US: J. P. Morgan Chase to Pay Investors $2.2 Billion

J. P. Morgan Chase

announced last night that it had agreed to pay $2.2 billion to Enron investors who accused the bank of participating in the accounting scandal that led to Enron's collapse.

The agreement came just days after Citigroup
reached a $2 billion settlement. While the settlements with two of
Enron's biggest lenders closes one chapter, other investment banks -
including Merrill Lynch and Credit Suisse First Boston - still face claims from investors.

Combined with earlier settlements, the pool available to compensate
investors who lost billions as Enron tumbled into bankruptcy in 2001
has grown to $4.7 billion and could eventually surpass the $6.13
billion that Wall Street firms have agreed to pay WorldCom investors.

J. P. Morgan Chase clearly rushed to the negotiating table after the
Citigroup settlement. That stands in sharp contrast to the WorldCom
shareholder lawsuit in March, when J. P. Morgan Chase waited until the
night before the trial to settle, agreeing to pay $2 billion to
investors. Had it quickly followed Citigroup, which settled a year ago
for $2.575 billion, J. P. Morgan Chase may have gotten away paying $1.4
billion in that case.

"The WorldCom settlement was a disaster for J. P. Morgan," said Tim
Ghriskey at money-management firm Solaris Asset Management in New York.
"No one on the Street wants to see a repeat of that."

J. P. Morgan Chase also said yesterday it would take a $2 billion
charge before taxes, or $1.25 billion after taxes, in the second
quarter, in part to cover costs associated with the settlement as well
as other potential lawsuits. The bank's legal reserves stand at about
$3.6 billion. The firm said insurance would not cover any portion of
the settlement.

"By settling this case and increasing reserves for our remaining
legal issues, the firm can better focus its energies on building our
great company and serving our clients and shareholders," William B.
Harrison Jr., the chief executive of J. P. Morgan Chase, said in a
statement. The bank did not admit wrongdoing in agreeing to settle.

J. P. Morgan has struggled in the last year, underperforming most
rivals as it continues to slash costs and merge operations after the
$58 billion merger with Bank One last year.

Analysts were already forecasting the bank's earnings in the second
quarter would come in sharply lower, after James Dimon, the bank's
president, indicated at a investor conference on June 1 that trading
revenue had tumbled. In the first quarter, trading revenue at the bank
totaled $2.2 billion. Mr. Dimon said that trading revenue would come in
below $842 million for the second quarter. J. P. Morgan will report its
second-quarter earnings in a month.

The move to settle quickly also shows that J. P. Morgan Chase is
trying to put its past behind it before Mr. Dimon ascends to the chief
executive suite next year.

"The pressure has been on for J. P. Morgan to settle Enron," says
Richard X. Bove, an analyst at Punk Ziegel & Co. "Jamie Dimon is
really trying to sweep the decks pretty thoroughly."

Shares of J. P. Morgan Chase rose 10 cents yesterday, to $35.60. The settlement was announced after the stock market closed.

Two years ago, J. P. Morgan Chase agreed to pay $162.5 million to
settle criminal and regulatory investigations into its dealings with
Enron. The bank had been accused of financing and putting together a
broad range of partnerships and transactions that contributed to
Enron's collapse and hid debt from investors.

Many of the transactions that came under fire were called prepays,
which investigators claimed were little more than loans disguised as
commodities transactions with a web of offshore corporations. Over a
number of years, J. P. Morgan was accused of participating in seven
prepay arrangements, including a deal with an offshore entity called
Mahonia that ultimately lent $2.6 billion to Enron. (Citigroup lent it
a total of $3.8 billion under similar arrangements, according to

The shareholder lawsuit covers the estimated 50,000 investors -
institutions, individuals and Enron employees - who bought Enron stock
or bonds between September 1997 and December 2001. These investors will
probably receive pennies for every dollar they lost. To take effect,
the settlement needs to be approved by the board of regents of the
University of California, the board of J. P. Morgan Chase and a federal
court in Houston.

The rush to settle with shareholders - the trial for the lawsuit is
not set to begin until October 2006 - indicates that the banks do not
want to risk paying out a significantly bigger award in a jury trial
and do not want to be among the holdouts in a settlement, which could
ultimately cost them more.

"Our litigation strategy is to seek escalating settlements from
defendants as we went down the road," said William S. Lerach, a lawyer
for the lead plaintiff in the shareholder lawsuit, the University of
California. "This result was consistent with that."

He declined to say whether other banks named in the suit are negotiating a settlement.

AMP Section Name:Corruption
  • 106 Money & Politics
  • 107 Energy
  • 186 Financial Services, Insurance and Banking
  • 208 Regulation

Stay Informed