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In re Enron Corp. Securities, Derivative & "Erisa" Litigation

United States District Court, S.D. Texas, Houston Division

February 28, 2017

In Re ENRON CORPORATION SECURITIES, DERIVATIVE & "ERISA" LITIGATION,
v.
UBS PAINEWEBBER, INC. AND UBS WARBURG, LLC, Defendants. KEVIN LAMPKIN, JANICE SCHUETTE, ROBERT FERRELL, AND STEPHEN MILLER, Individually and on Behalf of All Others Similarly Situated, Plaintiffs, Civil Action No. H-02-0851

          OPINION AND ORDER

          MELINDA HARMON UNITED STATES DISTRICT JUDGE

         The above referenced putative class action alleges violations of the following securities fraud statutes through Defendants' scheme to optimize revenue in investment banking fees from UBS Securities LLC's corporate client, Enron Corp. (“Enron”), at the expense and defrauding of UBS Financial Service's brokerage retail clients, Lead Plaintiffs Kevin Lampkin, Janice Schuette, Bobby Ferrell, Stephen Miller, Terry Nelson, Diane Swiber, Franklin Gittess, and Joe Brown and similarly situated individuals: §§ 11, 12(a)(2) and 15 of the Securities Act of 1933 (“the 1933 Act”), 15 U.S.C. §§ 77k, 77l, and 77o, et seq.; §§ 10(b) and 20 of the Securities Exchange Act of 1934 (“the 1934 Act”), 15 U.S.C. §§ 78j(b) and 78(t), et seq., and Rule 10b-5, 17 C.F.R. § 240.10b-5; and the Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C.§ 78u-4. The 1933 Act claims are brought against UBS Financial Services, Inc. f/k/a UBS Paine Webber, Inc. (“PW”) only. #122 ¶¶ 228, 269.

         Pending before the Court are (1) a motion to dismiss the Third Amended Complaint, [1] filed by Defendants PW[2] and UBS Securities LLC f/k/a UBS Warburg LLC (Warburg”), [3] (collectively, “UBS Defendants”) (Notice of Motion to Dismiss, instrument #125; Memorandum in support, #126); (2) an alternative motion for leave to amend complaint from Lead Plaintiffs Kevin Lampkin, Janice Schuette, Bobby Ferrell, Stephen Miller, Terry Nelson, Diane Swiber, Franklin Gittess, and Joe Brown; (#164);(3) a motion to certify class (#166), filed by Lead Plaintiffs; and (4) an opposed motion for amended scheduling order, for additional briefing, and for a ruling (#223), filed by Plaintiffs.

         Plaintiffs in this action have elected to proceed independently of the complaints in the Newby and Tittle actions in MDL 1446.

         As housekeeping matters, given the age of this litigation, the lengthy discovery period now closed, and the extensive briefing already filed in this case regarding the claims against the UBS Defendants, the Court denies the motion for amended scheduling order and for additional briefing as unnecessary (#223). In addition because Plaintiffs have already been permitted to file four complaints (#1, 6, 20, and 122), the Court denies their alternative motion for leave to file another (#164). Finally, in light of the issuance of this Opinion and Order, the Court finds that the remaining motion for a ruling (also part of #223) is MOOT.

         The Court leaves aside the name-calling, subjective accusations, and denigrating remarks in the various documents it reviews and focuses on the merits of the parties' contentions.

         I. Standards of Review A. Rule 8(a)

         Federal Rule of Civil Procedure 8(a) states, A pleading that states a claim for relief must contain:

(1) a short and plain statement of the grounds for the court's jurisdiction, unless the court already has jurisdiction, and the claim needs no new jurisdictional support;
(2) a short and plain statement of the claim showing that the pleader is entitled to relief; and
(3) a demand for the relief sought, which may include relief in the alternative or different types of relief.

         Under the Rule's requirement of notice pleading, “defendants in all lawsuits must be given notice of specific claims against them.” Anderson v. U.S. Dept. of Housing and Urban Development, 554 F.3d 525, 528 (5th Cir. 2008). While a plaintiff need not plead specific facts, the complaint must provide “the defendant fair notice of what the . . . claim is and the grounds upon which it rests.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). If the complaint lacks facts necessary to put a defendant on notice of what conduct supports the plaintiff's claims against it, the complaint is inadequate to meet the notice pleading standard. Anderson, 554 at 528. The complaint must not only name the laws which the defendant has allegedly violated, but also allege facts about the conduct that violated those laws. Id.

         B. Rule 12(b)(6)

         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. Randall D. Wolcott, MD, PA v. Sebelius, 635 F.3d 757, 763 (5th Cir. 2011), citing Gonzalez v. Kay, 577 F.3d 600, 603 (5th Cir. 2009). The plaintiff's legal conclusions are not entitled to the same assumption. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)(“The tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.”), citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007); Hinojosa v. U.S. Bureau of Prisons, 506 Fed.Appx. 280, 283 (5th Cir. Jan. 7, 2012).

         “While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, . . . a plaintiff's 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 . . . .” Twombly, 550 U.S. at 555 (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 . . . (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 [550 U.S. at 570]). “‘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, 556 U.S. 662, 678 (2009). The plausibility standard is not akin to a “probability requirement, ” but asks for more than a “possibility that a defendant has acted unlawfully.” Twombly, 550 U.S. at 556. “[T]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements do not suffice” under Rule 12(b). Iqbal, 556 U.S. at 678.

         Dismissal under Rule 12(b)(6) is proper not only where the plaintiff fails to plead sufficient facts to support a cognizable legal theory, but also where the plaintiff fails to allege a cognizable legal theory. Kjellvander v. Citicorp, 156 F.R.D. 138, 140 (S.D. Tex. 1994), citing Garrett v. Commonwealth Mortgage Corp., 938 F.2d 591, 594 (5th Cir. 1991); ASARCO LLC v. Americas Min. Corp., 832 B.R. 49, 57 (S.D. Tex. 2007). “A complaint lacks an ‘arguable basis in law' if it is based on an indisputedly meritless legal theory' or a violation of a legal interest that does not exist.” Ross v. State of Texas, Civ. A. No. H-10-2008, 2011 WL 5978029, at *8 (S.D. Tex. Nov. 29, 2011).

         As noted, on a Rule 12(b)(6) review, although generally the court may not look beyond the pleadings, the court may examine the complaint, documents attached to the complaint, and documents attached to the motion to dismiss to which the complaint refers and which are central to the plaintiff's claim(s), as well as matters of public record. Lone Star Fund V (U.S.), L.P. v. Barclays Bank PLC, 594 F.3d 383, 387 (5th Cir. 2010), citing Collins, 224 F.3d at 498-99; Cinel v. Connick, 15 F.3d 1338, 1341, 1343 n.6 (5th Cir. 1994). See also United States ex rel. Willard v. Humana Health Plan of Tex., Inc., 336 F.3d 375, 379 (5th Cir. 2003)(“the court may consider . . . matters of which judicial notice may be taken”). Taking judicial notice of public records directly relevant to the issue in dispute is proper on a Rule 12(b)(6) review and does not transform the motion into one for summary judgment. Funk v. Stryker Corp., 631 F.3d 777, 780 (5th Cir. 2011). “A judicially noticed fact must be one not subject to reasonable dispute in that it is either (1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned.” Fed.R.Evid. 201(b).

         Plaintiffs object to Defendants' attachment of significant amounts of extrinsic evidence to their motion and then arguing fact issues utilizing extrinsic evidence as support, both of which are inappropriate in a motion to dismiss.[4] The Court finds this objection to be unfounded.

         “‘[D]ocuments that a defendant attaches to its motion to dismiss are considered part of the pleadings if they are referred to in the plaintiff's complaint and are central to [its] claim.'” Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498-99 (5thCir. 2000), quoting Venture Assocs. Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 431 (7th Cir. 1993). “[W]hen a plaintiff does not attach a pertinent document to the complaint, a ‘defendant may introduce the exhibit as part of his motion attacking the pleading.'” Shepard v. Texas Dept. of Transportation, 158 F.R.D. 592, 595 (E.D. Tex. 1994); Charles Alan Wright, et al., 5A Federal Practice and Procedure: Civil § 1327 (3d ed. April 2016 update). All the documents that Defendants attach to their motion to dismiss were referenced and relied upon by Plaintiffs in their Third Amended Complaint, and are central to their claims. Plaintiffs have not questioned the authenticity of the documents. By such attachments the defendant simply provides additional notice of the basis of the suit to the plaintiff and aids the Court in determining whether a claim has been stated. Id. at 499. The attachments may also provide the context from which any quotation or reference in the motion is drawn to aid the court in correctly construing that quotation or reference. In re Enron Corp. Securities, Derivative & “ERISA” Litig., No. H-04-0087, 2005 WL 3504860, at 11 n.20 (S.D. Tex. Dec. 22, 2005). “Where the allegations in the complaint are contradicted by facts established by documents attached as exhibits to the complaint, the court may properly disregard the allegations.” Martinez v. Reno, No. 3:97-CV-0813-P, 1997 WL 786250, at *2 (N.D. Tex. Dec. 15, 1997), citing Nishimatsu Const. Co. v. Houston Nat'l Bank, 515 F.2d 1200, 1206 (5th Cir. 1975). When conclusory allegations and unwarranted deductions of fact are contradicted by facts disclosed in the appended exhibit, which is treated as part of the complaint, the allegations are not admitted as true. Carter v. Target Corp., 541 Fed.Appx. 413, 417 (5th Cir. Oct. 4, 2013), citing Associated Builders, Inc. v. Alabama Power Co., 505 F.2d 97, 100 (5th Cir. 1974), citing Ward v. Hudnell, 366 F.2d 247 (5th Cir. 1966). See Northern Indiana Gun & Outdoor Shows, Inc. v. City of South Bend, 163 F.3d 449, (7th Cir. 1996)(“It is a well settled rule that when a written instrument contradicts allegations in the complaint to which it is attached, the exhibit trumps the allegations.”); Roth v. Jennings, 489 F.3d 499, 509 (2d Cir. 2007)(when attached documents contain statements that contradict the allegations in the complaint, the documents control and the court need not accept as true the allegations contained in the complaint.”).

         C. Rule 9(b)

         “Rule 9(b) supplements but does not supplant Rule 8(a)'s notice pleading, ” and “requires “only ‘simple, concise, and direct' allegations of the ‘circumstances constituting fraud, ' which after Twombly must make relief plausible, not merely conceivable, when taken as true.” U.S. ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 186 (5th Cir. 2009).

         Rule 9(b) provides,

In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person must be averred generally.

         “In every case based upon fraud, Rule 9(b) requires the plaintiff to allege as to each individual defendant ‘the nature of the fraud, some details, a brief sketch of how the fraudulent scheme operated, when and where it occurred, and the participants.” Hernandez v. Ciba-Geigy Corp. USA, 200 F.R.D. 285, 291 (S.D. Tex. 2001). In a securities fraud suit, the plaintiff must plead with particularity the circumstances constituting the alleged fraud: Rule 9(b) requires the plaintiff to “‘specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent.'” Southland Securities Corp. v. INspire Ins. Solutions, Inc., 365 F.3d 353, 362 (5th Cir. 2004), quoting Williams v. WMX Technologies, Inc., 112 F.3d 175, 177-78 (5th Cir. 1997), cert. denied, 522 U.S. 966 (1997). “‘In cases concerning fraudulent misrepresentation and omission of facts, Rule 9(b) typically requires the claimant to plead the type of facts omitted, the place in which the omissions should have appeared, and the way in which the omitted facts made the representations misleading.'” Carroll v. Fort James Corp., 470 F.3d 1171, 1174 (5th Cir. 2006), quoting United States ex rel. Riley v. St. Luke's Hosp., 355 F.3d 370, 381 (5th Cir. 2004).

         Unlike the alleged fraud, Rule 9(b) allows a plaintiff to plead intent to deceive or defraud generally. Nevertheless a mere conclusory statement that the defendant had the required intent is insufficient; the plaintiff must set forth specific facts that raise an inference of fraudulent intent, for example, facts that show the defendant's motive. Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1068 (5th Cir. 1994)(“Although scienter may be averred generally, case law amply demonstrates that pleading scienter requires more than a simple allegation that a defendant had fraudulent intent. To plead scienter adequately, a plaintiff must set forth specific facts that support an inference of fraud.”); Melder v. Morris, 27 F.3d 1097, 1102 (5th Cir. 1994).

         The particularity requirement of Rule 9(b) also governs a conspiracy to commit fraud. Southwest Louisiana Healthcare System v. MBIA Ins. Corp., No. 05-1299, 2006 WL 1228903, *5 & n.47 (W.D. La. May 6, 2006); Hernandez v. Ciba-Geigy Corp. USA, No. Civ. A. B- 00-82, 2000 WL 33187524, *4 (S.D. Tex. Oct. 17, 2000)(“The weight of Fifth Circuit precedent holds that a civil conspiracy to commit a tort that sounds in fraud must be pleaded with particularity.”); In re Ford Motor Co. Vehicle Paint Litigation, No. MDL 1063, 1994 WL 426548, *34 (E.D. La. July 30, 1996); and Castillo v. First City Bancorporation of Texas, Inc., 43 F.3d 953, 961 (5th Cir. 1994).

         A dismissal for failure to plead with particularity in accordance with Rule 9(b) is treated 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).

         II. The Exchange Act and the PSLRA's Heightened Pleading Requirements

         Section 10(b) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78j(b), states in relevant part,

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of any facility of any national securities exchange . . .
(b) To use or employ in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement (as defined in [S]ection 206B of the Gramm-Leach-Bliley Act), any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

         Pursuant to the statute, the Securities and Exchange Commission (“SEC”) promulgated Rule 10b-5, 17 C.F.R. § 240.10b-5, which provides:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) to employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

         Although the statute does not expressly provide for a private cause of action, the Supreme Court has recognized that the statute and its implementing regulation imply a private cause of action for § 10(b) violations. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 157 (2008), citing Superintendent of Ins. of N.Y. v. Bankers Life & Casualty Co., 404 U.S. 6, 13 n.9 (1971).

         To state a claim under § 10(b) of the 1934 Act and Rule 10b-5, 17 C.F.R. § 240.10b-5, the plaintiff must plead “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Stoneridge, 552 U.S. at 157, citing Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 341-42 (2005). An omission is material for purposes of federal securities law if there is a “substantial likelihood that the disclosure of omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix' of information available.” TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988)(“adopt[ing] TSC Industries standard of materiality for the § 10(b) and Rule 10b-5 context”).

         Loss causation, i.e., a causal connection between the defendant's material misrepresentation or omission (or other fraudulent conduct) and the economic loss to the plaintiff for which it seeks to recover, can be proven by showing that when the relevant truth about the fraud is disclosed to or leaked into the market place, whether at once or in a series of events, whether by the defendant's announcing changes in its accounting treatments, or whistle blowers, or analysts question financial results, resignations of key officers, or newspapers and journals, etc., it caused the price of the stock to decline and thereby proximately caused the plaintiff's economic injury. Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 255 (5th Cir. 2009), citing Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 342 (2005). The Fifth Circuit has held that Rule 8(a)(2) and Twombly's plausibility standard govern the pleading of loss causation. Id. at 256-58.

         For many years plaintiffs in securities fraud suits brought claims under § 10(b) and Rule 10b-5 against secondary actors, [5] including investment bankers, lawyers, and accountants, who participated with primary violators in a scheme to defraud investors. In the last twenty years, the Supreme Court has greatly limited the reach of a private right of action against secondary actors under Rule 10b-5(a) and (c). Despite the fact that for three decades secondary actors had been found liable under the federal securities laws as aiders and abettors in lower courts, given the 1934 Act's silence as to aiding and abetting, the Supreme Court has concluded, “The section 10(b) implied private right of action does not extend to aiders and abettors.” Stoneridge, 552 U.S. at 158; see also Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 177-78 (1994)(for private parties[6]Section 10(b) “does not itself reach those who aid and abet” a primary wrongdoer's violation of the securities laws because while the statute prohibits the making of a material misstatement or omission or the commission of a manipulative act, [7] the “proscription does not “include giving aid to a person who commits a manipulative or deceptive act”; “We cannot amend the statute to create liability for acts that are not themselves manipulative or deceptive within the meaning of the statute.” 511 U.S. at 177-78. Instead, to impose liability, a plaintiff must establish that each named defendant committed its own primary violation of the securities laws to be held liable under § 10(b). Moreover the Supreme Court concluded that in some circumstances secondary actors, like lawyers, investment banks, and accountants, “who employ[] a manipulative device or make[] a material misstatement (or omission) on which a purchaser or seller of securities relies, ” can be liable as primary violators if “all the requirements for primary liability under Rule 10b-5 are met.” Id. at 191. In accord, Stoneridge, 552 U.S. at 158 (For a secondary actor to be held liable under § 10(b), that person or entity “must satisfy each of the elements or preconditions for [primary] liability.”).[8]

         “Where liability is premised on a failure to disclose rather than on a misrepresentation, ‘positive proof of reliance[9] is not a prerequisite to recovery. All that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered them important in the making of his decision. . . . This obligation to disclose and the withholding of a material fact establish the requisite element of causation in fact.'” Regents of Univ. of Cal. v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372, 383-84 (5th Cir. 2007)(quoting Affiliated Ute Citizens of the State of Utah v. U.S., 406 U.S. 128, 153-54 (1972)), cert. denied sub nom. Regents of Univ. of Cal. v. Merrill Lynch, Pierce, Fenner & Smith, 552 U.S. 1170 (2008). See also Basic, Inc., 485 U.S. at 243 (“[W]here a duty to disclose material information had been breached . . . the necessary nexus between the plaintiffs' injury and the defendants' wrongful conduct had been established.”).

         “When an allegation of fraud is based upon nondisclosure, there can be no fraud absent a duty to speak.” Central Bank, 511 U.S. at 174, quoting Chiarella v. U.S., 445 U.S. 222, 235 (1980). A duty to disclose arises only from “a fiduciary or other similar relation of trust and confidence between [parties]”; it “does not arise from the mere possession of nonpublic market information.” Chiarella, 445 U.S. at 228, 235. “Silence, absent a duty to disclose, is not misleading under Rule 10b-5.” Basic, Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988).

         The omission of a material fact by a defendant with a duty to disclose establishes a rebuttable presumption of reliance upon the omission by investors to whom the duty was owed. Affiliated Ute Citizens of the State of Utah v. U.S., 406 U.S. 126, 153-54 (1972). “To invoke the Affiliated Ute presumption of reliance on an omission, a plaintiff must (1) allege a case primarily based on omissions or non-disclosure and (2) demonstrate that the defendant owed him a duty of disclosure.” Regent of Univ. of Cal., 482 F.3d at 384. “This presumption is a judicial creature. It responds to the reality that a person cannot rely upon what he is not told.” Smith v. Ayres, 845 F.2d 1360, 1363 (5th Cir. 1988). “[A]dministrative and judicial interpretations have established that silence in connection with the purchase or sale of securities may operate as a fraud actionable under § 10(b)” when there is “a duty to disclose arising from a relationship of trust and confidence between parties to a transaction.” Chiarella, 445 U.S. at 230.

         “Whether a fiduciary duty exists is a question of law for the court's determination.” Stevenson v. Rochdale Investment Management, Inc., No. Civ. A. 3:97CV1544L, 2000 WL 1278479, at *3 (N.D. Tex. Sept. 7, 2000), citing Fuqua v. Taylor, 683 S.W.2d 735, 737 (Tex. App.--Dallas 1984, writ ref'd n.r.e.). Nevertheless the factfinder determines whether the facts give rise to a fiduciary duty. Id.

         In Kinzbach Tool Co. v. Corbett-Wallace Corp., 138 Tex. 565, 160 S.W.2d 509, 512-13 (Tex. 1942), the Texas Supreme Court wrote,

The term “fiduciary” is derived from the civil law. It is impossible to give a definition of the term that is comprehensive enough to cover all cases. Generally speaking, it applies to any person who occupies a position of peculiar confidence toward another. It refers to integrity and fidelity. It contemplates fair dealing and good faith, rather than legal obligation, as the basis of the transaction. The term includes those informal relations which exist whenever one party trusts and relies upon another, as well as technical fiduciary relations.

See also Fisher v. Roper, 727 S.W.2d 78, 81 (Tex. App.--San Antonio 1987, writ ref'd n.r.e.):

A fiduciary relationship exists when the parties are under a duty to act for or give advice for the benefit of another upon matters within the scope of the relation. It exists where a special confidence is reposed in another who in equity and good conscience is bound to act in good faith and with due regard for the interest of the one reposing confidence. A fiduciary relationship generally arises over a long period of time when parties have worked together toward a mutual goal. To establish a fiduciary relationship, the evidence must show that the dealings between the parties have continued for such a period of time that one party is justified in relying on the other to act in his best interest. To transform a mere contract into a fiduciary relationship, the evidence must show that the dealings between the parties have continued for such a period of time that one party is justified in relying on the other to act in his best interest. [citations omitted].

         For example, because of the relationship of trust and confidence between the shareholders of a corporation and “those insiders who have obtained confidential information by reason of their position with that corporation, ” courts have imposed a duty to disclose on a corporate insider when the corporate insider trades on the confidential information (“intended to be available only for a corporate purpose and not for the personal benefit of anyone”) and makes secret profits. Chiarella, 445 U.S. at 227-28. “Trading on such [material, nonpublic] information qualifies as a ‘deceptive device' under § 10(b) . . . because ‘a relationship of trust and confidence [exists] between the shareholders of a corporation and those insiders who have obtained confidential information by reason of their position with that corporation.'” United States v. O'Hagan, 521 U.S. 642, 651-52 (1997), citing Chiarella, 445 U.S. at 228. “That relationship . . . gives rise to a duty to disclose [or to abstain from trading] because of the ‘necessity of preventing a corporate insider from . . . tak[ing] unfair advantage of . . . uninformed shareholders.'” O'Hagan, 521 U.S. at 652, quoting Chiarella, 445 U.S. at 228-29. A corporate insider with material information is required to disclose it to the investing public or, if he cannot because he must protect a corporate confidence, or if he chooses not to disclose, he must abstain from trading in or recommending securities concerned while the inside information remains undisclosed. SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 848 (2d Cir. 1968)(en banc)(“[A]nyone in possession of material inside information must either disclose it to the investing public, or if he is disabled from disclosing it in order to protect a corporate confidence, or he chooses not to do so, must abstain from trading in or recommending the securities concerned while such inside information remains undisclosed.”), cert. denied sub nom. Kline v. SEC, 394 U.S. 976 (1969).

         An individual or entity that does not fit within the traditional definition of a corporate insider may become a “temporary insider” if the person “by entering into a special confidential relationship in the conduct of the business of the enterprise is given access to information solely for corporate purposes.” SEC v. Cuban, 620 F.3d 551, 554 (5th Cir. 2010), citing Dirks v. SEC, 463 U.S. 646, 655 n.13 (1983). The duty to disclose or abstain from trading arises from the corporate insider's duty to his shareholders, and it applies not only “to officers, directors and other permanent insiders of a corporation, ” but also to “attorneys, accountants, consultants and others who temporarily become fiduciaries of the corporation.” O'Hagan, 521 U.S. at 228-29, quoting Dirks v. SEC, 463 U.S. 646, 655 n.14 (1983).

         Violations of Rule 10b-5(a) and (c), which prohibit “employ[ing] any device, scheme or artifice to defraud” or “engag[ing] in any act, practice or course of business which operates . . . as a fraud or deceit upon any person” in connection with the sale of securities, were designated by some courts as “scheme liability.” In Stoneridge (5-3), the Supreme Court addressed the issue, “when, if ever, an injured investor may rely upon § 10(b) to recover from a party that neither makes a public misstatement nor violates a duty to disclose, but does participate in a scheme to violate § 10(b).” The high court rejected that scheme liability theory because a plaintiff cannot rely on a defendant's concealed deceptive acts. 552 U.S. at 156, 159-60. Justice Kennedy wrote for the majority,

Reliance by the plaintiff upon the defendant's deceptive acts is an essential element of the § 10(b) private cause of action. It ensures that, for liability to arise, the “requisite causal connection between a defendant's misrepresentation and a plaintiff's injury” exists as a predicate for liability. . . . We have found a rebuttable presumption of reliance in two different circumstances. First, if there is an omission of a material fact by one with a duty to disclose, the investor to whom the duty was owed need not provide specific proof of reliance. . . . Second, under the fraud-on-the-market doctrine, reliance is presumed when the statements at issue become public. The public information is reflected in the market price of the security. Then it can be assumed that an investor who buys or sells stock at the market price relies upon the statement. . . .
Neither presumption applies here. Respondents had no duty to disclose; and their deceptive acts were not communicated to the public. No member of the investing public had knowledge, either actual or presumed, of respondents' deceptive acts during the relevant times. Petitioner, as a result, cannot show reliance upon any of respondents' actions except in an indirect chain that we find too remote for liability.

Id. at 769.

         In Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135, 137-38, 142, 167 (2011)(5-4), examining what it means to “‘make any untrue statement of material fact' in connection with the purchase or sale of securities” under Rule 10b-5 and “mindful that [the Court] must give ‘narrow dimensions'” to the implied right of action under § 10(b) since Congress did not authorize it, [10] the majority of the United States Supreme Court attempted to further clarify the distinction between a primary violation and aiding and abetting by holding, “For purposes of Rule 10b-5, the maker of a statement is the person with ultimate authority over the statement, including its content and whether and how to communicate it. Without control, a person or entity can merely suggest what to say, not ‘make' a statement in its own right. One who prepares or publishes a statement on behalf of another is not its maker.”[11] See also Halliburton Co. v. Erica P. John Fund, Inc., 134 S.Ct. 2398, 2403 (2014)(Section 10(b) and Rule 10b-5 liability should not be extended “to entirely new categories of defendants who themselves had not made any material public misrepresentation.”). Thus Janus restricts liability under a § 10(b) private right of action to a person or entity with ultimate authority over a false statement on which an investor relied to his detriment in purchasing or selling a security.

         The PSLRA “installed both substantive and procedural controls” that were “[d]esigned to curb perceived abuses of the § 10(b) private action--nuisance filings, targeting deep-pocket defendants, vexatious discovery requests and manipulation by class action lawyers.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 208, 320 (2007). The PSLRA heightened the particularity requirements for pleading securities fraud in two ways: (1) the plaintiff must “specify each statement alleged to have been misleading and the reason or reasons why the statement is misleading . . ., ” 15 U.S.C. § 78u-4(B)(1)(B); and (2) for “each act or omission alleged” to be false or misleading, the plaintiff must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind, ” 15 U.S.C. § 78u-4(b)(2). Indiana Elec. Workers' Pension Trust Fund IBEW v. Shaw Group, Inc., 537 F.3d 527, 533 (5th Cir. 2007). As noted, Rule 9(b) requires the plaintiff in a securities fraud suit to “‘specify the statements contended to be fraudulent, identify the speaker, state when and where the statements were made, and explain why the statements were fraudulent.'” Southland, 365 F.3d at 362, quoting Williams v. WMX Technologies, Inc., 112 F.3d 175, 177-78 (5th Cir. 1997), cert. denied, 522 U.S. 966 (1997). See 15 U.S.C. § 78u-4. In other words, “‘[p]leading fraud with particularity . . . requires ‘time, place and contents of the false representations, as well as the identity of the person making the misrepresentation and what [that person] obtained thereby.'” Williams, 112 F.3d at 177 (5thCir. 1997), quoting Tuchman, 14 F.3d at 1068. The PSLRA mandates that “untrue statements or omissions be set forth with particularity as to ‘the defendant' and that scienter be pleaded with regard to ‘each act or omission' sufficient to give ‘rise to a strong inference that the defendant acted with the required state of mind.'” Southland, 365 F.3d at 364. The PSLRA's use of “the defendant” is reasonably construed to mean “‘each defendant' in multiple defendant cases.'” Id. at 365. Where the defendant is a corporation (as Warburg and PW are), the plaintiff must plead specific facts giving rise to a strong inference that a particular defendant's employee acted with scienter as to each alleged omission; “[a] defendant corporation is deemed to have the requisite scienter for fraud only if the individual corporate officer making the statement has the requisite level of scienter, i.e., knows the statement is false, or at least deliberately reckless as to its falsity, at the time he or she makes the statement.” Southland, 365 F.3d at 366. “‘The knowledge necessary to form the requisite fraudulent intent must be possessed by at least one agent [of the corporation] and cannot be inferred and imputed to a corporation based on disconnected facts known by different agents.'” Id. at 367, quoting Gutter v. E.I. Dupont De Nemours, 124 F.Supp.2d 1291, 1311 (S.D. Fla. 2000); also citing First Equity Corp. v. Standard & Poor's Corp., 690 F.Supp. 256, 260 (S.D.N.Y. 1988)(“A corporation can be held to have a particular state of mind only when that state of mind is possessed by a single individual.”), aff'd, 869 F.2d 175 (2d Cir. 1989).

         “‘In cases concerning . . . omission of facts, Rule 9(b) typically requires the claimant to plead the type of facts omitted, the place in which the omissions should have appeared, and the way in which the omitted facts made the representations misleading.'” Carroll v. Fort James Corp., 470 F.3d 1171, 1174 (5th Cir. 2006), quoting United States ex. rel. Riley v. St. Luke's Hosp., 355 F.3d 370, 381 (5th Cir. 2004). To meet the requirement of materiality, “there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix' of information made available” and would have actually been significant “in the deliberations of the reasonable shareholder.” Basic, Inc., 485 U.S. at 231-32; Southland, 365 F.3d at 362. See also Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 248-49 (5th Cir. 2009)(“Once the defendants engaged in public discussion . . ., they had a duty to disclose a ‘mix of information' that is not misleading.”). Thus the standard for misrepresentation in this context is whether the information disclosed, understood as a whole, would mislead a reasonable potential investor. L.W. Laird v. Integrated Resources, Inc., 897 F.2d 826, 832 (5th Cir. 1990). The Fifth Circuit has “long held under Rule 10b-5, a duty to speak the full truth arises when a defendant undertakes a duty to say anything. Although such defendant is under no duty to disclose every fact or assumption underlying a prediction, he must disclose material, firm-specific adverse facts that affect the validity or plausibility of that prediction.” Lormand, 565 F.3d at 249. “The omission of a known risk, its probability of materialization, and its anticipated magnitude, are usually material to any disclosure discussing the prospective result from a future course of action.” Id. at 248 These facts “must be laid out before access to the discovery process is granted.” Williams, 112 F.3d at 178.

         The Fifth Circuit does not permit group pleading of securities fraud suits. Owens v. Jastrow, 789 F.3d 529, 537 (5thCir. 2015), citing Southland, 365 F.3d at 365 (“[T]he PSLRA requires the plaintiffs to distinguish among those they sue and enlighten each defendant as to his or her particular part in the alleged fraud. . . . [W]e do not construe allegations contained in the [second amended complaint] against ‘defendants' as a group as properly imputable to any particular defendant unless the connection between the individual defendant and the allegedly fraudulent statement is specifically pleaded.”).[12] “Corporate officers are not liable for acts solely because they are officers or where their day-to-day involvement in the corporation is pleaded.” Financial Acquisition Partners LP v. Blackwell, 440 F.3d 278, 287 (5th Cir. 2006). A corporate officer may be liable if plaintiff identifies him and alleges he made materially misleading statements with scienter at a shareholder meeting or he signed documents on which statements were made. Id. Group pleading, or the group publishing doctrine, fails to satisfy the heightened pleading standards of the PSLRA. Southland, 365 F.3d at 363 n.9.[13]

         The Fifth Circuit further requires that scienter or the requisite state of mind, which for the PSLRA is ”an intent to deceive, manipulate, or defraud, ” or “‘severe recklessness' in which the ‘danger of misleading buyers or sellers . . . is either known to the defendant or is so obvious that the defendant must have been aware of it, '”[14] must be pleaded for each act or omission for each defendant in a multiple defendant case sufficiently to create “a strong inference that the defendant acted with the required state of mind.” Id. at 364-65. See also Owens v. Jastrow, 789 F.3d at 536 (“Severe recklessness is limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or inexcusable negligence, but an extreme departure from the standard of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it.”), quoting Abrams v. Baker Hughes, Inc., 292 F.3d 424, 430 (5th Cir. 2002). To determine whether a statement made by a corporation was made with the requisite intent, it is appropriate to look into the state of mind of the corporate official who made the statement rather than to the collective knowledge of all of the corporation's officers and employees acquired in the course of their employment. Southland, 365 F.3d at 366; Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135, 142 (2011)(“[T]he maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.”). “A defendant corporation is deemed to have the requisite scienter for fraud only if the individual corporate officer making the statement has the requisite level of scienter, i.e., knows that the statement is false or is at least deliberately reckless as to its falsity, at the time he or she makes the statement.” Southland, 365 F.3d at 366.

         “In determining whether the pleaded facts give rise to a ‘strong' inference of scienter, the court must take into account plausible opposing inferences.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 323 (2007). Furthermore, the inference of scienter ultimately must be “‘cogent and compelling, ' not merely ‘reasonable' or “permissible.'” “Congress required plaintiffs to plead with particularity facts that give rise to a ‘strong'--i.e., a powerful or cogent--inference.” Id.; Indiana Elec. Workers' Pension Trust Fund IBEW v. Shaw Group, Inc., 537 F.3d 527, 533 (5thCir. 2008), quoting Tellabs, Inc., 551 U.S. at 324. “To determine whether the plaintiff has alleged facts that give rise to the requisite ‘strong inference' of scienter, a court must consider plausible, nonculpable explanations for the defendant's conduct, as well as inferences favoring the plaintiff. The inference that the defendant acted with scienter need not be irrefutable, i.e., of the ‘smoking-gun' genre, or even the ‘most plausible of competing inferences.'” Id. at 323-24. But it must be “at least as compelling as any opposing inference one could draw from the facts alleged.” Id. at 324. “[A] tie favors the plaintiff.” Owens v. Jastrow, 789 F.3d 529, 536 (5th Cir. 2015), quoting Lormand v. US Unwired, Inc., 565 F.3d 228, 254 (5th Cir. 2009), citing Tellabs, 551 U.S. at 324. “The inquiry is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegations, scrutinized in isolation, meet that standard.” Lormand, 565 F.3d at 251, citing Tellabs, 551 U.S. at 322-23. While allegations of motive and opportunity may serve to strengthen the inference of scienter, such allegations alone are insufficient to satisfy the requirement. Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d 200, 208 (5thCir. 2009); Owens v. Jastrow, 789 F.3d at 539.

         If the plaintiff fails to satisfy the pleading requirements for scienter, “the district court ‘shall, ' on defendant's motion to dismiss, ‘dismiss the complaint.'” Nathenson, 267 F.3d at 407, citing § 78u-4(b)(3).

         Under the PSLRA, 15 U.S.C. § 78u-4(b)(4), a plaintiff must also allege and ultimately prove “the traditional elements of causation and loss, ” i.e., “that the defendant's misrepresentations (or other fraudulent conduct) proximately caused the plaintiff's economic loss.” Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 346 (2005). The plaintiff must plead economic loss and loss causation, i.e., a causal connection between the material misrepresentation or omission and the loss. Id. at 341-42. “[A]n inflated purchase price will not itself constitute or proximately cause the relevant loss.” Id. at 342. To establish proximate causation, the plaintiff must prove that when the “relevant truth” about the fraud began to leak out or otherwise make its way into the marketplace, it caused the price of the stock to depreciate and thereby proximately cause the plaintiff's economic injury. Lormand, 565 F.3d at 255 (“[W]e conclude that Rule 8(a)(2) requires the plaintiff to allege, in respect to loss causation, a facially ‘plausible' causal relationship between the fraudulent statements or omissions and plaintiff's economic loss, including allegations of a material misrepresentation or omission, followed by the leaking out of relevant or related truth about the fraud that caused a significant part of the depreciation of the stock and plaintiff's economic loss.”), citing Dura at 342, 346.

         Both the 1933 and the 1934 statutes have a section imposing liability on persons controlling a primary violator. Section 15, 15 U.S.C. § 77o of the 1933 Act, entitled “Liability of controlling persons, states in relevant part,

(a) Controlling persons
Every person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more persons by or through stock ownership, agency, or otherwise, controls any person liable under sections 77k or 77l of this title, shall also be jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling persons had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.
(b) Prosecution of persons who aid and abet violations
For purposes of any action brought by the Commission under subparagraph (b) or (d) of section 77t of this title, any person that knowingly or recklessly provides substantial assistance to another person in violation of a provision of this subchapter, or of any rule or regulation issued under this subchapter, shall be deemed to be in violation of such provision to the same extent as the person to whom such assistance is provided.[15]

         “The term control (including the terms controlling, controlled by and under common control with) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.” 17 C.F.R. § 230.405. To state a claim for Section 15 control person liability, a plaintiff must allege that a primary violation under Section 11 or 12 was committed and the defendant directly or indirectly controlled the violator. Kapps v. Torch Offshore, Inc., 379 F.3d 207, 221 (5th Cir. 2004). The plaintiff can show control by alleging facts showing that the defendant possessed the power to direct or cause the direction of the management and policies of a person through ownership of voting securities, by contract, business relationships, interlocking directors, family relations, or the power to influence and control the activities of another, but the plaintiff must allege more than the defendant's position or title. In re Dynegy, Inc. Sec. Litig., 339 F.Supp.2d 804, 828 (S.D. Tex. 2004). The Fifth Circuit does not require a plaintiff to allege that the controlling person actually participated in the underlying primary violation to state a claim for control person liability.

         Section 20(a) of the 1934 Act, 15 U.S.C. § 78(t)(“Liability of controlling persons and persons who aid and abet”), states,

Every person who, directly or indirectly, controls any person liable under any provision of this title or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable . . ., unless the controlling person acted in good faith and did not directly or indirectly induce the act of acts constituting the violation or cause of action.

         Claims under section 20(a) are not governed by Rule 9(b)'s heightened pleading requirements for fraud claims; plaintiffs need only give the defendant fair notice of the claim and the grounds for the allegations. In re BP p.l.c. Litig., 843 F.Supp.2d 712, 791 (S.D. Tex. 2012). Plaintiffs can state a claim of controlled persons against corporate officers who did not personally make a misrepresentation or play a significant role in the preparation of a misrepresentation by pleading facts that such a person nevertheless “had the requisite power to directly or indirectly control or influence corporate policy.” Id. at 792, quoting G.A. Thompson & Co., 636 F.2d 945, 958 (5th Cir. 1981).

         Because § 20(a) is a secondary liability provision, if the Plaintiff fails to state a claim for a primary violation under § 10(b) and/or Rule 10b-5, Plaintiff also fails to state a claim for control person liability under § 20(a). Id. at 750.

         The control person liability provisions of Section 20(a) of the 1934 Act and Section 15 of the 1933 Act, although worded differently, are interpreted similarly. Dynegy, 339 F.Supp.2d at 828, citing Abbot v. Equity Group, Inc., 2 F.3d 613, 619 n.15 (5thCir. 1993); In re Franklin Bank Sec. Litig., 782 F.Supp.2d 364, 380 (S.D. Tex. 2011), aff'd sub nom. Harold Roucher Trust U/A DTD 9/21/72 v. Nocella, 464 Fed.Appx. (5th Cir. Mar. 14, 2012).

         III. Securities Act of 1933

         The 1933 Act, 15 U.S.C. §§ 77a et seq., governs the content of securities registration statements, which the SEC requires for the trading and dealing of stock.

         The Securities Act of 1933 also bars the “offer or sale” of “securities” unless a registration statement has been filed with the SEC or an exception to registration requirements applies. Section 5 of the 1933 Act, 15 U.S.C. § 77e; SEC v. Continental Tobacco Co., 463 F.2d 137, 155-56 (5th Cir. 1972).

         Section 11, 15 U.S.C. § 77k, addressing “Civil liabilities on account of false registration statement, ” provides purchasers of registered securities with strict liability protection for material misstatements or omissions in registration statements with the SEC by specifically enumerated parts. It provides in relevant part,

(a) In case any part of the registration statement . . . contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statement therein not misleading, any person acquiring such security (unless it is proved that at the time of such acquisition he knew of such untruth or omission) may, either at law or in equity, in any court of competent jurisdiction, sue
(1) every person who signed the registration statement;
(2) every person who was a director of (or person performing similar functions) or partner in the issuer at the time of the filing of the part of the registration statement with respect to which his liability is asserted;
(3) every person who, with his consent, is named in the registration statement as being or about to become a director, person performing similar functions or partner; . . . .
(5) every underwriter to such security.

         Regarding (5), under Section 2(11), 15 U.S.C. § 77b(11), a statutory underwriter is defined functionally on the basis of its relationship to a particular offering and reaches “any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking . . . .” Furthermore 15 U.S.C. § 77k(a)(5) provides that any person who purchases a security, which was subject to a registration statement containing a false statement, may sue “every under writer with respect to such security.”

         Section 12, 15 U.S.C. § 77l, states in relevant part,

(a) in general--Any person who-
(1) offers or sells a security in violation of section 77e of this title, or
(2) offers or sells a security (whether or not exempted by the provisions of section 77c of this title, other than paragraphs (2) and (14) of subsection (a) of said section), by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of material fact necessary 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), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, or such truth or omission,
shall be liable, subject to subsection (b) of this section, to the person purchasing such security from him, who may sue either at law or in equity any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.

         Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, “applies to registered securities and imposes civil liability on the signatories to the registration statement and on the directors of the issuer when the registration statement is materially misleading or defective.” Firefighters Pension & Relief Fund of the City of New Orleans v. Bulmahn, 53 F.Supp.3d 882, 892 (E.D. La. 2014), citing Rosenzweig v. Azurix Corp. 332 F.3d 854, 861 (5th Cir. 2003). To state a claim under Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, the plaintiffs must allege that they purchased shares from a registration statement that contained (1) an omission or misstatement (2) of a material fact required to be stated or necessary to make other statements made not misleading. Krim v. Banc Texas Group, Inc., 989 F.2d 1435, 1445 (5th Cir. 1993)(defining a “material fact” as “one which a reasonable investor would consider significant in the decision whether to invest, such that it alters the ‘total mix' of information available about the proposed investment”).

         Thus section 11, 15 U.S.C. § 77k(a), permits “any person acquiring such security” to sue, including after market purchasers of shares issued in a public offering, [16] while in contrast, under section 12(a)(2), 15 U.S.C. § 77l(a)(2), a seller is only liable “to the person purchasing such security from him.” Rosenzweig, 332 F.3d at 872-73, citing inter alia Joseph v. Wiles, 223 F.3d 1155, 1159 (10th Cir. 2000)(“[T]he natural reading of ‘any person acquiring such security' is simply that the buyer must have purchased a security issued under the registration statement at issue, rather than some other registration statement.”).

         Regarding alleged omissions, under § 11 an issuer only has to disclose information that is required to make other statements not misleading or information that the securities laws require to be disclosed; simply possessing material nonpublic information does not give rise to a duty to disclose. Firefighters, 53 F.Supp.3d at 892. Moreover the statute's “‘expansive' liability provisions create 'virtually absolute liability' for corporate issuers for even innocent misstatements.” Id., quoting Krim v. pcOrder.com, Inc., 402 F.3d 489, 495 (5th Cir. 2205). Plaintiffs are not required to plead scienter, reliance or fraud under the statute. Id., citing Rombach v. Chang, 355 F.3d 164, 169 n.4 (2d Cir. 2004).

         Where grounded in negligence, Section 11 only requires notice pleading under Federal Rule of Civil Procedure 8, not the heightened standards of Federal Rule of Civil Procedure 9(b) or of the PSLRA. In re Dynegy, Inc. Sec. Litig., 339 F.Supp.2d 804, (S.D. Tex. 2004), citing Lone Star Ladies, 238 F.3d at 369 (averments that defendants made untrue statements of material facts and omitted to state material facts in violation of § 11 are not claims that sound in fraud and cannot be dismissed for failure to satisfy Rule 9(b)'s heightened pleading requirements), citing In re Electronic Data Systems Corp. “ERISA” Litig., 205 F.Supp.2d 658, 677 (E.D. Tex. 2004). Nor is a plaintiff required to allege and show that the defendant acted with scienter under § 11 of the Securities Act of 1933, 15 U.S.C. § 77k(a), or that he relied in any way on the defendant's misrepresentations or omissions. Collmer, 268 F.Supp.2d at 756 (S.D. Tex. 2003). Nevertheless, if the allegations are based in fraud, the heightened standards of Rule 9(b) apply. Firefighters, 53 F.Supp.3d at 892, citing Lone Star Ladies Inv. Club, 238 F.3d at 368, citing Melder, 27 F.3d at 1100 n.6, and Rombach, 355 F.3d at 171.

         “The Securities Act of 1933 imposes strict liability on offerors and sellers of unregistered securities” and allows purchasers to recover under Section 12(1) “regardless of whether they can show any degree of fault, negligent or intentional, on the seller's part.” Swenson v. Engelstad, 626 F.2d 421, 424-25 (5thCir. 1980). An issuer's liability to a plaintiff who buys a security issued pursuant to a registration statement with a material misstatement or omission under section 12 (as it is under section 11) of the 1933 Act is “‘virtually absolute.'” Lone Star Ladies Inv. Club v. Scholtzsky's Inc., 238 F.3d 263, 369 (5th Cir. 2001), quoting Herman & MacLean v. Huddleston, 459 U.S. 375, 382 (1983). In Pinter v. Dahl, 486 U.S. 622, 644 (1988), the Supreme Court indicate that in some situations the issuer is immune from liability in a firm commitment underwriting [where the public does not purchase from the issuers but from the underwriters]: “One important consequence of [the purchaser clause] is that § 12(1) imposes liability on only the buyer's immediate seller; remote purchasers are precluded from bringing actions against remote sellers. Thus a buyer cannot recover against his seller's seller.” Lone Star Ladies Inv. Club v. Schlotzsky's, Inc., 238 F.3d 363, 370 (5th Cir. 2001), quoting Pinter, 486 U.S. at 644 n.21 (emphasis added by Lone Star). Furthermore § 12(a)(2) applies only to purchases of stock in initial offerings, and not to aftermarket trading. Gustafson v. Alloyd Co., Inc., 513 U.S. 561 (1995). See also Rosenzweig v. Azurix Corp., 332 F.3d 854, 870-71 (5th Cir. 2003)(holding that purchasers who buy their shares on the secondary market lack standing to bring § 12(a)(2) claims.).

         Defendants other than the issuer can avoid liability by pleading and proving an affirmative defense of due diligence. Id.

         Section 12 restricts recovery to purchasers who purchase their shares from a seller who makes use of false or misleading statements. 15 U.S.C. § 77l(a)(2)(seller “shall be liable to the person purchasing such security from him.”). “Section 2(3) defines ‘sale' or ‘sell' to include ‘every contract of sale or disposition of a security or interest in a security, for value, ' and the terms ‘offer to sell, ' ‘offer for sale, ' or ‘offer' to include ‘every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value.' 15 U.S.C. § 77(b)(3). Under these definitions, the range of persons potentially liable under § 12(1) is not limited to persons who pass title.” Pinter v. Dahl, 486 U.S. 622, 643 (1988). While the purchase requirement limits liability to instances in which a sale has occurred, the language of the statute extends statutory seller status and thus liability to some persons who simply urged the buyer to purchase the security. Id. at 644.

         When a broker acting as an agent of one of the principles to a securities purchase successfully solicits a purchase, he is a person from whom the buyer purchases within the meaning of § 12 and is thus liable as a statutory seller. Pinter, 486 U.S. at 646, citing inter alia Cady v. Murphy, 113 F.2d 988, 990 (1stCir.)(finding a broker acting as an agent to be liable as a statutory seller), cert. denied, 311 U.S. 705 (1940). The Supreme Court went on to limit a solicitor's liability to exclude the solicitor, “merely to assist the buyer, ” “gratuitously urges another to make a particular investment”: “The language [‘buy . . . for value”] and purpose of § 12(1) suggest that liability extends only to the person who successfully solicits the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner, ” e.g., a broker. Id. at 647.

         As with § 11, where § 12(a) claims do constitute fraud, the plaintiff must plead the circumstances constituting fraud with Rule 9(b) particularity. Collmer v. U.S. Liquids, Inc., 268 F.Supp.2d 718, 756 (S.D. Tex. 2003), citing Melder v. Morris, 27 F.3d 1097, 1100 n.6 (5th Cir. 1994)(“When 1933 Securities Act claims are grounded in fraud rather than negligence . . . Rule 9(b) applies.”).

         Section 12(a)(2) of the Securities Act of 1933, 15 U.S.C. § 77l(a), states, “Any person who . . . offers or sells a security . . . by means of a prospectus or oral communication, which includes an untrue statement of material fact or omits to state a material fact necessary 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), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission, shall be liable, subject to subsection (b) of this section, to the person purchasing such security from him, who may sue either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received therein, upon the tender of such security, or for damages if he no longer owns the security.” Under section 12(a)(2) the term “seller” refers to “either the person who actually passes title to the buyer, or ‘the person who successfully solicits the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner, ' e.g., a broker.” Rosenzweig v. Azurix Corp., 332 F.3d 853, 871 (5th Cir. 2003), citing Pinter v. Dahl, 486 U.S. 622, 647 (1988). To constitute a “solicitation, ” at the very least the seller must “directly communicate with the buyer.” Id., citing Litigation v. Kraftsow, 890 F.2d 628, 636 (3d Cir. 1989)(“The purchaser must demonstrate direct and active participation in the solicitation of the immediate sale to hold the issuer liable as a § 12(a)(2).”).

         To prevail on a claim under § 12(a)(2), 15 U.S.C. § 77l(a)(2), the plaintiff must allege and prove that the defendant, as a seller of a security “by means of a prospectus or oral communication, ” misrepresented or failed to state material facts to the plaintiff in connection with the sale and that the plaintiff had no knowledge of untruth or omission. Collmer, 268 F.Supp.2d at 756, citing Junker v. Crory, 650 F.2d 1349, 1359 (5th Cir. 1981). As with § 11, “a ‘material' fact is one which a reasonable investor would consider significant in the decision whether to invest, such that it alters the ‘total mix' of information available about the proposed investment.” Krim, 989 F.2d at 1445.

         There is no liability under Section 12(a)(2) if there is no duty to disclose the allegedly false or misleading information. In re Morgan Stanley Technology Fund Sec. Litig., 643 F.Supp.2d 366, 381-82 (S.D.N.Y. 2009), citing In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 267 (2d Cir. 1933)(an actionable claim under the Securities Act or the Exchange Act must plead a material omission that involves information that the defendant has a duty to disclose).

         IV. Employee Stock Option Plans

         To have standing to sue under the 1933 and 1934 Acts, a plaintiff must be either a purchaser or a seller of the securities at issue. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975). Therefore for the securities laws to apply to a transaction between the employer and the employee, there must be a “security” and a “sale.” To determine whether a stock option plan is covered by the securities laws, the Court first examines whether the employee's interest in the plan is a “security, ” second, whether it involves an “offer” or “sale” of securities, and third, whether it falls within an exemption from either or both of the Acts.

         It is undisputed that a stock option is a security. Section 2(1) of the Securities Act of 1933, 15 U.S.C. § 77b(a)(1), and Section 3(a)(1) of the Exchange Act, 15 U.S.C. § 78c(a)(10), define a “security” almost identically, with the variations being insignificant here, to include inter alia any note, stock, bond, option, and participation in an investment contract. SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 480 & n.4 (9th Cir. 1973), cert. denied, 414 U.S. 821 (1973); Hunssinger v. Rockford Business Credits, Inc., 745 F.2d 484, 487 (7th Cir. 1984); Daily v. Morgan, 701 F.2d 496. 500 (5th Cir. 1983)(“‘Stock' is expressly included in the definition [of ‘security' in the 1933 and 1934 Acts], and represents to many people, both trained and untrained in business matters, the paradigm of a security.”); Yoder v. Orthomolecular Nutrition Institute, Inc., 751 F.2d 555, 558 (2d Cir. 1985)(holding that stock offered as an inducement to accept employment qualifies as a purchase or sale of securities under the Securities Exchange Act).

         An “investment contract” under the federal securities acts is a contract, transaction or scheme in which a person invests money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party. 15 U.S.C. § 77b(1) and § 78c(a)(10). Because the Securities Acts are remedial in nature and were enacted to regulate investments in an effort to protect against abuses in the securities market, the Supreme Court opined that the broad definition of securities “encompasses virtually any instrument that might be sold as an investment” and “embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the premise of profits.” Reves v. Ernst & Young, 494 U.S. 56, 60-61 (1990); SEC v. W.J. Howey Co., 328 U.S. 293, 299 (1946).

         In Howey, the Supreme Court established a test to determine whether a financial relationship constituted an “investment contract, ” i.e., “whether a contract transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts” of others. Id. at 298-99. In applying the test, courts should disregard form and focus on the “substance--the economic realities of the transaction--rather than the names that may have been employed by the parties.” United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 848-49 (1975). In Howey the Supreme Court determined, regarding the first prong, the investment of money, that the employees covered under the defined benefit[17] pension plan did not make an “investment of money, ” unlike other purchasers who had given up “some tangible and definable consideration” in return for their security”; in a pension plan “by contrast, the purported investment is a relatively insignificant part of an employee's total and indivisible compensation package” and “‘[n]o portion of an employee's compensation other than the potential pension benefits has any of the characteristics of a security. . . Only in the most abstract sense may it be said that an employee ‘exchanges' some portion of his labor in return for there possible benefits.” Int'l Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America v. Daniel, 439 U.S. 551, 560-61 (1979).[18] Nor was the second prong of the Howey test met because the pension plan's funds were mainly employer contributions. Id. at 562 (“[A] far larger portion of its income comes from employer contributions, ” and not from earnings from its assets). Because any profit made from the pension plan's investment of those monies was minimal and the covered employees would not gain or lose from the choice of those investments, the high court found that the fund was not a “common enterprise with profits to come solely from the efforts of others, ” and thus it was not an investment contract. Id. at 558, quoting Howey, 328 U.S. at 301. Finally the Supreme Court found that ERISA, which specifically regulates pension plans, undermined any reason for securities regulations of such pension plans. Id. at 569-70.

         After Howey, in Daniel the Supreme Court applied the Howey test to decide whether an employee's interest in an employee pension plan constituted a “security” under the 1934 Act. It concluded that the answer depended on whether the plan is voluntary or compulsory, individually contributory or noncontributory.[19] Daniel, 439 U.S. at 559; Employee Benefit Plans, SEC Release No. 33-6188, 1 Fed. Sec. Rep. (CCH) P 1051 at 2073-6 n, 19-20, 1980 WL 29482 (Feb. 1, 1980). A “compulsory” benefit indicates the employer imposed the benefit as a condition of employment (i.e., all employees were required to participate), while “noncontributory means that “[t]he employees paid nothing to the plan themselves, ” and the employer made all the contributions. Observing that every Supreme Court decision finding the existence of a security under the 1933 and 1934 Acts also found an investor who “chose to give up a specific consideration in return for a separable financial interest with the characteristics of a security” or a purchaser who “gave up some tangible and definable consideration for an interest that had substantially the characteristics of a security, ” the Supreme Court found that in Daniel's plan the “purported investment [was] a relatively insignificant part of an employee's total compensation package.” 439 U.S. at 560. “Only in the most abstract sense may it be said that an employee ‘exchanges' some portion of his labor in return for these possible benefits.” Id. “Looking at the economic realities, it seems clear that an employee is selling his labor primarily to obtain a livelihood, not making an investment.” Id. at 559-60.[20] Daniel held that an interest in a compulsory, noncontributory pension plan is not an interest in an investment contract, and thus not a “security” under the 1933 and 1934 Acts. Daniel, 439 U.S. at 553; Howey, 328 U.S. at 298. Thus the 1933 and 1934 Securities Acts do not apply to pension plans to which employees do not contribute and in which employee participation is compulsory because such a plan does not require the employee to “give up specific consideration in return for a separable financial interest with the characteristics of a security.” Daniel, 439 U.S. at 559, 570.

         The SEC subsequently expanded Daniel beyond pension plans to all involuntary and noncontributory employee benefit plans. SEC Release No. 33-6188 (Feb. 1, 1980); SEC Release No. 33-6281 (Jan. 15, 1981).

         Only an actual direct purchaser or seller of securities has standing to sue under Section 10(b) and Rule 10b-5. Blue Chip Stamps, 421 U.S. at 749-55, ratifying Birnbaum v. Newport Steel Corp., 193 F.3d 461, 462-63 (2d Cir. 1952). Section 11(a) of the Securities Act of 1933 “gave a right of action by reason of a false registration statement to ‘any person acquiring the security, and § 12 of the Act gave a right to sue the seller of a security who had engaged in proscribed practices with respect to prospectuses and communication to ‘the person purchasing such security from him.'” Blue Chip Stamps, 421 U.S. at 728. Section 2(3) of the Securities Act of 1933 states, “The term ‘sale' or ‘sell' shall include every contract of sale or disposition of a security or interest in a security for value, ” while section 3(a)(14) of the Securities Exchange Act of 1934 provides, “The terms ‘sales' and ‘sell' each include any contract to sell or otherwise dispose of.”

         Arising in the wake of Daniel's holding that an interest in a compulsory, noncontributory pension plan is not a “security, ” the SEC's “no-sale doctrine” provides that a grant of securities to employees pursuant to a stock bonus plan is not a “purchase or sale” where these employees “do not individually bargain to contribute cash or other tangible or definable consideration to such plans.” SEC Release No. 33-6188, 1980 WL 29482 at *15[21] (Feb. 1, 1980). Such plans are “involuntary [or compulsory], non-contributory plans.” Id. at *8. Thus compulsory noncontributory stock option plans where the employees do not individually bargain to contribute cash or other consideration are not “sales” under the definition of the Securities Act of 1933. Id. See also Compass Group PLC, SEC No-Action Letter, 1999 WL 311797 (May 13, 1999)(finding that registration of stock options was not required “when an employee does not give anything of value for stock other than the continuation of employment nor independently bargains for such stock, as a stock bonus program that involves the award of stock to employees at no direct cause.”). When an employee does not give anything of value[22] for stock other than the continuation of employment nor independently bargains for . . . stock, as when the employee receives his stock through a company-wide stock option plan “there is no ‘purchase or sale' of securities.” Wyatt v. Cendant Corp. (In re Cendant Corp. Sec. Litig.), 81 F.Supp.2d 550, 556 (D.N.J. 2000)(internal quotation omitted); McLaughlin v. Cendant Corp., (In re Cendant Corp. Sec. Litig.), 76 F.Supp.2d 539, 550 (D.N.J. 1999)(“Under the SEC's ‘no sale' doctrine, a grant of securities to an employee pursuant to a stock bonus plan is not a ‘purchase' or sale' because these employees ‘do not individually bargain to contribute cash or other tangible or definable consideration to such plan . . . [and] employees in almost all instances would decide to participate if given the opportunity.”), citing Securities Release No. 33-6188, 1980 WL 29482, and Compass Group PLC, SEC No-Action Letter, 1999 WL 311797 (May 13, 1999)(finding that no registration of stock options was required “when an employee does not give anything of value for stock other than the continuation of employment no independently bargains for such stock, such as a stock bonus program that involves the award of stock to employees at no direct cost.”); Daniel, 439 U.S. at 558-59 (holding that the Exchange Act does not apply to noncontributory, compulsory pension plan; “An employee who participates in a noncontributory compulsory pension plan by definition makes no payment into the pension fund.”).

         This reasoning has been applied to employee stock option plans. Cendant, 76 F.Supp.2d at 545-46, citing Bauman v. Bish, 571 F.Supp. 1054 (N.D. W.Va. 1983)(concluding that an employee stock option plan was “compulsory” where “there [was] no affirmative investment decision” made by the individual employee), and Childers v. Northwest Airlines, Inc., 688 F.Supp. 1357, 1363, 1364 (D. Minn. 1988)(“Plaintiffs' participation was an incident of employment and their only choice would have been to forego the receipt of benefits entirely”; “The notion that the exchange of labor will suffice to constitute the type of investment which the Securities Acts were intended to regulate was rejected in Daniel”). Only “[w]here an employee . . . acquires the right to [stock] options as part of his or her bargained-for compensation [will courts] infer that the employee made an intentional decision to ‘purchase' the options.” Cendant, 81 F.Supp.2d at 557-58, [23] citing Yoder v. Orthomolecular Nutrition Inst., Inc., 751 F.2d 555, 560 (2d Cir. 1985)(noting that the definitional sections of the two Acts, § 2 of the 1933 Act and § 2 of the 1934 Act, begin with the proviso, “When used in this title, unless the context otherwise requires[24] [emphasis added by this Court], . . ., ” and finding that the promise of a stock distribution in exchange for an individually bargained employee contract could be consideration for a “sale” under the Securities Act); Childers v. Northwest Airlines, Inc., 688 F.Supp. 1357, 1363 (D. Minn. 1988)(“Plaintiffs' participation was an incident of employment and their only choice would have been to forgo the receipt of benefits entirely.”).[25]

         Moreover where the plan is noncontributory and involuntary, the stock awarded to employees is not required to be registered because there is no “sale” to the employees since they have not individually bargained to contribute cash or other consideration to the employee stock ownership plan. 1980 SEC Release No. 33-6188. These courts and the SEC Release grew out of Daniel's finding that these stock option employees that did not directly contribute to the plan failed to meet the “investment of money” or investment contract requirement of Howey for a sale/purchase and the SEC's “no-sale” doctrine.

         Plaintiffs rely on decision by the Ninth Circuit in Falkowski v. Imation Corp., 309 F.3d 1123 (2002), amended, 320 F.3d 905 (9th Cir. 2003), that is contrary to the Cedant cases and to the 1980 SEC Release. The panel in Falkowski, interpreting SLUSA and its preemption of class actions that involved charges of fraud ”in connection with the purchase and sale of a covered security, ” grounded in California state law, dealt with a class action comprised of employees and contractors of Cemax who had received stock options through a company plan from their original employer, Cemax-Icon (“Cemax”), which was subsequently acquired by Imation and their options were converted to Imation stock options. Id. at 1126-27. A year later Imation sold Cemax to Eastman Kodak Company, and in connection with that sale, according to the plaintiffs in their class action, induced the employees to remain with Cemax-Imation merged company by misrepresenting the value of their stock and options and exaggerating the length of time they would have to exercise their options. Id. at 1127. Instead of basing their decision on the concept of an “investment contract” to which the employees had failed to contribute anything in Daniel, the Ninth Circuit panel observed that SLUSA's language was very like that of § 10(b), which bars securities fraud “in connection with the purchase or sale of any security.” Id. at 1129. Moreover, emphasizing that the Supreme Court in SEC v. Zandford, 535 U.S. 813 (2002), found that § 10b “should be construed not technically and restrictively, but flexibly to effectuate its remedial purposes” and “be viewed as part of the remedial package of federal securities laws, ” the Ninth Circuit panel focused on the fact that “the 1933 and 1934 Acts define the purchase or sale of a security to include any contract to buy or sell a security.” 15 U.S.C. §§ 77b(a)(3). 78c(a)(13)-(14).” Id. at 1129. They further reasoned that “if a person contracts to sell a security, that contract is a ‘sale' even if the sale is never consummated.” Id. The panel determined, “The grant of an employee stock option on a covered security is therefore a ‘sale' of the covered security. The option is a contractual duty to sell a security at a later date for a sum of money, should the employee choose to buy it. Whether or not the employee ever exercises the option, it is a ‘sale' under Congress's definition.” Id. at 1129-30. They concluded, “Whether or not an option grant is a sale in the lay sense, it is a sale under the securities laws because it is a contract to sell a security when the option is exercised. We reject the contrary holding of” the Cedant cases. Id. at 1130.

         This Court observes that Falkowski relied on a statement in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 750-51 (1975): “A contract to purchase or sell securities is expressly defined by section 3(a) of the 1934 Act, 15 U.S.C. section 78c(a), as a purchase or sale of securities for the purposes of the Act. . . . [T]he holders of . . . options and other contractual rights or duties to purchase or sell securities have been recognized as ‘purchasers' or ‘sellers' of securities for purposes of Rule 10b-5, not because of a judicial conclusion that they were similarly situated to ‘purchasers' or ‘sellers, ' but because the definitional provisions of the 1934 Act themselves grant them such a status.” In deciding to follow the Cedant cases and rejecting Falkowski, this Court would emphasize that Blue Chip Stamps was issued before Daniel (1979) and before the SEC 1980 Release. Moreover in the 1980 Release, the SEC changed its prior position to accord with Daniel's and its progeny's reasoning. Additional reasons for not following Falkowski are highlighted in McKissick v. Gemstar-TV Guide, Intern., Inc., 415 F.Supp.2d 1240, 1244-45 (N.D. Okla. 2005).[26]

Congress, in enacting the Securities and Exchange Act, provided definitions to help in the interpretation and application of the statutes. See 15 U.S.C. 78c. But, as the Supreme Court has stated, “The relevant definitional section of the 1934 Act are for the most part unhelpful; they only declare generally that the terms “purchase” and “sale” shall include contracts to purchase or sell. SEC v. Natl. Sec., Inc., 393 U.S. 453, 466 . . . (1969). Thus, the Court must look to other courts to discern boundaries for standing under a Rule 10b-5 cause of action to determine if the holding of stock options by the Plaintiff constitutes a contract to purchase or sell stocks. . . .
[T]he Supreme Court's language in the Blue Chip Stamps decision was nothing more than dicta that alone cannot serve as the basis for standing under 10(b) or Rule 10b-5. . . . To allow the Plaintiff, who simply held her stock options, to qualify as a purchaser or seller of stock under Rule 10b-5 under these facts would destroy the Supreme Court's reasoning for adopting the Birnbaum Rule.[27] As the Court stated, “In the absence of the Birnbaum doctrine, bystanders to the securities marketing process could await developments on the sidelines without risk.” Blue Chip Stamps, 421 U.S. at 747. . . .Here, the Plaintiff is exactly the person described by the Court, a “bystander to the securities market[].” Id. Moreover, as the Fifth Circuit has noted, “It is well established that the mere retention of securities in reliance on material misrepresentations or omissions does not form the basis for a section 10(b) or Rule 10b-5 claim.” Krim v. BancTexas Group, Inc., 989 F.2d 1435, 1443 n. 7 (5th Cir. 1993)(citing Blue Chip Stamps, 421 U.S. 723 . . . .

         V. Disregarding the Corporate Form

         Plaintiffs contend that the three Defendant UBS entities (PW, Warburg, and nonparty UBS AG) form a single enterprise which is liable to Plaintiffs for some or all of their alleged violations of the Securities Exchange Act. When an entity's corporate form is at issue, courts standardly hold that the law of the state of incorporation of that entity applies to determine whether its corporate form should be disregarded, i.e., whether one can pierce the corporate veil. Ace American Ins. Co. v. Huntsman Corp., 255 F.R.D. 179, 195 (S.D. Tex. 2008)(and cases cited therein). PW and Warburg were incorporated in Delaware; thus the Court applies Delaware's law to determine if their corporate forms should be disregarded and UBS should be treated as a single enterprise Defendant.[28]

         As stated in the complaint, PW and Warburg are subsidiaries of UBS AG. Contrary to Plaintiffs' insistence that in a Rule 12(b)(6) review the Court must accept their conclusory claim that “UBS” is a single entity and not three separate corporations as suggested by their names and corporate histories, under Delaware law a corporate entity “may be disregarded ‘only in the interest of justice, when such matters as fraud, contravention of law or contract, public wrong, or equitable considerations among members of the corporation require it, are involved.” In re Phillips Petroleum Sec. Litig., 738 F.Supp. 824, 838 (D. Del. 1990). A conclusory statement that three entities are one is not sufficient without specific facts supporting such an allegation. The separate corporate forms will not be disregarded “merely upon a showing of common management or whole ownership.” Id. “A subsidiary corporation may be deemed the alter ego of its corporate parent[29]where there is a lack of attention to corporate formalities, such as where the assets of two entities are commingled and their operations intertwined” or “where a corporate parent exercises complete domination over its subsidiary.” Mobil Oil Corp v. Linear Films, Inc., 718 F.Supp. 260, 266 (D. Del. 1989). To pierce the corporate veil under an alter ego theory, Delaware law requires a showing of fraud or similar injustice. Ace American, 255 F.R.D. at 196 (and cases cited therein). While the “general principle of corporate law ‘deeply ingrained in our economic and legal systems” is that “a parent corporation . . . is not liable for the acts of its subsidiaries, ” in exceptional circumstances plaintiffs may allege and ultimately prove that an alter ego relationship exists, in which a corporate parent exercises total domination and control over its subsidiary, that the corporation and its subsidiary “operated as a single economic entity” so that “the corporation is little more than a legal fiction, '” and the parent company has fraudulent intent Blair v. Infineon Technologies AG, 720 F.Supp. 462, 469 (D. Del. 2010), quoting United States v. Bestfoods, 524 U.S. 51, 61 (1998), and citing Bd. of Tr. of Teamsters Local 863 Pensions Fund v. Foodtown, Inc., 296 F.3d 164, 171 (3d Cir. 2002); Pearson v. Component Tech. Corp, 247 F.3d 471, 485 (3d Cir. 2001); and Mobil Oil Corp. v. Linear Films, Inc., 718 F.Supp. 260, 266 (D. Del. 1989)(“A subsidiary corporation may be deemed the alter ego of its corporate parent where there is a lack of attention to corporate formalities, such as where the assets of two entities are commingled and their operations intertwined. An alter ego relationship might also lie where a corporate parent exercises complete domination and control over its subsidiary.”). As a tool of equity, under Delaware law “[t]he corporate fiction may be disregarded to prevent fraud, ” and a wholly-owned subsidiary may sometimes be treated as an instrumentality of the parent. Buechner v. Farbenfabriken Bayer Aktiengesellschaft, 38 Del. Ch. 490, 493 (Del. Ch. 1959).

         The Third Circuit applies a “single entity test” that considers seven factors in deciding generally whether two or more corporations operated as a single economic entity: (1) a corporation is grossly undercapitalized for the purposes of the corporate undertaking; (2) a failure to observe corporate formalities; (3) the non-payment of dividends; (4) the insolvency of the debtor corporation at the time; (5) the siphoning of the corporation's funds by the dominant stockholder; (6) the nonfunctioning of other officers or directors; (7) the absence of corporate records; and (8) the fact that the corporation is merely a facade for the operations of the dominant stockholder(s). Blair, 720 F.Supp.2d at 470-71, citing United States v. Pisani, 646 F.2d 83, 88 (3d Cir. 1981)(approving the federal alter ego factors used by the Fourth Circuit in DeWitt Truck Brokers, Inc. v. W. Ray Fleming Fruit Co., 540 F.2d 681, 686-87 (4th Cir. 1976) to determine whether it was appropriate to pierce the corporate veil). “While no single factor justifies a decision to disregard the corporate entity, ” some combination of these factors is necessary and “an overall element of injustice or unfairness must always be present as well.” U.S. v. Golden Acres, Inc., 702 F.Supp. 1097, 1104 (D. Del. 1988), aff'd sub nom. Golden Acres, Inc. v. Sutton Place Corp., 879 F.2d 857 (3d Cir. 1989)(piercing the corporate veil where a subsidiary was undercapitalized, corporate formalities were not observed, the subsidiary was insolvent, the subsidiary did not pay dividends, and defendants were siphoning funds from the subsidiary, using it as “an incorporated pocketbook”). Some of these seven factors may be sufficient to show the requisite unfairness. Pisani, 646 F.2d at 88. The test does not require evidence of actual fraud as a prerequisite for piercing the corporate veil. Trustees of Nat. Elevator Industry Pension, Health Benefit and Educational Funds v. Lutyk, 332 F.3d 88, 194 (3d Cir. 2003).

         In a narrowed application of the alter ego theory, under Delaware law a court may “pierce the corporate veil of a company where . . . it in fact is a mere instrumentality or alter ego of its owner” and the two operate as a “single entity.” Fletcher v. Atex, Inc., 68 F.3d 1451, 1457 (2d Cir. 1995). To prevail on an alter ego claim, “a plaintiff must show (1) that the parent and the subsidiary operated as a single economic entity and (2) that an overall element of injustice or unfairness is present.” Id. For the first element, the plaintiff must allege “exclusive domination and control . . . to the point that [the subsidiary] no longer has legal or independent significance of its own.” Id., citing Wallace ex rel. Cencom Cable Income Partners II, LP v. Wood, 752 A.2d 1175, 1183-84 (Del. Ch. 1999). That element incorporates the list of typical factors in the general corporate veil-piercing analysis: “whether the corporation was adequately capitalized for the corporate undertaking; whether the corporation was solvent; whether dividends were paid, corporate records kept, officers and directors functioned properly, and other corporate formalities were observed; whether the dominant shareholder siphoned corporate funds; and whether, in general, the corporation simply functioned as a facade for the dominant shareholder. In re Foxmeyer Corp., 290 B.R. 229, 235 (Bankr. D. Del. 2003), citing Harco National Ins. Co. v. Green Farms, Inc., CIV. A. No. 1131, 1989 WL 110537, at *4 (Del. Ch. Sept. 19, 1989), quoting Golden Acres, 702 F.Supp. at 1104. To satisfy the second element the plaintiff must show fraud or injustice inherent “in the defendant's use of the corporate form”; however “[t]he underlying cause of action, at least by itself, does not supply the necessary fraud or injustice, ” but is distinct from the tort alleged in the suit. Id., citing In re Foxmeyer Corp., 290 B.R. 229, 236 (Bankr. D. Del. 2003); Sears, Roebuck & Co. v. Sears plc, 744 F.Supp. 1297, 1305 (D. Del. 1990). “‘To hold otherwise would render the fraud or injustice element meaningless, and would sanction bootstrapping.'” Id., citing Mobil Oil, 718 F.Supp. at 268. To pierce the corporate veil, the corporate structure must cause the fraud, and the fraud or injustice must be found in the defendants' use of the corporate form; the corporation must be a fraud or a sham existing only for the purpose of serving as a vehicle for fraud. Foxmeyer, 290 B.R. at 236 (cases not cited).[30]

         Plaintiffs have failed to allege any of these kinds of facts to warrant disregarding the corporate forms of PW and Warburg.

         V. Stock Broker Standards

         At issue in this case is whether PW, in its brokerage relationship with the investor participants in the Enron Stock Option program, had a fiduciary duty to disclose material information about Enron's fraudulent activities and financial decline to its investor retail clients purchasing or holding Enron securities or debt.

         Firms in the securities market operate in three main capacities: broker, broker-dealer, and investment advisor. Thomas controlled and their affairs are so conducted as to make them adjuncts or instrumentalities of the defendant company, ” and it listed factors that might be considered in determining whether a parent corporation is liable for the wrongdoing of a subsidiary because they operated as a single economic unit, including whether Lee Hazen, “Are Existing Stock Broker Standards Sufficient?, ” 2010 Colum. Bus. L. Rev. 710, 730 (2010).

         A “broker” is defined in Black's Law Dictionary (6th ed. West 1990) as, “An agent employed to make bargains and contracts for compensation. A dealer in securities issued by others. . . . An agent of a buyer or seller who buys or sells stocks, bonds, commodities, or services, usually on a commission basis.” See also Rauscher Pierce Refsnes, Inc. v. Great Southwest Sav., F.A., 923 S.W.2d 112, 115 (Tex. App.--Houston [14th Dist.] 1996)(“The relationship between a broker and its customer is that of principal and agent.”). Under the Exchange Act, 15 U.S.C. § 78c(a)(4)(A), a broker is “any person engaged in the business of effecting transactions in securities for the account of others.” A “broker-dealer” is defined as a “securities brokerage firm, usually registered with the S.E.C. and with the state in which it does business, engaging in the business of buying and selling securities to or for customers.” Black's Law Dictionary (6th ed. West 1990).[31] There is no explicit fiduciary standard applicable to broker-dealers under the Exchange Act, [32] but when they do more than act as order takers for their clients' transactions, they must meet other standards, including of suitability in making investment recommendations to their clients, and they must satisfy the rules of the self-regulatory organizations (“SROs”), including national securities exchanges and the Financial Industry Regulatory Authority (“FINRA, ” the self-regulatory body for broker-dealers) that oversee them. Thomas Lee Hazen, “Fiduciary Obligations of Securities Brokers, ” 5 Law Sec. Reg. § 14:133 (March 2016 update).

         Thus while a broker owes his investor-client a fiduciary duty, that duty varies in scope with the nature of their relationship, and determining that nature requires a fact-based analysis. Romano v. Merrill Lynch, Pierce, Fenner & Smith, 834 F.2d 523, 520 (5th Cir. 1987), cert. denied, 487 U.S. 1205 (1988). The nature of the account, whether nondiscretionary or discretionary, is one factor to be considered, as are the degree of trust placed in the broker and the intelligence and qualities of the customer. Id. A broker's duty is usually restricted to executing the investor's order when “the investor controls a nondiscretionary account and retains the ability to make investment decisions.”[33] Romano, 834 F.2d at 530; Martinez Tapia v. Chase Manhattan Bank, N.A., 149 F.3d 404, 412 (5th Cir. 1998).

         When investors “lack the time, capacity, or know-how to supervise investment decisions” and “delegate authority to a broker who will make decisions in their best interests without prior approval” in a discretionary account, however, there well may be a duty to disclose. Town North Bank, N.A. v. Shay Financial Services, Inc., Civ. A. No. 3:11-CV-3125-L, 2014 WL 4851558, at *17 (N.D. Tex. Sept. 30, 2014), citing Martinez Tapia, 149 F.3d at 412, [34] and SEC v. Zandford, 535 U.S. 813, 823 (2002). Under Texas law,

In a non-discretionary account, the agency relationship begins when the customer places the order and ends when the broker executes it because the broker's duties in this type of account, unlike those of an investment advisor or those of a manager of a discretionary account, are “only to fulfill the mechanical, ministerial requirements of the purchase or sale of the security . . . .” As a general proposition, a broker's duty in relation to a nondiscretionary account is complete, and his authority ceases, when the sale or purchase is made and the receipts therefrom accounted for. Thus, each new order is a new request that the proposed agent consents to act for the principal. There is no on-going agency relationship as there would be with a financial advisor or manager of a discretionary account.

Hand v. Dean Witter Reynolds, Inc., 889 S.W.2d 483, 493-94 (Tex. App.--Houston [14th Dist.] 1994, writ denied)(citations omitted).

         In a discretionary investment account, in contrast to a nondiscretionary account, a broker is a “fiduciary of his customer in a broad sense” and is required to

(1) manage the account in a manner directly comporting with the needs and objectives of the customer as stated in the authorization papers or as apparent from the customer's investment and trading history; (2) keep informed regarding the changes in the market which affect his customer's interest and act responsively to protect these interests; (3) keep his customer informed as to each completed transaction; and (4) explain forthrightly the practical impact and potential risks of the course of dealing in which the broker is engaged.

Anton v. Merrill Lynch, 36 S.W.3d 251, 257-58 (Tex. App.--Austin 2001, rev. denied)(citations omitted, emphases added in Anton), quoting Leib v. Merrill Lynch, Fenner & Smith, Inc., 461 F.Supp. 951, 953 (E.D. Mich. 1978), aff'd, 647 F.2d 165 (6th Cir. 1981).[35]

         Although there is no statutorily mandated heightened pleading of fiduciary duty for brokers, Thomas Lee Hazen, a noted scholar in the field, points out that “there is plenty of authority under the existing law that recognizes heightened obligations of securities broker-dealers, at least when they are acting in a capacity beyond that of mere order taker. . . . The law, regulations, and regulatory interpretations to date make clear that broker-dealers have fiduciary or fiduciary-like obligations when they provide services beyond executing customer orders.” Hazen, “Are Existing Stock Broker Standards Sufficient?, ” 2010 Colum. Bus. L. Rev. 710, 713-14 (2010). These legal sources include the Investment Advisers Act of 1940, regarding which the Supreme Court has held that, even though the word “fiduciary” does not appear in the statute, investment advisers are fiduciaries to their clients and must meet the fiduciary duties of care and loyalty, i.e., they must “must fully disclose material facts about prospective investments . . . [and] all conflicts of interests when giving advice.” Id. at 716, citing SEC v. Capital Gains Research Bureau, 375 U.S. 180, 191-92 (1963). A fundamental purpose common to a number of statutes enacted in the 1930's, including the Investment Advisers Act and the 1934 Act, “was to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry.” SEC v. Capital Gains Research Bureau, 375 U.S. at 186.

         The Investment Advisers Act of 1940, 15 U.S.C. § 80b-2(a)(11), however, defines “investment adviser” in relevant part as follows:

“Investment adviser” means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities, but does not include . . . (C) any broker or dealer whose performances of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor . . . .

         The Court concludes from the allegations in the complaint and the lack of mention of any special compensation for PW's advice to its retail clients that PW does not qualify as an investment advisor under subsection (C). See, e.g., Banca Cremi, S.A. v. Alex. Brown & Sons, Inc., 132 F.3d 1017, 1039 (4th Cir. 1997)(“In this case, it is clear that, to the extent that Epley and Alex. Brown provided ‘investment advisory services, ' such services were “‘solely incidental to the conduct of business as a broker dealer'” and “the Bank was not an ‘advisory client' of the defendants.”). The complaint states that PW did not charge Enron any fee to administer the Employee Stock Option program, and charged the employees merely six cents per share to exercise their options, apparently an administrative charge for effecting the transaction. #122 ¶ 67.

         Furthermore the Supreme Court has held that private rights of action under the Investment Advisers Act of 1940 are restricted to suits for equitable relief for rescission of investment adviser contracts and restitution under section 215; damages are not available. Transamerica Mortg. Advisors, Inc. v. Lewis, 444 U.S. 11 (1979). “‘[T]he rescinding party may have restitution of the consideration given under the contract, less any value conferred by the other party.'” Douglass v. Beakley, 900 F.Supp.2d 736, 745 (N.D. Tex. 2012), citing Transamerica Mortg. Advisors, 444 U.S. at 18-24. The SEC may enforce the Act by obtaining an injunction mandating that a registered investment adviser disclose to his clients any of the adviser's violations of his duties under the Act. Capital Gains, 375 U.S. at 181.[36]

         Relevant to the determination whether broker-dealers have fiduciary or fiduciary-like obligations when they provide services beyond executing customer orders are SEC rules, particularly those addressing “(a) conflicts between the firm's obligations to its customers and its own financial interests, and (b) trading in or recommending securities in the absence of adequate information about the issuer, ” made pursuant to the general anti-fraud provisions of sections 10(b), 15 U.S.C. § 78j(b), and 15(c), 15 U.S.C. §78o(c), of the 1934 Act, section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), [37] and section 206 of the Investment Advisers Act, described supra. Hazen, “Are Existing Stock Broker Standards Sufficient?, ” 2010 Colum. Bus. L. Rev. at 722.

         In the late 1930's, Congress amended the Exchange Act to authorize self-regulatory organizations for broker dealers. See, e.g., Andrew F. Tuch, The Self-Regulation of Investment Bankers, 83 Geo. Wash.L.Rev. 101, 112 & n.50 (December 2014), citing Securities Exchange Act of 1934, Pub. L. No. 73-291, 48 Stat. 8881 (codified as amended at 15 U.S.C. §§ 78a-78pp (2012)). Hazen particularly highlights the SEC and FINRA [formed in 2007 to replace the National Association of Securities Dealers (“NASD”)] regulations[38] as sources of fiduciary-like duties. Id. at 733-55. Sections 6(b)(5) and 15A(b)(6) of the Securities Exchange Act require stock exchanges and associations of brokers and securities dealers to establish rules to protect the investing public from fraudulent and manipulative practices in the securities market. 15 U.S.C. § 78o-3(b)(6). In response, a number of national exchanges and SROs have adopted “suitability rules” for brokers. The NASD adopted Rule 2310(a), which provides,

In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs.” This is the so-called “suitability rule, ” and its purpose is to protect unsophisticated investors of publicly-held corporations from the sometimes devious practices of unscrupulous securities transactions experts.

         The NYSE adopted a similar, “know your customer rule, ” NYSE Rule 405(a), which requires the officers of member organizations to “use diligence to learn essential facts relative to every customer, every order, every cash or margin account accepted or carried by such organization.” Generally regulatory rules of conduct do not provide a private right of action for individual investors, but are for actions brought by the SEC or state regulatory investors. As a result, aggrieved individual investors must frame their securities complaints as claims under § 10(b) of the Exchange Act and Rule 10b-5. Steven D. Irwin, Scott A. Lane, and Carolyn W. Mendelson, Wasn't My Brother Always Looking Out For My Best Interests? The Road to Become a Fiduciary, 12 Duquesne Bus. L. J. 41, 44-45 (Winter 2009)(“In itself, the regulatory violation does not state an independent claim for economic relief in a civil proceeding for the investor who suffered a loss at the hands of a broker who has made an unsuitable trade recommendation. Instead, the aggrieved investor must state a valid claim under Rule 10b-5. The plaintiff must allege, in connection with the purchase or sale of securities, the misstatement or omission of a material fact, made with scienter, upon which the plaintiff justifiably relied and which proximately caused the plaintiff's injury.”).

         Hazen comments regarding violations of NYSE, FINRA or NASD rules that “it is generally held that violation of a rule or a self regulatory organization will not, by itself, support a private right of action. However, a violation of an exchange or FINRA rule can form the basis of a 10b-5 action, provided of course, that all of the elements of a 10b-5 claim can be established.” “Market Regulation: Broker-Dealer Regulation; Credit Rating agencies, ” 5 Law Sec. Reg. § 14:175 (updated March 2016). The courts are split in a variety of ways over whether a private right of action exists for violations of such rules and regulations.

         The Fifth Circuit has deliberately chosen not to decide whether rules for brokers established by national exchanges and SROs, such as the NASD suitability rule or the NYSE “know your customer rule, ” provide a private cause of action for individual investors, but has found that they may be used as evidence of industry standards and practices. Miley v. Oppenheimer & Co., Inc., 637 F.2d 318, 333 (5th Cir. 1981)(en banc)(in a churning case “NYSE and NASD rules are excellent tools against which to assess in part the reasonableness or excessiveness of a broker's handling of an investor's account, ” the other five factors being the nature and objectives of the account, the turnover rate, in-and-out trading, the holding period of the respective securities, and the broker's profit), abrogated on other grounds, 470 U.S. 213 (1985).

         The Securities Exchange Act has no express civil remedy for a violation of an exchange or association rule. In a seminal opinion in Colonial Realty v. Bache and Co., 358 F.2d 178, 181 (2d Cir. 1965), cert. denied, 385 U.S. 817 (1966), in which a client sued his broker-dealer for failure to conduct its dealings in accordance with just and equitable principles of trade in violation of NYSE and NASD rules, Judge Henry J. Friendly opined that since a private remedy is not expressly stated in the 1934 Act, the finding of an implied private cause of action should be based on the court's duty to effect Congress's purpose in the statute and the federal policy it has adopted. A court may find an implied right of action under the Securities Exchange Act where there is explicit condemnation of certain conduct in the statute and when the statute provides a general grant of jurisdiction to enforce liability. Id. Judge Friendly concluded that there could be no general rule as to when a private claim can be maintained for a violation of NYSE and NASD rules because “the effect and significance of particular rules may vary with the manner of their adoption and their relationship to provisions and purpose of the statute and SEC regulations thereunder.” An implied action may arise from the protection intended by the legislature and the ineffectiveness of existing administrative and judicial remedies to accomplish. The court must examine the nature of the specific rule and its role in the regulatory scheme, with the party seeking to impose liability bearing a heavier burden of persuasion than the violation of the statute or of an SEC regulation would require. Id. at 182. Judge Friendly concluded, “The case for implication of liability would be strongest when the rule imposes an explicit ...


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