The Wall Street Journal-20080123-Justices Rebuff Enron Holders
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Justices Rebuff Enron Holders
WASHINGTON -- The Supreme Court turned away an appeal from Enron shareholders seeking to recover losses from Wall Street banks, underscoring the sweep of last week's decision limiting the liability of companies that help other corporations commit fraud.
The decision effectively ends the $40 billion Enron class-action lawsuit filed by several institutional investors, including public and private pension funds. Last week, in a case known as Stoneridge, the court ruled that federal law precluded private shareholder lawsuits against companies that helped a cable-television company falsely inflate its profits. The court said in a 5-3 opinion that the Securities and Exchange Commission has exclusive authority to go after such third parties, unless they issued public statements on which investors relied.
The Enron plaintiffs argued that their case should proceed at the Supreme Court because the defendants "are financial professionals who structured financial transactions that deceived the market." The defendants, including Merrill Lynch & Co., Credit Suisse Group, Barclays PLC and Pershing LLC, argued that the legal question in their case was identical to Stoneridge.
The Supreme Court sided with the defendants by rejecting the plaintiffs' appeal yesterday.
"The Supreme Court all along has defined securities fraud as being the public statements that the firm made to its shareholders," said Jennifer Arlen, who teaches corporate law at New York University School of Law. Yesterday's action stresses that "private plaintiffs can only go against people who participated directly in making those statements," not those "who lay the groundwork for being able to make those statements," she said.
A spokesman for the lead plaintiff, the University of California, said the Enron investors haven't given up hope of finding a legal strategy to fight the defendants. Trey Davis, the university's director of special projects, said the university will present its alternative approach soon to a federal district court.
Investors lost billions of dollars when Enron collapsed in late 2001 amid accounting fraud. The University of California and other plaintiffs had filed a class-action lawsuit targeting the financial firms. Last year, a federal appeals court in New Orleans rejected class-action status for the lawsuit, saying the plaintiffs hadn't established that they relied on actions by the investment banks. The high court's action means that ruling will stand.
(Regents of the University of California v. Merrill Lynch Pierce Fenner & Smith Inc.)
Separately, the justices sent another case that turns on the Stoneridge ruling back to lower courts.
The California State Teachers' Retirement System sued Cendant Corp., now known as Avis Budget Group Inc., and Time Warner Inc. for allegedly participating in a scheme where Homestore.com inflated its revenue. A federal appeals court let the class-action suit over the $190 million in accounting errors go forward, but the Supreme Court ordered that the case be reviewed in light of the Stoneridge precedent.
In June 2006, Homestore's former chief executive, Stuart Wolff, was found guilty in Los Angeles of charges related to a scheme to inflate advertising revenue. Homestore is now known as Move Inc.
(Avis Budget Group and Time Warner v. California State Teachers' Retirement System)
