Opinion: Investors: Caveat Emptor!
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We recently urged the Securities and Exchange Commission, which has been criticized under chairman Christopher Cox for cozying up to Wall Street, to push the Supreme Court to hear Regents of the University of California v. Merrill Lynch. The suit, filed on behalf of Enron’s investors, seeks damages from Enron’s bankers for their part in the Houston energy company’s fraudulent activities and subsequent implosion.
We argued that the SEC owed its support to investors and to itself. Because of the legal principle at stake, not allowing the suit to proceed would amount to offering financiers a “get-out-of-jail-free” card: carte blanche to commit fraud at a handsome profit. It would also undermine the SEC’s ability to enforce its own regulations and protect shareholders, possibly eroding confidence in American securities markets.
Happily, the SEC sided with Enron’s investors in a 3-2 vote, with Chairman Cox joining the majority.
Not so happily, Solicitor General Paul Clement, who files friend-of-the-court briefs at the urging of executive branch agencies like the SEC, chose to disregard the recommendation. Instead, he stayed silent, swayed by Treasury Secretary and former Goldman Sachs CEO Henry Paulson, who spoke up on the bankers’ behalf, arguing that the possibility of third-party liability would roil the U.S. financial markets. (How about the possibility of unchecked third-party fraud? Wouldn’t that roil markets, too?)
President Bush also chimed in on the matter. He said that the expense of “frivolous” shareholder lawsuits was too great to allow cases like the UC Regents’ to move forward.
It’s nothing if not predictable. The Bush Administration has asked the Supreme Court to restrict the legal rights of investors before.
The Regents’ lawyer says a cynic might argue that Cox’s vote to back shareholders was little more than a face-saving ploy. Certain that the Bush Administration would never urge the courts to take the Regents’ case, he could support it—and appear sympathetic to the shareholders he’s supposed to protect—without doing real harm to his Wall Street friends.
Who knows if there’s any truth to that. But, thanks to the Administration, the end result is the same. Shareholders, you’re increasingly on your own.
Photo credit: Filmakers Library