248 F. Supp. 3d 428
S.D.N.Y.2017Background
- Plaintiffs (investment funds collectively “Silvercreek”) bought Enron 7% Exchangeable Notes and Zero Coupon Exchangeable Notes in October 2001 and allege they relied on offering materials and broker/analyst recommendations.
- Enron later restated years of financials after using SPEs, prepays, minority-interest and tax transactions to overstate income and hide debt; Enron subsequently collapsed and officers (including Skilling) were criminally charged/convicted.
- Defendants in this motion: Credit Suisse, Deutsche Bank, Merrill Lynch (financial institutions), and Jeffrey Skilling (former Enron executive). Plaintiffs allege these banks structured/financed the deceptive transactions and promoted the securities to investors.
- Procedural posture: Case filed in 2002, consolidated in the Enron MDL in Texas, opted-out action stayed, later remanded to SDNY in 2016; defendants renewed motion to dismiss the third amended complaint (TAC).
- Claims at issue include common-law fraud, aiding and abetting fraud, civil conspiracy, Section 11 and Section 12(a)(2) Securities Act claims, negligent misrepresentation and aiding/abetting negligent misrepresentation, and a Texas Securities Act aiding/abetting claim; some claims are asserted against all or subsets of defendants.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Common-law fraud (banks) | Banks recommended the Notes, provided analyst reports and failed to disclose Enron’s accounting fraud; Silvercreek relied and was harmed | Banks lack scienter; plaintiff fails to tie specific bank personnel’s knowledge to the alleged misstatements and must meet Rule 9(b) | Dismissed as to Credit Suisse and Merrill Lynch for failure to plead scienter with a strong inference; fraud claim survives as to Skilling |
| Aiding & abetting fraud (banks) | Banks knowingly participated in and structured transactions that enabled Enron’s fraud; provided substantial assistance and had actual knowledge | Defendants contest knowledge, substantial assistance, and proximate causation | Survives: complaint sufficiently alleges underlying Enron fraud, defendants’ knowledge and substantial assistance to plead aiding/abetting |
| Section 11 (underwriter liability) | Deutsche Bank and Credit Suisse were underwriters or participated in distribution of the Zero Notes; negligence theory pleaded (not fraud) | Defendants dispute underwriter status and invoke pleading rules (Rule 9(b)) | Survives: Rule 9(b) does not apply to Section 11 claim pleaded as negligence; factual allegations adequate to plead underwriter participation at pleadings stage |
| Section 12(a)(2) (Credit Suisse) | Credit Suisse solicited and sold the Zero Notes | Defendants argue claim is time-barred by the Securities Act’s three-year statute of repose | Dismissed as time-barred: relation-back under Rule 15(c) cannot defeat Section 13 repose period |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (pleading must be plausible)
- Ashcroft v. Iqbal, 556 U.S. 662 (court must draw reasonable inferences in plaintiff’s favor at pleading stage)
- Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d 160 (strong-inference standard for scienter)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (test for evaluating competing inferences on scienter)
- Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190 (corporate scienter requires someone whose intent can be imputed to corporation)
- Crigger v. Fahnestock & Co., 443 F.3d 230 (elements of common-law fraud under New York law)
- Krys v. Pigott, 749 F.3d 117 (elements and pleading standards for aiding and abetting fraud)
- IndyMac MBS, Inc. v. Police & Fire Ret. Sys. (IndyMac), 721 F.3d 95 (statute-of-repose in §13 creates substantive right; limits relation-back)