The University of California today (Oct. 29) announced a $222.5-million settlement with Lehman Brothers in the Enron Corp. securities class action lawsuit. The university is lead plaintiff representing a class of Enron investors who lost billions of dollars.
“This agreement continues a pattern of highly favorable settlements with underwriter defendants and provides a substantial recovery to the purchasers of the Enron debt securities that Lehman Brothers participated in underwriting,” said James E. Holst, the university’s general counsel.
As one of the underwriters on millions of dollars of Enron notes, Lehman Brothers was charged with violations of the 1933 Securities Act, which makes underwriters liable for misstatements in a security registration statement. Under the 1933 Act, Lehman’s potential liability was limited to the loss of value of the securities it sold in the offerings it underwrote. Lehman was not charged with fraud.
In July, the University settled similar claims against the Bank of America for $69 million. Bank of America’s potential exposure was lessthan Lehman’s because it was sued in connection with fewer Enron securities offerings than Lehman.
“Like Bank of America, Lehman has agreed to pay more than 50 percent of its potential exposure for the debt offerings sued for in this case,” said William S. Lerach, of Lerach Coughlin Stoia Geller Rudman & Robbins LLP, lead counsel for the university in the litigation. “We continue to vigorously pursue those defendants, including banks, that, unlike Lehman and Bank of America, have been charged with knowingly participating in the scheme to defraud Enron investors. We expect that we will achieve even larger settlements or judgments from those defendants whose potential liability is much greater.”
The settlement is subject to court approval.
The agreement marks the third settlement in the case. In addition to the Bank of America settlement, UC reached a $40 million settlement in July 2002 with Arthur Andersen’s international umbrella organization that released Andersen Worldwide SC and its non-U.S. member firms from liability and dismissed them from the suit. Arthur Andersen’s U.S. arm, which served as Enron’s auditor prior to its bankruptcy, remains a defendant in the case.
In addition to Bank of America and Lehman Brothers, defendants in the shareholders’ lawsuit include the financial institutions of J. P. Morgan Chase, Citigroup, Merrill Lynch, Credit Suisse First Boston, Canadian Imperial Bank of Commerce, Barclays Bank, Deutsche Bank, Toronto-Dominion Bank and the Royal Bank of Scotland, all considered key players in a series of fraudulent transactions that ultimately cost Enron investors billions of dollars.
These banks set up false investments in clandestinely controlled Enron partnerships, used offshore companies to disguise loans and facilitated the phony sale of phantom Enron assets. As a result, Enron executives were able to deceive investors by reporting increased cash flow from operations and by moving billions of dollars of debt off their balance sheets, thereby artificially inflating securities prices. Unlike Lehman Brothers and Bank of America, the remaining bank defendants are potentially liable for Enron investors’ entire loss.
Other defendants include various former officers and directors of Enron, its accountants, Arthur Andersen, and two law firms.
In February 2002, the University of California was named lead plaintiff in the Enron shareholders’ class action suit previously filed against 29 top executives of Enron Corp. and its accounting firm, Arthur Andersen LLP. UC filed a consolidated complaint on April 8, 2002, adding the nine banks and two law firms as defendants in the case. In April 2003, U.S. District Court Judge Melinda Harmon completed her rulings on the various defendants’ motions to dismiss and lifted the stay on discovery. Following those rulings, UC filed a second amended complaint on May 14, 2003.
Other institutional investors acting as representative plaintiffs on behalf of Enron investors include Washington State Investment Board, the UNITE Family of Funds, Imperial County Employees Retirement System, San Francisco City and County Employees’ Retirement System, Employer-Teamsters Local Nos. 175 & 505 Pension Trust Fund, Hawaii Laborers Pension Plan, Greenville Plumbers Pension Plan, Archdiocese of Milwaukee and Staro Asset Management.
Depositions in the case began in June 2004, with the trial slated to begin in Houston on Oct. 16, 2006.
More background on the Enron lawsuit is available at http://www.universityofcalifornia.edu/news/enron
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