Wednesday, August 17, 2005

TD Tallies U$130 milliion Enron Tab

Bank sets aside further U$300 million, to settle impending suit with investors

The Globe and Mail, Sinclair Stewart, 17 August 2005

Toronto-Dominion Bank took a major step toward prying itself loose from the wreckage of Enron Corp. yesterday, paying $130-million (U.S.) to resolve a legal dispute with the company and setting aside an additional $300-million in reserves to help fund a possible class-action settlement with investors of the infamous energy trader.

TD is absorbing a $238-million (Canadian) after-tax charge this quarter because of the increased legal bills, which will reduce its profit per share by about 34 cents. It now estimates it will cost half a billion dollars to settle the class-action suit and completely sever its ties to the company.

Ed Clark, TD's chief executive officer, insisted that TD was a relative bit player with Enron, a so-called Tier Two bank that never had a close relationship with the company.

Although TD denied any wrongdoing as part of its deal with Enron, Mr. Clark said he felt compelled to settle because of the expense and unpredictability of a prolonged legal battle.

"No one at TD did anything wrong," he told analysts on an early morning conference call. "But we have been swept up in a system which is causing even innocent participants to pay. This is a real economic cost to the bank, and for that, I am truly sorry."

TD is the third Canadian bank in the past few weeks to reach Enron-related settlements. Canadian Imperial Bank of Commerce, the domestic bank with the closest ties to Enron, paid $274-million (U.S.) to settle the "MegaClaims" bankruptcy litigation with Enron and a staggering $2.4-billion to escape from the class-action suit, widely known as the Newby case: the biggest settlement so far among Enron's major financial partners. Royal Bank of Canada paid a total of $49-million to settle with Enron, but is still a defendant in the class action along with TD.

Yesterday's $130-million settlement with Enron is divided into three separate components. TD is paying $50-million to resolve allegations it aided a pervasive accounting fraud at the company, and is forking over $20-million to settle a bankruptcy avoidance claim filed by Enron. It is also committing an additional $60-million so that Enron will allow several third parties to bring claims against the company. TD sold $320-million worth of claims to these third parties after Enron filed for bankruptcy.

TD began stockpiling cash for Enron-related litigation last year, when it took a $300-million (Canadian) provision. This will be augmented by the additional $300-million (U.S.) provision it is swallowing when it reports its quarterly financial results next week, providing TD with combined legal reserves of about $666-million (Canadian). After deducting $160-million for the MegaClaims lawsuit with Enron, TD is left with $506-million, the amount it expects to pay to resolve the Newby class action.

"You can't be absolutely certain that you've got it correct . . . so you take the best shot you can," Dan Marinangeli, TD's chief financial officer, said of the latest provisions. "It's a very difficult assessment. We could be wrong."

Investors clutched at whatever shred of certainty they could find, as TD's stock dropped only modestly to $55.47, a loss of 9 cents on the Toronto Stock Exchange on a day when the entire banking sector lost ground. Most analysts viewed the settlement as a positive development, as it removed a significant cloud overhanging the company.

"The market was concerned that the charge would ultimately be higher than the one they took," said Robert Wessel, an analyst with National Bank Financial Inc. in Toronto.

There does seem to be a rough correlation between the size of the Newby and the MegaClaims settlements. CIBC's class-action bill was just under 10 times the amount it paid to settle with Enron. J.P. Morgan Chase & Co., which agreed to a $350-million (U.S.) settlement with Enron yesterday, paid more than six times that amount when it resolved the Newby case for $2.2-billion.

Judging by this range, it might cost TD between $385-million (Canadian) and $585-million to settle the class action, although the bank cautioned against using this measure as a yardstick.

Both Mr. Clark and Mr. Marinangeli declined to comment on the current state of negotiations with lawyers for the University of California, the lead plaintiff in the Enron class action.

Settlement score card

North American banks have been negotiating legal settlements with Enron Corp. and other litigants over the energy trading giant's 2001 collapse. The total so far:

• MegaClaims litigation (Enron bankruptcy)

CIBC $250-million $24-million $274-million
TD $50-million $80-million $130-million
RBC $25-million $24-million $49-million
J.P. MORGAN $350-million $0 $350-million
Citigroup Inc. Not settled Not settled Not settled

• Newby (Enron class action)

CIBC $2.4-billion
TD Not settled
RBC Not settled
J.P. MORGAN $2.2-billion
Citigroup Inc. $2-billion

• Regulatory settlements (2003)

CIBC $80-million
TD Not applicable
RBC Not applicable
J.P. MORGAN $160-million
Citigroup Inc. $145-million
Merrill Lynch $80-million

Source: Regulatory filings, company reports. Note: All figures in U$