May 18, 2007

Enron's Banks

Last week, the Washington Post ran an op-ed criticizing the Fifth Circuit's decision to deny class certification in the securities fraud case against Enron's banks. Point of Law has a response.

Posted by Lyle Roberts at 08:52 PM | TrackBack

April 10, 2007

It's All Class Certs Nowadays

While The 10b-5 Daily was on break last week, there were interesting developments in two of the biggest ongoing securities litigations.

(1) On Friday, the U.S. Court of Appeals declined to reconsider its class certification decision in the IPO allocation cases. The Associated Press has an article and the ruling can be found here (via WSJ).

Quote of note (ruling): "The Petitioners, having sought a broad class, are essentially complaining that we failed to narrow their class definition to an extent that might have satisfied Rule 23 requirements. Whatever authority we might have had to undertake that task, we did not think it appropriate to provide legal advice to experienced class-action litigators."

(2) Meanwhile, the plaintiffs in the Enron securities class action are attempting to appeal the denial of class certification by the U.S. Court of Appeals for the Fifth Circuit related to their claims against Enron's banks. A cert petition (via WSJ) was filed with the U.S. Supreme Court on Thursday. Among other things, the petition argues that the case is a "suitable companion" to the Charter Communications case the Court will hear next term. The media coverage includes articles by the Associated Press and Houston Chronicle.

Quote of note (cert petition): "This case is especially significant because it involves the alleged misconduct of banks – major actors in our nation’s financial markets and the banks that Central Bank identified as secondary actors who nonetheless 'may be potentially liable as primary violators under Rule 10b-5 in any complex securities fraud [where] there are likely to be multiple violators.'"

Posted by Lyle Roberts at 07:48 PM | TrackBack

March 20, 2007

What Is A Deceptive Act?

In two decisions issued last year, the Eighth Circuit and the Ninth Circuit split over the extent to which secondary actors (e.g., accountants, lawyers, or bankers) can be held primarily liable under Rules 10b-5(a) and (c) for deceptive devices, schemes, and acts. The Eighth Circuit limited the scope of potential liability, holding that "any defendant who does not make or affirmatively cause to be made a fraudulent misstatement or omission, or who does not directly engage in manipulative securities trading practices, is at most guilty of aiding and abetting and cannot be held liable under Sec. 10(b) or any subpart of Rule 10b-5." In contrast, the Ninth Circuit created a broader test, finding that "to be liable as a primary violator of Sec. 10(b) for participation in a 'scheme to defraud,' the defendant must have engaged in conduct that had the principal purpose and effect of creating a false appearance of fact in furtherance of the scheme." In a decision issued yesterday, the Fifth Circuit has sided squarely with the Eighth Circuit and limited the scope of liability.

In Regents of the Univ. of California., et al. v. Credit Suisse First Boston (USA), Inc., et al., 2007 WL 816518 (5th Cir. March 19, 2007), the issue presented was whether the district court had properly granted class certification for Rule 10b-5 claims brought against three banks that had entered into transactions with Enron. The "common feature of these transactions is that they allowed Enron to misstate its financial condition; there is no allegation that the banks were fiduciaries of the plaintiffs [Enron investors], that they improperly filed financial reports on Enron's behalf, or that they engaged in wash sales or other manipulative activities directly in the market for Enron securities." Nevertheless, the district court held that class certification was appropriate because a "deceptive act" included participation in a transaction whose principal purpose and effect was to create a false appearance of revenues. Because the banks had failed in their duty not to engage in a fraudulent scheme, the district court found that plaintiffs were "entitled to rely on the classwide presumption of reliance for omissions and fraud on the market." On appeal, the Fifth Circuit disagreed.

As an initial matter, the court found that it could address the district court's definition of "deceptive act" because it was the basis for the district court's determination that the plaintiffs were entitled to a presumption of reliance. Without that presumption, class certification would fail.

The court then turned to whether plaintiffs could properly rely on a presumption of reliance created by either the existence of actionable omissions or a fraud on the market. First, the court held that the banks had not made any actionable omissions because they "did not owe plaintiffs any duty to disclose the nature of the alleged transactions." Second, the court found that the district court's definition of "deceptive act" was "inconsistent with the Supreme Court's decision that Sec. 10 does not give rise to aiding and abetting liability." After examining relevant Supreme Court precedent, the court held that the Eighth Circuit's definition of "deceptive act" (i.e., conduct involving "either a misstatement or a failure to disclose by one who has a duty to disclose") was correct. In contrast, the banks' acts "at most aided and abetted Enron's deceit by making its misrepresentations more plausible." Finally, the court concluded that the transactions did not constitute market manipulation because the banks "did not act directly in the market for Enron securities." Because the banks' transactions with Enron were not deceptive acts and did not constitute market manipulation, there could be no fraud on the market presumption of reliance and class certification failed.

A few additional notes on the panel's decision:

(1) There is a "concurrence" that, in fact, is a vigorous dissent from the primary legal holdings in the majority opinion. In particular, the concurring judge found that the majority had overreached in deciding the substantive scope of Rule 10b-5 on an appeal from class certification and that its definition of "deceptive act" was too narrow.

(2) There has been a significant amount of commentary on the decision already. For an internet roundup, see this Point of Law post.

(3) One obvious question is whether this ruling will have any effect on the previous bank settlements in the Enron securities litigation totaling over $7 billion. According to a Wall Street Journal article in today's edition, the answer is "no," because the settlements are already final.

Quote of note (opinion): "We recognize, however, that our ruling on legal merit may not coincide, particularly in the minds of aggrieved former Enron shareholders who have lost billions of dollars in a fraud they allege was aided and abetted by the defendants at bar, with notions of justice and fair play. We acknowledge that the courts' interpretation of § 10(b) could have gone in a different direction and might have established liability for the actions the banks are alleged to have undertaken. Indeed, one of our sister circuits - the Ninth - believes that it did. We have applied the Supreme Court's guidance in ascribing a limited interpretation to the words of § 10, viewing the statute as the result of Congress's balancing of competing desires to provide for some remedy for securities fraud without opening the floodgates for nearly unlimited and frequently unpredictable liability for secondary actors in the securities markets."

Posted by Lyle Roberts at 08:41 PM | TrackBack

December 22, 2006

I'll Bet You Won't Print This

The fee-shifting imposed by the Enron court - related to claims brought against Alliance Capital - continues to make news. At the time of the decision, the Wall Street Journal (subscrip. req'd) published an editorial lauding the result. In today's edition, the plaintiff's attorney fights back with a letter that he challenges the paper to print (a bet he happily loses), while the newspaper's editorial board defends its analysis. The WSJ Law Blog has the blow-by-blow (free content).

Posted by Lyle Roberts at 05:19 PM | TrackBack

December 05, 2006

Pay Up

In an unusual decision, the S.D. of Tex. has ordered that a prominent plaintiffs' firm pay the attorneys' fees and expenses of Alliance Capital, a money management company sued for control person liability (under Section 15 of the 1933 Act) in the Enron securities class action. The plaintiffs had alleged that Alliance controlled one of its employees who also served as an Enron outside director. In his role as an Enron director, the employee signed a registration statement for a public offering that incorporated Enron's admittedly false financial statements for 1998-2000.

In In re Enron Corp. Securities, Derivative & "ERISA" Litigation, 2006 WL 3474980 (S.D.Tex. Nov. 30, 2006), the court found that the plaintiffs had failed to establish facts sufficient for a reasonable jury to conclude that Alliance was a control person. More interestingly, the court held that although the plaintiffs' firm could not be held liable for all of Alliance's fees and expenses from the outset of the case, once the director was deposed and sufficient evidence did not emerge, the plaintiffs' firm should have dropped the claim. Accordingly, the firm was required to pay Alliance's fees and expenses related to the summary judgment stage of the litigation.

The New York Times and the Wall Street Journal both have articles (subscrips. req'd) on the decision.

Quote of Note: "Moreover, it appears to this Court more appropriate that an award of fees and costs under § 11(e) should be borne by counsel: non-attorney clients more likely than not would not have the ability to determine at what point, based on what evidence, an action becomes legally 'frivolous,' while its licensed counsel should and is held to such a standard."

Posted by Lyle Roberts at 08:12 PM | TrackBack

July 24, 2006

Anyone But Me

Because few securities fraud cases go to trial, courts rarely have had to address the proportionate liability scheme created by the PSLRA. In a nutshell, the PLSRA provides for proportionate liability unless the trier of fact finds that the defendant "knowingly" violated the applicable securities laws. If a defendant is only found to have engaged in a reckless violation, the trier of a fact must make "findings with respect to each covered person and each of the other persons claimed by any of the parties to have caused or contributed to the loss incurred by plaintiff" to determine the proportionate liability of the defendant in question.

In a recent decision in the Enron securities class action - In re Enron Corp. Sec., Derivative & "ERISA" Litigation, 2006 WL 1851383 (S.D. Tex. July 5, 2006) - the court found that the failure of Congress to explain or limit the clause "each of the other persons claimed by any of the parties to have caused or contributed to the loss" has the potential to wreak havoc on a trial. The "other persons" could include "non-parties to the suit, defendants that have settled, defendants that have been dismissed, and indeed even the plaintiffs." Based on the vagueness of the statute, "defendants most likely will attempt to designate any person or entity that might conceivably have any responsibility for the plaintiffs' loss." Moreover, the statute does not specify what "caused" or "contributed to" means and does not establish who has the burden of proof as to the responsibility of these "other persons."

To address these issues, the court established some significant threshold requirements for implementing the proportionate liability scheme:

(1) Any party designating a non-party as potentially responsible for the plaintiffs' loss shall "bear the burden of proof demonstrating that the non-party violated the federal securities statutes."

(2) If the trier of fact determines that a defendant did not violate the securities laws, there cannot be any allocation of fault to that person.

(3) All parties who wish to claim that a non-party, settling party, or dismissed party is responsible for any or all of the plaintiffs' losses must file, prior to trial, "the name of such person or entity and provide a statement of the factual basis for claiming that fault should be allocated" to that person or entity. Moreover, the designating person must "demonstrate in that factual statement that the non-party could have been sued by plaintiffs, i.e., that the claims against it could have met requirements of the PSLRA, but was bypassed or dismissed."

Posted by Lyle Roberts at 07:34 PM | TrackBack

January 30, 2006

Around The Web

(1) The Boston Business Journal has an article on securities class action litigation trends. The article suggests that the recent rise in financial restatements may lead to a boom in filings.

(2) The Chicago Tribune provides a lengthy profile of Daniel Fischel, a law professor and leading expert witness in securities cases. Fischel will be testifying on behalf of Enron's former CEO at his criminal trial.

Posted by Lyle Roberts at 06:18 PM | TrackBack

October 19, 2005

Enron Status

Last week, the Houston Chronicle had a feature article discussing the status of the Enron securities litigation.

Quote of note: "Assuming all the existing settlements get court approval, there already is more than $7.8 billion — that's billion with a b — gaining interest in the name of disappointed Enron shareholders and ex-employees. Lawyers inside the class-action cases, where most of the cash is accumulating, think it's possible that in a year or two there will be $10 billion or more ready to be doled out."

Posted by Lyle Roberts at 06:38 PM | TrackBack

August 02, 2005

CIBC Settles Enron-Related Claims

Canadian Imperial Bank of Commmerce ("CIBC") (TSX: CM, NYSE: BCM) has agreed to a preliminary settlement of the claims brought against it as part of the Enron securities class action pending in the S.D. of Texas. The suit alleges that CIBC helped Enron inflate its revenues by hiding debt.

Bloomberg reports that the settlement is for $2.4 billion, which is more than the Enron-related settlements entered into by JPMorgan Chase or Citigroup and equivalent to 22% of CIBC's book value. The settlements in the Enron case have reached a total of approximately $7 billion.

Posted by Lyle Roberts at 06:03 PM | TrackBack

June 15, 2005

J.P. Morgan Settles Enron-Related Claims

The dominos are beginning to fall. On the heels of Citibank's settlement, JPMorgan Chase & Co.(NYSE: JPM) has announced a preliminary settlement of the claims brought against it as part of the Enron securities class action pending in the S.D. of Texas. The settlement is for $2.2 billion, bringing the total settlements in the case to $4.7 billion and counting. The Washington Post has this article.

Posted by Lyle Roberts at 10:45 PM | TrackBack

June 10, 2005

Citigroup Settles Enron-Related Claims

In another early settlement, Citigroup, Inc. (NYSE: C) has announced a preliminary settlement of the claims brought against it as part of the Enron securities class action pending in the S.D. of Texas. The settlement is for $2 billion and will be covered by the company's existing litigation reserves. Bloomberg has this report.

Posted by Lyle Roberts at 11:45 AM | TrackBack

April 21, 2005

Dura Roundup

More on the Dura decision:

(1) The Legal Times has an article (via - free regist. req'd) discussing the reaction of the parties to the decision.

(2) Forbes has a column stating that the decision was a "no-brainer" and providing some academic commentary.

(3) The Wall Street Journal has an editorial (subscrip. req'd) citing the decision as another reason why criminal sentencing in the Enron "barge" case should not be based on the alleged inflation of the company's stock price.

Posted by Lyle Roberts at 05:31 PM | TrackBack

January 10, 2005

Ex-Enron Directors Settle

Eighteen former Enron directors have entered into a preliminary settlement of the securities class action claims against them for $168 million. As in the similar WorldCom settlement, Bloomberg reports that a portion of the funds ($13 million) will be paid by ten of the directors personally. The amount of the personal payments is apparently "tied to allegations of insider trading."

Quote of note: "In addition to the $168 million settlement amount, the directors agreed to pay $32 million to Enron creditors, the investors said. That money will also be paid out of the insurance policies, which total $200 million of coverage. Another $13 million of insurance proceeds will be reserved for the legal fees of directors who didn't settle, including former Enron Chairman Kenneth Lay and ex-Chief Executive Jeffrey Skilling."

Posted by Lyle Roberts at 07:43 PM | TrackBack

November 16, 2004

Enron's Legal Tab

According to a feature article (free regist. req'd) in the Atlanta Journal-Constitution, the legal bills related to Enron's bankruptcy are close to $1 billion.

Quote of note: "When Enron Corp. emerges from bankruptcy by year's end, there won't be much wealth left for those who invested in the once high-flying company. By most estimates, Enron's creditors will likely receive 20 cents on the dollar, while shareholders probably won't get a cent. But don't worry about the lawyers, accountants and other advisers who've feasted on Enron's Chapter 11 case. Their court-approved fees are expected to reach $995 million."

Posted by Lyle Roberts at 06:08 PM | TrackBack

October 29, 2004

Lehman Settles Enron Claims

In a week filled with large settlements, Lehman Brothers Holdings, Inc. (NYSE: LEH) has announced the preliminary settlement of the '33 Act claims (misrepresentations in a registration statement) brought against it as part of the Enron securities class action in the S.D. of Tex. The settlement is for $222.5 million and follows on the heels of a similar, albeit smaller, settlement by Bank of America.

Posted by Lyle Roberts at 08:09 PM | TrackBack

July 06, 2004

Bank Of America Settles Enron-Related Claims

Bank of America Corporation (NYSE:BAC) announced on Friday the preliminary settlement of the claims brought against the company as part of the Enron securities class action pending in the S.D. of Texas. Bank of America has agreed to pay $69 million. It is the second settlement in the Enron case, following the July 2002 settlement by Arthur Andersen's international entities.

Bank of America was sued under the Securities Act based on its role as an underwriter for certain Enron and Enron-related debt offerings. According to a press release from the University of California, the lead plaintiff in the case, Bank of America's payment will be more than 50% of its potential damage exposure.

News coverage of the settlement includes articles from the Associated Press, Bloomberg, and Reuters.

Posted by Lyle Roberts at 07:21 PM | TrackBack

March 29, 2004

Still More On Sarbanes-Oxley And The Statute Of Limitations

The 10b-5 Daily continues to avidly follow the district court split over whether the extended statute of limitations for securities fraud in the Sarbanes-Oxley Act of 2002 revives time-barred claims. District courts have gone both ways on this question and the issue is currently before the U.S. Court of Appeals for the 11th Circuit.

Buried in a large Enron decision from last month is a new ruling on the issue. In Newby v. Enron Corp., 2004 WL 405886 (S.D. Tex. Feb. 25, 2004) , the court addressed a motion to intervene by the Imperial County Employees Retirement System. One issue was whether the proposed intervenor's claims would be time-barred. The decision has an extensive discussion of relevant case law and, on the revival of time-barred claims, holds:

"With regard to claims that were time-barred by the shorter one-year statute of limitations under Lampf prior to the enactment of the Sarbanes-Oxley Act, this court agrees with [the decision in Glaser v. Enzo Biochem, Inc., 2003 WL 21960613 (E.D. Va. July 16, 2003] that in what this Court finds is an absence of any expression of specific intent that Sarbanes-Oxley should apply retroactively, either in the Act or the legislative history, the Sarbanes-Oxley Act's extended limitations period cannot revive stale claims."

Posted by Lyle Roberts at 11:22 PM | TrackBack

March 18, 2004

The Enron Watch X

One of the issues in the Enron securities class action has been whether the bankruptcy examiner, who prepared a report that was strongly critical of the role of Enron's banks and auditors in the collapse of the company, would be required to produce documents or testify in the case. (See this post in The 10b-5 Daily from last December.)

According to a report in the Houson Chronicle, Judge Melinda Harmon (S.D. of Tx.) has ordered "not that [the bankruptcy examiner] provide evidence to those suing in the civil lawsuits before her, but that the financial institutions themselves turn over copies of all deposition transcripts or sworn statements relating to the Enron bankruptcy." The production must be completed by March 29.

Quote of note: "[T]he statements have already been given to Enron, its debtors and its creditors committee, and they are referenced at length in the public examiner's report. [Judge Harmon] said fairness dictates that all parties in the would-be class-action suits before her have the information. 'The parties seeking the statements could, they acknowledge, retake depositions of the individuals whose statements and depositions were taken by the examiner, but the costs would be enormous,' Harmon noted."

Posted by Lyle Roberts at 04:24 PM | TrackBack

March 15, 2004

The Enron Watch IX

The trial in the Enron securities class action has been postponed another year, until October 16, 2006, to accomodate the massive discovery in the case. (Last July, the court had set an October 17, 2005 trial date.) According to an article in today's Houston Chronicle, Judge Melinda Harmon of the S.D. of Tex. has scheduled 18 months for factual discovery.

Quote of note: "Harmon and Enron's bankruptcy judge even tried to force a settlement by ordering the deep-pocketed financial institutions to mediation with the representatives of shareholders and employees. But the parties were too far apart and, as in most litigation, the case needs to get further down the evidentiary road so both sides can better see exactly what can be proved in court before there may be a meeting of minds on settlement."

Posted by Lyle Roberts at 07:03 PM | TrackBack

September 25, 2003

The Enron Watch VII

The Wall Street Journal (subscrip. required) reports that Enron has filed a complaint against six of its former bankers in bankruptcy court. According to the article, "the complaint alleges that the banks 'bear substantial responsibility' for Enron's downfall because they participated 'with a small group of senior officers and managers of Enron in a mulityear scheme to manipulate and misstate Enron's financial difficulties.'"

The filing comes just days before the company is scheduled to participate in court-ordered mediation for the suits brought by its shareholders and financial institutions and appears designed to spur a more favorable settlement.

Posted by Lyle Roberts at 09:26 AM | TrackBack

September 11, 2003

The Enron Watch VI

The guilty plea of Enron's former treasurer, Ben Glisan, will help the plaintiffs in the pending securities class action against the company. According to a Reuters article, Glisan "admitted that he and others 'engaged in a conspiracy to manipulate artificially Enron's financial statements' in a secretive transaction called Talon, designed to hide debt." Glisan is set to begin his 5-year sentence for wire and stock fraud conspiracy immediately.

Quote of note: "The admission can stand as evidence in a civil court that Glisan, and Enron, engaged in fraud, freeing plaintiffs from having to prove that allegation. 'It may not make it a slam dunk, but it certainly is moving the ball right up to the hoop,' said Neil Getnick, whose Manhattan law firm Getnick & Getnick specializes in business ethics and anti-fraud litigation."

Posted by Lyle Roberts at 07:27 PM | TrackBack

July 17, 2003

The Enron Watch V

Mark your calendars. The judge in the Enron securities class action has laid out the case schedule. According to an article in the Houston Chronicle, the trial will commence on Oct. 17, 2005, provided, of course, that the case ever gets to that stage.

Posted by Lyle Roberts at 03:32 PM | TrackBack

July 10, 2003

The Enron Watch IV

According to a Reuters article, the trial in the securities class action against Enron is now scheduled to begin in October 2005 (nearly four years after the company's bankruptcy).

Quote of note: "Kathy Patrick, a lawyer who represents Enron's outside directors, told the judge that discovery could produce more than 100 million pages of documents. She likened the case to 'the Bataan death march.'"

Posted by Lyle Roberts at 11:07 PM | TrackBack

June 27, 2003

Enron's Employees Get Three Bites At The Apple

There is already a securities class action and an ERISA class action seeking damages on behalf of Enron's employees who invested in Enron stock through the company's pension plan. Now the Department of Labor is joining the bandwagon. The Houston Chronicle reports that the DOL has brought its own ERISA claim on behalf of the employees for violations of the pension laws. The suit "accuses former Chairman Ken Lay, former CEO Jeff Skilling, the former board of directors and officers on a committee overseeing Enron's retirement plans with failing to fulfill their responsibilities." Reuters also has an article.

Just as in the securities and ERISA suits, however, the DOL's suit appears to focus on alleged false statements that induced employees to invest in the stock at artificially high prices. But isn't this circumventing the PSLRA? (See this post for a discussion of the conflict.) And aren't the public and private ERISA suits going after the exact same sources of recovery? (See this post about a similar overlap problem between the SEC and securities class actions.)

Quote of note (Houston Chronicle): "'Mr. Lay went so far as to tout Enron stock as a good investment for employees even after he had information on the accounting scandals,' said Elaine Chao, U.S. Secretary of Labor."

Quote of note (Reuters): "Radzely [Labor Solicitor] later told Reuters that the department would seek to recover money where it could, including from each individual defendant and from an $85 million fiduciary liability insurance policy that covers some of them. But the court will determine the extent of each defendant's liability, he said. 'We're going to go wherever the money is,' he added."

Benefitsblog has collected links to related articles.

Posted by Lyle Roberts at 12:10 AM | TrackBack

June 17, 2003

The Enron Watch III

According to an article in the Houston Chronicle, the federal judges overseeing Enron's bankruptcy and securities class action suits have appointed a new mediator for the settlement negotiations. As noted here in The 10b-5 Daily, the judges previously gave the job to U.S. District Judge Kevin Duffy of the S.D.N.Y. Judge Duffy's name was withdrawn, at his request, a week later. They did not go far to find Judge Duffy's replacement -- the new mediator will be Senior U.S. District Judge William Conner, also of the S.D.N.Y.

Posted by Lyle Roberts at 12:04 AM | TrackBack

May 29, 2003

The Enron Watch II

The result of the joint status conference on the Enron bankruptcy and securities class action cases is court-ordered mediation. According to the Houston Chronicle and the Washington Post, U.S. District Judge Kevin T. Duffy of the S.D. of New York has agreed to serve as the mediator for Enron and its creditors, a group of financial institutions, and the shareholder and employee plaintiffs in the putative class actions. The order signed by the courts creates a mediation representative for each of the three categories of parties.

Quote of note (Washington Post): "The financial firms represent the most important potential source of recovery for shareholders, lawyers said. 'It may be that at the end of the day, the banks may decide to throw money at this to make it go away,' said Aaron R. Cahn, an attorney for a group of Enron creditors. 'A lot of that depends on realistic expectations of the merits of the case against the banks.'"

Quote of note (Houston Chronicle): Some people speculated that "the judges may have gathered lawyers from around the country for the mediation announcement because just being in the room, with around 100 attorneys buzzing around, made clear how unwieldy the Enron civil and bankruptcy proceedings will be."

Posted by Lyle Roberts at 01:46 PM | TrackBack

May 28, 2003

The Enron Watch

The Wall Street Journal (subscription required) has an article on Enron's push for a global litigation settlement. Enron has sought bankruptcy court approval to hire an attorney to pursue claims against its bankers, many of whom are co-defendants in the Enron securities class action. Not surprisingly, lead counsel for the securities class action is concerned that Enron is attempting to divert money away from injured investors. There is a joint status conference on the bankruptcy and securities class action cases today.

Quote of note: "Lawyers who are involved in the bankruptcy case view Mr. Cooper's [Enron's CEO] intiative as an effort to take control of the settlement process, and to attempt to stake a claim to a portion of any settlement money that Enron shareholders can wring out of the banks. Hiring a Texas litigator to represent Enron, these people say, coud help on that front."

Posted by Lyle Roberts at 02:13 PM | TrackBack