To be sure, the banks that shareholders have accused of helping Enron to misrepresent its financial health — through the creation of fraudulent special-purpose entities, among other schemes — have paid for their relationship with the collapsed company. As of February, the SEC has collected $440 million from settlements and enforcement actions against individuals and business partners (including some banks) that it accused of participating in Enron’s fraudulent activities. The SEC has not yet announced a distribution plan for the funds.
As for the shareholder lawsuits, three banks have settled, bringing the total dollar figure of settlements for Enron investors so far to $7.3 billion, according to Lerach, who believes his clients are owed more than $40 billion in damages. (Citigroup settled for $2 billion, J.P. Morgan Chase for $2.2 billion, and Canadian Imperial Bank of Commerce for $2.4 billion.) The shareholders’ case against Deutsche Bank was dismissed on appeal, and a separate case against Royal Bank of Canada, Royal Bank of Scotland, and Toronto Dominion has yet to progress to the same stage as the other banks. That case could similarly be affected by StoneRidge, say securities-law attorneys.
Recent Milestones in Determining Scheme Liability for Securities Fraud
• 1994: In Central Bank of Denver v. First Interstate Bank of Denver, the Supreme Court rules that parties that aided and abetted securities fraud are not directly liable for violating Rule 10(b). Only primary violators can be considered liable.
• 1995: Congress overrides President Clinton’s veto to pass the Private Securities Litigation Act to limit frivolous lawsuits involving securities laws.
• 2004: In an amicus brief, the SEC gives the following test for Simpson v. AOL, a lawsuit presented by Homestore shareholders: “Any person who directly or indirectly engages in a manipulative or deceptive act as part of a scheme to defraud can be a primary violator … any person who provides assistance to other participants in a scheme but does not himself engage in a manipulative or deceptive act can only be an aider and abettor.”
• 2005: Citigroup, Canadian Imperial Bank of Commerce, and J.P. Morgan Chase settle class-action lawsuits related to Enron fraud.
• April 11, 2006: Eighth U.S. Circuit Court of Appeals dismisses Charter Communications shareholders’ claims against Motorola and Scientific-Atlanta. If the courts impose liability for securities fraud on secondary actors that knew, or should have known, about their business partners’ fraudulent activities (but were not involved in related securities matters themselves), they would “introduce potentially far-reaching duties and uncertainties for those engaged in day-to-day business dealings.”
• June 30, 2006: In Simpson v. AOL, Ninth U.S. Circuit Court of Appeals defines the scope of primary liability under “scheme to defraud” 10(b), saying “the defendant must have engaged in conduct that had the principal purpose and effect of creating a false appearance of fact in furtherance of a scheme.”
• March 19, 2007: Fifth U.S. Circuit Court of Appeals reverses the class certification for three lawsuits against Merrill Lynch, Barclays, and Credit Suisse for their involvement in Enron’s fraud.
• June 11, 2007: The deadline for the U.S. solicitor general to submit the government’s (such as the SEC’s) view on scheme liability in the Charter case.
• October 2007: The earliest the Supreme Court will hear arguments in the Charter case. — S.J.