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SHANAHAN v. VALLAT

December 14, 2004.

WILLIAM S. SHANAHAN and ANTARES, LLC, Plaintiffs,
v.
MAURICE VALLAT, JAMES COLLINS-TAYLOR, LOUIS BOWEN, ACL NOMINEES LTD., ACL HOLDINGS LIMITED, and ACL ASIA LIMITED Defendants.



The opinion of the court was delivered by: MICHAEL MUKASEY, Chief Judge, District

OPINION & ORDER

Plaintiffs William S. Shanahan and Antares, LLC, sue Maurice Vallat, James Collins-Taylor, Louis Bowen and three corporations — ACL Nominees Ltd., ACL Holdings Limited, and ACL Asia Limited — alleging securities fraud in violation of section 12(2) of the Securities Act of 1933 (Securities Act), sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 (Exchange Act), Rule 10b-5 promulgated thereunder, and state common law. Defendant Vallat moves to dismiss the amended complaint pursuant to Fed.R.Civ.P. 9(b), 12(b)(2), and 12(b)(6). Defendants Collins-Taylor, Bowen, ACL Nominees Ltd., and ACL Holdings Limited move to dismiss the complaint under the above rules, and also under Fed.R.Civ.P. 12(b)(7) and the Private Securities Litigation Reform Act (PSLRA), or in the alternative, under the doctrines of international comity and forum non conveniens. For the reasons set forth below, the motions are denied, with the exception of defendants' motions to dismiss plaintiffs' claims under Section 12(2) of the Securities Act, and Vallat's and the ACL companies' motions to dismiss plaintiffs' claim under Section 20(a) of the Exchange Act, which are granted. Defendants' motion to dismiss plaintiffs' claim for punitive damages is also granted.

  I.

  The facts, as alleged in plaintiffs' amended complaint, are as follows. Plaintiff Shanahan and his company Antares, LLC,*fn1 were fraudulently induced by defendants to invest funds in Phoenix Telecommunication Limited (Phoenix).

  Defendant ACL*fn2 was a financial adviser to Phoenix. (Am. Compl. ¶ 6). ACL also served as Phoenix's corporate secretary through August 2000, acted as an escrow agent for Phoenix, and managed Phoenix's financial accounts and records from its incorporation through February 2000. (Id.) Defendant Collins-Taylor was a Director of Phoenix from its incorporation through May, 2001; Collins-Taylor is Executive Director of ACL, and had primary responsibility for ACL's work for Phoenix. (Id. ¶ 7) Defendant Bowen is founder and Managing Director of ACL, and was Collins-Taylor's supervisor at ACL. (Id. ¶ 8) Defendant Vallat was Chairman of Phoenix's Board of Directors in 1998 and 1999, and remained on Phoenix's Board until he was fired by the company in December, 2002. (Id. ¶ 5)

  On or before March 23, 2000, plaintiffs allege, defendant ACL provided defendant Vallat with Phoenix's financial statements for the years 1998 and 1999. (Id. ¶ 18) These statements had been written by Collins-Taylor under Bowen's supervision and were given to Vallat by ACL with the knowledge that Vallat would pass them on to Shanahan, who would use them in deciding whether or not to invest in Phoenix. Bowen and Collins-Taylor advised Vallat that he was to review only the portion of the statements pertaining to his own salary and expenses, and to "rubber stamp" the rest. Vallat forwarded the statements "to New York with the knowledge that they would be provided to Shanahan there," and subsequently discussed with Shanahan his potential investments in Phoenix during a telephonic meeting of the Phoenix Board, in which Shanahan participated. (Id.) By October 25, 2000, on the basis of Phoenix's 1998 and 1999 financial statements, Shanahan had invested a total of $2.2 million in Phoenix in exchange for 22 million shares of the company. (Id. ¶¶ 21-26)

  In November, 2000, Phoenix issued financial statements for the year 2000, which had been compiled by Vallat with the help of "an accountant he hired" and which were provided to Shanahan in December 2000 to help him decide whether to make any further investments in the company. (Id. ¶ 27) Between February 1, 2001, and September 19, 2001, Shanahan invested another $1,082,650 in Phoenix at $0.10 per share. (Id. ¶ 28) Plaintiff Antares, LLC, invested $1,756,256 in Phoenix between November 27, 2001 and October 7, 2002, at the same price. (Id. ¶ 29) Plaintiffs allege that they would not have made any of the above investments were it not for the 1998, 1999, and 2000 Phoenix financial statements that defendants provided. (Id. ¶ 30) Beginning in September, 2002, plaintiffs began to learn about numerous financial improprieties at Phoenix. First, Shanahan learned that ACL had commingled Phoenix's funds in a general account, allowing ACL to lend Phoenix's funds to another company and otherwise mismanage the funds without Phoenix's knowledge or consent, and without disclosure to any of Phoenix's shareholders. (Id. ¶ 36) The same month, Shanahan learned that Collins-Taylor and Bowen had arranged for Phoenix to pay $25,000 to ACL that was owed by a third party — a debt which Phoenix itself had no obligation to pay. (Id. ¶ 39) Though Phoenix and Sino had a similar This payment to ACL was not disclosed in any of the statements provided to plaintiffs. (Id. ¶ 39) Also in September, 2002, Shanahan learned that Phoenix had been paying the entire salary of an ACL employee from October 1998 through September 1999, which was contrary to the percentage payment agreement for that employee that had been disclosed in the 1998 and 1999 Phoenix financial statements. (Id. ¶ 40)

  In November, 2002, Shanahan learned that defendant Vallat accepted payment from Phoenix for past due salary, even though Shanahan had already paid Vallat the overdue amount from his own pocket. This so-called "double payment" was not disclosed in the financial statements provided to plaintiffs. (Id. ¶ 37) In December, 2002, Shanahan learned that Vallat had fraudulently issued 1.5 million shares of Phoenix stock to himself in December, 2001. (Id. ¶ 38) Around that time Shanahan learned also that in February, 2000, Vallat, Collins-Taylor, and Bowen had signed a contract to pay Vallat a salary of $9,000 a month from Phoenix. Vallat never disclosed this contract to the Phoenix Board of Directors, and instead obtained a higher salary from the company. (Id. ¶ 41)

  Vallat was fired on December 19, 2002, and in January, 2003, sued Phoenix in Hong Kong for back wages he alleged he was owed from 1998 through 2002. (Id. ¶¶ 41, 43) Phoenix's purported underpayments to Vallat were never disclosed to the Phoenix Board or identified as liabilities in the financial statements forwarded by defendants to plaintiffs. (Id. ¶¶ 43-44) Collins-Taylor testified in the Hong Kong labor proceeding that Vallat had always been owed these wages despite their nondisclosure in the financial statements he had helped to compile. (Id. ¶ 48) Vallat was awarded more than $76,000 in back wages by the Hong Kong court — an amount that exceeded Phoenix's liquid assets. Vallat has since threatened to liquidate the company to collect the judgment. (Id. ¶ 50)

  Because Phoenix's assets were depleted by the Vallat judgment, Phoenix has been unable to raise money to continue operating, and plaintiffs' more than $5 million investment has become "essentially worthless." (Id. ¶ 51) Plaintiffs allege that if defendants had disclosed Phoenix's liability to Vallat in any of the financial statements provided to them for the years 1998, 1999, and 2000, the company would have been able to plan for or pay the necessary expenses, and avoid the Hong Kong litigation and the subsequent downfall of the company. (Id. ¶¶ 50-51)

  II.

  This court must view the allegations in the amended complaint in the light most favorable to the nonmoving party, here the plaintiffs. Todd v. Exxon Corp., 275 F.3d 191, 197 (2d Cir. 2001). Dismissal is not warranted "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957).

  In their amended complaint, plaintiffs accuse defendants of violating various federal securities laws, including section 12(2) of the Securities Act, sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder. They also allege common law fraud. Defendants respond with two motions alleging assorted bases for dismissal of the entire action, and of each of the various claims contained therein. With the exception of the claim under section 12(2) of the Securities Act and any claims alleged under section 20(a) of the Exchange Act against defendants Vallat and ACL, all of plaintiffs' claims survive. Plaintiffs have adequately pleaded a basis for personal jurisdiction over defendants; their claims are pleaded with the requisite specificity; brought in an acceptable forum; do not violate the principle of international comity; and satisfy the requirements to state a claim under the various statutes at issue, except for section 12(2) of the Securities Act. I have provided brief reasons for these determinations below.

  A. Pleading Requirements Under Fed.R.Civ.P. 9(b) and PSLRA

  Defendants Vallat, Collins-Taylor, Bowen, ACL Nominees Ltd., and ACL Holdings Limited have moved to dismiss plaintiffs' allegations of fraud for lack of particularity under Fed.R. Civ. P. 9(b). Defendants Bowen, Collins-Taylor, ACL Nominees Ltd. and ACL Holdings Limited also allege that plaintiffs' claims are not pleaded with sufficient particularity under the PSLRA, 15 U.S.C. § 78u-4(b)(1) (2000).

  A complaint alleging securities fraud must satisfy Rule 9(b), Ganino v. Citizens Utils. Co., 228 F.3d 154, 168 (2d Cir. 2000), and that rule requires that "the circumstances constituting fraud . . . shall be stated with particularity." Fed.R.Civ.P. 9(b). To comply with Rule 9(b), plaintiffs must "`(1) specify the statements that . . . were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir. 2000) (quoting Shields v. Citytrust Bancorp Inc., 25 F.3d 1124, 1128 (2d Cir. 1994)). Similarly, the PSLRA, which applies to securities fraud claims brought under the Exchange Act only, requires that the complaint "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 74u-4(b) (1); see also Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004). Our Circuit "do[es] not require the pleading of detailed evidentiary matter in securities litigation," In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 72 (2d Cir. 2001), and "malice, intent, knowledge, and other condition of mind of a person may be averred generally." Ganino, 228 F.3d at 168.

  This Circuit requires also that plaintiffs must plead scienter in their fraud claims, and "allege facts to support a strong inference of `an intent to deceive, manipulate, or defraud.'" In re Vivendi Universal, S.A. Sec. Litig., No. 02-5571, 2003 U.S. Dist. LEXIS 19431, at *70 (S.D.N.Y. Nov. 3, 2003) (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12 (1976)). To prove such intent, plaintiffs must either (a) allege facts to show defendants had "both motive and opportunity to commit fraud," or (b) allege facts constituting "strong circumstantial evidence of conscious misbehavior or recklessness." Ganino, 228 F.3d at 168-69 (quoting Shields, 25 F.3d at 1128).

  In addition, plaintiffs are relieved of some of the burden of pleading specific defendants' specific roles in the alleged fraud by virtue of the "group pleading doctrine," which allows plaintiffs "to rely on a presumption that statements in prospectuses, registration statements, annual reports, press releases, or other group-published information, are the collective work of those individuals with direct involvement in the everyday business of the company." In re Oxford Health Plans, Inc. Sec. Litig., 187 F.R.D. 133, 142 (S.D.N.Y. 1999) (internal quotation marks omitted); see also DiVittorio v. Eguidyne Extractive Indus., 822 F.2d 1242, 1247 (2d Cir. ...


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