In re Enron Corp. Securities, Deriv. & "Erisa"

• Decision Date: 12 June 2007
• Docket Number: Civil Action No. G-02-723.,Civil Action No. H-01-3624.,No. MDL-1446.,MDL-1446.
• Citation: 491 F.Supp.2d 690
• Parties: In re ENRON CORPORATION SECURITIES, DERIVATIVE & "ERISA" LITIGATION. Mark Newby, et al., Plaintiffs, v. Enron Corporation, et al., Defendants American National Insurance Company, et al., Plaintiffs, v. Citigroup, Inc., et al., Defendants.
• Court: U.S. District Court — Southern District of Texas

491 F.Supp.2d 690

In re ENRON CORPORATION SECURITIES, DERIVATIVE & "ERISA" LITIGATION.

Mark Newby, et al., Plaintiffs, v. Enron Corporation, et al., Defendants American National Insurance Company, et al., Plaintiffs, v. Citigroup, Inc., et al., Defendants.

No. MDL-1446.

Civil Action No. H-01-3624.

Civil Action No. G-02-723.

United States District Court, S.D. Texas, Houston Division.

June 12, 2007.

OPINION AND ORDER OF PARTIAL SUMMARY JUDGMENT

HARMON, District Judge.

Pending before the Court in the above referenced cause alleging securities fraud under Texas statutory and common law is Plaintiffs American National Insurance Company, American National Investment Accounts, Inc., SM & R Investments, Inc., American National Property and Casualty Company, and Standard Life and Accident Insurance Company's motion for partial summary judgment (# 65) that Defendants Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch & Company, Inc. (collectively, "Merrill Lynch") are liable as a matter of law for actual damages¹ 1 for aiding and abetting Enron's fraud under article 581-33(F)(2) of the Texas Securities Act ("TSA"), Texas Revised Civil Statutes art. 581-33(F)(2).²

Plaintiffs, who claim they relied on Enron's misleading SEC-filed financial statements in deciding to purchase Enron securities, in essence charge, "Incontrovertible evidence establishes that Merrill knew the sole purpose of the Barge Transaction was to enable Enron in falsifying its reported financial condition, and that Merrill intentionally, and with reckless disregard for both the truth and the law, materially aided Enron in issuing false financial statements." # 65 at 3.

Standard of Review under Rule 56(c)

Summary judgment under Federal Rule of Civil Procedure 56(c) 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 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.'" Id., quoting In re Municipal Bond Reporting Antitrust Litig., 672 F.2d 436, 440 (5th Cir.1982), 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, 106 S.Ct. 2548, and Liberty Lobby, 477 U.S. at 249-50, 106 S.Ct. 2505.³ The court must consider all evidence and draw all inferences from the factual record in the light most favorable to the nonmovant. Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); National Ass'n of Gov't Employees v. City Pub. Serv. Board, 40 F.3d at 712-13.

Given the policy of Rule 56 to promptly dispose of cases when there is no genuine issue of material fact for trial, a district court may sua sponte grant summary judgment for a non-movant where there is no issue of material fact and where the court provides the proper ten-day notice to the opposing party of its intention to allow that party to come forward with all of its evidence to oppose a summary judgment against it. Exxon Corp. v. St. Paul and Marine Ins. Co., 129 F.3d 781, 786-87 (5th Cir.1997); Shepherd v. Gulf Coast Community Services, at 310 (5th Cir.2007).

Plaintiffs' Motion for Partial Summary Judgment (# 65)

Criminal convictions are admissible as non-hearsay. Federal Rule of Evidence 803(22) excepts judgments of previous felony convictions resulting from trial or from guilty pleas from the hearsay bar and allows them to be admitted into evidence in subsequent trials. Fed.R.Evid. 803(22) ("Evidence of a final judgment, entered after a trial or upon a plea of guilty ..., adjudging a person guilty of a crime punishable by death or imprisonment in excess of one year, to prove any fact essential to sustain the judgment....").

Relating to the Nigerian Barge transaction (alleged loan disguised as a sale) between Enron and Merrill Lynch Defendants, Plaintiffs argue that the evidence⁴ produced at, and the convictions resulting from, the criminal trial of several Merrill Lynch's employees, along with convictions and guilty pleas of Enron employees and with Merrill Lynch's acceptance of responsibility in an letter agreement with the Department of Justice⁵ for its employees' misconduct, establish Merrill Lynch's liability for actual damages as an aider and abettor of the primary violator, Enron, under § 581.33F(2) of the TSA. United States v. Brown, CR No. H-03-363 (S.D.Tex.), aff'd in part, rev'd in part, and vacated in part, 459 F.3d 509 (5th Cir. 2006) (holding inter alia that the honest services theory of wire fraud did not cover a scheme in which the employees' interests did not sufficiently diverge from those of the employer), cert. denied, ____ U.S. ____, 127 S.Ct. 2249, ____ L.Ed.2d ____ (2007).⁶

Plaintiffs emphasize that Merrill Lynch has admitted responsibility for its employees' violations. Although some of these convictions have been overturned, Plaintiffs note that James Brown's conviction (for perjury and obstruction of justice) is final and is evidence that Merrill Lynch is liable for aiding Enron's fraud. It also points to the Fifth Circuit's opinion reversing all the Defendants' convictions based on the government's theory of "honest services," in which the panel stated that its reversal "should not be read to suggest that no dishonest, fraudulent, wrongful or criminal act has occurred. We hold only that the alleged conduct is not a federal crime under the honest-services theory of fraud specifically. [emphasis in original]" U.S. v. Brown, 459 F.3d at 523.⁷ Plaintiffs submit substantial documentary evidence, including sworn statements by Enron officials who pled guilty, to argue that as matter of law Merrill Lynch is liable under the TSA for aiding and abetting Enron in selling securities to deceived investors.

Merrill Lynch's Opposition (# 68)

Article 581-33(F) (2) of the TSA creates liability for a

person who directly or indirectly with intent to deceive or defraud or with reckless disregard for the truth or the law materially aids a seller, buyer, or issuer of a security is liable under Section 33A, 33B, or 33C jointly and severally with the seller, buyer, or issuer, and to the same extent as if he were the seller, buyer, or issuer....

To establish an aiding and abetting claim against Merrill Lynch under article 581-33(F)(2) of the TSA, Plaintiffs must first establish that there was a primary violation of article 581-22(A) (2) by Enron. Sterling Trust Co. v. Adderley, 168 S.W.3d 835, 840-41 (Tex.2005). Article 581-33(A)(2) provides for primary liability For one who

offers or sells a security (whether or not the security or transaction is exempt under Section 5 or 6 of this Act) by means of an untrue statement of material fact or an omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading, is liable to the person buying the security from him, who may sue either at law or in equity for rescission, or for damages if the buyer no longer owns the security.

Merrill Lynch objects that the evidence does not show that Enron committed a primary violation because Enron does not qualify as a statutory "seller" under the statute; the evidence demonstrates that Enron did not sell the securities directly to Plaintiffs, but that Plaintiffs purchased their securities from various brokers. In re Enron. Sec., Derivative & ERISA Litig., 258 F.Supp.2d 576, 601-08 (S.D.Tex.2003) (holding that under the TSA a statutory "seller" is the person who...