In re Enron Cor. Sec., Dervivative & "Erisa" Lit.

Decision Date30 November 2006
Docket NumberNo. MDL-1446.,No. CIV.A. H-01-3624.,MDL-1446.,CIV.A. H-01-3624.
Citation463 F.Supp.2d 628
PartiesIn Re ENRON CORPORATION SECURITIES, DERIVATIVE & "ERISA" LITIGATION MARK NEWBY, et al., Plaintiffs v. ENRON CORPORATION, et al., Defendants The Regents of the University of California, et al., Individually and On Behalf of All Others Similarly Situated, Plaintiffs, v. Kenneth L. Lay, et al., Defendants.
CourtU.S. District Court — Southern District of Texas

Mark Kirsch, Jim Moyle, Joel M. Cohen, Jason D'Angelo, Guy Quinlan, Angelique Shingler, Clifford Chance US LLP, New York City, Ron Cook, Cook & Roach, LLP, Houston, TX, for Alliance Capital Management, L.P.

OPINION AND ORDER OF SUMMARY JUDGMENT

HARMON, District Judge.

Pending before the Court in the above referenced cause is Defendant Alliance Capital Management, L.P.'s1 ("Alliance's") motion for summary judgment (instrument # 4715), pursuant to Federal Rule of Civil Procedure 56, and for attorney's fees and costs under Section 11(e) of the Securities Act of 1933, 15 U.S.C. § 77k(e), on the ground that Plaintiffs' claim against Alliance is not only lacking evidentiary support, but "frivolous, without merit, and/or brought in bad faith."

Plaintiffs' Allegations

The allegations relating to Alliance and Savage are contained in ¶ 83(33) of the First Amended Consolidated: Complaint (# 1388):

Defendant Frank Savage ("Savage") was a director of Enron from 99 through 01, and was a member of its Finance Committee while he was on the Board. Savage signed the false and misleading Enron Registration Statement filed and effective with the SEC of 6/1/01, which was used to sell the following Enron securities as to which § 11 claims under the 1933 Act are asserted:

7/18/01 $1.9 billion Zero Coupon Convertible. Senior Notes due 2021

Since 95, Savage has been Chairman of Alliance Capital Management International (a division of defendant Alliance Capital Management, L.P.). Savage was also a director of defendant Alliance Capital Management L.P. ("Alliance"), a large financial services company which provides a broad variety of financial and investment management services and owns, operates and markets a series of mutual funds known as Alliance Mutual Funds. During 00-01, Alliance was the largest single institutional shareholder of Enron owning over 43 million shares of Enron stock in Alliance mutual funds.2 In addition, in its investment management business, Alliance had purchased millions of shares of Enron stock for the account of several of its large institutional investor clients. Alliance (and Savage) had a huge motive to keep Enron stock trading at very high levels. Savage sat on Enron's board to protect Alliance interests and so Alliance would receive the benefits of what Savage learned as a director of Enron and a member of its Finance Committee. Alliance controlled and directed Savage in his activities as a director of Enron. A key to keeping Enron's stock high was Enron maintaining its investment grade credit rating and its apparently strong financial condition — which required Enron to constantly raise new capital — an activity which was under the Enron Board's Finance Committee's control. Savage is sued under § 11 of the 1933 Act for the above-referenced securities offering. Alliance is sued as a controlling person of Savage and is liable under §§ 11 and 15 of the 1933 Act.

Standard of Review

Summary judgment under Federal Rule of Civil Procedure 56 is appropriate when "the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." A dispute of material fact is "genuine" if the evidence would allow a reasonable jury to find in favor of the nonmovant. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Initially the movant bears the burden of identifying those portions of the pleadings and discovery in the record that it finds demonstrate the absence of a genuine issue of material fact; the movant may, but is not required to, negate elements of the nonmovant's case to prevail on summary judgment. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Lujan v. National Wildlife Federation, 497 U.S. 871, 885, 110 S.Ct. 3177, 111 L.Ed.2d 695 (1990); Edwards v. Your Credit, Inc., 148 F.3d 427, 431 (5th Cir. 1998).

If the movant meets its burden and points out an absence of evidence to prove an essential element of the nonmovant's case on which the nonmovant bears the burden of proof a trial, the nonmovant must then present competent summary judgment evidence to support the essential elements of its claim and to demonstrate that there is a genuine issue of material fact for trial. National Ass'n of Gov't Employees v. City Pub. Serv. Board, 40 F.3d 698, 712 (5th Cir.1994). "[A] complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial." Celotex, 477 U.S. at 323, 106 S.Ct. 2548. "`[T]he mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment ....'" State Farm, Life Ins. Co. v. Gutterman, 896 F.2d 116, 118 (5th Cir.1990), quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). "Nor is the `mere scintilla of evidence' sufficient; `there must be evidence on which the jury could reasonably find for the plaintiff.'" Id.,quoting Liberty Lobby, 477 U.S. at 252, 106 S.Ct. 2505. The Fifth Circuit requires the nonmovant to submit "`significant probative evidence'" to raise a genuine issue of material fact for trial. Id., quoting In re Municipal Bond Reporting Antitrust Litig., 672 F.2d 436, 440 (5th Cir.1978), and citing Fischbach & Moore, Inc. v. Cajun Electric Power Co-Op., 799 F.2d 194, 197 (5th Cir.1986). Conclusory allegations unsupported by evidence will not preclude summary judgment. National Ass'n of Gov't Employees v. City Pub. Serv. Board, 40 F.3d at 713; Eason v. Thaler, 73 F.3d 1322, 1325 (5th Cir.1996). "If the evidence is merely colorable, or is not significantly probative, summary judgment may be granted." Thomas v. Barton Lodge II, Ltd., 174 F.3d 636, 644 (5th Cir.1999), citing Celotex, 477 U.S. at 322-23, 106 S.Ct. 2548, and Liberty Lobby, 477 U.S. at 249-50 106 S.Ct. 2505.3 The court must con. skier all evidence and draw all inferences from the factual record in the light most favorable to the nonmovant. Anderson v. Liberty Lobby, 477 U.S. at 255, 106 S.Ct. 2505; Clift v. Clift, 210 F.3d 268, 269 (5th Cir.2000).

Applicable Law

The sole claim against Alliance is for "control person" liability under Section 15 of the 1933 Act, 15 U.S.C. § 77o, relating to the contents of a registration statement for $1.9 billion in Enron Zero Coupon Notes signed by an Enron independent director, Frank Savage, who was also employed by Alliance at the time4 and purportedly "controlled" by Alliance.5

Section 11, 15 U.S.C. § 77k, allows any person acquiring securities pursuant to an untrue registration statement to sue, inter alia, every person who signed it and every person who was a director of the issuer at the time.

Section 15, 15 U.S.C. § 77o, which imposes derivative joint and several liability upon controlling persons for acts violating sections 11 and 12 of the 1933 Act,6 provides,

Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls any person liable under sections 77k or 771 of this title, shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person had no knowledge of or reasonable ground to believe in the existence of facts by reason of which the liability of the controlled person is alleged to exist.

As defined in 17 C.F.R. § 230.405(f), "The term `control' ... means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities by contract, or otherwise." Quoted in GA Thompson & Co. v. Partridge, 636 F.2d 945, 957-58 (5th Cir.1981), and in Abbott v. Equity Group, Inc., 2 F.3d 613, 619 (5th Cir.1993), cert. denied sub nom. Turnbull v. Home Ins. Co., 510 U.S. 1177, 114 S.Ct. 1219, 127 L.Ed.2d 565 (1994).

As has been true of so many issues in the Newby litigation, courts have taken a variety of positions on issues related to controlling person liability under the two statutes. See James Lockhart, J.D., Liability of Officer, Director, Employee, or other Individual Associated with Seller or Issuer of Securities as "Control Person" under § 15 of Securities Act 15 U.S.C. § 77o) and § 20(a) of Securities Exchange Act (15 U.S.C. § 78t(a)), 183 A.L.R. Fed. 141 (2006); Loftus C. Carson, The Liability of Controlling Persons Under the Federal Securities Acts, 72 Notre Dame L.Rev. 263, 266-67 (1997) ("Significantly, ... the federal courts have not been in agreement about the following issues: 1) how to determine when a person is a controlling person within the meaning of sections 15 and 20(a); or 2) how a controlling person, to avoid liability, can satisfy the requirements. Because of the failure of the federal courts to develop uniform, coherent approaches to these two questions, sometimes confusing and frequently questionable results have emerged in cases decided under sections 15 and 20(a)."). Because this Court is bound by Fifth Circuit law, it addresses that standard except on issues where the Fifth Circuit has been silent.

Even within the Fifth Circuit, the law on the controlling person doctrine is not crystal clear and...

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