(The news
featured below is a selection from the news covered in the Federal Securities
Report Letter, which is distributed to subscribers of the Federal
Securities Law Reports.)
Most Exchange Act Claims
Dismissed Against Enron Outside Directors
The U.S. District Court for the
Southern District of Texas dismissed Exchange Act fraud claims against the
outside directors of Enron Corp. Additionally, the court also dismissed the
Exchange Act controlling person claims under Section 20(a) and the Section 20A
claims for contemporaneous insider trading liability. Most claims under the
Securities Act survived dismissal, however.
Exchange Act Claims
The investors claimed that the
presence of the outside directors at board meetings when the special purpose
entity transactions and other alleged misconduct were discussed indicated that
the directors acted with scienter when they signed the company's
"clean" financial statements. In rejecting this claim, the court found
the "contents of the minutes too brief, general and imprecise to establish
scienter." The court added that "the references in the minutes to
various entities, transactions and problems are merely brief allusions or lists
of topics touched on" and noted that "no particular facts or details
about the presentation or discussion are recited that the outside directors knew
or recklessly disregarded that there was a Ponzi scheme afoot or that would
suggest that their resolutions as members of the board or committees were
intended to further fraud."
The scienter claims based on stock
sales by the outside directors also failed. The court noted that insider sales
alone are not indicative of fraud and that the sales were not suspicious.
According to the court, the "allegations, individually and together, fail
to raise a strong inference of scienter with respect to any of the outside
directors." The insider trading claims under Section 10(b) and Section 20A
were also dismissed.
Securities Act
Allegations
Most of the claims for primary and
secondary liability under the Securities Act survived the motion to dismiss,
however. The claims under Section 11 were not grounded in fraud, so scienter was
not an issue. The court found that the investors adequately alleged that the
outside directors violated Section 11 by signing filings containing false or
misleading statements. While the directors claimed that they investigated the
wrongdoing and reasonably relied on the independent auditor, the court concluded
that these "fact-specific " affirmative defenses could not be properly
resolved on the pleadings. Claims by certain plaintiffs were dismissed, however,
for failing to show reliance on the filings because the company had filed an
annual report prior to their purchases.
¨ In
re Enron Corp. Securities, Derivative and ERISA Litigation (SD Tex) is
reported at ¶92,296
.
| 
