Bush Administration, SEC at Odds over Scheme Liability in Enron Case

By | June 13, 2007

The Bush administration rejected a Securities and Exchange Commission recommendation in a key Supreme Court case and did not support shareholders suing Wall Street banks for damages over Enron’s collapse.

The Justice Department’s solicitor general, who represents the administration in Supreme Court cases, did not file a friend-of-the-court brief by the Monday deadline. The SEC recently asked Solicitor General Paul Clement to file in support of the Enron shareholders.

The move puts the Bush administration at odds with the federal agency that oversees securities markets as well as with dozens of states and several consumer and investor advocates.

Earlier Monday evening, Justice Department spokesman Eric Ablin would not say whether a brief had been filed or when one might be, but the department only had until midnight EDT Monday June 11 (0400 GMT) to do so.

Dan Newman, a spokesman for Enron plaintiffs’ law firm Lerach Coughlin, called the administration’s stance “an unprecedented example of politics trumping the rule of law, a crass slap in the face to (SEC Chairman Christopher) Cox and the Enron victims from the hyperpolitical Bush Justice Department.”

The case, pitting cable TV company Charter Communications Inc. against a shareholder that accused it of securities fraud, raises an issue known as scheme liability: Whether shareholders also can collect damages from investment banks, attorneys and accountants believed to have aided fraud by their corporate clients.

The high court’s ruling in the case could determine whether the Enron plaintiffs’ $40 billion (euro30 billion) lawsuit against the investment banks — stalled by a federal appeals court ruling in March — can proceed. The shareholders contend in the suit that Merrill Lynch & Co., Barclays PLC and Credit Suisse Group should be held equally liable as Enron Corp. as participants in the fallen energy company’s massive accounting fraud.

In recent weeks, unions, state regulators and plaintiffs’ attorneys pressed the SEC to intervene in the case on the side of the Enron shareholders. The agency did so on a 3-2 vote of its commissioners, as Cox, a former Republican congressman appointed by Bush, sided with the two Democrats.

Some observers had viewed the SEC’s stance as a key test of the agency’s leanings on questions of investor protection under Cox.

In a letter, three Democratic lawmakers also urged Clement to support the shareholders’ position: Rep. Barney Frank of Massachusetts, chairman of the House Financial Services Committee, and California Reps. George Miller and Brad Sherman.

But the Treasury Department, a Cabinet-level agency unlike the independent SEC, took the opposite stance in a letter to Clement’s office. The Treasury said U.S. competitiveness could be damaged if shareholders were able to collect equivalent damages from investment banks and other third parties in securities fraud cases.

“Treasury believes uncertainty related to primary liability for third parties could adversely affect the competitiveness of America’s financial markets by posing unknown risks for entities that do a broad range of business with public companies,” department spokeswoman Jennifer Zuccarelli said.

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On the Net:

Solicitor General’s office: http://usdoj.gov/osg

Securities and Exchange Commission: http://www.sec.gov

Treasury Department: http://www.ustreas.gov

Supreme Court: http://www.supremecourtus.gov/

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