ENRON SECURITIES CLASS ACTION LITIGATION FAILS
BY
SALLY RAMAGE
MARCH 2007
On March 19, 2007, the United States Court of Appeals for the
Fifth Circuit issued its decision in the Enron securities class-action
litigation. In general, bankers, accountants, and others who work with issuers
of publicly traded securities are not subject to securities-fraud claims that
arise from actions taken by the issuer.
After Enron became bankrupt in
2001 the plaintiffs sued a
number of financial institutions, alleging they had entered into a series of
sham transactions that permitted Enron to remove liabilities and book revenues
from the transactions whilst Enron was
actually incurring debt and brought their class-actions under Section 10(b) of the Securities Exchange Act
of 1934 and Securities and Exchange Commission Rule 10b-5 .The damages sought
was in excess of $40.0 billion.
On March 19, 2007, the Court of Appeals reviewed the trial court’s
certification of a class. In the Central
Bank case the
Supreme Court held that there was no liability under Section 10(b) for aiding
and abetting but that “secondary actors such as investment banks and
accountants can be liable as primary violators in some circumstances.”
In this Enron
class-action, the court held that the
“transactions in which the banks engaged at most aided and abetted Enron’s
deceit by making its misrepresentations more plausible.”
The financial institutions’ “participation in the transactions,
regardless of the purpose or effect of those transactions, did not give rise to primary liability under s 10(b).” Secondary
actors who engage in transactions with issuers of publicly traded securities,
which the issuer then uses to defraud investors, cannot be held liable as
primary violators unless the secondary actor:
(a) directly makes public misrepresentations;
(b) owes the issuer’s
shareholders a duty to disclose, but fails to do so; or
(c) directly manipulates
the market for the issuer’s securities through practices such as rigged prices.
ENDS
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