Jpmorgan Chase agreed to pay investors $2.2 billion to resolve claims it helped Enron inflate revenue by hiding debt, in the largest fraud...
JPMorgan Chase agreed to pay investors $2.2 billion to resolve claims it helped Enron inflate revenue by hiding debt, in the largest fraud settlement by the company’s investment bankers, the plaintiffs’ lead attorney said.
JPMorgan, the third-largest U.S. bank, settled less than a week after Citigroup said it would pay $2 billion to resolve litigation sparked by the energy trader’s 2001 collapse, attorney William Lerach said in an e-mailed release. Both banks were accused of helping Enron mislead investors through off-the-books partnerships. Shareholders also alleged that JPMorgan misrepresented loans as energy trades.
“Everybody wants this stuff to just go away,” said Richard Bove, an analyst at Punk Ziegel & in Pinellas Park, Fla., who has a “market perform” rating on JPMorgan stock. “This is putting a cap on it, and investors will breathe a sigh of relief that this is over.”
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The agreement leaves Merrill Lynch, Credit Suisse First Boston (CSFB) and six other former Enron lenders facing claims in shareholders’ $30 billion class-action lawsuit. Investors are seeking compensation after a plunge in shares of Enron, once the seventh-biggest U.S. corporation, erased about $67 billion from its market value in less than 16 months.
JPMorgan will take a charge of $1.25 billion to cover the cost of the settlement and boost its litigation reserves, the company said. The accord includes no admission of wrongdoing, JPMorgan said. It is subject to approval by U.S. District Judge Melinda Harmon in Houston.
The settlement is close to the company’s first-quarter net income of $2.26 billion. JPMorgan Chief Executive Officer William Harrison said in July that a “significant amount” of the $2.3 billion in legal reserves added in last year’s second quarter were earmarked for Enron-related litigation. The increase boosted JPMorgan’s total reserves to $4.7 billion.
“We are working hard to put the uncertainty of litigation risk behind us,” Harrison said.
JPMorgan in March settled allegations by WorldCom shareholders that it should have known the long-distance company was engaged in an $11 billion accounting fraud. JPMorgan agreed to pay $2 billion in the case, $630 million more than plaintiffs had sought 10 months earlier.
The WorldCom accord trimmed JPMorgan’s first-quarter net income by $558 million. JPMorgan shares have fallen 4 percent in the past year, valuing the company at $125 billion.
Banks targeted by the class-action lawsuit, in addition to Merrill and CSFB, are Canadian Imperial Bank of Commerce, Barclays, Deutsche Bank, Toronto-Dominion Bank, Royal Bank of Canada and Royal Bank of Scotland.
The JPMorgan settlement brings to $4.7 billion the total amount recovered by Enron shareholders. The agreements include Lehman Brothers’ for $222.5 million, Enron directors’ for $168 million and Bank of America’s for $69 million.
“We continue to pursue other defendants, including other banks that have been charged with knowingly participating in the scheme to defraud Enron investors,” Lerach said. “Further large recoveries are anticipated.”
JPMorgan and Citigroup, the world’s biggest bank, agreed in July 2003 to pay a combined $255 million to settle state and federal investigations into their role in Enron’s collapse. JPMorgan paid $135 million and Citibank handed over $120 million, Securities and Exchange Commission officials said.
The banks were accused of helping Enron executives inflate revenue by hiding debt in off-the-book partnerships. JPMorgan bankers also allegedly mischaracterized loans as energy trades.
Enron filed the second-largest bankruptcy in U.S. history in December 2001 after disclosing hidden debt. The company emerged from bankruptcy in November with a plan to repay creditors owed $74 billion about 20 cents on the dollar by selling its assets. The company will cease to exist once the assets are sold.
A U.S. Senate committee found in December 2002 that JPMorgan bankers helped Enron design “sham” transactions to evade taxes. Senators questioned JPMorgan officials about a loan that provided $60 million in tax benefits.
The deal cloaked a $375 million loan inside a $1.4 billion fake loan, the senators said. Enron repaid $1 billion instantly, allowing the company to write off higher interest payments for tax purposes, the committee said in its 35-page report.
In December 2002, Robert Traband, a JPMorgan vice president, told U.S. senators that, “We regret that we ever dealt with Enron” because of losses on energy trades and the harm to the bank’s reputation.
“JPMorgan Chase, like many other parties, dealt with Enron in the belief that it was a respected and creditworthy company,” Traband said at the time.
The next month, JPMorgan recouped as much as $654 million of losses on trades with Enron in a settlement with insurers. The bank had sued 11 insurers, including Travelers and CNA Financial’s Continental Casualty, after they refused to pay $1.1 billion of surety bonds that backed energy trades JPMorgan made with Enron. The insurers claimed they were tricked into backing the loans disguised as energy trades.