Bloomberg, Ann Woolner, 9 February 2007
When the full scope of Enron Corp.'s duplicity began unfolding, fingers pointed at an array of apparent accomplices.
Accountants who concocted hiding places for losses. Investment bankers who financed sham deals. Lawyers who approved all of it. Without such complicity, the primary schemers at Enron would have been stopped in their tracks.
Blame for the Enron scandal was spread far and wide in outraged press releases from politicians, exhaustive reports by Enron's bankruptcy examiner and statements by consumer and shareholder advocates.
``Not one of the watchdogs was there to prevent or warn of the impending disaster,'' concluded a Senate Government Affairs Committee report.
Reforms were passed. Prosecutions mounted. Lawsuits filed.
So you might imagine that by now shareholders would have hauled the enablers into court and emptied their pockets. That turns out to be more difficult than you might think because, even with all the shouting and finger-pointing in Congress, no one got around to amending the law to make sure that shareholders can sue errant watchdogs.
True, some of Enron's investment banks, accountants and lawyers have settled rather than fight. The settlements come to more than $7.3 billion so far, mostly from banks, well short of the $40 billion investors say they lost.
Whether the suit goes any further is now in the hands of a trio of federal judges in New Orleans. The issue, made tougher because Congress failed to clarify it, is whether the law lets shareholders sue the banks they say were architects of some of Enron's trickery.
``To let the secondary actors out who designed it would be a tragedy,'' Patrick Coughlin, who represents shareholders, pleaded to a Fifth U.S. Circuit Court of Appeals panel this week.
Blocking a clear shot at the second tier of alleged cheaters is a 1994 U.S. Supreme Court ruling, which said investors can't sue those who only aid and abet. The secondary actors must have played a primary role in the fraud, the court said.
Congress could have restored the shareholder rights when it passed the Private Securities Litigation Reform Act of 1995. Instead, that law restricted shareholder rights.
So when Enron went under at the end of 2001, there were those who blamed the watered-down investor protections.
``The Enron collapse proves the importance of holding anyone who aids and abets securities fraud responsible for their actions,'' the Consumer Federation of America and Consumers Union said in a joint statement in 2002.
Congress ignored that plea, leaving lawyers for shareholders to ask for help this week from the three federal judges. Attorneys for the banks argued the Supreme Court decision spares them from being held to account.
Even if they knew they were financing or designing deals to deceive Enron shareholders, lawyers for Merrill Lynch & Co. and Credit Suisse Group said, the 1994 ruling protects them. Unless secondary actors lie publicly or remain silent when they have an obligation to disclose, they can't be sued, the lawyers said.
``The Supreme Court has been clear,'' Merrill lawyer Stuart Baskin told the court. ``A deceptive act requires either a misstatement or an omission where you have a duty to speak.''
Credit Suisse ``was Enron's No. 1 bank,'' Coughlin pointed out. And Merrill arranged to ``buy'' some Nigerian barges from Enron specifically and solely to help the company make its earnings numbers in exchange for a promise from Enron to buy back the barges and pay a premium to Merrill.
``They did more than just knowingly provide assistance,'' Coughlin told the judges.
But neither bank made public misstatements about their dealings with Enron, their lawyers noted. And because they have no duty to protect Enron shareholders, their silence can't make them liable, either, they said.
Enron executives were the ones reporting phony numbers that could only be supported by the sham deals.
``So tell me, who is Merrill Lynch and the other defendants, who are they defrauding?'' Judge Grady Jolly asked Coughlin. ``Who do they owe the duty to?''
``To the Enron shareholders,'' Coughlin answered. The whole arrangement was aimed at fooling them, he said.
``We know that Merrill Lynch on the face of it has no duty to Enron shareholders,'' Jolly said.
The judges sounded divided on how badly secondary actors must behave to be sued.
U.S. District Judge Melinda Harmon in Houston, who would preside at a trial of the shareholders' claims, previously ruled that Merrill and Credit Suisse helped Enron hide its financial picture and can be sued.
Appellate courts have taken a harder line for the most part. The Fifth Circuit, with jurisdiction in Texas, Louisiana and Mississippi, hasn't previously decided the issue.
The mish-mash might have been avoided if Congress had acted after the corporate scandals of 2001 and 2002 to say when secondary actors could be sued for security fraud.
``There was a real sense at that time that this was the moment to finally make some progress,'' says Barbara Roper of the Consumer Federation of America.
Yes, there was a wave of reforms, but none of them hit this point.
Nor is it likely to happen now. All the momentum in Washington is going the other way, rolling back investor safeguards.
(Ann Woolner is a columnist for Bloomberg News. The opinions expressed are her own.
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When the full scope of Enron Corp.'s duplicity began unfolding, fingers pointed at an array of apparent accomplices.
Accountants who concocted hiding places for losses. Investment bankers who financed sham deals. Lawyers who approved all of it. Without such complicity, the primary schemers at Enron would have been stopped in their tracks.
Blame for the Enron scandal was spread far and wide in outraged press releases from politicians, exhaustive reports by Enron's bankruptcy examiner and statements by consumer and shareholder advocates.
``Not one of the watchdogs was there to prevent or warn of the impending disaster,'' concluded a Senate Government Affairs Committee report.
Reforms were passed. Prosecutions mounted. Lawsuits filed.
So you might imagine that by now shareholders would have hauled the enablers into court and emptied their pockets. That turns out to be more difficult than you might think because, even with all the shouting and finger-pointing in Congress, no one got around to amending the law to make sure that shareholders can sue errant watchdogs.
True, some of Enron's investment banks, accountants and lawyers have settled rather than fight. The settlements come to more than $7.3 billion so far, mostly from banks, well short of the $40 billion investors say they lost.
Whether the suit goes any further is now in the hands of a trio of federal judges in New Orleans. The issue, made tougher because Congress failed to clarify it, is whether the law lets shareholders sue the banks they say were architects of some of Enron's trickery.
``To let the secondary actors out who designed it would be a tragedy,'' Patrick Coughlin, who represents shareholders, pleaded to a Fifth U.S. Circuit Court of Appeals panel this week.
Blocking a clear shot at the second tier of alleged cheaters is a 1994 U.S. Supreme Court ruling, which said investors can't sue those who only aid and abet. The secondary actors must have played a primary role in the fraud, the court said.
Congress could have restored the shareholder rights when it passed the Private Securities Litigation Reform Act of 1995. Instead, that law restricted shareholder rights.
So when Enron went under at the end of 2001, there were those who blamed the watered-down investor protections.
``The Enron collapse proves the importance of holding anyone who aids and abets securities fraud responsible for their actions,'' the Consumer Federation of America and Consumers Union said in a joint statement in 2002.
Congress ignored that plea, leaving lawyers for shareholders to ask for help this week from the three federal judges. Attorneys for the banks argued the Supreme Court decision spares them from being held to account.
Even if they knew they were financing or designing deals to deceive Enron shareholders, lawyers for Merrill Lynch & Co. and Credit Suisse Group said, the 1994 ruling protects them. Unless secondary actors lie publicly or remain silent when they have an obligation to disclose, they can't be sued, the lawyers said.
``The Supreme Court has been clear,'' Merrill lawyer Stuart Baskin told the court. ``A deceptive act requires either a misstatement or an omission where you have a duty to speak.''
Credit Suisse ``was Enron's No. 1 bank,'' Coughlin pointed out. And Merrill arranged to ``buy'' some Nigerian barges from Enron specifically and solely to help the company make its earnings numbers in exchange for a promise from Enron to buy back the barges and pay a premium to Merrill.
``They did more than just knowingly provide assistance,'' Coughlin told the judges.
But neither bank made public misstatements about their dealings with Enron, their lawyers noted. And because they have no duty to protect Enron shareholders, their silence can't make them liable, either, they said.
Enron executives were the ones reporting phony numbers that could only be supported by the sham deals.
``So tell me, who is Merrill Lynch and the other defendants, who are they defrauding?'' Judge Grady Jolly asked Coughlin. ``Who do they owe the duty to?''
``To the Enron shareholders,'' Coughlin answered. The whole arrangement was aimed at fooling them, he said.
``We know that Merrill Lynch on the face of it has no duty to Enron shareholders,'' Jolly said.
The judges sounded divided on how badly secondary actors must behave to be sued.
U.S. District Judge Melinda Harmon in Houston, who would preside at a trial of the shareholders' claims, previously ruled that Merrill and Credit Suisse helped Enron hide its financial picture and can be sued.
Appellate courts have taken a harder line for the most part. The Fifth Circuit, with jurisdiction in Texas, Louisiana and Mississippi, hasn't previously decided the issue.
The mish-mash might have been avoided if Congress had acted after the corporate scandals of 2001 and 2002 to say when secondary actors could be sued for security fraud.
``There was a real sense at that time that this was the moment to finally make some progress,'' says Barbara Roper of the Consumer Federation of America.
Yes, there was a wave of reforms, but none of them hit this point.
Nor is it likely to happen now. All the momentum in Washington is going the other way, rolling back investor safeguards.
(Ann Woolner is a columnist for Bloomberg News. The opinions expressed are her own.
