The Enron scandal is rearing its ugly head again, and the Securities and Exchange Commission has to decide with whom it will stand: Will it be with small investors who depend on the honest advice of financial advisors or with bankers who, thanks to a recent federal court decision, have a license to facilitate fraud?
That stunning Fifth Circuit ruling is before the Supreme Court, which has to decide whether it will review the case. How the SEC weighs in could influence the justices, who will have their own choice to make between a conservative ideology that brooks virtually no boundaries for rampant corporate greed, and the values of basic fairness, honesty and justice.
At issue are the sham transactions that kept billions of dollars of Enron debt off the books and, for a while, artificially propped up the stock price. They were engineered by banks, but by a two to one vote the appeals panel said that investors could not sue the banks for being the enablers in the Enron fraud.
The SEC was created to protect investors from fraudulent behavior. But under current chairman Christopher Cox, its vigilance in that role is in doubt. Cox is an arch-conservative former House member from California accused in one profile of helping to "shape the regulatory environment in which Enron scandals ultimately flourished." As an eager supporter of Newt Gingrich's "Contract with America" in the 1990s, Cox actively fought against such regulatory efforts as a ban on undercover financial relationships between firms and their supposed-to-be independent auditors. At the top of his agenda at the SEC has been undoing the Sarbanes-Oxley law, under the excuse that its reporting and accountability standards are too onerous for small businesses.
But Cox also has to face the simple moral force of people such as Buddy Schwartz, a former blue-collar Hershey Foods mechanic who came to Washington this week to tell his story at a Washington news conference, along with several other Enron victims.
Schwartz worked overtime to send his children through college and have enough left over for a comfortable retirement. To manage the retirement money, Schwartz turned to his son, who worked as an investment advisor for Merrill Lynch. His son's bosses at Merrill Lynch convinced him that Enron was a no-miss buy. Trusting that advice meant that his son "lost a good portion" of his father's retirement savings. But Schwartz is not mad at his son. "Merrill Lynch and all these banks and Enron conspired together to steal money in the same way a common thief would break into my house and steal money," Schwartz said.
The media, business elites and the Washington establishment are behaving as if Enron is a closed book. CEO Ken Lay is literally dead and buried; finance chief Andy Fastow and the other malefactors have been punished; Enron's accounting firm, Arthur Anderson, has dissolved. Blares the cover of the latest Fortune: "Business Is Back! Profits Are Boffo. Stocks Are On Fire...And the Rogues Are Behind Bars." The system is working, right?
Not so fast.
A lawsuit led by the Regents of the University of California (whose pension fund lost $150 million) sought to get compensation for victims of a series of devious actions by Enron's bankers uncovered in internal documents.
The schemes included Merrill Lynch's "purchase" of some Nigerian barges from Enron on December 31, 1999, which Enron bought back six months later. That way, the debt Enron incurred by buying them in the first place never showed up on the year's books. What was in it for the investment bank? A 20 percent profit -- free money.
Barclays, another investment bank, created a shell company specifically to hide Enron debt. Credit Suisse First Boston let Enron make up "commodities deals" that never happened. All and sundry such deals made Enron look healthy to the investors they suckered, even as the company actually was earning no profit at all.
While some banks settled with the victims, others held out -- a wise decision, it turns out. Just weeks before the opening gavel, the Fifth Circuit crapped on their victims. The banks' actions were "hardly praiseworthy," but the banks were simply not liable, the majority concluded, because the banks themselves made no false statements to the public -- only Enron did.
Imagine if this became the general standard in our criminal law. As the lawyers who sued the banks put it, "The mastermind of the bank robbery who planned the heist, recruited the other robbers, provided the weapons, drove the get-away car, and went back to the hideout to split up the loot is not legally responsible just because he did not show his face inside the bank."
Or here's the bottom line in lawyer language from Judge James Dennis's angry dissent: In direct contravention of federal law that makes it illegal for "any person" "directly or indirectly" "to employ any device, scheme, or artifice to defraud," the ruling "immunizes a broad away of undeniably fraudulent conduct from civil liability....effectively giving secondary actors license to scheme with impunity, as long as they keep quiet."
Both the judges in the majority are Reagan appointees, solid "conservatives."
E. Grady Jolly, a 1962 graduate of the University of Mississippi law School, made tightly controlling such class action suits a major argument of his confirmation hearings. One of his noteworthy rulings let law enforcement take as much of a drug offender's property as it likes without it being considered "punishment"; in another, he struck down background checks for handgun purchases; and, in another, he concluded that whistleblowers could be fired for revealing discriminatory practices by their employers.
Judge Jerry E. Smith is a former chairman of the Harris County Republican Party in Houston. His rulings kept asbestos on the market, banned race-based affirmative action in law schools, de-certified a class of nicotine addicts seeking to sue the tobacco companies and made it harder to hold individuals responsible for violations of the Clean Water Act. Here are some things lawyers said about him for a directory of federal judges: "He is very conservative." "He is conservative." "He is very conservative." "He is very conservative." "He is very conservative."
Well, that's conservatism for you: When banks steal billions from pensions, it's perfectly fine by them.
The SEC has a chance to stay true to its own mission and insure that those responsible for the Enron fraud be held accountable to those who suffered in their schemes. Being for unbridled capitalism makes for a good applause line at one of those conservative think-tank dinners, but it doesn't impress hard-working middle Americans like Charles Prestwood.
Prestwood was a blue-collar Enron employee, working to keep gas flowing through its pipelines. "I had all of my stocks in Enron, but we were advised not to diversify," he said at the news conference. When he asked Enron officials and their financial advisors about the stock, he said the answer was always, "Nowhere else can you make money like you can at Enron. We believed that. ... We just thought that we could put our confidence in them, that what they put in that newspaper or what they put on that computer would be the truth and you could stand by it. But it wasn't."
Now, with his retirement funds gone, "I just hope we can get justice and our day in court."
Isaiah J. Poole is the executive editor of TomPaine.com. Rick Perlstein, author of The Big Con blog at Campaign for Americas Future, contributed to this article.