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The band’s getting back together, but will the tour bus ever hit the highway? A coalition of interest groups that unsuccessfully fought securities fraud legislation in 1995 has been reunited by a fever for reform that has gripped Wall Street watchdogs since revelations of financial misdeeds at Enron Corp. surfaced last year. What they want should make any big firm stand up and take notice: the restoration of aiding and abetting liability for lawyers and accountants, a move that would expose outside professionals to the aggressive securities fraud plaintiffs’ bar in the hopes of keeping the lawyers and accountants honest. They have a long way to go, however, and little vocal help on Capitol Hill. “We have been advocating that there be a statutory repeal of Central Bank of Denver for some time now,” said Damon Silvers, associate general counsel for the AFL-CIO. “We’ve certainly been energized by the whole Enron affair … . The role played by law firms and investment banks is pretty clear.” The U.S. Supreme Court’s 1994 decision in Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164, eliminated a private right of action against secondary players in securities fraud schemes. Big labor, consumer groups, plaintiffs’ lawyers and a key Republican senator from the Deep South want to overturn that case by statute, re-igniting an effort that flamed out during the passage of 1995′s Private Securities Litigation Reform Act. “We’re rounding up the troops right now,” said Sally Greenberg, an advocate who has been working on the issue for Consumers Union. Plaintiffs’ lawyers have also hired the Cuneo Law Group to lobby on their behalf. What hasn’t been figured out yet is exactly what to do next. “The trick is to get it in a bill,” Silvers said. “There are a number of ways to go at it, and we’re exploring all of them.” The origins of Central Bank began in the late 1980s, when the city of Colorado Springs, Colo., floated bonds to pay for improvements to a suburban development. The real estate market at the time was in a downward spiral, however, leaving bondholders out several million dollars. One of the investors, First Interstate Bank of Denver, sued the bond issuer, Central Bank of Denver, alleging that Central Bank knew the bonds were questionable because their viability was based on outdated real estate assessments. The two sides litigated the case to the Supreme Court. At the time, every federal appellate court in the country recognized the rights of investors to sue under the theory of secondary liability, which provided a right of action against those who aid and abet a fraud. On appeal, the issue was the standard of liability, not liability itself. But with a 5-4 vote, the Supreme Court eliminated secondary liability. Central Bank is suddenly one of the more popular Supreme Court decisions in recent years. The law firms of Vinson & Elkins and Kirkland & Ellis, named as defendants in a shareholder suit against Enron filed in federal court in Houston, have placed it at the heart of their defense. So have numerous Wall Street banks also named in the complaint. The case could be the only thing protecting the firms from footing the bill for a huge settlement: In calamitous cases like Enron where a company declares bankruptcy, the losses to shareholders vastly outstrip the ability of the company to pay damages. That puts pressure on defendants who were on the periphery of a fraud to chip in. But where did the Supreme Court draw the line in Central Bank? Since 1994, courts have wrestled with that question. Some think Congress can clear it up. “If Congress were to act legislatively, then it would be clear that people who do not make [financial] statements themselves but who assist in the fraud can be held liable,” said James Finberg, a partner at Lieff Cabraser Heimann & Bernstein. The San Francisco-based firm, a front-runner in the race to run the Enron litigation, is an active member of the securities class action bar. A key player who may have taken itself out of the effort to overturn Central Bank may be the Securities and Exchange Commission, which has so far been silent on the issue. Under former Chairman Arthur Levitt, the SEC tried unsuccessfully to get Congress to overturn Central Bank at the same time it considered the Private Securities Litigation Reform Act. “Even Levitt tried to do it, and the backlash from accountants was so fierce that he wasn’t able to,” Finberg said. But some within the SEC have demonstrated frustration. In remarks made in February, SEC Commissioner Isaac Hunt Jr. said the Supreme Court’s decision may have contributed to a decline in accounting standards. “Private litigation, historically, has provided significant incentive to professionals to provide high-quality services,” Hunt said. “The decision in Central Bank of Denver may have been a factor in reducing the incentives to professionals.” The House of Representatives has already passed a financial reform bill, but Greenberg and her associates didn’t pin their hopes for a repeal of Central Bank on that legislation. “The House is not amenable to this,” Greenberg acknowledged. (According to the campaign finance watchdog group Open Secrets, the sponsor of that bill, Ohio Republican Michael Oxley, has been the leading House recipient of campaign donations from the Big Five accounting firms since 1989.) Instead, the focus is on the Senate. The hopefuls have turned their eyes to Sen. Richard Shelby, the Alabama Republican who is the second-ranking minority member in the Senate’s Banking, Housing and Urban Affairs Committee. On Feb. 12, Shelby introduced a bill that would not only restore aiding and abetting liability but joint and several liability as well (some securities fraud cases use proportionate liability to calculate damages, where courts determine which percentages of a recovery each defendants must pay). “I believe then and I believe now, the changes made in 1995 and 1998 opened the door for fraud in the securities markets because the bills reduced the likelihood that those responsible for such frauds would be punished for their acts,” Shelby said when he introduced the bill. So far, no hearings have been scheduled and Shelby’s bill has a long and tough road ahead before it becomes law. It faces likely opposition from Chris Dodd, D-Conn., the second-ranking Democrat in the Banking, Housing and Urban Affairs Committee and a key supporter of the PSLRA. “For most members of Congress, the case that the PSLRA is broken has not been made,” said David Crane, a Washington, D.C., lawyer who worked on the 1995 bill and is now in charge of government affairs at Autodesk Inc. In the meantime, all eyes are on the Enron shareholder suit in Texas. New York’s Milberg Weiss Bershad Hynes & Lerach, who represents the lead plaintiff, the Regents of the University of California, included a host of investment banks and the two law firms who served as outside counsel to Enron as primary actors in the alleged fraud. That will test the line between primary and secondary liability. At a recent conference in Soquel, near Santa Cruz, Calif., a number of prominent securities law experts concurred that the definition of who can be included in a scheme-to-defraud claim will likely be the lasting legal impact of the Enron case. “I think that’s the big legal issue,” said Joseph Grundfest, who teaches securities law at Stanford Law School. As for what will happen in Congress, history is instructive. A similar coalition of consumer groups, labor unions and plaintiffs’ lawyers was not able to prevent the passage of the 1995 PSLRA or related legislation in 1998. But that was before America’s seventh-largest company collapsed. Still to be heard from is the group of prospective plaintiffs — institutional investors — who were handed the keys to the securities litigation kingdom by the PSLRA. Obviously, the University of California has done its talking with the Enron suit. But the National Association of Attorneys General, which sometimes speaks for the large pension funds that Congress sought to run securities litigation, has stayed on the sidelines. At least one pension fund’s lawyer isn’t looking for Congressional action on any financial reform bills — CalPERS prefers to effect change through management of its $151 billion portfolio, the largest in the country. “I don’t care what Congress does,” said Kayla Gillan, general counsel for the California Public Employees’ Retirement System, at the Soquel conference, “as long as they don’t do it in the streets and scare the horses.”

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