Investors, Advocates Worry About U.S. Position on Fraud Recovery

By Carrie Johnson
Washington Post Staff Writer
Saturday, June 9, 2007

Labor groups and plaintiffs' lawyers sounded alarms yesterday over upcoming court filings in a case that could determine whether investors in Enron and other fraud-ridden companies can recover money from investment banks.

The advocates expressed concern that Solicitor General Paul D. Clement, who argues Bush administration positions before the Supreme Court, could be preparing to reject a recommendation from securities regulators that the government take the side of investors. They fear such a move would make it impossible for shareholders to recover money from bankers, lawyers and accountants who watched silently while corporate clients engaged in wrongdoing.

The issue will come to a head Monday when briefs supporting plaintiffs are due in a Supreme Court case that revolves around the issue, called scheme liability. Industry groups and class-action lawyers have lobbied the Securities and Exchange Commission intensely to support their opposing positions, in which millions of dollars are at stake.

The five-member SEC recently voted to support the idea that investors could collect money from third parties that may have watched a fraud take place but did not make false statements about it, The Washington Post reported a week ago. That position tracked a pro-investor argument the SEC advanced in previous years, activists said.

But the Treasury Department adopted a different stand in a letter it sent to the solicitor general's office last week. Treasury officials said that U.S. companies could lose ground to foreign rivals if such cases were allowed to proceed, echoing language in three recent industry reports that claim the United States is at a disadvantage because of securities lawsuits.

"Treasury believes that uncertainty related to primary liability of third parties could adversely affect the competitiveness of U.S. markets by posing unknown risks for entities that do a broad range of business for public companies," spokeswoman Jennifer Zuccarelli said yesterday.

A spokesman for the Justice Department declined to comment yesterday on the approach Clement would take. The solicitor general could adopt the SEC position, make changes or decide to remain silent.

The Supreme Court case involves Charter Communications. But it is being closely watched as a proxy for the long-standing Enron dispute. Earlier this year, a federal appeals court stopped a class action against Merrill Lynch and Barclays over their role in Enron's 2001 collapse. A ruling by the high court in the Charter case could revive the Enron litigation, which already has recovered $7.3 billion for victims.

The possibility of a turnaround by the administration inflamed the Lerach Coughlin law firm, whose most prominent member, William S. Lerach, directed the Enron class action. Lerach said last week that he is considering retirement during a widening federal investigation of his litigation tactics.

Dan Newman, a spokesman for the law firm, said that the solicitor general not filing a brief in support of plaintiffs would be a "shameless" maneuver tantamount to "throwing the Enron victims overboard to rescue corporate crooks."

"It would be outrageous if the administration that swore on a stack of Bibles they were going to do the right thing by Enron victims later repudiated that position," said Damon A. Silvers, associate general counsel of the AFL-CIO.

View all comments that have been posted about this article.

© 2007 The Washington Post Company