Rosenzweig v. Azurix Corp.
| Decision Date | 13 June 2003 |
| Docket Number | No. 02-20804.,02-20804. |
| Citation | 332 F.3d 854 |
| Parties | Irving ROSENZWEIG, on behalf of himself and all others similarly situated; Miller/Howard Investments, Inc.; Masoud M. Al Fahaid; Walter R. Wooten; Masoud Faisal, Plaintiffs-Appellants, v. AZURIX CORP., et al., Defendants, Azurix Corp.; Rebecca Mark; Rodney Faldyn; Joseph Sutton; Jeffrey Skilling; Kenneth Lay; Rodney L. Gray, Defendants-Appellees. Malcolm Rosenfeld, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. Azurix Corp., et al., Defendants, Azurix Corp.; Rebecca Mark; Rodney Faldyn; Joseph Sutton; Jeffrey Skilling; Kenneth Lay, Defendants-Appellees. Ruthy Parnes, on behalf of herself and all others similarly situated, Plaintiff-Appellant, v. Azurix Corp., et al., Defendants, Azurix Corp.; Rebecca Mark; Rodney Faldyn; Joseph Sutton; Jeffrey Skilling; Kenneth L. Lay, Defendants-Appellees. Bruce Kalish, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. Azurix Corp., et al., Defendants, Azurix Corp.; Rebecca Mark; Rodney Faldyn; Joseph Sutton; Jeffrey Skilling; Kenneth Lay, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Thomas Emerson Bilek (argued), Hoeffner, Bilek & Eidman, Houston, TX, Jeffrey M. Haber, Bernstein, Liebhar & Lifshitz, Robert I. Harwood, Frederick William Gerkens, Wechsler Harwood, New York City, for Plaintiffs-Appellants.
Robin C. Gibbs (argued), Jeffrey C. Alexander, Robert Roy Burford, Gibbs & Bruns, Houston, TX, for Azurix Corp.
John J. McKetta, III, Helen Currie Foster, Graves, Dougherty, Hearon & Moody, Austin, TX, for Mark.
Jacks C. Nickens, Paul D. Flack, Nickens, Keeton, Lawless, Farrell & Flack, Houston, TX, for Faldyn and Gray.
Edward John O'Neill, Jr., Clements, O'Neill, Pierce, Wilson & Fulkerson, Houston, TX, for Sutton.
Jeffrey William Kilduff, O'Melveny & Myers, McLean, VA, for Skilling.
James E. Coleman, Jr., Carrington, Coleman, Sloman & Blumenthal, Dallas, TX, for Lay.
Appeal from the United States District Court for the Southern District of Texas.
Before SMITH, DENNIS and CLEMENT, Circuit Judges.
This securities fraud class action presents the issues of whether the district court, in dismissing the case with prejudice, erred by (1) denying the plaintiffs' motion for leave to amend their complaint; (2) determining that none of the plaintiffs' claims were actionable under the Securities Exchange Act of 1934; and (3) determining that the plaintiffs, as aftermarket purchasers, lacked standing to pursue their claims under the Securities Act of 1933. Although we conclude that aftermarket purchasers have standing to sue under § 11 of the Securities Act of 1933, we find that the case was properly dismissed and therefore AFFIRM.
Eight representative purchasers of Azurix Corporation stock brought this class action securities fraud lawsuit against Azurix, Enron Corporation, and six former Enron and Azurix officers and directors. In June 1999, Azurix, a global water and wastewater company Enron formed in January 1998, made an initial public offering of 36.6 million shares of common stock at around $20 per share. In December 2000, Enron took Azurix private by buying all the public's shares for around $8 per share. The plaintiffs, who all purchased Azurix stock in the secondary market, allege that the defendants violated federal securities laws by making various material misrepresentations and omissions in press releases and public filings. They allege these representations perpetrated a fraud on the market by artificially inflating Azurix's stock price. The district court dismissed the lawsuit with prejudice, see In re Azurix Corp. Securities Litigation, 198 F.Supp.2d 862 (S.D.Tex.2002), and denied the plaintiffs' post-dismissal motion to amend their complaint.
Azurix's business plan was to acquire and operate government-owned water and wastewater facilities that were being privatized. In October 1998, Azurix acquired England-based Wessex Water for $2.4 billion. Wessex was to provide a base of technical expertise and operating experience from which Azurix would evaluate and acquire potential water projects. Just before going public in June 1999, Azurix successfully bid $438.6 million to obtain a 30-year water concession1 from the province of Buenos Aires, Argentina. The Buenos Aires concession was the company's second-largest asset, behind Wessex.
Plaintiffs allege that defendants knew Azurix's business plan was fundamentally flawed and that the Buenos Aires concession was plagued with problems, but defendants nevertheless fraudulently inflated Azurix's stock price by making optimistic, misleading representations and concealing the truth.
The plaintiffs claim the prospectus2 "touted Azurix's ability to become a successful player in the global water and wastewater industry," by emphasizing the company's competitive strengths of management and financial expertise. The prospectus also "emphasized the global privatization opportunities [Azurix] purportedly intended to pursue," and stated that Azurix anticipated being able to finance its ambitious capital improvement plan from the cash flows of the privatization opportunities Azurix would obtain.3
Plaintiffs allege these statements were made without any basis in fact. According to a Wasserstein, Parella & Co. report, which Enron commissioned in connection with the December 2000 stock repurchase, the Buenos Aires concession "faced numerous problems since the acquisition including incomplete customer accounts, difficulties in accounts receivable collection, water quality issues and disputes over tariffs." (emphasis added). The report states that Azurix's cost of capital was "significantly higher" than its competitors'. Plaintiffs also allege Azurix was highly-leveraged and paid almost all of its IPO proceeds directly to Enron. And, according to Azurix's third quarter 1999 SEC filing, Azurix had to finance its long-term assets with short-term debt, not cash flows. In other words, plaintiffs allege there was no basis from which to conclude Azurix could possibly succeed.
The complaint also alleges that due diligence assurances4 in the prospectus "led the investing public to conclude that defendants performed due diligence on the Buenos Aires Concession, as well as other concessions...." According to former employees (who are not identified in the complaint) Azurix had sent people to Buenos Aires before taking over the concession, and those people discovered it had been poorly operated and had serious problems with collections. Azurix "hastily bid" for the concession, anyway. Plaintiffs cast these facts as alternative allegations of either a material misrepresentation (that due diligence was performed) or a material omission (that there were problems with the Buenos Aires concession).
In an August 5, 1999 press release, Azurix CEO and chairperson Rebecca Mark stated that "[t]he second quarter was a period of significant accomplishment for Azurix" and that the Buenos Aires concession would "establish[] the company as a major participant in the Argentine water market." She also stated that the IPO would "fund the many growth opportunities that will distinguish the company as a leading player in the global water industry." Plaintiffs allege Azurix repeated these statements in its SEC quarterly filing, Form 10-Q. These statements were false, plaintiffs allege, because, again, Azurix did not have the financial capacity to grow, much less operate at a profit.
After a 7.7% stock price decline on October 20, 1999, the Dow Jones News Service ran an article in which Azurix denied there was any corporate news to account for the dip. The story quoted an Azurix spokesperson as saying, "Our fundamentals are strong." The statement is alleged to be false because it was made just two weeks before Azurix announced, in a November 4, 1999 press release, that its earnings would fall short of estimates.
Plaintiffs allege that this November 4 press release also contained fraudulent statements, which were repeated in Azurix's 10-Q. The press release quoted Mark as saying, "The pipeline of private transactions and announced public tenders that we are pursuing remains very strong, even though the timing of certain transactions is unpredictable." The statement is false, according to plaintiffs, because, as Azurix's annual SEC filing (Form 10-K) would later reveal: "During the second half of 1999, several large privatization projects were postponed or cancelled."
The complaint alleges that Azurix's 1999 10-K "did not tell the whole story" with respect to the Buenos Aires concession because, although it mentioned some of the problems, it failed to mention that the concession had water quality problems, and that there were tariff disputes.
A February 7, 2000 press release contained three allegedly actionable statements, and Azurix repeated those statements in its 10-Q. First, it quoted Mark as saying, "In the past year we have assembled the core assets and capabilities for strong growth in our key markets." This statement is allegedly false because of the "acute problems" with the Buenos Aires concession and the 1999 project cancellations.
Second, the press release quoted Mark as saying, "We have successfully expanded our operations through the ownership of assets and through the services we offer as a total solutions provider to our municipal and industrial customers." The complaint asserts this statement was "materially misleading" because Mark knew that generating revenue from municipal and industrial customers would be very difficult.
Third, Mark stated in the press release, "Our Madera Ranch Water Bank project in California is an example of our innovative resources project which has considerable...
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