The Enron Bank Shot II

Earlier this month, former Securities and Exchange Commission (SEC) Chairman Arthur Levitt, a Clinton appointee, joined with former Chairman William Donaldson and Commissioner Harvey Goldschmid, both Bush II appointees, in filing an amici brief in the U.S. Supreme Court. They did so to support the notion that third parties operating behind the scenes (think investment banks) can and should be held accountable for "scheme liability" when they enable others (think Enron) to commit fraud. In a case styled Stoneridge, the former SEC'ers said "it is critical to the antifraud purposes of the federals securities laws that actors, other than issuers [of securities] and their officers and directors, who actively engage in deceptive conduct continue to be held liable ... We believe that this Court's resolution of the issue of fraudulent scheme liability in the instant case will have a profound effect on the continued deterrence of fraud, the ability of defrauded investors to recover their losses, and the overall fairness and effectiveness of our securities markets."

Why this unprecedented action by past SEC officers was deemed necessary -- why the current SEC did not act to protect the public interest -- presents a cautionary tale. It reflects the serious threat posed by a growing plutocracy -- what Kevin Phillips describes as "the fusion of money and government" -- to the core principals of our democracy and the rule of law. Thus, it was fusion at work when President Bush intervened personally, preventing the Solicitor General from supporting investors before the High Court -- notwithstanding a formal SEC vote led by its Bush II appointed Chairman Chris Cox to do just that.

These events involved not only the SEC and the White House, but also the Justice Department, the conservative judges acknowledged that their ruling "may not coincide, particularly in the minds of aggrieved shareholders who lost billions . . . with notions of justice and fair play."

The Enron victims' long journey has now reached the Supreme Court -- as has the parallel Stoneridge case. Both present the same question: can third parties such as investment banks be held accountable as part of an illegal scheme where they themselves made no public misrepresentations but participated in and benefited from the lies of others? Put differently, is there any remedy for those poor sods conned by the phony loans and sham transactions created by "bullish on America" Merrill Lynch and other banks that allowed Enron to falsify its financial condition? That question would seem to answer itself -- after all, the law prohibits anyone from engaging in deceit or an illegal scheme.

At least that's what the SEC thought. Charged to carry out our securities laws, the Commissioners voted 5-0 to support such "scheme liability," and 3-2 to file a brief in Stoneridge. While the Commission's make-up had changed, Chairman Chris Cox said "it is my view that precedent matters ... The SEC rules and policies should not be so effervescent as to change with one or two people on board."

Enter the plutocrats. To be precise, enter former Goldman Sachs Chairman and now Treasury Secretary Henry Paulson. To hold third parties liable, he said, would be bad for business. In making this argument, it is rumored that Paulson used a novel approach -a conference call with that noted legal scholar President George W. Bush and Solicitor General Paul Clement - who then declined to file the SEC brief.

Afterwards, testifying before a congressional committee, Paulson was asked by California Representative Maxine Waters about this unorthodox decision making process. No shrinking violet (more of a Venus fly trap), Waters was especially concerned about Enron's millions of shareholders - victimized by schemes concocted by former Bush ally Ken Lay, former Cox law firm client Merrill Lynch and former Paulson employer Goldman Sachs:


"I'm going to focus on Enron ... the biggest corporate crime in America . . . perpetrated on the people of this country and on the workers ... [W]hat has happened to the victims? And I am very, very surprised to find out that our government, this administration and you have decided ... that you are more interested in protecting those with third-party liability as it relates to Enron and . . other cases, than you are in protecting the citizens who got ...ripped off with this corporate crime."

Paulson went right into the Washington DC shuffle.

First, he urged that imposing liability on third parties that work hand in glove with others in defrauding investors would put the U.S. at a competitive disadvantage to foreign markets. Wall Street would lose business by being too honest. But as the bipartisan former SEC Commissioners' brief recognized: "[t]he continuation of fraudulent scheme liability will not harm American competitiveness; in fact, investor faith in the safety and integrity of our markets is their strength. The fact that our markets are the safest in the world has helped make them the strongest in the world. Capital formation through the United States securities markets since the enactment of the federal securities laws has been a resounding success."

Secretary Paulson also disingenuously testified that the Bush Administration had prevented filing the SEC brief not in Enron but the Stoneridge, knowing full well the decision there would impact Enron. He urged that he was a "strong advocate of the protections against securities fraud," just by the SEC (the one he muzzled), not by private citizens. Overlooked by the good Secretary was that the SEC is not permitted by law to recover damages for victims of fraud - only the victims themselves can - or rather, could - do that. The absence of a private remedy would thus cost the Enron victims more than ten billion dollars. But Paulson, who once observed that "long term, we may look at Enron as positive," argued that allowing private cases by fraud victims could unsettle the markets and "create a very uncertain legal environment for all the individuals . . . that deal with private companies. . . ."

Uncertainty? How about the uncertainty for investors of not knowing when they are being lied to or by whom, of not knowing who they can trust? How about the uncertainty now faced by countless Enron victims who lost their retirement, their life savings, their jobs, hopes and dreams? As the SEC's former Chief Counsel said, giving these banks a free pass would amount to giving "underwriters, auditors and attorneys a license to kill ... They'd create a safe harbor for fraud."

Like most plutocrats, Secretary Paulson is not malevolent toward such victims, just oblivious. He breathes rarified air. His net worth is over $700 million. Last year, Goldman Sachs awarded him $18.7 million in bonuses just for his last six months of work. Even the taxpayers chipped in. When he was appointed Treasury Secretary, the IRS (within his Department) issued a special "guidance document" "clarifying" that the standard 20% penalty for corporate executives who divest a deferred compensation arrangement would not apply to his $470 million in Goldman stock. He had divested to join the Bush Administration, to fulfill his civic duty. It just happened to be to Wall Street.

That's how plutocracy works. One of its fascinating aspects is that it is also bipartisan and equal opportunity. As long as you have the price of admission, you're in.

With much fanfare, the House Financial Services Committee recently held oversight hearings of the SEC. All five Commissioners testified. The hearing room was filled by well heeled, coifed and tailored lobbyists. Enron was the 800 pound gorilla in the room. Too bad he sat in the back. The Committee played softball with the Commissioners for hours. Enron, and its victims, were barely mentioned, forgotten by most, abandoned by some.

Some twenty years ago, Lincoln Caplan, a well-respected observer of things judicial, wrote The Tenth Justice, about the Solicitor General and the rule of law. In it, he sharply criticized the Reagan Administration and then Solicitor General Robert Bork for politicizing the judicial process to achieve ideological ends. His words are equally telling today, where we sacrifice our laws to the power of money:

"The American system of government is distinguished by a need for the consent of the governed. The law is the compact between the people and their representatives - and the Congress, the Executive Branch, and the Supreme Court must forge legal consensus in this country. If they fail to achieve this, they stir confusion and frustration, and encourage disrespect - even contempt - for the law at the deepest level."

On the 15th of August, briefs are due in Stoneridge on behalf of the business interests alleged to have been part of a scheme to defraud. As the former SEC Commissioners wrote, it is "one of the most important securities cases to be heard in years." Should the Solicitor General now choose to file a brief on the side of the fraudsters, then the conversion of the United States to a full blown plutocracy will be complete.

Al Meyerhoff is an attorney in Los Angeles.