The opinion of the court was delivered by: Scheindlin, District Judge.
This is a class action brought against Credit Suisse First
Boston Corporation ("Credit Suisse" or "CSFB") on behalf of
internet-related and high technology companies that hired Credit
Suisse to underwrite their initial public offering of stock
("IPO"). Plaintiffs' four causes of action are state law claims
related to underwriting contracts that they entered into with
Credit Suisse. Three of these claims assert that Credit Suisse
breached the expressed terms of the contracts as well as the
implied covenants and the fiduciary duties arising under those
contracts. See 2/4/02 Amended Complaint ("Am.Compl.") ¶¶ 32-55.
The fourth claim alleges unjust enrichment. See id. ¶¶ 56-61.
Credit Suisse now moves to dismiss the Complaint in its
entirety or in part. See infra Part III.C. For the reasons
discussed below, this motion is denied.
II. JURISDICTION AND PROCEDURAL BACKGROUND
This Court has jurisdiction over the complaint because there
is diversity of citizenship between the parties. See Am.
Compl. ¶ 4 (citing 28 U.S.C. § 1332). Plaintiff MDCM Holdings,
Inc. ("MDCM") is a Florida corporation with its principal place
of business in Florida. See id. ¶ 6. Defendant Credit Suisse
is a Massachusetts corporation with its principal executive
office in New York. See id. ¶ 7. Credit Suisse's Technology
Group, which participated in the IPOs of the putative class
members, has its headquarters in San Francisco, California. See
id. The Complaint seeks relief only under New York state law,
as required by the underwriting contracts. See id. ¶ 33.
The original Complaint was filed on May 25, 2001, in the
Southern District of Florida. On October 5, 2001, Credit Suisse
and MDCM presented the Florida district court with a joint
stipulation seeking a transfer to this Court. That transfer was
ordered on October 10, 2001. Venue is proper in this district
because Credit Suisse maintains its principal place of business
in the Southern District of New York, and a substantial part of
the events giving rise to the plaintiffs' claims occurred here.
See 28 U.S.C. § 1391(a), (c).
Under the Federal Rules of Civil Procedure, plaintiffs need
only provide "a short and plain statement of the claim showing
that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2).
"Such a statement must simply `give the defendant fair notice of
what the plaintiffs claim is and the grounds upon which it
rests.'" Swierkiewicz v. Sorema N.A., 534 U.S. 506, 122 S.Ct.
992, 998, 152 L.Ed.2d 1 (2002) (quoting Conley v. Gibson,
355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)). "This simplified
notice pleading standard relies on liberal discovery rules and
summary judgment motions to define disputed facts and issues and
to dispose of unmeritorious claims." Id.
Out of a desire to raise new capital, corporations often
decide to sell ownership of the company to the public by issuing
stock. The first step in this process requires a company to find
an investment bank that will agree to underwrite its IPO.*fn1
Agreements between the company issuing the stock ("issuer") and
the investment bank underwriting the IPO ("underwriter") are
executed in a contract commonly referred to as an underwriting
As with most contracts between sophisticated parties,
representatives of the company and the investment bank discuss
many topics before signing on the bottom line. The parties
generally negotiate the amount of capital that the company seeks
to raise, the type of security to be issued, the price and any
special features of the security, and the underwriter's
compensation.*fn2 For example, the contract may "obligate the
underwriter to acquire the IPO securities from the issuer at a
[discounted] fixed price, and then resell the IPO securities to
the public in accordance with the terms, and at a fixed offering
price." Am. Compl. ¶ 15. The difference between these two prices
is typically 7% of the IPO proceeds. See id. ¶ 19. The
investment bank's profit in selling the issuer's stock to the
public is intended to serve as compensation for its services.
Mortgage.com, a company that specialized in providing online
mortgage services, was one of the many internet-related and high
technology companies that went public in the late 1990s. In July
1999, Mortgage.com's Board of Directors authorized the
corporation to enter into an underwriting agreement with Credit
Suisse, one of the nation's leading underwriters.*fn3 See
Am. Compl. ¶¶ 14, 18, 25. On August 11, 1999, Mortgage.com and
Credit Suisse executed the underwriting agreement. See 8/11/99
Underwriting Agreement at 1-17, attached as Ex. 1 to Appendix of
Supplemental Materials provided by MDCM Holdings, Inc., at 1-17.
The same day,
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.
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 ...