I Told You So

To controversial securities litigator Bill Lerach, the current wave of corporate fraud scandals was both inevitable and preventable.

What are the legal grounds for pulling the banks into the litigation?

We have to show that the banks participated in a scheme to defraud or a course of business that operated as a fraud on the purchasers of Enron’s securities. Now, the banks will say that that kind of liability doesn’t exist. That’s a key legal decision the judge is going to have to make. Assuming she decides that fraudulent scheme and course of business liability still exists, then we have to prove that the banks participated in that either knowingly or in reckless disregard of the consequences of their conduct, and I’m confident we will be able to do that.

You’ve charged the banks with creating “a large Ponzi scheme” in which they were the main beneficiaries. How culpable are they?

The banks are terribly culpable. These top banks were involved in Enron’s day-to-day business operations. They helped them structure these SPE [special-purpose entity] transactions that were used to falsify the financial results; they helped them structure and fund the partnerships that were actually used not to create phony earnings for Enron, but to loot Enron. And banks were the primary beneficiaries of that. Not only the banks themselves, but also the executives in the banks who were secretly invested in those partnerships. And when this comes out–and it will–it is going to be monumentally embarrassing to a number of top bankers on Wall Street.

What do you say to the critics who charge that you are going after the banks and these other parties only because they have deep pockets?

It’s true. My job as a lawyer is to recover money for my clients who were defrauded, and to do that by pursuing all the responsible parties. I wish Enron was still around and had money and could pay, but that’s not the way it is.

What reforms would you like to see in a post-Enron world?

If I gave you my wish list, it would be pretty long. I’d like to see the ’95 act modified, of course. But I also think that there ought to be a federal corporation law, and that corporate governance ought not to be left to individual states. Look at the Delaware situation. It doesn’t make sense for a domestic Liechtenstein, in effect, to provide a haven for these multinational and national corporations. [A federal law] would get rid of the liability raincoat that protects Delaware directors from their negligence and dereliction of duty. I mean, who should pay back Bernie Ebbers’s $408 million loan? How about the directors who authorized that ridiculous loan in the first place?

What advice do you have for CFOs?

CFOs really have to go back to basics. You’ve got to trust that America’s investors will reward you if you are honest, even if you are conservative. If you expense your options, if you give them better transparency, if you create a culture of trust about your company, you’ll get rewarded for that. That’s what was wrong with the old system: you were rewarded for just the opposite kind of behavior–phony growth, pro forma, EBITDA.

A recent study found that CFOs are being named more and more in securities suits–74 percent of the time this year, compared with 67 percent last year. Is this a trend?

It is.

So CFOs should be on notice?

On guard.

(Editor’s note: Take a look at the CFO PeerMetrix interactive scorecards to see how companies are controlling costs, keeping an eye on working capital, managing their level of cash on hand, and holding down their effective tax rate.)


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