Bush administration backs business in filing

WASHINGTON – The Bush administration Wednesday sided with accountants, bankers and lawyers seeking to avoid liability in corporate fraud cases, arguing that investors must show they lost money after relying on deceptions by third parties in order to proceed with private lawsuits.

Ending weeks of speculation and intense lobbying, U.S. Solicitor General Paul Clement backed business interests in a multibillion-dollar dispute the Supreme Court will hear this fall. Allowing investors to move forward with their case, Clement wrote in a filing to the court, flies in the face of congressional intent and would amount to “a sweeping expansion” of the law.

The case is being closely watched because it could set a precedent for whether investors such as Enron retirees will be able to recover losses from business partners whom they say knowingly took part in fraud schemes. Often, legal experts say, accountants and bankers are the only remaining sources of money after a fraud unravels.

The lawsuit by Charter Communications investors against the company’s former business partners – Motorola and Scientific-Atlanta – drew federal lawmakers, trade groups, investor protection activists and former regulators who lined up on opposite sides of the case. The Supreme Court is scheduled to hear oral argument in the dispute Oct. 9.

The five-member Securities and Exchange Commission voted earlier this year to support plaintiffs in the case, but the agency’s brief was not filed with the court since the administration speaks with one voice, through Clement. The SEC did not sign the brief submitted Wednesday.

In the filing, Clement mostly adopted concerns expressed by President Bush, Treasury Secretary Henry Paulson Jr. and major trade groups including the U.S. Chamber of Commerce and the National Association of Manufacturers.

Weighing in for plaintiffs, Clement argued, would expose third parties in the United States and overseas to billions of dollars in legal claims and “considerably widen the pool of deep-pocketed defendants that could be sued” for misrepresentations by their business partners.

At issue in the case is whether shareholders can sue banks, law firms, accounting firms and suppliers who engaged in fraud but did not make public statements about the scheme on which investors relied. Clement said that third parties who do not speak to the market still can trigger prohibitions on manipulative or deceptive conduct. But to prevail, he said, private plaintiffs must prove they relied on the third parties to make investment decisions and that they suffered losses as a result.