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Lehman May Be Close to Settling Enron Lawsuit

The brokerage firm, which underwrote the energy trader's debt offerings, agrees to pay $222.5 million to investors, sources say.

September 24, 2004|From Bloomberg News

In a potential milestone in the Enron Corp. scandal, brokerage firm Lehman Bros. Holdings Inc. has agreed to pay $222.5 million to resolve a lawsuit filed by investors over its role as an underwriter for the onetime energy giant, people familiar with the settlement said.

New York-based Lehman, accused of misleading investors in Enron debt offerings stretching back to 1998, wouldn't admit wrongdoing under the settlement, the sources said.

Lehman's board and the University of California Board of Regents, the lead shareholder in the case, must approve the accord, which was negotiated by the brokerage's lawyers, the sources said.

The UC system lost $145 million on investments in Enron, which filed for bankruptcy protection in 2001 after revealing serious accounting problems.

"It's a pretty good-sized settlement that gives the investors a club for future negotiations," said James Cox, a securities law professor at Duke University. "It also provides the other big financial institutions who've been sued with a good idea of what the settlement threshold may be for this case."

The settlement would be the largest so far stemming from the 2002 investor suit, which named Citigroup Inc., J.P. Morgan Chase & Co. and other Enron investment banks among the defendants.

The settlement amount would be equal to about half of Lehman's net income in the quarter ended Aug. 31.

Lehman, the fifth-largest U.S. securities firm, issued debt offerings that contained misleading financial statements about Enron, investors claim. Under U.S. law, the brokerage's potential liability is limited to the securities it underwrote, Cox said.

Shareholders and bondholders, who are seeking $30 billion in damages, have accused other banks, such as Citigroup and J.P. Morgan, of helping Enron commit accounting fraud. The banks have denied wrongdoing in court papers.

The settlement process has not been completed, Lehman spokeswoman Hannah Burns said. "The company believes that such a settlement, if it occurs, will have no impact on the company's results from operations," she said.

Trey Davis, a spokesman for the California regents, declined to comment on negotiations.

"The university has been involved in settlement talks, and the regents are considering the matter at their board meeting this week," Davis said.

Enron shareholders allege in their suit that the former energy trader disguised billions of dollars in loans as energy transactions and hid debt in off-the-books partnerships.

Four former executives of Merrill Lynch & Co. and two former Enron employees are on trial in Houston, accused of conspiring to boost Enron's finances by $12 million through a sham sale of energy-producing Nigerian barges to Merrill Lynch. Prosecutors charge that Enron promised to return Merrill Lynch's investment plus 15%, making the transaction a loan.

Enron filed for bankruptcy protection after it admitted to misstating income and restated $586 million in revenue.

The company's shares lost $68 billion in value from their high in August 2000.

Enron has won U.S. Bankruptcy Court approval for a plan to sell all its properties and begin paying back creditors about 20 cents on the dollar. After that, the energy company would cease to exist. Enron, protected by U.S. bankruptcy laws, is not involved in any settlement talks.

Enron investors contend that financial institutions that underwrote the company's debt offerings failed to investigate properly whether disclosure statements that the company issued in conjunction with debt sales were accurate.

Investors challenged Lehman's involvement in the underwriting of at least three Enron debt issues starting in 1998.

The Lehman settlement would bring to $334.5 million the amount of money lawyers for the California regents have collected to reimburse Enron investors and finance litigation against the remaining defendants.

In July, Bank of America Corp., another underwriter of Enron debt offerings, agreed to pay $69 million to settle the investor suit.

The foreign affiliates of Arthur Andersen, Enron's former auditor, also settled their part of the suit for $40 million.

The Andersen settlement doesn't cover U.S.-based auditors accused of helping Enron executives hide more than $1 billion in losses. In June, a federal appeals court upheld Andersen's criminal conviction for obstructing the government's investigation of Enron's collapse.

Lehman shares fell $1.01 to $78.56 on the New York Stock Exchange. The stock is up 1.7% year to date.

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