States side with Enron shareholders in suit

California and 29 other states have taken the side of Enron Corp. shareholders seeking damages from big investment banks in a federal case over the banks’ alleged role in Enron’s accounting fraud.

The states’ move puts them at odds with a legal stance the Securities and Exchange Commission staff had considered taking in support of one of the banks, Merrill Lynch & Co., but appears now to have decided against.

In a brief filed Monday in a federal appeals court, attorneys general from the 30 states used the SEC’s legal arguments in 2002 Enron litigation to make the case that Merrill, Credit Suisse and the other investment banks should be held liable as participants in accounting fraud.

The SEC pursued Merrill, JPMorgan Chase & Co. and Citigroup Inc. over their role in Enron’s scheme, winning tens of millions of dollars in settlements with the investment powerhouses in 2003.

The states, in the brief written by Texas Atty. Gen. Greg Abbott, maintain that the Wall Street banks are liable “for directly participating in the Enron securities fraud” and “for manipulative and deceptive devices and contrivances.”

Residents of the 30 states who were shareholders were injured by Enron’s collapse, “and their rights, and the rights of other innocent citizens in future Enrons should be protected,” the filing says.

Attorneys for Merrill recently asked the SEC to file a brief in the U.S. 5th Circuit Court of Appeals in New Orleans in support of the firm’s position that on legal grounds, it should not be held liable in the case -- and the agency staff had considered doing so.

The staff is not expected to recommend to the SEC commissioners that the agency file such a brief in the case, making it unlikely that it will happen, a person familiar with the matter said Tuesday. He spoke on condition of anonymity because he was not authorized to speak officially on the matter.

The lawsuit on behalf of Enron shareholders seeks billions of dollars in damages from the investment banks.

The federal judge presiding over the litigation, U.S. District Judge Melinda Harmon in Houston, has granted it status to proceed as a class-action suit.

That decision is being reviewed by the appeals court in New Orleans. If the appeals court overturned Harmon’s ruling, the suit against the investment banks could be tossed out.