Updated from 8:52 a.m. EDT
The huge class-action settlement announced Friday by
could be the first payment on a $6 billion legal bill for Enron's Wall Street handlers.
The No. 1 financial services firm will pay $2 billion to settle a class-action suit that accused it of defrauding investors through its investment banking work for the fallen energy giant Enron. It's the first major payout in the Enron shareholder class action, which has been pending for nearly four years in a Houston federal court.
Citi was permitted to deny wrongdoing as part of the agreement, one of several it has recently struck to settle allegations of past malfeasance. The company shelled out $208 million last month for allegedly fleecing mutual fund investors out of a back-office discount that it should have passed along. Citi also agreed to a $27 million fine in March over allegations it took payments from fund companies to push their wares.
The settlement announced Friday will be covered by Citi's existing litigation reserve. The company earned $5.44 billion in the first quarter. The stock rose 7 cents to $47.75 Friday.
Because of its legal entanglements, which also include allegations of wrongdoing in its Tokyo office, Citigroup is barred by the
from making any big acquisitions. Friday's settlement is part of a broader effort to restore that privilege.
"It is a key priority for Citigroup to resolve major cases like this one and to put a difficult chapter in our history behind us," said Citigroup CEO Charles Prince, in a statement. "By doing so, we will be better positioned to realize our goals."
Citigroup's acquiescence to Enron's burned owners comes one year after the first settlement between an Enron adviser and shareholders who lost money in its bankruptcy. That pact was far smaller, with
Bank of America
paying $69 million.
Other banks with potential big exposure in the Enron class action include
Credit Suisse First Boston
Canadian Imperial Bank of Commerce
Legal experts have predicted that the total dollar value of settlement in the Enron shareholder litigation could approach or exceed the $6 billion paid-out by banks in the WorldCom shareholder suit.
Citigroup was one of the first banks to settle in the WorldCom class action, agreeing to pay $2.65 billion to investors in the lawsuit arising out of the accounting fraud that landed the onetime telecom giant in bankruptcy. The Citigroup settlement in the that case became a blueprint for other banks to reach settlements.
In the WorldCom litigation, J.P. Morgan paid $2 billion to settle claims against it. J.P. Morgan's payout in WorldCom ranked right behind Citigroup.
In Enron, it's believed that J.P. Morgan's level of exposure is roughly equal to that of Citigroup, because both banks were the primary lenders to Enron.
In 2002, J.P. Morgan paid $135 million to the
Securities and Exchange Commission
to settle allegations it disguised loans to Enron as trading proceeds. In a similar settlement, Citigroup paid $101 million to the SEC.
Other banks that have paid big regulatory fines for their role in the Enron debacle include Merrill and CIBC.