­ness Enron would do with it," another CIBC official said in a sworn statement to the examiner.

The report by Mr. Batson de­scribes for the first time the close relationship between CIBC and Enron, which dates back to the early 1990s.

CIBC and Enron conducted 48 transactions before Enron's collapse in late 2001. Mr. Batson alleges the disgraced energy trader used many of these transactions to hide billions of dollars in debt. He also concludes CIBC, along with five other international financial institutions "aided and abetted" Enron officials in manipulating the financial statements.

The bank disagreed with Mr. Batson's conclusions, denying any wrongdoing.

"My commentary is that he's telling the reader that this is com­ing from a particular point of view on behalf of creditors to obtain a maximum amount of settlement and that it should be viewed that way. This is not coming from a judge," CIBC spokesman Robert Waite said yesterday.

He added the bank's position in terms of its relationship with Enron has not changed, despite the severity of the allegations con­tained in Mr. Batson's third report.

"We've looked into this exhaus­tively and we have found no evidence of improprieties on behalf of CIBC or its employees," he said.

Mr. Batson describes how CIBC began structuring a few deals for Enron in the early 1990s out of the bank's London office. The pace picked up dramatically in 1998, and by January, 2000, Enron desig­nated CIBC as one of its Tier 1 banks.

In an e-mail to John Hunkin, CIBC's chairman and chief execu­tive officer, and other bank offi­cials, sent shortly after the designation, Billy Bauch, then managing director of CIBC World Markets' oil and gas group, con­gratulated his own team on obtaining the designation.

However, he noted that along with the prestige came "the bur­den and responsibility of partici­pating in certain unattractive transactions," and that CIBC would have to reduce its exposure to Enron in order to take on more business, according to the report.

"It's a reference to a low-margin, low-return business," Mr. Waite said yesterday. "It's not un­attractive in any sense of it being untoward or illegal or any of that."

The bank's primary involve­ment with Enron was through the so-called FAS 140 structured finance transactions. Most of those deals involved sales of assets by Enron to "special-purpose enti­ties" that the examiner says were really disguised bank loans.

Between June, 1998, and Octo­ber, 2001, CIBC engaged in 11 such deals with Enron. One group of deals, called the Hawaii transac­tions, alone allowed Enron to re­ceive cash for 10 different assets.

The FAS 140 transactions played a key role in the manipulation of Enron's books and led the com­pany to publish "materially mis­leading" financial statements, the examiner says.

The FAS 140 deals done with CIBC allowed the company to un­derstate debts totalling just over $1-billion (U.S.) between 1998 and 2000, Mr. Batson says.

In 1998, some CIBC officials became skeptical about these types of deals, Mr. Batson says.

"Presumably [Enron's auditor Arthur Andersen]is happy with the deals so far as signing annual financial statements are con­cerned," one CIBC official wrote in an internal email in June 1998. "It does of course make one wonder how 'true' a picture these state­ments actually give."

In the course of its dealings with Enron, CIBC's credit committee learned that about 15 per cent of Enron's profit in the first nine months of 1998 was attributable to the FAS 140 transactions, the ex­aminer says.

This knowledge prompted the bank's credit committee to ap­prove one FAS 140 transaction on the understanding that it would "validate our understanding with the company" to ensure that the current and following year's prof­itability is primarily driven from operations as opposed to financial engineering.

The report says CIBC received verbal assurances from Enron that its equity investments in the spe­cial-purpose entities would be repaid. It says the bank knew these assurances likely would not be dis­closed to Enron's auditors. If they had been, the company could not have accounted for the transac­tions as a sale.

As early as 1995, CIBC was aware of Enron's substantial off-balance-sheet debt, the report says. In an internal report that year, a bank executive said a securitization sought by Enron "must get off-balance-sheet treatment without even a note in the finan­cial statements."

Legal experts said yesterday that Mr. Batson's report will give Enron shareholders added ammunition in their fight against the company and certain banks. Several suits have been launched over Enron's collapse. Henry Hu, a professor of corporate and securities law at the University of Texas Law School, said the report and recent settle­ments by J. P. Morgan and Citi­group Inc. over their involvement with Enron, should also bolster the suits. "One of the uses of the Batson report, as well as . . . the [set­tlements] is to try to show that these banks were such an integral part of the deception at Enron that they ought to be considered pri­mary violators," he said. "The number of zeros the plaintiffs would probably be satisfied by probably went up."

Nancy Rapoport, dean of the University of Houston Law School, said Mr. Batson's report could ulti­mately deprive the banks of recov­ering any of the money owed to them by Enron. Mr. Batson has recommended that debts of CIBC and five other banks be subordi­nated to other creditors.

"You've got an independent ex­aminer with no particular axe to grind, who has come to a conclusion that is . . . pretty severe. Most good lawyers would use it as addi­tional pressure."