By Russell McCulley
Reuters
Monday, February 5, 2007; 7:47 PM

NEW ORLEANS (Reuters) - Lawyers for Merrill Lynch and Co. Inc. <MER.N> and Credit Suisse Group <CSGN.VX> on Monday told a U.S. appeals court a $40 billion lawsuit alleging the banks helped hide financial misdeeds that led to Enron's collapse should not proceed as a class-action complaint.

If the three-judge panel from the 5th Circuit Court of Appeals overturns the class certification ruling from U.S. District Judge Melinda Harmon in Houston, it would be a major blow to the investors' case, which is set for trial in April.

The banks argue that Judge Harmon has wrongly allowed investors to allege Merrill Lynch and Credit Suisse were primary participants in the fraud.

But in court papers Merrill Lynch has said there is no evidence to prove the investment bank was a "substantial or significant factor" in the losses that caused Enron's collapse.

And that was an issue the appeals judges focused on, quizzing both sides about whether or not the banks were only secondary actors in the alleged fraud.

"What is the test we use to determine whether a party is an aider and abettor rather than a secondary party?" Judge Jerry Smith, asked Richard Clary, a lawyer for Credit Suisse.

Patrick Coughlin, a attorney representing the plaintiffs, told the court the banks had a fiduciary duty to Enron's investors.

In a class-action lawsuit, investors consolidate their complaints, allowing more clout than if claims were pursued on an individual basis. And if the class-certification were overturned in this case, it would be a massive setback for the plaintiffs.

"It would be much more difficult for the plaintiffs to recover if the appeals court rules in the banks' favor," Lowell Peterson, a lawyer with Meyer Suozzi English & Klein in New York. "A lot of times, it's only realistic for these plaintiffs to pursue claims as a class."

So far, the lawsuit has netted more than $7 billion for investors, including $2 billion or more each from Canadian Imperial Bank of Commerce <CM.TO>, J.P. Morgan <JPM.N> and Citigroup <C.N>.

Other banks named in the complaint include Toronto Dominion Bank <TD.TO>, Royal Bank of Canada <RY.TO> and Royal Bank of Scotland Group Plc <RBS.L>.

Enron filed for bankruptcy on December 2, 2001. The company's collapse erased thousands of Enron employees' pensions and billion of dollars in investors' money.

Coughlin expects the appeals judges to issue an opinion on matter within a couple of weeks.