In what may have been the final blow to plaintiffs’ attempt to hold several investment banks liable for their involvement in the Enron scandal, the United States District Court for the Southern District of Texas granted summary judgment in favor of the investment banks after several years of litigation. In re Enron Corp. Sec., Derivative & “ERISA” Litig., No. H-01-3624, 2009 WL 565512 (S.D. Tex. Mar. 5, 2009). The court’s decision relied in large part upon the Fifth Circuit’s reversal of the court’s previous grant of class certification to plaintiffs, Regents of University of California v. Credit Suisse First Boston (USA), 582 F.3d 372 (5th Cir. 2007), as well as the Supreme Court’s decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, 128 S. Ct. 761 (2008). Ultimately, the court concluded that those decisions precluded liability as a matter of law against the secondary actor investment banks. Enron, 2009 WL 565512, at *1.
The plaintiffs’ original theory was that the investment bank defendants had entered into partnerships and transactions that allowed Enron to take liabilities off of its books and to record revenues when it was actually incurring debt. Id. at *2. Plaintiffs alleged that these transactions were part of a long-term scheme to defraud investors. Id. In reversing the district court’s certification of the proposed class, however, the Fifth Circuit found that the banks owed no duty of disclosure to Enron’s shareholders and were, at most, aiders and abettors of Enron’s fraud. Id. at *3. Thus, because there was no duty of disclosure, the district court had erred in applying the Affiliated Ute presumption of reliance, which applies in cases alleging omissions as opposed to misrepresentations. Id. at *4.
In addition, the Supreme Court’s Stoneridge decision, which was issued after the Fifth Circuit ruled, expressly rejected the same theory of “scheme liability” that had been employed by plaintiffs against the investment banks. The Stoneridge plaintiffs had attempted to hold two equipment suppliers of Charter Communications, Inc. liable for their alleged participation in a scheme to defraud Charter’s investors, even though the suppliers had made no statements to the investors and owed them no duty of disclosure. The Supreme Court held that the plaintiffs could not prove reliance because the suppliers’ “[alleged] deceptive acts, which were not disclosed to the investing public, [were] too remote to satisfy the requirement of reliance.” Stoneridge, 128 S. Ct. at 770.
In response to these decisions, plaintiffs in Enron still insisted that their case was an omissions case for which the Affiliated Ute presumption should apply. Enron, 2009 WL 565512, at *10. To counter the holdings in Regents and Stoneridge, plaintiffs attempted to rely upon a scarcely used multifactor test for determining the existence of a duty even in the absence of a fiduciary or confidential relationship. Id. at *25 (citing First Virginia Bankshares v. Benson, 559 F.2d 1307, 1314 (5th Cir.1977)).
As a threshold matter, however, the court had to determine whether plaintiffs were barred under “the mandate rule” from further litigation regarding whether the investment banks had a duty to disclose. Id. at *23. The mandate rule is a specific application of the “law of the case” doctrine, which “compels compliance on remand with the dictates of a superior court and forecloses relitigation of issues expressly or impliedly decided by the appellate court.” Id. at *8 (quoting United States v. Lee, 358 F.3d 315, 321 (5th Cir. 2004) (internal quotation marks omitted). Because the Fifth Circuit had concluded in Regents that the investment banks owed no disclosure duty to Enron’s shareholders, the investment banks asserted that the plaintiffs could not relitigate the issue on remand, even under this new theory.
The district court agreed, holding that the mandate rule barred relitigation of the question of whether the investment banks had a duty to disclose, which had been squarely addressed by the Fifth Circuit, and that none of the exceptions to the mandate rule applied here. Id. at *24. The court also rejected plaintiffs’ contention that the mandate rule did not apply because the Fifth Circuit erroneously considered matters that were beyond the scope of the class certification issues on appeal. The Fifth Circuit had addressed the disclosure duty issue because the “necessity of establishing a classwide presumption of reliance in securities class actions makes substantial merits review on a Rule 23(f) appeal inevitable.” Id. at *22. Thus, the Fifth Circuit’s consideration of the duty issue was appropriate and its prior ruling that no duty existed meant that plaintiffs were not entitled to invoke the Affiliated Ute presumption of reliance for purposes of attempting to fend off summary judgment. Id.
The district court held in the alternative that the plaintiffs’ revised theory would also fail to create a genuine issue of material fact regarding a duty to disclose or presumption of reliance. Id. at *25. Plaintiffs’ new theory relied upon the Virginia Bankshares “flexible duty” test, created by the Fifth Circuit in 1977, which held that, even in the absence of a fiduciary or confidential relationship, a court may find a duty to speak based on its consideration of: (1) the relationship between the parties; (2) the parties’ relative access to the information to be disclosed; (3) the benefit derived by the defendant from the purchase or sale; (4) the defendant’s awareness of plaintiff’s reliance on defendant in making its investment decisions; and (5) defendant’s role in initiating the purchase or sale. Id. at *26 (citing Virginia Bankshares, 559 F.2d at 1314).
The district court determined, however, that the flexible duty test was no longer viable since the Supreme Court has “published key decisions that implicitly and severely restrict, if not render obsolete, the flexible multifactor approach to finding a duty outside of a fiduciary or quasi-fiduciary confidential relationship.” Id. Most notably, the Supreme Court’s decision in Chiarella v. United States established, in the insider trading context, that there was no duty to disclose absent a fiduciary or other similar relation of trust between the parties. Id. (citing Chiarella v. United States, 445 U.S. 222, 228 (1980)). Thus, the court held that plaintiffs’ revised theory could not establish a duty to disclose on the part of the investment banks, even if the mandate rule did not apply. The district court also summarily rejected other similar arguments that the investment banks were: (1) “constructive fiduciaries”; (2) subject to the duty to disclose under the insider-trading “disclose or abstain” rule; (3) required to disclose certain information under Regulation S-K; (4) subject to a requirement of disclosure as underwriters, and (5) otherwise liable for market-related activities. Id. at *31-*33.
The district court further held that, in any event, plaintiffs’ modified theory would require an amendment of its complaint for which leave had not been sought pursuant to Federal Rules of Civil Procedure 15(a)(2) and 16(b)(4). Id. at *33-*34. Pursuant to Rule 16, the court held that plaintiffs could not demonstrate good cause for an amendment, and allowing an amendment at this stage would involve “reopening discovery in this massive multidistrict litigation, not to mention the extended litigation likely to follow.” Id. at *34. Moreover, even under Rule 15(a)’s more lenient standard, the court determined that it would deny leave to amend based on undue delay and the futility of any such amendment in light of Regents and Stoneridge. Id. at *35-*36.
The district court’s decision likely puts to an end the plaintiffs’ protracted attempt to hold liable the investment bank previously affiliated with Enron. Given the enormous potential damages in the case, the district court’s decision may be appealed to the Fifth Circuit. However, given the district court’s thorough and comprehensive analysis and recent controlling precedent from the Supreme Court, the plaintiffs would appear to have little chance of success on appeal.