In re Enron Corporation Securities, Derivative, MDL-1446.

Citation540 F.Supp.2d 800
Decision Date24 August 2007
Docket NumberNo. MDL-1446.,Civil Action No. H-01-3624.,Civil Action No. H-02-4788 (COORDINATED).,MDL-1446.
PartiesIn re ENRON CORPORATION SECURITIES, DERIVATIVE & "ERISA" LITIGATION. Mark Newby, et al., Plaintiffs v. Enron Corporation, et al., Defendants Public Employees' Retirement System of Ohio, et al., Plaintiffs, v. Andrew S. Fastow, et al., Defendants.
CourtUnited States District Courts. 5th Circuit. United States District Courts. 5th Circuit. Southern District of Texas
OPINION AND ORDER

MELINDA HARMON, District Judge.

Pending before the Court in the above referenced cause, transferred to this Court from the Southern District of Ohio by the Judicial Panel on Multidistrict Litigation for coordinated or consolidated pretrial proceedings in MDL 1446, is the Outside Directors'1 motion to dismiss with prejudice the Amended Complaint and conditional motion to reopen discovery (# 186).

Counsel for the Outside Directors, Kathy Patrick, informed the Court by a letter dated April 23, 2007, that the motion is fully briefed and ready for a decision. The motion was also included in the Notice of Master List of Motions Not Affected By Fifth Circuit Ruling Regarding Section 10 Liability (# 5656), which was submitted by Gibbs & Bruns after conference with all parties, to indicate that the Court could address it at this time.2

As a threshold matter, there is some uncertainty whether the amended complaint attached as an exhibit to Plaintiffs' September 11, 2005 motion for leave to amend (Ex. A to # 56) or the Amended Complaint filed on August 17, 2006(# 97), after the Court certified a class in Newby and established a schedule for all other actions, is the governing pleading. Because the claims in both complaints are the same against the Outside Director Defendants, and because the Outside Directors have referenced the key allegations in both complaints simultaneously, there is no prejudice to them either way. Moreover, in view of efficiency and fairness, the Court concludes that the second, # 97, shall be deemed the controlling complaint; thus it will summarize the relevant facts and cite the relevant paragraphs for resolving the motion to dismiss.

Plaintiffs Public Employees' Retirement System of Ohio ("PERS"), State Teachers' Retirement System of Ohio ("STRS"), School Employees Retirement System of Ohio ("SERS"), Ohio State Highway Patrol Retirement System ("OHPRS"), Ohio Tuition Trust Authority ("OTTA"), and Cincinnati Retirement System ("Cincinnati"), collectively the "Ohio Retirement Systems," have alleged three causes of action against the Outside Directors arising out of the collapse of Enron Corporation ("Enron"): (1) Count V for negligent misrepresentation; (2) Count VI for aiding and abetting common law fraud; and (3) Count IX for violations of Section 18 of the Securities Exchange Act of 1934, 15 U.S.C. § 78r.

I. Standards of Review

As stated in 5 Charles A. 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 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) ("Although scienter may be averred generally, case law amply demonstrates that pleading scienter requires more than a simple allegation that a defendant had fraudulent intent. To plead scienter adequately, a plaintiff must set forth specific facts that support an inference of fraud."); 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.

"[Wh]en agency is an element of a fraud claim, agency must be pleaded with particularity required under Rule 9(b)." Whitney National Bank v. Medical Plaza Surgical Center, L.L.P., No. H-06-1492, 2007 WL 400094, *3 (S.D.Tex.2007), citing Kolbeck v. LIT America, Inc., 923 F.Supp. 557, 570 (S.D.N.Y.1996), aff'd, 152 F.3d 918 (2d Cir.1998); American Credit v. HCG. Financial Servs., Inc., No. 89 C 9583, 1990 WL 77992, *4 (N.D.Ill. June 1, 1990); Chou v. University of Chicago, 254 F.3d 1347, 1362 (Fed.Cir.2001); Abels v. Farmers Commodities Corp., 259 F.3d 910, 916 (8th Cir.2001); and Lachmund v. ADM Investor Servs., Inc., 191 F.3d 777, 783 (7th Cir.1999).3

The particularity requirement of Rule 9(b) also governs a conspiracy to commit fraud. Southwest Louisiana Healthcare System v. MBIA Ins. Corp., No. 05-1299, 2006 WL 1228903, *5 & n. 47 (W.D.La. May 6, 2006); Hernandez v. CIBA-GEIGY Corp. USA, No. Civ. A. 00-82, 2000 WL 33187524, *4 (S.D.Tex. Oct. 17, 2000) ("The weight of Fifth Circuit precedent holds that a civil conspiracy to commit a tort that sounds in fraud must be pleaded with particularity."); In re Ford Motor Co. Vehicle Paint Litigation, No MDL 1063, 1996 WL 426548, *34 (E.D.La. July 30, 1996); and Castillo v. First City Bancorporation of Texas, Inc., 43 F.3d 953, 961 (5th Cir.1994).

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 factual basis for his belief." United States ex rel. Russell v. Epic Healthcare Management Group, 193 F.3d 304, 308 (5th Cir.1999), citing United States ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 903 (5th Cir.1997) (warning that the exception "must not be mistaken for license to base claims of fraud on speculation and conclusory allegations."). The relaxed standard is not applicable where the information is available from another source or where the plaintiff fails to allege a factual basis for his beliefs. Sealed Appellant I v. Sealed Appellee I, 156 Fed. Appx. 630, 634 (5th Cir.2005) (plaintiff must allege sufficient factual basis for his belief defendant committed fraud, e.g., particular documents containing false statements, identified by number, date or otherwise, or explain how he tried, but failed to obtain the information, whom he contacted, etc.).

In Benchmark Electronics, Inc. v. J.M. Huber Corp., 343 F.3d 719, 723, modified on denial of rehearing on other grounds, 355 F.3d 356 (5th Cir.2003), the Fifth Circuit commented, "Although Rule 9(b) by its terms does not apply to negligent misrepresentation claims, this court has applied the heightened pleading requirements...

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