The following general description of the litigation between Enron Creditors Recovery Corp. ("ECRC") and Citigroup is provided for informational purposes only and is designed to provide quick and useful information about the nature of the claims. Please refer to the complaints and other relevant documents for specific and complete information related to the allegations.

Background

Since Enron filed for bankruptcy, ECRC has worked diligently to recover money from various entities that rightly should go to the innocent Enron creditors.

A significant component of this effort has been the filing of lawsuits against U.S. and international financial institutions alleging various degrees of fraud, misrepresentation and malfeasance.

ECRC filed suit against 11 banks and brokerages seeking to recover billions of dollars in what is known as the "MegaClaims" litigation. Of the eleven entities that were sued, ten have settled their cases, returning nearly $1.76 billion dollars to the ECRC for distribution to Enron’s creditors.*

The settlements to-date have been as follows:

MegaClaims Settlements: Cash Settlements Totaling Almost $1.76 Billion

MegaClaims Settlements: Claims Disallowed or Subordinated Totaling Approximately $1.4 Billion

Only Citigroup, Inc. and certain of its subsidiaries and affiliates remain in this litigation. The following section outlines ECRC's allegations against Citigroup.

General Allegations in Case Against Citigroup

ECRC's claims against Citigroup are predicated on allegations that Citigroup knowingly and intentionally assisted certain former senior officers of Enron in deceiving the market. ¹

Specifically, ECRC alleges that Citigroup knowingly played a key role in assisting certain Enron officers ("Insiders") in manipulating and misstating Enron’s financial condition beginning in 1997 and continuing through Enron’s bankruptcy in December, 2001, thereby misleading the markets and harming Enron's innocent creditors.²

Specifically, during this period, ECRC alleges Citigroup entered into at least 13 structured finance transactions with Enron, knowing that Enron’s intended accounting for them was misleading and would give Enron’s investors, analysts and credit rating agencies the erroneous impression that Enron was a financially strong and growing company.

As discussed in the Examiner’s Report, each of the structured finance transactions between Enron and Citigroup share one or more of the following characteristics:

1. No rational business purpose. ³
2. Completion near the close of Enron’s financial reporting period and in an amount designed to assist Enron in meeting one or more targeted financial ratios. ⁴
3. Attempted disguise of cash flow from financing as cash flow from Enron’s business operations, which ultimately allowed the overstatement of Enron’s operating cash flow on Enron’s financial statements. ⁵
4. Attempted disguise of debt as price risk management liabilities (trading business liabilities), which ultimately allowed the understating of debt on Enron’s balance sheet. ⁶

Overview of Claims Against Citigroup

The claims against Citigroup fall into four major categories, which are listed below. Amounts repaid to ECRC will be paid to the innocent creditors.

1. Common Law Claims
   Claims asserted under state common law for damages alleged to have been caused by Citigroup aiding, abetting, and conspiring with former senior Enron officers to improperly manipulate Enron's public disclosures of its true financial condition. The amount of the damages will be proved at trial.
   

   Amount Involved
   Enron's innocent creditors in the aggregate suffered losses of approximately $18 billion.

2. Equitable Subordination/Disallowance
   Claims asserted under the Bankruptcy Code to subordinate/disallow Citigroup's claims, as well as claims filed by the CLN’s (called "Yosemite Claims") involving claims transferred by Citigroup. Subordination means ECRC would only have to pay Citigroup after other creditors have been made whole. Disallowance means the claims are not paid at all, ever. By subordinating and/or disallowing the Yosemite Claims and the Citigroup Claims, the funds set aside for these claims in the Disputed Claims Reserve ("DCR"), a cash reserve established by the Plan of Reorganization, will be distributed to innocent creditors. Citigroup transferred the Yosemite Claims after Enron filed for bankruptcy, and Citi and the Yosemite note holders have taken the position in the litigation that they can avoid the effects of subordination and disallowance by that transfer, a position that Enron challenges. The transferees of the Yosemite Claims have also sued Citigroup in a separate action, seeking to hold Citigroup responsible for any payment not made by Enron.
   

   Amount Involved
   $280 Million in Citigroup Claim
   $4.9 Billion in Yosemite Claims

3. Avoidance Actions
   Claims to recover payments made by Enron to Citigroup that constitute preferences or fraudulent transfers. These claims also include a claim to recover a payment made by Enron to Citigroup on the eve of Enron’s bankruptcy in connection with the termination of one of the Citigroup-Enron prepay transactions and fees paid to Citigroup within 35 days of the bankruptcy in connection with the aborted merger between Enron and Dynegy.
   

   Amount Involved
   $3.25 Billion total
   $18 Million in Aborted Merger Fees

4. Commercial Paper
   Claims to recover prepayments made by Enron on commercial paper debt within 45 days of Enron’s bankruptcy filing.
   

   Amount Involved
   $22 Million in Commercial Paper

Overview of Damages Caused

ECRC alleges that Citigroup's participation in the certain complex structured finance transactions outlined in the MegaClaims complaint allowed Enron to materially mask Enron's true financial condition. ⁷

ECRC believes the evidence supports a finding that Citigroup knowingly engaged in inequitable conduct that allowed former Enron senior officers to produce materially misleading financial statements that, through their public reporting and dissemination, caused substantial injury to Enron's innocent creditors by obscuring Enron's true financial condition⁸ ECRC believes substantial evidence demonstrates Citigroup's knowledge that the structured finance transactions it engaged in with Enron caused such damages.

Paul Deards, co-head of Citigroup's derivatives group, in fact acknowledged that "we put deals together for Enron which we knew confused the rating agencies."⁹

During the four-year period of the Enron-Citigroup structured finance transactions, Enron became a company whose liabilities vastly exceeded its available assets. Citigroup's actions caused foreseeable harm to Enron itself and resulted in harm to innocent parties who dealt with Enron, including creditors. ¹⁰

The Estate has calculated that as a result of this conduct, the gap between Enron's assets and its liabilities grew to approximately $18.1 billion. Enron believes that Citigroup can be held liable for this amount.

Citigroup's Alleged Role

From 1997 until Dec. 2001 (when Enron filed bankruptcy), Citigroup was one of Enron's most important financial partners. ¹¹

1. Enron and Citigroup entered into 60 transactions during that time – an average of one per month.¹²
2. Citigroup was richly rewarded - it collected at least $188 million in fees and interest payments from Enron. ¹³

The evidence also suggests that these revenues were an important motive for Citigroup's inequitable conduct; Citigroup believed that by supplying Enron with the complex structured finance deals that dressed up Enron's financial statements it would position itself to underwrite Enron equity offerings and debt placements.¹⁴

1. For example, a Citigroup memo states that, "[a]s part of Citigroup’s broader relationship with Enron, we have been asked to support this transaction. Given the importance of this relationship ... it is difficult if not impossible to deny this request."¹⁵

ECRC asserts that Citigroup knowingly assisted insiders in manipulating Enron’s financial statements. These transactions came in four general forms:

1. Deceptive Loan Schemes
   
   Ostensibly structured as a series of unrelated forward purchases of oil or natural gas by which Enron was to receive operating income, the so-called “Prepay Transactions” were actually nothing more than ordinary bank debt. ¹⁶
   
   
   • In these nine schemes, hundreds of millions of dollars were transferred to Enron from Citigroup, very often within days of the close of Enron's quarterly reporting period. ¹⁷
   • These funds were then accounted for on Enron's statement as cash from operations, rather than as what they really were – cash flows from financing.¹⁸
   • The effect of these Prepay Transactions was compounded because by reporting of the funds received as cash flows from operations, Enron did not have to report this as debt (i.e., a repayment obligation) on its balance sheets. ¹⁹
   
   
   Evidence shows that Citigroup understood the purpose of these transactions.
   
   
   • Indeed, the minutes of Citigroup's Capital Markets Credit Approval Committee meeting include the following statement: "The transaction provides favorable accounting treatment for the customer. Although the deal is effectively a loan, the form of the transaction would allow the customer to reflect it as 'liability from price risk management activity' on their balance sheet and also provides a favorable impact on reported cash flow from operations." ²⁰
   
   
   Citigroup was thus aware that Enron intended to use the Prepay Transactions as the basis for misleading disclosures concerning its financial condition.²¹ The Prepay Transactions were not cash flow from operations, they were simple debt – there were no commodity price risks in the transactions; no collateral was ever posted by Enron or Citigroup in response to changes in the price of oil or gas and no commodity ever moved from one party to another.²²
   
   
2. Masquerading Transactions
   
   Known as "Minority interest" transactions, these transactions were presented as investments in Enron subsidiaries, but actually were just simple loans from Citigroup and should have appeared on the balance sheet as such.²³ There were two such deals between Enron and Citigroup – both of which happened two days before the end of the respective years in which they were closed:
   
   
   • Nighthawk ($500 M on Dec. 29, 1997)²⁴
   • Nahanni ($500 M on Dec. 29, 1999)²⁵
   
   
   Both of these transactions were loans to Enron that were structured so that the loaned amounts appeared on Enron's balance sheet as minority interests – not as debt.²⁶
   
   In Nahanni, another manipulative feature was included – Citigroup suggested that instead of transferring $500M in cash, the minority investor should transfer to Enron $500M in US Treasury Bills, which Enron could sell and record as cash flow generated by trading activities.²⁷ Enron had never been in the business of buying/selling T-bills, and thus reporting this "income" as funds flow from operations was also misleading. Nahanni alone accounted for 41% of Enron’s total reported cash flow from operating activities in 1999. ²⁸
   
   Based on the evidence, ECRC alleges Citigroup was aware of Enron's intended accounting for the two transactions – in fact, the structures were proprietary products developed by Citigroup.²⁹ Citigroup even provided Enron with a pro forma balance sheet showing how the transaction would increase minority interest cash flows on Enron's balance sheet and could even be used to decrease Enron’s debt if Enron used the proceeds to pay down other existing obligations.³⁰ Citigroup referred to the Nahanni deal as "year-end window dressing"³¹ for Enron and as "essentially an insurance policy for year-end balancing."³²
   
   
3. Phony Sales
   
   Citigroup also participated with Enron in a series of transactions involving supposed "sales" of Enron's forest products business to special purpose entities, which were used to falsely inflate Enron's financial statements with the sales proceeds after each sale.
   
   
   • The Bacchus transaction involved the purported sale of a portion of Enron's pulp and paper products assets to a special purpose entity (SPE), and allowed Enron to book $112M in income and $200M in cash flow in 2000.³³ There was no real sale, however, because former Enron CFO Andrew Fastow and Citigroup had a secret, oral agreement that Enron would repurchase the pulp and paper assets at a later date.³⁴
   • Similarly, the Sundance Industrial transaction allowed Enron to keep $375M of debt off its balance sheet in 2001 and to wrongfully record $20M in income. Again, Citigroup's investment was improperly protected from loss.³⁵
   
   
   Substantial evidence shows that Citigroup knew that these transactions were intended to create artificial earnings to allow Enron to meet year-end targets.³⁶
   
   
   • For example, Steve Wagman, a Citigroup executive discussing the Bacchus transaction said: "Sounds like we made a lot of exceptions to our standard policies. I am sure we have gone out of our way to let them know that we are bending over backwards for them . . . let’s remember to collect this 'iou' when it really counts."³⁷
   • Also, some Citigroup senior officers warned against participating in the Sundance International transaction, such as David Bushnell, Head of Global Risk Management for Citigroup, who wrote, "The GAAP accounting is aggressive and a franchise risk to us if there is publicity."³⁸
   • Lynn Feintech, co-head of Citigroup's derivative group described Sundance as "a funky deal accounting-wise" and said she was "amazed that [Enron] can get it off balance sheet."³⁹
     
     

*Deutsche Bank settlement remains subject to court approval.

¹ See Third Interim Examiners Report, Appendix D, page 135
² See Third Interim Examiners Report, Appendix D, pages 2-4; See also Third Interim Examiners Report, page 54
³ See Third Interim Examiners Report, page 59
⁴ See Third Interim Examiners Report, Appendix D page 71-72 and page 88
⁵ See Third Interim Examiners Report, page 55-56
⁶ See Third Interim Examiners Report, page 55
⁷ See Third Interim Examiners Report, Appendix D, page 1
⁸ See Third Interim Examiners Report, Appendix D, page 141-142
⁹ See Third Interim Examiners Report, page 56
¹⁰ See Third Interim Examiners Report, Appendix D page 1
¹¹ See Third Interim Examiners Report, Appendix D, page 11
¹² See Third Interim Examiners Report, Appendix D, page 11
¹³ See Third Interim Examiners Report, Appendix D, page 19
¹⁴ See Third Interim Examiners Report, Appendix D, page 20
¹⁵ See Third Interim Examiners Report, Appendix D, page 21
¹⁶ See Third Interim Examiners Report, Appendix D, page 47
¹⁷ See Third Interim Examiners Report, Appendix D, page 45-46
¹⁸ See Third Interim Examiners Report, Appendix D, page 46-47
¹⁹ See Third Interim Examiners Report, Appendix D, page 47-48
²⁰ See Third Interim Examiners Report, Appendix D, page 70
²¹ See Third Interim Examiners Report, Appendix D, page 76-77
²² See Third Interim Examiners Report, Appendix D, page 51-53 and page 139
²³ See Third Interim Examiners Report, Appendix D, page 88-89
²⁴ See Third Interim Examiners Report, Appendix D, page 92
²⁵ See Third Interim Examiners Report, Appendix D, page 107
²⁶ See Third Interim Examiners Report, Appendix D, page 88-89
²⁷ See Third Interim Examiners Report, Appendix D, page 89
²⁸ See Third Interim Examiners Report, Appendix D, page 90
²⁹ See Third Interim Examiners Report, Appendix D, page 88 and page 101
³⁰ See Third Interim Examiners Report, Appendix D, page 93-94
³¹ See Third Interim Examiners Report, Appendix D, page 90
³² See Third Interim Examiners Report, Appendix D, page 113
³³ See Third Interim Examiners Report, Appendix D, page 117-118
³⁴ See Third Interim Examiners Report, Appendix D, page 119
³⁵ See Third Interim Examiners Report, Appendix D, page 125-128
³⁶ See Third Interim Examiners Report, Appendix D, page 116
³⁷ See Third Interim Examiners Report, Appendix D, page 124
³⁸ See Third Interim Examiners Report, Appendix D, page 131
³⁹ See Third Interim Examiners Report, Appendix D, page 130