But do you consider it a bad act entirely? After all, because of it, you have the University of California Regents as the lead plaintiff in the Enron case.
Other than the lead-plaintiff provision, which encouraged institutional investors to come forward, there was nothing good about the 1995 act. It was written almost entirely by corporate and accounting firm lobbyists. And I don’t think the people who passed the lead-plaintiff provision had any idea what it would end up doing. [The provision authorizes courts to name investors seeking the greatest financial relief as plaintiffs in class-action suits.]
What has happened, though, is that it has encouraged institutional investors to come forward. And when you combine that with the massive upsurge in fraud and the resulting interest in improved corporate governance, you are going to see almost all of these cases going forward prosecuted by institutional investors.
As the lead lawyer in Enron, how much pressure is there to maximize recovery for everyone? So much–$20 billion–was lost overall.
This represents the professional challenge of a lifetime. We’ve got a bankrupt company; we have $350 million in D&O insurance that carriers are going to try to rescind; we have an accounting firm that is a wisp of smoke; and even if we were to get precedent-breaking recoveries from individuals, it is still going to be small compared with the overall loss. So you really come down to pursuing these big Wall Street banks.
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.