Supreme Court seen likely to take on Enron appeal

By Dan Wilchins

NEW YORK, March 20 (Reuters) - The U.S. Supreme Court is likely to take on a critical appeal in an Enron fraud case, which could affect the future of billions of dollars of securities class-action cases, according to legal experts.

The U.S. Fifth Circuit Court of Appeals ruled on Monday that aggrieved investors cannot pool their efforts to sue banks, including Merrill Lynch & Co. MER.N and Credit Suisse Group Inc. (CSGN.VX), for helping put together financing transactions for Enron, which collapsed in 2001.

The banks did not play enough of a role in Enron's deception for the court to determine that they manipulated the price of Enron's securities, which meant that investors could not sue jointly as a class, the opinion said.

The ruling is a big deal for big securities class-action cases against deep pocketed third parties such as banks, which some critics say are unfair attacks on professionals providing services.

Lawyers said the decision differed from similar rulings in other federal courts. Disagreement among lower federal courts may make it more likely that the Supreme Court will step in.

"I would fully expect, and perhaps this is the case, that this will get to the Supreme Court and get resolved," said James Cox, a professor at Duke University School of Law in Durham, North Carolina.

He said the Ninth Circuit, which oversees several western states, has issued a ruling that implies that investors as a class under certain circumstances can sue third parties on the grounds of participation in a scheme to defraud.

Legislators may also resolve the issue, Cox added.

SPLIT OPINIONS

Donald Langevoort, a law professor at Georgetown, said: "You don't want to overstate the importance of this (the Fifth Circuit) ruling, because courts around the country have split on third-party exposure in these cases."

When a company goes belly-up through fraud, plaintiffs' lawyers often go after third parties such as banks and law firms, alleging that they participated.

Attacking as a class is a key part of the strategy, because it allows people who suffered to share legal costs. Otherwise, suing can get prohibitively expensive.

William Lerach, a lawyer for the Enron investor plaintiffs, said on Monday he would ask the High Court to review the ruling by the Fifth Circuit, the federal appeals court which covers Texas, Louisiana and Mississippi.

Lerach had argued that class certification was proper, because the investors suffered harm by trading in Enron securities, whose prices were distorted by the defendants' alleged fraud.

The Fifth Circuit disagreed, saying the actions of the defendants could not be shown to have manipulated Enron security prices meaningfully.

So far, the Enron lawsuit has netted more than $7 billion in settlements for investors, including $2 billion or more each from Canadian Imperial Bank of Commerce (CM.TO), J.P. Morgan (JPM.N) and Citigroup (C.N).