Wall Street giant Citigroup Inc. agreed Friday to pay $2 billion to settle a class-action lawsuit that accused the bank of defrauding the University of California and other investors through its work for fallen energy trader Enron Corp.
The deal, the biggest yet stemming from the 2001 bankruptcy that came to symbolize corporate corruption, could set the stage for other hefty recoveries in the Enron fiasco.
“This is a big, big step in the right direction,” said William S. Lerach, a San Diego lawyer who represented UC. The settlement is “a very favorable portent for the future” as negotiations proceed with other defendants, Lerach said.
Separate claims are pending against JPMorgan Chase & Co., Credit Suisse First Boston and other financial institutions that allegedly helped Enron hide mounting debt through elaborate accounting tricks.
Other settlements could reach or exceed hundreds of millions of dollars, analysts said, although the Citigroup deal is expected to be among the largest because it was one of the Houston company’s biggest lenders.
In a statement, Citigroup denied violating any law and said it agreed to settle “solely to eliminate the uncertainties, burden and expense of further protracted litigation.”
Citigroup, the nation’s largest financial institution, said it had ample legal reserves to cover the payout.
The Citigroup settlement dwarfed earlier deals made by Enron investors with Lehman Bros. Holdings Inc., Bank of America Corp. and others that totaled $492 million. Separately, Citigroup, Merrill Lynch & Co. and other banks have paid about $460 million to government regulators to settle Enron-related allegations.
The class-action settlements could eventually mean a multimillion-dollar recovery for UC, which lost $145 million on its Enron stock investments. But no distributions will be made until all outstanding claims are resolved, and university officials said it was too soon to determine how much they might get back.
UC, whose investment portfolio now totals $63 billion, said the losses had no effect on retiree benefits or on programs funded by its endowment.
Enron’s downfall cost investors an estimated $40 billion to $45 billion as its financial house of cards collapsed, crushing its once-highflying stock and prompting rating agencies to cut its debt to “junk” status. Lawyers said it was unclear how much of the loss was attributable to fraud and recoverable under the law.
Under the settlement, investors who bought Enron stock or bonds from Sept. 9, 1997, to Dec. 2, 2001, when the company sought bankruptcy protection, can seek recovery of damages. UC lawyer Lerach estimated that 50,000 investors might file claims.
“Every Enron investor who lost money should ... keep their records up to date,” he said.
Under their fee agreement, lawyers for the plaintiffs stand to get 8% to 10% of the amount recovered.
The UC-led suit accused financial institutions of helping Enron raise money even as it was secretly imploding. UC, which in February 2002 was named lead plaintiff in the consolidated class actions, claimed that the banks participated in a host of schemes that violated securities law.
Citigroup, for example, allegedly disguised loans to enable Enron to present a misleading picture of its balance sheet.
The suit said Citigroup lent Enron $2.4 billion in a series of deals identified as “swaps” and nicknamed Delta transactions because they were conducted through Citigroup’s Cayman Island unit, called Delta. Citigroup paid Enron hundreds of millions of dollars each time, obligating the company to repay the cash over five years.
Although the transactions were in fact loans, they were never disclosed as such on Enron’s books. The plaintiffs alleged that Enron was seeking to conceal the full amount of its debt so that regulators and investors would be unaware of its precarious financial position.
Based on its investment grade rating at the time, Enron could have gotten credit at much lower rates, but it paid Citigroup and JPMorgan 6.5% to 7% for the “disguised loans,” making the deals hugely profitable for the banks, the plaintiffs said.
In late 2001, after revelations about Enron’s accounting made headlines, Citigroup and JPMorgan unsuccessfully sought to arrange the company’s sale to rival Dynegy Inc. so they could split a $90-million investment banking fee and stave off its likely bankruptcy. The suit said calls to credit rating firm Moody’s Investors Service by Robert E. Rubin, a former Treasury secretary who was then Citigroup’s vice chairman, and by JPMorgan Chairman William Harrison were attempts to “strong-arm” the firm to prevent it from downgrading Enron before a sale could be completed.
The latest deal could help Citigroup shake the scandals that have tarnished its image and slowed its growth in recent years. The bank, which last year saw its profit drop for the first time since 1998, has been barred by the Federal Reserve from making major acquisitions as it scrambles to clear a spate of regulatory problems in the U.S. and abroad.
Last year, Citigroup agreed to pay $2.6 billion as part of a record $6.1-billion settlement by banks, auditors and former board members to resolve class-action claims resulting from the 2002 downfall of telecom giant WorldCom Inc. In March, Citigroup agreed to pay $75 million to investors in the defunct fiber optic network Global Crossing Ltd.
Citigroup Chief Executive Charles Prince called the latest accord a positive step for his firm.
“It is a key priority for Citigroup to resolve major cases like this one and to put a difficult chapter in our history behind us,” Prince, who succeeded Sanford Weill in October 2003, said in a statement.
Henry Hu, a corporate and securities law professor at the University of Texas at Austin, said the Fed sanctions had given Prince an incentive to get Citigroup past its scandals.
“This happened on an earlier watch. Prince wants to get rid of the baggage of the past,” Hu said.
Trey Davis, UC’s director of special projects, noted that the university’s Enron losses represented less than 0.3% of its funds under management at the time, and a smaller percentage of current assets.
“UC’s investment funds remain strong and there was no significant impact on either our portfolio or the benefits provided to retirees,” Davis said. “While it is not possible to recoup all of the investors’ losses in such cases -- especially when the fraudulent company is bankrupt -- the university has pursued a meaningful recovery ... for the shareholders."*
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Citigroup’s $2-billion payment to settle claims by Enron shareholders is the largest yet in a series of deals with investors and regulators in connection with the energy trader’s 2001 collapse.
August 2002: Andersen Worldwide, parent of auditor Arthur Andersen, says it will pay $32 million to settle lawsuits from Enron investors and employees.
February 2003: Merrill Lynch agrees to pay $80 million to settle a Securities and Exchange Commission investigation of its Enron dealings.
July 2003: Citigroup and JPMorgan Chase agree to pay more than $300 million to settle government charges that they helped Enron and Dynegy defraud investors.
December 2003: Canadian Imperial Bank of Commerce says it will pay $80 million to settle SEC allegations that it helped Enron inflate profit and hide debt.
July 2004: Bank of America says it will pay $69 million to settle a lawsuit by Enron investors over its role as underwriter for some debt offerings.
October 2004: Lehman Bros. says it will pay $222.5 million to settle a suit by the University of California and other investors over its role as an Enron underwriter.
January: Enron’s insurance firm says it will pay $155 million to UC and other investors to settle a shareholder lawsuit. Ten former Enron directors say they also will pay $13 million out of their own pockets.
Friday: Citigroup agrees to pay investors $2 billion to settle a lawsuit that accused the bank of fraud in its work for Enron.
Sources: Times research, Associated Press, Bloomberg News
Los Angeles Times