Ending a more than 15-year-long legal battle, the Fifth Circuit on May 24, 2019, unanimously affirmed the dismissal of a proposed class action against subsidiaries of UBS AG, alleging violations of U.S. 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.” Lampkin et al. v. UBS PaineWebber Inc. et al., No. 17-20608 (5th Cir. May 24, 2019).
The proposed class included individual retail-brokerage customers of the defendants, as well as former Enron employees who were issued Enron stock options through the company’s stock option plan. Plaintiffs sued both UBS Financial Services, Inc. (formerly UBS PaineWebber (“PW”)) and UBS Securities LLC (formerly UBS Warburg LLC (“Warburg”)), both of which were separate legal entities and subsidiaries of UBS AG during the relevant period. PW provided retail brokerage services to individuals, and Warburg provided investment-banking services to institutional clients, including Enron.
Grant of Employee Stock Option Not a “Sale”
In their suit, plaintiffs brought claims against PW under Section 11 and Section 12 of the Securities Act of 1933 (the “Securities Act”) in its capacity as “the exclusive broker and stock option plan administrator for Enron,” contending that PW is liable for false statements in Enron’s prospectuses and registration statements. The Fifth Circuit noted, however, that “Sections 11 and 12 expressly limit liability to “purchasers or sellers of securities.” The Court noted that plaintiffs’ Securities Act claims failed because the option grants did not constitute a “sale” under applicable law. In so holding, the panel observed that 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 expanded the U.S. Supreme Court’s ruling in Int’l Brotherhood of Teamsters v. Daniel, 439 U.S. 551, 558 (1979)—which rejected the argument that the exchange of labor was sufficient consideration in the context of a compulsory, non-contributory pension plan—to apply to the stock option plan at issue here.
No Duty to Disclose
In their second set of claims, the retail-brokerage customers plaintiffs alleged that defendants violated Section 10(b) and Rule 10b-5 of the Exchange Act by breaching their duty to disclose information about “the manipulation of Enron’s public financial appearance.” Claiming that UBS was a “single, integrated entity,” plaintiffs asserted the investment banking unit Warburg “had knowledge of Enron’s ‘financial chicanery’ because of its ‘long standing banking history with Enron,’” which allegedly included “material nonpublic information about Enron’s financial manipulations,” which the broker unit PW had a duty to disclose to plaintiffs. The Fifth Circuit, however, found plaintiff’s “integrated entity” allegations to be conclusory, and noted that they did not put forth any other theory that would permit the court “to aggregate the actions and knowledge of the defendant entities for purposes of assessing liability.” The panel also cited to the district court’s observation that Warberg was legally prohibited from sharing information with PW because of “federally required Chinese Walls” between PW and Warburg, “in its capacity as an investment bank.” In short, plaintiffs did not prove that either defendant had both material, nonpublic knowledge and a duty to plaintiffs.
The Court also concurred with the district court judge on the remaining issues on appeal, and affirmed the district court’s dismissal.