Enron investors lose another round. Yesterday, the Supreme Court denied a request for review of a class-killing decision by the Fifth Circuit in a case involving securities fraud claims by Enron investors against investment banks whose support enabled Enron to inflate its stock price. See Regents of the Univ. of Calif. v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372 (5th Cir. 2007); post here.
The appeals court’s class decertification turned on the viability of "scheme" liability under section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5. The Regents plaintiffs hoped that the Supreme Court would reverse the dismissal of another scheme liability case, but the Justices disappointed them in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., No. 06-43 (U.S. Jan. 15, 2008).
A new legal strategy? The WSJ reports today that the lead plaintiff in the Enron case still hopes to find "a legal strategy to fight the defendants" and "will present its alternative approach soon" to the federal district court in Houston.
How can an alternative approach prevail? For one thing, don’t the Enron investors have a little statute of limitations problem? Enron tanked more than seven years ago! And, even assuming they can get around the timeliness issue, how can they beat Stoneridge?
American Pipe and tolling limitations. The Supreme Court has given absent class members a break on the running of limitations. As Blawgletter said last July:
American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), and its progeny stop statutes of limitations from running — ties their legs, so to speak — on claims of each member of an on-file class action. The tolling lasts only so long as the class member remains in the class. It ends if and when the class member exits the class — either because the court denies class treatment of his claim, because he opts out of the class, or because of a change in the class definition.
The pendency of the Regents case thus tolled limitations, and members of the now-defunct Regents class therefore may now bring individual claims despite the one-year limitations and three-year repose periods so long as they act promptly.
Whither scheme liability? Assuming you can clear the limitations hurdle, didn’t Stoneridge kill all hope of holding the investment banks responsible for your loss? We don’t think so. As we read Justice Kennedy’s Stoneridge opinion for the majority, an Enron stock purchaser may recover from participants in a fraudulent scheme if the buyer can show that he relied on the honesty of the participants’ dealings with the company. The problem for the Stoneridge plaintiffs was that they had no idea that Charter cable used phantom advertising payments from a supplier, Scientific-Atlanta, to pump up revenues. The situation may differ with Enron investors; we look forward to seeing what the lead plaintiff comes up with.
Practicalities. But, really, doesn’t the denial of certiorari in Regents destroy hopes of holding the investment banks liable? Isn’t pursuing individual claims impractical?
We must say no. People who suffered large losses may indeed still have viable claims. Mutual funds, pension plans, investment companies, and even individuals who bought Enron stock before it crashed could yet prosecute their claims.
What to do? If you bought pre-tank Enron stock, you ought to consult legal counsel right away to review your options. A six-figure loss may justify a contingent fee arrangement, especially if others join you. Good luck!