White House at loggerhead with SEC, opposes third party class-action suits

The Bush administration dealt a heavy blow to lawsuits that accuse Enron Corp.’s investment banks of helping defraud shareholders out of billions of dollars, refusing to side with investors in a similar case at the US Supreme Court. In a lawsuit that harks back to the Enron scandal, the Bush administration is now at loggerheads with the federal agency that supervises securities markets as well as with state attorneys general and consumer and investor advocates. The administration has decided not to support investors whose securities fraud case is now before the Supreme Court. The White House made explicit on Tuesday that it is not in favor of third-party class action lawsuits. The deadline for siding with investors in a case before the Supreme Court has ended at midnight on Monday. Solicitor General Paul Clement declined to file a brief on the side of the plaintiffs in an upcoming Supreme Court case that will decide whether Enron’s shareholders can receive any damages from the banks and brokerage houses. The administration will now make a decision in the next 30 days whether to support the defendant companies or not to participate in the case at all. As a matter of fact, while deciding not to file a brief, Clement declined an appeal from the Securities and Exchange Commission to have the government interference on shareholders’ behalf. The SEC’s petition had surprised many, as its chairman, former representative Christopher Cox, is normally known as showing more kindness to the concerns of financial institutions than to those of litigious investors. However, at the center of the SEC’s reasoning is the charge to protect investors from scandals such as those of Enron and its associates. Al Hubbard, Bush’s chief economic adviser and director of the National Economic Council conveyed the President’s message that it’s important to reduce ‘unnecessary lawsuits’ and that federal securities regulators are in the best position to sue. Further, the White House is of the view that excessive litigation costs hurt the American economy, cost American jobs, and discourage participation in the country’s capital markets. The administration with its latest decision expressed that it is not interested in expanding the scope of class actions to include third parties. Al Hubbard further said, ‘We are a society that is overly litigious. And that is very harmful for our economy and very harmful for investors.’ The present case before the Supreme Court revolves around an appeal in which shareholders of Charter Communications Inc. have sued Scientific Atlanta and Motorola Inc., accusing them of aiding a conspiracy to exaggerate Charter’s revenues in 2000. A lower court has already dismissed the case, on the ground that the companies were not liable because they were not primary players in the alleged fraud. The decision to not file a brief in the Supreme Court has definitely demonstrated the intention of the Bush administration that it is acceptable for investment bankers to indulge in contemptible frauds on the public and walk off clean. The outcome of the Supreme Court case could decide whether investors can engage in lawsuits to claim investment losses if they can prove conspiracy between Wall Street institutions and scandal-ridden firms. Moreover, there is an under lying principle in securities law that when an investor is cheated as a part of a scheme, he can file lawsuits to receive his money back. The SEC is apparently supporting this assumption and willing to argue in favor of it before Supreme Court but Bush president seems to be unwavering in his attitude to not to support shareholders. Interestingly, the outcome of the case would also decide whether the Enron plaintiffs’ separate $40 billion lawsuit against the investment banks, which is held up by a federal appeals court ruling in March, can proceed ahead or not. Image Read

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