By Carrie Johnson and Robert Barnes
Washington Post Staff Writers
Wednesday, January 23, 2008
The Supreme Court yesterday declined to hear an appeal by Enron investors suing major banks that allegedly helped the Houston company disguise its financial problems, all but closing the door on efforts by shareholders to hold third parties responsible for crippling stock losses.
Without comment, the high court refused to consider a lawsuit filed by the University of California Regents after Enron collapsed nearly seven years ago. All told, investors in the energy trader lost $40 billion after disclosures that fraud had permeated the business, which came to symbolize an era of rampant corporate corruption.
The ruling is a staggering setback to the movement to expand investor rights. Often, financial experts say, business partners and corporate advisers are the only deep pockets left to tap after a scandal-ridden company has succumbed to bankruptcy.
The court's rejection comes less than a week after it ruled, 5 to 3, in a related case that suppliers, lawyers and accountants could not be held financially liable for market losses unless investors could show they relied on the third parties to buy or sell stock. That case, known as StoneRidge Investment Partners v. Scientific-Atlanta, involved a deal between a cable company and two business partners.
In the Enron case, investors claimed that banks including Merrill Lynch, Credit Suisse and Barclays participated in transactions that allowed Enron to hide its financial problems and unload stock and debt in the years before it fell apart. The banks denied the claims and refused to settle under intense pressure from plaintiff lawyers, arguing they had done nothing wrong and that the law shielded them from investor lawsuits.
Lawyers for shareholders in the Enron suit asked the court to send their case back to a lower court for another look rather than reject the appeal altogether. They argued last week that StoneRidge involved "liability of mere customers or suppliers," while in the Enron lawsuit, the alleged misdeeds of financial professionals took center stage. The court declined, apparently agreeing with the bankers that the earlier decision had set precedent that bound the Enron case, too.
The Enron dispute had divided the business and legal communities and even created dissension within the administration. President Bush and the Treasury secretary supported limits on shareholder lawsuits, while the Securities and Exchange Commission argued that the cases should proceed.
The decision "slams the door on the fingers" of plaintiff lawyers trying to recover money by targeting third parties in fraud cases, Washington lawyer David M. Becker said yesterday. "The Supreme Court sent a clear message that it is not going to be receptive."
Lawyers for the University of California, who won $7.3 billion in settlements for investors before a New Orleans appeals court stopped the case in its tracks last year, vowed to press on yesterday against big investment houses.
"We're used to surmounting big obstacles in this case," said Dan Newman, a spokesman for the Coughlin Stoia law firm.
Still, legal analysts suggested the battle was all but over in a matter that has rocked investor confidence and helped usher in new laws for corporate governance.
"From a public policy standpoint, it's an outrageous result," said former SEC Commissioner Harvey J. Goldschmid, who filed a friend-of-the-court brief on behalf of the plaintiffs. "You can't turn down Enron without understanding the signal you're sending."
The rulings were cheered by business leaders, including Robin Conrad, an executive at the U.S. Chamber of Commerce. "Our thinking was, if there was room for private actions, we'd be in a situation of a litigation free-for-all, that there'd really be no limiting principle here," she said.
The court decisions block plaintiffs from pursuing third-party cases but leave open an avenue for regulators at the SEC and prosecutors at the Justice Department. Current and former SEC officials, however, say they lack the resources to bring many of the complicated lawsuits, which can take years to investigate before reaching a courtroom.
In Enron, for instance, federal agencies collected $440 million for shareholders, far less than the amount that plaintiffs extracted in settlements with banks and accountants before the courts rejected their legal arguments, according to court documents.
"In effect, these financial institutions have one less thing to worry about," said Henry T.C. Hu, a securities law professor at the University of Texas.
That means Congress may be the last hope for plaintiffs seeking to expand their power to hold corporate miscreants accountable. House Financial Services Committee Chairman Barney Frank (D-Mass.) and Senate Banking Committee Chairman Christopher Dodd (D-Conn.) had urged the Supreme Court to rule on behalf of Enron shareholders. In an interview yesterday, Frank said he would hold hearings on the implications of both court rulings and on the workload of the SEC, which must shoulder the burden now that the Supreme Court has rejected plaintiffs' right to sue. The agency soon will be operating without any Democratic commissioners, who previously have backed third-party lawsuits.
"There's no point in legislation because you'd get a sure veto," Frank said. "There's zero chance" of passing such a far-reaching law in an election year, he said.
Also yesterday, the Supreme Court underscored its rulings by sending back another case ( Avis Budget Group Inc., et al. v. California State Teachers Retirement System) in which the U.S. Court of Appeals for the 9th Circuit agreed that an investor suit alleging "scheme liability'' could go forward. The justices told the lower court to reexamine the case in light of its StoneRidge decision.