Plaintiffs hunt for deeper pockets: Wall Street
New targets needed as Andersen fades
By Sandra Jones
March 18, 2002
Crain's Chicago Business
As Andersen diverts its dwindling resources toward fighting federal criminal charges, burned Enron Corp. shareholders are looking beyond the accounting firm to a deeper-pocketed defendant: Wall Street.
New York-based Milberg Weiss Bershad Hynes & Lerach LLP — the lead law firm for shareholders who are suing Andersen for its role in the energy trading giant's collapse — is planning to name major investment banking firms as defendants when it files a consolidated class-action complaint in Houston federal court April 1, according to shareholders' attorneys.
Among the firms expected to be named: JP Morgan Chase & Co., Citigroup Inc., Salomon Smith Barney Inc., Credit Suisse First Boston Corp., Goldman Sachs & Co., Merrill Lynch & Co. and Banc of America Securities LLC, according to two attorneys working on the complaint. Lawyers will try to assert that the bankers knew about Enron's troubles, and in some cases invested in the controversial off-balance-sheet partnerships, while still touting Enron's stocks and bonds to investors.
The bar for proving an investment bank defrauded shareholders and bondholders has gotten higher in recent years, based on changes in the law and recent Supreme Court rulings, legal experts say. But going after Wall Street is more likely to lead to a lucrative settlement than continuing to aggressively pursue Andersen.
Widening scope
"There's a great worry that Andersen won't be there with enough cash and that other defendants need to be looked at," says Jim McCarthy, a securities and bankruptcy lawyer at Diamond McCarthy Taylor & Finley LLP in Dallas. "The looming question with Andersen and the indictment is, what does it do to their ability to help with damages? They may deserve it, but it will restrict their ability to pay."
The Chicago-based accounting firm called the Justice Department's indictment a "death penalty" for the firm.
Andersen said in a statement late last week, "The department's action places in jeopardy the firm's ability to arrive at a substantial settlement with the shareholders of Enron," adding that its "ability to fund a substantial settlement is based on preserving the firm's practice and revenues."
And, indeed, lawyers for the shareholders say they would have preferred that the government charged individual Andersen partners and employees with obstruction of justice, instead of the entire firm.
The indictment threatens Andersen's ability to stand behind its audits. It is already scaring away clients and, in turn, revenue. And without revenue, Andersen won't be able to contribute to the tens of billions of dollars of damages shareholders are seeking.
"There's not much doubt that their name is tarnished, probably beyond redemption," says Richard Leftwich, an accounting and finance professor at the University of Chicago Graduate School of Business, who has moderated forums on Enron's collapse.
One lawyer working on the amended shareholder complaint expressed doubts that Andersen would even now be able to pay the approximately $800 million it had offered weeks ago to settle all civil legal liabilities from shareholders, employees and creditors. That offer was ultimately rejected.
Andersen had intended to fund that settlement with about $250 million in insurance coverage and $550 million in profits spread over many years, one plaintiffs' attorney says. If it loses business, or goes out of business, Andersen's contribution shrinks to the $250-million insurance claim.
That doesn't mean the shareholders won't continue to pursue Andersen. But, with clients fleeing and the firm's survival in jeopardy, Andersen's not likely to have any more money to add to that pot.
Enron investors have lost as much as $60 billion, some experts say. And damages, while yet to be determined, could add up to $25 billion or more.
The plaintiffs' attorneys are also looking into adding Enron and Andersen's law firms, as well as individual Andersen partners, to the amended complaint. The existing complaint names Enron's top executives and its board of directors, but no individual Andersen partners.
But neither the law firms nor the individuals are likely to turn up big bucks.
It is little wonder, then, that shareholders' lawyers are turning their attention to the source of Enron's money.
"The investment bankers will have to face the same decisions that Andersen faces," says Roy Van Grunt, director of Washington, D.C.-based accounting consultancy Ten Ecyk Associates Inc. "Do you want to drag out this litigation and pay a lot of lawyers for years, or do you want to throw money at it and make it go away?"
Border crossing?
As for Wall Street's defense, securities law experts say the investment banks will argue that a "Chinese wall" existed between the bankers selling advice to Enron and the analysts that sold Enron's stocks and bonds.
That argument didn't hold up well in congressional hearings earlier this month, and isn't likely to sit well with a jury if the civil lawsuit ever goes to trial.
Investment banks are already under fire for the way they conducted themselves in the heady days of the bull market. They are unlikely to garner much public sympathy if the Enron shareholders look to them to pay the bill.
Says Mr. McCarthy: "The terrible thing about Enron is that the damages to so many people are so large that it's difficult to conceive of enough pockets existing to make everybody whole."
©2002 by Crain Communications Inc. |
