Lampkin v. UBS Fin. Servs., Inc.

Decision Date24 May 2019
Docket NumberNo. 17-20608,17-20608
Citation925 F.3d 727
Parties Kevin LAMPKIN; Stephen Miller, individually and on behalf of all others similarly situated; Joe Brown; Frank Gittess; Terry Nelson; Dianne Swiber; Robert Ferrell, Plaintiffs-Appellants v. UBS FINANCIAL SERVICES, INCORPORATED, formerly known as UBS PaineWebber, Incorporated; UBS Securities, L.L.C., formerly known as UBS Warburg, L.L.C., Defendants-Appellees
CourtU.S. Court of Appeals — Fifth Circuit

Andy Tindel, Andy Tindel, Attorney & Counselor at Law, P.C., Tyler, TX, David Augustus, Dawn Renee Meade, Bonnie Spencer, Spencer Law Firm, Houston, TX, for Plaintiffs-Appellants.

Robert J. Giuffra, Jr., Esq., William Henry Wagener, Esq., Sullivan & Cromwell, L.L.P., New York, NY, Charles Rodney Acker, Ellen Bush Sessions, Norton Rose Fulbright US, L.L.P., Dallas, TX, Brendan Peter Cullen, Sullivan & Cromwell, L.L.P., Palo Alto, CA, for Defendants-Appellees.

Before HIGGINBOTHAM, SMITH, and GRAVES, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

This is another appeal arising out of the collapse of Enron. Plaintiffs are individual retail-brokerage customers of PaineWebber who purchased Enron securities and Enron employees who acquired employee stock options. Plaintiffs brought this action against subsidiaries of UBS, alleging violations of the securities laws for their role as a broker of Enron's employee stock option plan and for failure to disclose material information about Enron's financial manipulations to its retail investors. The case was initially consolidated into the Enron MDL until the plaintiffs elected to proceed on their own complaint. After a lengthy stay and multiple amendments to their original pleading, the district court dismissed the complaint for failure to state a claim. We affirm.

I.

Plaintiffs-Appellants bring this putative class action alleging violations of the securities laws against Defendants-Appellees UBS Financial Services, Inc. (formerly UBS PaineWebber ("PaineWebber")) and UBS Securities LLC (formerly UBS Warburg LLC ("Warburg")). During the relevant time period, PaineWebber and Warburg were separate legal entities and subsidiaries of UBS AG.

Plaintiffs fall into two groups: (1) individual retail-brokerage customers of PaineWebber who purchased Enron securities in a PaineWebber brokerage account between November 5, 2000 and December 2, 2001 and (2) Enron employees who acquired Enron stock option securities through their employment between October 19, 1998 and November 19, 2001, which they allege that PaineWebber underwrote (§ 11 claims) and sold (§ 12 claims). PaineWebber provided retail brokerage services to individuals and was acquired by UBS in July 2000. Warburg provided investment-banking services to institutional clients.

Until its collapse in late 2001, Enron was the seventh largest corporation in the world. Enron began as a traditional energy production and transmission company, concentrating in natural gas pipelines, but quickly grew into an "industry leader in the purchase, transportation, marketing, and sale of natural gas and electricity" and related financial instruments. Enron's rapid expansion made it a large consumer of cash and the company considered its credit ratings critical to its success. According to the complaint, Enron began to "seriously manipulate [its] financials" to conceal the negative effects of its accounting practices on public financial statements. After a series of financial disclosures and restatements events spiraled: the company's CFO, Andrew Fastow, was placed on a leave of absence, the Board of Directors formed a special committee to investigate the financial disclosures, and eventually, Enron filed for bankruptcy.

Plaintiffs allege that UBS1 and Enron maintained a "mutually self-serving relationship that took precedence over and conflicted with the interests of UBS's retail customers." They claim that PaineWebber provided millions of retail investors to whom Enron securities could be funneled, transferring Enron's risk into the marketplace and, in return, Enron chose PaineWebber as the administrator of its Enron Employee Stock Option Plans, giving UBS the "first bite at capturing Enron employee wealth to generate retail fees and income." Enron granted stock option plans to its employees in 1991, 1994, and 1999.2 Under the terms of the plans, an Enron board committee3 had the sole authority to designate participants in the stock plan and determine the types of awards to be granted to a participant, which were granted "for no cash consideration or for such minimal cash consideration as may be required by law." PaineWebber contracted to provide brokerage services for those plans, agreeing to serve as the "exclusive broker for stock option exercises of all [Enron's] publicly traded securities." While Enron granted the options, PaineWebber was tasked with facilitating the option exercises and providing record-keeping services related to the exercise of options. On the basis of those allegations, plaintiffs claim violations under Sections 11 and 12 of the Securities Act of 1933 (the "Securities Act").4 Plaintiffs claim that PaineWebber violated the Securities Act by acting as a "seller" and "underwriter" of Enron securities within the meaning of that statute, making PaineWebber liable for "materially false statements contained in the Enron prospectuses and registration statements" for Enron stock.

Plaintiffs also allege that UBS had knowledge of Enron's "financial chicanery" because of its "long standing banking history with Enron." Emphasizing that UBS is a single, integrated business venture, plaintiffs allege that UBS positioned itself between its retail brokerage clients and Enron, its corporate client, making it impossible for UBS to fulfill its legal obligations to both groups. They claim UBS had material nonpublic information about Enron's financial manipulations and a duty to disclose that information to its retail-brokerage customers. Plaintiffs highlight several transactions UBS participated in that they allege evidence UBS's knowledge of material information: (1) 1999 and 2000 amendments of equity-forward contracts, (2) participation in Osprey and Yosemite IV financial structures, and (3) participation in the Enron E-Next Generation Loan. According to plaintiffs, those transactions were devices and schemes designed to inflate the appearance of Enron's financial status.

Equity-forward contracts were financial instruments through which Enron was contractually obligated to purchase a specific number of Enron shares at a specific price from UBS and UBS had to deliver to Enron a specific number of shares at a specific price. The complaint alleges that those instruments were, in substance, undocumented and undisclosed loans to Enron to support Enron's hedge transactions used to manage its income. It documents two restructurings in 1999 and 2000 through which UBS increased the forward contract price, allowing Enron to extract the value from the shares in the amount of the difference between the initial forward contract price and the increased market value of the shares. Plaintiffs allege that these restructurings provided Enron hedges for assets that could not be hedged as well as seed money for elicit accounting and that UBS had "institutional knowledge of their fraudulent nature."

With respect to its participation in the Osprey and Yosemite IV transactions, plaintiffs allege that UBS participated in a follow-on offering of notes issued in connection with Enron's Osprey structure and purchased Enron credit-linked notes offered as part of Enron's Yosemite IV structure. Plaintiffs claim that UBS relied on other firms' diligence and failed to undertake its own due diligence in contravention of "relevant industry standards and UBS's own internal policies." By failing to conduct its own due diligence, plaintiffs claim UBS acted recklessly in failing to learn that "Enron used the Osprey structure to generate income by parking overvalued, non-performing assets in the structure." Similarly, plaintiffs allege UBS either knew, or was reckless in not knowing, that Enron used the Yosemite IV transactions to obtain disguised loans.

Finally, plaintiffs allege that E-Next Generation is "the best documented example of UBS participating in a materially false public presentation of Enron's financial appearance." They claim that UBS created an off-balance sheet loan to allow Enron to finance "the construction of its US electric generating build out and then, once the construction was complete, bring the project onto Enron's balance sheet" after it started generating revenues. Plaintiffs allege that the existence of the loan and its structure to avoid public disclosure were material facts to investors.

On the basis of those allegations, plaintiffs claim violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act")5 and Rule 10b-5 thereunder.6 They claim UBS violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by failing to disclose the conflicts under which it operated its brokerage business and the information and knowledge it possessed during the class period concerning the manipulation of Enron's public financial appearance. Plaintiffs contend that defendants' acts, practices, and course of business combined to operate a fraud upon the plaintiffs, deceiving them "into believing the price at which they purchased or held their Enron securities was determined by the natural interplay of supply and demand."

This case was initially filed in March 2002 and has a long procedural history. Plaintiffs filed a second amended complaint in June 2002 and, in November of that year, this case was coordinated with a multi-district litigation under the lead case Newby v. Enron Corp. , 188 F.Supp.2d 684 (S.D. Tex. 2002) In November 2003, the district court denied defendants' motion to dismiss the second amended complaint and the case proceeded to discovery. In July 2006, the district court...

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