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United States District Court, S.D. New York

March 12, 2004.


The opinion of the court was delivered by: DENISE COTE, District Judge


Plaintiff's in this action have attempted to plead a violation of Section 11 of the Securities Act of 1933 ("Section 11", and the "Securities Act") against corporate parents of underwriters. On October 27, 2003, defendants Bank of America Corp., Deutsche Bank AG, Goldman Sachs Group, Inc., J.P. Morgan Chase & Co., Lehman Brothers Holdings Inc., and Citigroup, Inc. (collectively, the "Holding Company Defendants") moved to dismiss with prejudice pursuant to Rule 12(b)(6), Fed.R. Civ. P., the Section 11 claim asserted against them in the amended complaint in Alameda County Employees' Retirement Association et al. v. Ebbers. et al., No. 03 Civ. 0890 (the "Alameda Complaint" and "Alameda Action"), an action which has been consolidated for pretrial purposes in In re WorldCom, Inc. Securities Litigation, No. 02 Civ. 3288 (DLC) (S.D.N.Y) ("Securities Litigation"),*fn1 The Holding Company Defendants seek dismissal on the ground that they do not fall within any of the five categories of defendants against whom a claim under Section 11 may be asserted. For the reasons set forth below, the Holding Company Defendants' motion is granted.


  The Alameda Action is one of many individual, as opposed to class, actions ("Individual Actions") filed by the law firm Milberg Weiss Bershad Hynes & Lerach LLP ("Milberg Weiss Actions") to assert claims principally against underwriters of WorldCom bond offerings. At a conference on September 12, 2003, defense counsel gave notice of their intent to bring two separate sets of motions to dismiss claims that are common to many Individual Actions.*fn2 The instant motion came with the second tranche of those motions to dismiss and addresses the liability of holding companies under Section 11.*fn3 As instructed by a September 22 Scheduling Order, defendants have brought their motion against one of the Individual Actions and the plaintiff's in the similarly situated Individual Actions have been given an opportunity to submit an amicus brief and will also have an opportunity to show cause why the Opinion issued today does not control any similar motion to dismiss their actions.*fn4

  The Alameda Action was initially filed on November 6, 2002 in Superior Court of the State of California, County of Los Angeles on behalf of 17 retirement associations, plans, and systems. The action was removed on November 22 and transferred by the Judicial Panel on Multi-District Litigation to this Court on January 30, 2003. The initial complaint included a Section 11 claim for two offerings of WorldCom debt securities: a May 2000 public offering (the "2000 Offering") and a May 2001 public offering (the "2001 Offering").*fn5 Pursuant to a scheduling order which required certain Individual Actions that wished to file an amended complaint to do so by July 11, on or about that day, the Alameda plaintiff's served the Alameda Complaint. This amended pleading added certain defendants, including members of the underwriting syndicates that were not included in the initial pleading.

  The Alameda Complaint asserts a single claim under Section 11 of the Securities Act. It challenges the accuracy of disclosures in the Registration Statements filed in connection with the 2000 and 2001 Offerings. With respect to these documents, the Alameda plaintiff's allege that the defendants failed to disclose accurate financial information relating to a number of items, including WorldCom's allegedly improper capitalization of costs, uncollectible receivables and goodwill. The Alameda Complaint states that "[e]ach bank is sued only for bond offerings in which it participated as an underwriter."

  The complaint claims that each of the six Holding Company Defendants is liable under Section 11 "through" the acts of a subsidiary that directly underwrote the WorldCom security offerings at issue. For example, it alleges that,

Defendant Bank of America Corp. is a large integrated financial services institution that through its controlled subsidiaries (such as defendant Banc of America Securities LLC (collectively "Bank America")) provides commercial and investment banking services, commercial loans to corporate entities, and acts as underwriter in the sale of corporate securities. Bank America was an underwriter of the WorldCom Bonds sold in 5,00 and 5,01.
(emphasis added). The Alameda Complaint makes parallel allegations against three other Holding Company Defendants. With regard to Citigroup, Inc. and J.P. Morgan Chase & Co., however, the complaint omits the adjective "controlled" as a modifier of the noun subsidiary. Thus, the allegation against these two parent companies is that each "is a large integrated financial services institution that through subsidiaries and divisions. . . ."*fn6


  The Holding Company Defendants move to dismiss the Section 11 claim against them on the ground that it fails to plead a cause of action since it alleges culpability based on their ownership or control of a subsidiary rather than on their participation in the underwriting. The pleading standard for a Section 11 claim has been described in prior Opinions in the Securities Litigation.*fn7 In brief, all factual allegations in a complaint must be taken as true, and a claim may only be dismissed "if it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Rombach v. Chang, 355 F.3d 164, 169 (2d Cir. 2004) (citation omitted).

  The starting point for this motion must be the text of Section 11 itself. The canons of statutory construction recently described in In re WorldCom, Inc. Securities Litigation, 2004 WL 315143, at *5-6, are incorporated herein and will not be repeated. Section 11 of the Securities Act enumerates five classes against whom such a claim may be asserted. The fifth class, underwriters, is at issue here. Section 11 states in pertinent part


[i]n case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security . . . may sue —
(1) every person who signed the registration statement;
(2) every person who was a director of . . . the issuer . . .;
(3) every person who . . . is named in theregistration statement as being or about to become a director . . . or partner;
(4) every accountant . . . who has with his consent been named as having prepared or certified any part of the registration statement . . .;
(5) every underwriter with respect to such security.
15 U.S.C. § 77k (emphasis supplied).

  Section 11 "was designed to assure compliance with the disclosure provisions of the [Securities] Act by imposing a stringent standard of liability on the parties who play a direct role in a registered offering." Herman & MacLean v. Huddleston, 459 U.S. 375, 381-82 (1983). In return for that broad-based imposition of liability, Section 11 places an unambiguous limitation on the categories of persons or entities against whom a claim may be brought. Section 11 claims for misleading statements made in a registration statement allow purchasers of a registered security to sue only "certain enumerated parties." Id. at 381 (distinguishing between the specific requirements of a Section 11 and Section 10(b) claim); see also Pinter v. Dahl, 486 U.S. 622, 650 n.26 (1988) ("Section 11(a) explicitly enumerates the various categories of persons involved in the registration process who are subject to suit under that section, including many who are participants in the activities leading up to the sale."); Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490, 494 (7th Cir. 1986) (dismissal of Section 11 claim because defendants did not fall within an enumerated category of proper defendants); In re Am. Bank Note Holographies. Inc. Sec. Litig., 93 F. Supp.2d 424, 436 (S.D.N.Y. 2000) (same).


The Securities Act defines an underwriter as any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking; but such term shall not include a person whose interest is limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors' or sellers' commission. As used in this paragraph the term `issuer' shall include, in addition to an issuer, any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer.
15 U.S.C. § 77b(a)(11) (emphasis supplied). The House Report and the Conference Committee Report that accompanied the Securities Act both explained that there must be actual participation in an underwriting by a defendant underwriter. The House Report notes:
Paragraph (11) sets forth the important definition of "underwriter." The term is defined broadly enough to include not only the ordinary underwriter, who for a commission promises to see that an issue is disposed of at a certain price, but also includes as an underwriter the person who purchases an issue outright with the idea of then selling that issue to the public. The definition of underwriter is also broad enough to include two other groups of persons who perform functions, similar in character, in the distribution of a large issue. The first of these groups may be designated as the underwriters of the underwriter, a group who, for a commission, agree to take over pro rata the underwriting risk assumed by the first underwriter. The second group may be termed participants in the underwriting or outright purchase, who may or may not be formal parties to the underwriting contract, but who are given a certain share or interest therein"
H.R. Rep. No. 85, 73rd Cong., 1st Sess. 13 (1933) (emphasis supplied). The Conference Committee Report states:
The substitute amends the definition of underwriter contained in the House bill so as to make clear that a person merely furnishing an underwriter money to enable him to enter into an underwriting agreement is not an underwriter. Persons, however, who participate in any underwriting transaction or who have a direct or indirect participation on such a transaction are deemed to be underwriters. The test is one of participation in the underwriting undertaking rather than that of a mere interest in it.
Conf. Rep. No. 152, 73rd Cong., 1st Sess. 24 (1933) (emphasis supplied).

  An "underwriter" is commonly understood to be a person who "buys securities directly or indirectly from the issuer and resells them to the public, or [] performs some act (or acts) that facilitates the issuer's distribution. He participates in the transmission process between the issuer and the public." Ingenito v. Bermec Corp., 441 F. Supp. 525, 536 (S.D.N.Y. 1977). See also Quinn & Co. v. Securities & Exch. Comm'n, 452 F.2d 943, 946 (10th Cir. 1971) ("An underwriter is one who purchases stock from the issuer with an intent to resell to the public.").

  According to the statutory definition of an underwriter, which includes those who participate directly and indirectly in an underwriting, liability under Section 11 extends to any person who has purchased securities from an issuer for distribution, or who offers or sells securities for an issuer for that purpose, or who participates directly or indirectly in those tasks. As a consequence, the


definition of a statutory underwriter turns on the relationship of the party and the offering. Professor Loss, a leading commentator on federal securities law, has observed that "[t]he term `underwriter' is defined not with reference to the particular person's general business but on the basis of his relationship to the particular offering. . . . Any person who performs one of the specified functions in relation to the offering is a statutory underwriter.
In re Laser Arms Corp. Sec. Litig., 794 F. Supp. 475, 484 (S.D.N.Y. 1989) (citing L. Loss, The Fundamentals of Securities Regulation at 1017 n.2 (1983)) (emphasis in original).

  Given this statutory emphasis on an entity's "participation" in the underwriting, courts have determined whether a defendant was an underwriter by analyzing its role in the underwriting process. See, e.g., Securities and Exchange Commission v. Culpepper, 270 F.2d 241, 246 (2d Cir. 1959). Having a relationship with an issuer or an underwriter, however, does not transform one into an underwriter. For example, a creditor of an issuer is not an underwriter. Ingenito, 441 F. Supp. at 536; 15 Broker-Dealer Regulation § 3:6 (June 2003). Market markers that simply purchase shares from other broker-dealers are also not underwriters. In re Laser Arms Corp. Sec. Litig., 794 F. Supp. 475, 484 (S.D.N.Y. 1989). Nor are banks that simply buy and sell shares for the investment advisory accounts that they manage. Zicklin v. Breuer, 534 F. Supp. 745, 748 (S.D.N.Y. 1982)

  The Alameda Complaint does not state a Section 11 claim against-the Holding Company Defendants. It does not allege that they are underwriters because of their participation in the underwriting of either the 2000 or 2001 Offering. Rather, it alleges liability based on these defendants' status as parents of underwriters. There is no basis in the statute or precedent for finding that a parent of an underwriter is a participant, either directly or indirectly, in an underwriting, and the Alameda plaintiff's have cited none.plaintiff's argue that a determination of whether the Holding Company Defendants are liable as underwriters is a fact-specific inquiry that must await a later stage of this litigation and is inappropriate for a motion to dismiss. The cases on which they rely for this argument are inapposite. In In re Global Crossing, Ltd. Sec. Litig., No. 02 Civ. 910 (GEL), 2003 WL 22999478 (S.D.N.Y. Dec. 22, 2003), the complaint alleged that the corporate affiliates had played a role in the underwriting. Id. at *19. In re Enron Corp. Sec., Deriv. & ERISA Litig., 235 F. Supp.2d 549, 598 (S.D. Tex. 2002), addressed the adequacy of the pleading of control person liability under Section 15 of the Securities Act.*fn8

  The Alameda plaintiff's argue in their opposition to this motion that the Holding Company Defendants may be liable under Section 11 for their "indirect" participation in an underwriting under either an enterprise or agency theory. There is no mention of an enterprise theory in the Alameda Complaint and there is no legal basis for an "enterprise" theory of liability for a Section 11 claim. "It is a general principal of corporate law deeply ingrained in our economic and legal systems that a parent corporation (so-called because of control through ownership of another corporation's stock) is not liable for the acts of its subsidiaries." United States v. Bestfoods, 524 U.S. 51, 61 (1998) (citation omitted).

  The Alameda Complaint also does not state an agency theory. A party must plead the theories of liability it wishes to pursue. Peterson v. Ins. Co. of N. Am., 40 F.3d 26, 32 n.3 (2d Cir. 1994). plaintiffs' attempt to cure the pleading deficiencies by describing new allegations in their opposition to this motion to dismiss is unavailing.*fn9

  Finally, the Alameda plaintiff's argue that the Holding Company Defendants are liable as control persons under Section 15 of the Securities Act. Section 15 imposes liability upon control persons for acts committed by those under their control who violate Section 11. 77 U.S.C. § 77o; Rombach, 355 F.3d at 117-76; In re WorldCom, Inc. Sec. Litig., 294 F. Supp.2d at 409.

  While the Alameda Complaint alleges that four of the Holding Company Defendants are underwriters because of their "control" of subsidiaries that were underwriters, the complaint does not explicitly plead a Section 15 claim. plaintiff's must specify the statute under which they are alleging liability in order to give the defendants fair notice of their claims. While the defendants point out several other obstacles to the pleading of any purported Section 15 claim, it is unnecessary to address those hurdles until the plaintiff's have presented a pleading that explicitly asserts a Section 15 claim.

  The Alameda plaintiff's request leave to amend. Under Rule 15, Fed.R.Civ. P., leave to amend shall be "freely given when justice so requires." Generally, a party is allowed to amend its pleading in the absence of a showing of "prejudice or bad faith." Block v. First Blood Assoc., 988 F.2d 244, 350 (2d Cir. 1992); see also Simmons v. Abruzzo, 49 F.3d 83, 86-87 (2d. Cir. 1995). The Alameda plaintiff's are granted leave to amend their complaint one additional time to assert claims against one or more of the Holding Company Defendants.*fn10 Conclusion

  The motion of Bank of America Corp., Deutsche Bank AG, Goldman Sachs Group, Inc., J.P. Morgan Chase & Co., Lehman Brothers Holdings Inc., and Citigroup, Inc. to dismiss the Section 11 claim asserted against them in the amended complaint in Alameda County Employees' Retirement Association et al. v. Ebbers, et al., No. 03 Civ. 0890, is granted.


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