A Citigroup banker's memo warned colleagues that a $200 million financing with Enron Corp. in 2001 was a "funky deal." Another banker urged the transaction be vetoed, calling it "a franchise risk to us if there is publicity."

A J.P. Morgan Chase memo noted that a related deal could be arranged to leave "no road map" for Canadian tax authorities trying to figured out what Enron owed.

Senate investigators of Enron's collapse peppered Citigroup and Chase executives with these and other documents yesterday, calling them evidence that their complex deals with Enron had aided a systematic manipulation of the company's financial statements.

The bank officials defended themselves during a contentious four-hour hearing before the Senate Permanent Subcommittee on Investigations, saying the banks were Enron's victims, not its accomplices. They too were misled about the real reasons behind the "structured finance" Enron used to inflate its earnings and hide its debts, they said. "We were lied to," said William T. Fox III, a Citigroup managing director.

"You are not the victims," countered Sen. Carl M. Levin (D-Mich.), outgoing chairman of the subcommittee. "There were warning flags galore" of Enron's purposes, added Sen. Susan Collins (R-Maine), who will chair the panel next year.

Victim or participant? That issue is more than a public relations problem for the banks. It bears on their potential liability for damages related to Enron's collapse in cases being played out in New York and Houston federal courthouses.

A federal jury in New York is hearing a lawsuit pitting J.P. Morgan Chase against insurance companies that have refused to pay nearly $1 billion in surety bonds that guaranteed a series of Enron's energy trades. The insurers claim that these deals were actually loans disguised as energy trades by Enron with the bank's help, misleading the insurers and investors generally about Enron's growing debts.

In Houston, U.S. District Judge Melinda Harmon has indicated she may soon decide whether Enron shareholders can add Citigroup and Chase and other major bankers to a massive civil class-action lawsuit against the company and its top executives. With Enron undergoing a bankruptcy reorganization and its lead accounting firm, Arthur Andersen LP, virtually out of business, the banks represent the richest potential source of damages for the shareholders and their lawyers.

Neither the documents assembled by the subcommittee nor the allegations in the insurance case are officially before Harmon, but the information may figure in her decision on broadening the case, some attorneys say.

A major hurdle for shareholders in the Houston case is a 1994 Supreme Court ruling that curtailed banks' liability for aiding or abetting fraud, said John Coffee Jr., a law professor at Columbia University.

But the Securities and Exchange Commission is not so limited, an SEC official noted at yesterday's hearing. It can sue bankers if they knowingly assist in a violation of securities laws, such as a company's release of significantly misleading financial information.

The critical legal issue now for the banks, attorneys say, is their knowledge before Enron crashed.

"To the extent that Enron's stock price was artificially inflated because their books were fraudulent, anyone who participated in that is potentially liable for participating in fraud," said Gary M. Brown, a Nashville lawyer and former subcommittee staff counsel.

"If you are aware of an ongoing fraud, you have a duty to speak," said Joseph Cohen, a Houston attorney. "Whether you can prove somebody knew something is a whole different ball game."

Executives of Chase and Citigroup said at the hearing that they broke no laws in their Enron transactions and did not realize how Enron used its many structured finance deals to pad its earnings and hide its problems.

Citigroup knew that Enron "significantly dresses up its balance sheet" with accounting maneuvers to meet the earnings targets promised to Wall Street, its executive Fox noted in a memo. But Fox added yesterday: "We had no reason to suspect or believe we could not trust their word."

However, the deals they did with Enron would not be done today, both banks' executives said. Citigroup and J.P. Morgan Chase now have new policies requiring a close, independent review of proposed deals with large or controversial accounting and tax purposes. Clients must agree to disclose the full effects of major financing transactions, Citigroup executives said.

The hearing focused on the bankers' knowledge of Enron's purposes in creating four byzantine deals in 2000 and 2001 that centered on a supposed $200 million sale of its pulp and paper trading venture, and a related $1.4 billion loan to Enron's paper operations.

Several Citigroup e-mails described the importance of the deal to the bank's relationship to Enron. One said Enron considered the deal to be "mission critical," making it a "must" for the bank.

The value of the trading business was inflated based on analysis by a Chase subsidiary, the subcommittee contends. Then Enron's "economic interest" in the business was sold to another private corporation created by Enron, resulting in a $200 million payment to Enron, on paper.

Enron then claimed a $112 million profit on the transactions, which accounted for more than 10 percent of its net income in 2000, the committee's report says. Fox said he was "shocked" by the amount of profit, which he learned from the subcommittee staff. But nearly all of the $200 million "sales price" was in fact a loan from Citigroup, which Enron had effectively guaranteed, the subcommittee said, branding it a sham transaction, not a true sale.

"Without Citigroup's complicity and financial resources, Enron would not have been able to complete the deal and manipulate its financial statements to meet Wall Street expectations for its 2000 earnings," Levin said.

The $1.4 billion "loan" involving the paper business was likewise a sham, Levin charged. Using a financial transaction designed by Chase, Enron artificially added $1 billion to the loan amount through an intricate one-day loan swap between Citigroup and Chase, the subcommittee said. By raising the amount of the so-called loan, Enron was able to claim $60 million in interest deductions on its Canadian tax obligations, tied to a Canadian paper mill that was part of the deal. Chase executives said they got legal assurance that the transaction was permitted.

A central issue in the New York insurance case is whether Chase had created "disguised" loans to help Enron portray borrowings as energy trades that were bringing in cash. Lawyers sparred this week about an e-mail message from Chase Vice Chairman Don Layton in which he used the phrase in reference to the energy deals.

"The key word is the use of the term 'disguised,' " U.S. District Judge Jed S. Rakoff said. "It may be the witness has an innocent explanation, but it raises questions on its face, that one is intending to camouflage and potentially mislead others."

William T. Fox III of Citigroup told a Senate panel yesterday "we were lied to" by Enron.