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The Supreme Court on Tuesday dashed the hopes of defrauded Enron investors who sought to recover billions of dollars from investment banks connected to the collapsed energy firm. Without comment, the justices denied review in Regents of the University of California v. Merrill Lynch, in which stockholders claimed that a range of banks participated in “contrived, deceptive deals” that helped Enron show profits that were not real. The high court’s action was widely expected in the wake of its Jan. 15 decision in Stoneridge Investment Partners v. Scientific-Atlanta Inc. In that decision, written by Justice Anthony Kennedy, the Court said third parties like bankers, accountants, and law firms were immune from so-called “scheme liability” under federal securities law, unless it can be shown that they made public misrepresentations that investors relied on. As soon as the Court decided Stoneridge last week, the lawyer for Enron plaintiffs, Patrick Coughlin of Coughlin Stoia Geller Rudman & Robbin in San Diego, filed a brief with the justices pointing out the differences between his case and Stoneridge. While the Stoneridge suit targeted vendors or suppliers, Coughlin wrote, the Enron suit was filed against “financial professionals who deliberately misled investors.” Lawyers for the financial institutions countered that the Stoneridge rule should apply to them as well. The justices apparently agreed that with Stoneridge decided, the issue of third-party liability was closed. Stephen Shapiro of Mayer Brown, who argued for the victorious business defendants in the Stoneridge case, said Tuesday’s denial of the Enron case can be read as a rejection of any notion that the Stoneridge decision had limited scope. The Court, Shapiro said, “further confirms that there is no �financial services exception,’ and that Stoneridge applies to all categories of defendants.” Kennedy, who wrote the Stoneridge decision, recused in the denial of review in the Enron case, apparently because one of the defendants is Credit Suisse First Boston. Kennedy recused in a high-profile case involving Credit Suisse last year, apparently because his son, Gregory, was a managing partner there whose compensation could be affected by the outcome of the case. In a separate action, the Court also followed up on Stoneridge by remanding another third-party case in which investor-plaintiffs won before the U.S. Court of Appeals for the 9th Circuit. The case, involving the real estate portal Homestore.com, is Avis Budget Group v. California State Teachers’ Retirement System. Kennedy’s wife, Mary, a retired Sacramento teacher, receives a pension from the California retirement system, according to his financial disclosure form. Kennedy did not recuse from the Court’s action in the case Tuesday and was not required to, according to Steven Lubet, a judicial ethics expert at Northwestern University School of Law. As a pensioner, Lubet said, Mary Kennedy is essentially a creditor without an ownership interest in the system, and the outcome of the case would not affect her financially.
Tony Mauro can be contacted at [email protected].

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