The opinion of the court was delivered by: DENISE COTE, District Judge
Certain defendants known as the Holding Company Defendants*fn2 have
moved to dismiss the claim against them in the Second Amended Complaint filed in Alameda County Employees'
Retirement Ass'n v. Ebbers, 03 Civ. 0890 (DLC) ("Alameda Action")
brought under Section 15 of the Securities Act of 1933 ("Securities
Act").*fn3 For the following reasons, their motion is granted.
On March 12, 2004, the motion of the Holding Company Defendants to
dismiss the claim against them brought under Section 11 of the Securities
Act ("Section 11") in the Amended Complaint in the Alameda Action was
granted. In re WorldCom, Inc. Sec. Litig., 308 F. Supp.2d 338
(S.D.N.Y. 2004) ("March 12 Opinion"). Familiarity with the March 12
Opinion is assumed. The March 12 Opinion granted the plaintiffs in the
Alameda Action (the "Alameda Plaintiffs") leave to amend their complaint
"one additional time to assert claims against one or more of
the Holding Company Defendants." Id. at *6 (emphasis in
original). A March 12 Scheduling Order ("March 12 Order") required the
plaintiffs to file any amended complaint by March 26.*fn4 The Amended Complaint in the Alameda Action contained a potpourri of
theories to state a claim under Section 11 against each of the Holding
Company Defendants "as an underwriter" for either the 2000 or 2001 bond
offering by WorldCom, Inc. ("WorldCom"). It claimed that each of these
defendants was liable under Section 11 "through" the acts of a subsidiary
that directly underwrote the offerings.
The Second Amended Complaint reasserts claims previously dismissed with
prejudice*fn5 and pleads for the first time a claim against each of the
Holding Company Defendants under Section 15 of the Securities Act
("Section 15").*fn6 The sole allegations in support of the Section 15 claim parallel the following allegation
against CitiGroup, Inc.
Defendant CitiGroup, Inc. is a large
integrated financial services institution that
through controlled subsidiaries and
divisions (such as defendant Salomon Smith
Barney, Inc. (collectively "CitiGroup")) provides
commercial and investment banking services,
commercial loans to corporate entities, and
acts as underwriter*fn7 in the sale of
corporate securities. CitiGroup was an underwriter
of the WorldCom Bonds sold in 8/98,*fn8 5/00 and
5/01. Defendant Salomon Smith Barney, Inc., is
liable under § 11 of the 1933 Act and
defendant CitiGroup. Inc. is liable under
§ 15 of the 1933 Act as a control person to
subsidiary Salomon Smith Barney, Inc.
(Emphasis supplied.) The Section 15 claim adds little to this
allegation. It states that
This claim is brought pursuant to § 15 of the
1933 Act against [the Holding Company Defendants].
[The Holding Company Defendants] controlled
each of their respective subsidiaries and
affiliates. These defendants' subsidiaries
and affiliates are liable under § 11 and/or
§ 12 of the 1933 Act and [the Holding Company
Defendants] are liable jointly and severally with
and to the same extent as their respective
subsidiaries and affiliates.
(Emphasis supplied.) Discussion
Section 15 attaches liability to "[e]very person who, by or through
stock ownership, agency, or otherwise, . . . controls any person
liable" under Sections 11 or 12 of the Securities Act.
15 U.S.C. § 770. To state a violation of Section 15, a plaintiff must plead
(1) an underlying primary violation of Sections 11 or 12 by the controlled
person; and (2) the defendant's control over the primary violator.
In re WorldCom, Inc. Sec. Litig., 294 F. Supp.2d 392, 409
(S.D.N.Y. 2003). The statute provides a defense for those who "had no
knowledge of or reasonable ground to believe in the existence of the
facts by reason of which the liability of the controlled person is
alleged to exist." 15 U.S.C. § 77o.
Control is defined as "the power to direct or cause the direction of
the management and policies of a person, whether through the ownership of
voting securities by contract, or otherwise."
17 C.F.R. § 230.405.*fn9 See SEC v. First Jersey Sec., Inc.,
101 F.3d 1450, 1473 (2d Cir. 1996) (adopting this standard for claim under
Section 20(a)). To establish a prima facie case at trial of control person
liability, a plaintiff must show "that the controlling person was in some
meaningful sense a culpable participant in the primary violation." Boguslavsky v.
Kaplan, 159 F.3d 717, 720 (2d Cir. 1998) (Section 20(a)) (citation
omitted); see In re WorldCom, Inc. Sec. Litig., 294 F. Supp.2d
A Section 15 claim is governed by the pleading standards set forth in
Rule 8, Fed.R.Civ.P. The complaint must contain " a short and plain
statement of the claim showing that the pleader is entitled to relief."
Rule 8(a)(2), Fed.R.Civ.P. Pleadings are to give "fair notice" of a
claim and "the grounds upon which they rest" in order to enable the
opposing party to answer and prepare for trial, and to identify the
nature of the case. Swierkiewicz v. Sorema, N.A., 534 U.S. 506,
512 (2002). "The federal rules allow simple pleadings and rely on liberal
discovery rules and summary judgment motions to define disputed facts and
issues and to dispose of unmeritorious claims." Phillip v. Univ. of
Rochester, 316 F.3d 291, 293 (2d Cir. 2003) (citation omitted).
Because Rule 8 is fashioned in the interest of fair and reasonable
notice, not technicality, "extensive pleading of fact [s] is not
required." Wynder v. McMahon, 360 F.3d 73, 77 (2d Cir. 2004)
(citation omitted). Indeed, post Swierkiewicz cases
have held that conclusory allegations without substantial factual
assertions satisfy Rule 8. See Toussie v. Powell, 323 F.3d 178,
185 n.3 (2d Cir. 2003). As previously indicated in this litigation in the
context of pleading a Section 20(a) claim, "[a] short, plain statement
that gives the defendant fair notice of the claim that the defendant was
a control person and the ground on which it rests its assertion that the defendant
was a control person is all that is required." In re WorldCom, Inc.
Sec. Litig., 294 F. Supp.2d at 415-16.
The Alameda Plaintiffs' Second Amended Complaint gives the Holding
Company Defendants fair notice of the claim that each of these defendants
was a control person for purposes of imposing Section 15 liability on
them. The more difficult question is whether it gives them fair notice of
the ground on which that assertion rests. Since the pleading identifies
the controlled persons as subsidiaries of the Holding Company Defendants,
the precise issue is whether the implied assertion that each Holding
Company Defendant is the parent of the entity against which a Section 11
claim is pleaded provides fair notice of the ground on which the
assertion of control rests. It does not.
The Alameda Plaintiffs have cited no case or authority in support of
the proposition that a parent/subsidiary relationship is a sufficient
basis from which to infer control. Indeed, it is a well-settled principle
of corporate law that a "a parent corporation and its subsidiary are
regarded as legally distinct entities." Carte Blanche (Singapore)
Pte., Ltd, v. Diners Club Intern., Inc., 2 F.3d 24, 26 (2d Cir.
1993). The Alameda Plaintiffs' Second Amended Complaint does not allege
any ownership of voting securities or other basis for asserting that the
Holding Company Defendants have the power to direct or cause the
direction of the management or policies of the defendant subsidiaries. In
Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87 (2d Cir. 2001), the allegation that
certain corporate affiliates controlled other corporate defendants was
insufficient as a matter of law to state a Section 20(a) claim.
Id. at 102. See also Aldridge v. AT&T Cross
Corp., 284 F.3d 12, 85 (1st Cir. 2002) (allegation that defendants
were controlling shareholders was not sufficient to state a Section
20(a) claim). While the plaintiffs have no obligation to plead facts to
support an inference of control, they must provide the Holding Company
Defendants with fair notice of their theory of control. Their failure to
do so at this point must be understood as a concession that they have no
basis for an assertion of control.*fn10
The March 12 Opinion provided the Alameda Plaintiffs with one
additional opportunity to amend their complaint to assert valid claims
against the Holding Company Defendants. They have failed to do so, and
thus, the claims against ...