In re Azurix Corp. Securities Litigation

Decision Date21 March 2002
Docket NumberNo. H-00-4034.,H-00-4034.
Citation198 F.Supp.2d 862
PartiesIn re AZURIX CORP. SECURITIES LITIGATION. Irving Rosenzweig, et al., Plaintiffs, v. Azurix Corporation, et al., Defendants.
CourtU.S. District Court — Southern District of Texas

Thomas E Bilek, Hoeffner Bilek & Eidman, Houston, TX, for plaintiffs.

Robin C Gibbs, Gibbs & Bruns, Charles W Schwartz, Vinson & Elkins, Houston, TX, for defendants.

MEMORANDUM AND ORDER

LAKE, District Judge.

Plaintiffs, Irving Rosenzweig, Miller/Howard Investments, Inc., Masoud Faisal M. Al Fuhaid, Walter Wooten, Malcolm Rosenfeld, Ruthy Parnes, Bruce Kalish, and Todd Williams, bring this consolidated class action on behalf of themselves and all others similarly situated who purchased the common stock of Azurix Corporation from June 9, 1999, through August 8, 2000 (the "Class Period"). Plaintiffs have sued defendants, Azurix Corporation ("Azurix"), Enron Corporation ("Enron"), and six of Azurix's and Enron's present and former officers and directors, Kenneth Lay, Jeffrey Skilling, Rodney Gray, Joseph Sutton, Rodney Faldyn, and Rebecca Mark, for violations of §§ 11, 12(a)(2), and 15 of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77k, 77l(2), and 77o; §§ 10(b) and 20(a) of the Securities and Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a); and Rule 10b-5 of the Securities and Exchange Commission ("SEC"), 17 C.F.R. § 240.10b-5. Plaintiffs seek certification as a class action pursuant to Fed.R.Civ.P. 23, compensatory and rescissory damages, costs, and expenses, including counsel and expert fees. Pending before the court are Enron Corp. and Atlantic Water Trust's Motion to Dismiss1 (Docket Entry No. 29) and the Joint Motion of Azurix Defendants to Dismiss Complaint for Failure to State a Claim (Docket Entry No. 30). For the reasons set forth below, defendants' motions will be granted.

I. Factual Background

Azurix is a global water company engaged in the business of acquiring, owning, operating, and managing water and wastewater assets, providing water- and waste-water-related services, and developing and managing water resources. Azurix was formed on January 29, 1998, by Enron. In October of 1998 Enron purchased Wessex Water LLC ("Wessex"), a water and wastewater company based in the United Kingdom, and merged Wessex into Azurix. Later that year Enron contributed its 100% ownership in Azurix to Atlantic Water Trust ("Atlantic"), in exchange for a 50% stake in Atlantic. Subsequently and throughout the Class Period, Enron controlled 33.5% of Azurix common stock. On June 9, 1999, Azurix filed a registration statement with the SEC, and went public through an initial public offering ("IPO") on the same date. Pursuant to the registration statement and prospectus, Azurix offered 36,600,000 shares to the public at the price of $20.50 per share.

During the Class Period a majority of Azurix's officers and directors were also present or former officers or directors of Enron. Rebecca Mark was Azurix's Chief Executive Officer ("CEO") and chairman of Azurix's board of directors; Mark was also a director and vice chairman of Enron. Rodney Faldyn was a managing director and Chief Accounting Officer of Azurix. Joseph Sutton served as a director of Azurix and a vice chairman of Enron. Rodney Gray was Chief Financial Officer and a vice chairman of Azurix. Prior to and throughout the Class Period Mark, Faldyn, Sutton, and Gray also served in various official and directorial capacities with numerous Enron subsidiary companies. Jeffrey Skilling and Kenneth Lay were also directors of Azurix throughout the Class Period. Skilling also served as President and Chief Operating Officer ("COO") of Enron, and Chairman and CEO of Enron North America Corporation; and Lay served at various times as Chairman of the Board, CEO, President, and COO of Enron.2

II. Plaintiffs' Allegations

Plaintiffs allege that during the Class Period defendants knowingly disseminated to the investing public, in public securities filings and press releases, materially false and misleading information concerning Azurix's privatization strategy, acquisitions, financial condition, and future business prospects. Plaintiffs allege that defendants' false and misleading statements, failure to disclose material adverse information, and failure to correct the false and misleadingly positive nature of prior statements had the aggregate effect of artificially inflating the market prices of Azurix common stock from June 9, 1999, the date of Azurix's initial public offering, through August 8, 2000.

A. Representations Alleged to be False or Misleading
1. The Registration Statement and Prospectus

Plaintiffs allege that the registration statement and prospectus (collectively, "the prospectus") that Azurix filed with the SEC pursuant to its IPO on June 9, 1999, and June 11, 1999, respectively, were materially false and misleading for a number of reasons.3 First, plaintiffs allege that defendants "touted" in these documents Azurix's ability to take advantage of the growing trend of privatization and out-sourcing of government-owned water and wastewater assets and services (¶ 2).4 Azurix advertised its "experienced management and business development teams," its "operating experience and technical expertise," its "regulatory and government affairs expertise," and its "financing expertise" as strengths that would enable Azurix to become a successful competitor in the water business.

Plaintiffs allege that the prospectus was also false and misleading because it "touted" Azurix's ability to become a "successful player" in the global water and wastewater industry (¶ 53). Plaintiffs allege that these statements were false and/or misleading because Azurix could not compete with its primary competitors due to its high leverage, capital constraints, and insufficient liquidity (¶ 77).

Plaintiffs further allege that the prospectus was false and/or misleading because Azurix identified numerous large public privatization projects in Europe, North America, Latin America, the Caribbean, the Middle East, Africa, and Asia that it "targeted." Plaintiffs allege that defendants specifically emphasized certain global privatization development opportunities that Azurix intended to pursue "vigorously" as part of its "business plan," including interests in long-term water concessions in Argentina and Mexico (¶ 55).

Plaintiffs allege that Azurix "repeatedly vaunted" its successful bid for an interest in a long-term water and wastewater concession in Buenos Aires, Argentina (the "Buenos Aires concession") (¶ 3).5 The registration statement and prospectus stated that Azurix would assume operations of the Buenos Aires concession on June 18, 1999, and that Azurix estimated spending approximately $1 billion over 30 years on capital improvements pursuant to the concession agreement, with $405 million expended within the first five years of the agreement. Plaintiffs allege that the prospectus also stated that financing for these improvements "would come from operating cash flows and long-term debt and equity at the concession level" (¶ 59). Plaintiffs claim that these statements were materially false and misleading because required capital expenditures were actually far greater than what defendants represented (¶ 60). Plaintiffs also allege that Azurix financed these capital improvements, as well as its own long-term debt, with massive short-term debt instead of through "operating cash flows and long-term debt and equity."

The registration statement and prospectus also stated that Azurix would evaluate each project to assess its value by conducting a due diligence review, identifying and quantifying the specific risks of each transaction. Plaintiffs allege that the prospectus thus misled the investing public into concluding that defendants had performed due diligence for its projects before bidding on them (¶ 56).

Plaintiffs allege that these statements regarding due diligence were specifically false and misleading with respect to the Buenos Aires project. Plaintiffs claim that these statements were misleading because the due diligence conducted by defendants failed to include any review before the project was assumed of the completeness, accuracy, or validity of accounts receivable and other assets of the concession (¶ 72). Plaintiffs claim that information disclosed after the IPO indicated that the Buenos Aires concession had faced "numerous problems" from the very beginning due to incomplete customer accounts, difficulties in accounts receivable collection, failure of the Argentinian government to transfer assets, water quality issues, and disputes over tariffs. Plaintiffs allege that these facts materially impaired the financial condition of the company.

Plaintiffs also allege that defendants failed to disclose in the prospectus the extent of the water quality remediation costs that would be involved under the Buenos Aires concession. Plaintiffs claim that the concession agreement required Azurix to perform clean-up water quality services that expended "significant capital" beyond Azurix's wherewithal. Plaintiffs allege that these water remediation costs "skyrocketed" during the Class Period and caused a material adverse impact on the financial condition of the company (¶ 5).

2. Other Alleged False and Misleading Representations Made During the Class Period Following the IPO

Plaintiffs allege that defendants reported to analysts "at the time of the IPO" that Azurix's earnings would approximate $500 million for the year 2000 and $800 million for the year 2001 (¶ 79). Plaintiffs allege that defendants lacked any basis to make these earnings estimates because at that time Azurix was already suffering from a heavy debt burden, lack of liquidity, and lack of access to the equity capital market.

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