This trend is consistent with the conservative approach of limiting federal government intervention that began during the Reagan administration. The extensive publicity concerning the way in which the law firm of Milberg, Weiss obtained class action cases by paying a network of lawyers and others to refer cases to it has, in my opinion, also had an adverse effect on the ability of plaintiff-side class-action lawyers to effectively prosecute cases.

Congress sent the federal courts a clear signal when it adopted the Private Securities Litigation Reform Act in 1995. Recent decisions illustrate this trend. In Regents of the University of California v. Credit Suisse First Boston (USA), Inc., ___F.3d ___ 2007 WL 816518 (5th Cir. 2007), the Fifth Circuit held that secondary actors, such as investment banks and independent auditors, who act in concert with public companies in schemes to defraud investors cannot be held legally responsible as primary violators under Rule 10b-5 unless that defendant either (1) directly makes public misrepresentations and owes the shareholders a duty to disclose or (2) directly manipulates the market for the company's securities, such as effecting wash sales or matched orders.

Although Enron's investment banks would be deemed aiders and abettors of Enron's deceitful conduct by facilitating its misrepresentations, that conduct does not constitute primary liability under Rule 10b-5 after Central Bank N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994). Central Bank held that there can no longer be a private right of action for aiding and abetting under Rule 10b-5. Of course, the SEC can still bring an enforcement action for aiding and abetting a Rule 10b-5 violation, either as an administrative proceeding or as an injunctive action in federal court. The Fifth Circuit also held that the investment bankers owed no duty to Enron's shareholders. The plaintiffs in the Enron case have asked the U.S. Supreme Court for certiorari*.

In Matter of Charter Communications, Inc. Securities Litigation, 443 F.3d 987 (8th Cir. 2006), the Eighth Circuit held that Central Bank stands for three broad principles:

1. A private plaintiff may not bring a Rule 10b-5 suit against a defendant for acts not prohibited by the text of § 10(b) of the Securities Exchange Act of 1934, as amended.
2. A "device or contrivance" is not deceptive within the meaning of §10(b) , absent some misstatement or a failure to disclose by one who has a duty to disclose.
3. The term "manipulative" in §10 (b) is limited to claims of unlawful manipulation (as opposed to deception) in connection with transactions in the securities marketplace, the effect of which is to prevent the market price from accurately reflecting the market's unimpeded judgment of the stock's value.

Thus, vendors who entered into sham transactions with Charter Communications to inflate its reported revenues were not liable to purchasers of Charter's common stock. The Supreme Court has accepted certiorari in the Charter Communications case.

In view of the recent conservative appointments to the Supreme Court, it appears that the class-action vehicle will be further limited in the securities area. Charter Communications and Central Bank illustrate just how difficult it now is for the plaintiff's class-action bar to get past the pleading stage and reach discovery, let alone a decision on the merits.

From the perspective of financial and securities industry professionals, however, this trend is very favorable. In the Enron case, the egregious role that investment banks played in designing and implementing off-balance sheet transactions, and booking revenues from transactions when Enron was actually incurring debt, were key in misrepresenting Enron's earnings and balance sheet.

The best insurance in not getting sued is avoiding situations where you know your conduct will have a material and improper impact on a company's financial or other disclosures to the investing public. Litigation, even if you prevail, is very expensive.

* a writ (order) of a higher court to a lower court to send all the documents in a case to it so the higher court can review the lower court's decision. (Law.com dictionary)

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CHARLES HECHT has been a principal of his own law firm specializing in securities law since 1971. He was previously on the staff of the Division of Corporate Finance of the Securities and Exchange Commission at its headquarters in Washington, DC. Contact him at 212.490.3232 or visit www.securitiescounselors.com