Investment banking firm Lehman Brothers Holdings Inc. is nearing an agreement to pay approximately $200 million to settle a shareholder lawsuit over its work for bankrupt energy trader Enron Corp., sources familiar with the case said.
Details of the settlement were still being hammered out Thursday, and Lehman Brothers said in a statement that the deal could still fall apart. Sources who said a settlement was in the works spoke only on the condition of anonymity because negotiations are still underway. The proposed settlement was first reported in the Wall Street Journal.
Lehman is one of a several big Wall Street firms named in a vast class-action shareholder lawsuit over Enron's dealings with a variety of professional service firms. Enron collapsed into bankruptcy in December 2001, costing investors billions of dollars. The Regents for the University of California, which lost $144.9 million in Enron's demise, are the lead plaintiff in the class-action suit.
If Lehman ultimately agrees to settle for around $200 million, securities law experts said, it could lead to much larger payments from other Wall Street firms, such as Citigroup Inc., Merrill Lynch & Co., and J.P. Morgan Chase & Co., that had more extensive dealings with Enron.
Lehman Brothers underwrote a handful of bond issues for Enron and was accused in the shareholder suit of failing to properly examine the energy trader's finances before helping issue the debt. Other Wall Street firms, by contrast, face more serious allegations of helping Enron hide billions of dollars in debt through off-balance-sheet partnerships and circular transactions that had no underlying economic value.
"There is some sense that the plaintiffs are going to want to say that this [possible Lehman settlement] sets a low-water mark for what they expect to get in future settlements," said former federal prosecutor David Gourevitch.
"The allegation that Lehman didn't do proper due diligence is, on the scale of these things, less serious than the allegation that some banks played a role in assisting Enron in doing what it did," Gourevitch said.
Lehman's agreement would follow a similar $69 million settlement made by Bank of America Corp. in July. Bank of America did not admit wrongdoing as part of the settlement. Lehman Brothers also is not expected to admit wrongdoing.
When the Bank of America settlement was announced, William S. Lerach, lead attorney for the shareholders, said he expected it would be "the precursor of much larger ones in the future."
The University of California Regents reached a $40 million settlement in 2002 with the international arm of now-defunct Enron accounting firm Arthur Andersen LLP.
Other big Wall Street firms named in the Enron class-action suit have denied wrongdoing in court filings. But they have also been increasing litigation reserves. Citigroup, for instance, said in May that it would increase its reserves for litigation and settlements to $6.7 billion.
Four former Merrill Lynch executives are on trial in Houston over an allegedly fraudulent transaction in which Enron sold three barges to Merrill.
Prosecutors say Enron falsely claimed a $12 million pretax profit from the sale even though it privately guaranteed that it would quickly buy the barges back. Multiple former Enron executives have entered guilty pleas, and former top leaders Kenneth L. Lay and Jeffrey K. Skilling are awaiting trial.
In a statement on Thursday, Lehman Brothers said the firm was "in negotiations to settle certain litigation relating to Enron, specifically the class-action litigation. . . . These negotiations have not been completed, and there is no assurance that a settlement will be achieved on terms acceptable to the Company. The Company says that the settlement, if it occurs, at the value being discussed, will not result in a charge to its income statement."
The University of California Regents declined official comment beyond saying settlement talks were ongoing.
One source familiar with the case said the final settlement figure could be about $222.5 million. But the source cautioned that the figure had changed repeatedly in recent days.