The Wall Street establishment earned a significant legal victory this week when a U.S. appeals court denied class-action status to former Enron investors attempting to bring suit against banking entities involved in the energy behemothÃ¢â‚¬â„¢s collapse. The ruling by the Fifth Circuit Court of Appeals, which overturned a Houston federal district court decision, comes only weeks before the trial was set to begin.
Plaintiffs in the class-action case were seeking roughly $40 billion in damages from several investment banks, including Barclays, Credit Suisse First Boston, and Merrill Lynch. (Other banks, including Citigroup, JP Morgan Chase, and CIBC, have been part of previous shareholder settlements that amounted to $7.3 billion.) The ruling means that any suit in the case must be brought only by individual investors, which drastically improves the prognosis for the defendants. Plaintiff attorneys are considering bumping the case to the Supreme Court.
In its stunning, highly controversial decision, the court stated that Ã¢â‚¬Å“Enron had a duty to shareholders, but the banks did not. The transactions in which the banks engaged at most aided and abetted EnronÃ¢â‚¬â„¢s deceit by making its misrepresentations more plausible. The banksÃ¢â‚¬â„¢ participation in the transactions, regardless of the purpose or effect of those transactions, did not give rise to primary liability.Ã¢â‚¬Â
If the decision stands, it may have far-reaching effects on shareholdersÃ¢â‚¬â„¢ ability to hold investment banks accountable for their actions and it will greatly narrow the parameters under which investment banks may be found liable for fraud. In short, the appeals court has ruled that banks may be held accountable for committing fraud themselves, but not at all held accountable for helping its clients commit fraud.
Amazingly, the court also cited the fact that the threat of a class action may put undue pressure on the banks to reach a settlement in a case they might very well win if it went to trial. However, the decision effectively puts the burden on individual investors to stand up to major financial institutions on their own. Any way you look at it, the ruling is a major boon to the banking industry in the Enron case and possibly beyond.