Monday, February 05, 2007

Credit Suisse, Merrill Lynch Ask Court to Throw Out Enron Fraud Suit

Reuters, Russell McCulley, 5 Feburary 2007

Lawyers for Merrill Lynch and Co. Inc. and Credit Suisse Group on Monday told a U.S. appeals court a $40 billion lawsuit alleging the banks helped hide financial misdeeds that led to Enron's collapse should not proceed as a class-action complaint.

If the three-judge panel from the 5th Circuit Court of Appeals overturns the class certification ruling from U.S. District Judge Melinda Harmon in Houston, it would be a major blow to the investors' case, which is set for trial in April.

The banks argue that Judge Harmon has wrongly allowed investors to allege Merrill Lynch and Credit Suisse were primary participants in the fraud.

But in court papers Merrill Lynch has said there is no evidence to prove the investment bank was a "substantial or significant factor" in the losses that caused Enron's collapse.

And that was an issue the appeals judges focused on, quizzing both sides about whether or not the banks were only secondary actors in the alleged fraud.

"What is the test we use to determine whether a party is an aider and abettor rather than a secondary party?" Judge Jerry Smith, asked Richard Clary, a lawyer for Credit Suisse.

Patrick Coughlin, a attorney representing the plaintiffs, told the court the banks had a fiduciary duty to Enron's investors.

In a class-action lawsuit, investors consolidate their complaints, allowing more clout than if claims were pursued on an individual basis. And if the class-certification were overturned in this case, it would be a massive setback for the plaintiffs.

"It would be much more difficult for the plaintiffs to recover if the appeals court rules in the banks' favor," Lowell Peterson, a lawyer with Meyer Suozzi English & Klein in New York. "A lot of times, it's only realistic for these plaintiffs to pursue claims as a class."

So far, the lawsuit has netted more than $7 billion for investors, including $2 billion or more each from Canadian Imperial Bank of Commerce, J.P. Morgan, and Citigroup.

Other banks named in the complaint include Toronto Dominion Bank, Royal Bank of Canada and Royal Bank of Scotland Group Plc.

Enron filed for bankruptcy on December 2, 2001. The company's collapse erased thousands of Enron employees' pensions and billion of dollars in investors' money.

Coughlin expects the appeals judges to issue an opinion on matter within a couple of weeks.
Bloomberg, Bob Van Voris and Jef Feeley, 5 February 2007

Merrill Lynch & Co. and Credit Suisse Group asked a federal appeals court to end a class action lawsuit by Enron investors seeking $40 billion they lost when the now- bankrupt energy trader collapsed in 2001.

The firms argued that a Houston judge was wrong to allow investors to sue as a group. Merrill and Credit Suisse claimed they can't be sued because they didn't participate directly in the fraud that led to Enron's bankruptcy. The investors argued the court can only address whether the plaintiffs can sue as a group. Trial is scheduled for April in Houston federal court.

``This class certification is putting enormous coercive impact on my client, facing a possible $40 billion exposure,'' Merrill lawyer Stuart Baskin said today in New Orleans federal appeals court.

A ruling throwing out class status may reduce any liability the banks would face for Enron losses. In June, U.S. District Judge Melinda Harmon said investors who bought Enron securities between October 1998 and November 2001 may combine their claims. The decision gave investors, who would otherwise be forced to sue individually, the possibility of a much higher recovery at trial and more leverage in negotiating any settlement.

Other former Enron lenders, including Citigroup Inc. and JPMorgan Chase & Co., both based in New York, and Toronto-based Canadian Imperial Bank of Commerce, have settled with investors for more than $7 billion.

Merrill, the third-largest U.S. securities firm by market value and based in New York, and Zurich-based Credit Suisse, Switzerland's second-largest bank, argued that Harmon's ruling is based on the mistaken theory that the banks are individually responsible for investor losses because they took part in a scheme run by Enron and its former executives.

That theory, the banks argued, unfairly allows shareholders to hold individual banks liable for the entire fraud, regardless of whether they knew or participated in the entire scheme.

To be liable, a defendant must ``make a material misstatement or an omission where there's a duty to speak, or engage in manipulative securities trading,'' said Richard Clary, a lawyer for Credit Suisse.

U.S. Circuit Judge E. Grady Jolly, one of three judges hearing today's arguments, asked defense lawyers whether Merrill's agreement to buy a barge from Enron, a transaction which the judge said posed no financial risk to the securities firm, would make Merrill liable to Enron investors.

``The barge transaction is no different than countless other transactions contained in allegations in the complaint,'' said Merrill lawyer Baskin. ``Merrill Lynch could be responsible for tens of billions of dollars of liability based on that one transaction,'' if the court accepts the investors' argument.

Baskin predicted the courts under the jurisdiction of the New Orleans appeals court, which includes federal courts in Louisiana, Mississippi and Texas, would become ``a breeding ground'' for securities fraud class actions if it permitted defendants to be responsible for the entire fraud based on one or two transactions.

The Nigerian transaction raised by Jolly involved the sham sale of energy-producing barges moored off the Nigerian coast. In a related criminal prosecution, the U.S. obtained convictions of Enron finance executive Dan Boyle and former Merrill banker James Brown.

Boyle and Brown were both convicted of fraud and lying to investigators. Brown's fraud verdicts were overturned, and he is free on bond while appealing his perjury conviction. Boyle chose not to appeal.

Prosecutors won guilty verdicts against three other former Merrill bankers in the barge case. The bankers' convictions were thrown out on appeal.

The Enron investors, led by the Regents of the University of California, claim the appeals court is limited to determining whether Harmon properly combined their claims into one case, not whether the claims have merit. They argue that Merrill and Credit Suisse can be sued under federal securities laws because they both knowingly engaged in the scheme to defraud Enron investors.

``The conduct was directed at the Enron shareholders,'' Patrick Coughlin, a lawyer for the investors, argued at today's hearing. ``That's when I say you've stepped over the line. That goes beyond aiding and abetting.''

In court filings, the investors claimed that ``each bank knew that to obtain part of Enron's lucrative business it had to structure, fund, and execute bogus transactions.''

Enron, once the world's biggest energy-trading firm, had a market value of as much as $68 billion before its bankruptcy, the second-largest in U.S. history after WorldCom Inc., wiped out more than 5,000 jobs and at least $1 billion in retirement funds. The investors sued the Houston-based company in 2001.

Investors accused the banks of helping former Enron Chairman Kenneth Lay and ex-Chief Executive Officer Jeffrey Skilling to manipulate Enron finances by disguising debt as loans, financing sham energy trades and using off-the-books partnerships to hide losses and inflate revenue.

A federal jury in Houston convicted Lay and Skilling in May 2006 of fraud and conspiracy charges after a four-month trial. Lay died of a heart attack at age 64 in July. His conviction was thrown out because he didn't have an opportunity to appeal.

Skilling, 53, was sentenced to more than 24 years in prison and is now serving his term at a federal prison in Waseca, Minnesota.

The case is: Regents of the University of California v. Credit Suisse First Boston, No. 06-20856, U.S. Court of Appeals for the Fifth Circuit.