Lehman to settle suit for $222.5 million

Shareholders say company misled them on Enron

September 24, 2004|By BLOOMBERG NEWS

NEW YORK - Lehman Brothers Holdings Inc., the fifth-biggest U.S. securities company, agreed yesterday to pay $222.5 million to resolve a lawsuit filed by investors over the bank's role as an underwriter for Enron Corp., the bankrupt energy trader, people familiar with the settlement said.

Lehman, accused of misleading investors in Enron debt offerings stretching back to 1998, won't admit wrongdoing in the settlement, the people said.

The accord is subject to the approval of Lehman's board and the University of California Board of Regents, lead shareholder in the case, the people said.

The settlement, which the company said won't hurt earnings, would be the largest stemming from the 2002 investor suit, which named Citigroup Inc., JPMorgan Chase & Co. and other Enron investment banks among the defendants. The amount of the settlement is equal to about half of Lehman's $505 million net income for its fiscal third quarter, which ended Aug. 31.

"It's a pretty good-sized settlement that gives the investors a club for future negotiations," said James Cox, a professor of securities law at Duke University. "It also provides the other big financial institutions who've been sued with a good idea of what the settlement threshold may be for this case."

Lehman issued debt offerings that contained misleading financial statements about Enron, investors argue. Under U.S. law, the company's potential liability is limited to the securities it underwrote, Cox said.

Shareholders and bondholders, who are seeking $30 billion in damages, have accused other banks, such as Citigroup and JPMorgan Chase, of helping Enron commit accounting fraud. The banks denied wrongdoing.

Thousands lost jobs

Enron filed for bankruptcy protection after it admitted misstating income and restated $586 million in revenue. Its shares lost $68 billion in value from their high in August 2000, and Enron fired more than 5,000 people. Because the company is protected by U.S. bankruptcy laws, it is not involved in any settlement talks.

Enron shareholders allege in their lawsuit that the former energy trader disguised billions of dollars in loans as energy transactions and hid debt in off-the-books partnerships.

They also contend that the financial institutions that underwrote the company's debt offerings failed to investigate properly whether disclosure statements the company issued in conjunction with debt sales were accurate. The investors challenged Lehman's involvement in the underwriting of at least three Enron debt issues starting in 1998.

The settlement has not been completed, said Hannah Burns, a Lehman spokeswoman. "The settlement, if it occurs, at the value being discussed, will not result in a charge to our income statement," she said, declining to give details.

$145 million lost

Trey Davis, a spokesman for the regents, declined to comment on settlement negotiations. California's university system lost $145 million on investments in Enron, which filed the second-largest bankruptcy in U.S. history in 2001.

"The university has been involved in settlement talks and the regents are considering the matter at their board meeting this week," Davis said.

The Lehman settlement would bring to $334.5 million the amount of money that lawyers for the California regents have collected to reimburse Enron investors and finance litigation against the remaining defendants.

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