The Enron Hail Mary

When the United States Supreme Court ruled 5-3 on Tuesday that third parties accused of participating in a public company's stock manipulation could not be sued under "scheme liability," it seemed to deal a fatal blow for the shareholders seeking billions of dollars from Wall Street banks that advised Enron. Not so fast!

Lawyers from Coughlin Stoia Geller Rudman & Robbins, the former law firm of William S. Lerach, say they have found a window of opportunity in the court's ruling in Stoneridge Investment Partners v. Scientific-Atlanta.

In a brief filed this afternoon with the high court, Patrick J. Coughlin notes that Justice Anthony M. Kennedy, who wrote the majority opinion in Stoneridge declined to extend the securities laws "beyond the securities markets -- the realm of financial business -- to purchase and supply contracts, or the realm of ordinary business operations." The defendants in Stoneridge were suppliers of set-top boxes to Charter Communications and agreed to deals that allowed the cable company to pump up phantom revenues and cash flows to meet Wall Street expectations in 2000.

The brief quotes Justice Kennedy, who pointed out, "nothing the respondents did made it necessary or inevitable for Charter to record the transactions as it did." The investment banks that served as advisers to Enron went much further, according to Coughlin's brief: "Enron's bankers designed and then executed transactions so they would have to be accounted for in a way that both hid Enron's debt and falsified its revenues."

But Kennedy's bottom line is this: The suppliers never communicated directly with the market. No statement. No reliance by investors. No liability. But Enron's investment banks did speak to the market, according to Coughlin's brief: "These banks spoke to the market by structuring and supporting off-the-books special purpose entities and related-party transactions."

Will that be enough for the Supremes to revisit "scheme liability?"

Until now, nobody thought so. The Enron plaintiffs' petition before the Supreme Court, seeking a review of a decision in favor of the investment banks from the federal appeals court in Houston, has been parked at the court since the summer. The justices have yet to deny or grant that petition for certiorari, and, because the Stoneridge case was very much thought to address the same issue Lerach's firm filed an amicus brief for the Stoneridge plaintiffs, and a law firm that has served as Lerach's co-counsel also assisted in the amicus brief filed by Democratic congressmen. (For more, read "Bill Lerach's Many Friends" here.) Indeed, the Enron defendants beat Coughlin's firm to the punch, filing their own supplemental brief yesterday, arguing that Stoneridge effectively answers the questions posed by the Enron petition.

"At a minimum, the case should be remanded for a fuller examination of the facts," Coughlin suggests.

Karen Donovan