NEW YORK (CNNfn) - A jury of three men and three women Monday began hearing a suit brought by J.P. Morgan Chase seeking $1.1 billion from 11 major insurance companies which had sold surety bonds to cover Enron's promises to deliver oil and gas.
J.P. Morgan Chase attorney John Callagy argued in U.S. District Court in Manhattan that the insurers gave "absolute and unconditional" promises that they would pay up if Enron failed to deliver oil and gas to a special purpose entity called Mahonia.
Mahonia was incorporated in the Channel Islands, Jersey, the British islands just off the coast of France. It was used to allow J.P. Morgan Chase to buy oil and gas -- to be delivered in the future -- in exchange for immediate payment.
These so-called "pre-paid commodity forward" contracts called for Enron to deliver the oil and gas to Mahonia, which then shipped the money it got from J.P. Morgan Chase to Enron. Callagy said the insurance companies were well aware of the risks involved. He told the jury, and U.S. District Judge Jed Rakoff, "They can't get away with a billion dollars just by trying to smear Chase with the Enron taint."
Alan Levine, the lead attorney for the insurance companies, said that the insurance companies, who earned about $12 million writing the surety bonds, were defrauded by Chase and Enron. He accused the bank, Mahonia and Enron of colluding to hide "disguised loans" to Enron that neither the bank nor the corporation wanted to disclose to the public, Wall Street or regulators.
He said the insurance companies did agree to "absolute and unconditional" payment but that did not include fraudulent behavior because insuring such risks would be against the law.
"Chase concocted the fraud with Enron. Chase was right in bed with Enron to structure these transactions to hide Enron's debt," Levine said.
Levine also told the jury that the oil and gas trades that supposedly were being insured did not involve actual sales and deliveries of the commodities for the most part.
The trial is expected to take three weeks to a month.