Candidly conceding that its ruling "may not coincide ... with notions of justice and fair play," the U.S. Court of Appeals for the Fifth Circuit yesterday decertified the shareholder class action against the banks that allegedly helped perpetrate Enron's frauds -- a case that has already produced more than $7 billion in settlements. The ruling, if it is not overturned by the full appeals court or the U.S. Supreme Court, will benefit Merrill Lynch, Credit Suisse First Boston, and Barclays, which had not settled, saving each potentially billions in liability.
Though the issues are complicated, and have lots of twists and turns, the heart of the problem has actually been apparent to most lawyers watching this case from the moment it was filed in 2002. Back in 1995, in a 5-4 ruling of the U.S. Supreme Court that shocked lawyers at the time -- it ran counter to what every appeals court that had faced the question had previously assumed -- the Court found that the securities laws did not create liability for those who "aid and abet" fraud (i.e., knowingly help others to commit fraud), as opposed to those who act as "principals" in such schemes. Even as they rendered that ruling, several of the justices in the majority acknowledged that the outcome of the ruling was unjust, and they urged Congress to fix the problem by amending the law to include aiding and abetting liability. In almost every other legal arena -- including the criminal arena -- aiders and abettors are treated as every bit as responsible as principals. (Indeed, the distinction between the two is often hard to draw.)
Congress never fully fixed the problem, however. It did allow the Securities and Exchange Commission to go after aiders and abettors, but not private plaintiffs attorneys. The reason is simple: it did not trust the latter to use good judgment in doing so; rather, it anticipated -- no doubt correctly -- that allowing aiding and abetting liability would result in banks, accountants, and law firms being routinely named in nearly every shareholder class action suit filed, no matter how frivolous. (Fittingly, the Enron case is brought by Bill "Partner B" Lerach, who is king of both the wheat and the chaff when it comes to class actions. He is lead counsel in the Enron case, and yet earlier in his career, for example, his firm also brought a series of civil RICO class actions against baseball trading card manufacturers for allegedly promoting gambling among children by giving away bonus trading cards in some, but not all, packs.)