346 F. Supp. 3d 473
S.D. Ill.2018Background
- Silvercreek (a group of investment funds) purchased over $100 million of Enron 7% Exchangeable Notes and Zero Coupon Exchangeable Notes in October 2001, shortly before Enron restated its financials and filed for bankruptcy.
- Enron hid debt and inflated income via off-balance-sheet SPEs (e.g., LJM1, LJM2, Marlin, Osprey); defendants (Credit Suisse, Deutsche Bank, Merrill Lynch) participated in designing, funding, marketing, or executing many such transactions.
- Plaintiffs allege defendants aided and abetted Enron’s fraud, aided and abetted negligent misrepresentation, conspired to commit fraud, and (against some defendants) made negligent misrepresentations and violated Section 11 and the Texas Securities Act.
- Defendants moved for summary judgment on multiple claims; the court applied the clear-and-convincing standard where appropriate and reviewed evidence (employee emails/testimony, transaction documents, Fastow’s declarations).
- The court found triable issues on aiding-and-abetting fraud, conspiracy, Credit Suisse negligent misrepresentation (broker role), Section 11 for Credit Suisse (as underwriter), and Texas Securities Act claims; it granted summary judgment for defendants on aiding-and-abetting negligent misrepresentation and granted Merrill Lynch summary judgment on negligent misrepresentation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Aiding & abetting fraud (knowledge & substantial assistance) | Defendants knew of and substantially assisted Enron’s fraud via structuring/funding SPE deals and marketing notes | Defendants claim they were either unaware, stonewalled by Enron, or only participated in legitimate transactions later misreported by Enron | Denied for all three banks — genuine disputes of material fact exist based on employee statements, deal roles, and Fastow evidence |
| Reasonable/actual reliance on Enron financials (underlying fraud element) | Silvercreek relied on Enron financials and analyst/broker reports in deciding purchases | Defendants argue Silvercreek relied only on price or should have inquired further given red flags | Denied — record supports a jury could find actual and reasonable reliance |
| Aiding & abetting negligent misrepresentation (special relationship) | Plaintiffs: secondary liability based on defendants’ assistance in Enron’s misleading disclosures | Defendants: no special relationship between issuer and public; secondary liability fails | Granted for all defendants — New York law bars negligent misrepresentation by issuer to investing public, so aiding claim fails |
| Negligent misrepresentation by brokers (Credit Suisse, Merrill Lynch) — special relationship & reliance | Silvercreek: Credit Suisse solicited and brokered the Zeros/7% Notes and made specific representations; Merrill played similar roles | Defendants: communications were generic analyst reports or no conduct evincing special relationship; reliance unreasonable | Credit Suisse: Denied — facts support a special relationship and reasonable reliance. Merrill Lynch: Granted — Plaintiffs did not show conduct linking Merrill to Silvercreek or that Merrill knew Silvercreek would rely |
| Section 11 (underwriter status for Zero Notes) | Plaintiffs: Credit Suisse and Deutsche Bank participated in distribution and are underwriters | Deutsche Bank: acted only in Rule 144A private placement; no evidence it participated in public distribution | Deutsche Bank: Granted (not an underwriter for public offering). Credit Suisse: Denied (evidence it sold Zeros in public distribution creates triable issue) |
| Texas Securities Act aiding/abetting | Plaintiffs: same knowledge/substantial assistance evidence supports TSA claims | Defendants: insufficient proof of aider’s awareness or intent | Denied as to Deutsche Bank and Credit Suisse — triable issues on knowledge, assistance, intent |
Key Cases Cited
- Regents of Univ. of Cal. v. Credit Suisse First Bos., 482 F.3d 372 (5th Cir.) (context on complexity of Enron-related facts)
- Krys v. Pigott, 749 F.3d 117 (2d Cir.) (elements for aiding-and-abetting fraud under New York law)
- Crigger v. Fahnestock & Co., 443 F.3d 230 (2d Cir.) (elements of underlying fraud claim)
- Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc., 343 F.3d 189 (2d Cir.) (factors for reasonable reliance)
- In re Livent, Inc. Noteholders Sec. Litig., 151 F. Supp. 2d 371 (S.D.N.Y.) (reliance/duty discussion in securities fraud context)
- In re Enron Corp., 511 F. Supp. 2d 742 (S.D. Tex.) (substantial assistance can include executing transactions and enhancing perceived financials)
- Wight v. BankAmerica Corp., 219 F.3d 79 (2d Cir.) (financial motive as circumstantial evidence of knowledge)
- In re Lehman Bros. Mortg.-Backed Sec. Litig., 650 F.3d 167 (2d Cir.) (Section 11 underwriter definition requires participation in actual distribution)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir.) (misrepresentations of existing facts actionable)