Financial services giant Citigroup Inc., today agreed to pay $2 billion to settle a class action lawsuit brought by investors accusing it of aiding in the massive fraud allegedly committed by Enron Corp., the bankrupt energy company.
In an announcement this morning, Citigroup admitted no wrongdoing but said it wanted to "get this difficult chapter in our history behind us."
The settlement is one of the largest ever but not the largest. Citigroup had already agreed to pay $2.58 billion to investors in connection with another celebrated scandal involving WorldCom. Inc.
Citigroup, the world's largest financial services company, has set aside about $5 billion for legal costs associated with a variety of accusations of wrongdoing over the past two years.
The specific case today is one of an unprecedented blizzard of claims and charges stemming from the Enron collapse in 2001. Former Enron executives Jeffrey K. Skilling and Kenneth L. Lay are awaiting criminal trials on fraud and conspiracy charges.
The Arthur Andersen accounting firm all but went out of business after it was convicted of complicity in the Enron case, a conviction reversed this month by the U.S. Supreme Court because of flawed jury instructions.
Today's settlement involves Enron investors, led by the University of California, who filed suit in 2002 against Citigroup and other large banks accusing them of setting up false investments in clandestinely controlled Enron partnerships and facilitating the phony sale of phantom Enron assets.
Among the financial institutions facing claims are JP Morgan Chase and Co., Barclay's PLC, Credit Suisse First Boston, Merrill Lynch, Canadian Imperial Bank of Commerce, Toronto Dominion Bank, Royal Bank of Canada, Deutsche Bank A.G., and the Royal Bank of Scotland.
The alleged fraud was designed to inflate the value of the company, which was actually failing and ultimately did collapse.
In a press release this morning, Charles Prince, Chief Executive Officer of Citigroup, said: "We have an ambitious agenda for Citigroup's future growth as we continue toward our goal to be the most respected global financial services company. 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. By doing so, we will be better positioned to realize our goals. We acknowledge and appreciate the determined and professional efforts of the Regents of the University of California and its advisors in working with us to achieve a settlement that meets the goals of all parties."
"This agreement is a tremendous recovery for Enron investors and continues a pattern of highly favorable settlements," said James E. Holst, the university's general counsel. "We will continue to work to achieve large recoveries from the remaining defendants, either through settlement or at trial," he said in a written statement.
The investors, including the university, the city of San Francisco retirement system, the Archdiocese of Milwaukee and a Teamsters pension trust fund, were scheduled to take Citigroup to trial in Texas in October 2006.
In its announcement on Friday, Citigroup said its existing litigation reserves are sufficient to cover the settlement, and that it does not plan to increase the remaining reserves, which are considered adequate for future exposure to pending Enron-and research-related claims.
The settlement is pending approval by Citigroup's directors and the Board of Regents of the University of California.
In January, a group of former Enron Corp. directors agreed to a $168 million settlement of their portion of the University of California class-action securities lawsuit.
Today's settlement was at least the fifth class action agreement reached in connection with Enron, the Houston-based energy trader.
Investment banking firm Lehman Brothers agreed to a $222.5 million settlement in October, Bank of America to a $69 million settlement in July, and the international unit of now-defunct accountant Arthur Andersen agreed to a $40 million settlement in July 2002.
In July, 2003, Citigroup settled a Securities and Exchange Commission complaint for $120 million alleging that it helped Enron mislead investors by characterizing loan proceeds as cash from operating activities. That settlement also covered SEC charges that Citigroup aided another company, Dynegy Inc., in manipulating financial statements.
A U.S. District Court judge in Houston must approve the settlement.