A group of Wall Street investment banks lost a motion to dismiss a class-action lawsuit brought by shareholders of

The NewPower Company

, an

Enron

spin-off that's filed for bankruptcy, just like its parent.

The ruling handed down Wednesday by a New York federal judge means that

Credit Suisse First Boston

,

Citigroup

(C) - Get Report

and

CIBC

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, the main underwriters of NewPower's $579 million initial public offering, could be on the hook for damages owed to the company's shareholders.

The judge's ruling also means the shareholders and their lawyers can begin discovery -- seeking documents and testimony from witnesses. The three investment banks also are defendants in the shareholder suit brought by Enron shareholders, which a federal judge in Texas has similarly refused to dismiss.

NewPower, based in New York, was a deregulated electrical power company that Enron spun off in an IPO led by CSFB, a division of

Credit Suisse Group

(CSR)

. Enron spun off NewPower even though it was a fledging company with no earnings and a small customer base. But the IPO prospectus described NewPower as a cutting-edge business that would benefit from its relationship with Enron, which at the time was still highly regarded on Wall Street.

U.S. District Judge Charles Brieant, in a 14-page decision, said the underwriters may have misled investors when they described NewPower in the IPO prospectus as "uniquely positioned to succeed.''

"It is evident that defendants wanted investors to believe that NewPower had in place something the others did not have, which was its relationship with Enron and an effective hedging strategy,'' said the judge. "In fact, NewPower did not have either, and it is highly likely the defendants knew this.''

Initially, the NewPower IPO was a limited success. The stock, priced at $21 a share, soared 30% on the first day of trading to close at $27. But the stock never saw those heights again and began to fall. The company filed for bankruptcy a few months after Enron's own bankruptcy filing in December 2001.

NewPower, however, played a big part in the shady accounting deals at Enron. Enron used the IPO to recognize a profit on its remaining 43% equity stake in NewPower, so it could report an additional $370 million in income in the fourth quarter of 2000.

To accomplish this, Enron engaged in an allegedly sham hedging strategy with the LJM2 Co-Investment Fund, the $394 million partnership set-up by Andrew Fastow, Enron's former chief financial officer, who has been indicted on federal fraud charges. The strategy also involved loans made to Enron from an entity called Hawaii 125-0, an off-balance sheet venture set-up by CIBC and group of other banks.

The judge's refusal to dismiss to the lawsuit also applies to a number of individual defendants, which includes several NewPower and Enron executives.