Enron investors to get $2 billion from Citigroup

Wall Street giant Citigroup agreed yesterday to pay $2 billion to settle a class-action lawsuit accusing the bank of defrauding investors through its work for fallen energy trader Enron.

The deal, the biggest yet stemming from the 2001 bankruptcy that came to symbolize corporate corruption, could set the stage for other hefty recoveries in the Enron fiasco.

"This is a big, big step in the right direction," said William Lerach, a San Diego lawyer who represented the University of California, which lost $145 million on Enron stock investments. As negotiations proceed with other defendants, Lerach called the settlement "a very favorable portent for the future."

Separate claims are pending against J.P. Morgan Chase, Credit Suisse First Boston and other financial institutions that allegedly helped the Houston company hide mounting debt through elaborate accounting tricks.

Other settlements could reach or exceed hundreds of millions of dollars, analysts said, although the Citigroup deal is expected to be among the largest because it was one of Enron's biggest lenders.

Denies breaking the law

In a statement, Citigroup denied "committing any violation of law and has agreed to the settlement solely to eliminate the uncertainties, burden and expense of further protracted litigation."

Citigroup, the nation's largest financial institution, said it had ample legal reserves to cover the payout.

The Citigroup settlement dwarfed earlier deals with Lehman Bros. Holdings, Bank of America and others that totaled $492 million. Separately, Citigroup, Merrill Lynch and other banks have paid about $460 million to government regulators to settle Enron-related allegations. No distributions will be made to victimized investors until all outstanding claims are resolved.

Enron's collapse cost investors an estimated $40 billion to $45 billion as its financial house of cards collapsed, crushing its once high-flying stock, prompting credit agencies to downgrade its debt to "junk" status and eventually leading to a bankruptcy filing. Former Enron Chairman Kenneth Lay and ex-Chief Executive Jeffrey Skilling are scheduled to go on trial in January.

Lawyers said it was unclear how much of Enron's loss was attributable to fraud and recoverable under the law. Under the settlement, investors who bought Enron stock or bonds between Sept. 9, 1997, and Dec. 2, 2001, when the company sought bankruptcy protection, can seek recovery of damages. Lerach estimated that 50,000 investors might file claims.

"Every Enron investor who lost money should ... keep their records up to date," he said.

Under their fee agreement, lawyers for the plaintiffs stand to receive 8 percent to 10 percent of the amount recovered.

Accused of disguising loans

The lawsuit accused financial institutions of helping Enron raise money even as it secretly was imploding. The University of California, which in February 2002 was named lead plaintiff in the consolidated class actions, claimed the banks participated in a host of schemes that violated securities law.

Citigroup, for example, allegedly disguised loans to enable Enron to present a misleading picture of its balance sheet.

Citigroup lent Enron $2.4 billion in a series of deals identified as "swaps" and nicknamed Delta transactions because they were conducted through Citigroup's Cayman Island unit, called Delta. Citigroup paid Enron hundreds of millions of dollars each time, obligating the company to repay the cash over five years.

Although the transactions were in fact loans, they never were disclosed as such on Enron's books. The plaintiffs alleged that Enron was seeking to conceal the full amount of its debt so that regulators and investors would be unaware of its precarious financial position.

Based on its investment-grade rating at the time, Enron could have received credit at much lower rates, but it paid Citigroup and J.P. Morgan 6.5 percent to 7 percent for the "disguised loans," making the deals hugely profitable for the banks, the plaintiffs said.

In late 2001, after revelations about Enron's accounting made headlines, Citigroup and J.P. Morgan sought to arrange the company's sale to rival Dynegy so they could split a $90 million investment banking fee and stave off its likely bankruptcy. The suit said calls by Citigroup Vice Chairman and former Treasury Secretary Robert Rubin and J.P. Morgan Chairman William Harrison to credit-rating firm Moody's Investors Service were attempts to "strong-arm" the firm from downgrading Enron before a sale could be completed.

History of scandals

The latest deal could help Citigroup shake the scandals that have tarnished its image and slowed its growth in recent years. The bank, which last year saw its profit drop for the first time since 1998, has been barred by the Federal Reserve from making major acquisitions as it scrambles to clear a spate of regulatory problems in the United States and abroad.

Citigroup last year agreed to pay $2.6 billion as part of the record $6.1 billion settlement by banks, auditors and former board members to resolve class-action claims resulting from the 2002 downfall of telecom giant WorldCom. Citigroup agreed in March to pay $75 million to investors in the defunct fiber-optic network Global Crossing.

Citigroup's chief executive, Charles Prince, called the latest accord a positive step for his firm.

"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," Prince, who succeeded Sandy Weill in October 2003, said in a statement.

Information on Lay and Skilling was provided by Reuters.