482 F.3d 372 (5th Cir. 2007), 06-20856, Regents of University of California v. Credit Suisse First Boston (USA), Inc.

Docket Nº:06-20856.
Citation:482 F.3d 372
Party Name:REGENTS OF the UNIVERSITY OF CALIFORNIA; Washington State Investment Board; San Francisco City and County Employees' Retirement System; Employer-Teamsters Local Numbers 175 and 505 Pension Trust Fund; Hawaii Laborers Pension Plan; Staro Asset Management LLC; Amalgamated Bank, as Trustee for the Longview Collective Investment Fund; Robert V. Flint;
Case Date:March 19, 2007
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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482 F.3d 372 (5th Cir. 2007)

REGENTS OF the UNIVERSITY OF CALIFORNIA; Washington State Investment Board; San Francisco City and County Employees' Retirement System; Employer-Teamsters Local Numbers 175 and 505 Pension Trust Fund; Hawaii Laborers Pension Plan; Staro Asset Management LLC; Amalgamated Bank, as Trustee for the Longview Collective Investment Fund; Robert V. Flint; John Zegarski; Mervin Schwartz, Jr.; Steven Smith; Archdiocese of Milwaukee; Greenville Plumbers Pension Plan; Nathaniel Pulsifer, as Trustee of the Shooters Hill Revocable Trust, Plaintiffs-Appellees,


CREDIT SUISSE FIRST BOSTON (USA), INC.; Credit Suisse First Boston LLC; Pershing LLC; Merrill Lynch & Company, Inc.; Merrill Lynch Pierce Fenner & Smith, Inc.; Defendants-Appellants,

Barclays PLC; Barclays Bank PLC; Barclays Capital, Inc., Appellants.

No. 06-20856.

United States Court of Appeals, Fifth Circuit.

March 19, 2007

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William S. Lerach, Eric Alan Isaacson, Joseph David Daley, Helen J. Hodges, Spencer Alan Burkholz, Lerach, Coughlin, Stoia, Geller, Rudman & Robbins, San Diego, CA, Sanford Svetcov, Patrick J. Coughlin (argued), Lerach, Coughlin, Stoia, Geller, Rudman & Robbins, San Francisco, CA, for Plaintiffs-Appellees.

David H. Braff, Jeffrey T. Scott, Marc De Leeuw, Michael T. Tomaino, Sullivan & Cromwell, New York City, Barry Abrams, Abrams, Scott & Bickley, Houston, TX, for Appellants.

Richard W. Clary (argued), Julie A. North, Darin P. McAtee, Cravath, Swaine & Moore, New York City, George W. Bramblett, Jr., Noel M.B. Hensley, Haynes & Boone, Dallas, TX, Lawrence David Finder, Odean L. Volker, Haynes & Boone, Houston, TX, for Credit Suisse Appellants and Pershing, LLC.

David Michael Gunn, David J. Beck, Russell Stanley Post, Beck, Redden & Secrest, Houston, TX, Stuart J. Baskin (argued), Herbert S. Washer, Adam S, Hakki, Shearman & Sterling, New York City, for Merrill Lynch & Co., Inc. and Merrill Lynch Pierce Fenner & Smith, Inc.

Laura W. Brill, David Siegel, Jonathan P. Steinsapir, Irell & Manella, Los Angeles, CA, for Clearing House Ass'n, LLC, Securities Industry & Financial Markets Ass'n and Chamber of Commerce of U.S., Amici Curiae.

David S. Morales, Asst. Atty. Gen., Austin, TX, for State Atty. Gens., Amicus Curiae.

Appeals from the United States District Court for the Southern District of Texas.

Before JOLLY, SMITH and DENNIS, Circuit Judges.

JERRY E. SMITH, Circuit Judge:

Having been granted leave to pursue an interlocutory appeal, see FED.R.CIV.P. 23(f), defendants challenge an order certifying a single class of plaintiffs. Relying largely on Central Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994),

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and its progeny, we reverse and remand.


The facts are difficult to detail but easy to summarize. Plaintiffs allege that defendants Credit Suisse First Boston ("Credit Suisse"), Merrill Lynch & Company, Inc. ("Merrill Lynch"), and Barclays Bank PLC ("Barclays Bank") (collectively "the banks") entered into partnerships and transactions that allowed Enron Corporation ("Enron") to take liabilities off of its books temporarily and to book revenue from the transactions when it was actually incurring debt. The common feature of these transactions is that they allowed Enron to misstate its financial condition; there is no allegation that the banks were fiduciaries of the plaintiffs, that they improperly filed financial reports on Enron's behalf, or that they engaged in wash sales or other manipulative activities directly in the market for Enron securities.

For example, plaintiffs allege that Merrill Lynch engaged in what they dub the "Nigerian Barges Transaction." According to plaintiffs, Enron wanted to "sell" its interest in electricity-generating barges off the coast of Nigeria by the end of 1999 so that it could book revenue and meet stock analysts' estimates for the calendar quarter. It could find no legitimate buyer, so it contacted Merrill Lynch and guaranteed that it would buy the barges back within six months at a premium for Merrill Lynch.

Six months later, Enron made good on its guarantee; an Enron-controlled partnership bought the barges from Merrill Lynch at a premium. When Enron reported its results for 1999, instead of booking the transaction as a loan, the characterization that Enron's outside accountants state would have been appropriate had they known of the side-agreement to buy back the barges, Enron booked the transaction as a sale and accordingly listed the revenue therefrom in its year-end financial statement.

Plaintiffs allege that the banks knew exactly why Enron was engaging in seemingly irrational transactions such as this. They cite certain of the banks' internal communications they characterize as proving that the banks were aware of the personal compensation Enron executives received as a result of inflating their stock price through the illusion of revenue and that the banks intended to profit by helping the executives maintain that illusion. 1 Likewise, plaintiffs allege that, although each defendant may not have been aware of exactly how each other defendant was helping Enron to misrepresent its financial health, the defendants knew in general that other defendants were doing so and that Enron was engaged in a long-term scheme to defraud investors and maximize executive compensation by inflating revenue and disguising risk and liabilities through its partnerships and transactions with the banks.


This suit followed Enron's collapse in 2001. The first action was filed on October 22 of that year; by December 12, 2001, the district court had consolidated over

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thirty actions relating to Enron securities and had designated the Regents of the University of California as the lead plaintiff. Years of discovery have ensued, and tens of millions of documents have been produced.

Early in the litigation, the banks filed motions to dismiss, but the district court denied them in a December 19, 2002, opinion. The court reconsidered some of the issues relevant to those motions in its opinion regarding class certification, issued on June 5, 2006, 2 in light of intervening developments in appellate caselaw. The court justified its reconsideration, stating that it had

the power to reconsider such interlocutory decisions, especially in light of the limited and much of it recent case law emerging on scheme liability. Moreover ... at class certification, especially after such substantial discovery as has been done here, the court may look behind the pleadings at evidence to determine whether a class should be certified.

The court determined that a "deceptive act" within the meaning of rule 10b-5(c) 3 includes participating in a "transaction whose principal purpose and effect is to create a false appearance of revenues."

The district court decided that rule 10b-5(a)'s prohibition of any "scheme ... to defraud" gives rise to joint and several liability for defendants who commit individual acts of deception in furtherance of such a scheme. Implicit in that ruling is the conclusion that plaintiffs have alleged that just such a scheme existed.

The court's theory of scheme liability considerably simplified finding commonality among the plaintiffs with respect to loss causation. The court stated that "a reasonable argument can be made that where a defendant knowingly engaged in a primary violation of the federal securities laws that was in furtherance of a larger scheme, it should be jointly and severally liable for the loss caused by the entire overarching scheme, including conduct of other scheme participants about which it knew nothing."

The district court concluded that plaintiffs are entitled to rely on the classwide presumptions of reliance for omissions and fraud on the market. 4 The court held that the Affiliated Ute presumption applies because the facts indicate that the banks had failed in their "duty not to engage in a fraudulent 'scheme.' " The court concluded, with respect to the fraud-on-the-market presumption of reliance, that no preliminary finding of market efficiency or investors' reliance thereon need be made where plaintiffs plead under rule 10b-5(a) (forbidding deceptive devices, schemes, and artifices) and 10b-5(c) (prohibiting deceptive acts, practices, and courses of business) rather than under the more usual cause of action, rule 10b-5(b) (proscribing misrepresentation).

A month after issuing its opinion on class certification, the district court, after

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reviewing plaintiffs' revised class definition and trial plan, issued its class certification order, dated July 5, 2006. It determined that, although the proportionate liability provisions of the Private Securities Litigation Reform Act ("PSLRA") are generally problematic, there is no necessary conflict between the court's theory of liability and that statute. See 15 U.S.C. § 78u-4(b)(4), (f)(2). The court ordered defendants to prepare a list of non-parties to whom they intend to assign responsibility and declared that defendants will bear the burden to prove non-parties' responsibility by a preponderance of the evidence.

The district court certified a class of all persons who purchased Enron securities between October 19, 1998, and November 27, 2001, and were injured thereby. The class seeks damages of $40 billion, against which losing defendants would be entitled to offset roughly $7 billion obtained by plaintiffs in previous settlements with former co-defendants. On November 1, 2006, a motions panel of this court granted defendants leave to appeal the class certification order, and we sua sponte expedited the appeal.


Plaintiffs point out that we are not bound by the motion panel's decision to grant leave to appeal; they urge that...

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