OPINION AND ORDER
The above referenced putative class action alleges violations of the following securities -fraud statutes through ■ Defendants’ scheme to optimize revenue in investment banking fees from UBS Securities LLC’s corporate client, Enron Corp. (“Enron”), at the expense and defrauding of UBS Financial Service’s brokerage retail clients, Lead Plaintiffs Kevin Lamp-kin, Janice Schuette, Bobby Ferrell, Stephen Miller, Terry Nelson, Diane Swiber, Franklin Gittess, and Joe Brown and similarly situated individuals: §§ 11, 12(a)(2) and 15 of the Securities Act of 1933 (“the' 1933 Act”), 15 U.S.C. §§ 77k, 111, and 11 o et seq.; §§ 10(b) and 20 of the Securities Exchange Act of 1934 (“the 1934 Act”), 15 U.S.C. §§ 78j(b) and 78(t), et seq., and Rule 10b-5, 17 C.F.R. § 240.10b-5; and the Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u-4. The 1933 Act claims are brought against UBS Financial Services, Inc. f/k/a UBS Paine Webber, Inc. (“PW”) only. .# 122 ¶¶228, 269.
Plaintiffs in this action have elected to proceed independently of the complaints in the Neioby and Tittle actions in MDL 1446.
As housekeeping matters, given the age of this litigation, the lengthy discovery period now closed, and the extensive briefing already filed in this case regarding the claims against the UBS Defendants, the Court denies the motion for amended scheduling order and for additional briefing as unnecessary (#223). In addition because Plaintiffs have already been permitted to file four complaints (# 1, 6, 20, and 122), the Court denies their alternative motion for leave to file another (# 164). Finally, in light of the issuance of this Opinion and Order, the Court finds that the remaining motion for a ruling (also part of # 223) is MOOT.
The Court leaves aside the name-calling, subjective accusations, and denigrating remarks in .the various documents it reviews and focuses on the merits of the parties’ contentions.
I. Standards of Review
A. Rule 8(a)
Federal Rule of Civil Procedure 8(a) states,
A pleading that states a claim for relief must contain:
(1) a short and plain statement of the grounds for the court’s jurisdiction, unless the court already has jurisdiction, and the claim needs no new jurisdictional support;
(2) a short and plain statement of the claim showing that the pleader is entitled to relief; and
(3) a demand for the relief sought, which may include relief in the alternative' or different types of relief.
Under the Rule’s requirement of notice pleading, “defendants in all lawsuits must be given notice of specific claims against them.” Anderson v. U.S. Dept. of Housing and Urban Development,
B. Rule 12(b)(6)
When a district court reviews a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), it must construe the complaint in favor of the plaintiff and take all well-pleaded facts as true. Randall D. Wolcott, MD, PA v. Sebelius,
“While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, ... a plaintiffs obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do ....” Twombly,
Dismissal under Rule 12(b)(6) is proper not only where the plaintiff fails to plead sufficient facts to support a cognizable legal theory, but also where the plaintiff fails to allege a cognizable legal theory. Kjellvander v. Citicorp,
As noted, on a Rule 12(b)(6) review, although generally the court may not look beyond the pleadings, the court may examine the complaint, documents attached to the complaint, and documents attached to the motion to dismiss to which the complaint refers and which are central to the plaintiffs claim(s), as well as matters of public record. Lone Star Fund V (U.S.), L.P. v. Barclays Bank PLC,
Plaintiffs object to Defendants’ attachment of significant amounts of extrinsic evidence to their motion and then arguing fact issues utilizing extrinsic evidence as support, both of which are inappropriate in a motion to dismiss.
“ ‘[Documents that a defendant attaches to its motion to dismiss are considered part of the pleadings if they are referred to in the plaintiffs complaint and are central to [its] claim.5 Collins v. Morgan Stanley Dean Witter,
C. Rule 9(b)
“Rule 9(b) supplements but does not supplant Rule 8(a)’s notice pleading,” and “requires “only ‘simple, concise, and direct’ allegations of the ‘circumstances constituting fraud,’ which after Twombly must make relief plausible, not merely conceivable, when taken as .true.” U.S. ex rel. Grubbs v. Kanneganti,
Rule 9(b) provides,
In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person must be averred generally.
“In every case based upon fraud, Rule 9(b) requires the plaintiff to allege as to each individual defendant ‘the nature of - the fraud, some .details, a brief sketch of how the fraudulent scheme operated, when and where it occurred, and the participants.” Hernandez v. Ciba-Geigy Corp. USA,
Unlike the alleged fraud, Rule 9(b) allows a plaintiff to plead intent to deceive or defraud generally. Nevertheless a mere conclusory statement that the defendant had the required intent is insufficient; the plaintiff must set forth specific facts that raise an inference of fraudulent intent, for example, facts that show the defendant’s motive. Tuchman v. DSC Communications Corp.,
The particularity requirement of Rule 9(b) also governs a conspiracy to commit fraud. Southwest Louisiana Healthcare System v. MBIA, Ins. Corp., No. 05-1299,
A dismissal for failure to plead with particularity in accordance with Rule 9(b) is treated as a Rule 12(b)(6) dismissal for failure to state a claim. Lovelace v. Software Spectrum, Inc.,
II. The Exchange Act and the PSLRA’s Heightened Pleading Requirements
Section 10(b) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78j(b), states in relevant part,
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of any facility of any national securities exchange ...
(b) To use or employ in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement (as defined in [S]ection 206B of the
Gramm-Leach-Bliley Act), any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
Pursuant to the statute, the Securities and Exchange Commission (“SEC”) promulgated Rule 10b-5, 17 C.F.R. § 240.10b-5, which provides:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) to employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
Although the statute does not expressly provide for a private cause of action, the Supreme Court has recognized that the statute and its implementing regulation imply a private cause of action for § 10(b) violations. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta,
To state a claim under § 10(b) of the 1934 Act and Rule 10b—5, 17 C.F.R. § 240.10b-5, the plaintiff must plead “(1) a material misrepresentation or omission by
Loss causation, i.e., a causal connection between the defendant’s material misrepresentation or omission (or other fraudulent conduct) and the economic loss to the plaintiff for which it seeks to recover, can be proven by showing that when the relevant truth about the fraud is disclosed to or leaked into the market place, whether at once or in a series of events, whether by the defendant’s announcing changes in its accounting treatments, or whistle blowers, or analysts question financial results, resignations of key officers, or newspapers and journals, etc., it caused the price of the stock to decline and thereby proximately caused the plaintiffs economic injury. Lormand v. US Unwired, Inc.,
For many years plaintiffs in securities fraud suits brought claims under § 10(b) and Rule 10b-5 against secondary actors,
“Where liability is premised on a failure to disclose rather than on a misrepresentation, ‘positive proof of reliance
“When an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak.” Central Bank,
The omission of a material fact by a defendant with a duty to disclose establishes a rebuttable presumption of reliance upon the omission by investors to whom the duty was owed. Affiliated Ute Citizens of the State of Utah v. U.S.,
“Whether a fiduciary duty exists is a question of law for the court’s determination.” Stevenson v. Rochdale Investment Management, Inc., No. Civ. A. 3:97CV1544L,
In Kinzbach Tool Co. v. Corbett-Wallace Corp.,
The term “fiduciary” is derived from the civil law. It is impossible to give a definition of the term that is comprehensive enough to cover all cases. Generally speaking, it applies to any person who occupies a position of peculiar confidence toward another. It refers to integrity and fidelity. It contemplates fair dealing and good faith, rather than legal obligation, as the basis of the transaction. The term includes those informal relations which exist whenever one party trusts and relies upon another, as well as technical fiduciary relations.
A fiduciary relationship exists when the parties are under a duty to act for or give advice for the benefit of another upon matters within the scope of the relation. It exists where a special confidence is reposed in another who in equity and good conscience is bound to act in good faith and with due regard for the interest of the one reposing confidence. A fiduciary relationship generally arises over a long period of time when parties have worked together toward a mutual goal. To establish a fiduciary relationship, the evidence must show that the dealings between the parties have continued for such a period of time that one party is justified in relying on the other to act in his best interest. To transform a mere contract into a fiduciary relationship, the evidence must show that the dealings between the parties have continued for such a period of time that one party is justified in relying on the other to act in his best interest, [citations omitted].
For example, because of the relationship of trust and confidence between the shareholders of a corporation and “those insiders who have obtained confidential information by reason of their position with that corporation,” courts have imposed a duty to disclose on a corporate insider when the corporate insider trades on the confidential information (“intended to be available only for a corporate purpose and not for the personal benefit of anyone”) and makes secret profits. Chiarella,
An individual or entity that does not fit within the traditional definition of a corporate insider may become a “temporary insider” if the person “by entering into a special confidential relationship in the conduct of the business of the enterprise is given access to information solely for corporate purposes.” SEC v. Cuban,
Violations of Rule 10b-5(a) and (c), which prohibit “employing] any device, scheme or artifice to defraud” or “engaging] in any act, practice or course of business which operates ... as a fraud or deceit upon any person” in connection with the sale of securities, were designated by some courts as “scheme liability.” In Ston-eridge (5-3), the Supreme Court addressed the issue, “when, if ever, an injured investor may rely upon § 10(b) to recover from a party that neither makes a public misstatement nor violates a duty to disclose, but does participate in a scheme to violate § 10(b).” The high court rejected that scheme liability theory because a plaintiff cannot rely on a defendant’s concealed deceptive acts.
Reliance by the plaintiff upon the defendant’s deceptive acts is an essential element of the § 10(b) private cause of action. It ensures that, for liability to arise, the “requisite causal connection between a defendant’s misrepresentation and a plaintiffs injury” exists as a predicate for liability.... We have found a rebuttable presumption of reliance in two different circumstances. First, if there is an omission of a material fact by one with a duty to disclose, the investor to whom the duty was owed need not provide specific proof of reliance.... Second, under the fraud-on-the-market doctrine, reliance is presumed when the statements at issue become public. The public information is reflected in the market price of the security. Then it can be assumed that an investor who buys or sells stock at the market price relies upon the statement....
Neither presumption applies here. Respondents had no duty to disclose; and their deceptive acts were not communicated to the public. No member of the investing public had knowledge, either actual or presumed, of respondents’ deceptive acts during the relevant times. Petitioner, as a result, cannot show reliance upon any of respondents’ actions except in an indirect chain that we find too remote for liability.
Id. at 769.
In Janus Capital Group, Inc. v. First Derivative Traders,
The PSLRA “installed both substantive and procedural controls” that were “[designed to curb perceived abuses of the § 10(b) private action—nuisance filings, targeting deep-pocket defendants, vexatious discovery requests and manipulation by class action lawyers.” Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
“ ‘In cases concerning ,,. omission of facts, Rule 9(b) typically requires the claimant to plead the type of facts omitted, the place in which the omissions should have appeared, and the way in which the omitted facts made the representations misleading.’” Carroll v. Fort James Corp.,
The Fifth Circuit does not permit group pleading of securities fraud suits. Owens v. Jastrow,
The Fifth Circuit further requires that scienter or the requisite state of mind, which for the PSLRA is “an intent to deceive, manipulate, or defraud,” or “ ‘severe recklessness’ in which the ‘danger of misleading buyers or- sellers ... is either known to the defendant or is so obvious that the defendant must have been aware of it,’ ”
“In determining whether the pleaded facts give rise to a ‘strong1 inference of scienter, the court must take into account plausible opposing inferences.” Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
If the plaintiff fails to satisfy the pleading requirements for scienter, “the district court ‘shall,’ on defendant’s motion to dismiss, ‘dismiss the complaint.’ ” Nathenson,
Under the PSLRA, 15 U.S.C. § 78u-4(b)(4), a plaintiff must also allege and ultimately prove “the traditional elements of causation and loss,” i.e., “that the defendant’s misrepresentations (or other fraudulent conduct) proximately caused the plaintiffs economic loss.” Dura Pharmaceuticals, Inc. v. Broudo,
Both the 1933 and the 1934 statutes have a section imposing liability on persons controlling a primary violator. Section 15, 15 U.S.C. § 77o of the 1933 Act, entitled “Liability of controlling persons, states in relevant part,
(a) Controlling persons
Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more persons by or through stock ownership, agency, or otherwise, controls any person liable under sections 77k or 77Z of this title, shall also be jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling persons had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.
(b) Prosecution of persons who aid and abet violations
For purposes of any action brought by the Commission under subparagraph (b) or (d) of section 77t of this title, any person that knowingly or recklessly provides substantial assistance to another person in violation of a provision of this subchapter, or of any rule or regulation issued under this subchapter, shall be deemed to be in violation of such provision to the same extent as the person to whom such assistance is provided.15
“The term control (including the terms controlling, controlled by and under common control with) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.” 17 C.F.R. § 230.405. To state a claim for Section 15 control person liability, a plaintiff must allege that a primary violation under Section 11 or 12 was committed and the defendant directly or indirectly controlled the violator. Kapps v. Torch Offshore, Inc.,
Section 20(a) of the 1934 Act, 15 U.S.C. § 78(t)(“Liability of controlling persons and persons who aid and abet”), states,
Claims under section 20(a) are not governed by Rule 9(b)’s heightened pleading requirements for fraud claims; plaintiffs need only give the defendant fair notice of the claim and the grounds for the allegations. In re BP p.l.c. Litig.,
Because § 20(a) is a secondary liability provision, if the Plaintiff fails to state a claim for a primary' violation under § 10(b) and/or Rule 10b-5, Plaintiff also fails to state a claim for control person liability under § 20(a). Id. at 750.
The control person liability provisions of Section 20(a) of the 1934 Act and Section 15 of the 1933 Act, although worded differently, are interpreted similarly. Dynegy,
III. Securities Act of 1933
The 1933 Act, 15 U.S.C. §§ 77a et seq., governs the content of securities registration statements, which the SEC requires for the trading and dealing of stock.
The Securities Act of 1933 also bars the “offer or sale” of “securities” unless a registration statement has been filed with the SEC or an exception to registration requirements applies. Section 5 of the 1933 Act, 15 U.S.C. § 77e; SEC v. Continental Tobacco Co.,
Section 11, 15 U.S.C. § 77k, addressing “Civil liabilities on account of false registration statement,” provides purchasers of registered securities with strict liability protection for material misstatements or omissions in registration statements with the SEC by specifically enumerated parts. It provides in relevant part,
(a) In case any part of the registration statement . ... ■ contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statement therein not misleading, any person acquiring such security (unless it is proved that at the time of such acquisition he knew of such untruth or omission) may, either at law or in equity, in -any court of competent jurisdiction, sue
(1) every person who signed the registration statement;
(2) every person who was a director of (or person performing similar functions) or partner in the issuer at the time of the filing of the part of the registration statement with respect to which his liability is asserted;
(3) every person who, with his consent, is named in the registration statement as being or about to become a director, person performing similar functions or partner; ....
(5) every underwriter to such security.
Regarding (5), under Section '2(11), 15 U.S.C. § 77b(a)(ll), a statutory underwriter is defined functionally on the basis of its relationship to a particular offering and reaches “any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking ....” Furthermore 15 U.S.C. § 77k(a)(5) provides that any person who purchases a security, which was subject to a registration statement containing a false statement, may sue “every .under writer with respect to such security.”
Section 12, 15 U.S.C. § 111, states in relevant part,
(a) in general'—Any person who—
(1) offers or sells a security in violation of section 77e of this title, or
(2) offers or sells a security (whether or not exempted by the provisions of section 77c of this title, other than paragraphs (2) and (14) of subsection (a) of said section), by the use of any means or instruments of transportation or communication in' interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of material fact necessary in order to make the statements, in light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, or such truth or omission,
shall be liable, subject to subsection (b) of this section, to the person purchasing such security from him, who may sue either at law or in equity any court of competent jurisdiction, to recover the consideration-paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.
Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, “applies to registered securities and imposes civil liability on the signatories to the registration statement and on the directors of the issuer when the registration statement is materially misleading or defective.” Firefighters Pension & Relief Fund of the City of New Orleans v. Bulmahn,
Thus section 11,15 U.S.C. § 77k(a), permits “any person acquiring such security” to sue, including after market purchasers of shares 'issued in a public offering,
Regarding alleged omissions, under § 11 an issuer only has to disclose information that is required to make other statements not misleading or information that the securities' laws require to be disclosed; simply possessing material nonpublic information does not give rise to a duty to disclose. Firefighters,
Where grounded in negligence, Section 11 only requires notice pleading under Federal Rule of Civil Procedure 8, not the heightened standards of Federal Rule of Civil Procedure 9(b) or of the PSLRA. In re Dynegy, Inc. Sec. Litig.,
“The Securities Act of 1933 imposes strict liability on offerors and sellers of unregistered securities” and allows purchasers to recover under Section 12(1) “regardless of whether they can show any degree of fault, negligent or intentional, on the seller’s part.” Swenson v. Engelstad,
Defendants other than the issuer can avoid liability by pleading and proving an affirmative defense of due diligence. Id.
Section 12 restricts recovery to purchasers who purchase their shares from a seller who makes use of false or misleading statements. 15 U.S.C. § 77l(a)(2) (seller “shall be liable to the person purchasing such security from him.”). “Section 2(3) defines ‘sale’ or ‘sell’ to include ‘every contract of sale or disposition of a security or interest in a security, for value,’ and the terms ‘offer to sell,’ ‘offer for sale,’ or ‘offer’ to include ‘every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value.’ 15 U.S.C. § 77b(3). Under these definitions, the range of persons potentially liable under § 12(1) is.not limited to persons who pass title.” Pinter v. Dahl,
When a broker acting as an agent of one of the principles to a securities purchase successfully solicits a purchase, he is a person from whom the buyer purchases within the meaning of § 12 and is thus liable as a statutory seller. Pinter,
As with § 11, where § 12(a) claims do constitute fraud, the plaintiff must plead the circumstances constituting fraud with Rule 9(b) particularity. Collmer v. U.S. Liquids, Inc.,
Section 12(a)(2) of the Securities Act of 1933, 15 U.S.C. § 77l(a), states, “Any person who ... offers or sells a security ... by means of a prospectus or oral communication, which includes an untrue statement of material fact or omits to state a material fact necessary in order to make the statements, in light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission, shall be liable, subject to subsection (b) of this section, to the person purchasing such security from him, who may sue either at law or in equity in any court of competent jurisdiction, to recover the consideration
To prevail on a claim under § 12(a)(2), 15 U.S.C. § 77l(a)(2), the plaintiff must allege and prove that the defendant, as a seller of a security “by means of a prospectus or oral communication,” misrepresented or failed to state material facts to the plaintiff in connection with the sale and that the plaintiff had no knowledge of untruth or omission. Collmer,
There is no liability under Section 12(a)(2) if there is no duty to disclose the allegedly false or misleading information. In re Morgan Stanley Technology Fund Sec. Litig., 643, F.Supp.2d 366, 381-82 (S.D.N.Y. 2009), citing In re Time Warner Inc. Sec. Litig.,
IV. Employee Stock Option Plans
To have standing to sue under the 1933 and 1934 Acts, a plaintiff must bé either a purchaser or a seller of the securities at issue. Blue Chip Stamps v. Manor Drug Stores,
It is undisputed that a stock option is a security. Section 2(1) of the Securities Act of 1933, 15 U.S.C. § 77b(a)(1), and Section 3(a)(1) of the Exchange Act, 15 U.S.C. § 78c(a)(10), define a “security” almost identically, with the variations being insignificant here, to include inter alia any note, stock, bond, option, and participation in an investment contract. SEC v. Glenn W. Turner Enterprises, Inc.,
An “investment contract” under the federal securities acts is a contract, transaction or scheme in which a person invests money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party. 15 U.S.C. § 77b(a)(1) and § 78c(a)(10). Because the Securities Acts are remedial in nature and were enacted to regulate investments in an effort to protect against abuses in the securities market, the Supreme Court opined that the broad definition of securities “encompasses virtually any instrument that might be sold as an investment” and “embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the premise of profits.” Reves v. Ernst & Young,
In Howey, the Supreme Court established a test to determine whether a financial relationship constituted an “investment contract,” i.e., “whether a contract transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts” of others. Id. at 298-99,
After Howey, in Daniel the Supreme Court applied the Howey test to decide whether an employee’s interest in an employee pension plan constituted a “security” under the 1934 Act. It concluded that the answer depended on whether the plan is voluntary or compulsory, individually contributory or noncontributory.
The SEC subsequently expanded Daniel beyond pension plans to all involuntary and noncontributory employee benefit plans. SEC Release No. 33-6188 (Feb. 1, 1980); SEC Release No. 33-6281 (Jan. 15, 1981).
Only an actual direct purchaser or seller of securities has standing to sue under Section 10(b) and Rule 10b-5. Blue Chip Stamps,
Arising in the wake of Daniel’s holding that an interest in a compulsory, noncontributory pension plan is not a “security,” the SEC’s “no-sale doctrine” provides that a grant of securities to employees pursuant to a stock bonus plan is not a “purchase or sale” where these employees “do not individually bargain to contribute cash or other tangible or definable consideration to such plans.” SEC Release No. 33-6188,
This reasoning has been applied to employee stock option plans. Cendant,
Moreover where the plan is noncontributory and involuntary, the stock awarded to employees is not required to be registered because there is no “sale” to the employees since they have not individually bargained to contribute cash or other consideration to the employee stock ownership plan. 1980 SEC Release No. 33-6188. These courts and the SEC Release grew out of Daniel’s finding that these stock option employees that did not directly contribute to the plan failed to meet the “investment of money” or investment contract requirement of Howey for a sale/purchase and the SEC’s “no-sale” doctrine.
Plaintiffs rely on decision by the Ninth Circuit in Falkowski v. Imation Corp.,
This Court observes that Falkowski relied on a statement in Blue Chip Stamps v. Manor Drug Stores,
Congress, in enacting the Securities and Exchange Act, provided definitions to help in the interpretation and application of the statutes. See 15 U.S.C. 78c. But, as the Supreme Court has stated, “The relevant definitional section of the 1934 Act are for the most part unhelpful; they only declare generally that the terms “purchase” and “sale” shall include contracts to purchase or sell. SEC v. Natl. Sec., Inc.,393 U.S. 453 , 466,89 S.Ct. 564 ,21 L.Ed.2d 668 (1969). Thus, the Court must look to other courts to discern boundaries for standing under a Rule 10b-5 cause of action to determine if the holding of stock options by thePlaintiff constitutes a contract to purchase or sell stocks....
[T]he Supreme Court’s language in the Blue Chip Stamps decision was nothing more than dicta that alone cannot serve as the basis for standing under 10(b) or Rule 10b-5.... To allow the Plaintiff, who simply held her stock options, to qualify as a purchaser or seller of stock under Rule 10b-5 under these facts would destroy the Supreme Court’s reasoning for adopting the Birnbaum Rule.27 As the Court stated, “In the absence of the Birnbaum doctrine, bystanders to the securities marketing process could await developments on the sidelines without risk.” Blue Chip Stamps,421 U.S. at 747 ,95 S.Ct. 1917 .... Here, the Plaintiff is exactly the person described by the Court, a “bystander to the securities market[].” Id. Moreover, as the Fifth Circuit has noted, “It is well established that the mere retention of securities in reliance on material misrepresentations or omissions does not form the basis for a section 10(b) or Rule 10b-5 claim.” Krim v. BancTexas Group, Inc.,989 F.2d 1435 , 1443 n. 7 (5th Cir. 1993)(citing Blue Chip Stamps,421 U.S. 723 ,95 S.Ct. 1917 ....
V. Disregarding the Corporate Form
Plaintiffs contend that the three Defendant UBS entities (PW, Warburg, and nonparty UBS AG) form a single enterprise which is liable to Plaintiffs for some or all of their alleged violations of the Securities Exchange Act. When an entity’s corporate form is at issue, courts standardly hold that the law of the state of incorporation of that entity applies to determine whether its corporate form should be disregarded, i.e., whether one can pierce the corporate veil. Ace American Ins. Co. v. Huntsman Corp.,
As stated in the complaint, PW and Warburg are subsidiaries of UBS AG. Contrary to Plaintiffs’ insistence that in a Rule 12(b)(6) review the Court must accept their conclusory claim that “UBS” is a single entity and not three separate corporations as suggested by their names and corporate histories, under Delaware law a corporate entity “may be disregarded ‘only in the interest of justice, when such matters as fraud, contravention of law or contract, public wrong, or equitable considerations among members of the corporation require it, are involved.” In re Phillips Petroleum Sec. Litig.,
The Third Circuit applies a “single entity test” that considers seven factors in deciding generally whether two or more corporations operated as a single economic entity: (1) a corporation is grossly undercapitalized for the purposes of the corporate undertaking; (2) a failure to observe corporate formalities; (3) the nonpayment of dividends; (4) the insolvency of the debtor corporation at the time; (5) the siphoning of the corporation’s funds by the dominant stockholder; (6) the nonfunction-ing of other officers or directors; (7) the absence of corporate records; and (8) the fact that the corporation is merely a facade for the operations of the dominant stockholders). Blair,
In a narrowed application of the alter ego theory, under Delaware law a court may “pierce the corporate veil of a company where ... it in fact is a mere instrumentality or alter ego of its owner” and the two operate as a “single entity.” Fletcher v. Atex, Inc.,
V. Stock Broker Standards
At issue in this case is whether PW, in its brokerage relationship with the investor participants in the Enron Stock Option program, had a fiduciary duty to disclose material information about Enron’s fraudulent activities and financial decline to its investor retail clients purchasing or holding Enron securities or debt.
Firms in the securities market operate in three main capacities: broker, broker-dealer, and investment advisor. Thomas Lee Hazen, “Are Existing Stock Broker Standards Sufficient?,” 2010 Colum. Bus. L. Rev. 710, 730 (2010).
A “broker” is defined in Black’s Law Dictionary (6th ed. West 1990) as, “An agent employed to make bargains and contracts for compensation. A dealer in securities issued by others.... An agent of a buyer or seller who buys or sells stocks, bonds, commodities, or services, usually on a commission basis.” See also Rauscher Pierce Refsnes, Inc. v. Great Southwest Sav., F.A.,
A “broker-dealer” is defined as a “securities brokerage firm, usually registered with the S.E.C. and with the state in which it does business, engaging in the business of buying and selling securities to or for customers.” Black’s Law Dictionary (6th ed. West 1990).
Thus while a broker owes his investor-client a fiduciary duty, that duty varies in scope with the nature of their relationship, and determining that nature requires a fact-based analysis. Romano v. Merrill Lynch, Pierce, Fenner & Smith,
When investors “lack the time, capacity, or know-how to supervise investment decisions” and “delegate authority to a broker who will make decisions in their best interests without prior approval” in a discretionary account, however, there well may be a duty to disclose. Town North Bank, N.A. v. Shay Financial Services, Inc., Civ. A. No. 3:11-CV-3125-L,
In a non-discretionary account, the agency relationship begins when the customer places the order and ends when the broker executes it because the broker’s duties in this type of account, unlike those of an investment advisor or those of a manager of a discretionary account, are “only to fulfill the mechanical, ministerial requirements of the purchase or sale of the security ....” As a general proposition, a broker’s duty in relation to a nondiscretionary account is complete, and his authority ceases, when the sale or purchase is made and the receipts therefrom accounted for. Thus, each new order is a new request that the proposed agent consents to act for the principal. There is no on-going agency relationship as there would be with a financial advisor or manager of a discretionary account.
Hand v. Dean Witter Reynolds, Inc.,
In a discretionary investment account, in contrast to a nondiscretionary account, a broker is a “fiduciary of his
(1) manage the account in a manner directly comporting with the needs and objectives of the customer as stated in the authorization papers or as apparent from the customer’s investment and trading history; (2) keep informed regarding the changes in the market which affect his customer’s interest and act responsively to protect these interests; (3) keep his customer informed as to each completed transaction; and (4) explain forthrightly the practical impact and potential risks of the course of dealing in which the broker is engaged.
Anton v. Merrill Lynch,
Although there is no statutorily mandated heightened pleading of fiduciary duty for brokers, Thomas Lee Hazen, a noted scholar in the field, points out that “there is plenty of authority under the existing law that recognizes heightened obligations of securities broker-dealers, at least when they are acting in a capacity beyond that of mere order taker.... The law, regulations, and regulatory interpretations to date make clear that broker-dealers have fiduciary or fiduciary-like obligations when they provide services beyond executing customer orders.” Hazen, “Are Existing Stock Broker Standards Sufficient?,” 2010 Colum. Bus. L. Rev. 710, 713-14 (2010). These legal sources include the Investment Advisers Act of 1940, regarding which the Supreme Court has held that, even though the word “fiduciary” does not appear in the statute, investment advisers are fiduciaries to their clients and must meet the fiduciary duties of care and loyalty, i.e., they must “must fully disclose material facts about prospective investments ... [and] all conflicts of interests when giving advice.” Id. at 716, citing SEC v. Capital Gains Research Bureau,
The Investment Advisers Act of 1940, 15 U.S.C. § 80b-2(a)(11), however, defines “investment adviser” in relevant part as follows:
“Investment adviser” means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities, but does not include ... (C) any broker or dealer whose performances of such services is solely incidental to the conduct of his business as a broker or dealer andwho receives no special compensation therefor ....
The Court concludes from the allegations in the complaint and the lack of mention of any special compensation for PW’s advice to its retail clients that PW does not qualify as an investment advisor under subsection (C). See, e.g., Banca Cremi, S.A. v. Alex. Brown & Sons, Inc.,
Furthermore the Supreme Court has held that private rights of action under the Investment Advisers Act of 1940 are restricted to suits for equitable relief for rescission of investment adviser contracts and restitution under section 215; damages are not available. Transamerica Mortg. Advisors, Inc. v. Lewis,
Relevant to the determination whether broker-dealers have fiduciary or fiduciary-like obligations when they provide services beyond executing customer orders are SEC rules, particularly those addressing “(a) conflicts between the firm’s obligations to its customers and its own financial in
In the late 1930’s, Congress amended the Exchange Act to authorize self-regulatory organizations for broker dealers. See, e.g., Andrew F. Tuch, The Self-Regulation of Investment Bankers, 83 Geo. Wash. L. Rev. 101, 112 & n.50 (December 2014), citing Securities Exchange Act of 1934, Pub. L. No. 73-291, 48 Stat. 8881 (codified as amended at 15 U.S.C. §§ 78a-78pp (2012)). Hazen particularly highlights the SEC and FINRA [formed in 2007 to replace the National Association of Securities Dealers (“NASD”)] regulations
In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs.” This is the so-called “suitability rule,” and its purpose is to protect unsophisticated investors of publicly-held corporations from the sometimes devious practices of unscrupulous securities transactions experts.
The NYSE adopted a similar, “know your customer rule,” NYSE Rule 405(a), which requires the officers of member organizations to “use diligence to learn essential facts relative to every customer, every order, every cash or margin account accepted or carried by such organization.” Generally regulatory rules of conduct do not provide a private right of action for individual investors, but are for actions brought by the SEC or state regulatory investors. As a result, aggrieved individual investors must frame their securities complaints as claims under § 10(b) of the Exchange Act and Rule 10b-5. Steven D.
Hazen comments regarding violations of NYSE, FINRA or NASD rules that “it is generally held that violation of a rule or a self regulatory organization will not, by itself, support a private right of action. However, a violation of an exchange or FINRA rule can form the basis of a 10b-5 action, provided of course, that all of the elements of a 10b-5 claim can be established.” “Market Regulation: Broker-Dealer Regulation; Credit Rating agencies,” 5 Law Sec. Reg. § 14:175 (updated March 2016). The courts are split in a variety of ways over whether a private right of action exists for violations of such rules and regulations.
The Fifth Circuit has deliberately chosen not to decide whether rules for brokers established by national exchanges and SROs, such as the NASD suitability rule or the NYSE “know your customer rule,” provide a private cause of action for individual investors, but has found that they may be used as evidence of industry standards and practices. Miley v. Oppenheimer & Co., Inc.,
The Securities Exchange Act has no express civil remedy for a violation of an exchange or association rule. In a seminal opinion in Colonial Realty v. Bache and Co.,
As indicated in Miley, the Fifth Circuit has been hesitant to recognize a private cause of action based only on a violation of a NYSE or NASD rule. See also Porter v. Shearson Lehman Bros., Inc.,
In 1988 Congress passed Section 15(f) of the Exchange Act, 15 U.S.C. § 78o(f),
Federal common law has also imposed fiduciary duties in federal securities cases. For example, because a brokerage relationship is a principal/agent relationship, some courts have found fiduciary duties that generally accompany such a relationship, including that “the broker must act in the customer’s best interests and must refrain from self-dealing unless the customer consents after full disclosure.” Hazen, “Are Existing Stock Broker Standards Sufficient?,”
Under the “shingle theory” of the common law, “by hanging up a shingle, a broker implicitly represents that he or she will conduct business in an equitable and professional manner.” Id. at 749, 738-39. As an extension of the common law doctrine of “holding out,” it has been long and well established that “a securities broker occupies a special position of trust and confidence with regard to his or her customer when making a recommendation, and that any recommendation of a security carries with it an implicit representation that the broker has an adequate basis for the recommendation.” Id. at 760-51, citing Hanly v. SEC,
As another basis for enforcing suitability, the “shingle theory” holds that the SEC and self-regulatory rules require broker-dealers to adhere to standards of fair and equitable principles of trade and that breach of the implied representation that a broker will deal fairly with the public [even at arm’s length] will be actionable in a private action under the securities laws only if a plaintiff customer can show a causal relationship between the alleged breach and injury to the plaintiff; a breach of fiduciary duty, alone, does not violate federal securities laws. Id. at 750, citing Charles Hughes & Co. v. SEC,
“[Accountability for the implied representations that may arise out of a fiduciary duty will not violate the securities laws’ antifraud provisions in the absence of showing that the defendant acted with the requisite scienter.” Thomas Lee Hazen, “Fiduciary Obligations of Securities Brokers,” 5 Law Sec. Reg. § 14:133 (updated March 2016), citing In the Matter of Michael Flanagan, Ronald Kindschi, and Spectrum Administration, Inc., Release No. 160, Release No. ID-160,
In addition, “[e]ven in the context of federal claims against a broker-dealer, the federal courts may look to state law to determine whether a fiduciary duty existed.” Hazen, “Are Existing Stock Broker Standards Sufficient?,”
The Texas Supreme Court has opined that “the term ‘fiduciary’ is derived from the civil law and contemplates fair dealing and good faith, rather than legal obligation, as the basis of the transaction. Further, that term includes those informal relations which exist whenever one party trusts and relies upon another, as well as technical fiduciary relations.” Texas Bank and Trust Co. v. Moore,
A fiduciary relation is not limited to cases of trustee and cestui que trust, guardian and ward, attorney and client, nor other recognized legal relations, but it exists in all eases in which influence has been acquired and abused, in which confidence has been reposed and betrayed, and the origin of the confidence is immaterial, and may be moral, social, or domestic or merely personal.
Moreover, “a fiduciary relationship exists when the parties are ‘under a duty to act for or give advice for the benefit of another upon matters within the scope of the relation.’ It exists where a special confidence is reposed in another who in equity and good conscience is bound to act in good faith and with due regard to the interests of the one reposing confidence.’ ” Id., quoting Lappas v. Barker,
In Texas, to state a claim for breach of fiduciary duty, the plaintiff must
Under Texas law the formal relationship between a broker and its customer is one of principal and agent. Rauscher Pierce Refsnes, Inc. v. Great Southwest Savings, F.A.,
An agent is one who consents to act on behalf of, and subject to, the control of another, the principal, who has manifested consent that the agent shall so act. Agency is a consensual relationship, and the agency or broker/customer relationship does not come into existence until the order has been placed and the broker has consented to execute it.... If a broker, under his contract with his principal, is charged with no responsibility and is not obligated to exercise any discretion, but his duty consists of merely bringing the parties together so that between themselves, they may negotiate a sale, and the sale is made in that manner, the broker is considered a mere“middleman” and is not necessarily the “agent” of either party.
The Restatement (Third) of Agency § 1.01 (2006) defines “agency” as follows: “Agency is the fiduciary relationship that arises when one person (a ‘principal’) manifests assent to another person (an ‘agent’) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.” An innate duty of good faith and fair dealing, honest performance, and strict accountability is owed by an agent to his principal, and is required in every transaction on behalf of the principal. Vogt v. Wamock,
Nevertheless, under Texas law, to impose an informal fiduciary duty in a business transaction, “the special relationship of trust and confidence must exist prior to and apart from the agreement that formed the basis of the suit.” Aubrey v. Barlin,
Y. Allegations of the Third Amended Complaint (# 122)
Each of the eight named Lead Plaintiffs purchased or held Enron equity securities and/or acquired stock options to purchase Enron securities in his [or her] PW account “in reliance on the information provided to him [or her] and absence of information withheld from him” by PW during the Class Period. # 122, ¶¶ 5-12. Plaintiffs contend that UBS owed them a duty of disclosure but failed to disclose material information within its knowledge, gained by its participation with Enron in creating a false public characterization of Enron’s financial condition throughout the 1934 Act Class Period, in order to maximize its earnings from Enron at the expense of and in conflict with the interests of its retail clients who were purchasing, acquiring and/or holding Enron securities.
Plaintiffs’ claims against PW under §§ 11 and 12 of the 1933 Act, 15 U.S.C. §§ 77k and 77l, on behalf of persons who acquired Enron employee stock options and the common stock acquired when they exercised those stock options, arise from PW’s alleged role as the exclusive broker and stock option plan administrator for Enron during the 1933 Act Class Period.
According to the governing complaint, it was common knowledge in the banking industry that Enron paid huge investment banking fees to banks that provided it with credit capacity. The rapid expansion of Enron’s business from natural gas pipelines to a global enterprise energy trading in the mid 1990’s created a substantial need for cash infusions, so from 1998 onward the UBS Defendants worked hard to expand their credit capacity for Enron in hopes of being allowed to obtain some of the more than $100 million in non-credit related investment banking fees that Enron paid out yearly. It also sought to obtain and retain high credit ratings to allow it to accumulate senior unsecured long-term debt, essential to its success. Moreover beginning in 1992 with the SEC’s okay and expanding as the years went by, Enron used mark to market accounting (“MTM accounting”), including for its merchant investments, which allowed Enron to recognize earnings long before its activities generated any cash, resulting in an ever increasing gap between income and actual funds flowing from operations (a “quality of earnings” issue) by 1999. By December 31, 2000, approximately $22.8 billion of Enron’s assets were accounted for using MTM accounting, representing 35% of its $65.5 billion total assets.
More specifically the complaint recites that Rocky Val Emery (“Emery”), originally a financial adviser with PW, in 1993 learned from a client, Bill Roamy, an executive with Enron-owned EOG Resources, that Enron was creating an “all employee” stock option program and putting it out for bids from investment firms for a contract to administer the Stock Option Program. # 122 ¶ 65. Seeking to make a lot of money, Emery put together a plan that impressed Enron, and PW was chosen in 1994 to be the exclusive Administrator of the Enron Employee Stock Option Plan, id. at ¶ 66, with Emery given the primary responsibility for overseeing services to Enron and the Enron employees who opened accounts. Emery’s group in PW was known as the Emery Group, which continued to expand and provide services to PW for four years. In 1998 PW and Enron entered into a written, three-year contract which provided that when an Enron employee chose to exercise his stock options, he had to do so exclusively through PW. # 122, ¶¶ 66-68. Once he exercised the stock options, he could either stay with PW or move his business to another firm. # 122 ¶ 67. To retain that retail business, PW did not charge Enron any fee to administer the Employee Stock Option program, and PW charged the employees merely six cents per share to exercise their options, and thereby insured that PW would receive a stream of wealth from the arrangement. # 122 ¶ 67.
With its goal being to retain wealth generated by Enron employees as they exercised their stock options, with its business model PW was gradually capturing and retaining about 60% of that wealth.
Furthermore to keep this money flowing, PW made a secret “gentlemen’s agreement” with Enron, unknown to PW’s clients, that PW financial advisors would not recommend that their retail customers should sell Enron stock, would advise them to exercise their Enron options, and would say nothing about Enron that might be perceived as negative. While PW advisors were permitted to advise their clients to diversify, those advisors had to speak with clients in code language, in which they intended “diversify” to mean “sell,” in violation of the rules of the National Association of Securities Dealers, Inc. (“NASD”). # 122 ¶ 74. PW did not reveal that communications between it and its clients were limited nor that there would be no full disclosure. These communications were intentionally misleading. ■ Furthermore, whenever a PW client asked his financial advisor about Enron, the financial advisor was required to give the client the “Strong Buy” rating on Enron’s stock by the managing director of the energy group at UBS Equity Research Ron Barone,
Because many of the high level executives at Enron had accounts at PW, when a “sudden firestorm of selling Enron stocks began within the ranks of upper level executives at Enron” in mid summer 2000, supported in the complaint by charts showing precise sales by specific, identified executives on pp, 31-36 ib. # -122,
As noted, Enron would not permit any adverse comments about its stock. Heritage Branch Manager Patrick Mendenhall, Heritage Branch Sales Manager Willie Finnigan, and Rocky Emery warned brokers in the branch on various occasions that if they communicated “any adverse information about Enron to Enron employees, they would be reprimanded, sanctioned, yanked from the Enron account, or even terminated.” # 122 ¶ 80. Whenever someone crossed that line, the brokers were told about the incident and the person was exposed. The brokers were given a blunt notice: “If you ‘piss off Enron, ‘you’re done.’ ” Id. During the summer of 2000, David Loftus, an employee in management, raised questions about Enron’s business decisions to another passenger on a plane and was subsequently criticized for doing so and admonished not to say anything negative about Enron. Id. ¶78. In 2001 Craig Ellis, a consultant to help PW’s sales force with various investments, at a sales meeting characterized the company as “ ‘cook the books’ Enron”; Ken Logs-don, one of Rocky Emery’s right-hand men and an elite member of the Emery Group, told Patrick Mendenhall, who then “silenced Ellis.” Id. ¶ 81.
As an extreme example of Enron’s repression of broker communications to clients, the complaint also goes into great detail about a PW broker, Chung Wu (“Wu”), who worked with the Emery Group at PW and whose client base was largely comprised of Enron employees and former employees who had opened their accounts when exercising their Enron stock options and whose wealth, he realized, was overly and dangerously concentrated in Enron stock and unexercised Enron stock options. # 122 ¶¶ 78-79, 82-110. After intense due diligence, Wu was concerned that expectations for Enron stock were far too optimistic. By March 1990, in spite of PW/UBS’s “Strong Buy” recommendation for Enron stock, Wu warned his clients of Enron’s “worsening condition.” Meanwhile between December 2000 and March 2001 PW sold more than
Wu continued to follow Enron’s deteriorating financial position and in a August 21, 2001 final report to his clients he urged them to divest themselves of Enron stocks and vested options. Several of Wu’s clients who were also Enron officers
PW also purportedly immediately implemented a written policy requiring compliance with the secret “gentlemen’s agreement” to prevent another such incident. PW management forbade its financial ad-visors from giving any advice to their retail clients regarding stock option issuers like Enron after August 21, 2001, and instead ordered them to refer the clients to UBS’s current research report and rating on the stock. # 122 ¶ 111. Not only did Barone’s deceptive “Strong Buy” rating remain unchanged until November 28, 2001, when it was merely downgraded to “Hold,”
In addition to “highlighting] UBS’s subordination of its retail clients’ interests to its own and those of Enron,” Plaintiffs claim that Wu’s termination illustrates “UBS’s coordination of its entire structure to accomplish a common goal,” as well as “the control Enron was able to exert over UBS, even during a period of time when UBS had its hands full moving heaven and earth to rid itself of liability and exposure to Enron.” # 122 ¶ 115.
UBS allegedly used its extensive information about Enron’s financial status,
Starting in June 2001, Enron’s financial image began to disintegrate rapidly, with Enron filing for bankruptcy on December 2, 2001. As part of its plan to transfer its Enron credit exposure, in June and July UBS issued and sold $163 million worth of notes to a Japanese investor with the payment obligation structured so that if Enron filed bankruptcy or otherwise defaulted on an obligation to UBS, UBS would not have to repay the notes. In July 2001 UBS commenced selling Enron debt securities held by UBS to a wider group of similarly unknowing investors, including its retail clients. UBS had also purchased from initial purchasers Enron Zero Coupon Convertible Senior Notes Due 2021, which Enron had issued and sold in a private placement in February 2001 and which UBS began selling while using its
Furthermore, UBS had approximately $390 million of notational trading exposure with Enron on the Equity Forward Contracts. The Equity Forward Contracts were derivative financial instruments whose value fluctuated with the market price of Enron stock: on a specific future date, known as the “Settlement Date,” Enron was contractually obligated to purchase from UBS, and UBS was contractually obligated to deliver to Enron, a specified number of Enron shares at a specific price, known as the “Forward Price.” If at a given time the market price of Enron stock was higher than the Forward Price, the contracts were “in the money” for Enron, i,e., UBS owed Enron value in excess of the value Enron owed UBS. If the market price of Enron stock was below the Forward Price, the contracts were “out of the money” for Enron, i.e., Enron owed UBS value in excess of the value UBS owed Enron. The contracts would be settled in two ways: (1) they could be “physically settled,” meaning that UBS would deliver shares to Enron and Enron would deliver cash to UBS or vice versa; or (2) they could be “net share settled.” Under the latter method, if the contract net share settled when the contract was “in the money” for Enron, UBS would deliver to Enron the number of shares required at the current market price to equal the net value of the Contract to Enron; if the contract was “out of the money for Enron, Enron would deliver to UBS the number of shares at market price required to equal the net liability of Enron under the contract. The new value Enron promised to pay or to give up was subject to an interest component as expressed in the amendments. Furthermore Enron had the contractual right to terminate the Forward Contracts at any time. In 1999 and 2000 UBS allegedly used these Equity Forward Contracts to effect what in essence were two undocumented and undisclosed loans to Enron that were not reported as debt and to support manufactured hedge transactions between Enron and two related party entities to allow Enron improperly to manipulate its income in violation of tax and accounting principles. The two loan transactions kept more than $260,000,000 in debt off Enron’s balance sheet and net losses associated with merchant investments off its income statement. # 122 ¶¶ 119-23. Moreover Enron used the value to fund LJM, a special purpose vehicle that Enron could use to hedge stocks that it could not sell (“Illiquid Positions”) and to avoid prohibitions under GAAP and § 1032(a)
Amendments in 1999 and 2000 to the Equity Forward Contracts permitted Enron and UBS to devise a largely similar
In June 2001 when Enron’s stock price was sinking to near $50.00, UBS agreed to lower the trigger price on the Equity Forward Contracts to $40.00’, A provision in these Forward Contracts gave UBS the right to force Enron to settle the Contracts before their Settlement Date if the price of Enron stock closed at or below a set trigger price for two consecutive days. On August 14, 2001 Enron announced the resignation of its CEO, Jeff Skilling. The next day Enron’s stock price closed at $40.25, causing an uproar in UBS’s corporate finance, equity risk management, credit, trading and legal departments. After requiring Enron to provide nonpublic information on the number, amounts, and trigger prices of equity forward contracts with other parties, as well as information about Enron’s recent trading in its own shares, UBS finally agreed to lower the trigger price on stringent conditions, including a commitment that Enron settle the large equity forward -contract at its October maturity, that Enron increase the number of shares with which it could net share settle the contracts, and that Enron provide UBS with “Most Favored Nation” status, meaning that Enron would not allow its other equity forward trades to have a higher trigger price or more favorable unwind conditions than were permitted to UBS contracts. Matters only got worse. In response to Enron’s request for a lower trigger price, UBS required Enron to settle the smaller contract at maturity and continued to address the larger. As the risk increased, the stock continued to drop in value, and in late October UBS finally exercised its early termination rights, received a cash payment to settle an equity swap and the remainder of the forward contract, and immediately sold 2.2 million shares of Enron stock that it held as a hedge to obligations under these contracts. Because UBS understood the default risk Enron posed throughout the period, UBS managed to unwind its positions timely, leaving it little exposure to Enron before Enron declared bankruptcy.
In contrast to Barone, Stewart Morel (“Morel”), debt/credit analyst for War-burg, reported on Enron bonds and the company’s ability to pay its debts. Anyone at UBS could have a copy of Morel’s opinions. In his analysis of Enron’s public filings, Morel observed an increase in debt consistently over the period from the third quarter of 2000 until Enron went out of business. Morel knew that Enron’s deteriorating credit and possible loss of investment grade status would cause acceleration of its debt.obligations, which in turn would require Enron to have more short-
Plaintiffs allege that the ways UBS actively used Barone’s research and hid Morel’s was part of the scheme and artifice to deceive its retail clients. While UBS’s policy required financial advisors to provide Barone’s research to retail clients and touted its equity research as objective, fair, sound, and founded on a reasonable basis, UBS did not reveal the material information that its analysts received substantial amounts of money for, at the request of, the Bank, covering companies and cozying up to corporate management to obtain investment banking business. # 122 ¶ 224. The industry standard, according to Brian Barefoot, requires that a bank that discovers corporate malfeasance should stop analyst coverage on the stock, suspend the stock and the research activity, and investigate. # 122 ¶ 226. According to the complaint, UBS took none of these steps, but instead relentlessly hawked Bar-one’s “strong Buy” opinion to deceive the investing public for UBS’s own gain. Even though the UBS analyst research note containing the recommendation specifically stated that the rating was intended to be distributed only to major institutional investors, PW required its brokers to send it to their retail clients across the board, regardless of the suitability of the Enron securities for a particular retail client. # 122 ¶¶ 263-64. Any broker that refused to promote Enron securities aggressively and rapidly, like Wu, was quickly terminated. Id. ¶ 264-65. No negative comments about Enron were tolerated and any advice to sell had to be characterized as for diversification purposes. Id. at 265.
Lampkin, Ferrell, and Swiber’s claims under the 1933 Act’s Section 12(a)(2) against PW arise out of the alleged misrepresentations and omissions identified on the restatement of the Enron financials before November 8, 2001 in Enron’s formal notice, filed Form 8-K,
Regarding Section 12(a)(2), Plaintiffs allege that PW qualifies as a “seller” under the statute because PW successfully promoted or solicited the purchase of securities to serve its own financial interests or the interests of the securities owner. “Brokers and other solicitors are well positioned to control the flow of information to a potential purchaser, and, in fact, such persons are the participants in the selling
Finally, regarding the § 12(a)(2) claims against PW, Plaintiffs Lampión, Ferrell, and Swiber insist they are grounded entirely in negligence and/or strict liability, and not in fraud.
The same Plaintiffs, themselves, and on behalf of the putative class, also sue PW as underwriter for untrue statements .of material fact or omissions in the S-8 Registration Statements filed with the SEC, identified in ¶ 230 of # 122, under Section
As noted, under Section 2(11), 15 U.S.C. § 77b(a)(11), a statutory underwriter is defined functionally on the basis of its relationship to a particular offering and reaches “any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking .... ” # 122 ¶ 279. PW has promoted, offered, and sold for Enron and has had a direct or indirect participation in the offer and sale and the distribution of securities at issue into the initial and secondary security markets. PW meets both the seller aspect of an underwriter (Section X of # 122, pp. 87-107) and the participation aspect of the statutory definition of “underwriter” (Section XII). The SEC construes the words “participates” and “participation” as covering any person “enjoying substantial relationships with the issuer or underwriter, or engaging in the performance of any substantial functions in the organization or management of the distribution.” Op. of Gen. Counsel Securities Act Release No. 33-1862 (Dec. 14, 1938). PW, in consideration for the exclusive right to broker Enron employees’ exercise of stock options
Plaintiffs also allege that because PW contractually arranged to be the exclusive conduit for Enron securities being placed into the hands of Enron employees and Enron affiliates’ employees through the Stock Option Plans, meant that PW was the sole gatekeeper to the initial and secondary markets for the 100,000,000 securities issued via the process registered by the Registration Statements. A contractual arrangement with an issuer whereby a broker-dealer becomes the administrator, organizer, manager, and exclusive conduit for the distribution of hundreds of millions of securities clearly falls within the statutory definition of an underwriter under section 2(a)(11), 17 U.S.C. § 77b(a)(11),
In sum, argue Defendants, under § 2(11) of the 1933 Act PW qualifies an “underwriter” of securities issued pursuant to Registration Statements and is subject to liability under Section 11 for untrue statements of material facts and omissions of material facts in the Registration Statements. PW offered and sold securities for
Defendants’ Motion to Dismiss (# 125 and 126)
Defendants contend that Plaintiffs’ Third Amended Complaint alleges claims of a scheme under § 10(b) of the 1984 Act that is no different from, and even weaker than, the scheme claims in Newby asserted against Deutsche Bank and Barclays, which were dismissed by this Court in the Newby litigation. See Newby v. Enron Corp. (In re Enron Corporation Securities, Derivative & “ERISA” Litig.), H-01-3624, # 4785.
First, Warburg allegedly participated in transactions that misrepresented to the public Enron’s financial status and damaged Plaintiffs (i.e., PW’s retail customers) in five ways, none of which, Defendants contend, stated a viable primary liability claim under § 10(b): by underwriting a follow-on offering
Second, Defendants maintain that Plaintiffs’ claims, listed above, constitute aiding and abetting and are thus not cognizable under § 10(b) and Rule 10b-5. As in New-by, Plaintiffs in this action allege that War-burg defrauded investors by extending “disguised loans” to Enron and participating in concealed off-balance-sheet financ-ings. When addressing claims in Newby against Deutsche Bank and Barclays, this Court has already ruled that such claims constitute aiding and abetting and cannot give rise to a primary violation of the 1934 Act under the Supreme Court’s decisions in Central Bank and Stoneridge.
Third, for the required element of scien-ter, even though Plaintiffs recognize that Warburg and PW were separate and distinct entities during the putative Class Periods, with no ownership interests in each other, Plaintiffs fail to plead with the required specificity which individual employee at which defendant had what knowledge of wrongdoing or wrongful intent for 1934 Act and the PSLRA claims. Southland,
Nor have Plaintiffs pleaded loss causation, Defendants charge. While they plead that Enron’s “financial collapse” was caused by its inability “to service its debt,” Defendants point out that the alleged fraudulent brokerage practices at PW relating to purchases or sales of Enron stock by PW’s retail brokerage customers had no relation to Enron’s purported fraudulent financial statements and were disclosed only after Enron’s stock price had plummeted to zero.
Finally, regarding the 1933 Act claims against PW under Sections 11 and 12 on behalf of persons who acquired Enron stock options and common stock through the exercise of those options (¶¶ 16(iii)-(iv) and 230), there was no “sale” involved in Enron options. The purported false Forms S-8 targeted by the Third Amended Complaint registered only Enron stock, not employee stock options, and therefore could not have constituted “registration statements” or “prospectuses” offering Enron employee options for which PW is an alleged underwriter. Moreover, an employer’s grant of stock options to its employees is not a “sale” of securities, so PW could not have been an “underwriter” of options triggering Section 11 liability, nor liable for “offering or selling” options under Section 12(a)(2). Last, there are no facts alleged showing that any named Plaintiff has standing to assert 1933 Act claims based on shares acquired by exercising an employee stock option.
While Warburg and PW are separate legal entities with no ownership interests in each other, throughout the complaint Plaintiffs do not distinguish between the two, often using “UBS” to not only refer to both, but also to nonparty parent corporation UBS AG, and the term “Defendants”
Defendants emphasize that in opinions in Newby, this Court detailed the legal duties owed by banks to Enron investors, like Plaintiffs here. Defendants charge that because Plaintiffs here allege no facts distinguishing their claims against War-burg from those dismissed against banks in Newby, Plaintiffs’ “banking” claims against Warburg must be dismissed for the same reasons. Plaintiffs fail to plead primary scheme liability against Warburg. For example, in Enron, H-01-3624, slip, op. (# 4735), at 180 (S.D. Tex. 2006), this Court wrote,
The ... allegations that Deutsche Bank provided standard [banking] services, i.e., underwrote billions of dollars of Enron-related securities, lent money to Enron, provided commercial banking and investment banking services to Enron, and earned a lot of money in fees from Enron, or that its employees who performed due diligence on Enron projects had an obligation to ensure that statements in offering memoranda are full, fair and accurate, in an effort to plead scheme liability under § 10(b), are too general and clearly lack the kind of specific facts that would support; a strong inference of scienter under the PSLRA. Moreover, .., these acts constitute aiding and abetting and thus are not actionable under § 10(b) in this case pursuant to the holding of Central Bank.
In sum, each of the five transactions in which the complaint asserts that Warburg participated fail to state a claim for two reasons: none states a primary violation of Section 10(b) and Rule 10b-5 and Plaintiffs fail to plead particular facts giving rise to a strong inference that Warburg acted with scienter.
In the same Opinion and Order (# 4735 at 183 & n,158), this Court dismissed claims that Deutsche Bank violated Section 10(b) and Rule 10b-5 by underwriting debt issued by the Osprey Trust or Enron, that Deutsche Bank structured Osprey to fund Whitewing while knowing that Enron sold assets to Whitewing at inflated values to falsify Enron’s earnings, and that Deutsche Bank designed Osprey to transfer billions of dollars of debt off Enron’s balance sheet. Noting that Lead Plaintiff in Newby did “not explain specifically what was inhei’ently deceptive in these structur-ings created by Deutsche Bank,” this Court concluded, “Once again, without specific facts demonstrating that Deutsche Bank established an innately illicit deceptive entity or device, Deutsche Bank was at most merely aiding and abetting any subsequent deceptive use of these entities by Enron, the trustees, and Enron’s auditor.” Id. The Court also rejected allegations that Deutsche Bank’s underwriting of various securities violated Section 10(b) and Rule 10b-5. Id.
Similarly in the instant action, in its services as one of several co-managers in a follow-on offering of Osprey notes, War-burg did not “structure” Osprey. Not only have Plaintiffs failed to identify any “innately deceptive entities or devices” employed by Warburg in the Osprey offering, but they did not allege that they purchased any notes in the Osprey offering, nor could they, since the Osprey notes were sold in private placements to qualified institutional buyers. Newby, H-01-3624, #4735 at 23. Even if a bank structured and' led the underwriting syndicate of the Osprey offering, it would at most be aiding and abetting of Enron’s fraud. Warburg’s lesser role as a mere co-managing underwriter of that offering could not be more.
Not only have Plaintiffs failed to allege a primary violation by Warburg, but they do not plead scienter with the requisite particularity. No facts are pleaded showing
As for Warburg’s alleged trades in Zero Coupon Notes, in the Newby action, id. Deutsche Bank was the “selling security holder” of $169 million worth of Zero Coupon Notes, more than 200 times the amount of Zero Notes sold by Warburg, while Deutsche Bank was also one of five initial purchasers in the initial Rule 144 private placement of the Zero Coupon Notes.
In addition the complaint fails to plead facts that even hint than any alleged trades in the Zero Coupon Notes were based on nonpublic information or were meant to defraud investors. There is no allegation of any connection between research reports rating Enron stock a “Strong Buy” and Enron’s SEC filing at the same time listing UBS AG and War-burg as selling security-holders of these notes other than their proximity in time.
In Newby, H-01-3624, #4735 at 183, Deutsche Bank was dismissed despite allegations that it underwrote credit-linked debt securities associated with Citibank’s Yosemite transactions. Barclays was dismissed even though it executed prepay transactions relating to the Yosemite IV Credit Linked Notes Offering because the Court found the prepays were “not per se illegal.” IcL, # 4874 at 61. Plaintiffs here do not assert that Warburg participated in a prepay, but do charge that Warburg defrauded them by underwriting the credit-linked notes in Yosemite IV (# 122 ¶ 52) when it knew that “Enron used these Yosemite transactions to obtain what in economic substance were loans, despite their public characterization as funds flow from operations” (# 122 ¶ 156). The fraud in this case was effected by Enron, not by the underwriting of the notes, argue Defendants. Furthermore Defendants insist such conclusory allegations that Warburg was aware of the prepay are, as this Court found in Newby, # 4735 at 180, “too general and clearly lack the kind of specific facts that would support a strong inference of scienter under the PSLRA,” and fail to
Defendants point out that the amendments to the two Equity Forward Contracts between UBS and Enron occurred in mid-1999 and early 2000, long before the Class Period and before PW was affiliated with Warburg or UBS AG. The complaint asserts the contracts were actually undocumented and undisclosed loans to Enron, which were used “to support manufactured hedge transactions between Enron and two related party entities, which Enron used improperly to manage its income” and to keep more than $260,000,000 in debt from its balance sheet. # 122 ¶¶ 121-22. The complaint alleges that UBS entered into these loans knowing that they would not be reported as debts and that the manufactured hedge positions would be employed to shore up MTM accounting of income by denying the possibility of losses in connection with those assets. Id. ¶ 122. Defendants insist that the allegations that Warburg helped Enron by extending disguised loans of any kind at most constitute allegations of aiding and abetting Enron’s fraud.
After explaining the two restructurings in detail, Defendants conclude that the “Complaint’s factual allegations were a form of ‘net settlement’ that discharged Warburg’s pre-existing obligations to Enron and struck new forward contracts.” # 122 ¶ 120. Contrary to Plaintiffs’ claims, the two Equity Forward Contracts were no more loans than any other forward contract. The complaint correctly states that “the value of the contracts, but not their terms, fluctuated with the market price of Enron stock.” # 122 ¶ 212. While Plaintiffs highlight the “interest component in the two Equity Forward Contracts,” Defendants note that such contracts typically incorporate an “interest component” in that the forward price is higher than the market price. See David F. Levy, Towards Equal Tax Treatment of Economically Equivalent Financial Instruments: Proposals for Taxing Prepaid Forwards, Equity Swaps, and Certain Contingent Debt Instruments, 3 Fla. Tax. Rev. 471, 481 (1997)(to determine a forward contract price, “the parties add to the current spot price of the underlying property ... the costs that the seller will incur in holding the underlying property (i.e., insurance, storage, and interest.)”). Levy describes forward contracts, id. a 478-79, as having “fixed price terms” such that one party can “benefit economically from a downward movement” in the price of the underlying asset and the other “benefit[s] economically from an increase in the price” of the asset. Accordingly, Warburg transferred to the SPE Harrier Enron stock worth $254 million in April 2000 after the stock increased in value since June 1999; in October 2001 Enron paid Warburg $153 million after Enron’s stock price fell after April 2000. # 122 ¶¶ 145, 185-86. The restructurings were not disguised loans, but a form of “net settlement” that discharged Warburg’s pre-ex-isting obligations to Enron and struck new forward contracts, i.e., “reset Warburg’s obligations to Enron to zero, allow an Enron SPE to receive Enron stock, and put in place new equity forward contracts re-
Furthermore, even if the amendments to the Equity Forward Contracts had been undisclosed loans, the complaint-still fails to state a claim against Warburg because Plaintiffs’ allegations constitute at most aiding and abetting Enron in concealing its debt and falsely representing its financial condition to potential investors. Furthermore there is nothing innately illicit about equity derivative transactions, which are common and legitimate transactions used by the world’s largest companies. #129, Lomuscio Decl Ex. 11 (International Swaps and Derivatives Association, Securities Industry Association, and The Bond Market Association, amicus brief in Enron Corp. v. UBS AG, Adv. Proc. No. 03-93373 (Bankr. S.D.N.Y.) at 1 and 12.
Plaintiffs claim that Warburg knew that the E-Next Generation LLC Credit Facility was intentionally kept off Enron’s balance sheet to present a false picture of Enron’s financial conditions to conceal a $600 million loan to Enron, Defendants respond that again Plaintiffs fail to plead a primary violation of Rule 10b-5. As this Court wrote in Newby, H-01-3626, # 4735 at 181, “[A] bank making a loan to a borrower, even where it knows the borrower will use the proceeds to commit securities fraud, is aiding and abetting,” and “ ‘[fjinancings and investments are not sham transactions if there is no suggestion that the transactions were something other than-what they purported to be.’ ” Citing In re Parmalat Sec. Litig.,
As noted Warburg' and PW are legally separate entities, Warburg is not a broker, and Warburg owes no duty to disclose to PW’s retail investor clients.
Defendants also insist that the complaint fails to plead with particularity what material, nonpublic information about Enron who at Warburg possessed and when.
Finally, Defendants insist, Warburg did not unlawfully trade on insider information. Plaintiffs’ allegation that “UBS undertook trading activities to eliminate its credit exposure to Enron for its own benefit, while in possession of ... material,
Defendants also argue that PW’s failure to provide its retail customers with information about Enron’s “true” financial condition does not qualify as securities fraud. PW’s only agreement with Enron was to administer Enron’s employee stock option plan. Plaintiffs do not allege that this agreement aided Enron in concealing anything or that the administration of the plan gave PW any knowledge of Enron’s actual financial condition. Instead Plaintiffs plead
Moreover a party is not a primary violator if it only engaged in routine business transactions or failed to disclose another party’s fraud if it had no duty to do so. Newby, # 4735 at 47-49.
Defendants also maintain that PW had no duty to disclose material omissions to retail clients and participants in the Enron stock option plan because the clients’ brokerage accounts were nondiseretionary and the clients retained the ability to make investment decisions. Martinez Tapia v. Chase Manhattan Bank, N.A.,
In ¶ 223 of the complaint (# 122) Plaintiffs allege,
This is not an “analyst” case. Plaintiffs do not sue UBS because Barone’s research was wrong or because Morel’s research was right. However, the manner in which UBS actively used Bar-one’s Research notes, and hid Morel’s, was part of the scheme and artifice to deceive its retail clients.
Thus Plaintiffs have not asserted, but had no obligation to, that Barone acted with scienter. As noted, the Fifth Circuit does not permit group pleading of securities fraud. “ ‘It is not enough to'establish fraud on the part of a corporation that one corporate officer makes a false statement that another knows to be false. A defendant corporation is deemed to have the requisite scienter for fraud only if the individual corporate officer [accused of fraud] has the requisite level of scienter ....’” Southland,
Plaintiffs assert that UBS failed to disclose to PW customers’ conflicts of interest between PW’s brokerage business and options-administration contract with Enron and the nonpublic information about Enron’s financial status and “questionable business practices” obtained by Warburg bankers. Defendants highlight the fact that Plaintiffs do not allege that PW’s conflicted internal business practices caused Enron to collapse nor facts showing scienter
Nor does the complaint provide facts giving rise to a strong inference that any PW employer possessed nonpublic information about Enron or “questionable business practices” allegedly known to War-burg bankers. The complaint references a conversation between Warburg banker Jim Hunt and PW branch manager Pat Mendenhall on August 24, 2001 about Wu, three days after Wu was fired. # 122 ¶¶ 93-94, 102, 110.
Nor have Plaintiffs alleged facts showing that PW employees were severely reckless for not obtaining nonpublic information about Enron. Retail brokers have long been barred from seeking material nonpublic information from another division of a financial institution to assist their clients in investment decisions; indeed they must erect Chinese Walls to prevent the flow of information, in a multi-service financial institution and stop their employees from illegally obtaining and trading on nonpublic information.
Furthermore Plaintiffs fail to plead that any acts or omissions by Warburg or PW caused Plaintiffs’ losses. Dura Pharmaceuticals,
To establish proximate causation, the plaintiff must allege that when the “relevant truth” about the fraud began to leak out or otherwise make its way into the market, it caused the price of the stock to depreciate and, thereby, proximately caused the plaintiffs economic harm. Loss causation in fraud-on-the-market cases can be demonstrated circumstantially by “(1) identifying a ‘corrective disclosure’ (a release of information that reveals' to the market the pertinent truth that was previously concealed or obscured by the company’s fraud); (2) showing that the stock price dropped soon after the corrective disclosure; and (3) eliminating other possible explanations for this price drop so that the factfinder can infer that it is more probable than not that it was the corrective disclosure— as opposed to other possible depressive factors—that caused at least' a ‘substantial’ amount of the priced drop.”
Defendants observe that the complaint fails to identify any public disclosures about PW’s business practices or conflicts of interest at any time when Enron’s stock was trading and thus Plaintiffs fail to plead loss causation. Glaser v. Enzo Biochem, Inc.,
Last of all, Defendants maintain that Plaintiffs’ claims, expressly brought on behalf of all persons who purchased or acquired Enron employee options or acquired Enron common stock through the exercise of such an option (# 122 ¶ 16(iii), (iv)) fail to allege that PW violated Section 11 or 12 of the 1933 Act. Defendants agree with Plaintiffs that Enron employees did not “purchase” or “sell” stock options received from Enron; both Sections 11 and 12 “are by them terms expressly limited to purchasers or seller of securities.” Blue Chip,
Defendants point out that the Enron plans expressly indicate that Enron’s grants of options to employees were noncontributory: they state that “any employee” was eligible to receive awards of Enron stock options, that “awards shall be grantéd for no cash consideration or for such minimal cash consideration as may be required under applicable law,” that no employee or other person eligible to participate in the plan had any right to be awarded stock options, and that grants of options could be made to discharge Enron’s contractual obligations or “in payment of any benefit or remuneration payable under any compensatory plan or program.” Lomuscio Decl. Ex. 20 (Enron Corp. 1994 Stock Plan) at § 4.1 (cited at Complaint ¶¶ 230, 234), § 5.3(i) (id. at § 7.1), and § 5.3(vii). See also Lomuscio Decl. Ex. 21 (Enron Corp. 1999 Stock Plan) at §§ 4.1, 5.3(i), 5(3)(vii), 7.1, cited at Complaint ¶¶ 230 and 233); and Ex. 22 (Enron 1991 Stock Plan at §§ 4.1, 5.4(1),
These claims, however, must also bé dismissed because Enron’s grant of stock options to its employees was not a registered offering. As noted, the 1980 Release required an offer or sale of a security for the registration and antifraud provisions of the 1933 Act to be applicable. The Enron Forms S-8 cited by Plaintiffs demonstrate that they registered only Enron common stock that could be acquired by optionees upon the exercise of their options. Lomuscio Decl., Exs. 23, 24, 25 (Enron Corp. Forms S-8 filed Jan. 26, 2001 in connection with the 1991, 1994, and 1999 Stock Plans), at 1. Enron’s Plan documents also state, “The Company intends to register ... the shares of Stock acquirable pursuant to Awards under the Plan.” Lomuscio Decl. Exs. 22, 20, and 21. (Enron 1991, 1994, and 1999 Stock Plans) at § 5.3(v). The General Instructions to Form S-8 demonstrate that the form is available for registration of securities to be offered under any employee benefit plan,” e.g., “the exercise of employee benefit plan options and the subsequent resale of the underlying securities.” Lomuscio Decl. Ex. 26 (SEC Form S-8, General Instructions) at § 1(a). # 126 at p. 56.
Finally Defendants insist that no named Plaintiff has standing to assert a 1933 Act claim based on the acquisition of Enron stock by exercising Enron options because the complaint and the affidavits attached to the complaint fail to state that any named plaintiff ever exercised his stock options and acquired Enron stock, not to mention that he or she lost money on such shares, or to plead facts tracing those shares to any registration statement or prospectus identified in the complaint. Thus the named Plaintiffs cannot represent a class of persons who hypothetically could bring viable 1933 Act claims.
Plaintiffs’ Response (# 148; Index of Authority # 149-164)
As in a similar MDL 1446 case with respect to the 1934 Act claims against the same UBS Defendants, Giancarlo, et al., v. UBS Financial Services, et al., H-03-4359, # 175, Plaintiffs here distinguish their claims from those in Newby by explaining that their claims arise from UBS’s relationship to Plaintiffs as their securities broker, as a U.S. broker-dealer, and as a member of self-regulated securities organizations, which owed Enron investors an admitted duty
As for the structure of UBS, although Defendants attempt to distinguish the three separate entities comprising UBS, Plaintiffs argue that the complaint (# 122 at ¶¶ 27, 32, 36-36, 38, 44 and 94) asserts, and the Court must accept as true for purposes of the motion to dismiss, that UBS is an “integrated business enterprise,” with Warburg and PW under UBS AG, as evidenced by its business operations during the Class Period. # 148 at p. 7. See also Augustus Decl., # 109, “Attachment 3,” p. 18, The Making of UBS (3d ed. March 2006); Attachments 4-11; Attachment 1 at pp. 11-12.
The Lampkin Plaintiffs challenge the same five transactions as the Giancarlo Plaintiffs: (1) the two restructurings of the equity forward contracts as disguised loans, not as net share settling of existing contracts and new replacement contracts; (2) the E-Next Generation facility, allegedly structured to keep the facility off Enron’s balance sheet and to provide Enron with a $600 million loan in direct violation of UBS’s investment banking, tax, legal, and accounting or regulatory protocols; (3) the Yosemite IV prepay transactions, with Plaintiffs arguing that UBS’s issuance of the credit linked notes and the prepay commodity forward arrangement were not independent transactions, but interdependent pieces of a single integrated transaction in which UBS participated, contrary to Defendants’ claims
Regarding the ratings of UBS energy sector debt analyst Stewart Morel, Plaintiffs, citing to Morel’s deposition,
Plaintiffs claim that Rule 10b-5’s 'requirement that a primary violator directly or indirectly engage in a manipulative or deceptive, nonrepresentational act, which is at the center of this case,
Plaintiffs also object that they have not engaged in group pleading, but have identified specific officers of UBS who had knowledge that Enron’s public financial statements were materially misleading, when these officers had this knowledge, and what they knew. Complaint, # 122 ¶¶ 124, 130, 137-44, 150, 152, 157-59, 161,
Scienter can be shown in part by pleading facts indicating a defendant’s regular pattern of related and repeated conduct, involving an appreciation by UBS of the situation and a severely reckless failure to take action consistent with the standard of ordinary care to address such danger. For example, UBS mandated that Enron pay it $375 million in cash in September and October 2001 (# 122 ¶¶ 182-86), virtually immunizing itself from Enron’s creditors in bankruptcy because in early April 2001 a UBS risk committee, including Bill Glass, had identified Enron as one of only three companies that UBS did “not like” (# 122 ¶ 164). Subsequent transactions that closed and created credit exposure to Enron had to be approved and the exposure had to be sold or hedged (# 122 ¶ 164). UBS also took steps increasingly to eliminate its credit exposure to Enron (# 122 ¶ 187). For example in June-July 2001, UBS issued and sold JPY (Japanese Yen) 20 billion (approximately $163 million) worth of UBS securities to a foreign investor, pursuant to which UBS’s repayment obligations were linked to Enron creditworthiness. # 122 ¶ 174. If Enron filed bankruptcy or defaulted on its payment obligations to UBS, UBS could avoid repayment of its debt to this institutional investor. Id. UBS used this issuance to obtain essentially a $163 million credit default sway from the unknowing investor. Another example, in July 2001 UBS held a cumulative face value at maturity of $261,800,000 worth of Zero Coupon Convertible Senior Notes Due in 2011, which UBS had Enron register for public sale; UBS then sold the notes into the market and reduced its exposure to Enron. # 122 ¶ 175. The outstanding equity forward contracts constituted UBS’s most significant exposure to Enron in 2001. UBS negotiated specific concessions from Enron that would allow UBS to unwind its position fully with a stock price as low as $9.93 per share and stop Enron from offering better terms to any other bank before UBS agreed to amend the early termination provisions of the contracts. # 122 ¶¶ 177-78. It ultimately managed to settle part and terminate part of the contracts, forcing Enron to pay the remaining balance of
Lampkin, Ferrell and Swiber’s 1933 Act claims against UBS under Sections 11 and 12 are solely against PW, as a statutory underwriter and seller. UBS makes only two arguments to support its motion to dismiss these claims: (1) Plaintiffs did not “purchase” registered securities through the Enron stock plans because a corporation’s grant to employees of an interest in an involuntary, noncontributory employee benefit plan, such as an employee stock option plan, does not constitute a “sale” under the 1933 Act, and (2) the Plaintiffs lack standing to assert claims under the 1933 Act. #126 at pp. 53-55 and n.33.
Plaintiffs contend that the “no sale” doctrine does not apply to Enron’s employee stock option plans. See Int’l Brotherhood of Teamsters, Chauffeurs, Warehousemen, and Helpers of America v. Daniel,
The Commission’s belief that the registration provisions of the 1933 Act should be applicable to voluntary contributory plans which involve the purchase by employees of employer stock is supported by the legislative history of the Act. In 1934 Congress considered and rejected a proposed amendment to the Act that would have exempted employee stock investment and stock option plans from the Act’s registration provision. That amendment, which had been passed by the Senate but was eliminated in conference, was not adopted “on the ground that the participants in employees” stock investment plans may be in as great need of the protection afforded by the availability of information concerning the issuer for which they work as are most members of the public.
Deck of Augustus, Attachment 36 at p. 471. Thus the 1991, 1994, and 1999 Enron Stock Plans fall inside the boundaries of stock option benefit plans that are subject to the registration requirements of the Securities Act. The SEC’s interpretation of the securities laws is entitled to deference. See generally Chevron U.S.A., Inc. v. NRDC, Inc.,
Plaintiffs note that UBS’ claims that the “SEC noted that although ‘stock bonus plans,’ or ‘plans under which and employer awards shares of its own stock to covered employees at no direct cost to the employees,’ did provide employees with a security (corporate stock), # 126 at p. 54, ‘there is no ‘sale’ in the 1933 Act sense to employees since such employees do not individually bargain to contribute cash or other tangible or definable consideration to such plans.” Asserting that UBS tries to obfuscate the issue by treating as equals “stock option plans” where the interest received by the employee is itself a “security,” and other types of employee benefit plans that involve securities but do not involve an investment decision with regard to them. Plaintiffs contend that stock option plans force an employee to make an investment decision, i.e., to exercise the option security and sell the underlying stock, to exercise the option security and hold the stock, or to do nothing and allow the option security to expire unexercised. The SEC has asserted, “Employees making such decisions should continue to be afforded the protections of the anti-fraud provisions of the Federal Securities Law.” Decl. of Augustus, Attachment 36 at 475. Moreover, the employee has to pay Enron for the stock when he exercises his' stock option, thereby contributing cash under the plan’s provisions.
Plaintiffs demonstrate that the Enron Stock Plan includes provisions for when and how the exercise is to be accomplished, the option agreement, and other
Plaintiffs cite Falkowski v. Imation Corp.,
In addition to Form S-8, which registers both offer and the sale of all securities issued to an employee benefit plan, its Notes to General Instruction F states, “Where a registration statement on this form relates to securities to be offered pursuant to an employee stock purchase, savings, or similar plan, the registration statement is deemed to register an indeterminate amount of interests in such plan that are separate securities and required to be registered under the securities Act.”
To fully own Enron common stock, an employee must initially decide whether to invest in it and if so, must pay for it. Their stock option plans were voluntary and contributory. Nor did Enron hide the fact that it sought to raise money through the sale of Enron common stock to its employees through the plans.
Arguing that UBS’s contention that because Enron failed to register its stock options by S-8 Forms, Plaintiffs lack standing to assert a 1933 Act is incorrect, Plaintiffs insist that they have standing to assert their 1933 Act claims as a subclass of plaintiffs who purchased or acquired options to purchase Enron equity securities, and/or purchased or acquired Enron equity securities through the exercise of an option to purchase Enron equity securities, pursuant to the registration statements and/or prospectuses pursuant to the subject Enron stock option plans identified in the complaint at ¶¶ 16, 228, and 269. The complaint asserts that Lampkin, Ferrell, and Swiber received registered securities pursuant to the plans during the defined class periods. # 122 ¶¶ 5,7,9.
Regarding the claims of “holders,” Plaintiffs urge the Court to reconsider and reject the holding in Blue Chips Stamps and progeny that those who neither purchased nor sold Enron securities during the class period, but merely held onto them, lack standing to sue for securities fraud because there is no federal remedy for holders who are the victims of a fraud by issuers, their brokers, their analysts, their accountants and their banks.
Defendants’ Reply (# 167)
Defendants object to Plaintiffs’ current argument that PW’s status as Plaintiffs’ stockbroker and as a corporate affiliate of Warburg somehow changes the allegations of PW’s aiding and abetting of Enron’s fraud into a primary violation of the securities laws. Plaintiffs now claim that a “core group” of Warburg bankers learned material nonpublic information about Enron’s “true financial condition,” that this knowledge is imputable to UBS AG, War-burg and PW as “institutional knowledge,” that the three UBS entities owed a duty to disclose this information to PW customers or to bar those customers from trading Enron securities, but that to “optimize” their fees from Enron Warburg and PW did not disclose the information or suspend the trading in Enron securities even though to have done so would have prevented Plaintiffs’ resulting losses. Defendants contend that Plaintiffs cannot cite a single case upholding what they claim is a “unique” theory.
Defendants maintain that Plaintiffs fail to allege scienter adequately under
Nor do Plaintiffs plead loss causation. At most, Warburg’s transactions with Enron constitute aiding and abetting Enron’s financial-statement fraud. Plaintiffs fail to explain how any PW brokerage practices directly affected Enron’s stock price or to plead that Enron’s stock price declined because of any public disclosure of PW’s dealings with Enron.
Defendants further point out that War-burg and PW had established duties not to share information with each other because they were required by federal law to maintain a Chinese Wall between them. Moreover insider trading laws prohibited War-burg and PW from sharing any material nonpublic information with Plaintiffs. For both reasons Plaintiffs’ argument that because Warburg had material, nonpublic information about Enron, Warburg and PW had a duty to disclose it to PWs customers is meritless.
While Plaintiffs’ omission-based fraud claims require them to plead they were owed a fiduciary duty, Warburg did not have a fiduciary relationship with PW’s clients, and Plaintiffs have failed to allege facts showing that PW had one with them.
In addition, Plaintiffs fail to cite even one case upholding a claim under §§ 11 and/or 12 of the 1933 Act based on an employer’s award of stock options to its employees, no less against a third-party administrator like PW. Such claims are meritless and unprecedented and should be dismissed, insist Defendants.
Plaintiffs’ allegations about the five transactions involving Warburg are at most claims of aiding and abetting under the holding of Central Bank because Plaintiffs assert that these transactions were used by Enron to falsify its financial statements. Thus they fail to state a securities fraud claim against Warburg or PW as primary violators. Now Plaintiffs appear to have shifted to a claim that these five transactions demonstrate Warburg’s knowledge of Enron’s wrongdoing.
[C]onclusory allegations that a defendant designed and structured an SPE or a transaction that was inherently deceptive will not satisfy the pleading standards under the PSLRA and Rule 9(b). Simply calling something a “sham” or a“pretense” or a “fiction” does not make a transaction a primary violation. Lead Plaintiff must allege specific details that show that a structure of the entity or a transaction that was created by [the bank] was inherently deceptive and that the bank used and employed it to deceive investors, not that Enron, its officers and accountants subsequently used the entity improperly to cook its books, or that [the bank] engaged in acts, practices, or course of business that operated as a fraud or deceit on any person in connection with the purchase or sale of an Enron security.
None of the transactions identified in the complaint satisfies this standard. Plaintiffs do not plead anything inherently’ deceptive about the equity forward contracts, net share settlement, or the early termination of a financial contract. Nor have Plaintiffs explained how Warburg, rather than Enron or its accountants, “used and employed” the restructurings to deceive investors. Nor did Plaintiffs allege that any requisite “purchase or sale” of an Enron security involving them occurred regarding the equity forward contracts or their restructuring.
Nor have Plaintiffs asserted that War-burg created the Osprey structure. War-burg only participated in a follow-on offering of Osprey debt securities. Nothing about the Osprey notes was “inherently deceptive,” and Warburg did not “use and employ” Osprey to deceive investors. Any deception came from Enron's sales of assets to Whitewing at allegedly noneconomic prices or the accounting treatment of those sales. Nor was there a purchase or sale of an Enron security involving Plaintiffs with respect to the Osprey notes.
Similarly Warburg did not create the Yosemite structure as a whole, nor the Yosemite IV structure particularly, but merely participated in a follow-on offering of credit-linked notes issued by a trust. There was nothing “inherently deceptive” about the credit-linked notes. Warburg was not involved in the prepay part of the Yosemite IV transaction, nor did it use and employ the prepay to deceive investors. Nor were- Plaintiffs involved in any purchase or sale of an Enron security regarding this offering of credit-linked notes.
The same is true for the E-Next Generation Credit Facility, the structure of which Warburg also did not create, but along with several other banks simply extended tó it a line of credit. There was nothing inherently deceptive about the line of credit! tó construct' the power plants, regardless of whether it was recorded on the balance sheet by Enron. Nor did Warburg use and employ it to deceive investors. Any deception was in Enron’s accounting for it. Similarly, nor did any purchase or sale of an Enron security occur when money was lent to E-Next.
Furthermore Defendants maintain that Plaintiffs fail to allege scienter. Plaintiffs’ claim that the Court is required tó accept as true their assertion that Warburg, PW, and UBS AG function as a single business enterprise is a textbook example of impermissible group pleading. Plaintiffs must identify, but have not, a particular employee of each defendant and what he knew about Enron, .when, why that information was material or nonpublic, and what fraudulent acts or omissions each such individual allegedly made or failed to make. South-land,
Nor do they adequately plead what PW knew about Enron’s fraud. The emails they mention do not show a sharing of any Enron-related nonpublic information between Warburg and PW and had nothing to do with Enron’s financial conditions or the risks that Enron would be unable to service its debt and therefore suffer financial collapse. Because they have not alleged that any identified PW employee obtained nonpublic information about Enron’s financial condition or about Warburg of UBS AG’s credit exposure to Enron, they cannot argue that any PW employee failed to disclose information that Plaintiffs have not shown they possessed.
While Plaintiffs appear to agree that Enron’s actions caused the price of Enron stock to drop, Plaintiffs contend that Defendants caused then.' losses because somehow Defendants were aware of some part of Enron’s wide-ranging fraud and that it was “foreseeable” that Plaintiffs’ losses would occur if the market discovered Enron’s fraud. Defendants insist that because Plaintiffs cannot show that Warburg committed a primary violation of the securities laws by participating in a transaction that affected Enron’s financial statements, they cannot plead loss causation against it simply by asserting that Enron’s financial statements were misleading. Defendants have shown that Plaintiffs failed to allege that any of PW’s brokerage practices were disclosed before Enron’s bankruptcy, so they could not have caused Plaintiffs’ losses. In the same way, Plaintiffs cannot show that the failure to reveal information that PW and/or Warburg possessed about Enron’s financial condition caused Plaintiffs’ losses when that information was revealed to the marketplace.
While Plaintiffs charge that Defendants failed to act according to their own guidelines and Sales Practices Compliance Manual to suspend coverage and restrict sales of Enron stock (“the restricted list policy), Plaintiffs fail to allege that PW’s purported policy violations were a violation of Rule 10b-5 or caused Plaintiffs’ losses. Furthermore, even if Plaintiffs placed Enron stock on a restricted list, such placement would not have affected Plaintiffs’ trading decisions because investors desiring to trade that stock had numerous other sources for information about Enron.
Moreover, insist Defendants, Plaintiffs mischaracterize PW’s “restricted list” policy. The policy manual did not require PW to “suspend analyst coverage and restrict sales” whenever the global UBS AG organization obtained material nonpublic information about an issuer. PW’s policy manual actually states that securities may be placed on the Legal Restricted List “for a number of reasons,” none of which is articulated in the part of the manual cited by Plaintiffs. In addition, Plaintiffs fail to attach that part of the manual immediately following the pages on which Plaintiffs erroneously rely. These pages contain a section entitled “The Information Barrier,” “better known as the ‘Chinese Wall’ or the ‘Information Wall,’ between the banking side of the Firm (Investment banking, merchant banking, capital markets banking, syndicate, public finance, asset-backed or mortgage-backed banking, and structur
Even if Plaintiffs had adequately pleaded that Warburg employees or PW employees possessed material nonpublic information concerning Enron and that the failure to disclose this information caused Plaintiffs’ losses, these claims would still fail because Warburger and PW not only had no obligation to share that information with Plaintiffs, but had affirmative duties not to share it. Multi-service financial institutions have a duty to prohibit bankers from giving nonpublic information to other bank employees; in fact barring such allows brokerage and research operations to continue unimpeded by bankers’ “institutional” knowledge. See Koppers Co., Inc. v. Am. Express Co., Shearson Lehman Brothers Holdings, Inc., Shearson Lehman Hutton, Inc., SL Merger, Inc., BNS Partners, BNS Inc., Bright Aggregates, Inc., Beazer PLC, and Nat’l Westminster Bank PLC,
Defendants argue that the complaint fails to plead with particularity the information possessed by Warburg employees, no less that it was material or nonpublic. “The price of impermissible generality is that the averments will be disregarded.” Lone Star Ladies Inv. Club,
Plaintiffs claim that Warburg “undertook [unspecified] trading activities to eliminate its credit exposure to Enron for its own benefit, while in possession of ... [unspecified] material, non-public information [garnered from participating in various unsavory transactions with Enron].” #122 ¶¶ 52, 115-16, 174, 187, 208, 337. They allege that Warburg traded on material nonpublie information (i.e., the “number, amounts, and trigger prices” of Enron’s equity forward contracts with two other banks) by amending and settling its equity forward contracts with Enron in late 2001, and by Warburg’s later “unwinding” of its hedge position in October 2001. # 122 ¶¶ 176-88. Defendants argue that “full disclosure forecloses liability under the misappropriation theory,” and because Enron voluntarily gave Warburg in September 2001 the same information on which Plaintiffs claim Warburg traded to cause Warburg to extend the equity forwards, Warburg did not violate Rule 10b-5 under either the misappropriation theory (misappropriating confidential information for securities trading in breach of a duty owed to the source of the information) or the classical theory (breach of a duty of trust and confidence owed by corporate insiders to corporate shareholders) of insider trading.
Defendants also argue that PW’s alleged failure to provide its customers with information about Enron’s “true” financial condition is not a securities fraud claim. Plaintiffs do not assert that the single transaction that PW participated in with Enron, i.e., an agreement to administer Enron’s stock option plan, aided Enron in concealing anything or that the administration of that plan provided PW with any knowledge of Enron’s true financial condition. Instead they rely on the vaguely characterized “gentleman’s agreement” between PW and Enron that purportedly prohibited PW from advising its clients to sell or from saying anything negative about Enron. # 122 at ¶ 74. Plaintiffs provide no details about the secret agreement or how it operated to defraud clients who held Enron stock in their PW accounts. Thus they fail to allege a securities fraud claim against PW.
PW is not a primary violator of the securities laws if it only engaged in routine business transactions or failed to disclose another party’s fraud absent a duty to do so. There are ho allegations that PW engaged in any banking or other transactions used by Enron to conceal its actual financial state, or that Enron used the employee stock option plan to defraud investors. Even if there were, such allegations are not sufficient to make PW a primary violator of the law. Since Plaintiffs fail to state a claim against PW as a primary violator used by Enron to conceal its financial state, PW had no duty to disclose its business relationship with Enron or transactions in Enron securities, no less against Warburg as the source of UBS’s alleged knowledge about Enron, to its retail clients and participants in the Enron stock option plan because their accounts were nondiscretionary. Martinez Tapia,
The complaint conclusorily charges that UBS failed to disclose (1) “conflicts of interests” regarding PW’s brokerage business and its contract to administer Enron’s options plan and (2) nonpublic information about Enron’s financial condition and “questionable business practices” purportedly obtained by Warburg bankers from transactions with Enron. # 122 at ¶¶ 25, 51, 52. Defendants emphasize that Plaintiffs do not plead that PW’s internal business practices caused Enron to collapse and that they fail to allege scienter regarding any omissions involving Enron’s financial condition. There are no facts alleged that give-rise'to a strong inference that any PW employee possessed nonpublie information about Enron or its alleged “questionable business practices” purportedly known to Warburg bankers. Furthermore, PW was not severely reckless for failing to obtain nonpublic information about Enron because retail brokers are not permitted to seek such in another division of a financial institution to advise their clients on investments, and broker-dealers are required by law to establish Chinese wall's to preclude the flow of information within a multi-service financial institution
Defendants point out that the complaint’s allegations of loss causation fail to distinguish between PW and Warburg despite the fact that loss causation must be pleaded as to each act or omission in violation of Rule 10b-5 as to each separate defendant. 15 U.S.C. § 78u—4(b)(4); Southland,
Defendants contend that Plaintiffs’ claims under §§ 11 and 12 of the 1933 Act fail also because Enron employees did not “purchase or sell” stock options received from Enron,
Furthermore Defendants present a list of six no-action letters from the SEC demonstrating that for over thirty years the SEC has advised companies that because no 1933 Act “sale” occurs in the grant of stock options to employees of a corporation, the options do not have to be registered under the 1933 Act. # 167 at pp. 31-32. Defendants assert that the no-action letters cited by Plaintiffs, dated after the Class Period, do not discuss the application of the “no sale” doctrine to grants of employee stock options, but instead relate to irrelevant questions of whether three classes of membership units “can be considered one class of securities” for the purposes of Rule 701 or whether stock options are exempt from the registration requirements of Section 12(g) of the 1934 Act.”
Defendants represent that to be characterized as an “underwriter” of Enron employee options for purposes of Section 11 liability, PW must have “purchased” options from Enron, or “offered” or “sold” options for Enron, in connection with the “distribution” of employee options by Enron. 15 U.S.C. § 77b(a)(1). Defendants maintain that a corporation’s grant to employees of an interest in an involuntary, noncontributory employee benefit plan, for example an employee stock option plan, does not constitute a “sale” under the 1933 Act. Therefore PW cannot be liable for any losses stemming from Enron’s grants of options to its employees. See 17 C.F.R. § 230.405 (“The term ‘employee benefit plan’ means any written purchase, savings, option, bonus, appreciation, profit sharing, thrift, incentive, pension, or other similar plan or written compensation contract solely for employees .... ”).
Sections 11 and 12 of the 1933 Act are restricted by their express terms to “purchasers or sellers of securities.” Blue Chip,
Defendants sum up the law this Court discussed under “Applicable law.” In Daniel,
Subsequently in SEC Release No. 33-6188, Employee Benefit Plans; Interpretations of Statute, 45 F.R. 8960 (Feb. 11, 1980), codified at 17 C.F.R. 21 (the “1980 Release”), the SEC explained that “for the registration and antifraud provisions of the 1933 Act to be applicable, there must be an offer or sale of a security.” 1980 Release,
Defendants observe that the “no sale” doctrine applies to grants of employee stock options which are a type of employee benefit plan. SEC Release No. 33-6455, Interpretive Release on Regulation D, 48 F.R. 10045 (March 10, 1983), at Question 78 (“In a typical plan, the grant of [employee stock] options will not be deemed a sale of a security for purposes of the Securities Act.”); Sarnoff Corp., SEC No-Action Letter, 2001 SL 811033 (July 16,
The terms of Enron’s Stock Option Plans evidence that Enron’s grants of options to its employees were noncontributory, stating that “any employee” was eligible to receive awards of Enron stock options, that “awards shall be granted for no cash consideration or for such minimal cash consideration as may be required under applicable law,” that no employee or other person eligible to participate in the plan had any right to be awarded stock options, and that grants of options could be made to discharge Enron’s contractual obligations or “in payment of any benefit or remuneration payable under any compensatory plan or program.”. These documents, referenced in # 122 ¶ 233, are relied on by Plaintiffs as “prospectuses” giving rise to 1933 liability; # 130, Lomuscio Decl. Ex. 20 (Enron Corp. 1994 Stock Plan) at §§ 4.1, 5.3(1), 7.1, 5.3(vii), cited at # 122 ¶¶ 230 and 233, See also # 130, Lomuscio Dec. Ex. 21 (Enron Corp. 1999 Stock Plan) at §§ 4.1, 5.3(1), 5,3(vii), 7.1, cited at #122 ¶¶230, 233; and Ex. 22 (Enron Corp. 1991 Stock Plan) at §§ 4.1, 5.4(1), 8.1, cited at # 122 ¶¶ 230, 233.
In sum, because no “purchase or sale” occurred when Enron granted stock options to its employees, all 1933 Act claims of Plaintiffs Lampkin, Ferrell, Swiber, and Nelson must be dismissed. # 122 ¶¶ 5,7,9,10.
In addition, Defendants repeat that these claims must be dismissed also because Enron’s Forms S-8 neither registered nor offered Enron Stock Options, so Enron’s grant of stock options to its employees was not a registered offering. The Forms S-8 cited by the complaint state they registered only the Enron common stock that eould be acquired by optionees when they exercised those options. # 130, Lomuscio Decl. Exs. 23, 24, 23 at 1 (“This registration statement is being filed ... to register additional shares of Enron Common stock for sale”) and # 128 Ex. 5 (statement by Enron General Counsel James Derrick regarding Forms S-8 “relating to a proposed offering and sale of up to an aggregate of 10,000,000 shares ... of Common Stock ... of the Company which may be issued pursuant to the Company’s [1991, 1994, or 1999] Stock Plan.”). Enron’s Plan documents also state, “The Company intends to register ... the shares of Stock acquirable pursuant to the Awards under the Plan.” # 130, Lomuscio Dec. Exs. 22, 20, 21 (Enron 1991, 1994, and 1999 Stock plans) at § 5.3(v). The instructions to Form S-8 indicate that the form is available for registration of “securities of the registrant to be offered under any employee benefit plan,” such as “the exercise of employee benefit plan options and the subsequent resale of the underlying securities.” # 130, Lomuscio Ex. 26 (SEC Form S-8, General Instructions) at § 1(a).
Next Defendants emphasize that none of the named Plaintiffs has standing to bring the 1933 Acts based on the acquisition of Enron stock by exercising their options. The complaint and Plaintiffs’ attached affidavits do not allege that any named plaintiff ever obtained Enron stock by exercising his or her stock options, not to mention that he or she lost money on such shares or asserted facts sufficient to trace those shares to any registration statement or prospectus identified in the complaint. Therefore Plaintiffs lack standing. 15
Last, Defendants charge that Plaintiffs have not alleged 1933 Act damages, which under Sections 11 and 12 aré calculated based on the “purchase price” paid by each plaintiff for the security. Rosenzweig v. Azurix Corp.,
Plaintiffs’ Response to Defendants’ Reply (# 178)
Claiming that Defendants’ reply has raised two completely new arguments ((1) the grant of an option is not a sale “for value” and (2) having a Chinese Wall policy on paper “forecloses” liability for fraud), Plaintiffs' argue that they, should have an opportunity to respond and then do so in this document, although they failed to move for leave of court to do so. In its discretion, the Court will review the unauthorized document.
Plaintiffs assert that while' their claims are unique when compared with the Newby cases’ claims, and that there are other security class actions based on various wide-ranging schemes and material omissions with similar facts (broker-dealer securities frauds involving the inflation of stock price, creation of misleading, favorable research reports, .company-wide policies to cause brokers to increase or maintain demand for a stock among its customers, and failures to disclose known adverse information or risks inherent in a speculative security) to the ones asserted here that have not been dismissed. Ignoring the mandates of the PSLRA and the fact that they have already had several “bites at the apple,” Plaintiffs argue that at this point the Court should be construing the Third Amended Complaint’s allegations in a light most favorable to them, and not focusing on the sufficiency of the elements of Plaintiffs’ § 10(b) fraud claims. See, e.g., Varljen v. H.J. Meyers, Inc., No. 97 Civ 6742,
Plaintiffs point out that although UBS argued in .its motion to dismiss that the
The Court finds this argument merit-less. Defendants have not abandoned application of the “no sale” doctrine, but rely on both points, both relevant under the law, and neither of which cancels out the other.
Regarding UBS’s defense that it should be protected from liability because it has a Chinese Wall policy for preventing conflicts of' interest, Plaintiffs respond that Chinese Walls are only one of a number of required mechanisms to isolate the trading side of the firm from the banking side in order to raise such a defense and that a firm must not only have such a policy, but must implement it. Plaintiffs cites as a “glaring example” of UBS’s failure to observe its Chinese Wall procedures the equity forward securities contracts. Because these paragraphs without explanation vaguely refer to “UBS” without recognizing any distinction between the bank entity from broker PW, they do not address the Chinese Wall. Thus Plaintiffs’ point is overruled. Complaint, # 122 at ¶¶ 163-65, 176-77.
Court’s Decision
This Court finds that Defendants correctly state the law and apply it to the numerous and detailed allegations in the Third Amended Complaint and in response to Plaintiffs’ briefs. The Court discusses below a few key reasons why Defendants’ motion to dismiss should be granted in all respects, but refers the parties to Defendants’ submissions for additional reasons why Plaintiffs fail to state a claim under the Securities statutes against PW and Warburg.
I. UBS As A Single Entity
“Delaware public policy does not lightly disregard the separate legal existence of corporations.” BASF Corp. v. POSM II Properties Partnership, L.P., C.S. No. 3608-VCS,
Although the Delaware courts usually resolve these issues of disregarding corporate structure in the Court of Chancery based on facts presented, since this case is for securities fraud under the 1933 and 1934 Acts and the PSLRA and Rule 9(b), this Court finds that at least the pleading of some facts sufficient to make a plausible claim that the UBS entities operated as a single entity in defrauding them is necessary but not satisfied here. It finds that Plaintiffs have failed to plead facts sufficient to support their single, fully integrated entity theory of the three UBS entities or of just the two named UBS Defendants to satisfy requirements under Delaware law demonstrating that the UBS entities’ corporate structures should be disregarded. Plaintiffs “must essentially demonstrate that in all aspects of the business, the two corporations actually functioned as a single entity and should be treated as such.” Pearson v. Component Technology Corp.,
Plaintiffs have not pleaded facts supporting any of the seven factors in the “single entity test” of the Third Circuit, which includes Delaware, to justify piercing the corporate veil: (1) gross undercapi-talization of a defendant corporation for the purposes of the corporate undertaking; (2) a failure to observe corporate formalities; (3) the non-payment of dividends; (4) the insolvency of the debtor corporation at the time; (5) the siphoning of the corporation’s funds by the dominant stockholder; (6) the nonfunctioning of other officers or directors; (7) the absence of corporate records; and (8) the fact that the corporation is merely a facade for the operations of the dominant stoekholder(s). Blair,
Furthermore it appears that the purpose behind Plaintiffs’ single-entity theory is to evade a federal policy and expand liability under the 1934 Act from just War-burg to PW even though the alleged activities of the two entities are not overlapping or redundant (one an investment bank providing credit or loans to Enron, the other a broker for participants in Enron’s stock option plans).
In sum, Plaintiffs have failed to plead sufficient facts to plead a plausible claim that Warburg and PW functioned as a single entity to allow the Court to pierce their corporate veils. Moreover, they have failed to plead facts distinguishing the actions of the two corporations, as required under Southland to state claims of securities fraud, a failure which infects a substantial portion of the Third Amended Complaint. Southland,
II. Both The 1933 and 1934 Acts
A. Purchasers or Sellers, But Not Holders
Plaintiffs sue both Defendants under Section 10b and Rule 10b-5, which require that an impermissible misstatement or omission of material fact be made with scienter, on which Plaintiffs relied, and which proximately caused them injury “in connection with the purchase or sale of securities.” They sue PW under section 11, 15 U.S.C. § 77k(a), as purchasers of securities whose registrations contain false or misleading statements of material fact and under section 12(2), 15 U.S.C. 77l(a)(2), of
“In a ‘holder’ claim, the plaintiff alleges not that the defendant wrongfully induced the plaintiff to purchase or sell stock, but that the defendant wrongfully induced the plaintiff to continue holding his stock. As a result, the plaintiff seeks damages for the diminished value, of the stock, or the value of a forfeited opportunity, allegedly caused by the defendants misrepresentations [or omissions].” Grant Thornton, LLP v. Prospect High Income Fund, ML CBO IV (Cayman), Ltd.,
“The manner in which the defendant’s ■violation caused the plaintiff to fail to act could be a result of the reading of a prospectus, .., but it could just as easily come as a result of a claimed reading of information contained in the financial page of a local newspaper. Plaintiffs proof would not be that he purchased or sold stock, a fact which would .be capable óf documentary verification in most situations, but instead that he decided not to purchase or sell stock. Plaintiffs entire testimony could be dependent upon uncorroborated oral evidence of many of the crucial elements of his claim, and still be sufficient to go to the jury. The jury would not even have the benefit of weighing the plaintiffs version against the defendant’s version, since the elements" to which the plaintiff would testify would be in many cases totally unknown and unknowable to the defendant. The very real risk in permitting those in respondent’s position to sue under Rule 10b-5 is that the door will be open to recovery of substantial damages on the part of one who offers only his own testimony to prove that he ever consulted a prospectus of the issuer, that he paid any attention to it, or that the representations contained in it damaged him.
Grant Thornton,
B. “Purchase or Sale” Requirement
For the 1933 and 1934 Acts to apply to the Enron stock option plans there must be a sale. As has been discussed, under Howey,
Moreover-PW does not qualify as a statutory “underwriter” under § 12 because PW did not “purchase” the Enron stock from Enron that its investor clients received upon exercising their stock options, nor did those clients “purchase” the stock from PW, Plaintiffs have no claim under § 12(a)(2) of the 1933 Act. As noted by Defendants, none of the Plaintiffs in the Third Amended Complaint alleges that he or she exercised stock options to obtain Enron stock.
For purposes of section 11(a) of the Securities Act of 1933, because neither PW nor its clients “purchased” the Enron stock obtained by the investor clients, Plaintiffs have no claim under 15 U.S.C. § 77k(a)(5)(Any person who purchases a security, which was subject to a registration statement containing a false statement, may sue “every under writer with respect to such security.”).
Therefore neither § 11 or 12 of the 1933 Act applies, and Plaintiffs fail to state a claim under them.
C. Controlling Person Liability
Because Plaintiffs have failed to state a claim of a primary violation of either the 1933 or 1934 Act, any derivative claims they have asserted for controlling person liability also fail. In re BP p.l.c. Litig.,
III. Securities Exchange Act of 1934
A. Scheme Liability: Primary Violations vs. Aiding and Abetting
Even if there had been a sale, as noted, the United States Supreme Court has rejected the scheme liability theory under § 10(b). There is no private right of action under § 10(b) of the Exchange Act for aiding and abetting. Stoneridge,
While the Third Amended Complaint alleges that UBS participated with scienter in five transactions with Enron, it was Enron (and its accountants and lawyers), not Warburg or PW, as the only primary violator, that was responsible for using these transactions to “cook its books,” creating its allegedly fraudulent financial statements, stock registrations and other documents filed with the SEC, i.e., making misrepresentations of material fact, and thereby manipulating its public financial image to defraud the investing public.
B.PW’s Broker Dealer Relationship to Plaintiffs and A Duty to Disclose Under the 1934 Act
Even if Plaintiffs had established a sale, no named Plaintiff alleges that he had a discretionary account with PW and therefore PW’s duty its client investors was restricted to executing the investor’s order. Romano,
Moreover, as pointed out by Defendants, there are no factual allegations showing a direct relationship of Plaintiffs to Warburg or UBS AG, which were not parties to the contract between Enron and PW to administer Enron’s stock option plans and which did not serve as brokers for PW’s retail investor clients, nor in any fiduciary capacity of trust and confidence which would require Warburg and/or UBS AG to disclose any nonpublic information it may have discovered regarding any fraud by Enron.
Furthermore, as delineated in great detail by Defendants, PW and Warburg were barred by federally required Chinese Walls from sharing any information acquired by Warburg in its capacity as an investment bank from its dealings with Enron on the five fraudulent transactions at issue. Plaintiffs have failed to allege with the required specificity any exchange of material information between the entities in violation of the Chinese Wall policy.
C. Heightened Pleading Standards
Plaintiffs fail to satisfy the PSLRA’s heightened pleading standards by specifying exactly what nonpublic, material information the UBS entities knew about Enron, who discovered it, when, how, and under what circumstances and why it was fraudulent.
D. Scienter
Even if there had been a “sale,” Plaintiffs fail to allege facts establishing that Defendant corporations had acted with scienter. As discussed previously, the PSLRA mandates that “untrue statements or omissions be set forth with particularity
E. Loss Causation
As stated by Defendants, Plaintiffs fail to allege loss causation against either Defendant. Dura Pharmaceuticals,
Leaving aside Plaintiffs’ failure to specify the'material, nonpublic information that any particular Warburg employee gleaned from Enron during the various transactions, Plaintiffs have not alleged any specific material misrepresentation or omission by Warburg that caused Enron’s stock 'to plummet. Nor have Plaintiffs alleged facts plausibly showing that War-burg’s five transactions and allegedly disguised loans were inherently fraudulent and caused Enron to file for bankruptcy. As noted, these transactions were merely acts adding and abetting Enron in its subsequent fraudulent accounting ■ of its finances.
Court’s Order
For the reasons stated above, the Court
ORDERS that
(1) Plaintiffs’ opposed motion for amended scheduling order and for additional briefing is DENIED, and its motion for a ruling is MOOT (# 223);
(2) Plaintiffs’ “holder” claims under federal law are DISMISSED under Rule 12(b)(6) for failure to state a claim for which relief may be granted;
(3) Defendants’ motion to dismiss (# 125) is GRANTED;
(4) Since Plaintiffs have already submitted three amended complaints and thus had multiple “bites of the apple,” and given the age of this litigation, Plaintiffs’ motion for leave to amend (# 165) is DENIED; and
A final judgment shall issue by separate instrument.
Notes
. Third Amended Complaint is instrument # 122.
, PW is a Delaware corporation authorized to do business in Texas and is a wholly owned subsidiary of Switzerland’s banking conglomerate UBS AG. # 122 at ¶ 13.
.Warburg is a Delaware limited liability company, authorized to do business in Texas and also a wholly owned subsidiary of UBS AG. #122 ¶ 14.
Warburg and PW are collectively referred to as "Defendants.” # 122 ¶ 15, Warburg, PW and UBS AG are collectively referred to as "UBS.” Id.
. The Court does not address Plaintiffs’ arguments about the pleading standard for scheme liability under Rule 10b-5 (a) and (c) because of the Supreme Court's later rejection of such claims in Stoneridge.
. Judge Jose A. Cabranes in Pacific Inv. Management Co., LLC v. Mayer Brown LLP,
. The PSLRA added Section 20(e), 15 U.S.C. § 78t(e), to the 1934 Act, affirming the right of the SEC to prosecute aiders and abettors in
. The word "manipulative" is a term of art when used in the context of securities markets and connotes intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities.” Regents of Univ. of Calif. v. Credit Suisse First Boston (USA), Inc.,
. Plaintiffs argue that this Court is bound by its earlier determination in In re Enron Corp. Securities, Derivative & ‘‘ERISA’’ Litig.,
Not only does this Court have the ability to reconsider its prior rulings, but it observes that some key decisions about pleading requirements have been issued since by the Supreme Court, including Stoneridge (rejecting scheme liability), Janus Capital Group, Inc. v. First Derivative Traders,
.”[P]roof of reliance ensures that there is a proper ‘connection between a defendant's misrepresentation and a plaintiff’s injury.’ ’’ Erica P. John Fund, Inc. v. Halliburton Co.,
. The majority of the Supreme Court began by construing the word "make” in Rulé 10b-5 very narrowly:
One “malees” a statement by stating it. When "make” is paired with a noun expressing the action of a verb, the resulting phrase is "approximately equivalent in sense” to that verb. 6 Oxford English Dictionary 66 (def. 59)(1933)(hereinafler OED)
....For instance, "to make a proclamation” is the approximate equivalent of "to proclaim,” and "to make a promise” approximates "to promise.” See 6 OED 66 (def. 59). The phrase at issue in Rule 1 Ob-5, "to make any ... statement.” is thus the approximate equivalent of "to state.”
In my view, ... the majority has incorrectly interpreted the Rule's word "make,” Neither common English nor this Court's earlier cases limit the scope of that word to those with "ultimate authority” over a statement’s content. To the contrary, both language and case law indicate that, depending upon the circumstances, a management company, a board of trustees, individual company officers, or others, separately or together, might "make” statements contained in a firm’s prospectus—even if a board of directors has ultimate content-related responsibility.
Id.,
. The high court compared the relationship between the aider and abettor and the primary violator to that between a speechwriter and a speaker: "Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it. And it is the speaker who takes credit—or blame— for what is ultimately said.” Id. at 143,
.The group pleading or group publishing doctrine permits plaintiffs to presume that statements in prospectuses, registration statements, annual reports, press releases, etc. are collectively attributable to persons with direct involvement in the regular business of the company. Southland,
. The Third Circuit, which includes Delaware, has also held that "the group pleading doctrine is no longer viable in private securities actions after the enactment of the PSLRA,” Winer Family Trust v. Queen,
. Quoting Broad v. Rockwell Int’l Corp.,
. Plaintiffs assert that Defendants are liable for their employees’ conduct under the common law doctrine of respondeat superior, as well as under § 15 of the Securities Act on 1933, 15 U.S.C. § 77(o), and under § 20 of the Securities Exchange Act of 1934, 15 U.S.C. § 78(t).
. See Rosenzweig,
. Employee benefit plans are divided into two broad categories: defined benefit and defined contribution plans. The SEC explains in Employee Benefit Plans, SEC Release No. 33-6188,
A defined benefit plan pays fixed or determinable benefits. The benefits ordinarily are described in a formula which specifies the amount payable in monthly or annual installments to participants who retire at a certain age. As long as the plan and the employer(s) contributing to the plan remain solvent, and the plan continues to be operate, vested participants will receive the benefits specified, In the event the investment results of the plan do not meet expectations, the employees) usually will be required, on the basis of actuarial computation, to make additional contributions to fund the promised benefits. Conversely, if plan earnings are better than anticipated, the employer(s) may be permitted to make contributions that are less than the projected amounts. A defined contribution plan does not pay any fixed or determinable benefits. Instead, benefits will vary, depending on the amount of plan contributions, the investment success of the plan, and allocations made of benefits forfeited by non-vested participants who terminate employment. Thus, the amount of benefits is based, in part, on the earning generated by the plan. .
Observing that the opinion in Int'l Brotherhood of Teamsters, Chauffeurs, Warehousemen & Helpers of America v. Daniel,
. The Supreme Court noted in Daniel,
. In Daniel the plan was compulsory because all employees were enrolled in it under a collective bargaining agreement and it was noncontributory because the employer alone paid money into it.
.Inducements to continue employment (in contrast to inducements to accept employment) are not seen as a contribution sufficient to constitute a "security” to meet the test. In re Cendant Corp. Sec. Litig.,
. Or 1980 SEC LEXIS 2141 at *15.
. The phrase "for value” in § 2(1) of the Securities Act of 1933 has been construed to include a wide variety of forms of consideration, including property, cash, services, and
. "To 'purchase or sell’ stock options, employee-purchasers must give up a specific consideration in return for a separable financial interest with the characteristics of a security,” Cendant,
. Addressing this key phrase in the beginning of the definitional sections of the 1933 and 1934 Acts, Matthew T. Bodie explains in Aligning Incentives With Equity: Employee Stock Options and Rule 10b-5, 88 Iowa L. Rev. 539, 558-59 (March 2003),
Courts and commentators have debated over the exact meaning of this exception, particularly whether "context” means "in the context of the statute’s text,” or “in the context of the facts of the case.” In two Rule 10b—5 cases involving employee ownership interests—one involving stock [Yoderv. Orthomolecular Nutrition Institute, Inc.], the other stock options [Collins v. Rukin, 342 F.Supp. 1282 , 1286 (D. Mass. 1972)(defendant corporation offered plaintiff a stock option as an inducement to accept employment, which satisfied the "for value” requirement of the 1933 Act)]—defendants argued that the securities laws should not apply in the "context” of securities that form a part of an employment contract. In both cases, while the courts noted that the securities laws were designed to protect investors, they nevertheless found the securities protections broad enough to encompass employees with interests in their companies. As Judge Friendly wrote in the Yoder case, “We see no reason why ‘the context requires’ us to hold that an individual who commits herself to employment by a corporation in return for stock or the promise of stock should not be considered an investor.”
. As noted, under Howey and Daniel, an employee's participation in a noncontributory, compulsory pension plan also cannot be characterized as an investment contract. Daniel,
. In Mckissick, as a result of the merger of TV Guide, Inc. and Gemstar International Group Limited, in which TV Guide became a wholly-owned subsidiary of Gemstar, each TV Guide shareholder received a fractional share of Gemstar stock in exchange for his TV Guide stock and each person who held stock options for purchase of TV Guide stock were granted stock options in Gemstar in the same fractional share given current shareholders. The plaintiff, who was President and Chief Operating Officer of TV Guide and had been awarded a number of stock options remained in that position with the subsidiary after the merger in 2000, but then left in 2003. She alleged that she had planned to exercise her stock options with TV Guide before the merger, but was fraudulently induced to hold them because of misrepresentations that mere made to her during the merger on which she relied, so her stock options were converted into Gemstar stock options. Soon after the value of Gemstar stock and her stock options significantly decreased, causing her a major loss. She sued. The plaintiff did not allege that she purchased or sold any stock at the time of the merger, but only that she had a contractual right to do so.
. Birnbaum v. Newport Steel Corp.,
. As noted, the Third Circuit, which includes Delaware, has rejected group pleading as failing to satisfy the PSLRA’s particularity in pleading requirement. Winer,
.Delaware courts use varying terminology when addressing the issue of liability in a parent-subsidiary relationship, "fy]et regardless of the precise nomenclature employed, the contours of the theory are the same.” Mobil Oil,
. In Skouras v. Admiralty Enterprises, Inc.,
all of the subsidiary corporations were engaged in the same general business as the parent; the parent owned all of the shares ... of the subsidiaries; all the members of the boards of directors of ... the subsidiary corporations were also directors of defendant, and a majority of members of the boards of the remaining ... subsidiaries were directors of defendant. Furthermore, the books of the subsidiaries were not in defendant’s possession, custody, or control. Upon determining that the separate subsidiary corporations had been formed for fraudulent purposes, this court granted plaintiffs’ demand for inspection of the books of defendant’s subsidiaries....
Id. at 681.
. Under the Exchange Act a "dealer” is a person who engages in "the business of buying and selling securities .., for such person’s own account,” and not as part of a regular business. 15 U.S.C. § 78c(a)(5)(A). The term broker-dealer includes persons who act as brokers, dealers, or both brokers and dealers. Tuch, Self-Regulation,
. Section 913(g) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. No. 111-203, 124 Stat. at 1827-28, gives the SEC rulemaking authority to impose a fiduciary duty on broker-dealers, but it has not done so.
. On the other hand, where the broker’s duty simply consists of bringing parties together so they can negotiate a sale by themselves, he is merely a middleman and not necessarily an "agent” of any. Rauscher,
. Citing Hill v. Bache Halsey Stuart Shields, Inc.,
. Also cited by other courts in the Fifth Circuit, e.g., In re Rea,
. As the Fifth Circuit observed in Laird v. Integrated Resources, Inc.,
. Section 77q(a), addressing "Use of interstate commerce for purpose of fraud or deceit, states,
It shall be unlawful for any person in the offer or sale of any securities (including security-based swaps) or any security-based swap agreement (as defined in section 78c(a)(78) of this title) or by use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly
(1) to employ any device, scheme, or artifice to defraud, or
(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
(3)to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
. For example, Article III, NSAD Rules of Fair Practice, NASD Manual (CCH) ¶ 2151 provides, "A member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade.”
. Section 78o(f) provides,
Every registered broker or dealer shall make appropriate rules or regulations about these policies and procedures. See 17 C.F.R. §§ 230.37, 230.138, 230.139. Thus an investment bank is required to erect a Chinese wall between its securities analysts' research department and its divisions providing commercial banking, underwriting, or other services to issuers of securities to prevent information from the latter influencing the former.
. Section 204A of the Investment Advisers Act, 15 U.S.C, § 80b-4a (“Prevention of misuse of nonpublic information") provides,
Every investment adviser subject to section 8 Ob-4 of this title shall establish, maintain, and enforce written policies and .procedures reasonably designed, taking into consideration the nature of such investment adviser's business, to prevent the misuse in violation of this chapter of the Securities Exchange Act of 1934 [15 U.S.C.A. § 78a et seq.], or the rules and regulations thereunder, of material nonpublic information by such investment adviser. The Commission, as it deems necessary or appropriate in the public interest or for the protection .of investors, shall adopt rules or regulations to require specific policies or procedures reasonably designed to prevent misuse in violation of this chapter or the Securities Exchange Act of 1934 [15 U.S.C.A. § 78a etseq.] (or the rules or regulations thereunder) of material nonpublic information.
. A nondiscretionary account is one in which the customer must approve all transactions before they are effected. Hand v. Dean Witter Reynolds, Inc.,
, Plaintiffs identify as alleged undisclosed conflicts of interest the following matters (see # 122 ¶¶ 209-22). UBS, like many investment banks, uses research analysts as “bird dogs” to lure in customers and assist the banking department of the bank, just as it used Barone and his "Strong Buy” recommendation, but UBS never disclosed to the investing public or to Plaintiffs Barone's activities or pay. Described as a "regular” occurrence, Mark Altman, deputy head of the U.S. Equity Research for UBS, conceded that, at the request of the investment bankers in UBS, the Equity Department research analysts helped by initiating coverage of a company as an incentive for that company to then do business with the bank. Barone took clients to visit Enron, assisted in the Enron-owned Azurix’s IPO, and participated in Enron-subsidiary EOTT's secondary and senior note offerings. Brian Barefoot, head of PW’s investment bank until the completion of its integration with UBS, in February 2000 contributed money on behalf of the investment banking department to the "research compensation pool” for Barone’s efforts, including those related to Azurix and EOTT, Each year Barone’s base salary and
The Court observes that the customers who were purportedly lured in to do business with UBS are not members of the Plaintiff class defined in the Third Amended Complaint and thus not relevant to this suit.
. The Class Period for the § 10(b), 1934 Act claims was from November 5, 2000 to December 2, 2001,
The Class Period for the §§11 and 12 1933 Act claims was from October 19, 1998 to November 19, 2001.
There are two proposed subclasses of PW customer Plaintiffs under each of the two Acts. # 122 at p. 6, ¶ 16. These are (1) a class of purchasers of Enron common or preferred stock on whose behalf the 1934 Act claims are alleged (¶ 16(1); (2) a class of holders of Enron common or preferred stock with claims under the 1934 Act (¶ 16(h)); (3) and (4) classes of former Enron employees with claims regarding Enron employee stock options under Section 11 and Section 12 of the 1933 Act (¶. 16 (iii) and (iv), respectively).
.Under the 1933 Act, “sellers” and "underwriters” of securities are required to make full and complete disclosure to purchasing investors in public offerings. Section 11, 15 U.S.C. § 77k(a).
. Pages 95-96 (¶ 200) of # 122 list the public offerings of Enron securities for which PW or UBS served as underwriter.
. The complaint at ¶ 69 states that by 1999 about 45,000-50,000 Enron employees participated in the Employee Stock Option Plans.
. It should be noted that ironically Plaintiffs’ complaint, if anything, bolsters Barone’s credentials to evaluate energy companies (# 122 ¶ 206);
Barone is the managing director in the energy group at UBS Equity Research and has been an analyst since 1971. At UBS, he specializes in natural gas transmission, distribution, independent power production and energy marketing companies. He has been ranked on Institutional Investors' "All Star Team” for 27 consecutive years. In 2001, Barone was ranked No. 2 in the natural gas category by Institutional Investors’ All-American Team. Prior to joining UBS, Barone was the natural gas analyst at Paine Webber, Inc.
The Court notes that the complaint alleges no facts that would demonstrate that Barone acted with scienter in misleading those he advised. As Defendants observe, # 126 at p. 43, it was not "an extreme departure from the standards of ordinary care” for Warburg to permit Barone to publish his research even though others had different views. Financial Acquisition Partners LP v. Blackwell,
. . Barone allegedly sent a Note with each rating to the PW brokers to indicate that it was a rating, not a recommendation, and that he expected they would read and understand it and discuss with their client whether a stock was appropriate for the account holder, but this information was never revealed to PW clients. # 122 ¶ 76,
. The complaint asserts (# 122 at ¶¶ 205 and 207-08),
205. UBS purports to have "Research .Principles." During the class period, it represented to clients that the purpose of its equity research was to benefit the investing clients by (1) analyzing companies, industries and countries to forecast their financial performance; and (2) providing opinions on the value, and future behavior of securities. UBS represented that its equity research was objective, had a reasonable basis and was balanced and objective. Perhaps most importantly, UBS represented that its Equity Research would not be used by UBS "... to advance its own interests over those of its client, or to advance analysts’ own interests.” [emphasis in original # 122] ....
207. UBS's fraudulent course of business is evidenced, in part, by its (1) willingness to allow Barone to continue coverage on Enron when he espoused positions that UBS knew were wrong; and (2) requiring, in the face of'its knowledge, that Barone’s "Strong Buy” Research Notes be given to each and every client who asked questions regarding Enron. Within the UBS investment bank it was openly discussed that Barone's analysis and "Strong Buy” rating was [sic} inconsistent with the investment bank's knowledge of Enron’s finances. Moreover, the investment bank’s • senior credit officers admitted shortly before Enron's bankruptcy that Barone’s continuous "Strong Buy” rating when highlighted by the press was "very embarrassing."
208, UBS allowed Barone to accept, apparently blindly, Enron's upper management’s nonsensical explanations and ignore known hard data, More importantly, UBS did not manage Barone, took advantage of Barone’s contrary rating to mitigate UBS’s exposure to Enron, and used Barone to serve Enron, UBS’s "true client,” by en-' hanping its investment banking and retail revenues at the complete expense of the Plaintiffs to whom UBS owed concrete regulatory duties of disclosure.
Defendants point out that courts have dismissed -claims based on an investment bank’s failure to "monitor or correct” allegedly incorrect research reports. #126 at p. 42, citing Podany v. Robertson Stephens, Inc.,
.Defendants argue that these pages of trades do- not demonstrate knowledge by PW of Enron's deteriorating financial condition.
The Court notes that in Advanta Corp., id., the Third Circuit went on to say "But if the stock sales were unusual in scope or timing, they may support an inference of scienter.” Citing Shaw v. Digital Equipment Corp.,
. Specifically, Jeff Donahue, Enron's Senior Vice President of Corporate Development; Joan Amero, who worked for Enron-owned PGE in Portland Oregon; and Mary Joyce, Senior Vice President of Executive Compensation.
. The complaint points out that beginning in June 2001, UBS eliminated virtually all of its trading and credit exposure to Enron by the time Enron filed for bankruptcy on December 2, 2001. At the same time it continued to sell Enron securities and debt to uninformed investors, including its retail clients. #122 ¶ 174-75. By the first week of September UBS had begun its review to downgrade Enron's internal rating and determined by October that such a downgrade would take place. # 122 ¶ 174.
. Including 1999 and 2000 amendments of existing Equity Forward Contracts, the Osprey and Yosemite IV financial structures, and the Enron E-Next Generation loan.
. UBS Defendants identify and describe in detail (1) the 1999 and 2000 amendments to existing Equity Forward Contracts to effect two undocumented and undisclosed loans to Enron (# 122 ¶ 119-146, 176-80), (2) the Osprey transaction (id. ¶¶ 147-155), (3) the Yosemite IV structures (id. ¶¶ 156-160), and (4) the Enron E-Next Generation loan (id. ¶¶ 161-66). The complaint also lists other transactions on which UBS worked through which it purportedly gained additional nonpublic information about Enron’s deceptive acts: "Project Wiamea” or "Project Kahuna”; "Project Summer” or "Enigma”; and “Enigma II.” # 122 ¶¶ 167-73.
.The nondisclosure of material information in violation of a duly to disclose is a "deceptive” act prohibited by Section 10(b) and Rule 10b-5. In re Enron Corp. Sec., Derivative & "ERISA” Litig.,
. Section 1032(a) states, "Nonrecognition of Gain or Loss—-No gain or loss shall be recognized to a corporation on receipt of money or other property in exchange for stock (including treasury stock) of such corporation. No gain or loss shall be recognized by a corporation with respect to any lapse or acquisition of an option, with respect to a securities futures contract (as defined in section 1234B), to buy or sell its stock (including treasury stock),’’
. In their response to the motion to dismiss, # 148 at p. 32, Plaintiffs explain that " ‘Buy’ meant that a bond was expected to outperform other investments, a ‘Hold’ meant the bond was expected to track the market and a ‘Sell’ meant the bond was expected to under perform.”
. Defendants challenge Plaintiffs’ allegations as false and maintain that Morel’s opinion was not at odds with Barone’s, as evidenced by the same reports that Plaintiffs cite. They contend that Morel's June 2001 research report actually recommended reducing exposure to Enron and buying ENE structured offerings. # 126 at pp. 44-45. Defendants argue that the falsity of Plaintiffs’ allegations about Morel’s research and recommendations is evidenced by the reports that Plaintiffs rely on. # 130, Lomuscio Decl., Ex. 19 (Morel June 21, 2001 research report, UBS/LAM 069845-96) at 10.
.The complaint, # 122 ¶ 236 asserts that this Form 8-K stated that Enron would be providing material information to investors about the following matters:
* A required restatement of prior period financial statements to reflect: (1) recording the previously announced $1.2 billion reduction to shareholders' equity reported by Enron in the third quarter of 2002; and (2) various income statement and balance sheet adjustments required as the result of a determination by Enron and its auditors (which resulted from the information made available from further review of certain related-party transactions) that three unconsolidated entities should have been consolidated in the financial statements pursuant to generally accepted accounting principles.
* Enron intended to restate its financial statements for the years ended December 31, 1997 through 2000 and the quarters ended March 31 and June 30, 2001. As a result, the previously-issued financial statements for these periods and the audit reports covering the year-end financial statements for 1997 to 2000 should not be relied upon.
* The accounting basis for the $1.2 billion reduction to shareholders’ equity.
* The Special Committee appointed by Enron’s Board of Directors to review transactions between Enron and related parties.
⅜ Information regarding the LJM1 and LJM2 limited partnerships formed by Enron’s then Chief Financial Officer, the former CFO’s role in the partnerships, the business relationships and transactions between Enron and the partnerships, and the economic results of those transactions as known thus far to Enron, which are outlined [in the attached Tables to the report].
⅜ Transactions between Enron and other Enron employees.
. The complaint asserts that copies were provided of the Stock Option Plans of 1991, 1994, and 1999, along with any restatements or amendments to them.
. Plaintiffs state that the Whitewing structure was discussed in # 122, but the Court is unable to find any mention of Whitewing other than a single, unexplained reference to Osprey/Whitewing in ¶ 258 of # 122.
. The advisors were frequently reminded that they were not to provide any' opinion regarding the exercise of the stock options until the-employee had set up an account with PW.
. Section 77k(a)(5) states in relevant part,
In any case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security (unless it is proved that at the time of such acquisition he knew of such untruth or omission) may, either at law of in equity, in any court of competent jurisdiction, sue— every underwriter with respect to such security.
. Section 2(a)(l 1) states,
The term "underwriter” means any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking; but such term does not include a person whose interests is limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors' or sellers’ commission. As used in this paragraph the term "issuer” shall include, in addition to an issuer, any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer.
. Because the Court has not considered the Enron Bankruptcy Examiner's Report, the results of two NASD Arbitrations, regulatory activity against UBS and the fact that other counsel have not sued UBS in connection with Enron litigation, since none of these challenged factors control the determinations of this Court in this case, the Court does not address Plaintiffs’ objections to them.
. "Follow-on offering” is defined at http:// www.investopedia.coro/terms/f/follow onoffering.asp as follows:
A follow-on offering is an issue of stock that comes after a company has already issued an initial public offering (IPO). A follow-on offering can be diluted, meaning that the new shares lower a company's earnings per share (EPS), or undiluted, if the additional shares are preferred. A company looking to offer additional shares registers the offering with regulators, which includes a prospectus of the investment.
Unlike an IPO, which includes a price range that the company is looking to sell its shares, the price of a follow-on offering is market-driven.... The price of a follow-on offering is usually offered at a small discount from the closing market price on the day of the transaction.
. # 127, Declaration of Richard J.L. Lomuscio, Exhibit 4 (Enron Corp. Form 424B3, filed Aug. 17, 2001) at 1 (Warburg listed as "selling security holder” of $800,000 worth of Zero Coupon Notes; Nonparty UBS AG, London Branch, listed as a "selling security holder” of $250 million of those notes), and Exhibit 5 (Enron Corp. Form 424B3, filed July 25, 1001) at 7 (listing Deutsche Bank as one of five initial purchasers of Zero Coupon Notes).
. ' "Equity derivative transactions may be settled with cash payments-, the physical exchange of cash for securities, or by delivering 'a sufficient quantity of a designated security in lieu of cash’-i.e., net share settlement. Id. at 2 & n.2," # 126 at 27 n.28, citing id., Ex, 11.
. Under the classical theory of insider trading, a corporate insider violates § 10(b) and Rule 10b-5 when he trades in the securities of his own corporation based on material, nonpublic information, i.e., conduct which constitutes a "deceptive device” under the statute because there is a relationship of trust and confidence between the shareholders of a corporation and those insiders who have gained confidential information because of their position within the corporation. Id. at 651-52,
Under the misappropriation theory, a person who is a corporate outsider violates the statute and the rule by committing fraud in connection with a securities transaction when he misappropriates confidential information to trade in securities in breach of .a duty owed to the source of the information. -In other words, "a fiduciary's undisclosed, self-serving use of a principal’s information to purchase or sell securities in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of that information.” Id.
. In their response to UBS’s argument that there is no basis for a strong inference that UBS acted with scienter, # 148 at pp. 20-21, Plaintiffs insist that UBS's undertaking of these transactions, which its own (but very vaguely mentioned) banking standards, protocols, and regulations made to be improper attempts to achieve particular tax, legal, accounting and regulatory treatments where conventional structures could achieve the same alleged commercial purpose, in itself gives rise to a strong inference of knowledge or severe recklessness.
. For purposes of the motion to dismiss only, Defendants concede that Wu was wrongfully fired by Pat Mendenhall solely to curry favor with Enron’s human resources executives, but emphasize that Plaintiffs provide no logical link between Wu's termination and their securities fraud claim that someone at PW knew something about Enron's "true” financial condition but failed to disclose that information to PW customers despite a duty to do so. # 126 at pp. 41-42. Even though he had no duty to disclose to his non-discretion-aiy-account clients, Wu did disclose to them what his own independent research found about Enron’s precarious financial condition.
. See Declaration of David L. Augustus ("Augustus”), # 109-123, "Attachment 1,” UBS Form F-1 Registration Statement at 42-45; id. “Attachment 2,” UBS Compliance Sales Practice Policy Manual at pp. 215-21.
.See GMS Group, LLC v. Benderson,
. The Court notes that these publications are not subject to the pleading requirements of the PSLRA; Plaintiffs’ complaints are.
. To Defendants’ contention that Plaintiffs’ pleadings about the mechanics of Yosemite IV are conclusory and vague, Plaintiffs respond that they have alleged facts showing that UBS knew the Yosemite structures used a circular commodity swap to give Enron upfront cash and eliminate price risk exposure between the parties, thus constituting a loan to Enron. # 148 at p. 29, citing Complaint, # 122 at ¶¶ 156-59.
. Augustus Decl., Ex. 30,
. As opposed to Newby, in which the theory of liability centers around allegations that various financial institutions worked together With Enron to create a false financial appearance. # 148 at p. 35.
. The Court observes that ¶ 124 merely states, "On May 17, 1999 Fastow approached Jim Hunt with a proposition that would allow Enron to extract value from the [Equity Forward] contracts by using the UBS hedge shares ... in the amount of the difference between the Forward Price and the increased market value of the shares, which was approximately $30 per share,” As the Court explained on pages 11-12, this is the way the contracts were supposed to work and there was nothing deceptive or fraudulent about them. Paragraph 130 simply names officers for UBS and Enron on a conference call discussing the restructuring of the Equity Forward Contracts, again a matter not innately deceptive or illegal. The same appears to be true of the substance of all of the listed paragraphs. At most the allegations once again amount to aiding and abetting Enron in effectuating a fraud on investors and the public.
. Decl. of Augustus, Attachment 36 at p. 467.
. In In re Enron Corp. Securities, Derivative & ERISA Litigation,
Whether an employee’s interest in an employment retirement (pension) benefit plan constitutes as "security'' within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934 ... depends on whether the plan is "voluntary or involuntary, and contributory or noncontributory.” The S.E.C. defined a " ‘voluntary’ plan [as] ‘one in which the employees may elect whether or not to participate,’ ” while a “contributory” plan is "one in which employees make direct payments, usually in the form of cash or payroll deductions, to the plan.” [The 1980 Release,1980 WL 29482 at *6 and nn. 19, 20]. In other words, a "noncontributory” plan would be one where the employer makes all the contributions. The interests of employees in an employee benefit plan "are securities only when the employees voluntarily participate in the plan and individually contribute thereto.” Id. at *2, 7. On the other hand, "... the Securities Acts do not apply to a noncontributory, compulsory plan." Id. at *8, citing [International Brotherhood,439 U.S. at 570 ,99 S.Ct. 790 ]. The SEC has long taken the position that interests in voluntary contribution pension and profit-sharing plans are “securities” because "such interests constitute investment contracts The SEC's Chairman stated before the Senate Committee on Human Resources on the antifraud provisions of the proposed ERISA Improvements Act of 1979 (S.209),
An employee who is given a choice whether to participate in a voluntary pension plan and decides to contribute a portion of his earnings or savings to such plan, has clearly made an investment decision, particularly when his contribution is invested in securities issued by his employer. Id. (noting that the reasoning in Daniel supports the view that the employee’s interest in a voluntary, contributory plan is an investment contract).
This Court observes that Enron’s stock option plans were involuntary and noncontributory. As noted earlier, after Daniel its progeny expanded Daniel's reasoning to all employee benefit plans. Under that reasoning, Enron's employees’ interests in the Enron stock option plans were not interests in an investment con
. In Proctor v. Vishay Intertechnology,
SLUSA "does not itself displace state law with federal law but makes some state-law claims nonactionable through the class action device in federal as well as state court." In other words, SLUSA does not provide a federal rule of decision in lieu of a state one, but instead provides a federal defense precluding certain state law actions from going forward. Thus, what we termed complete preemption in pre-Kircher cases, by which we are no longer bound on this issue ... is actually a federal preclusion defense, and would not fall under the complete preemption exception to § 133 l's well-pleaded complaint rule.
. “The grant of an employee stock option on a covered security is therefor a ‘sale’ of that covered security. The option is a contractual duty to sell a security at a later date for a sum of money should the employee choose to buy it. Whether or not the employee ever exercises the option, it is a ’sale’ under Congress's definition." Falkowski,
. The Ninth Circuit in Falkowski,
[I]t is inapplicable here. Unlike stock bonus plans, stock option plans involve contracts to sell stock for money at a later date (stock that is indisputably a "security”). Whether or not an option grant is a sale in the lay sense, it is a sale under the securities laws because it is a contract to sell a security when the option is exercised, We reject the contrary holding of In re Cendant Corp. Sec. Litig.,76 F.Supp.2d 539 , 545 (D.N.J. 1999).
. Subsequently in Kircher v. Putnam Funds Trust,
.Defendants point out, # 167 at p. 30 & n.18, that Falkowski deals with a sale under the 1934 Act, which, unlike a 1933 Act "sale,” does not have to be "for value,” the key phrase in the 1933 Act that does not appear in the 1934 Act. 15 U.S.C. §§ 77b(a)(3), 78c(a)(14); 1980 Release, 45 F.R. 8960, 8969 ("The key elements in the [1933 Act definition of sale] from the standpoint of employee benefit plans are the words ‘value’ and 'solicitation of an offer to buy,’ for without one or both the 1933 Act is inapplicable.”); Blue Chip Stamps,
As Matthew Bodie points out in Aligning Incentives with Equity: Employee Stock Options and Rule 10b-5, 88 Iowa L. Rev, 539, 556-57 (March 2003), in three decisions in which the courts found ESOPS to be voluntary and contributory and therefore represented securities, there were key distinctions made that distinguished them from Falkowski. In Uselton v. Commercial Lovelace Motor Freight, Inc.,
. Defendants note that Google relates to Google’s failure to comply with SEC Rule 701 and does not mention the "no sale” doctrine.
, Defendants object that General Instruction F concerns only those securities that “are required to be registered under the Securities Act,” and they argue that the grant of stock options under the 1933 Act is not deemed a "sale” and does not have to be registered. See discussion infra. Furthermore the instruction defines the number or securities deemed registered, not what securities must be registered on Form S-8. See also 17 C.F.R. § 230,416(c)(similar language in regulation). Only underlying stock, not the options themselves, must be registered. See, e.g., following SEC no-action letters; Dayton Steel Foundry Co.,
. Plaintiffs object that they indicated in their response to requests for production on October 17, 2005 regarding the five transactions detailed in the Complaint that UBS gained its knowledge of Enron’s manipulation of its public financial appearance, but chose not to reveal it to the market and instead foster its relationship with Enron to achieve Tier 1 banking fees from Enron; in other words, Plaintiffs argue that every aspect of UBS’s relationship with Enron is part of UBS’ fraud on the market. Decl. of Augustus, Ex. 1 at pp. 5-7. See also Complaint (# 122) at par/ 117.
. Also available as In re Enron Corp. Securities, Derivative & "ERISA” Litig., No. MDL 1446,
. As opined by the court in SEC v. Alexander,
[A] person who is in possession of insider information and discloses that information to others can be held liable for violating section 10(b) and Rule 10b-5 as a "tipper” even if he or she did not trade on the inside information. See Shapiro v. Merrill Lynch, Pierce, Fenner & Smith,495 F.2d 228 , 237 (2d Cir. 1974). "Trades by tippees are attributed to the tipper.” Elkind v. Liggett & Myers, Inc.,635 F.2d 156 , 165 (2d Cir. 1980).
The plaintiff must also plead that the defendant tipper acted with adequate scienter, i.e., facts giving rise to a strong inference of fraudulent intent. Id.
. Although "outsiders” like Warburg may become temporary fiduciaries to shareholders by "entering] into a special confidential relationship in the conduct of the enterprise and [receiving] access to information solely for corporate purposes,” ”[f]or such a duty to be imposed ... the corporation must expect the outsider to keep the disclosed nonpublic information confidential, and the relationship must imply such a duty.” Dirks v. SEC,
. In # 167 at p. 29, Defendants note that the 1933 Act defines the term "sale” as encompassing “every contract of sale or disposition of a security or interest in a security for value.” 15 U.S.C. § 77b(a)(3)(emphasis added). A grant of stock options to employees under the 1933 Act is a "sale” only if the grant is "for value.” Enron employees received their stock options “for no consideration,” so the grant of them was not “for value” and did not constitute a 1933 Act "sale.” In Bauman v. Bish,
Participation in the ESOP [employee stock ownership plan] for employees of the proposed company is not voluntary, and is, in a sense, compulsory. Each participant who meets certain minimum hours of service requirements will have stock allocated to his or her account. Thus, there is no affirmative investment decision. More importantly, there is no furnishing of “value” by participating employees, See 15 U.S.C. § 77b[(a)](3). Instead of giving up some tangible and definable consideration, participants earn stock through labor for the employer. The notion that the exchange of labor will suffice to constitute the type of investment which the Securities Acts were intended to regulate was rejected in Daniel, [439 U.S. at 559-561 ,99 S.Ct. 790 ("An employee who participates in a noncontrib-utoty, compulsory pension plan by definition makes no payment into the pension fund. He only accepts employment, one of the conditions of which is eligibility for a possible benefit on retirement. [T]he purported investment is a relatively insignificant part of an employee’s total and indivisible compensation package. No portion of an employee's compensation other than the potential pension benefits has any of the characteristics of a security, yet these noninvestment interests cannot be segregated from the possible pension benefits. Only in the most abstract sense may it be said that an employee "exchanges” some portion of his labor in return for these possible benefits. He surrenders his labor as a whole, and in return receives a compensation package that is substantially devoid of aspects resembling a security, His decision to accept and retain covered employment may have only an attenuate relationship, if any, to perceived investment possibilities of a future pension. Looking at the economic realities, it seems clear that an employee is selling his labor primarily to obtain a livelihood, not making an investment.”].... [T|he Court finds that the proposed ESOP is a method of deferring income, not reducing wages or paying for stock. See Am. Jur. 2d Pension Reform Act § 187 (1975).
In accord Register v. Cameron & Barkley Co.,
. In Daniel,
An employee who participates in a noncontributory, compulsory pension plan by definition makes no payment into the pension fund. He only accepts employment, one of the conditions of which is eligibility for a possible benefit on retirement.In every decision of this Court recognizing the presence of a "security” under the Securities Acts, the person found to have been an investor chose to give up a specific consideration in return for a separate financial interest with the characteristics of a security.... Even in those cases where the interest acquired had intermingled security and nonsecurity aspects, the interest obtained had "to a very substantial degree the element of investment contracts ....” In every case the purchaser gave up some tangible and definable consideration in return for an interest that had substantially the characteristics of a security.
. The SEC defines an "investment contract” as "any contract, transaction or scheme whereby a person invests money in a common enterprise and is led to expect profits solely from the efforts of the promoter or third party.” Denise L. Evans, J.D., and O. William Evans, J.D., The Complete Real Estate Encyclopedia (The McGraw Hill Companies, Inc. 2007).
. Under Chevron U.S.A., Inc. v. NRDC, Inc.,