Kevin Lampkin v. UBS Painewebber, Inc., et , 925 F.3d 727 ( 2019 )

Case: 17-20608 Document: 00514971195 Page: 1 Date Filed: 05/24/2019
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
May 24, 2019
No. 17-20608
Lyle W. Cayce
Clerk
KEVIN LAMPKIN; STEPHEN MILLER, individually and on behalf of all
others similarly situated; JOE BROWN; FRANK GITTESS; TERRY
NELSON; DIANNE SWIBER; ROBERT FERRELL,
Plaintiffs - Appellants
v.
UBS FINANCIAL SERVICES, INCORPORATED, formerly known as UBS
Painewebber, Incorporated; UBS SECURITIES, L.L.C., formerly known as
UBS Warburg, L.L.C.,
Defendants - Appellees
Appeal from the United States District Court
for the Southern District of Texas
Before HIGGINBOTHAM, SMITH, and GRAVES, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
This is another appeal arising out of the collapse of Enron. Plaintiffs are
individual retail-brokerage customers of Paine-Webber who purchased Enron
securities and Enron employees who acquired employee stock options.
Plaintiffs brought this action against subsidiaries of UBS, alleging violations
of the securities laws for their role as a broker of Enron’s employee stock option
plan and for failure to disclose material information about Enron’s financial
manipulations to its retail investors. The case was initially consolidated into
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the Enron MDL until the plaintiffs elected to proceed on their own complaint.
After a lengthy stay and multiple amendments to their original pleading, the
district court dismissed the complaint for failure to state a claim. We affirm.
I.
Plaintiffs-Appellants bring this putative class action alleging violations
of the securities laws against Defendants-Appellees UBS Financial Services,
Inc. (formerly UBS PaineWebber (“PaineWebber”)) and UBS Securities LLC
(formerly UBS Warburg LLC (“Warburg”)). During the relevant time period,
PaineWebber and Warburg were separate legal entities and subsidiaries of
UBS AG.
Plaintiffs fall into two groups: (1) individual retail-brokerage customers
of PaineWebber who purchased Enron securities in a PaineWebber brokerage
account between November 5, 2000 and December 2, 2001 and (2) Enron
employees who acquired Enron stock option securities through their
employment between October 19, 1998 and November 19, 2001, which they
allege that PaineWebber underwrote (§ 11 claims) and sold (§ 12 claims).
PaineWebber provided retail brokerage services to individuals and was
acquired by UBS in July 2000. Warburg provided investment-banking services
to institutional clients.
Until its collapse in late 2001, Enron was the seventh largest corporation
in the world. Enron began as a traditional energy production and transmission
company, concentrating in natural gas pipelines, but quickly grew into an
“industry leader in the purchase, transportation, marketing, and sale of
natural gas and electricity” and related financial instruments. Enron’s rapid
expansion made it a large consumer of cash and the company considered its
credit ratings critical to its success. According to the complaint, Enron began
to “seriously manipulate [its] financials” to conceal the negative effects of its
accounting practices on public financial statements. After a series of financial
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disclosures and restatements events spiraled: the company’s CFO, Andrew
Fastow, was placed on a leave of absence, the Board of Directors formed a
special committee to investigate the financial disclosures, and eventually,
Enron filed for bankruptcy.
Plaintiffs allege that UBS 1 and Enron maintained a “mutually self-
serving relationship that took precedence over and conflicted with the interests
of UBS’s retail customers.” They claim that PaineWebber provided millions of
retail investors to whom Enron securities could be funneled, transferring
Enron’s risk into the marketplace and, in return, Enron chose PaineWebber as
the administrator of its Enron Employee Stock Option Plans, giving UBS the
“first bite at capturing Enron employee wealth to generate retail fees and
income.” Enron granted stock option plans to its employees in 1991, 1994, and
1999. 2 Under the terms of the plans, an Enron board committee 3 had the sole
authority to designate participants in the stock plan and determine the types
of awards to be granted to a participant, which were granted “for no cash
consideration or for such minimal cash consideration as may be required by
law.” PaineWebber contracted to provide brokerage services for those plans,
1 Throughout the complaint, plaintiffs refer generally to “UBS.” Plaintiffs state at the
outset that “P[aine]W[ebber], Warburg, and UBS AG may be collectively referred to herein
as ‘UBS.’” When describing allegations in the complaint, we use the language of the complaint
with respect to which defendant was responsible for each alleged action. Defendants reject
the notion that they can be viewed as a “joint venture” for purposes of assessing liability
under the securities laws, and that argument is discussed infra, Section III.
2 Defendants attached copies of the 1999 Enron Stock Plan, and the “letter agreement”
through which PaineWebber agreed to provide broker financing to Enron for the execution of
employee stock options, to its motion to dismiss before the district court. Those documents
are properly considered here. Causey v. Sewell Cadillac-Chevrolet, Inc., 394 F.3d 285, 288
(5th Cir. 2004) (“Documents that a defendant attaches to a motion to dismiss are considered
part of the pleadings if they are referred to in the plaintiff’s complaint and are central to her
claim.”).
3 “Committee” is defined as “a committee of the Board of Directors of the Company
designated by such Board to administer the Plan and composed of not less than two outside
directors.”
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agreeing to serve as the “exclusive broker for stock option exercises of all
[Enron’s] publicly traded securities.” While Enron granted the options,
PaineWebber was tasked with facilitating the option exercises and providing
record-keeping services related to the exercise of options. On the basis of those
allegations, plaintiffs claim violations under Sections 11 and 12 of the
Securities Act of 1933 (the “Securities Act”). 4 Plaintiffs claim that
PaineWebber violated the Securities Act by acting as a “seller” and
“underwriter” of Enron securities within the meaning of that statute, making
PaineWebber liable for “materially false statements contained in the Enron
prospectuses and registration statements” for Enron stock.
Plaintiffs also allege that UBS had knowledge of Enron’s “financial
chicanery” because of its “long standing banking history with Enron.”
Emphasizing that UBS is a single, integrated business venture, plaintiffs
allege that UBS positioned itself between its retail brokerage clients and
Enron, its corporate client, making it impossible for UBS to fulfill its legal
obligations to both groups. They claim UBS had material nonpublic
information about Enron’s financial manipulations and a duty to disclose that
information to its retail-brokerage customers. Plaintiffs highlight several
transactions UBS participated in that they allege evidence UBS’s knowledge
of material information: (1) 1999 and 2000 amendments of equity-forward
contracts, (2) participation in Osprey and Yosemite IV financial structures, and
(3) participation in the Enron E-Next Generation Loan. According to plaintiffs,
those transactions were devices and schemes designed to inflate the
appearance of Enron’s financial status.
Equity-forward contracts were financial instruments through which
Enron was contractually obligated to purchase a specific number of Enron
4 15 U.S.C. §§ 77k, 77l.
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shares at a specific price from UBS and UBS had to deliver to Enron a specific
number of shares at a specific price. The complaint alleges that those
instruments were, in substance, undocumented and undisclosed loans to
Enron to support Enron’s hedge transactions used to manage its income. It
documents two restructurings in 1999 and 2000 through which UBS increased
the forward contract price, allowing Enron to extract the value from the shares
in the amount of the difference between the initial forward contract price and
the increased market value of the shares. Plaintiffs allege that these
restructurings provided Enron hedges for assets that could not be hedged as
well as seed money for elicit accounting and that UBS had “institutional
knowledge of their fraudulent nature.”
With respect to its participation in the Osprey and Yosemite IV
transactions, plaintiffs allege that UBS participated in a follow-on offering of
notes issued in connection with Enron’s Osprey structure and purchased Enron
credit-linked notes offered as part of Enron’s Yosemite IV structure. Plaintiffs
claim that UBS relied on other firms’ diligence and failed to undertake its own
due diligence in contravention of “relevant industry standards and UBS’s own
internal policies.” By failing to conduct its own due diligence, plaintiffs claim
UBS acted recklessly in failing to learn that “Enron used the Osprey structure
to generate income by parking overvalued, non-performing assets in the
structure.” Similarly, plaintiffs allege UBS either knew, or was reckless in not
knowing, that Enron used the Yosemite IV transactions to obtain disguised
loans.
Finally, plaintiffs allege that E-Next Generation is “the best documented
example of UBS participating in a materially false public presentation of
Enron’s financial appearance.” They claim that UBS created an off-balance
sheet loan to allow Enron to finance “the construction of its US electric
generating build out and then, once the construction was complete, bring the
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project onto Enron’s balance sheet” after it started generating revenues.
Plaintiffs allege that the existence of the loan and its structure to avoid public
disclosure were material facts to investors.
On the basis of those allegations, plaintiffs claim violations of Section
10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) 5 and Rule
10b-5 thereunder. 6 They claim UBS violated Section 10(b) of the Exchange Act
and Rule 10b-5 thereunder by failing to disclose the conflicts under which it
operated its brokerage business and the information and knowledge it
possessed during the class period concerning the manipulation of Enron’s
public financial appearance. Plaintiffs contend that defendants’ acts, practices,
and course of business combined to operate a fraud upon the plaintiffs,
deceiving them “into believing the price at which they purchased or held their
Enron securities was determined by the natural interplay of supply and
demand.”
This case was initially filed in March 2002 and has a long procedural
history. Plaintiffs filed a second amended complaint in June 2002 and, in
November of that year, this case was coordinated with a multi-district
litigation under the lead case Newby v. Enron Corp. In November 2003, the
district court denied defendants’ motion to dismiss the second amended
complaint and the case proceeded to discovery. In July 2006, the district court
ordered all MDL plaintiffs who wanted to proceed under their own complaints
to give notice of that intent, which plaintiffs did, opting to “proceed under their
own independent complaint, as finally amended.” The operative third amended
complaint was filed the next month and defendants filed a timely motion to
dismiss. Shortly thereafter, this court decertified the Newby class 7 and the
5 15 U.S.C. § 78j(b).
6 17 C.F.R. § 240.10b-5.
7 Regents of Univ. of Cal. V. Credit Suisse First Bos., 482 F.3d 372, 377 (5th Cir. 2007).
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Supreme Court granted certiorari on a case concerning the scope of liability
under Section 10(b) of the Exchange Act. 8 The district court stayed this case
pending resolution of Stoneridge by the Supreme Court. Two years after the
Supreme Court’s decision came down, plaintiffs moved to lift the stay and, a
year later, the district court lifted that stay. Plaintiffs moved to amend their
complaint a fourth time and the district court denied plaintiffs’ motion as
untimely. In February 2017, five and a half years after the stay was lifted, the
district court granted defendants’ motion to dismiss and denied plaintiffs’
subsequent motion for reconsideration. This appeal followed.
II.
“This court reviews de novo a district court’s grant or denial of a Rule
12(b)(6) motion to dismiss, ‘accepting all well-pleaded facts as true and viewing
those facts in the light most favorable to the plaintiff[.]’” 9 “To survive a motion
to dismiss, a complaint must contain sufficient factual matter, accepted as
true, to ‘state a claim to relief that is plausible on its face.’” 10 “A claim has facial
plausibility when the plaintiff pleads factual content that allows the court to
draw the reasonable inference that the defendant is liable for the misconduct
alleged.” 11 However, “the tenet that a court must accept as true all of the
allegations contained in a complaint is inapplicable to legal conclusions” or
“[t]hreadbare recitals of the elements of a cause of action, supported by mere
conclusory statements.” 12 Where a plaintiff alleges fraud, Fed. R. Civ. P. 9(b)
“creates a heightened pleading requirement that ‘the circumstances
8 Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008).
9 True v. Robles, 571 F.3d 412, 417 (5th Cir. 2009) (quoting Stokes v. Gann, 498 F.3d
483, 484 (5th Cir. 2007)).
10 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550
U.S. 544, 570 (2007)).
11 Id. (citing Twombly, 550 U.S. at 556).
12 Id. (citing Twombly, 550 U.S. at 555).
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constituting fraud or mistake shall be stated with particularity.’” 13 To meet
that heightened pleading standard, “the who, what, when, and where must be
laid out before access to the discovery process is granted.” 14 Securities fraud
claims under Section 10(b) are subject to Rule 9(b)’s heightened pleading
standards. 15
This court reviews a district court’s decision denying a motion for leave
to amend for abuse of discretion. 16 Fed. R. Civ. P. 16(b) governs amendments
to pleadings after a scheduling order has been entered by the district court 17
and provides that a scheduling order “may be modified only for good cause and
with the judge’s consent.” 18
III.
Plaintiffs bring claims against PaineWebber in its capacity as “the
exclusive broker and stock option plan administrator for Enron,” contending
that PaineWebber is liable for false statements in Enron’s prospectuses and
registration statements. Under Section 11, an underwriter can be liable to a
person who acquires a security where the registration statement “contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein.” 19 Under Section 12, any person who “offers or sells a
security,” with a prospectus or oral communication “which includes an untrue
statement of a material fact or omits to state a material fact necessary in order
13 United States ex rel. Rafizadeh v. Cont’l Common, Inc., 553 F.3d 869, 872 (5th Cir.
2008) (quoting Fed. R. Civ. P. 9(b)).
14 Southland Secs. Corp. v. Inspire Ins. Sols., Inc., 365 F.3d 353 (5th Cir. 2004)
(quoting ABC Arbitrage Plaintiffs Grp. v. Tchuruk, 291 F.3d 336, 349 (5th Cir. 2002)).
15 Id. at 3620
16 Moore v. Manns, 732 F.3d 454, 456 (5th Cir. 2013) (citing Wilson v. Bruks-Klockner,
Inc., 602 F.3d 363, 368 (5th Cir. 2010).
17 S&W Enters., LLC v. SouthTrust Bank of Ala., NA, 315 F.3d 533, 535 (5th Cir.
2003).
18 Fed. R. Civ. P. 16(b)(4).
19 15 U.S.C. § 77k(a)(5).
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to make such statements, in the light of the circumstances under which they
were made, not misleading,” is liable to the person “purchasing such security
from him.” 20
The parties dispute whether the Enron employee stock option plans
amounted to a sale of securities within the meaning of the statute. The district
court held that the stock option plans did not constitute a sale as a matter of
law because “there is no investment of money in a common enterprise with
profits to come solely from the efforts of others, for which the plan participants
expect a profit and . . . because Enron’s stock option plans are noncontributory
and compulsory for its employees.” Plaintiffs contend that the district court
erred by conflating employee stock ownership plans and employee stock option
plans. While an employee benefit plan requires a court to determine whether
the beneficiary interest is a security, plaintiffs assert that the stock options
here are securities under the statutory definition, meaning the Daniel test to
determine whether the interest is a security is inapplicable. Relying on the
same distinction, plaintiffs maintain that the SEC’s “no-sale doctrine” for
employee benefit plans does not apply to employee stock option plans.
Plaintiffs contend that there was a “sale” here because the grant of the Enron
options was “for value”—the provision of services through employment.
Sections 11 and 12 expressly limit liability to “purchasers or sellers of
securities.” 21 The Securities Act defines a sale as “every contract of sale or
disposition of a security or interest in a security, for value.” 22 In Daniel, the
Supreme Court determined that an employee’s “participation in a
noncontributory, compulsory pension plan” is not the equivalent of purchasing
20 15 U.S.C. § 77l(a)(2).
21 Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 736 (1975) (Ҥ 11(a) of the
1933 Act confines the cause of action it grants to ‘any person acquiring such security’ while
the remedy granted by § 12 of that Act is limited to the ‘person purchasing such security.’”).
22 15 U.S.C. § 77b(a)(3).
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a security. 23 To determine whether a transaction “constitutes an investment
contract, ‘[t]he test is whether the scheme involves an investment of money in
a common enterprise with profits to come solely from the efforts of others.’” 24
The Court noted that for the employees participating in the pension plan, the
“purported investment is a relatively insignificant part” of the employee’s total
compensation, and the decision to accept and retain employment likely had
only an attenuated relationship to the investment. 25 For that reason,
participation in the noncontributory, compulsory pension plan was unlike
other cases where the Court recognized “the presence of a ‘security’ under the
Securities Acts”—in those cases the investor gave up a specific consideration
in return for a “separable financial interest with the characteristics of a
security.” 26
Shortly after Daniel, the SEC issued a release to “resolve the
uncertainty” surrounding Daniel’s application to “many types of employee
benefit plans not covered by the decision.” 27 In that release, the SEC clarified
that “for the registration and antifraud provisions of the 1933 Act to be
applicable, there must be an offer or sale of a security.” 28 The SEC went on to
explain that although “plans under which an employer awards shares of its
stock to covered employees at no direct cost to the employees” do award
securities, “there is no ‘sale’ in the 1933 Act sense to employees, since such
persons do not individually bargain to contribute cash or other tangible or
definable consideration to such plans.” 29 The following year, the SEC released
23Int’l Brotherhood of Teamsters v. Daniel, 439 U.S. 551, 558 (1979) (citing SEC v.
W.J. Howey Co., 328 U.S. 293, 300 (1946)).
24 Id.
25 Id. at 560.
26 Id. at 559.
27 SEC Release No. 33-6188, 45 F.R. 8960 (Feb. 1, 1980).
28 Id. at 8962.
29 Id. at 8968.
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a second interpretive release to supplement the 1980 release and “provide
further guidance and assistance to employers and plan participants in
complying with the Act.” 30 The SEC clarified the definition of voluntary and
contributory plans, noting “it is the staff’s view that the determination of
whether a plan is a voluntary contributory one rests solely on whether the
participating employees can decide at some point whether or not to contribute
their own funds to the plan.” 31 In an interpretive release on Regulation D
exemptions, the SEC noted “[i]n a typical plan, the grant of the options will not
be deemed a sale of a security for purposes of the Securities Act.” 32
PaineWebber also points to a number of “No Action Letters” sent by the SEC
that support the conclusion that the SEC does not consider a compulsory option
grant a “sale” under the Securities Act. 33
Consistent with the interpretations of the SEC, courts have extended
Daniel to compulsory and involuntary employee stock option plans. 34 “A
30 SEC Release No. 33-6281, 1981 WL 36298 (Jan. 15, 1981).
31 Id. at *2.
32 SEC Release No. 33-6455, 48 F.R. 10045, 10054 (March 10, 1983). Plaintiffs take
pains to minimize this statement, correctly noting that it was made in the context of defining
the scope of Regulation D exemptions for an employee stock option plan for key employees.
Id. While they are correct about the context, the statement did not explicitly limit its no-sale
determination to that narrower context. While not determinative on its own, the statement
further supports PaineWebber’s position that the compulsory option grants were not a sale
under the meaning of the Securities Act.
33 See e.g., Sarnoff Corp., SEC No-Action Letter, 2001 WL 811033, at *10 (July 16,
2001) (“As discussed earlier, Sarnoff would give employees Interests or options to acquire
Interests at no cost, and would receive no cash, property, services, or surrender of a legal
right in exchange for the Interests or options (including upon exercise of the options). Rather,
Sarnoff employees would be fully, fairly, and completely compensated for their employment
activities on behalf of Sarnoff through Sarnoff's standard salary, bonuses, and similar
compensation. Hence, the Program would not involve the ‘sale,’ ‘offer for sale,’ or ‘solicitation
of an offer to buy’ securities and no registration therefore should be required under the
Securities Act.”).
34 See e.g., In re Cendant Corp. Sec. Litig., 76 F. Supp. 2d 539, 544–45 (D.N.J. 1999)
(“[C]ourts apply the SEC’s ‘no sale’ doctrine when an employee’s plan is found to be
compulsory and noncontributory. This reasoning has been extended to employee stock option
plans.”) (internal citation omitted).
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hallmark of a ‘voluntary’ plan is the ability of the employee to make an
‘investment decision’ to acquire the stock options.” 35 The central question of
Daniel is “whether employees made an investment decision that could be
influenced by fraud or manipulation.” 36 Where employees’ participation is an
“incident of employment,” there is no bargained-for exchange that requires an
affirmative investment decision 37—under Daniel, the “exchange of labor” is
insufficient. 38
Plaintiffs assert that the cases extending the no-sale doctrine to
employee stock option plans are a pernicious “disease” infecting the federal
jurisprudence—they maintain that the doctrine is limited to ERISA employee
benefit plans like the employee pension plan at issue in Daniel and certain
employee stock ownership plans. But as the district court correctly recognized,
the grant of options to employees here was not a sale. The employees did not
bargain for the options and they were granted for no cash consideration.
Plaintiffs attempt to distinguish option grants by pointing out that the
employees would be forced to make an affirmative investment decision after
the grants were made—at that point, employees would decide whether to
exercise the option or allow it to expire unexercised. However, plaintiffs
expressly disclaim reliance on the exercise of the options. Indeed they
repeatedly emphasize that “[t]he Options Plaintiffs’ claims in no way depend
upon the exercise of a stock option to purchase the underlying stock.” Their
claim is based entirely on the grant of the options—an action which required
no affirmative investment decision by the plaintiffs. Their theory that option
35 In re Cendant Corp. Sec. Litig., 81 F. Supp. 2d 550 (D.N.J. 2000) (internal citation
omitted).
36 In re Lehman Bros. Holdings Inc., 855 F.3d 459, 469 (2d Cir. 2017).
37 In re Cendant Corp., 76 F. Supp. 2d at 545 (quoting Childers v. Northwest Airlines,
Inc., 688 F. Supp. 1357, 1363 (D. Minn. 1988)).
38 Id. (quoting Bauman v. Bish, 571 F. Supp. 1054, 1064 (N.D.W. Va. 1983)).
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grants fall outside the purview of the no-sale doctrine is contradictory: the
affirmative investment decision is made when the employees decide whether
to exercise their options, but their claims are explicitly based only on the grant
of the options.
Finding no caselaw to support their position, plaintiffs rely heavily on an
SEC proceeding against Google, Inc. and David Drummond, Google’s general
counsel. 39 The SEC instituted cease-and-desist proceedings against Google and
Drummond for failing to comply with Rule 701, which provides certain
Securities Act exemptions to securities issuers who are not subject to the
Exchange Act’s reporting requirements. 40 Rule 701 is designed to “allow[]
privately-held companies to compensate their employees with securities
without incurring the obligations of public registration and reporting.” 41 The
SEC determined that Google—a privately-held company to whom Rule 701
applied—and Drummond violated or caused the company to violate its
reporting requirements by exceeding the $5 million threshold set out by Rule
701. 42 Plaintiffs contend that the proceedings “confirm” that granting stock
options involves a sale within the meaning of the Securities Act. Plaintiffs
overread those proceedings. While their interpretation is a plausible extension
of the Google decision, the SEC did not address the no-sale doctrine and made
its decision in the context of concluding which exemptions a private company
could take advantage of. 43 We are not persuaded that the SEC’s decision in
Google indicates a wholesale rejection of the no-sale doctrine in the context of
39 In the Matter of Google, Inc. and David C. Drummond, SEC Admin. Proc. No. 3-
11795, Rel. No. 8523 (Jan. 13, 2005).
40 Id. at *2; 17 C.F.R. § 230.701(b)(1).
41 Id.
42 Id.
43 In addition to Rule 701, the SEC considered whether the Google option grants
qualified under Section 4(2), which exempts certain private security offerings and Rule 506,
which provides an exemption for options issued to certain accredited investors. Id.
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employee option grants. Finally, even if the Google decision did represent a
change in the SEC’s stance—and we conclude it does not—plaintiffs fail to
show how that 2005 decision could be applied retroactively to PaineWebber’s
actions between 1998 and 2001. 44
At base, plaintiffs Securities Act claims fail because their participation
in the Employee Stock Option Plan was compulsory and employees furnished
no value, or tangible and definable consideration in exchange for the option
grants. The Court in Daniel rejected the idea that the exchange of labor was
sufficient consideration in the context of a compulsory, non-contributory
pension plan—the same logic applies to the option plan at issue here. 45
Plaintiffs made no investment decision in the grant of the options, the Enron
plans were compulsory and non-contributory. The fact that plaintiffs would
eventually make an affirmative investment decision—whether to exercise the
option or let it expire—at some point in the future is of no consequence.
Plaintiffs’ claims are based explicitly on the grant of the option, not the exercise
of that option. Because plaintiffs have not overcome the most fundamental
hurdle to their Securities Act claims, we need not consider UBS’s alternative
arguments that (1) PaineWebber was not an underwriter or seller; (2) plaintiffs
failed to allege that any false prospectus or registration statement covered the
Enron options; and (3) that plaintiffs failed to plead damages. Plaintiffs’
Securities Act claims require a sale—plaintiffs have failed to demonstrate that
the grant of Enron options amounted to the sale of a security. For those
reasons, the district court correctly dismissed plaintiffs’ Section 11 and Section
12 claims.
44 Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 208 (1988) (“[A]dministrative rules
will not be construed to have retroactive effect unless their language requires this result.”).
45 Daniel, 439 U.S. at 569.
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IV.
In their second set of claims, the retail-brokerage customer plaintiffs
contend that UBS violated Section 10(b) of the Exchange Act and Rule 10b-5
thereunder by failing to disclose information and knowledge regarding “the
manipulation of Enron’s public financial appearance” in the face of a duty to
do so. To state a claim for securities fraud under Section 10(b) of the Exchange
Act, a plaintiff must adequately allege “(1) a material misrepresentation (or
omission); (2) scienter, i.e., a wrongful state of mind; (3) a connection with the
purchase or sale of a security; (4) reliance . . .; (5) economic loss; and (6) loss
causation, i.e., a causal connection between the material misrepresentation
and the loss.” 46 Plaintiffs’ claims are based on UBS’s alleged silence in violation
of a duty to disclose. The crux of plaintiffs’ claim is that PaineWebber and
Warburg united in a joint venture named UBS, that that joint venture owed a
duty to its retail brokerage clients stemming from the security industry’s self-
regulatory organization rules and UBS’s “special relationship” with plaintiffs,
and that UBS failed to disclose information that “Enron manipulated and
materially misstated its financial results to the public.”
The district court concluded that plaintiffs failed to plead sufficient facts
to support a plausible claim that Warburg and PaineWebber functioned as a
single entity, did not establish that defendants acted with scienter, and did not
establish that Warburg or UBS AG, which were not parties to the contract
between Enron and PaineWebber, owed a duty to plaintiffs. Essentially, the
district court determined that plaintiffs had not shown that Warburg owed a
duty to disclose information it possessed to clients of PaineWebber by virtue of
any “joint venture” between Warburg and PaineWebber and, in fact, that
46 Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 341–42 (2005) (internal
citations omitted).
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Warburg could not share information with PaineWebber because of “federally
required Chinese Walls” between PaineWebber and Warburg, in its capacity
as an investment bank.
After the parties submitted their briefing in this case, another panel of
this court issued an unpublished decision in a related case, affirming the same
district court’s dismissal of similar Exchange Act claims brought by
PaineWebber customers who had bought Enron bonds or other debt
instruments. 47 In their response to defendants’ 28(j) letter, plaintiffs attempt
to distinguish Giancarlo by stating that the panel “simply found the [appellate]
briefing submitted by the Giancarlo plaintiffs’ insufficient to demonstrate a §
10(b) claim” and based its decision on those deficiencies rather than “perceived
deficiencies in their pleading in the trial court.” 48 Plaintiffs assert that the
panel’s decision “is not a decision on the merits of the § 10(b) claim asserted by
the Plaintiffs in the Lampkin case.” 49 That characterization is inconsistent
with the panel opinion, which held that plaintiffs had not adequately
established the existence of a joint venture, nor put forth any other theory that
permitted aggregation of the actions and knowledge of the defendant entities, 50
and had failed to establish that any one defendant had material non-public
knowledge and a duty to disclose that knowledge to the plaintiffs. 51 The panel
concluded, therefore, that “the district court properly dismissed Plaintiffs’
47 Giancarlo v. UBS Fin. Servs., Inc., 725 F. App’x 278 (5th Cir. 2018) (unpublished),
cert denied, 139 S. Ct. 199 (2018). As defendants note in their 28(j) letter to this court,
Giancarlo was litigated in parallel with the instant action by the same counsel before the
same district court. See Feb. 28, 2018 28(j) Letter.
48 March 6, 2018 Response to 28(j) Letter.
49 Id.
50 Giancarlo, 725 F. App’x at 284.
51 Id. at 286.
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amended complaint.” 52 Although we are not bound by an unpublished decision,
we find the reasoning in Giancarlo persuasive and adopt it here.
First, plaintiffs contend that they adequately alleged that PaineWebber
and Warburg united to form a joint venture named UBS. Plaintiffs urge that
because PaineWebber and Warburg were incorporated under Delaware law,
the court looks to the Delaware standard for establishing that a joint venture
exists: where there is (1) a community of interest in the performance of a
common purpose, (2) joint control or right of control, (3) a joint proprietary
interest in the subject matter, (4) a right to share in the profits, (5) a duty to
share in the losses which must be sustained. 53 Plaintiffs point to allegations
that UBS made public admissions in media releases describing itself as an
“integrated” bank and predicted in a press release after PaineWebber’s
acquisition that PaineWebber would become “an integral part of UBS
Warburg.” However, like the plaintiffs in Giancarlo, plaintiffs here do not
explain how the allegations they point to support a finding that defendants
shared profits or losses or establish that defendants had joint control or right
of control over the joint venture. 54 The press releases described by plaintiffs
support a shared interest but are insufficient to support joint venture liability
under Delaware law—as this court in Giancarlo emphasized, “vague corporate
platitudes about integration as a firm” are insufficient to support a finding of
joint venture liability. 55 Beyond plaintiffs’ conclusory statements that UBS
52 Id.
53 Warren v. Goldinger Bros., Inc., 414 A.2d 507, 509 (Del. 1980) (quoting Kilgore Seed
Co. v. Lewin, 141 So. 2d 809, 810–11 (Fla. App. 1962)).
54 Giancarlo, 725 F. App’x at 283–84 (“None of the allegations allude to profit sharing,
or loss sharing.”) (citing N.S.N. Int’l Indus., N.V. v. E.I. DuPont de Nemours & Co., C.A., No.
12902, 1994 WL 148271 (Del. Ch. Mar. 31, 1994) (finding no joint venture where agreement
between parties did not contemplate loss sharing)).
55 Id. (citing Warren, 414 A.2d at 509); see also Janus Cap. Grp., Inc. v. First Derivative
Traders, 564 U.S. 135, 145–46 (2011) (“declin[ing] th[e] invitation to disregard the corporate
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was a single, integrated entity, plaintiffs have not established the existence of
a joint venture and, as in Giancarlo, “have not put forth any other theory that
permits us to aggregate the actions and knowledge of the defendant entities
for purposes of assessing liability.” 56
With respect to duty, plaintiffs contend that defendants had knowledge
of material nonpublic information concerning Enron and that they owed a duty
to disclose that information. Plaintiffs assert that a duty to disclose arose
through UBS’s retail brokerage relationship with plaintiffs and through UBS’s
“special relationship” as a entity between its retail client and its issuer client.
Because, as we discussed, plaintiffs have not adequately pled that Warburg
and PaineWebber formed a joint venture, they must demonstrate that the
entity that possessed the material, nonpublic information—according to
plaintiffs allegations, Warburg or UBS AG—had the duty to disclose that
information. 57
Plaintiffs emphasize that a duty to disclose can arise without the
existence of a fiduciary duty, and point to two sources of the alleged duty here.
First, they contend that the security industry’s self-regulation rules give rise
to actionable duties under the Exchange Act. According to plaintiffs, the
integration of a retail brokerage business (PaineWebber) into the joint venture
brought with it duties placed on broker-dealers by the rules of two self-
regulatory organizations (“SROs”), the NASD and NYSE. Plaintiffs claim that
the NASD and NYSE “establish obligatory standards” and “obligated UBS to
form” where it was “undisputed that the corporate formalities were observed” and entities
remained legally separate).
56 Id. at 284.
57 Giancarlo, 725 F. App’x at 284 (“Moreover, even a searching review of the relevant
documents supports, at most, that Warburg and UBS AG had some insider knowledge of
Enron’s financial situation, as those are the defendants that participated in the transactions
identified by Plaintiffs. Thus, Plaintiffs must show that Warburg or UBS AG owed them a
duty of disclosure.”).
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speak.” Plaintiffs’ complaint cites to NASD Rule 2210(d) which governs “[a]ll
member communications with the public” and mandates that “[n]o material
fact or qualification may be omitted if the omission . . . would cause the
communications to be misleading.” This theory of duty falls with plaintiffs’
theory of joint venture liability. The SRO rules depend on a communication—
but as in Giancarlo, PaineWebber was the entity that communicated with the
retail brokerage customer plaintiffs but plaintiffs fail to allege that
PaineWebber had knowledge of Enron’s financial misrepresentations. 58 The
defendant with the duty was not the defendant with the knowledge. Simply
labeling the offending entity “UBS” does not rescue plaintiffs from this fatal
flaw.
Plaintiffs also point to a second source of defendants’ alleged duty, the
alleged “special relationship” between UBS and plaintiffs. Essentially,
plaintiffs claim that UBS stood between Enron and its retail brokerage
customers and that special relationship obligated its disclosure about Enron’s
financial manipulations. In support of this alleged duty, plaintiffs rely on
Affiliated Ute Citizens of Utah v. United States. 59 In Affiliated Ute, a bank that
was acting as a transfer agent for Ute tribe members bought the plaintiffs’
restricted stock without disclosing that they had created a secondary market
for the stock where they could sell it for a profit. 60 The Court held that the
“sellers had the right to know that the defendants were in a position to gain
financially from their sales and that their shares were selling for a higher price
58 Giancarlo, 725 F. App’x at 285 (“The only defendant alleged to have ‘communicated’
with Plaintiffs is PaineWebber, and Plaintiffs have not sufficiently alleged that any person
at PaineWebber had knowledge concerning Enron’s financial manipulations. Thus, even if
we accepted Plaintiffs’ invitation to hold that NASD rules can impose a duty of disclosure for
purposes of § 10(b) liability, Plaintiffs have not shown that any defendant violated such
rules.”) (internal citations omitted).
59 406 U.S. 128 (1972).
60 Affiliated Ute, 406 U.S. at 152–53.
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in that market.” 61 Plaintiffs have not alleged an analogous relationship
between themselves and the entity that sold them securities, PaineWebber.
Furthermore, plaintiffs do not suggest that PaineWebber was the entity that
had knowledge of the Enron securities market. 62 PaineWebber was the broker
for the retail-brokerage customers while UBS AG and Warburg were the
entities that played a role in the particular transactions identified in the
complaint purporting to evidence the material knowledge of Enron’s financial
manipulations—again, plaintiffs’ use of the grouping “UBS” does not cure the
fact of those entities’ separate legal statuses.
Plaintiffs fundamentally fail to establish that either defendant had
material, nonpublic knowledge to disclose and a duty to disclose. They attempt
to circumvent this requirement by arguing that UBS operated as a “single,
fully integrated entity,” meaning that any material, nonpublic information
known to UBS AG or Warburg had to be disclosed by PaineWebber. Because
they have not adequately pled that defendants formed a joint venture, the lack
of particularized allegations that any defendant entity possessed material
information about Enron’s finances and a duty of disclosure are fatal to their
claim. 63
61 Id. at 153.
62 See e.g., Giancarlo, 725 F. App’x at 286 (“Documents attached to the pleadings
discuss the role of ‘UBS Warburg AG’ in several transactions and indicate that that ‘UBS
Warburg’ was the ‘joint lead manager of Credit Linked Notes for Enron.’ Plaintiffs specify
that their brokers were employees of PaineWebber. Plaintiffs do not argue that PaineWebber
had any special knowledge of the market for Enron debt securities, and UBS AG’s and
Warburg’s dealings with Enron cannot support that PaineWebber had a duty of disclosure.”).
63 Id. at 284 (citing Fin. Acquisition Partners LP v. Blackwell, 440 F.3d 278, 289 (5th
Cir. 2006)).
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V.
Plaintiffs contend that, even if their third amended complaint was
properly dismissed by the district court, the court abused its discretion in
denying them the opportunity to file an amended complaint.
While Fed. R. Civ. P. 15(a) provides that leave to amend shall be “freely”
given, 64 where a plaintiff seeks to amend its complaint after a scheduling order
has been entered, Fed. R. Civ. P. 16(b) governs. 65 Under that rule, a scheduling
order “may be modified only for good cause and with the judge’s consent.” 66
The court must consider four factors in determining whether there was good
cause for the delay: (1) the explanation for the failure to timely move for leave
to amend, (2) the importance of the amendment, (3) the potential prejudice the
other party would suffer if the amendment was allowed, and (4) the availability
of a continuance to cure that prejudice. 67
Plaintiffs explain their failure to seek timely amendment, pointing to
depositions of Enron’s former CFO and UBS’s expert, which were taken after
the amendment deadline, and UBS’s “unforeseeable denial” of facts admitted
to in its SEC filings. As this court recognized in Giancarlo, which proceeded
under a similar schedule, Enron’s CFO was deposed eight months before this
action was stayed, during which time plaintiffs failed to seek to amend their
complaint. 68 Plaintiffs waited a full two years after Stoneridge was decided
before moving to lift the stay. Plaintiffs’ suggestion that they could not have
predicted that defendants would argue that Warburg and PaineWebber are
separate legal entities is implausible given the reference to different entities
64 Fed. R. Civ. P. 15(a).
65 S&W Enters., 315 F.3d at 535.
66 Fed. R. Civ. P. 16(b)(4).
67 S&W Enters., 315 F.3d at 536 (citing Reliance Ins. Co. v. La. Land & Exploration
Co., 110 F.3d 253, 257 (5th Cir. 1997)).
68 Giancarlo, 725 F. App’x at 287–88.
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in different allegations of the operative complaint. Plaintiffs also submit that
the proposed amendment was “clearly” important given the dismissal in the
case. Again, as in Giancarlo, that conclusory statement does not tell this court
which new allegations would cure the deficiencies highlighted by the district
court. 69 Specifically, plaintiffs have not made clear how their revised
allegations would support their theory that PaineWebber and Warburg
participated in a joint venture. Even taking plaintiffs at their word that
defendants would not have been overly prejudiced by the proposed
amendment, the first two factors in the analysis are determinative here. The
district court did not abuse its discretion in refusing to grant leave to amend.
VI.
Because plaintiffs failed to state a claim under the Securities Act or the
Exchange Act and the district court did not abuse its discretion in denying
plaintiffs an additional chance to amend their complaint, we affirm the district
court’s dismissal.
69 Id. at 288.
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