Enron Class-Action Suit Killed By Supreme Court

Today the U.S. Supreme Court effectively killed off any chance of a $40 billion class-action lawsuit against the investment firms that did business with Enron. The suit charged that the Wall Street firms were complicit in Enron’s massive corporate fraud fiasco. The Supreme Court, however, just ruled on a similar case last week and found that “third parties – vendors, contractors and consultants such as banks, accountants or attorneys – can’t be sued over corporate fraud unless investors relied on them when making their investing decisions.”

“Enron Holder Suit Against Wall Street Rejected By High Court” [CNN Money]

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  1. m0unds says:

    ..great.

  2. RvLeshrac says:

    That ruling makes no sense.

    If you relied on Bob, the guy two houses down, you couldn’t sue them in the first place – it would be thrown out by any competent judge.

    It stands to reason that investors would have relied on the advice of the people who give investment advice.

  3. llcooljabe says:

    @RvLeshrac: But were the investment advisors complicit? i.e. did they know the inner workings of Enron? They most likely worked off all the SEC documents released by the company and audited by Arthur Andersen. Why should they be blamed for taking the company’s statements and documents at face value?

    It’s Arthur Andersen that should get the blame for signing off on all the audits.

  4. Tux the Penguin says:

    @RvLeshrac: The people they were wanting to sue weren’t investment analysts. They were wanting to sue the lawyers who helped set up the SPE’s and the accountants who audited and consulted Enron. That’s like wanting to sue your teacher because you got bad grades.

  5. keith4298 says:

    The decision just says that violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 apply to people that have a fiduciary duty to the stockholders.

    In plain English, the act says that I can’t lie and make misleading statements about my stocks and if I do, I can get sued by the stockholders over it. It describes the relationship as being between the person doing the reporting (about the stock) and the person buying the stock.

    The present Supreme Court case is about people that aren’t reporting anything to the SEC (e.g. banks) that are complicit in the fraud. Since they have no direct relationship to the stockholders, the stockholders are free to sue individually, but can’t form a class since no “class” of stockholders relied on the banks advice.

    Unfortunely that means that you’d have to spend a few hundred thousand to a millon dollars to get back the $500 in stock you bought.

    Anyone for Tort reform?

  6. bsalamon says:

    surprising, considering that the plaintiffs can argue that they relied on how those people evaluated Enron…and their knowledge of Enron’s fraud could make them complicit and liable in any action against Enron

  7. swalve says:

    @keith4298: I’m not sure about your point. This is a good decision based on the law, which you explained well.

    But what does tort reform have to do with it?

  8. jeff303 says:

    @llcooljabe: Exactly right. There’s a reason we have accounting firms instead of having every single investment company investigate/audit every single company they would like to buy a stake in. This lawsuit going through would be tantamount to saying, “OK investment companies can never legally trust the word of the accounting firms and must do the research themselves”. This would be insane.

  9. swalve says:

    @jeff303: We can sue them for fraud they were complicit in. The accounting industry’s blowup a few years ago was proof of that.

    What we can’t sue them for is doing their job properly for a corrupt company.

  10. RvLeshrac says:

    @Tux the Penguin:

    The accounting groups who audited Enron were complicit in the schemes. The level of fraud at Enron was such that there could be no other possible explanation for the “cleanliness” of the audits.

    It is more like suing the teacher for giving you poor grades not based on scholarship, and then suing the TA for ‘auditing’ the grading process and being complicit in the attempt to fail you without merit.

    @llcooljabe:

    That makes sense, but the ruling still doesn’t, since it specifies “consultants,” which includes a wide class of workers. Accounting firms are often “outside consultants” for the accounting work – that doesn’t mean that they aren’t complicit, and certainly doesn’t mean that the documents weren’t then used to defraud a class.

  11. dgcaste says:

    It’d be fun if the judge participated in this blog.

  12. bsalamon says:

    i’m a law student…that has got to be worth something.
    The reality is that the people who are suing would have to have tangible proof that they relied on the inaccurate and fraudulent acts done by the Wall Street Firms when they invested. That means that they would have to provide proof that, for example, Arthur Andersen’s reporting on Enron was a deciding factor in their decision to invest in Enron. To do that on a Class-Action stage would be hard…unless they can provide documents that show that the Wall Street Firms, that were complicit in the fraud, had suggested that Enron was the way to go when investing.

  13. Curiosity says:

    FYI this is “fall out from previous cases. The former case was “Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. et. al” [www.supremecourtus.gov] and it upholds the previous case before that “Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A.” [supreme.justia.com] ,

    There are a few points the cases make:

    1. Private causes of action are different from criminal actions and Secondary actors are subject to criminal penalties, see, e.g., 15 U. S. C. §78ff, and civil enforcement by the SEC, see, e.g., §78t(e) And some state securities laws permit state authorities to seek fines and restitution from aiders and abettors.

    2. All secondary actors, further-more, are not necessarily immune from private suit. The securities statutes provide an express private right of action against accountants and underwriters in certain circumstances, see 15 U. S. C. §77k, and the implied right of action in §10(b) continues to cover secondary actors who commit primary violations.

    This is a more accurate statement than the “quote” above.

  14. Curiosity says:

    @keith4298:
    True, but the actual news is that the Supreme Court just denied the petition for certiorari, I believe what you are referring to is the US Court of Appeals for the Fifth Circuit decision which stands in the absence of either a decision by the Supreme Court or if a lower Federal Court agrees to hear it again. [www.iht.com]

    I think people are a bit confused about whom the ruling came from (the US Court of Appeals for the Fifth Circuit, not the Supreme Court) and may confuse why the SC denied certiorari (see previous SC cases or their wanting to leave it open) and why US Court of Appeals for the Fifth Circuit ruled the way they did.

    The latter is the actual law for this case, though possibly not all, since the SC did not actually apply the law here.