UNITED STATES: Enron Investors Suing Banks Spurned by Top U.S. Court

UNITED STATES: Enron Investors Suing Banks Spurned by Top U.S. Court
The U.S. Supreme Court rejected an appeal by Enron Corp. investors, ending their bid to press a $40 billion suit against Merrill Lynch & Co. and other banks that lent money to the now-defunct energy trader.

The justices made no comment in turning away the appeal today, acting a week after putting new limits on shareholder suits against a company's banks and business partners. The Enron investors challenged a lower court ruling that barred them from joining together in a class-action suit against Merrill Lynch, Credit Suisse Group, Barclays Plc and other banks.

The rebuff means an investor group led by the University of California regents won't add to the $7.3 billion they collected in settlements with other Enron banks. More broadly, the Supreme Court sent a new signal about its skepticism toward shareholder suits, refusing even to order a federal appeals court to reconsider the Enron case in light of last week's ruling.

The investors sought to distinguish their suit from the one rejected by the high court last week, saying the Enron case came ``in the context of fraud perpetrated by financial professionals engaged in fraudulent dealings in our securities markets.''

Last week's 5-3 Supreme Court ruling, Stoneridge v. Scientific-Atlanta, involved a suit by Charter Communications Inc. investors against two of the cable company's suppliers. The majority said the alleged wrongdoing in that case ``took place in the marketplace for goods and services, not in the investment sphere.''

No Exception
The court's rejection of the Enron investor appeal came without any published dissent. The rebuff ``further confirms that there is no financial services exception'' to the Stoneridge ruling, said Stephen Shapiro, who successfully represented the suppliers in last week's case.

Credit Suisse spokeswoman Victoria Harmon said the company is ``pleased with the decision of the court.''

The lead lawyer for the Enron investors, Patrick Coughlin of Coughlin Stoia Geller Rudman & Robbins, wasn't immediately available for comment.

Justice Anthony Kennedy, who wrote the Stoneridge decision, didn't take part in the court's consideration of the Enron case. Although Kennedy gave no explanation, his son, Gregory Kennedy, works as an investment banker at Credit Suisse in New York.

Houston-based Enron was the world's largest energy-trading company, with a market value of as much as $68 billion, before it collapsed in December 2001. The bankruptcy, the second-largest in U.S. history, wiped out more than 5,000 jobs and at least $1 billion in retirement funds.

Investor Accusations
Enron's investors accused the company's banks of helping late Chairman Kenneth Lay and ex-Chief Executive Officer Jeffrey Skilling disguise debt as loans, finance sham energy trades and use off-the-books partnerships to hide losses and inflate revenue.

The Supreme Court's action today ``just shows you how out of step the Stoneridge holding is with investor protection,'' said James Cox, a securities law professor at Duke University. He said the questionable transactions in Enron were ``cooked up by the investment banks.''

Investors settled claims against JPMorgan Chase & Co. for $2.2 billion, Citigroup Inc. for $2 billion and Canadian Imperial Bank of Commerce for $2.4 billion.

The group's lead lawyer had been Bill Lerach, who in October pleaded guilty to secretly paying clients of his former firm, Milberg Weiss, to participate in shareholder lawsuits. Coughlin, Lerach's former partner, has since taken over the lead role.

Shareholder Reliance
In barring the suit from going forward as a class action, the 5th U.S. Circuit Court of Appeals in New Orleans said it couldn't presume that shareholders, when making investment decisions, relied on the alleged wrongdoing by the banks. Last week's Supreme Court decision used somewhat similar reasoning, though not in the class action context. The court said the Charter shareholders didn't show they relied on the alleged deception by suppliers Motorola Inc. and Scientific-Atlanta Inc.

Kennedy said federal securities-fraud law ``does not reach all commercial transactions that are fraudulent and affect the price of a security in some attenuated way.''

New York-based Merrill and the other banks in the Enron case urged the Supreme Court simply to reject the appeal, rather than send the case back to the lower court. The Stoneridge case ``involved facts extraordinarily similar to the facts that are present here,'' the banks argued.

Lawyers have said they expect other banks and outside advisers to use the Supreme Court ruling to try to block shareholder suits. Citigroup lawyers last week said the Stoneridge decision may be grounds to dismiss claims by investors in Parmalat Finanziaria SpA, the dairy company that filed Italy's largest bankruptcy.

The ruling also may help UBS AG shareholders fend off a lawsuit by investors who lost money in the HealthSouth Corp. fraud.

The Enron case is Regents of the University of California v. Merrill Lynch, 06-1341.

By Greg Stohr
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