JPMorgan Chase & Co. and Toronto-Dominion Bank agreed yesterday to pay a total of $480 million in cash to settle claims that they helped Enron Corp.'s former management engage in fraud.
Enron said that JPMorgan, the third-largest U.S. bank, will pay $350 million and drop claims against the company valued at $660 million. Toronto-Dominion, Canada's second-largest bank, said it will pay Enron $70 million in cash and an additional $60 million for claims against Enron the bank sold to other investors.
The settlements bring JPMorgan's Enron costs in cash and forgone recovery of debt to $3.2 billion, including a $2.2 billion agreement two months ago in a separate investor lawsuit. Citigroup Inc., the biggest U.S. bank, Deutsche Bank AG, and Merrill Lynch & Co. still are negotiating claims that they also helped Enron hide debt and inflate revenue.
"It ratchets up the cost for the banks that have yet to settle," said Max Berger, a lawyer with Bernstein Litowitz Berger & Grossman in New York who negotiated bank settlements in the $6 billion WorldCom Inc. investor lawsuit. "The spotlight on them is that much more."
Enron, the world's largest energy trader until its 2001 bankruptcy, has reached agreement with five banks in the case, reducing the value of their claims by $3 billion. JPMorgan, Enron's largest creditor, had its claims cut to less than $1 billion from about $2.9 billion with yesterday's agreement, Enron Chairman John Ray.
"It does put pressure on the rest of the banks," Ray said. "We think the fact that we are getting $1 billion value from Chase speaks volumes and is a great result for the creditors."
Barclays PLC and Credit Suisse First Boston Inc. are also negotiating with Enron to settle bankruptcy-related claims. Enron previously settled with Canadian Imperial Bank of Commerce, Royal Bank of Scotland PLC and Royal Bank of Canada.
Enron is raising money to pay creditors owed $74 billion about 20 cents on the dollar. The company won court approval of a plan to exit bankruptcy last year and now exists solely to sell assets and resolve claims for creditors.
Recovery has totaled almost $11 billion, including $7.2 billion to former shareholders from Citigroup, JPMorgan, CIBC and other financial companies. Bondholders, lenders and other creditors will benefit from the $3 billion reduction in the value of bank claims for money lent to Enron, as well as $665 million in cash payments from JPMorgan and other banks.
Enron shares lost $68 billion in value from their peak in 2000 to the company's December 2001 bankruptcy filing. A New York bankruptcy judge ended the company's bankruptcy protection in November 2004, and still oversees claims issues.
"With today's agreement we have put behind us another significant piece of our Enron exposure," JPMorgan Chairman William Harrison said in a statement.
The bank set aside $3.7 billion in the second quarter for legal costs related to claims that it helped some companies defraud investors, bringing the bank's total pretax legal reserves to $4.7 billion. Harrison said on a July 21 conference call with investors that a "significant amount" of the second-quarter reserves were for claims related to Enron's collapse.
Shares of the bank, which had net income of $994 million in the second quarter, fell 7 cents to $34.58 at 4:16 p.m. on the New York Stock Exchange.
In addition to its cash payment, Toronto-Dominion will set aside $300 million for possible legal settlements in the class action lawsuit filed by Enron shareholders.
"It would be reasonable to argue, given the facts of our involvement in Enron, that we should be able to resolve any claim for quite a small amount," said Ed Clark, Toronto-Dominion's chief executive officer. "On the other hand, given the uncertainties in this situation, it would seem prudent to increase our reserve."
"This has had an economic cost to the bank, and for that I am truly sorry," Clark said on a conference call. The bank denied any wrongdoing in the case.
The settlements are subject to approval by a federal judge.