SEC Announces Agreement with Canadian Imperial Bank of Commerce and Two Executives to Settle Charges of Aiding and Abetting Enron Accounting Fraud
FOR IMMEDIATE RELEASE
CIBC to Pay $80 Million, Executives to Pay More than $600,000, to Compensate Fraud Victims
Washington, D.C., December 22, 2003 -- The Securities and Exchange Commission today instituted a settled enforcement proceeding against one of North America's largest financial institutions, Canadian Imperial Bank of Commerce (CIBC), for CIBC's role in Enron Corp.'s manipulation of its financial statements. The SEC also sued three of CIBC's executives, two of whom are settling. The Commission's complaint charges CIBC and the three executives with having helped Enron to mislead its investors through a series of complex structured finance transactions over a period of several years preceding Enron's bankruptcy.
The Commission filed a civil injunctive action in U.S. District Court in Texas. Without admitting or denying the Commission's allegations, CIBC consented to the entry of a final judgment in that action that (i) permanently enjoins CIBC from violating the antifraud, books and records, and internal control provisions of the federal securities laws, and (ii) orders CIBC to pay $80 million: $37.5 million in disgorgement, a $37.5 million penalty, and $5 million in prejudgment interest. The Commission intends to direct the money paid by CIBC to Enron fraud victims pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002.
Also named as defendants in the injunctive action are Daniel Ferguson, Ian Schottlaender and Mark Wolf. Schottlaender, a former managing director in CIBC's corporate leveraged finance group in New York City, is contesting the charges. Wolf and Ferguson, without admitting or denying the Commission's allegations, have consented to the entry of a final judgment that permanently enjoins each from violating the antifraud, books and records, and internal control provisions of the federal securities laws. In addition, Ferguson, executive vice president of CIBC's treasury, balance sheet and risk management group, has agreed to pay a total of $563,000: disgorgement of $265,000, a penalty of $265,000, and prejudgment interest of $33,000, and has agreed to the entry of an order barring him from serving as an officer or director of a publicly traded company for five years. Wolf, formerly a CIBC executive director, responsible for credit management in the leveraged finance group, and based in Houston, has agreed to pay a total of $60,000: disgorgement of $27,500, a penalty of $27,500, and prejudgment interest of $5,000. The Commission will likewise direct those monies to Enron fraud victims pursuant to the Fair Fund provisions.
"Today's action demonstrates that neither financial institutions nor their executives can hide behind the technical complexities of structured transactions to avoid responsibility for contributing to fraudulent accounting and manipulated financial results," said Steve Cutler, Director, SEC's Division of Enforcement.
Linda Chatman Thomsen, Deputy Director of the SEC's Division of Enforcement, added: "Counter parties who facilitate accounting driven transactions that lack any viable business purpose, other than to bolster financial results to deceive the investing public, do so at their peril."
Between June 1998 and October 2001, CIBC and Enron structured 34 financings as "asset sales" for accounting and financial reporting purposes, allowing Enron to hide from investors and rating agencies the true extent of its borrowings. Enron used these disguised loans to increase earnings by more than $1 billion, to increase operating cash flows by almost $2 billion, and to avoid disclosure of more than $2.6 billion in debt on its financial statements. Enron's alternative, borrowing money using the asset as collateral, would have given Enron access to cash to meet its operating expenses, but carried with it financial reporting consequences — increased debt, no positive effect on cash flow and no positive effect on earnings — that would have had a detrimental impact on Enron's credit rating and stock price.
As alleged in the Commission's complaint, the financings involved purported transfers of assets from Enron to Enron-sponsored off-balance sheet qualified special purpose entities (QSPEs) or special purpose entities (SPEs). Enron treated these transfers as accounting "sales" pursuant to Financial Accounting Standards Board (FASB) Statements No. 125 and 140, in order to book earnings and recognize operating cash flows, without reporting the associated debt on its financial statements. CIBC organized a syndicate of banks to provide, in the form of debt, the majority of the capitalization of the QSPEs and SPEs. Applicable accounting rules also require that a portion of their capitalization — nominal in the case of a QSPE and at least three percent in the case of an SPE — be equity unrelated to Enron and at risk of loss. CIBC provided this outside "equity at risk" to validate the financings. The accounting rules also require that the transferor, Enron, relinquish control over the assets, transferring the risk and rewards of ownership of the assets to the transferees.
The complaint further alleges that the transactions met neither the requirement that the equity stake be at risk, nor the requirement that the transferor relinquish control over the asset. With respect to the equity, the complaint alleges that a senior CIBC official directed Schottlaender to obtain commitments from Enron senior management that Enron would support CIBC's equity contribution. In conversations between Andrew Fastow, Enron's CFO, and defendant Schottlaender, Fastow gave Schottlaender "the strongest possible assurances" that CIBC's equity would be repaid. The defendants knew that this "undocumented understanding" could not be disclosed in written deal documents between Enron and CIBC because it would be fatal to the "sale" accounting treatment that was the sole basis for the financings. Within CIBC, the guaranteed equity stake in the Enron transactions was referred to as, among other things, "trust me" equity, a term attributed to Schottlaender. Up to the date Enron filed for bankruptcy, consistent with the assurances, Enron fully repaid CIBC for its equity stake and the promised 15 percent return in each of the financings as they unwound or were settled, even when the assets had lost value.
The complaint further alleges that Enron did not relinquish control over the assets. For example, the parties understood that Enron, not CIBC, was responsible for the ultimate disposition of each asset. Consistent with this undocumented understanding, Enron or an Enron affiliate reacquired or refinanced each of the assets before the expiration date of the financing. Similarly, CIBC's return on its equity stake was — like a loan — limited to its original investment and a stated yield of generally 15 percent. In the event an asset appreciated beyond CIBC's limited contractual return, Enron structured the financings to receive any further increase in asset value, an increase generally considered a return on equity. The complaint also points to the limited or no due diligence performed in connection with the transfers. According to the complaint, the transactions were in fact a form of asset parking. Both CIBC and Enron described the largest transaction structure as a "short term revolving warehouse facility."
The complaint alleges that although CIBC officials had concerns over whether Enron had "financially engineered" a large portion of its profits, CIBC was determined to achieve status as one of Enron's elite "Tier I" of banks. CIBC earned approximately $18 million in fees from the fraudulent financings. The disgorgement award of $37.5 million includes all the fees from the fraudulent transactions, as well as all "relationship" fees from any other transactions occurring at or after the date of the first fraudulent transaction. CIBC's civil penalty also is based upon the total fees CIBC received from Enron from 1998 until Enron's demise.
The Commission brought its Enron-related actions in coordination with the U.S. Department of Justice Enron Task Force that, also today, entered into a settlement agreement with CIBC. The Federal Reserve Bank of New York and the Canadian Office of the Superintendent of Financial Institutions entered into a separate written agreement with CIBC that obligates CIBC to enhance its risk management programs and internal controls so as to reduce the risk of similar misconduct.
With this action, the Commission has raised to 11 the total number of separate actions it has brought in connection with the Enron matter since Enron declared bankruptcy. The various defendants and respondents now include four major financial institutions, Enron's former Chief Financial Officer, and 11 other former senior Enron executives. The commission has so far garnered over $400 million for the benefit of the victims of the Enron fraud.
The Commission's investigations relating to Enron are continuing.
For further information contact:
Linda Chatman Thomsen, Deputy Director, Division of Enforcement — (202) 942-4501See Also: Litigation Release 18517;Complaint
Charles J. Clark, Assistant Director, Division of Enforcement — (202) 942-4731