Another Big Bank Settles Enron Suit
Four days after reaching a settlement with Citigroup Inc., the University of California agreed Tuesday to a $2.2-billion payout from JPMorgan Chase & Co. on behalf of shareholders who lost money in the collapse of Enron Corp.
The settlement is the sixth so far and the largest yet stemming from the Houston company’s stunning downfall in 2001. It brings the total recovery pool to $4.7 billion and counting, putting it on pace to eclipse the record $6.1 billion recovered in class-action suits against defunct telecom giant WorldCom Inc.
JPMorgan Chase did not admit any wrongdoing in the settlement; the bank said its aim was solely to eliminate the burden of “further protracted litigation.” The company said it would take a special charge of about $2 billion in the current quarter to increase its legal reserves.
“We are working hard to put the uncertainty of litigation risk behind us,” JPMorgan Chase Chairman William B. Harrison Jr. said in a statement.
UC and other former Enron stock and bond holders still have claims pending against eight investment banks, including Credit Suisse First Boston Inc. and Merrill Lynch & Co., and several other defendants that are accused of helping the energy trader carry out a massive fraud before its accounting scheme -- called “a hall of mirrors in a house of cards” in the suit -- unraveled.
“We’re very pleased by these recent successes, but we still have a lot of work to do,” said San Diego attorney William S. Lerach, who is representing the UC system. “There’s a lot more money to be recovered.”
Enron stock and bond holders 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, which in 2002 was named by a federal court in Texas as the lead plaintiff representing the company’s shareholders, lost $145 million on its Enron stock purchases. The university said the loss had no effect on retiree benefits or its endowment program. Its assets under management stand at $63 billion.
On Friday, Citigroup settled with the plaintiffs for $2 billion. Earlier settlements in the Enron class action involved Lehman Bros. Holdings Inc., which agreed to pay $223 million; Bank of America Corp., $69 million; Enron’s outside directors, $168 million; and Andersen Worldwide, the international arm of accounting firm Arthur Andersen, $32 million.
The latest settlement is subject to approval by the UC regents, JPMorgan Chase’s board of directors and the court. No money will be paid out until all the claims are resolved, a process that could take several years.
Analysts expect the JPMorgan Chase and Citigroup settlements to be among the largest in the class action because the two firms were the leading lenders to Enron.
The banks set up complex investments in clandestinely controlled Enron partnerships, used offshore companies to disguise loans and facilitated phony sales of “phantom” Enron assets in violation of the Securities Exchange Act of 1934 and other laws, UC alleged. As a result, Enron executives were able to deceive investors by reporting increased cash flow from operations and by moving billions of dollars of debt off Enron’s balance sheet, which artificially inflated its securities prices, the plaintiffs said.
Along with the group of banks, other defendants include Goldman Sachs & Co. because of its role as an underwriter of Enron securities; former executives of Enron; and Arthur Andersen.
Recovered funds will be split among investors who bought Enron stock or bonds between September 1997 and its December 2001 bankruptcy filing.
Lawyers said it was too soon to tell how much investors will get, but once all the claims are settled, the court would approve a distribution plan. Investors should keep their records up to date in order to submit claims in the future, they advised.