Last month's deferred prosecution agreement with the Justice Department could cost PNC Financial Services Group Inc. much more than the $115 million of fines and restitution it agreed to pay.
The deal, in which the Pittsburgh company "accepts and acknowledges" responsibility for what the government called improper use of three off-balance-sheet entities, provides a gold mine of evidence for plaintiff's and class-action attorneys, several lawyers said.
"This is a road map that shows exactly what PNC did, when they did it, and how they did it," said Debra Speyer, a Philadelphia investor-rights lawyer and former prosecutor for the National Association of Securities Dealers.
Tom Ajamie, a partner with Schirrmeister Ajamie LLC in Houston, called the agreement a "severe" one for PNC. "They've been charged with deceiving investors by moving problem loans to off-balance-sheet structures, where people don't know about them."
A spokesman for PNC would not comment.
Last year's regulatory troubles put PNC at the top of speculators' takeover lists, but the Justice Department settlement may give potential suitors pause. The deal stipulates that if the subsidiary PNC ICLC Corp., the unit at the heart of the settlement, "sells or merges all or substantially all" of its business operations during the term of the agreement, the buyer would be bound by the agreement as well.
The settlement addresses $762 million of troubled loans and venture capital investments that the company transferred to "certain off-balance-sheet entities" in 2001.
Bank regulators first intervened early last year by demanding that PNC move the assets back on to its balance sheet, an act that forced it to lower its 2001 earnings by $155 million. It entered a supervisory period with the Federal Reserve Bank of Cleveland and Office of the Comptroller of the Currency last July and agreed to make a number of changes to its risk management and governance procedures.
A Justice Department official said that PNC has been very cooperative and agreed to "real, internal reforms," which led the department to defer any criminal prosecution for 12 months to give the company time to comply.
Ironically, lawyers say, that cooperation could cost PNC dearly.
So far the Justice Department has ordered it to pay $25 million of penalties and set aside $90 million for an investor restitution fund to be administered and dispersed by a third party.
Barry A. Weprin, a lawyer at Milberg Weiss LLC who is pursuing a class action against PNC on behalf of shareholders, said the settlement has made what he calls an already strong case even stronger. "Even before the Department of Justice action, it was apparent this case would survive a motion to dismiss. Now they've admitted most of their conduct was wrong."
What's more, Mr. Weprin said, the restitution fund would likely put only a dent in the judgment his firm expects to win. "The $90 million would be available to satisfy some of the claims in our case, but it's our estimate that the damages are a substantial multiple of that."
J. Boyd Page of the Atlanta law firm J. Boyd Page & Associates LLC said that agreements like this provide invaluable help to plaintiffs, because the government has much broader investigative powers than private lawyers and thus can turn up more information of interest.
"Clearly, a lot of evidence has been uncovered that would be difficult for private lawyers to ever find," Mr. Page said. "Following in the government's footsteps has tremendous advantages."
The Justice Department has forbidden PNC from contradicting any "statement of fact" contained in the June 2 settlement, another potential sticking point for the company. Usually regulatory agreements allow a company to say it neither confirms nor denies any charges. Even April's historic $1.4 billion settlement between securities regulators and the nation's top investment banking firms contained such a clause.
The wording in the PNC deal "is a lot different than many that we see and much more restrictive," said Mr. Page, who specializes in investor lawsuits. "There's no question that it provides greater strength to class-action lawyers and limits the ability of PNC to deny the facts or sugarcoat the story."
In the settlement's statements of fact, the Justice Department charges that PNC's three off-balance-sheet transactions violated generally accepted accounting principles for special-purpose entities and that it "improperly treated the transfers" of $762 million of loans and investments "as sales qualifying for nonconsolidation."
The transfers resulted in "a material overstatement" of earnings per share in the third quarter of 2001, a "material understatement" of loss per share in the fourth quarter, and an overstatement - of 52% - of total 2001 per-share earnings, according to the settlement.
PNC set up the special-purpose entities with the help of American International Group Inc., and a Pittsburgh law firm approved the transactions. The Justice Department says that PNC paid the insurance company "management fees" that were in reality "structuring fees or balance-sheet rental fees."
The Corporate Fraud Task Force, a Justice Department unit formed last summer, oversaw the case against PNC.
Mr. Ajamie said that in response to the scandals at Enron Corp. and WorldCom Inc., regulators are taking a more aggressive approach to corporate investigations and actions. "We're going to see this happen more often."
But many say the settlement address conduct that would be a problem in any environment.
"The fact that this is a deferred prosecution agreement underscores the severity of it," said Mr. Page. "This is not a civil settlement. This is a plea and a potential criminal proceeding - and that is quite serious."
