HOUSTON — Enron Corp. couldn’t maintain its illusion as a swaggering energy giant without help from nine investment banks and two law firms, said attorneys who added them as defendants in a securities fraud lawsuit in Houston.
“This fraud could not have been accomplished by a few corporate executives, no matter how dishonest or energetic they may have been,” lead attorney William Lerach said as the amended lawsuit was filed Monday.
The 500-page complaint, filed on behalf of large investors and led by the University of California, said the banks and law firms raked in massive fees while financing and approving sham deals that hid debt and inflated profits.
A second suit, on behalf of employees and retirees who lost their 401(k)s loaded with company stock when Enron collapsed, also named several banks and a law firm as defendants in a 294-page amended complaint filed Monday.
Enron collapsed into bankruptcy last year, leaving thousands of workers jobless, amid a maze of alleged accounting abuses.
“There were certainly rotten apples at Enron, but they couldn’t have done it without the active participation of professionals — lawyers, accountants and Wall Street,” said Steve Berman, the Seattle attorney in charge of the employees’ case.
Both suits name Merrill Lynch & Co.; J.P. Morgan Chase & Co.; Credit Suisse First Boston; and Citigroup Inc. The investor suit also names Canadian Imperial Bank of Commerce (CIBC); Bank of America Corp.; Barclays Bank PLC; Deutsche Bank AG and Lehman Brothers Holding Inc.
Both suits name Enron’s chief outside law firm, Vinson & Elkins in Houston, and the investor suit also names Chicago-based Kirkland & Ellis. Both also added Andersen Worldwide to the defendant list.
The suits allege that the banks’ knowledge of questionable partnerships and other transactions gave them an inside view of Enron’s financial condition as they sold securities to investors.
Those partnerships and transactions, backed by Enron stock and in part developed and funded by the banks, could hide debt and inflate profits as long as Enron maintained a high stock price, the lawsuits said.
But when shares dropped, debt payments were triggered. The banks injected cash into Enron through various deals that the company used to maintain its image as a profit powerhouse, the suits said.
Regarding the law firms, the suits allege that they knowingly approved questionable partnerships and financial deals and either wrote or approved false or misleading filings with the Securities and Exchange Commission.
“It defies logic to say that we profited from our relationship with Enron when we’ve already announced exposure of $2.6 million and losses so far of $453 million. We were damaged as well,” said J.P. Morgan spokeswoman Kristin Lemkau. J.P. Morgan is Enron’s largest creditor.
“We believe there is no basis for this claim and we intend to vigorously defend against it,” said Merrill Lynch spokesman Joe Cohen.
The other banks declined to comment or didn’t return calls.
Andersen Worldwide said Monday that only its U.S. member firm did Enron work, and it “is the only proper defendant in claims relating to that audit opinion. Changes in Arthur Andersen LLP’s situation cannot be used to justify baseless claims against Andersen Worldwide SC or individual member firms.”
Kirkland & Ellis said Monday the investor suit was “filled with flagrant misstatements,” and the firm “never represented Enron, had no responsibility for the accounting judgments ... and never invested in any of the partnerships or transactions at issue.” That firm and Vinson & Elkins said their work would be deemed proper when the facts are out.
Enron spokesman Mark Palmer declined comment.
The original investor lawsuit was filed in December shortly after Enron went bankrupt. It targeted current and former Enron officials who sold more than $1 billion in stock from October 1998 through last November. It also named Arthur Andersen, which was indicted last month for destroying Enron-related audit documents.
Lerach said further investigation pointed to liability on the part of the banks and law firms.
But experts said Andersen, facing the indictment, an exodus of clients and global partners and layoffs of 7,000 employees, doesn’t have the cash to settle big claims. The banks do.
“They might have been included in the action anyway, but now with Enron and Arthur Andersen struggling financially, the bankers and lawyers are perceived as the remaining sources of funds that might pay off Enron’s shareholders,” said Frank Velie, a former New York federal prosecutor who now specializes in securities law and white-collar crime.
Plaintiffs’ attorneys also have to prove participation, such as orchestrating a fraud scheme or writing false disclosures, said Joel Seligman, dean of the Washington University School of Law.
“The real challenge is to discover whether those facts can be proven or if you’re dealing with someone who was passive and just read false information prepared by someone else,” he said.