Three of Canada's largest banks are under mounting pressure to resolve a class-action lawsuit filed against them by former investors of Enron Corp. following similar settlements with the disgraced energy trader in the past week.
But the added urgency does appear to come with a silver lining. There's a growing optimism among the financial institutions that their legal bills could be much less than they had originally anticipated.
In recent days, Citigroup Inc. has agreed to pay $2-billion (U.S.) to Enron shareholders to settle allegations that it was a key player in one of the world's most high-profile accounting swindles.
J.P. Morgan Chase & Co. followed suit on Monday, forking over $2.2-billion to erase itself from the lawsuit.
The numbers, while large, are still well below the amounts many observers believed the banks would have to pay in order to disentangle themselves from the $25-billion class action.
“There was a great sense of relief when people saw Citigroup and J.P. Morgan,” said one Canadian bank official.
“It's far less than people thought it would be.”
Canadian Imperial Bank of Commerce, Toronto-Dominion Bank and Royal Bank of Canada are among eight major financial institutions that have yet to reach a settlement with the Enron investors.
The others are Merrill Lynch & Co. Inc., Credit Suisse First Boston, Barclays Bank PLC, Deutsche Bank AG, and Royal Bank of Scotland PLC.
The University of California, which is the lead plaintiff in the lawsuit, said the pace of the negotiations with other defendants should begin to accelerate now that a couple of major dominoes has already fallen and established a benchmark for costs.
“You would expect that things would start picking up,” said Trey Davis, a university spokesman.
John Coffee, a law professor at Columbia University in New York, said Citigroup received a “huge” discount by being one of the first to the bargaining table, and suggested the remaining banks will be feeling the pressure to reach their own deals so they are not left shouldering the burden alone in court.
“I think Enron is the clearest case I can think of where no defendant wants to go to trial,” he said.
Enron investors, who have so far recouped $4.7-billion from the company's former bankers, were hoping to garner approximately $10-billion in total settlements. But in light of the lower-than-expected Citigroup and J.P. Morgan deals, that number will shrink to between $7-billion and $8-billion, Mr. Coffee predicted. He said investors will likely receive about 15 per cent of their original investments, which totalled more than $40-billion, once their legal bills are paid.
CIBC, which appears to have had the closest ties to Enron of any Canadian bank, paid $80-million in late 2003 to settle U.S. regulatory allegations that it aided and abetted the company's accounting scandal. The bank has also booked $300-million (Canadian) in provisions to fund a possible resolution of the class-action suit, although it has warned it may have to increase its legal reserves.
TD booked $300-million worth of provisions last year for Enron and other matters, while RBC has yet to set aside money for the suit. Estimates vary as to how much these remaining banks will have to shell out to settle the dispute, ranging from $20-million (U.S.) for those with little involvement to as much as $1-billion for those with close links to Enron. Mr. Coffee says Merrill could pay $1-billion, and CSFB and even CIBC could find themselves on the hook for between $500-million and $750-million.
David Moorcroft, a spokesman for RBC, declined to comment on the impact of the U.S. settlements.
CIBC spokesman Rob McLeod said he could not elaborate on the Enron matter.
© The Globe and Mail
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