The outcome of shareholder lawsuits that placed some of the blame for Enron’s fraud on the energy giant’s business partners could hinge on an unrelated case that will be heard by the Supreme Court later this year. The case, which involves Charter Communications and its vendors, could answer the tricky question of whether business partners of fraudulent businesses are similarly liable for violating securities laws.
The lower courts have been divided on the issue, which has been played out in shareholder cases against the banks that did business with Enron. But those cases could be held up until the Supreme Court opines on StoneRidge Investment v. Scientific Atlanta, which the justices could hear as early as October. Agreeing to take the case in March, the high court is tasked with deciding whether vendors of Charter Communications that were involved in an alleged sham transaction involving behind-the-scenes dealings could be considered primary violators of securities rules.
By including an Enron-associated bank case with the StoneRidge case, the Supreme Court could answer larger issues about liability and secondary actors. However, the court has yet to decide whether it will agree to combine the cases, or even hear the Enron case at all. The lead plaintiff’s attorney in the Enron case, William Lerach, has requested that the Supreme Court hear his client’s appeal for its suit against Merrill Lynch, Barclays, and Credit Suisse along with StoneRidge. If that happens, Lerach hopes the decision will answer the question of whether so-called secondary actors — such as banks, audit firms, or vendors — can be considered directly liable for securities fraud. As in most legal cases, the wording is key: under the Private Securities Litigation Reform Act of 1995, private litigants have no case unless they can prove the accused company did more than just aided and abetted the wrongdoing.
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 false appearance of revenues, intending to deceive investors in the corporation’s stock.”