Loans Disguised as Trades

Whereas

Recent Senate investigations into energy sector companies, Enron, Dynergy and CMS Energy showed that these corporations engaged in round trip trades, which are purchases and sales with the same party at the same price. These trades falsely inflated the revenue reported by the company, and they subsequently contributed to the financial problems of these companies. Such round trip trades, also known as "wash sales", if made in securities, were prohibited by Congress in 1934 as a result of abuses in the 20's.

Senator Carl Levin stated " . . .the Subcommittee looked at the sham transactions that Enron used to obtain billions in loans from major financial institutions without showing any debt on Enron's books. . . . Chase and Citigroup did more than just help Enron carry out its deceptions; they also pitched Enron-style, phony prepays to other companies, further spreading into the U.S. business community the poisonous practice of misleading accounting." As a result Citigroup may find itself liable for recovery to the Enron creditors.

A Wall Street Journal editorial commented "These banks deserve the beating they're now getting." "The outline that emerged from the Senate (Hearings) seems to show that Citi and Morgan were energetically helping Enron disguise reality from investors."

The process used by Citigroup was:

Chase indirectly sponsored a Special Purpose Entity (SPE), Delta Energy, which was incorporated in the off-shore financial center of the Cayman Islands to avoid taxation and provide greater secrecy. Delta Energy had only $1,000 in capital, which supported at least 14 prepay transactions totaling an estimated $4.8 billion. The later transactions amounting to $2.4 billion of this total were finance through "Yosemite" bond offering to qualified institutional buyer. Essentially all of these bonds were outstanding at the time of bankruptcy, and may result in losses to the institutional bond holders, while Citigroup may have losses of about $300 million..

Delta Energy made prepaid forward contracts for crude with Enron, while simultaneously Citigroup, Enron and Delta Energy entered into cash-settled swap hedging transactions. The net result of these transactions was the equivalent of a loan at a fixed interest rate with no crude oil market risk.

We believe that the corporation should develop a detailed policy starting from the position outlined by Sandy Weill: "(I)f a company does not agree to record a material financing as debt on its balance sheet, Citigroup will only execute the transactions if the company agrees to publicly disclose its impact to investors."

Be It Resolved that the shareholders request the Board of Directors to develop a policy that effectively precludes our corporation and its clients from treating as trading transactions material financings that serve the purpose of loans.

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