In re Enron Corp. Securities

Page 644

529 F.Supp.2d 644

In re ENRON CORPORATION SECURITIES Derivative & "ERISA" Litigation.

Mark Newby, et al., Plaintiffs v. Enron Corporation, et al., Defendants The Regents of the University of California, et al. Individually and On Behalf of All Others Similarly Situated, Plaintiffs, v. Kenneth L. Lay, et al., Defendants.

No. MDL-1446.

Civil Action No. H-01-3624.

United States District Court, S.D. Texas, Houston Division.

June 5, 2006.

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OPINION AND ORDER RE CLASS CERTIFICATION

MELINDA HARMON, District Judge.

ROAD MAP

    I. Lead Plaintiffs Objectives............................................................... 650
   II. Objections to Motion for Class Certification............................................. 652
       A. Certain Defendants.................................................................... 653
       B. Alliance Capital Management, LLP...................................................... 654
       C. Outside Directors..................................................................... 656
       D. Financial Institutions................................................................ 658
       E. Putative Class Members................................................................ 665
       F. Certain Individual Defendants......................................................... 667
       G. Vinson & Elkins, LLP.................................................................. 668
       H. Merrill Lynch......................................................................... 668
  III. Prerequisites for Class Certification.................................................... 670
       A. General Principles.................................................................... 670
       B. Rule 23(a)'s Requirements............................................................. 672
          1. Numerosity......................................................................... 672
          2. Commonality........................................................................ 672
          3. Typicality......................................................................... 673
          4. Adequacy........................................................................... 674
       C. Rule 23(b)'s Requirements............................................................. 676
          1. Predominance of Common Issues...................................................... 677
             a. Affiliate Ute and/or Fraud-on-the-Market Presumptions for
                  Section 10(b)/Rule 10b-5 Claims............................................... 678
             b. Reliance and Section 11 Claims.................................................. 696
          2. Superiority........................................................................ 697
   IV. Rulings on Specific Issues............................................................... 699
       A. Single Class.......................................................................... 699
       B. Scheme Liability...................................................................... 701
       C. Limitations and Tolling Regarding Section 12(a)(2) Claims............................. 707
       D. Length of Class Period................................................................ 711
       E. Scheme or Schemes/Individual Damages: Potential Conflicts of Interest
            Among Class Members................................................................. 713
       F. Damages and Causation................................................................. 716
          1. Claims Under § 10(b).......................................................... 716
          2. Claims Under §§ 11 and 12(a)(2).......................................... 721
          3. PSLRA and Exchange Act "Inconsistency"............................................. 721
       G. Standing and Foreign Debt Securities Claims Under §§ 12(a)(2) and 10(b)..... 723

       H. Adequacy of Challenged CLass Representatives.......................................... 724
       I. Presumptions of Reliance.............................................................. 739
          1. Affiliated Ute Presumption Applies................................................. 739
          2. Fraud-on-the-Market Presumption................................................... 739
             a. Analyst Reports................................................................. 740
             b. Greenberg v. Crossroads Sys., Inc., 364 F.3d 657................................ 742
             c. Market Efficiency and Fraud on The Market: Enron Securities..................... 745
       J. Claims Against Deutsche Bank Entities................................................. 772
    V. Court's Order............................................................................ 777

The above referenced putative class action alleges violations of sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), 78t(a), 78t-1(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.1013-5, and of sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77k, 77l(a), and 77o,¹ during a proposed Class Period commencing on October 19, 1998 and ending November 27, 2001.² Pending before the Court is Lead Plaintiff The Regents of the University of California's amended motion for class certification (# 1445), pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3). A class certification hearing was held on March 7-8, 2006.

Because they are directly relevant to the motion for class certification, this Court also addresses the Deutsche Bank Entities' motion for partial reconsideration and dismissal, or motion to require a second amended complaint before a response by them (# 3791) and Lead Plaintiff's motion for leave to file an amended complaint as to Deutsche Bank and motion for entry of an order requiring Deutsche Bank to answer Lead Plaintiffs amended complaint (# 3903).

I. Lead Plaintiff's Objectives

Specifically Lead Plaintiff seeks certification of a single plaintiff class³ defined as follows:

[A]ll persons, excluding defendants and members of their immediate families, any officer, director or partner of any defendant, any entity in which a defendant has a controlling interest and the heirs of any such excluded party, who purchased the publicly traded equity and debt securities of Enron Corporation between October 19, 1998 and November 27, 2001, including the publicly traded securities issued by Enron-related entities during the Class Period, the value or repayment of which was dependent upon the credit, financial condition or ability to pay of Enron, and (2) all states or political subdivisions thereof or state pension plans that purchased from defendants Enron's 6.40% Notes due 7/15/06 or 6.95% Notes due 7/15/28, and that authorize the prosecution of their claim pursuant to the Texas Securities Act.⁴ # 1445 at 1. Plaintiffs have alleged a common scheme to defraud throughout the Class Period and argue that arty of the multiple "separate schemes" raised in opposition by Defendants are part of this single scheme (including SPEs, off-the-book partnerships and transactions, swaps, etc.) to falsify Enron's financial results and defraud its investors. The federal securities laws "reach complex fraudulent schemes as well as lesser misrepresentations or omissions." Shores v. Sklar, 647 F.2d 462, 470 (5th Cir.1981), cert, denied, 459 U.S. 1102, 103 S.Ct. 722, 74 L.Ed.2d 949 (1983).⁵ Lead Plaintiff insists that the investors relied upon the integrity of the market price and on Enron's reputation as a well run company in determining whether to buy Enron securities: Had they known of the concealed actions of some of the currently objecting Defendants, such as the Financial Institutions, who or which purportedly contributed to the fraudulent scheme but claim Plaintiffs failed to demonstrate reliance, the putative class representatives have testified that they would not have been lured into investing in the company, thereby justifying a presumption of class-wide reliance based on the fraud-on-the-market theory. More recently Lead Plaintiff has alternatively claimed that the class is entitled to a presumption of reliance under Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972).

Lead Plaintiff proposes that the following plaintiffs, a mixture of individuals and entities, be designated as class representatives: (1) For purchasers of Enron Common Stock, Lead Plaintiff; Robert V. Flint; Amalgamated Bank, as Trustee for the Long View Collective Investment Fund, Long View Core Bond Index Fund and Certain Other Trust Accounts; Hawaii Laborers Pension Plan; George M. Placke; Michael J. Bessire; Dr. Richard Kimmerling; Michael B. Henning; John Zegarski; Joseph C. Speck; Ben L. Schuette; San Francisco City and County Employees' Retirement System; John J. and Charlotte E. Cassidy, as Trustees for the John & Charlotte Cassidy Family Trust; Dr. Fitzhugh Mayo; and (2) for purchasers of Enron Debt, Washington State Investment Board; Employer-Teamsters Local Nos. 175 & 505 Pension Trust Fund; Archdiocese of Milwaukee Supporting Fund, Inc.; Nathaniel Pulsifer, trustee of the Shooters Hill Revocable Trust; Staro Asset Management, L.L.C.; and the Greenville Plumbers Pension Plan; (3) for purchasers of Enron Preferred Stock, Mervin Schwartz, Jr.; and Stephen M. Smith.⁶

Lead Plaintiff also seeks approval of Lerach Coughlin Stoia Geller Rudman & Robbins LLP as Lead Class Counsel.

II. Objections to Motion for Class Certification

Because Lead Plaintiff has settled with Bank of America Corporation the Court does not address its individual brief in opposition, on behalf of itself and Banc of America Securities LLC (# 1778) and...