The University of California filed a motion last week to add a private lawsuit against the remaining banks involved in the ongoing class-action suit against Enron.
As the main plaintiff in the class-action suit filed against Enron on Dec. 21, 2001, the UC has recovered more than $7 billion in damages on behalf of the class.
Although most claims have been resolved, the UC has outstanding claims with several investment banks involved in the incident, including Barclays Bank, Credit Suisse First Boston and Merrill Lynch.
“We have a strong argument on behalf of the class,” said Chris Patti, counsel of the UC.
“But, because the primary theory which we had been relying on was undermined by the Supreme Court, we are asking the court to file a private lawsuit.”
Patti described the private suit as a “fall-back” option in case their class-action claims are defeated again.
Originally, the UC argued the banks were liable based on the theory of “scheme liability,” meaning the banks could be responsible for defrauding investors, without explicitly communicating the fraud to them, according to a university press release.
However, the 5th U.S. Circuit Court of Appeals rejected this claim in 2007, stating that the banks could only be held liable if they lied directly to investors, according to Daily Bruin archives.
In that decision, the dissenting judge stated that the ruling “immunizes a broad array of undeniably fraudulent conduct from civil liability, … effectively giving secondary actors license to scheme with impunity, as long as they keep quiet.”
Nonetheless, Trey Davis, director of special projects of the UC, believes there are multiple avenues to pursue legal action against the banks.
Now the UC is taking a new approach, arguing the banks are liable based on the theory of “nondisclosure,” meaning they had a duty to disclose information about Enron’s financial misdoings, Patti said.
The court is still considering these claims and the new motion for a private suit will only be pursued if the federal class-action claims are dismissed.
If they are dismissed, the private suit will allow the UC to make alternative claims based on state law, which cannot be used in federal class actions, Patti added.
“The advantage is that Texas law provides additional legal theories to assert liability, including aiding and abetting liability,” Patti said.
According to a university press release, total losses as a result of the Enron incident have been estimated at $40 billion, of which the UC lost $144 million.
The $7 billion recovered to date is the biggest settlement reached in terms of security class-action suits, said Dan Newman, spokesperson for Coughlin Stoia, the law firm representing the UC.
Still, Patti said he believes they can recover at least another $10 billion and probably even $20 billion on behalf of the entire class through their outstanding claims with the banks.
In the first round of distributions to the class, the UC received more than $22 million and is likely to recover more than $30 million after the second round, Patti said.
“But, that still leaves more than $100 million in losses to be recovered,” Patti said.
The university will continue to pursue those losses, first through the class-action suit and then through the private suit, if necessary.