On January 24, 2002, I gave a presentation, at the Large- and Medium-Sized Firms Practice Management Committee of the New York State Society of CPAs, entitled "Like the Energizer Bunny, the Enron Mess Keeps Going and Going." It seems I was right as Citigroup just settled a lawsuit in which it agreed to pay $1.66 billion to the Enron Bankruptcy Estate, which had filed bankruptcy and fraud claims against Citigroup in the United States Bankruptcy Court in New York.
According to a press release, Citigroup denies any wrongdoing and has agreed to the settlement “solely to eliminate the uncertainties, burden and expense of further protracted litigation.” Interestingly, as staggering as a figure of $1.6 billion is, that was just about the amount Citigroup received for an office building that it sold in New York City last year.
As the ramifications from Enron continue, I wonder if a similar scenario will play out with regard to Bear Stearns. If you do a quick search of the Internet you will find leaders of the U.S. Senate Finance Committee asking the Federal Reserve, the Treasury Department, JPMorgan Chase & Co., and Bear Stearns for more details about JPMorgan's plan to buy Bear Stearns. SEC Chair Christopher Cox has endorsed updating guidance on bank liquidity in light of the collapse of Bear Stearns. You will also find three separate class actions (Law Offices of Brodsky & Smith, LLC Announces Class Action Lawsuit on Behalf of Bear Stearns' Employees for ERISA Violations CitiGroup; Federman & Sherwood Announces That It Has Filed the First Securities Class Action Lawsuit Against the Bear Stearns Companies, Inc. (NYSE: BSC), for the March 12, 2008 Through March 14, 2008 Class Period; and Hagens Berman Sobol Shapiro Files Proposed Class-Action Lawsuit on Behalf of Bear Stearns' Employees Citing ERISA Violations).
I expect the Enron lawsuits will be used as roadmaps in the Bear Stearns litigation. This means the actions of the corporate officers at Bears Stearns, the business partners with Bear Stearns, and its auditor, Deloitte & Touche, will get intense scrutiny.
There are interesting obvious parallels to Enron. For example, as was the case in Enron, many Bear Stearns employees’ retirement plans were heavily invested in company stock, and it appears that Bear Stearns’ management encouraged that.
A significant result of the Enron debacle and the fall of WorldCom was Sarbanes-Oxley. I expect there will be significant legislative and regulatory changes here also. Some will seek greater protection for employees who are given their company stock as an investment option in the company’s 401(k) plan. With more and more individuals relying as the bulk of their retirement nest egg the defined contribution plans in which their investments decisions are subject to the limitations of the plans, I expect more horror stories to come out. As with Enron, it looks like the Bear Stearns mess will keep going and going for many, many years.
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