UC and Enron Investors Join Coalition Urging the SEC to Protect Investors and Hold Banks Accountable for Securities Fraud
University of California - Office of the President
May 9, 2007
The University of California joined a broad coalition of consumer and labor organizations today (May 9) in asking the U.S. Securities and Exchange Commission to weigh in with the Supreme Court on behalf of Enron investors who were victimized by the Wall Street banks’ fraud.
“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 UC attorney Christopher M. Patti. “The evidence clearly proves that these financial institutions were active, knowing and crucial participants in the Enron fraud and not innocent bystanders. We urge the SEC, whose mission it is to protect investors, to join us in asking for our day in court.”
The groups’ request to the SEC details how the Enron fraud was perpetrated and led to the criminal indictment of many Enron executives, the company’s accounting firm and certain bank officials.
On April 5, Enron shareholders filed a petition with the U.S. Supreme Court, asking the justices for a review of their class action lawsuit against several banks whose active and knowing participation in the Enron fraud led to more than $40 billion 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, 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. 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. Internal documents and testimony has also revealed these banks simultaneously sold Enron stock to the public through false prospectuses and market analyses recommending the company’s stock.
The banks argue that because they did not make any false “statements” (using an extremely narrow legal definition of the word) about their conduct, they cannot be sued for any fraud they committed. The banks claim that their lack of false statements makes them a “secondary actor” immune to liability.
As a dissenting 5th Circuit 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 Supreme Court, in either the Enron case or the separate case of Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc (No. 06-43), will soon determine whether secondary actors that knowingly commit fraud can be held liable for their actions – what is known as “scheme liability.”
The Securities and Exchange Commission is currently revaluating their long history of supporting scheme liability, including in the Enron case.
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.
Among the banks engaging in these false financial devices:
“A rejection of scheme liability would deny justice for victims and allow perpetrators of fraud to walk away without being held accountable, said William S. Lerach, the plaintiff’s lead counsel with the firm of Lerach Coughlin Stoia Geller Rudman & Robbins LLP. “The SEC’s decision is a critical moment for the Enron victims who seek justice in this tragic situation.”
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.
To date, UC has obtained more than $7.3 billion 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.
The remaining defendants in the case which was set for trial include Barclays Bank, Credit Suisse First Boston and Merrill Lynch, as well as three former Enron officers – Jeff Skilling, CEO; Richard Causey, chief accounting officer; 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 the Supreme Court petition: www.universityofcalifornia.edu/news/enron/supremecourt0407.pdf
For more background on the Enron case:
Letters to the SEC: