Where the Money Is: Willie Sutton Wasn't the Only One to Recognize a Deep Pocket When He Saw One. Now the Plaintiffs Bar Is Targeting Banks. (Risk Management)

By Peterson, James R. | ABA Banking Journal, July 2002 | Go to article overview

Where the Money Is: Willie Sutton Wasn't the Only One to Recognize a Deep Pocket When He Saw One. Now the Plaintiffs Bar Is Targeting Banks. (Risk Management)


Peterson, James R., ABA Banking Journal


The nation's biggest class-action law firm has dropped a bomb on the banking industry in the form of a $25 billion lawsuit linking nine banks and brokerage firms to the Enron disaster.

Whether the action by high-profile litigator Millberg Weiss Bershad Hynes & Lerach will prove lethal is open to question. But, at the very least, the firm has created a whole new target class for the plaintiffs bar, adding banks to the list of third parties often sued for big cash awards when companies go bankrupt and leave their cupboards bare.

"In this environment, anyone near an accounting problem is potentially at risk, and among the potential targets are commercial and investment banks" says Michael Young, a partner at the New York law firm Willkie Farr & Gallagher and author of "Accounting Irregularities and Financial Fraud" (Aspen, 2002). "The ground is shifting beneath everybody's feet and it's tough for all the players to keep their balance," says Young. "Litigators are casting a wide net in a search for parties who may be in some subtle way facilitating accounting manipulations."

While the ground shifts, it's often difficult to distinguish the good guys from the bad. Greed is not unknown in corporate life. But it's also true that in our increasingly litigious culture, the innocent can get swept away with the culprits. Whatever the case, shareholders who lost money in the Enron collapse obviously are hoping to increase their chances for recovering their losses by going after banks that did business with Enron.

Enron gives litigators a big boost

The plaintiffs bar is the nemesis of the accounting industry, targeting many firms as third parties in shareholder lawsuits when companies go belly up. For more than a decade Big 5 firms have spent hundreds of millions of dollars to settle these "deep-pocket" lawsuits in an effort to cut their potential losses--though many of the suits lacked merit.

With the strong support of the accounting industry, Congress passed the Private Securities Litigation Reform Act, a law designed to reduce frivolous lawsuits that are based solely on guilt by association. But that law has not stemmed the tide. Although frivolous lawsuits seem to be on the decline, the total number of shareholder suits filed in the federal courts in 2001 was actually more than double the number filed in 1995, when the law was passed. The increase was fueled at least partly by a growth in corporate bankruptcies in a declining economy.

It was in this sour economic climate that Enron toppled and fell. And the collapse of the Houston energy giant has given shareholder litigators a new lease on life.

Soon after Enron filed for bankruptcy on December 2, 2001, Milberg Weiss, a firm that has prosecuted hundreds of shareholder lawsuits, filed a consolidated class action suit against Enron in U.S. District Court in Houston, accusing particular Enron executives and the company's auditor Arthur Andersen with violations of the federal securities laws. The complaint claimed the executives engaged in massive insider trading while the accounting firm was accused of making false and misleading statements about Enron's financial performance.

Details of the complaint

Then on April 8 Milberg Weiss dropped the bomb, amending its complaint to target nine financial institutions, including J.P. Morgan Chase, Citigroup, Merrill Lynch, Credit Suisse First Boston, Canadian Imperial Bank of Commerce (CIBC), Bank America, Barclays Bank, Deutsche Bank and Lehman Brothers. The huge 502-page document claims the institutions participated in fraudulent transactions that ultimately cost Enron shareholders more than $25 billion. The complaint also says a number of top bank executives profited personally from the alleged schemes.

It is the policy of each of the institutions targeted not to talk about matters in litigation. …

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