# In Re Enron Corp. Securities, Derivative & Erisa Lit.

> District Court, S.D. Texas · January 6, 2011 · 761 F. Supp. 2d 504

URL: https://www.frixlaw.com/law-library/cases/2476672

## Case

- **Full name:** In Re ENRON CORPORATION SECURITIES, DERIVATIVE & “ERISA” LITIGATION. Mark Newby, Et Al., Plaintiffs v. Enron Corporation, Et Al., Defendants; Westboro Properties, LLC, Et Al., Plaintiffs, v. Credit Suisse First Boston, Inc., Et Al., Defendants
- **Court:** District Court, S.D. Texas
- **Decided:** January 6, 2011
- **Citations:** 761 F. Supp. 2d 504
- **Precedential status:** Published
- **Opinion:** Opinion by Da Harmon
- **Judges:** Harmon
- **Cited by:** 50 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/2476672

## How later opinions describe it (automated extraction)

- stating that “it is axiomatic that a complaint cannot be amended by briefs in opposition to a motion to dismiss,” quoting In re Baker Hughes Sec. Litig., 136 F. Supp. 2d 630, 646 (S.D. Tex. 2001)
- noting that a holder must prove “an existing and definite plan to sell that would have occurred in the absence of the false communication”
- noting that a plaintiff must prove reliance on a “direct communication aimed to stop [the] sale”

## Opinion text

OPINION AND ORDER OF DISMISSAL
MELINDA HARMON, District Judge.
The above referenced action, H-03-1276, alleges that a Defendant Deutsche Bank Securities, Inc. (“Deutsche Bank” or “the bank”)
1
fraudulently induced Plaintiffs Westboro Properties LLC and Stonehurst Capital, Inc. in 1999 and 2000 to purchase beneficial ownership interests (“Osprey Certificates”) in the Osprey Trust, a special purpose entity (“SPE”) allegedly secured by worthless or nearly worthless assets purchased from Enron Corporation purportedly through “arms-length” transactions and dumped into Osprey, as part of a larger conspiracy with Enron to manipulate Enron’s financial statements and defraud investors. Pending before the Court in H-03-1276 is Deutsche Bank’s motion to dismiss (instrument # 39) Plaintiffs’ Second Amended Complaint (# 33), pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b). All other Defendants have settled with Plaintiffs.
Initially Plaintiffs argue that Texas law applies here, because (1) Texas has the most significant relationship with Defendants allegedly wrongful conduct and is the reason why these cases were referred to the Southern District of Texas; (2) an out-of-state plaintiff may sue under the Texas Securities Act (“TSA”) if the complained-of conduct took place in Texas; and (3) Texas has a strong public policy interest in enforcing its securities laws. Given that Enron Corp., was based in Houston, Texas and was inextricably intertwined in each of the transactions at issue here, where many of the important documents were drafted and decisions made, the nucleus of the litigation is in this district. Plaintiffs seek equitable
*517
and/or monetary relief for violations of Sections 581-33A and 581-33F of the TSA, Tex.Rev.Civ. Stat. Ann. § 581-1
et seq.;
common-law aiding and abetting, fraud, and civil conspiracy; and Sections 12(a)(2) and 15 of the Securities Act of 1933, 15 U.S.C. §§
77l
(a)(2) and
77o.
Plaintiffs also request attorneys’ fees and exemplary damages. They claim they are entitled to unlimited exemplary damages under the Texas Civil Practice & Remedies Code § 41.008(c) because each Defendant violated and/or conspired with Enron to violate Texas Penal Code §§ 32.43 (commercial bribery) and/or 32.47 (fraudulent concealment of a writing).
Alternatively, Plaintiffs assert their claims under New York common law.
After careful review of the parties’ submissions and the applicable law, for the reasons stated below the Court concludes that Plaintiffs have failed to state a claim against Deutsche Bank under Federal Rules of Civil Procedure 9(b) and 12(b) and that this action should accordingly be dismissed.
Standards of Review
When a district court reviews a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), it must construe the complaint in favor of the plaintiff and take all well-pleaded facts as true.
Kane Enterprises v. MacGregor (USA), Inc.,
322 F.3d 371, 374 (5th Cir.2003),
citing Campbell v. Wells Fargo Bank,
781 F.2d 440, 442 (5th Cir.1986).
‘While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detañed factual allegations, ... a plaintiffs obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.... ”
Bell Atlantic Corp. v. Twombly,
550 U.S. 544 , 127 S.Ct. 1955, 1964-65 , 167 L.Ed.2d 929 (2007) (citations omitted). “Factual allegations must be enough to raise a right to relief above the speculative level.”
Id.
at 1965,
citing
5 C. Wright & A. Miller,
Federal Practice and Procedure
§ 1216, pp. 235-236 (3d ed. 2004) (“[T]he pleading must contain something more ... than ... a statement of facts that merely creates a suspicion [of] a legally cognizable right of action”).
“Twombly
jettisoned the minimum notice pleading requirement of
Conley v. Gibson,
355 U.S. 41 , 78 S.Ct. 99 , 2 L.Ed.2d 80 (1957) [“a complaint should not be dismissed for failure to state a claim 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’], and instead required that a complaint allege enough facts to state a claim that is plausible on its face.”
St. Germain v. Howard,
556 F.3d 261 , 263 n. 2 (5th Cir.2009),
citing In re Katrina Canal Breaches Litig.,
495 F.3d 191, 205 (5th Cir.2007) (“To survive a Rule 12(b)(6) motion to dismiss, the plaintiff must plead ‘enough facts to state a claim to relief that is plausible on its face.’ ”),
citing Twombly,
127 S.Ct. at 1974 . “ ‘A claim has facial plausibility when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.’ ”
Montoya v. FedEx Ground Package System, Inc.,
614 F.3d 145, 148 (5th Cir.2010),
quoting Ashcroft v. Iqbal,
- U.S. -, 129 S.Ct. 1937, 1940 , 173 L.Ed.2d 868 (2009). Dismissal is appropriate when the plaintiff fails to allege “ ‘enough facts to state a claim to relief that is plausible on its face’ ” and therefore faüs to “ ‘raise a right to relief above the speculative level.’ ”
Montoya,
614 F.3d at 148 ,
quoting Twombly,
550 U.S. at 555, 570 , 127 S.Ct. 1955 .
In
Ashcroft v. Iqbal,
129 S.Ct. at 1940 , the Supreme Court, applying the
Twombly
plausibility standard to a
Bivens
claim of unconstitutional discrimination
*518
and a defense of qualified immunity for government official, observed that two principles inform the
Twombly
opinion: (1) “the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.” ... Rule 8 “does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions.”; and (2) “only a complaint that states a plausible claim for relief survives a motion to dismiss,” a determination involving “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.”
Furthermore, the plaintiff must plead specific facts, not merely conelusory allegations, to avoid dismissal.
Collins v. Morgan Stanley Dean Witter,
224 F.3d 496, 498 (5th Cir.2000) “Dismissal is proper if the complaint lacks an allegation regarding a required element necessary to obtain relief....”
Rios v. City of Del Rio, Texas,
444 F.3d 417, 421 (5th Cir.2006),
cert. denied,
549 U.S. 825 , 127 S.Ct. 181 , 166 L.Ed.2d 43 (2006).
In addition to the complaint, the court may review documents attached to the complaint and documents attached to the motion to dismiss to which the complaint refers and which are central to the plaintiffs claim(s).
Collins,
224 F.3d at 498-99 . If an exhibit attached to the complaint contradicts an allegation in the complaint the exhibit controls.
United States ex rel. Riley v. St. Luke’s Episcopal Hosp.,
355 F.3d 370, 377 (5th Cir.2004).
The court may also take notice of matters of public record when considering a Rule 12(b)(6) motion.
Davis v. Bayless,
70 F.3d 367 , 372 n. 3 (5th Cir.1995);
Cinel v. Connick,
15 F.3d 1338 , 1343 n. 6 (5th Cir.1994).
Fraud claims must also satisfy the heightened pleading standard set out in Federal Rule of Civil Procedure 9(b): “In allegations alleging fraud ..., a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.” A dismissal for failure to plead with particularity as required by this rule is treated the same as a Rule 12(b)(6) dismissal for failure to state a claim.
Lovelace v. Software Spectrum, Inc.,
78 F.3d 1015 , 1017 (5th Cir.1996). The Fifth Circuit interprets Rule 9(b) to require “specificity as to the statements (or omissions) considered to be fraudulent, the speaker, when and why the statements were made, and an explanation of why they were fraudulent.”
Plotkin v. IP Axess, Inc.,
407 F.3d 690, 696 (5th Cir.2005).
In accord Lerner v. Fleet Bank, N.A.,
459 F.3d 273, 290 (2d Cir.2006).
The pleading standards of
Twombly
and Rule 9(b) apply to pleading a state law claim of conspiracy to commit fraud.
U.S. ex rel. Grubbs v. Kanneganti,
565 F.3d 180, 193 (5th Cir.2009) (“a plaintiff alleging a conspiracy to commit fraud must ‘plead with particularity the conspiracy as well as the overt acts ... taken in furtherance of the conspiracy’ ”),
quoting FC Inv. Group LC v. IFX Markets, Ltd.,
529 F.3d 1087, 1097 (D.C.Cir.2008).
In accord Lerner v. Fleet Bank, N.A.,
459 F.3d at 290-92 .
If Plaintiffs fail to state a claim for fraud underlying their civil conspiracy claim, the civil conspiracy claim must be dismissed, too.
Allstate Ins. Co. v. Receivable Finance, Co.,
501 F.3d 398, 414 (5th Cir.2007);
American Tobacco Co., Inc. v. Grinnell,
951 S.W.2d 420, 438 (Tex.1997) (“Allegations of conspiracy are not actionable absent an underlying [tort]”);
Frames v. Bohannon Holman LLC,
No. 3:06-CV-2370-0, 2009 WL 762205 , *10 (N.D.Tex. Mar. 24, 2009).
In accord Kott
*519
ler v. Deutsche Bank AG,
607 F.Supp.2d 447, 461 (S.D.N.Y.2009)
Dismissal under Federal Rule of Civil Procedure 12(b)(6) is “appropriate when a defendant attacks the complaint because it fails to state a legally cognizable claim.”
Ramming v. United States,
281 F.3d 158, 161 (5th Cir.2001),
cert. denied sub nom. Cloud v. United States,
536 U.S. 960 , 122 S.Ct. 2665 , 153 L.Ed.2d 839 (2002),
cited for that proposition in Baisden v. I’m Ready Productions,
No. Civ. A. H-08-0451, 2008 WL 2118170 , *2 (S.D.Tex. Tex. May 16, 2008).
See also ASARCO LLC v. Americas Min. Corp.,
382 B.R. 49, 57 (S.D.Tex.2007) (“Dismissal ‘can be based either on a lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory.’ ” [citation omitted]),
reconsidered in other part,
396 B.R. 278 (S.D.Tex.2008);
Esposito v. New York,
355 Fed.Appx. 511, 512-13 (2d Cir.2009).
Relevant Law
A court decides a conflicts-of-law question only when a case is connected with more than one state and the laws of these states differ on one or more points in issue.
Greenberg Traurig of New York, PC v. Moody,
161 S.W.3d 56, 69-70 (Tex.App.-Houston [14th Dist.] 2004, no pet.). Federal courts apply the forum state’s conflict-of-laws rules to determine what law governs state-law claims.
Klaxon Co. v. Stentor Elec. Mfg. Co.,
313 U.S. 487, 496 , 61 S.Ct. 1020 , 85 L.Ed. 1477 (1941);
Bailey v. Shell Western E & P, Inc.,
609 F.3d 710, 722 (5th Cir.2010). Determining which state’s law governs is a question of law for the court to decide.
Torrington Co. v. Stutzman,
46 S.W.3d 829, 848 (Tex.2000).
Where the parties have not agreed by contract which law should apply, Texas courts apply the law of the state with the most significant relationship to the particular substantive issue.
Duncan v. Cessna Aircraft Co.,
665 S.W.2d 414, 421 (Tex.1984) (the court considers “the qualitative nature of the particular contacts with a state” and the “state policies underlying the particular substantive issues”). Texas has adopted the
Restatement (Second) of Conflict of Laws
§ 6 (1971)’s “most significant relationship test to decide choice of law issues.”
Hughes Wood Prods., Inc. v. Wagner,
18 S.W.3d 202, 205 (Tex.2000). Section 6(2) sets out general factors for consideration in determining the applicable law:
(a) the needs of the interstate and international systems,
(b) the relevant policies of the forum,
(c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue,
(d) the protection of justified expectations,
(e) the basic policies underlying the particular field of law,
(f) certainty, predictability and uniformity of the result, and
(g) ease in the determination and application of the law to be applied.
The courts consider “the qualitative nature of the particular contacts” with a state and the “state policies underlying the particular substantive issues.”
Duncan v. Cessna Aircraft Co.,
665 S.W.2d 414, 421 (Tex.1984).
For claims based on fraud and misrepresentation, to determine which state’s law applies, in Texas the court considers the specific factors in the
Restatement (Second) of Conflict of Laws
§ 148.
Highland Crusader Offshore Partners, LP v. Motient Corp.,
281 S.W.3d 237, 249-50 (Tex.App.-Dallas 2009). Section 148 provides,
*520
(1) When the plaintiff has suffered pecuniary harm on account of his reliance on the defendant’s false representations and when the plaintiffs action in reliance took place in the state where the false representations were made and received, the local law of this state determines the rights and liabilities of the parties unless, with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the occurrence and the parties, in which event the local law of the other state will be applied.
(2) When the plaintiffs action in reliance took place in whole or in part in a state other than that where the false representations were made, the forum will consider such of the following contacts, among others, as may be present in the particular case in determining the state which, with respect to the particular issue, has the most significant relationship to the occurrence and the parties:
(a) the place, or places, where the plaintiff acted in reliance upon the defendant’s representations,
(b) the place where the plaintiff received the representations,
(c) the place where the defendant made the representations,
(d) the domicil, residence, nationality, place of incorporation and place of business of the parties,
(e) the place where a tangible thing which is the subject of the transaction between the parties was situated at the time, and
(f) the place where the plaintiff is to render performance under a contract which he has been induced to enter by the false representations of the defendant.
If any two of the contacts apart from the defendant’s domicil, state of incorporation, or place of business, are located wholly in a single state, that state will usually be the state of applicable law with respect to most issues.
Grant Thornton LLP v. Suntrust Bank,
133 S.W.3d 342, 358 (Tex.App.-Dallas 2004, pet. denied),
citing Restatement (Second) of Conflict of Laws
§ 148, cmt. j. In a conflict-of-laws analysis for a fraud-based claim, the principal focus is on where the conduct occurred.
Greenberg Traurig,
161 S.W.3d at 72 .
For tort claims in general, Section 145 applies:
(1) The rights and liabilities of the parties with respect to an issue in tort are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the occurrence and the parties under the principles stated in § 6.
(2) Contacts to be taken into account in applying the principles of § 6 to determine the law applicable to an issue include:
(a) the place where the injury occurred,
(b) the place where the conduct causing the injury occurred,
(c) the domicil, residence, nationality, place of incorporation and place of business of the parties, and
(d) the place where the relationship, if any, between the parties is centered.
These contacts are to be evaluated according to their relative importance with respect to the particular issue.
Because there is no difference in the substantive law relating to fraud and civil conspiracy to defraud under New York and Texas law, this Court does not need to conduct a conflict-of-law analysis as to those causes of action.
Greenberg Traurig,
161 S.W.3d at 70 .
New York’s Blue Sky Laws, commonly known as the Martin Act, prohibit numerous fraudulent practices in the
*521
distribution, exchange, sale and purchase of securities.
Greenberg Traurig,
161 S.W.3d at 76 . Unlike the TSA, the Texas Blue Sky Law, however, investors have neither an express nor an implied private right for securities fraud under the Martin Act.
Id., citing Pahmer v. Greenberg,
926 F.Supp. 287, 302 (E.D.N.Y.1996),
aff'd sub nom. Shapiro v. Cantor,
123 F.3d 717 (2d Cir.1997);
CPC Int'l, Inc. v. McKesson Corp.,
70 N.Y.2d 268 , 519 N.Y.S.2d 804, 806-07 , 514 N.E.2d 116, 118 (1987). Thus there is a conflict between the Blue Sky laws of New York and of Texas.
Complaint’s Factual Allegations About Deutsche Bank
Deutsche Bank provided substantial commercial and investment banking services, commercial loans, and advisory services to Enron. The Second Amended Complaint (# 33) focuses on Deutsche Bank’s material involvement in two different matters constituting part of Enron’s alleged scheme to manipulate its balance sheet, falsify financial reports filed with the Securities and Exchange Commission (“SEC”), and defraud investors: (1) promoting to Plaintiffs and other investors the sale of beneficial ownership interests, i.e., Osprey Certificates, in a SPE known as the Osprey Trust, which purportedly allowed Enron to rid itself of unwanted assets, hide debt, and inflate its reported income and (2) a series of tax transactions, used to “cook” Enron’s books.
Osprey Certificates
There were three sales of equity and debt participation in the Osprey Trust, which was comprised of Whitewing Associates LP, established in December 1997 as a limited liability entity owned by Enron, and Whitewing Management LLC. “Osprey I” occurred in September 1999 and included the sale of $1.4 billion in 8.31% “Senior Secured Notes” due on January 15, 2003 and $100,000,000 in certificates of beneficial ownership (“Osprey Trust Certificates” or “Osprey Certificates”) to institutional investors. A second equity sale (“Osprey II”) closed in June 2000 and was composed of $70,000,000 of Osprey Trust Certificates. The last offering, “Osprey III,” took place in September 2000 and consisted of $750,000,000 in 7.797% “Senior Secured Notes,” also due on January 15, 2003, and $50,000,000 of Osprey Trust Certificates. Plaintiffs purchased $9,000,000 of Certificates in Osprey I and $5,000,000 in Osprey II. # 33 at ¶¶ 40-44.
The proceeds from the sale of Osprey securities were to be used to purchase an ownership interest in a limited partnership known as Whitewing. Enron held a major ownership interest in Whitewing through two Enron affiliates, Egret I LLC and Peregrine I LLC, and in effect controlled the whole structure. Defendant financial institutions collectively promoted the sales of the Osprey Notes and Certificates through “presentation-to-investors” pamphlets, formal Offering Memoranda (“OMs”) for the Osprey I and III Notes, and face-to-face meetings. With regard to their purchase of the Certificates, Plaintiffs received and reviewed the August 1999 and June 2000 pamphlets that allegedly contained materially misleading statements or omitted material information known to Defendants. For example, these materials misrepresented that Whitewing was to acquire assets at fair market value through arm’s length transactions between Whitewing and Enron. Those who prepared the materials also knowingly made material omissions about transfer restrictions on particular assets that Defendants and Enron were planning to sell to the Osprey structure and the actual value of the collateral in the form of the assets that backed the investment. The assets in Whitewing, acquired by wrongful transfers from Enron on terms materially unfair to Whitewing, constituted the security for the Osprey Trust investors. The OMs for Os
*522
prey I and III Notes incorporated Enron’s purportedly false and misleading SEC filings for those year s,
2
on which Plaintiffs claim they relied. Plaintiffs also met with representatives of the underwriting syndicate Defendant financial institutions acting jointly and severally, including Seth Rubin of Deutsche Bank, and relied upon the institutions’ duty as underwriters in a private offering to conduct a thorough due diligence investigation and upon their statements regarding the sale and purchase of the Osprey offerings.
The complaint asserts that, motivated by large fees and commissions, Deutsche Bank acted as a joint bookrunning manager, i.e., as one of the underwriters controlling the offering, and Deutsche Bank “actively sold”
3
Osprey Certificates. # 33 at ¶ 97. It also alleges that Plaintiffs’ representative, Doug Stark, recalls the involvement of Deutsche Bank’s Seth Rubin in the presentation of material for Osprey I, and that Rubin failed to tell Stark the truth about the assets to be purchased by Osprey and that Citigroup was using Osprey to offload $40 million of its own risks to Enron.
4
Deutsche Bank allegedly also concealed the opinion of another Deutsche Bank employee, Paul Cambridge, stated in an email of November 2000: “The Osprey transaction was a highly tailored structured finance designed to meet certain balance sheet and income statement goals of Enron.”
5
# 33, ¶ 97. Mike Jakubik had worked as part of Enron’s Osprey team before joining Deutsche Bank’s Houston office as its Enron-relationship person and was one of those responsible for conceiving and marketing Osprey I to potential investors.
Id.
at ¶¶ 101, 103. Jakubik knew that the Osprey offerings were intended to “create a vehicle for dumping [Enron’s] problem assets to avoid dramatic write-downs and receivfe] cash well in excess of the fair market value of these assets,” while the Osprey Trust was “a mechanism for funding these overpriced acquisitions with Plaintiffs’ funds.”
Id.
at ¶ 102.
6
He knew there were no arm’s length negotiations between Enron and Whitewing because the executives representing each side were Enron employees with incentive to promote Enron’s interests and that Whitewing would pay inflated prices for the assets.
Id.
at ¶ 103. Nor did Deutsche Bank reveal that the entire Osprey/Whitewing structure was controlled by Enron.
Id.
at ¶ 141.
7
Id.
# 33 at ¶ 141. The complaint without any specific
*523
facts charges that Jakubik also helped Deutsche Bank structure and promote the Osprey III offering of Notes and Certificates.
Id.
at ¶ 104. Plaintiffs argue that these allegations support their claim that Deutsche Bank was a primary violator of the TSA.
Defendants also falsely assured the prospective investors that upon the occurrence of a “trigger event,” including any downgrade in Enron’s credit rating or a significant drop in Enron’s stock price, the investors would supposedly be protected by the Osprey Indenture Trustee’s power to sell and liquidate the assets. Furthermore the Osprey structure was ultimately backed through the Condor Share Trust only by Enron stock and an Enron guaranty, so an understanding of Enron’s actual financial condition was critical to the Osprey Trust investors.
Plaintiffs purchased their Osprey Certificates believing that the WhitewingUsprey assets
8
fully supported the structure’s val
*524
ue and unaware that transfer restrictions and liquidity restraints made most of the assets in Whitewing unmarketable. The complaint summarizes, “In reality, Defendants formed Osprey to fund Whitewing’s acquisitions of exorbitantly priced Enron assets so Enron could continue to report falsely inflated financial results and conceal from disclosure the asset impairment, excessive liabilities, and increasing losses that Enron was incurring from its unsuccessful businesses.” # 33, ¶ 75.
The complaint charges that Defendants caused the Osprey I OM to be false and materially misleading by describing the investments as a blind pool even though the Sarlux and Trakya transactions had already been identified for the purchase and by failing to disclose the purchases in reasonable detail, including the financial terms of the sale and the severe transfer restrictions. The Osprey III offering largely copied Osprey I in expanding the fraud already perpetrated on purchasers of Osprey I securities, and again characterized by material transfer restrictions with great impact on the value of the interest purchased and by the grossly inflated overpayment for the Sarlux and Trakya assets, which were not disclosed in the Osprey III OM.
Tax Transactions
Tax opinions from independent tax ad-visors and Enron Bankruptcy Examiner Neal Batson identify the “business purpose” of the tax transactions as the generation of “accounting income” and “balance sheet management” for Enron, especially at the end of accounting periods and particularly the year-end financial reports. # 33 at ¶¶ 436-39.
In addition to two major structured finance transactions named Osprey and Marlin (discussed infra), which raised billions of dollars for Enron and enabled it to remove non-performing or poorly performing assets from its consolidated balance sheet, the complaint identifies and discusses six tax transactions developed and promoted by Deutsche Bank: four, known as the “BT/Deutsche Tax Transactions,” for Enron to hide its financial condition, were dubbed Teresa, Steele, Cochise, and Tomas; and two “tax accommodation” transactions, to provide tax benefits to Deutsche Bank, were called Renegade and Valhalla. All of these purportedly gave Deutsche Bank knowledge of Enron’s financial condition and accounting fraud.
The complaint reports that according to Enron Bankruptcy Examiner Neal Batson, the BT/Deutsche Tax Transactions enabled Enron wrongfully to record approximately $158 million of income from two REMIC Carryover Basis Transactions,
9
$143.7 million of which Enron improperly recorded as pre-tax income, as well as erroneously to record a $229 mil
*525
lion increase in after-tax net income by reporting Teresa in a manner out of compliance with generally accepted accounting principles (“GAAP”). # 33, ¶ 467. After the first BT/Deutsehe Tax Transaction, Teresa, was presented to Enron by Deutsche Bank in 1996 and closed the next year, the design and implementation of tax transactions became Deutsche’s most significant area of involvement with Enron and ultimately became a conspiracy. # 33, ¶¶ 468, 472. Deutsche Bank received over $40 million in fees for its work on the four BT/Deutsche Tax Transactions. # 33, ¶470. These transactions, as noted by Neal Batson, had nothing to do with tax savings and failed to comply with GAAP;
10
they were designed to enable Enron to manipulate and falsify its SEC-filed financial statements by generating current accounting income through creation of speculative future tax credits, but no reserves were set aside in the event that the promised benefits were never realized. #33, ¶¶ 473-77; see also ¶¶ 487-91. With the help of Enron’s R. Davis Maxey, head of the Corporate Tax Planning Group, which dealt with transactions designed to aid in the manipulation of Enron’s financial reports, Deutsche Bank was able to turn Enron’s tax department into a “profit center,” as described in a February 14, 2003
USA Today
story, “Enron Unit Turned Tax Shelters into Profit.” # 33, ¶¶ 478-81. Moreover, Enron and Deutsche Bank disregarded critical third-party opinions regarding the tax transactions, including advice from Arthur Andersen, various law firms hired by Enron and Deutsche Bank, and tax attorney Bill McKee. # 33, ¶¶ 483-85.
11
In Teresa, for example, a “tax basis step-up” transaction described by Batson as among the “most egregious” of the structures for manipulating financial accounting rules, Enron quantified an increase in the value of Enron’s Houston corporate headquarters building as a future tax benefit, recorded that quantified benefit as current accounting income over an artificially short period of time, and passed Enron’s interest in the building to a partnership, with later distribution of the property to an Enron affiliate that had achieved an increased basis in its partnership interest. Enron expected the increased tax basis in the partnership eventually to be reflected as an increase in the basis of the corporate headquarters building and expected depreciation deductions over 39.5 years, as summarized in a March 14, 1997 memorandum by Deutsche Bank’s Thomas Finley, Christine Levinson and John Tsai and as described in Batson’s Second Interim Report, Appendix J, Annex 4.
12
# 33, ¶¶ 492-95. The tax benefit
*526
would not be available until some undetermined time in the future, when the headquarters was distributed to Enron and Enron would take advantage of the increased depreciation deductions. Thus the point of Teresa was to generate financial accounting income by improperly recording deferred tax assets in advance of future tax deductions, even before the resulting increased basis could attach to a depreciable asset. # 33, ¶ 496. The complaint asserts that, based on Teresa, Enron improperly created $229 million of after-tax “income” in its SEC-filed financial statements. # 33, ¶ 497. Although originally Deutsche Bank was to receive a fee of approximately $8 million for Teresa, that amount was later reduced to $6,625 million after Enron agreed to participate in Project Renegade, which functioned to benefit the Deutsche Bank. # 33, ¶ 499.
Earning a fee of $10 million in the next tax transaction, Deutsche Bank designed Steele, the first of two REMIC Carryover Basis Transactions (“the REMIC Transactions”), to appear to be a legitimate tax avoidance structure that acquired and managed a portfolio real estate and other financial assets with an enhanced earning profile, but which actually was intended to generate false “accounting income” to doctor Enron’s financial reports rather than tax savings. # 33, ¶¶ 522, 513-14, 505, 507-08. The REMIC transactions’ purpose was inappropriate inflation of reported financial accounting, pre-tax income of expenses by associating those expenses with investments in some “Facilitating Assets,” which were low-yielding and included substantial transaction costs. # 33, ¶ 505. Steele generated this false income by amortizing a large portion of the deferred tax credits associated with the acquisition of the REMIC Residual Interests into pretax accounting income over the life of the Facilitating Assets, which in Steele were five-year corporate bonds.
13
# 33, ¶ 515. From 1997-2001, Enron’s consolidated statements improperly reported $144 million of pre-tax income involving the Facilitating Assets.
Id.
Arthur Andersen prepared for Deutsche Bank a report on Steele, dated August 6, 1998, that warned of potential problems with the structure and that it might not survive scrutiny by the IRS. # 33, ¶ 509. Some employees at Deutsche Bank were uncomfortable with the transaction. For example, Peggy Capomaggie in a September 10, 1997 internal email to Thomas Finley and other Deutsche Bank bankers, questioned whether Enron’s acquisition of assets from the bank was a properly constituted “business combination,” a requirement to comply with the IRS Code, and whether other accounting alternatives should be discussed, but she was overruled. # 33, ¶¶ 517-18.
Cochise, a variation on Steele, was similarly reported in a manner not in compliance with GAAP or relevant IRS regulations. It, too, was based on speculative tax deductions, intended to generate accelerated , pre-tax accounting income without appearing to do so, and was set up to allow the sale or monetization of REMIC Resid
*527
ual Interests. Deutsche Bank sold Cochise to Enron on a representation that it could generate $75 million in pre-tax accounting income and $79 million in accounting earnings from the future benefit of future tax deductions. # 33, ¶ 524-25, 527-28, 531. Batson’s Second Interim Report, Appendix J, Annex 2, describes the true purpose of Cochise and the numerous SPEs and intra-SPE transactions used to conceal it. # 33, ¶ 526. Instead of corporate bonds, Cochise’s Facilitating Assets were interests in two airplanes purchased from a Deutsche affiliate, treated as a “business combination.” # 33, ¶ 530. The financial accounting basis of the interests could then be reduced to zero, and the basis reduction used to offset the deferred tax asset that the acquisition of the REM-IC Residual Interests generated. # 33, ¶ 530. Deutsche Bank knew Enron planned to recognize the gain on the sale as the full fair value of the airplanes and to amortize the deferred credit over five years even though the deferred tax assets were attributable solely to REMIC Residual Interests with a much longer life. # 33, ¶ 531. Deutsche Bank was paid about $15 million for its work on Cochise. # 33, ¶ 533.
Deutsche Bank designed and closed the Tomas Transaction in 1998 to avoid Enron’s having to report its acquisition of Portland General Holdings, Inc. and unwound the structure as planned in 2000. # 33, ¶¶ 535-36. The bank’s PowerPoint presentation described Tomas’ benefits as “generat[ing] tax basis in a portfolio of ‘burnt out’ leveraged lease assets, which Portland General originally acquired, and provid[ing] a mechanism for liquidating the portfolio at a substantial gain,” once again making the sale of the low-tax-basis assets appear to be an accounting income gain. # 33, ¶¶ 536, 538. Ultimately Tomas enabled Enron to record permanent tax benefits as pre-tax gains on Enron’s financial statements. Enron gave assets to the Tomas structure that Enron wanted to sell and which had a low basis for both accounting and tax purposes. # 33, ¶ 539. The Tomas structure enabled Enron to swap low-tax-basis stock of an affiliate that held cash equal to the sales value of the low-basis assets, which then could be liquidated without Enron having to recognize tax gain. # 33, ¶ 539.
To satisfy certain IRS regulations, documentation of part of the Tomas transaction indicated that Oneida, an Enron controlled SPE, would engage in a leasing business, but it had failed to do any leasing by June 2000. To make it appear that Oneida was operating a business concern, Deutsche Bank and Enron transferred the Cochise Facilitating Asset airplanes to Oneida in the summer of 2000. # 33, ¶ 540. To ensure that Enron could recognize accounting gains quickly, Enron and Deutsche Bank had an unwritten agreement that the structure would be unwound in two years and a day. Under relevant tax rules, certain favorable presumptions arise when a contributing partner received a liquidating distribution more than two years after its contribution, but they do not apply where there is an understanding that liquidation has been planned at the commencement of the transaction. # 33, ¶ 541. Nevertheless, although Deutsche Bank and Enron intended Tomas to be unwound in two years and one day, Enron gave it a tax treatment that was risky and uncertain and improperly recorded the full tax benefit from the avoidance of the built-in gain at the end of the two years. # 33, ¶ 542. It booked the entire proceeds of $36.5 million from the sale of the airplanes as net income, which was made possible only by the wrongful purchase accounting adjustments that reduced Enron’s book value in the aircraft to zero, in turn contrary to GAAP because the purchase of the airplanes was not related to the acquisition of the REM-IC Residual Interests in Cochise. # 33, ¶¶ 544, 548. Moreover, Deutsche Bank knew that Oneida paid an excessive price
*528
for the airplanes, as evidenced by a third-party appraisal that Deutsche Bank commissioned and received from BK Associates, Inc. on June 12, 2000. # 33, ¶ 543. In total, the accounting for Tomas, which did not comply with GAAP, allowed Enron to recognize gains of $25.6 million in 1998 and $18 million in 2000. # 33, ¶¶ 545-56. Enron’s R. Davis Maxey told Neal Batson that Enron held the Cochise airplanes for a time simply to create the impression that they had not been purchased for resale, even though the opposite was true. #33, ¶ 547. Deutsche Bank knew the truth because it had devised the structure to permit such. Plaintiffs claim they did not know about Deutsche Bank’s aiding Enron by artificially creating accounting income and that the result affected Enron’s financial statements. Plaintiffs maintain such information would have been an important consideration in their decision whether to purchase the Osprey Certificates. #33, ¶ 549.
The complex tax accommodation transactions, Renegade and Valhalla, which employed various Enron — and Deutsche-controlled affiliates to conceal the real aims of Enron and Deutsche Bank, were designed to provide tax benefits to Deutsche Bank, and they demonstrate the conspiracy between the two. # 33, ¶ 550, 556. For Renegade, in December 1998 Enron borrowed $18 million from BT/Deutsche Bank at a discounted rate, compensated by Deutsche Bank in the reduction of its fee for Teresa from $8 million to approximately $6,625 million. In Valhalla, a May 2000 transaction, with Enron’s help Deutsche Bank created deductible interest and nontaxable income by exploiting differences between United States and German tax law. # 33, ¶ 553. Enron shared a portion of Deutsche Bank’s windfall through an interest rate differential between the interest rate on a Deutsche/Enron Note and the interest rate on the “Participation Rights” under an Enron-Deutsche agreement. # 33, ¶ 554. With Valhalla Enron gained a five-year net borrowing while generating approximately $17-20 million of annual pre-tax earnings and cash flow, while Deutsche Bank gained approximately $40 million of annual tax benefits. # 33, ¶ 555. The Valhalla Transaction is described in Batson’s Second Interim Report, Appendix J, and in his Third Interim Report, Appendix G. The complaint asserts that Deutsche Bank’s home office in Germany questioned as contrary to a German statute and against money laundering law the propriety of a part of Valhalla in which Deutsche Bank’s Frankfurt office lent $2 billion to an indirect German subsidiary of Enron called Rheingold. # 33, ¶¶ 558-60.
With Deutsche Bank’s aid, Enron created the Marlin Transaction, structured as a “share trust,” to move Enron’s unsuccessful water business (Azurix and its subsidiaries, including its purchase of Wessex Water Pic and its associated debt), off Enron’s balance sheet. # 33, ¶¶ 561-65. Mike Jakubik of Deutsche Bank told Bat-son that treating the Marlin transaction as off-balance sheet financing would avoid the rating agencies’ categorizing the structure as debt, which would have an adverse impact on Enron’s credit rating, and preclude having to issue more Enron stock, # 33, ¶ 566; ¶ 576 (email from Deutsche Bank’s George Tyson to Paul Cambridge confirming that Deutsche Bank knew that Enron’s primary goal was keeping all of the Azurix and Marlin debt off-balance sheet and that Enron was concerned about the ratings impact of refinancing Marlin). Deutsche Bank was a joint bookrunning manager with Credit Suisse First Boston (“CSFB”) (then operating as Donaldson, Lufkin & Jenrette, “DLJ”) for both the Marlin I transaction and the Marlin II transaction, the latter being used to refinance the Marlin I. # 33, ¶ 567-68. Marlin I was comprised of approximately $1,024 billion in Marlin 7.09% Senior Secured Notes due December 2001 (the debt component) and
*529
$125 million of certificates (the equity component). # 33, ¶ 568. Based on the alleged “independence” of Marlin from Enron, the share trust, with its poorly performing assets and debt of almost $2 billion, was not reported on Enron’s consolidated financial reports. # 33, ¶ 569. In actuality, however, it was totally controlled by Enron. # 33, ¶ 570. Furthermore Enron contributed 204,800 shares of its preferred stock (convertible into 17.2 million shares of Enron common stock) to the Marlin Preferred Share Trust and undertook the Share Trust obligations, with recourse to Enron. # 33, ¶ 571. Given Enron’s control and assumption of risk through its stock contribution and assumption of share trust liabilities, the deconsolidation of Marlin in Enron’s financial statements violated GAAP. # 33, ¶ 572. Furthermore, as joint bookrunning manager for Marlin I and designer of the Marlin structure, the complaint asserts that Deutsche Bank was responsible for performing due diligence and disclosing relevant facts that investors would consider material. # 33, ¶ 573. Because Marlin was privately placed, Marlin investors and the capital markets depended on the underwriters’ disclosures.
Id.
Deutsche Bank decided to conceal Enron’s control of the structure and the ultimate recourse to Enron. # 33, ¶ 574. As Deutsche Bank involvement continued from Marlin I to Marlin II, in a July 8, 1998 memorandum to Mike Jakubik and other Deutsche Bank bankers, Calli Hayes listed a number of problems with the Marlin structure and commented, “My biggest problem with the transaction as proposed is the exit strategy — there isn’t one, at least not a solid one.” # 33, ¶ 578.
During the period that it was involved in the various tax transactions, with specific dates identified and examples provided, Deutsche Bank continued publicly to provide only upbeat evaluations and recommendations of Enron and Enron-related affiliates, concealing its precarious and risky financial condition. #33, ¶¶ 582-90.
LJM2
Moreover the complaint generally claims that Deutsche Bank, conspiring with other Defendant financial institutions, helped fund LJM2 and knew that it, with its sham transactions and falsified independence from Enron, was used by Enron to manipulate its balance sheet. # 33, ¶¶ 675-703, 723-29. Deutsche Bank’s BT invested $10 million in LJM2. #33, ¶734. The complaint summarily describes cooperation agreements and guilty pleas of various Enron-related officials to document the deceptions employed to use LJM2 and the Raptors to avoid undesirable results from Enron’s accounting treatments. The complaint asserts generally that Deutsche Bank and Citigroup “participated and invested in a clandestine special purpose entity which was controlled by Fastow and Enron to facilitate the phony sales of overvalued Enron assets” and “conspired with Enron and Fastow to aid Enron’s fraud by means of transactions that deceptively moved worthless or underperforming assets, as well as debt, off Enron’s balance sheet.” # 33, ¶ 729. The result of the conspiracy was that the price of Enron stock was artificially inflated, Enron was able to borrow at a low interest rate that did not reveal the risk of such loans, and Plaintiffs “were unable to ascertain Enron’s true financial condition.”
Id.
Deutsche Bank failed to disclose what it knew about LJM2 and Enron’s financial reports. # 33, ¶¶ 735-40.
Deutsche Bank’s Motive
The complaint claims that Deutsche Bank joined in the conspiracy to defraud in order to maintain its Tier I banking status with Enron and to pocket the high fees.
14
*530
In short, it was motivated by greed. # 33, ¶ 730.
Knowledge of Enron’s Actual Financial Condition
Deutsche Bank purportedly knew about Enron’s deteriorating financial status because of the wide range of services it provided to Enron (lending, security offerings, structured financing, and advisory services, especially those related to tax), because of the transactions it participated in with Enron and Enron-related entities, and because the bankers met regularly and personally with top Enron officials, especially banker Paul Cambridge with Andrew Fastow and Ben Glissan, and Enron board member Herbert Winokur, as did senior Deutsche Bank manager Yves Balman with Enron’s Jeffrey Skilling.
The complaint further charges that starting in 1999, Deutsche Bank began reducing its exposure to Enron. Deutsche Bank’s William Archer, in an internal email to Hugo Banziger, described attachments to the email as a “paper trail” of its “growing discomfort” with Enron credit. # 33, ¶ 442; see also ¶¶ 448-52 (internal emails from Cambridge, Archer, and Calli Hayes reflecting concern about exposure to Enron). The attachments were a document dated April 25, 2000, two documents dated December 1, 2000, a document dated December 1, 2001, a document dated May 7, 2001, a document dated October 9, 2001, and an undated document. Deutsche Bank never revealed, indeed deliberately concealed, its knowledge of Enron’s financial condition and the risks for investing in Enron from Plaintiffs and the general investing public. Deutsche Bank’s Paul Cambridge and Calli Hayes testified before Bankruptcy Examiner Neal Batson’s team that by early 2000 Deutsche Bank was concerned about Enron’s reported financial condition in statements filed with the SEC. # 33, ¶ 444. Cambridge emailed Deutsche Banker William Archer on September 10, 2001 that there was a “general inclination” by Deutsche Bank’s Chief Credit Officer for North America to “disbelieve [Enron] no matter what the source”. # 33, ¶ 446. The same credit officer was concerned that Skilling’s resignation in August 2001 was “the tip of an iceberg of a lot of potential bad news coming up.” # 33, ¶ 447. On May 7, 2001, as shown by the Minutes of Deutsche Bank’s Underwriting Committee, Deutsche Bank purchased $25 million of credit default protection in the derivative market and wanted to buy more, but found the cost prohibitive. The October 9, 2001 Amended Minutes of the same Committee reveal that Enron had considerable off-balance sheet liability and that its transactions lacked transparency about its hedging activities.
Conspiracy Claim
The complaint asserts that from at least 1997 Deutsche Bank aided Enron in its fraudulent accounting goals by designing, financing and/or implementing the above named substantial tax-related transactions, in addition to Osprey and Marlin, and it participated in the fraud-enabling LJM2 partnership. Plaintiffs, in purchasing the Osprey Certificates, relied on Enron’s financial statements, which they insist that Deutsche Bank helped to make false and misleading.
Deutsche Bank’s Motion to Dismiss
Noting that the Second Amended Complaint is Plaintiffs’ third bite of the apple
15
*531
and was filed after discovery was completed, Deutsche Bank moves to dismiss with prejudice all causes of action against it.
Section 12(a)(2) Claims
No Prospectus
According to the complaint, Plaintiffs purchased Osprey Certificates after face-to-face sales meetings and after “receiving] and rel[ying] on the information presented in the August 1999 and June 2000 Pamphlets” that were summaries for potential investors.
16
# 33 at ¶¶ 47-48, 50. Plaintiffs, who purchased only Osprey Certificates, did not purchase the Notes, which were sold through Rule 144A and Reg S offerings and formal offering memoranda.
Section 12(a)(2) liability expressly reaches only persons who directly sell a security “by means of a prospectus” that contains a misstatement or omission of material fact. 15 U.S.C. § 77l (a)(2). The term “prospectus” is restricted to a document that “must include the ‘information contained in a registration statement.’ ”
Gustafson v. Alloyd Co.,
513 U.S. 561, 569 , 115 S.Ct. 1061 , 131 L.Ed.2d 1 (1995).
17
Thus only public offerings with documents including information in a registration statement are subject to Section 12(a)(2) liability.
Id.
18
; Yung v. Lee,
432 F.3d 142, 149 (2d Cir.2005) (“Section 12(a)(2) liability cannot attach unless there is an ‘obligation to distribute a prospectus.’ ”). Plaintiffs’ § 12(a)(2) claims fail because there was no prospectus applicable to their Osprey Certificate purchases and because they purchased their Certificates pursuant to a purely private sale, insists Deutsche Bank.
19
Furthermore, argues Deutsche Bank, in purchasing their Osprey Certificates, Plaintiffs understood and agreed that there was no “obligation to distribute a
*532
prospectus” in connection with the Certificates because the Purchase Agreements governing these purchases expressly state, “Osprey Certificates will be offered and sold to the Osprey Certificateholders without being registered under the Securities Act of 1933 ... in reliance on exemptions therefrom and may not be offered or sold except pursuant to an exemption from the registration requirements of the Securities Act.” #41, Certificate Purchase Agreements, Harlow Decl., Exs. 1 & 2 at 1, 4. The Agreements further state that non-registration was dependent in part on representations from Plaintiffs, including that Plaintiffs were purchasing Certificates for their own investment purposes “and not with a view toward distribution of the Certificates in a way that would require registration.”
Id.
at 4. These Agreements additionally required each Certificate-holder to represent that it was an “accredited investor” within the meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D
(id.
at 2)— which provides for an exemption from registration under Section 4(2) of the Securities Act.
See, e.g., Faye L. Roth Revocable Trust v. UBS Painewebber, Inc.,
323 F.Supp.2d 1279, 1294-96 (S.D.Fla.2004) (holding that offerings under Regulation D to “accredited investors” are not covered by Section 12(a)(2)). See discussion below.
Moreover, even if the Osprey I OM had applied to the Certificates, it is not a “prospectus.” The OMs explicitly state there was no prospectus distribution requirement. The Osprey I OM’s cover recites that the Osprey Notes were offered pursuant to Rule 144A and Regulation S, neither of which is subject to the registration requirements of the Securities Act of 1933, and that the Notes “HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933.” #41, Harlow Decl., Ex. 6 (Osprey I OM). Transactions under Rule 144A (“Private Resales of Securities to Institutions”) are private transactions with qualified institutional buyers that are not subject to the 1933 Act’s registration requirements. 17 C.F.R. § 230.144 (a). Because no prospectus is required, such offerings cannot give rise to Section 12(a)(2) liability.
See, e.g., In re WorldCom, Inc. Sec. Litig.,
294 F.Supp.2d 431, 455-56 (S.D.N.Y.2003) (dismissing Section 12(a)(2) claim because “[t]he terms of the [144A] Offering Memorandum compel the conclusion that the ... Offering was a private placement ... no matter how the plaintiff might word the claim, the document involved cannot be silkenized [sic ] into a § 12(a)(2) ‘prospectus.’ ” [citations omitted]);
Am. High-Income Trust v. Alliedsignal,
329 F.Supp.2d 534, 543 (S.D.N.Y.2004) (holding that “offerings under Rule 144A are by definition non-public, and offering memoranda distributed in connection with such offerings cannot give rise to Section 12(a)(2) liability”). Registration S offerings are similarly made pursuant to a safe harbor from the registration requirements of Section 5 of the 1933 Act. 17 C.F.R. §§ 230.901-230.905 . Moreover such sales are not offered pursuant to a prospectus and are not subject to Section 12(a)(2) liability.
Gustafson,
513 U.S. at 578 , 115 S.Ct. 1061 .
In sum, in the absence of a prospectus for the Osprey Certificates, there can be no Section 12(a)(2) liability.
Private Placement
Plaintiffs § 12(a)(2) claims should also be dismissed because the allegations in the complaint reveal that the Certificates were sold in purely private transactions. In the wake of
Gustafson ,
courts have routinely held that Section 12(a)(2) does not apply to any form of private placement.
See, e.g., Lewis v. Fresne,
252 F.3d 352, 357-58 (5th Cir.2001);
In re Azurix Corp. Sec. Litig.,
198 F.Supp.2d 862, 893 (S.D.Tex.2002);
Double Alpha, Inc. v. Mako Partners, LP,
No. 99 Civ.
*533
111541, 2000 WL 1036034 , *3 (S.D.N.Y. July 27, 2000). Plaintiffs have not made any factual allegations that would establish that the Certificates
20
were offered to the public, and there were no formal offering documents for them. In addition the small size of the Certificate offerings indicates they were private sales: the September 1999 had five purchasers requesting ten Certificates, while the July 2000 offering-had four purchasers requesting eight certificates. # 41, Harlow Decl., Exs. 1 & 2 at Schedule I.
Deutsche Bank further argues that Plaintiffs are sophisticated institutional investors who, in the words of the United States Supreme Court, do not “need the protection of the [1933] Act.”
SEC v. Ralston Purina Co.,
346 U.S. 119, 125 , 73 S.Ct. 981 , 97 L.Ed. 1494 (1953). The relevant Certificate Purchase Agreements are conditioned on Plaintiffs’ warranty and representation that they were “accredited investors”
21
within the meaning of Rule 501(a) of Regulation D. # 41, Harlow Decl. Exs. 1 & 2 at 3.
In addition Plaintiffs’ obligation to accept and pay for their Certificates was expressly conditioned upon their having received (1) “such other documentation, certificates or opinions as [they] may reasonably request in connection with the consummation of the transactions contemplated” in the Certificate Purchase Agreement; and (2) the underlying Osprey and Whitewing transaction documents were “in form and substance reasonably satisfactory to each Osprey Certificate holder.”
Id.
at 2. Moreover, those transaction documents reveal that a condition precedent for the entire Osprey financing was an opinion letter stating that all the transaction documents were provided to its satisfaction by the Certificate purchasers’ own attorney, Dewey Ballantine.
22
Time-Barred Claims
Deutsche Bank argues that Plaintiffs’ claims based on Plaintiffs’ September 1999 purchases under Sections 12(a)(2) and 15 are time-barred because they were not brought within one year of the date of discovery of the general facts constituting the alleged violations and within three years from the date the securities (statute of repose) were purchased, which expired
*534
nearly nine months prior to the filing of the Original Complaint on April 17, 2003.
23
. 15 U.S.C. § 77m;
Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson,
501 U.S. 350, 364 , 111 S.Ct. 2773 , 115 L.Ed.2d 321 (1991).
Control Person Claim under Section 15 of the Securities Act of 1933
Moreover because Plaintiffs cannot assert a primary violation of Section 12(a)(2) in connection with their private purchases of the Certificates, the derivative controlling person claim asserted under Section 15, 15 U.S.C. § 77o, fails as a matter of law.
Lewis,
252 F.3d at 357 n. 3.
TSA Claims
Deutsche Bank maintains that Plaintiffs’ claims for primary and secondary violations of the TSA fail because the purchase of the Certificates occurred in New York, both Plaintiffs and Deutsche Bank are based in and acted in New York, and there was no Texas entity that was a party to the purchase transaction.
24
See In re Enron Corp. Sec., Deriv. & “ERISA” Litig.,
235 F.Supp.2d 549, 691-92 (S.D.Tex.2002) (TSA can be invoked to protect investors outside Texas from securities law violations “emanating from Texas”).
To state a claim under Article 581-33A(2) or Article 581-33F(2), a plaintiff must allege facts showing a primary violation by a “seller” or “offeror” that is in privity with the plaintiff. Tex.Rev.Civ. Stat. art. 581-33A(2) (“A person who offers or sells a security ... by means of an untrue statement of a material fact or an omission ... is liable to the person buying the security from him.”). Like Section 12(a)(2) of the Securities Act of 1933, the TSA’s Article 581-33A(2) imposes liability only on persons who actually pass title or who actively engage in solicitation of the securities purchased by a plaintiff.
In re Enron Corp. Sec., Deriv. & “ERISA” Litig.,
258 F.Supp.2d 576, 603-04 (S.D.Tex.2003). Under the facts pleaded by Plaintiffs, the only possible primary violators of the TSA are Osprey Trust or Deutsche Bank. Enron is the only Texas-based entity named in the complaint, but it is not alleged to be either a sellor or an offeror of Osprey Certificates in privity with Plaintiffs. The documents reflect that Osprey Trust sold the Certificates to Plaintiffs. Therefore, argues Deutsche Bank, there is no alleged statutory violation “emanating from Texas.”
Plaintiffs have alternatively pleaded that New York law applies here. New York’s Blue Sky Laws, known as the Martin Act, N.Y. Gen. Bus. Law § 352
et seq.,
are analogous to Texas’s TSA. Deutsche Bank argues that Plaintiffs’ TSA claims would be barred by New York’s Martin Act, creating a conflict of laws, because, as noted
supra,
the Martin Act does not permit [a] private right of action for violations of its antifraud provisions.
Silvercreek Management, Inc. v. Salomon Smith Barney, Inc. (In re Enron Corp. Sec., Deriv. &
*535
“ERISA” Litig.,),
No. Civ. A. H-02-3185, 2003 WL 23305555 , at *4 & n. 9 (S.D.Tex. Dec. 11, 2003),
citing CPC Int’l, Inc. v. McKesson Corp.,
70 N.Y.2d 268, 276 , 519 N.Y.S.2d 804 , 514 N.E.2d 116 (1987), and
Castellano v. Young & Rubicam, Inc.,
257 F.3d 171, 190 (2d Cir.2001).
See also Greenberg Traurig,
161 S.W.3d at 75-76 (dismissing TSA claims where New York law applied to Plaintiffs’ allegations and holding that “unlike the Texas Securities Act, New York’s Martin Act provides for neither an express nor implied private claim,” but instead gives the state Attorney General broad regulatory and remedial powers to prevent securities fraud). The Martin Act governs fraud and deception in the purchase and sale of securities, including claims that do not require proof of intent to defraud, and thus private actions not involving proof of intent to defraud are barred by the Martin Act.
CPC Int’l,
70 N.Y.2d at 276 , 519 N.Y.S.2d 804 , 514 N.E.2d 116 ;
Castellano,
257 F.3d at 190 . Plaintiffs’ private claims under Article 581-33A(2) of the TSA would be barred by the Martin Act, creating a conflict of laws.
Under
Restatement (Second) of Conflict of Laws
§ 148(1) for claims of fraud and misrepresentation,
When the plaintiff has suffered pecuniary harm on account of his reliance on the defendant’s false representation and when
plaintiff’s action in reliance took place in the state where the false representations were made and received,
the local law of this state determines the rights and liabilities of the parties unless, with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the occurrence and the parties, in which event the local law of the other state will be applied, [emphasis added by the Court]
Here, insists Deutsche Bank, the representations at issue were made and received, and Plaintiffs’ alleged reliance and harm from the purchase of Osprey Certificates occurred, in New York, so under Section 148, New York law should apply to Plaintiffs’ claims.
25
The same result would be reached under Section 145 for tort claims if one looked to where Plaintiffs suffered the injury, where the conduct causing the injury occurred, and where the parties reside and/or are incorporated, and where the relationship between the parties was centered. At all relevant times Deutsche Bank and Plaintiffs were New York parties and their alleged relationship was centered in New York. Complaint ¶¶ 1, 2, 4-5, 61. The documents Plaintiffs claim to have relied on in deciding to purchase their Certificates were allegedly distributed by Deutsche Bank at meetings between the parties and the closing of the Osprey financing transactions occurred in New York. Complaint ¶ 61; # 41, Participation Agreement, Harlow Decl. Ex. 3 at Section 2.1. Although the other alleged primary violator under the TSA, the Osprey Trust, is a Delaware statutory business Trust, all other relevant contacts are in New York.
Common Law Claims
Fraud
Next, argues Deutsche Bank, the common law fraud claim fails because Plaintiffs have not alleged facts to support essential elements, i.e., (1) that Deutsche Bank made any misstatements to Plaintiffs, (2) that a Deutsche Bank actor had scienter in making a misstatement, or (3) that Plaintiffs reasonably relied on a misstatement by Deutsche Bank or that Deutsche Bank had any duty to disclose to
*536
Plaintiffs. Fed.R.Civ.P. 9(b) requires Plaintiffs to specify the “who, what, when, where, and how of the alleged fraud.”
United States ex rel. Williams v. Bell Helicopter Textron, Inc.,
417 F.3d 450, 453 (5th Cir.2005) (citation and internal quotation marks omitted).
26
To the extent that Plaintiffs allege that they purchased their Certificates based on material omissions by Deutsche Bank, Deutsche Bank insists the claim fails because it owed no duty to disclose to Plaintiffs.
More specifically, although Plaintiffs assert that they relied on various misstatements in the OMs and incorporated Enron financial statements, for the Osprey Notes and other misrepresentations, the claim fails because nowhere do Plaintiffs allege that Deutsche Bank made any of the statements, drafted or directed the drafting of, or played any role in the preparation of, Enron’s financial statements, or was responsible for Enron’s disclosures that were incorporated into the OMs. Plaintiffs do not identify any specific statements made to them by Deutsche Bank; rather the Osprey I OM expressly states that the information in it was furnished by Enron or the issuer (Osprey). Cf.
In re Enron Corp. Sec., Deriv. & “ERISA” Litig.,
529 F.Supp.2d 644, 774 (S.D.Tex.2006) (“Lead Plaintiff does not identify any alleged misleading statements other than Enron’s incorporated financial statements in the offering memoranda, in particular any statements that were actually ‘created’ by Deutsche Bank employees, nor has it shown that Deutsche Bank employees in any way participated in the preparation of the incorporated, allegedly misleading Enron financial statements.”). As for the pamphlets that Plaintiffs assert they reviewed in connection with their purchase of the Osprey Certificates, no statements, not to mention misstatements, are identified in them that were made by Deutsche Bank. Indeed, in the entire complaint, Plaintiffs only twice stated they had a meeting about Osprey with one person from Deutsche Bank, Seth Rubin, and they do not allege that he said anything. Plaintiffs do not comply with Rule 9(b) when they assert “Defendants” generally stated or misrepresented certain things, since several different financial institutions and legal entities were involved.
Common law fraud in both New York and Texas requires a showing of scienter, a knowing misrepresentation.
New York Univ. v. Cont’l Ins. Co.,
87 N.Y.2d 308, 318-19 , 639 N.Y.S.2d 283 , 662 N.E.2d 763 (1995);
Johnson & Higgins of Texas, Inc. v. Kenneco Energy, Inc.,
962 S.W.2d 507, 526-27 (Tex.1998). Both permit a showing of scienter by recklessness only when the plaintiff alleges facts showing that the speaker made a statement as a definitive assertion knowing he was without knowledge as to the truth.
Johnson & Higgins,
962 S.W.2d at 527 ;
Burgundy Basin Inn, Ltd. v. Watkins Glen Grand Prix Corp.,
51 A.D.2d 140 , 379 N.Y.S.2d 873, 880 (1976). Regardless the Plaintiff must provide significant factual detail to support an inference of scienter.
Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp.,
565 F.3d 200, 213 (5th Cir.2009) (While not subject to the heightened “strong inference” of scienter standard of the federal securities laws, to adequately plead fraud for Texas common law fraud
*537
under Rule 9(b) in federal court “a plaintiff must set forth specific facts to support an inference of fraud by either showing a defendant’s motive to commit securities fraud (but motives universal to corporations and their officers do not suffice)
27
or identify special circumstances that indicate conscious misrepresentation or behavior on the part of the defendant”),
cert. denied,
- U.S. -, 130 S.Ct. 199 , 175 L.Ed.2d 125 (2009);
Giant Group, Ltd. v. Arthur Andersen, LLP, 2
A.D.3d 189, 770 N.Y.S.2d 291, 292 (2003).
28
Deutsche Bank contends that the complaint here fails to offer particular facts to support any direct fraud claim against it, but only conclusorily asserts scienter against Defendants generally.
29
No Deutsche Bank employee is individually identified as a statement maker with the requisite level of knowledge and intent.
See Southland Sec. Corp. v. INSpire Ins. Solutions, Inc.,
365 F.3d 353 , 365-66 (5th Cir.2004) (required state of mind must actually exist in the individual making or being a cause of the making of the misrepresentation and may not be simply imputed to the individual on agency principles). No facts are alleged demonstrating scienter against the three individuals from Deutsche Bank mentioned in the complaint (Seth Rubin, Paul Cambridge and Mike Jakubik).
No statements in any Deutsche Bank analyst reports are specified as materially false or misleading, nor do Plaintiffs show that any analyst recommendations were knowingly false when made or that any of
*538
its analysts actually knew of the underlying fraud, maintains Deutsche Bank.
Nor, maintains Deutsche Bank, do Plaintiffs adequately plead reasonable, actual reliance, an essential element of common law fraud, on any statement by Deutsche Bank. They merely allege generally that Plaintiffs collectively relied on Enron’s financial statements and other unspecified representations. Since they have not attributed a single specific misrepresentation to Deutsche Bank, they clearly cannot establish reliance on any such statement. The only statements by Deutsche Bank that Plaintiffs do allege are “buy” recommendations and other statements purportedly included in certain analyst reports, but those reports do not make any recommendations about the Osprey Certificates, nor do Plaintiffs allege that they read or that they were even aware of these recommendations; instead they asserted that they “reasonably relied that
[sic
] Citigroup, UBS and Deutsche would not purposely disseminate deceptive analyst reports to the investing public.” Complaint ¶ 583-85, 766. Furthermore Plaintiffs cannot claim reasonable reliance on the Osprey OMs because the documents expressly and unambiguously state that they were not Certificate offering documents. #41, Osprey I OM, Harlow Deck Ex. 6 at cover, 10 (“The Osprey Trust Certificates are not being offered hereby.”). Moreover, Deutsche Bank asserts that the matters about which Plaintiffs claim to have been misled are prominently and fully disclosed, that Enron would determine which assets and what prices Whitewing would acquire from Enron. As noted, their purchases were expressly conditioned upon their receiving documentation and information that they might reasonably request and the power to review and consent to some asset sales, so they could have obtained additional information they wanted about Osprey financing and asset sales.
In addition, under both New York and Texas common law, where the fraud claim is one of omission, the plaintiff must show that the defendant had a duty to disclose material information because of a fiduciary or other confidential relationship or contractual relationship between the parties.
Weinstock v. Handler,
244 A.D.2d 273 , 664 N.Y.S.2d 298, 298-99 (N.Y.App.Div.1997);
Ins. Co. of N. Am. v. Morris,
981 S.W.2d 667, 674 (Tex.1998). Deutsche Bank argues that Plaintiffs, have failed to allege facts that would give rise to a duty to disclose by Deutsche Bank under the circumstances here.
Last, Plaintiffs’ fraud claims cannot be based on their decision to hold rather than to sell their Certificates. There is no adequate pleading of scienter in the making of alleged misrepresentations. Even if “holder” claims were established under New York and Texas common law, Plaintiffs must allege, but have not, that they relied on a personal, direct communication aimed to stop a sale.
In re WorldCom, Inc. Sec. Litig.,
382 F.Supp.2d 549 , 559 (S.D.N.Y.2005) (recognizing that holder claims are disfavored generally and requiring situations of direct communication);
Shirvanian v. DeFrates,
No. 14-02-00447-CV, 2004 WL 35987 (Tex.App.-Houston [14th Dist.] Jan. 8, 2004)
(“Shirvanian
I”) (the only Texas court to have analyzed whether “holder” claims can be asserted under Texas law) (for holder claims must allege not only a personal, face-to-face communication with the defendant, but also an existing and definite plan to sell that would have occurred in the absence of the false communication designed to preclude their sale),
withdrawn and replaced,
161 S.W.3d 102 (Tex.App.-Houston [14th Dist.] 2004)
(“Shirvanian II”).
30
*539
Aiding and Abetting Fraud Under New York Law
Common law aiding and abetting of a fraud under New York law, to which Rule 9(b)’s heightened pleading standards apply,
31
requires pleading facts showing (1) the existence of a fraud; (2) defendant’s actual knowledge of the fraud; and (3) that defendant provided substantial assistance to advance the fraud’s commission.
Inzerilla v. Am. Tobacco Co.,
No. 11754/96, 2000 WL 34016364 , *3 (N.Y.Sup.Ct. Oct. 27, 2000);
Lindsay v. Lockwood,
163 Misc.2d 228, 233 , 625 N.Y.S.2d 393 (N.Y.Sup.Ct.1994).
To show substantial assistance under New York law, a plaintiff must plead facts showing not only that the defendant significantly aided the primary wrongdoer’s, here Enron’s, fraud, but also that the aiding defendant’s actions proximately caused the plaintiffs injuries.
Cromer Fin. Ltd. v. Berger,
137 F.Supp.2d 452, 470 (S.D.N.Y.2001). Plaintiffs cannot rely on “but for” causation; aider and abettor liability mandates that the injury be a direct or reasonably foreseeable result of the defendant’s conduct.
Id.
Deutsche Bank charges that Plaintiffs failed to plead with the degree of specificity required by Rule 9(b) and failed to plead the required elements of aiding and abetting fraud. Instead they speculate about what Deutsche Bank “must have known” when the transactions were structured and proffer bare conclusions that Plaintiffs were harmed by Deutsche Bank’s conduct.
Furthermore Plaintiffs fail to allege that Deutsche Bank had actual knowledge of Enron’s alleged fraud for their aiding and abetting claim.
Albion Alliance Mezzanine Fund, LP v. State Street Bank and Trust Co., 8
Misc.3d 264, 797 N.Y.S.2d 699 , 706-07 (N.Y.Sup.2003),
aff'd,
2 A.D.3d 162 , 767 N.Y.S.2d 619 (1 Dept.2001). Allegations of constructive knowledge or recklessness in not knowing are insufficient to allege the required state of mind of actual and concrete knowledge of the underlying fraud.
Filler,
339 F.Supp.2d at 557. An allegation that a defendant “should have known” about the fraud is also insufficient.
VTech Holdings, Ltd. v. Pricewaterhouse Coopers, L.L.P.,
348 F.Supp.2d 255, 269 (S.D.N.Y.2004).
Plaintiffs conclude that Deutsche Bank structured certain tax transactions to “help[] Enron achieve its fraudulent accounting objectives.” Complaint ¶ 457. Deutsche Bank argues that Plaintiffs fail to allege facts showing that it knew that its tax and other structured transactions with Enron had “no legitimate purpose”
*540
and would be used to commit fraud.
Id.
at ¶¶ 434-35, 464. Plaintiffs present third-party commentary and hindsight observations, especially from Neal Batson, that the transactions allowed Enron to record erroneously millions of dollars of income, but they do not plead facts that establish that anyone at Deutsche Bank knew at the time of entering into the transactions how Enron would disclose them, that they were improper, or that Enron was entering into them to commit fraud. Absent such details, the aiding and abetting claim must be dismissed for failure to plead actual knowledge of the underlying fraud. Allegations of an intention to realize accounting income benefits do not translate into knowledge of improper benefits, no less knowledge of fraud. The complaint fails to allege facts showing that Deutsche Bank knew Enron entered into the tax transactions to defraud investors.
Nor have Plaintiffs alleged facts showing that Deutsche Bank had actual knowledge that the Osprey and Marlin financings were fraudulent or that anyone at Deutsche Bank knew these transactions would be used by Enron to commit fraud. Nor have they asserted any facts demonstrating that Deutsche Bank had any actual knowledge of fraudulent activity by the LJM2 Partnership or that anyone at Deutsche Bank knew that LJM2 would be used for any fraudulent purpose.
While Plaintiffs assert that they suffered losses when their Osprey certificates became worthless, they do not allege how the tax transactions, and specifically Deutsche Bank’s role in them, proximately caused their injuries,
32
but only state that Enron may have used some of those transactions to inflate its accounting income.
Cromer Fin.,
137 F.Supp.2d at 472 (granting motion to dismiss where plaintiffs fail to show that their injuries were the direct result of the defendant’s role in the alleged fraud). Nor do they allege that Deutsche Bank’s involvement in the Osprey and Marlin transactions proximately caused their injuries. Plaintiffs claim they were injured by asset transfers at inflated values from Enron to Whitewing, but they do not and cannot allege that Deutsche Bank, which participated only in the Osprey financing transaction, had anything to do with Enron’s subsequent abuse of the Osprey/Whitewing structure. Deutsche Bank notes that Plaintiffs, alone, were uniquely situated to control those asset transfers since they were the only parties whose express consent was required for any significant purchases. # 41, Osprey I OM, Harlow Deck Ex. 5 at § 6.06(c)(i) (describing consent rights of Certificateholders for acquisitions of $40 million or greater).
33
Claiming that it was only a passive investor
34
that provided $10 million out of approximately $40 million (2.5% of the total investment) invested in LJM2, an insubstantial sum, Deutsche Bank insists it did not as a matter of law provide substantial assistance to LJM2 or any fraud involving LJM2.
Finally, Deutsche Bank maintains that Plaintiffs, while complaining that Deutsche Bank assisted in the concealment of Enron’s fraud by failing to issue a downgrade
*541
or a warning about the company, do not allege that its analyst reports caused Plaintiffs’ injuries. Not preventing loss is different from causing it. There was no fiduciary or contractual relationship between Deutsche Bank and Plaintiffs and therefore no affirmative duty of Deutsche Bank to disclose.
In re Sharp Int’l Corp.,
403 F.3d 43, 52 (2d Cir.2005);
Kaufman v. Cohen,
307 A.D.2d 113 , 760 N.Y.S.2d 157, 170 (2003) (“[I]nstead of an affirmative misrepresentation, a fraud cause of action may be predicated on acts of concealment where the defendant had a duty to disclose material information.”). Plaintiffs do not even plead that they saw or read a Deutsche Bank analyst report. Nor did one of Deutsche Bank’s analysts address, no less recommend, the Osprey Certificates.
Civil
Conspiracy
Deutsche Bank contends that Plaintiffs’ civil conspiracy claims fail because Plaintiffs have not alleged facts demonstrating a knowing agreement by each alleged co-conspirator to commit fraud.
35
Snyder v. Puente De Brooklyn Realty Corp.,
297 A.D.2d 432 , 746 N.Y.S.2d 517, 521-22 (2002),
appeal denied,
99 N.Y.2d 506 , 755 N.Y.S.2d 712 , 785 N.E.2d 734 (N.Y.2993) (plaintiff must plead facts supporting “ ‘an inference that defendants knowingly agreed to cooperate in a fraudulent scheme or shared a perfidious purpose’ ”);
Ins. Co. of N. America v. Morris,
981 S.W.2d 667, 675 (Tex.1998) (plaintiff must establish a “meeting of the minds,” “an agreement or understanding between the conspirators to inflict a wrong against, or an injury on, another,” “a meeting of minds on the object or course of action, and some mutual mental action coupled with an intent to commit the act which results in injury; in short, there must be a preconceived plan and unity of design and purpose, for the common design is of the essence of the conspiracy.”). Plaintiffs have failed to plead that Deutsche Bank knowingly conspired with Enron to defraud investors with the specificity required by Fed.R.Civ.P. 9(b). Instead they have pleaded that Deutsche Bank participated in certain tax, investment, or structured finance transactions that Enron may have used to defraud investors. Plaintiffs have also failed to plead that as an alleged conspirator, Deutsche Bank knew the wrongful nature of the conduct of primary actor Enron.
Plaintiffs’ Response (# 47)
Plaintiffs first complain that Deutsche Bank has attached over 400 pages of documents to its motion, some of which were never referenced in their complaint, others that are both repetitious and only tangentially related to their claims.
Collins,
224 F.3d at 498-99 , (approving view that “ ‘documents that a defendant attaches to a motion to dismiss are considered part of the pleadings if they are referred to in the plaintiffs complaint and are central to her claim.’ In so attaching, the defendant merely assists the plaintiff in establishing the basis of the suit, and the court in making the elementary determination of whether a claim has been stated.”). While
*542
Plaintiffs insist that they do not view the motion to dismiss as one for summary judgment, they submit a “few rebuttal exhibits” and ask that if the Court does not consider them, that it strike those submitted by Deutsche Bank. # 46 at 3.
Plaintiffs also ask the Court to consider an adverse-inference spoliation instruction because of “Deutsche Bank’s purposeful destruction of documents” related to this action, in which the bank’s primary relationship banker, Paul Cambridge, testified that he knowingly engaged. # 46 at 4; Ex. A (Deposition of Cambridge). The Court finds this request premature, as will be discussed.
Plaintiffs challenge Deutsche Bank’s primary defense, that it did not know its statements were false and deceptive. Plaintiffs quote from an email with an attached Powerpoint presentation, entitled “Whitewing Investment Proposal-Sarlux and Trakya Projects,” from the sellers of the Osprey Notes and Certificates, including Deutsche Bank, received by Doug Stark immediately before the closing of the Osprey Trust; it purports to weigh numerous risks and benefits in the Sarlux and Trakya projects to be invested in by Whitewing. # 47 at 5-7 and Ex. B at DBN 181426 and 181436. They maintain that the bank furthermore knew that there were significant prohibitions on equity transfer and changes in control of these assets which the bank did not disclose to Plaintiffs. # 33 at ¶¶ 67, 75, 133, 135, 137, 145.
36
They assert that Deutsche Bank had learned this concealed information more than one month before, around August 9, 1999, from due diligence that it had performed for a transaction known as Margaux (Ex. C). Margaux was never completed, but some of the same assets involved in it were shortly afterward sold to Plaintiffs in the Whitewing transaction. # 33 at ¶ 106. Plaintiffs argue that comparing what Deutsche Bank knew about Sarlux and Trakya (evidenced in their marketing materials) with what it told Plaintiffs exposes a consistent pattern of fraudulent omissions. # 33 at ¶ 106. Referencing Ex. C at DBK 0066905-6, DBK 0066906, and DBK 66905 and the Complaint (# 33) at ¶¶ 111, 81, 112-14, Plaintiffs argue that Deutsche Bank knew, but did not disclose, that its transfer of economic interest in Sarlux would require Sarlux board approval, that the Whitewing transaction would be prohibited because Enron could not reduce its shareholding below 25% during the first five years, and that the equity agreement, itself, stated that one “may not assign, transfer, novate or dispose of any of — or any interest in, their rights and/or obligations under the Equity Agreement.” Regarding Trakya, the bank’s statements were again contrary to what it knew at the time, i.e., that the Shareholders Agreement stated that “No shareholder shall make a Transfer of Its Shares to a third party without the unanimous consent of all Shareholders ...” (Ex. C at DBK 0066897), that as a result Enron “could not without the consent of other Shareholders pledge its ownership in Trakya to the bond holders”
{id.
at DBK 66898), that the shareholder agreements placed substantial restrictions on the transfer of subordinated debt (Ex. B at DBK 0066900), and that Trakya’s risk insurance on equity required Enron to “remain at all times the beneficial owner of the insured investments” so that selling the assets to Plaintiffs would give the insurer rights to terminate the insurance (Ex. C at DBN 181428 and DBK 0066901).
Arguing first for the application of Texas law to their claims, Plaintiffs reiterate
*543
that Houston, Texas was the hub of the alleged conspiracy to enable Enron to cook its books and perpetrate fraud upon Plaintiffs for the following reasons. It is where the scheme to defraud was hatched and executed. Deutsche Bank worked with Enron in its Houston headquarters in creating the Osprey/Whitewing structure and in devising numerous other transactions and SPEs for the conspiracy to defraud. The agreement, memorialized in a contract (Letter Agreement, Ex. E), between Enron and Deutsche Bank to enter into the Osprey/Whitewing, which designated the bank and any of its affiliates (“DBSI”) and DLJ to be Enron’s “exclusive agents” in addition to being an underwriter for the transaction, was conceived, planned, and consummated (signed) in Texas, as evidenced by the testimony of Mike Jakubik (Ex. E at 296-98). Therefore as an agent that makes fraudulent representations, uses duress, or knowingly assists in a tortious fraud or in duress by its principal or by others, Deutsche Bank is liable in tort to Plaintiffs even though the fraud occurs in a transaction on behalf of the principal.
Paxton v. Weaver,
553 F.2d 936, 939 (5th Cir.1977),
citing Restatement (Second) of Agency,
§ 348 (1958) (“An agent who fraudulently makes representations, uses duress, or knowingly assists in the commission of tortious fraud or duress by his principal or by others is subject to liability in tort to the injured person although the fraud or duress occurs in a transaction on behalf of the principal.”). Plaintiffs argue that they suffered injury when Enron, in Houston, executed its transfer of assets at far below fair value to the Osprey/Whitewing structure and later collapsed.
Plaintiffs ask the Court to defer ruling on the choice-of-law issue because the law of different states may apply to the various claims, and Deutsche Bank does not consider the possibility.
See LaBelle v. Brown & Williamson Tobacco Co. Ltd.,
1999 WL 33591435 , *13, 1999 U.S. Dist. LEXIS 21629 , *45 (D.S.C. Mar. 18, 1999) (opining where the court faced a motion to dismiss, “As the choice of law question remains unresolved for the time being, the court will reserve a ruling on this matter until such time as that question is resolved and the issue can be briefed more fully by the parties.”). The Court denies that request, noting that a plaintiff could not comply with
Twombly
pleading standards unless it identifies the applicable law and the essential elements under that law.
LaBelle
was decided long before
Twombly
and has no precedential value in the Fifth Circuit, as is true of many cases cited by Plaintiffs regarding pleading sufficiency for the various causes of action they assert. Moreover, the Court observes that Plaintiffs have had seven years, since 2003, to consider the question and by now should be prepared to support their claims regarding the applicable state law. So far the only state laws contemplated by the parties are either Texas or New York, so the Court will address the pleadings under them.
37
*544
Plaintiffs assert that the TSA is a broad remedial statute intended to protect both Texas residents and non-residents from fraudulent securities practices emanating from Texas.
In re Enron Corp. Sec., Derivative & “ERISA” Litig.,
235 F.Supp.2d 549, 691-92 (S.D.Tex.2002).
See also Rio Grande Oil Co. v. State,
539 S.W.2d 917, 921 (Tex.Civ.App.-Houston [1st Dist.] 1976, writ ref'd n.r.e.) (TSA applies if any act in the selling process of securities covered by the Act occurs in Texas);
Texas Cap. Sec., Inc. v. Sandefer,
58 S.W.3d 760, 776 (Tex.App.-Houston [1st Dist.] 2001, pet. ref'd). The TSA claims are in accord with Texas’ public policy for comprehensive security regulation. Plaintiffs urge that their TSA claims against Deutsche Bank should be allowed to proceed because of Texas’ strong public policy interests.
Plaintiffs also contend that because there is no significant difference between New York and Texas law for simple fraud and conspiracy to defraud claims, there is no conflict-of-law decision required.
While Deutsche Bank wants the Court to focus on each transaction separately, Plaintiffs emphasize that the transactions involving Osprey Trust were extremely complicated and were documented to conceal the fraud. The fraud involved two SPEs, Osprey Trust, which collected money from investors, and Whitewing, which purchased assets from Enron to aid Enron in cooking its books. Plaintiffs urge the Court to consider the totality of the documentation evidencing the whole scheme, which they claim makes evident that Texas has the most significant relationship with Plaintiffs’ claims.
All the claims brought under Texas law except for primary violation of the TSA have analogues in New York common law. Plaintiffs argue that Deutsche Bank “tacitly concedes” that if Texas law applies to the state-law claims, their TSA claims survive. They note that Deutsche Bank did not object to the sufficiency of their allegation that Deutsche Bank was a primary violator under the statute (a person who sells securities “by means of an untrue statement of material fact or an omission to state a material fact”), but only argued that New York law applied instead. Tex.Rev.Civ. Stat. Art. 581-33A. The TSA does not require a buyer to prove reliance on the sellers’s misrepresentation or omission, nor does it require proof of scienter or have a causation requirement.
Weatherly v. Deloitte & Touche,
905 S.W.2d 642, 648-49 (Tex.App.-Houston [14th Dist.] 1995, writ dism’d w.o.j.),
abrogated on other grounds, Tracker Marine LP v. Ogle,
108 S.W.3d 349 (Tex.App.-Houston [14th Dist.2003], no pet.);
Wood v. Combustion Engineering, Inc.,
643 F.2d 339, 345 (5th Cir.1981);
Busse v. Pacific Cattle Feeding Fund
#
1 Ltd.,
896 S.W.2d 807, 815 (Tex.App.-Texarkana 1995, writ denied);
Geodyne Energy Income Production Partnership v. The Newton Corp.,
97 S.W.3d 779, 783-85 (Tex.App.-Dallas 2003),
rev’d on other grounds,
161 S.W.3d 482 (Tex.2005). Plaintiffs maintain that they have adequately pleaded a primary violation of the TSA by Deutsche Bank: that Deutsche Bank was an underwriter and Enron’s agent for Osprey, that it allowed Enron to remove non-performing or poorly performing assets from its consolidated balance sheet, that it knew that Osprey was designed for such manipulation, and that Plaintiffs relied on Enron’s financial statements made false by Deutsche Bank’s aid to Enron’s fraud in deciding to purchase the Certificates. More specifically
*545
Plaintiffs have discussed the pamphlets authored and used by Deutsche Bank in offering and selling the Osprey Certificates, described communications with Deutsche Bank’s Seth Rubin, material misrepresentations by Deutsche Bank promising arm’s length negotiations and fair market value for the assets, and material omissions by Deutsche Bank.
Alternatively, if the Court finds that Deutsche Bank did not sell the Certificates, Plaintiffs assert that they have adequately alleged that in violation of article 581-33F(2) Deutsche Bank is secondarily liable for aiding Enron, which was the true offeror or issuer under the sham front of the Osprey/Whitewing structure. The only challenge raised by Deutsche Bank on this claim is that there was no primary violation by Enron. Plaintiffs maintain that in essence Enron was the issuer or seller of the Osprey securities because it created and controlled the Osprey/Whitewing structure as part of its scheme to defraud and that Enron made material false statements and omissions, as evidenced in guilty pleas and cooperation agreements of its former officers Richard Causey, Andrew Fastow, and Mark Koenig.
Alternatively, Plaintiffs insist they have adequately pleaded that Deutsche Bank was an aider and abettor under New York common law.
See, e.g., UniCredito Italiano SpA v. JPMorgan Chase Bank,
288 F.Supp.2d 485, 502 (S.D.N.Y.2003) (to state a claim for aiding and abetting fraud under New York common law a plaintiff must allege (1) the existence of an underlying fraud, (2) knowledge of this fraud on the part of the aider and abettor, and (3) substantial assistance by the aider and abettor in achieving the fraud). Substantial assistance exists when a defendant affirmatively assists, helps conceal, or enables the fraud to proceed by failing to act when required to do so, and the aider’s actions proximately cause the harm on which the primary liability is predicated.
Id.
Plaintiff argue they have met the requirements, citing # 33 at ¶ 165-67, 169-72, 175-76, 409-549. They claim they have raised a strong inference of scienter by alleging facts showing motive (high fees and commissions) and a clear opportunity to participate in Enron’s fraudulent scheme and by identifying specific circumstances indicating conscious misbehavior (tax transactions, Marlin, Osprey, LJM2, and Deutsche Bank’s failure to disclose Enron’s misstated financials). They maintain they do not need to allege scienter as to a particular analyst because Deutsche Bank used its analysts as conduits
38
through which the fraudulent scheme could be continued. They have alleged that Deutsche Bank affirmatively aided Enron’s fraud by assistance in a wide array of detailed transactions with Enron-related entities that proximately
*546
caused Plaintiffs’ injuries, and that Deutsche Bank clearly knew of the fraud. Even Plaintiffs’ allegations of scienter demonstrate the bank’s aid to Enron.
ABF Cap. Management v. Askin Capital Management, LP,
957 F.Supp. 1308, 1330 (S.D.N.Y.1997) (“[Ejven silence or inaction that is designed to aid a primary fraud particularly where there is heightened economic motivation to do so may constitute substantial assistance.”). Plaintiffs contend they have satisfied the element of proximate cause by alleging that the injury was a foreseeable consequence of Deutsche Bank’s misrepresentations or omissions.
39
Plaintiffs purchased their Osprey Certificates based on information that Deutsche Bank knew was false. Because of these falsified financials, the excessively priced assets to be purchased with Osprey Trust funds, and Deutsche Bank’s knowledge of Enron’s actual financial condition, Deutsche Bank could reasonably foresee that Plaintiffs would be harmed. Furthermore causation can be adequately pleaded by affirmation that no investment would have been made if the Plaintiffs had known the investment was based on fraudulent financials.
Fidelity Funding of Cal., Inc. v. Reinhold,
79 F.Supp.2d 110, 122 (E.D.N.Y.1997).
40
Plaintiffs urge the Court that since they have settled with all the other Defendants, the Court should consider all references to “Defendants” to refer specifically to Deutsche Bank, or grant them leave to amend to specify that party.
Common-Law Fraud
In response to Deutsche Bank’s contention that Plaintiffs failed to plead common law fraud
41
under the nearly identical standards of Texas and New York common law (misstatements, scienter, reliance, and a duty to disclose), Plaintiffs argue that allegations of direct and circumstantial evidence meet the pleading requirements. Under New York law, for the element of a material misrepresentation, “some statements, although literally accurate, can become, through their context and manner of presentation, devices which mislead investors.”
McMahan & Co. v. Wherehouse Entertainment, Inc.,
*547
900 F.2d 576, 579 (2d Cir.1990). The real question is does the statement mislead investors or potential investors?
Fogarazzo v. Lehman Bros.,
341 F.Supp.2d 274, 294 (S.D.N.Y.2004) (technically accurate statement can be actionable when material omission renders it a “half-truth”). Under Texas law, a duty to disclose may occur outside of a confidential or fiduciary relationship “in at least three other contexts. When one voluntarily discloses information, he has a duty to disclose the whole truth. When one makes a representation, he has a duty to disclose new information when he is aware the new information makes the earlier representation misleading or untrue. Finally, when one makes a partial disclosure and conveys a false impression.”
Hendricks v. Grant Thornton,
973 S.W.2d 348, 363 (Tex.App.-Beaumont 1998, pet. denied) (citations omitted).
See also Jana L. v. West 129th St. Realty Corp.,
22 A.D.3d 274, 277 , 802 N.Y.S.2d 132 (N.Y.A.D. 1 Dept.2005) (where the complaint is based on fraudulent concealment, “[a]bsent a fiduciary relationship between the parties, a duty to disclose arises only under the ‘special facts doctrine, where one party’s superior knowledge of the essential facts renders a transaction without disclosure inherently unfair.”). Thus under both New York and Texas common law fraud, deceptive half-truths or technically correct partial disclosures that convey a false impression are actionable.
Plaintiffs insist that as lead underwriter for the Osprey offerings, Deutsche Bank had an obligation to perform due diligence and assure that representations about the offering were accurate, maintain Plaintiffs. Plaintiffs claim they relied upon the OM and the presentation pamphlet listing Deutsche Bank as an author of these documents and on statements made by Deutsche Bank and CSFB representatives in the OM about how the Osprey Trust/Whitewing SPE would function. Although Deutsche Bank argues that the OM expressly related only to the Notes and not to the Certificates, Plaintiffs assert that the OM was used by Deutsche Bank as a sales tool to sell the Certificates, that the OM was given to them as the only information available about how the Osprey Trust would operate, and that Plaintiffs were expressly assured by Deutsche Bank that the description was accurate. Plaintiffs claim that instead of a blind pool as promised, several of the Osprey/Whitewing transactions had been planned long before the offering closed and that Deutsche Bank knew all about them. “[A] statement concerning a future act which is made with the knowledge or intention that the act would not occur ... is deemed a statement of ‘a material existing fact sufficient to support a fraud action.’ ”
Chase Manhattan Bank, N.A. v. Perla,
65 A.D.2d 207, 210 , 411 N.Y.S.2d 66, 68 (N.Y.App.Div.1978) (citations omitted). Plaintiffs have alleged that the promotional pamphlet and the OM, drafted by Deutsche Bank when it knew the representation was false, promised the negotiations between Whitewing and Enron to purchase Enron’s assets would be similar to a third-party, arm’s length purchase and sale, while Plaintiffs’ representative, Doug Stark, made clear that the value of the Whitewing collateral was material to Plaintiffs when he spoke to Seth Rubin. The OM falsely characterized the Osprey investment as a blind pool when two significant investments had been identified for purchase and it failed to describe the planned purchases in reasonable detail, including financial data. For example, the terms of the purchases of Sarlux and Trakya by Whitewing, which were excessive given the severe transfer restrictions and call-rights on and known non-marketability (because of Enron’s Margaux transaction) of these assets, were known to Deutsche Bank, but not disclosed by Seth Rubin to Doug Stark, before the closing of the Osprey
*548
offering, but the bank intentionally failed to “correct” its partial disclosures and thereby altered the total mix of information needed for investors to make an informed decision whether to invest. Deutsche Bank also knew that Whitewing paid more than $30 million over the market value for Promigas, which closed shortly after the Osprey I closing. All these transfers, about which Deutsche Bank withheld critical information, were designed to allow Enron to fake earnings on its financial reports. Deutsche Bank also misrepresented that the Osprey Indentured Trustee had the ability to sell and liquidate the Whitewing assets upon occurrence of certain trigger events, that $578 million of the Trust proceeds would be used “to redeem an equity interest of an unaffiliated equity investor in Whitewing,” i.e., underwriter Citigroup, but whose identity Deutsche Bank failed to disclose even though it knew of Citigroup’s plan to use the Osprey/Whitewing structure to reduce its own exposure to Enron. While Enron made the misrepresentations in its financial statements, Deutsche Bank’s knowledge that they were falsified makes its silence actionable.
As for Deutsche Bank’s scienter, Plaintiffs argue that the only explanation for its numerous false statements, half truths, and material omissions is fraudulent intent to induce Plaintiffs into purchasing Osprey Trust Certificates. Furthermore, the larger scheme and conspiracy between Deutsche Bank and Enron also supports an inference of scienter. The tremendous fees paid to Deutsche Bank for its actions on behalf of Enron were an incentive to do whatever was necessary to keep Enron happy.
As for reasonable reliance, Plaintiffs argue that Deutsche Bank’s opposition is largely based on the Complaint’s use of “Defendants,” instead of naming Deutsche Bank. They again ask the Court to either consider the generic term to refer to Deutsche Bank or to let them replead. Furthermore, they argue that at minimum they have raised a fact issue as to whether Plaintiffs’ reliance was reasonable. Despite the OM’s statement that it is not offering the Osprey Certificates, as noted earlier, the OM was used by Deutsche Bank as a sales tool to sell the Certificates, and that (1) the OM was given to them as the only information available about how the Osprey Trust would operate, and (2) Plaintiffs were expressly assured by Deutsche Bank that the description was accurate. The OM was one of two documents provided by Deutsche Bank to Plaintiffs about the investment, and Deutsche Bank does not claim that then-reliance on the presentation pamphlets was unreasonable. Deutsche Bank also notes that the representation that prices and other terms would be conducted in arm’s length negotiations was qualified by the statement, “but there can be no assurance that such prices and other terms will reflect those that would be agreed upon by unaffiliated third parties.” Motion at 28. Plaintiffs complain that Deutsche Bank is taking the phrase out of context, that it knew from the beginning that there would be no arm’s length deals and that all of the terms and prices would be fraudulently set. Although Deutsche Bank urges that Plaintiffs could have obtained more information and better terms, Plaintiffs argue that the securities were offered and sold on a ‘take-it-or-leave-it’ basis, the terms of placement were not and could not be negotiated, and the only information available at the time was in the OM, the pamphlets, and the email from CSFB and Deutsche Bank (documents authored or sponsored by Deutsche Bank after purportedly performing due diligence).
Conspiracy to Defraud
Deutsche Bank has argued that the conspiracy-to-defraud claim under
*549
either Texas or New York law
42
fails because Plaintiffs did not adequately plead Deutsche Bank’s knowledge of the fraud and/or an agreement between Deutsche Bank and Enron. The former has been discussed previously. Plaintiffs assert the agreement or meeting of the minds between Deutsche Bank and Enron was to falsify Enron’s financial records and illegally file these statements with the SEC, as well as to withhold material information about the Osprey TrusVWhitewing assets from potential investors to whom Deutsche Bank, as Enron’s agent, was marketing the Certificates. The object of the co-conspirators was to help each other make a lot of money by allowing and approving improper transactions and disseminating false financial information in filings with the SEC in violation of securities laws. Plaintiffs contend that Deutsche Bank worked hard to conceal its agreement to conspire with Enron by downplaying its involvement in Enron’s fraudulent transactions and failing to disclose its knowledge of Enron’s true financial condition. They reiterate that they are entitled to an instruction on spoliation because of Deutsche Bank’s practice of destroying documentation demonstrating or relating to the agreement between Deutsche Bank and Enron to conspire. Ex. C., Deposition of Paul Cambridge at 388-89;
Trevino v. Ortega,
969 S.W.2d 950, 953 (Tex.1998). Plaintiffs have described overt acts, such as devising and implementing a number of tax transactions and identifying the significant financial impact they had on Enron’s books, the collusion of Enron and Deutsche Bank in the tax accommodation transactions, and the fraud accomplished through the Marlin transactions and participation in LJM2. Deutsche Bank’s intent to mislead investors can be inferred from its efforts to reduce its exposure to Enron at the same time its analysts were disseminating untrue reports and buy recommendations for Enron, which it failed to disclose.
Barrie v. Intervoice-Brite, Inc.,
397 F.3d 249 ,
modified and reh’g denied,
409 F.3d 653 (5th Cir.2005) (where one defendant knew that the statement of another was false, but the first defendant remained silent, both defendants were liable).
43
*550
Where particular agent-analysts do not have scienter for misrepresentations, but the defendant knowingly allows its analysts to use fraudulent financial information as the basis of analyst reports as part of a larger fraudulent scheme, the defendant, who has a duty to disclose, is liable to the investor who relied on those misrepresentations.
Quaak v. Dexia, S.A.,
445 F.Supp.2d 130 (D.Mass.2006)
44
Concerted Action
In addition, because Deutsche Bank did not address Plaintiffs’ claim that Deutsche Bank and Enron engaged in concerted action to defraud Plaintiffs under New York law, Plaintiffs insist that the concerted action claim, too, survives.
Sections 12(a)(2) and 15 of the Securities Act of 1933
Plaintiffs insist the express words of Section 12(a)(2) create liability for a party that offers or sells a security by means of a prospectus
“or oral communication, which ... omits to state a material fact in order to make the statements, in light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission).”
Here oral communications omitting material facts about the risks of the assets in the Osprey securities transaction were made to Plaintiffs to induce them to purchase their Certificates, including Seth Rubin’s
45
communications with Douglas Stark, an employee of Plaintiffs at the time. Plaintiffs also argue that
Gustafson,
513 U.S. at 567-68 , 115 S.Ct. 1061 , and its progeny have been misread. The issue in
Gustafson ,
which dealt with a secondary offering, was how to define the term “prospectus” in § 12(a)(2), and does not address “oral communication.” The Supreme Court did not hold that “oral communication” means that the oral communication is restricted to communications relating to a prospectus, but only stated that the Third and Seventh Circuit Courts of Appeals have so held.
46
513 U.S. at 567-68 , 115 S.Ct. 1061 (observing that the Third and Seventh Circuits “agree that
*551
the phrase ‘oral communication’ is restricted to oral communications that relate to a prospectus”). Plaintiffs also point out that
Chistafson
Court misstated the words of the
Ballay
panel, 925 F.2d at 688, which actually wrote,
We agree with both parties that the words “prospectus or oral communication” must be construed as related terms. We are persuaded that the plain meaning of the words “prospectus or oral communication” together is that buyers may recover for material misrepresentations made in a prospectus or in an oral communication related to a prospectus
or initial offering
[emphasis added].
The issue before the
Ballay
panel was whether § 12(a)(2) related to a secondary market purchase and it concluded that the statute did not. Plaintiffs emphasize that them claims relate to an initial offering, which they argue, under
Ballay,
may properly be brought under § 12(a)(2).
As for Deutsche Bank’s citation to
Lewis v. Fresne,
252 F.3d 352, 357 (5th Cir.2001) (and progeny), Plaintiffs argue that
Fresne
overextended
Gustafson
beyond the reach of the Supreme Court’s narrow holding, which did not address oral communications relating to initial offerings, but instead a “prospectus” in secondary offerings under § 12(a)(2), to conclude that section 12 does not apply to private transactions.
Alternatively, Plaintiffs contend that the Osprey integrated offering of notes and certificates does not qualify for an exemption from the registration requirements of the 1933 Act. The statute was designed to protect investors by promoting full disclosure of information thought necessary for an informed investment decision.
SEC v. Ralston Purina,
346 U.S. 119, 124-25 , 73 S.Ct. 981 , 97 L.Ed. 1494 (1953). In
Ralston Purina ,
the Supreme Court held that the issuer, here Deutsche Bank, bears the burden of proving that the exemption from registration requirements applies.
Id.
at 119 , 73 S.Ct. 981 . That protection is based more on access to information than a party’s sophistication and wealth. Where a party has no ability to obtain the vital, material information about the investment, the exemption should not apply.
Carroll v. First Nat’l Bank,
413 F.2d 353, 357 (7th Cir.1969);
Banca Cremi v. Alex. Brown,
955 F.Supp. 499, 516 (D.C.Md.1997) (“[T]he Securities Exchange Act is not intended to provide protection only for uninformed or unsophisticated investors ... as ‘fraud may also be perpetrated upon the powerful and sophisticated.’ ”). “But once it is seen that the exemption question turns on the knowledge of the offerees, the issuer’s motives, laudable though they may be, fade into irrelevance.”
Ralston Purina,
346 U.S. at 119 , 73 S.Ct. 981 .
47
Deutsche Bank’s success in getting Plaintiffs to sign acknowledgments that they are sophisticated, accredited investors does not mean that such status gave them access to the material information that Deutsche Bank intentionally concealed from them.
48
Deutsche Bank is liable for
*552
material omissions it made in its oral communications to Plaintiffs, they contend.
Statute of Limitations
Finally to Deutsche Bank’s argument that Plaintiffs’ first purchase of the Osprey Certificates in 1999 is barred by limitations, Plaintiffs respond that this Court has not decided whether the Sarbanes-Oxley Act, 28 U.S.C. § 1658 (b), extends the applicable limitations period to § 12(a)(2) claims grounded in fraud.
Cf. In re Enron Corp. Sec., Derivative & “ERISA” Litig.,
465 F.Supp.2d 687 , 711 n. 33 (S.D.Tex.2006) (“Thus the new Sarbanes Oxley statute of limitations does not apply to non-fraud-based actions under § 11 and 12(a)(2) of the 1933 Act.”). Regardless, they maintain that they state a timely and cognizable claim under the § 12(a)(2) for their second purchase in 2000, and Deutsche Bank agrees.
Deutsche Bank’s Reply (# 48)
Generic “Defendants”
Regarding their use of the general term “Defendants,” Plaintiffs request that the Court consider each generic reference to be to Deutsche Bank since all other Defendants have settled. Deutsche Bank objects that Plaintiffs must present only factual allegations that have evidentiary support and must link Deutsche Bank to each individual act or statement.
Exhibits
Second, argues Deutsche Bank, Plaintiffs pretend that the documents attached to their response are for “rebuttal” of the Osprey transaction documents that Deutsche Bank offered with its motion. Deutsche Bank maintains that these attachments cannot be used to amend their poorly pleaded complaint nor do they rebut or even relate to any of the transaction documents that are central allegations or provide support for any of Plaintiffs’ claims. The bank points to Exs. B and C to the Response, which Plaintiffs claim show that the bank misrepresented the nature of the risks associated with Whitewing investment in Sarlux and Trakya. The bank argues that these documents were available to Plaintiffs long before they filed their Second amended Complaint, but more importantly they are irrelevant: they do not identify any misrepresentations by Deutsche Bank nor support elements of Plaintiffs’s claims. The same is true of the other “rebuttal” exhibits. Those exhibits that were provided by Deutsche Bank, in contrast, are documents that are relied on, referred to, or quoted from in the Second Amended Complaint and all but the tax opinion letters govern or provide restrictions about the Osprey Certificate purchases.
After examining these documents, the Court agrees with Deutsche Bank’s arguments.
New Allegations of Fraudulent Inducement
Objecting to Plaintiffs’ new contention that Deutsche Bank fraudulently induced them to sign an acknowledgment in their Certificate Purchase Agreements that they are sophisticated accredited investors, Plaintiffs provide no support for this claim. Plaintiffs have not challenged their own express representations in the same transaction documents that they had access to
*553
necessary information in making their investment decisions and that the Osprey documents were all to their and their attorneys’ satisfaction at the time of the closing.
Amendment Futile
In summary, instead of addressing the pleading defects raised by Deutsche Bank, Plaintiffs avoid or try to redraft the complaint’s allegations and misstate the controlling law on various points. Their pleading defects cannot be cured by further amendment, insists the bank.
Section 12(a)(2) Claims
The bank reiterates that the § 12(a)(2) claims must be dismissed because Plaintiffs do not allege that they purchased their Certificates pursuant to a “prospectus.”
Gustafson,
513 U.S. 561 , 115 S.Ct. 1061 ;
see also Waltree Ltd. v. ING Furman Selz LLC,
97 F.Supp.2d 464, 470 (S.D.N.Y.2000). Despite the statutory language regarding offers made by “oral communication,” the Supreme Court has clearly held that this phrase “is restricted to oral communications that relate to a prospectus.” 513 U.S. at 567-68 , 115 S.Ct. 1061 . Numerous courts have followed this binding Supreme Court precedent.
See, e.g., Yung v. Lee,
432 F.3d 142 , 148 n. 5 (2d Cir.2005). Contrary to Plaintiffs’ argument, the Third Circuit Court of Appeals in
Ballay
also narrowly interpreted § 12(a)(2): “We deduce no evidence that Congress intended an expansive meaning of oral communication unconnected to the term ‘prospectus.’ ” 925 F.2d at 688. Furthermore the United State Supreme Court in
Gustafson
held that a “prospectus” refers to a document soliciting the public to purchase securities, and § 12(a)(2) applies only to public offerings. 513 U.S. at 574, 577-78 , 115 S.Ct. 1061 . Because the Osprey Certificates were privately placed, the § 12(a)(2) claims fail.
Gustafson,
513 U.S. at 582 , 115 S.Ct. 1061 (section 12(a)(2) does not relate to private sales or secondary offerings)
49
;
Fresne,
252 F.3d at 357-58 .
See also Holland v. GEXA Corp.,
161 Fed.Appx. 364, 366 (5th Cir.2005);
Yung v. Lee,
432 F.3d at 148 ;
Joseph v. Wiles,
223 F.3d 1155, 1161 (10th Cir.2000);
Maldonado v. Dominguez,
137 F.3d 1, 8 (1st Cir.1998).
Choice of Law Determination
The bank argues that, and this Court has ruled, choice-of-law determinations can be made at a motion-to-dismiss stage of the litigation.
King v. Douglass,
973 F.Supp. 707, 723-24 (S.D.Tex.1996).
Deutsche Bank agrees with Plaintiffs that New York and Texas common-law for fraud and civil conspiracy do not differ significantly. The Court finds no conflict.
Regarding Plaintiffs’ TSA claims, the parties also agree that there is a conflict between New York and Texas law and that if New York applies here, the TSA claims are precluded.
Greenberg Traurig,
161 S.W.3d at 75-76 . Even without that determination, however, Deutsche Bank maintains that the TSA does not apply because it does not extend to misrepresentations in
*554
New York by non-Texas sellers or offerors to New York Plaintiffs where no step of the allegedly misleading sale occurred in Texas. As argued previously, Plaintiffs have not pleaded any facts that could make Enron a party to, or a primary violator in, these TSA claims based on their purchase of Osprey Securities from the seller Osprey, a Delaware entity. Plaintiffs concede that the primary violation conduct occurred in New York, but that they can invoke the TSA for both a primary and an aiding and abetting claim against Deutsche Bank because some unspecified aiding activity by Deutsche Bank may have occurred in Texas. The bank argues that the idea that Texas can regulate the primary violation based on some subset of aiding activity, but not any misrepresentations in the security sale, is not plausible. In contrast, Deutsche Bank has shown that when the test factors of the
Restatement (Second) of Conflict of Laws
§ 148(1), as well as of § 145(2) for tort claims, are applied, Plaintiffs’ claims based on misrepresentations relating to their Certificate purchases are governed by New York law for claims of fraud and misrepresentation. Plaintiffs do not address either of these sections, no less analyze these factors to determine the applicable law. Furthermore § 148(1), governing misrepresentation cases, requires the Court to apply New York law because Plaintiffs allege that the misrepresentations were made, received, and acted on in New York and Plaintiffs, who are New York-based institutional investors and/or investment managers, suffered their pecuniary losses in that state. It is not the global scheme they assert, but the specific Osprey Certifícate purchases and TSA claims that must be the focus of the analysis. Plaintiffs attempt to obscure these facts by submitting an extra-complaint advisory services engagement letter signed in Houston (Response, Exs. D, E) when the specific acts of misrepresentations and the injuries alleged took place in New York. Furthermore, the documents and testimony by Mike Jakubik about the engagement letter do not involve the offerings on which Plaintiffs sue, but concern Osprey III in October 2000. Moreover, no Texas public policy interests are involved in a case with no alleged Texas actor or Texas selling activities that are redressable under the TSA.
The secondary aider claim under the TSA fails because it depends on Enron as the primary violator, which it cannot be because (1) Enron was not the seller or offeror of the Osprey certificates, (2) there are no allegations that Enron was involved in the selling process, and (8) there are no allegations that Plaintiffs purchased their Certificates from Enron. Osprey Trust issued the Certificates, as reflected in the sales documents. Plaintiff fails to provide factual support for its assertion that Osprey Trust was a sham front for Enron, so its existence should be disregarded and Enron should be viewed as the true offeror or issuer of the Certificates.
Common Law Fraud
Deutsche Bank reiterates that Plaintiffs have failed to plead common law fraud with the requisite particularity. They fail to identify any misrepresentations or demonstrate scienter. They do not allege that Deutsche Bank drafted, directed the drafting of, or played any role in compiling Enron’s financial statements. When they argue that the bank misrepresented the ability of the Osprey Indentured Trustee to cause the sale and liquidation of Whitewing upon a triggering event, they cite to ¶ 97 of the Complaint; that paragraph makes no mention of the Osprey indenture trustee and merely alleges that Douglas Stark remembered that Seth Rubin was involved in the presentation of Osprey I material, but does not identify anything he
*555
said.
50
Plaintiffs now allege (Response at 29 n. 6) that they were “expressly assured by Deutsche personnel,” none of whom is identified, that the description in the OM of the functioning of Osprey Trust and Whitewing was accurate and cite ¶¶ 47, 50, and 62-66 of the Complaint; none of these paragraphs refers to Deutsche Bank.
See Southland Sec. Corp. v. INSpire Ins. Sol., Inc.,
365 F.3d 353 , 365 (5th Cir.2004) (rejecting group pleading doctrine and requiring a complaint to specify which document or portion or statement therein is attributable to each individual defendant). Moreover, insists the bank, since Plaintiffs have failed to particularize their pleadings, even if the Court allowed Plaintiffs to substitute Deutsche Bank for all the references to “Defendants,” that modification would not cure all these deficiencies. The Court agrees with these objections.
Deutsche Bank further objects that Plaintiffs assert new, extra-complaint allegations that Deutsche Bank misrepresented the risks associated with Sarlux and Trakya assets, which Whitewing ultimately purchased from Enron. Deutsche Bank emphasizes that Plaintiffs cannot “amend” their complaint through responsive pleading. In addition, these new arguments rely on a falsehood that Deutsche Bank and other sellers sent Plaintiffs’ representative Douglas Stark an email with a PowerPoint presentation entitled “Whitewing Investment Proposal-Sarlux and Trakya Projects.” Response at 5 and 31 & Ex. B. Deutsche Bank contends that the document on its face indicates that it did not come from anyone at Deutsche Bank, but from someone at DLJ, now Credit Suisse, to various people including Stark and Deutsche Bank. Furthermore it is a Whitewing investment proposal; Enron and Whitewing were the parties to these asset purchases, with the Osprey Certificate-holders having a right of consent, and Deutsche Bank was not a “seller” in any of the transactions. Nor do Plaintiffs provide any factual support demonstrating that Deutsche Bank possessed the information that would make the information in the email misleading. Although Plaintiffs’ Response at 7-9 points to Exhibit C as a document indicating that Deutsche Bank knew of risks regarding Sarlux and Trakya because of the due diligence it performed for the Margaux transaction, Deutsche Bank insists Exhibit C reflects that it was not authored by or sent to anyone at Deutsche Bank. Plaintiffs appear to claim that the bank knew of the information in Exhibit C because Mike Jakubik, who at other times worked at BT/Deutsche Bank, is listed as copied on the document, but Jakubik was at Enron in August 1991 and did not join Deutsche Bank until August 2000. Ex. 1 to # 48, Jakubik Dep. Tr. at 287:9-16.
Regarding scienter, Plaintiffs also fail to allege the necessary factual detail to support an inference of scienter.
Giant Group, Ltd. v. Arthur Andersen, LLP,
2 A.D.3d 189 , 770 N.Y.S.2d 291, 292 (2003);
Johnson & Higgins of Texas, Inc. v. Kenneco Energy, Inc.,
962 S.W.2d 507, 526-27 (Tex.1998). Where the fraud is alleged against a corporate defendant, the plaintiff must allege that the individual corporate officer making the statement had the requisite level of knowledge and intent.
Southland Securities,
365 F.3d at 366. Instead of meeting this requirement, Plaintiffs improperly urge the Court to infer scienter on the grounds there can be no other plausible explanation for the bank’s false statements, half truths and material omissions. Their other suggestion based on the fees earned by Deutsche Bank fails in light of the overwhelming authority discounting such a motive because every rational economic actor desires to earn more.
*556
Ellison v. Am. Image Motor Co.,
36 F.Supp.2d 628, 639-40 (S.D.N.Y.1999);
THC Holdings Corp. v. Chinn,
No. 95 Civ. 4422(KMW), 1998 WL 50202 , at *9 (S.D.N.Y. Feb. 6, 1998).
Plaintiffs also fail to plead specific facts demonstrating reasonable reliance on specific misrepresentations.
In re Enron Corp. Sec., Derivative & “ERISA” Litig.,
284 F.Supp.2d 511, 644 (S.D.Tex.2003);
Hernandez v. Ciba-Geigy Corp. USA
200 F.R.D. 285, 293 (S.D.Tex.2001) (dismissing complaint pursuant to Rule 9(b) where plaintiffs failed to allege that the misstatements were read). Deutsche Bank points out that Plaintiffs were separately represented by counsel and approved the terms of, and all transaction documents for, the Osprey financing, and their Certificate purchases were expressly conditi

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/2476672. Public record. Not legal advice.