Citigroup Inc., the nation’s largest financial services company, on Friday said it will pay $2 billion to settle a class-action lawsuit over its role in helping Enron Corp. orchestrate a massive accounting fraud that led to the energy trader’s collapse.
The settlement marks the largest payout so far pledged to Enron investors, who claim they were bilked out of billions of dollars when the energy company went bankrupt in 2001. It also becomes one of the largest corporate settlements in history, but still below the $2.58 billion Citigroup agreed to pay WorldCom Inc. investors last year.
Some 50,000 stock and bondholders that filed claims as part of the lawsuit — led by the University of California’s board of regents — alleges some banks helped Enron defraud investors, continue operations and raise money even as the company was imploding. The settlement marks the fifth made in the long-running Enron debacle, and was seen as a catalyst for future deals with eight other banks targeted in similar lawsuits — including JPMorgan Chase & Co.
“We can’t predict the future, we don’t want to try and predict the future, but this development is obviously very favorable for our side of the case,” said William Lerach, the lawyer representing the lead plaintiff, the University of California, which lost millions when Enron declared bankruptcy.
In addition to JPMorgan Chase, class-action suits are pending against 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. Citigroup’s payment is more than four times the total of $491.5 million already received from settlements with Lehman Brothers Holdings Inc., Bank of America Corp., Andersen Worldwide, Enron’s outside directors and Ken Harrison, Enron’s former vice chairman.
As part of the settlement deal, Citigroup has denied committing any violation of law, saying it settled “solely to eliminate the uncertainties, burden and expense of further protracted litigation.”
It was the third major settlement by Citigroup of class-action litigation in little more than a year.
In May 2004, Citigroup agreed to pay nearly $2.6 billion as its part of the record $6.13 billion settlement by investment banks, auditors and former board members to settled class action claims stemming from the 2002 collapse of WorldCom Inc. The telecommunications company has since emerged from bankruptcy to operate as MCI Inc.
The WorldCom settlement — which was negotiated by Citi chief executive Charles Prince — covered allegations of misconduct by Citi and its investment divisions as well as former star telecom analyst Jack B. Grubman. That settlement also caused other banks to move into negotiations to settle similar suits filed on behalf of WorldCom shareholders.
In March, Citigroup agreed to pay $75 million to settle class action litigation brought on behalf of purchasers of Global Crossing securities. Global Crossing filed for bankruptcy in 2002.
The class-action suit had alleged some banks helped Enron set up partnerships with clandestine ties to the company, use offshore companies to disguise loans and facilitate sales of phony assets.
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, the suit said.
New York-based Citigroup said its legal reserves are sufficient to cover the settlement, and that the remaining funds should be adequate for its future exposure to pending Enron- and research-related claims.
The settlement must be approved by the federal court, Citigroup’s directors and the board of regents at the University of California.
“This agreement is a tremendous recovery for Enron investors and continues a pattern of highly favorable settlements,” said James E. Holst, the university’s general counsel.
Lerach said, “We continue to pursue other defendants, including other banks that have been charged with knowingly participating in the scheme to defraud Enron investors.”
Goldman Sachs has also been named a defendant in the case because of its role as an underwriter of Enron securities, according to the University of California.