HOUSTON/SAN FRANCISCO -- Enron Corp. shareholders on Monday charged some of the biggest players on Wall Street with fraud, saying investment banks and securities firms colluded with Enron executives to bilk investors out of at least $25 billion.
In an amended lawsuit targeting some of the proudest pillars of the U.S. financial establishment, the lawyers said investment banks, securities houses and law firms all became rich by setting Enron up as a financial "house of cards" that exploded in the biggest bankruptcy in U.S. history.
"Instead of protecting the public from the Enron fraud, the bankers knowingly chose to become partners in deceit," said William Lerach, the lead lawyer for the plaintiffs. "They were not only willing participants but profiteers."
The allegations, which legal experts said could be difficult to prove, are in court papers filed Monday by the University of California board of regents on behalf of thousands of other stockholders of the defunct Houston energy trader, now a symbol of high-flying financial chicanery.
The class action suit already named a raft of top Enron executives, including former Chairman Kenneth Lay and former chief executive Jeffrey Skilling, as well as accountant Andersen, which has been indicted on a federal obstruction of justice charge for destroying Enron-related documents.
But by expanding the charges to include such Wall Street stalwarts as J.P. Morgan Chase, Lehman Brothers and Merrill Lynch, the suit now takes aim at Enron's financial backers -- accusing them of setting up fraudulent deals to dupe investors into thinking Enron was a worthy investment.
Instead, the energy company declared bankruptcy on Dec. 2, costing shareholders at least $25 billion in losses.
"The investors were wiped out, but the banks still have their billions of dollars," Lerach said. "I do think, unfortunately, some of it is thought to be business as usual on Wall Street, and it shouldn't be."
Tough to Prove
Legal experts said the new charges -- while potentially extending liability for Enron's collapse to some of the richest firms in corporate America -- would be tough to prove.
Because of a 1994 U.S. Supreme Court decision, anti-fraud provisions of the securities laws do not extend to "aiders and abettors" unless they actively participate in the scam, a point that could be difficult to prove in court
"They clearly have a large challenge before them," said Christopher Bebel, a Houston lawyer. "However, they have no alternative. They have to pursue this course of action to have a chance of locating sufficient funds."
But some legal experts said it was possible the plaintiffs could prevail, even with the Supreme Court ruling.
"Enron is an exceptional situation which might warrant exceptional outcomes. So that's definitely working in the favor of the class," said Max Berger, a securities lawyer and partner at Bernstein Litowitz Berger & Grossman.
The shareholder complaint, filed in Houston's federal court, names investment banks Merrill Lynch & Co. Inc., Deutsche Bank AG, J.P. Morgan Chase & Co. Inc., Credit Suisse First Boston, Citigroup Inc., Barclays Bank Plc, Canadian Imperial Bank of Commerce, Bank of America Corp. and Lehman Bros. Holdings Inc.
"We believe there is no basis for this claim and we intend to vigorously defend against it," a Merrill spokesman said. A Barclays Capital spokesman in London also said the firm thought the claim baseless. Citigroup, J.P. Morgan, CSFB and Deutsche Bank declined to comment, while CIBC, Lehman and Bank of America were not immediately available to comment.
Also named were Enron's chief outside counsel, Houston legal powerhouse Vinson & Elkins, and Chicago-based law firm Kirkland & Ellis, which represented some off-balance sheet partnerships that led to Enron's demise. The two law firms have also said they would fight the allegations.
Already named were 38 top Enron officers and 21 partners at Andersen, which is crumbling under the weight of problems caused by role in the Enron scandal. The embattled auditor said Monday it would cut 7,000 jobs, or a quarter of its U.S. staff.
Concern for Capital Markets
The University of California, named lead plaintiff in the case because of its size and experience in similar litigation, said it lost almost $145 million on its Enron investment.
"The university is participating in this lawsuit ... because of our concern for the integrity of the capital markets," U.C. General Counsel James Holst told a news conference Monday.
Lawyers for the plaintiffs said they were examining a number of off-the-books deals facilitated by banks that were later exposed as sham transactions designed to hide Enron's financial vulnerability while making Enron executives -- and some senior bankers -- very rich.
"The defendants' sophisticated manipulations allowed them to enrich themselves at the expense of millions of Americans," Holst said.
While former Enron leaders, including Lay, Skilling and one time chief financial officer Andrew Fastow, considered the engineer of the dubious financial partnerships, have all denied wrongdoing, the suit charges they made vast amounts of money through insider trading.
The complaint alleges Lay made about $184 million, nearly twice the money previously thought, from insider stock sales. His trades are the focus of an investigation by the Federal Bureau of Investigation and the U.S. Securities & Exchange Commission, as Reuters first reported last week.
The class-action trial is set to start on Dec. 1.
Meanwhile, a second class-action amended complaint was filed in Houston Monday on behalf of Enron employees who lost their retirement savings.
- 185 Corruption