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States Seek Billions from Enron's Former Banking Partners

At least 30 states will join Enron Corp. shareholders to pursue billions in damages from the company's former banking partners. According to a legal brief filed Monday in Houston by attorneys general from across the country, the states' residents who were Enron shareholders were injured by the company's bankruptcy.

U.S. District Judge Melinda Harmon granted status for the case to proceed as a class-action lawsuit, and her ruling is now under review by the Fifth Circuit Court of Appeals in New Orleans.

Texas Attorney General Greg Abbott, who represented the states' attorneys general, submitted a 28-page brief, which cited legal criteria proposed in 2002 by the Securities and Exchange Commission (SEC) to determine the liability of participants in a deceptive scheme. According to the SEC, deception that paints a false picture of a company's revenues may be made by acts as well as words. Participants in fraudulent schemes, wrote the SEC, do more than aid and abet the fraud because they engage in transactions whose main purpose is to create a false financial picture. Therefore, the SEC wrote, the participants should be held liable.

The SEC used the legal criteria to pursue and obtain civil settlements from several of Enron's leading investment partners, including Merrill Lynch & Co., JP Morgan Chase & Co., Citigroup and the Canadian Imperial Bank of Commerce.

The states now pressing to make a case for a class-action lawsuit charge that the investment banks are liable "for directly participating in the Enron securities fraud" and "for manipulative and deceptive devices and contrivances."

To accept the investment banks' interpretation of legal precedent "would result in virtual immunity for banks, law firms, accountants and other securities professionals from private liability in many cases," the states' brief noted. The banks' interpretation contradicts securities laws, it said, because "the view that those crafty enough to benefit from participating in a securities fraud while carefully avoiding the public attribution of a false statement to them can escape liability."

Besides Texas, states represented in the shareholder brief are Alabama, Arizona, Arkansas, California, Connecticut, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Mississippi, Montana, New Hampshire, New Jersey, New Mexico, North Dakota, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Utah, Vermont and West Virginia.

The main Enron shareholder lawsuit, which is led by the University of California (UC), is scheduled for trial in April. At least five of the 11 banks originally sued have settled their cases for a total of more than $7 billion (see Daily GPI, July 7, 2006; May 25, 2006). Bankers remaining in the original shareholder lawsuit include Merrill Lynch, Credit Suisse First Boston, Barclays plc, Toronto-Dominion Bank, Royal Bank of Canada, Deutsche Bank AG and the Royal Bank of Scotland Group plc.

Former Enron CFO Andrew Fastow, considered the mastermind of Enron's complex financial schemes, provided testimony late last year to aid the shareholders' lawsuit before he began serving a six-year prison sentence in Bastrop, TX (see Daily GPI, Oct. 9, 2006).

In a court filing last month concerning the UC shareholder lawsuit, Merrill Lynch argued that the class-action status granted to Enron's shareholders was too "expansive" because it wrongly holds all parties, including those that aided Enron's schemes but did not know its true purposes, liable for investor losses. Without admitting any wrongdoing, Merrill Lynch agreed in 2003 to pay $80 million to settle SEC civil charges concerning two questionable transactions in 1999 (see Daily GPI, Feb. 24, 2003).

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