High court limits shareholders suits
WASHINGTON – The Supreme Court on Tuesday 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 produced dissension within the administration. President Bush and the treasury secretary supported limits on shareholder lawsuits while the Securities and Exchange Commission argued 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 Becker said Tuesday. “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 Tuesday against big investment houses.
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 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.