J. P. Morgan Chase announced last night that it had agreed to pay $2.2 billion to Enron investors who accused the bank of participating in the accounting scandal that led to Enron’s collapse.
The agreement came just days after Citigroup reached a $2 billion settlement. While the settlements with two of Enron’s biggest lenders closes one chapter, other investment banks – including Merrill Lynch and Credit Suisse First Boston – still face claims from investors.
Combined with earlier settlements, the pool available to compensate investors who lost billions as Enron tumbled into bankruptcy in 2001 has grown to $4.7 billion and could eventually surpass the $6.13 billion that Wall Street firms have agreed to pay WorldCom investors.
J. P. Morgan Chase clearly rushed to the negotiating table after the Citigroup settlement. That stands in sharp contrast to the WorldCom shareholder lawsuit in March, when J. P. Morgan Chase waited until the night before the trial to settle, agreeing to pay $2 billion to investors. Had it quickly followed Citigroup, which settled a year ago for $2.575 billion, J. P. Morgan Chase may have gotten away paying $1.4 billion in that case.
“The WorldCom settlement was a disaster for J. P. Morgan,” said Tim Ghriskey at money-management firm Solaris Asset Management in New York. “No one on the Street wants to see a repeat of that.”
J. P. Morgan Chase also said yesterday it would take a $2 billion charge before taxes, or $1.25 billion after taxes, in the second quarter, in part to cover costs associated with the settlement as well as other potential lawsuits. The bank’s legal reserves stand at about $3.6 billion. The firm said insurance would not cover any portion of the settlement.
“By settling this case and increasing reserves for our remaining legal issues, the firm can better focus its energies on building our great company and serving our clients and shareholders,” William B. Harrison Jr., the chief executive of J. P. Morgan Chase, said in a statement. The bank did not admit wrongdoing in agreeing to settle.
J. P. Morgan has struggled in the last year, underperforming most rivals as it continues to slash costs and merge operations after the $58 billion merger with Bank One last year.
Analysts were already forecasting the bank’s earnings in the second quarter would come in sharply lower, after James Dimon, the bank’s president, indicated at a investor conference on June 1 that trading revenue had tumbled. In the first quarter, trading revenue at the bank totaled $2.2 billion. Mr. Dimon said that trading revenue would come in below $842 million for the second quarter. J. P. Morgan will report its second-quarter earnings in a month.
The move to settle quickly also shows that J. P. Morgan Chase is trying to put its past behind it before Mr. Dimon ascends to the chief executive suite next year.
“The pressure has been on for J. P. Morgan to settle Enron,” says Richard X. Bove, an analyst at Punk Ziegel & Co. “Jamie Dimon is really trying to sweep the decks pretty thoroughly.”
Shares of J. P. Morgan Chase rose 10 cents yesterday, to $35.60. The settlement was announced after the stock market closed.
Two years ago, J. P. Morgan Chase agreed to pay $162.5 million to settle criminal and regulatory investigations into its dealings with Enron. The bank had been accused of financing and putting together a broad range of partnerships and transactions that contributed to Enron’s collapse and hid debt from investors.
Many of the transactions that came under fire were called prepays, which investigators claimed were little more than loans disguised as commodities transactions with a web of offshore corporations. Over a number of years, J. P. Morgan was accused of participating in seven prepay arrangements, including a deal with an offshore entity called Mahonia that ultimately lent $2.6 billion to Enron. (Citigroup lent it a total of $3.8 billion under similar arrangements, according to investigators.)
The shareholder lawsuit covers the estimated 50,000 investors – institutions, individuals and Enron employees – who bought Enron stock or bonds between September 1997 and December 2001. These investors will probably receive pennies for every dollar they lost. To take effect, the settlement needs to be approved by the board of regents of the University of California, the board of J. P. Morgan Chase and a federal court in Houston.
The rush to settle with shareholders – the trial for the lawsuit is not set to begin until October 2006 – indicates that the banks do not want to risk paying out a significantly bigger award in a jury trial and do not want to be among the holdouts in a settlement, which could ultimately cost them more.
“Our litigation strategy is to seek escalating settlements from defendants as we went down the road,” said William S. Lerach, a lawyer for the lead plaintiff in the shareholder lawsuit, the University of California. “This result was consistent with that.”
He declined to say whether other banks named in the suit are negotiating a settlement.