In re Enron Corp. Securities

Decision Date06 June 2007
Docket NumberCivil Action No. H-01-3624.,Civil Action No. G-02-723.,No. MDL-1446.,MDL-1446.
Citation490 F.Supp.2d 784
PartiesIn 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.
CourtU.S. District Court — Southern District of Texas

Brad S. Karp, Paul Weiss, et al., New York, NY, Jacalyn D. Scott, Wilshire Scott et al., Houston, TX, for Citigroup Inc., Salomon Smith Barney Inc., James P. Reilly, Jr., C. Scott Bruin, Defendants.

David J. Beck, Beck Redden and Secrest, Houston, TX, Herbert S. Washer, Herman & Sterling LLP, New York, NY, Taylor M. Hicks, Jr., Hicks Thomas et al., Houston, TX, for Merrill Lynch Pierce Fenner & Smith, Inc., Merrill Lynch & Co., Defendants.

Jeffrey Roger Parsons, Beirne Maynard et al., Houston, TX, Robert P. Trout, Trout Cacheris, PLLC, Washington, DC, for Schuyler Tilney, Defendant.

Jason Edward Williams, Fulbright & Jaworski LLP, Houston, TX, for KPMG LLP, Movant.


HARMON, District Judge.

Pending before the Court in the above referenced cause alleging securities fraud under Texas statutory and common law inter alia are (1) Defendant Schuyler M. Tilney's ("Tilney's")1 motion to dismiss (instrument # 47) Plaintiffs' First Amended Complaint under Fed.R.Civ.P. 9(b) and 12(b)(6); and (2) Defendants Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch & Company, Inc.'s (collectively, "Merrill Lynch's")2 partial motion to dismiss (# 48) Plaintiffs' First Amended Complaint.3

Plaintiffs 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 were purchasers or "holders" of Enron and Enronrelated securities from 1997-2001, the "relevant" period of alleged wrongdoing.4 Specifically, Plaintiffs American National Insurance Company, American National Investment Accounts, Inc., SM & R Investments, Inc., and Standard Life and Accident Insurance Company bought Enron common stock during the "relevant" period. American National Insurance Company purchased Enron commercial paper and an Enron bond in 2001. Farm Family Life Insurance Company and Farm Family Casualty Insurance Company purchased Enron preferred stock in 1993, and Farm Family Life Insurance additionally purchased an Enron bond in 1992; these entities held these securities throughout the relevant period. Finally, National Western Life Insurance Company bought Enron bonds in 1992 and 1993 and continued to hold them through the relevant period. # 46 at ¶ 37. Plaintiffs claim they suffered substantial losses in the value of their securities when Enron collapsed and filed for bankruptcy protection on December 2, 2001.

Plaintiffs allege that Defendants helped Enron conceal its deteriorating financial condition from the investing public and conspired with Enron to "cook its books" through deceptive transactions, specifically the Nigerian Barge, Power Trades, and LJM2 transactions in the end of 1999 and in 2000, with ongoing effects. Merrill Lynch and others purportedly devised or executed these transactions to hide Enron's fraudulent accounting from rating agencies and investors, as well as issued through its analysts, even as Enron was descending into bankruptcy in late 2001, "buy" or "strong buy" recommendations for Enron securities, which Merrill Lynch knew would be "widely disseminated in the financial news media" and would be "available to Plaintiffs and other investors." First Amended Complaint (# 46) at ¶¶ 34, 510-24. "The conspiracy amounted to a giant Ponzi scheme whereby Defendants helped Enron raise ever-increasing amounts of cash to make outstanding debt payments and maintain a facade of "'normal' operations."" # 46 at 4, ¶ 26. The complaint further asserts that the Nigerian Barge Transaction and the Power Trades Transaction resulted in Enron's recognition of approximately $60 million in income for the fourth quarter of 1999, raising net income from $199 mil ion to $259 million, a 30% increase; the transactions also enabled Enron to meet its earnings targets. Id. at ¶¶ 329-30. The ultimate result was to increase Enron's stock price and enable Enron to raise millions of dollars from the bond market at investment grade interest rates. Id. at ¶ 330. The factual allegations against Merrill Lynch and Tilney are mostly contained in ¶¶ 304-464 of the First Amended Complaint (# 46).

The governing complaint asserts four causes of action under Texas law: (1) aiding and abetting statutory fraud by Enron under the Texas Securities Act, Texas Revised Civil Statute Annotated Article 581-33 F(2) (West 2002) ("TSA"); (2) aiding and abetting statutory fraud by Enron under Section 27.01(d) of the Texas Business and Commerce Code (West 2002); (3) common law fraud; and (4) conspiracy to commit fraud. In essence Defendants' motions seek to dismiss the last three causes of action, all holder claims, and possible time-barred claims asserted under the TSA.5

I. Standards of Review

As stated in 5 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure Civ.3d § 1204 at 104-05 (West 2004),

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 pleadings allowed in the 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.

See also In re Enron Corp. Sec., Derivative & "ERISA" Litig., 388 F.Supp.2d 780, 783-84 (S.D.Tex.2005) (and cases cited therein).

A. Rule 9(b)

Federal Rule of Civil Procedure 9(b) provides, In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person must be averred generally.

"In every case based upon fraud, Rule 9(b) requires the plaintiff to allege as to each individual defendant the nature of the fraud, some details, a brief sketch of how the fraudulent scheme operated, when and where it occurred, and the participants." Hernandez v. Ciba-Geigy Corp. USA, 200 F.R.D. 285, 291 (S.D.Tex.2001). In a securities fraud suit, the plaintiff must plead with particularity the circumstances constituting the alleged fraud: Rule 9(b) requires the plaintiff to "`specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent.'" Southland Securities Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 362 (5th Cir. 2004), quoting Williams v. WMX Technologies, Inc., 112 F.3d 175, 177-78 (5th Cir. 1997), cert. denied, 522 U.S. 966, 118 S.Ct. 412, 139 L.Ed.2d 315 (1997). "`In cases concerning fraudulent misrepresentation and omission of facts, Rule 9(b) typically requires the claimant to plead the type of facts omitted, the place in which the omissions should have appeared, and the way in which the omitted facts made the representations misleading.'" Carroll v. Fort James Corp., 470 F.3d 1171, 1174 (5th Cir.2006), quoting United States ex. rel. Riley v. St. Luke's Episcopal Hosp., 355 F.3d 370, 381 (5th Cir.2004).

Although Rule 9(b) allows a plaintiff to plead intent to deceive or defraud generally, a mere conclusory statement that the defendant had the required intent is insufficient; the plaintiff must set forth specific facts that raise an inference of fraudulent intent, for example facts that show the defendant's motive. Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1068 (5th Cir.1994); Melder v. Morris, 27 F.3d 1097, 1102 (5th Cir.1994). Intent to deceive or defraud usually must be proved by circumstantial evidence, but to establish a material fact, that evidence "`must transcend mere suspicion.'" IKON Office Solutions, Inc. v. Eifert, 125 S.W.3d 113, 124 (Tex.App. — Houston [14th Dist.] 2003, pet. denied). Although a party's intent to defraud is determined at the time the party made the misrepresentation, "it may be inferred from the party's subsequent acts after the representation is made." Id.; see also Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432, 434 (Tex.1986). The court should not view each piece of circumstantial evidence separately, but should weigh the evidence as a whole. IKON, 125 S.W.3d at 124. "Intent is a fact question uniquely within the realm of the trier of fact because it so depends upon the credibility of the witnesses and the weight to be given to their testimony." Spoljaric v. Percival Tours, Inc., 708 S.W.2d at 434.

The Fifth Circuit, although construing Rule 9(b) strictly, has recognized an exception and permits the requirements to be "relaxed" where facts relating to the fraud are "peculiarly within the perpetrator's knowledge"; then the alleged fraud "may be pled on information and belief, provided the plaintiff sets forth the...

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