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IN RE CINAR CORP. SECURITIES LITIGATION

February 25, 2002

IN RE CINAR CORPORATION SECURITIES LITIGATION. PHILLIP G. KELLEY, KATHY H. KELLEY, MICHAEL G. MAYBERRY, AND SHARON H. MAYBERRY, PLAINTIFFS,
V.
CINAR CORPORATION, MICHELINE CHAREST, AND RONALD A. WEINBERG, DEFENDANTS. STEVEN T. CARSON, PATRICIA L. CARSON, AND JANET B. DELLOSA, PLAINTIFFS, V. CINAR CORPORATION, CINAR HOLDINGS, INC., MICHELINE CHAREST, RONALD A. WEINBERG, AND HASANAIN PANJU, DEFENDANTS. KAREN HILDERBRAND, INDIVIDUALLY AND ON BEHALF OF A CERTAIN ELECTING SMALL BUSINESS TRUST AND A CERTAIN IRREVOCABLE TRUST, AND KIM THOMPSON, INDIVIDUALLY AND ON BEHALF OF CERTAIN ELECTING SMALL BUSINESS TRUSTS AND A CERTAIN IRREVOCABLE TRUST, PLAINTIFFS, V. CINAR CORPORATION, CINAR EDUCATION INC., MICHELINE CHAREST, RONALD A. WEINBERG, AND HASANAIN PANJU, DEFENDANTS.



The opinion of the court was delivered by: Dearie, District Judge.

      MEMORANDUM & ORDER

This case involves four separate actions arising out of allegedly fraudulent disclosures made by defendant CINAR Corporation ("CINAR" or "the Company") and its officers in various public financial statements issued during the period from April 8, 1998 through March 10, 2000. The first suit, In re CINAR Corporation Securities Litigation, No. 00-CV-1086 (E.D.N.Y. 2000), is a class action brought by plaintiffs who purchased shares of CINAR on the NASDAQ, the price of which they claim was artificially inflated by the allegedly fraudulent filings. The remaining three suits, Kelley v. CINAR Corporation, No. 1:00-CV-91-T (W.D.N.C. 2000), Carson v. CINAR Corporation, No. 1:00-CV-626 (M.D.N.C. 2000) and Hilderbrand v. CINAR Corporation, No. 01-CV-1985 (E.D.N.Y. 2001) involve business owners in North Carolina and Ohio who sold their companies to CINAR in exchange for CINAR stock relying on the Company's financial statements as an accurate indicator of its fiscal health. Plaintiffs in these four actions assert claims arising under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the "Securities Act") and Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder, as well as various state law causes of action. In addition to these suits, a group of Canadian plaintiffs who bought CINAR stock on Canadian exchanges have brought suit in Canada, alleging similar causes of action. The Judicial Panel on Multidistrict Litigation consolidated the four actions brought by American plaintiffs and transferred them to this Court for pre-trial proceedings pursuant to 28 U.S.C. § 1407.

Defendants move to dismiss on numerous grounds. Defendant CINAR moves to dismiss the Consolidated and Amended Class Action Complaint ("Class Action Complaint" or "CAC") and the Kelley Complaint on grounds of comity and forum non conveniens. Defendants Ronald A. Weinberg and Micheline Charest move to dismiss the Class Action Complaint and Kelley Complaint on grounds of comity and forum non conveniens and move to dismiss the Kelley Complaint on additional grounds of insufficient service of process and failure to state a claim of fraud.*fn1 Defendant Marie-Josée Corbeil moves to dismiss the Class Action Complaint on grounds of comity, forum non conveniens and lack of personal jurisdiction. Defendant Ernst & Young moves to dismiss the Class Action Complaint on grounds of comity, forum non conveniens and failure to comply with Rule 9(b). CINAR moves to dismiss the Carson Complaint on grounds of comity, forum non conveniens and failure to state a claim under the North Carolina Unfair Trade Practices Act. Weinberg and Charest move to dismiss the Carson Complaint on grounds of comity, forum non conveniens and failure to state a claim of fraud. Defendant Panju moves to dismiss the Carson Complaint on grounds of comity, forum non conveniens, lack of personal jurisdiction, failure to comply with Rule 9(b), failure to state a claim of control person liability under Section 20(b) of the Exchange Act and failure to state a claim of fraud. Finally, CINAR moves to dismiss the Hilderbrand Complaint on grounds of comity and forum non conveniens.

BACKGROUND

The Defendants

Defendant CINAR is a Canadian corporation that develops, produces and distributes non-violent programming and educational materials for children both in Canada and abroad. Founded in 1976, it is incorporated under the laws of Quebec and maintains its principal place of business in Montreal, Quebec, Canada. CINAR Holdings, Inc. and CINAR Education, Inc., both incorporated in Delaware, are wholly owned subsidiaries of CINAR.

Defendants Ronald A. Weinberg and Micheline Charest, a married couple, co-founded CINAR. From 1994 until 2000 Weinberg served as CINAR's President and Co-Chief Executive Officer, and Charest served as its Chairman of the Board and Co-Chief Executive Officer. Both became Directors of CINAR in 1984 and were members of the Management Committee.

Defendant Hasanain Panju became CINAR's Corporate Comptroller in 1994 and was then made Vice-President of Finance in 1995. In 1996, Panju was named CINAR's Chief Financial Officer. Panju became a Director of CINAR in 1995 and was a member of the Management Committee.

Defendant Marie-Josée Corbeil was a Vice-President of CINAR and served as its General Counsel. Corbeil was also a Director of CINAR and a member of the Management Committee.

In re CINAR*fn2

CINAR became a publically-traded company in September 1993. CINAR initially sold its shares only on the Montreal and Toronto exchanges, but it began trading in the United States on the NASDAQ in July 1994. Since 1994, CINAR has issued stock in four subsequent offerings: in April 1995, in July 1996, in September 1997 and in March 1999. See id. ¶ 44. In connection with these stock issuances, Weinberg and Charest made several trips to New York and North Carolina, among other places, to attend meetings with investors and to participate in "road shows" designed to promote CINAR stock in the United States. See Aff. of Peter Lerner ¶¶ 4, 5A. The last two of these offerings, which fell within the period from April 1997 to March 2000 that is the subject of this class action, were largely directed to buyers in the United States. Under the terms of the Underwriting Agreement for the September 1997 stock offering, the U.S./International Underwriters were to sell 2.7 million of the 3.1 million shares issued and were prohibited from selling in Canada or to Canadian citizens. Under a similar agreement for the March 1999 stock offering, the same underwriters were to sell more than 5.4 million of the 7 million shares issued and were again forbidden to sell in Canada or to Canadian citizens. See CAC ¶¶ 18, 44.

Over the course of that same time period, CINAR issued several press releases, published financial reports and submitted SEC filings, all of which form the basis for the Class Plaintiffs' causes of action. The gravamen of the Class Action Complaint is that these statements and releases contained inflated estimates of CINAR's financial position because they took into account improperly claimed tax credits and did not record unauthorized related party transactions and off-shore investments. CAC ¶¶ 3, 108-09. This information began to surface on October 15, 1999, when press reports circulated that Canadian authorities were conducting an investigation into alleged tax fraud on the part of CINAR. The investigation focused on whether CINAR had availed itself illegally of an incentive plan that granted tax credits to Canadian television productions that programmed Canadian-authored content. According to the reports, CINAR had falsely attributed several scripts written by American authors to Canadians in order to receive the tax benefit. CINAR's Class B stock price dropped from $28.00 per share to $22.125 per share by the close of the day's trading.*fn3 In response to this decline, CINAR announced that any tax liability would be minimal and that its Audit Committee would conduct an inquiry into the matter. CINAR's stock price gradually rose again to $27.3875 per share as of February 18, 2000. See CAC ¶¶ 5-7.

As a result of these disclosures, Canada Customs and Revenue Agency and the Quebec provincial tax authorities initiated civil investigations into CINAR's improperly obtained tax credits. The Royal Canadian Mounted Police ("RCMP") also commenced criminal investigations concerning possible tax fraud and, in April 2000, filed court papers in connection with its investigation alleging that CINAR had improperly received $7.8 million (Cdn.) in tax credits. CAC ¶ 48. During the course of these investigations and those by CINAR's Audit Committee, it was discovered that CINAR had indeed obtained tax credits to which it was not entitled. The investigations revealed that Helene Charest, the sister of defendant Micheline Charest and a Canadian citizen, had signed several American authored scripts under the pseudonym "Erica Alexandre," a name formed from the names of Weinberg and Charest's two children. The investigations further revealed that Thomas LaPierre also lent his name to American authored scripts.*fn4 LaPierre also claims that the defendants asked him to draw up sub-contracts for American authors. CAC ¶¶ 46-47. On December 19, 2000, CINAR admitted that it had improperly obtained tax credits and announced that it had agreed to pay the Canadian federal government approximately $5.1 million (Cdn.), abandon all claims for tax credits equaling roughly $6 million (Cdn.) and acknowledge an additional tax liability of approximately $3.7 million (Cdn.). CINAR also announced that it had agreed to pay the Quebec government roughly $7.9 million (Cdn.), abandon claims for tax credits equaling $3.6 million (Cdn.) and acknowledge an additional tax liability of approximately $1.1 million (Cdn.). See Aff. of Neil L. Selinger, Ex.1 ("Selinger Aff. ___").*fn5

The class action plaintiffs ("Class Plaintiffs") bring suit on behalf of themselves and a class of all persons who purchased shares of CINAR Class B stock on the NASDAQ exchange from April 8, 1997, when CINAR announced its financial results for the first quarter ending February 28, 1997, through and including March 10, 2000 and on behalf of two sub-classes: (1) all persons who purchased CINAR stock issued in the 1997 Offering pursuant to the 1997 Registration Statement and through the U.S./International Underwriters as defined therein and (2) all persons who purchased CINAR stock issued in the 1999 Offering pursuant to the 1999 Registration Statement and through the U.S./International Underwriters as defined therein. CAC ¶ 33. Plaintiffs allege that defendants misled the investing public by issuing materially false financial statements, press releases and other public filings concerning CINAR's financial position. Plaintiffs specifically target CINAR's 1997 and 1999 SEC Registration Statements in which the defendants submitted false statements in connection with offerings of 3.1 million Class B shares in 1997 and 7 million Class B shares in 1999, the vast majority of which were sold to United States or other non-Canadian citizens. According to plaintiffs, these filings overstated CINAR's revenues and earnings, neglected to disclose unauthorized offshore investments and failed to record related party transactions in accordance with U.S. and Canadian Generally Accepted Accounting Principles ("GAAP"). Such misstatements, it is alleged, artificially inflated CINAR's stock price and constituted fraud-on-the-market.

Class Plaintiffs plead eight causes of action against CINAR, Weinberg, Charest, Panju, Corbeil and CINAR's auditors, E & Y. Count One alleges that CINAR, Weinberg, Charest and Panju violated Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Count Two alleges that Weinberg, Charest and Panju were "controlling persons" of CINAR and are liable under Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). Counts Three, Four and Five allege that some or all of defendants CINAR, Weinberg, Charest and Panju are liable under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77k(a), 771(a)(2), 770, for omissions and misstatements in the 1997 Registration Statement. Counts Six, Seven and Eight allege that some or all of defendants CINAR, Weinberg, Charest, Panju, Corbeil and E & Y are liable under Sections 11, 12(a)(2), and 15 of the Securities Act for omissions and misstatements in the 1999 Registration Statement.

Kelley v. CINAR

In 1986, Phillip Kelley, Kathy Kelley, Michael Mayberry and Sharon Mayberry (the "Kelley Plaintiffs") founded HighReach Learning, Inc. ("HighReach"), a North Carolina company that manufactures and distributes children's educational materials. Each of the four plaintiffs owned twenty-five percent of the company's stock. In January 1998, CINAR and CINAR's wholly owned Delaware subsidiary, CINAR Education, offered to purchase HighReach. The companies entered into negotiations. Defendant Weinberg, who represented CINAR in this transaction, traveled to North Carolina and New York on several occasions to arrange the deal. During these negotiations, Weinberg provided the Kelley Plaintiffs with copies of CINAR's financial statements and represented that they reflected an accurate picture of the Company's financial position. See Kelley Am.Compl. ¶¶ 13-20.

On May 26, 1998, CINAR and the Kelley Plaintiffs finalized the deal and signed a Stock Purchase Agreement ("Kelley SPA"). According to the Kelley SPA, the Kelley Plaintiffs sold 689 shares of HighReach stock to CINAR Education in exchange for $18 million in cash, and sold the remaining 311 shares to CINAR for 422,000 shares of CINAR Class B stock. At the time, CINAR Class B stock was trading at $19 per share. CINAR represented in the Kelley SPA that their SEC filings "did not contain any untrue statement of a material fact" and that the financial statements included in the SEC filings "fairly present[ed] the consolidated financial position of CINAR." Id. ¶¶ 24-25. It was further stipulated that all representations and warranties made by CINAR in the Kelley SPA would continue for three years after the closing date. Id. ¶ 27. After the disclosures of October 1999 through March 2000 described above, CINAR's stock price tumbled and the NASDAQ halted trading. Plaintiffs claim that the fraudulent financial statements artificially inflated CINAR's stock price and allowed CINAR to exchange fewer of its Class B shares in its purchase of HighReach.

The Kelley Plaintiffs plead six causes of action against CINAR, Weinberg and Charest. Count One alleges that CINAR, Weinberg and Charest violated Section 10(b) of the Exchange Act. Count Two alleges that Weinberg and Charest were "controlling persons" of CINAR and are liable under Section 20(a) of the Exchange Act. Count Three alleges that all defendants violated the North Carolina Securities Act, N.C. Gen.Stat. § 78A-1, et seq. Counts Four and Five allege common law fraud and negligent misrepresentation against all defendants. Count Six alleges breach of contract against CINAR.

Carson v. CINAR

In 1976, Stephen Carson, Patricia Carson and Janet Dellosa (the "Carson Plaintiffs") founded Carson-Dellosa Publishing Inc. ("Carson-Dellosa"), a North Carolina company that produces and distributes educational materials for classroom use. In 1996, CINAR approached the Carson Plaintiffs to purchase Carson-Dellosa as well as two other companies in which the Carson Plaintiffs had an interest, The Wild Goose Company ("Wild Goose") and Unique Collating Service, Inc. ("Unique"). At various times in 1997, Weinberg, Charest and Panju traveled to North Carolina to convince the Carson Plaintiffs to sell Carson-Dellosa. Plaintiffs allege that throughout this period they were in frequent contact with both Weinberg and Panju by phone. During negotiations, defendants made several representations to the Carson Plaintiffs concerning the soundness of CINAR's financial position and stock price. For example, despite plaintiffs' desire to receive cash for the sale of Carson-Dellosa, Weinberg and Panju both told plaintiffs that it would be a better financial decision to accept CINAR stock in lieu of cash. Weinberg and Panju urged plaintiffs to consider CINAR's recent market performance as an indication of the projected future value of its stock and stated that, based on the facts known to them, they expected the value of CINAR stock to rise over the next two to three years. Defendants also provided plaintiffs with several of CINAR's financial reports, including the CINAR Annual Reports for 1994, 1995 and 1996, Management Proxy Circulars from 1995, 1996 and 1997, and the 1997 Interim Report for the First Quarter ending February 28, 1997, all of which plaintiffs claim misstated CINAR's financial position for the reasons already explained. See Carson Am.Compl. ¶¶ 14-22.

Relying on these statements and the accuracy of the market price of CINAR stock, the Carson Plaintiffs agreed to sell their interest in Carson-Dellosa to CINAR and CINAR Holdings in exchange for $22,151,100 in cash and CINAR stock then worth $16 million. Plaintiffs also sold their interest in Wild Goose and Unique to CINAR for cash, bringing the transaction's total value up to approximately 40.5 million. On July 28, 1997, the two parties set out these terms in a Stock Purchase Agreement ("Carson SPA") executed in North Carolina in which CINAR expressly warranted the accuracy of its financial statements and SEC filings. Id. ¶¶ 29-36. The Carson SPA expressly stated that "all forms, reports, registration statements and documents required to be filed by [CINAR] with the [SEC] . . . did not contain any untrue statement of a material fact or fail to state a material fact required to be stated therein" and that "[t]he audited financial statements and audited interim financial statements included [in the SEC filings] . . . fairly present the consolidated financial position of CINAR." Id. ¶¶ 36-37. CINAR also represented in the Carson SPA that since November 30, 1996, there had been no "material adverse change" to CINAR's business. Id. ¶ 38. As part of the transaction, the Carson Plaintiffs also entered into employment contracts with Carson-Dellosa that prohibited them from competing with Carson-Dellosa anywhere in the world for two years after termination of their employment. See id. ¶ 35. After the disclosures of October 1999 through March 2000 described above, CINAR's stock price fell drastically. Plaintiffs claim that defendants fraudulently induced them to enter into the Carson SPA by knowingly making false representations in their financial statements and in other disclosures.

The Carson Plaintiffs plead eight causes of action against CINAR, Weinberg, Charest and Panju. Count One alleges that CINAR, Weinberg, Charest and Panju violated Section 10(b) of the Exchange Act. Count Two alleges that Weinberg, Charest and Panju were "controlling persons" of CINAR and are liable under Section 20(a) of the Exchange Act. Count Three alleges that all defendants violated the North Carolina Securities Act. Counts Four and Five allege common law fraud and negligent misrepresentation against all defendants. Count Six alleges breach of contract against CINAR. Count Seven alleges that Weinberg, Charest and Panju aided and abetted fraud. Count Eight alleges violation of the North Carolina Unfair Trade Practices Act against all defendants, N.C. Gen.Stat. § 75-1.1

Hilderbrand v. CINAR

In 1987, Karen Hilderbrand and Kim Thompson (the "Hilderbrand Plaintiffs") founded Twin Sisters Productions ("Twin Sisters"), an Ohio company that produces and distributes children's educational materials and musical products. See Hilderbrand Compl. ¶ 16. In the middle of 1999, CINAR and CINAR Education approached the Hilderbrand Plaintiffs to express their interest in purchasing Twin Sisters, which already had been approached by a rival company, IFG. From that time through February 2000, defendant Panju was in contact with plaintiffs by telephone and met with plaintiffs on several occasions, including once in Ohio. Defendant Weinberg also met with plaintiffs in Montreal and Ohio. Both Panju and Weinberg represented that defendant Charest had knowledge of the terms of sale as proposed by Panju and Weinberg. When both CINAR and IFG offered a purchase price of $9 million, CINAR further offered to pay the Hilderbrand Plaintiffs $2.5 million in additional consideration over the course of four years if Twin Sisters met particular earning targets for each year and if the Hilderbrand Plaintiffs relinquished their pre-existing royalty agreements. The earning targets were calculated on the basis of the past performance of Twin Sisters and factored in a projected increase that would result from promised capital contributions and a central distribution center, each to be supplied by CINAR following the sale. The additional consideration would be in the form of CINAR stock. CINAR further offered to retain the Hilderbrand Plaintiffs as employees of Twin Sisters after the sale and pay them CINAR stock options as part of their employment agreements. See id. ¶¶ 24-33, 44-48.

The Hilderbrand Plaintiffs plead three causes of action against CINAR, Weinberg, Charest and Panju. Counts One and Two allege common law fraud and negligent misrepresentation. Count Three alleges grounds for a preliminary injunction to preclude CINAR from selling its educational division, including Twin Sisters, until the Hilderbrand SPA and the Hilderbrand EA are reformed to provide for payment of additional consideration.

DISCUSSION

When considering a motion to dismiss under Rule 9(b) or Rule 12(b)(6), a court must presume the facts alleged in the complaint to be true, and draw all factual inferences in favor of the plaintiff. In re Livent, Inc. Sec. Litig., 78 F. Supp.2d 194, 199-200 (S.D.N.Y. 1999). This presumption is inapplicable, however, to motions to dismiss on grounds of international comity and forum non conveniens which address the court's subject matter jurisdiction. See id. at 200 ("The presumption on factual inferences does not apply to a forum non conveniens motion."). Accordingly, the Court may take into account "the pleadings and any evidence before it, such as affidavits." Id. (quoting Cargill Int'l S.A. v. MIT PAVEL DYBENKO, 991 F.2d 1012, 1019 (2d Cir. 1993)).

A. International Comity*fn6

Defendants argue that all of the actions before the Court are inherently Canadian disputes and should be dismissed for reasons of international comity in favor of a class action already proceeding in Canada. Defendants contend that resolution of the case will involve interpreting complex provisions of the Canadian and Quebec tax laws — a task that is better left to Canadian courts. In exercising jurisdiction, the Court may also risk entanglement with ongoing Canadian civil and criminal investigations into CINAR's conduct. In addition, because the tax credit program is a hotly-contested and widely-publicized political issue in Canada, the Court would be injecting itself into a volatile local controversy. Plaintiffs counter that the focus of their respective complaints is not CINAR's duplicity with Canadian tax authorities, but rather the fraudulent statements made to American investors in connection with their secondary stock offerings on the NASDAQ and stock purchase agreements with American companies. Thus, according to plaintiffs, the actions have an American locus rather than a Canadian one. Moreover, plaintiffs observe that the Court will not have to interpret Canadian tax laws because CINAR has already admitted to Canadian authorities that it improperly received tax credits.

The Supreme Court defined comity as "the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation." Hilton v. Guyot, 159 U.S. 113, 164, 16 S.Ct. 139, 40 L.Ed. 95 (1895). According to this principle, "United States courts ordinarily refuse to review acts of foreign governments and defer to proceedings taking place in foreign countries, allowing these acts and proceedings to have extraterritorial effect in the United States." Pravin Banker Assocs. v. Banco Popular Del Peru, 109 F.3d 850, 854 (2d Cir. 1997). Courts should take special care to avoid potential conflicts and entanglements in the area of international relations. See In re Maxwell Communication Corp., 93 F.3d 1036, 1047 (2d Cir. 1996). Courts will not yield to foreign proceedings, however, if deferring would "be contrary to the policies or prejudicial to the interests of the United States." Pravin, 109 F.3d at 854.

The parties dispute the governing standard for dismissal on grounds of international comity. Plaintiffs contend that defendants must first demonstrate that a "true conflict" exists between United States law and Canadian law such that it would be impossible for a person to comply with the directives of both. Only after the defendants have satisfied this threshold inquiry is the Court then to assess the strength of each country's interest in the litigation according to a seven factor balancing test outlined in the Restatement (Third) of Foreign Relations. See Class Pls.' Mem. of Law in Opp'n at 24-25 ("Class Pls.' Opp. at ___"). Defendants maintain that a "true conflict" need not exist for the Court to dismiss and that the correct balancing test to apply is not the Restatement factors, but rather the seven factor inquiry set out in Timberlane Lumber Co. v. Bank of America, 749 F.2d 1378 (9th Cir. 1984). See Def. CINAR Corp.'s Reply Mem. of Law in Supp. at 2-8 ("CINAR Reply at ___").

1. "True Conflict"

In In re Maxwell the Second Circuit stated that a "true conflict" is, indeed, a threshold requirement and that such a conflict exists between two countries only if the laws of one "require conduct that violates [the laws of the other]." In re Maxwell, 93 F.3d at 1049-50. In adopting this requirement, the In re Maxwell court relied on the Supreme Court's decision in Hartford Fire Ins. Co. v. California, 509 U.S. 764, 798-99, 113 S.Ct. 2891, 125 L.Ed.2d 612 (1993). In Hartford Fire, the Supreme Court declined to dismiss the suit on grounds of comity, thereby allowing application of the Sherman Act to London reinsurers. See id. After finding that no true conflict existed because it was possible "[to] comply with the laws of both [the United States and Britain]," the Court refused to deliberate further on the issue, stating "[w]e have no need in this litigation to address other considerations that might inform a decision to refrain from the exercise of jurisdiction on grounds of international comity." Id. at 799, 113 S.Ct. 2891.

The crux of the "true conflict" dispute lies in the interpretation of this statement. Defendants argue that the Court's mention of "other considerations" indicates that there are contexts in which a "true conflict" is not necessary for courts to abstain. In support, defendants cite a pre-In re Maxwell case that refused to extend the "true conflict" requirement to trademark cases. See Sterling Drug, Inc. v. Bayer, 14 F.3d 733, 746-47 (2d Cir. 1994) (stating "[t]hough the Court's approach to the comity issue might not be limited to the antitrust context, we think it is not automatically transferable to the trademark context.") (cited with approval in In re Maxwell). Plaintiffs counter that this is merely a refusal by the Court to analyze the balancing test factors because the lack of a true conflict was dispositive of the issue. See Carson Pls.' Mem. of Law in Opp'n at 9-10.

The Court agrees with plaintiffs' position. At least one court in the Second Circuit has agreed with this interpretation. See Trugman-Nash, Inc. v. New Zealand Dairy Bd., 954 F. Supp. 733, 737 (S.D.N.Y. 1997). Moreover, even if Sterling Drug leaves open the possibility that some contexts might not require a "true conflict," no court in the Second Circuit has held that securities fraud cases like this invite such special considerations.*fn7 Finally, ever since In re Maxwell, courts in the Second Circuit have been consistent in affirming a "true conflict" threshold. See Filetech v. France Telecom, 157 F.3d 922, 932 (2d Cir. 1998); Bodner v. Banque Paribas, 114 F. Supp.2d 117, 129-30 (E.D.N.Y. 2000); Trugman-Nash, 954 F. Supp. at 736-37. Defendants' citation of Bigio v. Coca-Cola Co., 239 F.3d 440 (2d Cir. 2000); Jota v. Texaco, Inc., 157 F.3d 153 (2d Cir. 1998) and Pravin in support of their argument is unpersuasive. While these cases do not specifically mention a "true conflict" requirement, they do not refute it either. See Bigio, 239 F.3d at 454-55; Jota, 157 F.3d at 160 (both stating that the district court on remand should consider whether the foreign court constitutes an adequate forum, but neglecting to mention the "true conflict" threshold); see also Pravin, 109 F.3d at 854-55 (affirming the district court's exercise of jurisdiction because declining to do so would have been contrary to United States policy, but not alluding to the existence of a "true conflict"). Defendants do not maintain that it would be impossible for them to comply with both American securities law and Canadian tax law. Defendants are thus unable to meet the "true conflict" threshold, a fact that, by itself, would militate against dismissal. See In re Maxwell, 93 F.3d at 1049-50; Hartford Fire, 509 U.S. at 798-99, 113 S.Ct. 2891.

Even if the Court were to consider issues of potential conflict as only one factor in a multifaceted balancing test, as defendants suggest, defendants still cannot demonstrate a likelihood of significant conflict if proceedings were to continue in both countries. Defendants assert that, should the Court retain jurisdiction in this matter, it will be required to interpret complex Canadian tax laws. While it is undoubtedly true that Canadian courts have more experience interpreting these laws, there is no indication that this Court's application of those laws will conflict with previous Canadian precedent. Certainly this Court will not be called upon to apply laws that are in direct opposition to Canadian law. The point is therefore directed more to the Court's expertise in these matters — a concern that is more appropriately considered in a forum non conveniens analysis.*fn8 To the extent it impacts the comity analysis, though a valid concern, it does not create a conflict or circumstance meriting dismissal. See Manu Int'l, S.A. v. Avon Prods., Inc., 641 F.2d 62, 67-68 (2d Cir. 1981) ("[District courts] must guard against an excessive reluctance to undertake the task of deciding foreign law, a chore federal courts must often perform.").

Defendants also claim that the Court's involvement could also compromise Canadian civil and criminal investigations, which have garnered considerable media attention in Canada. The Court does not see any serious conflict and defendants have offered only vague suggestions as to how it might occur, stating that "inconsistent or expansive rulings" might cause problems. CINAR Reply at 13. A decision from this Court will do little to undermine Canadian civil investigations because CINAR has already reached a settlement with the regulatory authorities. See Selinger Aff., Ex. 1. In the unlikely event that this Court decides that CINAR's impropriety extended beyond what it has already conceded, it is difficult to see how such a ruling would cause enough tension to warrant a comity dismissal. Canadian civil authorities have already resolved the matter to their satisfaction. The possibility that this Court may decide that the Canadian government was entitled to a little more should not cause any great uproar. To the extent that a ruling of this Court may impact any Canadian criminal investigations, the Court finds that such concerns do not rise to a sufficient level to implicate concerns of comity. Moreover, Canadian authorities, to this point, have expressed no concerns with this Court's retention of jurisdiction.

2. Balancing Tests

Even if defendants could show that a "true conflict" exists or that a "true conflict" is not necessary for dismissal, they cannot demonstrate that the other comity factors weigh in favor of dismissal, regardless of which balancing test is used. Defendants contend that the applicable law in this circuit is the test found in Timberlane. Plaintiffs maintain that the controlling factors are found in the Restatement (Third) of Foreign Relations. The In re Maxwell court cited and applied the Restatement factors as controlling law. See In re Maxwell, 93 F.3d at 1048. However, courts in the Second Circuit, both before and after In re Maxwell, have applied or endorsed the Timberlane factors. See O.N.E. Shipping Ltd. v. Flota Mercante Grancolombiana, 830 F.2d 449, 451 (2d Cir. 1987); Trugman-Nash, 954 F. Supp. at 737. The dispute is pointless for two reasons. First, the two tests are almost identical, for all intents and purposes. Indeed, the Second Circuit in Filetech seemed to indicate that the two tests should be read together as one seven-factored test. See Filetech, 157 F.3d at 928-29. Second, regardless of which test is used, the defendants cannot demonstrate that dismissal is warranted.

Under the Timberlane test the court must balance the following factors: (1) the degree of conflict with foreign law or policy, (2) the nationality or allegiance of the parties and the locations or principal places of business or corporations, (3) the extent to which enforcement by either state can be expected to achieve compliance, (4) the relative significance of effects on the United States as compared with those elsewhere, (5) the extent to which there is explicit purpose to harm or effect American commerce, (6) the foreseeability of such effect, and (7) the relative importance to the violations charged of conduct within the United States as compared with conduct abroad. Timberlane, 749 F.2d at 1383-86.*fn10

The first of these factors (Restatement § 403(2)(h)) has already been addressed in the discussion of the "true conflict" threshold. No legitimate conflict exists with Canadian law or Canadian investigations. The Court adds only that the Restatement specifically mentions that the mere fact that one state has already begun judicial proceedings, while relevant to evaluating Sections 403(2)(g) and (h), does not automatically counsel for dismissal. See Restatement (Third) Foreign Relations Law § 403, Comment d. Moreover, the only parallel proceeding in Canada is the Canadian class action. No parallel Canadian suit exists for the Kelley, Carson or Hilderbrand plaintiffs' claims.

The second Timberlane factor favors neither side. CINAR is a Canadian company and the named defendants are all Canadian citizens. The plaintiffs are American citizens. CINAR's argument that the suit is about tax fraud and therefore has an entirely Canadian nexus is unpersuasive. The suit is rather about CINAR's fraudulent disclosures to American investors. There is just as much of an American nexus as there is a Canadian nexus. The Restatement test is even stronger on this point. While Section 403(2)(b) might be neutral like the second Timberlane factor, Section 403(2)(a) specifically looks for a link between "the activity and the territory of the regulating state." Restatement § 403(2)(a) (emphasis added). The relevant activity here was defendants' pursuit of American investors in the United States — listing its securities on the NASDAQ, attending "road shows," etc. — and its false statements to those same investors and to American authorities.

The third through sixth factors either favor the plaintiff or do not add significant weight to defendants' argument for dismissal. Both the United States and Canada could surely achieve compliance. The effect of the securities fraud was greater here than in Canada. CINAR's tax liability in Canada totaled $8.7 million, while its damage to American investors ranges in the hundreds of millions of dollars. See Tr. Oral Argument at 51. There is no indication that defendants explicitly sought to harm American commerce, but it is worth noting that defendants did target primarily American investors in the 1997 and 1999 stock offerings and specifically sought out American companies for acquisition. Moreover, defendants could easily foresee that by registering its securities on the NASDAQ and by negotiating stock purchase agreements with American companies in the United States, any fraudulent statements it made would certainly have an affect here. Thus, these four factors do little to support the case for dismissal.

Finally, the seventh factor favors maintaining jurisdiction. Once again, CINAR asserts that this case, at its core, implicates the validity of the Canadian tax credit scheme, and as such, the importance of this suit is far greater in Canada than in the United States. CINAR further argues that asserting jurisdiction in this suit would be placing American interests in enforcing its securities laws over an issue of national importance to Canada and would seem to make any foreign fraud an American concern so long as it involved American investors. Again, defendants are alluding to a conflict that does not exist. This Court's ruling will not affect the debate over the tax credit scheme. Nor is the United States asserting jurisdiction over a primarily local dispute. To say the least, the fraud occurred here as much as it did in Canada. Accordingly, the United States has a legitimate ...


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