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A Manhattan jury will be allowed to see e-mails that a judge characterized as potentially “explosive” in the billion-dollar insurance trial over the financing of Enron by J.P. Morgan Chase & Co. Southern District of New York Judge Jed S. Rakoff ruled Monday that 11 insurance companies sued by Chase for $1.1 billion in surety bonds can introduce the e-mails, in which a senior Chase officer allegedly used the term “disguised loans” to refer to future contracts for oil and gas. The insurance companies charge that the use of the phrase “disguised loans” shows that Chase intentionally misled the insurers into guaranteeing loans, which the companies say they are barred from insuring under New York law. The e-mails were not discovered until after the insurance companies entered into their agreements with Chase. The ruling came during the third week of trial in J.P. Morgan Chase Bank v. Liberty Mutual Insurance Co., 01 Civ. 11523, a case filed by Chase last December to force payment on the surety bonds after Enron collapsed. The insurance companies countered by charging that Chase purchased future deliveries of oil and gas from an off-shore entity called Mahonia Ltd. — future deliveries that Mahonia had purchased from Enron — and that Chase then sold those future deliveries to another entity, which then sold them back to Enron. “The result, according the defendants, was that Enron obtained money from Chase that Enron repaid to Chase at a prescribed rate of interest — the classic definition of a loan — with all the risks except the risk of Enron’s insolvency effectively eliminated,” Rakoff said in his ruling Monday. During opening arguments, John Callagy of New York’s Kelley Drye & Warren, Chase’s lead counsel, said the insurance companies were trying to escape their obligations by tarring Chase with “the Enron brush.” The judge said Monday the defendant insurance companies must show by clear and convincing evidence at trial that they were defrauded by Chase, “proving, among other things, that Chase knew that the underlying arrangements were disguised loans.” Chase had moved before trial to prevent the introduction of the e-mails into evidence. In a pretrial motion, Chase argued that “it is clear from the deposition testimony in this case that the so-called ‘disguised loans’ referred to are the prepaid forward sale contracts themselves — the transactions which the defendants knowingly bonded and concede are legitimate.” At the beginning of trial, Rakoff indicated he would allow the e-mails into evidence, but he said he “continued to entertain further discussion of the issue,” out of “appreciation of the potential impact of this proof.” On Monday, the judge said the evidence was “highly probative” and there appeared to be no danger of unfair prejudice to Chase by allowing it before the jury. Rakoff said one e-mail might persuade the jury that Chase understood “that these transactions functioned economically as loans and were understood by Chase as such but were nonetheless booked and recorded as if they were not loans.” JURY INTERPRETATION In the e-mail, sent in 1999 by Chase senior officer Donald Layton, Layton said he was “queasy” about a process in which he said the investment bank was “making disguised loans, usually buried in commodities or equities derivatives.” But Layton contends he was not discussing Enron in the e-mail. When examined and cross-examined outside the hearing of the jury, Layton “disclaimed more than superficial knowledge” of the transactions that are at the heart of the trial, Rakoff said. Layton, the judge added, “stated that all he was trying to convey in his use of the term ‘disguised loans’ was that equity derivatives and prepaid commodities transactions involved loan-like cash advances that were not being subject to the same internal controls and comparisons that Chase utilized with respect to loan, a defect he sought to fix.” But while Layton was an “impressive witness,” the judge said, cross-examination revealed “an alternative interpretation — highly relevant to the issues in this case — that a reasonable juror unpersuaded by Layton’s testimony might adopt.” PHRASE A ‘PROBLEM’ During opening arguments, Alan Levine of New York’s Kronish Lieb Weiner & Hellman, one of a battery of lawyers representing the insurance companies, said Chase had a “real problem” with the phrase “disguised loans” because it meant exactly what it was intended to mean — a mechanism for hiding the true nature of the transactions.

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