Silvercreek Mgmt., Inc. v. Citigroup, Inc.

Decision Date31 March 2017
Docket Number02-CV-8881 (JPO).
Citation248 F.Supp.3d 428
Parties SILVERCREEK MANAGEMENT, INC., et al., Plaintiffs, v. CITIGROUP, INC., et al., Defendants.
CourtU.S. District Court — Southern District of New York

Eugene J. Frett, Bruce S. Sperling, Scott F. Hessell, Sperling & Slater, P.C., Chicago, IL, H. Adam Prussin, Pomerantz, Haudek, Block, Grossman & Gross, L.L.P., Stanley Merrill Grossman, Pomerantz LLP, Lyndon Mitchell Tretter, Wollmuth Maher & Deutsch LLP, New York, NY, for Plaintiffs.

Linda Murray Regis–Hallinan, Ruth Ellen Harlow, Pepper Hamilton, LLP, Richard W. Clary, David Harold Korn, Cravath, Swaine & Moore LLP, Adam Selim Hakki, Daniel Craig Lewis, James Dongjoon Lee, Shearman & Sterling LLP, New York, NY, Daniel M. Petrocelli, Jeffrey A. Barker, Laura Perry, O'Melveny & Myers, LLP, Los Angeles, CA, for Defendants.


J. PAUL OETKEN, United States District Judge

Plaintiffs, a group of investment funds, brought this action against Defendants, a set of financial institutions and individuals, for conduct relating to the issuance of debt securities by Enron Corporation ("Enron").1 (See Dkt. No. 10–115 ("TAC").)

Plaintiffs assert claims under state tort law and federal securities law. Although filed in this Court in 2002, this action was consolidated with numerous other Enron–related actions in an MDL proceeding in Texas for several years, returning to this Court in 2016. Defendants move to dismiss Plaintiffs' complaint for failure to state a claim. For the reasons that follow, the motion is granted in part and denied in part.

I. Background

This action has been pending since 2002 and involves allegations of misconduct relating to the collapse of Enron. In October of 2001, Plaintiffs invested over $100 million in 7% Exchangeable Notes (the "7% Notes") and Zero Coupon Exchangeable Notes (the "Zero Notes") issued by Enron. (TAC ¶ 1.) At the time, Enron was the world's largest energy trader and was engaged in a variety of other related and unrelated businesses. (Id. )

In a story that is by now well known, Enron's success was not to last. In late 2001, Enron was forced to restate its financial results for the previous four years. (Id. ¶ 2.) The restatements, which dramatically reduced Enron's reported income and increased its reported debt, stemmed from the company's use of unconsolidated special purpose entities ("SPEs") and off-balance-sheet transactions.2 (Id. ) In their complaint, Plaintiffs describe several specific SPE transactions in great detail. (Id. ¶¶ 183–248.) Enron also engaged in a variety of other transactions such as prepay contracts ("prepays"),3 minority-interest transactions,4 and tax-driven transactions.5

(Id. ¶¶ 249–262.) Enron filed for bankruptcy shortly after its financial restatement, and its auditor, Arthur Andersen LLP ("Arthur Andersen"), was found guilty of obstruction of justice and ultimately folded. (Id. ¶ 3.)

Plaintiffs claim that, in investing in Enron's debt securities, they relied upon information contained and incorporated in the securities' prospectuses and registration statements, public disclosures and representations made by Enron management, and research reports and commentary by investment research analysts. (Id. ¶¶ 4, 106–111, 164.) The heart of Plaintiffs' claim is that Enron, and the individuals and institutions serving Enron, engaged in financial engineering designed to mislead investors and the public about the financial health of the firm. In this action, Plaintiffs seek to hold responsible the banks and individuals they allege are responsible for their losses. (Id. ¶ 5.)

This background section will first briefly introduce each of the Defendants6 (their actions in relation to Enron will be described in greater detail below) and will then provide an overview of the history of this action, from its initiation in 2002 through the present motion.

A. Current Defendants

Defendants at issue in this motion to dismiss are three financial institutions—Credit Suisse, Deutsche Bank, and Merrill Lynch—and one Enron executive—Skilling.

Plaintiffs allege that Defendant Credit Suisse was an underwriter of the Zero Notes offering and provided commercial and investment banking services to Enron, including by structuring Enron's prepay transactions and SPEs. (Id. ¶¶ 28, 31.) Credit Suisse also had a business relationship with Silvercreek, providing brokerage services, research reports, and investment advice. (Id. ¶ 30.)

Plaintiffs allege that Defendant Deutsche Bank provided commercial and investment banking services to Enron. (Id. ¶ 20.) Plaintiffs allege that Deutsche Bank "had a close relationship with Enron" and "knew that Enron was falsifying its financial reports." (Id. ¶ 341.) In particular, Plaintiffs allege that Deutsche Bank helped Enron structure multiple tax-related transactions and set up and finance SPEs. (Id. ¶ 20.) These transactions included eleven SPE transactions from 1995 to 2001, and a variety of other allegedly fraudulent schemes. (Id. ¶ 341.)

Plaintiffs allege that Defendant Merrill Lynch provided commercial and investment banking services to Enron. (Id. ¶ 35.) In particular, they allege that Merrill Lynch helped Enron structure and finance SPEs and participated in transactions designed to mischaracterize loans as purchase and/or sale transactions, another effort to cover up Enron's indebtedness. (Id. )

Defendant Jeffrey Skilling served in a variety of executive leadership roles at Enron. He was President from 1997 to August 2001, Chief Operating Officer from January 1997 to February 2001, a Director from 1997, and Chief Executive Officer from February to August 2011. (Id. ¶ 39.) Skilling was ultimately convicted of securities fraud, sentenced to 24 years in prison, and fined $45 million; his conviction was affirmed in part by the United States Supreme Court. (Id. ¶ 40.) See Skilling v. United States , 561 U.S. 358, 130 S.Ct. 2896, 177 L.Ed.2d 619 (2010). Plaintiffs allege that Skilling was "directly involved in creating and overseeing the off-book entities and fraudulent financial transactions which were used to inflate Enron's reported earnings and underreport Enron's debt." (TAC ¶ 264.)

B. Procedural Background

This action arrives at this Court more than a decade after the incidents giving rise to its claims. The suit was initially filed in the Southern District of New York on November 7, 2002. (Dkt. No. 1.) The case was assigned to then–District Judge Gerard E. Lynch. (Dkt. No. 3.) Several months later, it was transferred for pretrial purposes to the Southern District of Texas by the Judicial Panel on Multidistrict Litigation, where it was consolidated as part of the Enron Multidistrict Litigation ("MDL"), Number 1446, for which the lead case was Newby v. Enron Corp. , No. H–011–3624 (S.D. Tex.). (Dkt. No. 5.) Discovery in this action was completed by 2006 (with some exceptions) in accordance with the case management plan governing the Newby action. (Dkt. No. 27 at 1–2.)

On July 5, 2006, the MDL Court certified a plaintiff class; the Silvercreek Plaintiffs opted out of the class. (Id. at 2.) This action, and the other opt-out actions, were then stayed pending resolution of the Newby class action. (Id. )

On June 25, 2010, after the conclusion of the Newby action, the Silvercreek Plaintiffs moved to lift the stay and for leave to file a third amended complaint. (Id. ) The MDL Court lifted the stay and granted leave to amend. (Dkt. No. 10–120.) The Silvercreek Plaintiffs filed the operative Complaint (the "TAC") in August 2011. (See TAC.) As discussed above, the TAC names five Financial Institution Defendants—Barclays, Credit Suisse, Deutsche Bank, JPMorgan, and Merrill Lynch—and six Enron Director/Officer Defendants—Fastow, Skilling, Causey, Buy, Derrick, and the Estate of Kenneth Lay. (Id. )

The Financial Institution Defendants jointly moved to dismiss the TAC in the Texas Court in September of 2011. (Dkt. Nos. 10–123, 10–124.) Causey and Skilling filed answers, and Skilling also joined in the motion to dismiss. (Dkt. Nos. 10–122, 10–130, 10–131.) After the completion of briefing, Silvercreek settled with Barclays and JPMorgan. (Dkt. Nos. 10–148, 10–161.) Fastow, Buy, Derrick, and the Estate of Lay have, to date, not responded. (Dkt. No. 27 at 2.)

On March 21, 2016, Silvercreek filed a motion before the Judicial Panel on Multidistrict Litigation for remand to this District, which was granted. (Dkt. Nos. 9, 10–183.) The case was assigned to this Court on June 15, 2016. (Dkt. No. 11.) In light of the intervening years and developments since the initial filing of the motion to dismiss, the parties sought leave from this Court to submit new briefing on the pending motion to dismiss. (Dkt. No. 27.) The Court granted that request. (Dkt. No. 37.) The Court now considers that motion.

The Court also notes that in ruling on these claims, it is not writing on a blank slate—far from it. Much ink has been spilled, mostly by the MDL Court, but also by the Fifth Circuit, addressing claims arising from Enron's demise. While those rulings do not have precedential effect in this action, and the Court relies on the particularities of the circumstances here (as described in Silvercreek's Complaint) in arriving at its decision, such rulings provide helpful guidance.

II. Legal Standard

To survive a Rule 12(b)(6) motion to dismiss, a plaintiff must allege "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). In considering a motion to dismiss, courts must accept as true all "factual allegations contained in the complaint," Twombly , 550 U.S. at 572, 127 S.Ct. 1955, and must draw "all inferences in the light most favorable to the...

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