FOR IMMEDIATE RELEASE|
MONDAY, DECEMBER 22, 2003
TDD (202) 514-1888
CANADIAN IMPERIAL BANK OF COMMERCE AGREES TO COOPERATE WITH ENRON INVESTIGATION, EXIT STRUCTURED FINANCE BUSINESS, IMPLEMENT REFORMS, WITH OVERSIGHT BY MONITOR
WASHINGTON, D.C. - Deputy Attorney General and Corporate Fraud Task Force Chairman James B. Comey, Jr., Assistant Attorney General Christopher A. Wray of the Criminal Division and Enron Task Force Director Leslie R. Caldwell announced today that the Canadian Imperial Bank of Commerce (CIBC) has accepted responsibility for the criminal conduct of its employees in connection with a series of structured finance transactions with Enron Corp., and has agreed to cooperate fully with the continuing Enron investigation.
As part of an agreement reached with the Department of Justice, CIBC will cease engaging in most structured finance transactions with U.S. public companies for a period of three years. The bank also agreed to implement a series of sweeping reforms required by the Justice Department that address the integrity of client and third-party transactions. An independent monitor will oversee CIBC’s compliance with these new reforms.
“We’ve seen recently that corporate corruption extends far beyond cooking one’s own books,” said Deputy Attorney General James B. Comey, Jr. “Third-party facilitators have played a critical role in allowing corporate misconduct to happen, whether it be outside counsel, accountants, advisors, or as we see in this case, a bank whose financing schemes fueled Enron’s misdeeds and damaged the integrity of the financial marketplace.”
“We are pleased that CIBC has accepted responsibility, is cooperating with the Enron investigation and is enacting these important reforms,” said Assistant Attorney General Christopher A. Wray of the Criminal Division. “CIBC’s agreement to quit almost all structured finance with U.S. companies for three years and the appointment of a monitor to ensure compliance substantially reduces the risk of further fraud.”
The written agreement with the Justice Department includes a factual statement of how CIBC aided and abetted Enron’s fraudulent financial practices. According to the factual statement, by 1998, CIBC had engaged in a number of significant, complex financial transactions with Enron and earned substantial fees. However, CIBC had not yet attained the coveted “Tier 1" status of Enron’s most favored banks, to which Enron routed its most attractive and lucrative business. Beginning in 1998, CIBC and Enron engaged in a series of accounting-driven transactions - known as FAS 125/140 - which involved the sale of Enron assets to “special purpose entities” with off-balance sheet financing. CIBC understood that Enron’s purpose in entering into these transactions was to remove assets from its balance sheets and book earnings and/or cash flow at quarter-end and year-end. After engaging in some of these transactions, Enron awarded “Tier 1" status to CIBC.
According to the statement, CIBC and Enron knowingly violated applicable accounting rules governing these transactions in two ways. First, before entering into the transactions, CIBC and Enron orally agreed to unwind several of the transactions prior to their stated maturity date. These oral side deals were not disclosed to Enron’s auditors because this would have negated the off-balance sheet accounting treatment sought by Enron.
Second, in 1999, Enron solicited CIBC to become the three-percent “equity” holder in FAS transactions and to provide the lucrative debt component of the transaction, meaning CIBC was the lender and earned fees for the transaction. In order for such a transaction to be properly taken off balance sheet, at least three percent of the financing had to be contributed by an independent equity source that was truly at risk. CIBC provided the “equity” stake only because Enron’s senior management first orally promised CIBC that the “equity” would be repaid with a profit at or before the end of the term of the transaction. This promise of repayment meant that CIBC’s “equity” investment was not truly at risk, and therefore that off balance sheet accounting treatment was improper. CIBC sought and obtained such promises from Enron’s senior management in connection with its three percent equity investment in Projects Leftover, Nimitz, Alchemy, Discovery and Hawaii 125-0. Again, these oral side deals were not disclosed to Enron’s auditors for fear of negating the desired accounting treatment.
The transactions at issue moved significant assets off Enron’s balance sheets and manufactured massive amounts of cash flow and earnings for Enron. These transactions accounted for significant portions of the reported earnings of Energy Energy Services (EES) and Enron Broadband Services (EBS), Enron’s two most touted business units at the time. CIBC’s transactions with Enron generated between 75 percent and 100 percent of EES’s reported earnings in 2000 and the first two quarters of 2001, and between 46 percent and 62 percent of EBS’ reported earnings for 2000 and the first quarter of 2001.
In addition to agreeing to exit most structured finance business with U.S. public companies for three years, CIBC has agreed to a series of reforms, including the creation of a new committee, the Financial Transaction Oversight Committee, to review quarter-end and year-end transactions effected by a third party with CIBC. In addition, CIBC has agreed to pay for a monitor, the Stamford, Connecticut-based law firm of Day Berry and Howard, to review and oversee CIBC’s compliance with the agreement for three years. The monitors reports to the Justice Department.
As long as CIBC abides by the terms of the agreement, the Justice Department has agreed to not prosecute the bank, based on CIBC’s acceptance of responsibility, its full cooperation with the Enron investigation, its agreement to cease structured finance transactions with U.S. companies for three years, its adoption of a series of significant reforms, and its acceptance of a monitor to oversee compliance, along with the payment of $80 million to the Securities and Exchange Commission. The agreement with CIBC does not protect any individuals from prosecution.
In September 2003, the Department of Justice reached an agreement with Merrill Lynch & Co., Inc., in which the company accepted responsibility for the conduct of its employees and agreed to cooperate fully with the continuing Enron investigation. Merrill Lynch also agreed to implement a series of sweeping reforms addressing the integrity of client and third-party transactions. An independent monitor, along with an outside auditing firm, will monitor Merrill Lynch’s compliance with these reforms.
The agreement with CIBC is part of the Justice Department’s investigation into the collapse of Enron Corp. The investigation is headed by the Enron Task Force, a team of federal prosecutors supervised by the Department’s Criminal Division and agents from the FBI and the IRS Criminal Investigations Division. The Task Force also has coordinated with and received considerable assistance from the SEC. The agreement today was reached in conjuction with the SEC, the Office of Supervision of Financial Institutions in Canada, and the Federal Reserve, each of which has entered into separate agreements with CIBC. The Enron Task Force is part of President Bush’s Corporate Fraud Task Force, created in July 2002 to investigate allegations of fraud and corruption at U.S. corporations.
The Task Force investigation is continuing.