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The 5th U.S. Circuit Court of Appeals has ruled that Enron Corp. shareholders cannot proceed with a class action against investment banks for their alleged role in the accounting fraud that led to Enron’s collapse. Regents of the University of California v. Credit Suisse First Boston (USA) Inc., No. 06-20856. Judge Melinda Harmon of the U.S. District Court for the Southern District of Texas had granted class certification in a massive shareholders securities suit pending in her court. The plaintiffs, led by the Regents of the University of California, were preparing to go to trial on April 16 against bankers Credit Suisse First Boston, Merrill Lynch & Co. Inc. and Barclays PLC. The plaintiffs allege that the banks entered into transactions and partnerships that allowed Enron temporarily to remove liabilities from its financial records and book them as revenue. The plaintiffs seek damages of $40 billion; they previously negotiated settlements in excess of $7 billion with other defendants. Harmon issued an order in 2006 certifying a class of investors who bought Enron securities between Oct. 19, 1998, and Nov. 27, 2001. Harmon said, “the plaintiffs are entitled to rely on the classwide presumptions of reliance for omissions and fraud on the market” under the 1972 U.S. Supreme Court decision, Affiliated Ute Citizens v. U.S. Harmon said that the facts indicated that the banks had failed in their “duty not to engage in a fraudulent ‘scheme.’ “ The 5th Circuit reversed and remanded. Writing on behalf of the court, Judge Jerry Smith said that Harmon had misapplied Affiliated Ute because the banks did not owe a duty to the Enron shareholders to disclose the nature of the alleged improper transactions. “It is natural to expect a plaintiff to rely on the candor of one who owes him a duty of disclosure, and it is fair to force one who breached his duty to prove that the plaintiff did not so rely. Here, however, where the plaintiffs had no expectation that the banks would provide them with information, there is no reason to expect that the plaintiffs were relying on their candor,” Smith wrote. The banks were not fiduciaries and did not owe the plaintiffs any duty to disclose the nature of the alleged transactions. “When it determined that the banks owed no duty to the plaintiffs other than the general duty not to engage in fraudulent schemes or acts,” Smith wrote, “the district court should have declined to apply the Affiliated Ute presumption. Instead, it presumed what the plaintiffs had only alleged: that reliance, which is a specific, defining element of the relevant legal violation, had in fact occurred. The logic of Affiliated Ute is that, where a plaintiff is entitled to rely on the disclosures of someone who owes him a duty, requiring him to prove ‘how he would have acted if omitted material information had been disclosed’ is unfair. “If the plaintiffs’ allegations are true, Enron committed fraud by misstating its accounts, but the banks only aided and abetted fraud by engaging in transactions to make it more plausible; they owed no duty to Enron’s shareholders.”

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