Former Enron Corp. investors have reaped a legal bounty in the past week: A total of $4.2 billion in settlements from JPMorgan Chase & Co. and Citigroup Inc. to resolve lawsuits over the failed energy trader’s fraudulent finances.
JPMorgan announced a $2.2 billion settlement late Tuesday, the largest Enron settlement to date. The lawsuit, in which about 50,000 Enron stock and bond holders filed claims, was led by the University of California.
The settlement comes just four days after Citigroup Inc., the nation's largest financial services firm, agreed to pay investors $2 billion to settle the lawsuit. JPMorgan is No. 3 in terms of its market capitalization.
The lawsuit alleges that a number of banks and brokerages helped Houston-based Enron continue to operate and raise money even as the energy trader was lurching toward a 2001 bankruptcy.
The settlement is the latest in the long-running Enron debacle, with some $491.5 million in deals already made with Lehman Brothers Holdings Inc., Bank of America Corp., Andersen Worldwide, Enron’s outside directors and Enron’s former vice chairman, Ken Harrison.
“These were two giant steps on the road, but we have a long way to go before the end of the road,” said William Lerach, the lawyer representing the University of California, which lost $144.7 million when Enron declared bankruptcy. “There will be other large settlements coming soon.”
Lerach and other attorneys for the university are still litigating with Barclays PLC, Credit Suisse First Boston, Merrill Lynch & Co., Toronto Dominion Bank, Royal Bank of Canada, Deutsche Bank AG and the Royal Bank of Scotland.
Among the individuals named as defendants are Enron founder and ex-CEO Kenneth Lay, former Chief Executive Jeffrey Skilling, and former top accountant Richard Causey. All have pleaded not guilty to charges of fraud and conspiracy in a case scheduled to go to trial in January 2006.
All the settlements still must be approved by a federal judge in Texas, who will determine a formula under which claimants would be paid. No date for a hearing has been set, and investors might not see any funds for more than a year.
The financial institutions allegedly helped Enron set up partnerships that the company used to improperly boost profits while moving billions of dollars of debt off its balance sheet. That allowed Enron to report higher cash flow from operations and lower debt, making its financial picture look better than it was and artificially inflating the company’s stock and bond prices, according to the lawsuit.
JPMorgan Chase was accused of helping Enron engage in large prepaid transactions in which debt was concealed from the balance sheet to inflate the bottom line. In addition, the Wall Street giant was accused of issuing bullish research reports that stressed Enron’s liquidity while the company was on the verge of collapse.
In the settlement, JPMorgan Chase denied breaking any laws. The bank said in a statement that the deal was done “solely to eliminate the uncertainties, burden and expense of further protracted litigation.”
The company expects to take a $2 billion charge on its earnings, or $1.25 billion after taxes, during the current quarter to cover the settlement. The charge also will be used to cover remaining legal matters the bank faces.