"Partners in deceit"
stltoday.com
04/10/2002 05:06 AM
ENRON
EXTRAORDINARY questions of collusion and deception were raised this week about nine of the biggest
investment banks in the country, a "Who's Who" of Wall Street. The questions touch on the integrity of
the American financial markets and could not be more important.
William S. Lerach, the lead attorney in a class-action suit brought by shareholders of the Enron Corp.,
charged that the nine banks defrauded investors by "raising billions of dollars ... they knew would be
used to fund a Ponzi scheme." Mr. Lerach charged that the banks and two law firms were "partners in
deceit" with Enron and its accounting firm, Arthur Andersen LLP.
The Enron shareholders are seeking to recover up to $25 billion lost when the giant Houston-based
energy trading firm collapsed last fall. Enron is now in bankruptcy and the crippled Arthur Andersen firm
has agreed to settle its liabilities for $300 million. The addition of the nine banks as defendants gives the
plaintiffs potential access to huge reserves of cash. The firms named in the suit were J.P. Morgan
Chase; Citigroup; Merrill Lynch; Credit Suisse First Boston; Canadian Imperial Bank of Commerce; Bank
of America; Barclays Bank; Deutsche Bank and Lehman Brothers.
Each of the nine did substantial business with Enron. It will be up to a federal jury in Houston to
determine how much of the business was legitimate. Of particular interest are off-the-books
partnerships set up by Enron and funded by the banks in the late 1990s. Were the banks aware that
these partnerships were essentially accounting schemes designed to inflate Enron's earnings while
generating huge fees for the banks? And if the banks were aware, why did they continue to tout
Enron's stock to investors?
While investment banks are funding the activities of corporations, their brokerage divisions often advise
clients about buying and selling shares in these same companies. The potential conflicts of interest are
enormous. Two weeks before the Securities and Exchange Commission began investigating Enron,
most brokerage houses were still rating its shares a "strong buy." When Enron collapsed, many
employees and shareholders lost their life savings.
Arthur Andersen's employees, too, are paying a heavy price. The company, trying to reorganize while
under a federal criminal indictment, this week began laying off 7,000 people, a quarter of its work force.
Many of the employees got the word by voice mail.
Meanwhile, David B. Duncan, who headed Andersen's Enron business, made a deal with federal
prosecutors. He pleaded guilty Tuesday to a single count of obstruction of justice in return for providing
testimony against others. The plaintiffs in the Enron-related lawsuits will be keenly interested in what
Mr. Duncan has to say.
Securities regulators and individual investors should be keenly interested as well. The health of the
economy depends on utter confidence in the integrity the markets. Firms that failed the integrity test in
the Enron case should be subject to heavy judgments. Individuals who failed should go to prison.
For all the complications of the Enron deal -- Mr. Lerach called it "a house of cards inside a hall of
mirrors" -- there are two simple words that apply. They are "fraud" and "theft." |
