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Enron Reaches Fraud Settlement with J.P. Morgan, Toronto Dominion

J.P. Morgan agreed last week to pay Enron Corp. at least $350 million in an overall deal valued at $1 billion, and Toronto Dominion Bank agreed to pay at least $70 million in cash, to settle claims that the two banks assisted the bankrupt company's former management to defraud shareholders and creditors.

Enron said in a statement last Tuesday that J.P. Morgan also will pay to settle claims of Enron creditors, with a value of $660 million. The bank said it will give up certain contested claims it has filed as part of Enron's bankruptcy proceedings, but that it may proceed with others.

In addition to its cash settlement, Toronto Dominion agreed to subordinate $55.6 million in held claims and pay $60 million for the allowance of about $320 million in claims transferred by the bank to third parties.

The latest settlements are part of Enron's "MegaClaims" litigation, which is the current management's efforts to hold the banks partly responsible for Enron's former fraud. The lawsuits are generating money that the bankruptcy estate may use to pay the company's creditors. The Enron MegaClaims complaint involves claims that the banks aided and abetted breaches of fiduciary duties; aided and abetted fraud; and engaged in civil conspiracy. The lawsuit also includes bankruptcy-based claims relating to equitable subordination; preferential and/or fraudulent transfers; and the re-characterization of certain transactions.

Settlements announced to date provide for $735 million of cash payments and the subordination or cash in lieu of subordination of more than $3 billion in claims.

Enron Interim CEO Stephen Cooper called the settlements "a tremendous financial outcome...We are encouraged by the momentum of the recent MegaClaims settlements and look forward to working with the remaining financial institutions to get these issues behind us."

J.P. Morgan said it doesn't expect the settlement to have a material adverse impact on its earnings.

"With today's agreement, we have put behind us another significant piece of our Enron exposure," said J.P. Morgan CEO William B. Harrison.

In an earlier settlement in June, J.P. Morgan agreed to pay $2.2 billion to Enron creditors to settle fraud claims by investors who lost money when the former energy trader went bankrupt (see NGI, June 20). Investors who lost money when Enron declared bankruptcy in late 2001 have sued several banks that helped Enron's former management team, and so far, they have obtained more than $7 billion in settlements.

Financial institutions still to settle include Barclays plc, Citigroup Inc., Credit Suisse First Boston Inc., Deutsche Bank AG and Merrill Lynch & Co.

The agreement, which resolves all open issues between Enron and the two financial institutions, remains subject to the approval of the U.S. Bankruptcy Court for the Southern District of New York.

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