Merrill Lynch & Co. and Credit Suisse Group, sued by Enron Corp. investors, will ask an appeals court to end a class action after other defendants paid more than $7 billion to settle the securities-fraud litigation.
The 5th US Circuit Court of Appeals in New Orleans is set to hear arguments February 5 on whether Enron Corp. investors can continue pressing their claims as a group. The banks, both former Enron lenders, say shareholders shouldn't be able to pursue their suit, because they can't prove the firms directly participated in the accounting fraud that sparked a federal investigation and Enron's bankruptcy in December 2001.
A ruling for Merrill Lynch & Co., the world's third-largest securities firm by market value, and Credit Suisse Group, Switzerland's second-largest bank, may clear them from having to pay any of the $40 billion that investors claim they lost when Enron collapsed. Individual investors probably don't have the money to fight the banks in court on their own, securities lawyers say. „This is the ballgame,” said Robert Zito, a New York-based litigator who represents companies accused of securities fraud.
„If Merrill and the other banks convince the 5th Circuit to decertify this class, the lawsuit will die a natural death.” Houston-based Enron, once the world's largest energy-trading firm, had a market value of as much as $68 billion before its bankruptcy, the second-largest in US history after WorldCom Inc., wiped out more than 5,000 jobs and at least $1 billion in retirement funds. Investors sued the company in 2001. Peter Veruki, an administrator at Vanderbilt University in Nashville, Tennessee, lost more than $40,000 in the energy trader's collapse. He said the appeals court should consider the ruling's impact on people like him.
„These judges should know that thousands of people are counting on them to allow the case to go forward,” Veruki said. „It's the only way we have any hope of getting anything back from this disaster.” Investors have recovered $7.3 billion from other Enron defendants, including New York-based Citigroup Inc., New York-based JPMorgan Chase & Co. and Toronto-based Canadian Imperial Bank of Commerce. Those agreements would not be affected by any ruling that breaks up the class action.
Investors accuse the banks of helping former Enron Chairman Kenneth Lay and ex-CEO Jeffrey Skilling to manipulate Enron finances by disguising debt as loans, financing sham energy trades and using off-the-books partnerships to hide losses and inflate revenue. „We have no more official comment than what we've argued before the court,” said Mark Herr, a spokesman for New York-based Merrill Lynch, the world's third-largest securities firm. „We don't comment on pending litigation,” said Victoria Harmon, a spokeswoman for Credit Suisse.
A Houston jury convicted Lay and Skilling in May 2006 of fraud and conspiracy charges after a four-month trial. Lay died of a heart attack at age 64 in July. His conviction was vacated because he didn't have an opportunity to appeal. Skilling was sentenced to more than 24 years in prison and is now serving his term at a federal facility in Waseca, Minnesota.
US District Judge Melinda Harmon gave investors permission in June 2006 to combine their claims in Houston against Enron's lenders after finding shareholder losses resulted from a wide-ranging scheme to defraud. Merrill Lynch said in its appeal that Harmon mistakenly allowed investors to group Enron lenders in a so-called mega-scheme liability theory, making all the banks responsible for the $40 billion in losses.
That theory unfairly allowed shareholders to hold individual banks liable for all fraudulent acts committed between 1999 and 2001 regardless of whether the lender knew about or participated in each fraud, Merrill Lynch's lawyers said in their appeal papers.
Merrill Lynch also said federal securities law requires shareholders to prove lenders were directly involved in Enron's fraudulent deals to qualify for damages. Showing they just „aided and abetted” the transactions by providing loans isn't enough, the company said. „Merrill Lynch did not issue false statements. Enron did,” the company's lawyers said in their appeals brief. Merrill Lynch is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.
Lawyers for Enron investors said that Merrill Lynch and Credit Suisse's Credit Suisse First Boston unit were involved in helping Enron officials, such as former Chief Financial Officer Andrew Fastow, structure deals to boost quarterly earnings. Patrick Coughlin, who will argue the appeal for investors, did not return a call for comment.
„The proof will show that CSFB and Merrill knowingly engaged in a scheme to defraud” Coughlin, a lawyer with the San Diego-based firm Lerach Coughlin Stoia Geller Rudman & Robbins, wrote in his appeal papers. „Each bank knew that to obtain part of Enron's lucrative business, it had to structure, fund and execute bogus transactions.”
Fastow, who agreed to testify against the banks, will tell jurors at any trial of the class action that Merrill Lynch bankers helped him create partnerships used to make off-the-books asset purchases from Enron, investors said in their brief. Those deals generated millions of dollars in phony earnings to meet quarterly targets, according to Fastow's testimony at the Lay and Skilling trial.
Throwing out the case now would waste five years of work and millions of dollars spent gathering evidence about Enron's fraudulent deals, investors told the appeals court in their filings. Harmon set an April 9 trial date to hear investors' claims against the banks. Bill Lerach, the shareholders' lead lawyer, said in June that the case may take as long as three months to try and will focus on eight different categories of fraudulent deals at Enron. (Bloomberg)