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CIBC to pay $2.4-billion to settle Enron investors suit

Massive U.S. agreement raises questions about the future direction of the bank

Globe and Mail - August 3, 2005
by Sinclair Stewart

Canadian Imperial Bank of Commerce unveiled a massive $2.4-billion (U.S.) legal settlement with Enron investors yesterday, a move that provides some costly closure on CIBC's troubled past and at the same time raises serious questions about the bank's future direction.

The University of California, the lead plaintiff in the $40-billion class-action suit, accused CIBC of participating in an "elaborate scheme to defraud investors." CIBC did not admit or deny any wrongdoing as part of the deal, the largest yet among the handful of major financial institutions that have settled with shareholders of the disgraced energy trader.

"That is customary in settlement agreements, for defendants to disclaim fraud. The numbers speak for themselves," said William Lerach, who is lead counsel for the university.

"I think the settlement reflects the level of involvement of CIBC and reflects the fact that they waited for others to settle before them," he said.

CIBC is swallowing a $2.8-billion (Canadian) pretax charge to cover this settlement and other Enron-related suits, a stunning figure for a bank that earned just $1.99-billion in profit for all of 2004. The bank had previously set aside just $300-million in legal reserves for its involvement with Enron.

Following the settlement, the bank is suspending its share buyback program until it can nurse its balance sheet back to health, and will likely freeze any dividend increases.

Industry observers are also expecting the bank to be downgraded by credit rating agencies.

Gerry McCaughey, who signed off on the agreement less than 24 hours after he replaced John Hunkin as chief executive officer of the bank, is already running out of options after his first day on the job.

CIBC has essentially abandoned its foreign growth plans in the past two years following some painful episodes south of the border, including the failure of its U.S. electronic banking subsidiary, Amicus.

That hasn't bothered investors, who have been drawn to CIBC for its income trust-like strategy: return most of your profit to shareholders, either by repurchasing stock or providing generous dividend increases. Without these tools, however, many are questioning how badly the stock will be punished, and suggest that Mr. McCaughey will have to sit tight and focus on rebuilding the balance sheet.

The bank said its important Tier 1 capital ratio will decline to 7.5 per cent, and cautioned it will not likely be able to reach its internal objective of 8.5 per cent before mid-2006.

"It completely evaporates their excess capital," said Robert Wessel, an analyst with National Bank Financial Inc. "Before, they had a choice whether or not to deploy capital [on acquisitions] or return it to shareholders. Now they don't have a need to deploy or return."

Stephen Forbes, a spokesman for the bank, said CIBC's goal was to put the lawsuit behind it and eliminate the "uncertainties, burden and expense" of further litigation.

Under Mr. Hunkin, CIBC made an aggressive push into the U.S. investment banking scene in the late 1990s and had aspirations of being mentioned in the same breath as its larger, more powerful Wall Street rivals. But this was not what the bank's shareholders had in mind.

Earlier this summer, J.P. Morgan Chase & Co. paid $2.2-billion (U.S.) to end its involvement in the lawsuit, while Citigroup Inc. paid $2-billion. A host of other banks and brokerages, including Toronto-Dominion Bank and Royal Bank of Canada, have yet to reach an agreement.

Several analysts said the CIBC deal will cast a pall over Canadian banking stocks as the market speculates about how much TD and RBC may have to shell out for similar settlements with Enron investors.

For CIBC, the Enron settlement marks a costly and painful culmination of various regulatory problems that have afflicted the bank in recent years. In late 2003, the bank paid $80-million to U.S. regulators to settle allegations it aided and abetted the accounting fraud at Enron. Two weeks ago, just before Mr. Hunkin left his post, it struck a $125-million deal with the U.S. Securities and Exchange Commission and New York State Attorney-General Eliot Spitzer to settle its alleged role in a mutual fund trading scandal.

Then there have been the other distractions, such as the embarrassing faxing snafu last year in which private customer information was errantly sent to a Virginia junkyard.

The bank is still named in a separate suit filed by the company itself against several of its lenders and banking partners. RBC settled its part in this suit last week for $49-million. The bank will pay $25-million to Enron, and an additional $24-million to advance its bankruptcy claims against the company.

Included in CIBC's $2.8-billion (Canadian) in reserve charges is approximately $200-million to fund a possible settlement with Enron, an action that has been dubbed the "MegaClaims" litigation.

CIBC's Enron bombshell

CIBC agrees to largest settlements to date amount banks for its role in the Enron Corp. fraud. Though it did not admit wrongdoing, CIBC paid up to resolve a suit that alleged it helped Enron raise money, hide debt and inflate revenues. The tab, larger than expected on the Street, exceeds payments made by much larger Enron bankers Citigroup and J.P. Morgan Chase.

  • $2.2-billion J.P. Morgan Chase, June, 2005
  • $2.0-billion Citigroup, June, 2005
  • $168-million Outside Directors, January, 2005
  • $222.5-million Lehman Brothers, October, 2004
  • $69-million Bank of America, July, 2004
  • $32-million Andersen Worldwide SC, 2002
  • $32-million LJM2 bankruptcy recovery, 2004-05

  • $7.12-billion total settlements as of Aug. 2, 2005

'The numbers speak for themselves. I think the settlement reflects the level of involvement of CIBC and reflects the fact that they waited for othes to settle before them,'

  • William Lerach, lead counsel for University of California $247-million
  • Amount CIBC set aside for the settlement 22%
    Amount the payout equals, in relation to CIBC's book value 2%
  • Amount Citigroup's $2-billion payout equals in relation to its book value

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