Plaintiffs' Memorandum of Law in Opposition to Motions to Dismiss ...

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statement was false and misleading. Enron's leveraging of its own stock in the LJM2/Raptors bogus hedging transactions in 00 alone increased Enron's equity risk materially higher than what was represented – approximately $100 million instead of $7 million – resulting from a severe negative change in Enron's equity exposure. 627. f. False and Misleading Statements About Enron's Price Risk Management Activities and Financial Instruments The Registration Statements for Enron's securities sales in 00-01 also made numerous misrepresentations concerning Enron's credit risk, incorporated by reference from Enron's 99-00 10-Ks. Enron's true credit risk was misstated and the false impression was given that Enron had minimized its credit risk. In truth, Enron had leveraged billions of dollars of its own stock as credit support for the purported third parties that it was dealing with in Enron's bogus hedging transactions through the LJM partnerships and the Raptors. The Outside Directors knew this because Enron provided the credit support such that it was the one ultimately bearing all the risk of the hedges in Enron's bogus hedging transactions through the LJM partnerships. 628. The Registration Statements for Enron's 00-01 securities sales, incorporated the following statement from Enron's 10-Ks (629): Credit risk relates to the risk of loss that Enron would incur as a result of the nonperformance by counterparties pursuant to the terms of their contractual obligations. Enron maintains credit policies with regard to its counterparties that management believes significantly minimize overall credit risk. These policies include an evaluation of potential counterparties' financial condition (including credit rating), collateral requirements under certain circumstances and the use of standardized agreements which allow for the netting of positive and negative exposures associated with a single counterparty. * * * Enron does not anticipate any material impact to its financial position or results of operations as a result of nonperformance of third parties on financial instruments related to non-trading activities. The 00 10-K, incorporated in Enron's 01 Registration Statements, further represented that Enron's total reserves for credit exposure were only $452 million as of year-end 00. 629. The statements above were false and misleading. Enron's credit exposure in 00 due to the LJM2/Raptors transactions alone – over $250 million – was not reflected in the reserves. In 01 Enron's credit exposure due to the LJM2/Raptors transactions, alone, was over $500 million as of 4/01 and $1 - 93 -
illion as of 7/01. And, contrary to what was represented, Enron did anticipate a material impact to its financial position due to Enron's credit exposure. Indeed, from the fall of 00 and during 01, Enron's stock price was spiraling downward, piercing equity issues, and triggering massive credit exposure to Enron. The house of cards was crumbling before the eyes of those who engaged and participated in constructing it. 630. Contrary to the Outside Directors' unsupported arguments in their briefs, plaintiffs have more than met the Fifth Circuit's holding regarding misrepresentations and descriptions of why they are material. The Fifth Circuit has explained: Generally, like materiality, determining whether information has been adequately disclosed is a mixed question of fact and law and, therefore, is a question for a jury.... Consequently, we will only remove the question from the jury if the disclosure is so obvious that reasonable minds cannot differ. Isquith, 847 F.2d at 208. Furthermore, the Court has held: "'The appropriate inquiry is whether, under all the circumstances, the omitted fact or the prediction without a reasonable basis "is one [that] a reasonable investor would consider significant in [making] the decision to invest, such that it alters the total mix of information available about the proposed investment."'" BMC Software, 183 F. Supp. 2d at 869, n.18 (quoting Krim v. BancTexas Group, 989 F.2d 1435, 1445 (5th Cir. 1993)). A determination of materiality, like the determination of whether defendants' disclosures are adequate, cannot be resolved at the 12(b)(6) stage. Id. Lone Star, 238 F.3d at 369. 4. Plaintiffs Do Not Have to Plead Reliance The Outside Directors contend plaintiffs have to plead reliance on the allegedly untrue statements or omissions in the Registration Statements. The Outside Directors claim Amalgamated Bank, Hawaii Laborers, the Archdiocese of Milwaukee purchased securities after Enron had issued an earnings statement covering at least twelve months after the effective date of the Registration Statement. For Amalgamated Bank, defendants calculate the effective date from when Enron filed its Form 10-K in 00. This analysis erroneously construes the term effective date to mean either the original date or pre-effective date of the Registration Statement. In fact, Rule 158 defines the term effective date as follows: (c) For purposes of the last paragraph of section 11(a) only, the "effective date of the registration statement" is deemed to be the date of the latest to occur of (1) the - 94 -
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UNITED STATES DISTRICT COURT SOUTHE
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Page c. The Outside Directors Who S
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Page 5. Defendants Claim They Can A
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Page Chiarella v. United States, 44
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Page In re AST Research Sec. Litig.
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Page Krim v. BancTexas Group, 989 F
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Page Santa Fe Indus., Inc. v. Green
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Page LEGISLATIVE HISTORY H.R. Rep.
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in various elements of Enron's sche
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to generate 40% of the profits Enro
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• No other company offered such i
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of dollars to maintain its liquidit
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In fact, in mid-8/01, an Enron exec
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and course of business, that Enron'
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Investigations Subcommittee of the
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LJM's interest, Enron had agreed in
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fraudulent course of business by ap
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As stated above, the Board received
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deceptive device, J.P. Morgan and E
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e triggered, which would require En
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I realize that we have had a lot of
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Debt Amount of Understatement Share
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100 90 80 Total Shares Sold By Defe
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year and make any recommendations t
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• Committee receives a document f
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1996) (it is improper to isolate "t
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defendants' alleged securities frau
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The CC specifies precisely what sta
Page 57 and 58: Date Statement Outside Director Sig
Page 59 and 60: Robertson, 32 F. Supp. 2d. 443. The
Page 61 and 62: facts that affect the validity or p
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Page 65 and 66: Id. at 363-64. Accord Heller v. Am.
Page 67 and 68: The Court said: "[T]he text of the
Page 69 and 70: 3. The CC Alleges Facts Giving Rise
Page 71 and 72: These actions alone are enough to d
Page 73 and 74: would have resulted in a $0.4 milli
Page 75 and 76: approval of them was necessary, and
Page 77 and 78: These are distinct liability theori
Page 79 and 80: Thus, Enron's Board had continuous
Page 81 and 82: of a mere $13 million (an almost 10
Page 83 and 84: is an issue of fact that is inappro
Page 85 and 86: 100 times those in prior periods. 4
Page 87 and 88: a considerable number of shares aft
Page 89 and 90: (g) Norman Blake Although Blake onl
Page 91 and 92: This inquiry into contemporaneity p
Page 93 and 94: puts and calls); see also Dau v. Ce
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Page 97 and 98: offending registration statement. S
Page 99 and 100: arguments are nothing more than a c
Page 101 and 102: occurred via the LJM2 partnership's
Page 103 and 104: Enron provides premium broadband de
Page 105 and 106: actually hedging with itself, not r
Page 107: For example, the 00-01 Registration
Page 111 and 112: also incorporated all documents fil
Page 113 and 114: possession, direct or indirect, of
Page 115 and 116: Anheuser-Busch Cos. v. Summit Coffe
Page 117 and 118: made by the primary violator." Id.;
Page 119 and 120: IV. Conclusion Accordingly, based o
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Plaintiffs' Memorandum of Law in Opposition to Motions to Dismiss ...

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