Enron Corp. - University of California | Office of The President

prospectus of "data presented" to them by the company. It should make no difference
that this data is elicited by questions addressed to the company officers by the
underwriters, or that the underwriters at the time believe that the company's officers
are truthful and reliable. In order to make the underwriters' participation in this
enterprise of any value to the investors, the underwriters must make some
reasonable attempt to verify the data submitted to them. They may not rely solely
on the company's officers or on the company's counsel. A prudent man in the
management of his own property would not rely on them.
Finally, in Feit v. Leasco Data Processing Equip. Corp., 332 F. Supp. 544, 582 (E.D.N.Y. 1971),
the court stated that underwriters
are expected to exercise a high degree of care in investigation and independent
verification of the company's representations. Tacit reliance on management
assertions is unacceptable; the underwriters must play devil's advocate.
The banks named as defendants in this action grossly violated these duties in their dealings with
Enron.
643. The banks named as defendants evolved into their present structures in anticipation
of and after the repeal of the Glass-Steagall Act in 99, which allowed financial enterprises again to
offer both commercial and investment banking services – a practice which had been outlawed for
over 60 years. Combined investment and commercial banking activities were outlawed by Congress
due to the abuses arising from such combined activities during the 20s, which contributed to the
fraudulent behavior of Wall Street and culminated in the great stock market crash of 29. As will be
seen below, this recombination contributed to the banks' involvement in the scheme to defraud Enron
investors. On 3/25/02, Business Week wrote:
After the stock market crashed in 1929, Congress hauled in Wall Street
bosses to explain how bankers helped companies inflate earnings for a decade
through complex structures. Congress scrutinized bank practices for years, then
passed the Glass-Steagall Act, splitting commercial banks from brokerages. That
checked the Street's temptation to monkey with clients' finances while flogging their
stock.
Now Congress needs answers from Wall Street's chiefs again. Congress
repealed Glass-Steagall in 1999, under pressure from bankers who swore they would
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