SEC to Side with Investors in Enron Case

The SEC reportedly will support Enron shareholders in a Supreme Court case addressing whether banks, auditors, vendors, and other "secondary actors" can be held liable for another company's fraud.

The Securities and Exchange Commission plans to support investors in a Supreme Court case that could determine whether business partners of fraudulent businesses can be held primarily liable for violating securities laws, according to the Washington Post.

The U.S. solicitor general, who may file an amicus brief on the government’s opinion on the case, has until June 11 to file the document. SEC spokesman John Nester told CFO.com the commission will not be commenting publicly on the matter before that time. The Post cited two unnamed sources as saying the SEC has asked the solicitor general to file court documents in support of the plaintiffs.

SEC chairman Christopher Cox has been pressured by investor advocates, the plaintiff’s lead attorney in an Enron-related case, and lawmakers to submit an opinion. A recent Wall Street Journal article claimed the scheme-liability litigation is a litmus test for whether Cox favors business interests.

Two cases before the Supreme Court involve scheme liability and the question of where direct responsibility for a scheme ends, including one involving Enron shareholders. 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 a case set to be heard this fall involving Charter Communications and its vendors. 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.

The court has yet to decide whether it will agree to combine the cases. The justices have also not decided whether to hear the Enron case. Lerach went to the Supreme Court when the class certification of the class-action suit against the three banks — set for trial this past spring — was overturned by a federal appeals court. 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.”

On Friday, Sen. Chris Dodd, chairman of the Committee on Banking, Housing, and Urban Affairs, sent a letter to Cox asking whether the SEC plans to write an amicus brief in the Supreme Court case. He called the SEC’s previous opinions on similar cases “meritorious.” In 2004, the last time the SEC addressed the issue, the commission sided with investors, saying “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.”

This past May, Cox said the SEC commissioners had not decided which point of view they would take in the scheme liability cases, 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.

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