According to a Reuters report, the Vanguard funds purchased $65 million of the notes in a private November 1999 offering and later bought an additional $5.7 million worth of the notes. The Vanguard suit alleges that the notes were part of a series of “elaborate circular transactions” designed to disguise billions of dollars in loans to Enron as bona fide energy transactions and to enable Citibank to reduce its then-excessive lending exposure to the energy trader. The suit also alleges that credit risk was shifted to third-party investors like Vanguard without disclosing Citibank’s “inside knowledge of Enron’s overstated financial condition.”
The suit claims that proceeds of the Yosemite Trust Notes, which totaled some $800 million, were used to repay Enron’s debt to Citibank. Enron filed for bankruptcy in December 2001, causing both employees and investors to lose millions in what was perhaps the largest and most highly publicized financial debacle in recent years. The Vanguard funds seek full payment of principal and interest on the notes.
Besides the two Citigroup Inc. units, the suit names a third defendant, Delta Energy Corp., which it described as a Cayman Islands affiliate of Citibank. Vanguard officials filed the suit in a Pennsylvania state court. Headquartered in Valley Forge, Pennsylvania, Vanguard is the second-largest US mutual fund company.
Numerous other Enron investors – particularly institutional investors such as large pension funds – are already waging court battles to recoup their own losses (See Mississippi Seeking Investment Losses From Enron ).