“Scheme liability” and the campaign

Should the people who lost their retirement savings in the Enron debacle be able to sue the “aiders and abettors” of the fraud:the banks, investment banks, and accounting firms that made it possible for Enron management to cheat the shareholders? The usual suspects on the Supreme Court, following the lead of the Bush Administration, said no, siding with the con artists agains the victims. But the court was interpreting a statute, not the Constitution. So the Congress could undo the damage (with respect to future cases) by changing the law. This is a good issue for the Democrats to raise between now and Election Day.

While I wasn’t paying much attention, the Supreme Court issued a ruling (in an otherwise unrelated case) that has the following consequence: under existing securities laws all the banks and investment banks and accounting firms that helped Enron fleece investors are immune from civil liability under the securities laws. Only Enron is liable, which is to say the victims won’t be able to recoup more than pennies on the dollar.

Technically, the court rejected the notion of “scheme liability” or the application of the common-law notion of “aiding and abetting” to securities fraud.

The Bush Administration filed an amicus supporting the position of the con artists; the SEC came in on the other side. Of course, the court rules on the law, not on the politics, so it was a complete coincidence that Kennedy, Roberts, Thomas, Alito, and Scalia sided with the crooks and Ginsburg, Souter, and Stevens supported the victims. (Well, I suppose a view of the law that supported the theft of the Presidency ought not, just for consistency’s sake, be too censorious about the theft of mere money, as long as the thieves are wearing business suits.)

Note that this was not a Constitutional decision. It was simply a problem of interpreting a statute, and previous cases decided under that statute. So Congress could decide tomorrow that, from now on, when financial institutions collude with crooked corporate managers defraud investors the investors can sue them for it.


The whole point of controlling the Congress is that you can get your bills to the floor, and make your opponents vote on them. Filibuster? Be my guest. I’d love to go to the country in November over the question whether the big businesses who swindled thousands of people out of their retirement, and made a ton of money doing so, should have to make the losses good. The Speaker and the Majority Leader should tell the two Commerce Committees that they want a bill on this topic ready to move to the floor by the end of May.

That gives plenty of time for hearings, and for a nice, leisurely debate after which Sen. McCain can decide whether to enrage the money-cons or the voters. This won’t be entirely easy on the Democratic side; the financial services industry sends a lot of money our way. B I can’t think of any better use for the Democrats’ new-found fund-raising prowess than to start paying more attention to what the voters want than what the donors want.

The “scheme liability” issue puts in a nutshell the idea that the Washington game is rigged in favor of rich crooks. Sometimes the populists are right. It’s about time for the Democrats to start doing the right thing.

Footnote This issue seems like a natural for Barack Obama.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com