In the first significant shareholder settlement since Enron collapsed more than three years ago, Citigroup has agreed to pay $2 billion to investors who accused the bank of aiding Enron in its huge accounting scandal.
Investors lost tens of billions of dollars on Enron, as the once high-flying energy company plunged into bankruptcy in 2001.
Under the settlement, investors who bought Enron’s stock and bonds between September 1997 and December 2001 – institutions, individuals and Enron employees – likely will receive pennies on every dollar of their losses.
William Lerach, the lawyer representing the lead plaintiff in the Enron case, the University of California, said he expected about 50,000 investors to step forward eventually and claim a portion of the settlement.
Under this settlement, his firm will collect fees totaling 8 percent to 10 percent of the overall amount received – or as much as $20 million – subject to approval by the judge in the case.
Before its collapse, Enron was a cash cow for Wall Street, generating billions in underwriting and advisory fees.
The lawsuit accused Citigroup and other firms of creating false investments in elaborate and complex Enron partnerships that had the effect of deceiving investors and moving billions of dollars of debt off Enron’s balance sheet.
Enron’s bankruptcy filing and the criminal and regulatory investigations that followed put the role of the corporate advisers – Wall Street banks, law firms and accountants – under harsh scrutiny.
Citigroup and JPMorgan Chase agreed in 2003 to pay nearly $300 million in fines and penalties to settle accusations by the Securities and Exchange Commission and the Manhattan district attorney’s office that the two banks enabled Enron to misrepresent its true financial condition before its collapse.
The agreement is expected to increase the pressure on other Wall Street firms named in the lawsuit to settle rather than risk a much bigger payout in a court ruling.
“The potential exposure to the banks in this case could have been really large,” said Joseph Grundfest, a law professor at Stanford University and a former commissioner at the SEC. “It was not in the best interest of Citigroup to push the issue through to a jury verdict.”
The settlement, which comes on the heels of the $2.65 billion Citigroup agreed to pay WorldCom investors last year, also signals the desire of Citigroup’s chief executive, Charles Prince, to clean up the reputation of the giant financial-services conglomerate, which has been battered in the United States and abroad.
While the $2 billion settlement is certainly large, by being among the first to settle the lawsuit, Citigroup may have cut itself a better deal.
If other Wall Street firms follow its lead, that total settlement could reach about $6 billion, securities lawyers estimate.
That is well below the estimate of $10 billion that some lawyers were looking at as a potential total settlement in the case.
“I think the general expectation has been that the Enron numbers would come in a lot bigger than the WorldCom settlement, given Citigroup’s alleged role in Enron,” says Sean Coffey of Bernstein Litowitz Berger & Grossmann, who represented the lead plaintiff in the shareholder lawsuit against WorldCom, which eventually reaped $6.13 billion for investors.
Lerach said he was pleased with the amount of the Enron settlement for Citigroup.
“It’s a very favorable development for our side of the case,” he said. He declined to say whether other banks are also negotiating settlements.
James Holst, general counsel for the University of California, said he, too, was satisfied with the settlement.
“In this phase of the Enron litigation, we think this is an outstanding result,” he said.
The settlement must be approved by Citigroup’s board, the board of regents of the University of California, and a federal court in Houston, where a trial of the lawsuit is to begin in October 2006.
Last year, Citigroup increased its legal reserves to $6.7 billion, after the WorldCom settlement. On Friday, investor reaction to news of the settlement was muted, and shares of Citigroup ended down 4 cents, to $47.64. The bank says its reserves are adequate to cover any payments related to pending cases, including Enron.
Besides the WorldCom settlement, Citigroup also agreed to pay $75 million to settle class-action claims filed by shareholders of telecom company Global Crossing, which filed for bankruptcy in 2002.