Everyone knows that some investment banks, including Merrill Lynch, Barclays, and Credit Suisse Group helped Enron commit fraud against shareholders. The question is, should shareholders be able to sue and collect damages from those same entities that were accomplices in the crime? The SEC, after in investigation, voted to ask that the Solicitor General Paul Clement file on behalf of the investors in a related case that's before the Supreme Court; Stoneridge Investment Partners v. Scientific-Atlanta and Motorola, 06-43..
U.S. Securities and Exchange Commission Chairman Christopher Cox has sided with Democratic commissioners and voted to weigh in on the side of investors in a Supreme Court case, according to two people familiar with the matter.
The 3-2 vote means that the agency is recommending that the U.S. Solicitor General's office advocate on behalf of investors in a case about whether third parties can be sued under federal securities laws for allegedly participating in another company's accounting fraud. That brief is due on Monday.
So what's the stance of the Bush administration?
The Bush administration rejected a Securities and Exchange Commission recommendation in a key Supreme Court case and did not support shareholders suing Wall Street banks for damages over Enron's collapse.
The Justice Department's solicitor general, who represents the administration in Supreme Court cases, did not file a friend-of-the-court brief by Monday's deadline....
Dan Newman, a spokesman for Enron plaintiffs' law firm Lerach Coughlin, called the administration's stance "an unprecedented example of politics trumping the rule of law, a crass slap in the face to (SEC Chairman Christopher) Cox and the Enron victims from the hyperpolitical Bush Justice Department."
Why does the Stoneridge case matter?
Along with the possibility that it could be considered in tandem with the Enron case, legal experts consider the StoneRidge hearing important because it gives the Securities and Exchange Commission a public forum for siding with either business or investors in these types of cases. The SEC has until June 11 to file an amicus brief on behalf of the plaintiffs and address the issue of scheme liability. The commission last addressed the question nearly three years ago when it filed a "friend of the court" opinion on the side of Homestore shareholders in Simpson v. AOL with the Ninth Circuit Court of Appeals.
At the time, the commission argued against a lower court ruling that said aiding and abetting manipulative or deceptive behavior is not in itself enough to classify a company as a primary violator of Rule 10(b) of the Securities and Exchange Act of 1935. The SEC asserted that a third party can be considered a primary violator if it "engages with the corporation in a transaction whose principal purpose and effect is to create a 0 appearance of revenues, intending to deceive investors in the corporation's stock."
The Ninth Circuit's decision to dismiss the case went against the plaintiffs and added to the confusion about when secondary actors could be held liable. "There is clearly a split in the circuit courts on when you can draw the line between primary liability and aiding and abetting," says Herbert Washer, a partner at Shearman & Sterling, which represents Merrill Lynch in the Enron case. The Ninth Circuit's opinion went beyond the scope of how the Supreme Court and other courts have defined what is considered a manipulative and deceptive act, he adds.
Companies that had a hand in creating the fraud, rather than just knowing about the violation, should be held liable, says Donald Langevoort, a professor at Georgetown University Law Center, who is considering submitting an amicus brief with other law professors in the StoneRidge case. Langevoort and other securities-law experts are hoping for a bright-line rule to come out of the StoneRidge case, which could happen if it is linked with the Enron case. Otherwise the question before the court would be too narrow and "we will have more years of uncertainty in litigation," he says.
