UC Reaches $69 Million Settlement with Bank of America in Enron Securities Case
From University of California
July 2, 2004
The University of California today (July 2) announced a settlement with Bank of America in the Enron Corp.securities class action lawsuit. The university is lead plaintiff representing a class of Enron investors who lost billions of dollars in the now-bankrupt energy firm. The UC Board of Regents will consider final approval of the $69 million settlement at its regularly scheduled meeting on July 14-15.
“We are very pleased with this settlement which, given the limited potential liability of the Bank of America, represents a substantial recovery and sets a benchmark for the ratio between potential liability and recovery for the other financial institution defendants,” said James E. Holst, the university's general counsel.
In the class action suit, Bank of America was not alleged to have committed fraud on Enron's stockholders. Rather, the financial institution was sued in its role as an underwriter for certain Enron and Enron-related debt offerings only. Under the 1933 Securities Act, Bank of America's potential liability was limited to the loss of value of the securities it sold in the offerings it underwrote.
“Bank of America's payment represents more than 50 percent of its potential damage exposure for the debt offerings sued for in this case,” said William S. Lerach, of Lerach Coughlin Stoia and Robbins LLP, lead counsel for the university in the litigation. “We anticipate this settlement will be the precursor of much larger ones in the future, especially with the banks that face liability for participating in the scheme to defraud Enron's common stockholders.”
The settlement is subject to court approval.
The agreement marks the second settlement in the case. In July 2002, UC, as lead plaintiff in the class action, reached a $40 million settlement with Arthur Andersen's international umbrella organization in the Enron fraud suits 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, defendants in the shareholders' lawsuit includes 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 moving billions of dollars of debt off their balance sheets and artificially inflating stock values. Unlike Bank of America, these banks are potentially liable for the Enron investors' entire loss.
Other defendants include various former officers and directors of Enron, its accountants, Arthur Andersen, and its Houston-based corporate counsel Vinson & Elkins.
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.
Depositions in the case began in June 2004, with the trial slated to begin Oct. 16, 2006.
More background on the Enron lawsuit is available at http://www.universityofcalifornia.edu/news/enron
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