Court's Fraud Case Widely Seen as Stand-In for Enron
Carrie Johnson and Robert Barnes, Staff Writers
Friday, October 5, 2007
The largest corporate frauds in recent history could not have
happened without the brainpower of accountants, bankers and
lawyers who partnered with executives at the troubled firms.
Often, these third-party businesses are the only wealthy sources
left for investors to tap after such schemes unravel in massive
That's why Robert Van Der Volgen, whose pension fund invests the
retirement savings of 750,000 teachers, says the outcome of a
dispute to be heard by the Supreme Court on Tuesday will help
determine nothing less than the integrity of the financial
"The security of our members really depends in a large part on
having some honesty as to the statements being made by large
corporations," said Van Der Volgen, a lawyer at the California
State Teachers Retirement System. "All these fraud cases really
have been attempts to mask the returns of a company."
On one side of the Supreme Court case are resourceful plaintiff
lawyers trying to recoup money that their clients lost through
fraud and who see other businesses as accessories to the crime.
On the other side are some of the nation's most powerful
industry lobbyists, who argue that regulators already have the
authority to punish lawbreakers and say that allowing investors
to expand the targets of their lawsuits will only put U.S.
companies at a global disadvantage.
The fight has unleashed so much passion and so many
opportunities for fundraising that a Washington law professor
calls it the business community's equivalent of Roe v. Wade.
Indeed, the dispute is widely viewed as a stand-in for one of
the most notorious frauds of the past decade --
Enron. In ruling on this case, the high court also could tip
the balance of a lawsuit that Enron shareholders filed against
Merrill Lynch and other banks that allegedly helped the
Houston energy firm disguise its financial problems. That
case is on hold, but a judgment in support of investors could
"It's 11 on a scale of one to 10," said Donald C. Langevoort, a
Georgetown University law professor. "Enron is the 800-pound
gorilla shadowing this case."
At issue in the case, Stoneridge Investment Partners v.
Scientific-Atlanta, is whether a group of investors (Stoneridge)
can seek damages against two technology companies
Motorola) for allegedly helping a
St. Louis firm called
Charter Communications inflate its revenue through a series
of sham deals in 2000. A lower court ruled that because
Scientific-Atlanta and Motorola did not make public statements
about the deals on which investors based their decision to buy
or sell Charter stock, the third-party companies were not on the
hook for fraud when it came to light.
The Supreme Court case has been marked by numerous unusual
twists, including personal intervention earlier this year by
President Bush and Treasury Secretary
Henry M. Paulson Jr., who is a former chief executive of
Goldman Sachs, one of the country's biggest investment
banks. Both men prodded the solicitor general, who speaks on the
administration's behalf at the court, to reject the judgment of
Securities and Exchange Commission, which sets policy to
protect investors and which had voted to support the plaintiffs
in the case.
Two justices recused themselves, but last summer
Chief Justice John G. Roberts Jr. apparently sold stock he
owned in order to participate in the Stoneridge argument.
Court analysts have noted that in general, the Supreme Court
took a remarkable pro-business stance in its most recent term,
even as the justices sharply divided on social issues. Justice
Anthony M. Kennedy, whose vote last term proved critical in
a series of cases, last month told the Economic Club of
New York that previous court decisions that went against
business interests accounted for some of the reason that U.S.
markets were losing ground to international competitors.
Roy T. Englert Jr., an appellate lawyer and antitrust litigator,
said it is "not entirely clear how predictive" the court's
recent rulings are for Stoneridge. But the court heard four
antitrust cases and one securities law case, and all but one
were decided in favor of business by "very lopsided margins."
Some of the most important decisions were written by members of
the so-called liberal wing of the court.
"It is a court that is very mistrustful of lawyer-driven
litigation," Englert said. By that he means "counsel finding
soft spots in the system rather than clearly injured persons
bringing actions against companies that do wrong."
Englert said he isn't sure, though, if that description fits
here. "If not in Stoneridge, at least in Enron, there were real
injured parties and real wrongdoing," he said. "The question is
how far the liability is going to extend." Thirty groups have
filed briefs in the case on both sides. More than half the
Maryland and the District but not
Virginia, support the investors.
The Council of Institutional Investors, whose members include
the country's largest pension funds, said a Supreme Court ruling
in support of third-party businesses could tempt accountants and
bankers to curry favor with wayward clients and could offer safe
harbor for fraud "so long as they do not publicly announce their
involvement" with a client company's financial mistakes.
But business groups say that to support plaintiffs would expose
U.S. and foreign companies to untold numbers of lawsuits, many
of which are settled to avoid the high costs of litigation. The
total dollar value of claims asserted in securities class-action
lawsuits skyrocketed from about $150 million in 1997 to more
than $9.6 billion in 2004, according to the Washington Legal
Foundation, a business-friendly interest group. Joseph A.
Stanford University law professor who supports businesses in
the case, said the SEC and the
Justice Department already have the power to sue third
parties for their involvement in a fraud scheme. He noted that
Congress repeatedly has rejected attempts to expand the rights
of investors to sue. "There's a question of real principle here:
Which decisions should be made by the courts, and which should
be made by Congress?" Grundfest said.
Yet a retired SEC enforcement lawyer who spent more than a
quarter-century at the agency questions whether
resource-strapped regulators can police the markets adequately
"The commission can't be everyplace at once," said the lawyer,
James T. Coffman. "There simply isn't enough money. The
commission is never going to be in a position to take up the
slack if the court rules against private plaintiffs in