Wall Street giant Citigroup Inc. agreed Friday to pay $2 billion to settle a class-action lawsuit that accused the bank of defrauding the University of California and other investors through its work for fallen energy trader Enron Corp.
The deal, the biggest yet stemming from the 2001 bankruptcy that came to symbolize corporate corruption, could set the stage for other hefty recoveries in the Enron fiasco.
"This is a big, big step in the right direction," said William S. Lerach, a San Diego lawyer who represented UC. The settlement is "a very favorable portent for the future" as negotiations proceed with other defendants, Lerach said.
Separate claims are pending against JPMorgan Chase & Co., Credit Suisse First Boston and other financial institutions that allegedly helped Enron hide mounting debt through elaborate accounting tricks.
Other settlements could reach or exceed hundreds of millions of dollars, analysts said, although the Citigroup deal is expected to be among the largest because it was one of the Houston company's biggest lenders.
In a statement, Citigroup denied violating any law and said it agreed to settle "solely to eliminate the uncertainties, burden and expense of further protracted litigation."
Citigroup, the nation's largest financial institution, said it had ample legal reserves to cover the payout.
The Citigroup settlement dwarfed earlier deals made by Enron investors with Lehman Bros. Holdings Inc., Bank of America Corp. and others that totaled $492 million. Separately, Citigroup, Merrill Lynch & Co. and other banks have paid about $460 million to government regulators to settle Enron-related allegations.
The class-action settlements could eventually mean a multimillion-dollar recovery for UC, which lost $145 million on its Enron stock investments. But no distributions will be made until all outstanding claims are resolved, and university officials said it was too soon to determine how much they might get back.
UC, whose investment portfolio now totals $63 billion, said the losses had no effect on retiree benefits or on programs funded by its endowment.
Enron's downfall cost investors an estimated $40 billion to $45 billion as its financial house of cards collapsed, crushing its once-highflying stock and prompting rating agencies to cut its debt to "junk" status. Lawyers said it was unclear how much of the loss was attributable to fraud and recoverable under the law.
Under the settlement, investors who bought Enron stock or bonds from Sept. 9, 1997, to Dec. 2, 2001, when the company sought bankruptcy protection, can seek recovery of damages. UC lawyer Lerach estimated that 50,000 investors might file claims.
"Every Enron investor who lost money should ... keep their records up to date," he said.
Under their fee agreement, lawyers for the plaintiffs stand to get 8% to 10% of the amount recovered.
The UC-led suit accused financial institutions of helping Enron raise money even as it was secretly imploding. UC, which in February 2002 was named lead plaintiff in the consolidated class actions, claimed that the banks participated in a host of schemes that violated securities law.
Citigroup, for example, allegedly disguised loans to enable Enron to present a misleading picture of its balance sheet.
The suit said Citigroup lent Enron $2.4 billion in a series of deals identified as "swaps" and nicknamed Delta transactions because they were conducted through Citigroup's Cayman Island unit, called Delta. Citigroup paid Enron hundreds of millions of dollars each time, obligating the company to repay the cash over five years.
Although the transactions were in fact loans, they were never disclosed as such on Enron's books. The plaintiffs alleged that Enron was seeking to conceal the full amount of its debt so that regulators and investors would be unaware of its precarious financial position.
Based on its investment grade rating at the time, Enron could have gotten credit at much lower rates, but it paid Citigroup and JPMorgan 6.5% to 7% for the "disguised loans," making the deals hugely profitable for the banks, the plaintiffs said.
In late 2001, after revelations about Enron's accounting made headlines, Citigroup and JPMorgan unsuccessfully sought to arrange the company's sale to rival Dynegy Inc. so they could split a $90-million investment banking fee and stave off its likely bankruptcy. The suit said calls to credit rating firm Moody's Investors Service by Robert E. Rubin, a former Treasury secretary who was then Citigroup's vice chairman, and by JPMorgan Chairman William Harrison were attempts to "strong-arm" the firm to prevent it from downgrading Enron before a sale could be completed.
