American Enterprise Institute’s Ted Frank provides this excellent WSJ ($) op-ed on the stakes involved in the upcoming Supreme Court decision in Stoneridge v. Scientific-Atlanta, which could seriously erode the Central Bank rule against holding financial institutions secondarily liable for damages in providing financing for a company that defrauds its investors. As usual, Professors Ribstein and Bainbridge do a fine job of explaining why it would be poor public policy to undermine the Central Bank rule, while J. Robert Brown makes the case for expanding secondary liability.
But policy reasons aside, there is a practical reason why the Supreme Court should uphold the Central Bank rule. The Court is currently considering whether to expand the Stoneridge v. Scientific-Atlanta case to include the review of the denial of class status to the plaintiffs in the main securities fraud lawsuit against several investment banks that provided financing for Enron. One of the myriad of claims in that case is one based on the much-discussed the Nigerian Barge transaction that has already resulted in the unjust conviction and imprisonment of four former Merrill Lynch executives. The plaintiffs in that Enron securities fraud case contend that Merrill should be held liable for billions of dollars in damages resulting from Enron’s demise because Merrill purchased an interest in the barges that allowed Enron to book $12 million in allegedly false earnings.
So, the Enron securities fraud case provides a preview of what we will get from erosion of the Central Bank rule: Help arrange $12 million in earnings = liability for billions of dollars in damages.
I don’t see the Supreme Court buying that math.