President Weighed in on Case; Outcome Will Affect Enron Investors

By MARCY GORDON, Associated Press Writer
2007 The Associated Press

June 12, 2007

WASHINGTON — In a lawsuit that harks back to the Enron scandal, the Bush administration is at odds with the federal agency that oversees securities markets as well as with state attorneys general and consumer and investor advocates.

President Bush personally weighed in with his views before the administration decided not to support investors whose securities fraud case is now before the Supreme Court.

The president's message was that it's important to reduce "unnecessary lawsuits" and that federal securities regulators are the ones in the best position to sue, said Al Hubbard, Bush's chief economic adviser and director of the National Economic Council.

Hubbard said Bush's perspective was conveyed to Solicitor General Paul Clement by Deputy White House counsel Bill Kelley. Hubbard said the president communicated his policy views, not specifically what he thought the solicitor general should do.

Bush's role in the case underscores its significance. The outcome of the Supreme Court case could determine whether investors can pursue lawsuits to recover investment losses if they can prove collusion between Wall Street institutions and scandal-ridden companies.

The deadline for siding with investors in the case now before the Supreme Court ended at midnight Monday, and the solicitor general did not file a brief. Clement represents the government's views before the Supreme Court. The administration will decide in the next 30 days whether to side with the defendant companies or not to participate in the case at all.

"We think the SEC is the right entity to bring those lawsuits and make sure investors are protected," Hubbard said in describing the president's views. "We are in a society that is overly litigious and it's very harmful to society, very harmful to investors."

"The president believes that it's important to make certain that we reduce the unnecessary lawsuits because that's a very big burden to the economy, which adversely impacts investors," Hubbard added.

"There was a difference of opinion within the administration, but ultimately the president makes up his own mind," said Hubbard. He said the Federal Reserve and the Office of the Comptroller of the Currency sent letters supporting "the policy position that the president believes in."

The Securities and Exchange Commission voted 3-2 to ask the solicitor general to support shareholders in the pending court case.

The case before the Supreme Court pits cable TV company Charter Communications Inc. against a shareholder that accused it of securities fraud, raising an issue known as scheme liability.

The issue is whether shareholders can collect damages from investment banks, attorneys and accountants believed to have aided fraud by their corporate clients.

The high court's ruling in the case could determine whether the Enron plaintiffs' separate $40 billion lawsuit against the investment banks — stalled by a federal appeals court ruling in March — can proceed.

The Supreme Court filings in the Charter case refer repeatedly to the Enron scandal.

Thirty state attorneys general sided with investors and referenced the Enron scandal 55 times in a 43-page court filing.

"Our system of monitoring and eliminating securities fraud would be severely undermined" if the parties who could have pulled the plug on Enron "get to walk away," the state attorneys general wrote.

State securities regulators also filed papers in the Supreme Court in the case.

"Companies have partnered not just with their accountants, but also with their investment banks as in Enron," said North American Securities Administrators Association. The group represents securities regulators in the United States, Canada and Mexico.

Former Enron shareholders contend in the suit that Merrill Lynch & Co., Barclays PLC and Credit Suisse Group should be held equally liable as Enron Corp. as participants in the fallen energy company's massive accounting fraud.

The case before the Supreme Court is Stoneridge Investment v. Scientific-Atlanta, 06-43.