Paulson Behind Opposition to Third-Party Suits

Treasury Secretary Henry M. Paulson Jr. said yesterday he personally initiated his department's role in a Supreme Court case that could hurt shareholders' efforts to recover losses in securities fraud lawsuits.

At Paulson's request, Treasury this month cautioned the Justice Department's solicitor general about enabling investors to sue firms that have done business with scandal-ridden companies.

Paulson's acknowledgment came at a hearing with the House Financial Services Committee in which Rep. Maxine Waters (D-Calif.) focused on the plight of investors who lost billions of dollars in the collapse of Enron, a Texas energy company.

The issue arose because of a shareholder suit before the Supreme Court that seeks to recover money in a securities fraud case against two suppliers to a cable TV company. The outcome probably will determine whether a similar lawsuit by Enron investors against investment banks is allowed to proceed.

The Securities and Exchange Commission urged the solicitor general to file a brief in support of investors. But President Bush, Treasury, the Federal Reserve Board and the Office of the Comptroller of the Currency weighed in on the opposite side of the issue, which is referred to as third-party liability.

"I am a very strong advocate of protections against security fraud," Paulson replied. "I asked the Treasury Department to send a letter to the solicitor general" on the separate case before the Supreme Court because "I thought it had enormous implications for the U.S. economy."

Paulson said his concern was exposing firms to liability that "happen to do business" with a company that has engaged in securities fraud.