Lawsuit to Target the Banks, Law Firms of Enron

Investment banks and law firms that helped Enron Corp. create the off-the-books partnerships that lie at the heart of the company’s collapse will be targeted in a sweeping new legal action to be filed today by aggrieved Enron shareholders.

The court papers--which will name nine investment banks, two law firms and several individuals--portray the Wall Street firms as deeply involved in an effort to disguise the company’s deteriorating financial condition from shareholders, rating agencies and other outsiders.

The allegations will come in the form of a consolidated complaint scheduled to be filed in federal court in Houston by the University of California Board of Regents, the lead plaintiff in the previously filed class-action case that had named only Enron executives and accounting firm Andersen. The plaintiffs claim to have lost more than $25 billion when Enron’s stock price shriveled from its August 2000 peak of almost $91 to its current 33 cents.

The shareholders claim the Wall Street firms intentionally designed a series of sham transactions that let Enron mask its worsening finances by moving millions of dollars of debt off its balance sheet.

The dealings made the company seem to be profitable and hid the severe financial risks it was taking. The lawsuit also alleges that top Wall Street executives profited personally from some of the transactions.

The charges are certain to open a new chapter in the Enron saga. Wall Street’s potential involvement in Enron’s downfall has been the subject of intensive study by congressional regulators, Enron creditors and others.

The Wall Street firms have repeatedly denied any wrongdoing. Several investment banks have said they were victims of Enron, and they are among the largest creditors to have sued Enron in federal Bankruptcy Court, claiming they are owed billions of dollars in unpaid loans.

Until now, Andersen has received the most criticism for its role in auditing Enron’s books.

But with Andersen’s own financial troubles--and its shrinking ability to pay reparations to victims--becoming increasingly apparent, shareholders and others are now homing in on investment banks and other deep-pocketed targets, experts say.

William Lerach, the lead attorney representing the University of California, said the banks committed egregious wrongdoing and should be held responsible.

“If the banks happen to have a lot of money, well so be it,” Lerach said in an interview on Sunday. “The banks made a lot money in their dealings with Enron. And if they went over the line under our legal system they’re responsible and they should pay to the investors who were hurt.”

Some of the allegations in the new complaint have been made public previously, such as in an internal Enron report released in February or in other lawsuits filed against the investment banks.

But the suit also appears to disclose new details about Wall Street’s role in the partnerships. For example, the amended complaint alleges a total of $1.2 billion in insider trading by 28 Enron directors and officers, about $171million more than previously made public.

The document also appears to have new details about some of the most controversial off-the-books partnerships, known as LJM-2 and Mahonia.

According to a media release issued Sunday by the UC, the investment banks “helped to set up clandestinely controlled Enron partnerships, used offshore companies to disguise loans and facilitated the phony sale of overvalued Enron assets.”

Even as the Wall Street firms were helping to shield Enron’s worsening financial condition, stock analysts at the firms were publicly extolling Enron’s prospects to investors, the complaint will allege.

The law firms “issued false legal opinions, helped structure non-arm’s-length transactions and helped prepare false submissions” to federal securities regulators.

However, it could be difficult for investors to prove that Wall Street firms engaged in wrongdoing, legal observers say.

Under a 1994 U.S. Supreme Court decision, plaintiffs must prove that investment banks either “recklessly” or “intentionally” misled investors, said David Skeel, a corporate law professor at the University of Pennsylvania. Before 1994, plaintiffs only had to satisfy a lower legal standard that the banks had aided and abetted a client’s wrongdoing.

“Everybody looks bad here, so there’s probably some settlement value to naming the banks,” Skeel said.

“But if it went to court, of the professionals, the banks are the least likely to be found liable, unless there’s some smoking gun” that has yet to be discovered.

Other legal experts agreed.

For example, one could argue that the law firms that set up the Enron partnerships that hid losses, and the firms that conducted internal reviews for Enron’s board of directors but failed to highlight problems at the company, are culpable in the meltdown of the energy trader.

But according to Houston securities litigator Thomas Ajamie, that is a difficult claim for shareholders to enforce. That’s because law firms had contracts with Enron, not its shareholders.

“The law doesn’t look as favorably on parties that are once removed from the contract,” Ajamie explained.

In the case of the financial institutions and the investment banks that Lerach’s firm is naming in the consolidated lawsuit, it will be difficult to proved that they “aided and abetted” fraud at Enron, Ajamie said.

Nonetheless, the charges are serious and “I know that this is something the banks are very concerned about,” Ajamie said. “They know that this is more than a fishing expedition for whoever has deep pockets.”

The case may turn on how much inside information the banks and investment bankers had and whether that could be used to prove that they should have known that they were involved in “sham transactions,” Ajamie said.

The banks listed in the 485-page complaint are 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 Bros. The law firms are Vinson & Elkins and Kirkland & Ellis.

Lehman Bros. and Salomon Smith Barney, which is owned by Citigroup, declined comment on Sunday. J.P. Morgan Chase spokesman Kristin Lemkau said only that “the Mahonia transaction was on our balance sheet and was intended to be on Enron’s balance sheet.” She declined to comment further.

Barclays Bank, Credit Suisse First Boston, CIBC, Merrill Lynch, Bank of America, Deutsche Bank and law firms Vinson & Elkins and Kirland & Ellis could not immediately be reached for comment.

U.S. District Judge Melinda Harmon in Houston named the University of California system the lead plaintiff in the class action lawsuit against Enron’s senior management and the Andersen accounting firm in February.

Enron’s stock collapse cost the university system $145 million in pension and endowment funds it had invested in the company.

The university joined the lawsuit in December, claiming that it was duped by a “massive insider trading” scheme in which the company and Andersen issued false financial statements and made “false and misleading statements about the company’s purportedly record results and strong operating performance.”

The university at one point owned 2.2 million Enron shares. CalPERS, the state’s public employees’ retirement system pension fund, said it has lost $45 million in Enron shares. The California State Teachers Retirement System lost about $40 million.

Times staff writer Melinda Fulmer contributed to this report.