Risk & Compliance

Investors Ask SEC to Back Enron Bank Lawsuit

The commission has yet to opine on whether Merrill Lynch, Credit Suisse, and Barclays should be equally liable for Enron's accounting fraud.
Stephen TaubMay 10, 2007

Union officials, state regulators, and people who lost money when Enron collapsed are calling on the Securities and Exchange Commission to support their effort to sue Wall Street banks for damages, according to the Associated Press.

Investors who lost their retirement savings made their plea to the regulator on Wednesday as their lawsuit against three investment banks awaits a Supreme Court decision. SEC chairman Christopher Cox reportedly listened to the Enron victims’ concerns; however, the commission has not yet filed supporting briefs for either side of the case. The $40 billion lawsuit claims that Merrill Lynch & Co., Credit Suisse Group, and Barclays PLC should be held equally liable for the accounting fraud at Enron. The case raises the larger question of whether so-called secondary actors can be held responsible for another company’s misdeeds.

“The SEC must now stand firm and vigorously to protect the public,” Andy Stern, president of the Service Employees International Union, said at a news conference earlier this week, according to the AP. Silence by the agency on the issue “would be both deafening and dangerous,” he reportedly said.

It’s an issue that has conflicted the courts, which have issued split decisions. As CFO.com pointed out in March, a three-judge panel for the Fifth Circuit found in favor of secondary actors — three investment banks that did business with Enron. The court ruled that the investors cannot combine their litigation against Merrill Lynch, Credit Suisse First Boston, and Barclays Bank into a class-action lawsuit. “Presuming plaintiffs’ allegations to be true,” the judges said, according to The New York Times, “Enron committed fraud by misstating its accounts, but the banks only aided and abetted that fraud by engaging in transactions to make it more plausible; they owed no duty to Enron’s shareholders.”

In an unrelated case, CFO.com reported earlier this week, a federal judge ruled that Fannie Mae shareholders cannot include Goldman Sachs in their lawsuit stemming from the mortgage giant’s accounting scandal, according to the Associated Press. People who lost money from investing Fannie Mae shares had asserted that Goldman constructed deals that enabled the mortgage company to shift more than $107 million in earnings into future years without properly informing investors, the wire service added.

In his ruling, U.S. District Judge Richard J. Leon said, however, that there’s no evidence that Goldman prepared any of Fannie’s misleading financial statements or knew about them in advance, according to the AP. Earlier, Goldman was dropped as a defendant in a shareholder derivative lawsuit, the wire service reported.

In March, the Supreme Court also agreed to rule on another case that would determine whether a company’s shareholders can sue its suppliers when the company is alleged to have committed securities fraud. This case involves StoneRidge Investment Partners and its stake in cable television provider Charter Communications. StoneRidge alleged that Charter had entered into sham transactions with Motorola and Scientific-Atlanta and inflated Charter’s revenue by $17 million, reported the Associated Press at the time.

StoneRidge sued Motorola and Scientific-Atlanta (now part of Cisco Systems) for participating in a “scheme to defraud” investors. A federal district court and the Eighth U.S. Circuit Court of Appeals each dismissed StoneRidge’s claim, ruling that Motorola and Scientific-Atlanta aided and abetted Charter’s fraud but did not violate securities laws themselves, according to the AP.

Last summer, however, the Ninth Circuit determined that plaintiffs can seek damages from a third party in certain circumstances. The plaintiffs in Simpson v. AOL Time Warner were shareholders in a company that in 1996 launched the real-estate website Homestore.com (now Move.com). According to the AP at the time, plaintiffs could prevail if they proved that the principle purpose and effect of a defendant’s behavior was to create “a false appearance from illegitimate transactions in furtherance of a scheme” to commit fraud.

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