Citigroup Inc. yesterday agreed to pay $2 billion to settle a class-action lawsuit filed by investors who argue the world's largest bank helped a faltering Enron Corp. disguise billions of dollars in debt.
The settlement is among the largest ever -- following closely behind a $2.65 billion payment Citigroup made last year to wipe away a lawsuit involving its underwriting work for WorldCom Inc. "It is a key priority for Citigroup to resolve major cases like this one and to put a difficult chapter in our history behind us," chief executive Charles O. Prince III said in a statement.
Citigroup said the cost of the settlement was covered by reserves it had set aside for litigation. The firm did not admit wrongdoing as part of the deal, instead saying it disposed of the case to "eliminate the uncertainties, burden, and expense of further protracted litigation."
A bankruptcy examiner and a Senate committee concluded two years ago that the bank had aided Enron, the disgraced Houston energy company, in creating the appearance of cash flow. Deals with Citigroup accounted for $1 billion of the $1.3 billion that Enron cited as net cash from operations in the second quarter of 2001, as it unsuccessfully sought to fend off a bankruptcy filing.
Citigroup paid $145 million to settle related claims by the Securities and Exchange Commission and New York District Attorney Robert M. Morgenthau in 2003. The bank earned steep fees for engaging in the Enron deals, called "prepays" because companies were paid to deliver products, such as oil, at a later date.
Despite recent signs of push-back against corporate governance reforms and a few setbacks in business fraud prosecutions, legal experts said the huge settlement underscores that gatekeepers such as investment bankers and auditors will be held accountable for helping clients mislead investors about their financial health.
Gary M. Brown, a corporate lawyer at Baker, Donelson, Bearman, Caldwell and Berkowitz PC in Nashville, cited the criminal convictions last year of Merrill Lynch & Co. executives for helping Enron engage in a sham deal, as well as the recent Citigroup civil settlement. "Without question, these transactions and others executed by Citigroup and other investment banks allowed Enron to present a more robust financial picture to, and accordingly to deceive, the investing public," said Brown, a former staff lawyer on the Senate's Permanent Subcommittee on Investigations, which investigated Enron's demise.
The agreement by Citigroup could accelerate settlements by other investment banking defendants targeted by the class-action lawsuit for their dealings with Enron. They include Merrill, J.P. Morgan Chase & Co., Credit Suisse First Boston LLC and Canadian Imperial Bank of Commerce. In the WorldCom case, other banks reached settlements following Citigroup's. Former Enron leaders Kenneth L. Lay and Jeffrey K. Skilling and auditors at Arthur Andersen LLP also remain as defendants in the case. The lawsuit is scheduled for trial in October 2006.
William S. Lerach, the lead attorney for the plaintiffs, told reporters in a conference call that the deal "obviously augurs well" without predicting imminent settlements with the other defendants. He declined to address the status of negotiations with other banks. Lerach said his firm ultimately could receive as much as 8 to 10 percent of proceeds from the settlement pursuant to a fee agreement.
Former independent Enron board members, Lehman Bros., Bank of America and Andersen's worldwide accounting arm already have reached settlements with Lerach totaling nearly $500 million.
The Citigroup deal requires the approval of the Board of Regents of the University of California, whose retirement system had been named the lead plaintiff in the case. The deal also needs the blessing of U.S. District Judge Melinda Harmon, who has been overseeing the Enron civil lawsuits from her Houston office.
James E. Holst, general counsel at the university, said he would emphatically recommend the deal to his board members at a meeting next month.
"We think this is a tremendous result for the investors who were the victims of these circumstances," Holst said in a conference call.
Still, it could be a long while before investors who lost money see a check in the mail. Funds will be distributed only after the remaining defendants resolve the lawsuit and a judge approves a dispersal plan, Lerach said. People who owned Enron shares or debt securities between Sept. 9, 1997, and Dec. 2, 2001, may be eligible to receive proceeds from the class-action case.
Citigroup shares closed at $47.64 yesterday, down 4 cents or less than 1 percent.