V&E Dismissed from Enron Litigation - Banks Remain as Deep Pockets

Here's what some Corporate/Legal Ethics Profs are saying about the Lead Plaintiff's decision to dismiss the law firm Vinson & Elkins from the Enron class action lawsuit:

"Yesterday, Judge Harmon granted plaintiff's motion to voluntarily dismiss Vinson & Elkins from the Enron class action.  The motion was conditioned on a finding by the court that the dismissal is not a "settlement" within the meaning of the Private Securities Litigation Reform Act (PSLRA).  The idea was to avoid triggering the Act's provision for "proportionate share liability" and thus permit a larger recovery against the remaining "deep pocket" defendants, namely banks.  Technically, the dismissal is "without prejudice," so class members could pursue any claims individually, but of course in reallity that's not going to happen, as the court acknowledges.

The full order of the court is attached.  Here are the key paragraphs:

The Court recognizes that while the class members are
not legally bound, i.e., precluded from pursuing the claims
dismissed by Lead Plaintiff in these motions, as a practical
matter they may well be. Clearly a class action serves to help
and protect those who could not afford to bring suit on their own.
The Court further recognizes that many class members and the
public at large may be angered by the dismissal of Vinson & Elkins
and the Enron directors without a trial to determine whether they
are liable for defrauding shareholders, especially in the wake of
the numerous allegations made against them by Lead Plaintiff for
years. Defendants have argued that by dismissing those most
directly responsible for Enron’s business and instead pursuing
secondary-actor banks, Lead Plaintiff is “taking the Enron out of
Enron.”

Nevertheless, the Court recognizes the right of Lead
Plaintiff to control its suit, to streamline it for trial, and to
pursue the “deepest pockets” without expending further time and
money on Defendants from which it does not expect to be able to
collect substantial funds,9 as long as it does not violate Rule
23(e). Lead Plaintiff represents that its decision to dismiss the
law firm and the Enron individual Defendants is based on their
relative financial status, not on the merits of the claims against
them. In Lead Plaintiff’s effort to maximize recovery for the
class and avoid unnecessary expenses for relatively minimal gain,
while preserving the class members’ right to sue independently,
there is no evidence of any conflict of interest between Lead
Plaintiff and the class. Thus the Court concludes that there is
no “settlement” to trigger the judgment reduction provision and
no law applicable to the circumstances here to prevent the
voluntary dismissal of Vinson & Elkins . . . .

9 Mr. Villa has argued, and Lead Plaintiff appears to agree,
that Vinson & Elkins’ resources pale in comparison with those of
the Financial Institutions, that Vinson & Elkins would be unable to
pay a sizeable judgment, and that further pursuit of the law firm
would be expensive and risky.

"A sad day for legal ethics, in my view (full disclosure: I was retained as an expert by the plaintiff class in the case)." - George Cohen, Brokaw Professor of Corporate Law, University of Virginia School of Law

(ag) Jan. 26, 2007, in Corporate Governance