JP Morgan Follows Citigoup’s Lead And Settles With Enron Investors

J.P. Morgan Chase & Co. is following Citigroup’s lead, agreeing to settle a lawsuit from Enron investors for $2.2 billion. Morgan was accused of having a role in a big accounting fraud scandal at Enron.

Morgan must now increase its reserve for litigation. The company will take a $2 billion pre-tax charge, delivering a big blow to its second quarter earnings which are expected to fall by 35 cents a share.

“Morgan also looks relatively worse versus Citigroup for three reasons. First, Citigroup settled first for both WorldCom and now Enron, so it looks like Citi forced J.P. Morgan’s hand. Second, Morgan is paying more than Citigroup ($2.2B versus $2.0B), and third Morgan has an earnings hit whereas Citi had enough in legal reserves, which at least raises the issue about the degree of J.P. Morgan’s prior conservatism,” said Prudential analysts.

Like Citigroup, Morgan doesn’t admit to any law breaking, but has paid the largest settlement to these Enron investors so far. Several other banks also have suits filed against them, and it is probably just a matter of time before they settle too. Mark Tran of Guardian Unlimited writes:

Led by the University of California, which lost $144.7m of its investments in Enron, the lawsuit alleges that a number of banks and brokerages helped the company to continue to operate and raise money even as the company was unravelling.

Among the individuals named as defendants are the Enron founder, Kenneth Lay, former chief executive Jeffrey Skilling, and former top accountant Richard Causey. All have pleaded not guilty to charges of fraud and conspiracy in a trial scheduled to start next January. The financial institutions allegedly helped Enron set up partnerships that the company used to improperly boost profits while moving billions of dollars of debt off its balance sheet. The manoeuvre gave a misleading impression of Enron’s finances and artificially inflated its stock and bond prices, according to the lawsuit.

“These were two giant steps on the road, but we have a long way to go before the end of the road,” said William Lerach, the lawyer representing the University of California. “There will be other large settlements coming soon.”

Merrill Lynch, Credit Suisse First Boston and Goldman Sachs are among the banks that have yet to settle with the investors. Now that Citigroup and J.P. Morgan have settled, the pressure on them to do so is growing.

Chris is a staff writer for Murdok. Visit Murdok for the latest ebusiness news.