Tuesday, March 20, 2007

Enron Investor Class Action Against Banks Thrown Out

Dow Jones Newswires, 20 March 2007

If the class-action lawsuit filed by Enron was always a non-issue for Toronto-Dominion Bank and Royal Bank of Canada, it's even more so now that it was blocked by a U.S. federal appeals panel, says BMO Capital Markets. "This reaffirms our belief," BMO says, adding that if further appeals are blocked, both banks could bring Enron provisions back into income. That would represent about 45 Canadian cents a share for TD and 25 Canadian cents a share for RY.
The Globe and Mail, Barrie McKenna & Andrew Willis, 20 March 2007

A U.S. judge's decision to throw out a $40-billion (U.S.) class-action lawsuit against two key Enron Corp. bankers could help get Royal Bank of Canada and Toronto-Dominion Bank off the hook as well.

A U.S. appeals court ruled yesterday in New Orleans that a lower court made a "legal error" when it granted class-action status to thousands of Enron shareholders in their case against Merrill Lynch & Co. Inc. and Credit Suisse First Boston (USA) Inc.

As a result, the U.S. Court of Appeals for the 5th Circuit blocked the lawsuit.

The banks had argued that the lower court wrongly allowed investors to allege Merrill Lynch and Credit Suisse were primary participants in the fraud that eventually led to Enron's demise.

In court papers, Merrill Lynch had argued there was no evidence to prove it was a "substantial or significant factor" in the losses that triggered Enron's collapse.

RBC and TD are among a clutch of other banks facing similar lawsuits from former investors in the energy trading company, which collapsed amid an accounting scandal in 2001.

The vindication of Merrill Lynch and Credit Suisse, along with a ruling last year favouring Barclays PLC, is expected to make it tougher for shareholders to successfully pursue other Enron cases.

"We're pleased by the decision," RBC spokeswoman Beja Rodeck said. The bank declined to comment further.

"On first review, we are pleased with the decision," said TD spokeswoman Dianne Salt, adding that the bank's lawyers are continuing to review the decision.

Lawyers for investors insisted they would seek to get the U.S. Supreme Court to review yesterday's decision. "We are very disappointed," said William Lerach, a lawyer for the investor plaintiffs, which include several large pension funds.

"We respect the court, but we think the decision is clearly wrong."

In the decade running up to Enron's failure, most global banks did business with the Houston-based energy company. For example, TD worked with other banks on several "prepay transactions" that Enron allegedly used to disguise billions of dollars in loans as commodity trades.

Enron shareholders have already recouped about $7-billion from five of the company's lenders, including Canadian Imperial Bank of Commerce. CIBC, which at the time was being investigated by the U.S. Justice Department, agreed in 2005 to pay $2.4-billion to shareholders.

In a class-action lawsuit, investors consolidate their complaints, allowing them more clout than if claims were pursued on an individual basis. RBC set aside $500-million last year to cover potential legal costs associated with Enron, while TD struck a $300-million reserve.

Should the Enron suit be dismissed, these provisions would be reduced, providing a one-time profit boost.

Booking Enron reserves as profits would make a material difference to both bank's results, as the provisions amount to a third of their quarterly income. In the first three months of this year, RBC earned a record $1.49-billion while TD had a profit of $1.01-billion, also a record.

Analysts have speculated that both banks could get back some of the Enron reserves and investors would be unlikely to increase their valuation of the two banks based on one-time gains, so market reaction to the recoveries would likely be muted. However, the banks could use the Enron win in shareholder-friendly ways, such as devoting the money to share buybacks.
Bloomberg, Jef Feeley, 19 March 2007

Enron Corp. investors can't sue the company's former lenders as a group, a U.S. appeals court ruled, forcing individuals to pursue the banks independently for $40 billion in losses suffered in its 2001 collapse.

Today's decision by the New Orleans-based court means Enron investors can't combine efforts to recoup losses from banks such as Merrill Lynch & Co., Credit Suisse Group and Barclays Plc. The ruling doesn't affect more than $7.3 billion in earlier settlements reached with other Enron banks, lawyers said.

``It's an incredible win for Merrill Lynch and all the investment banks,'' said Robert Zito, a partner with New York- based law firm Schiff Hardin who defends companies in civil suits. ``It demolishes any real exposure that might have been there and makes the other investment banks that settled for a lot of money look like they acted precipitously.''

Last week, Merrill, Credit Suisse and Barclays asked the court to delay an April 16 trial in Houston federal court on claims they helped the bankrupt energy trader's executives manipulate earnings. The lawyers urged the court to postpone the proceeding until it decided whether the lawsuit could proceed as a class-action, or group lawsuit on behalf of all shareholders and bondholders injured by Enron's implosion.

The ruling, said Zito, means ``most of the investors have no way to prosecute their claims.''

``They don't have the money to do it. They are done,'' he added. ``It's game over.''

Enron investor lawyer William Lerach said he will appeal the decision to the U.S. Supreme Court.

``This is a terrible day for the victims of the Enron fraud,'' Lerach, a partner at San Diego-based Lerach Coughlin Stoia & Robbins, said.

Mark Herr, a spokesman for New York-based Merrill, and Victoria Harmon, a spokeswoman for Zurich-based Credit Suisse, said the banks are ``pleased'' with the ruling.

``This is an excellent day for us,'' said David Braff, a lawyer for London-based Barclays.

The decision also applies to other former Enron lenders who weren't scheduled for trial next month. Those banks include Toronto-based Toronto-Dominion Bank and Toronto-based Royal Bank of Canada, Canada's two largest lenders.

Royal Bank of Canada spokesperson Beja Rodeck declined to immediately comment on the ruling. Neither Simon Townsend nor Neil Parmenter, both spokesmen for Toronto-Dominion, were immediately available for comment on the decision.

Investors already have recovered more than $7.3 billion in settlements with other former Enron lenders. Among them was a $2.2 billion accord with JPMorgan Chase & Co., a $2 billion settlement with Citigroup Inc., the largest U.S. financial services company, and a $2.4 billion settlement with Canadian Imperial Bank Commerce.

Today's ruling doesn't affect those settlements, Lerach said. Citigroup spokeswoman Shannon Bell, JPMorgan spokesman Adam Castellani and CIBC spokesman Stephen Forbes declined to comment.

``Those settlements are full and final resolutions of claims against those defendants,'' Lerach, the shareholders' lead lawyer, said earlier this year. ``That money will go to the investors.''

The U.S. Securities and Exchange Commission already has won tens of millions of dollars in Enron-related settlements with Merrill, JPMorgan and Citigroup.

The banks claimed in court papers that shareholders shouldn't be able to press their suit as a group because they can't prove that the firms directly participated in the accounting fraud at Enron. U.S. District Judge Melinda Harmon in Houston, who was to preside over the trial, denied the banks' request for a delay in February.

In its 42-page opinion, the appeals court said Enron's lenders couldn't be considered to have played primary roles in the decision by Enron's management to use off-the-book partnerships and other devices to manipulate earnings reports.

The court found that the trial judge wrongly concluded that the banks engaged in ``deceptive acts'' that defrauded the market and entitled investors to sue as a group.

For investors to proceed as a group, they had to claim that the banks misrepresented something that caused harm. Alternatively, they can claim the banks failed to tell them about the fraud and caused their stock losses.

On the latter test, investors must also show the banks owed them a duty to disclose the fraud. Investors failed to meet either test, the appeals court ruled.

The remaining options for the plaintiffs are ``extremely unattractive,'' said Lawrence Hamermesh, a professor at the Delaware campus of Widener University Law School. One option is to ask for a delay and then appeal to the U.S. Supreme Court. Hamermesh sees that path as ``dicey, because it's not clear whether the Supreme Court would find it interesting or worthwhile to revisit the issue.''

Hamermesh said there is nothing to prevent the plaintiffs from suing the banks as individuals, but that option is ``highly implausible'' and ``economically, not viable.''

``Even for substantial stockholders, any given stockholder's recovery is not close enough to fund the prosecution, which makes for an almost insuperable obstacle,'' he said.

Former Enron employee Johnnie Nelson, 47, said he was ``disappointed, but not surprised'' by the court's decision to throw out the class-action case.

``Most of us out here in the field didn't have any hope of receiving that money anyway,'' Nelson, a former Enron pipeline worker, said in an interview. ``The money that's in the settlement so far is okay, because $7 billion is a lot of money. But I don't think they've taken the lawyers fees out of that yet.''

Nelson was one a series of former Enron workers who testified against Lay and Skilling in their criminal trial.
Associated Press, Michael Kunzelman, 19 March 2007

A federal appeals court ruled Monday that Enron Corp. shareholders cannot proceed with a class-action lawsuit against investment banks for their alleged role in the accounting fraud that led to Enron's collapse.

The 5th U.S. Circuit Court of Appeals opinion reversed a ruling by U.S. District Judge Melinda Harmon in Houston, who had said shareholders could sue as a class.

"As we have recognized, class certification may be the backbreaking decision that places 'insurmountable pressure' on a defendant to settle, even when the defendant has a good chance of succeeding on the merits," the 5th Circuit opinion said.

The three-judge panel said it's appropriate for the court to intervene "before settlement may be coerced by an erroneous class certification decision."

Shareholders' attorneys argue that Merrill Lynch & Co., Credit Suisse Group and other investment banks that did business with Enron should be held liable for billions of dollars in damages.

William Lerach, an attorney for the policyholders, expressed disappointment in the 5th Circuit's ruling.

"We think it is unfair and wrong under the law," he said. "The basic holding of the court is that even if the banks participated knowingly in a scheme to defraud investors in Enron's collapse, you cannot have a class action against the banks."

Enron, once the nation's seventh-largest company, entered bankruptcy proceedings in December 2001 when accounting tricks could no longer hide billions of dollars in debt. The collapse wiped out thousands of jobs, more than $60 billion in market value and more than $2 billion in pension plans.

Lerach said he and other shareholders' attorneys are likely to appeal Monday's ruling to the U.S. Supreme Court "as quickly as possible." A trial for the shareholders' $40 billion lawsuit was set to start next month, but Lerach said the 5th Circuit's ruling will force it to be postponed.

"The judge couldn't go ahead with a trial under these circumstances," Lerach said.

Merrill Lynch spokesman Mark Herr said the company is pleased with the 5th Circuit's ruling, but he declined to make further comment.

Attorneys general from 30 states have sided with Enron shareholders in their bid for a class action.

The Securities and Exchange Commission already has won tens of millions of dollars in settlements with Merrill, JPMorgan Chase & Co. and Citigroup Inc.

In 2003, Merrill agreed to pay $80 million to settle the SEC's civil charges that it participated in Enron's phony sales of floating power plants, designed to inflate the company's earnings. Four former Merrill executives were convicted of fraud and conspiracy charges in 2004 for their roles in the deal.

Andrew Fastow, Enron's now-imprisoned former finance chief, testified in the shareholder litigation this fall. He acknowledged that some of the transactions Enron conducted with its investment banks created the false appearance of profits and cash flow.

Along with Merrill and Credit Suisse, the other defendants in the shareholders' suit are Royal Bank of Canada, Royal Bank of Scotland, and Toronto-Dominion Bank.

Barclays Bank PLC also is named as a defendant in the shareholders' suit. "Barclays is very pleased with the 5th Circuit's ruling and grateful that the 5th Circuit agreed with its views," company attorney David Braff said.