CIBC to Pay $2.4 Billion in Enron Suit
Canadian Imperial Bank of Commerce agreed Tuesday to pay $2.4 billion to investors who lost money in the collapse of Enron Corp., the biggest settlement yet in a series of deals negotiated by lawyers for the University of California.
The accord brings the recovery pool in the case stemming from the Houston energy trader’s stunning downfall in 2001 to a record $7.1 billion and counting, topping the $6.1 billion collected in the class action involving fallen telecom giant WorldCom Inc.
Like several other banks in the case, CIBC was accused of helping Enron conceal its shaky finances by disguising loans as other transactions. UC and other investors lost an estimated $74 billion when Enron’s accounting schemes unraveled and its stock plummeted in value.
None of the defendants, including CIBC, has admitted wrongdoing. In a statement Tuesday, CIBC said it was acting “solely to eliminate the uncertainties, burden and expense of further protracted litigation.”
“By settling this case and maintaining what we believe are adequate reserves for our remaining Enron-related legal issues, we can better focus our energies on our other priorities,” said Chief Executive Gerry McCaughey.
The Toronto-based bank, which boosted its legal reserves in its most recent quarter to cover Enron-related litigation costs, earned $1.8 billion in its last fiscal year, ended Oct. 31.
In separate deals announced in June, Citigroup Inc. agreed to pay $2 billion and JPMorgan Chase & Co. agreed to pay $2.2 billion to the shareholder coalition led by UC.
The latest settlement “demonstrates that the university’s strategy of aggressively pursuing the defendants is working,” said William S. Lerach, lead counsel for the plaintiffs.
Lerach said the deal also put more pressure on other defendants, including Merrill Lynch & Co. and Credit Suisse First Boston, to reach terms.
“We can’t predict the future,” he said, “but we’ve said all along that those who settled earlier would do better than those who did not come to the table.”
Lawyers said it was too soon to tell how much investors would get until all outstanding claims were settled. At that time, a federal court judge in Texas is expected to approve a distribution plan for investors who bought Enron stock or bonds between September 1997 and its December 2001 bankruptcy filing.
Investors should keep their records up to date so they can submit claims, attorneys advised.
Under their fee agreement, lawyers for the plaintiffs stand to get 8% to 10% of the amount recovered.
According to the Securities and Exchange Commission, CIBC made dozens of loans from 1998 to 2001 to Enron but identified them as “asset sales.” The transactions enabled Enron to artificially boost its reported net income by more than $1 billion and avoid disclosing more than $2.6 billon in debt, making the company’s balance sheet look cleaner and propping up its credit rating, the SEC alleged.
CIBC agreed in December 2003 to pay $80 million to settle the SEC’s civil charges.
Lerach said Tuesday that CIBC also helped inflate Enron’s stock by issuing bullish research reports from its analysts that painted a false picture of the company’s prospects.
Enron stock and bond investors lost a total of $74 billion from the company’s peak valuation, of which Lerach estimated that $40 billion to $45 billion was attributable to fraud.
UC lost $145 million on its Enron stock purchases, and in 2002 was named by the federal court in Texas as the lead plaintiff for shareholders seeking to recover losses. The university, with assets under management of $63 billion, said the Enron losses had no effect on retiree benefits or its endowment program.
The latest settlement has been approved by CIBC’s board of directors and must be OKd by the UC regents and the court.
Attorneys for UC previously negotiated settlements with Lehman Bros. Holdings Inc. for $223 million and Bank of America Corp. for $69 million. Enron’s outside directors agreed to pay $168 million, and Andersen Worldwide, the international arm of accounting firm Arthur Andersen, kicked in $32 million.
Along with Merrill and CS First Boston, remaining defendants include Barclays Bank, Deutsche Bank, Toronto-Dominion Bank, Royal Bank of Canada and Royal Bank of Scotland.
Goldman Sachs Group Inc. also has been named a defendant for its role as an underwriter of Enron securities.
Plaintiffs claim that several of the banks set up false investments in clandestinely controlled Enron partnerships, used offshore companies to disguise loans and facilitated sales of phantom Enron assets, allowing Enron executives to deceive investors and artificially inflate its securities prices.
The settlement with CIBC does not mandate corporate governance reforms, but Lerach said it would help deter banks from abetting fraud in the future.