In re Enron Corp. Secur., Deriv. & "Erisa" Lit.

610 F.Supp.2d 600

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.

MDL No. 1446.

Civil Action No. H-01-3624.

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

March 5, 2009.

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OPINION AND ORDER

MELINDA HARMON, District Judge.

Pending before the Court in the above referenced cause are three motions for summary judgment, filed on June 26, 2006 by (1) Merrill Lynch, Pierce, Fenner & Smith, Inc. and Merrill Lynch & Co. (collectively, "Merrill Lynch") (instrument # 4816); (2) Barclays PLC, Barclays Bank PLC, and Barclays Capital, Inc. (collectively, "Barclays") (# 4817); and (3) Credit Suisse First Boston LLC (now Credit Suisse Securities (USA) LLC), Pershing LLC, and Credit Suisse First Boston (USA), Inc. (now Credit Suisse (USA), Inc.) (collectively "CSFB") (# 4824).¹

These motions for summary judgment were "updated" after the issuance of two key decisions, Regents of University of California v. Credit Suisse First Boston (USA), 482 F.3d 372 (5th Cir.2007)(2-1)² (hereinafter, "Regents"), cert. denied sub nom. Regents of University of California v. Merrill Lynch, Pierce, Fenner & Smith, Inc., ___ U.S. ___, 128 S.Ct. 1120, 169 L.Ed.2d 957 (2008), and Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008) (hereinafter, "Stoneridge") (5-3, with Justice Breyer not participating). After careful review and consideration of the record and the law, as a matter of law this Court concludes that Regents and Stoneridge are dispositive of Lead Plaintiff the Regents of the University of California's § 10(b) claims against these secondary-actor Financial Institution Defendants, and therefore of the motions for summary judgment.

I. Standard of Review

Summary judgment under Federal Rule of Civil Procedure 56(c) is appropriate when "the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." See, e.g., Condrey v. SunTrust Bank of Ga., 429 F.3d 556, 562 (5th Cir.2005). Movant bears the initial burden of demonstrating that there is no genuine issue of material fact. Id., citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). A genuine issue of material fact exists if the summary judgment evidence is such that a reasonable jury could return a verdict for the nonmovant. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In deciding whether a genuine issue of material fact exists, "we view facts and inferences in the light most favorable to the nonmoving party." Mahaffey v. Gen. Sec. Ins. Co., 543 F.3d 738, 740 (5th Cir.2008).

While "failure to state a claim" is usually challenged by a motion to dismiss under Rule 12(b)(6), it may also serve as a basis for summary judgment. Whalen v. Carter, 954 F.2d 1087, 1098 (5th Cir.1992). In a summary judgment context, the failure to state a claim "is the `functional equivalent' of the failure to raise a genuine issue of material fact." Id. In such an instance also, the court must "accept all well-pleaded facts as true, viewing them in the light most favorable to the plaintiff." "[E]valuated much the same as a 12(b)(6) motion to dismiss," summary judgment is appropriate "if accepting all alleged facts as true, the plaintiffs' complaint nonetheless failed to state a claim." Ashe v. Corley, 992 F.2d 540, 544 (5th Cir.1993); Gilbert v. Outback Steakhouse of Fla., Inc., 295 Fed.Appx. 710, 712-13 (5th Cir.2008). See also United States ex rel. Simmons v. Zibilich, 542 F.2d 259, 260 n. 3 (5th Cir. 1976) ("The district court's order does not state whether it rests on Rule 12(b)(6) or on Rule 56. That difficulty raises no material obstacle, since the standard to be met in granting a 12(b)(6) motion (plaintiff unable to prove any set of facts that would entitle him to recovery) and the standard for granting a motion for summary judgment (no dispute of material fact and movant entitled to judgment by law) both reduce to the same question in this case: Was defendant entitled to judgment on the basis that the law does not recognize a federal cause of action for the facts alleged by plaintiff.").

II. Relevant Law

A. The Fifth Circuit in Regents

In Regents, 482 F.3d 372, on the interlocutory appeal reversing this Court's class certification in Newby and remanding the case for further proceedings, the Fifth Circuit briefly summarized Lead Plaintiff's § 10(b)³ and Rule 10b-5(a) and (c) allegations of scheme liability against the Financial Institution Defendants as follows:

Plaintiffs allege that defendants Credit Suisse First Boston ..., Merrill Lynch & Company, Inc...., and Barclays Bank PLC ... entered into partnerships and transactions that allowed Enron Corporation ("Enron") to take liabilities off its books temporarily and to book revenue from the transactions when it was actually incurring debt. The common feature of these transactions is that they allowed Enron to misstate its financial condition; there is no allegation that the banks were fiduciaries of the plaintiffs, that they improperly filed financial reports on Enron's behalf, or that they engaged in wash sales or other manipulative activities directly in the market for Enron securities.

Id. at 377. Moreover,

Plaintiffs allege that the banks knew exactly why Enron was engaging in seemingly irrational transactions such as [the Nigerian Barge transaction]. They cite certain of the banks' internal communications they characterize as proving that the banks were aware of the personal compensation Enron executives received as a result of inflating their stock price through the illusion of revenue and that the banks intended to profit by helping the executives maintain that illusion. Likewise, the plaintiffs allege that, although each defendant may not have been aware of exactly how each other defendant was helping Enron to misrepresent its financial health, the defendants knew in general that other defendants were doing so and that Enron was engaged in a long-term scheme to defraud investors and maximize executive compensation by inflating revenue and disguising risk and liabilities through its partnerships and transactions.

Id. at 377.

The Honorable Jerry E. Smith, writing for the majority, first focused on this Court's "incorrect" definition, drawn from a dictionary, of "deceptive act" under § 10(b) as including "participation in a `transaction whose principal purpose and effect is to create a false appearance of revenues,'"<sup>4</sup> and determined that this Court's definition was "dispositive of this appeal" because it "sweeps too broadly."<sup>5</sup> Id. at 378, 382, 383, 390. Moreover, this Court also concluded "that rule 10b-5(a)'s prohibition of any `scheme ... to defraud' gives rise to joint and several liability for defendants who commit individual acts of deception in furtherance of such a scheme," such as that which Lead Plaintiff attempted to plead in Newby. Id. at 378.

The appellate court opined that only certain Supreme Court case law, and not a dictionary, should be the source of the definition of "deceptive device." 482 F.3d at 389. It admonished, "It is essential for us to ensure that the district court does not misapply aiding-and-abetting liability under the guise of primary liability, through an overly broad definition of `deceptive act[s],' and thereby give rise to an erroneous classwide presumption of fraud on the market.<sup>6</sup>" Id. at 383. Judge Smith stressed the Supreme Court's holding that for primary liability, a "device," such as a scheme, is not "deceptive" within the meaning of § 10(b) "unless it involves breach of some duty of candid disclosure" owed to investors; otherwise the defendant merely aided and abetted the fraud by Enron by participating in a scheme and engaging in transactions that allowed Enron to misrepresent its financial condition. Id. at 389, citing Chiarella v. U.S., 445 U.S. 222, 234-35, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980) ("When an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak.... We hold that a duty to disclose under § 10(b) does not arise from the mere possession of nonpublic market information."), and U.S. v. O'Hagan, 521 U.S. 642, 655, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997) ("Because the deception essential to the misappropriation theory<sup>7</sup> involves feigning fidelity to the source of information, if the fiduciary discloses to the source that he plans to trade on nonpublic information, there is no `deceptive device' and thus no § 10(b) violation.").

With respect to the effect of a duty to disclose on the element of reliance under Affiliated Ute, the Fifth Circuit opined,

Where liability is premised on a failure to disclose rather than on a misrepresentation, "positive proof of reliance is not a prerequisite to recovery.... This obligation to disclose and the withholding of a material fact establish the requisite element of causation in fact." ....

For us to invoke the Affiliated Ute presumption of reliance on an omission, a plaintiff must (1) allege a case primarily based on omissions or nondisclosure and (2) demonstrate that the defendant owed him a duty of disclosure. The case at bar does not satisfy this conjunctive test.

Assuming arguendo that plaintiffs' case primarily concerns improper omissions, the banks were not fiduciaries and were not otherwise obligated to the plaintiffs. They did not owe plaintiffs any duty to disclose the nature of the...