Wall Street's investment banks just got another step closer to making defrauding investors an accepted line of business. And Enron's employees who lost their pensions and the small investors who got fleeced in the Enron frauds just got shafted again -- this time at the urging of President George W. Bush.
Wall Street's most powerful investment banks and their friends in high places lobbied the U.S. Solicitor General Paul Clement to reject the recommendation of the Securities and Exchange Commission that the Justice Department support defrauded investors in their appeal to the Supreme Court.
The case before the Supreme Court is called Stoneridge v Scientific-Atlanta, but the Court decision will directly impact the millions of victims of Enron's collapse -- and say much about the honesty of U.S. markets.
Briefs in support of the defrauded investors were filed by dozens of state attorneys general, by the Council of Institutional Investors and some of the nation's largest pension funds whose investments are at risk if Wall Street banks can concoct fraudulent schemes with impunity. Yet, in an unprecedented failure to meet his responsibilities to the public, Solicitor General Clement, who represents the United States before the Court, decided to punt.
Clement is not exactly a neutral party. He's a star of the right-wing bar. He clerked for Laurence Silberman and Antonin Scalia, among the most partisan and reactionary judges of our time. He served as an aide to Sen. John Ashcroft. He is an activist in the right-wing Federalist Society that seeks a return to 19th century jurisprudence.
And this spear-carrier for the right got his marching orders from the top. Treasury Secretary Henry M. Paulson called directly and arranged for President Bush to weigh in personally.
The intervention of the treasury secretary and the president is hardly business as usual--particularly since neither Paulson nor President Bush are neutral observers either. Paulson is the former chairman of Goldman Sachs, a named defendant on the Enron case. And Enron and CEO "Kenny Boy" Lay were George Bush's leading supporters, contributing cash, the corporate plane, and fundraising energy to Bush's rise.
The president, according to his chief economic advisor, Al Hubbard, ''believes that it's important to make certain that we reduce the unnecessary lawsuits because that's a very big burden to the economy, which adversely impacts investors."
But it is investors who have brought the Enron lawsuit, and it is the defrauded investors who the solicitor general and Bush just shafted. The poster child for the unchecked greed of the 1990s, Enron's executives, accountants and Wall Street banks created the ultimate Ponzi scheme. When it came unglued, the public lost billions, lives were ruined, and pensions were lost.
For five long years, the victims of the Enron fraud have pressed ahead, seeking justice against the banks who orchestrated the fraud. The trial was finally set to begin when two conservative Fifth Circuit appellate judges swooped in and hijacked the case. They bought the banks' tortured logic that although unquestionably in cahoots with Enron, they could not be held liable.
Why? Because Merrill Lynch and the other defendant banks stayed behind the curtain--merely directing the crime, participating in the crime, and collecting their share of the loot--but never themselves actually communicated directly to the market. The fraudulent schemes, of course, were public and misled investors (including Merrill Lynch's own investment advisors who promoted Enron's stock).
The Enron judges acknowledged "our ruling on legal merit may not coincide ...with notions of justice and fair-play." (To say nothing of common sense or a sensible concern for the reputation of U.S. markets.) But forced to choose between the banks that committed the fraud and the investors who got screwed, the judges, the treasury secretary and the president chose the thieves over the victims.
No matter the banks enthusiastically worked hand in glove with Enron executives. No matter that they created "structured transactions" with the sole purpose of allowing Enron to hide enormous losses and claim fictitious profits--while actually never making a dime. No matter that the Enron trial judge, a conservative Bush I appointment, found "a long shadow over Merrill Lynch's ongoing participation . . . in the unified scheme to defraud." No matter that Merrill Lynch was fined millions of dollars by the SEC for its part in this sordid affair. No matter that several Merrill executives were reduced to taking the Fifth Amendment before Congress. And no matter that countless ordinary people, those that rely on their bank and the market to be honest, robust and fair, lost billions.
There would be no day of reckoning. Fraud is just business as usual for Wall Street banks.
The Supreme Court Justices will now decide, in the words of the old protest song, "whose side are you on," Main Street or Wall Street? How this drama turns out will say a lot about our justice system - and a lot about our economy. If Wall Street banks have no liability for fraudulent schemes they concoct, the scandals of the last decade will look like choir boy pranks compared to what is to come.
Robert L. Borosage is co-director of the Campaign for America's Future