Investors Defeated In Enron Decision

By Carrie Johnson
Washington Post Staff Writer
Tuesday, March 20, 2007

A federal appeals court yesterday thwarted attempts by a group of Enron investors to sue investment banks over their role in the Houston energy trader's collapse, giving Wall Street a powerful weapon to defend itself against future claims.

The decision by the U.S. Court of Appeals for the 5th Circuit postpones a $40 billion class-action case that was expected to go to trial within weeks and frustrates the efforts of shareholders to win payment from Merrill Lynch, Credit Suisse First Boston and Barclays.

To be held liable for the claims, the banks must have taken part in deception and must have violated a duty to investors. But the appeals court panel rejected the notion that in the absence of clear lies or omissions from bankers, the banks had an obligation to investors.

In practical terms, the court substantially narrowed the scope of liability for bankers, lawyers and accountants who may have not participated directly in a corporate fraud but who stood by silently as it proceeded.

William Lerach, the San Diego plaintiff lawyer who has collected $7.3 billion from banks and other defendants in the case, called the decision "wrong under the law" and "unfair to victims in the worst fraud in recent memory." Lerach vowed to appeal the ruling all the way to the U.S. Supreme Court.

The high court may well accept his invitation. Yesterday's decision puts the 5th Circuit, which has jurisdiction over such states as Texas and Louisiana, in conflict with the 9th Circuit, which covers a vast swath of Western states including California, Washington and Oregon. In a similar but unrelated case, the 9th Circuit has adopted a far-less-strict standard for investors to bring class-action securities suits.

"We're looking at a serious split that's going to need to be resolved by the Supreme Court, if not in this case, then in another one," said Deborah Jeffrey, a defense lawyer in the District who represents a former Enron executive.

The Enron class action is one of the largest securities lawsuits and settlements in U.S. legal history. Two years ago, Citigroup and J.P. Morgan Chase settled for more than $2 billion each under intense pressure from plaintiff lawyers. But since then, the outcry against some of these business practices diminished. Waiting out the change in sentiment benefited the banks that resisted the shareholders' demands.

"For the 5th Circuit to step in only weeks before the trial is a major signal in the direction of a narrowed scope of liability . . . and a very big victory for business," said Georgetown University law professor Donald C. Langevoort.

In a series of conferences last week, industry titans and even Treasury Department officials pressed the Justice Department and the Securities and Exchange Commission to rewrite costly regulations and make it more difficult for investors to sue gatekeepers such as banks and accounting firms.

Lawyers for the banks and the shareholders today will meet with U.S. District Judge Melinda Harmon, who has presided over the sprawling case for five years, to consider how to proceed. The appeals court ruling effectively bars individual investors with few resources from pursuing their claims. Large institutions with more money may choose to file their cases in state court, experts said.

In recent months, seeking to wrap up the long-running case and focus on the deepest pockets, plaintiffs had moved to dismiss as defendants several former Enron executives, including former Internet unit chief Lou Pai, who reaped more than $280 million from selling his stock.

Yesterday's ruling counts as a victory for the former executives as well, because banks will no longer be interested in hitting them up to pay for a share of the possible settlement or verdict.

Among the remaining defendants in the case is former Enron chief executive Jeffrey K. Skilling, who is serving a 24-year, four-month prison term in Waseca, Minn., after being convicted last year of conspiracy, securities fraud and insider trading. Skilling's lawyer has vowed to appeal the conviction.

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