The Securities and Exchange Commission lays out the facts in various documents such as Litigation Release No. 20159 and Accounting and Auditing Enforcement Release No. 2619, and in the related Complaint in the U.S. District Court.

Managers at Enron needed to prop up the firm's net income and cash flows in 1999, so in December 1999 Jeffrey McMahon, then treasurer of Enron, negotiated with managers at Merrill Lynch to purchase an interest in Enron's Nigerian barges. Executives from Merrill Lynch balked because there were some significant issues about the value of this investment, so McMahon and other Enron officials sweetened the pot by giving an oral promise to repurchase the investment in six months, and they promised Merrill Lynch an annualized return of 22 percent.

The Merrill Lynch managers agreed to the transaction, which was consummated in mid-December 1999 and was reversed in late June 2000 when Merrill Lynch sold its investment in the Nigerian barges to LJM2, one of the infamous special purpose entities of Enron.

Litigation Release No. 18038 complements this discussion but it focuses on Merrill Lynch's involvement in this scheme. (Also see the related complaint). The SEC claimed that Merrill Lynch and senior managers Robert Furst, Schuyler Tilney, Daniel Bayly, and Thomas Davis committed securities fraud by assisting top-level Enron managers in depicting a loan as if it were an authentic sale of Nigerian barges, plus engaging in two energy option contracts that canceled each other out, but for which Enron improperly recorded income.

The SEC summed the case this way, "Based on their substantial assistance to Enron, defendants aided and abetted Enron's violations of the federal securities laws." Merrill Lynch the firm settled with the SEC by agreeing to pay disgorgement, penalties, and interest of $80 million.

In a 2004 trial, a jury found these four Merrill executives guilty of participating in a fraudulent scheme. The former Merrill managers appealed the verdicts, and amazingly the Fifth Circuit tossed them out. The appellate court held that those bankers provided "honest services" and that they did not personally profit from the deal.

That argument assumes that getaway drivers supply honest services to bank robbers; after all, an oral agreement to repurchase the investment at 22 percent return is a strong signal that something is amiss with the transaction. The argument also shows a lack of understanding how managers profit in the real world. Investment bankers advance their careers by bringing in business that generates income for the bank; Merrill Lynch's executives did that with the Enron barge transaction, thereby promoting their careers, their promotions, and their salaries and bonuses, even if in an indirect fashion.

Shareholders led by the University of California brought a class-action suit against Merrill Lynch and other banks, including Credit Suisse First Boston, who participated in several sham pre-pay transactions with Enron, and Barclays, who engaged in sham transactions with Enron via a special purpose entity named Colonnade. Other banks had settled with the plaintiffs, including Canadian Imperial Bank of Commerce (settling at $2.4 billion) and Citigroup ($2 billion). The trial never got off the ground, as the Fifth Circuit tossed it out on a 2-1 vote. With astounding hubris, the majority acknowledged that its decision did not "coincide … with notions of justice and fair play." Plaintiffs have appealed to the Supreme Court where those quaint notions may still exist.

This state of affairs stems from the 1994 case Central Bank of Denver v. First Interstate Bank of Denver. The Supreme Court decreed that professional advisers who knowingly aid and abet securities fraud are not liable to victims. The Court said that the securities laws do not extend that far and invited Congress to rewrite the securities laws if its members thought the provisions defining securities fraud should extend to professional advisers. The Congress extended it a bit, allowing the SEC to take modest actions against such culprits, but the Congress did not extend Section 10(b) provisions to aggrieved shareholders.

Some interpret the refusal by Congress to this extension as thinking that SEC actions would prove sufficient in deterring securities fraud. Given the financial news during 2001-2002, history has proved such an explanation erroneous. Besides, Congress tipped its hand toward managers and against investors when it enacted the 1995 Securities Litigation Reform Act and the 1998 Securities Litigation Uniform Standards Act, which made it harder to sue errant managers and which capped damages when the managers lost. In short, Congress has consistently eroded the disincentives designed to keep corporate managers from lying to their shareholders and creditors. Maybe some corporate managers made it worthwhile for some members of Congress to ignore the cries of investors.

The Supreme Court is reviewing the case of Stoneridge Investment Partners, LL.C. v. Scientific-Atlanta, which similarly focuses on the liability of an entity that aids and abets managers who commit securities fraud. What is fascinating is the reading of the various amici curiae briefs floating around. One brief by former SEC Commissioners William Donaldson, Arthur Levitt, and Harvey Goldschmid strongly argue that "the continued viability of private actions based on such liability is essential for the protection of the nation's investors and the integrity of our financial markets." Alas, the SEC Commissioners are not unanimous. Another brief contends that the Supreme Court should affirm the decision by the Fifth Circuit, and this brief reflects the views of many former SEC Commissioners, including Roderick Hills, Harvey Pitt, Harold Williams, and Isaac Hunt. At least these briefs identify those who truly care for the interests of the investment community and those who only give it lip service.

Not willing to leave the hanky panky to Congress, the judiciary, and some SEC Commissioners, President Bush and Treasury Secretary Henry Paulsen have made pleas to the Supreme Court to affirm the lower court's decision. Paulsen, you may remember, used to be chairman of Goldman Sachs. Oh, I forgot to mention that Enron investors also sued Goldman Sachs for their underwriting the Enron securities. Not that that would influence the Treasury Secretary in the least.

Ken Connor, Chair of Center for a Just Society, summed up this nasty, tangled, and internecine mess when he wondered whether today's business motto is "If we don't cheat, we can't compete." Well, Ken, I believe it is the new motto. As the saying goes, "If the shoe fits, wear it." That is, after you steal it. And become friends with the sheriff and the judge.

This essay reflects the opinion of the author and not necessarily the opinion of The Pennsylvania State University.