The Next Enron Scandal

The Enron scandal is rearing its ugly head again, and the Securities and Exchange Commission has to decide with whom it will stand: Will it be with small investors who depend on the honest advice of financial advisors or with bankers who, thanks to a recent federal court decision, have a license to facilitate fraud?

That stunning Fifth Circuit ruling is before the Supreme Court, which has to decide whether it will review the case. How the SEC weighs in could influence the justices, who will have their own choice to make between a conservative ideology that brooks virtually no boundaries for rampant corporate greed and the values of basic farness, honesty and justice.

At issue are the sham transactions that kept billions of dollars of Enron debt off the books and, for a while, artificially propped up the stock price. They were engineered by banks, but by a 2 to 1 vote the appeals panel said that investors could not sue the banks for being the enablers in the Enron fraud. For more on that ruling, and the two conservative judges behind it, read Rick Perlstein's excellent post in "The Big Con" blog.

The SEC was created to protect investors from fraudulent behavior. But under current chairman Christopher Cox, its vigilance in that role is in doubt.  Cox is an archconservative former House member from California  accused in one profile  of helping to “shape the regulatory environment in which Enron scandals ultimately flourished.” As an eager supporter of Newt Gingrich’s “Contract with America” in the 1990s, Cox actively fought against such regulatory efforts as a ban on undercover financial relationships between firms and their supposed-to-be independent auditors. At the top of his agenda at the SEC has been undoing the Sarbanes-Oxley law, under the excuse that its reporting and accountability standards are too onerous for small businesses.

But Cox also has to face the simple moral force of people such as Buddy Schwartz, a former blue-collar Hershey Foods mechanic who came to Washington this week to tell his story at a Washington news conference, along with several other Enron victims.

Schwartz worked overtime to send his children through college and have enough left over for a comfortable retirement. To manage the retirement money, Schwartz turned to his son, who worked as an investment advisor for Merrill Lynch. His son’s bosses at Merrill Lynch convinced him that Enron was a no-miss buy. Trusting that advice meant that his son “lost a good portion” of his father’s retirement savings. But Schwartz is not mad at his son. “Merrill Lynch and all these banks and Enron conspired together to steal money in the same way a common thief would break into my house and steal money,” Schwartz said.

Institute for America's Future co-director Robert Borosage made the key point in his opening statement: The SEC has a chance to stay true to its own mission and insure that those responsible for the Enron fraud be held accountable to those who suffered in their schemes. Being for unbridled capitalism makes for a good applause line at one of those conservative think-tank dinners, but it doesn’t impress hard-working middle Americans like Charles Prestwood.

Prestwood was a blue-collar Enron employee, working to keep gas flowing through its pipelines. “I had all of my stocks in Enron, but we were advised not to diversify,” he said at the news conference. When he asked Enron officials and their financial advisors about the stock, he said the answer was always, “Nowhere else can you make money like you can at Enron. We believed that. ... We just thought that we could put our confidence in them, that what they put in that newspaper or what they put on that computer would be the truth and you could stand by it. But it wasn’t.”

Now, with his retirement funds gone, “I just hope we can get justice and our day in court.”

Views expressed on this page are those of the authors and not necessarily those of Campaign for America's Future or Institute for America's Future