TD to pay US$130 million to settle Enron suit
Adds US$330 million to reserve

TD Bank Financial Group today agreed to pay US$130 million to settle its part of the “megaclaims” lawsuit filed by Enron Corp., the bankrupt U.S. energy trader.

TD said it will make a pre-tax payment of US$50 million US in cash to Enron to resolve alleged common-law claims.

The settlement also includes an additional US$20 million payment “to resolve alleged bankruptcy avoidance claims which seek to recover from TDBFG certain pre-bankruptcy payments. These claims relate to payments made by Enron to creditors in the three years prior to Enron declaring bankruptcy.”

As well, TD will pay US$60 million so that Enron will allow about US$320 million in claims that TD had transferred to third parties.

TD will also waive distributions on a remaining US$55 million worth of claims that the bank had already written off.

The agreement provides for the resolution of all claims between the parties. In making the settlement, TD denied any wrongdoing or liability. The settlement is still subject to approval by a U.S. bankruptcy court.

This deal isn’t the end of TD Bank’s Enron woes. It is also a defendant in other Enron-related litigation, including a securities class-action pending in Texas, known as the “newby” action.

Therefore, TD also announced it will add US$300 million to its reserve for a securities class-action suit pending in Texas, resulting in an after-tax charge of $238 million (Cdn.), to be recorded in the third quarter.

Dominion Bond Rating Service has reviewed the announcement, concluding that it views the settlement as modestly positive as litigation risk is reduced, although the class action suit remains outstanding.

Although TD’s capital levels are reasonable and some reserves are in place, DBRS says it believes the resolution of class action lawsuits remains unpredictable. DBRS says it expects TD’s capital ratios to remain reasonable after taking into account pending transactions including TD Banknorth Inc.’s acquisition of Hudson United Bancorp and the deal to sell TD Waterhouse to Ameritrade.

“I am pleased that we have dealt with this bankruptcy litigation,”” said Ed Clark, president and CEO, TD Bank, in a release. “The work we have done over the last two years to strategically reposition the bank, strengthen our balance sheet and diversify our earnings potential through strategic acquisitions has positioned us well no matter what the markets or, in this instance, past circumstances, may throw our way.”

“We have agreed to a negotiated settlement in this matter because we thought it was preferable to the time, expense and unpredictability of litigation and for that reason, believe that it is in the best interest of our shareholders,” said Clark.

“Because there have been no settlements reached for the securities action with any of the less involved banks, it is difficult to know what reserves are prudent. It would be reasonable to argue, given the facts of our involvement in Enron, that we should be able to resolve any claim for quite a small amount. On the other hand, given the uncertainties in this situation, it would seem prudent to increase our reserve,” noted Clark.

Standard & Poor’s rating Services says that the after-tax charge of US$130 million charge ($103 million after-tax) was within its expectations and represents less than 20% of the TD’s second-quarter earnings. However, it cautions that the ultimate cost of the Newby litigation is “very difficult to estimate, although the bank retains reserves of slightly more than US$400 million.” Standard & Poor’s says it would generally not consider the costs to be a factor in the rating unless they exceeded a quarter’s worth of earnings.

Enron has sued 10 banks, alleging they “aided and abetted fraud” and could have prevented the energy trader’s collapse.

In the U.S., JPMorgan Chase & Co. today announced that it will pay US$350 million to settle its part of the megaclaims suit. JPMorgan agreed in June to pay US$2.2 billion to Enron shareholders to settle its part of the class-action suit.

“With today’s agreement, we have put behind us another significant piece of our Enron exposure,” said William Harrison Jr., chairman and CEO. “We are intensely focused on executing our merger, serving our clients and building a great company,” he added.

Earlier this month, CIBC agreed to pay US$250 million in the megaclaims suit, while also agreeing to a US$2.4 billion settlement in the class-action lawsuit.