Background of the Banks’ Role in the Enron Debacle

Although three banks (and others) have settled with the victims for $7.2 billion, several huge banks still named in this suit have not paid a penny to the victims of the fraud.

As the Court’s dissenting Judge summarized, 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.”

"...testified that many of the banks’ transactions were contrived, deceptive deals done solely to create the false appearance of profits and cash flow. "

Merrill Lynch purchased Nigerian barges from Enron on the last day of 1999 only because Enron secretly promised to buy the barges back within six months, guaranteeing Merrill Lynch a profit of more than 20%. As a result of this fraud, Merrill Lynch ultimately paid $80 million to settle with the SEC.

Where did that $80million go?

Barclays entered into several sham transactions with Enron,

Credit Suisse First Boston engaged in “pre-pay” transactions with Enron

Background on the Enron Victims' Lawsuit to Recover Damages from Wall Street Banks that Orchestrated the Enron Fraud

Background of the Banks’ Role in the Enron Debacle


As a result of the massive fraud at Enron, shareholders lost tens of billions of dollars. Many Enron executives, Enron’s accounting firm and certain bank officials were indicted.

Andrew Fastow, Enron’s now-imprisoned former finance chief, testified that many of the banks’ transactions were contrived, deceptive deals done solely to create the false appearance of profits and cash flow. Internal Enron documents and testimony of bank employees detailed how the banks engineered sham transactions to keep billions of dollars of debt off Enron’s balance sheet and create the illusion of increasing earnings and operating cash flow. For example:

Merrill Lynch purchased Nigerian barges from Enron on the last day of 1999 only because Enron secretly promised to buy the barges back within six months, guaranteeing Merrill Lynch a profit of more than 20%. As a result of this fraud, Merrill Lynch ultimately paid $80 million to settle with the SEC.

Barclays entered into several sham transactions with Enron, including creating a “special purpose entity” called Colonnade, a shell company to hide Enron’s debt, named after the street in London where the bank is headquartered.

Credit Suisse First Boston engaged in “pre-pay” transactions with Enron, including serving as one of the stop-offs for a series of round-trip, risk-free commodities deals in which commodities were never actually transferred or delivered.

Although three banks (and others) have settled with the victims for $7.2 billion, several huge banks still named in this suit have not paid a penny to the victims of the fraud.
The Fifth Circuit’s Decision


After years of preparation and just a few weeks before trial, the Fifth Circuit Court of Appeals vacated the class certification order.

Although the 2-to-1 decision of the Fifth Circuit acknowledged that the banks’ conduct was “hardly praiseworthy,” it ruled that because the banks themselves did not make any false “statements” about their conduct, they could not be liable to the victims even if they knowingly participated in the scheme to defraud Enron’s shareholders.

As the Court’s dissenting Judge summarized, 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.” In an extraordinary admission, the Court’s two-member majority acknowledged that their ruling runs afoul of “justice and fair play” (“We recognize, however, that our ruling . . . may not coincide, particularly in the minds of aggrieved former Enron shareholders who have lost billions of dollars in a fraud they allege was aided and abetted by the defendants at bar, with notions of justice and fair play.”)

For more background on the Enron lawsuit: www.universityofcalifornia.edu/news/enro