Vanderbilt Law Review


Robert J. Grubb

First Page



Mervin "Buddy" Schwartz, Jr., embodied the American Dream. A Pennsylvania resident, Schwartz began working for Hershey Foods in 1961 as a maintenance mechanic.' He eventually became a member of the local union's executive board. A hard worker providing for his family, Schwartz had a thirteen-year perfect attendance record and often worked overtime. He even managed to attend night classes and obtained an associate's degree in Bible studies.

Lacking any financial training, Buddy Schwartz relied on the retirement plan and 401k5 Hershey provided for his retirement. Because he contributed the maximum allowable amount out of each paycheck to his 401k, he was able to retire in 1999 at the age of sixty with retirement assets worth approximately $284,000. He rolled these assets over to Merrill Lynch so his son, James Schwartz, a financial advisor, could manage them. Not only did he retire early, but Buddy Schwartz and his wife, Louise, also were able to purchase a retirement home in Arizona to be close to family. For Buddy Schwartz, the American Dream was coming true.

This all changed, however, when James called his father in 2000 to tell him about a hot growth stock10 for a "fast-growing and stable company" called Enron. Relying on positive Merrill Lynch analyst opinions, James advised his father to invest in Enron, which he did by purchasing about $30,000 worth of preferred stock. Imagine Schwartz's despair when the Enron scandal erupted in 2001, and he lost his initial investment and was forced to sell his retirement home in Arizona. Imagine his outrage when he discovered that his brokerage firm, Merrill Lynch, was lying and scheming with Enron to make its financial statements look more promising than they actually were through fraudulent transactions. Imagine his heartbreak when the Fifth Circuit destroyed his American dream in one stroke by failing to certify a nationwide class that would have included Schwartz and other defrauded investors. According to the court, the fraudulent actions did not give rise to primary liability under 10(b) of the Securities Exchange Act of 1934.