What does the Enron cert denial mean?

The Supremes denied cert in the Enron case. So what does this mean? Unfortunately, the WSJ’s report presents a somewhat misleading picture.

First, the article says that the decision “underscor[es] the sweep of last week's decision limiting the liability of companies that help other corporations commit fraud.” Actually, that’s far from clear. As I wrote last week, here and here, Stoneridge left potentially exposed parties like lawyers, accountants and investment banks that are closer to securities fraud than the Stoneridge defendants. The cert denial is a win for the specific defendants in Enron, but leaves the general issue in limbo.

Second, the WSJ quotes NYU’s Jennifer Arlen as saying that “[t]he Supreme Court all along has defined securities fraud as being the public statements that the firm made to its shareholders” and that “private plaintiffs can only go against people who participated directly in making those statements," not those "who lay the groundwork for being able to make those statements."

But that’s not clear either. Indeed, one of the few things the Court did clarify in Stoneridge is that mere conduct can trigger securities liability. Here’s what the Court said:

The Court of Appeals concluded petitioner had not alleged that respondents engaged in a deceptive act within the reach of the §10(b) private right of action, noting that only misstatements, omissions by one who has a duty to disclose, and manipulative trading practices . . . are deceptive within the meaning of the rule. . . . If this conclusion were read to suggest there must be a specific oral or written statement before there could be liability under §10(b) or Rule 10b–5, it would be erroneous. Conduct itself can be deceptive, as respondents concede.

This conduct might include misleading structures on which plaintiffs relied.

So the Enron cert denial leaves scheme liability battered but still alive. Someday, when securities fraud litigation is more politically palatable, the Court might pull this theory from the rubble of Stoneridge.