MOTIONS SUBMITTED
Motion of Justin Eisele for attorney's fees.
s, such as a commission, from the transactions induced by false representations.
WorldCom, 2006 WL 1047130, at *6 (statute's "`benefits from the false representation' . . . applies to those who have benefitted in the specific sale . . . of stock in which the fraud occurred, for instance a company who receives fees. . . ."),
citing Belton v. Dover Prop. Sales, Inc., No. 3-85-0557-H,
1985 WL 8797, at *3 (N.D. Tex. July 16, 1985) (applies even to those who receive customary fees from a sale that would not have occurred but for the misrepresentation).
As for Plaintiffs' common-law fraud claims, Duncan argues that Plaintiffs have failed to allege that Plaintiffs directly relied upon Andersen's and/or Duncan's audit opinions. Instead, eight independent insurance companies making independent decisions state conclusorily that they all justifiably relied on unspecified false representations by Duncan, without a single fact in support. Such a general statement is not sufficient to sustain their fraud claim. #56, ¶ 607.
Furthermore, Duncan maintains that Plaintiffs have failed to plead adequately, with particular facts, that Duncan intended to induce their reliance. Pacific Mutual, 51 S.W. 3d at 581 (the "maker of the misrepresentation must have information that would lead a reasonable man to conclude that there is an especial likelihood" that it will reach plaintiffs and influence their conduct) ( quoting Restatement (Second) of Torts § 531, comment d (1977)).
Plaintiffs' conspiracy claim fails because the allegations are insufficient to state an underlying fraud claim against Duncan, and they fail to allege any facts demonstrating that there was a "meeting of the minds" between Duncan and any other defendants.
Plaintiffs' negligence claim is properly characterized as one for negligent misrepresentation under the Restatement (Second) of Torts § 552. Section 552 restricts an accountant's liability to a "limited group of persons for whose benefit and guidance he intends to supply the information or knows the recipient intends to supply it" and does not allow recovery for every foreseeable consumer of financial information. Scotland Heritable Trust, 81 F.3d at 612; see also McCamish, 991 S.W. 2d at 794 ("a section 552 cause of action is available only when information is transferred by [a professional] to a known party for a known purpose."). An allegation that an accountant should have known that a third party might rely on the statements is insufficient; "the Restatement's actual knowledge standard applies to accountants in Texas." Compass Bank, 388 F.3d at 505. Duncan argues that plaintiffs are generic "potential investors with no previous connection to either the corporation or the accountant," and thus not members of a "limited group" to which Duncan might be liable for negligent misrepresentation. Scotland Heritable Trust, 81 F.3d at 614.
Plaintiffs' Response to Duncan
Plaintiffs highlight Duncan's repeated assertion of his Fifth Amendment rights whenever he was asked questions on key issues earlier in this litigation. "As Arthur Andersen [LLP]'s lead engagement partner on the Enron account, and the person largely responsible for the destruction of massive amounts of Enron-related documents, Duncan is uniquely qualified to provide critical information pertaining to the issues presented in Plaintiffs' action — but he has refused to do so." #72 at 3; #56 at ¶¶ 566-69. He was "the primary Arthur Andersen partner with knowledge of the `intent' of Arthur Andersen's work." Id. at 4. Therefore, insist Plaintiffs, adverse inferences may be drawn against him and in favor of Plaintiffs in this civil action. FDIC v. Fidelity Deposit Co. of Md., 45 F.3d 969, 977 (5th Cir. 1995) ( citing Baxter v. Palmigiano, 425 U.S. 308, 318 (1976)).
Plaintiffs further claim under the spoliation doctrine that they are entitled to an adverse inference against Duncan, which arises because in bad faith and bad conduct, Duncan purposefully and wrongly destroyed documents relevant to the issues, resulting in Plaintiffs' inability to specify documentary evidence to support their claims.
With respect to the TSA article 581-33F(2) claim against Duncan for aiding and abetting primary violator Enron, as an issuer of securities, which made material false statements and omissions to defraud the investing public into purchasing Enron securities, Plaintiffs insist they have stated a primary violator claim against Enron under articles 581-33C and 581-033F(2). See quoted portions of Richard Causey's plea agreement, ¶¶ 83-85; of Andrew Fastow's plea agreement, ¶¶ 95-99; and of Michael Kopper's cooperation agreement, ¶¶ 11-14. The Andersen Defendants have not cited any authority requiring privity or a similar relationship between a section 33C issuer, as opposed to a section 33A(2) seller, and the party alleging a violation of section 33F(2).
As indicated elsewhere, the statements quoted in these plea agreements are too general to state a claim of fraud. For example Causey admitted "While CAO, I and other members of Enron's senior management fraudulently misled investors and others about the true financial position of Enron in order to inflate artificially the price of Enron stock. More specifically, I conspired with members of Enron's senior management to make false and misleading statements, in Enron's filings with the [SEC] and in analyst calls, about the financial condition of Enron, which did not fairly and accurately reflect Enron's actual financial conditions and performance as I knew it." ¶ 83. The same generality characterizes Fastow's and Kopper's statements.
Moreover Plaintiffs observe that this Court has noted judicial uncertainty regarding the relationship between the two provisions, while other well-reasoned decisions expressly hold that a plaintiff does not have to purchase directly from the party responsible for disseminating the false and misleading misrepresentations or actionable omissions. In re Enron Corp., 258 F. Supp. 2d at 603; Sandefer, 58 S.W. 3d at 776.
In sum, should the Court decide a primary violation fails under section 33A(2), Plaintiffs insist they state a cognizable aiding and abetting claim under article 581-33F(2), based upon Enron's primary violation as an issuer of securities under article 581-33C.
As for Duncan's benefitting from his silence while Enron issued false and deceptive financial reports for purposes of Plaintiffs' statutory fraud claim under section 27.01(d), Plaintiffs point to the threefold increase in Arthur Andersen's business with Enron between 1996 and 2000 and Duncan's high salary and bonuses as lead engagement party. In 1996 Arthur Andersen had revenues of $15.9 million; in 2002, it received fees of approximately $47.9 million from Enron. Duncan and his firm also benefitted from obtaining additional consulting business. #56, ¶¶ 489-92, 603 ("Enron was Arthur Andersen's biggest account, generating over $50 million per year during the last two years of Enron's existence. David Duncan and Stephen Goddard both benefitted by being lead accountants for the Enron engagement, both earning high salaries and bonuses."). Plaintiffs relied upon Arthur Andersen's "unqualified" approvals of the SEC-filed Enron financial reports that Duncan knew were false. They insist there is no authority to support Duncan's contention that a plaintiff must somehow trace a particular dollar that was used to purchase the security to the pocket of the section 27.01(d) violator.
Defendants' only challenge to Plaintiffs' common-law fraud and conspiracy to defraud claims is a failure to state a claim of fraud (i.e., Duncan and Andersen's knowing illegal filing of false financial statements with the SEC), which is the underlying tort of the conspiracy claim. Plaintiffs object that they describe the collusion between Duncan and Enron to falsify Enron's SEC-filed financial statements. They maintain that they have alleged that because Duncan was responsible for supervising the Enron audit team and the final review of the financial data published by Enron, he was aware of the wrongful conduct of his underlings. #56, ¶¶ 470, 501-06 (discussing Duncan's involvement with fraud perpetrated by LJM2 and the Raptors).
Duncan and Enron purportedly conspired to help each other make large amounts of money by allowing and approving improper transactions and disseminating false information in filings with the SEC in violation of securities laws. #56, ¶ 624 ("Each Management, and AA Defendant, had a meeting of the minds with Enron on the course of action for perpetrating the fraud: allowing and approving Enron's improper transactions and accounting gimmickry."). All involved understood that investors reasonably relied upon the SEC-filed financial statements. #56, ¶¶ 74, 75, 83-85. Plaintiffs claim that they have alleged with particularity circumstantial evidence giving rise to an inference of an agreement among Enron, Arthur Andersen, LLP, and Duncan to conspire to prepare and illegally file the SEC financial statements and have described numerous overt acts by Duncan and Enron in furtherance of the conspiracy. Specifically they point to Duncan's knowledge of the inherent conflict of interest in Fastow's duties as Enron's CFO and his role in governing LJM2. #56, ¶ 501. Emails dated December 28, 2000 and October 15, 2001 from Duncan to other Andersen accountants show a meeting of the minds and constitute overt acts in furtherance of the conspiracy by concealing the impropriety of aggregating the Raptors, but that they did so to conceal the severe decline in value of Raptors I and III's assets. #56, ¶¶ 504-06. They have also alleged that Arthur Andersen and Duncan conspired with Enron to conceal the related parties in the Chewco/JEDI transaction. #56, ¶¶ 514-15. See also ¶¶ 69-170 (conduct by Enron); ¶¶ 532-64 (conduct by Duncan).
The fraud claims against Duncan and Arthur Andersen are based on the material misrepresentations made in Enron's financial statements and Duncan and Andersen's "unqualified" approval of Enron's financial statements, which Duncan and Arthur Andersen knew were false when made and would be illegally filed with the SEC. #56, ¶¶ 51, 473, 494, 510-15, 608-12, 627. Plaintiffs claim they relied on these SEC filings and suffered damages as a result. #56, ¶¶ 56; 613; 628; 470; 493 (Duncan's failure to comply with GAAS and GAAP); 494 (how the issuance of unqualified approval of Enron's SEC-filed financial statements violated AICPA standards and constitutes simple fraud); 495-525 (even when forced to restate Enron's financial statements, Duncan did not reveal the whole truth); 501; 504 (Duncan conspired with Enron improperly to report the financial condition of the Raptors and to aggregate two of them when the financial instruments in them substantially declined); 527 (internal Andersen memo showing Duncan's knowledge of, but decision to ignore, Enron's "lack of management integrity"); 529; 532-36; 541-45 (concealing the true nature of the Citigroup and JPMC prepay transactions); 554-56 (Carl Bass was replaced as an Enron engagement partner at Enron's request because of his criticism of Enron's proposed accounting tricks and Duncan's disregard to Bass' assessment of the Raptors as this "whole deal looks like there is no substance"); 547-50 (CIBC's agreement with DOJ and numerous Andersen emails confirming Duncan's fraudulent conduct); 560; 564. The financial statements were filed with the SEC and disseminated to the public to paint a false picture of Enron that would induce Plaintiffs and others to purchase Enron securities. #56, ¶¶ 69, 492-95, 504-06, 514, 527, 530-42, 549, 554-56, 565-71. Plaintiffs claim the Duncan had "reason to expect" that Plaintiffs would rely upon "unqualified" SEC-filed financial statements. #56, ¶¶ 83-85 (Causey judicially admitted that he "participated along with others in Enron's senior management in efforts to mislead the investing public about the true nature of Enron's financial performance by making false and misleading statements, and omitting facts necessary to make certain statements not misleading."), 95-99 (Fastow admitted that Enron's senior management "manipulated Enron's publicly reported financial results. Our purpose was to mislead investors and others about the true financial position of Enron and, consequently, to inflate artificially the price of Enron's stock and to maintain fraudulently Enron's credit rating."). Finally, as a result Plaintiffs suffered injury. #56, ¶¶ 55, 478, 594, 604, 613, 631-32, 637-46.
The Court observes that Plaintiffs have failed to provide any specific examples.
Paragraph 548 states conclusorily that CIBC admitted to and listed a number of FAS 140 and minority interest transactions with Enron that were fraudulent, some of which were given unqualified approval by Andersen, but fails to identify them or explain how they were fraudulent.
Given Duncan's assertion of his Fifth Amendment rights and his ordering of the Enron-related document destruction, i.e., spoliation, Plaintiffs insist they are entitled to inferences that Duncan withheld relevant information and destroyed evidence that would bolster their claims.
Finally, the Andersen Defendants challenge Plaintiffs' negligent misrepresentation claim solely on the grounds that they are not among the "limited group" of persons to whom Arthur Andersen knowingly provided information under Ernst Young, LLP v. Pacific Mutual Ins. Co., 51 S.W. 3d at 577-78. Plaintiffs respond that Duncan, as the lead Enron engagement partner, probably had the most knowledge about Arthur Andersen LLP's intent and reasonable expectations. Duncan's refusal to testify by invoking his Fifth Amendment rights, in combination with his role in destroying documents that likely would yield probative information, creates a strong inference that Plaintiffs have met their burden on stating a negligent misrepresentation claim.
Richard B. Buy's Motion to Dismiss or For More Definite Statement (#67)
Buy argues that Plaintiffs' complaint is conclusory, i.e., lacking specific facts as to Buy that could support the four causes of action against him. The complaint fails to allege that Buy made any specific misrepresentations or took any actions, no less fraudulent ones. Mentioned substantively in fewer than fifteen paragraphs, Buy is included numerous times only as a member of the "Management Defendants": these group allegations are quintessential conclusory allegations that do not meet the heightened pleading requirements of Rule 9(b). Plaintiffs' allegation that Buy conspired to allow Enron to report its financial condition falsely (¶ 131) has no facts alleged to support it or to satisfy the who, what, when and where required under Rule 9(b).
Buy maintains that there are no allegations as to what decisions he made, or what false transactions he engaged in, or where he committed any fraudulent acts. He insists that he had no involvement in the preparation of publications of Enron's financial statements during his employment at the company and no responsibility while at the company for the preparation and issuance of press releases. He was not an Enron board member and was not present at any of the meetings mentioned in the complaint. Thus the complaint fails to state a claim and should be dismissed with prejudice as to him.
Alternatively, Buy urges that the Court set a deadline for amendment by Plaintiffs to assert specific allegations of actionable conduct by Buy that would satisfy Rule 9(b).
Plaintiffs' Request for Acknowledgment that Admissions of Defendant Buy are Deemed Admitted and Response to Buy's Motion to Dismiss (#76)
Plaintiffs urge the Court to deny Buy's motion in its entirety in light of his repeated assertion of his Fifth Amendment rights in the face of their discovery requests and the resulting adverse inference to which they claim entitlement. If the Court chooses not to do so, Plaintiffs ask the Court to grant Buy's alternative request to provide a more definite statement by way of an amended complaint.
First Plaintiffs attach as Exhibit A unanswered Requests for Admission, served on Buy on October 26, 2005 and posted on the Enron 3s1 website, and ask the Court to acknowledge that these requests are deemed admitted under Federal Rule of Civil Procedure 36(a).
While the requests generally ask if Enron's publicly filed financial statements, Form 10-Ks, and Form 10-Qs for specified periods were materially false or misleading and whether Buy had actual awareness that each one was, as requested admissions they are not any more specific and do not have any more particularity than the allegations in the complaint.
Plaintiffs point out that the Court did not direct a longer or shorter time for responding and that Rule 29 is inapplicable because the parties made no stipulations concerning responses to requests for admission.
As for Plaintiffs' failure to plead adequate facts supporting their claims against Buy as a control person under the TSA's article 581-33F(1), statutory fraud under Texas Business and Commerce Code § 27.01, and common law fraud, Plaintiffs point to Buy's repeated assertion of his Fifth Amendment rights in depositions taken during the Newby fact discovery to avoid providing information relevant to Plaintiffs' claims. Exs. D and E. Since Buy's knowledge of LJM2's "quirky and fraudulent transactions" was probably second only to Fastow's among Enron employees, Buy's refusal to testify creates a reasonable inference against Buy and in favor of Plaintiffs.
The Rule 12(b)(6) and 9(b) motions to dismiss must be resolved on the pleadings, not on additional evidence, which Plaintiffs have attached to their response. They state in a footnote that if allowed to amend, they would incorporate their evidence into the new complaint.
Regarding their claim against Buy as a control person liable under 581-33F(1) of the TSA, Plaintiffs have alleged that the Management Directors Rick Causey, Andrew Fastow, Michael Kopper, Richard Buy, Jeff Skilling and Kenneth Lay, together, exercised control over Enron generally. #56, ¶¶ 79-81, 128-29. In re Enron Corp. Sec., Derivative "ERISA" Litig., 258 F. Supp. 2d 576, 608 (S.D. Tex. 2003) (plaintiffs must show that the controlling person (1) exercised control over the operations of the corporation generally and (2) had the power to control the specific transaction or activity constituting the primary violation, citing Frank v, Bear Stearns, 11 S.W. 3d 380, 383 (Tex. App. — Houston [14th Dist.] 2000, pet. denied). Plaintiffs are not required to show scienter. Id. See also id., citing comment to 33F(1) ("Depending on the circumstances, a control person might include an employee, an officer or director, a large shareholder, a parent company, and a management company.").
Plaintiffs urge that the facts demonstrate that Buy was a "control person" at Enron. Buy was Executive Vice President and Chief Risk Officer of Enron from June 1999 through Enron's bankruptcy and served on Enron's Management Committee. #56, ¶ 128. Buy's power to influence the operations of the corporation is evidenced by Enron's internal requirement that Buy sign off on certain transactions before the transactions could be executed. #56, ¶ 136 (Buy "failed to use the power vested in him by the Board of Directors to prevent Fastow from engaging in numerous fraudulent transactions."). Andrew Fastow's testimony confirms that Buy was an important member of the management team running the affairs of Enron. Ex. F at 1337:20-1338:3; 1571:20-1572:3; 1579:25-1581:6; 1599:1-15; 1764:21-1765:3. See also Ex. D at 5, questions 38, 74-77. As for the alleged TSA violation in the falsification of Enron's financial records and purposeful illegal filing of false financial statements with the SEC, the requests for admission, deemed admitted, assert Buy's knowledge, long before the restatements were issued in the fall of 2001, that Enron's 10-K financial statements filed with the SEC were materially false and/or misleading. Ex. A at 6-9, requests for admission 12-42. LJM2, set up by Enron and Fastow, was instrumental in Enron's accounting fraud. #56, ¶¶ 92-99, 129, 132-34, 501-06. Plaintiffs have alleged that Buy and Causey were charged by the Board of Directors with the monitoring and approval of all LJM2 transactions. 356, ¶ 129. Given his accounting background, Buy allegedly knew that many of LJM2's transactions were shams and were accorded improper accounting treatment on Enron's financial statements, but he approved them anyway. #56, ¶¶ 129-36. Plaintiffs maintain they have adequately alleged control person liability against Buy under 581-33F(1) of the TSA.
As for imposing Buy's liability as an aider and abettor under subdivision 33F(2), a primary violation by Enron is established because "Enron was publicly traded on the New York Stock Exchange under the symbol ENE and was an `issuer' and/or `seller' of securities for the purposes of the Texas securities laws," and made material false statements and omissions to defraud the investing public. #56, ¶¶ 42, 69-72, 93, 95-99, 72-74, 75, 83-85.
Under subsection 33F(2), Buy was an aider of Enron's fraud because he had more than a "general awareness" of his role in the fraud: he approved fraudulent LJM2 transactions and was aware of the Nigerian Barge Transaction. See also Exhibit D at 5, questions 38-42, Buy knew of his obligation to ensure "DASH" form approvals were proper, but approved the fraudulent transactions anyway. Plaintiffs assert that Buy's "assistance" was "substantial" "because LJM2 was critical for effectuation of the fraud and Buy had the ability to control LJM2's transactions." #76 at 8, citing #56, ¶¶ 95-99 (describing how LJM2 was used to help Enron cook its books); 129-34 (discussing Buy's responsibilities for approving LJM2's transactions and explaining that Buy did not assure that the transaction were proper); 501-06 (describing LJM2's role in falsifying the financial condition of Enron's Raptors). They argue that Buy's conduct creates the strong inference that he either intended to deceive investors or acted with reckless disregard for the truth or law when he approved the fraud-enabling LJM2 transactions. #56, ¶¶ 129-31; Ex. A at 609, requests for admission 12-42 (Buy admits he knew, long before Enron issued restatements, that 10-K financial statements filed by Enron were materially false and/or misleading).
For purposes of statutory fraud under section 27.01(d) against Buy, Plaintiffs claim they have adequately asserted the three elements: (1) Buy not only had actual awareness of the falsity of the financial statements that resulted from LJM2 and Enron's accounting shenanigans (#56, ¶¶ 132-35), but he admits actual knowledge of the falsity of Enron's 10-K filings with the SEC (Ex. A at 6-9, requests for admission 12-42; Ex. E at 6, question 15); (2) there is no evidence that Buy disclosed, nor does Buy claim that he disclosed, the falsity of Enron's SEC-filed financial reports; and (3) Buy benefitted from the false representations by selling 140,000 shares of Enron stock for $10,656,000 and was rewarded with bonus payments of about $1,600,000 for his aid in falsification of the financial statements, which allowed Enron to meet certain performance targets (#56, ¶ 137).
Regarding the conspiracy claim, Plaintiffs contend that Buy, Fastow, and Enron engaged in a conspiracy to falsify Enron's financial records and knowingly and illegally to file false financial statements with the SEC (underlying tort), while Buy and Fastow made lots of money and kept Enron afloat, an objective to be achieved by executing improper fraudulent transactions and disseminating false financial information in filings with the SEC in violation of securities laws. #56, ¶¶ 45-47, 68, 131. They claim all involved understood that investors reasonably relied upon such SEC-filed financial statements. #56, ¶ 70, 75, 85. They maintain their complaint alleges circumstantial evidence from which one can infer an agreement to conspire among Enron, Fastow, and Buy. #56, ¶¶ 128-39. They assert that Fastow's testimony confirms the agreement and Buy's role in the conspiracy. Ex. F at 1337:20-1338:3; 1571:20-1572:3; 1579:25-1581:6; 1599:1-15; and 1764:21-1765:3.
Court's Decision
1. Inferences and Privileges
As a threshold matter, the Court looks first to Plaintiffs' claim that they are entitled to an adverse inference against the Arthur Andersen Defendants based on Duncan's invocation of the Fifth Amendment privilege against self incrimination and on the Andersen Defendants' alleged spoliation of crucial evidence.
a. Fifth Amendment
While an adverse inference may be drawn in a civil case when a party asserts his Fifth Amendment privilege, the trier of fact is not required to draw a negative inference. Baxter v. Palmigiano, 425 U.S. 308, 318 (1976) ("[T]he Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them."); Daniels v. Pipefitters' Ass'n Local Union No. 597, 938 F.2d 800, 802 (7th Cir. 1992) ("The inference is permissible, but not required."); 8 Wright, Miller and Marcus, Federal Practice Procedure § 2018 n. 63 (3d ed. 2004).
David Duncan, who was fired by Arthur Andersen on January 15, 2002, initially invoked his Fifth Amendment privilege against self incrimination on February 4, 2002 when he was called to testify before the House Commission on Energy and Commerce. On April 9, 2002 he entered into a cooperation agreement with the government (H-02-CR-209, instrument #6) and pled guilty to one count of obstruction of justice for ordering his staff to shred thousands of Enron-related documents during late October and early November 2001 in the face of an imminent SEC inquiry. He subsequently testified for five days as the key government witness at the criminal trial of Arthur Andersen, LLP (H-02-CR-121, #101, 102, 110, 111, and 112), from May 13-17, 2002. Arthur Andersen was convicted on June 15, 2002 and sentenced on October 16, 2002. After the conviction of the accounting firm was reversed by the United States Supreme Court, Duncan, with the Court's permission, withdrew his plea of guilty, and his case was dismissed by the government H-02-CR-209, #36.
Arthur Andersen, LLP v. United States, 544 U.S. 696, 125 S.ct. 2129 (2005) (reversing and remanding because the jury instruction failed to convey properly the mens rea element of "knowingly . . . corruptly persuades" another person to destroy records to be used in an official proceeding under 18 U.S.C.A. § 1512(b)(2)(A, B) because it did not require the jury to find the requisite consciousness of wrongdoing in order to convict and because the instruction did not require the jury to find a nexus between the persuasion to destroy documents and a particular proceeding). The government did not pursue a retrial.
Under Federal Rule of Evidence 410, evidence of a plea of guilty, which was later withdrawn, or of any statement made by the defendant during plea negotiations with the prosecutor or statements made in court during proceedings under Rule 11, are not admissible in any civil or criminal proceeding against the defendant who withdrew the plea. Thus neither Duncan's guilty plea nor any of his statements at the time of his plea in court may be used against him here.
Therefore Plaintiffs cannot use the fact of Duncan's guilty plea to support their claims but the Court observes that there are other sources of information that are readily available to provide Plaintiffs with a basis to discover and plead specific facts in support of claims against Duncan. Under the circumstances here, making an adverse inference against Duncan for invoking his Fifth Amendment Rights to satisfy Plaintiffs' pleading requirement would seem moot.
With regard to Richard Buy, the only document that he has filed in this action is his motion to dismiss, and that motion does not invoke his Fifth Amendment privilege against self incrimination as to the Second Amended Complaint. Plaintiffs state that Buy claimed the privilege before government investigative bodies, but Plaintiffs have not provided sufficient information for the Court to determine whether Buy invoked his Fifth Amendment rights anywhere before or after responses to Plaintiffs' requests for admission were due. Nor in this case has Buy addressed the effect of his default admissions nor responded to Plaintiffs' request to the Court for acknowledgment that admissions are deemed admitted by default. The Court observes that Buy was never indicted for his role at Enron.
Not only did he not respond to the request for admissions, but he has never moved to withdraw or amend once they became automatically admitted after thirty days of service. Fed.R.Civ.P. 36(a) and (b).
A proper and timely invocation of the Fifth Amendment privilege may impact Rule 36's mandate that admissions, whether express or by default, are conclusive to the matters admitted. Nevertheless, as noted, "An individual may not make a `blanket refusal' to answer questions, but instead must affirmatively assert the privilege `with sufficient particularity to allow an informed ruling on the claim.' . . . `He is obliged to answer those allegations that he can and to make a specific claim of the privilege to the rest.'" Toyota Motor Credit Corp. v. Palma, No. 3:07-CV-1248-B, 2007 WL 4165706, *2 (N.D. Tex. Nov. 26, 2007), quoting North River Ins. Co. v. Stefanou, 831 F.2d 484, 486-87 (4th Cir. 1987 ("[T]o invoke this [ Fifth Amendment] privilege the party claiming it must not only affirmatively assert it, he must do so with sufficient particularity to allow an informed ruling on the claim."), cert. denied, 486 U.S. 1007 (1988), and 5 C. Wright A. Miller Federal Practice and Procedure § 1280, at 360 (1969). A "blanket refusal to answer questions does not suffice to raise constitutional questions." United States v. Carroll, 567 F.2d 955, 957 (10th Cir. 1977), citing United States v. Malnik, 489 F.2d 682, 685 (5th Cir.), cert. denied, 419 U.S. 825 (1974). See also Dish Network, LLC v. SatFTA, No. C 08-1561 JF (PVT), 2009 WL 2057916, *2 (N.D. Cal. July 13, 2009) (A blanket assertion of one's Fifth Amendment privilege in the face of requests for admissions is improper; the defendant must respond to each question individually). Therefore even if Buy had expressly asserted his Fifth Amendment rights in this action, a blanket invocation of the Fifth Amendment is an insufficient response under Rule 36.
Buy has not even made that, so the Court concludes that Rule 36 applies and the admissions are deemed admitted. Therefore Plaintiffs' request that the Court acknowledge that the admissions are deemed admitted under Rule 36 is granted.
Nevertheless the Court finds that the deemed admissions do not provide the kind of detail necessary to plead, no less prove, a fraud claim under Rule 9(b). They speak in generalities and fail to identify specific examples that answer the who, what, where, how and why required by the Rule and by Fifth Circuit case law. Moreover, many of them undermine the allegations against the Arthur Andersen Defendants by stating that Enron officials, including Buy, concealed from Arthur Andersen many of the facts of their wrongdoing that Arthur Andersen would need for accurate accounting for Enron.
b. Spoliation
As for spoliation, there are substantial sources of information available to Plaintiffs to draw on for a plausible factual pleading of the document destruction at Enron in the fall of 2001. Material issues include whether Arthur Andersen LLP and Duncan had notice and knew or should have known that the documents were relevant to future litigation so as to trigger a duty to preserve the Enron records and whether Duncan breached that duty. Smith v. American Founders Financial Corp., 365 B.R. at 681. Did Arthur Andersen's retention policy excuse the destruction of documents? Did David Duncan act in bad faith in destroying the Enron-related documents and did he destroy them "because the contents of those documents were unfavorable to that party.'" Whit v. Stephens County, 529 F.3d at 284-85. Were Plaintiffs prejudiced or was there other evidence available to take the place of the destroyed documents? These issues could and should have been addressed and pleaded with factual specificity by Plaintiffs in the instant case before they resorted to asking for a blanket negative inference based on spoliation. Ultimately even if Plaintiffs provide evidence establishing spoliation, the Court has discretion in deciding what kind of sanctions should be imposed if the party seeking the adverse inference demonstrates spoliation. Even if the evidence at that stage warrants a special instruction, such an instruction allows, but does not mandate an inference that the evidence did not favor the spoliator. Plaintiffs would still have the burden of proof on their causes of action; while a spoliation instruction may allow the party seeking it "to survive a legal sufficiency challenge, it will not by itself, prevent a successful factual sufficiency challenge," because in a factual sufficiency challenge the spoliation presumption is merely one factor that we must consider in reviewing the evidence for factual sufficiency." Wackenhut Corrections Corp. v. de la Rosa, No. 13-06-00692-CV, 2009 WL 866791, *24 (Tex. App. — Corpus Christi Apr. 2, 2009), citing Trevino, 969 S.W. 2d at 960-61 (Baker, J. concurring). The Court finds that, standing alone at the pleading stage of the litigation, Plaintiffs' conclusory claim of spoliation is insufficient to satisfy the heightened pleading standards.
The government argued that mentioning the document retention policy was a code to trigger shredding at a time when it was not permissible, and it produced evidence of tons of shredded documents being trucked away at this precarious time for Enron.
c. Restatement
The Court agrees with those courts who have determined that a restatement of previous financial reports filed with the SEC demonstrates that those financial statements which it covers were erroneous when made, but a restatement alone does not prove scienter or fraudulent intent on the part of those who prepared them. Additional factual allegations giving rise to an inference of, or demonstrating intent or severe recklessness, depending on the cause of action, are necessary to satisfy Rule 9(b) for fraud-based claims, with the exception of a primary violation of the TSA and Texas Business and Commerce Code § 27.01,.
1. Sufficiency of Pleading Against Buy and Arthur Andersen Defendants: Motions to Dismiss Under Rule 9(b) and 12(b)(6)
The Court's summation of the allegations reflects its conclusion that much of the complaint is composed of generalities or legal conclusions inadequately supported by specific factual allegations, and thus fails to satisfy the heightened pleading standards of Rule 9(b) for the fraud-based claims.
Nevertheless, the Enron collapse severely victimized numerous people and entities. In the interests of justice this Court believes that if Plaintiffs are able to plead and prove intentional fraud by Defendants, they should not be denied relief. Plaintiffs have constructed a skeletal framework of at least some claims, and the Court is confident that there are numerous sources of information available sufficient to flesh it out with specific details to meet the requirements of Rule 12(b), Twombly, Iqbal, and Rule 9(b). For example, they have identified a number of emails and memoranda by date and by the individuals involved, but fail to describe the contents. The numerous fraudulent transactions referenced need to be described — where, when, why, and how fraudulent and who was involved. Therefore, having herein highlighted the weaknesses in the current controlling pleading, the Court will give Plaintiffs one more opportunity to attempt to replead those of their claims that it concludes may be viable, as indicated below, while dismissing those for which they are unable to plead essential elements.
a. TSA 1. Enron as a Primary Violator
Plaintiffs have not, and apparently cannot, allege that they purchased their securities from Enron nor an agent of Enron as their immediate "seller," nor were they in privity with Enron for purposes of liability under article 581-33A(2). See generally In re Enron Sec., 258 F. Supp. 2d at 603-08.
Plaintiffs argue alternatively that because Enron was an "issuer" of securities, it could be strictly liable as a primary violator under article 581-33C of the TSA. Article 581-33C imposes strict primary liability on issuers of registered securities purchased on a secondary market for misleading statements in the prospectus under which those securities were issued.
The complaint satisfies the first element under article 581-33C in stating in ¶ 42 that "Enron was publicly traded on the New York Stock Exchange under the symbol ENE and was an `issuer' and/or `seller' of securities for purposes of Texas securities laws." In ¶ 290 of the complaint, Plaintiffs identify the relevant prospectuses under which the securities purchased by Plaintiffs were issued and name the Enron Directors who signed them and therefore "made" a statement for which they and Enron may be liable under article 581-33C. Nevertheless Plaintiffs fail to point to specific misleading statements or identify material omissions in the prospectuses named, no less explain how such material misrepresentations or omissions were deceptive. In the interests of justice, the Court will allow Plaintiffs a final opportunity to attempt to replead with the requisite detail this claim, identifying specific material misrepresentations and omissions in prospectuses. As noted earlier, there is no requirement of privity or reliance for a claim under article 581-33C. Bateman, 15 Houston L. Rev. at 849.
If Plaintiffs succeed in adequately pleading a primary violation by Enron as an issuer under either article 581-33A(2) or 581-33C, the derivative claims against Buy as a "controlling person" of Enron under article 581-33F(1), and against Buy as well as against the Andersen Defendants under article 581-33F(2), for materially aiding Enron "with reckless disregard for the truth or the law," by giving "unqualified" or "clean" opinions to the relevant SEC-filed financial statements that were incorporated into the prospectuses, will stand. Sterling Trust, 168 S.W. 3d at 845 ("[A] secondary violator's liability depends on the primary violator's culpability. . . . [A] secondary violator may only be liable `to the same extent' as the primary violator.").
b. Statutory Fraud Under Tex. Bus. Comm. Code § 27.01(d)
Enron's restatements establish generally that it had made a broad array of false misrepresentations of past or existing material fact. The quoted portions of the plea agreements and cooperation agreements of former Enron officials sufficiently evidence Enron's intent to fraudulently induce investors into buying Enron securities, inter alia.
As indicated above, the Court grants Plaintiffs leave to attempt to plead with requisite specificity required by Rule 9(b) the justifiable reliance of each Plaintiff, individually, on one or more misrepresentations, which must also be specified (what, when, by whom, how fraudulent). Martin, 947 F.2d at 1280 ("Texas courts . . . demand proof that the `party acted in reliance upon the false representation.'"). As opined in Grant Thornton, LLP v. Suntrust Bank, 133 S.W. 3d 342, 355 (Tex. App. — Dallas 2004),
Reliance, or the lack thereof, can be shown only by demonstrating the person's thought processes in reaching the decision. Proof of reliance or lack of reliance necessarily requires an individualized determination because, under all the same facts and circumstances, one person may have relied on the misrepresentation in reaching a decision, while another did not rely on it in reaching the same decision. . . . "[P]roof of reliance . . . necessarily requires an individual determination for each person. . . .
If on repleading Plaintiffs succeed in stating a primary violation of § 27.01 against Enron, the Court agrees with Plaintiffs that they have satisfied the elements of a claim for secondary liability under § 27.01(d) against Buy and Arthur Andersen Defendants by stating facts making a plausible claim that they was were actually aware of the falsity in Enron's representations to investors and benefitted from them.
c. Common Law Fraud
As noted, Texas law is in accord with the Restatement (Second) of Torts § 531 in requiring for affirmative misrepresentations intended to induce a third party to act that an "alleged fraudfeasor must `have information that would lead a reasonable man to conclude that there is an especial likelihood that it will reach those persons and will influence their conduct." Pacific Mutual, 51 S.W. 3d at 580. "[E]ven an obvious risk that a third person will rely on a representation is not enough to impose liability. . . . General industry practice or knowledge may establish a basis for foreseeability to show negligence, but it is not probative of fraudulent intent." Id. at 581.
Plaintiffs have failed and do not appear able to plead information that demonstrates an especial likelihood that each of them was intended to receive and rely on any representations in financial statements by Enron or by the Arthur Andersen Defendants. As noted, there are no allegations that Buy made any representations.
If their claim is for fraudulent concealment, Plaintiffs have not alleged facts showing that the Arthur Andersen Defendants and/or Buy had a duty to these third parties to disclose any such facts about Enron to them, or that Plaintiffs each relied on the fact that these Defendants were silent.
Accordingly the common-law fraud claims are dismissed.
d. Civil Conspiracy to Defraud
As discussed, Plaintiffs' common law fraud claims fail. The Court is granting Plaintiffs a final opportunity to replead their statutory fraud claims under the TSA and § 27.01 against Enron as a primary violator and against Buy and the Andersen Defenders as secondary violators. If they succeed, these claims may sustain their conspiracy cause of action. For conspiracy they must also allege with particularity facts that make plausible their contention that there existed a common purpose or object, a "meeting of the minds," among Enron, Arthur Andersen Defendants and Buy, to defraud Plaintiffs. The Court will then determine whether they have succeeded in stating both statutory fraud and conspiracy claims.
e. Negligent Misrepresentation against Arthur Andersen Defendants
Plaintiffs' negligent misrepresentation claim against the Arthur Andersen Defendants also fails because Plaintiffs have not alleged and do not appear able to allege facts showing that Plaintiffs were members of a limited group known to and for whose benefit and guidance these Defendants supplied information and which they intended or knew Plaintiffs would rely upon, distinct from the much larger group or class of persons who might reasonably be expected sooner or later to have access to it and foreseeably take action in reliance upon it. Restatement (Second) of Torts, § 552; McCamish, 991 S.W. 2d at 793-94. Thus this claim is dismissed.
ORDER
Accordingly, for the reasons indicated above, the Court
ORDERS that Plaintiffs' request that the Court acknowledge that the admissions served on Buy are deemed admitted under Rule 36 (#76) is GRANTED and the admissions are deemed admitted. The Court further
ORDERS that Arthur Andersen and D. Stephen Goddard, Jr.'s motion to dismiss (#62), Richard B. Buy's motion to dismiss (#67), and David B. Duncan's motion to dismiss (#69) are GRANTED as to Plaintiffs' common law fraud and negligent misrepresentation claims, but are otherwise DENIED. Plaintiffs are granted leave to replead within thirty days those claims which the Court has identified as possibly viable. Defendants may thereafter file timely responsive pleadings.
Finally, because the remaining claims are against some Enron Defendants in prison or unavailable, the Court
Claims remain pending against Jeffrey Skilling, Andrew Fastow, Richard Causey, Michael Kopper, and Kenneth Lay, now deceased.
ORDERS that Plaintiffs' motion for status conference (#111) is currently DENIED. Plaintiffs shall inform the Court within twenty days whether they wish to proceed against these Defendants through their attorneys, stay the case, or dismiss the case against all or any of them.
SIGNED at Houston, Texas.