We’ve earlier discussed Ramesh Ponnuru’s expose of The Center for a Just Society, a trial lawyers organization that masquerades as conservatives; the article quoted both me and Walter. The Center has purchased a banner ad on our site, arguing for wide-ranging liability in the Enron litigation. We’re happy to run the ad, because the debate is entirely one-sided. Readers will note how the idea of causation, or statutory requirements, or Supreme Court precedent, or long-term negative impact on investors from expanded liability, is entirely ignored in Conner’s article, and the allegation of wrongdoing is entirely conclusory. Those interested in a more complete discussion of the issues in the Enron case may wish to review the expanded version of my Wall Street Journal op-ed available on the AEI website, or the opposition to certiorari by the defendants in the Enron litigation:
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.”
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