The Supreme Court last week rejected a $40 billion lawsuit by Enron Corp. investors alleging securities fraud by Wall Street investment banks that had done business with the former energy merchant. The rejection came without comment.

Enron investors were seeking $40 billion in a lawsuit against Merrill Lynch & Co., Credit Suisse and Barclays. Several banks, including JPMorgan Chase, Citigroup and the Canadian Imperial Bank of Commerce, have agreed already to pay investors $7.2 billion. Shareholders have been attempting to recover some of their losses since the company declared bankruptcy in late 2001; a Houston judge consolidated many of the claims filed between 2002 and 2006 (see NGI, Jan. 15, 2007).

At this point, shareholders' only recourse would be to resubmit their case for a rehearing before the Fifth U.S. Circuit Court of Appeals in New Orleans. The circuit court ruled against them last year (see NGI, March 26, 2007).

The ruling against the shareholders by the high court was not a surprise. On Jan. 16 the Supreme Court in a 5-3 ruling decided against investors in a similar lawsuit, which alleged that two suppliers doing business with a cable television company had engaged in securities fraud. Investors led by Stoneridge Investment Partners had filed a lawsuit against Scientific-Atlanta and Motorola, which make digital cable converter boxes for cable television subscribers. In that ruling the court stated that suppliers, banks, law firms and other third parties were too far removed from investors' decision-making to be subject to shareholder lawsuits -- even if the outside parties joined in fraudulent activity.

In the earlier decision, the court rejected the "scheme liability" argument. The majority stated that Congress had left it up to the Securities and Exchange Commission -- not shareholders -- to monitor and penalize third parties that had engaged in fraudulent activity. Justice Anthony Kennedy wrote for the majority, "The investors cannot be said to have relied upon any of (the third party's) deceptive acts in the decision to purchase or sell securities."

Justice John Paul Stevens, in a dissent, argued that the court is "simply wrong" in finding lawmakers did not mean for investors to have the right to sue third parties.

However, Kennedy wrote that the suppliers' "deceptive acts, which were not disclosed to the investing public, are too remote" to suggest shareholders relied upon them in making their buying decisions. Adopting the investors' view -- that third parties could be sued when a company misleads its shareholders -- "would expose a new class of defendants" to investor lawsuits. "Contracting parties might find it necessary to protect against these threats, raising the costs of doing business," Kennedy wrote. "Overseas firms with no other exposure to our securities laws could be deterred from doing business here."

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