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The $12 billion (and counting) payback
Settlements of investor fraud lawsuits have reached record levels, with more likely to follow.
June 15, 2005: 11:24 AM EDT
By Krysten Crawford, CNN/Money staff writer

NEW YORK (CNN/Money) - J.P. Morgan's agreement to pay $2.2 billion to settle a lawsuit by Enron investors brings the money coming to the fallen energy company's shareholders and their lawyers to nearly $4.7 billion.

Those Enron lawyers predicted Wednesday more settlements with other companies sued, a sizable group that includes Deutsche Bank and Merrill Lynch, to come soon.

WorldCom investors, meanwhile, are looking at a $6 billion payback.

The eye-popping recoveries -- while only a small fraction of the losses suffered by investors -- are proof that something unusual is going on in the world of securities lawsuits 3-1/2 years after Enron's collapse became the first of several high-profile scandals to rock corporate America.

Institutional Shareholder Services (ISS), which tracks investor lawsuits, estimates that a record $12.2 billion in securities class-action settlements have been announced in which the deadline for eligible investors to submit claims hasn't passed. That amount doesn't include the hefty sums federal and state officials have recovered on behalf of investors from the mutual fund and other regulatory scandals.

The megabucks are startling given that, a decade ago, Congress passed a law that many thought would protect companies against so-called stock-drop lawsuits.

What's striking -- aside from the fact that the number of these cases filed and the settlements later reached continues unabated -- is that companies are shelling out more money than ever before, without admitting they did anything wrong, to put the cases behind them.

Since May 2004, there have been four securities class-action settlements in which a single company has agreed to pay investors $2 billion or more -- a phenomenon unseen until now. Citigroup and J.P. Morgan have the dubious honor of being responsible for two of those settlements apiece.

The $12.2 billion pool covers investments from the late 1990s and on, when companies such as WorldCom (now MCI (Research)), Enron, Qwest Communications (Research), and McKesson were allegedly breaking laws and harming investors as a result.

"We've never seen the sums of money that are going into this pool before," said Bruce Carton, vice president of the Securities Class-Action Services subsidiary operated by ISS. "And it's not like we're seeing twice as many cases or twice as many settlements. Those numbers are staying pretty constant."

The record for the single largest securities settlement is Cendant, which agreed to pay disgruntled investors close to $2.9 billion in 2000. Citigroup's $2.6 billion WorldCom settlement ranks second.

Explaining the recent spate of big payouts, Carton said the cases were "high-profile, ugly cases that the general public is aware of. The settlements in these cases where the damages were enormous are themselves going to be enormous."

Nell Minow, a shareholder activist and co-founder of The Corporate Library, points to the controversial 1995 securities reform law which, instead of protecting companies from shareholder lawsuits, actually gave investors more leverage to pursue companies for alleged wrongdoing.

The Private Securities Reform Act of 1995, passed over President Clinton's veto, "has made a huge difference," said Minow.

A long road ahead

Still, both Carton and Minow say the settlement dollars pale in comparison to the losses that investors suffered. And while the money piles up, experts say it's going to be a long time before investors who were hurt are compensated.

Take, for instance, the $2 billion Citigroup settlement announced late last week in the Enron case. The deal still needs approval from the boards of Citigroup and the University of California, the lead investor, as well as from the federal judge in Texas overseeing the case.

Once those parties sign off, the long process of identifying eligible investors who owned Enron stock between 1997 and 2001 begins, a period that is longer than usual in these cases. Then investors have to be notified, individually or through their mutual or pension fund, after which they have about three to six months to file claims.

It can take another 18 months after the claims deadline has passed for checks to be cut and mailed. "We may be two years away from people getting money from this settlement," said Carton.

J.P. Morgan's $2.2 billion and Citigroup's $2 billion aside, there have been four other settlements in the Enron shareholder litigation totaling about $490 million. The first of those, a $40 million deal in 2003 with Andersen Worldwide, is still in the claims process, according to Carton.

William Lerach, lead lawyer for Enron shareholders and perhaps the country's best-known lawyer in securities class-action cases, estimated that some 50,000 Enron institutional and individual investors would be eligible to recover money.

Lerach said it's impossible to know how much the average return to investors will be until the size of the overall settlement pool is determined, the number of claimants are known and the amount of money each investor is due is determined. What's more, Lerach and his team of lawyers stand to reap 8 to 10 percent of the total recovery, or at least $375 million as of Wednesday.

"Unfortunately, not matter how successful we are, we will never get all of the money back," Lerach told reporters.

More settlements to come?

The $12.2 billion-plus settlement pool could get even bigger. Many more investor lawsuits remain, including cases against HealthSouth (Research) and Tyco International (Research), to name a few.

The Enron litigation, with nearly $4.7 billion in settlements as of Friday, is far from over. On top of Merrill Lynch and Deutsche Bank, other remaining defendants in the case include Credit Suisse First Boston, Barclays, Royal Bank of Scotland, and former Enron law firm Vinson & Elkins.

James Holst, the general counsel of the University of California, a major Enron investor, noted during a press conference Wednesday how quickly J.P. Morgan caved after Citigroup settled its portion of the case last week and said he anticipates "an accelerating pace as we go forward from here."

Neither Holst nor Lerach would identify any companies that might settle next.

A trial in the case is scheduled for October 2006.

For the latest on Tyco and other corporate scandals, click here.

-- This is an updated version of a story that first ran on June 10.  Top of page

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