Wednesday, January 23, 2008

Enron Investors Suing Banks Spurned by Top US Court

Bloomberg, Christopher Scinta, 23 January 2008

Enron Corp. creditors could see their original payout more than quadruple to as much as $31 billion after a trial against Citigroup Inc.

Enron Creditors Recovery Corp., the entity winding up the defunct energy trader's affairs, distributed $13.3 billion, or 36 cents on the dollar, since a bankruptcy plan was approved in 2004. That includes most of $1.73 billion in out-of-court settlements with 10 of the 11 banks creditors accused of aiding the fraud that wiped out the company. They argue that Citigroup, the only lender that hasn't settled, should pay the rest of the claims, about $18 billion. The amount is more than six times the $2.8 billion reserve for Enron, WorldCom Inc. and initial public offering-related litigation that Citigroup disclosed in a Nov. 5 regulatory filing.

Evidence at a trial set for April in New York may include an examiner's report citing bank e-mails as evidence Citigroup assisted in the fraud. Testimony against the bank by Andrew Fastow, Enron's imprisoned former chief financial officer, may also be introduced.

``There's a lot of evidence that financial irregularities occurred and they were aided and abetted and assisted by the banks,'' said John Coffee, a Columbia Law School securities law professor in New York.

The creditors' distribution from litigation and asset sales almost doubled to $11.5 billion in the year after April 2006. An $18 billion win this spring would bring the total to more than four times the 2006 figure.

The creditors say Citigroup should be forced to pay the remaining debt under a rule allowing recovery from one of a group of defendants for the total damages caused by all. The New York- based bank says the so-called deep-pocket rule shouldn't apply.

``Everyone is looking at Citi to see the kind of pocket it has left,'' said Nancy Rapoport, a law professor at the University of Nevada-Las Vegas and co-editor of a 2004 book on Enron. ``Citi has a lot to be worried about.''

The lawsuit is among legacies Vikram Pandit assumed in December on being named chief executive officer after Charles Prince III was forced to step down amid the global credit squeeze.

Citi reported the largest loss in its history, $9.83 billion, for the fourth quarter posted Jan. 15 after it wrote down the value of subprime mortgage investments by $18 billion.

The bank lost more than half its market value in the past year and fell yesterday to a 52-week low closing price of $24.40. It rose $1.96 to $26.36 today in New York Stock Exchange composite trading.

Citigroup considers the Enron lawsuit meritless and will fight it, spokesman Michael Hanretta said. No settlement talks are under way, said Harlan Loeb, an Enron creditors' spokesman.

There's an ``unprecedented'' amount of evidence against Citigroup, said John Ray III, chairman of Houston-based Enron Creditors Recovery. This includes the report by examiner Neal Batson, who quoted one internal bank e-mail as saying, ``Sounds like we made a lot of exceptions to our standard policies'' in setting up an Enron deal. ``Let's remember to collect this IOU when it really counts.''

The bank ``bent its own internal rules and participated in transactions about which it had substantial reservations, in order to accommodate Enron and maintain an important client relationship,'' Batson concluded about special-purpose entities, or SPEs, used to disguise loans as investments.

``There is evidence both that Citigroup knew Enron's SPE transactions would result in Enron's financial statements being materially misleading, and that Citigroup provided substantial assistance to Enron in completing those transactions,'' he wrote.

Creditors are ``anxious to get to trial,'' Ray said, calling a Citigroup effort to move the case from U.S. Bankruptcy Court a stalling tactic.

In December, the bank said the case should be heard before a U.S. District Court jury, not Bankruptcy Judge Arthur Gonzalez. Bankruptcy courts don't conduct jury trials and are below district courts in the federal judicial hierarchy.

Citigroup attorney Brad Karp of Paul, Weiss, Rifkind, Wharton & Garrison in New York declined to comment. Enron creditors' attorney David Stern of Klee Tuchin Bogdanoff & Stern in Los Angeles didn't return a call seeking comment.

Prince told Congress in 2002 the bank relied on Enron and its auditors for accounting advice in setting up transactions. Congressional investigators said Citigroup helped the energy trader hide debt by disguising loans as trades.

The bank asked Gonzalez Jan. 7 to throw out most of the suit, saying Enron Creditors Recovery doesn't have standing to pursue creditors' claims. Enron, not banks that lent it money, is to blame for its collapse, Citigroup said in court papers. Citigroup claims Enron still owes it as much as $5 billion.

Citigroup in 2005 agreed to a $2 billion settlement of another suit, in which Enron shareholders claimed banks helped executives including Kenneth Lay and Jeffrey Skilling commit fraud. The banks that refused to settle, including Merrill Lynch & Co., won when an appeals court ruled the shareholders couldn't sue as a group for the $40 billion they were seeking to recover. The U.S. Supreme Court yesterday refused to hear an appeal.

Ray, of Enron Creditors Recovery, declined to comment on what would be a fair settlement in his case, saying only that he will continue to fight for returns.

``Certainly it's the bold aggressiveness that got us from 17 cents to what today is 36 cents,'' Ray said.

Charles Tatelbaum, a bankruptcy attorney at Adorno & Yoss in Fort Lauderdale, Florida, said that while another $2 billion Citigroup settlement is possible, creditors are looking for more.

``They are gambling with house money,'' Tatelbaum said. ``The speculators that bought at 15 cents on the dollar are going to say go for it.''

The claims were bought from original creditors and may have been traded since. Bankruptcy claims are traded in private transactions whose terms are rarely disclosed.

Claims were traded by Lehman Commercial Paper Inc., SPCP Group LLC, Bear Stearns Investment Products Inc. and Ore Hill Hub Fund Ltd., according to court documents. All the buyers declined to comment or didn't return calls.

Even if Citigroup offers to bring the creditors' recovery to 50 cents on the dollar, that ``may not be enough to move the needle with this group,'' said Michael Sirota, a bankruptcy attorney with Cole Schotz Meisel Forman & Leonard in Hackensack, New Jersey.

Enron creditors settled with Royal Bank of Scotland Group Plc, Royal Bank of Canada, Canadian Imperial Bank of Commerce, Toronto-Dominion Bank, JPMorgan Chase & Co., Credit Suisse Group, Merrill Lynch & Co., Fleet Bank N.A., Barclays Plc and Deutsche Bank AG.

The case is Enron Creditors Recovery Corp. v. Citigroup Inc., 03-9266, and the bankruptcy case is In re: Enron Corp., 01- 16034, both U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Financial Post, Duncan Mavin, 22 January 2008

Royal Bank of Canada and Toronto-Dominion Bank seem to have won a $1-billion Enron-reprieve thanks to a U.S. Supreme Court decision legal experts say ends the prospect the banks will face successful legal claims related to their role in the collapse of the failed energy trader.

The Supreme Court decision Tuesday also raises questions about Canadian Imperial Bank of Commerce's move to settle its Enron legal bill early, for US$2.4-billion, in 2005.

"For the people who are trying to maintain these suits against Enron and its advisors there are some options but it looks like it's a pretty long haul now," said Michael Peerless, a class-action lawyer with Siskind, Cromarty, Ivey & Dowler LLP based in London, Ont.

"It's a very serious blow to the [Enron] plaintiffs," Mr. Peerless said.

The U.S. court kicked out an appeal from former Enron shareholders. The appeal was against an earlier decision that barred them from suing banks that lent money to Enron including Merrill Lynch & Co., Credit Suisse Group and Barclays PLC.

Lawyers say the decision also impacts plaintiffs against other banks that have set aside reserves to cover legal claims against them. TD and RBC have set aside about $1-billion for Enron related suits between them.

"We're pleased with the decision of the court and at this time we are reviewing the implications," said a spokesperson for TD.

For TD and RBC, the court's decision is "some good news in a sea of bad news" for the struggling financial services sector said Desjardins Research analyst Michael Goldberg.

"While I don't think this means TD and RBC can release the reserves they previously set up for Enron, I'd like to believe they are breathing a little easier," added Genuity Capital Markets analyst Mario Mendonca.

A senior banker at another Canadian financial institution was critical Tuesday of CIBC's decision to settle early, saying the bank's payout was "a big number to be wrong on."

CIBC was one of a small group of banks that settled their high-profile legal claims early.

Shareholders have recovered more than US$7-billion from Enron's bankers and others, including US$2.4-billion that CIBC agreed to pay in August, 2005.

The bank's settlement also stepped into the spotlight last year when one of the lead litigators acting for Enron plaintiffs got himself into legal hot water. William Lerach -- who negotiated the CIBC settlement on behalf of

Enron investors -- pleaded guilty to a federal conspiracy charge in October last year after admitting making secret payments to plaintiffs in class-action lawsuits.

Executives at CIBC have defended their decision to settle which, they say, brought certainty to the bank's Enron issues.

Some observers agree that CIBC made a logical decision to pay out based on the facts available at the time.

"Hindsight is 20/20," said Chris Caparelli, a litigation lawyer with Torys LLP in New York. "At the time there was something to be said for settling on a value that seemed to make sense."

There has been a shift in the law in the U.S. in the past couple of years that makes it more difficult for investors to sue in cases like this, Mr. Caparelli added.

Class action rules in the U.S. have been getting tougher of late, agreed Mr. Peerless.

Tuesday's Supreme Court decision came on the heels of a ruling last week in an unrelated Supreme Court case that put new limits on shareholder suits against a company's banks and business partners.

"The way the law has developed in the U.S., investment banks are [now] kind of shielded from problems, unless you can prove that you relied on their representations. A passive class member has to show that even before a case can go forward and that's a tricky problem."

CIBC's executives insist that the particular circumstances of the claims against CIBC were different than those against some other banks. As early as 2003, CIBC was facing possible criminal indictments from the U.S. Department of Justice.

The bank acknowledged wrongdoing by some of its employees and agreed to pay a relatively inexpensive US$80-million settlement to the Securities and Exchange Commission. That settlement also meant CIBC could not defend itself from shareholder suits, leading to the mammoth payout in 2005.
Bloomberg, Greg Stohr, 22 January 2008

The U.S. Supreme Court rejected an appeal by Enron Corp. investors, refusing to resurrect a $40 billion suit against Merrill Lynch & Co. and other banks that lent money to the now-defunct energy trader.

The justices made no comment in turning away the appeal today, acting a week after putting new limits on shareholder suits against a company's banks and business partners. The Enron investors challenged a lower court ruling that barred them from joining together in a class-action suit against Merrill Lynch, Credit Suisse Group, Barclays Plc and other banks.

The rebuff likely means an investor group led by the University of California regents won't add to the $7.3 billion they collected in settlements with other Enron banks. More broadly, the Supreme Court sent a new signal about its skepticism toward shareholder suits, refusing even to order a lower court to reconsider the Enron case in light of last week's ruling.

The investors sought to distinguish their suit from the one rejected by the high court last week, saying the Enron case came ``in the context of fraud perpetrated by financial professionals engaged in fraudulent dealings in our securities markets.''

Last week's 5-3 Supreme Court ruling, Stoneridge v. Scientific-Atlanta, involved a suit by Charter Communications Inc. investors against two of the cable company's suppliers. The majority said the alleged wrongdoing in that case ``took place in the marketplace for goods and services, not in the investment sphere.''

The court's rejection of the Enron investor appeal came without any published dissent. The rebuff ``further confirms that there is no financial services exception'' to the Stoneridge ruling, said Stephen Shapiro, who successfully represented the suppliers in last week's case.

The lead lawyer for the Enron investors, Patrick Coughlin of Coughlin Stoia Geller Rudman & Robbins, said the group will try to revive its case by shifting the focus to analyst reports issued by the banks, rather than their role in setting up the mechanisms used to deceive investors.

``I'm disappointed, but we'll go back to the district court now,'' Coughlin said.

That legal theory isn't likely to succeed, according to James Cox, a Duke University securities law professor who has been supportive of the investor claims. The investors will have to show that the analyst reports, and not some other factors, caused them to lose money. The Supreme Court in 2005 made it harder for investors to make that showing.

The investors will face ``significant if not insurmountable loss-causation issues,'' Cox said.

Cox said the rejection of the Enron appeal ``just shows you how out of step the Stoneridge holding is with investor protection.''

Justice Anthony Kennedy, who wrote the Stoneridge decision, didn't take part in the court's consideration of the Enron case. Although Kennedy gave no explanation, his son, Gregory Kennedy, works as an investment banker at Credit Suisse in New York.

Credit Suisse spokeswoman Victoria Harmon said the company is ``pleased with the decision of the court.''

Houston-based Enron was the world's largest energy-trading company, with a market value of as much as $68 billion, before it collapsed in December 2001. The bankruptcy, the second-largest in U.S. history, wiped out more than 5,000 jobs and at least $1 billion in retirement funds.

Enron's investors accused the company's banks of helping late Chairman Kenneth Lay and ex-Chief Executive Officer Jeffrey Skilling disguise debt as loans, finance sham energy trades and use off-the-books partnerships to hide losses and inflate revenue.

Investors settled claims against JPMorgan Chase & Co. for $2.2 billion, Citigroup Inc. for $2 billion and Canadian Imperial Bank of Commerce for $2.4 billion.

The group's lead lawyer had been Bill Lerach, who in October pleaded guilty to secretly paying clients of his former firm, Milberg Weiss, to participate in shareholder lawsuits. Coughlin, Lerach's former partner, has since taken over the lead role.

In barring the suit from going forward as a class action, the 5th U.S. Circuit Court of Appeals in New Orleans said it couldn't presume that shareholders, when making investment decisions, relied on the alleged wrongdoing by the banks.

Last week's Supreme Court decision used somewhat similar reasoning, though not in the class action context. The court said the Charter shareholders didn't show they relied on the alleged deception by suppliers Motorola Inc. and Scientific-Atlanta Inc.

Kennedy said federal securities-fraud law ``does not reach all commercial transactions that are fraudulent and affect the price of a security in some attenuated way.''

``Having read Stoneridge, I can't imagine that the court would have anything to criticize in the 5th Circuit case in terms of its understanding of the law,'' said Georgetown University securities-law professor Donald Langevoort.

New York-based Merrill and the other banks in the Enron case urged the Supreme Court simply to reject the appeal, rather than send the case back to the lower court. The Stoneridge case ``involved facts extraordinarily similar to the facts that are present here,'' the banks argued.

The case is Regents of the University of California v. Merrill Lynch, 06-1341.