In re Enron Corp. Securities, Derivative

Decision Date13 September 2005
Docket NumberNo. MDL-1446.,No. CIV.A. G-02-0299.,No. CIV.A. H-01-3624.,MDL-1446.,CIV.A. H-01-3624.,CIV.A. G-02-0299.
Citation388 F.Supp.2d 780
PartiesIn Re ENRON CORPORATION SECURITIES, DERIVATIVE & "ERISA" LITIGATION Mark Newby, et al., Plaintiffs v. Enron Corporation, et al., Defendants American National Insurance Company; American National Investment Accounts, Inc; SM & R Investments, Inc.; American National Property and Casualty Company; Standard Life and Accident Insurance Company; Farm Family Life Insurance Company; Farm Family Casualty Insurance Company; and National Western Life Insurance Company, Plaintiffs v. J.P. Morgan Chase And Company, Defendant.
CourtU.S. District Court — Southern District of Texas

HARMON, District Judge.

Pending before the Court is Defendant J.P. Morgan Chase & Co.'s ("JPMorgan Chase's") motion to dismiss (instrument # 1029 in H-01-3624) Plaintiffs' First Amended Complaint (# 8 in G-02-0299) pursuant to Federal Rules of Civil Procedure 9(b)1 and 12(b)(6).2

Plaintiffs assert three causes of action under Texas law: (1) common law fraud; (2) statutory fraud under the Texas Business and Commerce Code § 27.01(a)(1)(2002); and (3) securities fraud under the Texas Securities Act, Texas Revised Civil Statute Annotated Article § 581-33(A)-(C)(2002). The First Amended Complaint alleges that, acting for its own financial gain, JPMorgan Chase participated in a scheme designed to allow Enron to "cook its books" and defraud the investing public, including Plaintiffs. It asserts that a series of JPMorgan Chase's year-end transactions with Enron through Mahonia Ltd. were not oil and gas sales contracts or "trades," but sham loans to Enron from Mahonia/JPMorgan Chase, utilized by Enron to manipulate its misleading annual financial reports and manage its tax liabilities by transferring losses from one financial period to another, thereby defrauding shareholders and investors in Enron securities who relied upon the false financial reports.3 JPMorgan Chase is also charged with engaging in a fraudulent course of conduct by failing to disclose its relationship with Mahonia and misrepresenting in the contracts between Enron and Mahonia that JPMorgan Chase was merely an agent for Mahonia. In actuality, the complaint at ¶ 26 claims that JPMorgan Chase was "in a position of control and authority over Mahonia," as evidenced by a security agreement between Mahonia and Chase Manhattan Bank stating that JPMorgan had a "lien and security interest in the whole of [Mahonia's] undertaking and assets, present and future." Enron's and JPMorgan Chase's fraudulent conduct purportedly resulted in the misrepresentation of Enron's financial condition on Enron's books and in its SEC reports.

The first amended complaint at ¶ 47 also alleges that JPMorgan Chase through the same period "attempted to create a market for or increase sales of Enron stock." Plaintiffs identify a number of dates from 1999-2001 on which they conclusorily assert that unnamed JPMorgan Chase's "institutional and retail advisors around the country issued positive `buy' ratings on Enron securities," despite JPMorgan Chase's undisclosed knowledge from asserted participation in and control of the Mahonia sham sales, that Enron was misrepresenting its financial condition in annual reports. First Amended Complaint (# 8) at ¶ 47. Plaintiffs do not allege that they purchased securities directly from JPMorgan Chase.

JPMorgan Chase urges the Court to dismiss the action because (1) Plaintiffs fail to satisfy Federal Rule of Civil Procedure 9(b)'s requirement that fraud be pleaded with particularity (time, place, contents of false representations, identity of the JPMorgan Chase employee(s) making misrepresentation and what JPMorgan Chase obtained by it, and facts supporting an inference of scienter) with respect to all three causes of action, each sounding in fraud; (2) the pleading, which fails to allege that JPMorgan Chase is the seller of any Enron security purchased by any Plaintiff, or that it controlled a seller, buyer or issuer of any Enron security purchased by any Plaintiff, is insufficient to state a claim under the Texas Securities Act; (3) Plaintiffs' claims for Texas statutory and common law fraud are insufficiently pled and fail as a matter of law; and (4) Plaintiffs provide no facts to support their allegations that JPMorgan Chase conspired with Enron or is liable as a control person and/or aider and abettor under Texas law or had any duty to disclose facts about Mahonia Ltd. and/or Enron to Plaintiffs.

In response, Plaintiffs object that (1) JPMorgan Chase applies federal substantive law to their Texas state-law claims; (2) JPMorgan Chase fails to address their statutory fraud claim; and (3) JPMorgan Chase fails to address the only section of the Texas Securities Act under which they assert a claim, i.e., aider and abettor liability under Article 581-33(F)(2). Insisting that JPMorgan Chase is applying the wrong standards to their claims, Plaintiffs maintain that the proof required for their state law causes of action differs from that for federal securities claims; specifically § 27.01 of the Texas Business & Commerce Code does not have a scienter element and the Texas Securities Act has a much lower "state of mind" claim than the scienter requirement under federal securities law.

Federal pleading standards apply to Plaintiffs' state law claims here:

The manner and details of pleading in the federal courts are governed by the Federal Rules of Civil Procedure regardless of the source of substantive law to be applied in the particular action.... [It] no longer can be doubted that the rules regarding the standard of specificity to be applied to federal pleadings, the pleading allowed in federal courts, the form of the pleadings, the special requirements for pleading certain matters, the allocation of the burden of pleading among the parties, and the signing of pleadings by an attorney of record or an unrepresented party, all are governed by the federal rules and not by the practice of the courts in the state in which the federal court happens to be sitting.

5 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure Civ.3d § 1204 (1990 & Supp.2005). See FDIC v. Dawson, 4 F.3d 1303, 1308 (5th Cir.1993)("[T]he pleading requirements in federal court are governed by Federal Rule of Civil Procedure 8, rather than by state law."), cert. denied, 512 U.S. 1205, 114 S.Ct. 2673, 129 L.Ed.2d 809 (1994); Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103 (9th Cir.2003)("It is established law, in this circuit and elsewhere, that Rule 9(b)'s requirement that the circumstances of fraud must be stated with particularity requirement applies to state-law causes of action,"); Hayduk v. Lanna, 775 F.2d 441, 443 (1st Cir.1985); Minger v. Green, 239 F.3d 793 (6th Cir.2001) (Rule 9(b) applies to pleading state law fraud in federal court); Roberts v. Francis, 128 F.3d 647, 650-51 (8th Cir.1997). See also Stephens v. Halliburton Co., No. Civ. A. 3:02-CV-1442-L, 2003 WL 22077752, *7 (N.D.Tex. Sept.5, 2003)(applying Rule 9(b) to Texas state law claims for common law and statutory fraud). Thus Rule 9(b) does apply and requires heightened pleading for fraud-based claims.4 The Court notes that the First Amended Complaint was filed without leave of Court after this case was removed and transferred to this Court and before any pleadings responsive to the original petition were filed, as is permissible under Fed.R.Civ.P. 15(a).

To state a claim for common law fraud under Texas law a plaintiff must allege that the defendant made (1) a material misrepresentation (2) that was false, (3) which, at the time it was made, the defendant either knew was false or made it recklessly without knowledge of its truth, (4) with the intent that it be relied upon, (5) that the misrepresentation was actually and justifiably relied and acted upon by the plaintiff, and (6) that the plaintiff suffered injury. Johnson & Johnson Med., Inc. v. Sanchez, 924 S.W.2d 925, 929-30 (Tex.1996); Johnson & Higgins, Inc. v. Kenneco Energy, Inc., 962 S.W.2d 507, 524 (Tex.1998); Ernst & Young, L.L.P. v. Pacific Mutual Life Ins. Co., 51 S.W.3d 573, 577 (Tex.2001).

Moreover in Texas a fraud cause of action exists where the false representation was made with the intent of reaching and deceiving a third person and thereby caused that third party injury; privity is not required between the fraudfeasor and the person he is trying to influence to establish a fraud claim. Pacific Mutual, 51 S.W.3d at 578-80 ("a defendant who acts with knowledge that a result will follow is considered to intend the result," consistent with the standard of the Restatement (Second) of Torts § 531 (1977) that the fraudfeasor intend and have "reason to expect" that the third party will act in reliance on the misrepresentation).5

The Court agrees with JPMorgan that Plaintiffs have not adequately pleaded with requisite Rule 9(b) factual particularity any misrepresentation by JPMorgan Chase or the circumstances, i.e., time, place, contents of a false representation (no less the identity of the JPMorgan Chase employee(s) making a misrepresentation or that any misrepresentation by Defendant was actually and justifiably relied upon by a plaintiff here), nor specifically what JPMorgan Chase obtained by a misrepresentation, as required to state an actionable fraud cause of action against JPMorgan Chase. The only misrepresentations alleged to have been made by Defendant are the vaguely referenced recommendations by its brokers to investors generally to buy Enron securities on the grounds that the company was strong. Furthermore the purported misrepresentations in financial reports by Enron, which is not a party to this suit, are not pled with particularity either. In addition, although reliance is an essential element of both Texas common law fraud and statutory fraud,6 Plaintiffs have not provided factual allegations demonstrating that they relied...

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