J.P. Morgan Chase & Co. yesterday agreed to pay $2.2 billion to settle a class-action lawsuit alleging the bank helped Enron Corp. report misleading financial results, the latest fallout from the accounting scandals of the late 1990s.
Chase became the second major investment bank in less than a week to resolve claims over the demise of the Houston energy firm. Regulators and plaintiff lawyers accused Chase of funneling $2.6 billion to Enron in the form of disguised loans between 1997 and 2001. By not acknowledging the payments as debt, Enron made its books look better.
Bank officials said they would take a $2 billion pretax charge this quarter to cover the settlement and increase reserves for other pending litigation and regulatory investigations. Chase neither admitted nor denied wrongdoing.
"We are working hard to put the uncertainty of litigation risk behind us," chief executive William B. Harrison Jr. said in a news release.
The deal "sustains the course of highly favorable settlements" for Enron shareholders, said James E. Holst, general counsel for the lead plaintiff, the University of California, in a prepared statement.
The agreement requires the approval of the university's board of regents and a federal judge. Lawyers involved in the case said it was a matter of months or years before defrauded investors would see checks in the mail. Enron's collapse into bankruptcy in December 2001 cost thousands of workers their jobs and their retirement savings.
The Chase agreement comes on the heels of a slightly smaller, $2 billion deal reached by Citigroup Inc. last week. Yesterday's commitment by Chase brought the total recovery in the lawsuit to about $4.7 billion, with more settlements likely to come before the trial, scheduled to begin in October 2006.
William S. Lerach, the lead plaintiff lawyer, said the university continues to pursue other defendants, including Merrill Lynch & Co., Credit Suisse First Boston LLC and the Canadian Imperial Bank of Commerce. Former Enron executives Kenneth L. Lay and Jeffrey K. Skilling, awaiting trial on criminal charges next year, also remain as defendants in the class-action case.
"I can't predict the future, but obviously the noose is tightening for the remaining defendants," Lerach said in an interview. "We've made it clear from the outset that we've been pursuing a strategy of attempting to obtain escalating settlements."
Chase shelled out $160 million two years ago to settle related charges with the Securities and Exchange Commission and the Manhattan district attorney over the transactions with Enron. The deals in question are known as prepays because they involve the promise to provide a commodity such as oil or gas at some point in the future.
Regulators and investigators on the Senate permanent subcommittee on investigations pointed to internal e-mails in an effort to show that Chase employees knew they were helping Enron disguise its mounting debt.
A Chase employee sent an e-mail to a co-worker in November 1998 saying, "Enron loves [prepays] as they are able to hide funded debt from their equity analysts," according to court papers filed by the SEC in 2003.
One unnamed bank worker said the transactions amounted to a way to "discreetly get [Enron], you know, several hundred million dollars and have no market knowledge of what's going on," in a Sept. 13, 2001, taped phone call, the court papers said.
Yesterday's Enron settlement marked the second big class-action payout in less than a year for Chase. The bank agreed in March to shell out $2 billion to resolve claims over its underwriting work for WorldCom Inc. The WorldCom lawsuit marks the biggest shareholder recovery to date in a securities class-action case -- a total of $6.13 billion that has yet to make its way back to investors.
Legal experts predicted the Enron class-action settlement could ultimately meet or exceed the WorldCom payouts. Plaintiffs in the Enron case said settlement funds would sit in bank accounts earning interest until the judge approves a disbursement plan. It is unclear how many people who bought Enron stock and bonds between 1997 and 2001 will apply for money, lawyers said. Last week Lerach predicted as many as 50,000 claims could be filed.