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Enron “MegaClaims” litigation

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On April 4, 2008, Enron Creditors Recovery Corp. (Enron) reached a multibillion dollar agreement with Citigroup, Inc., the final defendant to settle in the Enron “MegaClaims” litigation regarding the role of multiple banks in Enron’s 2001 collapse.

Under the terms of the settlement, Citigroup paid Enron Creditors Recovery Corp. $1.66 billion. Citigroup further agreed that indemnification claims (as to which the Bankruptcy Court established a $4 billion claim reserve) and an additional $249.4 million of claims against the Enron Estate held by Citi would be waived. Dr. B. Douglas Bernheim, Edward Ames Edmonds Professor of Economics at Stanford University and Bates White Partner, served as the causation and damages expert on behalf of Enron and its unsecured creditors.

Dr. Bernheim, supported by Bates White staff, submitted two expert reports and provided deposition testimony on the role that Enron’s structured finance transactions played in masking the financial health of Enron. Dr. Bernheim developed econometric models that quantified the impact of alleged financial and accounting fraud on the bankrupt energy company’s credit rating. He also estimated the damages that should be attributed to the defendants’ alleged involvement in aiding and abetting the fraud and breach of fiduciary duty committed by the Enron insiders.

The analyses showed that had it not been for the defendants’ complicit transactions, the Enron situation would have been resolved two and half years earlier than it was. At that point, and in the absence of financial fraud, Enron’s creditors would have suffered significantly fewer, if any, losses. Bates White’s analyses established that the masking of Enron’s financial health for at least two and a half years allowed the losses of the company and its creditors to grow by $16 billion. Bates White also demonstrated that the growth of creditors’ losses was foreseeable from the standpoint of the participants in the alleged fraud.

Working under Dr. Bernheim’s close supervision, Bates White built sophisticated econometric models to predict how and when, in the absence of alleged financial fraud, the credit rating agencies would likely have reacted to a more accurate representation of Enron’s financial health. Bates White’s methodology provided a common and consistent basis for measuring the causal contribution of each of almost 100 separate transactions—and ultimately of each defendant—to the harm suffered by the company and its creditors. Bates White’s efforts also included a thorough analysis of Enron’s massive derivatives trading book. This analysis accounted for the key drivers of the value of Enron’s trading positions in bankruptcy. Furthermore, as part of the equitable subordination proceedings against the defendants, Bates White developed a methodology to estimate the resolution values of Enron’s assets and obligations for each of the 180 Enron debtor entities.

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