The Canadian Imperial Bank of Commerce agreed yesterday to pay $2.4 billion to settle securities fraud allegations brought by former Enron Corp. investors, pushing to $7 billion the total collected from Wall Street banks and others for their role in the energy company's 2001 collapse.
With the CIBC settlement, the Enron recovery becomes the largest in U.S. history, surpassing the $6.1 billion recovered in settlements earlier this year on behalf of investors in WorldCom Inc., the telecommunications giant that collapsed in 2002.
Though smaller than other banks that dealt with Enron, CIBC will pay the most so far to settle. In June, J.P. Morgan Chase & Co. agreed to pay $2.2 billion to settle its role in the case, while another New York banking behemoth, Citigroup Inc., agreed to pay $2 billion.
In 2003, CIBC paid $80 million to settle Securities and Exchange Commission charges that it helped mislead Enron investors by false asset sales over several years.
As is typical in major bankruptcies, Enron stockholders and bondholders are expected to recover only a fraction of the $47 billion in total damages that investors allege were caused by wrongdoing surrounding the energy company's fall. Former Enron employees who held the company's stock in their pension plans are pursuing separate claims.
William S. Lerach, lawyer for the University of California, the lead plaintiff in the class-action lawsuit in federal court in Houston, said investors will seek larger amounts from the remaining defendants. They include several Wall Street investment banks, major law firms including Chicago's Kirkland & Ellis and Houston's Vinson & Elkins, and the U.S. arm of Enron's defunct auditor, Arthur Andersen. Enron has reached an agreement with Andersen Worldwide.
"This was a big step; we have many steps down the road," Lerach said. "We've said that those who settled earlier would do better than those who didn't come to the table at an appropriate time."
Among other things, plaintiffs alleged that CIBC arranged transactions between Enron and a so-called special purpose entity that falsely burnished Enron's balance sheet and earnings. Lerach said a purported CIBC equity stake in the entity was "false and illusory," rendering the deals without "economic substance" and misleading to investors.
In a statement, CIBC said the settlement includes no admission of wrongdoing and that it agreed to settle "solely to eliminate the uncertainties, burden and expense of further protracted litigation."
The agreement follows other high-profile class-action settlements earlier this year, as the corporate scandals that began the decade wind down.
Former Enron chief executive Jeffrey K. Skilling and company founder Kenneth L. Lay are set for trial in January on criminal charges stemming from the collapse.
Jacob H. Zamansky, a New York securities lawyer who is not involved in the case, said the size of the CIBC settlement indicates the plaintiffs had strong evidence against the bank.
"The settlement by CIBC is very substantial in that it had been viewed as a bit player in the fraud," Zamansky said. "Overall, I'm disappointed that more money hasn't been gotten for victims. They're getting pennies on the dollar."
Remaining defendants include Merrill Lynch & Co., Credit Suisse First Boston, Barclays Bank, Deutsche Bank, Toronto-Dominion Bank, Royal Bank of Canada and Royal Bank of Scotland.
Enron investors alleged the investment banks set up false investments in secretly controlled Enron partnerships, used offshore companies to disguise loans and arranged the phony sale of phantom assets. Those and other maneuvers misled investors by falsely boosting cash flow and improperly moving billions of dollars of debt off Enron's balance sheet, plaintiffs allege.
The Toronto bank holding company said the settlement will lower a key capital ratio from 10.7 percent to 7.5 percent, below its target of 8.5 percent. The bank said it hoped to restore the ratio in the next year.