CIBC Allowed Enron To Inflate Earnings. Although the losses suffered by Enron investors may have exceeded $42 billion, settlements in the class-action, fraud-based, lawsuit against several major financial institutions and banks that allegedly helped Enron to inflate revenue, and commit other fraudulent acts, have now reached almost $7.1 billion.
Canada’s fifth-largest bank, Canadian Bank of Commerce, has agreed to pay $2.4 billion to resolve the claims brought against it which included hiding debt to inflate revenue figures for the one-time seventh largest corporation in the U.S.
CIBC’s actions allowed Enron to inflate earnings by over $1 billion and avoid disclosure of more than $2.6 billion in debt between 1998 and 2001. This also prompted civil charges by the Security and Exchange Commission (SEC) which the bank has agreed to settle for an additional $80 million.
Previously, on June 14, J.P. Morgan Chase & Co. agreed to pay $2.2 billion to settle claims that it helped Enron in its reporting of false financial statements in order to hide massive amounts of debt while the bank’s analysts issued misleading and erroneous reports which painted Enron’s finances in a falsely positive light.
total amount of settlements
That multibillion dollar settlement followed the $2 billion dollar settlement announced by Citigroup Inc. on June 10 of similar claims arising out of its involvement in the sale of Enron stock and bonds. It brought to $4.691 billion the total amount of settlements negotiated to that point in Enron-related litigation.
The CIBC settlement is the most so far involving the Enron debacle. Lehman Brothers Holdings Inc., Bank of America Corp., Andersen Worldwide, and former Enron officials have already settled for a combined figure of $491.5 million.
The remainder of the case is scheduled to go to trial in October 2006 against the remaining defendants including Merrill Lynch & Co., Credit Suisse First Boston, Barclays PLC, Toronto Dominion Bank, Royal Bank of Canada, Deutsche Bank AG, and Royal Bank of Scotland.
As with all of the previous settlements, the CIBC agreement was tentatively reached with the attorneys for lead plaintiff (the Board of Regents of the University of California) which must approve the settlement along with the United States District Court for the Southern District of Texas.
J.P. Morgan and Citigroup viewed the settlements as a way “to put the uncertainty of litigation risk behind us” (J.P. Morgan) and “to eliminate the uncertainties, burden and expense of further protracted litigation” (Citigroup). CIBC sees it as putting an end to “an unpleasant and painful chapter” in the bank’s history.
Interestingly, CIBC wound up paying about 22% of its book value (assets less liabilities) and about 11% of its market cap, while the far larger ($227 billion market value) Citigroup only paid about 2% of book value.
This disparity was attributed to what one defense lawyer described as: “The longer you wait to settle in a case like this, the more you end up paying.” The $2.4 billion settlement exceeds CIBC’s entire earnings for 2004 of $1.8 billion and is ten times the amount ($247 million) originally set aside by CIBC for the Enron litigation. .
In the wake of the $7.1 billion in settlements and as the trial date draws near, many observers expect a domino-effect to begin as to the remaining defendants. As one attorney familiar with such litigation put it: “No one wants to be left holding the bag when the trial starts. At that point, litigation costs begin to soar and a substantial verdict, which is not spread out over a number of major defendants, can drive one or more of the remaining defendants into financial ruin.”