JP Morgan heads for new Enron battle

AMERICAN banking giant JP Morgan Chase faces a potentially huge payout under a $29bn (£18.2bn) class action being brought against a number of banks by Enron investors. This is despite the bank achieving a better-than-expected settlement with 10 leading insurers involved in bond deals with the failed company.

JP Morgan and the insurers reached an out-of-court settlement on Thursday over Enron oil and gas derivative contracts, which will see the bank receive $600m out of the $1bn it was seeking. The hardest-hit insurers are Travelers Property Casualty, which will pay $139m, and Chubb, which will pay $95m.

Despite its apparent victory, JP Morgan is one of several banks named in a class action by Enron investors, who claim the banks colluded with Enron executives to defraud investors.

A Houston judge last month found that the case could proceed, and several pieces of evidence from the insurance litigation are likely to be used in the case. Foremost among them is a trail of emails written by JP Morgan vice-chairman Donald Layton describing the forward contracts as 'disguised loans'. JP Morgan will use a finding from the judge that it did not aid and assist financial fraud at Enron.

JP Morgan shares rose more than 5% in New York last night after the settlement was announced as the market judged the deal would not affect the bank's ability to pay dividends.

The bank said it would take around $400m in before-tax charges in the fourth quarter to reflect its losses on the contracts, which stem from six deals with Enron made from 1998 in which the energy firm was paid in advance for oil and natural gas. The bank said it would also make $900m provision to cover itself against Enron-related litigation.

JP Morgan initiated the legal action against the insurers, arguing that losses on the deals, arranged through a Chase offshore affiliate called Mahonia, were covered by bonds they had issued. The insurers claimed that JP Morgan had misled them over the deals, which they said were not forward contracts but disguised loans.

The case was settled the day it was to go before a jury but JP Morgan chief executive William Harrison said the bank had done nothing wrong over the deals and had 'acted appropriately'.