In re Jp Morgan Chase Securities Litigation

363 F.Supp.2d 595

In re: JP MORGAN CHASE SECURITIES LITIGATION

No. 02 Civ. 1282(SHS).

United States District Court, S.D. New York.

March 28, 2005.

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Ira M. Press, Pamela Elizabeth Kulsrud, Kirby, McInerney & Squire, L.L.P., New York City, Lionel Z. Glancy, Michael Goldberg, Los Angeles, CA, Neal A. Dublinsky, Glancy & Binkow, L.L.P., Los Angeles, CA, for Brian Barry on behalf of the Barry Family LP, individually, and on behalf of all others similarly situated, Plaintiff.

Christopher J. Gray, Law Office of Christopher J. Gray, P.C., New York City, Christopher Lovell, Lovell & Stewart, L.L.P., New York City, Steve W. Berman, Hagens, Berman L.L.P., Seattle, WA, Steven C. Mitchell, Hagens Berman & Mitchell, PLLC, Phoenix, AZ, for ECA & Local 134 IBEW Joint Pension Trust of Chicago, Movant.

Ira M. Press, Kirby, McInerney & Squire, L.L.P., New York City, for Joseph Gregory, Movant.

OPINION & ORDER

STEIN, District Judge.

                                  TABLE OF CONTENTS
  I.  Background ........................................................................602
      A.  Overview ......................................................................602
      B.  The Parties ...................................................................603
      C.  The Alleged Scheme ............................................................603
          1.  The Mahonia Transactions ..................................................603
          2.  LJM2 ......................................................................606
      D.  The Fall of Enron .............................................................607
      E.  JPM Chase's Alleged Misstatements and Omissions ...............................608
          1.  Allegedly Improper Accounting for the Mahonia Transactions as
                Trades Rather Than as Loans and as Viable Rather than Impaired ..........609
              a.  Mahonia Transactions Should Allegedly Have Been Booked as
                   Loans, Not Trades ....................................................609
              b.  The Mahonia Assets Were Allegedly Non-performing ......................610
          2.  Alleged Failure to Disclose Legal and Financial Liability .................611

          3.  Representations Regarding Integrity and Risk Management ...................612
          4.  Analysts' Buy Ratings for Enron Stock .....................................613
          5.  JPM Chase's Alleged Downplaying of its Enron-related Exposure .............613
 II.  Discussion ........................................................................615
      A.  Standard ......................................................................615
          1.  Motion to Dismiss the Amended Complaint Pursuant to Fed.R.Civ.P
                12(b)(6) ................................................................615
          2.  Pleading Requirements of Fed.R.Civ.P. 9(b) and the PSLRA ..................615
      B.  Plaintiffs' Claims ............................................................616
      C.  Securities Fraud in Violation of Sections 10(b) and 20(a) of the Exchange
            Act and Rule 10b-5 Promulgated Thereunder ...................................616
          1.  Mismanagement .............................................................617
          2.  Why the Alleged Misstatements and Omissions Were Fraudulent ...............618
          3.  Scienter ..................................................................618
              a.  Motive and Opportunity to Commit Fraud ................................619
              b.  Alleging Facts That Constitute Strong Circumstantial Evidence
                    of Conscious Misconduct or Recklessness .............................623
          4.  Material Falsity of The Alleged Misstatements .............................625
              a.  Allegedly Improper Accounting for the Mahonia Transactions ............626
              b.  Failure to Disclose Alleged Improprieties in Connection with the
                    Mahonia and LJM2 Transactions .......................................632
              c.  Representations Regarding Integrity and Risk Management................632
              d.  Analysts' Buy Ratings for Enron Stock .................................633
              e.  JPM Chase's Alleged Downplaying of Its Enron-related
                    Exposure ............................................................634
          5.  Dismissal of the Section 10(b) Claim ......................................634
      D.  Section 11 of the Securities Act ..............................................635
      E.  Section 15 of the Securities Act ..............................................635
      F.  Section 14(a) of the Exchange Act .............................................636
III.  Conclusion ........................................................................636

This consolidated litigation has been brought as a class action against J.P. Morgan Chase & Co. and arises from the infamous implosion of the Enron Corporation. Plaintiffs, a proposed class of J.P. Morgan Chase & Co. shareholders, seek to recover losses they suffered due to that bank's alleged misrepresentations concerning its transactions with Enron. Specifically, plaintiffs bring claims pursuant to Sections 11 and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77k and 77o, and Sections 14(a), 10(b) and 20(a) of the Securities and Exchange Act of 1934, 15 U.S.C. §§ 78n(a), 78j(b), 78t(a) and 78t-1.

Plaintiffs charge that J.P. Morgan Chase & Co. and two of its officers — defendants William Harrison, Jr. and Marc J. Shapiro — made misleading statements regarding J.P. Morgan Chase & Co.'s exposure to Enron-related liabilities in various public communications, including a joint proxy statement filed in anticipation of Chase Manhattan's acquisition of J.P. Morgan. Defendants have brought a motion to dismiss plaintiffs' First Amended and Consolidated Class Action Complaint for Violations of Federal Securities Laws ("Amended Complaint") for failure to state a claim for relief pursuant to Fed.R.Civ.P. 12(b)(6), and for failure to comply with the heightened pleading standard that Fed.R.Civ.P. 9(b) and the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4, mandate for securities fraud actions. Because plaintiffs have failed to plead scienter in connection with any material misrepresentation or omission with the required particularity, the complaint is dismissed without prejudice to its re-pleading.

I. BACKGROUND

A. Overview

Plaintiffs bring this action on behalf of those who purchased securities in The Chase Manhattan Corp. ("Chase") between November 8, 1999 and December 31, 2000, as well as those who purchased securities in J.P. Morgan Chase & Co. ("JPM Chase") between January 2, 2001 and July 23, 2002.¹ (Am.Compl.¶ 1). JPM Chase was formed when Chase acquired J.P. Morgan & Co. ("JP Morgan") at the end of 2000. (Id.).² The factual allegations in the Amended Complaint, which are recounted below, are accepted as true for the purposes of this motion to dismiss the complaint. See In re Carter-Wallace, Inc. Sec. Litig., 220 F.3d 36, 38 (2d Cir.2000).

Plaintiffs allege that during the class period, JPM Chase made various assertions, including public comments, financial statements and filings with the Securities and Exchange Commission ("SEC"), that omitted and misrepresented material information relating to transactions in which the bank provided Enron credit disguised as revenue from prepaid commodity trades ("prepays"). According to the Amended Complaint, by 2001, JPM Chase had arranged eight such prepays with Enron, totaling $3.7 billion in value. (Am.Compl.¶ 65).

During the class period, JPM Chase allegedly helped structure and finance Special Purpose Entities ("SPEs") so that Enron could conceal debt that would otherwise have appeared on its balance sheet. (Id. ¶ 42). With JPM Chase's allegedly knowing collusion, Enron characterized loans as revenue, and thereby obscured its actual financial position behind the specter of healthy cash flow and a manageable debt burden. (Id. ¶ 61). Meanwhile, JPM Chase's analysts issued allegedly false and misleading positive reports that designated Enron's stock a "buy." (Id. ¶ 51). Essentially, plaintiffs allege that JPM Chase complicitly participated in a Ponzi scheme — by loaning Enron huge amounts of money and falsely perpetuating the appearance that Enron was financially healthy, JPM Chase generated substantial fees and induced the infusion of fresh capital into Enron. (Id. ¶¶ 49-50; 81).

Plaintiffs allege that JPM Chase enjoyed various benefits from participating in Enron's scheme. First, the non-sustainable revenue artificially inflated the price of JPM Chase stock, which JPM Chase allegedly planned to use in stock-for-stock acquisitions of other financial institutions. (Id. ¶¶ 457-58). Second, JPM Chase received underwriting, consulting and commitment fees, as well as interest and other payments. (Id. ¶¶ 43-49). These fees were allegedly greater than those paid in typical lending arrangements. (Id. ¶ 55). JPM Chase allegedly hoped to receive even greater remuneration by marketing its prepay services to other companies. (Id. ¶¶ 484-88). Third, as a result of artificial stock price inflation, the individual defendants received large performance-based bonuses. (Id. ¶¶ 462-68). Fourth, JPM Chase minimized its own exposure by enticing others to sink fresh capital into Enron. (Id. ¶¶ 49-50). JPM Chase also allegedly sought to protect the hundreds of millions of dollars worth of credit default put options it had written on Enron's publicly traded debt. (Id. ¶ 51). To avoid massive exposure, JPM Chase had to keep Enron from defaulting within the time period covered by those...