Financial Post, Barbara Shecter, 17 August 2005
Toronto-Dominion Bank is shelling out US$130-million to settle claims with bankrupt Enron Corp., but there could be far worse news ahead as a massive lawsuit filed by shareholders of the disgraced energy trader works its way through the courts.
Yesterday, TD raised a reserve set aside to cover other liabilities from its relationship with Enron by US$300-million to US$400-million, which will lower earnings by 34 cents a share in the third-quarter.
TD denied liability or wrongdoing in yesterday's settlement, but Ed Clark, TD's chief executive, acknowledged the damage the bank's involvement with Enron has wrought.
"The Enron file has been upsetting to anyone involved in it," he told analysts and investors on a conference call. "It is clear to me ... that no one at TD did anything wrong, 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."
Ten major North American banks faced multi-million-dollar exposure to regulatory sanctions and lawsuits stemming from their relationships with the disgraced energy trader. Enron sunk into bankruptcy protection in 2001 after a massive accounting fraud, and now exists merely to pursue and fight legal claims.
Among other things, banks were accused of helping Enron inflate revenue by disguising loans.
Three Canadian banks -- Canadian Imperial Bank of Commerce, TD and Royal Bank of Canada -- had dealings with Enron. Each was named in the so-called MegaClaims lawsuit filed by Enron for the banks' alleged role in facilitating the scandal. The Canadian banks were also named in a shareholder lawsuit led by the University of California pension fund that was filed in 2003.
The potential impact of the Enron scandal on Canadian banks was ratcheted up this month when CIBC stunned investors with a US$2.4-billion settlement with Enron shareholders.
Analysts don't expect TD to take the pounding CIBC has endured from investors because TD was not among Enron's "tier one" banks and had a smaller role in the company's misfortunes.
Still, analysts at the Dominion Bond Rating Service were mindful of the surprising magnitude of the CIBC settlement in a report released yesterday.
"Although TD's capital levels are reasonable and some reserves are in place, DBRS believes the resolution of class-action lawsuits remains unpredictable," analysts Brenda Lum and Robert Long wrote.
CIBC, which has so far made the biggest settlement with Enron's shareholders, also settled the Enron Megaclaims lawsuit this month for US$250-million.
In late 2003, CIBC paid US$80-million in a settlement with regulators and avoided criminal prosecution by agreeing, in part, to co-operate with an ongoing investigation.
To date, Royal Bank of Canada has paid US$49-million to settle claims with Enron but has not set aside any money to deal with the shareholder suit.
Royal executives have maintained the bank played a small role in the Enron saga, and that it is difficult to estimate the size of an eventual payment to the satisfaction of accountants.
A source close to CIBC said the bank was restrained by similar accounting rules from increasing its $300-million legal reserve, which is now dwarfed by TD's. An increase would have alerted investors to the financial impact of a much larger settlement, and is bound to be an issue if a shareholder-led class action lawsuit gets off the ground in Canada.
Mr. Clark said it would be "reasonable to argue" that TD could settle any claims against it for a small amount, "given the facts" of the bank's involvement in Enron.
"On the other hand, given the uncertainties in this situation, it would seem prudent to increase our reserve," he said.
So far, about US$6.6-billion has been recovered from banks on behalf of Enron shareholders. Enron has extracted about US$670-million through its MegaClaims action.
JP Morgan Chase & Co., which paid US$2.2-billion to settle the class action lawsuit in June, agreed to a further US$350-million payment yesterday in the MegaClaims suit that will go to Enron's creditors.
Jamie Keating, an analyst at RBC Capital Markets, told clients yesterday he is comfortable with TD's remaining US$400-million litigation reserve because he expects the bank to pay out between US$280-million and US$480-million to settle the Enron shareholder lawsuit.
Most of the shareholder settlements so far work out to about 10 times the amount paid to resolve Enron's MegaClaims suit, which would peg TD's liability at closer to US$700-million.
In a report last week before TD increased its litigation reserve by US$300-million, Rob Wessel, an analyst at National Bank Financial, said TD's stronger earnings and larger taxable base in the U.S. could help it weather a settlement as high as $850-million.
Andre-Philippe Hardy, an analyst at Merrill Lynch & Co., said TD's stock price already reflects an unlikely "Enron impact" of $1.8-billion, as a result of the beating the shares took following CIBC's back-to-back legal settlements this month.
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Toronto-Dominion Bank is shelling out US$130-million to settle claims with bankrupt Enron Corp., but there could be far worse news ahead as a massive lawsuit filed by shareholders of the disgraced energy trader works its way through the courts.
Yesterday, TD raised a reserve set aside to cover other liabilities from its relationship with Enron by US$300-million to US$400-million, which will lower earnings by 34 cents a share in the third-quarter.
TD denied liability or wrongdoing in yesterday's settlement, but Ed Clark, TD's chief executive, acknowledged the damage the bank's involvement with Enron has wrought.
"The Enron file has been upsetting to anyone involved in it," he told analysts and investors on a conference call. "It is clear to me ... that no one at TD did anything wrong, 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."
Ten major North American banks faced multi-million-dollar exposure to regulatory sanctions and lawsuits stemming from their relationships with the disgraced energy trader. Enron sunk into bankruptcy protection in 2001 after a massive accounting fraud, and now exists merely to pursue and fight legal claims.
Among other things, banks were accused of helping Enron inflate revenue by disguising loans.
Three Canadian banks -- Canadian Imperial Bank of Commerce, TD and Royal Bank of Canada -- had dealings with Enron. Each was named in the so-called MegaClaims lawsuit filed by Enron for the banks' alleged role in facilitating the scandal. The Canadian banks were also named in a shareholder lawsuit led by the University of California pension fund that was filed in 2003.
The potential impact of the Enron scandal on Canadian banks was ratcheted up this month when CIBC stunned investors with a US$2.4-billion settlement with Enron shareholders.
Analysts don't expect TD to take the pounding CIBC has endured from investors because TD was not among Enron's "tier one" banks and had a smaller role in the company's misfortunes.
Still, analysts at the Dominion Bond Rating Service were mindful of the surprising magnitude of the CIBC settlement in a report released yesterday.
"Although TD's capital levels are reasonable and some reserves are in place, DBRS believes the resolution of class-action lawsuits remains unpredictable," analysts Brenda Lum and Robert Long wrote.
CIBC, which has so far made the biggest settlement with Enron's shareholders, also settled the Enron Megaclaims lawsuit this month for US$250-million.
In late 2003, CIBC paid US$80-million in a settlement with regulators and avoided criminal prosecution by agreeing, in part, to co-operate with an ongoing investigation.
To date, Royal Bank of Canada has paid US$49-million to settle claims with Enron but has not set aside any money to deal with the shareholder suit.
Royal executives have maintained the bank played a small role in the Enron saga, and that it is difficult to estimate the size of an eventual payment to the satisfaction of accountants.
A source close to CIBC said the bank was restrained by similar accounting rules from increasing its $300-million legal reserve, which is now dwarfed by TD's. An increase would have alerted investors to the financial impact of a much larger settlement, and is bound to be an issue if a shareholder-led class action lawsuit gets off the ground in Canada.
Mr. Clark said it would be "reasonable to argue" that TD could settle any claims against it for a small amount, "given the facts" of the bank's involvement in Enron.
"On the other hand, given the uncertainties in this situation, it would seem prudent to increase our reserve," he said.
So far, about US$6.6-billion has been recovered from banks on behalf of Enron shareholders. Enron has extracted about US$670-million through its MegaClaims action.
JP Morgan Chase & Co., which paid US$2.2-billion to settle the class action lawsuit in June, agreed to a further US$350-million payment yesterday in the MegaClaims suit that will go to Enron's creditors.
Jamie Keating, an analyst at RBC Capital Markets, told clients yesterday he is comfortable with TD's remaining US$400-million litigation reserve because he expects the bank to pay out between US$280-million and US$480-million to settle the Enron shareholder lawsuit.
Most of the shareholder settlements so far work out to about 10 times the amount paid to resolve Enron's MegaClaims suit, which would peg TD's liability at closer to US$700-million.
In a report last week before TD increased its litigation reserve by US$300-million, Rob Wessel, an analyst at National Bank Financial, said TD's stronger earnings and larger taxable base in the U.S. could help it weather a settlement as high as $850-million.
Andre-Philippe Hardy, an analyst at Merrill Lynch & Co., said TD's stock price already reflects an unlikely "Enron impact" of $1.8-billion, as a result of the beating the shares took following CIBC's back-to-back legal settlements this month.
