Enron Investors Seek Supreme Court Review in Securities Case, Seek Right to Sue Banks Responsible for Fraud

From The University of California

April 5, 2007

Enron shareholders took their case to the U.S. Supreme Court today (Apr. 5), filing a petition for a review of their class action lawsuit against several banks whose active and knowing participation in the Enron fraud led to tens of billions of dollars in investor losses. The petition seeks to overturn the March 19, 2-1 decision by a three-judge panel of the Fifth Circuit Court of Appeals.

In reaching its decision last month, the 5th Circuit imposed a very narrow interpretation of the securities law to hold accountable and liable only those who have made affirmative misstatements in the market. Acknowledging that their ruling runs afoul of “justice and fair play,” the 5th Circuit majority ruled that while the banks' conduct was “hardly praiseworthy,” they are not liable for any fraud they committed because they did not make any false “statements” about their conduct. The bank defendants are alleged to have engineered financial transactions that disguised Enron's borrowing and falsely inflated the company's operating revenues and earnings. As a dissenting judge in the case pointed out, the ruling “immunizes a broad array of undeniably fraudulent conduct from civil liability…effectively giving secondary actors license to scheme with impunity, as long as they keep quiet.”

“The Enron shareholders deserve the opportunity to present their case at trial. On behalf of the victims of one of the largest securities frauds in history, we believe the law is broad enough to include parties who intentionally engage in deceptive conduct for the purpose of misleading investors, ” said Charles Robinson, the University's general counsel. “The evidence clearly proves that these financial institutions were active, knowing and crucial participants in the Enron fraud and not innocent bystanders. We are simply asking for our day in court.”

A copy of the petition is available online at:
  www.universityofcalifornia.edu/news/enron/supremecourt0407.pdf.
Appendix I: www.universityofcalifornia.edu/news/enron/supremecourt_app1_0407.pdf
Appendix II: www.universityofcalifornia.edu/news/enron/supremecourt_app2_0407.pdf

Andrew Fastow, Enron's former chief financial officer, has testified that many of these banks' transactions with his company were designed solely to create the false appearance of profits and cash flow. Internal Enron documents and the testimony of bank employees has detailed how the banks engineered sham transactions to keep billions of dollars of debt off of Enron's balance sheet and create the illusion of increasing revenue growth, earnings and cash flow – for the purpose of keeping its stock price inflated and deceiving shareholders and the market.

Among the banks engaging in these false financial devices:

  • Merrill Lynch purchased Nigerian barges from Enron on the last day of 1999, allowing Enron to record a paper profit on the sale, only because Enron secretly promised to buy the barges back within six months, guaranteeing the bank a profit of more than 20%. As a result of this fraud, Merrill Lynch ultimately paid $80 million to settle with the U.S. Securities and Exchange Commission.

  • Barclays entered into several sham transactions with Enron, including the creation of a “special purpose entity” called Colonnade, a shell company to hide Enron's debt – named after the street in London where the bank is headquartered.

  • Credit Suisse First Boston engaged in “pre-pay” transactions with Enron, including receiving fees for serving as one of the stop-offs for a series of round-trip, risk-free commodities deals in which commodities were never actually transferred or delivered. The off-setting commodities trades were a contrivance to disguise what was in reality a loan.

Plaintiffs contend that the federal anti-fraud statute, which prohibits any person from directly or indirectly using or employing a deceptive device or contrivance, clearly encompasses such conduct. The 5th Circuit majority, explicitly rejecting a “natural” reading of the statute, held that it is limited to prohibiting misstatements of fact. In reaching that conclusion, the panel split with many other federal courts and with the view of the Securities and Exchange Commission.

Although some of the bank defendants have settled with the Securities and Exchange Commission, forfeiting nearly a half billion dollars in illegal profits, and some banks have reached settlements with the plaintiffs, these three banks named as defendants in the class action lawsuit have still not repaid any funds to the defrauded shareholders. Because the Enron corporation is bankrupt, legal action against the banks who engaged in the fraud remains the only practical recourse for victims to recover at least a portion of the money they lost in the fraud.

“The banks should be held accountable. Beyond shielding them from redress in the Enron case, the 5th Circuit's decision gives other corporations the green light to commit fraud without consequence in the future, threatens the credibility of the securities markets, and leaves investors without any legal recourse,” said William S. Lerach, the plaintiff's lead counsel with the firm of Lerach Coughlin Stoia Geller Rudman & Robbins LLP.

Given the 5th Circuit's ruling, Judge Melinda Harmon has stayed the trial in the U.S. District Court in Houston, and no new trial date has been set.

UC has obtained more than $7.3 billion (including interest) for Enron investors, including $2.4 billion from Canadian Imperial Bank of Commerce, $2.2 billion from JPMorganChase, $2 billion from Citigroup, $222.5 million from Lehman Brothers, $69 million from Bank of America, $168 million from Enron's outside directors, and $32 million from Andersen Worldwide. UC has also secured a distribution of $37 million for investors through the bankruptcy proceeding for the LJM2 partnership involved in the Enron scheme.  

Prior settlements are not affected by the 5th Circuit's ruling. The prior settlement money will be allocated to the settlement class according to a plan of allocation which will be presented to Judge Harmon for approval.

The remaining defendants in the case which was set for trial include Barclays Bank, Credit Suisse First Boston and Merrill Lynch, as well as several former Enron officers, including Jeff Skilling, CEO; Richard Causey, chief accounting officer; Richard Buy, chief risk officer; Jeff McMahon, treasurer; and Mark Koenig, executive vice president of investor relations. The cases against Royal Bank of Canada, Royal Bank of Scotland and Toronto Dominion Bank have not been set for trial and are stayed pending the appeal of the 5th Circuit's ruling.

For more materials and background on the Enron case:
www.universityofcalifornia.edu/news/enron