Investor and estate litigation against Enron’s banks

analysisThe Enron securities class action, Newby v. Enron Corp. (Civil Action No. H-01-3624, part of MDL 1446 before Judge Melinda Harmon of the U.S. District Court for the Southern District of Texas), was filed on October 22, 2001 against Enron and some of its officers and directors. After the appointment of the Regents of the University of California as lead plaintiff, a consolidated complaint filed on April 8, 2002 added claims against Credit Suisse First Boston, Merrill Lynch and several other financial institutions; an amended consolidated complaint of May 14, 2003 added further defendants. An amended confidentiality order entered in Newby on February 18, 2005, on the motion of defendant Moody’s Investors Service, referred collectively to JPMorgan Chase & Co., JPMorgan Chase Bank and J.P. Morgan Securities; Citigroup Inc., Citibank and two Citigroup Global Markets entities; Barclays PLC, Barclays Bank PLC and Barclays Capital; and the Canadian Imperial Bank of Commerce and two CIBC World Markets entities as the “Investment Bank Defendants”. ^{1 2 3}

analysisIn September 2005 lead plaintiffs’ counsel announced that the lead plaintiff, the Regents of the University of California, had obtained more than $7 billion for Enron investors, including a $2.4 billion agreement with the Canadian Imperial Bank of Commerce announced on August 2, 2005, $2.2 billion from JPMorgan Chase, $2 billion from Citigroup, $222.5 million from Lehman Brothers, $69 million from Bank of America, $168 million from Enron’s outside directors and $32 million from Andersen Worldwide SC. The amounts are as stated by a party to the litigation, and the CIBC agreement was then still subject to court approval. JPMorgan Chase said in June 2005 that it would pay $2.2 billion to settle investor allegations that it helped Enron prop up its share price through sham loans, and the settling former outside directors admitted no wrongdoing, according to press reports summarized by a class-action case database. The same database, citing a May 2006 press report, recorded Judge Harmon’s final approval of the CIBC, JPMorgan Chase and Citigroup settlements, totaling $6.6 billion. ^{4 2}

analysisAccording to a class-action case database compiled from press reports, a group of former Enron outside directors, whom its summary does not name, settled in January 2005 without admitting wrongdoing, with insurance to cover most of the $168 million cost and $13 million to be paid by the former directors personally; the settlement agreement and any court approval are not in the retained record. The same database gives the Andersen Worldwide settlement as $40 million rather than the $32 million announced by lead plaintiffs’ counsel, a difference the retained record does not explain, and according to a September 2006 press report the university also agreed to a $72.5 million settlement from Arthur Andersen, terms as announced by the lead plaintiff. ^{2 4}

analysisThe announcement of September 2005 listed Merrill Lynch, Credit Suisse First Boston, Barclays Bank, Deutsche Bank, Toronto-Dominion Bank, Royal Bank of Canada and the Royal Bank of Scotland as remaining defendants, alleged to have been key players in fraudulent transactions that cost Enron investors an estimated $40–45 billion in market losses, by setting up false investments in secretly controlled Enron partnerships, disguising loans through offshore companies and facilitating sham sales of Enron assets; Goldman Sachs, as an underwriter, Arthur Andersen and certain law firms also remained defendants. These were the lead plaintiff’s allegations as summarized by its counsel, not findings of a court. The remaining banks contested the claims: a federal judge dismissed the claims against Barclays in July 2006 as at most aiding and abetting, Merrill Lynch and Toronto-Dominion sought dismissal on similar grounds, and a Merrill Lynch motion to dismiss was still pending in August 2008, according to press reports summarized by a class-action case database. The same database records that in March 2007 the Fifth Circuit reversed class certification as to Merrill Lynch, Credit Suisse First Boston and Barclays; Goldman Sachs later settled for $11.5 million, according to lead plaintiffs’ counsel; and the database records an opinion and order of March 2009 granting the defendants’ motions for summary judgment, without naming the defendants. ^{4 2 5}

analysisAccording to press accounts summarized by a securities class-action case database, Judge Harmon dismissed the shareholder claims against Barclays in July 2006, holding that its alleged conduct amounted at most to aiding and abetting, and reinstated Barclays in December 2006 to allow the plaintiffs to replead. Barclays’ counsel said in December 2006 that the reinstatement was a ruling on the plaintiffs’ procedural objection that had strongly confirmed the legal analysis and reasoning behind the July dismissal. In March 2007 a Fifth Circuit panel overturned her August 2006 class certification as to Merrill Lynch, Credit Suisse First Boston and Barclays, stating that, taking the allegations as true, the banks “only aided and abetted” Enron’s fraud and “owed no duty to Enron’s shareholders”. The underlying court documents are not in the retained record. ²

analysisAccording to a press report summarized by the same database, in September 2008 Judge Harmon gave final approval to the plan for distributing the more than $7.2 billion in Newby settlements and awarded lead counsel $668 million plus interest; the database dates the order of final judgment to on or around September 8, 2008. Lead plaintiffs’ counsel described a $7.3 billion settlement fund to which, besides the banks, auditors, a law firm, a partnership and Enron’s directors contributed, after review of 70 million pages of documents and more than 350 fact depositions. The court’s orders are not in the retained record, and the reported totals differ ($7.2 billion and $7.3 billion). ^{2 5}

analysisOn December 2, 2003 the Regents of the University of California filed a separate action (H-03-5528) against the Royal Bank of Scotland Group plc, National Westminster Bank Plc and related Greenwich NatWest and Campsie entities, which had not been named in the Newby complaints, and against Toronto Dominion Bank. The only claim against Toronto Dominion arose under the Securities Exchange Act of 1934 from its participation in six prepaid commodity swaps with Enron, which it identified as the December 1998 Truman, Jethro, Alberta and London prepays. RBS contended that the separate suit was a stratagem to evade time bars and moved to dismiss on time-bar grounds and for absence of a primary violation; Toronto Dominion urged that its pending motion to dismiss, which invoked the statute of repose, was meritorious and described the later-sued banks as minor participants. ¹

analysisOn January 9, 2004 the Regents filed a further action (H-04-0087) against the Royal Bank of Canada and affiliates. The court denied RBC’s motion to dismiss; RBC argued that its September 2000 “Alberta” transaction differed from the other prepays at issue, that no viable primary-violator claim lay against it, that most claims were time-barred under the pre-Sarbanes-Oxley limitations period and that Fastow’s deposition reflected its minor role. A separate action filed on February 6, 2004 (H-04-0088) asserted against Goldman Sachs only strict liability under section 11 of the Securities Act over the registration statement for an August 1999 underwriting of $255 million of Enron notes exchangeable into Enron Oil & Gas stock, without any fraud allegation. Goldman Sachs stressed that the complaint disclaimed any fraud allegation and said Fastow’s declaration reflected its non-involvement in the scheme. Lead plaintiffs’ counsel later reported an $11.5 million settlement between the University of California and Goldman Sachs. ^{1 2}

analysisBy early 2007 the remaining financial institution defendants in Newby were Credit Suisse First Boston entities (including Pershing LLC, formerly Donaldson, Lufkin & Jenrette Securities) and Merrill Lynch entities, joined by Barclays, alleged to have participated in manipulative devices to inflate Enron’s profits and hide its debt. On February 7, 2007 Judge Harmon, who was reconsidering on summary judgment whether a primary violation of section 10(b) had been stated against Barclays, denied motions to consolidate Newby, then set for trial on April 9, 2007, with the later suits against RBS and Toronto Dominion, Royal Bank of Canada and Goldman Sachs. ¹

analysisThe bankruptcy examiner’s final report of November 4, 2003 recalled that his third interim report had concluded that a fact-finder could find that certain financial institutions involved in Enron’s special purpose entity (SPE) transactions aided and abetted senior Enron officers in breaching their fiduciary duties and engaged in inequitable conduct, such that a court could equitably subordinate their claims, totaling more than $5 billion, to those of other creditors; he added that the amount could be significantly greater. That is an examiner’s conclusion, not a court judgment. On September 24, 2003 Enron and Enron North America had filed in the bankruptcy court a complaint against certain financial institutions and their affiliates, Enron Corp. v. Citigroup Inc., No. 03-09266 (AJG), seeking avoidance and return of preferential payments and fraudulent transfers, equitable subordination of the institutions’ claims, recovery of more than $3 billion as avoidable transfers or obligations, and unstated damages for alleged aiding and abetting, as recorded in the examiner’s final report. By October 2006 settlements in this MegaClaims litigation had provided more than $800 million in cash and the subordination, or cash in lieu of subordination, of more than $3 billion in claims, and Citigroup, Deutsche Bank and Barclays remained defendants, according to a press report. ^{1 2}

analysisIn his third interim report the examiner also found that, where recipients of transfers avoidable as preferences had filed claims against the debtors, which exceeded $4.766 billion, the estates might use section 502(d) of the Bankruptcy Code to disallow those claims, limiting or precluding recovery by investors in many of Enron’s SPEs. He identified a further $6.1 million of preference claims against professionals serving the estates as special counsel and approximately $63.7 million of potentially avoidable transfers to other professionals. These are the examiner’s conclusions that a fact-finder could so find, not court judgments. ³

analysisAccording to an August 2005 press report summarized by a class-action case database, J.P. Morgan Chase agreed to pay Enron $350 million and effectively waived some of its claims against Enron, bringing the deal’s total value for creditors to more than $1 billion; Toronto-Dominion Bank agreed to pay $70 million; and CIBC, Royal Bank of Canada and the Royal Bank of Scotland also settled the MegaClaims litigation. Enron said these settlements brought MegaClaims payments to $735 million. Citigroup, Credit Suisse First Boston, Deutsche Bank, Merrill Lynch and Barclays had not settled at that time; of these, Citigroup, Credit Suisse First Boston, Deutsche Bank and Merrill Lynch declined to comment and a Barclays representative was not available, according to the same report. The underlying court and settlement documents are not in the retained record. ⁴

analysisAccording to an October 2006 press report summarized by the same database, FleetBoston Financial Corp. and affiliates agreed to pay Enron nearly $20 million: $10.4 million to settle their part of the MegaClaims lawsuit against ten banks and $9.35 million to settle an avoidance action over preferential transfers in Enron’s commercial paper litigation. FleetBoston did not admit liability or wrongdoing, and both parties said they settled to avoid the costs and uncertainties of further litigation. Enron’s president and chairman, John J. Ray III, said Enron remained eager to reach resolution with the remaining financial institutions. The underlying court and settlement documents are not in the retained record. ⁴

analysisSilvercreek Management Inc. and affiliated investment funds, which had invested more than $100 million in October 2001 in Enron’s 7% Exchangeable Notes and Zero Coupon Exchangeable Notes, sued financial institutions and individuals in the Southern District of New York on November 7, 2002 (Silvercreek Management, Inc. v. Citigroup, Inc., No. 02-CV-8881), asserting state tort and federal securities claims; the case was later handled in the Enron MDL in Texas. Their third amended complaint of August 2011 named Barclays, Credit Suisse, Deutsche Bank, JPMorgan and Merrill Lynch, and as individual defendants Andrew Fastow, Jeffrey Skilling, Richard Causey, Richard Buy, another former Enron officer and the estate of Kenneth Lay. After the financial institution defendants jointly moved to dismiss in September 2011, Silvercreek settled with Barclays (Barclays PLC and Barclays Capital Inc.) and JPMorgan (J.P. Morgan Chase & Co. and JPMorgan Securities Inc.). Fastow, Buy, a further former officer and the estate of Kenneth Lay had not responded to the complaint, while Causey and Skilling filed answers. On March 31, 2017 Judge J. Paul Oetken granted in part and denied in part the motion to dismiss brought by Credit Suisse, Deutsche Bank, Merrill Lynch and Skilling; the fraud claim against Skilling was not dismissed. ¹