Alston & Bird (“A&B”) obtained a dismissal with prejudice in a recent case of great significance to an industry plagued by a wave of class action filings. See In re Mirant Corp. Sec. Litig., No. 1:02-CV-1467-RWS, 2009 WL 48188 (N.D. Ga. Jan. 7, 2009). Shortly after Enron filed for bankruptcy and internal Enron memos describing that company’s trading practices were released, plaintiffs filed a securities fraud class action against Mirant Corporation, a competitive provider of electricity and energy-related products, and certain of its officers and directors. Plaintiffs tried to exploit the stigma associated with allegations of Enron-type energy trading and relied heavily on guilt-by-association allegations to plead their claims. Recently, however, the U.S. District Court for the Northern District of Georgia held that such allegations were insufficient to state a claim for violation of the federal securities laws and dismissed the case in its entirety with prejudice.  

Plaintiffs’ primary claims were for alleged violations of (i) Section 11 of the Securities Act of 1933 against Mirant’s officers, directors, and the companies that underwrote Mirant’s September 2000 initial public offering and (ii) Section 10(b) of the Securities Exchange Act of 1934 against Mirant’s officers. Id. at *9-*10. Initially, A&B represented Mirant as well as certain directors and/or officers. Mirant was dismissed from the case by virtue of its Chapter 11 bankruptcy proceeding, and A&B continued to represent the individual defendants.

At the heart of plaintiffs’ Section 11 and Section 10(b) claims was the allegation that defendants violated the federal securities laws by failing to disclose that Mirant engaged in purported illegal energy trading. Id. at *17. A complaint alleging the nondisclosure of an illegal scheme is “fatally flawed” if it “fails to allege facts which would establish such an illegal scheme.” Id. The Court held that plaintiffs’ complaint failed to allege such facts. Id. at *18-*19. The complaint’s allegations of “nefarious sounding energy trades,” such as “ricochet games” and “loop-to-looping,” simply did not carry the day because the complaint failed to “describe how any of the purportedly improper trading practices violated state or federal law.” Id. at *18. In short, plaintiffs’ “blanket characterization of business transactions as illegal [did] not make them so, nor [did] alleging their nondisclosure necessarily state a valid Securities Act or Exchange Act violation.” Id. Accordingly, the Court dismissed the Section 11 and Section 10(b) claims premised on defendants’ alleged failure to disclose Mirant’s purported involvement in Enron-type energy trading.

The Court also dismissed the Section 11 claims premised on two purported accounting errors in the IPO Registration Statement. With respect to the threshold matter of the pleading burden applicable to plaintiffs’ Section 11 claims, the Court held that the heightened pleading standards of Rule 9(b) applied because the Section 11 claims sounded in fraud, i.e., the allegations against the Section 11 defendants were “inextricably intertwined with their allegations against the [Section 10(b) defendants].” Id. at *15. Specifically, plaintiffs had incorporated in the Securities Act count “hundreds of pages of mostly fraud allegations before employing the disfavored” general disclaimer of fraud. Id. at *15. Moreover, every single alleged misstatement or omission on which plaintiffs based their Section 11 claim was also alleged as a fraudulent misstatement or omission against the former officers. Id. at *15.

The Section 11 claims premised on the alleged accounting errors did not withstand the Court’s scrutiny under Rule 9(b) standards. First, plaintiffs alleged that Mirant failed to recognize an impairment to its Western Power Distribution asset. Id. at *20. The Court dismissed this Section 11 claim because plaintiffs failed to allege facts establishing that the applicable accounting standard required Mirant to recognize an impairment. Id. at *20-*21. Second, Mirant restated its financial statements, resulting in part in a $29 million reduction of income reported for year-end 2000. Id. at *24. Plaintiffs alleged that the 2000 income reported in the IPO registration statement was false because of the restatement. Id. The IPO registration statement, however, did not include 2000 income for the entire year, but reported only for the first six months of 2000. Because plaintiffs failed to allege that the reported income for the first six months of 2000 was false, the Court dismissed the Section 11 claim premised on the restatement. Id. at *25. Specifically, the Court held that “[p]laintiffs may not plead a Securities Act violation based on the inference that at least some of the $29 million of restated income was reported in Mirant’s IPO Registration Statement.” Id.