Supreme Court Missed a Chance to Protect Pension Funds, Investors

Opinion from The Morning Call
2008 The Morning Call

January 24, 2008

Caveat emptor: n. The axiom or principle in commerce that the buyer alone is responsible for assessing the quality of a purchase before buying.

American Heritage Dictionary

Caveat emptor is no longer just a warning to consumers to exercise caution before they buy. Two U.S. Supreme Court rulings this week and last essentially made this a reality for investors, and therefore, the stock market, too.

The big case, of course, was a suit filed by the University of California to recoup tens of millions of dollars its pension plan lost in the Enron collapse of 2001. Pennsylvania officials, as did those in 32 other states, had joined this suit because state pension funds lost $70 million when the Texas energy company went bankrupt. Other investors were party to the suit, too. When Enron's balloon, inflated by financial deceit and accounting trickery, burst, it cost thousands their jobs, blew a $60 billion hole in the national economy and $2 billion evaporated from pension plans around the country.

The Enron plaintiffs had pressured a number of the financial institutions who had enabled Enron to overstate its value and understate its liabilities to settle for $7.3 billion. The University of California's suit before the Supreme Court sought $40 billion more from Merrill Lynch, Credit Suisse First Boston and Barclays Bank.

But on Tuesday, the justices, without comment, rejected the suit. Apparently their decision hinged on a similar case they ruled upon last week -- Stoneridge v. Scientific-Atlantic -- another case with Pennsylvania connections. StoneRidge Investment Partners, a Malvern, Chester County, investment firm, had alleged that investors in a cable company were defrauded by its suppliers. In a 5-3 decision, the Supreme Court ruled against the investors because they couldn't show that their investment decisions were based on lies by the third-parties -- the suppliers. Justice Anthony Kennedy wrote that federal securities fraud law ''does not reach all commercial transactions that are fraudulent and affect the price of a security in some attenuated way.''

Ergo, Merrill Lynch and the banks are off the hook.

It's interesting that the Securities Exchange Commission, whose job it is to assure the credibility and integrity of the marketplace, urged the Bush administration to side with the investors. Instead, Mr. Bush sided with those who helped Enron ''cook'' its books and perpetrate a monumental fraud on the nation. In the current turmoil of stock market volatility and the fears of recession, apparently the justices considered the Enron case too hot to handle. In the process, an opportunity to make financial markets more accountable was lost, leaving the job to Congress, which must contend with a hostile White House.

Caveat emptor, indeed!