shares in Mortgage.com were issued to the public and began
trading on the NASDAQ National Market under the ticker symbol
"MDCM". Am. Compl. ¶ 25.
Pursuant to the underwriting agreement, Mortgage.com sold
7,062,500 shares of common stock to Credit Suisse for $7.44 per
share, exactly 7% less than the public offering price of $8.00
per share. See id. In addition, Credit Suisse exercised an
option under the underwriting agreement and acquired 379,375
additional shares for the same price. See id. As a result,
Mortgage.com's IPO generated gross proceeds of approximately
$59.5 million. See id. The compensation for Credit Suisse's
service was $4,167,450. See id.
Two weeks after the IPO, Mortage.com's stock had almost
doubled in value. See id. ¶ 26. On August 26, the stock price
hit $22-3/4 per share, closing at $15-3/8 per share. See id.
Such an increase was not unusual during the late 1990s:
Mortgage.com was one of many issuers whose shares dramatically
increased in value after being issued to the public. See id. ¶
22. "In 1998 and 1999," for example, "the value of IPO shares
frequently surged 400-500% during the first day of trading."
Andres Rueda, "The Hot IPO Phenomenon and the Great Internet
Bust," 7 Fordham J. Corp. & Fin. L. 21, 23 (2001). "Indeed,
data published by Professor Jay Ritter of the University of
Florida notes that the 10 biggest first-day IPO percentage
increases in history all took place within the Class Period
herein."*fn4 Am. Compl. ¶ 28.
The complaint alleges that Credit Suisse used this phenomenon
to enrich itself by requiring that customers who wanted to
purchase IPO shares pay it the prospectus price plus, directly
or indirectly, a share of profits that the customers
realized.*fn5 See id. ¶¶ 37, 40. Credit Suisse's actual
compensation was thus far greater than the amount agreed upon by
the issuers in the underwriting agreements. See id. ¶¶ 30, 37,
40. Moreover, the Complaint asserts that Credit Suisse
purposefully underpriced certain securities in order to
guarantee that those shares would rise in value once issued to
the public. See id. ¶¶ 2224. From the issuers' perspective,
there was "money left on the table" because of this
underpricing. Id. ¶ 22. For example, if Mortgage.com's
original offering price had been somewhere between the high and
low price of August 26, 1999, the company would have realized
additional gross proceeds of $54 million to $109 million. See
id. ¶ 25.
B. MDCM's Class Action
On May 25, 2001, the corporation formerly known as
Mortgage.com, now called MDCM Holdings, Inc.,*fn6 sued Credit
Suisse on behalf of issuers that had used the investment bank to
underwrite their IPOs from January 1, 1998, to October 31, 2000.
See Am. Compl. ¶ 1. The putative class is limited to companies
whose securities "increased in value 15% or more above their
original offering price within 30 days following the
IPO."*fn7 Id. ¶ 1.
Count I of the Complaint alleges that Credit Suisse breached
the explicit terms of the underwriting agreements in two ways.
First, Credit Suisse did not sell the IPO shares to the public
as the contract requires, but instead directed shares to favored
customers. See id. ¶¶ 29, 39. Second, Credit Suisse did not
sell the IPO shares for the price provided in the prospectus,
but instead required purchasers to pay a higher price.*fn8
See id. ¶¶ 19, 36, 37. See also supra note 5.
Count II alleges that Credit Suisse violated implied covenants
of good faith and fair dealing that accompanied its performance
of the underwriting agreements. Credit Suisse allegedly violated
these covenants by underpricing the IPO shares so that it could
allocate undervalued shares to favored clients and receive
additional compensation. See id. ¶ 49. As a result, the
issuers received deficient and overpriced underwriting services.
Count III alleges that Credit Suisse owed fiduciary duties of
loyalty, due care and fair dealing to the issuers. These duties
arose because Credit Suisse was the underwriter of the IPOs and
had superior knowledge and expertise, receipt of confidential
information, and acted as an agent and advisor to the issuers.
See id. ¶¶ 52-53. According to the Complaint, Credit Suisse
violated those duties by allocating shares to favored customers
and sharing in the profits made by those customers. See id. ¶¶
Count IV is brought in the alternative to Counts I through
III.*fn9 See id. ¶ 58. It asserts a claim of unjust
enrichment against Credit Suisse on the ground that the issuers
"conferred benefits upon Defendant in connection with their IPOs
which, in the circumstances . . . would be inequitable for
Defendant to retain." Id. ¶ 58. Count IV further alleges that
the profit-sharing compensation from favored customers unjustly
enriched Credit Suisse. See id. ¶¶ 60, 61.
C. Credit Suisse's Motion to Dismiss
Credit Suisse argues that MDCM's complaint should be
dismissed, in its entirety or in part, for five reasons.
"First, MDCM's state law claims are barred by the Securities
Litigation Uniform Standards Act of 1998 (`SLUSA'), Pub L. No.
105-353, 112 Stat. 3227 (codified at 15 U.S.C. § 77p,
78bb(f))." Memorandum of Law in Support of Defendant Credit
Suisse First Boston's Corporation's Motion to Dismiss the
("Def.Mem.") at 2. "Second, MDCM lacks standing to assert
these claims." Id. "Third, claims for breach of contract and
the implied covenant of good faith and fair dealing are
deficient because MDCM does not and cannot identify any
contractual provision that has been breached." Id. "Fourth,
MDCM cannot claim that CSFB was unjustly enriched because . . .
the doctrine of unjust enrichment cannot be used here to create
new contract obligations where a valid written agreement already
exists." Id. "Finally, the claim for breach of fiduciary duty
is preempted under New York's Martin Act, N.Y. Gen. Bus. Law §
352 [New York's securities statute], et seq." Id.
IV. SLUSA DOES NOT BAR THIS CLASS ACTION
A. Statutory Framework and Purpose
When Congress enacted the Private Securities Litigation Reform
Act of 1995 ("PSLRA"), it sought to raise the bar for bringing
class actions under the Securities Act of 1933 and Securities
Exchange Act of 1934. Among other things, the PSLRA heightened
pleading standards, generally required courts to stay discovery
pending resolution of a motion to dismiss, and placed limits on
recovery. See 15 U.S.C. § 77z-1 to-2 (Securities Act of 1933);
15 U.S.C. § 78u-4 to -5 (Securities Exchange Act of 1934). In
the aftermath of the PSLRA, however, plaintiffs increasingly
filed securities class actions in state courts under state law
theories of liability.*fn10
Congress responded in 1998 by enacting SLUSA, which aims to
"prevent plaintiffs from seeking to evade the protections that
Federal law provides against abusive litigation by filing suit
in State court, rather than Federal court." H.R.Rep. No. 105803
(1998). The purpose of SLUSA was to make federal court the
exclusive venue, and federal law the exclusive remedy, for most
securities class actions. SLUSA provides in pertinent part:
No covered class action based upon the statutory or
common law of any State or subdivision thereof may be
maintained in any State or Federal court by any
private party alleging —
(1) an untrue statement or omission of a material
fact in connection with the purchase or sale of a
covered security; or
(2) that the defendant used or employed any
manipulative or deceptive device or contrivance in
connection with the purchase or sale of a covered
15 U.S.C. § 77bb(f)(1).
SLUSA thus provides for federal preemption of any claim that
meets four prerequisites. The lawsuit must be: (1) a "covered
class action"; (2) based on state law; (3) in which the
plaintiff has alleged either a "misrepresentation or omission of
a material fact" or "any manipulative or deceptive device or
contrivance;" (4) "in connection with the purchase or sale of a
covered security." Id. See also Green v. Ameritrade, Inc.,
279 F.3d 590, 596 (8th Cir. 2002) (outlining four elements of SLUSA)
(citations omitted). Because plaintiffs do not allege the third
element of SLUSA — misrepresentations or omissions — the statute
does not preempt their class action.*fn11
B. MDCM's Complaint Does Not Allege Any Misrepresentations
When determining whether SLUSA preempts a lawsuit, a court is
directed to look at what the "private party [is] alleging."
15 U.S.C. § 78bb(f)(1) (emphasis added).*fn12 MDCM only alleges
than that Credit Suisse signed numerous contracts in which it
promised to do one thing but then did another. "The failure to
carry out a promise made in connection with a securities
transaction is normally a breach of contract. It does not
constitute fraud unless, when the promise was made, the
defendant secretly intended not to perform or knew that he could
not perform." Mills v. Polar Molecular Corp., 12 F.3d 1170,
1176 (2d Cir. 1993). MDCM has not alleged that Credit Suisse had
such an intent and, to prevail on its breach of contract claims,
MDCM need not offer any evidence about Credit Suisse's mental
state. Under its current claims, it only needs to prove that
Credit Suisse did not satisfy the requirements laid out in the
underwriting agreements. Therefore, the contract claims do not
involve allegations of misrepresentation or omissions by Credit
Credit Suisse argues that "courts . . . have disregarded state
law labels and dismissed [such] claims under SLUSA." Def. Mem.
at 8 (citations omitted). The cases relied on by Credit Suisse,
however, involve plaintiffs who made explicit allegations of
misrepresentation or material omission.*fn14 In none of those
cases was it
necessary for the court to rewrite the plaintiffs allegations by
adding misrepresentation or fraud to the complaint, or for the
court to speculate about the defendant's intent at the time it
signed a contract.
Indeed, in the one case that this Court has found that
squarely addresses whether SLUSA preempts class actions that are
explicitly based on contract law, the court concluded it did
not. See Green v. Ameritrade, 120 F. Supp.2d 795, 796 (Neb.
2000), aff'd on other grounds, 279 F.3d 590, 597-99 (8th Cir.
2002). In Green, the plaintiff brought a class action against
Ameritrade, a provider of online securities price information
and stock brokerage services. The amended complaint alleged that
Ameritrade breached its contracts with subscribers who used the
company "to obtain last sales information or real time market
quotes for stocks or options via the internet." Id. at 796.
Because the amended complaint alleged "nothing other than a
claim for breach of express agreements by Ameritrade," the
plaintiffs claim required no proof as to whether Ameritrade
misrepresented or committed fraud about its intent to satisfy
its contracts and SLUSA was not applicable. Id. at 799 (citing
Burns v. Prudential Secs., 116 F. Supp.2d 917 (N.D.Ohio 2000)).
Here, it would be inappropriate to transform MDCM's contract
claims into fraud claims because New York law would require
dismissal of such claims. "Under New York law, a fraud claim is
precluded where it relates to a breach of contract." Trepel v.
Abdoulaye, 185 F. Supp.2d 308, 310 (S.D.N.Y. 2002) (applying New
York law). "[A] simple breach of contract is not to be
considered a tort unless a legal duty independent of the
contract itself has been violated." Clark-Fitzpatrick, Inc. v.
Long Island R.R. Co., 70 N.Y.2d 382, 389, 521 N.Y.S.2d 653,
516 N.E.2d 190 (1987) (emphasis added). "This legal duty must spring
from circumstances extraneous to, and not constituting elements
of, the contract, although it may be connected with and
dependent upon the contract." Id.
Most courts that have considered the issue have held that,
under New York law, a contract claim cannot be converted into a
fraud claim merely by adding "`an allegation that the promisor
intended not to perform when he made the promise.'" Shred-It,
USA, Inc. v. Mobile Data Shred, Inc., 202 F. Supp.2d 228, 237
(S.D.N.Y. 2002) (quoting Papa's-June Music, Inc. v. McLean,
921 F. Supp. 1154, 1160 (S.D.N.Y. 1996)). Rather, to sustain a
fraud claim arising out of a contractual relationship a
(i) demonstrate a legal duty separate from the duty
to perform under the contract;
(ii) demonstrate a fraudulent misrepresentation
collateral or extraneous to the contract; or
(iii) seek special damages that are caused by the
misrepresentation and unrecoverable as contract
Bridgestone/Firestone, Inc. v. Recovery Credit Servs., Inc.,
98 F.3d 13, 20 (2d Cir. 1996) (citations omitted). See also
Papa's-June Music, Inc., 921 F. Supp. at 1160-61 (collecting
cases). These elements have not been alleged by MDCM, and
neither this Court nor the defendant have the right to redraft
the complaint to include new claims.*fn15 See The Fair v.
Kohler Die & Specialty Co., 228 U.S. 22, 25, 33 S.Ct. 410, 57
L.Ed. 716 (1913)
(Holmes, J.) ("Of course, the party who brings a suit is master
to decide what law he will rely upon. . . ."); see also Holmes
Group, Inc. v. Vornado Air Circulation Sys., Inc., ___ U.S.
___, 122 S.Ct. 1889, 1894, 153 L.Ed.2d 13 (2002) (same).
Accordingly, SLUSA does not preempt plaintiffs' contract-related
claims against Credit Suisse.
V. CREDIT SUISSE'S REMAINING ARGUMENTS
A. MDCM Has Standing to Bring this Class Action
Credit Suisse's second argument in support of its motion to
dismiss is that MDCM lacks standing because:
[e]ach of MDCM's legal claims is founded on the same
core theory of injury — namely that [Credit Suisse]
deliberately and secretly "underpriced" stock in the
"hot" IPOs of unwitting putative class members,
thereby depriving them of "millions of dollars" in
IPO proceeds. But, MDCM cannot claim to have suffered
this injury because the Mortgage.com IPO was
indisputably neither hot nor underpriced.
Def. Mem. at 11. Credit Suisse then proffers "judicially
noticeable facts" to support its claim that Mortgage.com was not
a "hot" stock.