Isda backs Bear Stearns appeal against Enron

The International Swaps and Derivatives Association and the Bond Markets Assocation (BMA) have backed Bear Stearns' latest attempt to keep hold of $25.9 million in payments on a stock forward agreement, in the face of Enron's attempt to recover it.

Enron entered the one-year forward for 323,000 of its own shares in May 2000 and settled in August 2001, paying $25.9 million for the shares. Just over three months later, on December 2, Enron filed for Chapter 11 bankruptcy protection.

As part of the bankruptcy process, Enron filed suits in 2003 against Bear Stearns and three other banks - CSFB, Lehman Brothers and UBS - asking for the return of payments made in 2001 in connections with derivatives trades. Enron's argument was that it was already insolvent - although not in Chapter 11 - when the payments were made.

Bear Stearns and the other banks, backed by both Isda and the BMA, argued that the payments were protected by the safe harbour provisions of the US bankruptcy code. They warn that allowing Enron to claw back the payments could lead to the disruption of the financial markets.

However, when the original suit reached the New York Southern District bankruptcy court in April this year, the court ruled in Enron's favour, blocking a motion to dismiss filed by Bear Stearns. The US firm, with support in an amicus brief from ISDA and the BMA, is now seeking an appeal against the decision.

In the filing, Isda warns that "the bankruptcy court's ruling effectively eviscerates the safeguards" and adds that the opinion, if left unreviewed, would "chill the financial markets, exactly the outcome Congress intended to prevent".