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Jan. 23 (Bloomberg) -- Enron Corp. creditors could see their original payout more than quadruple to as much as $31 billion after a trial against Citigroup Inc.
Enron Creditors Recovery Corp., the entity winding up the defunct energy trader's affairs, distributed $13.3 billion, or 36 cents on the dollar, since a bankruptcy plan was approved in 2004. That includes most of $1.73 billion in out-of-court settlements with 10 of the 11 banks creditors accused of aiding the fraud that wiped out the company. They argue that Citigroup, the only lender that hasn't settled, should pay the rest of the claims, about $18 billion. The amount is more than six times the $2.8 billion reserve for Enron, WorldCom Inc. and initial public offering-related litigation that Citigroup disclosed in a Nov. 5 regulatory filing.
Evidence at a trial set for April in New York may include an examiner's report citing bank e-mails as evidence Citigroup assisted in the fraud. Testimony against the bank by Andrew Fastow, Enron's imprisoned former chief financial officer, may also be introduced.
``There's a lot of evidence that financial irregularities occurred and they were aided and abetted and assisted by the banks,'' said John Coffee, a Columbia Law School securities law professor in New York.
The creditors' distribution from litigation and asset sales almost doubled to $11.5 billion in the year after April 2006. An $18 billion win this spring would bring the total to more than four times the 2006 figure.
Deep Pocket
The creditors say Citigroup should be forced to pay the remaining debt under a rule allowing recovery from one of a group of defendants for the total damages caused by all. The New York- based bank says the so-called deep-pocket rule shouldn't apply.
``Everyone is looking at Citi to see the kind of pocket it has left,'' said Nancy Rapoport, a law professor at the University of Nevada-Las Vegas and co-editor of a 2004 book on Enron. ``Citi has a lot to be worried about.''
The lawsuit is among legacies Vikram Pandit assumed in December on being named chief executive officer after Charles Prince III was forced to step down amid the global credit squeeze.
Citi reported the largest loss in its history, $9.83 billion, for the fourth quarter posted Jan. 15 after it wrote down the value of subprime mortgage investments by $18 billion.
The bank lost more than half its market value in the past year and fell yesterday to a 52-week low closing price of $24.40. It rose $1.96 to $26.36 today in New York Stock Exchange composite trading.
Bank Will Fight
Citigroup considers the Enron lawsuit meritless and will fight it, spokesman Michael Hanretta said. No settlement talks are under way, said Harlan Loeb, an Enron creditors' spokesman.
There's an ``unprecedented'' amount of evidence against Citigroup, said John Ray III, chairman of Houston-based Enron Creditors Recovery. This includes the report by examiner Neal Batson, who quoted one internal bank e-mail as saying, ``Sounds like we made a lot of exceptions to our standard policies'' in setting up an Enron deal. ``Let's remember to collect this IOU when it really counts.''
The bank ``bent its own internal rules and participated in transactions about which it had substantial reservations, in order to accommodate Enron and maintain an important client relationship,'' Batson concluded about special-purpose entities, or SPEs, used to disguise loans as investments.
Examiner's Report
``There is evidence both that Citigroup knew Enron's SPE transactions would result in Enron's financial statements being materially misleading, and that Citigroup provided substantial assistance to Enron in completing those transactions,'' he wrote.
Creditors are ``anxious to get to trial,'' Ray said, calling a Citigroup effort to move the case from U.S. Bankruptcy Court a stalling tactic.
In December, the bank said the case should be heard before a U.S. District Court jury, not Bankruptcy Judge Arthur Gonzalez. Bankruptcy courts don't conduct jury trials and are below district courts in the federal judicial hierarchy.
Citigroup attorney Brad Karp of Paul, Weiss, Rifkind, Wharton & Garrison in New York declined to comment. Enron creditors' attorney David Stern of Klee Tuchin Bogdanoff & Stern in Los Angeles didn't return a call seeking comment.
Prince told Congress in 2002 the bank relied on Enron and its auditors for accounting advice in setting up transactions. Congressional investigators said Citigroup helped the energy trader hide debt by disguising loans as trades.
Citigroup Motion
The bank asked Gonzalez Jan. 7 to throw out most of the suit, saying Enron Creditors Recovery doesn't have standing to pursue creditors' claims. Enron, not banks that lent it money, is to blame for its collapse, Citigroup said in court papers. Citigroup claims Enron still owes it as much as $5 billion.
Citigroup in 2005 agreed to a $2 billion settlement of another suit, in which Enron shareholders claimed banks helped executives including Kenneth Lay and Jeffrey Skilling commit fraud. The banks that refused to settle, including Merrill Lynch & Co., won when an appeals court ruled the shareholders couldn't sue as a group for the $40 billion they were seeking to recover. The U.S. Supreme Court yesterday refused to hear an appeal.
Ray, of Enron Creditors Recovery, declined to comment on what would be a fair settlement in his case, saying only that he will continue to fight for returns.
``Certainly it's the bold aggressiveness that got us from 17 cents to what today is 36 cents,'' Ray said.
Looking for More
Charles Tatelbaum, a bankruptcy attorney at Adorno & Yoss in Fort Lauderdale, Florida, said that while another $2 billion Citigroup settlement is possible, creditors are looking for more.
``They are gambling with house money,'' Tatelbaum said. ``The speculators that bought at 15 cents on the dollar are going to say go for it.''
The claims were bought from original creditors and may have been traded since. Bankruptcy claims are traded in private transactions whose terms are rarely disclosed.
Claims were traded by Lehman Commercial Paper Inc., SPCP Group LLC, Bear Stearns Investment Products Inc. and Ore Hill Hub Fund Ltd., according to court documents. All the buyers declined to comment or didn't return calls.
Even if Citigroup offers to bring the creditors' recovery to 50 cents on the dollar, that ``may not be enough to move the needle with this group,'' said Michael Sirota, a bankruptcy attorney with Cole Schotz Meisel Forman & Leonard in Hackensack, New Jersey.
Enron creditors settled with Royal Bank of Scotland Group Plc, Royal Bank of Canada, Canadian Imperial Bank of Commerce, Toronto-Dominion Bank, JPMorgan Chase & Co., Credit Suisse Group, Merrill Lynch & Co., Fleet Bank N.A., Barclays Plc and Deutsche Bank AG.
The case is Enron Creditors Recovery Corp. v. Citigroup Inc., 03-9266, and the bankruptcy case is In re: Enron Corp., 01- 16034, both U.S. Bankruptcy Court, Southern District of New York (Manhattan).
http://www.bloomberg.com/apps/news?pid=20601109&sid=aEccplg9qa5I&refer=home
Enron Creditors Recovery Corp., the entity winding up the defunct energy trader's affairs, distributed $13.3 billion, or 36 cents on the dollar, since a bankruptcy plan was approved in 2004. That includes most of $1.73 billion in out-of-court settlements with 10 of the 11 banks creditors accused of aiding the fraud that wiped out the company. They argue that Citigroup, the only lender that hasn't settled, should pay the rest of the claims, about $18 billion. The amount is more than six times the $2.8 billion reserve for Enron, WorldCom Inc. and initial public offering-related litigation that Citigroup disclosed in a Nov. 5 regulatory filing.
Evidence at a trial set for April in New York may include an examiner's report citing bank e-mails as evidence Citigroup assisted in the fraud. Testimony against the bank by Andrew Fastow, Enron's imprisoned former chief financial officer, may also be introduced.
``There's a lot of evidence that financial irregularities occurred and they were aided and abetted and assisted by the banks,'' said John Coffee, a Columbia Law School securities law professor in New York.
The creditors' distribution from litigation and asset sales almost doubled to $11.5 billion in the year after April 2006. An $18 billion win this spring would bring the total to more than four times the 2006 figure.
Deep Pocket
The creditors say Citigroup should be forced to pay the remaining debt under a rule allowing recovery from one of a group of defendants for the total damages caused by all. The New York- based bank says the so-called deep-pocket rule shouldn't apply.
``Everyone is looking at Citi to see the kind of pocket it has left,'' said Nancy Rapoport, a law professor at the University of Nevada-Las Vegas and co-editor of a 2004 book on Enron. ``Citi has a lot to be worried about.''
The lawsuit is among legacies Vikram Pandit assumed in December on being named chief executive officer after Charles Prince III was forced to step down amid the global credit squeeze.
Citi reported the largest loss in its history, $9.83 billion, for the fourth quarter posted Jan. 15 after it wrote down the value of subprime mortgage investments by $18 billion.
The bank lost more than half its market value in the past year and fell yesterday to a 52-week low closing price of $24.40. It rose $1.96 to $26.36 today in New York Stock Exchange composite trading.
Bank Will Fight
Citigroup considers the Enron lawsuit meritless and will fight it, spokesman Michael Hanretta said. No settlement talks are under way, said Harlan Loeb, an Enron creditors' spokesman.
There's an ``unprecedented'' amount of evidence against Citigroup, said John Ray III, chairman of Houston-based Enron Creditors Recovery. This includes the report by examiner Neal Batson, who quoted one internal bank e-mail as saying, ``Sounds like we made a lot of exceptions to our standard policies'' in setting up an Enron deal. ``Let's remember to collect this IOU when it really counts.''
The bank ``bent its own internal rules and participated in transactions about which it had substantial reservations, in order to accommodate Enron and maintain an important client relationship,'' Batson concluded about special-purpose entities, or SPEs, used to disguise loans as investments.
Examiner's Report
``There is evidence both that Citigroup knew Enron's SPE transactions would result in Enron's financial statements being materially misleading, and that Citigroup provided substantial assistance to Enron in completing those transactions,'' he wrote.
Creditors are ``anxious to get to trial,'' Ray said, calling a Citigroup effort to move the case from U.S. Bankruptcy Court a stalling tactic.
In December, the bank said the case should be heard before a U.S. District Court jury, not Bankruptcy Judge Arthur Gonzalez. Bankruptcy courts don't conduct jury trials and are below district courts in the federal judicial hierarchy.
Citigroup attorney Brad Karp of Paul, Weiss, Rifkind, Wharton & Garrison in New York declined to comment. Enron creditors' attorney David Stern of Klee Tuchin Bogdanoff & Stern in Los Angeles didn't return a call seeking comment.
Prince told Congress in 2002 the bank relied on Enron and its auditors for accounting advice in setting up transactions. Congressional investigators said Citigroup helped the energy trader hide debt by disguising loans as trades.
Citigroup Motion
The bank asked Gonzalez Jan. 7 to throw out most of the suit, saying Enron Creditors Recovery doesn't have standing to pursue creditors' claims. Enron, not banks that lent it money, is to blame for its collapse, Citigroup said in court papers. Citigroup claims Enron still owes it as much as $5 billion.
Citigroup in 2005 agreed to a $2 billion settlement of another suit, in which Enron shareholders claimed banks helped executives including Kenneth Lay and Jeffrey Skilling commit fraud. The banks that refused to settle, including Merrill Lynch & Co., won when an appeals court ruled the shareholders couldn't sue as a group for the $40 billion they were seeking to recover. The U.S. Supreme Court yesterday refused to hear an appeal.
Ray, of Enron Creditors Recovery, declined to comment on what would be a fair settlement in his case, saying only that he will continue to fight for returns.
``Certainly it's the bold aggressiveness that got us from 17 cents to what today is 36 cents,'' Ray said.
Looking for More
Charles Tatelbaum, a bankruptcy attorney at Adorno & Yoss in Fort Lauderdale, Florida, said that while another $2 billion Citigroup settlement is possible, creditors are looking for more.
``They are gambling with house money,'' Tatelbaum said. ``The speculators that bought at 15 cents on the dollar are going to say go for it.''
The claims were bought from original creditors and may have been traded since. Bankruptcy claims are traded in private transactions whose terms are rarely disclosed.
Claims were traded by Lehman Commercial Paper Inc., SPCP Group LLC, Bear Stearns Investment Products Inc. and Ore Hill Hub Fund Ltd., according to court documents. All the buyers declined to comment or didn't return calls.
Even if Citigroup offers to bring the creditors' recovery to 50 cents on the dollar, that ``may not be enough to move the needle with this group,'' said Michael Sirota, a bankruptcy attorney with Cole Schotz Meisel Forman & Leonard in Hackensack, New Jersey.
Enron creditors settled with Royal Bank of Scotland Group Plc, Royal Bank of Canada, Canadian Imperial Bank of Commerce, Toronto-Dominion Bank, JPMorgan Chase & Co., Credit Suisse Group, Merrill Lynch & Co., Fleet Bank N.A., Barclays Plc and Deutsche Bank AG.
The case is Enron Creditors Recovery Corp. v. Citigroup Inc., 03-9266, and the bankruptcy case is In re: Enron Corp., 01- 16034, both U.S. Bankruptcy Court, Southern District of New York (Manhattan).
http://www.bloomberg.com/apps/news?pid=20601109&sid=aEccplg9qa5I&refer=home
