Wednesday, June 15, 2005
JPMorgan Chase & Co. and Citigroup Pay $4.2 billion To End Enron Litigation
Pressure on Banks to End Enron Litigation
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By KRISTEN HAYS, AP Business Writer 2 hours, 8 minutes ago
HOUSTON - Now the pressure's really on. News that bankers JPMorgan Chase & Co. and Citigroup will pony up a collective $4.2 billion to make a conglomeration of Enron Corp. shareholder lawsuits go away lights a settlement fire under other banks and brokerages still named as defendants, legal experts said Wednesday.
"There will be scrambling among the remaining banks to settle now," said Thomas Ajamie, a securities lawyer in Houston. "There's clearly enough money to fund the litigation from here to eternity and that just adds more and more pressure."
But shareholders won't see checks in the mail anytime soon, because who gets how much still must be calculated and then approved by a judge.
"No matter how successful we are, we will never get all the money back," said William Lerach, lead lawyer for the University of California, the lead plaintiff in the litigation. "We will get good recovery for people. How much we get remains to be seen."
Enron spiraled into scandal-ridden bankruptcy in December 2001 upon revelations of hidden debt, inflated profits and widespread accounting tricks. Thousands of workers lost their jobs and its once high-flying stock became worthless.
JPMorgan Chase announced Monday it would pay $2.2 billion to settle allegations that the bank colluded with Enron to skirt accounting rules when the energy company counted loans as income to puff up reported earnings. Last week, Citigroup announced it would pay $2 billion to settle similar allegations of participating in dubious deals.
Neither institution acknowledged any wrongdoing, and said they struck the deals to put the litigation behind them. Those who have followed the Enron scandal and other corporate quagmires, such as the WorldCom collapse, say that reasoning isn't just a public relations ploy.
"To me, it doesn't relate to the merits of the Enron case. The possible outcomes are very murky, and it's going to take years to litigate this," said Paul R. Brown, professor of accounting at New York University's Stern School of Business. "In the meantime, it's a drag on the firm from a stock price perspective, a drag on morale, and you end up with a tainted name. These firms have concluded that the drag is too big a price to pay."
That lesson should be ingrained within JPMorgan, which in March became the last major bank to settle the major class-action WorldCom lawsuit, agreeing to a $2 billion payment. JPMorgan had a chance to settle the case in 2004 for $1.37 billion, but held out in hopes of a better deal, which never materialized.
JPMorgan's accord in the Enron case marks the sixth and largest such settlement of the litigation filed in October 2001. Another $491.5 million in settlements have already been reached with Lehman Brothers Holdings Inc., Bank of America Corp., Andersen Worldwide, 17 former Enron outside directors and former Enron vice chairman Ken Harrison. They, too, didn't acknowledge any wrongdoing.
James Holst, the University of California's general counsel, hinted Wednesday that more deals were coming.
"We're going to see accelerated activity in the weeks ahead," Holst said, declining to elaborate.
Remaining defendants in the case include Merrill Lynch & Co., Canadian Imperial Bank of Commerce, Barclays PLC, Credit Suisse First Boston, Toronto Dominion Bank, Royal Bank of Canada, Deutsche Bank AG and the Royal Bank of Scotland.
More than two years ago U.S. District Judge Melinda Harmon in Houston and U.S. Bankruptcy Judge Arthur Gonzalez in New York ordered the plaintiffs and banks to try to settle and appointed a mediator to help. Those efforts, at least initially, produced no results.
But now the biggest targets are bowing out, said Anthony Sabino, an associate professor at Peter J. Tobin College of Business at St. John's University.
"This is all about who's going to be left holding the bag and no one wants to do that," he said. "It will probably be hard to see such extraordinary numbers again, but no one wants to go to trial on this."
He added that Merrill and CIBC may have more urgency than the other remaining defendants. In 2003, Merrill and CIBC each paid the SEC $80 million in 2003 to settle allegations of participating in murky deals with Enron. Both banks also struck deals with the
Justice Department' to avoid prosecution by acknowledging that employees may have committed crimes and implementing reforms to prevent such transactions.
Lerach said the plaintiffs are preparing for trial in October 2006 and will be ready "to go ahead with whoever is left standing at the end and we're working on that every day."
Other remaining defendants include Enron founder Kenneth Lay, former CEO Jeffrey Skilling, and former Enron accountant Arthur Andersen LLP.
All the settlements still must be approved by Harmon, who will determine a formula under which some 50,000 claimants would be paid. A hearing for her to consider the Citigroup and JPMorgan settlements hasn't yet been scheduled, and investors might not see any funds for more than a year.
Enron's collapse caused $40 billion to $45 billion in market losses, but securities laws allow investors to seek tens of billions of dollars more in additional damages.
Lerach said investors should keep their records and be ready to claim their share. He said he didn't want to characterize what they would actually receive as pennies on the dollar because "it depends on how much they bought, when they bought, when they sold and how much they lost."
AP Business Writers Michael J. Martinez and Joe Bel Bruno contributed to this report.