In re ENRON CORPORATION SECURITIES, DERIVATIVE & "ERISA" LITIGATION.
Mark Newby, et al., Plaintiffs
v.
Enron Corporation, et al., Defendants
Public Employees' Retirement System of Ohio, et al., Plaintiffs,
v.
Andrew S. Fastow, et al., Defendants.
United States District Court, S.D. Texas, Houston Division.
*803 OPINION AND ORDER
MELINDA HARMON, District Judge.
Pending before the Court in the above referenced cause, transferred to this Court from the Southern District of Ohio by the Judicial Panel on Multidistrict Litigation for coordinated or consolidated pretrial proceedings in MDL 1446, is the Outside Directors'[1] motion to dismiss with prejudice the Amended Complaint and conditional motion to reopen discovery (# 186).
Counsel for the Outside Directors, Kathy Patrick, informed the Court by a letter dated April 23, 2007, that the motion is fully briefed and ready for a decision. The motion was also included in the Notice of Master List of Motions Not Affected By Fifth Circuit Ruling Regarding Section 10 Liability (# 5656), which was submitted by Gibbs & Bruns after conference with all parties, to indicate that the Court could address it at this time.[2]
*804 As a threshold matter, there is some uncertainty whether the amended complaint attached as an exhibit to Plaintiffs' September 11, 2005 motion for leave to amend (Ex. A to # 56) or the Amended Complaint filed on August 17, 2006(# 97), after the Court certified a class in Newby and established a schedule for all other actions, is the governing pleading. Because the claims in both complaints are the same against the Outside Director Defendants, and because the Outside Directors have referenced the key allegations in both complaints simultaneously, there is no prejudice to them either way. Moreover, in view of efficiency and fairness, the Court concludes that the second, # 97, shall be deemed the controlling complaint; thus it will summarize the relevant facts and cite the relevant paragraphs for resolving the motion to dismiss.
Plaintiffs Public Employees' Retirement System of Ohio ("PERS"), State Teachers' Retirement System of Ohio ("STRS"), School Employees Retirement System of Ohio ("SERS"), Ohio State Highway Patrol Retirement System ("OHPRS"), Ohio Tuition Trust Authority ("OTTA"), and Cincinnati Retirement System ("Cincinnati"), collectively the "Ohio Retirement Systems," have alleged three causes of action against the Outside Directors arising out of the collapse of Enron Corporation ("Enron"): (1) Count V for negligent misrepresentation; (2) Count VI for aiding and abetting common law fraud; and (3) Count IX for violations of Section 18 of the Securities Exchange Act of 1934, 15 U.S.C. § 78r.
I. Standards of Review
As stated in 5 Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure Civ.3d § 1204 at 104-05 (West 2004),
The manner and details of pleading in the federal courts are governed by the Federal Rules of Civil Procedure regardless of the source of substantive law to be applied in the particular action.... It no longer can be doubted that the rules regarding the standard of specificity to be applied to federal pleadings, the pleadings allowed in the federal courts, the form of the pleadings, the special requirements for pleading certain matters, the allocation of the burden of pleading among the parties, and the signing of pleadings by an attorney of record or an unrepresented party, all are governed by the federal rules and not by the practice of the courts in the state in which the federal court happens to be sitting.
See also In re Enron Corp. Sec., Derivative & "ERISA" Litig.,
A. Rule 9(b)
Federal Rule of Civil Procedure 9(b) provides,
In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person must be averred generally.
"In every case based upon fraud, Rule 9(b) requires the plaintiff to allege as to each individual defendant the nature of the fraud, some details, a brief sketch of how the fraudulent scheme operated, when and where it occurred, and the participants.'" Hernandez v. Ciba-Geigy Corp. USA,
Although Rule 9(b) allows a plaintiff to plead intent to deceive or defraud generally, a mere conclusory statement that the defendant had the required intent is insufficient; the plaintiff must set forth specific facts that raise an inference of fraudulent intent, for example, facts that show the defendant's motive. Tuchman v. DSC Communications Corp.,
"[Wh]en agency is an element of a fraud claim, agency must be pleaded with particularity required under Rule 9(b)." Whitney National Bank v. Medical Plaza Surgical Center, L.L.P., No. H-06-1492,
The particularity requirement of Rule 9(b) also governs a conspiracy to commit fraud. Southwest Louisiana Healthcare System v. MBIA Ins. Corp., No. 05-1299,
The Fifth Circuit, although construing Rule 9(b) strictly, has recognized an exception and permits the requirements to be "relaxed" where facts relating to the fraud are "peculiarly within the perpetrator's knowledge"; then the alleged fraud "may be pled on information and belief, provided the plaintiff sets forth the factual basis for his belief." United States ex rel. Russell v. Epic Healthcare Management Group,
In Benchmark Electronics, Inc. v. J.M. Huber Corp.,
Subsequently, in an unpublished opinion, the Fifth Circuit clarified its ruling in Benchmark Electronics. Judge Dennis, writing for a unanimous panel, recognized that "Rule 9(b) is an exception to the liberal federal court pleading requirements embodied in Rule 8(a)" and that its "stringent pleading requirements should not be extended to causes of actions not enumerated therein"; thus where plaintiffs clearly set out and distinguish separate claims for fraud and for negligent misrepresentation, the "negligent misrepresentation claims are only subject to the liberal pleading requirements of Rule 8." American Realty Trust, Inc. v. Hamilton Lane Advisors, Inc.,
Subsequently Judge Godbey of the Northern District of Texas issued an opinion construing Benchmark, Williams, Shushany, and other key Fifth Circuit cases. American Realty Trust, Inc. v. Travelers Cas. and Sur. Co. of America,
applies not to claims per se, but to "averments" of fraud. If such an averment is inadequate, then the court disregards it when determining whether a claim is stated. Id. In other words, the inadequate averment is "stripped from the claim." When fraud is an element of the claim, inadequate averments necessarily result in dismissal. When fraud is not an element, as in the case of negligent misrepresentation, the inquiry is more complicated. One must first disregard inadequate averments of fraud. At that point, Rule 9(b) is no longer relevant. The remaining question is whether a negligent misrepresentation claim is stated under the standard notice pleading principals applicable to such claims.[7]
Id. at 751. See also Nazareth International, Inc., No. Civ. A. 304CV1265M,
A dismissal for failure to plead with particularity in accordance with Rule 9(b) is treated as a Rule 12(b)(6) dismissal for failure to state a claim. Lovelace v. Software Spectrum, Inc.,
B. Rule 12(b)(6)
Dismissal under Rule 12(b)(6) is disfavored and a motion to dismiss under the rule is rarely granted. Lowrey v. Texas A & M University System,
Under Fed.R.Civ.P. 10(c), "a copy of any written instrument which is an exhibit to a pleading is a part thereof for all purposes." Thus documents attached to a complaint are viewed as part of the plaintiff's *809 pleadings. General Electric Capital Corp. v. Posey,
Traditionally, dismissal was not proper "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Lowrey,
[O]nce a claim has been stated adequately, it may be supported by any set of facts consistent with the allegations in the complaint. Conley, then, described the breadth of opportunity to prove what an adequate complaint claims, not the minimum standard of adequate pleading to govern a complaint's survival.
II. Applicable Substantive Law
Negligent Misrepresentation
Under Ohio common law, the elements of a claim for negligent misrepresentation are as follows: "`One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others *810 in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.'" Delman v. City of Cleveland Heights,
Thus an actor that fails to exercise reasonable care or competence in supplying the correct information may be liable for negligent misrepresentation under Ohio tort law. Ohio Bureau of Workers' Compensation v. MDL Active Duration Fund, Ltd.,
A claim for negligent misrepresentation under Ohio law cannot be based on omissions or on a failure to do something; it must be based on affirmative statements or acts. Isaac v. Alabanza Corp., No. 05 JE 55,
The statute of limitations for a negligent misrepresentation claim in Ohio is four years. Ohio Revised Code ("R.C.") 2305.09 (general 4 year limitations period for tort actions not expressly covered by other provisions in the Code). Because negligent misrepresentation is not listed as one of the causes of action to which the discovery rule applies under R.C. 2305.09, such a claim accrues when the misrepresentation is made. Orshoski v. Krieger, No. OT-01-009,
*811 Aiding and Abetting Common Law Fraud
In In re Enron Sec., Derivative, and "Erisa" Litig.,
This Court relied in part on the fact that the Sixth Circuit Court of Appeals has concluded that the Supreme Court of Ohio would recognize such a claim. In Aetna Casualty and Surety Co. v. Leahey Construction Co., Inc.,
The statute of limitations for fraud in Ohio is four years. RC 2305.09(C). The discovery rule applies. R.C. 2305.09 ("If the action is for fraud, [the cause of action shall not accrue] until the fraud is discovered."). "The `discovery rule' generally provides that a cause of action accrues for purposes of the governing statute of limitations at the time when the plaintiff discovers or, in the exercise of reasonable care, should have discovered the complained of injury." Investors REIT One v. Jacobs,
Violation of Section 18 of the Securities Exchange Act of 1934
Section 18, 15 U.S.C. § 78r, provides an explicit private right of action to investors for damages arising from the purchase or sale of a security in actual reliance upon a false or misleading statement contained in any document or report filed with the SEC in compliance with the Exchange Act:
Any person who shall make or cause to be made any statement in any application, report, or document filed pursuant to this chapter or any rule or regulation thereunder or any undertaking contained in a registration statement as provided in subsection (d) of section 78o of this title,[12] which statement was at the *813 time and in light of the circumstances under which it was made false or misleading with respect to any material fact, shall be liable to any person (not knowing that such statement was false or misleading) who, in reliance upon such statement, shall have purchased or sold a security at a price which was affected by such statement, for damages caused by such reliance, unless the person sued shall prove that he acted in good faith and had no knowledge that such statement was false or misleading. A person seeking to enforce such liability may sue at law or in equity in any court of competent jurisdiction, In any such suit the court may, in its discretion, require an undertaking for the payment of the costs of such suit, and assess reasonable costs, including reasonable attorneys' fees, against either party litigant.
Thus to state a claim under § 18, the plaintiff must plead that (1) a document filed pursuant to the Exchange Act, or any rule or regulation promulgated under it, contained a false or misleading statement; (2) the defendant made or caused to be made the false or misleading statement; (3) the plaintiff actually relied on the false statement; and (4) that reliance caused loss to the plaintiff. In re Stone & Webster, Inc. Sec. Litig.,
In Howard v. Everex Systems, Inc.,
There is a significant difference, however, between mere participation in a scheme to misrepresent and those directly attesting to the truth of a statement by making (in the ordinary sense) that very statement. By standing behind a statement, the public assumes that they can trust the word of the maker of that statement .... Key corporate officers should not be allowed to make important false financial statements knowingly or recklessly, yet still shield themselves from liability to investors simply by failing to be involved in the preparation of those statements.
Id. at 1061-62. See also In re Reliance Securities Litig.,
While some courts have not decided whether Rule 9(b) applies to § 18 claims,[14] most Circuit Courts of Appeals have concluded that the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. section 78u-4(b)(1),[15] does apply to such claims. See, e.g., Deephaven Private Placement Trading Ltd.,
The Fifth Circuit not only applies the PSLRA, but has held that "the PSLRA's pleading requirements incorporate Rule 9(b)'s fraud-pleading standard." Financial Acquisition Partners, L.P. v. Black-well, *815
Thus while Section 18 requires a plaintiff to plead that "the defendant made a statement of material fact that was false at the time and in light of the circumstances under which it was made," the PSLRA further requires that the complaint "specify (1) each statement alleged to have been misleading, (2) the reason why the statement is misleading, and (3) if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." Deephaven Private Placement,
A plaintiff bringing a claim under section 18 has a significantly lighter burden of proof than a plaintiff suing under § 10(b) of the Securities Exchange Act: in particular, as noted, he does not have to plead facts showing a strong inference of scienter. *816 Stone & Webster,
Nevertheless a plaintiff is required to plead, with particularity, actual reliance, as opposed to constructive or presumed reliance or reliance based on the fraud-on-the-market theory. See In re Suprema Specialties, Inc. Sec. Litig.,
Section 78r(c) contains an express statute of limitations: "No action shall be maintained to enforce any liability created under this section unless brought within one year after the discovery of the facts constituting the cause of action and within three years after such cause of action accrued." Because of this provision and because the statute does not require the pleading and proving of scienter and thus covers negligence and strict liability claims, this Court has held that the extended (2 year/5 year) statute of limitations in section 804 of the Sarbanes-Oxley Act of 2002, 28 U.S.C. § 1658(b), which only "`applies to private rights of action involving claims of fraud, deceit, manipulation or contrivance,'" does not apply to § 18. In re Enron,
Moreover, as this Court discussed in # 161 at 51-54 (
In federal securities claims, the statute of limitations begins to run when the plaintiff has actual knowledge of the facts giving rise to his claims or has notice of facts that in the exercise of reasonable due diligence should have known of the alleged wrongdoing. In re Dynegy, Inc. Sec. Litig.,339 F.Supp.2d 804 , 845 (S.D.Tex.2004), citing inter alia Jensen v. Snellings,841 F.2d 600 , 607 (5th Cir.1988). "Storm warnings" is a term used to denote circumstances which trigger a plaintiff's duty to inquire because they suggest to an investor of ordinary intelligence that he has been injured. Id. at 846; see also Margolies v. Deason,464 F.3d at 553-54 ("whether *817 the plaintiff `by exercise of reasonable diligence,' should have learned of facts placing him on notice of his claim ... is commonly referred to as inquiry notice."), citing Jensen v. Snellings,841 F.2d 600 , 607 (5th Cir.1988) (plaintiffs cannot ignore "storm warnings" that would alert a reasonable investor to the possibility of fraudulent statements or omissions in his securities transaction). Although there is disagreement among courts as to exactly what constitutes a storm warning or inquiry notice, "the facts relied upon to support inquiry notice must rise to a level of more than mere suspicion; they must instead be `sufficiently confirmed or substantiated' to a point at which the victims are incited to investigate.'" Id., quoting Ritchey v. Horner,244 F.3d 635 , 640-41 (8th Cir.2001), in turn quoting Fujisawa Pharmaceutical Co., Ltd. v. Kapoor,115 F.3d 1332 , 1335 (7th Cir.1997). In addition, the information involved must "`be such that it relates directly to the misrepresentations and omissions the [p]laintiffs later allege in their action against the defendants." Id., citing Newman v. Warnaco Group, Inc.,335 F.3d 187 , 193 (2d Cir.2003).
Because a determination of when a plaintiff is on inquiry notice depends upon the facts and because courts may weigh such matters differently, such a decision is often inappropriate under Rule 12(b)(6) review. Dynegy,339 F.Supp.2d at 846 , citing Marks v. CDW Computer Centers, Inc.,122 F.3d 363 , 367 (7th Cir.1997); see also Margolies v. Deason,464 F.3d at 553-54 ("The factintensive inquiry is typically appropriate for consideration by a jury.") (applying same analysis to Texas blue sky law claims as federal securities law claims), citing Ruebeck v. Hunt,142 Tex. 167 ,176 S.W.2d 738 , 740 (1944) ("Unless the evidence is such that reasonable minds may not differ as to its effect, the question as to whether a party has exercised diligence in discovering fraud is for the jury.").
There are, nevertheless, circumstances where a plaintiff is on inquiry notice as a matter of law:
Where ... the facts needed for determination of when a reasonable investor of ordinary intelligence would have been aware of the existence of [wrongdoing] can be gleaned from the complaint and papers such as the prospectuses and disclosure forms that are integral to the complaint, resolution of the issue on a motion to dismiss is appropriate.
Dynegy,339 F.Supp.2d at 847 , quoting Dodds v. Cigna Securities, Inc.,12 F.3d 346 , 352 n. 3 (2d Cir.1993), cert. denied,511 U.S. 1019 ,114 S.Ct. 1401 ,128 L.Ed.2d 74 (1994). The Dynegy court pointed out that the Second Circuit has determined the issue of notice in a large number of cases on a motion to dismiss. Id., citing In re WorldCom Inc. Sec. Litig.,294 F.Supp.2d 431 , 445 (S.D.N.Y. 2003). It is however a heavy burden for the plaintiff: "Inquiry notice exists only when uncontroverted evidence irrefutably demonstrates when plaintiff discovered or should have discovered the fraudulent conduct." Id., quoting Nivram Corp. v. Harcourt Brace Jovanovich, Inc.,840 F.Supp. 243 , 249 (S.D.N.Y.1993).
Outside Directors' Motion to Dismiss
Outside Directors maintain that all three of Plaintiffs' claims are grounded in fraud because, along with other defendants, they allegedly "participated in the massive fraudulent scheme that Enron perpetrated against the Ohio Retirement Systems and other public investors," as evidenced by the incorporation of numerous allegations in the complaint into the three causes of action against the Outside Directors; for example Outside Directors purportedly drafted, approved, disseminated and/or *818 ratified materially false and misleading information about Enron Corporation ("Enron"), including SEC filings, while being aware of or recklessly disregarding the falsity of these materials, knowingly or recklessly caused Enron not to consolidate the results of the LJM partnerships on Enron's financial statements, were aware of the nature and purpose of prepay transactions that were being improperly accounted for to misstate Enron's financial condition, and aided and abetted fraud by Enron. Amended Complaint (# 97) at ¶¶ 3, 66, 183, 207, 656. Outside Directors contend that because Plaintiffs have incorporated all of their fraud-based allegations into every count of their complaint ("Plaintiffs repeat and reallege the allegations contained in each of the foregoing paragraphs as if fully set forth herein" in Amended Complaint at ¶ 639 re Count V for negligent misrepresentation; at 11654 re Count VI for aiding and abetting common fraud; and at ¶ 669 re Count IX for section 18 of the Exchange Act), Rule 9(b) applies to all of the complaint. Melder,
Outside Directors next argue that the complaint fails to plead specific facts to comply with Rule 9(b) because the complaint does not identify what alleged misrepresentations were made and when by the Outside Directors. Group-pleaded allegations against "Defendants" or "Individual Defendants," generally, are not acceptable. Southland Sec. Corp. v. INSpire Ins. Solutions, Inc.,
Outside Directors contend that Plaintiffs fail to, and cannot, identify a single misrepresentation by an Outside Director, no less to provide the requisite information about who made the statement, what the statement was, when it was made, why it was misleading or how the Outside Director allegedly knew the statement was misleading when made because the representations were made by Enron's management or by Enron.[17] Moreover, Enron *819 incorporated into these reports the audit and internal control opinions of Arthur Andersen[18] that also demonstrate that the financial statements were the responsibility of Enron's management.[19]
With respect to the aiding and abetting claim, Outside Directors again point out Plaintiffs' failure to identify even one fraudulent statement by the Outside Directors or any other Defendants, no less plead with the specificity required by Rule 9(b), Nor have they alleged actual knowledge by any Outside Director of any false or misleading speaker's role in the fraud. Restatement § 876(b); Aetna Casualty & Surety Co. v. Leahey Const. Co.,
Outside Directors maintain that this Court has already ruled that Plaintiffs are not entitled to an opportunity to amend to cure defects in their pleadings: "Because cases establishing pleading standards for Plaintiffs' various causes of action were issued long before they filed their motion for leave to amend and proposed amended complaint, and because this Court has issued *820 numerous orders in Newby and the coordinated and consolidated cases addressing pleading requirements, the Court sees no reason to permit Plaintiffs to amend again." In re Enron,
Outside Directors also contend that at least some of the claims are time-barred. The § 18 claims are subject to a one-year limitations period and a three-year period of repose. 15 U.S.C. § 78r(c) ("No action shall be maintained to enforce any liability created under this section unless brought within one year after the discovery of the facts constituting the cause of action and within three years after such cause of action accrued."). This Court has opined, "In federal securities claims, the statute of limitations begins to run when the plaintiff has actual knowledge of the facts giving rise to his claims or has notice of facts that in the exercise of reasonable due diligence should have known of the alleged wrongdoing." # 161 at 51-52. With respect to such "storm warnings," "[w]here ... the facts needed for determination of when a reasonable investor of ordinary intelligence would have been aware of the existence of [wrongdoing] can be gleaned from the complaint and papers such as prospectuses and disclosure forms that are integral to the complaint, resolution of the issue on a motion to dismiss is appropriate." Id. at 53. Outside Directors observe that it is impossible to identify from the complaint what alleged misrepresentations were made and when by them. Id. at 91. They insist that any breach of duty would have to have been based on Enron's restated financial results,[20] so the facts in the complaint establish that Plaintiffs were on inquiry notice of that restatement no later than November 8, 2001. Amended Complaint at ¶ 417 ("Enron shocked the market when it filed with the SEC a Form 8-K... revealing that the Company was restating its reported financial results for 1997, 1998, 1999, 2000, and the first two quarters of 2001."). They highlight Plaintiffs' allegation that the announced restatements "constitute admission that the representations *821 made in the original financial statements and other financial information contained in the Company's SEC filings... were materially false and misleading when made." Id. at ¶ 418. Thus by Plaintiffs' own allegations in H-02-4788, they were on inquiry notice by November 8, 2001, and the statute of limitations for the § 18 claims expired no later than November 8, 2002, well before July 11, 2003, the date which this Court found in its July 11, 2003 order (# 1561 in Newby), as amended on July 11, 2006 (# 4848 in Newby), was the earliest any tolling began to apply.[21] # 165 at 80-81.[22] Thus, conclude Outside Directors, Plaintiffs' § 18 claims against Outside Directors are time-barred by the one-year statute of limitations as a matter of law.
Outside Directors additionally claim that the state law claims (negligent misrepresentation and aiding and abetting common law fraud), based on alleged purchases or representations before July 11, 1999, are also time barred if tolling began with the Court's July 11, 2003 order on that date. See # 161 at 91. Moreover, negligent misrepresentation claims of newly added Plaintiffs OTTA and Cincinnati should be dismissed where they are based on alleged representations made more than four years before their constructive filing date. Because these two Plaintiffs were not subject to the July 11, 2003 order, their claims cannot be deemed filed until they filed their motion to join this action on September 15, 2005; therefore all of OTTA's and Cincinnati's negligent misrepresentation claims based on purchases or representations prior to September 15, 2001 should be dismissed as time-barred.
Should the Court not dismiss all of Plaintiffs' claims against Outside Directors, Outside Directors request the Court to reopen discovery since they have been unable to take any discovery against Plaintiffs.
Plaintiffs' Response
Plaintiffs, object to Outside Directors' attempt to insert Rule 9(b)'s heightened pleading standard to claims Plaintiffs insist are not covered by it, specifically negligent misrepresentation and violation of § 18. They rely on American Realty,
Even if Rule 9(b) is applicable, Plaintiffs claim that they have satisfied its standard because they have identified each of the *822 Outside Directors who signed specified annual reports filed with the SEC between 1998 and 2001, and have identified which statements were false and misleading, when they were made, and why they were false and misleading. Moreover, Enron's November 8, 2001 announcement that it would restate its financial statements for 1997, 1998, 1999, 2000, and the first two quarters of 2001[23] constitutes an admission that the financial figures in these reports were false. ¶¶ 417-18, 421. The Court will not repeat all the allegations summarized by Plaintiffs # 264 at 6-12, with citations to paragraphs in the complaint, but refers the parties to these documents.
Plaintiffs assert that it is well established that directors, both inside and outside, are liable for false statements made in SEC filings that they sign. See, e.g., F.N. Wolf & Co., Inc. v. Estate of Neal, No. 89 Civ. 1223,
Regarding their claim for aiding and abetting, Plaintiffs insist they have adequately pled the first element, knowledge that the primary violator-party's conduct is a breach of duty, because an allegation of actual knowledge is not required, only that the aider and abettor have a general awareness of its role in the other's tortious conduct. Javitch v. First Montauk Financial Corp.,
*823 Plaintiffs insist that the Amended Complaint satisfies Rule 9(b) because it names each Outside Director that signed each of Enron's false and misleading annual reports during the relevant time period, the dates these annual reports were issued, each statement alleged to be false and misleading, and why each statement was false. See paragraphs 295-302, 320-28, 341-52, 371-76.
As for objections of untimeliness, Plaintiffs rely on the rule that a motion to dismiss based on statute of limitations should be granted only when the complaint conclusively shows on its facts that the claim is time-barred. Autry Petroleum Co. v. BP Products North America, Inc., No. 4:05-CV-113,
Last, Plaintiffs contend that the Outside Directors' argument that OTTA and Cincinnati were not subject to the July 11, 2003 scheduling order that tolled the applicable statute of limitations and are therefore precluded from asserting negligent misrepresentation claims based on conduct that occurred before September 1, 2001 (four years prior to the date they filed their motion to join this suit),[26] is a narrow construction of that order and ignores the rule that an entity may not file an independent action to avoid the constraints of a scheduling order in an action. Chinn v. Giant Food, Inc.,
*824 Plaintiffs object to Outside Directors' conditional motion to reopen discovery as conclusory and contend that it does not show good cause with particularity.
Because they had a reasonable basis for concluding that Rule 9(b) did not apply to their claims and relied on significant case law that they could satisfy the first element of their aiding and abetting claim by showing a general awareness by the aiding and abetting tortfeasor of its role in the fraud, they request the Court to grant them leave to amend.
Outside Directors' Reply
Reiterating that Plaintiffs have incorporated into their claims against Outside Directors pages of factual allegations of fraud that cannot be disentangled from any "non-fraud" allegations, regarding the "massive fraudulent scheme" perpetrated by Enron's Board of Directors, inter alit/4 Outside Directors insist that Rule 9(b) applies to all the claims against them under a long line of Fifth Circuit cases.[28]See Amended Complaint, ¶¶ 3, 66, 183, 207, 450, 451, 459, 656. They maintain that Plaintiffs have not urged any separate focus on their negligent misrepresentation and Section 18 claims; instead the claims are based on the same set of facts. Moreover, in the wake of American Realty, the majority of district court decisions have reconciled it with Benchmark and pre-existing authority. See SMI-Owen Steel Co., Inc. v. St. Paul Fire & Marine Ins. Co., Nos. Civ. A. G 00149, G 01 CV 627,
*825 Next Outside Directors argue that they are not deemed to have "made" all of the statements contained in SEC filings that they have signed[29]; rather their signatures merely "`indicate that they believe that the filing is accurate and complete.'" # 291 at 5, quoting In re Enron Corp.,
Outside Directors further insist that Plaintiffs have not adequately pled aiding and abetting common law fraud against them because they have not alleged that the Outside Directors had actual knowledge of the underlying fraud. Aetna Casualty,
Moreover, with respect to group pleading, urge the Outside Directors, this Court as the transferee court in an MDL proceeding, "[w]hen analyzing questions of federal law, ... should apply the law of the law of the circuit in which it is located." In re Silica Prods. Liab. Litig.,
In addition, given Section 18's one-year statute of limitations and three-year statute of repose, Outside Directors reiterate that the complaint, itself, conclusively establishes that Plaintiffs were on inquiry notice of their Section 18 claims against Outside Directors in November 2001-or any time more than one year before tolling began under the Court's July 11, 203 scheduling order. In the Amended Complaint at ¶¶ 671, 673, and 671 ("When the truth was finally revealed in November 2001"),[30] Plaintiffs pled that in November 2001 they identified as false or misleading the financial statements on which the Section 18 claims are based, i.e., had actual notice from the restatement; thus their Section 18 claims were time-barred one year later. They note that this Court's previous opinions, which found later dates for inquiry notice of claims, related to claims against secondary actors, i.e., bank defendants whose roles in the alleged scheme would have been far less obvious to a reasonable investor of ordinary intelligence. Moreover, Plaintiffs also conclusorily asserted that they "relied on each of the Forms 10-K and the financial statements contained therein ... between 1997 and November 2001," a wide "reliance" net that includes information that the public learned was inaccurate in November 2001. The alternative inquiry notice date, April 8, 2002, when Lead Plaintiff filed the Fist Consolidated Complaint in Newby, in light of Plaintiffs' express reliance here on previously filed lawsuits and the similarity in substantive allegations between this suit and Newby, bars Plaintiffs from claiming in good faith that limitations expired any later than April 8, 2003, before any tolling begun under the Court's July 11, 2003 order.
Moreover, contend Outside Directors, some of Plaintiffs' negligent misrepresentations claims against the Outside Directors are also time-barred. There is no dispute that such claims based on representations purportedly made before July 11, 1999 are time-barred. As noted, the four-year statute of limitations bars "new" plaintiffs OTTA and Cincinnati, who were not subject to the July 11, 1003 "tolling" order, from asserting such claims based on representations before September 15, 2001, four years before OTTA and Cincinnati filed their motion to join this action.
*827 Court's Determination
Pleading Standard
As a threshold matter, the Court, agrees with Outside Defendants that Plaintiffs have incorporated, indiscriminately, all their allegations of fraud into the claims in Counts V, VI, and IX against Outside Directors, and thus Rule 9(b) establishes the pleading standard for all of them. The Court finds that Plaintiffs have relied on the same factual representations for their negligent misrepresentation and fraud claims, and they have made no attempt here to distinguish the two causes of action so as to warrant application of Rule 8's notice pleading requirements to the negligent misrepresentation claim. Benchmark,
Moreover the PSLRA does apply to § 18 of the Exchange Act, and the Fifth Circuit has held that the PSLRA incorporates the standard of Rule 9(b). Financial Acquisition Partners, L.P. v. Blackwell,
Allegations Against Outside Directors
According to the Amended Complaint, all the named Defendants "engaged in a complex scheme to falsify [Enron's] financial results and overstate Enron's income by at least $591 million and understate debt by more than $2.5 billion." ¶ 131. It goes into substantial detail about the various ways the fraud was allegedly effected, including improper accounting, off-balance-sheet SPEs (including Chewco, LJM partnerships, and the four Raptors) and transactions (Rhythms NetConnections, Inc. stock purchase; unwinding Swap Sub and creation of Southampton, L.P.; "sales" of "assets" to LJM partnerships; prepay transactions; minority interest transactions including Nahanni and Rawhide; Nigerian barge purchase; Broadband transactions including Braveheart and dark fiber capacity swaps; FAS 140 transactions; improper tax transactions; Forest Products transactions including Fishtail, Bacchus, Sundance, and Slap Shot; the Share Trust transactions including the Marlin transaction and Whitewing transaction; the Cash 6 transaction; and the SO2 transaction) that violated GAAP, hedging, and Fastow's conflicting roles as Enron's CFO and managing partner of the LJM partnerships. It was the combination of these fraudulent vehicles, each described in detail, that permitted the misrepresentations of Enron's financial condition contained within the SEC-filed documents signed by Outside Directors. Moreover, the Amended Complaint addresses each of the Form 10-Ks, explaining, with reference to the vehicles identified above, how and why it misrepresents Enron's financial condition. In In re Cabletron Systems,
In this case, however, Mesko alleges that Cabletron's revenue was fraudulently inflated by tens of millions of dollars per quarter. Given that Cabletron's quarterly revenue ranged from $371 million to $381 million during the class period, reasonable investors unquestionably might consider a difference of such magnitude material. Accurate earnings figures are total aspects of the "total mix of information" which investors would consult when evaluating Cabletron's stock. Furthermore, the nature of much of the alleged inaccuracy in earnings derives from the systematic fraud, described in detail, that extends to completely fictitious sales. This distinguishes it from cases where the alleged GAAP violation consisted merely of questionable bookkeeping practices.... Mesko has adequately pled that the fraudulent revenue recognition rendered Cabletron's SEC filings materially misleading.
Id.[31] This Court does the same here.
Regarding the individual Outside Directors, Plaintiffs have alleged that Belfer, Blake, Baxter, Chan, Duncan, Gramm, Jaedicke, LeMaistre, Foy, Mendelsohn, Meyer, Ferraz Pereira, Urquhart, Wakeham, Walker, and Savage were members of Enron's board of directors, identifies the times when each served on the board, and states which SEC-filed documents, specifically Form 10-Ks, each Outside Director signed.[32] It further asserts that Belfer, Blake, Baxter, Chan, Duncan, Gramm, Jaedicke, LeMaistre, and Foy were "in possession and aware of materially adverse undisclosed information" when they engaged in insider trading, identifies the amount of stock each director sold, and indicates the total amount he or she received in illegal insider trading profits.
The complaint further states that Enron's board of directors approved the LJM partnerships, approved Fastow's role as managing partner of the LJM partnerships, and, after the scheme began to unravel *829 and the press coverage was increasingly critical, on October 24, 2001 placed Fastow on administrative leave. Plaintiffs also assert that the Wall Street Journal reported that Board member Charles Le-Maistre revealed that the LJM2 partnerships were utilized to retain Fastow at Enron. ¶ 145. Moreover, "the Board members failed to implement any procedures to effectively manage or oversee the CFO's unusual dual responsibilities."
Section 18
Outside Directors have cited Southland,
Nevertheless Southland also carved out an important exception, which, for purposes of the claim under § 18 against the Outside Directors, based on their signing of Enron's Forms 10-K, is at issue here:
However, corporate documents that have no stated author or statements within documents not attributed to any individual may be charged to one or more corporate officers provided special factual allegations link the individual to the statement at issue. Such specific facts tying a corporate officer to a statement would include a signature on the document or particular factual allegations explaining the individual's involvement in the formulation of either the entire document, or that specific portion of the document containing the statement.
Id. at 365; see also Financial Acquisition Partners LP v. Blackwell,
Actual reliance is an element of a § 18 claim. Although the Amended Complaint states at one point that the market for Enron bonds was "an efficient market that promptly digested current information with respect to Enron from all publiclyavailable sources and reflected such information in ... price" and that Plaintiffs "relied on the integrity of the market price" of the securities (e.g., ¶¶ 134), i.e., pleading fraud on the market, there are only five conclusory allegations of actual reliance[33] on the SEC-filed documents signed by Outside Directors. Two of the five relate to the § 18 claim. One is in ¶ 673, "Plaintiffs read and relied upon each of the Forms 10-K and the financial statements contained therein, and Forms 8-K issued by Enron, between 1997 and November 2001, not knowing that they were false and misleading." The second, in ¶ 674, states,
In connection with the purchase of the 7.125% Enron Bonds, the Yosemite Notes and Enron's stock, Plaintiffs and their agents specifically read and relied on the false and misleading statements of the Company's financial condition in the Forms 8-K for 1998 through November 2001 and Forms 10-K filed with the SEC for fiscal 1997 through 2000. Plaintiffs' reliance was reasonable, particularly given the clear opinion from the Company's auditor Andersen, and the repeated glowing earnings reports and other press releases that the Individual Defendants caused Enron to issue.
Such conclusory, general statements are not sufficient to satisfy Rule 9(b)'s particularity requirement. Plaintiffs need to make specific factual allegations describing each Plaintiff's reliance on the statements in these documents and allege a causal connection between the statements and that Plaintiffs purchase of Enron securities. See In re Suprema,
As for the one year/three year statute of limitations and repose for § 18 claims, emphasizing Plaintiffs' assertion that Enron's announcement on November 8, 2001 that it would restate its financial statements (including the 10-Ks signed by the Outside Directors) for 1997, 1998, 1999, and 2000 "constitute[s] an admission that the representations made in the original financial statements.... were materially false and misleading when made," Outside Directors insist that Outside Directors had notice of the claims against them by that date and should reasonably have questioned the content of the financial statements which they had approved by signing.
This Court disagrees. A restatement does not necessarily equate to fraud. In previous rulings regarding storm warnings about the alleged fraud at Enron, the Court has emphasized the extreme complexity and sophistication of the accounting, improper use of non-consolidated off-shore SPEs, hedging, and manipulated transactions and concealed loans that allegedly led to the collapse of Enron and found that while triggering a duty to investigate, neither the restatements nor Enron's bankruptcy would as a matter of law provided investors of ordinary intelligence in the exercise of reasonable diligence with sufficient facts to unravel enough of the alleged vast and complicated scheme to realize how they had been injured by it and file suit within a year. To constitute storm warnings, the facts relied upon to support inquiry notice must rise to a level of more than mere suspicion; they must instead be`sufficiently confirmed or substantiated' to a point at which the victims are incited to investigate.'" In re Dynegy,
Negligent Misrepresentation
As noted, this Court finds that under the Southland exception to the group pleading doctrine, Plaintiffs have adequately alleged affirmative misrepresentations contained within the SEC-filed Forms 10-K signed by the Outside Directors, and therefore "made" by them, in the course of their business or profession for the guidance of shareholders and investors. Moreover, even if Southland exception does not apply to state common-law claims, the Court has found Plaintiffs have alleged numerous reasons why the reported financial status of Enron in the Forms 10-K was false and misleading.
Plaintiffs have not, however, adequately pled facts demonstrating their exercise of reasonable care in obtaining or communicating the information in the 10-Ks nor sustaining a claim of justifiable reliance by Plaintiffs to satisfy the particularity requirement of Rule 9(b).
Nor, since Rule 9(b) applies to the negligent misrepresentation claim here, have Plaintiffs adequately plead fraudulent intent. Although the Rule states that scienter may be "averred generally," case law in the Fifth Circuit requires more:
a plaintiff must set forth specific facts that support an inference of fraud. See Greenstone v. Cambex Corp.,975 F.2d 22 , 25 (1st Cir.1992) ("The courts have uniformly held inadequate a complaint's general averment of the defendant's `knowledge' of material falsity, unless the complaint also sets forth specific facts that makes it reasonable to believe that defendant knew that a statement was materially false or misleading.") (emphasis in original).
Tuchman v. DSC Communications Corp.,
The factual background adequate for an inference of fraudulent intent can be satisfied by alleging facts that show a defendant's motive to commit securities fraud. Where a defendant's motive is not apparent, a plaintiff may adequately plead scienter by identifying circumstances that indicate conscious behavior on the part of the defendant though the strength of the circumstantial allegations must be correspondingly greater.
Id.
Here, the only allegation, which is conclusory and relates to all the defendants, and the content of which indicates in part does not even apply to Outside Directors, is in ¶ 642: "If not intentional or reckless, the defendants' misrepresentations and their complete disregard of accounting practices, were clearly negligent in derogation of the duty they owed to make accurate representations to Company shareholders and investors."
Because Ohio Retirement System Plaintiffs were relying on Rule 8(b)'s notice pleading,[35] the Court will grant them leave *833 to supplement their complaint if they can plead these elements with the specificity required by Rule 9(b). Nevertheless, the Court admonishes that it found the allegations against the Outside Directors in the Newby complaint, which were far more developed, insufficient to meet scienter requirements. In re Enron Corp. Sec., Derivative and "ERISA" Litig.,
Furthermore, the four-year statute of limitations for the negligent misrepresentation claims, which was tolled as of the date of the scheduling order, July 11, 2003, also the date on which the Ohio Retirement Systems' Amended Complaint is deemed constructively filed, Plaintiffs can only reach claims based on misrepresentations made on July 11, 1999 or later. Since the only allegations against the Outside Directors for negligent misrepresentation appear to be their signing of the Form 10-Ks and therefore responsibility for misrepresentations in those documents, and because the Amended Complaint states that the 1997 10-K was filed with the SEC on March 31, 1998 (¶ 295) and the 1998 10-K was filed on March 31, 1999 (¶ 320), claims based on these two Forms 10-K are time-barred.
Aiding and Abetting Common Law Fraud
Aside from signing the Forms 10-K, the only allegations against the Outside Directors are conclusory statements that some of them engaged in insider trading while in possession of adverse information about Enron, that the Board approved the LJM partnerships and Fastow's conflicting roles as their managing partner while acting as Enron's CFO, and their failure to effectively monitor Fastow's activities, none of which satisfies Rule 9(b).
As for the elements of aiding and abetting, Plaintiffs have alleged no specific facts giving rise to an inference that the Outside Directors had a general awareness of their role in the complex scheme to defraud investors, no less that they had "actual knowledge" and that they knowingly and substantially assisted the wrongdoing by primary violators.
Because there is no issue about the well established application of Rule 9(b) to such a claim, the Court finds no reason to permit amendment of the pleadings regarding it and grants the motion to dismiss it as asserted against the Outside Directors.
Accordingly, the Court
ORDERS that Outside Directors' motion to dismiss is GRANTED IN PART as to Plaintiffs' aiding and abetting common law fraud against them and DENIED as to the § 18 and negligent misrepresentation claims. Plaintiffs shall file with 30 days of entry of this opinion and order a supplement to their § 18 and their negligent misrepresentation claims that satisfies Rule 9(b) or they shall inform the Court that they no longer wish to pursue the causes of action against Outside Directors. If Plaintiffs file a supplement, Outside Directors may timely challenge sufficiency of the new pleading. If the Court finds that Plaintiffs state a claim for which relief can be granted, it will address the discovery requests of Outside Directors.
NOTES
Notes
[1] Movant Outside Directors are Robert A. Belfer, Norman P. Blake, Jr., Ronnie C. Chan, John H. Duncan, Wendy L. Gramm, Robert K. Jaedicke, Joe H. Foy, Charles A. LeMaistre, John Mendelsohn, Jerome J. Meyer, Frank Savage, John A. Urquhart, Charles, E. Walker, and Herbert S. Winokur, Jr.
[2] In the Notice of Master List of Motions Not Affected By Fifth Circuit Ruling Regarding Section 10 Liability (# 5656), Ms. Patrick had indicated that the Outside Directors wished to file a surreply; her follow-up letter was to inform the Court that they had done so and that the motion was ripe for ruling. The schedule subsequently agreed to by the parties and approved by the Court did not indicate otherwise for this motion, even though the Court generally deferred briefing on and resolution of motions addressing federal claims in the member cases. Thus the Court reviews the instant motion to dismiss.
[3] In Lachmund the Seventh Circuit held that "when the plaintiff relies upon the same circumstances to establish both the alleged fraud and the agency relationship of a defendant, the reasons for more particularized pleading that animate Rule 9(b) apply with equal force to the issue of agency and to the underlying fraud claim."
[4] In Williams v. WMX, the Fifth Circuit stated that it was applying the particularized pleading standard of Rule 9(b) because plaintiffs did not try to distinguish their negligent misrepresentation claim from their fraud claim and relied on the same misrepresentations for. both.
[5] Outside Directors object to Plaintiffs' suggestion that American Realty overturned Benchmark because Fifth Circuit Rule 47.5 provides that an unpublished opinion is not precedent unless it satisfies limited circumstances set out in Rule 47.5.4, which does not apply here. They also contend that American Realty "misinterprets Benchmark as merely involving an appellant's failure to distinguish between its fraud claims and negligent misrepresentation claims on appeal' (i.e., a `waiver' theory) ... In reality, Benchmark's holding focused on the plaintiff's failure to urge a separate focus between the fraud claims and negligent claims in its complaint a fact made obvious by the court's conclusion that the two claims `are based on the same set of alleged facts' .... [citations omitted]." They complain that Plaintiffs are citing American Realty to "evade a long line of Fifth Circuit authority extending Rule 9(b) pleading requirements to `non-fraud' causes of action that are nevertheless grounded in fraud." #291 at 2.
[6] Judge Godbey concluded that Benchmark Electronics, Williams, and Shushany "rest on a theory of waiver."
[7] The Lone Star panel summarized,
When averments of fraud are made in a claim in which fraud is not an element, an inadequate averment of fraud does not mean that no claim has been stated. The proper route is to disregard averments of fraud not meeting Rule 9(b)'s standard and then ask whether a claim has been stated. There is a qualification. The district court need not rewrite such a deficient complaint. It may dismiss, without prejudice, placing the responsibility upon counsel.
American Realty,
[8] The majority in Bell Atlantic opined that the rule in Conley v. Gibson,
[9] As reasoned by the court in Bell v. Holden Survey, Inc., No. 729,
The General Assembly's failure to include general negligence claims under the discovery rule set out in R.C. 2305.09 argues strongly that it was not the legislature's intent to apply the discovery rule to such claims. See Kirsheman v. Paulin,
Id. at *5.
[10] See also In re National Century Financial Enterprises, Inc., No. 2:03-md-1565,
[11] As the underlying cause of action for the aiding and abetting claim here, the elements of common law fraud in Ohio are (1) a representation or, where there is a duty to disclose, concealment of a fact, (2) which is material to the transaction at issue, (3) made falsely, with knowledge of its falsity, or with utter disregard and recklessness as to whether it is true or false that knowledge may be inferred, (4) with the intent of misleading another into relying upon it, (5) justifiable reliance upon the representation or concealment, and (6) resulting injury proximately caused by the reliance. Cohen v. Lamko, Inc.,
[12] Section 18 applies only to documents filed pursuant to the Exchange Act; it does not apply to filings made solely under the 1933 Act or any of the other securities laws. In re Alstom SA,
SEC regulations expressly exempt certain filings from the provisions of Section 18. See, e.g., 17 C.F.R. § 240.13a-16(c) (exempting Form 6-K furnished pursuant to Rule 13a-16); 17 C.F.R. § 240.15d-16(c) (exempting Form 6-K furnished pursuant to Rule 15d-16); 17 C.F.R. §§ 240.14a-3(c)-(d), 240.14c-3 (b) (exempting annual reports sent to shareholders unless report is incorporated into proxy solicitation materials or other filed reports by reference; subjecting the annual report to Section 18 liability if it is prepared pursuant to Form 10-K and Form 10-KSB and submitted in satisfaction of the proxy solicitation rules); 17 C.F.R. §§ 240.13a-13(d), 240.15d-13 (e) (exempting financial information on Form 10-Q and Form 10-QSB); 17 C.F.R. § 240.12g3-2 (b)(4) (exempting certain information filed by foreign private investors); 17 C.F.R. § 240.17h-2T(c)(5) (exempting certain information filed by brokers or dealers); see also Heit v. Weitzen,
Alstom,
[13] It has been pointed out that the Kramer court incorrectly assumed that § 18 applied to a 1933 Act registration, when it only applies to documents required to be filed with the SEC under the Exchange Act. See, e.g., Edward Brodsky and M Patricia Adamski, Chapter 13. Manipulation and False SEC Filings: Sections 9 and 18 of the Exchange Act, Law of Corp. Offs. & Dirs.: Rts., Duties & Liabs. § 13:4 ("Persons Liable") n. 5 (2007). Brodsky and Adamski observe,
Presumably ... the degree of participation of the particular defendant will determine whether he can be said to have made or caused the challenged statement to be made. Directors, simply by virtue of their position as such, should not automatically be deemed to have caused a corporate statement to be made. However, a majority of the board of directors must sign the company's annual report on Form 10-K, and such signing directors may be subject to increased exposure under section 18(a). [footnotes omitted]
[14] See, e.g., In re Suprema Specialties, Inc. Sec. Litig.,
[15] Section 78u-4 (b)(1) provides,
In any private action arising under this chapter in which the plaintiff alleges that the defendant
(a) made an untrue statement of a material fact; or
(b) omitted to state a material fact necessary in order to make the statements made, in light of the circumstances in which they were made, not misleading;
the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.
[16] Under Section 11's affirmative due diligence defense, the defendants can avoid liability for non-expertised portions of the registration statement if they show that after reasonable investigation, they had good reason to believe and did believe that the statements in it were true and not misleading. 15 U.S.C. § 77k(b)(3)(A). As for the expertised portions, which include the financial statements, under an affirmative "reliance" defense defendants are entitled to rely on any portion of the registration statement made on authority of an expert's opinion (e.g., accountants' and auditors') if they show they had no reason to believe and did not believe that the statements were untrue or misleading. 15 U.S.C. § 77k(b)(3)(C).
[17] Outside Directors state that every Enron filing from 1997 through 2000 included the following statement:
Management's Responsibility for Financial Reporting
The following financial statements of Enron Corp. and subsidiaries (collectively Enron) were prepared by management, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles and necessarily include some amounts that are based on the best estimates and judgments of management.
# 186 at 9, citing 2000 Enron Annual Report at 29; 1999 Enron Annual Report at 39; 1998 Enron Annual Report at 43; 1997 Enron Annual Report at 51 (relevant pages attached as Ex. 1).
The Court notes that Plaintiffs have alleged numerous violations of GAAP by Enron officials and Andersen, specifically identified and discussed, which raise fact issues not appropriate for review under Rule 12(b)(6).
[18] Arthur Andersen represented,
Reports of Independent Public Accountants
To Shareholders and Board of Directors of Enron Corp.:
We have examined management's assertion that the system of internal control of Enron Corp. (an Oregon corporation) and subsidiaries as of December 31, 2000, 1999 and 1998 was adequate to provide reasonable assurance as to the reliability of financial statements.... Management is responsible for maintaining effective internal control over the reliability of financial statements and the protection of assets against unauthorized acquisition, use or disposition. Our responsibility is to express an opinion on management's assertion based on our examination....
In our opinion, management's assertion that the system of internal control of Enron Corp. and its subsidiaries as of December 31, 2000, 1999, and 1998 was adequate to provide reasonable assurance as to the reliability of financial statements ... based upon current standards of control criteria....
We have audited the accompanying consolidated balance sheet of Enron Corp. (an Oregon corporation) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, comprehensive income, cash flows and changes in shareholders' equity for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of Enron Corp.'s management. Our responsibility is to express an opinion on these financial statements based on our audits.
# 186 at 10, citing 2000 Enron Annual Report at 30; 1999 Enron Annual Report at 40; 1998 Enron Annual Report at 44 (Ex. 1).
As will be discussed, this statement does not relieve Outside Directors of liability for signing
[19] Outside Directors assert that this Court previously noted the limited significance of an outside director's signature on an SEC filing in In re Enron,
This Court completely disagrees; in fact its discussion emphasizes exactly the opposite, i.e., that "[t]he SEC has attempted to make signatures on corporate documents that are filed with the SEC carry significant weight." See id.,
[20] According to the Amended Complaint at ¶¶ 152 and 153,
On November 8, 2001, Enron stunned the market by announcing its intention to restate its financial statements for 1997, 1998, 1999, and 2000 and the first two quarters of 2001 to reduce previously-reported net income by an aggregate of $591 million. Enron attributed the restatement to transactions involving three entities: Chewco Investments, L.P. ("Chewco"), a limited partnership run by Kopper; Joint Energy Development Investments Limited Partnership ("JEDI"), an investment partnership between Chewco and Enron; and LJM1, an investment partnership that had two institutional investors as limited partners and whose general partner was a limited partnership wholly owned by Fastow. The Company also disclosed that Fastow had earned $30 million in fees for managing limited partnerships that Enron used to move poor-performing assets and debt off of its books.
The restatement reduced Enron's reported net income by $96 million in 1997, $113 million in 1998, $250 million in 1999, and $132 million in 2000. The impact of the restatement on shareholders' equity was even more dramatic, reducing such equity by $313 million in 1997, $448 million in 1999, and an incredible $1.164 billion in 2000. In addition, Enron's reported debt increased by $711 million in 1997, $561 million in 1998, $685 million in 1999, and $628 million in 2000.
[21] Outside Directors urge that even if the Court found that Plaintiffs were not on notice of their claims against the Outside Directors until April 8, 2002, when the First Amended Consolidated Complaint in Newby was filed, the statute of limitations would still have run by April 2004.
[22] The Court has explained (# 161 in H-02-4788;
Original Plaintiffs and Cincinnati and OTTA filed their motion for leave to file amended complaint and for Cincinnati and OTTA to join in that amended complaint (# 54), adding federal securities claims and the Outside Directors as Defendants, on September 15, 2005, during the period of tolling and nearly ten months before the Newby class was certified on July 5, 2006 and the scheduling order was issued on July 11, 2006. The Court finds that Cincinnati and Otta's claims, like those complaints allowed to be amended in accordance with that scheduling order (including that in the action sub judice), should be construed as constructively filed on July 11, 2003.
[23] Enron revealed that it was restating its financial statements to include the financial activities of Chewco, JEDI, and LJM1 that should have been, but were not, reported on Enron's consolidated financial statements in prior periods and include adjustments and reclassifications that had been proposed by Arthur Andersen in prior years by Enron's officers.
[24] Nevertheless, under In re Korean Air Lines Disaster,
[25] In National Century the court observed that the group pleading doctrine is "premised on the assumption that `[i]n cases of corporate fraud where the false or misleading information is conveyed in prospectuses, registration statements, annual reports, press releases, or other `group published information,' it is reasonable to presume that these are the collective actions of the officers.'"
The complaints spell out exactly which positions Poulson, Ayers, and Parrett held with National Century, NPF VI, and NPF XII. Each complaint either directly alleges or supports an inference that Poulson, Ayers, and Parrett reviewed and approved the Offering Materials, despite knowing that the Offering Material contained misrepresentations and material omissions. And the complaints allege that the [defendants] actively concealed their wrong doing from Plaintiffs after the note purchases were made. In sum the Court finds that Plaintiffs have satisfied the pleading requirements of Rule 9(b).
Id. at *9. With regard to a group-pleading challenge to the aiding and abetting claim before it, the court found that the plaintiffs "have stated a claim for aiding and abetting because their complaints specify what positions "the [defendants] held and alleged that [they] knowingly organized and assisted each other in executing the fraudulent scheme." Id. at *12. Thus it appears that the court required more than a conclusory statement that the defendants were officers and directors of a corporation that issued misleading statements.
[26] This Court previously held that the discovery rule did not apply to negligent misrepresentation claims and that the original Plaintiffs could not assert negligent misrepresentations claims based on conduct before July 11, 1999. December 8, 2006 (# 161) at 87 (also available at In re Enron,
[27] The Court finds these cases, on their facts, do not support the proposition for which Plaintiffs here cite them. In Chinn, grounded in Title VII and the ADEA, the court ruled that the Plaintiff employees could not file a new class action in order to avoid "constraints" established by scheduling orders in earlier filed class actions and that the law of the case doctrine barred employees from joining a different class action. In Parker, defendants at the eleventh hour filed what was a third motion for extension of time. Because two extensions had already been allowed and because defendants did not cite any reason why additional time was needed, the court denied the motion.
[28] Benchmark,
[29] Outside Directors insist Plaintiffs have misconstrued Howard v. Everex Systems, Inc.,
[30] 671. As set forth above, the Section 18 Defendants made or caused to be made statements which were, at the time and in light of the circumstances under which they were made, false or misleading with respect to material facts, in documents filed with the SEC. Specifically, the Company's Forms 8-K from 1998 through November 2001 were filed with the SEC, and audited financial statements for the years 1997, 1998, 1999, and 2000 were included in the Company's Forms 10-K that were filed with the SEC. Those financial statements have been withdrawn and were restated, which restatement of financial figures by way of definition (see Accounting Principles Board Opinion No. 20) makes such statements false and misleading....
673. Except for Andersen, each of the Section 18 Defendants signed the Company's 1997, 1998, 1999 and 2000 Forms 10-K, and Andersen certified the financial statements contained therein....
675. When the truth was finally revealed in November 2001 about the false and misleading statements in the Company's documents and reports filed with the SEC, including the existence of accounting irregularities, Plaintiffs were significantly damaged by the resulting drop in the value of the Company's securities.
[31] Similarly in § 10(b) claim cases, courts have found that pleading particular facts about specific and significant GAAP violations can give rise to a strong inference of scienter. In re Cylink Sec. Litig.,
In the instant case, this Court notes that Plaintiffs have alleged all these kinds of detailed facts.
[32] The complaint states that the 1997 10-K was signed by Outside Directors Belfer, Blake, Chan, Duncan, Foy, Gramm, Jaedicke, LeMaistre, Meyer, Urquhart, Wakeham, Walker and Winokur. The 1998 10-K was signed by Belfer, Blake, Chan, Duncan, Foy, Gramm, Jaedicke, LeMaistre, Meyer, Urquhart, Wakeham, and Winokur. The 1999 10-K was signed by Belfer, Blake, Chan, Duncan, Foy, Gramm, Jaedicke, LeMaistre, Mendelsohn, Meyer, Pereira, Savage, Urquhart, Wakeham, Walker, and Winokur. The 2000 10-K was signed by Belfer, Blake, Chan, Duncan, Gramm, Harrison, Jaedicke, LeMaistre, Mendelsohn, Meyer, Pereira, Savage, Urquhart, Wakeham, and Winokur. ¶¶ 295 (1997), 320 (1998), 342 (1999), 371 (2000).
[33] The first three conclusory statements are expressly related to Plaintiffs' negligent misrepresentation claim, but are not limited to the SEC-filed documents signed by Outside Directors: in ¶ 643 ("Plaintiffs, justifiably relying on the integrity of the market and/or on the statements and reports of Enron, the Individual Defendants, the Financial Institution Defendants and Andersen[,] purchased Enron securities at artificially-inflated prices."); in ¶ 649 ("Plaintiffs reasonably relied upon the false representations of the Company's financial condition in the annual reports disseminated by the Individual Defendants and the unqualified opinions issued in relation thereto by Andersen. Plaintiffs also relied upon the material misrepresentations in the Company's quarterly reports, press releases and Registration Statements, and upon analyst reports, prospectuses and Offering Memoranda issued by Enron or the Financial Institution Defendants, including the Yosemite Notes Offering Memorandum."); and in ¶ 651 ("With no knowledge of the false and misleading nature of the representations [and omissions by defendants... made in the course of defendants' business, profession and/or employment for their financial benefit and for the guidance of Plaintiffs in their investment decisions], Plaintiffs justifiably, relied upon the false and misleading information in purchasing Enron stock and bonds and the Yosemite Notes.").
[34] In the Consolidated Complaint # 441, filed April 8, 2002, the Newby Plaintiffs inter alia alleged a vast Ponzi scheme that included specific reasons why Enron's financial statements, registration statements, prospectuses, etc. were false and misleading has similarities to the claims of the Ohio Retirement Systems Plaintiffs make against the Outside Directors, but were brought under different statutes and different state law.
[35] For a discussion of the division of courts regarding the application of Rule 9(b) to negligent misrepresentations claims in Ohio and around the country, see In re National Century Financial Enterprises, Inc., No. 2:03-MD 1565,