CITIGROUP, the world’s biggest financial services company, faces a $2.5 billion (£1.4 billion) lawsuit from investors who claim they were victims of a “massive scheme of deception” when they invested in securities linked to Enron, the collapsed energy trader.

The action is the latest in a string of lawsuits against the Wall Street firms that provided financing for Enron in the run-up to its collapse in 2001. The lawsuits are aimed at recovering some of the billions of dollars lost in the failure of the energy company.

The Bank of New York started the latest action in the New York State Supreme Court on behalf of numerous companies, including Angelo Gordon and Appaloosa Investment, two firms that specialise in investing in distressed debt. The companies claim that Citigroup, one of Enron’s lead advisers, invented a scheme to raise billions of dollars from investors through the sale of notes called “Yosemite” securities.

Citigroup allegedly then used the money to make loans to Enron, and to reduce its own credit exposure to the failing company. The lawsuit alleges Citigroup is guilty of fraud, breach of contract and fiduciary duty, and negligence in the transactions, which allegedly took place between 1999 and 2001. Enron sought Chapter 11 bankruptcy protection in December 2001.

The lawsuit claims: “As Citigroup well knew, Enron’s rapid growth during the 1990s was largely fictional. Enron’s actual operating cash flow was just a fraction of, and its actual debt levels vastly higher than, the figures it reported publicly.” The Bank of New York was trustee for the investors, but had no direct financial interest in the securities.

The lawsuit could prompt Citigroup to add to a $6.7 billion reserve it has put aside for the costs of paying for legal actions relating to the collapse of Enron and WorldCom, the telecom company, and other Wall Street scandals.

Citigroup has already agreed to a $2.65 billion settlement with WorldCom investors, who claimed it participated in financial fraud.

Investors in the latest lawsuit claim Citigroup knew Enron’s debts were much greater than the company had disclosed, and that it knew, before Enron filed for Chapter 11, that it would default.

TOP MANAGER PLEADS GUILTY

Enron’s former head of investor relations pleaded guilty to federal securities fraud charges yesterday. Mark Koenig, 49, admitted “participating with Enron senior management . . . in a scheme to commit securities fraud”. He faces up to ten years in prison and a fine of $1 million (£555,000).

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