Risk & Compliance

Bush, SEC Differ in Fraud Liability Case

The SEC voted to support investors in a Supreme Court case that could determine liability for Enron's "secondary actors," but Bush believes regulat...
Sarah JohnsonJune 13, 2007

President Bush may have blocked a Securities and Exchange Commission amicus brief siding with investors in a Supreme Court scheme liability case, according to the Associated Press.

The U.S. solicitor general — who files the government’s opinion on Supreme Court cases — reportedly let the deadline pass for siding with plaintiffs in a case that could determine whether third parties can be held directly liable for another company’s securities violations after hearing Bush’s take on the matter. A Department of Justice spokesman confirmed to CFO.com on Tuesday, the day after the deadline, that the solicitor general did not file a brief.

According to the AP, White House lawyer Bill Kelley shared Bush’s view with Solicitor General Paul Clement that it’s important to reduce “unnecessary lawsuits” because they bring a burden to the U.S. economy. In an interview with the wire service, Bush’s chief economic adviser Al Hubbard said Bush believes federal securities regulators are in the best position to sue, rather than shareholders. “We think the SEC is the right entity to bring those lawsuits and make sure investors are protected,” Hubbard told the AP, describing Bush’s views. “We are in a society that is overly litigious and it’s very harmful to society, very harmful to investors.”

Indeed, the SEC has sued so-called secondary actors accused of helping Enron to misrepresent its financial health before its collapse in 2001. As of February, the SEC has collected $440 million from settlements and enforcement actions against individuals and business partners (including some banks) that it accused of participating in Enron’s fraudulent activities. The SEC has not yet announced a distribution plan for the funds.

Enron shareholders have also brought their own lawsuits against three banks through appeals courts up to the Supreme Court. The plaintiffs have asked the Supreme Court to combine their appeal against Merrill Lynch, Barclays, and Credit Suisse with a case brought by Charter Communications shareholders against the cable company’s vendors for a sham transaction. The Supreme Court will hear arguments for the latter case, Stoneridge v. Scientific-Atlanta, this fall, but has not yet decided whether to hear the two cases together or even hear the Enron case at all.

Amicus briefs on the side of Charter’s investors were due to the high court by midnight on June 11. The court received briefs from 30 state attorneys general and state securities regulators, according to AP. The deadline for filing an opinion in support of the defending companies is not for another month, the AP added.

The SEC commissioners reportedly voted 3-2 in support of asking the solicitor general to file a document supporting investors’ point of view. In 2004, the SEC filed a “friend of the court” opinion in support of Homestore shareholders in a lawsuit that also examined whether business partners of fraudulent companies can be held liable for a scheme. “Any person who directly or indirectly engages in a manipulative or deceptive act as part of a scheme to defraud can be a primary violator,” the SEC wrote one year before Christopher Cox became chairman.

Cox had been pressured by Enron investors and congressmen to weigh in on the Charter case during the past month. Pressed by a senator at a recent hearing about the SEC budget, Cox answered “no” when asked whether anything had changed in the past three years to warrant a shift in the SEC’s opinion on the Homestore case. The Wall Street Journallater called the case a “litmus test” for whether Cox favors investors over business interests.

Hubbard told the AP the Federal Reserve and Office of the Comptroller sent letters to Clement supporting Bush’s position. Bush did not tell the solicitor general what to do but merely shared his position on the case, Hubbard added.