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High court rejects investors' suit against Enron bankers

January 23, 2008|David G. Savage | Times Staff Writer

WASHINGTON — The Supreme Court on Tuesday rejected a lawsuit from Enron Corp. investors who sought to recover more than $30 billion from Wall Street investment bankers who they alleged had schemed with the failed Houston energy trading firm.

Without comment, the justices dismissed an appeal from pension and investment funds, including the University of California. The funds had argued that all the key players in the Enron debacle should be held liable for their losses.

In a separate action Tuesday, the justices overturned a ruling that would have allowed the California State Teachers' Retirement System to sue major companies, including Avis and AOL, on allegations that they schemed with Homestore Inc. to inflate its financial results.

The pair of decisions follows last week's major ruling that sharply limited who can be held liable for a massive stock fraud. In that 5-3 decision, the high court said lawsuits for securities fraud could extend only to the company that allegedly fooled its investors, not to bankers and vendors alleged to have participated in the scheme.

For the Enron-related suits, Tuesday's one-line rejection by the high court appears to mark the end of the line. The plaintiffs recouped $7.3 billion in settlements with some bankers, but they lost in their bid to win a recovery from other major investment banks.

The Homestore litigation now returns to a federal court in California, but it too may be nearing its end. Born during the dot-com boom of the 1990s, Homestore provided online real estate listings. Its stock price plunged after it was forced to restate its earnings by $190 million for 2000 and 2001. Several executives were prosecuted and convicted of fraud. The Westlake Village-based company is now called Move Inc.

Lawyers for the teachers' retirement fund hoped to recover money not just from Homestore but also from other companies that they said "entered into sham transactions" with it to make it appear as though the company was generating more revenue.

The Enron suit raised the same issue, which had divided judges across the nation. In the Enron case, the U.S. appeals court in New Orleans had rejected the broad lawsuit against the investment bankers. However, in California, the U.S. 9th Circuit Court of Appeals cleared the way for the suit against Homestore's business partners to proceed.

Lawyers for Avis and for AOL parent Time Warner Inc. appealed to the high court, arguing that the 9th Circuit was wrong. They insisted that the anti-fraud laws did not extend to "secondary actors."

On Tuesday, the justices issued a brief order that vacated, or set aside, the 9th Circuit's decision and said the case should be reconsidered under last week's ruling that limited the reach of stock fraud suits.

In its opinion last week in the case of StoneRidge Investment Partners vs. Scientific Atlanta, the Supreme Court rejected the notion of "scheme liability," the idea that all those who participate in a scheme should be liable for it.

In the wake of that ruling, the plaintiffs' lawyers in the Enron litigation said the court's ruling did not shield "financial professionals [who] engaged in fraudulent dealings." But the justices rejected their appeal.

The winning lawyer in last week's case said Tuesday that the court clearly intended to erect a broad shield against such lawsuits.

"This confirms that there is no financial services exception, and that StoneRidge applies to all categories of defendants," said Stephen M. Shapiro, a Chicago lawyer.

An attorney for the California teachers' fund said his case was not dead. Joseph Cotchett, a lawyer in Burlingame, Calif., said he would renew his suit seeking to hold liable "all the other defendants" who allegedly schemed with Homestore.

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david.savage@latimes.com

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