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March 28, 2003


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


The original complaint in this action named nine additional individual defendants, including various business associates and other family members of Jose Ballesteros, who have all settled their claims with the SEC, and have consented to entry of a final judgment of permanent injunction without admitting or denying the allegations in the SEC's original complaint. Initially, Cardinal Trust, Sagitton Limited, Gianni Trust, and Gianni Enterprises Limited (collectively "the Trust defendants") moved to dismiss the original complaint pursuant to Fed.R.Civ.P. 12(b)(6). By Order dated April 26, 2002, the Trust defendants' motions to dismiss were denied without prejudice as moot, and the plaintiff was permitted to file an amended complaint.*fn1

Thereafter, an Amended Complaint (the "Complaint") was filed asserting (1) violations of § 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, ("Count 1"); and (2) violations of § 14(e) of the Exchange Act, 15 U.S.C. § 78n(e) and Rule 14e-3 promulgated thereunder, 17 C.F.R. § 240.14e-3, ("Count 2"). The SEC seeks a permanent injunction prohibiting the Trust defendants and the Individual defendants from violating these securities laws, and also seeks civil monetary penalties from these parties, pursuant to 15 U.S.C. § 78u-1.

The Trust defendants move to dismiss both Count 1 and Count 2 of the Complaint pursuant to Fed.R.Civ.P. 12(b)(6) arguing, among other things, that the Complaint fails adequately to state a violation of § 10(b), Rule 10b-5, § 14(e) or Rule 14e-3 because there is no allegation that any Trust defendant had the requisite state of mind required under the securities laws. The Trust defendants also argue that there is no basis for holding a trust liable under the securities laws for the illegal conduct of an individual, such as Jorge Ballesteros, who was associated with a trust entity.


On a motion to dismiss, pursuant to Fed.R.Civ.P. 12(b)(6), the allegations in the Amended Complaint are accepted as true. See Grandon v. Merrill Lynch & Co., 147 F.3d 184, 188 (2d Cir. 1998). In deciding a motion to dismiss, all reasonable inferences are drawn in the plaintiff's favor. See Gant v. Wallingford Bd. of Educ., 69 F.3d 669, 673 (2d Cir. 1995); Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989). The Court's function on a motion to dismiss is "not to weigh the evidence that might be presented at trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden. 754 F.2d 1059, 1067 (2d Cir. 1985). Therefore, the defendant's motion to dismiss should only be granted if it appears that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief. See Swierkiewicz v. Sorema, N.A., 534 U.S. 506, 122 S.Ct. 992, 998, 152 L.Ed.2d 1 (2002); Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Grandon, 147 F.3d at 188; Goldman, 754 F.2d at 1065.

Accordingly, the following facts in the Complaint are, for the purposes of this motion, accepted as true. On June 28, 1999 Nalco announced along with a French Company, Suez Lyonnaise des Eaux, S.A. ("Suez"), that a Suez subsidiary would be making a tender offer to purchase all outstanding Nalco stock at a substantial premium. (Compl.¶ 2.) Jose Ballesteros, who was at that time a member of Nalco's Board of Directors, obtained this information, which was not public, and communicated it to his brother Jorge Ballesteros. (Compl.¶¶ 2, 33.) Jorge Ballesteros, through the Gianni Trust and the Cardinal Trust and with their assets over which he held considerable influence and control, purchased at least 216,300 Nalco shares for approximately $7.2 million. (Compl.¶¶ 2, 55.) This transaction netted Jorge and Jose Ballesteros illegal profits exceeding $3.2 million dollars. (Compl.¶ 2.) After the death of Jose Ballesteros, his estate paid disgorgement to the SEC amounting to $3,380,283.77, representing the profits by all members of the Ballesteros family, including all of the remaining defendants. (Compl.¶ 5.)

Cardinal Trust had as its primary beneficiary, Ileana Zavala de Ballesteros, Jorge Ballesteros' wife. (Compl.¶ 11.) In October, 1998 the same day this trust was formed she delegated to Jorge Ballesteros, via a Letter of Wishes, the "authority, acting alone, to issue investment instructions to the Trustees" of the Cardinal Trust. (Compl.¶ 11.) This Letter of Wishes also provided that Jorge Ballesteros had the power to veto any instructions of his wife concerning the distribution of any of the trust's assets, and that the trust benefits would be maintained for his benefit jointly with his wife during her lifetime and solely for his benefit after her death. (Compl.¶ 11.) Jorge Ballesteros' wife never tried to exercise or actually exercised any authority, as settlor or primary beneficiary, to make investment decisions on behalf of Cardinal Trust. (Compl.¶ 63.) Through his control of Cardinal Trust, Jorge Ballesteros was also able to direct the investments of Sagitton Limited, a private investment company, all of whose common stock was owned by Cardinal Trust. (Compl.¶ 13.)

Similarly, Gianni Trust had as its primary beneficiary, Josefina Franco de Ballesteros, Jorge Ballesteros' mother. (Compl.¶ 14.) In January, 1998 on the same day the trust was formed she appointed Jorge Ballesteros, via a Letter of Wishes, as the sole investment advisor of Gianni Trust. (Compl.¶ 14.) The Letter of Wishes also provided that Jorge Ballester os had the authority to issue investment instructions to the Gianni Trust trustees, so long as the trustees followed the instructions of the primary beneficiary of the trust if there were to be conflicting instructions. (Compl.¶ 14.) The Letter of Wishes also provided that the trust's primary beneficiary was to be Jorge Ballesteros' mother during her lifetime, and that trust assets were to be distributed to Jorge Ballesteros and his four siblings, or their spouses, upon his mother's death. (Compl.¶ 14.) Jorge Ballesteros' mother never tried to exercise or actually exercised any authority, as settlor or primary beneficiary, to make investment decisions on behalf of Cardinal Trust. (Compl.¶ 64.) Through his control of Gianni Trust, Jorge Ballesteros was able to able to direct the investments of Gianni Enterprises Limited, a private investment company all of whose stock was owned by the Gianni Trust. (Compl.¶ 16.)

From the time that Cardinal Trust and Gianni Trust were established, Jorge Ballesteros dominated and controlled their investment activities as well as those of Sagitton and Gianni Enterprises Limited. (Compl.¶ 55.) No other individual ever gave instructions on how to invest the trust assets of the Gianni Trust or Cardinal Trust except Jorge Ballesteros. (Compl.¶ 56.) Any investment decision was solely based on the determinations and instructions of Jorge Ballesteros. (Compl.¶ 56.) During the relevant time, Cardinal Trust and Gianni Trust were administered by BT Trustees (Jersey Ltd.) with nominee directors it supplied and the trustee was Bankers Trust AG of Zurich, Switzerland. (Compl.¶¶ 12, 15.) Similarly, during the relevant period Sagitton Limited and Gianni Enterprises Limited were administrated by BT Trustees (Jersey) Ltd. with nominee officers and directors it supplied. (Compl.¶¶ 13, 16.) No investment decision was ever made by the officers and/or directors of Cardinal Trust, Gianni Trust, Sagitton and Gianni Enterprises, or by Bankers Trust AG or BT Trustees (Jersey) Ltd. (Compl.¶¶ 56, 57.)

As a member of Nalco's Board of Directors, Jose Ballesteros was aware of Nalco's prohibition on the trading of Nalco stock by directors who are in possession of material nonpublic information. (Compl.¶¶ 26-27.) The information regarding the proposed tender offer by Suez was material, nonpublic information disclosed to Jose Ballesteros and other directors at a series of Nalco board meetings, where they were also reminded of Nalco's policy on stock trading by directors. (Compl.¶¶ 29, 33.) Specifically, at a June 5, 1999 board meeting Nalco directors were advised of a blackout period then in effect in which they were not to trade Nalco stock. (Compl.¶ 33.) At a June 17, 1999 Nalco board meeting, Jose Ballesteros was advised that the transaction with Suez would likely be finalized sometime between June 20 and 27, at which time the Nalco board would hold a vote. (Compl.¶ 36.)

After this board meeting, and between June 18 and June 24, Jose Ballesteros, along with his brother, Jorge, to whom Jose had conveyed the material inside information about the Suez transaction, used the Gianni Trust and the Cardinal Trust entities, along with other offshore trusts which they controlled, to purchase some 216,300 shares of Nalco Stock. (Compl.¶ 37.) These transactions were effectuated by Jose Ballesteros passing investment instructions, based on his material nonpublic information, to various family and business associates, including his brother Jorge Ballesteros, who were associated with the offshore trusts and other controlled entities and who consummated the purchases. (Compl.¶¶ 38-47.) In the transactions involving the Trust defendants' purchase and sale of the Nalco stock, the Trust defendants treated Jorge Ballesteros as the trust settlor, rather than a mere investment advisor, in making the decision to use trust or company assets to execute the stock sales. (Compl.¶¶ 60-61.) Sagitton purchased $700,000 worth of Nalco stock and Gianni Enterprises Limited purchased $5,000,000 of the stock, on the basis of written instructions given by Jorge Ballesteros. (Compl.¶¶ 60-61.) After the Suez transaction became public, those shares were sold, resulting in a profit of $3,227,446.04 for Jose and Jorge Ballesteros. (Compl.¶¶ 37, 51-54.)

Jose Ballesteros knowingly or recklessly caused trades of Nalco stock to be executed on the basis of material nonpublic inside information, and consequently violated his fiduciary duty owed to Nalco not to trade its stock on the basis of such information. (Compl.¶¶ 81-82.) Jorge Ballesteros, in receiving information from his brother about Nalco, knew or was reckless in not knowing that the information he received was nonpublic and that its use or disclosure was a violation of a fiduciary duty owed to Nalco. (Compl. ¶ 83.) Jorge Ballesteros' subsequent use of the Trust defendants to execute transactions of Nalco stock, ...

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