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Section: Daily Dispatches

Morgan Chase Wants to Bar
'Disguised Loans' Evidence

By David Voreacos
Bloomberg News

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NEW YORK, Nov. 22 -- J.P. Morgan Chase amp; Co.
wants to bar internal communications
describing trades with Enron Corp. as
quot;disguised loansquot; from being introduced at a
trial aimed at forcing insurers to cover $965
million in losses on the transactions,
according to court papers.

The 11 insurers, who backed the value of gas
trades among Enron, J.P. Morgan and an
offshore entity, Mahonia Ltd., refused to
honor the claim, arguing the bank had used
the trades as camouflage for lending Enron
money. Enron, once the world's largest energy
trader, sought bankruptcy protection in

Keeping the internal documents out of court
may be crucial to J.P. Morgan's case, some
lawyers say. The $965 million in losses would
wipe out almost a third of the $3.1 billion
in profit before taxes the bank earned in the
first nine months of this year.

quot;This is a silver bullet for the insurance
companies, and the effect of this motion is
to place a spotlight on this silver bullet,quot;
said former federal prosecutor Christopher
Bebel, who's now in private practice in

J.P. Morgan in court papers asked a judge to
exclude quot;J.P. Morgan Chase internal
communications referring to `disguised
loans,'quot; court papers said. The
communications weren't specified in public

The bank already has written off $456 million
of trading contracts and loans with Enron.

Confidential Documents

Joe Evangelisti, a J.P. Morgan spokesman,
declined to comment. The bank refused to
describe its argument for excluding the
communications from the trial.

quot;Most of the materials on both sides were
filed under a confidentiality stipulation, so
I can't get into the specifics,quot; said John
Callagy, a J.P. Morgan attorney. quot;Right now,
my hands are tied.quot;

The insurers have until Monday to respond to
the request before U.S. District Judge Jed
Rakoff, who will preside over a trial in New
York that begins Dec. 2, the one-year
anniversary of Enron's bankruptcy filing.

J.P. Morgan shares rose 6 cents to $24.95 at
12:54 p.m. in New York Stock Exchange
composite trading.

The company also wants to exclude testimony
from David W. Wilson, an oil and gas industry
expert hired by the insurers who said in a
March affidavit that quot;unusual arrangementsquot;
in the contracts with Enron suggest they may
have been loans.

In addition, the bank is seeking to prevent
the insurers from introducing testimony given
in pretrial depositions by Enron's ex-
president, Jeffrey McMahon, and former
Treasurer Ben. F. Glisan Jr. The court papers
don't specify what the testimony was.

Celia Barenholtz, an attorney for Travelers
Casualty amp; Surety Co. and other insurers in
the case, declined to comment, saying that
most of the documents were under court seal.

The insurers, which include Liberty Mutual
Group and St. Paul Cos., issued surety bonds
to guarantee that Enron would deliver natural
gas and crude oil to Mahonia.

quot;Hide Debtquot;

Members of the U.S. Senate Permanent
Subcommittee on Investigations said in a July
hearing that Mahonia was controlled by J.P.
Morgan. The bank's chief executive officer,
William Harrison, told the committee in a
statement that J.P. Morgan incorporated
Mahonia in 1992 as an independent company.
While it was sponsored by the bank, Harrison
said, J.P. Morgan had no direct control of
the entity.

At the hearing, Sen. Carl Levin cited a 1998
e-mail between bankers in which one said
Enron loved such transactions because quot;they
are able to hide funded debt from their
equity analysts,quot; they allowed them to defer
revenue, or quot;(better yet) bury it in their
trading liabilities.quot;

Donald McCree, a managing director for J.P.
Morgan Securities Inc., testified that the e-
mail was quot;an unfortunate statementquot; that did
not reflect how the bank viewed the

Rakoff ruled this month that quot;a reasonable
jurorquot; might conclude that the deals were a

Callagy said he was confident that a six-
member civil jury will reject fraud
allegations made by the insurers.

quot;They signed a contract with us, they knew
what the transactions were all about, and
they should pay,quot; Callagy said. quot;It's very
simple. They didn't misunderstand, they knew
exactly what they were doing. They weren't
defrauded. They just made that up.quot;