"We recognize," federal appellate Judge Jerry Smith wrote in a March opinion tossing out a lawsuit by Enron shareholders against the banks that helped the company cook its books, "that our ruling on legal merit may not coincide, particularly in the minds of aggrieved former Enron shareholders who have lost billions of dollars in a fraud they allege was aided and abetted by the defendants at bar, with notions of justice and fair play."
Nothing like a judicial edict that acknowledges it violates common decency.
Smith and Judge Grady Jolly had just decreed that banks that had aided Enron in concealing its liabilities and inflating its assets were not themselves liable for these acts because it was Enron, not they, that had made the misleading statements.
Smith looked at a prime example of such Enron-enabling: a scheme in which Enron wanted to sell some electricity-generating barges off the coast of Nigeria so it could book the revenue and meet analysts' 1999 year-end projections. Alas, nobody was buying, so Enron contacted Merrill Lynch, which agreed to "purchase" the barges with the understanding that Enron would buy them back with interest within six months. Six months later, one of Enron's shadow companies designed to conceal the company's worthless properties bought the barges back. In short, a high-interest loan was deliberately misrepresented as a sale to boost revenue and trigger executive bonuses. But since the misrepresentations were Enron's, Smith wrote, Merrill Lynch and other financial institutions helping Enron in kindred schemes were not liable.
Smith's reasoning plainly troubled the third member of the judicial panel, Judge James Dennis. "The majority," he wrote, "immunizes a broad array of undeniably fraudulent conduct from civil liability ... effectively giving secondary actors license to scheme with impunity, as long as they keep quiet."
And thus a $40 billion lawsuit filed on behalf of roughly 50,000 Enron shareholders, many of whose life savings were destroyed by the company's massive fraud, in which it was abetted by numerous pillars of American finance, was dismissed, just four weeks before a trial was to begin.
Citigroup, JP Morgan Chase, Bank of America, and others had already settled out of court, and the $7.3 billion from that settlement will be distributed to the plaintiffs later this year. But Merrill Lynch, Barclays, and Credit Suisse First Boston were going to trial until the obliging federal judges immunized them.
The matter does not stop there, fortunately. The plaintiffs' attorney, legendary trial lawyer and Wall Street nightmare William Lerach, has appealed the ruling to the Supreme Court, which is likely to hear this or a similar case (or both) in the fall. Of particular significance is whether the Securities and Exchange Commission will ask the Justice Department to file an amicus brief for the plaintiffs. SEC Rule 10b-5 makes it unlawful for any person, "directly or indirectly," "to employ any device, scheme or artifice to defraud" investors. Intervening on shareholders' behalf in this kind of proceeding would seem implicit in the SEC's raison d'etre, but under the leadership of Bush appointee Christopher Cox, the commission has appeared eager to foster on Wall Street the very anything-goes ethic that compelled New Deal leaders to create the SEC in the first place.
Today in Washington, some Enron plaintiffs will gather to importune the SEC to do its job. One of them will be Charles Prestwood, who went to work maintaining Houston Natural Gas plants back in the '60s. In 1985, Houston Natural Gas merged with another company to form Enron, for which Prestwood worked until his retirement in 2000. Enron had automatically invested all his retirement funds in its own stock, and with the huge run-up in Enron shares, his retirement nest egg came to $1.3 million. Just as the Enron meltdown began, however, the company froze all its 401(k) accounts, and Prestwood couldn't access his funds. He emerged with $8,000.
Prestwood, who has disabling heart problems, didn't have extravagant retirement plans. "I just wanted to see the sights in the good old U.S.A.," he says. "Today, I can't afford to go anywhere. I just barely survive."
All Charles Prestwood wanted was to travel beyond Texas. All he wanted was an employer that wouldn't destroy his 401(k), a financial system to keep his employer honest, and, now, judges to hold that employer and those banks liable for the theft of his old age. "I cannot understand judges who would look at the people who designed the theft, provided the money to do it and drove the getaway car, and say that they didn't do anything. This country boy," he says, "has a hard time interpreting these things."
A version of this column originally appeared in The Washington Post.
