Legal News

?Enron Was a Gnat Compared to What?s Going On?

By Dan Slater

In his Tuesday column, the WSJ’s Dennis Berman writes that “the post-Enron crackdown appears not only to have failed to stop flagrant corporate risk-taking, but to have lulled Washington to sleep.” But, he writes, those looking for retribution against the execs of failed companies will quickly see that prosecutions won’t come easy.

Take Lehman, for example. A group of current and former Lehman execs, including CEO Dick Fuld, have been subpoenaed as part of a federal probe into whether the bank misled investors. At issue: Lehman’s statements about its financial strength at the same time the company was falling apart. Also, Lehman was marking its $32.6 billion in commercial property as much as 35% higher than other holders.

But given that investors currently hold a wide range of valuations for commercial property, how will such a case as Lehman’s play to a jury? Berman writes:

Consider, for instance, that investors today hold a range of valuations for privately held casino operator Harrah’s Entertainment Inc. These values range from 75% to 25% of the company’s $17.3 billion initial purchase price. Now multiply such judgment calls across Wall Street, where valuations on whole classes of investments have been askew since the credit crisis took hold some 15 months ago.

“These are necessarily going to be very close cases,” said University of Illinois law prof Larry Ribstein. Should Fuld “err on the side of panic, or state the risk pessimistically, he’s got a full-scale bank run. If he gets optimistic, it’s bordering on fraud.”

Sidney Powell, a Texas attorney for former Merrill Lynch employees who are still awaiting retrial for participating in a Nigerian power deal with Enron, puts it most pointedly: “Enron was a gnat compared to what’s going on.”

Full post as published by Law Blog - WSJ.com on October 28, 2008 (boomark / email).