NEW YORK – JPMorgan Chase & Co. (JPM), the third-largest U.S. bank, agreed Tuesday to pay $2.2 billion to settle a class-action lawsuit over its role in helping Enron Corp. (search) engineer an accounting fraud that bilked investors out of billions of dollars.
The agreement, confirmed by the bank and plaintiffs, represents the largest settlement deal in lawsuits against banks, advisers and Enron executives connected to the energy trader's 2001 bankruptcy. It also comes just four days after Citigroup Inc. (search), the nation's largest financial services company, agreed to pay investors $2 billion to settle the lawsuit.
Some 50,000 Enron stock and bond holders led by the University of California's board of regents filed claims as part of the lawsuit. The suit alleges that a number of banks and brokerages helped Houston-based Enron continue operations and raise money even as the company was imploding.
The settlement marks the sixth made in the long-running Enron debacle, with some $491.5 million in deals being made with Lehman Brothers Holdings Inc. (search), Bank of America Corp., Andersen Worldwide, Enron's outside directors and Enron's former vice chairman, Ken Harrison. An attorney for the investors said the reason why JPMorgan is paying $200 million more than Citigroup is because the University of California has offered incentives for those that strike settlements sooner rather than later.
"These were two giant steps on the road, but we have a long way to go before the end of the road," said William Lerach, the lawyer representing the University of California, which lost $144.7 million when Enron declared bankruptcy. "There will be other large settlements coming soon."
Lerach, and other attorneys for the university are still litigating with Barclays PLC , Credit Suisse First Boston, Merrill Lynch & Co., Toronto Dominion Bank, Royal Bank of Canada, Deutsche Bank AG and the Royal Bank of Scotland.
Among the individuals named as defendants are Enron founder and ex-CEO Kenneth Lay, former Chief Executive Jeffrey Skilling, and former top accountant Richard Causey. All have pleaded not guilty to charges of fraud and conspiracy in a case scheduled to go to trial in January 2006.
All the settlements still must be approved by a federal judge in Texas, who will then determine a formula under which claimants would be paid.
The financial institutions allegedly helped Enron set up partnerships that the company used to improperly boost profits while moving billions of dollars of debt off its balance sheet. That allowed Enron to report higher cash flow from operations and lower debt, making its financial picture look better than it was and artificially inflating the company's stock and bond prices, according to the lawsuit.
JPMorgan Chase was accused of helping Enron engage in large prepaid transactions in which debt was hidden from the balance sheet to inflate the bottom line. In addition, the Wall Street giant was accused of issuing bullish research reports that stressed Enron's liquidity while the company was on the verge of imploding.
In the settlement, JPMorgan Chase denied breaking any laws. The bank said in a statement that the deal was to "solely to eliminate the uncertainties, burden and expense of further protracted litigation."
The settlement covers stock and bonds that were issued by Enron between Sept. 9, 1997 and Dec 2, 2001, according to the plaintiffs.
JPMorgan Chase said it expects to take a charge to earnings of approximately $2 billion on a pretax basis, or $1.25 billion after taxes, during the current quarter to cover the settlement. The charge will also be used to cover remaining legal matters the bank faces, but said it would still remain well capitalized.
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