ROADMAP MEMORANDUM AND ORDER RE MERRILL LYNCH AND DEUTSCHE BANK ENTITIES
I. Merrill Lynch 827
*825 A. Motion for Clarification.827
B. Motion to Dismiss Exchange Act Claims.827
1. Primary Violator.827
2. Loss Causation.830
II. Deutsche Bank Entities.832
A. Summary of Allegations and Arguments .832
1. Exchange Act Claims.832
2. 1933 Act Claims.839
B. Court’s Rulings.843
1. Exchange Act Claims.843
(a) Pleading Sufficiency.843
(b) Statute of Limitations.843
(i) Sarbanes-Oxley Act.844
(ii) Continuing Violation Theory .844
(iii) Period of Repose and Tax Scheme Claims.848
(iv) Rеlation Back and Equitable Tolling/Estoppel Doctrines.849
2. 1933 Act’s § 12(a)(2) and § 15 Claims.859
(a) Standing.859
(b) Private or Public Offerings.859
III. Order.866
MEMORANDUM AND ORDER
With respect to Lead Plaintiffs initial Consolidated Complaint (instrument #441), 1 in the Court’s memorandum and order, entered on December 20, 2002 (# 1194), the Court granted Deutsche Bank AG’s first motion to dismiss all claims against it. The Court also found that Lead Plaintiff had not met the pleading requirements imposed by the PSLRA 2 in its allegations against Merrill Lynch & Co., but denied Merrill Lynch’s motion to dismiss and ordered Lead Plaintiff to amend its pleadings to address with adequate particularity the Nigerian barge transaction and/or the transactions with Enron North America involving a complex set of bogus power trades in the Midwest, both of which fit the pattern of fraud previously pleaded by Lead Plaintiff. Both transactions occurred in 1999.
After the Court had resolved all motions to dismiss the First Consolidated Complaint, on May 14, 2003 Lead Plaintiff filed its First Amended Consolidated Complaint (# 1388), with amended allegations against Merrill Lynch & Co. and claims against newly added Merrill Lynch, Pierce, Fen-ner and Smith (collectively, “Merrill Lynch”). 3 The First Amended Consolidated Complaint also asserted claims against Deutsche Bank AG once again, but added as new Defendants Deutsche Bank Securities, Inc., DB Alex. Brown LLC, and Deutsche Bank Trust Company Americas (collectively “the Deutsche Bank Enti *826 ties”). 4
With respect to all these Defendants, pending before the Court in the above referenced cause are Merrill Lynch’s motion to dismiss the amended complaint (# 1499); Merrill Lynch’s motion for clarification of the Court’s June 27, 2003 order concerning the PSLRA stay (# 1556); and the Deutsche Bank Entities’ motion to dismiss (# 1620).
Against Merrill Lynch, the First Amended Consolidated complaint asserts claims for violation of § 10(b), 15 U.S.C. § 78¡j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, and for control person liability under § 20(a), 15 U.S.C. § 78t(a), of the Securities Exchange Act of 1934 (“the 1934 Act”).
The amended complaint also charges the three “surviving” Deutsche Bank Entities (Deutsche Bank AG, Deutsche Bank Securities Inc., and Deutsche Bank Trust Company) with violations of § 10(b) and § 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. It further asserts that Deutsche Bank AG and Deutsche Bank Securities Inc. f/k/a Deutsche Banc Alex. Brown violated § 12(a)(2) 5 and § 15 6 of the Securities Act of 1933 (“the 1933 Act”).
*827 I. Merrill Lynch
A. Motion for Clarification
As a threshold matter, the Court grants Merrill Lynch’s motion for clarification. The Court concurs that because the Court has not yet ruled that Lead Plaintiff has adequately stated a claim against Merrill Lynch or the Deutsche Bank Entities, the discovery stay under the Private Securities Litigation Reform Act (“PSLRA”) is still in effect as to these Defendants. Accordingly, the Court now reviews their motions to dismiss the claims against them in the First Amended Consolidated Complaint.
B. Motion to Dismiss Exchange Act Claims against Merrill Lynch
The Court hereby incorporates into this memorandum and order the factual allegations and applicable law set out in the Court’s previous memoranda and orders addressing motions to dismiss in Newby.
Merrill Lynch essentially makes two arguments in its motion to dismiss pursuant to Fed. Rules оf Civil Procedure 12(b)(6) and 9(b): (1) that Lead Plaintiff has not and cannot allege facts showing that Merrill Lynch was a primary violator of § 10(b) and Rule 10b — 5; and (2) that Lead Plaintiff has failed to allege loss causation arising from the challenged Nigerian barge transaction and the power swaps in 1999, as required under § 10(b) and Rule 10b-5.
1. Primary Violator
First, insisting that Lead Plaintiff has failed to plead a primary violation of the securities laws by Merrill Lynch, Merrill Lynch argues that the allegations only amount to, if anything, mere aiding and abetting of securities fraud, not cognizable as a primary violation of § 10(b) and Rule 10b-5. Merrill Lynch points to a recent complaint (Ex. B to Declaration of Stephen M. Loftin (# 1500)) filed by the SEC against Merrill Lynch and four of its former employees charging them only with aiding and abetting securities fraud violations. Merrill Lynch maintains that Lead Plaintiffs claims are barred by the Supreme Court’s decision in
Central Bank of Denver, N.A. v. First Interstate Bank of Denver, 511
U.S. 164,
Furthermore Merrill Lynch contends that it had no special business relationship with Enron or its shareholders regarding the transactions at issue, that Merrill Lynch did not create, structure or direct any purported misstatements, and that any injury suffered by plaintiffs was caused by Enron’s alleged misstatements about its financial status. In the same vein Merrill Lynch insists that it never directed or contrived the Nigerian barge investment nor the power swaps in 1999, which it maintains were merely normal business deals with nothing illegal involved, that it never engaged in a manipulative or deceptive act, and that it never participated in recording these challenged transactions in *828 Enron’s books or reviewing the correctness of Enron’s accounting. Indeed, Merrill Lynch argues that the transactions targeted in the complaint did not directly affect the market for Enron securities until after Enron’s purported misrepresentations of them. 8
Quoting
In re Homestore.com, Inc. Sec. Litig.,
[O]f the many participants in a “scheme,” there may be primary violators and secondary violators. Those who actually “employ” the scheme to defraud investors are primary violators, while those who merely participate in or facilitate the scheme are secondary violators. In the present case, the primary architects of the scheme are the officers of Homestore who designed and carried out the schemes to defraud. The Court holds that other actors, such as AOL and its employees who actively participated in the triangular transaction scheme, did not “employ” the scheme to defraud investors, and are therefore secondary violators. Therefore, they are “aiders and abettors” within the meaning to Central Bank.
Merrill Lynch urges that if there was a scheme to defraud, Enron alone is responsible because it designed the transactions, employed the scheme, and misrepresented its financial situation.
Second, Merrill Lynch contends that Lead Plaintiff has failed to allege loss causation, a requisite element for a claim under § 10(b). Merrill Lynch argues that because the Nigerian barge transaction and the power swaps were not known to the public until April and August of 2002,
9
respectively, five and nine months after the Class Period ended on November 27, 2001, and long after the price of Enron securities had collapsed, Lead Plaintiff cannot plead or prove that the plaintiffs’ losses were caused by these two transactions, nor that any conduct by Merrill Lynch caused plaintiffs any pecuniary loss. Loss causation is an element of a claim under § 10(b), 15 U.S.C. § 78u-4(b)(4) (“In any private action arising under this chapter, the plaintiff shall have the burden of proving that the act or omission of the defendant alleged to violate this chapter caused the loss for which the plaintiff seeks to recover damages.”).
See Huddleston v. Herman & MacLean,
*829 In acknowledging the wide spectrum of judicial opinions regarding § 10(b) and Rule 10b-5, this Court has rejected the narrow construction of the statute and of primary violations employed by Home-store.com and refers the parties to its extensive discussion in # 1194. Moreover, as explained in that memorandum and order, a misrepresentation need not have been made because the statute also applies to conduct, 10 here the alleged substantial, active role in major fraudulent transactions with no legitimate business purpose, but designed to deceive investors in and central to a scheme and course of business operating to present a falsely inflated image of Enron’s financial strength.
After reviewing the First Amended Consolidated Complaint and all submissions relating to Merrill Lynch’s motion to dismiss (# 1499), i.e., # 1500, 1501, 1574, 1575, 1601, 1617, 1685, and 1720, the Court finds that Lead Plaintiff has adequately stated a claim with particularity, giving rise to a strong inference of scienter, against Merrill Lynch under §§ 10(b) and 20(a) of the 1934 Act.
Lead Plaintiff has alleged with specificity that Merrill Lynch “directly or indirectly” employed a scheme to defraud and engaged in acts, practices, and a course of business over the Class Period, as well as issued numerous analysts’ reports and recommendations containing false and misleading statements about Enron’s financial condition, as part of the purported Ponzi scheme that was intended to and did operate as a fraud or deceit upon investors in connection with the purchase of Enron securities, including the plaintiff class. Lead Plaintiffs new and specific allegations regarding the Merrill Lynch’s deceptive conduct in the Nigeriаn barge deal (purchasing Nigerian barges from Enron to create sham earnings of over $12 million in return for a secret, oral side agreement with Andrew Fastow that Enron would repurchase them within six months so there would be no risk, but only a lucrative profit for Merrill Lynch). Moreover, Lead Plaintiff alleges that notes were written by and warnings made to Merrill Lynch’s Commitment Committee by James Brown, head of Merrill Lynch’s Structured Finance Group, reflecting concerns about the “reputational risk” of the deal, 11 as well as internal communications in the company. Such allegations support a strong inference that Merrill Lynch knew the Nigerian barge deal was a phony transaction created to manipulate Enron’s income statements in return for Merrill Lynch’s lucrative 15% return. Lead Plaintiff has also provided copies of a letter agreement between the Department of Justice/Enron Task Force and Merrill Lynch reflecting Merrill Lynch’s acceptance of responsibility for the Nigerian barge transaction and cooperation with the government, and of the indictment of Merrill Lynch employees Daniel Bayly, James A. Brown and Robert S. Furst for their role in the transaction inter alia. # 1685. Exs. C & D.
In the same vein the alleged bogus future power swaps were from incomplete *830 power plant construction projects, incapable of producing energy (again with a clandestine agreement to cancel the transactions after Enron’s 1999 earnings report) and no energy ever changed hands. In addition the complaint points out that Merrill Lynch sought and obtained a statement from Enron’s Chief Accounting Officer, Richard Causey, that Enron had not relied on Merrill Lynch for account advice regarding these transactions.
All these facts constituted conduct purportedly designed to mislead potential investors and the market generally about Enron’s ■ financial integrity. Although Merrill Lynch argues its actions were not unlawful and that they were merely business transactions later misrepresented by Enron in its financial statements, the factual allegations suggest knowingly deceptive conduct, concealed for unlawful purpose^), which included misleading Enron investors whose money was needed to perpetuate the Ponzi scheme and Merrill Lynch’s “money tree.” Sham business transactions with no legitimate business purpose that are actually guaranteed “loans” employed to inflate Enron financial image are not above-board business practices. This Court disagrees with Merrill Lynch’s contention that the alleged “ ‘deception’ did not occur until Enron allegedly misreported” the transactions. # 1501 at 16.
These newly alleged transactions are not to be viewed in isolation. Lead Plaintiffs complaint has alleged an ongoing scheme in which Merrill Lynсh participated in a substantial way over years. Not only do the particularities of alleged Nigerian barge deal, which purportedly was approved by top executives on Merrill Lynch’s Commitment Committee despite warnings from James Brown, and the power swaps in 1999 imply deception of Wall Street and the public at large by Merrill Lynch and give rise to a strong inference of scienter, they also cast a long shadow over Merrill Lynch’s ongoing, substantial participation in the alleged Ponzi scheme. Merrill Lynch purportedly actively engaged in the scheme to defraud not only in 1999, but from early in the Class Period when it participated in establishing and funding LJM2 at a critical accounting time, despite red flags identified in the complaint and known to Merrill Lynch. Its participation resulted in dubiously enormous financial returns for Merrill Lynch officers who personally invested in it, as well as lucrative earnings for the company. The concealed pattern of manipulation (including unlawful SPEs, off-the-books transactions without any legitimate economic purpose to inflate Enron’s earnings and conceal its debts, sham hedging, guaranteed “loans” or disguised sales, etc.,) that characterized the alleged Ponzi scheme, repeated in the Nigerian barge and sham power swaps transactions, created a highly inaccurate public picture of Enron’s financial condition; the success of the alleged deceptive scheme, buttressed by purported misrepresentations about Enron in Defendants’ analysts’ reports and recommendations, attracted investors and caused their loss when the bubble burst and the fraudulent scheme was exposed. Indeed, when this Court ordered Lead Plaintiff to replead its claims against Merrill Lynch, it did so because the Nigerian barge transaction and the power swaps fit the pattern that the original consolidated complaint had alleged; such parallels imply a deliberate, unified scheme to defraud.
2. Loss Causation
As for Merrill Lynch’s causation challenge, there are two aspects of causation that must be alleged under § 10(b): transaction causation and loss causation.
Emergent Capital Investment Manage
*831
ment, LLC v. Stonepath Group, Inc.,
Like reliance, transaction causation refers to the causal link between the defendant’s misconduct and the plaintiffs decision to buy or sell securities.... It is established simply by showing that, but for the claimed misrepresentations or omissions, the plaintiff would not have entered into the detrimental securities transaction.” ... Loss causation, by contrast, is the causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff. .. We have often compared loss causation to the tort law concept of proximate case, “meaning that the damаges suffered by plaintiff must be a foreseeable consequence of any misrepresentation or material omission.” .... Similar to loss causation, the proximate cause element of common law fraud requires that plaintiff adequately allege a causal connection between defendants’ nondisclosures and the subsequent decline in the value of the [the] securities .... Of course, if the loss was caused by an intervening event, like a general fall in the price of Internet stocks, the chain of causation will not have been established. But such is a matter of proof at trial and not to be decided on a Rule 12(b)(6) motion to dismiss, [citations omitted]
Id.
at 197.
12
See also Caremark Inc. v. Coram Healthcare Corp.,
In the Fifth Circuit, the plaintiff must prove loss causation by showing that “the untruth was in some reasonably direct, or proximate, way responsible for his loss. The causation requirement is satisfied in a Rule 10b-5 case only if the misrepresentation [or omission] touches upon the reasons for the investment’s decline in value.”
Huddleston,
Viewing the pleading in a light most favorable to Lead Plaintiff, the Court finds that the first amended consolidated complaint does allege the requisite loss causation between plaintiffs’ alleged economic loss and the acts, misrepresentations, omissions, and/or concealment of the realities underlying the sham financial reports and image of success projected by Enron and co-Defendants. Not only does the complaint allege that the fraud artificially inflated the value of Enron securities, indeed of the corporation itself, but there is no showing that the plaintiffs’ loss was the result of external market forces such as recession, a volatile market, a fall in prices in energy trading generally or any “intervening” factor. Instead the plaintiffs have adequately pleaded that their loss was directly and foreseeably caused by Defendants’ alleged fraudulent practices at Enron, including Merrill Lynch’s Nigerian barge transaction and bogus power trades involving Enron North America, the nonexistence of the reported influx of cash, and the all too real, increasing, but hidden, debt as Defendants’ deceptive scheme allowed them to create the illusion of a growing and profitable company while grabbing high fees based on fraudulent business deals with no legitimate purpose other than to “cook the books” and appropriate money from deceived investors. Nonexposure of Enron’s deceptive business practices and the concealment of its actual financial condition directly and foreseeably induced the plaintiffs to purchase the securities at a highly inflated price until the Ponzi scheme bubble inevitably broke. Once the fraud began to be disclosed, the swift drop in the market price of Enron securities reflected the real financial condition of this empty house of cards and revealed the disparity between the plaintiffs’ purchase price and the actual value of the securities when they were bought. While information about Merrill Lynch’s individual role in the Nigerian barge transaction and the sham power swaps may not have been made public until long after the Enron bankruptcy, that fact does not relieve Merrill Lynch of responsibility for Enron’s collapse; Merrill Lynch’s alleged substantial participation in the deceptive business practices contributed to the artificial inflation of the price of the securities and thereby was a direct and major cause of plaintiffs’ financial loss, according to the amended complaint.
In sum, the Court denies Merrill Lynch’s second motion to dismiss.
II. Deutsche Bank Entities
The Court has similarly reviewed the Deutsche Bank Entities’ motion to dismiss (# 1620) claims in the First Amended Consolidated Complaint, pursuant to Federal Rules of Civil Procedure 12(b), 9(b) and 15, against all three for violation of § 10(b) and § 20(a) (control person liability) of the 1934 Act and against Deutsche Bank Securities Inc. and Deutsche Bank AG for violations of § 12(a)(2) and § 15 (control person liability) of the 1933 Act. It has also reviewed related filings (# 1620, 1621, 1707, 1751, 1883, and 1887).
A. Allegations and Arguments
1. Exchange Act Claims
According to general allegations in Lead Plaintiffs new pleading, which were in large part previously asserted in the First Consolidated Complaint and dismissed as insufficient by the Court, *833 Deutsche Bank provided substantial commercial lending and banking and investment services to Enron, helped structure and finance LJM2 and advise on additional transactions that falsified the company’s financial statements relating to that SPE, aided Enron in falsifying its financial statements and misrepresenting its financial condition to the public, and issued throughout the Class Period falsely positive securities analyst reports, including a number identified by date, about Enron’s success and prospects for more. 13 Deutsche Bank also served as underwriter for billions of dollars of Enron and Enron-related securities, for which it allegedly issued false and misleading Registration Statements and Prospectuses (again based on Enron’s inflated financial picture that the Deutsche Bank Entities purportedly played a major role in creating). The Court previously found that such allegations were insufficient to state a claim against Deutsche Bank, AG under § 10(b) and derivatively under § 20(a).
The new pleading, drawing on revelations in recent reports issued by Congressional investigators and Enron’s Bankruptcy Examiner, Neal Batson, adds to previous charges new § 10(b) claims against Deutsche Bank as a primary violator based on six structured tax deals (“STDs”), i.e., fraudulent tax schemes knowingly devised, structured, promoted to Enron as a method to generate accounting income, and executed by Deutsche Bank and its Bankers Trust Division (“Bankers Trust”), 14 purportedly without a valid business purpose, but solely to mislead investors by fraudulently, materially, and artificially inflating Enron’s financial results and allowing Enron to avoid paying federal income tax in 1996, 1997, 1998, 1999 and 2001. 15 The STDs allowed Enron to recognize present earnings from future speculative tax savings, in the words of Neal Batson’s Third Report, App. G at 3-4, “in an erroneous and misleading manner as pre-tax income,” without ever disclosing the origins of the earnings to investors or the IRS. According to the amended complaint, these STDs were in deliberate violation of the “business purpose” tax law, which requires that a transaction have a valid business purpose other than generating tax savings. The amended complaint at 531, ¶ 797.6, asserts that the flaunting of the “business purpose” rule
was included in the opinion letters documenting the Bankers Trust transactions. As put by John Buckley, chief tax counsel to the Democratic members of the Committee on Ways and Means and former chief of staff to the Joint Committee on Taxation: “All of these transactions have no real business purpose, unless *834 you believe it’s to artificially create income to report to shareholdеrs.” Moreover these tax structures have been under investigation and negatively criticized by Congressional committees and Enron bankruptcy Examiner Neal Batson, as described in the amended complaint. 16
Lead Plaintiff argues, “Artificial inflation of financial results cannot reasonably be a valid business purpose under the federal income tax laws as written by Congress.” # 1707 at 17.
The complaint focuses on six of these tax transactions (Projects Steele, Teresa, Cochise, Tomas, Renegade and Valhalla 17 ) in some detail. It alleges the basic functions of each, identifies specific amounts of money fraudulently infused into Enron’s financial reports by each and the amounts earned by Deutsche Bank in creating and carrying out the projects, points to opinion letters from law firms relating to each Project and charges each scheme with an actual purpose of inflating Enron’s financial reports, references tax and accounting standards that were purportedly violated, and explains how Bankers Trust functioned as a primary actor 18 in each scheme, without all of which the tax sav *835 ings and financial statement benefits claimed would have been impossible. 19 The Amended Complaint at ¶ 797.5 identifies as the “investment bankers who were the architects for Bankers Trust/Deutsche Bank’s tax wing in Enron’s house of cards ... largely former Andersen personnel, who had worked in its New York office,” specifically Managing Director Thomas Finley, Vice Presidents Brian McGuire and William Boyle, and Manuel Schneid-man. Moreover the complaint asserts that Bankers Trust “clearly knew that Enron’s financial results were artificially inflated by these tax schemes — which is evident from the way each transaction was structured,” as described in greater detail in the Complaint. For instance, with respect to Project Steele, the complaint alleges that not only did Bankers Trust “clearly know that a huge portion of Enron’s reported financial income was from an undisclosed taxation scheme and not from ordinary business operations,” but “Project Steele included an ‘unusual provision nullifying the deal’ if it had to be disclosed,” obviously because if the IRS learned about the scheme, “it would almost certainly challenge the transaction.”
The Deutsche Bank Entities argue that the fact they had presented the tax schemes to the Federal Reserve and the IRS for review undermines Lead Plaintiffs allegations that these transactions were fraudulent. In response, Lead Plaintiffs amended complaint, quoting Batson’s reports and the Joint Committee on Taxation’s Report (“JCT”), asserts that there “is no indication that the bank regulators ever reviewed or approved the proposed tax or accounting consequences of these structures,” that much of the informаtion was never seen by the IRS, that the IRS’ review was very narrow and circumscribed, and that the schemes were so complex as to “raise[] serious concerns about the ability of the IRS to ever find out about these transactions.” Obviously there are fact issues here that cannot be resolved at a motion-to-dismiss stage of the litigation, during which the Court views Lead Plaintiffs allegations as true.
The “surviving” Deutsche Bank Entities, i.e., Deutsche Bank AG, Deutsche Bank Trust Company Americas, and Deutsche Bank Securities Inc., 20 have moved to dismiss the § 10(b) claim for failure to satisfy the heightened pleading standards of the PSLRA and Fed.R.Civ.P. 9(b), and for failure to plead with specificity the elements of such claim, including scienter as to each entity, 21 transaction causation (reliance, i.e., that the fraud precipitated the investment decision), and loss causation.
Lead Plaintiff responds that it has adequately pleaded reliance under the fraud-on-the-market doctrine, accepted by the Fifth Circuit, by pleading that the STDs “operated to present a falsely positive pic *836 ture of Enron’s financial condition ... thereby artificially inflating the value of Enron’s publicly traded securities” and that plaintiffs relied on . these market prices. # 1707 at 26, citing # 1388 at ¶¶ 797, 799, 983-984. It has also asserted that Deutsche Bank made materially false and misleading statements or omissions in analyst reports and offering documents, on which plaintiffs relied. This Court concurs that Lead Plaintiff has adequately pleaded reliance under § 10(b).
Moreover, regarding loss causation,
22
Lead Plaintiff points out that while plaintiffs’ damages were allegedly “caused by an assortment of conduct that violated § 10(b),” Deutsche Bank does not have to be “the
sole
reason for the artificial inflation and subsequent decline in Enron’s share price,” but according to the complaint was “a primary participant in the fraudulent scheme that caused plaintiffs’ losses.” # 1707 at 27-28,
citing Caremark, Inc. v. Coram Healthcare Corp.,
Deutsche Bank Defendants insist that the new allegations about the tax schemes do not set forth sufficient facts to demonstrate that they were fraudulent to satisfy Rule 9(b)’s particularity requirement; instead Lead Plaintiff relies on claimed summaries of the Bankruptcy Examiner’s Second Reports and the JCT report. The Examiner’s Third Report, insist Defendants, undermines the claim that the tax schemes were fraudulent by showing they were arm’s length business transactions. In particular Deutsche Bank argues that *837 Lead Plaintiffs new claims fail to meet the “creator test” adopted by this Court 24 because the complaint only asserts that the Deutsche Bank Entities engaged in customary, arm’s-length business transactions in these tax structures.
Deutsche Bank Entities also insist that these new claims based on the tax schemes against all Deutsche Bank Entities are time-barred and that the § 10(b) claims now also asserted against Deutsche Bank Trust Company Americas and Deutsche Bank Securities Inc. do not “relate back” under Fed. R. of Civ. P. 15(c). 25
Deutsche Bank Entities also maintain that none of the § 10(b) claims meets the particularity requirements for pleading and that the § 12(a)(2) claim fails because the First Amended Consolidated Complaint does not allege that the offering memoranda contained material misstatements or omissions and because the statute does not apply to private placements. Thus the complaint also fails to state a claim for derivative control person liability under § 20(a) of the 1934 Act and § 15 of the 1933 Act.
ABC Arbitrage Plaintiffs Group v. Tchuruk,
Deutsche Bank Entities point out that Project Teresa closed in March 1997, Steele in October 1997, Tomas in September 1998, Renegade in December 1998, Cochise in January 1999 and Valhalla in May 2000. They contend that the closing of each project triggered the period of repose. The Amended Consolidated Complaint was not filed until May 14, 2003, over three years after Lam/pf’s three-year period of repose would have expired as to these projects.
Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson,
Furthermore, Defendants insist, the claims against newly added Defendants
*838
Deutsche Bank Trust Company Americas and Deutsche Bank Securities Inc.
26
under § 10(b) and/or § 12(a)(2) had to have been, but were not, brought within one year of discovery.
Jensen v. Snellings,
Indeed, the Deutsche Bank Entities argue that the complaint, itself, is the best evidence of the expiration of the statute of limitations for claims brought under all the statutes as to the newly added Defendants because it identifies October 16, 2001 as the date on which Enron disclosed $1 billion in charges and a reduction of shareholders’ equity by $1.2 billion, followed by media disclosures, in turn followed by plaintiffs’ filing of their first complaint in this securities fraud action on October 22, 2001; nevertheless, argue Deutsche Bank Entities, Plaintiffs waited until May 14, 2003, nineteen additional months after the first complaint was filed, to add Deutsche Bank Trust Company Americas and Deutsche Bank Securities, Inc.
27
They further contend that Plaintiffs chose not to take advantage of the eight-month period between the filing of their first consolidated complaint and the Court’s December 2002 ruling on motions to dismiss, during which they could have amended as a matter of course pursuant to Fed.R.Civ.P. 15(a). They maintain that Plaintiffs were aware of the facts and circumstances surrounding the tax schemes by May 22, 2002, when the
Washington Post
published a detailed article about the very tax transactions named in the Amended Complaint. April Witt and Peter Behr,
Enron’s Other Strategy: Taxes; Internal Papers Reveal How Complex Deals Boosted Profits by $1 Billion, Washington Post,
May 22, 2002,
republished,
Furthermore, insist Deutsche Bank Defendants, there is no “relation back” applicable to the addition of Deutsche Bank Trust Company Americas and Deutsche Bank Securities Inc. in the First Amended Consolidated Complaint because the first consolidated complaint, at ¶¶ 83(i), 71, 107, *839 and 648, mentioned that Deutsche Bank Trust Company Americas, formerly known аs Bankers Trust Company, was part of Deutsche Bank and it referred to Deutsche Bank Alex. Brown, now known as Deutsche Bank Securities Inc. In sum, charge the Deutsche Bank Entities, “[P]laintiffs made a strategic decision not to name [Deutsche Bank Trust Company Americas and Deutsche Bank Securities, Inc.] in the Newby Complaint, not to add them as defendants as a matter of course prior to December 19, 2002, and not to request leave to amend as to either thereafter with respect to the [Six Structured Transactions].” # 1621 at 10. They did not make a mistake about the identity of these two entities.
Deutsche Bank Entities also maintain that the challenged tax transactions were legitimate and were designed to comply with the tax laws and accounting standards (GAAP), as even critics agree. Moreover, they contend, the bankruptcy Examiner concluded that Valhalla was beneficial to Enron and did not involve any questionable accounting. They argue that the fact that the tax deals were structured to provide accounting and tax benefits to Enron does not make them illegitimate or lacking in a valid purpose. In its opposition, Lead Plaintiff contends that they did not comply with GAAP and cites the Enron bankruptcy Examiner’s identical conclusion as to the Steele, Cochise, Teresa and Tomas Projects. # 1707 at 15 & n. 11. Moreover, even if they were in compliance, Lead Plaintiff argues that they were still fraudulent because they concealed from investors what was going on underneath Enron’s financial statements to artificially inflate Enron’s financial results. The Court finds that these are factual issues not appropriately resolved in a motion to dismiss, where the standard requires the Court to view alleged facts in a light most favorable to Lead Plaintiff.
2. 1933 Act Claims Against Deutsche Bank Entities
The claims against the Deutsche Bank Entities under § 12(a)(2), 28 and derivative claims under § 15 (control liability), arise from Deutsche Bank’s participation as underwriter/initial purchaser of certain Enron Securities, including the following: (1) In January 1997, 6 million shares of 8-1/2% Enron capital preferred shares at $25 per share; (2) in February 1999, 27.6 million shares of Enron common stock at $31.34 per share; (3) in February 2001, $1.9 billion Enron Zero Coupon convertible bonds; and (4) on June 9, 1999 38.5 million shares of Azurix IPO at $19 per share. According to the complaint, Deutsche Bank served the same role for Enron-related Foreign Debt Securities offerings with purportedly false and misleading Offering Memoranda, relating to which Deutsche Bank failed to make reasonable investigation: (1) $1,400,000,000 8.31% Senior Secured Notes due in 2003, issued on 9/23/99 by Osprey Trust and Osprey I, Inc.; (2) $500,000,000 8% Enron Credit Linked Notes due in 2005, issued by Enron Linked Notes Trust on 8/17/00; (3) $750,000,000 7.9% Senior Secured Notes due in 2003 and Euros 315,000,000 6.375% Senior Secured Notes due in 2003, issued on 9/28/00 by Osprey Trust and Osprey I, Inc.; and (4) $475,000,000 6.31% Senior Secured Notes due in 2003 and Euros 515,000,000 6.19% Senior Secured Notes due in 2003, issuеd by Marlin Water Trust II and Marlin Water Capital Corporation II on 7/12/01.
*840
With respect to the newly added § 12(a)(2) claims, the Deutsche Bank Entities contend that Lead Plaintiff fails to identify material misstatements or omissions in the Offering Memoranda. Furthermore, relying on
Gustafson v. Alloyd Co., Inc.,
Lead Plaintiff in opposition argues that under Fifth Circuit law, whether there is a public offering is a question of fact that must be examined under the circumstances of each ease, with the burden of proof on Deutsche Bank Entities.
Hill York Corp. v. Am. International Franchises, Inc.,
Nor, Deutsche Bank Entities insist, does Lead Plaintiff state a claim for control person liability under § 15 of the 1933 Act or § 20(a) of the 1934 Act because it has failed to allege facts beyond a defendant’s position or title to show that the defendant had actual power or control over the controlled person. See this Court’s December 12, 2002 memorandum and order (# 1194) at 64-67.
The Court disagrees with Defendants and finds that if Lead Plaintiff has stated a claim for liability under § 10(b) of the 1934 Act and/or § 12(a)(2) of the 1933 Act, it has sufficiently stated a claim for control person liability. As pointed out in its memorandum (# 1707 at 35), the complaint alleges that Deutsche Bank AG is a integrated financial services institution composed of divisions and subsidiaries including Deutsche Bank Securities Inc. and Deutsche Bank Trust Company Americas, the later two are wholly owned and controlled subsidiaries of Deutsche Bank AG through which Deutsche Bank AG conducts its business affairs and all of whose stock is directly or indirectly owned by Deutsche Bank AG, and that Deutsche Bank completely directs and controls the subsidiaries’ business operations inter alia by ownership and selection and appointment of their offices and, where necessary, their directors.
Lead Plaintiff argues that Sarbanes-Ox-ley’s extended limitations period applies to the claims against newly added Defendants Deutsche Bank Trust Company Americas and Deutsche Bank Securities, Inc. in the Amended Consolidated Complaint, since these claims were commenced by the new complaint after the Act’s enactment. The Court has previously rejected this argument. # 1999 at 33-56.
Lead Plaintiff alternatively argues that even if the Court finds the extended limitations inapplicable, the filing of the tax claims against the new entities nevertheless satisfies the one-year statute of limita *842 tions. Deutsche Bank has itself stated that Plaintiffs were aware of the facts and circumstances surrounding the tax structure at least as long ago as May 22, 2002 32 ; the amended complaint was filed on May 14, 2003, within a year of the date it was put on notice.
Lead Plaintiff further insists the claims also fall within the Lampf three-year period of repose because the Deutsche Bank Entities’ argument that the tax Projects “closed” more than three years before the First Amended Consolidated Complaint was filed ignores the amended complaint’s allegations of the Deutsche Bank Entities’ ongoing, active, primary participation in these Projects, which inflated Enron’s earnings subsequently over a period of years and continuously paid the Deutsche Bank Entities fees for their work, indeed through the Class Period. In other words, Lead Plaintiff looks not to the date each scheme was structured or “closed,” but to the ongoing acts to effectuate the scheme by Defendants leading to fraudulent results within the Class Period, i.e., it seeks application of a “continuing violation theory” to the Ponzi scheme.
For example, according the latest complaint, Cochise, like Project Steele, involved the transfer of mortgage-backed securities and other assets from Deutsche Bank to an Enron affiliate, with both Enron and Bankers Trust improperly sheltering taxable income through deductions for losses involving the same assets. As the first stage of the project, Enron purchased two airplanes from Deutsche Bank for $46.7 million in January 1999, which Deutsche Bank repurchased on June 28, 2000 for $36.5 million, and which Enron bought back one month later through an Enron subsidiary, Oneida. When Enron fraudulently sold the planes back to Deutsche Bank on June 28, 2000, which act was within three years of the filing of the First Amended Complaint and thus within the period of repose under § 10(b), Enron reported the full proceeds as net income, in violation of GAAP, as was found by the bankruptcy Examiner, 3rd Report, App. G at 54. Moreover, pursuant to a shareholder agreement, Deutsche Bank became a partner with Enron in a fraudulent Deutsche Bank entity called Maliseet to further Project Cochise through acts as late as January 28, 2001. Cochise artificially inflated Enron’s earnings by $27.7 million in 1999, $50.3 million in 2000, and 23.2 million in 2001 (for a total of $101 million during 1999-2001). This inflated income was reported in Deutsche Bank’s analyst reports and Enron’s financial statements. As with the other STDs, an opinion letter from an established law firm made clear that the purpose of the transaction was inflating Enron’s financial statements.
Similarly the amended complaint asserts that Project Steele also allowed Enron and Deutsche Bank to claim a tax deduction for the same group of mortgage-backed securities. Enron and Bankers Trust used a new partnership, ECT Partners, jointly owned by Enron and Bankers Trust, to which Bankers Trust transferred money-losing securities. (Deutsche Bank purchased a 5% preferred ownership interest in ETC. to achieve the inflated Enron financial statements.) According to the complaint, the Internal Revenue Code prohibits a company from buying another entity, in this case Enron and Bankers Trust, merely to acquire its tax deductions. The *843 complaint charges that Enron claimed the deal was not for tax avoidance, but for “obtain[ing] financial income” benefits, in other words “to inflate earnings,” both illicit purposes according to Lead Plaintiff. Project Steele purportedly provided $65 million in net earnings to Enron from 1997 through 2001.
B. Court’s Rulings
1. Exchange Act Claims
(a) Pleading Sufficiency under § 10(b)
After reviewing all of the circumstances alleged in the First Amended Consolidated Complaint, buttressed substantially by the detailed claims relating to the STDs, the Court finds that if the claims based on the STDs were not time-barred, Lead Plaintiff has adequately and particularly stated a claim against the Deutsche Bank Entities as secondary actors committing primary violations of § 10(b) and Rule 10b-5, including facts giving rise to a strong inference of scienter on their part. It has asserted that the six distinct STDs, each described in some detail, violated GAAP by serving solely to falsely report inflated income for Enron; violated Rule 10b-5 in deceiving investors by misleading the public, which had no way to know that the purported pre-tax earnings income came from potential benefit of speculative future tax deductions based on hidden STDs; and violated the Tax Code and the business purpose rule in order to fraudulently inflate financial results. It also, throughout the Class Period, issued analyst reports with strong “Buy” recommendations and laudatory statements about the company despite its knowledge that the financial reports were false, in substantial part because of the undisclosed STDs. 33
(b) Statute of Limitations for § 10(b) Claims re Tax Schemes and Added Entities
Nevertheless, because the Court finds that the claims based on the STDs are time-barred, the Court finds that the pleadings, without those claims, are insufficient to raise the requisite strong inference of scienter and to state a claim against the Deutsche entities under § 10(b). Because the time bar of limitations reduces the number of viable claims to just a single STD, again, without the pattern of tax schemes, the pleadings fail to meet the requirements of the PSLRA.
There are insurmountable challenges under the applicable period of repose and statute of limitations for both the § 10(b) claims, and therefore the derivative § 20(a) control person claim, based on the STDs. Because of the limitations bar, the Court concludes that Lead Plaintiff has failed to state a claim against the Deutsche Bank Entities under these two statutes.
*844 (i) Sarbanes-Oxley Act
The Court hereby incorporates the law relating to statutes of limitations applicable to claims under § 10(b) and § 20(a) of the 1934 Act and to § 11, § 12(a)(2), and § 15 of the 1933 Act, which it set out in its February 25, 2004 memorandum and order (# 1999) at 24-63, regarding the Imperial Employees Retirement System’s motion to intervene.
As noted, the Court has previously rejected the argument that the extended statute of limitations in the Sarbanes-Ox-ley Act applies to both § 10(b) and § 12(a)(2) claims in the Newby class action for reasons that apply here. Thus the Court holds that the one-year/three-year limitations period set out in Lampf applies to the § 10(b) and derivative § 20(a) claims asserted here, while the one-year/ three-year periods of § 13 applies to Lead Plaintiffs claims under the 1933 Act.
(ii) Continuing Violation Theory
Lead Plaintiff has also argued that even if the close date of each STD project constituted a securities violation, the close was “part of a continuing conduct that violated § 10(b) throughout the Class Period”
34
and which was not apparent until much later in the scheme. Lead Plaintiff maintains that the “STDs did
not
end at the purported ‘close’ date of the transactions,” which referred merely to “the signing of documents forming a partnership or some other entity in which Enron and Deutsche Bank called themselves investors”; instead “[i]n each STD, Deutsche Bank continued to play a significant role in carrying out the transaction over a period of several years” and the STDs “inflated Enron’s financial statements after they ‘closed.’ ” Moreover, Deutsche Bank continued to receive fees and issue false and misleading analyst reports while underwriting Enron and Enron-related securities offerings and participating in LJM2. # 1707 at 7-8. Lead Plaintiff contends that the “ ‘close’ of the transactions was a part of continuing conduct that violated § 10(b) repeatedly throughout the Class Period.”
Id., citing Huckabay v. Moore,
The “continuing violation” doctrine arose in the context of Title VII employment discrimination cases, 42 U.S.C. § 2000e
et seq.,
as an equitable exception to the statute’s brief period for filing charges with
*845
the EEOC,
35
which is shorter than that allowed under
Lampf,
The continuing violation theory relieves a plaintiff of establishing that all of the complained-of conduct occurred within the actionable period if the plaintiff can show a series of related acts, one or more of which falls within the limitations period.... The core idea [of the continuing violations theory,] however, is that [e]quitable considerations may very well require the filing periods not begin to run until facts supportive of a Title VII charge or civil rights action are or should be apparent to a reasonably prudent person similarly situated. The focus is on what effect, in fairness and logic, should have alerted the average lay person to act to protect his rights. At the same time, the mere perpetuation of the effects of time-barred discrimination does not constitute a violation of Title VII in the absence of independent actionable conduct occurring within the statutory period.... Thus, a plaintiff can avoid a limitations bar for an event that fails to fall within the statutory period where there is “[a] persistent and continuing system of discriminatory practices in promotion or transfer [that] produced effects that may not manifest themselves as individually discriminatory except in cumulation over a period of time.” [citations omitted]
Messer v. Meno,
Although there is no definitive standard for what constitutes a continuing violation, the plaintiff must demonstrate more than a series of discriminatory acts. He must show an organized scheme leading to and including a present violation, ... such that it is the cumulative effect of the discriminatory practice, rather than any discrete occurrence, that gives rise to the cause of action [citations omitted].
Huckabay,
Unlike securities claims, the time for filing charges with the EEOC in an employment discrimination action has long been viewed as not jurisdictional and as
*846
“subject to equitable doctrines such as tolling or estoppel.”
Zipes v. Trans World Airlines, Inc., 455
U.S. 385, 393,
Few courts have addressed whether or not the continuing violation doctrine applies to securities fraud cases under the one-year/three-year limitations provisions for claims under § 10(b) under
Lampf
and for claims § 12(a)(2) through § 13. As the only federal appellate court that has done so, the Fourth Circuit, based on the language in
Lampf
stating that equitable tolling does not apply to the period of repose for claims under § 10(b), has rejected the continuing violation doctrine’s application to securities fraud claims.
Caviness v. Derand Resources Corp.,
The only case this Court has found recognizing the application of the continuing violation theory in a securities fraud action was cited by Lead Plaintiff.
36
SEC v. Ogle,
No. 99 C 609,
Moreover, even if the continuing violation doctrine were applicable to securities violations in
Newby,
in a 5-4 decision authored by Justice Clarence Thomas, the United States Supremе Court has recently constricted the scope of the doctrine.
National R.R. Passenger Corp. v. Morgan,
We derive several principles from these cases. First, discrete discriminatory acts are not actionable if time barred, even when they are related to acts alleged in timely filed charges. Each discrete discriminatory act starts a new clock for filing charges alleging that act. The charge, therefore, must be filed within the 180- or 300-day period after the discrete discriminatory act occurred. The existence of past acts and the employee’s prior knowledge of their occurrence, however, does not bar employees from filing charges about related discrete acts so long as the acts are independently discriminatory and charges addressing those acts are themselves timely filed. Nor does the statute bar an employee from using the prior acts as background evidence in support of a timely claim.
Id.
at 113,
There may be circumstances where it will be difficult to determine when the time period should begin to run. One issue that may arise in such circumstances is whether the time begins to run when the injury occurs as opposed to when the injury reasonably should *848 have been discovered. But this case presents no occasion to resolve that issue.
Id.
at 114 n. 7,
In sum this Court concludes that the limitations bar in the Newby securities fraud action should not be equitably tolled by a continuing violation theory. It agrees with the Fourth Circuit in Caviness, analyzing the Supreme Court’s language in Lampf, regarding the balancing effect of the statute of repose’s absolute “cut-off’ function against the one-year inquiry-notice statute of limitations for § 10(b) claims, in addition to the clear language in § 13. These undermine Lead Plaintiffs argument that a continuing violation theory should save from a limitations bar all of its claims based on acts relating to all STDs. Moreover, under the facts pleaded here, this Court concludes that the continuing violations doctrine should not apply. Lead Plaintiff has alleged a formal “close” of a tax scheme, i.e., an execution of documents establishing a partnership or association for purposes of' realizing tax savings, a discrete act, followed by continuing discrete acts by Deutsche Bank Entities effectuating the various tax schemes at different times in different ways by use or abuse of that legal relationship.
(iii) Period of Repose and Tax Scheme Claims
Therefore for limitations purposes, at issue here is at what point the period of repose begins to run for claims under § 10(b). Defendants make a rational argument that “the closing of each [SDT] created the pool of assets and the structure that then supported the economic benefits flowing from the transactions” and was thus a discrete act that commenced the fraud. # 1751 at 8. Even if the Court views the pleadings in a light most favorable to Lead Plaintiff and accepts what Lead Plaintiff argues, i.e., that the “closing” was merely a signing of the documents to establish a legal relationship and did not trigger the period of repose for each STD, then the Court concludes that the first discrete act immediately after such document execution in each STD surely would start the running of the period of repose. Lead Plaintiff bears the burden of establishing the date of that first discrete act in the execution of each STD scheme and of showing that the First Amended Consolidated Complaint was filed within three years of those dates to establish a scheme of STDs, but it has- not done so. Even if it had, it must also have satisfied the one-year, inquiry-notice period for filing suit: at what point in each scheme should an ordinary investor reasonably have recognized that his interest was being harmed and that an investigation should be undertaken, and whether he subsequently timely filed suit.
From an examination of Lead Plaintiffs First Amended Consolidated Complaint and its pleadings relating to the motion to dismiss, it is facially apparent that some § 10(b) STD-based claims are obviously time-barred. Lead Plaintiff has identified step 1 of Project Cochise, the purchase of two airplanes by Enron from Deutsche Bank as occurring in January 1999. # 1707 at 9. Thus the period of repose as to Project Cochise would have expired in January 2002, before the First Consolidated Complaint was filed on April 8, 2002 (if the Court were to allows the claims to “relate back”) and long before the filing of the First Amended Consolidated Complaint in May 2003. Lead Plaintiff also quotes the JCT Report identifying the “initial step in the implementation of Project Teresa” as the contribution of property by Enron and *849 EN-BT Delaware, Inc. (a Deutsche subsidiary) to Organization Partner, Inc. in exchange for stock on March 21, 1997. # 1707 at 12. Thus the period of repose also expired as to claims relating to Teresa. Although the Court is unable to determine with certainty from the pleadings when the first discrete act of execution occurred, statements in Lead Plaintiffs pleadings imply that claims based on other tax schemes are also time-barred with the exception of Valhalla. Lead Plaintiff indicates that Project Steele through Enron SPE and Deutsche Bank’s ECT Partners contributed millions to “Enron’s bottom line from 1997 # 1707 at 11. Lead Plaintiff also states, “In October 1997, Deutsche Bank bought into ECT Partners (the Enron SPE at the heart of Project Steele,” suggesting that claims based on Project Steele are time-barred).” With respect to Tomas, the pleadings do not provide the date of formation of Seneca, an Enron/Deutsehe Bank partnership, and of its receipt of lease assets that it was to hold for two years, but does state that the assets were sold in December 2000, after which Seneca ceased to exist. That fact suggests that Seneca received the assets in 1998, and thus claims based on Tomas would also be time-barred. There are no facts provided about Projects Renegade and Valhalla as to when the first discrete act in execution of those alleged tax schemes occurred. Lead Plaintiff has not met its burden of pleading, no less ultimately proving, its claims are timely.
(iv) Relation Back and Equitable Tolling/Estoppel Doctrines
Having attempted to circumvent a limitations bar by arguing first that the longer three-year/five-year limitations periods under Sarbanes-Oxley Act governs the First Amended Consolidated Complaint and then that the continuing violation theory should apply here, both of which contentions this Court has rejected, Lead Plaintiff alternatively urges the Court to find that the addition of the two new Deutsche entities and the claims against them “relate back” to the filing date of the first consolidated pleading (April 8, 2002) under Rule 15(c). It maintains that the Bank Defendants cannot reasonably claim prejudice by surprise because the amendment addresses mistakes that Bank Defendants claimed existed in the First Consolidated Complaint. The “relation back” issue has been raised by numerous Bank Defendants in their motions to dismiss. In essence, Bank Defendants argue that Lead Plaintiff originally named the wrong parties, i.e., the bank parent companies, and now untimely adds their subsidiaries as Defendants.
At issue here is whether Rule 15(c) will allow the First Amended Consolidated Complaint to relate back to the date of the filing of the First Consolidated Complaint and avoid one-year limitations bar against (1) newly added Deutsche Defendants and (2) the newly added STD claims. Leave to grant a Rule 15(a) motion is subject to the court’s sound discretion, limited by Rule 15(a)’s mandate that “leave shall be given when justice so requires.”
Jacobsen,
Addressing “Relation Back of Amendments,” Rule 15(c) allows the amendment of a complaint to add or change a party defendant after limitations has expired under certain conditions. It provides in relevant part,
An amendment of a pleading relates back to the date of the original pleading when
*850 (1) relation back is permitted by the law that provides the statute of limitations applicable to the action, or
(2) the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading, or
(3) the amendment changes the party or the naming of the party against whom a claim is asserted if the foregoing provision (2) is satisfied and within the period provided by Rule 4(m) [with 120 days following the filing of the complaint] for service of the summons and complaint, the party to be brought in by amendment (A) has received such notice of the institution of the action that the party will not be prejudiced in maintaining a defense on the merits, and (B) knew or should have known that, but for a mistake cоncerning the identity of the proper party, the action would have been brought against the party. 37
*851
“Notice may be formal or informal.”
Montgomery v. U.S. Postal Service,
With respect to subpart (3)(A)’s notice clause requirement, the Fifth Circuit “will infer notice if there is an identity of interest between the original defendant and the defendant sought to be added or substituted.”
Jacobsen v. Osborne,
Moreover, as another basis, the Fifth Circuit in
Jacobsen
stated that the court can judicially notice such identity of interest where the old and new parties share counsel.
With respect to the identity of interest exception, here Lead Plaintiff has asserted that it satisfied the notice prong because it has (1) conclusorily alleged that the newly added Deutsche entities are wholly owned subsidiaries of, and controlled by, Deutsche Bank AG and (2) apparently, as reflected in the record, share the same counsel in this litigation. For purposes of this motion the Court finds that it has satisfied the notice prong under Fifth Circuit law.
In addition to the notice clause of subpart (3)(A), however, the “mistake clause” of subpart (3)(B) must also be satisfied for the amended complaint to “relate back.” Where the change in naming parties or substituting new parties was not the result of a
mistake,
i.e., misidentifieation or misnomer, but rather because the plaintiff did not know the identity of the defendant originally, the relation-back doctrine does not apply.
Jacobsen,
In Lead Plaintiffs Memorandum in Opposition to the Bank Defendants’ Motions to Dismiss the First Amended Consolidated Complaint (# 1574) at 24, Lead Plaintiff has argued “mistake in fact as to identity” and “mistake in law”
40
and insists that
*853
“Bank Defendants, with their superior information concerning the identity and involvement of their subsidiaries in the Enron fraud, ought to have anticipated (and did) that culpable entities would be added as defendants here, after correct identities were revealed.” Lead Plaintiff objects to Bank Defendants’ characterization that Lead Plaintiff made a deliberate tactical or strategic decision to name only certain bank entities and thus is not entitled to “relation back” pursuant to Fed.R.Civ.P. 15(c); Lead Plaintiff claims that on April 8, 2002, when it filed the First Consolidated Complaint, its “naming of the bank defendants originally sued was based on the limited information then available, without the benefit of documents and testimony later obtained and released by the Senate or by Enron’s Bankruptcy Examiner. Indeed, while the Bank Defendants claimed this was a case of mistaken identity in their pleading motions and answers in response to the Consolidated Complaint, most did not divulge the identities of the culpable subsidiaries.”
Id.
Deutsche Bank is one of those who kept silent. Indeed, as Lead Plaintiff asks, why would the Bank Defendants identify any of their own subsidiaries involved in the Enron fraud? Lead Plaintiff cites
Berrios v. Sprint Corporation,
No. CV-97-0081 (CPS),
This Court observes that in
Jacobsen,
the Fifth Circuit not only found that the plaintiff in a § 1983 suit alleging false arrest and abuse by sheriffs deputies, initially did not know the identity of new defendants, but that once he did have some idea, he delayed in participating in discovery and in filing an amendment. The panel found that the plaintiff was dilatory and hints that where a plaintiff diligently investigates in an effort to identify the proper party, there might be a different result (“[W]e note this action has been plagued by delays... In short the result reached today as to the deputies could— and, indeed, should — have been avoided.”).
Here, Lead Plaintiff was barred from doing discovery by the PSLRA until the motions to dismiss were resolved. Therefore it first sued the parent Bank Defendants based on whаt information it had and then, while the motions to dismiss were pending, pursued information reported publicly by the Congressional investigations and the Bankruptcy Examiner. Lead Plaintiff also, within a short time after the Court’s December 19, 2002 ruling on the Banks’ motions to dismiss, sought permission by letter to amend, as will be discussed.
With respect to the requirements for “relating back” under Rule 15(c) to save the additional parties and additional SDT claims from being time-barred, the Court finds that the claims made against the new Deutsche Bank Entities do arise out of the same, challenged, fraudulent Ponzi scheme as those against Deutsche Bank AG in the First Consolidated Complaint; the Court finds that the SDT claims are also part of that same conduct set forth in the first consolidated pleading, if viewed in the context of the alleged Ponzi scheme. Moreover, the Court infers that the two new entities must have received notice that they would have been sued, were it not for a lack of knowledge by Lead Plaintiff about their corporate identities, because of identity of interest and shared counsel with Deutsche Bank AG.
Nevertheless, unless the Court finds that the corporate confusion and the PSLRA stay constitute “good cause” under
Jacobsen,
it appears that there was no “mistake” as to the additional parties or to the additional SDT claims. By Lead Plaintiffs own admission, the identities of the two new Deutsche Banks were unknown, i.e., Lead Plaintiff lacked knowledge of these two as proper parties, when it filed its First Consolidated Complaint. Lead Plaintiff further claims that it was not put on notice about the tax schemes until May 22, 2002 and filed the amended complaint within the one-year statute of limitations on May 14, 2003. The Court has considered as significant factors that Lead Plaintiffs lack of knowledge was allegedly caused by (1) the complex corporate structure of similarly named entities with identity of interests which the parent company, Deutsche Bank AG, did not unravel for Lead Plaintiff, (2) the absence of discovery to determine legally responsible entities, and (3) the sheer size, complexity, and sophistication of the alleged fraud.
Defendants have objected that there was delay on Lead Plaintiffs part, because even after Lead Plaintiff learned of the two new entities, it was dilatory and intentionally did not timely name them until it filed the First Amended Consolidated Complaint in May 2003. In response, however, Lead Plaintiff points out that in the Court’s ruling on December 19, 2002, this Court ordered Banking Defendants to file additional appropriate motions to dismiss if they had viable challenges that the wrong entity was being sued. See, e.g., # 1194 at 4 n. 5. As noted, counsel for Lead Plaintiff then wrote a letter to the Court on January 14, 2003, requesting a scheduling conference and specifically asking inter alia whether “to address certain bank defendants’ arguments, should Lead Plaintiff amend or supplement to name subsidiaries of the Bank Defendants or file a new complaint with the same claims and adding subsidiaries [emphasis added by the Court].” Exhibit 1 to # 1575. Numerous motions to dismiss were still pending. On January 27, 2003, the Court issued an order in which it responded to that letter request and stated,
It makes no sense to establish a schedule, including for amendment of pleadings, without knowing all that needs to be done.... Lead Plaintiff also asks whether it should add the subsidiaries of the bank Defendants to an amended or supplemental complaint. The Court indicated in its memorandum and order [# 1194] that if the banks object to being named defendants because a subsidiary or other entity was the real party in interest, they should file appropriate motions. The bank Defendants should do so now, and Lead Plaintiff should file its response as quickly as possible, so that all amendment or supplementation can be efficiently and timely accomplished in one instrument.
# 1238 in Newby and # 551 in Tittle, at 2-3. Despite this order, some Bank Defendants, including the Deutsche Bank Entities, waited over three months, well after one year [and the limitations period] since Lead Plaintiff had filed its First Consolidated Complaint, to file their motions, while others (J.P. Morgan Chase, Merrill Lynch, Lehman Brothers, and Credit Suisse First Boston) never did so, while Barclays withdrew its motion. Lead Plaintiff claims that it relied on the Bank Defendants’ silence and filed its First Amended Consolidated Complaint according to the schedule subsequently established by the Court after it ruled on all the motions to dismiss, so the amendment would by accomplished efficiently and comprehensively, and not piecemeal. Lead Plaintiff argues that Bank Defendants should be equitably estopped from asserting the statute of limitations defense now raised. 41 Tyler v. Union Oil Co., 304 F.3d *856 379, 391 (5th Cir.2002)(applicability of equitable estoppel turns on “whether the defendant’s conduct, innocent or not, reasonably induced the plaintiff not to file suit within the limitations period.”).
There are two doctrines, among others, that may toll a statute of limitations: equitable tolling and equitable estoppel. Equitable tolling and equitable estoppel are both “ ‘based primarily on the view that a defendant should not be permitted to escape liability by engaging in misconduct that prevents the plaintiff from filing his or her сlaim on time.’ ”
Lekas v. United Airlines, Inc.,
Under the law of the Fifth Circuit, “ ‘Equitable tolling focuses on the plaintiffs excusable ignorance of the [defendant’s wrongful conduct]. Equitable estoppel, in contrast, examines the defendant’s conduct and the extent to which the plaintiff has been induced to refrain from exercising his rights.’ ”
Rhodes v. Guiberson Oil Tools Div.,
Neither the doctrine of equitable estoppel nor that of equitable tolling applies to statutes of repose because “their very purpose is to set an outer limit unaffected by what the plaintiff knows.”
Cada v. Baxter Healthcare Corp.,
Courts have also held that equitable tolling also does not apply to the three-year statute of repose in § 13 for claims under §§ 11 and 12(a)(2) 42 of the 1933 Act. See Thomas Lee Hazen, 1 Law of Securities Regulation § 7.10[2] (2d ed. 2004 Supp.)(“[T]he courts have almost uniformly agreed that the three year statute of repose in sections 11 and 12 is absolute and thus equitable tolling principles will not be invoked to extend the period further ”)(and cases cited therein). Indeed Hazen clearly states,
Section 13 is not only a statute of limitations but also operates as a statute or repose. There is an absolute maximum of three years to prevent stale claims. Actions brought under section 12(a)(2) must be brought within three years of the sale forming the basis for the alleged violation.
Id. at § 7.10[4]. Here, however, under the allegations in the complaint, the § 12(a)(2) claims are not barred by the statute of repose.
Furthermore, while it is clear that equitable tolling does not apply to extend the period of repose, the application of equitable estoppel to securities laws is not clear. The Fourth Circuit has expressed uncertainty: “We have never read the doctrine of equitable estoppel into the federal securities laws.”
Chance v. F.N.Wolf & Co., Inc.,
when knowledge or notice is required to start the statute of limitations running, there is no room for equitable tolling,” has commented, “But there may still be room in such a case for equitable estop-pel. Katz v. Amos Treat & Co.,411 F.2d 1046 , 1055 (2d Cir.1969)(Friendly, J.) holds there is room; Short v. Belleville Shoe Mfg. Co.,908 F.2d 1385 , 1392 (7th Cir.1990), [ cert. denied,501 U.S. 1250 ,111 S.Ct. 2887 ,115 L.Ed.2d 1052 (1991),] leaves the question open.” Equitable tolling just means that without fault by either party, the plaintiff does not have enough information to sue within the period of limitations, and in the type of statute of limitations that we are discussing the period doesn’t start until he has the information, making equitable tolling redundant. But the plaintiff might have the required information-actual knowledge of the violation or inquiry notice, as the case may be-yet be *858 thwarted from suing in time by misrepresentations or other actions by the defendant; for example, the defendant may have promised not to plead the statute of limitations.
Tregenza v. Great American Communications Co.,
Some courts have held that the doctrine of equitable estoppel, too, is inapplicable to the three-year period of repose.
See, e.g., Caviness,
Others have focused on its applicability to the one-year limitations period, since under equitable estoppel the plaintiff knows of his claim and discovery is not an issue. Some courts have concluded that equitable estoppel may apply to extend that one-year period, but may not extend limitations by more than the two yеars’ grace period provided by the three-year statute of repose.
Short v. Belleville Shoe Mfg.,
In
Newby,
Lead Plaintiff is requesting application of equitable estoppel on the grounds that Defendants failed to file motions to dismiss raising the issue of wrongly named entities as ordered by the Court. This argument is not fully convincing because it is the plaintiffs burden to file within the limitations period and, from the record, it appears Lead Plaintiff could have done so. Nevertheless the circumstances here are distinguishable from the usual situation giving rise to a request for equitable estoppel. Not only did Lead Plaintiff rely on Defendants’ failure to file such motions, but, perhaps more significantly, it relied on the Court’s determination that in the interests of efficiency and avoidance of repeated amendments, the complaint should not be amended until all the original motions to dismiss were all resolved and the Court had identified all pleading deficiencies that required supplementation. In a litigation this size and with the complexity and variety of the issues raised, substantial delay was inevit
*859
able. Moreover, when the Court responded to Lead Plaintiffs timely letter asking about amendment of numerous issues, it was not thinking about the statute of limitations problem when it opined that in the interests of efficiency of time and cost, amendment of the complaint should be deferred until all the motions to dismiss were resolved and should be effected in a single instrument. In view of all these circumstances and pursuant to Federal Rule of Civil Procedure 15(a)(“leave [to amend] shall be freely granted when justice so requires”), the Court construes that letter of January 14, 2003 as a timely motion for leave to amend and finds that January 14, 2003 constitutes the date that the Amended Consolidated Complaint was filed, and was timely filed, for purposes of the statute of limitations.
Northwestern National Ins. Co. v. Alberts,
Nevertheless, as indicated, the problem here is that Lead Plaintiffs § 10(b) tax scheme allegations, which are essential to avoiding a 12(b)(6) dismissal for failure to state a claim, are nearly all time-barred by the three-year statute of repose. As noted, only the Valhalla Project appears to be within the three-year statute of repose. Allegations based on a single tax scheme, which was not even detailed in the complaint, are not sufficient to sustain a claim of a primary violation of § 10(b). Accordingly, Lead Plaintiffs § 10(b), and derivative § 20(a), claims against Deutsche Bank Entities must be dismissed.
2. 1933 Act’s Section 12(a)(2) and § 15 Claims
(a) Standing
To state a claim under § 12(a)(2), a plaintiff must have individual standing.
In re Taxable Mun. Bond Sec. Litig.,
As noted, ICERS, which recently intervened, has standing to sue under § 12(a)(2) for its claims relating to its purchase in the July 12, 2001 offering of Marlin Water Trust II notes, for which Deutsche Bank served as underwriter and qualifies as a statutory “seller” (a “person who actually passes title to the buyer, or ‘the person who successfully solicits the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner,’
e.g.,
a broker”).
Rosenzweig v. Azurix Corp.,
(b) Private or Public Offerings
There is no dispute that the Four note resales on which Lead Plaintiffs § 12(a)(2) *860 claims are based were exempt from the registration requirements of Section 5 of the 1933 Act.
Section 12 applies only to public offerings and not to private transactions.
Gustafson v. Alloyd Co.,
Section 10 does not provide that some prospectuses must contain the information contained in the registration statement. Save for the explicit and well-defined exemptions for securities listed under § 3, see 15 U.S.C. § 77c (exempting certain classes of securities from the coverage of the Act), its mandate is unqualified: “[A] prospectus ... shall contain the information contained in the registration statement.”
An examination of § 10 reveals that, whatever else “prospectus” may mean, the term is confined to a documеnt that, absent an overriding exemption, must include the “information contained in the registration statement.” By and large, only public offerings by an issuer of a security, or by controlling shareholders of an issuer, require the preparation and filing of registration statements. See 15 U.S.C. §§ 77d, 77e, 77b(ll). It follows, we conclude, that a prospectus under § 10 is confined to documents related to *861 public offerings by an issuer or its controlling shareholders.
Id.
44
Thus unless a securities transaction is exempt from registration requirements by statute, rule, regulation, or by judicial ruling,
45
it must be registered with the SEC in accordance with § 5 before any use may be made of any means of interstate commerce or the mails to sell or offer to sell securities. Thus a § 12(a)(2) claim may be asserted only by purchasers of stock in a public offering pursuant to a prospectus containing material misrepresentations or omissions.
Gustafson,
The phrase, “public offering,” is not defined in § 4(2) of the Securities Act of 1933, 15 U.S.C. § 77d(2) (exempting from § 5’s registration requirements any transactions by an issuer not involving a public offering). In the leading case on the issue, the Supreme Court defined the scope of the private offering exemption by examining the legislative purpose of the Act, i.e., to protect investors by requiring full disclosure of information that was material to making informed investment decisions; therefore “since exempt transactions are those as to which ‘there is not practical need for ... (the bill’s) application,” the applicability of the § 4(2) private placement exemption should rest upon “whether the particular class of investors affected need the protection of the Act.”
SEC v. Ralston Purina Co.,
The defendant bears the burden of proving a private-offering-exemption affirmative defense.
SEC v. Ralston Purina Co.,
What constitutes a public offering turns on a number of factors and requires a fact-specific analysis on a case by case basis.
Hill York Corp. v. American International Franchises, Inc.,
Consideration of these factors need not exhaust the inquiry, nor is one factor’s weighing heavily in favor of the private status of the offering sufficient to ensure the availability of the exemption. Rather these factors serve as guideposts to the court in attempting to determine whether subjecting the offering to registration requirements would further the purposes of the 1933 Act.
Doran v. Petroleum Management Corp.,
Regarding the first factor, the Fifth Circuit explained,
“No particular numbers are prescribed. Anything from two to infinity may serve: perhaps even one .... ” Obviously, however, the more offerees, the more likelihood that the offering is public. The relationship between the offerees and the issuer is most significant. If the offerees know the issuer and have special knowledge as to its business affairs, such as high executive officers of the issuer would possess, then the offering is apt to be private.... Also to be considered is the relationship between the offerees and their knowledge of each other. For example, if the offering groups is being made to a diverse and unrelated group, i.e., lawyers, grocers, plumbers, etc., then the offering would have the appearance of being public; but an offering to a select group of high executive officers of the issuer who know each other and of course have similar interests and knowledge of the offering would likely be characterized as a private offering, [footnotes omitted]
Hill York Corp.,
Regarding the second factor, the number of units offered, “there is no fixed magic number. Of course, the smaller the number of units offered, the greater the likelihood the offering will be considered
*863
private.”
Hill York Corp.,
Moreover, relating to the fourth factor, the manner of offering, the Fifth Circuit has indicated, “A private offering is more likely to arise when the offer is made directly to the offerees rather than through the facilities of public distribution such as investment bankers or the securities exchanges. In addition, public advertising is incompatible with the claim of private offering.” Id.
Finally, the “ultimate test” remains “whether ‘the particular сlass of persons affected need the protection of the Act.’ ”
Id.
Because the 1933 Act is remedial legislation, it is entitled to a broad construction, while the exemptions to registration requirements and prospectuses must b'e narrowly construed.
Id.
Thus the defendant must show that each offeree had the same information that was available in the registration statement or had access to that information.
Swenson v. Engelstad,
As noted previously, relying on
State of Alaska Dept. of Revenue v. Ebbers (In re Worldcom, Inc. Sec. Litig.),
The Court observes that a number of features of the Newby offering memoranda are similar to those in State of Alaska. For example, the offering memorandum for Osprey Trust Osprey I, Inc. 8.31% Senior Secured Notes due 2003, Ex. 3 to # 1621, which is virtually identical to the others, states in relevant part,
THE SENIOR NOTES HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED . . . OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. ACCORDINGLY, THE SENIOR NOTES ARE BEING OFFERED HEREBY ONLY (A) TO “QUALIFIED INSTITUTIONAL BUYERS” (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT . . . IN RELIANCE ON THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT PROVIDED BY RULE 144A) AND (B) OUTSIDE THE UNITED STATES TO CERTAIN PERSONS IN RELIANCE UPON REGULATION S UNDER THE SECURITIES ACT .... PROSPECTIVE PURCHASERS ARE HEREBY NOTIFIED THAT *864 SELLERS OF THE SENIOR NOTES MAY BE RELYING ON THE EXEMPTIONS FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A AND REGULATION S...
The same offering memorandum has other provisions suggesting that it is a private offering: it states that it has not been registered with the SEC, that it is “personal to each offeree to whom it has been delivered” and “does not constitute an offer to any other person or to the public generally,” that distribution or disclosure of any of the parts of the memorandum to any other person not an advisor to the original offeree is “unauthorized,” .that the recipient is “to make no photocopies of this memorandum,” and, if he chooses not to purchase the notes, that he is to return the memorandum to the firm distributing it. On the bottom of each page is the phrase, “Confidential Treatment Requested .... ”
Furthermore, Rule 144A, 17 C.F.R. § 230.144A, expressly states that offerings to Qualified Institutional Investors (“QIBs”) under the rule’s provisions “shall not be deemed to have been offered to the public.” As one court explains,
Rule 144A creates a safe harbor from the registration requirements of the Securities Act for certain institutional investors known as Qualified Institutional Buyers (“QIB’s”) — institutions that own and invest on a discretionary basis at least $100 million. The SEC instituted the rule because, while the Securities Act was “remedial legislation designed to protect ... unsophisticated, individual investors ..., certain institutions can fend for themselves and therefore, offers and sale to such institutions does not involvе a public offering!)]”
In re Hayes Lemmerz Intern., Inc.,
Regulation S, adopted in SEC Release No. 33-6863 (April 23, 1990), is a non-statutory exemption for securities offered and sold outside the United States from the registration requirements under § 5 of the 1933 Act. 17 C.F.R. § 230.901 (2004). Because a memorandum accompanying a Regulation S offering is not required to contain information contained in a registration, it may not be a “prospectus” and thus might not support a claim under Section 12.
Nevertheless, the law is not clear as to whether an offering memorandum that is not exempt under § 4(2), but that falls under Rule 144A or Regulation S is necessarily a private offering. A district court in the Southern District of New York recently refused to extend the reasoning of
Gustafson
to Regulation S offerings; it concluded that even though registration is not required for such offerings, because Regulation S offerings are not exempted under § 3 or § 4 of the Securities Act of 1933, 15 U.S.C. § 77c, they are subject to liability under § 12(a)(2) if they are public offerings.
Sloane Overseas Fund, Ltd. v. Sapiens Intern. Corp., N.V.,
Emphasizing that under Fifth Circuit law the question of whether an offering is private is a question of fact that must be resolved in light of the facts and circumstances of each case,
Swenson,
With respect to the rationale of
State of Alaska,
this Court is aware of other decisions, pursuant to
Gustafson,
dismissing claims under § 12(a)(2) where the court ruled that the offering memorandum was on its face not a “prospectus,” but a private placement memorandum for purposes of § 12(a)(2) claims. Nevertheless nearly all considered other factors or circumstances in reaching their decision, especially whether the plaintiffs have nevertheless claimed in their pleadings that the offering was public, recognizing that at the 12(b)(6)
*866
stage of litigation a court must accept well pleaded facts by the plaintiffs as true.
See, e.g., Vannest v. Sage, Rutty & Co., Inc.,
Furthermore, several courts have expressly held that such fact-intensive inquiries are not appropriate for review under a motion to dismiss, where a court, assuming the plaintiffs allegations are true, should find they are adequate to establish a public offering.
See, e.g., Flake v. Hoskins,
This Court, viewing the allegations in the First Amended Consolidated Complaint in a light most favorable to Lead Plaintiff, cannot conclude that there is no chance that it might be able to prove its claim that these were public offerings. Clearly discovery and submission of evidence are essential before such a determination can be made.
III. ORDER
Accordingly, for the reasons indicated above, the Court
ORDERS that Merrill Lynch’s motion for clarification (# 1556) is GRANTED; the discovery stay under the PSLRA was in effect as to Merrill Lynch and Deutsche Bank until issuance of this order, but is now lifted. The Court further
*867 ORDERS that Merrill Lynch’s motion to dismiss (# 1499) is DENIED. Finally, the Court
ORDERS that the Deutsche Bank Entities’ motion to dismiss (# 1620) is GRANTED as to § 10(b) and § 20(a) claims under the Exchange Act based on the SDTs against all three entities, but DENIED as to claims grounded in § 12(a)(2) and § 15 of the 1933 Act against Deutsche Bank AG and Deutsche Bank Securities, Inc. Thus Deutsche Bank Trust Company Americas is DISMISSED from this action.
Notes
.The original Newby complaint (#1) was filed on October 22, 2001. After appointment by the Court, Lead Plaintiff filed the First Consolidated Complaint for Violation of the Securities Laws ("the Newby Complaint”) on April 8, 2002. #441. The latest, controlling Amended Consolidated Complaint for Violation of the Securities Laws (# 1388) was filed on May 14, 2003.
. Private Securities Litigation Reform Act of 1995, which amended both the Securities Act of 1933 and the Securities Exchange Act of 1934. 15 U.S.C. § 78u-4.
. The new complaint identifies Merrill Lynch, Pierce, Fenner & Smith as the agent of, and an entity controlled by, its parent company, Merrill Lynch and Co., Inc.
.According to the First Amended Consolidated Complaint, Deutsche Bank AG controlled Deutsche Bank Securities Inc. (successor of Deutsche Bank Alex. Brown LLC), DB Alex. Brown LLC (a wholly owned subsidiary of Deutsche Bank Securities Inc.), and Deutsche Bank Trust Company Americas (a wholly owned subsidiary of Deutsche Bank AG).
With a supporting affidavit and documents (Exs. 1-2 to # 1621), Deutsche Bank Entities in the Memorandum of Law in support of their motion to dismiss, #1621 at 1, nn. 1 and 2, state that as "a matter of public record,"
... [0]n or about June 4, 1999, Tanus Corporation, a subsidiary of Deutsche Bank AG, merged with Bankers Trust Corporation, owner of 100% of the common stock of Bankers Trust Americas ... [and][o]n or about April 25, 2003 Bankers Trust Corporation changed its name to Deutsche Bank Trust Company Americas....
[O]n or about December 3, 1999, BT Alex. Brown Incorporated converted into a Delaware limited liability company named DB Alex. Brown, LLC.... On or about January 12, 2001, [Deutsche Banc Securities Inc. ("DBSI") ] merged with and into DB Alex. Brown LLC.... DBSI was the surviving company and changed its name to Deutsche Bank Alex. Brown Inc.... On or about March 29, 2002, Deutsche Bank Alex. Brown Inc. changed its name to Deutsche Bank Securities Inc. Therefore, neither DB Alex. Brown LLC nor Deutsche Bank Alex. Brown Inc. are legal entities capable of being sued as entities distinct from DBSI.
. Section 12(a)(2) of the 1933 Act, 15 U.S.C. § 77Z(a)(2), formerly designated Section 12(2), provides that a purchaser of a security may bring a private action against a seller that "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 ... not misleading."
According to the First Amended Consolidated Complaint at 127, ¶ 107(b), Deutsche Bank Securities Inc.
under the control of Deutsche bank AG ... acted as an underwriter of certain Enron and Enron affiliated entity securities, including: the Enron Credit Linked Notes Trust 8/17/00 8% Enron Credit Linked Notes due 05; the Osprey Trust, Osprey I, Inc. 9/28/00 7.797% and 6.375% Senior Secured Notes due 1/15/03; Enron’s 2/01 sale (and 7/01 resale) Zero Coupon Convertible Senior Notes due 21; the Osprey Trust, Osprey I, Inc. 9/23/99 8.31% Senior Secured Notes due 03; and the Marlin Water Trust II, Marlin Water Corp. II 7/12/01 6.31% and 6.19% Senior Secured Notes due 03.
. Section 15 makes liable "[e]very person who, by or through stock ownership, agency, or otherwise, ... controls any person liable” under Sections 11 or 12 of the 1933 Act. 15 U.S.C. § 77o.
. In
Central Bank,
the Supreme Court held that a private plaintiff may not maintain an aiding and abetting action under § 10(b). The SEC is authorized under § 21(d) of the Exchange Act, 15 U.S.C. § 78u(d), to bring enforcement actions for equitable relief and seek monetary penalties against those who aid and abet violations of § 10(b); moreover section 104 of the PSLRA, amended 15 U.S.C. § 78t to authorize SEC injunctive actions for aiding and abetting of violators, thereby "revers[ing] any impact
Central Bank
might have had on the SEC’s power to enjoin the aiding and abetting of these securities provisions.''.
U.S. S.E.C. v. Fehn,
. In a footnote relating to the addition of Merrill Lynch, Pierce, Fenner and Smith (“MLPF & S”) in the amended complaint, Merrill Lynch joins the other banks in asserting that the claims against any newly added entities related to the original named Defendants is barred by the statute of limitations because the amended consolidated complaint was filed more than a year after discovery of . the facts constituting the alleged misconduct and does not relate back to the original consolidated complаint because Lead Plaintiff has not shown any "mistake” about the identity of the correct party. The Court will address that argument when it deals with the Deutsche Bank Entities' motion to dismiss, since the issue was raised in, briefed, and argued in detail in the body of its and other banking Defendants’ motions, unlike in Merrill Lynch’s footnote.
. Merrill Lynch represents that the Nigerian barge transaction was first reported in The Wall Street Journal on April 9, 2002, while the power swaps were disclosed by The New York Times on August 8, 2002. Loftin Decl. (# 1500), Exs. C & D.
. The allegations of nondisclosure of vital information materially affecting the market price of Enron’s securities support application of the rebuttable fraud-on-the-market theory of reliance. Leaving aside the allegations of misrepresentations about Enron made by Merrill Lynch analysts, the Court observes that this doctrine, which is recognized in the Fifth Circuit, suffices to establish reliance.
. Merrill Lynch puts the phrase in context by providing the full quotation from a copy of Brown's notes (Ex. A to Declaration of Stephen M. Loftin (# 1500)): "reputational risk with aid/abet Enron income stmt, manipulation.” The Court observes that Mr. Brown's characterization of the transaction is not a legal conclusion binding on the Court.
. There is no dispute about adequacy of allegations asserting transaction causation here.
.Lead Plaintiff claims that throughout the Class Period Deutsche Bank issued analyst reports, lauding the company’s "monumental earnings potential over the next five years,” accompanied by "Buy” recommendations, while knowingly concealing the fact that the. bogus tax schemes created by Deutsche Bank, to be discussed, substantially contributed to Enron's falsely inflated financial results. See, e.g., # 1388, ¶¶ 131, 152 184, 210, 232, 237, 253, 257. The complaint further charges Deutsche Bank with misstatements and omissions in its boilerplate disclosure on its analyst reports, which failed to reveal conflicts of interest in its investments in LJM2, in offering documents as underwriter of Enron securities, incorporating Enron’s false financial statements to which Deutsche Bank’s STDs substantially contributed and that were subsequently restated.
. Named Defendant Deutsche Bank Trust Company Americas, a wholly owned subsidiary of Deutsche Bank AG, is the successor of Bankers Trust Company.
. According to the complaint, Bankruptcy Examiner Neil Batson estimated that Enron reported income of approximately $800 million from 1995-September 2001 based on these tax schemes.
.The Amended Complaint references the First (September 21, 2002) and Second (January 21, 2003) Interim Reports of Neal Batson and the 2,700-page Joint Committee on Taxation Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations ("the JCT Report”), which Lead Plaintiff has informed the Court is available at www.house.gov/jct, although it has attached copies of passages that it has cited to # 1707, Ex. A.
The Deutsche Bank Entities also address the Third Interim Report of the Examiner. Moreover, they argue that the JCT Report did not deal with accounting or securities law issues and that it concluded that the structured tax transactions were proper and complied with the law, indeed "were designed to satisfy the literal requirements of the corporate tax laws” and "were predicated on the interaction of the corporate tax-free transfer rules and the basis rules that apply to such transfers.” JCT Report at 9. Citing passages from these reports, Lead Plaintiff disputes Deutsche Bank Entities’ characterizations of the substance of the documents and argues that it has pleaded very specifically the structure and illegitimate purpose of each project, the Deutsche Bank Entities' role, numerous GAAP violations, and the exact amount by which each STD inflated Enron's earnings with sufficient details to raise a strong inference that Defendants acted with scienter. Enron and Deutsche Bank are alleged to have agreed to conceal the STDs, with Deutsche Bank even inserting a contractual clause nullifying Project Steele if it were ever disclosed. In its memorandum of law in opposition, Lead Plaintiff asserts that 20% of Enron's reported earnings were derived from these or similar tax transactions. # 1707 at 21.
The Court observes that any conclusions in these reports are not binding and they do not relieve Lead Plaintiff of its obligation to plead facts supporting the elements of its claim with the requisite particularity.
. The complaint states that the first four were devices designed to have no other purpose than to obtain favorable tax benefits and earnings income, while in the last two schemes Bankers Trust allegedly engaged in sham transactions with Enron to obtain favorable tax benefits. It also represents that although some of the transactions were created prior to the Class Period, they were structured to cause artificial inflation of income and tax savings in the future, during the Class Period.
. For instance, with respect to Project Tomas, the complaint at 538, V 797.27, quotes the JCT Report to demonstrate the essential role played by Bankers Trust:
To dispose of the leased assets with a stepped up basis without incurring tax, Enron formed a partnership with Bankers Trust, which in essence served as an accommodation party in the transaction. Without a willing though unrelated party to hold the leased assets through a partnership for at least two years before selling them off, the tax savings and financial statement *835 benefits claimed through the use of this structure would not have been possible.
The appreciated assets were subsequently sold without payment of taxes on the appreciation, but thе earnings were booked.
.Plaintiffs' Memorandum (# 1707 at 18) quotes the third Batson report, App. G at 3-4, concluding that Deutsche Bank “designed, promoted and participated” in the structured tax deal "while knowing that the transaction[s] served no substantial business purpose for Enron other than enabling Enron to report the potential benefit of speculative future tax deductions in an erroneous and misleading manner as pre-tax income.”
. See footnote 4.
. Arguing that the complaint fails to distinguish among them, Deutsche Bank Entities point out that this Court has held that group pleading is "at odds with the PSLRA," which requires particularized pleading of scienter as to each Defendant.
Collmer v. U.S. Liquids, Inc.,
. See pages 830-32 of this memorandum and order.
. In its memorandum (# 1707 at 29), Lead Plaintiff reprints a graph taken from the Washington Post demonstrating the amount of artificial inflation created by eleven Enron fraudulent tax transactions in 1997, 1998, 1999, and 2000 and stating that the six Deutsche Bank tax transactions "accounted for 69% of the total inflation to Enron’s net income resulting from tax schemes.”
. As Lead Plaintiff points out, the creator test, discussed in # 1194, applies to the making of false or misleading statements, but not to allegations of a scheme under Rule 10b-5(a) and (c), 17 C.F.R. § 240.10b-5, as is also alleged here. # 1707 at 19. Lead Plaintiff has alleged that Deutsche Bank's overall conduct in Enron's Ponzi scheme makes it liable for its role and the damages it caused.
. Rule 15(c), addressing "Relation Back of Amendments”, provides in relevant part,
An amendment of a pleading relates back to the date of the original pleading when
(1) relation back is permitted by the law that provides the statute of limitations applicable to the action, or
(2) the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading, or
(3)the amendment changes the party or the naming of the party against whom a claim is asserted if the foregoing provision (2) is satisfied and within the period provided by Rule 4(m) [with 120 days following the filing of the complaint] for service of the summons and complaint, the party to be brought in by amendment (A) has received such notice of the institution of the action that the party will not be prejudiced in maintaining a defense on the merits, and (B) knew or should have known that, but for a mistake concerning the identity of the proper party, the action would have been brought against the party.
. Deutsche Bank AG was initially sued in the First Consolidated Complaint, filed on April 8, 2002, under § 10(b) and § 20(a) of the Exchange Act of 1934 and Rule 10b-5. The Court granted its motion to dismiss those claims on December 19, 2002. The First Amended Consolidated Complaint, filed on May 14, 2003 once again named Deutsche Bank AG as a Defendant under the same statutes, but with the added STD claims. Lead Plaintiff further sued, for the first time, Deutsche Bank Trust Company Americas and Deutsche Bank Securities Inc. under § 10(b) and § 20(a), and Deutsche Bank Securities Inc. under § 12(a)(2) and 15 of the Securities Act of 1933.
. The Court finds the argument that Plaintiffs were on inquiry notice of these complex, concealed tax schemes on October 16, 2001 meritless. Instead, it finds May 22, 2002, the date of publication of the first Washington Post article on the STDs as the date when a reasonably prudent person would have been put on notice.
. "Any person ... who offers or sells ... shall be liable ... to the person purchasing such security from him ...” for false and misleading statements or omissions in or from prospectuses or other selling communications. 15 U.S.C. § 771(a).
. The Deutsche Bank Entities urge that the four Rule 144A/Regulation S note resales (the September 1999 Osprey Trust/Osprey I Inc. Notes, the September 2000 Osprey TrusVOs-prey I, Inc. Notes, the August 2000 Enron Credit Notes, and the July 2001 Marlin Water Trust II/Marlin Water Capital Corp. II Notes, see Exs. 3-6 to # 1621) were private placement resales to which § 12(a)(2) does not apply and thus the cause of action must be dismissed as to Deutsche Bank Securities Inc.
Alternatively, Deutsche Bank Entities argue that plaintiffs lack standing to pursue the § 12(a)(2) claims because they have not alleged and cannot claim to have purchased securities in any of the four resales, nor have they shown that the seller of the securities misrepresented or failed to state material facts in connection with the sale. The Court recently granted a motion to intervene brought by Imperial County Employees Retirement System (''ICERS''), which did purchase on July 12, 2001 $345,000 par value of Marlin Water Trust II Notes, for which Deutsche Bank served as one of the underwriters and which would have standing to sue.
. Specifically, the district court in Alaska wrote,
The Offering Memorandum states that it "is personal to each person to whom it has been delivered and does not constitute an offer to any other person or to the public generally.'' It prohibits offerees from photocopying or disseminating the document. On its first page and in a section captioned "transfer restrictions,” it explains that the Notes "have not been registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except pursuant to an exemption from, in a transaction not subject to or in a transaction in compliance with the registration requirement of the Securities Act.” Each note was required to bear a legend stating that the security "has not been registered under the Securities Act ... and may not be offered, sold, pledged or otherwise transferred” except in accordance with certain limitations, including the limitation that the acquirer be a "qualified institutional buyer” as defined by Rule 144A or "not a U.S. person as defined by SEC Regulation S.”
The first page of the Offering Memorandum explains that the notes are being offered only "to qualified institution[al] buyers (as defined in rule 144A under the Securities Act) in compliance with Rule 144A and [] to non-U.S. persons outside the United States in reliance on Regulation S.” The Offering Memorandum warns qualified institutional buyers that the seller "may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A.” Rule 144A exempts private placements from the registration requirements of Section 5. See 15 U.S.C. [§ ] 77(d)(2); 17 C.F.R. § 230.144A.
This Court would highlight the fact that the district court in Alaska also based its decision on the fact that the complaint itself alleged that the transaction was a private placement, but nevertheless in their motion the plaintiffs argued it was not.
As will be discussed, the Fifth Circuit, among others, follows the test established in
SEC v. Ralston Purina Co.,
. Now available at:
In re Worldcom, Inc. Sec. Litig.,
. Although Deutsche Bank also contends that plaintiffs had notice of alleged fraud on October 22, 2001, Lead Plaintiff maintains that plaintiffs had no reason to suspect that Deutsche Bank was involved in tax deals with Enron and that Deutsche Bank cannot cite any publicly available facts that should have put plaintiffs on notice at that time.
. In its memorandum of law in opposition, Lead Plaintiff has quoted the Bankruptcy Examiner's Third Report, App. G at 22-23, to argue that by 2000, while continuing to recommend Enron securities, Deutsche Bank had learned a substantial amount about Enron’s undisclosed and precarious off-balance sheet debt:
In early 2000, BT/Deutsche became cognizant of a change in Enron's balance sheet and income statement... . Recognizing that the extent of Enron’s off-balance sheet obligations could not be discerned from its financial statements, BT/Deutsche held several meetings with Enron to probe the increasing dependency of Enron on its trading activities and asset sales. During those meetings, BT/Deutsche requested and received information about [among other things] the level of [Enron's] off-balance sheet obligations.... Enron consistently informed BT/Deutsche that its off-balance sheet obligations were in the range of $9-10 billion.
# 1707 at 25.
. The First Amended Consolidated Complaint at 532, ¶ 797.9, asserts,
While some of the fraudulent tax transactions devised by Bankers Trusl/Deutsche Bank were created before the Class Period, each transaction resulted in the artificial inflation of Enron’s reported financial re-suits during the Class Period because each transaction resulted in the fraudulent recognition of income and purported tax savings going forward, resulting in the accrual of benefits years after the actual transaction closed.
. A Title VII plaintiff must file a charge of discrimination with the Equal Employment Opportunity Commission within 180 days (or 300 days in "deferral” states) after the alleged discriminatory act occurred. 42 U.S.C. § 2000e-5(e)(l).
. In
SEC
v.
Ogle,
No. 99 C 609,
. Before. Rule 15(c) was amended in 1991, it provided,
Whenever the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading, the amendment relates back to the date of the original pleading. An amendment changing the party against whom a claim is asserted relates back if the foregoing provision is satisfied and, within the period provided by law for commencing the action against the party to be brought in by amendment that party (1) has received such notice of the institution of the action that the party will not be prejudiced in maintaining a defense on the merits, and (2) knew or should have known that, but for a mistake concerning the identity of the proper party, the action would have been brought against the party.
The United States Supreme Court in
Schiavone v. Fortune,
(1) [T]he basic claim must have arisen out of the conduct set forth in the original pleading; (2) the party to be brought in must have received such notice that it will not be prejudiced in maintaining its defense; (3) that the party must or should have known that, but for the mistake concerning identity, the action would have been brought against it; and (4) the second and third requirements must have been fulfilled within the prescribed limitations period.
Id.
at 29,
. The Second Circuit, which questions whether an identity of interest exception exists, does not agree that the mere fact that a parent and wholly owned subsidiary are involved supports relation back and argues for evidence of the particular entanglement of the two entities:
We assume for purposes of this discussion that an identity of interest exception exists. But it is clear that sufficient identity of interest to warrant imputation of notice is lacking in this case. Courts accepting that rationale have required substantial structural and corporate identity, such as shared organizers, officers, directors and offices .... In the instant case none of these relationships were found to exist between Raytheon and Caloric. Further the parent-subsidiary relationship standing alone is simply not enough — as Professors Wright and Miller perhaps too optimistically state .. . — to establish the identity of interest exception to the relation back rule. Greater identity of interest must be shown than this record reveals. The two businesses must have organized or conducted their activities in a mаnner that strongly suggests a close linkage. Recognizing this, appellant makes much of the shared legal counsel and parses Heveran's role as Caloric’s counsel into something more than it really was. Consequently, we conclude the identity of interest exception may not be used to impute to Raytheon the timely service of pleadings made on its subsidiary Caloric.
In re Allbrand Appliance & Television Co., Inc.,
. At issue in
Jacobsen,
was whether, under the circumstances in that case, "to prevent a time-bar, an amendment to substitute a named party for a 'John Doe’ defendant may relate back under amended Rule 15(c)(3).”
. A number of federal courts have recognized a distinction between a "mistake of fact” and a "mistake of law” in construing "mistake concerning the identity of the proper party” in Rule 15(c).
In re Worldcom, Inc.
*853
Sec. Litig.,
. In an argument that does not adequately apply to the claims against the Deutsche Bank Entities for reasons discussed in this memorandum and order, Lead Plaintiff argues that because it sued within the three-year period of repose, equitable estoppel may extend the
*856
time for filing beyond the one-year discovery limitation as long as it was actually filed within the period of repose.
Berning v. A.G. Edwards & Sons, Inc.,
. Claims under § 12(a)(2) must be brought "in no event ... more than three years after the sale.” Thus the three-year period of repose for claims under § 12(a)(2) begins to run at the time of the sale, when the investor executes a subscription agreement and tenders his payment.
. Section 2(a)(10) of the 1933 Act, 15 U.S.C. § 77b(a)(10), broadly defines "prospectus” to mean "any prospectus, notice, circular, advertisement, letter or communication, written or by radio or television, which offers any security for sale or confirms the sale of any security.” The Supreme Court observed that "the list refers to documents of wide dissemination” and "public communication,” "not face-to-face or telephonic communications.”
Gustafson,
Section 10 exempts from the registration requirements set out in § 5 certain securities issued pursuant to § 3 (e.g., exempting inter alia securities issued or guaranteed by the United States government and its agencies, state and local governments and banks) and transactions pursuant to § 4 of the Securities Act. While § 5, 15 U.S.C. § 77e, mandates that a seller file a registration statement as to any security that it sells or offers for sale, sections 3 and 4 list exceptions to that registration requirement. Relevant here, a private placement, i.e., "transactions by an issuer not involving any public offering” but sold to a limited number of qualified investors, is exempted from registration requirements under § 4(2), 15 U.S.C. § 77d(2).
One commentator has pointed out that "prospectus” is defined so broadly that it includes "virtually any writing that might be construed to offer a security for sale.” David A. Leipton, 15 Broker-Dealer Reg. § 3:52 (West 2004; Database Updated Oct. 2003). He gives an example where the SEC found that a business card with a note written on it, "Phone me as soon as possible as my allotment is almost complete on this issue,” enclosed in a mailing along with a preliminary prospectus and a cover letter to customers during the preeffective period, was a prospectus because it "solicited an offer” but failed to meet the requirements of Section 5(b) for prospectuses. Id.
. In
Gustafson,
. For example, as indicated, section 4(2) is a statutory exemption from the registration requirements of § 5 of the Securities Act of 1933 for "transactions by an issuer not involving any public offering.” Rule 144A establishes a non-exclusive safe harbor exemption for secondary sales of certain kinds of unregistered securities, previously sold pursuant to an exemption, to QIBs, while Regulation S provides that only offers and sales of securities made in the United States, but not offshore transactions, are subject to the registration requirements.
. In
Gustafson,
the Supreme Court found that a contract that accompanied the sale of the securities was not required to contain the information contained in a registration statement,” and therefore was not a "prospectus.”
. The Supreme Court stated in
Ralston Purina,
.
SEC v. Murphy,