WASHINGTON — Corporate America and investors like those financially harmed in the Enron Corp. collapse will be watching closely this week as the Supreme Court hears a lawsuit on whether third-party businesses that partner with troubled firms can be sued.
Business interests have jumped into the court fight, arguing that shareholders in companies that commit securities fraud should not be allowedto sue banks, accountants, law firms and suppliers that some say assisted in the fraud.
The high court case involves Stoneridge Investment Partners' lawsuit against Motorola Inc. and Scientific-Atlanta Inc., two technology companies that Stoneridge says helped a St. Louis company called Charter Communications inflate its revenue through a series of sham deals in 2000.
The high court ruling in this case also could tip the balancein a lawsuit that Enron shareholders filed against banks that they say helped the Houston energy firm disguise its financial problems. That case is on hold, but a judgment in support of Stoneridge could revive it.
A coalition of business groups, including the American Bankers Association, said in court papers in the Stoneridge case that allowing investors to file class-action lawsuits in such cases would "threaten the safety and soundness of individualfinancial institutions and the nation's banking system."
But firms and corporations that enabled companies such as Enron to defraud stockholders should have to pay, attorneys for the investors say.
Patrick Coughlin, the lead lawyer for Enron shareholders, said "The banks orchestrated the fraud. They weren't sideline viewers. ... So when the question comes up about who should be on the hook for Enron, it's thebanks."
The fight has unleashed so much passion that one Washington law professor calls it the business community's equivalent of Roe v. Wade.
"It's 11 on a scale of one to 10," said Donald Langevoort, a Georgetown University law professor. "Enron is the 800-pound gorilla shadowing this case."
Meir Feder, a New York lawyer who defends companies in securities cases, said "everybody understands that the Enron shareholders are victims here, but there's a reason that Congress and the Supreme Court haven't allowed people to sue third parties."
He added, "In the real world, for every third party who actually had a role in a fraud, you're going to get lots of suits against other third parties who really didn't."
Only eight of the nine justices will participate in Tuesday's case. Justice Stephen Breyer has withdrawn from the case;he gave no reason, but financial disclosure documents state that he owned stock in Cisco Systems Inc., which now owns Scientific-Atlanta Inc.
Chief Justice John Roberts, who did not participate in the court's decision to hear the lawsuit, has entered back into it.
The Stoneridge case has strong parallels to the one pursued by Enron shareholders, which the high court has left alone. The Enron suit was up for consideration June 21 at one of the justices' regularly scheduled private conferences, but the court has neither accepted nor rejected it.
"It's easier to decide a legal issue in a noncharged atmosphere, which may have been what the justices had in mind by not taking on Enron," Coughlin said.
Robert Van Der Volgen, whose pension fund invests the retirement savings of 750,000 teachers, says the outcome of the Stoneridge case will help determine nothing less than the integrity of the financial system.
"The security of our members really depends in a large part on having some honesty as to the statements being made by large corporations," said Van Der Volgen, a lawyer with the California State Teachers Retirement System. "All these fraud cases really have been attempts to mask the returns of a company."
Stoneridge accused Motorola and Scientific-Atlanta of engaging in sham transactions with cable television company Charter Communications Inc. The purported motive was to inflate Charter's revenue by $17 million, help meet Wall Street expectations and avoid a drop in thecompany's stock price.
Because of a number of deals including the ones involving Motorola and Scientific-Atlanta, Charter eventually restated its financial statements, reducing revenue by $292 million from 2000-02. In addition, four former Charter executives pleaded guilty in the matter after the Justice Department investigated the deals.
Stoneridge's efforts to recoup investment losses from Motorola and Scientific-Atlanta were turned back by lower courts, which said the allegations were nothing more than claims that the two companies aided and abetted the fraud by Charter. Neither Motorola nor Scientific-Atlanta was alleged to have engaged in any deceptive act, the courts said.
Enron investors got a similar ruling from the 5th U.S. Circuit Court of Appeals, which found that Enron had a duty to disclose financial problems to shareholders, but the company's banks did not.
In both cases, the issue comes down to the meaning of the word "deceptive" in federal securities law.
At stake in the Enron case is compensation sought by hundreds of thousands of investors from banks that they say helped the company, once the nation's seventh-largest, hide billions in debt and make failing venturesappear profitable.
The Enron case and the Stoneridge investors' suit are the latest chapter in the struggle between plaintiffs attorneys and the business world over class-action suits.
When lawyers who file such suits persuade a court to certify a large class of plaintiffs, companies almost always settle rather than risk going to trial. A 2002 study for the conservative Federalist Society found that three of every four federal securities fraud cases were settled, with the remainder thrown out of court.
Since 2000, investors filing federal class-action suits that allege securities fraud have settled for $42 billion, according to the Stanford Law School Securities Class Action Clearinghouse.
So far, some banks have settled with Enron investors: Citibank for $2 billion; J.P. MorganChase for $2.2 billion; Canadian Imperial Bank of Commerce for $2.4 billion.
Others are still fighting: Merrill Lynch & Co. Inc.; Credit Suisse First Boston; Barclays Bank PLC; Pershing LLC, now a subsidiary of Bank of New York Mellon Corp.
For investors, recent developments have gone against them.
The Securities and Exchange Commission voted to intervene in the Stoneridge case on the side of investors.
But the Justice Department solicitor general, after pitches from President Bush and Treasury Secretary Henry Paulson, rejected the SEC's recommendation and filed a brief on the side of Motorola and Scientific-Atlanta.
In addition, groups favorable to the business community are citing the criminal case against the former lead lawyer for Enroninvestors as an indication that class-action suits and their lawyers are out of control.
William Lerach, a high-profile California attorney, agreed to plead guilty in an investigation of a law firm paying kickbacks to get people to become plaintiffs in class-action cases.
"The kickback problem is bad enough, but even when they're following the rules, many of these lawsuits are legalized extortion," said Ted Frank of the American Enterprise Institute, a Washington think tank.
The case before the justices is Stoneridge v. Scientific-Atlanta, 06-43. The Enron case is the Regents of the University of California v. Merrill Lynch Pierce Fenner & Smith Inc., 06-1341.
Information for this article was contributed by Pete Yost of The Associated Press and by Carrie Johnson and Robert Barnes of The Washington Post.
Front Section, Pages 1, 10 on 10/07/2007