NEW YORK – Citigroup Inc. (C) said Friday it will pay $2 billion to Enron Corp. shareholders who accused it of helping the energy trader in a massive accounting fraud, a move that further cleans up the bank's legal record and could pressure others to settle the case.
The class-action settlement is the biggest in the long-running Enron debacle and one of the largest in corporate history, though less than the $2.58 billion Citigroup agreed to pay WorldCom Inc. (search) investors in 2004.
Analysts said the agreement with Citigroup, the world's largest financial services company, could prompt settlements from other banks facing claims for their roles in Enron's December 2001 collapse.
"I think this will force the hand of other big banks like JPMorgan Chase. Usually once one settles, the others follow," said Tim Ghriskey, chief investment officer at Solaris Asset Management in New York.
Other financial institutions involved include JP Morgan Chase and Co. (JPM), Barclays Plc , Credit Suisse First Boston , Merrill Lynch (MER), Canadian Imperial Bank of Commerce , Toronto Dominion Bank , Royal Bank of Canada , Deutsche Bank AG and the Royal Bank of Scotland.
Citigroup did not admit wrongdoing in agreeing to settle.
It said the pre-tax payment was fully covered by its existing litigation reserves, which were boosted to $6.7 billion after the WorldCom settlement.
The bank does not plan to adjust its remaining reserves and considers them adequate for its exposure to additional pending Enron and investment research-related lawsuits.
Citigroup Chief Executive Charles Prince (search), who took over at the helm of Citigroup in 2003, said it was a key priority for the bank 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," Prince said in a statement.
Citigroup was told by the Federal Reserve (search) in March to delay any big takeover plans until the company tightened internal controls and addressed a slew of regulatory problems.
The settlement with Enron investors needs approval from the bank's board of directors, the board of regents of the University of California -- the lead plaintiff for investors in the case -- and a federal court in Houston.
Tim Woolston, a portfolio manager at Boston Advisors, said the Enron settlement "clears up history" for Citigroup.
"Prince is able to close a chapter on a less-than-savory period at the bank, and lets it go forward. He is clearly in fix-it mode. Obviously, there is more to do," he said.
Analysts said the settlement was not a market-moving event for Citigroup stock but was positive as it moved them on.
William Lerach, the lawyer representing the regents of the University of California, which lost millions when Enron collapsed, said he was pleased with the settlement.
"It's particularly significant in that several large, similarly situated banks remain as defendants in the case, so this is a step down the road, not the last step on the road."
Lerach, who estimates the recoverable damages for Enron investors are in the "tens of billions of dollars," declined comment on whether he is in settlement talks with any others.
"I certainly anticipate that we would see several other large settlements (in the Enron matter in the future)," he said, adding the Citigroup deal came after a series of talks.
Two other banks previously reached settlements with Enron investors. Lehman Brothers agreed to a $222.5 million settlement, while Bank of America agreed to pay $69 million.
In settling the WorldCom case last year, Citigroup helped spur other banks to make similar settlements, with WorldCom investors expected to recover about $6 billion, the largest U.S. securities settlement ever, from more than a dozen banks.
Enron filed for bankruptcy after its use of off-balance sheet deals to hide tens of billions of dollars in debt were revealed. Its meltdown sparked a flurry of shareholder lawsuits and some criminal charges against the company and management.
According to a 485-page amended complaint filed by Enron investors in 2002, Citigroup and other banks hid loans to the energy trader, set up false investments and facilitated phantom sales, receiving multi-million dollar fees in return.
Citigroup was accused of using its Delta subsidiary in the Cayman Islands to carry out $2.4 billion in financial "swaps" with Enron. According to the lawsuit, the swaps "perfectly replicated loans and were, in fact, loans," but were not disclosed on Enron's books.
The energy trader emerged from bankruptcy proceedings last year but the company, now a private entity, is in the process of liquidating remaining assets to pay off part of its debts.