Dec. 2 Trial Set Over Insurer Enron Bonds

The insurers, in countering motion papers and in arguments before the judge last week, contend that the gas transactions they bonded were actually disguised loan agreements, and under New York law surety insurers are prohibited from providing loan guarantees.

Trades that the bank did with Enron were made through two offshore entities based on Jersey, a Channel Island–Mahonia Ltd. and Mahonia Natural Gas Ltd.

JPMorgan argued that the insurers had plenty of time to examine the transactions involved, and the contracts the insurers signed had such ironclad language that they were compelled to honor them.

Judge Rakoff, during the motion arguments, said the legal points involved in the case had no clearcut precedents. He also challenged the JPMorgan attorney, John M. Callagy, with questions about the possible impact of fraud on the agreements.

In his ruling, the judge said the gas delivery arrangements at issue "now appear to be nothing but a disguised loan."

According to the insurers, the transaction underlying their December 2000 bond "taken as a whole, functioned as a loan, in which Enron borrowed money from Chase (through Mahonia) and repaid it, with interest, to Chase (through an entity called Stoneville). Given this structure, physical delivery of the gas was irrelevant. The gas started and ended with Enron and all that remained was a loan."

The judge set Friday as a date for the two sides to submit plans for the pre-trial fact-finding discovery process between the parties.