The Corporations' Court: Supremes Rule Against Shareholders in Enron-Style Fraud Schemes

By Isaiah J. Poole, Common Sense. Posted October 15, 2007.

If you are a Wall Street investment banker, there's new evidence that you've got the best Supreme Court money can buy.

Conservative Supreme Court justices did little to hide their disdain for the need to protect the interests of investors earlier this week as they heard the case of a group of stockholders seeking to recover damages from a corporation engaged in a fraud scheme designed to illicitly pump up their stock price.

As veteran Supreme Court reporter Lyle Denniston reported in ScotusBlog,

If some of Wall Street's major players -- the giant invesment houses -- were looking nervously toward the Supreme Court on Tuesday morning, as they reportedly were, by midday they were entitled to take a breath and relax. As the Court concluded an hourlong hearing in a vitally important securities case, there seemed hardly a chance -- even a remote one -- that federal law against stock fraud would be read to give investors a significant new tool to go after stock fraud themselves. With the seeming exception of only Justice Ruth Bader Ginsburg, and the possible added exception of Justice David H. Souter, members of the Court showed little to no sympathy for opening up a broad new category of liability to investors.

The case involves two cable box makers who entered into an agreement with Charter Communications, a cable company, in which Charter would pay a $17 million cost increase for boxes from the companies. The companies agreed to use the windfall to buy an equivalent amount of advertising. That enabled Charter to claim it had an addition $17 million in revenue as it treated the equivalent increased expense as capital spending. The effect was a balance sheet that looked better than it actually was, and hence a stock price that was artificially inflated, á la Enron.

This should be a no-brainer: If you cook up a fraud scheme that ends up inflating a company's stock price, you should be liable for the fraud. But, as we've noted before, the Bush administration is using the right-wing ideological playbook, not common sense law, to encourage the Supreme Court -- as if recent Bush appointees John Roberts and Samual Alito needed persuading -- to shield so-called secondary actors from liability in stock fraud cases.

What that would mean is that the banks who helped orchestrate the infamous Enron stock fraud would also escape liability solely because they only concocted the rip-off scheme on behalf of the company that did the actual ripping off. Guantanamo Bay would be nearly empty if our terrorist detention policies operated on the same principle.

To these conservatives, it seems the greatest enemy to free enterprise is the ability of ordinary citizens to use the courts and regulatory agencies to punish corporate thieves and recover that has been stolen from them.

Roberts, the chief justice, made clear his stand when he said that Congress -- that would be the Republican, Chamber-of-Congress-controlled Congress just reduced to minority status last year, to be precise -- has already set the bounds for shareholder rights in these cases and, as he was quoted in The Washington Post, "my suggestion is that we should get out of the business of expanding it."

(The would be the same Justice Roberts who, along with Justiice Stephen Breyer, initially recused himself from hearing this case because both he and Breyer owned stock in Cisco Systems, the parent company of one of the cable box makers. But Roberts chose to sell the stock so he could weigh in. Breyer chose to continue refrain from participating.)

If the Supreme Court is going to allow the business community to run virtually unchecked with these kinds of schemes, with victims having no recourse, then Congress needs to step up now with a law that makes it clear that structuring Enron-style, cooking-the-books schemes is not merely sordid, but is the kind of criminal behavior that gets you sued.

              

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Isaiah J. Poole is the executive editor of TomPaine.com.

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