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Keywords

plaintiffdefendantliabilityprecedentmotioncorporationcondition precedent
liabilityprecedentmotioncorporationregulationcase lawcondition precedentdeliberation

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In re Enron Corp. Securities, Derivative & ERISA Litigation, 235 F.Supp.2d 549, Fed. Sec. L. Rep. P 92,239

Facts

The case arose from the collapse of Enron Corporation, which was accused of engaging in a large-scale Ponzi scheme to artificially inflate its earnings and conceal its debt through unrecognized special purpose entities (SPEs). Investors alleged that various defendants, including accounting firms, law firms, and investment banks, made false statements or failed to disclose adverse facts while selling Enron securities. The lead plaintiff, the Washington State Investment Board, asserted claims under the Texas Securities Act and federal securities laws for losses incurred during the class period from October 19, 1998, to November 27, 2001.

The rapid collapse of Enron Corporation (“Enron”) and the resulting scope, variety, and severity of losses are unprecedented in American corporate history. It is not surprising that this consolidated action raises a number of novel and/or controversial issues that the law has thus far not addressed or about which the courts are in substantial disagreement.

Issue

The main legal issues included whether misrepresentation about the value of a security is a condition precedent for liability under § 10(b) and whether secondary actors can be held liable as primary violators for material misstatements.

The court held that: (1) misrepresentation about value of particular security is not condition precedent for § 10(b) and Rule 10b-5 liability; (2) secondary actor who creates material misstatement on which investor relies can be liable as primary violator under § 10(b) even if actor's identity is not disclosed to investor.

Rule

The court applied the principles of securities fraud under § 10(b) of the Exchange Act and Rule 10b-5, which prohibit the use of manipulative or deceptive devices in connection with the purchase or sale of securities. It also considered the Texas Securities Act, which allows for liability based on untrue statements or omissions without requiring reliance by the purchaser.

Section 10(b) of the Exchange Act states in relevant part, It shall be unlawful for any person, directly or indirectly … (b) To use or employ, in connection with the purchase or sale of any security … any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may proscribe as necessary or appropriate in the public interest or for the protection of investors.

Analysis

The court analyzed the allegations against the defendants, determining that the investors had sufficiently stated claims under § 10(b) by alleging material misstatements and the involvement of secondary actors in the fraudulent scheme. The court found that the presence of disclaimers did not negate the reliance element of the claims, and that knowledge gained by banks in their lending activities could be imputed to their analysts for establishing the scienter element.

After a careful review of frequently divergent case law and extensive deliberation, the Court applies the following law to the allegations in the consolidated complaint and, where appropriate, explains the bases for its selection.

Conclusion

The court granted in part and denied in part the motions to dismiss, allowing certain claims to proceed while dismissing others. The court's decision emphasized the broad scope of liability under securities laws for both primary and secondary actors involved in fraudulent activities.

Motions granted in part and denied in part.

Who won?

The investors partially prevailed as the court allowed several claims to proceed against various defendants, indicating that the allegations of fraud were sufficiently substantiated.

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