United States District Court, S.D. New York
December 14, 2004.
WILLIAM S. SHANAHAN and ANTARES, LLC, Plaintiffs,
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.
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)
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
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. 1987);
Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir. 1986); In re
Philip Servs. Corp. Sec. Litig., No. 98-0835, 2004 U.S. Dist.
LEXIS 9261, at *54-*55 (S.D.N.Y. May 19, 2004).
Plaintiffs have satisfied the requirements for particularity
and scienter in their securities fraud claims under the above
standards. The amended complaint sets forth the alleged
fraudulent statements the omission of some of Phoenix's
financial liabilities in the 1998, 1999, and 2000 financial
statements provided to plaintiffs. (Am. Compl. ¶¶ 18, 27, 36-37,
39-50) The complaint identifies the authors of those statements
(Collins-Taylor, under the supervision of Bowen, and ACL
generally for the 1998 and 1999 statements; and Vallat for the
2000 statement), and states when Vallat provided all three
statements to Shanahan. (Id. ¶¶ 18, 27) The complaint, by
alleging material omissions in the financial statements, but for
which plaintiffs would not have invested, specifies why the
statements are fraudulent. (Id. ¶ 30) The complaint also
alleges sufficient scienter under either the motive and
opportunity or the recklessness standard: Defendants were
reckless in failing to disclose known financial liabilities to a potential investor that ultimately may have led to the company's
insolvency; defendants had opportunity to omit liabilities from
the statements by virtue of their collective control over ACL and
Phoenix, and motive to do so in order to attract investors to a
company in need of financing. Finally, the group pleading
doctrine relieves plaintiffs from proving the exact details of
Bowen's, Collins-Taylor's, and Vallat's involvement in the 1998,
1999, and 2000 statements, because all three individuals were
allegedly involved in the everyday business of Phoenix. (Id. ¶¶
5, 7, 8)
B. Transaction and Loss Causation
Defendant Vallat has moved to dismiss plaintiffs' claims under
section 10(b) of the Exchange Act, and under Rule 10b-5
promulgated thereunder, alleging that the amended complaint fails
to allege transaction or loss causation. Defendants
Collins-Taylor, Bowen, ACL Nominees Ltd., and ACL Holdings
Limited move to dismiss the above claims on the ground that no
loss causation is alleged.
A plaintiff must be able to prove causation when alleging
securities fraud, and:
[i]t is settled that causation under federal
securities law is two-pronged: a plaintiff must
allege both transaction causation, i.e., but for the
fraudulent statement or omission, the plaintiff would
not have entered into the transaction; and loss
causation, i.e., that the subject of the fraudulent
statement or omission was the cause of the actual
Suez Eguity Investors, L.P. v. Toronto-Dominion Bank, 250
F.3d 87, 95 (2d Cir. 2001); see also id. at 96 ("Loss causation . . .
has been likened to the tort concept of proximate cause,
meaning that in order for the plaintiff to recover it must prove
the damages it suffered were a foreseeable consequence of the
misrepresentation.") Loss causation is a "foreseeability finding
[that] turns on fairness, policy, and . . . `a rough sense of
justice.'" AUSA Life Ins. Co. v. Ernst & Young, 206 F.3d 202
217 (2d Cir. 2000) (quoting Palsgraf v. Long Island R. Co.,
248 N.Y. 339, 352 (1928)).
Transaction causation is alleged on the face of plaintiffs'
amended complaint: Plaintiffs explicitly allege that but for the
allegedly fraudulent financial statements provided by defendants,
they would not have invested in Phoenix. (Am. Compl. ¶ 30) The
court has no reason to doubt the truthfulness of this statement.
Additionally, plaintiffs are entitled to a rebuttable presumption
of reliance on the fraudulent statements. Cromer Fin. Ltd. v.
Berger, No, 00-2284, 2003 U.S. Dist. LEXIS 10554, at *17
(S.D.N.Y. June 23, 2003).
Loss causation is also apparent from the amended complaint.
Plaintiffs allege that defendants' omissions of Phoenix's
financial liabilities in the statements defendants provided to
them caused plaintiffs to invest, and to end up with an
"essentially worthless" investment when one of those liabilities
became embroiled in a costly lawsuit. (Am. Compl. ¶ 51) These
allegations are sufficient to form a basis for loss causation
under the above standard; both plaintiffs and defendants might have foreseen future losses for Phoenix if the
unreported liabilities had come due, or indeed if any of the
other omissions in the financial statements had caused harm to
C. Control Liability Under Section 20(a) of the Exchange Act
All defendants move to dismiss plaintiffs' claim for securities
fraud under section 20(a) of the Exchange Act,
15 U.S.C. § 78t(a), which establishes a cause of action for persons in
control of fraudulent activity.
To make a prima facie case under section 20(a), plaintiffs must
show: "(1) a primary violation by a controlled person; (2)
control of the primary violator by the defendant; and (3) that
the controlling person was in some meaningful sense a culpable
participant in the primary violation." Boguslavsky v. Kaplan,
159 F.3d 715, 720 (2d Cir. 1998) (internal quotation marks
omitted). The second element control over a primary violator
may be established by showing that a defendant "`possessed 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.'" SEC v. First Jersey
Sec., Inc., 101 F.3d 1450, 1473 (2d Cir. 1996) (quoting
17 C.F.R. § 240.12b-2). The third element of the control person
liability test is subject to the heightened pleading standards of
the PSLRA: The controlling person's role must be stated with
particularity and give rise to an inference of scienter that is, there must be a strong reason to believe
that the controlling person either knew or should have known that
the controlled person was committing fraud. See
15 U.S.C. § 78u-4(b)(2); Abbad v. Amman, No. 03-9169, 2004 U.S. App.
LEXIS 21033, at *1-*3 (2d Cir. Oct. 8, 2004); Gabriel Capital,
L.P. v. Natwest Fin., Inc., 122 F. Supp. 2d 407, 427 (S.D.N.Y.
Plaintiffs' amended complaint satisfies these requirements as
to defendants Bowen and Collins-Taylor. Plaintiffs allege primary
violations by Vallat and the ACL companies, such as the failure
to disclose or point out various financial liabilities in the
Phoenix statements provided to plaintiffs for 1998, 1999, and
2000. (Am. Compl. ¶¶ 36-50) The complaint also alleges that Bowen
was in control of all other defendants by virtue of his position
as founder and Managing Director of ACL, his participation in
ACL's management of Phoenix's affairs, and his direction and
supervision of Collins-Taylor and Vallat. (Am. Compl. ¶ 8) Bowen
is alleged to have had control over the financial statements
provided by ACL to Vallat and plaintiffs; given his level of
involvement in ACL's management of Phoenix's affairs, Bowen knew
or should have known about any fraudulent conduct that was
occurring. Similarly, Collins-Taylor was in control of ACL's
Phoenix operations, sat on the Phoenix Board of Directors, and
allegedly had direct influence over Vallat's conduct and
decisions on the Phoenix Board. (Am. Compl. ¶ 7) The amended
complaint sufficiently pleads control liability as to both Bowen
and Collins-Taylor. Plaintiffs do not appear to accuse ACL or Vallat of control
liability under section 20(a), but to the extent that they do,
those claims are dismissed, as the amended complaint does not
allege that either ACL or Vallat had control over other persons
conducting fraudulent activities.
D. Securities Fraud Under Section 12(2) of the Securities Act
Defendants allege that plaintiffs' claims under section 12(2)
of the Securities Act, 15 U.S.C. § 77l(2), should be dismissed
because the transactions at issue involved the private sale of
securities from Phoenix to Shanahan, and section 12(2) applies
only to public sales and offerings; defendants also argue that
plaintiffs' section 12(2) claim is not pleaded with sufficient
particularity. The latter argument fails for the reasons stated
in Part II.A of this opinion plaintiffs' securities fraud
claims are pleaded with sufficient particularity for the purposes
of Fed.R.Civ.P. Rule 9(b), if Rule 9(b) even applies to
section 12(2) claims. See In re Ultrafem Inc. Sec. Litig.,
91 F. Supp. 2d 678, 690 (S.D.N.Y. 2000) (noting that the Second
Circuit has not ruled on whether Rule 9(b) applies to section
Section 12(2) gives a buyer a claim against a seller who makes
material misstatements or omissions "by means of a prospectus or
oral communication." 15 U.S.C. § 77l(2)). "[T]he phrase `oral
communication' is restricted to oral communications that relate
to a prospectus," and the definition of a prospectus under the Securities Act "is confined to documents related to
public offerings by an issuer or its controlling shareholders."
Gustafson v. Alloyd Co., 513 U.S. 561, 567-68, 569 (1995).
The breadth of the Supreme Court's holding in Gustafson has
been disputed in this District. Several courts have held that
Gustafson excludes "purchasers in private or secondary market
offerings" from bringing claims under section 12(2). Saslaw v.
Askari, No. 95-7641, 1997 WL 221208, at *6 (S.D.N.Y. Apr. 25,
1997); see also In re WRT Energy Sec. Litig., No. 96-3611,
1997 U.S. Dist. LEXIS 14009, at *16 (S.D.N.Y. Sept. 9, 1997),
vacated and remanded on other grounds sub nom. Attard v.
McGuire, 75 Fed. Appx. 839, 2003 U.S. App. LEXIS 21098 (2d Cir.
2003). Other courts have held that section 12(2) claims may be
more broadly available where plaintiffs allege that a sale
defendants define as private is actually public. Fisk v.
Super Annuities, Inc., 927 F. Supp. 718, 730 (S.D.N.Y. 1996);
cf. Vannest v. Sage, Rutty & Co., 960 F. Supp. 651, 655
(W.D.N.Y. 1997) (giving controlling weight to the offerors'
intention as to the public or private nature of the sale).
Whether an offering is public within the meaning of the
Securities Act depends on "(1) the number of offerees; (2) the
sophistication of the offerees, including their access to the
type of information that would be contained in a registration
statement; and (3) the manner of the offering." ESI Montgomery
County, Inc. v. Montenay Int'l Corp., 899 F. Supp. 1061, 1065
(S.D.N.Y. 1995) (quoting United States v. Arutunoff,
1 F.3d 1112, 1118 (10th Cir. 1993)). In ESI, the Court held that if the
plaintiffs had alleged a public offering, then it was "premature"
for the Court to "assess the weight" of the above factors and
decide whether the offering was public or private at the summary
judgment stage. Id.
In their amended complaint, plaintiffs state that when
plaintiff Shanahan requested the 1998 and 1999 financial
statements from Phoenix, "by this point in time millions of
shares of Phoenix's had been publicly offered to numerous
investors all over the world." (Am. Compl. ¶ 16) On the face of
the amended complaint, plaintiffs separate the Shanahan
transaction in time from the public offering of Phoenix shares,
and do not claim that his purchase was connected with the
offering. Additionally, there is no allegation that Phoenix's
provision of its 2000 financial statements to Shanahan was in any
way connected with a public offering of Phoenix stock. Analysis
of whether offering is the public or private is unnecessary,
given that plaintiffs themselves do not allege a connection
between Phoenix's public offering and the private sales of
securities by Phoenix to Shanahan and Antares, LLC. Plaintiffs'
section 12(2) claim is therefore invalid under the Supreme
Court's holding that the meaning of the term "prospectus" for the
purposes of the Securities Act "is confined to documents related
to public offerings by an issuer or its controlling
shareholders." Gustafson, 513 U.S. at 569.
Plaintiffs' motion to replead this claim under Fed.R.Civ.P. 15(a) is denied. Plaintiffs already have had one
opportunity to amend their complaint and did not see fit to alter
the allegations underlying their section 12(2) claim at that
point. Plaintiffs' request to replead is framed in general terms
and applies to all claims in the amended complaint; plaintiffs
provide no specific justification for their request to replead
the 12(2) claim. Moreover, in the absence of new evidence, there
is no feasible way repleading could cure the defect in
plaintiffs' 12(2) claim, because the alleged fraudulent
statements were not part of a public offering. The section 12(2)
claim is therefore dismissed with prejudice.
E. Common Law Fraud
Because plaintiffs have sufficiently pleaded at least one
federal securities fraud claim, this court retains supplemental
jurisdiction over plaintiffs' common law fraud claim.
23 U.S.C. § 1367.
F. Personal Jurisdiction
Personal jurisdiction under the federal securities laws is
measured by the limits of the Fifth Amendment Due Process Clause.
SEC v. Softpoint, Inc., No. 95-2951, 2001 U.S. Dist. LEXIS
286, at *6-*7 (S.D.N.Y. Jan. 17, 2001); see also SEC v.
Unifund SAL, 910 F.2d 1028, 1033 (2d Cir. 1990).*fn3 The
due process test for personal jurisdiction analysis has two
components: A "minimum contacts" inquiry and a "reasonableness"
inquiry. Metro. Life Ins. Co. v. Robertson-Ceco Corp.,
84 F.3d 560, 567 (2d Cir. 1996).
When personal jurisdiction is assessed under a federal statute,
minimum contacts are to be examined between defendants and the
forum nation, rather than between defendants and the forum state.
Cromer Fin. Ltd. v. Berger, 137 F. Supp. 2d 452, 473
(S.D.N.Y. 2001); Softpoint, 2001 U.S. Dist. LEXIS 286, at
*9-*10; see also Chew v. Dietrich, 143 F.3d 24, 28 n. 4 (2d
Cir. 1998). Minimum contacts analysis has a specific component,
which encompasses whether "defendant has purposefully directed
his activities at residents of the forum, and the litigation
results from alleged injuries that arise out of or relate to
those activities," Burger King Corp. v. Rudzewicz,
471 U.S. 462, 472 (1985) (citation and internal quotation marks omitted),
and a general component, which requires defendant to have
"continuous and systematic general business contacts" with the
forum. Helicopteros Nacionales de Colombia, S.A. v. Hall,
466 U.S. 408, 416 (1984).
If minimum contacts are established, the court must assess the
reasonableness of exercising personal jurisdiction over
defendant. That inquiry is determined by weighing the following
(1) the burden that the exercise of jurisdiction will
impose on the defendant; (2) the interests of the
forum state in adjudicating the case; (3) the
plaintiff's interest in obtaining convenient and
effective relief; (4) the interstate judicial
system's interest in obtaining the most efficient
resolution of the controversy; and (5) the shared
interest of the states in furthering substantive
Metro. Life. Ins., 84 F.3d at 568.
If personal jurisdiction is established under a federal
statute, then pendent personal jurisdiction may be asserted over
plaintiffs' state law claim if the state and federal claims
"derive from a common nucleus of operative fact," and where the
"federal statute authorizes nationwide service of process" even
if personal jurisdiction over the state claim is not "otherwise
available." IUE AFL-CIO Pension Fund v. Herrmann,
9 F.3d 1049, 1056 (2d Cir. 1993).
Following the above analysis, personal jurisdiction exists over
all defendants in this case. The amended complaint alleges that
Bowen and Vallat visited the United States several times to
solicit investors for Phoenix, including one trip in November
1999 that included visits to Texas, Louisiana, and New York. (Am.
Compl. ¶¶ 5, 8) All defendants provided Shanahan in New York with
the financial statements that have led to this litigation (all
defendants were involved in the 1998 and 1999 statements, and Vallat provided the 2000 statement), and all
noncorporate defendants contacted Shanahan in New York by
telephone, fax, and email while negotiating his investment in
Phoenix. (Am. Compl. ¶¶ 15-16, 18)
These contacts are sufficient to establish specific personal
jurisdiction: Defendants acted with intent to influence a
resident of the United States, and this litigation arises out of
defendants' acts. Defendants' frequent business contacts with
United States residents through ACL and individually establish
general personal jurisdiction. The reasonableness of exercising
personal jurisdiction is also evident: Plaintiff Shanahan resides
in the United States and works in New York, making this forum
convenient for him; "The United States has a substantial interest
in the enforcement of its securities laws," Cromer Fin.,
137 F. Supp. 2d at 479; New York has a strong interest in a fraud which
was perpetrated against one of its citizens; defendants reside in
many different countries,*fn4 "such that the choice of the
Southern District of New York for litigation provides both a
convenient forum [for plaintiff] and one with expertise in this kind of
Finally, this court retains pendent personal jurisdiction over
plaintiffs' state fraud claims against defendants, because
worldwide service of process applies to the Securities Act and
the Exchange Act, see 15 U.S.C. § 77v(a) and 15 U.S.C. § 78aa,
and because the alleged state and federal claims stem from the
same facts. Therefore personal jurisdiction in this district is
proper as to all defendants in this case.
G. International Comity
Defendants ACL, Bowen, and Collins-Taylor have moved to dismiss
on the ground of international comity, arguing that a proceeding
for back pay instituted by defendant Vallat in the Hong Kong
Labour Tribunal should bar any action by this court in this
matter. (Def. Mem. at 38-40)
International comity is "the recognition which one nation
allows within its territory to the legislative, executive, or
judicial acts of another nation." Hilton v. Guyot,
159 U.S. 113, 164 (1895). Comity is a rule of "practice, convenience, and
expediency," rather than one of law, Somportex, Ltd. v.
Philadephia Chewing Gum, 453 F.2d 435, 440 (3d Cir. 1971), and
"courts will not extend comity to foreign proceedings when doing
so would be contrary to the policies or prejudicial to the
interests of the United States." Pravin Banker Assocs. v.
Banco Popular Del Peru, 109 F.3d 850, 854 (2d Cir. 1997). The principle of international comity will permit a court to
decline to hear a case only when there is a "true conflict"
between the laws of the countries involved. Hartford Fire Ins.
Co. v. California, 509 U.S. 764, 798-99 (1993). A true
conflict exists between the laws of two countries "only if the
laws of one `require conduct that violates [the laws of the
other.]'" In re CINAR Corp. Sec. Litig., 186 F. Supp. 2d 279,
291 (E.D.N.Y. 2002) (quoting In re Maxwell Communication Corp.,
93 F.3d 1036, 1050 (2d Cir. 1996)) (alteration in original). If a
true conflict is found, the court must then apply a seven-factor
balancing test to identify the strength of each country's
interest in the matter and determine whether the case should be
dismissed on comity grounds. In re CINAR,
186 F. Supp. 2d at 291; see also Filetech, S.A. v. Fr. Telecom S.A.,
157 F.3d 922, 928-29 (2d Cir. 1998).
In this case, we need look no further than the "true conflict"
requirement to determine that the principle of international
comity does not require dismissal here. The Hong Kong Labour
Tribunal's decision that Vallat was owed back wages by Phoenix
has no bearing on this action, which concerns alleged securities
fraud by Phoenix against plaintiffs Shanahan and Antares, LLC.
The fact that the Hong Kong Tribunal did not award Vallat back
pay for 1998 and 1999 does not affect whether or not the
nondisclosure of those liabilities in the 1998 and 1999 financial
statements constituted securities fraud under United States law,
and no foreign law will be violated if this court considers the fact that those liabilities were unreported. That
the Securities and Futures Commission in Hong Kong and the
Commercial Crime Bureau of the Hong Kong Police have both
declined to investigate whether or not Phoenix's actions
constituted crimes in Hong Kong also has no bearing on and
creates no conflict with the securities laws of this nation. No
true conflict is present, and even if one were present, the court
would retain this case because the United States has a strong
interest in enforcing its own securities laws when one of its
residents has alleged a violation thereof. Cromer Fin.,
137 F. Supp. 2d at 479.
H. Forum Non Conveniens
Defendants ACL, Bowen, and Collins-Taylor have moved to dismiss
the amended complaint also on the ground of forum non conveniens.
The parties in this case are located all over the world,*fn5
but defendants argue that Hong Kong is the most appropriate and
The doctrine of forum non conveniens permits a district court
"in rare instances," Wiwa v. Royal Dutch Petroleum Co.,
226 F.3d 88, 100 (2d Cir. 2000) to dismiss a case otherwise properly
brought if moving the case elsewhere "will best serve the
convenience of the parties and the ends of justice." Koster v.
(American) Lumbermens Mut. Cas. Co., 330 U.S. 518, 527 (1947). In assessing a forum non conveniens motion, the court must engage
in a two-step analysis: First, the court must determine if an
adequate alternative forum exists, and if one does, the court
nonetheless applies a presumption in favor of the plaintiff's
choice of forum. Second, the court must weigh factors related to
the public interest and the private interests of the parties to
determine whether the presumption in favor of the plaintiff's
forum is overcome. Iragorri v. Int'l Elevator Inc.,
243 F.3d 678, 680 (2d Cir. 2001). "[U]nless the balance is strongly in
favor of the defendant, the plaintiff's choice of forum should
rarely be disturbed," Gulf Oil Corp. v. Gilbert,
330 U.S. 501, 508 (1947), and the burden of proof to demonstrate
inconvenience is on the defendant seeking dismissal. DiRenzo v.
Philip Servs. Corp., 232 F.3d 49, 57 (2d Cir. 2000). A
plaintiff's choice of forum is given even more weight if the
plaintiff has chosen to litigate in the United States, his home
forum, and defendants seek to litigate the case in a foreign
jurisdiction. Id. at 62-63 ("Our result is not motivated by
jingoism, but rather by the sensible consideration that the
greater connections a plaintiff has to his chosen forum, the more
likely is the inconvenience to him resulting from changing to a
"An alternate forum will normally be adequate so long as the
defendant is amenable to process there," DiRenzo,
232 F.3d at 57, and by that standard, Hong Kong is an adequate alternative
forum because the federal securities laws at issue provide for
worldwide service of process. Additionally, courts in this district have found Hong Kong to be an adequate alternative forum
for litigation of commercial disputes, see, e.g., Yung v.
Lee, No. 00-3965, 2002 U.S. Dist. LEXIS 16655, at *6 (S.D.N.Y.
Sept. 5, 2002), and plaintiffs have not argued to the contrary.
Having found an adequate alternative forum, the court must
apply the presumption in favor of plaintiffs' choice of forum,
and then balance the public and private interest factors to
decide whether dismissal is appropriate despite the presumption.
In Gulf Oil Corp. v. Gilbert, the Supreme Court enumerated
five "public interest" factors to assess in considering a forum
non conveniens motion:
"the administrative difficulties flowing from court
congestion; the `local interest in having localized
controversies decided at home'; the interest in
having the trial of a diversity case in a forum that
is at home with the law that must govern the action;
the avoidance of unnecessary problems in conflict of
laws, or in the application of foreign law; and the
unfairness of burdening citizens in an unrelated
forum with jury duty."
Piper Aircraft v. Reyno, 454 U.S. 235
, 241 n. 6 (1981)
(quoting and citing Gilbert, 330 U.S. at 508-09).
Administrative difficulties are not a factor in this case.
See Cromer Fin. Ltd. v. Berger, 158 F. Supp. 2d 347, 355
(S.D.N.Y. 2001) ("While the docket of the Southern District is an
active one, courts in this district have shown themselves more
than able to address the issues that arise in complex actions in
an expeditious and comprehensive manner.") Because plaintiffs
allege fraud under United States law, committed at least
partially in New York against plaintiffs based in New York and Connecticut, New York has a greater public interest in being host
to the litigation than does Hong Kong, which is simply the
residence and place of business of several (but not all) of the
The private interest factors elaborated by the Gilbert court
also fail to tip the balance in defendants' favor. These factors
include: "(1) ease of access to evidence; (2) the availability of
compulsory process to compel the attendance of unwilling
witnesses; (3) the cost of willing witnesses' attendance; . . .
and all other factors that might make the trial quicker or less
expensive." DiRenzo, 232 F.3d at 66 (citing Gilbert,
330 U.S. at 508). These factors weigh less clearly in favor of plaintiffs,
simply because the parties and the evidence are spread all over
the world plaintiffs are in New York and Connecticut, several
defendants are in Hong Kong, one is in France, and Phoenix and
many of its documents are in Rome. See supra note 4. But
wherever the case is adjudicated, at least some of the parties
and witnesses will incur expenses and be inconvenienced by
travel. Because neither the public nor the private Gilbert
factors weigh in favor of defendants, the court must apply the
presumption in favor of plaintiffs' choice of forum, and deny
defendants' motion for dismissal on the ground of forum non
Defendants ACL, Bowen, and Collins-Taylor also move to dismiss plaintiffs' claim for punitive damages. Under New York
law, punitive damages are not available in "the ordinary fraud
and deceit case," but they may be available in fraud actions
where the fraud "is gross and involves high moral culpability."
Walker v. Sheldon, 10 N.Y.2d 401, 405, 223 N.Y.S.2d 488, 499
(1961). See also Lovely Peoples Fashion, Inc. v. Magna
Fabrics, Inc., No. 95-8450, 1998 U.S. Dist. LEXIS 11197, at *27
(S.D.N.Y. July 22, 1998) (allowing punitive damages if plaintiffs
could plead and prove that defendants engaged in `gross, wanton,
or willful fraud or other morally culpable conduct.'") (quoting
China Trust Bank v. Standard Chartered Bank, PLC,
981 F. Supp. 282 (S.D.N.Y. 1997)). There is no need to prove that the
fraud is aimed at the general public to recover punitive damages.
See id.; Borkowski v. Borkowski, 39 N.Y.2d 982, 983,
387 N.Y.S.2d 233, 234 (1976); Blakeslee v. Rabinor,
182 A.D.2d 390, 392, 582 N.Y.S.2d 132, 134 (1st Dep't 1992).
Plaintiffs have sufficiently pleaded a case for fraud, but have
not alleged facts that point to high moral culpability or to
gross, wanton, or willful fraud. Defendants have not been
convicted of any crime relating to this transaction, either in
Hong Kong or in the United States. The dollar value of the
information omitted from the Phoenix statements provided to
plaintiffs, and defendants' other alleged omissions, appears to
be little more than $200,000, while plaintiffs invested more than
$5 million in Phoenix. Although these omissions did ultimately
lead to a costly litigation and the near-liquidation of Phoenix, defendants do not appear to have acted with greater moral
culpability than is involved in an "ordinary" fraud case.
Therefore, defendants' motion to dismiss plaintiffs' claim for
punitive damages is granted.
* * *
For the reasons set forth above, defendants' motions to dismiss
are denied, with the exception of Vallat's and the ACL companies'
motions to dismiss a claim under section 20(a) of the Exchange
Act against them, and all defendants' motions to dismiss
plaintiffs' claims under section 12(2) of the Securities Act,
which are granted. Defendants' motion to dismiss plaintiffs'
claim for punitive damages is granted.