On Apr. 8, J.P. Morgan, along with eight other investment banks that worked for Enron, was dragged into the class-action fray in a suit being pursued by that most prolific filer of class actions: New York-based law firm Milberg Weiss Bershad Hynes & Lerach. It has all the makings of a long and bloody battle.
Critics dismiss class-action lawyers as nuisances desperately casting about for someone who will pay them to go away. This case has Wall Street worried, though. The plaintiffs feel they have a fighting chance of overcoming the serious legal hurdles that face class-action suits. And, if nothing else, the suit--and its attendant document discovery--could be an ongoing embarrassment for the bankers as the Enron controversy drags on.
Apart from J.P. Morgan, the defendants include a glittering array of investment bankers: Citigroup (C
), Merrill Lynch (MER
), Credit Suisse First Boston, Canadian Imperial Bank of Commerce (BCM
), Bank of America (BAC
), Barclays Bank, Deutsche Bank (DB
), and Lehman Brothers (LEH
). All of the banks vigorously deny wrongdoing. "It defies logic to say we profited from our relationship with Enron," says a J.P. Morgan spokesperson. "We are owed $2.6 billion. We had a $435 million write-down in the fourth quarter."
Lead trial attorney William S. Lerach has yet to begin the discovery process, which will give him access to bank documents. But information that has come out of press and congressional investigations has already established that six of the banks--J.P. Morgan, Credit Suisse, Lehman Brothers, Canadian Imperial, Deutsche Bank, and Merrill Lynch--were involved in funding Enron's controversial LJM2 partnership.
To prevail, the plaintiffs must prove that the bankers knowingly colluded in and profited from the fraud. The suit contends that, because the institutions and their executives invested in the structures or lied to investors about Enron's condition, the nine weren't mere accessories to fraudulent financing schemes. The plaintiffs argue that the banks knew Enron was using them to hide its financial problem, although they filed documents supporting stock and bond issues they underwrote that told the public otherwise. Lerach says this demonstrates that the banks were "knowing participants in a scheme to defraud."
The plaintiffs' 503-page complaint is arguably the most thorough compendium to date on how the banks helped Enron get its debt off its balance sheet and away from the public eye. Henry T.C. Hu, a securities-law professor at the University of Texas, points out that a 1994 Supreme Court ruling, which hampered class-action securities-fraud suits, hasn't stopped lower courts from finding advisers, such as investment banks, liable in fraud cases. "If the facts are egregious enough, if the judge is sympathetic enough, she can kind of blur the line between a primary and secondary actor," says Hu.
So stay tuned for a grueling fight--or possibly a big-bucks settlement. "This is one of those truly bad-fact cases," says William R. Ballowe, vice-president of Woodruff-Sawyer & Co., a broker of corporate-fraud insurance. That could be Enron's epitaph. And now, the bankers are caught up in the Enron mess as well. By Dan Carney in Washington