6 Opposition To Arthur Andersen LLP's Motion To Dismiss 06/10/2002

87 Pages·2002·0.37 MB·English

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
In re ENRON CORPORATION SECURITIES § Civil Action No. H-01-3624
LITIGATION § (Consolidated)
§
§ CLASS ACTION
This Document Relates To: §
§
MARK NEWBY, et al., Individually and On §
Behalf of All Others Similarly Situated, §
§
Plaintiffs, §
§
vs. §
§
ENRON CORP., et al., §
§
Defendants. §
§
THE REGENTS OF THE UNIVERSITY OF §
CALIFORNIA, et al., Individually and On §
Behalf of All Others Similarly Situated, §
§
Plaintiffs, §
§
vs. §
§
KENNETH L. LAY, et al., §
§
Defendants. §
§
OPPOSITION TO ARTHUR ANDERSEN LLP'S
MOTION TO DISMISS
TABLE OF CONTENTS
Page
I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II. Factual Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
A. Year-End 97 Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
B. The 97-00 Successes – Enron's Stock Soars . . . . . . . . . . . . . . . . . . . 5
C. The Partnerships and SPEs . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
D. Enron Energy Services ("EES") . . . . . . . . . . . . . . . . . . . . . . . . .16
E. Enron Broadband ("EBS") . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
F. New Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
G. Hidden/Disguised Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
H. Enron's Access to the Capital Markets . . . . . . . . . . . . . . . . . . . . . .21
I. Late 00/Early 01 Prop-Up . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
J. The Impending Collapse . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
K. The End . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
III. Andersen's Scienter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
A. Andersen's Desire for Fees Drove the Firm to Commit Fraud . . . . . . . . . .28
B. Andersen's Willingness to Commit Securities Fraud on Behalf of
Lucrative Clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
C. Andersen's Attempted Coverup of Enron's Fraud . . . . . . . . . . . . . . . .31
IV. Standard of Review for Andersen's Motion to Dismiss . . . . . . . . . . . . . . . . .33
V. Plaintiffs Have Adequately Alleged Andersen's Violation of §10(b) and Rule 10b-
5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
A. Plaintiffs Have Pled Andersen's Fraud with Particularity . . . . . . . . . . . .34
1. The Andersen Individual Defendants' Material Misrepresentations . . .38
a. The Andersen Individual Defendants' False Statements
About Enron's 97 and 98 Financial Statements . . . . . . . . .38
b. The Andersen Individual Defendants' False Statements
About Enron's 99 Financial Statements . . . . . . . . . . . . .39
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Page
c. The Andersen Defendants' False Statements About Enron's
00 and 01 Financial Statements . . . . . . . . . . . . . . . . .40
2. Andersen Is Liable for Enron's False Statements Because it Played
a "Significant Role" in Drafting Them . . . . . . . . . . . . . . . . . .48
3. Andersen Had a Duty to Correct its False Opinions . . . . . . . . . . .51
B. Plaintiffs Have More than Adequately Alleged Andersen's Scienter . . . . . .53
1. Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
2. Andersen Knowingly Committed Fraud . . . . . . . . . . . . . . . . .53
a. Andersen Knew Enron Improperly Hid Debt and Inflated
Income Through Use of Captive SPEs . . . . . . . . . . . . . .53
(1) Andersen Knew the Chewco and JEDI SPEs Were
Fraudulent . . . . . . . . . . . . . . . . . . . . . . . .54
(2) Andersen Knew the LJM Transactions Were
Fraudulent . . . . . . . . . . . . . . . . . . . . . . . .56
(3) Andersen Knew the Raptor Transactions Were
Fraudulent . . . . . . . . . . . . . . . . . . . . . . . .60
b. Andersen Knowingly Ignored Material Adjustments in
Enron's 97 Audit . . . . . . . . . . . . . . . . . . . . . . . . .62
c. Andersen Knew Enron's Accounting Treatment for
Braveheart Transactions Was Improper and the Company
Abused Mark-to-Market Accounting . . . . . . . . . . . . . . .63
d. The Magnitude of Enron's Restatements Raises an
Inference of Scienter . . . . . . . . . . . . . . . . . . . . . . .65
e. Andersen Disregarded Other Red Flags at Enron . . . . . . . .66
3. Andersen's Intentional Destruction of Documents Raises a Strong
Inference of Scienter . . . . . . . . . . . . . . . . . . . . . . . . . . .68
4. Andersen's Motive to Commit Fraud . . . . . . . . . . . . . . . . . . .69
VI. Plaintiffs Have Adequately Alleged Andersen's Violation of §11 . . . . . . . . . . . .71
VII. Plaintiffs Have Adequately Alleged Andersen's Violation of the Texas Securities
Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72
A. Enron Committed a Primary Violation of the Texas Securities Act . . . . . . .73
B. Andersen Had a General Awareness of Its Role in Enron's Violations and
Rendered Substantial Assistance to Enron . . . . . . . . . . . . . . . . . . .73
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C. Andersen Acted with at Least Reckless Disregard for the Truth of Enron's
Representations in the 7/7/98 Offering Documents . . . . . . . . . . . . . . .74
VIII. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75
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TABLE OF AUTHORITIES
CASES Page
A.T. Brod & Co. v. Perlow,
375 F.2d 393 (2d Cir. 1967) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
ABC Arbitrage v. Tchuruk,
No. 01-40645, 2002 U.S. App. LEXIS 9112
(5th Cir. May 13, 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . 34, 36, 37, 60
Aaron v. SEC,
446 U.S. 680 (1980) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Abrams v. Baker Hughes Inc.,
Civ. No. 01-20514, 2002 U.S. App. LEXIS 9565
(5th Cir. May 21, 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53, 59
Adam v. Silicon Valley Bancshares,
884 F. Supp. 1398 (N.D. Cal. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Affiliated Ute Citizens v. United States,
406 U.S. 128 (1972) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Anixter v. Home-Stake Prod. Co.,
77 F.3d 1215 (10th Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Basic Inc. v. Levinson,
485 U.S. 224 (1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42, 45
Bovee v. Coopers & Lybrand C.P.A.,
272 F.3d 356 (6th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59, 67
Capital Group v. Deloitte & Touche, L.L.P.,
27 F. Supp. 2d 1324 (N.D. Ga. 1998) . . . . . . . . . . . . . . . . . . . . . . . . . 63
Carley Capital Group v. Deloitte & Touche, L.L.P.,
27 F. Supp. 2d 1324 (N.D. Ga. 1998) . . . . . . . . . . . . . . . . . . . . . . . .63, 66
Central Bank, N.A. v. First Interstate Bank, N.A.,
511 U.S. 164 (1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim
Chu v. Sabratek Corp.,
100 F. Supp. 2d 815 (N.D. Ill. 2000) . . . . . . . . . . . . . . . . . . . . . . . . 36, 57
Conley v. Gibson,
355 U.S. 41 (1957) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Cooper v. Pickett,
137 F.3d 616 (9th Cir. 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Crescendo Invs. v. Brice,
61 S.W.3d 465 (Tex. App. – San Antonio 2001, pet. denied) . . . . . . . . . . . .73, 74
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Page
CFS-Related Sec. Fraud Litig.,
No. 99-CV-825-K(J) (N.D. Okla. Dec. 21, 2001) . . . . . . . . . . . . . . . . . . . 70
DSAM Global Value Fund v. Altris Software, Inc.,
288 F.3d 385 (9th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Danis v. USN Communs., Inc.,
73 F. Supp. 2d 923 (N.D. Ill. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . 67
DiLeo v. Ernst & Young,
901 F.2d 624 (7th Cir. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Ernst & Ernst v. Hochfelder,
425 U.S. 185 (1976) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Fine v American Solar King Corp.,
919 F.2d 290 (5th Cir. 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim
Finkel v. Docutel/Olivetti Corp.,
817 F.2d 356 (5th Cir. 1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
First Equity Corp. v. Standard & Poor's Corp.,
690 F. Supp. 256 (S.D.N.Y. 1988),
aff'd, 869 F.2d 175 (2d Cir. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Fla. State Bd. of Admin. v. Green Tree Fin. Corp.,
270 F.3d 645 (8th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . 61, 62, 65, 66
Frank v. Bear,
11 S.W.3d 380 (Tex. App. – Houston [14th Dist.] 2000, pet. denied) . . . . . . . .72, 73
Frymire-Brinati v. KPMG Peat Marwick,
2 F.3d 183 (7th Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Greebel v. FTP Software, Inc.,
194 F.3d 185 (1st Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Haack v. Max Internet Communs., Inc.,
Civ. No. 3:00-CV-1662-G, 2002 U.S. Dist. LEXIS 5652
(N.D. Tex. Apr. 2, 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59, 65
Heller v. Am. Indus. Props. Reit,
Civ. No. SA-97-CA-1315-EP, 1998 U.S. Dist. LEXIS 23286
(W.D. Tex. Sept. 25, 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Howard v. Everex Sys.,
228 F.3d 1057 (9th Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
In re Complete Mgmt. Sec. Litig.,
153 F. Supp. 2d 314 (S.D.N.Y. 2001) . . . . . . . . . . . . . . . . . . . . . 54, 63, 69
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Page
In re First Merchants Acceptance Corp. Secs. Litig.,
Civ. No. 97-C-2715, 1998 U.S. Dist. LEXIS 17760
(N.D. Ill. Nov. 2, 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36, 65
In re Health Mgmt. Inc. Sec. Litig.,
970 F. Supp. 192 (E.D.N.Y. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . 44, 57
In re Hi/fn, Inc. Sec. Litig.,
Civ. No. C-99-4531-SI, 2000 U.S. Dist. LEXIS 11631
(N.D. Cal. Aug. 9, 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
In re IKON Office Solutions, Inc.,
66 F. Supp. 2d 622 (E.D. Pa. 1999) . . . . . . . . . . . . . . . . . . . . 37, 38, 56, 61
In re Landry's Seafood Restaurants Inc., Sec. Litig.,
No. H-99-1948 (S.D. Tex. Feb. 20, 2001) . . . . . . . . . . . . . . . . . . . . . 46, 71
In re Leslie Fay Cos. Sec. Litig.,
835 F. Supp. 167 (S.D.N.Y. 1993) . . . . . . . . . . . . . . . . . . . . . . . 36, 55, 65
In re MicroStrategy Inc. Sec. Litig.,
115 F. Supp. 2d 620 (E.D. Va. 2000) . . . . . . . . . . . . . . . . . . . . . . . passim
In re NetSolve, Inc.,
185 F. Supp. 2d 684 (W.D. Tex. 2001) . . . . . . . . . . . . . . . . . . . . . . . .34, 49
In re Reliance Sec. Litig.,
91 F. Supp. 2d 706 (D. Del. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
In re Sec. Litig. BMC Software, Inc.,
183 F. Supp. 2d 860 (S.D. Tex. 2001) . . . . . . . . . . . . . . . . . . . . . . passim
In re Software Toolworks Sec. Litig.,
50 F.3d 615 (9th Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
In re Sunbeam Sec. Litig.,
89 F. Supp. 2d 1326 (S.D. Fla. 1999) . . . . . . . . . . . . . . . . . . . . . . . 62, 66
In re Telxon Corp. Sec. Litig.,
133 F. Supp. 2d 1010 (N.D. Ohio 2000) . . . . . . . . . . . . . . . . . . . . . passim
In re Waste Mgmt. Inc. Sec. Litig.,
Civ. No. H-99-2183 (S.D. Tex. Aug. 16, 2001) . . . . . . . . . . . . . . . . . . 46, 61
In re ZZZZ Best Sec. Litig.,
864 F. Supp. 960 (C.D. Cal. 1994) . . . . . . . . . . . . . . . . . . . . . . . 44, 49, 50
Ingenito v. Bermec Corp.,
441 F. Supp. 525 (S.D.N.Y. 1977) . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
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Page
Kinney v. Metro Global Media, Inc.,
170 F. Supp. 2d 173 (D.R.I. 2001) . . . . . . . . . . . . . . . . . . . . . . . 36, 54, 63
Lone Star Ladies Inv. Club v. Schlotzsky's Inc.,
238 F.3d 363 (5th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
McNamara v. Bre-X Minerals, Ltd.,
Civ. No. 5:97-CV-159, 2001 U.S. Dist. LEXIS 4571
(E.D. Tex. Mar. 30, 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . 49, 53, 54
Meason v. Bank of Miami,
652 F.2d 542 (5th Cir. 1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Melder v. Morris,
27 F.3d 1097 (5th Cir. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Nathenson v. Zonagen Inc.,
267 F.3d 400 (5th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim
Oran v. Stafford,
226 F.3d 275 (3d Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . 34, 59, 63
Paul F. Newton & Co. v. Texas Commerce Bank,
630 F.2d 1111 (5th Cir. 1980) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Rehm v. Eagle Fin. Corp.,
954 F. Supp. 1246 (N.D. Ill. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Reiger v. PriceWaterhouseCoopers LLP,
117 F. Supp. 2d 1003 (S.D. Cal. 2000), aff'd sub nom.,
DSAM Global Value Fund v. Altris Software, Inc.,
288 F.3d 385 (9th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
Rubinstein v. Collins,
20 F.3d 160 (5th Cir. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51, 65
Rudolph v. Arthur Andersen & Co.,
800 F.2d 1040 (11th Cir. 1986) . . . . . . . . . . . . . . . . . . . . . . . . 51, 52, 53
Schiller v. Physicians Resource Group, Inc.
Civ. No. 3:97-CV-3158-L, 2002 WL 318441
(N.D. Tex. Feb. 26, 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
SEC v. Capital Gains Research Bureau, Inc.,
375 U.S. 180 (1963) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SEC v. Cook,
Civ. No. 3:00-CV-272-R, 2001 U.S. Dist. LEXIS 2601
(N.D. Tex. Mar. 8, 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SEC v. Zandford,
__ U.S. __, No. 01-147, 2002 U.S. LEXIS 4023
(June 3, 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46, 47
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Page
SEC v. First Jersey Sec. Litig.,
101 F.3d 1450 (2d Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . 44, 49
Santa Fe Indus., Inc. v. Green,
430 U.S. 462 (1977) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Shapiro v. Cantor,
123 F.3d 717 (2d Cir. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Shores v. Sklar,
647 F.2d 462 (5th Cir. 1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Summers v. Welltech, Inc.,
935 S.W.2d 228 (Tex. App. - Houston [1st Dist.] 1996, no writ) . . . . . . . . . . . 73
Superintendent of Ins. v. Bankers Life & Casualty Co.,
404 U.S. 6 (1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46, 47
U.S. Quest, Ltd. v. Kimmons,
228 F.3d 399 (5th Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
United States v. Bank of New England, N.A.,
821 F.2d 844 (1st Cir. 1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61, 62
United States v. Natelli,
527 F.2d 311 (2d Cir. 1975) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
United States v. O'Hagan,
521 U.S. 642 (1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
United States v. T.I.M.E.-D.C., Inc.,
381 F. Supp. 730 (W.D. Va. 1974) . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Vick v. Texas Employment Com.,
514 F.2d 734 (5th Cir. 1975) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Vosgerichian v. Commodore Int'l,
862 F. Supp. 1371 (E.D. Pa. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Wright v. Ernst & Young LLP,
152 F.3d 169 (2d Cir. 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 51
Young v. Nationwide Life Ins. Co.,
2 F. Supp. 2d 914 (S.D. Tex. 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Ziemba v. Cascade Int'l, Inc.,
256 F.3d 1194 (11th Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . 47, 50, 51
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STATUTES, RULES AND REGULATIONS
15 U.S.C.
§77k(a)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
§78j(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim
§78j-l(b)(1)-(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
§78j-l(b)(3)-(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
§78u-4(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Texas Revised Civil Statutes
art. 581-33C(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73, 74, 75
art. 581-33F(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

Federal Rules of Civil Procedure
Rule 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Rule 9(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34, 36, 75
Federal Rules of Evidence
Rules 404(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
17 C.F.R.
§230.158 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
§240.10b-5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim
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