NEW YORK - In the first significant shareholder settlement since Enron Corp. collapsed more than three years ago, Citigroup Inc. has agreed to pay $2 billion to investors who accused the bank of aiding Enron in its huge accounting scandal by selling the defunct energy giant's stocks and bonds.
It is the largest settlement to date offered to the investors, who allege that several banks helped Enron defraud thousands of shareholders, costing them billions of dollars when the energy trader went bankrupt in 2001.
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 and claim a portion of the settlement. Under this settlement, his firm will collect fees of 8 percent to 10 percent of the amount received by the University of California - or as much as $20 million - subject to approval by the judge in the case.
Lerach said he was pleased with the settlement amount. "It's a very favorable development for our side of the case," he said. He declined to say whether other banks are also negotiating a settlement.
"This agreement is a tremendous recovery for Enron investors and continues a pattern of highly favorable settlements," said James Holst, general counsel for the university, which lost nearly $145 million from Enron investments.
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.
"It was not in the best interest of Citigroup to push the issue through to a jury verdict," said Joseph Grundfest, a law professor at Stanford University and a former commissioner at the Securities and Exchange Commission.
The settlement, which follows the $2.65 billion Citigroup agreed to pay WorldCom Inc. investors last year, also signals the desire of Citigroup's chief executive, Charles O. Prince, to clean up the reputation of the financial services conglomerate, which has been battered in the United States and abroad.
Citigroup, the nation's largest financial services company, said in a statement that it denies it broke the law and is settling "to eliminate the uncertainties, burden and expense of further protracted litigation."
"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 said.
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 financial condition before its collapse.
Last year, Citigroup increased its legal reserves to $6.7 billion after the WorldCom settlement.
Yesterday, investor reaction to news of the settlement was muted, and shares of Citigroup ended down 4 cents, at $47.64, on the New York Stock Exchange. The bank says its reserves are adequate to cover any payments related to pending cases, including Enron, Parmalat and conflicts with analyst research.
Besides the WorldCom settlement, Citigroup also agreed to pay $75 million to settle class-action claims filed by shareholders of telecom company Global Crossing Ltd. The New Jersey-based fiber-optics company had one of the largest corporate bankruptcies ever in January 2002.
In July 2003, Citigroup agreed to pay $120 million to settle SEC charges stemming from the Enron scandal. JPMorgan Chase also paid $135 million in that SEC settlement.
The proposed Enron settlement must be approved by the university's board of regents, Citigroup's directors and the U.S. District Court for the Southern District of Texas, which has been hearing the case.
Citigroup said it would pay investors who purchased publicly traded equity and debt securities issued by Enron and its related units between Sept. 9, 1997, and Dec. 2, 2001. The money would come from reserves set aside to deal with such lawsuits, Citigroup said.
The Enron investors have obtained more than $491 million in settlements with Lehman Brothers Inc., Bank of America Corp., Andersen Worldwide and Enron directors.
The investors have accused some banks of helping to arrange false investments in clandestine Enron partnerships, using offshore companies to disguise loans and aiding in the sale of phony Enron assets.
Enron executives are accused of deceiving investors with reports of less debt and increased cash flow from operations, artificially inflating the company's securities prices, the plaintiffs said.
"We will continue to work to achieve large recoveries from the remaining defendants, either through settlement or at trial," Holst said of the financial institutions still facing the lawsuit.
Citigroup agrees to settle fraud suit
Bank would pay $2 billion to Enron investors who say they were deceived
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