New York – Citigroup Inc., the nation’s biggest financial institution, said today it will pay $2 billion to settle a class-action lawsuit over its role in the sale of Enron Corp. stock and bonds before the energy company’s collapse that cost investors billions of dollars.
Under the settlement, Citigroup said it will distribute the payment to investors who bought publicly traded equity and debt securities issued by Enron and its related units between Sept. 9, 1997, and Dec. 2, 2001.
Enron went bankrupt in December 2001 when revelations of hidden debt, inflated profits and accounting trickery shattered its facade of success. Thousands of workers lost their jobs.
The class-action investor suit, which also names more than two dozen top Enron executives, had accused Citigroup and other investment firms of helping Enron defraud investors, continue operations and raise money even as the company was imploding.
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.” Citigroup shares rose 10 cents to $47.78 in morning trading on the New York Stock Exchange. Its shares have traded in a 52-week range of $47.82 to $49.99.
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.
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 Enron class-action suit, led by the University of California’s board or regents, 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.
Citigroup’s payment is the largest settlement so far in the case, more than four times the total of $491.5 million already received from settlements with Lehman Brothers, Bank of America, Andersen Worldwide, Enron’s outside directors and Ken Harrison, Enron’s former vice chairman.
The New York-based banking company 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.
William S. Lerach, lead counsel for the university in the litigation, said “We continue to pursue other defendants, including other banks that have been charged with knowingly participating in the scheme to defraud Enron investors.” Other defendants in the lawsuit include JPMorgan Chase, Merrill Lynch, Credit Suisse First Boston, Canadian Imperial Bank of Commerce, Barclays Bank, Deutsche Bank, Toronto-Dominion Bank, Royal Bank of Canada and Royal Bank of Scotland.
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.