Peace Dividends: Big Firms Settle With Financial Regulators

Million-dollar settlements used to make headlines. Not anymore. The following is a list of recent billion-dollar settlements that will affect future rates for directors and officers liability insurance.

-On May 10, 2004, Citigroup Inc. announced that it will pay $2.65 billion to Worldcom Inc. investors and announced that it will set aside $4.95 billion to cover litigation costs. This brings its reserves related to all pending corporate litigation and regulatory settlements to approximately $6.7 billion (pretax).

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-On June 30, 2004, JP Morgan Chase recorded a $3.7 billion (pre-tax) addition to its litigation reserve, which brings the firm?s reserve for all litigation, including Enron and WorldCom settlements with regulators regarding equity research claims, and various other securities actions, to approximately $6.7 billion.

-On Dec. 18, 2003, New York Attorney General Eliot Spitzer announced a settlement with Alliance Capital Management that required Alliance to pay restitution and penalties of $250 million. The deal also required Alliance to reduce fees it charged investors by $350 million over the next five years.

On Feb. 5, 2004, Spitzer announced, along with the U.S. Securities and Exchange Commission and the New Hampshire Bureau of Securities Regulation, a $175 million settlement, which required Massachusetts Financial Services Co. of Boston to pay restitution to injured investors, and to cut its management fees by an estimated $125 million over the next five years and pay a penalty of $50 million.

-From April to June 2004, various other mutual fund advisers entered into similar settlements with Spitzer.A number of civil cases relating to mutual fund activities remain.

-On Oct. 31, 2004, a federal judge issued an order approving the $1.4 billion global settlement of cases that the SEC and other regulators brought against 10 of the top investment firms and two individuals alleging undue influence of investment banking interests on securities research at brokerage firms.

Many financial institutions remain defendants in civil suits relating to companies like Enron, Worldcom and Adelphia. There is the possibility, even the likelihood, that there will be more settlements by financial institutions and perhaps judgments in some of these cases. The potential liability for all financial institutions in all of these situations is very large.

March 1, 2005

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