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XPEDIOR CREDITOR TRUST v. CREDIT SUISSE FIRST BOSTON

March 9, 2004.

XPEDIOR CREDITOR TRUST on behalf of itself and others similarly situated, Plaintiff, -against- CREDIT SUISSE FIRST BOSTON (USA) INC., as successor-in-interest to DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION, Defendant


The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge

OPINION AND ORDER

The Securities Litigation Uniform Standards Act of 1998 ("SLUSA")*fn1 preempts certain class actions that allege misrepresentations, omissions, or other fraudulent schemes in connection with the purchase or sale of covered securities. Under SLUSA, regardless of the words used by a plaintiff in framing her allegations and regardless of the labels she pastes on each cause of action, a court must determine whether fraud is a necessary component of the claim. Under this test, a complaint is preempted under SLUSA when it asserts (1) an explicit claim Page 2 of fraud or misrepresentation (e.g., common law fraud, negligent misrepresentations, or fraudulent inducement), or (2) other garden-variety state law claims that "sound in fraud." Defendants move to dismiss the instant complaint based on SLUSA preemption. Because neither misrepresentations nor a scheme to defraud are a necessary component of plaintiff's claims, the preemption motion is denied.

  The Xpedior Creditor Trust*fn2 is suing Credit Suisse First Boston (USA), Inc. ("CSFB"), as successor-in-interest to Donaldson, Lufldn & Jenrette Securities Corp. ("DLJ"),*fn3 on behalf of companies that issued securities in initial public offerings ("IPOs") underwritten by DLJ. The kernel of Xpedior's suit is that DLJ capitalized on the underpricing of the IPO and thereby violated the express and implied terms of the parties' underwriting agreement, including DLJ's duty of good faith and fair dealing and its duty as Xpedior's fiduciary. Xpedior Page 3 also claims that DLJ was unjustly enriched.

  CSFB now moves to dismiss the Complaint, arguing that Xpedior's claims are preempted by SLUSA, and otherwise fail as a matter of law. For the reasons that follow, with one exception, CSFB's motion is denied.

 I. BACKGROUND*fn4

  Although the two cases are not related, the allegations in this case closely mirror those in MDCM Holdings, Inc. v. Credit Suisse First Boston Corp.,*fn5 familiarity with which is assumed. In brief, Xpedior, in an effort to raise new capital, decided to go public in 1999. DLJ agreed to underwrite the offering.

  Pursuant to an underwriting agreement dated December 16, 1999, Xpedior sold 8,535,000 shares of its common stock to DLJ and other members of the underwriting syndicate for $17.67 per share.*fn6 DLJ and the other syndicate members also exercised an option to acquire an additional 1,280,250 shares at the same price.*fn7 DLJ, in turn, sold these shares to the public at $19.00 per share — an "underwriting spread" of 7% — netting DLJ a total of $13,054,282.00 in Page 4 underwriting commission.*fn8 Xpedior raised approximately $173.4 million in the IPO.*fn9 Xpedior's stock was registered with the Securities Exchange Commission and, starting on the day of the IPO, commenced trading on the NASDAQ National Market under the ticker symbol "XPDR."*fn10

  At the end of its first day of trading, Xpedior stock closed at $26.00 per share, or approximately 37% above the original $19.00 per share offering price.*fn11 Xpedior's IPO was thus typical of other IPOs underwritten by DLJ at this time. For example, the DLJ-underwritten IPOs in MarketWatch.com, Akamai Technologies, and Free Markets experienced a more than 450% increase in price on their first day of trading.*fn12 "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."*fn13 Of the ten IPOs cited, DLJ participated as lead underwriter in three, and as a syndicate Page 5 member in one other.*fn14

  Xpedior complains that DLJ used the "irrational exuberance" of the late `90s tech market to enrich itself by requiring customers who sought to purchase IPO shares to pay it the offering price plus, directly or indirectly, a share of profits that the customers realized.*fn15 "These payments frequently took the form of direct sharing in their clients' profits who quickly sold (or `flipped') the particular IPO stock at issue to other investors in the aftermarket; increased or excessive trading commissions paid by the favored clients in connection with the IPO stock and/or on other securities transactions; commitments for future IPO and/or other new securities trading business; and other similar arrangements to benefit DLJ."*fn16 In addition, Xpedior alleges that DLJ took advantage of the "underpricing environment" in which the IPO took place by implementing allocation and compensation practices that relied on a precipitous increase in the value of the IPO shares once issued to the public.*fn17 Xpedior asserts four claims arising from this conduct. Page 6

  Count I of the Complaint alleges that DLJ breached the explicit terms of the underwriting agreement in three ways. First, DLJ did not sell the IPO shares to the public as the contract requires, but instead directed shares to favored customers.*fn18 Second, DLJ did not sell the IPO shares for the price provided in the prospectus, but instead required purchasers to pay a higher price.*fn19 Third, DLJ, by virtue of its allocation and profit-sharing practices, was over-compensated for its underwriting services in violation of the fixed "underwriting spread" provided in the agreement.*fn20

  Count II alleges that DLJ violated implied covenants of good faith and faith dealing that accompanied its performance of the underwriting agreement.*fn21 DLJ allegedly violated these covenants by taking advantage of the underpriced IPO shares so that it could allocate those shares to favored clients and receive additional compensation in return.*fn22 As a result, Xpedior received deficient and overpriced underwriting services and was unable to maximize its Page 7 profits from the IPO.*fn23

  Count III alleges that DLJ owed fiduciary duties of loyalty, due care and fair dealing to Xpedior.*fn24 These duties arose because DLJ was the underwriter for the IPO and had superior knowledge and expertise, was in receipt of confidential information, and acted as an agent and advisor to the issuer.*fn25 According to the Complaint, DLJ violated these duties by allocating shares to favored customers and sharing in the profits made by those customers.*fn26

  Count IV, brought in the alternative to Counts I through III,*fn27 asserts a claim of unjust enrichment and restitution against DLJ on the ground that Xpedior "conferred benefits upon DLJ in connection with [its] IPO[] which, in the circumstances . . . would be inequitable for Defendant to retain."*fn28 Count IV further alleges that the profit-sharing compensation from favored customers Page 8 unjustly enriched DLJ.*fn29

  CSFB now moves to dismiss the Complaint.

 II. LEGAL STANDARD

  "Given the Federal Rules' simplified standard for pleading, `[a] court may dismiss a complaint only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations.'"*fn30 Thus, a plaintiff need only plead "`a short and plain statement of the claim' that will give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests."*fn31

  At the motion to dismiss stage, the issue "`is not whether a plaintiff is likely to prevail ultimately, but whether the claimant is entitled to offer evidence to support the claims. Indeed it may appear on the face of the pleading that a recovery is very remote and unlikely but that is not the test.'"*fn32

  The task of the court in ruling on a Rule 12(b)(6) motion is "`merely Page 9 to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof.'"*fn33 When deciding a motion to dismiss pursuant to Rule 12(b)(6), courts must accept all factual allegations in the complaint as true and draw all reasonable inferences in plaintiff's favor.*fn34

 III. DISCUSSION

  A. SLUSA

  1. The Statutory Framework

  In 1998, Congress enacted SLUSA 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."*fn35 The purpose of SLUSA is to ensure that securities fraud cases are heard only in federal courts and only under federal law. The Act provides in relevant part:

  No covered class action based upon the statutory or common law Page 10 of any State or subdivision thereof may be maintained in any State or ...


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