University of California Joins Others Urging Supreme Court to Support Enron Investors

Amici curiae in support of scheme liability filed by UC, Attorneys General, academic experts, securities administrators, consumer and labor groups, and large pension funds

From The University of California

June 11, 2007

The University of California today (June 11) joined dozens of state Attorneys General, many of the nation's largest pension funds, leading academic experts, consumer groups and professional organizations to file friends-of-the-court briefs with the U.S. Supreme Court in support of investor protections.

“The evidence clearly proves that these financial institutions were active, knowing and crucial participants in the Enron fraud – they were not innocent bystanders,” said Charles Robinson, the University's general counsel. “For victims of one of the most egregious corporate frauds in history, we are simply asking for our day in court.”

The Supreme Court, in either the Enron case or the 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. The briefs addressing this question – a concept known as “scheme liability” – were filed today in support of the plaintiffs in the Stoneridge case.

Today, UC also filed a reply brief in further support of its previously filed petition for certiorari requesting the Supreme Court to decide the Enron appeal at the same time as the Stoneridge case during its 2007-08 term. UC, the lead plaintiff in a class-action lawsuit seeking to recover damages from the Wall Street banks that helped to orchestrate the Enron fraud, filed a petition in April asking the Supreme Court to overturn a recent ruling by the Fifth Circuit Court of Appeals that would end litigation against those banks.

According to several news reports, the Securities and Exchange Commission recently recommended that the U.S. Justice Department also file an amicus brief on behalf of the Stoneridge plaintiffs. According to the reports, the SEC voted to file a pro-plaintiff brief in Stoneridge and to affirm its long-standing support of the existence of scheme liability. SEC chairman Christopher Cox has also publicly vowed that “the United States government will do its level best to make sure that injured Enron investors receive the full amount of coverage to which they're entitled by the legal system.”

UC's amicus brief detailed the banks' unique role in masterminding the Enron fraud, stating that the investors' class action case “demonstrates the difference between conduct that merely aids or abets another's wrongdoing, and conduct that is itself deliberately deceptive… [T]he Banks reaped huge profits by engaging in the scheme in which they: structured contrived financial transactions to falsify Enron's financial statements (generating fake profits and hiding billions of dollars of debt); sold billions in new Enron securities to the public (via prospectuses and circulars containing the falsified financial statements), thereby raising the fresh funds required to keep the Enron Ponzi scheme going; and had their securities analysts recommend Enron's stock via false analyst reports. This conduct inflated Enron's securities until the truth came out during 2001, causing the securities' prices to plummet and become worthless.”

Several of the nation's foremost academic experts in securities law – professors James D. Cox, Jill E. Fisch, Donald C. Langevoort, Richard M. Buxbaum, Melvin A. Eisenberg and Hillary A. Sale – explained in their brief that, without scheme liability, market integrity will suffer and victims will too often be left holding the bag: “[U]nless investors can recover from any person who engages in deceptive sham schemes, the integrity of our markets will suffer. These investors – and the markets – will suffer because centrally and recurrently involved third party schemers will face far weaker disincentives to avoid participating in sham transactions which they know are at the heart of a company's fraudulent misstatements. In some cases, where the company making misstatements is insolvent, such active schemers will be the only source of recovery.”

Attorneys General representing more than 30 states across the nation pointed out in their brief that without scheme liability many defrauded investors would have no redress: “Eliminating scheme liability for ‘non-speaking' actors will significantly diminish victims' right to compensation under the securities laws. …Virtually all of the record $7.1 billion settlement to investors in Enron came from ‘non-speaking' actors…Without those funds, many individual Enron shareholders would have received nothing; and without ‘scheme liability,' many more defrauded investors will receive nothing.”

The North American Securities Administrators Association also filed an amicus brief on behalf of all the 50 state's securities administrators, arguing: “A decision that holds all parties accountable for their role in a fraudulent scheme – regardless of whether their deception was perpetrated through words or deeds – will help repair the damage done to investors and deter future violations, without unduly burdening the legitimate industry. At a time when large scale financial fraud shows little sign of abating, this Court should ensure that injured investors have the opportunity to seek relief in federal court.”

The Council of Institutional Investors, which represents more than 130 public, labor and corporate pension funds with assets exceeding $3 trillion, stated: “Adoption of the strict test [for primary liability] would undercut lessons learned in the aftermath of recent financial scandals regarding the complexity of securities fraud today and the importance of deterring secondary actors from participating in fraud. It would give accountants, investment bankers, lawyers, and other third parties a ‘safe harbor' for fraud so long as they do not publicly announce their involvement with an issuer's misstatements. Contrary to the reasoning of some courts, the strict test is not required to stem a tide of frivolous litigation against secondary actors. Finally, neither lawsuits against issuers themselves nor SEC enforcement will adequately compensate investors in the face of the strict test.”

The Change to Win coalition of seven major labor unions which represent six million workers nationwide, filed a brief stating that refusing to hold secondary actors liable simply because they did not make false statements would encourage fraud: “[T]his ‘Speak No Evil' rule created by the court of appeals profoundly affects the honesty and integrity of the securities markets as well as the ability of defrauded investors to recover their losses. …The Enron, WorldCom, and other devastating corporate financial scandals of recent years have demonstrated the sophistication and ingenuity with which securities fraud may be perpetrated through sham transactions and seriously undermined confidence in our markets and our regulatory system. Immunizing intentionally deceptive conduct just because the perpetrator has not itself made any direct public statement guts the central purpose of the federal securities laws and encourages fraud.”

In their brief by AARP, the Consumer Federation of America and the U.S. Public Interest Research Group, consumer advocates explained: “The answer the Court gives to the question presented in this case will have significant consequences for victims of major corporate frauds of the sort that brought down Enron, WorldCom, and other companies during the last decade. Recent history shows that investors harmed by these frauds all too often go uncompensated for their losses when the accountants, bankers, lawyers, and others who are not affiliated with the corporate issuer but who actively scheme with the issuer to defraud investors…are not held to account for their violations of Section 10(b) of the Securities Exchange Act of 1934.”

“If the Supreme Court does not uphold scheme liability, it will establish legal precedent that Wall Street cannot be held accountable or responsible for conduct that hurts Main Street,” said Patrick Coughlin, the Enron plaintiffs' lead counsel with the firm of Lerach Coughlin Stoia Geller Rudman & Robbins LLP.

Briefs in Stoneridge case

Stoneridge plaintiff's brief:

University of California:

States' Attorneys General:

North American Securities Administrators Association:

Council of Institutional Investors:

Leading academic experts:

Labor organizations:

Public employee pension funds for New Jersey, New York, Pennsylvania, Michigan, Arkansas and Rhode Island:

New York State Teachers Retirement System et al.:

AARP, U.S. PIRG and Consumer Federation of America:

UC's Supreme Court petition in Enron case

UC's reply petition in Enron appeal (June 11, 2007):

UC seeks Supreme Court review of 5th Circuit Court's Enron ruling (April 5, 2007):

More background on the Enron case: