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Why is Enron Creditors Recovery Corp. suing Citigroup?Enron Creditors Recovery Corp. ("ECRC") alleges that Citigroup (and some of its subsidiaries and affiliates) knowingly played a key role in assisting certain Enron officers in manipulating and misstating Enron's financial condition beginning in 1997 and continuing through Enron's bankruptcy in December 2001, thereby defrauding Enron's innocent creditors and shareholders. Specifically, during this period, ECRC alleges Citigroup entered into at least 13 structured finance transactions with Enron, knowing that Enron's intended accounting for them was misleading and would give Enron's investors, analysts and credit rating agencies the erroneous impression that Enron was a financially strong and growing company. The Examiner concluded that all of the transactions between Enron and Citigroup share one or more of the following characteristics:
What is the MegaClaims litigation?As part of its mission to liquidate remaining operations and distribute assets to its creditors, ECRC filed its "MegaClaims" complaints against 11 major banks that it contends contributed to the collapse of Enron. The MegaClaims complaint specifically alleges, consistent with the findings of the court-appointed Examiner, the involvement of those banks in the fraud, breaches of fiduciary duties, and civil conspiracy that created losses of more than $18 billion. This litigation seeks to recover billions of dollars from the financial institutions that ECRC believes engaged in such conduct and to return the money to Enron's innocent creditors. For more information about the MegaClaims litigation, please click here . What other banks have been involved in the MegaClaims litigation?There were eleven banks and brokerages named in the MegaClaims litigation, of which ten have settled to date:
ECRC has received nearly $1.76 billion in cash from these settlements to distribute to creditors and other innocent parties who suffered financial consequences as a result of the banks' actions and ultimate collapse of Enron. Please click here for further information about settlements. The only claim that remains is pending against Citigroup, which represents the largest of the eleven claims. *This settlement remains subject to the court approval. What are the legal claims in the Citigroup litigation?ECRC's allegations against Citigroup fall into four areas, outlined generally below:
What is the value of the lawsuit against Citigroup?A judgment will be issued on each of the four issues and each issue has a range of possible values. However, ECRC believes that its claims against Citigroup are worth billions of dollars. In fact, ECRC seeks to eliminate $5 billion in Citigroup claims and seeks the return from Citigroup of over $3 billion in fraudulent transfers (avoidance actions). How will this lawsuit help Enron's creditors?This lawsuit will help Enron creditors in two ways. First, if Citigroup is found liable, Citigroup will be required to pay money to the Enron estate. This money will in turn be distributed to Enron's innocent creditors. Second, in this suit ECRC seeks to subordinate or disallow Citigroup's claims against the Estate. If the judge indeed rules that ECRC either doesn't have to pay Citigroup until other innocent creditors are compensated or doesn't have to pay them at all, this will free up billions of dollars currently held in ECRC's Disputed Claims Reserve. This fund is set up in the Plan of Reorganization to ensure Enron can pay all outstanding claims, including those that it is trying to subordinate. Once those claims are subordinated or disallowed, ECRC will distribute the money in the reserve to the innocent creditors. When will the litigation against Citigroup be resolved?ECRC has been working diligently to resolve this case and to return additional funds to its innocent creditors. A trial on these matters is set to begin April 2008, and ECRC is confident that at that time Citigroup will be held responsible for its role in the company's collapse and the ensuing damage to creditors. Does Citigroup have enough money in their litigation reserves for this lawsuit?As of December 31, 2006, Citigroup's litigation reserves for Enron and all other outstanding litigation (including litigation not related to Enron) decreased from $6.7 billion to $3.2 billion. (Source: Citigroup 10K) How is the Springfield litigation related to the Citigroup litigation?At the time of Enron's bankruptcy, Citigroup held billions of dollars in face value claims related to its financial dealings with Enron. In 2002, after Enron filed its bankruptcy petition, Citigroup transferred one such claim with a face value amount of $5 million to Deutsche Bank (previously known as Bankers Trust Company). Deutsche Bank then transferred that claim to Springfield Associates on May 15, 2002. The issue to be resolved in the Springfield matter is whether Enron should have to pay Springfield even though it was assigned a tainted claim from Citigroup post-petition. ECRC argues that the claim should be subject to equitable subordination or disallowance because to hold otherwise would allow Citigroup (or any other bad actor) to "wash" a claim by simply transferring it to a third party. Such claim washing, if successful, would legitimize such maneuvering, transforming a tainted claim into one having the validity and priority as claims held by innocent creditors. Such maneuvering would be contrary to established law. |
Current Related PressPlease use the links below to view recent media coverage related to ECRC’s litigation against Citigroup.
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