Investors Lose Key Advocate In Case on Financial Crimes
Tuesday, June 12, 2007
The top law enforcement officers in Arkansas and New Jersey did it.
So did professors in Tulsa and pension funds in New York, Alabama, and Michigan.
Yet when it came time yesterday to file court briefs favoring investors in a once-in-a-generation securities law dispute, the U.S. solicitor general remained on the sidelines. A deadline passed with no word from Paul D. Clement, the Bush administration's liaison to the Supreme Court.
By keeping silent, Clement rejected a plea from the Securities and Exchange Commission to throw the government's weight behind investors, producing howls from plaintiff lawyers, unions and senior House Democrats.
At issue in the coming Supreme Court case is whether shareholders can sue bankers, lawyers and accountants who help their corporate clients get away with financial malfeasance but do not make misleading public statements in the process. The dispute is worth billions of dollars to corporate America -- and to lawyers who represent plaintiffs in class-action cases.
Earlier this month, the five-member SEC voted to prepare legal papers supporting investors in the lawsuit, to be heard in the court's next term. But Treasury Department officials adopted an opposing view, citing industry complaints that lawsuits put U.S. companies at a disadvantage to foreign rivals. The solicitor general's office, responsible for representing the federal government's position at the high court, found itself in the middle of an inter-agency squabble.
Representatives for the SEC and the Treasury declined to comment yesterday even as advocates on both sides of the issue amplified their views.
"Without this tool to address fraudulent activity by business partners and service providers to public companies, we will lose an important deterrent to financial wrongdoing," Reps. Barney Frank (D-Mass.), George Miller (D-Calif.) and Brad Sherman (D-Calif.) wrote in a letter delivered to Clement and SEC officials yesterday.
In essence, the Supreme Court ruling in the current case will determine third-party liability in a string of cases, including whether Enron investors and plaintiff lawyer William S. Lerach can jump-start a stalled case against Merrill Lynch and Barclays. The University of California, lead plaintiff in that $7 billion case involving the 2001 Enron collapse, filed court papers yesterday supporting the investors' position.
"It would be really tragic for America's investors to have our government turn against them in a case as noteworthy as Enron," former SEC chairman Arthur Levitt said in an interview. "The SEC's stand on behalf of investors is the appropriate position."
In a prepared statement, the U.S. Chamber of Commerce predicted a "legal free-for-all" if plaintiff lawyers were allowed to proceed in such cases. Peter J. Wallison, a scholar at the American Enterprise Institute, fumed in an interview that if government sides against business interests, "it will be disastrous for the country's economy."
It remains unclear whether Clement will continue to remain silent or whether he will submit court papers supporting investment banks in the Supreme Court case. In the dispute, investors are seeking permission to move forward with a lawsuit against Scientific-Atlanta and Motorola for allegedly helping Charter Communications conceal financial woes.
Briefs in favor of business are due in a month. A Justice Department spokesman declined to comment yesterday on the solicitor general's next step.