Candidly conceding that its ruling "may not coincide ... with notions of justice and fair play," the U.S. Court of Appeals for the Fifth Circuit yesterday decertified the shareholder class action against the banks that allegedly helped perpetrate Enron's frauds -- a case that has already produced more than $7 billion in settlements. The ruling, if it is not overturned by the full appeals court or the U.S. Supreme Court, will benefit Merrill Lynch (MER), Credit Suisse First Boston, and Barclays (BCS), which had not settled, saving each potentially billions in liability.

Though the issues are complicated, and have lots of twists and turns, the heart of the problem has actually been apparent to most lawyers watching this case from the moment it was filed in 2002. Back in 1995, in a 5-4 ruling of the U.S. Supreme Court that shocked lawyers at the time -- it ran counter to what every appeals court that had faced the question had previously assumed -- the Court found that the securities laws did not create liability for those who "aid and abet" fraud (i.e., knowingly help others to commit fraud), as opposed to those who act as "principals" in such schemes. Even as they rendered that ruling, several of the justices in the majority acknowledged that the outcome of the ruling was unjust, and they urged Congress to fix the problem by amending the law to include aiding and abetting liability. In almost every other legal arena -- including the criminal arena -- aiders and abettors are treated as every bit as responsible as principals. (Indeed, the distinction between the two is often hard to draw.)

Congress never fully fixed the problem, however. It did allow the Securities and Exchange Commission to go after aiders and abettors, but not private plaintiffs attorneys. The reason is simple: it did not trust the latter to use good judgment in doing so; rather, it anticipated -- no doubt correctly -- that allowing aiding and abetting liability would result in banks, accountants, and law firms being routinely named in nearly every shareholder class action suit filed, no matter how frivolous. (Fittingly, the Enron case is brought by Bill "Partner B" Lerach, who is king of both the wheat and the chaff when it comes to class actions. He is lead counsel in the Enron case, and yet earlier in his career, for example, his firm also brought a series of civil RICO class actions against baseball trading card manufacturers for allegedly promoting gambling among children by giving away bonus trading cards in some, but not all, packs.)

But the omission leaves fraud victims uncompensated in obviously legitimate cases, like the Enron case, and may even help encourage such frauds to the extent that aiders and abettors are emboldened by their apparent immunity. The Enron case is the ultimate example. Here, banks allegedly -- and, by now, the evidence against certain banks seems overwhelming -- knowingly helped Enron manipulate its financial statements by engaging in numerous shady deals and sham transactions. It may well be that the banks felt free to do so at least in part because they thought they were immune from aiding and abetting liability.

When these suits were filed, the banks immediately brought motions to dismiss, claiming that the complaint only accused them of being, at worst, aiders and abettors in these frauds on Enron shareholders. (The bank officials had no direct fiduciary duty to Enron shareholders, the way the Enron officials did.) U.S. District Judge Melinda Harmon found a way around the obstacle at that time, ruling that the banks were so deeply involved here that they could be considered principals. And it was on the basis of that early ruling that shareholders have recovered, to date, more than $7 billion. (Which they can keep.) But yesterday that ruling finally received, in effect, appellate scrutiny (though in a slightly different procedural context), and was overturned.

The Fifth Circuit panel majority (one judge would have decertified the class on other grounds) was quite candid about the dilemma it felt the courts face, and that it believed the Supreme Court had already resolved in a direction that is harsh toward plaintiffs: "the rule of liability must be either overinclusive or underinclusive so as to avoid what [has been] called “in terrorem settlements” resulting from the expense and difficulty of, even meritoriously, defending this kind of litigation." It's a difficult call, but I actually come down on Lerach's side on this one.

How about you?