Newby v. Enron Corp. (762 F. Supp. 2d 942, 2010)

United States District Court for the Southern District of Texas 2010-12-08

Crimes and Criminal Procedure

Citations

Full opinion text

OPINION AND ORDER OF PARTIAL DISMISSAL

MELINDA HARMON, District Judge.

Pending before the Court in G-03-0967, alleging a giant Ponzi scheme involving inter alia all Defendants sued here, in violation of (1) the Texas Securities Act (“TSA”), Tex.Rev.Civ. Stat. art. 581-33, et seq., (2) the Texas Fraud in Real Estate And Stock Transactions statute, Texas Business & Commerce Code § 27.01 et seq., and (3) Texas common law (fraud, civil conspiracy to commit fraud, and negligence and professional malpractice), are motions to dismiss the Second Amended Complaint pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b), filed by the following Defendants: (1) Arthur Andersen, LLP and D. Stephen Goddard, Jr. (collectively, “Andersen”) (instrument # 62); (2) Richard B. Buy (# 67), who, alternatively requests a more definite statement under Fed. R.Civ.P. 12(e); and (3) David B. Duncan (# 69). Furthermore, in their response to Richard B. Buy’s motion, Plaintiffs include a request for acknowledgment that unanswered admissions served on Richard B. Buy on October 26, 2005 (Ex. A to # 76) are deemed admitted (# 76). Finally Plaintiffs have filed a motion for status conference (# 111).

The Plaintiffs are American National Insurance Company, American National Investment Accounts, Inc., S.M. & R. Investments, Inc., American National Property and Casualty Company, Standard Life and Accident Insurance Company, Farm Family Life Insurance Company, Farm Family Casualty Insurance Company, and National Western Life Insurance Company.

According to the Second Amended Complaint, Defendants are comprised of three, at times overlapping, groups. # 56 at ¶¶ 48-50. Arthur Andersen, LLP and two of its accountants, D. Stephen Goddard, Jr. and David B. Duncan, are referred to in the complaint as the “AA Defendants.” The Enron “Management Defendants,” who are purportedly liable in their individual capacities “because the wrongful conduct was not within the proper scope of employment with Enron,” are Kenneth Lay, Jeffrey Skilling, Andrew Fastow, Richard Causey, Richard Buy, and Michael Kopper. The complaint asserts that they conceived and perpetrated the fraud, which was subsequently rubber-stamped by the Executive Committee and by the Board of Directors, which wantonly disregarded their duties to perform independent oversight of the corporation’s activities and to implement and monitor controls, thereby aiding Enron’s fraud. Finally a third group, the “Director Defendants,” who were members of Enron’s Board of Directors, originally included Robert Jaedicke, Ronnie Chan, Joe Foy, John Wakeham, Wendy Gramm, John Mendelsohn, Paulo Ferraz Pereira, Robert Belfer, Norman Blake, Jr., John H. Duncan, Charles LeMaistre, Frank Savage, Herbert Winokur, Ken L. Harrison, Rebecca Mark-Jusbasche, Jerome Meyer, John Urquhart and Charles Walker. Allegations against the “Director Defendants” are complaints against each individual during the time period that the individual was a member of the Board of Directors, unless otherwise indicated. As noted earlier, all of the above listed “Director Defendants” have since been dismissed from the suit (# 60, 84, 91, 101, 105, 109, 110). Nevertheless Kenneth Lay and Jeffrey Skilling were also Enron Board members, so each allegation against the “Director Defendants” is also an allegation against the two of them. As noted, Mr. Lay is deceased, but Plaintiffs’ claims against Skilling as a “Director Defendant,” as well as a “Management Defendant,” remain pending.

The Court will address the Andersen Defendants’ two motions, and subsequently, Richard B. Buy’s.

Standard of Review under Rules 12(b)(6) and 9(b)

When a district court reviews a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), it must construe the complaint in favor of the plaintiff and take all well-pleaded facts as true. Kane Enterprises v. MacGregor (USA), Inc., 322 F.3d 371, 374 (5th Cir.2003), citing Campbell v. Wells Fargo Bank, 781 F.2d 440, 442 (5th Cir.1986). In addition to the complaint, the court may review documents attached to the complaint and documents attached to the motion to dismiss to which the complaint refers and which are central to the plaintiffs claim(s). Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498-99 (5th Cir.2000).

Generally, “[w]hile a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, ... a plaintiffs obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do ..., ” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1964-65, 167 L.Ed.2d 929 (2007) (citations omitted). “Factual allegations must be enough to raise a right to relief above the speculative level.” Id. at 1965, citing 5 C. Wright & A. Miller, Federal Practice and Procedure § 1216, pp. 235-236 (3d ed.2004) (“[T]he pleading must contain something more . :. than ... a statement of facts that merely creates a suspicion [of] a legally cognizable right of action.”). “Twombly jettisoned the minimum notice pleading requirement of Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 ... (1957) [“a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief’], and instead required that a complaint allege enough facts to state a claim that is plausible on its face.” St. Germain v. Howard, 556 F.3d 261, 263 n. 2 (5th Cir.2009), citing In re Katrina Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir.2007). “Dismissal is proper if the complaint lacks an allegation regarding a required element necessary to obtain relief .... ” Rios v. City of Del Rio, Texas, 444 F.3d 417, 421 (5th Cir.2006), cert. denied, 549 U.S. 825, 127 S.Ct. 181, 166 L.Ed.2d 43 (2006).

Recently, in Ashcroft v. Iqbal, the Supreme Court, applying the Twombly plausibility standard to a Bivens claim of unconstitutional discrimination and a defense of qualified immunity for a government official, observed that two principles inform the Twombly opinion: (1) “the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.” ... Rule 8 “does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions”; and (2) “only a complaint that states a plausible claim for relief survives a motion to dismiss,” a determination involving “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Iqbal, — U.S. -, 129 S.Ct. 1937, 1940, 173 L.Ed.2d 868 (2009) (5-4).

Fraud claims must also satisfy the heightened pleading standard set out in Federal Rule of Civil Procedure 9(b): “In allegations alleging fraud ..., a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.” “What constitutes ‘particularity’ will necessarily differ with the facts of each case .... ” Benchmark Electronics, Inc. v. J.M. Huber Corp., 343 F.3d 719, 724 (5th Cir.2003) (citing Guidry v. Bank of LaPlace, 954 F.2d 278, 288 (5th Cir.1992)), modified on other grounds, 355 F.3d 356 (5th Cir.2003).

The Fifth Circuit interprets Rule 9(b) to require at minimum “specificity as to the statements (or omissions) considered to be fraudulent, the speaker, when and why the statements were made, and an explanation of why they were fraudulent.” Plotkin v. IP Axess, Inc., 407 F.3d 690, 696 (5th Cir.2005). See also Williams v. WMX Technologies, Inc., 112 F.3d 175, 179 (5th Cir.1997) (Rule 9(b) requires “ ‘the who, what, when, where, and how1 to be laid out.”) (citations omitted), cert. denied, 522 U.S. 966, 118 S.Ct. 412, 139 L.Ed.2d 315 (1997).

Furthermore, although Rule 9(b) expressly states, “Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally,” the Fifth Circuit has ruled that even though common-law fraud claims are not subject to the strong inference of scienter standard imposed by the Private Securities Litigation Reform Act of 1995 (“PSLRA”) on federal securities claims, Rule 9(b) “incorporates an element of scienter.” Flaherty & Crumrine Preferred Income Fund, Inc. v. TXU Corp., 565 F.3d 200, 213 (5th Cir.2009) (citing Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 341 (5th Cir.2008)), cert. denied, — U.S.-, 130 S.Ct. 199, 175 L.Ed.2d 125 (2009). Rule 9(b) applies to state law fraud claims. Sullivan v. Leor, 600 F.3d 542, 550-51 (5th Cir.2010). In order to plead adequately fraudulent intent in the context of a state-law securities fraud claim, a plaintiff must allege specific facts to support an inference of fraud. Flaherty, 565 F.3d at 213. “ ‘Alleged facts are sufficient to support such an inference if they either (1) show a defendant’s motive to commit securities fraud or (2) identify circumstances that indicate conscious behavior on the part of the defendant.’ ” Id., quoting Herrmann Holdings, Ltd. v. Lucent Technologies, Inc., 302 F.3d 552, 565 (5th Cir.2002).

The pleading standards of Twombly and Rule 9(b) apply to pleading a state-law claim of conspiracy to commit fraud. U.S. ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 185, 193 (5th Cir.2009) (“The Twombly standard replaces the lenient and longstanding rule that ‘a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief. The new reading raises a hurdle in front of what courts had previously seen as a plaintiffs nigh immediate access to discovery-modest in its demands but wide in its scope.”; “a plaintiff alleging a conspiracy to commit fraud must ‘plead with particularity the conspiracy as well as the overt acts ... taken in furtherance of the conspiracy’ ”), quoting FC Inv. Group LG v. IFX Markets, Ltd., 529 F.3d 1087, 1097 (D.C.Cir.2008).

Because conspiracy to defraud is a derivative tort that includes an underlying claim of common-law fraud, under Rule 9(b) if the plaintiff fails to adequately plead fraud, the court must dismiss the conspiracy claim, too. Jag Media Holdings, Inc. v. A.G. Edwards & Sons, Inc., 387 F.Supp.2d 691, 710 (S.D.Tex.2004); in accord Allstate Ins. Co. v. Receivable Finance, Inc., 501 F.3d 398, 414 (5th Cir.2007) (If Plaintiffs fail to state a claim for fraud underlying their civil conspiracy claim, the civil conspiracy claim must be dismissed, too.); American Tobacco Co., Inc. v. Grinnell, 951 S.W.2d 420, 438 (Tex.1997) (“Allegations of conspiracy are not actionable absent an underlying [tort]”); Krames v. Bohannon Holman, LLC, No. 3:06-CV-2370-0, 2009 WL 762205, *10 (N.D.Tex. Mar. 24, 2009) (“Plaintiffs’ failure to state a claim for fraud, which is the offense underlying their conspiracy claim, necessitates that Plaintiffs’ conspiracy claim should similarly be dismissed.”).

Rule 9(b) also applies to statutory fraud claims arising under Tex. Bus. & Comm. Code § 27.01. 7-Eleven Inc. v. Puerto Rico-7 Inc., No. 3:08-CV-00140-B, 2008 WL 4951502, *2 (N.D.Tex. Nov. 19, 2008), citing Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 338-39 (5th Cir.2008).

A dismissal for failure to plead with particularity as required by Rule 9(b) is treated the same as a Rule 12(b)(6) dismissal for failure to state a claim. Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1017 (5th Cir.1996).

Federal Rule of Civil Procedure 36: Requests for Admission

Rule 36(a)(1) states in relevant part,

(1) Scope. A party may serve on any other party a written request to admit, for purposes of the pending action only, the truth of any matters within the scope of Rule 26(b)(1) relating to:

(A) facts, the application of law to fact, or opinions about either; and

(B) the genuineness of any described documents.

Rule 36(a)(3) provides,

(3) Time to Respond: Effect of Not Responding.

A matter is admitted unless, within 30 days after being served, the party to whom the request is directed serves on the requesting party a written answer or objection addressed to the matter and signed by the party or its attorney. A shorter or longer time for responding may be stipulated to under Rule 29 or be ordered by the court.

Finally, Rule 36(b) sets out the procedure to seek to withdraw or amend a matter admitted:

(b) Effect of an Admission; Withdrawing or Amending It. A matter admitted under this rule is conclusively established unless the court, on motion, permits the admission to be withdrawn or amended. Subject to Rule 16(e), the court may permit withdrawal or amendment if it would promote the presentation of the merits of the act and if the court is not persuaded that it would prejudice the requesting party in maintaining or defending the action on the merits. An admission under this rule is not an admission for any other purpose and cannot be used against the party in any other proceeding.

The Fifth Circuit has opined that “Rule 36 allows litigants to request admissions as to a broad range of matters, including ultimate facts, as well as applications of law to fact.” In re Carney, 258 F.3d 415, 419 (5th Cir.2001). Nevertheless, Rule 36 cannot be used to compel an admission of a conclusion of law. Id., citing Playboy Enterprises, Inc. v. Welles, 60 F.Supp.2d 1050, 1057 (S.D.Cal.1999). The breadth of the scope “allows litigants to winnow down issues prior to trial and thus focus their energy and resources on disputed matters.” Id., citing Wright, Miller & Marcus, Federal Practice and Procedure: Civil 2d § 2254 (1994). To insure that parties can rely on matters admitted, a matter admitted “is conclusively established unless the court on motion permits withdrawal or amendment of the admission.” Id., quoting Rule 36.

A deemed admission can only be withdrawn or amended by a motion in compliance with Rule 36(b). Carney, 258 F.3d at 419. See id. at 420 (“[T]he proper course for a litigant that wishes to avoid the consequences of failing to timely respond to Rule 36 requests for admission is to move the court to amend or withdraw the default admissions in accordance with the standard outlined in Rule 36(b).”). Recognizing the “ ‘potential harshness’ ” of the Rule in that “ ‘the failure to respond to admissions can effectively deprive a party of the opportunity to contest the merits of a case,’ ” the Fifth Circuit has opined that this result “ ‘is necessary to insure the orderly disposition of cases; parties to a lawsuit must comply with the rules of civil procedure. In addition the harshness is tempered by the availability of the motion to withdraw admissions Id., quoting United States v. Kasuboski 834 F.2d 1345, 1350 (7th Cir.1987).

To permit withdrawal or amendment, the district court “must find that withdrawal or amendment: 1) would serve the presentation of the case on its merits, but 2) would not prejudice the party that obtained the admissions in its presentation of the case.” Id. See also Le v. Cheesecake Factory Rest., Inc., No. 06-20006, 2007 WL 715260, *2-3 (5th Cir. Mar. 6, 2007). Even if these two factors are met, the court still has the discretion to deny a request for withdrawal or amendment. Carney, 258 F.3d at 419; Cheesecake Factory, 2007 WL 715260, *3 (in addition to deciding whether denial of the withdrawal would essentially eliminate any presentation of the case, this court and others have considered other factors, such as whether the plaintiff has demonstrated that the merits would be served by advancing evidence showing that “ ‘the admission is contrary to the record of the case,’ or that the admission ‘is no longer true because of changed circumstances or [that] through an honest error a party has made an improvident admission.’ ”), citing N. La. Rehab. Ctr., Inc. v. United States, 179 F.Supp.2d 658, 663 (W.D.La., 2001). In accord Branch Banking & Trust Co. v. Deutz-Allis Corp., 120 F.R.D. 655, 658-59 (E.D.N.C.1988) (denying withdrawal because movants for withdrawal proffered “no affidavit, verified pleading, or other evidence ... to suggest the admission, if left standing, would render an unjust result under the law.”). The Fifth Circuit has also held that the court acts within its discretion if it considers the fault of the party seeking withdrawal or its diligence in seeking withdrawal. Cheesecake Factory, 2007 WL 715260, at *2.

Adverse Inferences in Civil Actions

1. Invocation of the Fifth Amendment Privilege

The Fifth Amendment states in relevant part, “No person ... shall be compelled in any criminal case to be a witness against himself. ...” U.S. Const. Amend. V. The Fifth Amendment privilege against compulsory self incrimination “can be asserted in any proceeding, civil or criminal, administrative or judicial, investigatory or adjudicatory.....” Kastigar v. United States, 406 U.S. 441, 444, 92 S.Ct. 1653, 32 L.Ed.2d 212 (1972); U.S. v. Ramos, 537 F.3d 439, 454 (2008). The privilege against self-incrimination “protects against any disclosures which the witness reasonably believes could be used in a criminal prosecution or could lead to other evidence that might be so used.” Kastigar at 445, 92 S.Ct. 1653; Ramos at 454. The privilege protects a party against self incrimination under both federal and state law. Murphy v. Waterfront Comm’n of New York Harbor, 378 U.S. 52, 77-78, 84 S.Ct. 1594, 12 L.Ed.2d 678 (1964). The privilege covers not only responses that would support the party’s criminal conviction, but also “embraces those which would furnish a link in the chain of evidence needed to prosecute.” Malloy v. Hogan, 378 U.S. 1, 11, 84 S.Ct. 1489, 12 L.Ed.2d 653 (1964), citing Hoffman v. U.S., 341 U.S. 479, 486-87, 71 S.Ct. 814, 95 L.Ed. 1118 (1951); Maness v. Meyers, 419 U.S. 449, 461, 95 S.Ct. 584, 42 L.Ed.2d 574 (1975).

“[W]hile a person may refuse to testify during civil proceedings on the ground that his testimony might incriminate him ... his refusal to testify may be used against him in a civil proceeding.” Farace v. Independent Fire Ins. Co., 699 F.2d 204, 210 (5th Cir.1983), cited for that proposition, Hinojosa v. Butler, 547 F.3d 285, 291 (5th Cir.2008). While a jury in a criminal case is not permitted to draw adverse inferences when a defendant invokes his Fifth Amendment right and refuses to testify, it is well established that “the Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them.” Baxter v. Palmigiano, 425 U.S. 308, 318, 96 S.Ct. 1551, 47 L.Ed.2d 810 (1976), cited for that proposition, Hinojosa, 547 F.3d at 291.

Under Fed.R.Civ.P. 8(b)(6) (“An allegation — other than one relating to the amount of damages — is admitted if a responsive pleading is required and the allegation is not denied.”), “the failure to deny an allegation in a pleading to which a responsive pleading is required constitutes an admission of that allegation.” North River Ins. Co. v. Stefanou, 831 F.2d 484, 486 (4th Cir.1987), cert. denied, 486 U.S. 1007, 108 S.Ct. 1733, 100 L.Ed.2d 196 (1988). A proper and timely assertion of the Fifth Amendment privilege against self-incrimination, even at the pleading stage, can preclude the operation of Rule 8(b)(6). Id. When served with a request for admissions, “a party is entitled to the same constitutional protection as if the party were called as a witness at trial.” In re Fetla’s Trading Post, Inc., No. 04 B 12231 et al., 2006 WL 538802, *3 (Bankr. N.D.Ill. Mar. 02, 2006).

Nevertheless, a blanket refusal to answer requests for discovery by invoking the Fifth Amendment privilege is insufficient; an individual must affirmatively assert the privilege “with sufficient particularity to allow an informed ruling on the claim.” North River Ins. Co. v. Stefanou, 831 F.2d at 486-87. “He is obliged to answer those allegations that he can and to make a specific claim of the privilege as to the rest.” Id. at 486, citing 5 C. Wright & A. Miller, Federal Practice and Procedure § 1280 at 360 (1969). Then the court must conduct “a particularized inquiry, deciding in connection with each specific area that the questioning seeks to explore, whether or not the privilege is well-founded.” SEC v. First Financial Group of Texas, Inc., 659 F.2d 660, 668 (5th Cir.1981). See also Stefanou, 831 F.2d at 486 (“Nor does a proper invocation of the privilege mean that a defendant is excused from the requirement to file a responsive pleading; he is obliged to answer those allegations that he can and make a specific claim of privilege as to the rest.”), citing 5 C. Wright & A. Miller, Federal Practice and Procedure § 1280, at 360 (1969); id. at 487 (“[F]or one to invoke this privilege the party claiming it must not only affirmatively assert it, he must do so with sufficient particularity to allow an informed ruling on the claim.”). “Even where a party has a legitimate claim of privilege with respect to certain questions or lines of inquiry, that person may not be entitled to invoke his privilege to remain totally silent. Only where the court finds that he could ‘legitimately refuse to answer essentially all relevant questions,’ because of the threat of incrimination from any relevant question is a person totally excused from responding to relevant inquiries.” Id. at 668-69. “A party is not entitled to decide for himself whether he is protected by the fifth amendment privilege.” First Financial Group of Texas, Inc., 659 F.2d at 668. See also Hoffman v. U.S., 341 U.S. 479, 486, 71 S.Ct. 814, 95 L.Ed. 1118 (1951) (“The witness is not exonerated from answering merely because he declares that in so doing he would incriminate himself — his say-so does not of itself establish the hazard of incrimination. It is for the court to say whether his silence is justified.”).

Moreover a party may waive the Fifth Amendment right if he testifies to certain transactions and then refuses to testify further because the disclosure of a fact waives the privilege as to its details. Brown v. Walker, 161 U.S. 591, 597, 16 S.Ct. 644, 40 L.Ed. 819 (1896) (“Thus, if the witness himself elects to waive his privilege, as he may doubtless do, since the privilege is for his protection and not for that of other parties, and discloses his criminal connections, he is not permitted to stop, but must go on and make a full disclosure.”); McCarthy v. Arndstein, 262 U.S. 355, 358-59, 43 S.Ct. 562, 67 L.Ed. 1023 (1923) (same), rehearing granted, 263 U.S. 676, 44 S.Ct. 33, 68 L.Ed. 501 (1923), aff'd, 266 U.S. 34, 45 S.Ct. 16, 69 L.Ed. 158 (1924); Rogers v. U.S., 340 U.S. 367, 373-74, 71 S.Ct. 438, 95 L.Ed. 344 (1951) (“Disclosure of a fact waives the privilege as to details”; “[W]here a witness has voluntarily answered as to materially [in] criminating facts ... he cannot stop short and refuse further explanation, but must disclose fully what he attempted to relate.”).

In general, the district court has wide discretion in deciding whether to admit evidence of a party’s invocation of the Fifth Amendment. Farace, 699 F.2d at 210. The Fifth Circuit has found that under Federal Rule of Evidence 403 (“[E]vidence may be excluded if its probative value is substantially outweighed by the danger of unfair prejudice .... ”), a district court may exclude evidence of invocation of the Fifth Amendment privilege, even though it generally allows adverse inferences against parties in civil actions when they refuse to testify in response to probative evidence, e.g., when that party subsequently testifies or cooperates with an investigation. Burdine v. Johnson, 262 F.3d 336, 367 (5th Cir.2001), cert. denied sub nom. Cockrell v. Burdine, 535 U.S. 1120, 122 S.Ct. 2347, 153 L.Ed.2d 174 (2002). Moreover the Fifth Circuit has affirmed a district court decision that the adverse inference from a party’s refusal to answer questions about collateral matters, by itself, was insufficient to create an issue of material fact to preclude summary judgment without significant probative evidence to bolster the inference. State Farm Life Ins. v. Gutterman, 896 F.2d 116, 119 (5th Cir.1990) (after stating under oath in a deposition and an affidavit that she did not participate in her husband’s death, “Diane Gutterman’s refusal to testify to collateral matters regarding Dr. Gutterman’s shooting is not ‘significant probative evidence’ to create a genuine issue of material fact” without other evidence to bolster the inference), citing Avirgan v. Hull, 691 F.Supp. 1357 (S.D.Fla.1988) (concluding the adverse inference from the party’s refusal to answer questions was insufficient to create a material issue of fact). See also Federal Deposit Ins. Corp., 45 F.3d at 977-78 (invocation of Fifth Amendment by a non-party against a party is barred where not relevant but used only to discredit a party). “The assertion of the [fifth amendment] privilege, particularly on the advice of counsel, is an ambiguous response.” Farace, 699 F.2d at 210-11 (holding that the district court did not err in excluding as unfairly prejudicial evidence of a party’s assertion of his fifth amendment right). The Fifth Circuit has “limited the value of the negative inference by recognizing that a party seeking summary judgment cannot rely solely on the other party’s exercise of his fifth amendment rights.” Gutterman, 896 F.2d at 119 n. 3, citing United States v. White, 589 F.2d 1283, 1287 (5th Cir.1979) (“[A] grant of summary judgment merely because of the invocation of the fifth amendment would unduly penalize the employment of the privilege.”).

The entry of a guilty plea does not waive or extinguish the privilege, which remains in effect through sentencing because the party’s response to questions might have an adverse impact on his sentence or his prosecution for other crimes. Mitchell v. United States, 526 U.S. 314, 324-27, 119 S.Ct. 1307, 143 L.Ed.2d 424 (1999). “[A] guilty plea is more like an offer to stipulate than a decision to take the stand” and the “purpose of Rule 11 is to inform the defendant of what he loses by forgoing the trial, not to elicit a waiver of the privilege for proceedings still to follow.” Id. at 323, 119 S.Ct. 1307.

Moreover, Federal Rule of Evidence 410 generally mandates that where a defendant who entered a plea of guilty is later permitted to withdraw it under Federal Rule of Criminal Procedure 32(d), evidence of that plea is not admissible in any criminal or civil proceeding against the defendant who made it. The same is true of any statements made by the defendant during the negotiations with the prosecutor or statements made in court to establish the factual basis for the plea for the court. Fed.R.Evid. 410(4).

2. Spoliation of Evidence

“Spoliation” is “the destruction of evidence .... The significant and meaningful alteration of a document or instrument.” Andrade Garcia v. Columbia Med. Ctr., 996 F.Supp. 605, 615 (E.D.Tex.1998) (citations omitted). “If a party with a duty to preserve evidence fails to do so and acts with culpability, a court may impose appropriate sanctions.... The obligation to preserve evidence arises when the party has notice that the evidence is relevant to litigation or when a party should have known that the evidence may be relevant to future litigation.’ ” Smith v. American Founders Financial Corp., 365 B.R. 647, 681 (S.D.Tex.2007) (and cases quoted and cited therein). “A court may ... assume facts against a party that destroys or loses evidence subject to a preservation obligation.” Id., citing FDIC v. Hurwitz, 384 F.Supp.2d 1039, 1099 (S.D.Tex.2005). Under the doctrine of spoliation, a jury may draw an adverse inference “ ‘that a party who intentionally destroys important evidence in bad faith did so because the contents of those documents were unfavorable to that party.’ ” Whitt v. Stephens County, 529 F.3d 278, 284-85 (5th Cir.2008), quoting and citing Russell v. Univ. of Texas, 234 Fed.Appx. 195, 207 (5th Cir.2007); Vick v. Texas Employment Commission, 514 F.2d 734, 737 (5th Cir.1975) (“The adverse inference to be drawn from the destruction of records is predicated on bad conduct of the defendant. ... The circumstances of the act must manifest bad faith.”); in accord, Wal-Mart Stores, Inc. v. Johnson, 106 S.W.3d 718, 721 (Tex.2003) (“a party who has deliberately destroyed evidence is presumed to have done so because the evidence was unfavorable to its case”).

The Fifth Circuit has concluded that “[e]videntiary ‘presumptions’ which merely permit an adverse inference based on unproduced evidence are ... controlled by federal law.” King v. Ill. Cent. R.R., 337 F.3d 550, 556 (5th Cir.2003); in accord, Adkins v. Wolever, 554 F.3d 650, 652 (6th Cir.2009) (joining the Fourth, Second and Ninth Circuit Court of Appeals in holding that federal law controls a federal court’s imposition of sanctions as relief for spoliated evidence because “a federal court’s inherent powers include broad discretion to craft proper sanctions for spoliated evidence”).

Because there are so few Fifth Circuit cases addressing imposition of spoliation sanctions, however, and because this case before the Court involves Texas state law claims, the Court “may supplement its analysis by applying elements from Texas case law” where they are not contrary to established Fifth Circuit law. In re Advanced Modular Power Systems, Inc., No. 07-34646-H4-7, 2009 WL 2762477, *9 (Bkrtcy.S.D.Tex. Aug. 31, 2009), citing Silvestri v. Gen. Motors Corp., 271 F.3d 583, 590 (4th Cir.2001) (recognizing that federal law governs, but nevertheless examining New York law); Flury v. Daimler Chrysler Corp., 427 F.3d 939, 944 (11th Cir.2005) (noting that although federal law governs spoliation, the court applied Georgia law); Schmid v. Milwaukee Elec. Tool Corp., 13 F.3d 76, 78 (3d Cir.1994) (noting disagreement on whether spoliation is an issue of substantive state law or federal evidence law, but not reaching the choice of law issue because the panel concluded that the district court’s decision exceeded the court’s bounds of discretion under both).

In Trevino v. Ortega, 969 S.W.2d 950, 953-61 (Tex.1998), Justice Baker wrote an influential concurrence describing the procedure and remedies available to Texas courts to protect parties prejudiced by spoliation. Justice Baker first identified the three purposes served by remedies for spoliation (1) to punish the spoliator for destroying relevant evidence; (2) to deter future spoliators; and (3) perhaps most important, to serve an evidentiary function by allowing courts to use sanctions or submit a “presumption that levels the evidentiary playing field and compensates the nonspoliating party.” Id. at 954 (Baker, J., concurring).

If a party to a lawsuit believes the other party has wrongly destroyed or discarded relevant evidence, that party may move for sanctions or request a spoliation jury instruction. Offshore Pipelines, Inc. v. Schooley, 984 S.W.2d 654, 666 (Tex.App.-Houston [1st Dist.] 1998, no pet.), citing Trevino, 969 S.W.2d at 953 (Baker, J. concurring). Texas courts have followed a procedure set out in Justice Baker’s concurrence in Trevino. “[T]he inquiry as to whether a spoliation presumption is justified requires a court to consider (1) whether there was a duty to preserve evidence; (2) whether the alleged spoliator breached that duty; and (3) whether the spoliation prejudiced the nonspoliator’s ability to present its case or defense.” Adobe Land Corp., 236 S.W.3d at 358, citing Trevino, 969 S.W.2d at 954-5 (Baker, J. concurring); Offshore Pipelines, 984 S.W.2d at 666.

As a threshold matter, before the court determines whether discovery abuse has occurred, the opposing party must demonstrate that the destroying party had a duty to preserve the evidence at issue. Adobe Land Corp., 236 S.W.3d at 358, citing Wal-Mart Stores, Inc., 106 S.W.3d at 722. A duty to preserve the evidence arises “only when a party knows or reasonably should know that there is a substantial chance that a claim will be filed and that the evidence in its possession or control will be potentially relevant to that claim.” Id., citing id., citing 1 Weinstein & Berger, Weinstein’s Federal Evidence § 302.06[4] at 301-28.3 (2d ed. 2003) (“[T]here must be a sufficient foundational showing that the party who destroyed the evidence had notice both of the potential claim and of the evidence’s potential relevance” before a duty to preserve arises). Emphasizing that “[a] party should not be able to subvert the discovery process and the fair administration of justice simply by destroying evidence before a claim is actually filed,” in Trevino Justice Baker opined about at what point during prelitigation does the duty [to preserve evidence] arise and what kind of “notice” is required:

In [National Tank Co. v. Brotherton, 851 S.W.2d 193, 204 (Tex.1993) ] the Court defined “anticipation of litigation” in the context of whether a party should be allowed to assert an investigative privilege. The Court focused on how to determine when a party reasonably foresees or anticipates litigation. Importantly, we did not require actual notice of the potential litigation for a party to anticipate litigation. Instead we recognized that “common sense dictates that a party may reasonably anticipate suit being filed ... before the plaintiff manifests an intent to sue.” ... Consequently, the Court held that to determine when a party reasonably anticipates or foresees litigation, trial courts must look at the totality of the circumstances and decide whether a reasonable person in the party’s position would have anticipated litigation and whether the party actually did anticipate litigation. See National Tank, 851 S.W.2d at 207.

Trevino, 969 S.W.2d at 956 (emphasis in original) (Baker, J., concurring).

Once a duty to preserve has been established, the court must determine whether the party breached its duty. Adobe Land Corp., 236 S.W.3d at 359, citing Trevino, 969 S.W.2d at 957 (Baker, J., concurring). While the possessor of potential evidence need not retain every document, it must “preserve what it knows, or reasonably should know is relevant in the action, is reasonably calculated to lead to the discovery of admissible evidence, is reasonably likely to be requested during discovery, or is the subject of a pending discovery sanction.” Adobe Land Corp., 236 S.W.3d at 358-59, citing Tex. Elec. Coop. v. Dillard, 171 S.W.3d 201, 209 (Tex.App.-Tyler 2005, no pet.). Under Texas law, while a spoliator may raise a defense of destruction of evidence pursuant to a corporate retention policy, “when a party’s duty to preserve evidence arises before the destruction or when a policy is at odds with a duty to maintain records, the policy will not excuse the obligation to preserve.” Id. at 360, citing id.

Last, the court must ask whether the other side’s ability to present its case was prejudiced by the spoliation. Adobe Land Corp., 236 S.W.3d at 360, citing Offshore Pipelines, 984 S.W.2d at 666 (citing Trevino, 969 S.W.2d at 954-55 (Baker, J., concurring)). To do so, the court considers various factors, such as the relevancy of the missing evidence and the availability of other evidence to take the place of the missing information. Adobe Land Corp., 236 S.W.3d at 360, citing Trevino, 969 S.W.2d at 958 (Baker, J. concurring).

If the court determines that the spoliating party had a duty to preserve the evidence, that it breached that duty, and that the other side was accordingly prejudiced, the court has broad discretion in choosing an appropriate remedy, such as a suitable sanction or a spoliation instruction. Offshore Pipelines, 984 S.W.2d at 666.

As stated, in the Fifth Circuit, the sanction of an adverse inference instruction may be imposed only after a showing of bad faith by the party being sanctioned, to be determined by an independent investigation by the court to decide whether it has been a victim of fraud. Smith v. American Founders Financial Corp., 365 B.R. 647, 681 (S.D.Tex.2007), citing Chambers v. NASCO, Inc., 501 U.S. 32, 43-44, 111 S.Ct. 2123, 115 L.Edüd 27 (1991) (holding that federal courts have the inherent power to manage their affairs to achieve orderly and expeditious disposition of cases, but this power must be exercised with restraint and discretion, especially in fashioning an appropriate sanction for conduct that abuses the judicial process), and King v. Illinois Cent. R.R., 337 F.3d 550, 556 (5th Cir.2003), citing United States v. Wise, 221 F.3d 140, 156 (5th Cir.2000). See also Vick, 514 F.2d at 737 (“The adverse inference to be drawn from destruction of records is predicated on bad conduct of the defendant”; “[mjoreover the circumstances of the act must manifest bad faith.”). The adverse inference is not automatic where documents are destroyed under a routine policy or “ ‘simply because documents are destroyed after the initiation of litigation.’ ” St. Tammany Parish Hospital Serv., District No. 1 v. Travelers Property Casualty Co. of America, 250 F.R.D. 275, 276 (E.D.La.2008), quoting Russell v. Univ. of Tex. of Permian Basin, 234 Fed.Appx. 195, 208 (5th Cir.2007). A showing of bad faith or bad conduct is essential.

Relevant Substantive Law

1. Common-Law Fraud

a. Affirmative Misrepresentation

For common-law fraud a plaintiff must prove that (1) a material representation was made; (2) the representation was false; (3) when the representation was made, the speaker knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion; (4) the representation was made with the intention that it be acted upon by the other party; (5) the party actually and justifiably acted in reliance upon the representation; and (6) the party suffered injury. Ernst Young, LLP v. Pac. Mutual Life Ins. Co., 51 S.W.3d 573, 577 (Tex.2001); Johnson & Higgins of Tex., Inc. v. Kenneco Energy, Inc., 962 S.W.2d 507, 524 (Tex.1998).

Fraudulent intent may be established by direct or circumstantial evidence. Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432, 434-35 (Tex.1986). “Fraud is usually not discernible by direct evidence and is usually so covert or attendant with such attempts at concealment as to be incapable of proof other than by circumstantial evidence.” W.L. Lindemann Operating Co. v. Strange, 256 S.W.3d 766, 776 (Tex.App.-Fort Worth 2008).

Noting that “our fraud jurisprudence has traditionally focused not on whether a misrepresentation is directly transmitted to a known person alleged to be in privity with the fraudfeasor, but on whether the misrepresentation was intended to reach a third person and induce reliance,” and that the Texas Supreme Court had previously held “that a misrepresentation made through an intermediary is actionable if it is intended to influence a third person’s conduct,” the Texas Supreme Court has concluded that “Texas jurisprudence is entirely consistent with section 531’s [of the Restatement (Second) Torts ] reason-to-expect standard, which requires a degree of certainty that goes beyond mere foreseeability.” Ernst & Young, L.L.P. v. Pacific Mutual Life Insurance Co. (hereinafter, “Pacific Mutual”), 51 S.W.3d 573, 578-80 (Tex.2001). Restatement (Second) of Torts § 531 (1977) provides,

One who makes a fraudulent misrepresentation is subject to liability to the persons or class of persons whom he intends or has reason to expect to act or to refrain from action in reliance upon the misrepresentation, for pecuniary loss suffered by them through their justifiable reliance in the type of transaction in which he intends or has reason to expect either conduct to be influenced.

Id. (emphasis added).

“Texas does not require that there be privity between the alleged target of the fraud and the fraudfeasor.” Great Plains Trust Co. v. Morgan Stanley Dean Witter & Company, 313 F.3d 305, 323 (5th Cir.2002). “[T]he alleged fraudfeasor must ‘have information that would lead a reasonable man to conclude that there is an especial likelihood that it will reach those persons and will influence their conduct) ” Pacific Mutual, 51 S.W.3d at 580, citing Restatement (Second) of Torts § 531 cmt. d (1977) (which does not require privity and recognizes liability when the alleged fraudfeasor has “reason to expect” a person’s or class of persons’ reliance on the fraudfeasor’s representations). Moreover, the information must “reach” the third party and “influence its conduct.” Id. Furthermore, “even an obvious risk that a third person will rely on a representation is not enough to impose liability.... General industry practice or knowledge may establish a basis for foreseeability to show negligence, but it is not probative of fraudulent intent.” Id. at 581. Thus a plaintiff must demonstrate that the defendant intended that the plaintiff receive and rely upon the defendant’s representation and that the plaintiff actually received and relied upon that representation. Admiral Ins. Co. v. Heath Holdings USA, Inc., No. Civ. A. 3:03-CV-1634G, 2004 WL 1144062, *4 (N.D.Tex. May 21, 2004). Furthermore, “the plaintiff must have incurred pecuniary loss ‘in the type of transaction in which [the maker of the representation] intends or has reason to expect [his or her] conduct to be influenced.’ ” Pacific Mutual, 51 S.W.3d at 580, quoting Restatement (Second) of Torts § 531 (1977).

To prevail on a fraud claim, a plaintiff must show that it actually and justifiably relied on the defendant’s representation and thereby suffered damages. Pacific Mutual, 51 S.W.3d at 577. “Texas courts require a showing of actual reliance and do not recognize a fraud-on-the-market theory of reliance for common law claims.” In re Enron Corp. Securities, Derivative & “ERISA” Litig., 490 F.Supp.2d 784, 814 (S.D.Tex.2007), citing Griffin v. GK Intelligent Sys., Inc., 87 F.Supp.2d 684, 690 (S.D.Tex.1999), and Steiner v. Southmark Corp., 734 F.Supp. 269, 270 (N.D.Tex.1990). See also Rubalcaba v. Pacific/Atlantic Crop Exchange, Inc., 952 S.W.2d 552, 556 (Tex.App.-El Paso 1997, no writ) (under Texas law “fraud is never presumed,” but actual reliance is required).

b. Common-Law Fraudulent Concealment

A subcategory of fraud is fraud by nondisclosure or fraudulent concealment. Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 181 (Tex.1997). For common-law fraud based on nondisclosure, a plaintiff must allege that (1) defendants concealed or failed to disclose a material fact that they knew the plaintiff was ignorant of or did not have the opportunity to discover, (2) they intended to induce plaintiff to take some action by concealing or failing to disclose the material fact, and (3) he suffered as a result of acting on the Defendants’ nondisclosure. Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 341 (5th Cir.2008), citing Bradford v. Vento, 48 S.W.3d 749, 754-55 (Tex.2001); see also 7979 Airport Garage, L.L.C. v. Dollar Rent A Car Syst., Inc., 245 S.W.3d 488, 507 n. 27 (Tex.App.-Houston [14th Dist.] 2007, pet. denied); see also Celanese Corp. v. Coastal Water Authority, 475 F.Supp.2d 623, 637 (S.D.Tex.2007) (“Elements of fraud by nondisclosure are: (1) the defendant failed to disclose facts to the plaintiff; (2) the defendant had a duty to disclose those facts; (3) the facts were material; (4) the defendant knew the plaintiff was ignorant of the facts and the plaintiff did not have an equal opportunity to discover the facts; (5) the defendant was deliberately silent when it had a duty to speak; (6) by failing to disclose the facts, the defendant intended to induce the plaintiff to take some action or refrain from acting; (7) the plaintiff relied on the defendant’s nondisclosure; (8) the defendant was injured as a result of acting without that knowledge.”). It is essential that the defendant have a duty to disclose this information to the plaintiff. Id.

Under Texas law, an affirmative duty to disclose may arise under four circumstances: (1) where there is a fiduciary or confidential relationship between the parties, the defendant must disclose; (2) where a person voluntarily discloses new information, he must disclose the whole truth; (3) when a person makes a representation and new information makes the earlier misrepresentation misleading or untrue; and (4) when a person makes a partial disclosure and conveys a false impression. In re Enron Corp. Sec., Derivative & “ERISA” Litig., 490 F.Supp.2d 784, 794 (S.D.Tex.2007) (and cases cited therein).

2. Statutory Fraud

Texas also has a cause of action for statutory fraud. Tex. Bus. & Comm.Code § 27.01, encompassing both a primary and a secondary violation. The Court quotes the statute in relevant part:

§ 27.01 Fraud in Real Estate and Stock Transactions

(a) Fraud in a transaction involving real estate or stock in a corporation or joint stock company consists of a

(1) false representation of a past or existing material fact, when the false representation is

(A) made to a person for the purpose of inducing that person to enter into a contract; and

(B) relied on by that person in entering into that contract;----

(b) a person who makes a false representation ... commits the fraud described in Subsection (a) of this section and is liable to the person defrauded for actual damages.

(c) A person who makes a false representation or false promise with actual awareness of the falsity thereof commits the fraud described in Subsection (a) of this section and is liable to the person defrauded for exemplary damages. Actual awareness may be inferred where objective manifestations indicate that a person acted with actual awareness.

(d) A person who (1) has actual awareness of the falsity of a representation ... made by another person and (2) fails to disclose the falsity of the representation ... to the person defrauded, and (3) benefits from the false representation ... commits the fraud described in Subsection (a) of this section and is liable to the person defrauded for exemplary damages. Actual awareness may be inferred where objective manifestations indicate that a person acted with actual awareness.

(e) Any person who violates the provisions of this section shall be liable to the person defrauded for reasonable and necessary attorney’s fees, expert witness fees, costs for copies of depositions, and costs of court.

Section 27.01(d) addresses secondary liability, here allegedly incurred by Andersen Defendants and Richard B. Buy, for being actually aware of the primary violation by Enron, remaining silent about it, and benefitting from that false representation, under Section 27.01(a) and (b).

Section 27.01 and its predecessor, article 4004, V.T.C.S., are penal in nature and must be strictly construed by the courts. Ratcliff v. Trenholm, 596 S.W.2d 645, 650 (Tex.Civ.App.-Tyler 1980, writ ref d n.r.e.); Bykowicz v. Pulte Home Corp., 950 F.2d 1046, 1050-51 (5th Cir.1992), cert. denied, 506 U.S. 822, 113 S.Ct. 73, 121 L.Ed.2d 38 (1992).

Recent briefing has caused this Court to reconsider and examine again whether under Section 27.01(d), a secondary violator must have an independent duty to disclose. There is sparse case law dealing with Section 27.01(d), and most of that merely quotes the statute, without applying it to the facts in the case. After careful review of the statute and case law examining a duty to disclose fraud generally, the Court concludes that it has wrongly imposed as a pleading requirement the elements of common-law fraud by nondisclosure on Section 27.01(d), perhaps having been led to that result by the failure of other courts to distinguish the two in contemporaneously addressing Section 27.01 as a whole and common-law fraudulent concealment.

Statutory construction questions are legal issues for the court. Johnson v. City of Fort Worth, 114 S.W.2d 653, 656 (Tex.1989). In construing a statute, the objective of the court is to determine and give effect to the Legislature’s intent. City of Rockwall v. Hughes, 246 S.W.3d 621, 625-26 (Tex.2008); National Liab. & Fire Ins. v. Allen, 15 S.W.3d 525, 527 (Tex.2000). The Court presumes that the Legislature intended the plain meaning of its words. Allen, 15 S.W.3d at 527. To give effect to the legislature’s intent, “we look first and foremost to the words of the statute.” Lexington Ins. Co. v. Strayhorn, 209 S.W.3d 83, 85 (Tex.2006). A court should construe the statute’s words according to their plain and common meaning unless a contrary intention is apparent from the context or unless such a construction leads to absurd results. City of Rockwall v. Hughes, 246 S.W.3d 621, 625-26 (Tex.2008); see also Texas Dept. of Protective and Regulatory Services v. Mega Child Care, Inc., 145 S.W.3d 170, 177 (Tex.2004) (Where the text of a statute is unambiguous, the court must first examine and follow the clear, plain language and common meaning); Allen, 15 S.W.3d at 527. Every word of a statute is presumed to have been used for a purpose, and every word excluded is presumed to have been excluded for a purpose. City of Rockwall, 246 S.W.3d at 628.

Reading the plain and unambiguous language of Section 27. 01(d), the Court notes that an alleged violation of the statute must be based on “the falsity of a representation or promise made by another person [emphasis added by the Court],” i.e., made by the alleged primary violator, in this case Enron. There is no mention of a duty to disclose under § 27.01(d). To be liable, under the clear language of the statute, the alleged aider and abettor (here Buy, Duncan, Goddard, and/or Arthur Andersen) need only to “(1) [have] actual awareness of the falsity of a representation ... made by another person and (2) fail[] to disclose the falsity of the representation ... to the person defrauded, and (3) benefit[ ] from the false representation.” Section 27.01(d). See Dentler v. Perry, No. 04-02-00034-CV, 2002 WL 31557302, *8 (Tex.App.-San Antonio 2002, no pet.); Rodriguez v. Elizabeth Lusk, No. 08-03-00385-CV, 2004 WL 2307443, *3 (Tex.App.-El Paso, Oct. 14, 2004) (“The plaintiff must ... prove that the defendant had actual awareness of the falsity of the representation if the plaintiff is seeking exemplary damages based on a misrepresentation made by someone other than the defendant.”), citing Woodlands Land De velopment Co. L.P. v. Jenkins, 48 S.W.3d 415, 426 n. 4 (Tex.App.-Beaumont 2001).

“Actual awareness may be inferred where objective manifestations indicate that a person acted with actual awareness.” § 27.01(d). Two appellate courts have concluded that the Texas Supreme Court’s definition of “actual awareness” in a DTPA case “ ‘would be similar, if not identical’ ” to that for section 27.01 of the Texas Business & Commerce clause:

actual awareness ‘does not mean merely that a person knows what he is doing; rather, it means that a person knows what he is doing is false, deceptive, or unfair. In other words, a person must think to himself at some point, “Yes, I know this is false, deceptive, or unfair to him, but I’m going to do it anyway.’”

Woodlands Land Development Co. v. Jenkins, 48 S.W.3d 415, 426 (Tex.App.-Beaumont 2001), and Scott v. Sebree, 986 S.W.2d 364, 371 (Tex.App.-Austin 1999, pet. denied), citing St. Paul Surplus Lines Ins. Co. v. Dal-Worth Tank Co., 974 S.W.2d 51, 53-54 (Tex.1998).

Reliance is a necessary element of statutory fraud under § 27.01, just as it is of common law fraud. Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 182 (Tex.1997). “Texas law does not require a plaintiff to show the reasonableness of its reliance on a misrepresentation to prove fraud. Rather Texas courts simply demand proof that the ‘party acted in reliance upon the [false] representation.’ ” Martin v. MBank El Paso, N.A., 947 F.2d 1278, 1280 (5th Cir.1991). See also In re Webber, 350 B.R. 344, 372-73 (Bankr. S.D.Tex.2006) (“The ‘justifiable reliance’ element of common law fraud [and statutory fraud] does not require [the plaintiff] to demonstrate ‘reasonableness. However ... [the plaintiff] cannot recover if he blindly relies upon a misrepresentation the falsity of which would be patent to him if he utilized his opportunity to make a cursory investigation.’ ”).

3. Common-Law Civil Conspiracy to Defraud

A civil conspiracy is composed of two or more persons combining to accomplish an unlawful purpose or to accomplish a lawful purpose by unlawful means. Massey v. Armco Steel Co., 652 S.W.2d 932, 934 (Tex.1983). The elements of a cause of action for civil conspiracy in Texas are (1) two or more persons; (2) an object to be accomplished; (3) a meeting of the minds on the object or course of action; (4) one or more unlawful, overt acts; and (5) damages as the proximate result. Juhl v. Airington, 936 S.W.2d 640, 644 (Tex.1996); Tri v. J.T.T., 162 S.W.3d 552, 556 (Tex.2005). To impose liability on a defendant for civil conspiracy to defraud, plaintiff must establish (1) that there was such a conspiracy and (2) that the particular defendant, here Buy, Duncan, Goddard, and/or Arthur Andersen, with Enron, agreed with one or more of the conspirators about the claimed illegal object or purpose of the conspiracy and intended to effectuate it. Goldstein v. Mortenson, 113 S.W.3d 769, 779 (Tex.App.-Austin 2003, writ refd), citing Ward v. Sinclair, 804 S.W.2d 929, 931 (Tex.App.-Dallas 1990), citing Zervas v. Faulkner, 861 F.2d 823, 836 (5th Cir.1988).

A conspiracy to defraud must have a common purpose, supported by a concerted action to defraud, and each member must have the understanding that the other has that purpose. Goldstein v. Mortenson, 113 S.W.3d at 779. “ ‘There must be an agreement or understanding between the conspirators to inflict a wrong against, or injury on, another, a meeting of the minds on the object or course of action, and some mutual mental action coupled with an intent to commit the act which results in injury; in short, there must be a preconceived plan and unity of design and purpose, for the common design is of the essence of the conspiracy.’ ” Schlumberger Well Surveying Corp. v. Nortex Oil & Gas Corp., 435 S.W.2d 854, 857 (Tex.1969). See also Laxson v. Giddens, 48 S.W.3d 408, 410 (Tex.App.-Waco 2001) (“One without knowledge of a conspiratorial plan or scheme to injure another by the commission of a particular wrong cannot share the intent to injure such other, [emphasis in original]”). “For a civil conspiracy to arise, the parties must be aware of the harm or the wrongful conduct at the beginning of the combination or agreement [or when the party joins the conspiracy] .... One cannot agree, expressly or tacitly, to commit a wrong about which he has no knowledge.” Firestone Steel Products Co. v. Barajas, 927 S.W.2d 608, 614 (Tex.1996), citing Triplex Communications, Inc. v. Riley, 900 S.W.2d 716, 719 (Tex.1995) (“[C]ivil conspiracy requires specific intent. For a civil conspiracy to arise, the parties must be aware of the harmful or wrongful conduct at the inception of the combination or agreement.”); Schlumberger Well Surveying Corp. v. Nortex Oil & Gas, 435 S.W.2d 854, 857 (Tex.1969) (“[O]ne without knowledge of a conspiratorial plan or scheme to injure another by commission of a particular wrong cannot share the intent to injure the other.”).

Nevertheless, “[t]he agreement need not be formal; rather, the understanding may be tacit; and it is not essential that each conspirator have knowledge of the details [of the conspiracy]; 'inferences of concerted action may be drawn from participation in the transactions.” J.T.T. v. Chon Tri, 111 S.W.3d 680, 684 (Tex.App.-Houston [1st Dist.] 2003) (citing Bourland v. State, 528 S.W.2d 350, 354 (Tex.Civ.App.-Austin 1975, writ refd n.r.e.)), reversed on other grounds, 162 S.W.3d 552 (Tex.2005).

On the other hand, “[t]he fact that a conspirator is not present at, or does not participate in, all of the conspiratorial activities does not, by itself, exonerate him.” United States v. Ashley, 555 F.2d 462, 467 (5th Cir.1977), cert. denied sub nom. Leveritte v. United States, 434 U.S. 869, 98 S.Ct. 210, 54 L.Ed.2d 147 (1977); see also United States v. Thomas, 686 F.Supp. 1078, 1087-88 (M.D.Pa.1988) (quoting Ashley ). “[I]t is axiomatic that it is not necessary for each conspirator to have entered into the unlawful agreement at its inception.” Id. at 468. “A person may participate in a conspiracy without knowing the identities of all the other co-conspirators.” Id., citing United States v. Capo, 791 F.2d 1054, 1066 (2d Cir.1986). “[A] changing cast of characters does nothing to lessen the fact of one conspiracy. Once the existence of a common scheme of conspiracy is shown, ‘slight evidence is all that is required to connect a particular defendant with the conspiracy.’ ” Id. at 467. The district court in Ashley opined, “Further, even if this case does present circumstances of changing and overlapping membership and activities, they were all directed toward a common goal. In such circumstances, ‘most courts have found, as we do here, sufficient evidence to uphold a jury verdict reflecting a single conspiracy.’ ” 555 F.2d at 468, citing United States v. Beasley, 519 F.2d 233, 246 (5th Cir.1975).

In addition, “a co-conspirator is bound by the overt acts of other conspirators taken in furtherance of the conspiracy, whether or not said co-conspirator was a member of the conspiracy at the time .... ” Thomas, 686 F.Supp. at 1088.

Conspiracy is a derivative tort because recovery is not based on the conspiracy, i.e., the agreement, but on the injury from the underlying tort, here allegedly fraud. Tilton v. Marshall, 925 S.W.2d 672, 681 (Tex.1996). “The gist of a civil conspiracy is the damage resulting from commission of a wrong which injures another, and not the conspiracy itself’; in other words, it is the injury resulting from an act done pursuant to the conspiracy’s common purpose that gives rise to the cause of action, not the existence of the conspiracy itself. Schlumberger Well Surveying Corp. v. Nortex Oil & Gas Corp., 435 S.W.2d 854, 856 (Tex.1968); see also Alford Chevrolet-Geo v. Jones, 91 S.W.3d 396, 403 (Tex.App.-Texarkana 2002, pet. denied) (It is not the agreement, but the injury to the plaintiff from an act done pursuant to the common purpose that gives rise to a cause of action for civil conspiracy), citing Carroll v. Timmers Chevrolet, 592 S.W.2d 922, 925 (Tex.1979). Thus to be liable for conspiracy, a defendant must also participate to some degree in the underlying fraud. Id. Furthermore, to establish a conspiracy to defraud, the plaintiff must prove both a civil conspiracy and the underlying fraud. Conger v. Danek Med., Inc., 27 F.Supp.2d 717, 721-22 (N.D.Tex.1998), citing American Tobacco Co. v. Grinnell, 951 S.W.2d 420, 438 (Tex.1997).

Typically a conspiracy is proved by circumstantial evidence. Schlumberger, 435 S.W.2d at 858, citing Jernigan v. Wainer, 12 Tex. 189 (1854). “Circumstantial evidence may be used to establish any material fact, but it must constitute more than mere suspicion.” Transport, 898 S.W.2d at 278, citing Browning-Ferris, Inc. v. Reyna, 865 S.W.2d 925, 927-28 (Tex.1993) (“some suspicion linked to other suspicion produces only more suspicion, which is not the same as evidence.”); Schlumberger, 435 S.W.2d at 858 (“vital facts may not be proved by unreasonable inferences from other facts and circumstances”; any vital fact must be proved “by evidence amounting to something more than a mere scintilla”). Where the circumstantial evidence is meager, “if ‘circumstances are consistent with either of two facts and nothing shows that one is more probable than the other, neither fact can be inferred.’ ” Transport Ins. Co. v. Faircloth, 898 S.W.2d 269, 278 (Tex.1995), quoting $56,700 in U.S. Currency v. State, 730 S.W.2d 659, 662 (Tex.1987). Circumstantial evidence can include acts by or statements of the alleged conspirators. International Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567, 581-82 (Tex.1963) (“The general rul