Where Is Washington’s Love for Shareholders?

By BEN STEIN

SOMETHING terrible happened last week in terms of legal protections for stockholders. The terrible thing came out of the present administration, and I simply cannot understand how it could have gotten it so wrong, except on the basis of the machinations of one of our favorite subjects, Henry M. Paulson Jr., the Treasury secretary.

The loyal reader will recall that a few months ago, I wrote in this space about a stunning decision by the Fifth Circuit Court of Appeals involving Enron. In that decision, the judges reversed a federal district court and threw out a case against the investment banks that are accused of helping to make the Enron fraud possible.

The Fifth Circuit did not deny that the Enron fraud took place with the aid of many large investment banks. And the Fifth Circuit did not deny that Enron fraud was made possible by investment banks not just helping out when Enron asked for questionable accounting schemes, but also coming forward to help obscure the truth about Enron’s parlous situation and therefore badly misleading investors.

No, the Fifth Circuit said that under a case with totally different facts, called Central Bank of Denver vs. First Interstate Bank of Denver, there was no liability for parties who were not an integral part of the fraud, but “merely” (always a red-flag word in legal opinions) “aiding and abetting” and could not be liable under federal securities law in a class action.

To allow for certainty in fraud cases (in other words, the certainty that stockholders will be mistreated), the Fifth Circuit said that the class-action case against the investment banks could not even go to trial.

There was much screaming and gnashing of teeth over this opinion, especially from longtime proponents of stockholders’ rights, like Lynn E. Turner, former chief accountant of the Securities and Exchange Commission (and me).

This set up a conflict of circuits because other courts of appeal had held that there could be, as it is called, “scheme liability” when an investment bank or an accounting firm had been an integral part of a fraud scheme. The Supreme Court will generally hear such cases.

Now comes the part that is enough to make you cry if you, like me, had any hope that the law had something to do with justice or the Department of Justice.

Many writers and public figures came forward to ask Christopher Cox, the chairman of the S.E.C., to file an amicus brief asking the Supreme Court to hear the Enron case. Mr. Cox, while a great guy, has not always been the most attuned to shareholder issues. But Mr. Cox and his S.E.C. did the right thing and drew up an amicus brief on behalf of the shareholders asking the highest court to hear the case.

This was Saul on the road to Damascus and a great turning point — except that’s when Mr. Paulson weighed in. Mr. Paulson, who before becoming Treasury secretary was head of Goldman Sachs, a huge investment bank (in which I am a paltry stockholder), urged Paul D. Clement, a worthy gent who is the United States solicitor general at the Justice Department, not to file the S.E.C. amicus brief in the Enron case.

Why? Well, certainly not because such a move might result in a change that could cost investment banks a ton of money. No, it wasn’t that at all. It was because if the law started to go after investment banks for aiding and abetting and making possible immense securities frauds, that would hurt the competitiveness of United States financial markets.

That same old whining about how poor, poor Wall Street, where high-ranking officials can make only $50 million or $60 million a year and where hedge fund managers can make $1 billion-plus a year, might be hurt if stockholders were actually protected from sneak attacks by investment bankers.

Poor, poor Wall Street, where the Champagne flows like water and the players get billions for helping the rich get richer. We had better protect them instead of the widows and orphans who were wiped out by the fraud at Enron.

The next thing we knew, others in the White House weighed in, saying they did not want trial lawyers running amok looking for people to sue and upsetting businessmen.

And that was that. Mr. Clement decided not to file the brief in the Supreme Court. The shareholders of Enron and other similarly situated companies will have their cases heard, but without the justices partaking of a fine opinion from the S.E.C. siding with them. That’s the kind of juice Mr. Paulson has.

Now, Goldman Sachs is a defendant in an Enron stockholders’ case in which allegations of an illegal offering statement for Enron’s stock — underwritten by Goldman Sachs — have been made. It is not the same case as is under discussion in the “scheme liability” cases, but the basic issue — fraud connected with Enron — is the same.

As noted, Mr. Paulson until recently was head of Goldman Sachs. I think it is fair to assume that a clubbable guy like him still has many friends in investment banking.

So he apparently felt there was something wrong about standing up for stockholders of Enron hurt by investment banks’ possible manipulations of truth — but nothing wrong with his using his exalted post at Treasury to protect his Wall Street pals. Surely there is an ethical issue there somewhere. If not in the statutes, is there not the ethical issue of Mr. Paulson, one of the highest honchos in the land, lacking basic shame?

I KNOW that Mr. Bush does not read The Times. But I know a lot of people at the White House do. Please, some of you, reconsider this embarrassment. There is no justice in this refusal to aid the Enron shareholders. There is no political gain from slapping the little guy in the face. There is no money to be made: Wall Street is giving lavishly to Hillary Clinton and Barack Obama already.

The G.O.P. is supposed to be on the side of the small investors, not of those accused of being crooks — or so I used to think. Was I wrong all along? Is the Bush White House just the handmaiden of Wall Street? Please don’t let this be true. I am sure Mr. Paulson is a powerful figure. And I know the hour is late. But the time is always right to do right, and that time is now.

Please ask the solicitor general to reconsider filing the S.E.C.’s brief. The basic building block of capitalism is trust, and it is crumbling.

Ben Stein is a lawyer, writer, actor and economist