William Lerach has been called the "class action king" for his long, controversial career defending aggrieved shareholders in securities fraud cases. He's both feared and reviled by many corporations in the United States. His rough tally from past cases? US$40 billion. If his name is not familiar in Canada, it may be soon. Lerach is the lead attorney in the richest class action surrounding the collapse of the energy giant, Enron Corp. Two weeks ago, a judge approved the largest litigation recovery in history in that lawsuit, a US$6.6-billion partial settlement over the role three banks, including the Canadian Imperial Bank of Commerce, played in Enron's collapse. And Lerach is not done yet. Among the defendants that have yet to settle are two more Canadian banks that had dealings with Enron, Toronto-Dominion and Royal Bank of Canada. At stake are hundreds of millions of dollars that Lerach vows to win in coming months.

Last month's guilty verdict for Enron's founder Kenneth Lay and CEO Jeffrey Skilling closed a major chapter in the Enron saga, but also underscored the unabated lust for blood five years after the company collapsed. The furor will continue to play out in the civil courts, where the class action trial for those who don't settle is set to begin in October. It is one of the last hopes for investors to recoup more of what was lost in Enron's US$60-billion implosion (so far, in total, US$7.2 billion has been collected in Enron settlements, which will eventually be paid to claimants). TD and RBC are not unprepared. Both have already set aside huge legal reserves - US$500 million for RBC and US$300 million for TD - for the litigation. Neither the banks nor Lerach would comment on whether there have been talks recently, but with the trial date looming, more settlements among the nine remaining financial institutions seem likely.

Enron's collapse was the result of a series of sham transactions that hid debt and allowed the company to fake its financial results. Bankruptcy examiners have said the banks were partners and enablers, providing the money Enron needed to carry out the fraud. TD and RBC maintain they were bit players in the Enron saga. Indeed, their transactions with Enron were among the more straightforward. "If it hadn't been for the fact that it was Enron, they probably wouldn't have been written about," says an industry source familiar with the litigation.

But the transactions still raise important questions as to how much the banks knew of Enron's widespread accounting fraud at the time, and whether that makes them liable in Enron's demise. While RBC and TD were not among Enron's so-called "tier one" banks, their dealings with Enron were extensively documented by the company's court-appointed bankruptcy examiners. The final examiner's report dedicated almost 70 pages to TD's dealings with the company, concluding that in six transactions, the bank "aided and abetted" the Enron fraud. Similar focus was placed on RBC. Another examiner, outlining several RBC-Enron transactions with code names like Hawaii, Alberta and Cerberus, concluded that RBC also "aided and abetted certain Enron officers in breaching their fiduciary duty."

RBC is sticking to its assertions of last summer that it would "vigorously defend the remaining Enron-related cases against it." TD also said its position has not changed in recent weeks, adding that it is "adequately provisioned" for the litigation. "We should be able to resolve any claim for quite a small amount," said TD's president and CEO Ed Clark in a statement last summer. Both banks have already settled a claim against them by Enron (RBC paid the company US$25 million and TD paid US$50 million). RBC also settled a case in 2004 with Rabobank Group, which had taken over an RBC transaction with Enron worth US$517 million. That transaction is being used as evidence in the class action claim. Rabobank said it was duped by RBC, alleging the bank knew of Enron's fraudulent practices through three employees it hired that had dealt with Enron at a previous employer. The three bankers resigned from RBC shortly before Enron's collapse, and are fighting extradition from the U.K. to the U.S.

The fact that TD and RBC have delayed settling implies they don't feel there is a strong case against them, says Richard Powers, the assistant dean of the University of Toronto's Rotman School of Management. The plaintiffs are likely asking for more than TD and RBC are currently prepared to pay. "It becomes a bit of a game of chicken at this point," he says, adding that such actions rarely go to trial. But Lerach is undaunted, warning with typical aplomb: "Skilling and Lay and the other Enron insiders that have been convicted of crimes or plead guilty to crimes are going to be sitting there in October as defendants in the civil trial right along with the Canadian banks if they don't settle."

Maclean's June 12, 2006