Over the years, the SEC has repeatedly stated that its mission is “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”   In this context, the agency has repeatedly told Congress and the courts that private securities litigation is a necessary adjunct to its enforcement program.  The SEC recently repeated this theme in the opening paragraph of the government’s amicus brief filed in the  Tellabs, Inc. v. Makor Issues & Rights, Ltd. appeal before the U.S. Supreme Court.  In the brief, the government stated that “[m]meritorious private actions are an essential supplement to criminal prosecutions and civil enforcement actions brought, respectively, by DOJ and the SEC.”

Yet the argument in the Tellabs brief seems to move away from the SEC’s long held position.  There the government argues against a “reasonable inference of state of mind,” which is the pleading standard advanced by the Seventh Circuit Court of Appeals.  Rather, the government adopts the defendant’s position, advocating for a stricter “high likelihood” standard.  If the Supreme Court accepts the government’s argument, it would make it more difficult for plaintiffs to survive dispositive motions, such as a motion to dismiss.  It is curious that the SEC seems to be siding with defendants, not the investors it has long claimed are an “essential supplement” to its enforcement program.   

Likewise in January 2007, Conrad Hewitt, SEC Chief Accountant, advocated for limiting liability for accountants and recommended that the profession lobby Congress for such protections.   If adopted this position could limit the ability of plaintiffs to recover in private securities litigation.  Again, this seems to  undermine the SEC’s  long stated position.
 
Finally,  The Wall Street Journal, in an April 16, 2007 article by   Kara Scannel reported that the SEC “is exploring a new policy that could permit companies to resolve complaints by aggrieved shareholders through arbitration, limiting shareholders’ ability to sue in court.”  If adopted such a proposal could limit the ability of plaintiffs to recover in private securities litigation.  Again, this seems inconsistent with the long held views of the agency.
 
All of this raises fundamental questions about the views of the SEC.  No doubt the agency continues to reiterate its traditional positions about shareholders and private litigation.  At the same time, as the adage aptly notes, actions often speak louder than words.  In this context the question becomes:  Is the SEC shifting away from its strong alliance with shareholders?  If so, is this in response to the agency’s critics?  Or perhaps a response to claims that the U.S. markets are less competitive because of the threat of costly litigation.  Does this change reflect the often reported split among the Commissioners on various issues?  

The Enron Nigerian barge deal seems to be the deal that refuses to go away – and many wish that it would.   The deal as initially conceived was simple enough:  Enron sold an interest in electricity producing barges to Merrill Lynch and others, recording the sale price as income.  That income helped Enron meet its earnings goals for the period.  According to the government an unwritten promise from Enron specified that it would resell or buy back the barges by mid-2000.   According to the government and class action plaintiffs, this covert  promise compromised the sale and modified it into a disguised loan and, thus, fraud.


The Government.  In U.S. v. Brown, the indictment alleged that four Merrill Lynch executives who participated in the deal were guilty of conspiracy and wire fraud, engaging in a scheme to defraud Enron of honest services.  U.S. v. Brown, No. 05-20319 (5th Cir. Aug. 1, 2006).  According to the Fifth Circuit Court of Appeals the “honest services” language in the statutes has been interpreted to require actions close to bribery.  Since the government failed to offer proof of that type, the Fifth Circuit reversed the convictions of the Merrill Lynch executives who, by that time, had served part of their sentences.  


Now however, the government is seeking to retry three of the Merrill Lynch executives.  In a motion filed with the district court in Huston on December 4, 2006, the government sought to strike the “honest services” fraud allegations from the indictment.  See United States’ Motion to Strike the Honest Services Fraud Allegations from the Indictment, filed in U.S. v. Bermingham, Cr-H-02-0597 (S.D. TX. Filed Dec. 4, 2006).  If granted, this would leave the alternate theory of fraudulent deprivation of Enron’s money or property.  The case may proceed back to trial on this theory.


The Class Actions.  The same barges are involved in Regents of the University of California v. Credit Suisse First Boston.  That class action sought to hold Merrill Lynch and others liable for securities fraud based, in part, on the barge deal.   In a recent opinion the Fifth Circuit Court of Appeals reversed a class certification order. Regents of the University of California v. Credit Suisse First Boston, Inc., No. 06-20856, 2007 U.S. App. LEXIS 6396 (5th Cir. Mar. 19, 2007).  The Court held that the action could not proceed as to defendant investment banks in view of the Supreme Court’s decision in Central Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994), which eliminated liability for aiding and abetting in private securities fraud actions.  The plaintiffs recently requested the Supreme Court to hear this case.  
While these two cases are very different, one a criminal prosecution and the other a securities class action, they share more than a factual similarity based on selling barges.   The common thread from the Fifth Circuit seems to be that those outside Enron are not being held responsible for what Enron executives did to manipulate the financial statements of that now defunct company.  But neither the government in Brown nor the plaintiffs in Credit Suisse are listening.  Thus, the Enron barge saga will continue – at least for awhile.