The Ninth Circuit’s decision to dismiss the case went against the plaintiffs and added to the confusion about when secondary actors could be held liable. “There is clearly a split in the circuit courts on when you can draw the line between primary liability and aiding and abetting,” says Herbert Washer, a partner at Shearman & Sterling, which represents Merrill Lynch in the Enron case. The Ninth Circuit’s opinion went beyond the scope of how the Supreme Court and other courts have defined what is considered a manipulative and deceptive act, he adds.
Companies that had a hand in creating the fraud, rather than just knowing about the violation, should be held liable, says Donald Langevoort, a professor at Georgetown University Law Center, who is considering submitting an amicus brief with other law professors in the StoneRidge case. Langevoort and other securities-law experts are hoping for a bright-line rule to come out of the StoneRidge case, which could happen if it is linked with the Enron case. Otherwise the question before the court would be too narrow and “we will have more years of uncertainty in litigation,” he says.
In StoneRidge, shareholders of Charter Communications accuse the cable company’s vendors — including Motorola and Scientific-Atlanta (now owned by Cisco) — of partaking in a “scheme to defraud” investors. A federal district court and the Eighth U.S. Circuit Court of Appeals have dismissed StoneRidge’s claim, ruling that Motorola and Scientific-Atlanta aided and abetted Charter’s actions to misrepresent its revenue, but did not violate securities laws themselves.
At a Senate hearing about the SEC budget earlier this month, SEC chairman Christopher Cox said the commissioners had not decided what point of view they would take in StoneRidge, if any. He answered “no” when asked whether anything had changed in the past three years to warrant a shift in the SEC’s opinion on the Homestore case, which was issued a year before Cox became chairman. On Thursday an SEC spokesman told CFO.com the commission has not yet decided whether to address the case, but said that if it were to submit a brief, it would likely do so closer to the June 11 deadline.
The bank defendants in the Enron case have until Friday to submit their response to Lerach’s request for a Supreme Court hearing. The banks had been scheduled for an April trial when a Fifth Circuit three-judge panel decided to reverse a lower court’s decision for class certification. According to various press reports, Lerach has said his clients filed a class-action suit because they could not afford to try three separate cases. Lerach did not respond to CFO.com’s request for comment.
The Fifth Circuit’s majority opinion said the banks did not have direct responsibility for Enron’s investors. “Presuming plaintiffs’ allegations to be true, Enron committed fraud by misstating accounts, but the banks only aided and abetted that fraud by engaging in transactions to make it more plausible; they owed no duty to Enron’s shareholders.”