As trial dates in the various law suits spawned by the Enron debacle draw nearer, the financial institutions being sued are gradually deciding to “bite the bullet” by agreeing to pay sizable settlements in order to put the whole sordid affair behind them and to concentrate on regaining their own financial stability.
The two branches of the litigation are: (1) the “Megaclaims" lawsuit filed by Enron Corp. against 10 banks which alleges the banks "aided and abetted" the massive accounting fraud that caused Enron’s collapse; and (2) the fraud-based class-action suits filed by Enron investors who lost tens of billions of dollars.
The latest settlements include those by J.P. Morgan Chase & Co., which agreed to pay Enron $350 million and waive some of its claims against Enron, bringing the total value of the arrangement for Enron creditors to more than $1 billion, and Toronto Dominion Bank which will pay Enron $70 million and relinquish rights to pursue some claims against it.
In addition to the latest settlements, Canadian Imperial Bank of Commerce, Royal Bank of Canada, and Royal Bank of Scotland Group PLC also have settled the claims against them in the Megaclaims litigation.
Enron said yesterday’s settlements bring payments in the Megaclaims case to $735 million. In addition, the settling defendants have agreed to forgo or to pay for rights to pursue about $3 billion in other claims.
The five major banks that have yet to resolve the Megaclaims litigation are Citigroup Inc., Credit Suisse Group’s Credit Suisse First Boston Inc., Deutsche Bank AG, Merrill Lynch & Co., and Barclays PLC.
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.
Earlier this month, Canada’s fifth-largest bank, Canadian Bank of Commerce, 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.
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 largest 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 class-action 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.
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 recent high-profile settlements, many legal experts expect the domino-effect to continue as to the remaining defendants in both litigations since settlements tend to balloon as a trial date approaches.
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.”