Enron shareholders could start pocketing their part of $7.2 billion in settlements of massive federal civil litigation by year-end now that a judge has approved the distribution plan.
Late Monday U.S. District Judge Melinda Harmon approved a plan to distribute the money to eligible shareholders, clearing the way for the California-based law firm that runs the litigation to move toward distributing it.
"We continue to be hopeful that we can make a distribution before the end of the year, and the order approving the plan of allocation is a big step toward that goal," said Dan Newman, spokesman for the firm, Coughlin Stoia Geller Rudman & Robbins.
Harmon also approved the firm's request for $688 million in fees, just under 10 percent of the $7.2 billion, for its work on the case that was originally filed in October 2001, a few weeks before Enron crumbled into bankruptcy.
"We're pleased that the court recognizes the tremendous amount of work, skill and determination required to overcome significant obstacles in this complicated case and recover over $7 billion for defrauded investors," said Patrick Coughlin, chief trial counsel for the firm.
The settlement tally is the largest ever in U.S. securities litigation, surpassing the $6.1 billion amassed in WorldCom litigation, according to the Securities Class Action Clearinghouse at Stanford University.
Under the plan that Harmon approved, shareholders eligible for a payout must have purchased Enron stock between Sept. 9, 1997, and Dec. 2, 2001, the day the company went bankrupt. Shareholders who bought stock before that time or after bankruptcy are not eligible.
Also, eligible shareholders received paperwork they were to file by last April 30. Those who missed the deadline can still file their paperwork, but late claims have no guarantee of securing payouts.
The plan outlines procedures to distribute the settlement proceeds to about 1.5 million individuals and entities, such as pension funds. Investors who bought common stock during the span of eligibility stand to receive an average of $6.79 per share, while those who bought preferred shares stand to get an average $168.50 per share.
The plan generated some opposition, largely from shareholders who bought stock outside the span of eligibility. The lead plaintiff in the litigation, the University of California Regents, which lost $144 million when Enron failed, argued that while the settlement didn't satisfy everyone, it was fair and reasonable.
"This court agrees," Harmon wrote in her approval order.
With the largest-ever settlement came the largest-ever request for attorney fees.
The firm negotiated the fee with the University of California based on a percentage of money recovered. The $688 million, part of which will be funded by interest on the total settlements, is 9.52 percent of the $7.2 billion.
Harmon called the university a "highly sophisticated investor" that struck a fee agreement aimed at keeping more than 90 percent of the settlement amount for shareholders.
Early settlementsThe bulk of the settlements, $6.6 billion, came from JPMorgan Chase, Citigroup and the Canadian Imperial Bank of Commerce in 2005. Smaller amounts came from Bank of America; Lehman Bros.; former Big Five auditing firm Arthur Andersen and its defunct global umbrella organization, Andersen Worldwide; LJM2, a former partnership once run by ex-Enron finance chief Andrew Fastow to conduct deals with Enron; and law firm Kirkland & Ellis. The only individuals, who settled for a collective $168 million, were former Enron directors.
Facing a bankrupt company when the litigation was filed weeks before Enron failed in 2001, the plaintiffs pursued deep-pocketed banks that did business with Enron. Specifically, plaintiffs said the banks played as much a role in fraud as Enron did by crafting and financing dubious deals.
Not all defendants settled. Merrill Lynch & Co., Barclays and Credit Suisse First Boston kept fighting and appealed to the 5th U.S. Circuit Court of Appeals to reject the plaintiffs' theory that the banks were primary players in fraud. At most, they argued, the banks could be viewed as secondary players who aided and abetted fraud, and as such could be pursued by the Securities and Exchange Commission, but not in private securities litigation.
Ruling for banksLast year the 5th Circuit sided with the banks, effectively gutting the remaining litigation. The Supreme Court later ruled in a separate case with similar issues to greatly limit shareholder ability to sue vendors, accountants, law firms and others legally responsible for securities fraud of another party. The high court later refused to review the Enron case, so it returned to Harmon's court and was expected to skid to a halt.
Harmon noted in her ruling Monday that if the settlements hadn't been reached when they were — before the 5th Circuit's March 2007 ruling — the other bank settlements "likely would not have been obtained."
However, the plaintiffs haven't given up. They have since argued to Harmon that the three remaining banks are liable because they were so active in conducting deals with Enron and selling its securities that they had a duty to disclose what they knew about fraudulent practices.
The banks counter that the 5th Circuit ruling trumps that argument, which they call the plaintiffs' "tortured attempt to rewrite history."
Harmon has yet to rule.
Three former top Enron executives also remain named defendants alongside Merrill, Barclays and Credit Suisse: former CEO Jeff Skilling, former chief accounting officer Richard Causey and former investor relations chief Mark Koenig.
Skilling is serving a 24-year prison term and appealing his multiple 2006 convictions; Causey admitted to securities fraud and is serving a 5 1/2 -year prison term; and Koenig, who admitted to aiding and abetting securities fraud, wrapped up an 18-month prison stay in May.