The Fifth Circuit has affirmed dismissal of claims alleging that UBS had knowledge of Enron’s "financial chicanery" and failed to disclose conflicts of interest prior to the energy giant’s collapse in 2001.
A federal district court on Texas correctly dismissed securities fraud claims brought by retail brokerage customers and former Enron employees against two subsidiaries of UBS AG. The Fifth Circuit Court of Appeals held that the plaintiffs failed to demonstrate that the grant of Enron options amounted to the "sale" of a security under the Securities Act. In addition, neither UBS subsidiary had material, nonpublic knowledge and a duty to disclose (Lampkin v. UBS Financial Services, Inc., May 24, 2019, Higginbotham, P.).
Long and winding road. In a putative class action complaint filed in March 2002, groups of both individual retail customers of PaineWebber and former Enron employees who acquired Enron stock options brokered by PaineWebber alleged that UBS and Enron maintained a "mutually self-serving relationship" that took precedence over and conflicted with the interests of UBS’s retail customers." Among other things, the plaintiffs alleged that PaineWebber provided millions of retail investors to whom Enron securities could be funneled, transferring Enron’s financial risk into the marketplace and, in return, Enron chose PaineWebber as the administrator of its stock options plan.
Specifically, the plaintiffs claimed that PaineWebber violated Sections 11 and 12 of the Securities Act by acting as a "seller" and "underwriter" of Enron securities and making materially false statements contained in Enron’s prospectuses and registration statements. The plaintiffs also alleged that PaineWebber violated the Exchange Act by failing to disclose conflicts in the operation of its brokerage business and the knowledge it possessed during the class period concerning the manipulation of Enron’s public financial appearance. After a tortuous procedural history, the Southern District of Texas dismissed the complaint in February 2017.
No-sale. On appeal, the parties disputed whether the Enron employee stock option plans amounted to a "sale" of securities under the Securities Act. In the plaintiffs’ view, the district court erred because the SEC’s "no-sale doctrine" applicable to employee benefit plans does not apply to employee stock option plans. Under the no-sale doctrine, no sale of securities will be deemed to have occurred when an employee’s plan is found to be compulsory and noncontributory. The plaintiffs contended that a sale occurred here because the grant of the Enron options was "for value"—the provision of services through employment. The plaintiffs further argued that the cases extending the no-sale doctrine to employee stock option plans are a pernicious "disease" infecting the federal jurisprudence.
The Fifth Circuit disagreed, however, observing that the employees did not bargain for the options and they were granted for no cash consideration. The court further noted that the plaintiffs’ theory that the options grants fell outside the purview of the no-sale doctrine was contradictory: The plaintiffs claimed that the affirmative investment decision was made when the employees decided whether to exercise their options, but their claims were explicitly based only on the grant of the options. Accordingly, the district court correctly dismissed the plaintiffs’ Section 11 and Section 12 claims.
No integrated entity. The Fifth Circuit likewise affirmed the dismissal of the fraud and secondary liability claims under Exchange Act Sections 10(b) and 20(a). The appellate court held that the plaintiffs failed to establish that either corporate defendant had material, nonpublic knowledge to disclose and a duty to disclose. Although they attempted to circumvent this requirement by arguing that UBS operated as a "single, fully integrated entity," the plaintiffs did not adequately plead that the defendants formed a joint venture. Accordingly, the lack of particularized allegations that any defendant entity possessed material information about Enron’s finances and a duty of disclosure were fatal to their claim.
The case is No. 17-20608.
Attorneys: Andy Tindel (Andy Tindel Attorney & Counselor At Law, P.C.) and David Augustus (Spencer Law Firm, LLC) for Kevin Lampkin. Robert J. Giuffra, Jr. (Sullivan & Cromwell LLP.) and Charles Rodney Acker (Norton Rose Fulbright LLP) for UBS Financial Services, Inc.
Companies: UBS Financial Services, Inc.
MainStory: TopStory BrokerDealers FraudManipulation LouisianaNews MississippiNews TexasNews
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