CItibank and Enron //Deep pockets or deep guilt?

[Miklos Vasarhelyi <miklosv@andromeda.rutgers.edu>]

June 10, 2005

Citigroup to Pay $2 Billion in Enron Lawsuit

By JENNIFER
BAYOT 

Citigroup, the world's largest financial services firm, said today
that it had agreed to pay $2 billion to investors who accused it of
assisting in accounting fraud at

Enron, the one-time energy giant.

The Citigroup payout would be the largest yet to emerge from Enron's
collapse, adding to $492 million in settlements already agreed to by
other financial firms and advisers, including

Lehman Brothers and

Bank of America. In late afternoon trading, shares of Citigroup were
down 7 cents, or 0.15 percent, at $47.61. 

The Citigroup deal could prompt additional settlements in cases pending
against at least nine other banks.

"It's obviously a very favorable development for our side of the
case," said William S. Lerach, a lawyer representing the University
of California, the lead plaintiff among several institutional investors.

Those investors, predominantly pension funds and universities, have
accused banks and other corporate advisers of helping Enron doctor its
financial statements and create partnerships off the books. 

In the years leading up to Enron's bankruptcy filing in late 2001, shares
in the company lost at least $40 billion, lawyers said, as investigators
uncovered huge hidden debts and other fraud at the company.

Investors in Enron will receive their portion of any settlement funds
based on a plan that must be approved by Judge Melinda F. Harmon of
Federal District Court in Houston. 

Legal fees will amount to 8 to 10 percent of any money recovered,
assuming court approval, and Mr. Lerach estimated that 50,000
institutions or individuals would receive payouts. But no money will
change hands until all the defendants have settled or gone to
trial.

For Citigroup, which maintains its innocence, the settlement resolves a
nagging liability, and the company had already set aside $6.6 billion to
cover any legal costs. Citigroup also said today that its remaining
reserves would be enough to handle any costs arising from other lawsuits
the company faced over its corporate advisory services and stock
research. The largest such threat, analysts said, is a lawsuit by
Parmalat, the bankrupt Italian food company, accusing Citigroup of
helping some of its executives create complex transactions that misled
shareholders. "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," Citigroup's chief executive, Charles O. Prince, said in a
statement. 

Despite the size of the payout, some analysts said Citigroup had made the
right decision to resolve the case and move on. 

"I think they're smart in getting these issues settled and getting
this behind them," said Mark Batty, a financial services stock
analyst at PNC Advisers, an investment firm. "It's hard to view a $2
billion settlement as a positive," he added. But now "they can
focus on future growth and expanding the business."

Under the leadership of Mr. Prince, who succeeded Sanford C. Weill in
2003, Citigroup has been working on putting to rest several scandals
arising from its relationships to companies accused of defrauding
shareholders. 

In May 2004, it reached a $2.58 billion settlement with investors in

WorldCom, the telecommunications company that misstated its profits
by $10.6 billion. That agreement has been credited with encouraging other
banks and financial services firms to reach their own settlements with
investors. 

Now, with Enron investors, Citigroup has taken the rare approach of
cutting a deal early. "You often see a settlement on the so-called
courthouse steps," said Roger Frankel, a senior partner and
corporate bankruptcy specialist at Swidler Berlin in Washington. "I
think this will be model for not just financial institutions but also
companies that have major litigation creating uncertainty in their
stock." The strategy? "You pick a number and you settle it and
you're done."

Other defendants in shareholder lawsuits over Enron could again follow
Citigroup's lead.

J.P. Morgan Chase,

Merrill Lynch and Credit Suisse First Boston have all been named in
class-action lawsuits accusing them of aiding Enron in the deception of
investors or in the formation of inappropriate joint ventures.

The lawsuits represent individuals and institutions who bought Enron
shares or bonds between Sept. 9, 1997, and Dec. 2, 2001, when Enron filed
for bankruptcy. The company's assets and certain divisions have since
been sold.

Miklos A. Vasarhelyi
KPMG Professor of AIS
Rutgers University
Director Rutgers Accounting Research Center
315 Ackerson Hall
180 University Avenue
Newark, NJ 07102
(973) 353 5002
(201) 4544377 mobile