Citigroup Agrees to Pay $2 Billion in Enron Scandal
By JULIE CRESWELL , NY TIMES, June 11, 2005

In the first significant shareholder settlement since Enron collapsed more than three years ago, Citigroup has agreed to pay $2 billion to investors who accused the bank of aiding Enron in its accounting scandal.

The agreement is expected to increase the pressure on other Wall Street firms named in the lawsuit, including J. P. Morgan Chase, Merrill Lynch, and Credit Suisse First Boston, to settle rather than risk a much bigger payout in a court ruling.

"The potential exposure to the banks in this case could have been really large," said Joseph A. Grundfest, a law professor at Stanford University and a former commissioner at the Securities and Exchange Commission. "It was not in the best interest of Citigroup to push the issue through to a jury verdict."

The settlement, which comes on the heels of the $2.58 billion Citigroup agreed to pay WorldCom investors last year, also signals the desire of Citigroup's chief executive, Charles O. Prince, to clean up the reputation of the giant financial services conglomerate, which has been battered in the United States and aboard.

While the $2 billion settlement is certainly large, by being among the first to settle the lawsuit, Citigroup may have cut itself a better deal. If other Wall Street firms follow its lead, that total settlement could reach about $6 billion, securities lawyers estimate. That is well below the estimate of $10 billion that some lawyers were looking at as a potential total settlement in the case.

"I think the general expectation has been that the Enron numbers would come in a lot bigger than the WorldCom settlement, given Citigroup's alleged role in Enron," said Sean Coffey of Bernstein Litowitz Berger & Grossmann, which represented the lead plaintiff in the shareholder lawsuit against WorldCom, which eventually reaped $6.13 billion for investors.

The Enron lawsuit accused Citigroup and other firms of creating false investments in elaborate and complex Enron partnerships that had the effect of deceiving investors and moving billions of dollars of debt off the company's balance sheet.

Investors lost tens of billions of dollars on Enron, as the once high-flying energy company plunged into bankruptcy in 2001. Under the settlement, investors who bought Enron's stock and bonds from September 1997 to December 2001 - institutions, individuals and Enron employees - will probably receive pennies on every dollar of their losses.

William S. Lerach, the lawyer representing the lead plaintiff in the Enron case, the University of California, said he expected about 50,000 investors to step forward eventually and claim a portion of the settlement. Under this settlement, his firm will collect fees totaling 8 percent to 10 percent of the total amount received - or as much as $200 million - subject to approval by the judge in the case.

Mr. Lerach said he was pleased with the amount of the settlement. "It's a very favorable development for our side of the case," he said. He declined to say whether other banks were also negotiating a settlement.

James E. Holst, the general counsel for the University of California, said he, too, was satisfied with the settlement. "In this phase of the Enron litigation, we think this is an outstanding result," he said.

To take effect, the settlement must be approved by Citigroup's board, the board of regents of the University of California and a federal court in Houston, where a trial of the lawsuit is expected to begin in October 2006.

Before its collapse, Enron was a cash cow for Wall Street, generating millions in underwriting and advisory fees. Enron's bankruptcy filing and the criminal and regulatory investigations that followed put the role of the corporate advisers - Wall Street banks, law firms and accountants - under harsh scrutiny. Citigroup and J. P. Morgan Chase agreed in 2003 to pay nearly $300 million in fines and penalties to settle accusations by the Securities and Exchange Commission and the Manhattan district attorney's office that the two banks enabled Enron to misrepresent its true financial condition before its collapse.

Last year, Citigroup increased its legal reserves to $6.7 billion, after the WorldCom settlement. The bank says its reserves are adequate to cover any payments related to pending cases, including Enron, Parmalat and conflicts with analyst research.

Yesterday, investor reaction to news of the settlement was muted, and shares of Citigroup ended down 4 cents, to $47.64.

Besides the WorldCom settlement, Citigroup also agreed to pay $75 million to settle class-action claims filed by shareholders of the telecommunications company Global Crossing, which filed for bankruptcy in 2002.

Mr. Prince is trying to wipe Citigroup's slate clean and put the bank in a new direction. Earlier this year, Citigroup was told by the Federal Reserve to delay any big takeover plans until it tightened internal controls and addressed a number of regulatory problems in the United States and abroad. Actions in recent months by Citigroup units in Japan and Europe have damaged its reputation in those countries.

"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," Mr. Prince said in a statement. Citigroup did not admit wrongdoing in agreeing to settle.

The question now is how quickly other Wall Street firms will follow Citigroup's lead in light of the fact that delaying settlement in the WorldCom shareholder lawsuit may have cost firms like J. P. Morgan Chase dearly. On the eve of the WorldCom trial, J. P. Morgan Chase finally settled for $2 billion. That was much higher than the $1.4 billion analysts had expected it to pay and caused it to bump up its own reserves.

"Defendants who settle first or early tend to get better deals and there's no better evidence than that than the WorldCom litigation," noted David Hilder, an analyst with Bear Stearns.

A representative for Morgan declined to comment on the settlement.

Other financial institutions named in the lawsuit include the Canadian Imperial Bank of Commerce, Barclays Bank, Deutsche Bank, Toronto-Dominion Bank, Royal Bank of Canada and the Royal Bank of Scotland.

Enron's former chairman Kenneth L. Lay; its former chief executive, Jeffrey K. Skilling; and its former accounting chief, Richard Causey, face conspiracy charges in the case. The three have pleaded not guilty and their trials are expected to begin next January.

Roslyn, Long Island, NY: The Enron of Education Fraud and Corruption