Lessons of Enron: forgotten before they've been learned



It appears that some federal regulators are prepared to forget the lessons of Enron even before the lawsuits spawned by Enron have been heard by the courts.
The Associated Press reports that the Securities and Exchange Commission is considering taking the side of Merrill Lynch & amp; Co. in a federal case brought by Enron shareholders seeking damages from Merrill and other big investment banks over their alleged role in Enron's accounting fraud.
The SEC's job is to help assure investors in American companies that while any investment carries a certain risk, American companies aren't allowed to stack the deck against the shareholders.
Obviously, the SEC wasn't keeping a very close eye on Ken Lay and Enron during the decade or so that the company showed unbelievable growth -- with the accent being on unbelievable.
But, OK, everybody makes mistakes and Ken Lay and the people he surrounded himself with were very slick operators. And we're sure that the SEC is sorry that tens of thousands of investors lost huge amounts of money when the house of cards collapsed. Doubly sorry for those thousands of people who lost their nest eggs, especially the employees of companies that Enron swallowed up who had their retirement accounts switched from companies they had invested in for decades to Enron scrip.
Well, if the SEC were really all that sorry, it would let a federal court in Houston work its way through the pending lawsuit without its interference.
Fine paid, no admission made
In 2003, Merrill agreed to pay 80 million to settle the SEC's civil charges that it participated in Enron's phony sales of floating power plants, designed to inflate the company's earnings in 1999. The firm neither admitted nor denied wrongdoing in the settlement.
Now shareholders have gone to court seeking compensation from Merrill. One big difference between this case and the SEC charges is that the court will determine at the end of the day whether there was any wrongdoing. Merrill won't be able to say, "Well, we're going to give you 80 million, but we didn't do anything wrong."
Apparently Merrill thought it could use an ally after U.S. District Judge Melinda Harmon gave the plaintiffs standing to proceed as a class-action suit. Lawyers for Merrill recently asked the SEC to file a brief in support of the firm's position that it should not be held liable in the case.
But instead of telling Merrill to fight its own battles, the SEC is actually considering the request.
Merrill's lawyers are arguing that in granting class-action status to the shareholders, Judge Harmon accepted an "expansive" theory that wrongly holds all parties -- including those that aided Enron's scheme but didn't know its true purpose -- liable for losses incurred by investors.
One would think that if the SEC fined Merrill 80 million, it had reason to believe Merrill wasn't all that ignorant of what Enron was up to. But, at any rate, Merrill's degree of complicity is a matter that should be allowed to work its way through the courts without the SEC taking the side of Merrill.
If the SEC wanted to show it is interested in protecting investors, it should file an amicus for the plaintiffs. They are the ones who are trying to do the SEC's job -- restore confidence in the markets that was damaged by the Enron scam.

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