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The Bank of New York has filed a lawsuit accusing Citibank and its parent company of a “massive scheme of deception” designed to hide the failing finances of the bankrupt energy giant Enron Corp. while making billions of dollars for itself. The lawsuit, filed in Manhattan’s state Supreme Court, does not specify how much the plaintiffs seek, but it states the investors want to at least recoup their investments, which would be as much as $2.4 billion. Court papers say Citibank knew that the Houston-based energy giant’s growth in the 1990s was “largely fictional” and that its cash flow was much less than — and its debt much larger — than what was publicly reported. The Bank of New York, which represents several investment trusts in the lawsuit, says reports from the U.S. Senate, the Securities and Exchange Commission, the Manhattan district attorney’s office, and other agencies show that Citibank, while knowing the “false and misleading nature” of Enron’s finances, induced investments in the company. Since 1994, the lawsuit says, Citibank loaned Enron money and helped the company hide large amounts of debt. “By the late 1990s,” court papers say, Citibank found itself in a dilemma,” having loaned money to a company it knew was on the brink. “Citibank wanted to keep Enron afloat to help conceal its prior involvement in Enron’s fraud, but it also wanted to limit its Enron credit exposure in the likely event that Enron could not be kept afloat,” court papers say. Two years before Enron’s 2001 collapse, Citibank loaned the company another $2.4 billion, according to the suit, which was filed Monday. “Citibank found itself in a bind,” court papers say. “It knew that Enron was not loan-worthy, yet if it failed to find Enron new sources of financing, it ran the significant risk that Enron would collapse before Citigroup could recover the billions of dollars Enron owed it.” To reduce its own exposure, Citigroup approached major institutional investors, including insurance companies and mutual funds, to invest in something known as “Yosemite transactions.” Notes issued under these transactions had a face value of $2.4 billion and were based on Enron’s apparent creditworthiness. The bank also shifted the risk of the loans by devising “credit default swap agreements.” Under these agreements the trusts would give up valuable investments in exchange for Citibank’s claims against Enron. If Enron remained financially sound, note holders would receive larger interest rates than on bonds Enron issued, and they would collect the principal upon the bond’s maturity. But, the lawsuit says, Citibank knew the investors were getting less than they bargained for because of the likelihood of an Enron bankruptcy. “When Enron finally did collapse and file for bankruptcy,” court papers say, “Citibank did in fact fail to deliver the promised qualifying claims.” Copyright 2004 Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.

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