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Stoneridge and Enron update

Earlier: May 31.

The Washington Post is reporting that the SEC has demonstrated itself captured by the special interest of the plaintiffs' bar, and will ask the Solicitor General to intervene in the Enron appeal on behalf of plaintiffs, contrary to good law and good public policy. (Carrie Johnson, "SEC to Side With Enron Plaintiffs", Washington Post, June 2). The reporting is appalling: the final decision rests with the Solicitor General, whose brief would have been due yesterday: did the SG file or not? The reporter also mistakenly states that the Court will "hear the case" when in fact the Court is only considering a petition for certiorari. And there's no mention of the full-court lobbying press done by the plaintiffs' bar, or the fact that the SEC's position contradicts sounds law, and thus reflects political pressure.

My WSJ op-ed has resulted in a lot of blogosphere commentary: Bainbridge; Ribstein; Kirkendall; and Roberts, who continues to round up links.

(Update, June 3: the AP reports today that the SEC "declined to comment" about the Washington Post story, but also fails to note that June 1 was the deadline to file, and doesn't say if a brief was actually filed. I wonder if the Washington Post story is a leak to provide political cover for the SEC, and that they'll pass the buck to the SG's office for why no brief was filed? If a government brief had been filed Friday, one would expect the SEC to admit it, and would also expect it to be floating around the blogosphere.)

(Update to the update, June 3, 4 PM. A reader suggests that the Washington Post article is actually talking about Stoneridge though the article does not mention that case by name. That is a plausible interpretation that would make the Washington Post article make more sense; the reporter may have been limited by the constraints of space and forced to leave out information such as the name of the case the SEC was planning to file a brief in, even as it mentions the larger Enron case. If the Solicitor General does not veto the SEC's politically-motivated recommendation, the Stoneridge amicus brief would be due June 11.)

How ludicrous and extortionate the underlying case is can be demonstrated in part by the opposition to the certiorari petition, not yet on line:

The alleged �scheme� is
petitioner�s legal contrivance that attempts to string together
scores of acts by Enron and its senior officers over a more
than three-year period, in which nearly one hundred
defendants and non-defendants purportedly knowingly
participated. Petitioner alleges that respondents participated
in this �scheme� by engaging in some of the more than 60
distinct financial transactions that were allegedly part of the
�scheme.� For this, petitioner contends that each of those
defendants is subject to joint and several liability for alleged
damages that essentially equal Enron�s entire market value
over a three-year period.

The record on the class certification appeal alone consists
of more than 39,000 pages. Although the limited space
available does not permit this brief to describe the full variety
of statements, transactions, and other conduct that petitioner
has alleged comprise the �scheme,� petitioner alleges that all
of that conduct allowed Enron to misstate its publicly filed
financial statements. No bank is alleged to have participated
in preparing any of those financial statements or to have
provided any accounting advice to Enron. Moreover, both the
district court and court of appeals found that the banks owed
no duty of disclosure to Enron shareholders given the absence
of any fiduciary or special relationship to those investors.

Respondents entered into a variety of financial transactions
with Enron at different times and with varying degrees of
frequency. Nevertheless, petitioner seeks to hold each
respondent jointly and severally liable for approximately $40
billion of damages allegedly caused by Enron�s alleged
overarching �scheme,� without regard to what acts each
defendant allegedly performed, when during the class period
each defendant transacted with Enron, what losses each
defendant�s conduct may have caused, or whether a defendant
had any knowledge of the conduct and transactions of other
alleged �scheme� participants. Put another way, petitioner
uses the word �scheme� to mean a hub-and-spoke conspiracy,
with Enron as the hub. ...

The district court then concluded that a classwide
presumption of reliance (essential for class certification)
could be applied based on petitioner�s theory of �scheme�
liability. The court concluded that
the fraud-on-the-market presumption of reliance applied to
any �scheme� participant if a subsequent false statement by
the issuer �flow[s] from� the participant�s transaction, even
when the market was completely unaware of the transaction
and the participant. ...

[A]ny defendant alleged to have
participated in the �scheme� to any degree (even by way of a
single transaction with a relatively minimal effect on Enron�s
financial statements) at any time during the class period could
be held liable for all shareholders� losses over the entire class
period, including losses from �conduct of other scheme
participants about which it knew nothing.� ...

Because the respondents made no misrepresentations and
lacked the duty to disclose to Enron shareholders necessary to
create liability based on an omission, there was no �deceptive
act� by respondents upon which the market could have relied,
and hence no basis to apply the fraud-on-the-market
presumption of classwide reliance: �Here . . . where the
plaintiffs had no expectation that the banks would provide
them with information, there is no reason to expect that the
plaintiffs were relying on their candor. Accordingly, it is only
sensible to put plaintiffs to their proof that they individually
relied on the banks� omissions.�



Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.