Class Action Settlements: Enron
Enron was an American energy company based in Houston, Texas, whose downfall led to the largest bankruptcy filing in U.S. history at the time. The company was formed by Kenneth Lay in 1985 as a result of a merger of Houston Natural Gas and InterNorth.
Several years after the merger, Enron's executives, led by Jeffrey Skilling, then president of the company, utilized dubious accounting methods as well as misleading financial statements to hide billions of dollars in debt generated by a series of failed deals and other transactions. The executives also misled Enron's board of directors and auditors and apparently pressured the accounting firm Arthur Anderson to hide its liabilities and inflate its assets.
Enron stock rose as high as US$90 in mid-2000 before plummeting to less than $1 per share by the end of November 2001 and its filing for bankruptcy on December 2, 2001. By that time, the U.S. Securities and Exchange Commission had opened an investigation into fraud allegations.
Prior to its filing bankruptcy, Enron executives attempted to sell the company to Dynegy, another Houston-based energy company that operated power plants and was a major player in natural gas and coal, but the deal fell through on November 28, 2001, and Enron filed for Chapter 11 bankruptcy protection four days later.
The Christian Science Monitor reported on September 8, 2009, that in the four-year period prior to the bankruptcy filing, Enron shareholders lost an estimated $74 billion. Bankruptcy documents indicated that Enron had debt and outstanding loans of around $23 billion. Soon after the bankruptcy was announced, 20,000 Enron employees filed a class action suit alleging securities fraud for $2 billion lost in pensions. The suit was settled in May 2004 for $85 million, later increased to $89 million. The employees' average settlement recovery was $3,100, according to a May 14, 2005, article in the Times of London. Investors were able to recover an additional $4.2 billion from a number of banks the following year.
A shareholders' class action suit against Enron, its individual officers and directors, Arthur Anderson and its partners and employees, and Enron's former law firm, Vinson & Elkins, was settled in September 2008 for $7.2 billion. The funds were distributed among the lead plaintiff, the University of California, about 1.5 million individuals and organizations, and the University of California's own law firm, which was paid $688 million in attorney fees. The settlement was the largest of any U.S. securities fraud case in history.
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