United States District Court, S.D. New York
August 5, 2005.
In re GLOBAL CROSSING, LTD. SECURITIES LITIGATION.
The opinion of the court was delivered by: GERARD E. LYNCH, District Judge
OPINION AND ORDER
In this consolidated class action arising from the alleged
accounting improprieties at the telecommunications firm Global
Crossing, Ltd. ("GC"), and its subsidiary Asia Global Crossing
Ltd. ("AGC"), Count XX of the Second Amended Consolidated Class
Action Complaint ("complaint") charges J.P. Morgan Chase & Co.
("JPMC") with control-person liability pursuant to Section 15 of
the Securities Act of 1933. JPMC moves to dismiss this count. The
motion will be denied.
The facts set forth below, drawn from the complaint,*fn1
must be taken as true for purposes of this motion. See Bolt Elec.,
Inc. v. City of New York, 53 F.3d 465, 469 (2d Cir. 1995).
The alleged fraud underlying plaintiffs' complaint, and this
motion, has been described in this Court's previous opinions, and
the facts will be repeated here only to the extent that they are relevant to JPMC's motion. See, e.g., In re Global Crossing,
Ltd. Sec. Litig., 322 F. Supp. 2d 319 (S.D.N.Y. 2004); In re
Global Crossing, Ltd. Sec. Litig., 313 F. Supp. 2d 189 (S.D.N.Y.
2003). According to plaintiffs, AGC was integral to GC's scheme
to defraud the public and its investors. Specifically, plaintiffs
allege that GC and AGC booked revenue in the hundreds of millions
of dollars from economically worthless swap transactions in which
they simply exchanged telecom capacity between themselves or with
other members of the telecom industry.
As to JPMC, plaintiffs allege that JPMC acted as a controlling
person of its subsidiary J.P. Morgan Chase Securities, Inc.
("Securities"), which was a member of the underwriters group for
AGC's October 2000 initial public offering of its common stock.
(Compl. ¶ 1239.) Securities was the successor to Chase H&Q and
Chase Securities Inc. (Id. ¶ 103.) Plaintiffs allege that the
AGC IPO Registration Statement contained materially false and
misleading statements regarding AGC. The complaint specifically
[b]y virtue of its ownership, executive conditions,
superior positions, contractual rights, participation
in and/or interaction in the operations and/or
underwriting of Offerings for [AGC] . . . [JPMC] had
the power to influence and control and did influence
and control, directly or indirectly, the
decision-making of [Securities], including the
content and dissemination of the various statements
which [p]laintiffs contend are false and
misleading. . . . [JPMC] and/or its predecessors in
interest, had direct involvement in the day-to-day
operations of [Securities] and/or its predecessors in
interest, and its employees and agents, and therefore
are presumed to have had the power to control or
influence the particular transactions giving rise to
the securities violations as alleged herein, and
exercised the same. . . . As a direct and proximate
result of [JPMC's] wrongful conduct [p]laintiffs and
other members of the Class suffered damages in
connection with their purchase or acquisition of
[AGC] securities. (Id. ¶¶ 1239-41.)
Moreover, according to plaintiffs, Securities "is a wholly-owned
subsidiary of [JPMC] and is held out as part of J.P. Morgan's `Investment Bank' franchise;
the subsidiary's results are consolidated with the results of the
rest of [JPMC's] business and all revenues from [Securities] flow
to [JPMC]; and [Securities] does not have any independent
directors separate from those elected by [JPMC's] shareholders
and its executive officers are also officers of [JPMC]." (P. Mem.
4 n. 2 (citing J.P. Morgan 2000 Annual Report filed with the SEC
on Form 10-K on March 30, 2001, at 1, 10, 110, 116-17).)*fn2
In addition to alleging facts about JPMC's relationship to
Securities, plaintiffs attempt to paint a picture of collusion
between various J.P. Morgan entities and GC. Plaintiffs point out
that Gary Winnick, GC's Chairman, was appointed to J.P. Morgan's
National Advisory Board and Maria Elena Lagomasino, CEO of J.P.
Morgan's Private Bank, was appointed as a director on the AGC's
board of directors in April 2001. "Through the activities of J.P.
Morgan's wholly-owned subsidiaries, the appointment of Winnick to
J.P. Morgan's National Advisory board and the presence of
Lagomasino on the [AGC] Board, J.P. Morgan gained extensive
knowledge about the integrity of [GC] and [AGC's] business and
was in the distinct position of being able to warn investors of
the problems in [GC] and [AGC's] business that were evident at
the time of the [AGC] IPO." (P. Mem. 4 (citing Compl. ¶¶ 103,
846-50, 855).) But "[t]hese warnings were ignored and
[Securities, in its capacity as an underwriter] instead sold
3,000,060 shares of [AGC] to the investing public." (Id. (citing Compl. ¶ 639).) "[JPMC]
served as one of Gary Winnick's personal bankers and, through its
subsidiaries including [Securities] and J.P. Morgan Private Bank,
earned millions of dollars in fees from [AGC] through
underwriting activities, letters of credit, and personal loans
made to [GC] and [AGC] directors and executives." (Id. (citing
Compl. ¶ 103).)
I. Standard on a Motion to Dismiss
For the purposes of this motion to dismiss, the facts as
alleged in the plaintiffs' complaint must be taken as true, Bolt
Elec., 53 F.3d at 469, and all reasonable inferences must be
drawn in the plaintiffs' favor. Freedom Holdings, Inc. v.
Spitzer, 357 F.3d 205, 216 (2d Cir. 2004). At the same time,
"[g]eneral, conclusory allegations need not be credited . . .
when they are belied by more specific allegations of the
complaint." Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1092
(2d Cir. 1995). In deciding a motion to dismiss pursuant to Rule
12(b)(6), the Court may consider documents attached to the
complaint as exhibits or incorporated in it by reference, or,
even documents that may not be incorporated by reference but are
integral to the complaint. Brass v. American Film Techs., Inc.,
987 F.2d 142, 150 (2d Cir. 1993); see Sira v. Morton,
380 F.3d 57, 67 (2d Cir. 2004). In addition to facts alleged in the
complaint, the Court may take judicial notice of public
disclosure documents filed with the SEC. Kramer v. Time Warner
Inc., 937 F.2d 767, 773-74 (2d Cir. 1991). Ultimately, this
Court may only dismiss a complaint 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." Patel v. Searles,
305 F.3d 130, 135 (2d Cir. 2002) (quoting Conley v. Gibson,
355 U.S. 41, 45-46 (1957) (internal quotation marks omitted)). II. The Section 15 Claim
Under Section 15 of the Securities Act of 1933:
[e]very person who, by or through stock ownership,
agency, or otherwise, or who, pursuant to or in
connection with an agreement or understanding with
one or more other persons by or through stock
ownership, agency, or otherwise, controls any person
liable under [Sections 11 or 12(a)(2)], shall also be
liable jointly and severally with and to the same
extent as such controlled person to any person to
whom such controlled person is liable, unless the
controlling person 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. In order to state a claim under Section 15, a
plaintiff must allege (a) a primary violation of Sections 11 or
12 by a controlled person, and (b) control by the defendant of
the primary violator. See Burstyn v. Worldwide Xceed Group,
Inc., No. 01 Civ. 1125 (GEL), 2002 WL 31191741, at *7 (S.D.N.Y.
Sept. 30, 2002); see also Boguslavsky v. Kaplan,
159 F.3d 715
, 720 (2d Cir. 1998).
To be liable as a control person, the defendant "must actually
possess, in fact, rather than in theory, the ability to direct
the actions of the controlled person." Wallace v. Buttar,
239 F. Supp. 2d 388, 396 (S.D.N.Y. 2003). In other words, plaintiffs
must show both that the 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, 1472-73 (2d Cir. 1996) (internal citation and
quotation marks omitted); In re Blech Sec. Litig.,
961 F. Supp. 569, 586 (S.D.N.Y. 1997), and that defendant had "actual control
over the transaction in question." Ross v. Bolton, No. 83 Civ.
8244 (WK), 1989 WL 80428 (S.D.N.Y. Apr. 4, 1989) (internal citation and quotation
marks omitted); see Wallace, 239 F. Supp. 2d at 396; In re
CINAR Corp. Sec. Litig., 186 F. Supp. 2d 279, 319 (E.D.N.Y.
2002). Conclusory allegations of control are insufficient as a
matter of law. See In re Deutsche Telekom AG Sec. Litig., No.
00 Civ. 9475 (SHS), 2002 WL 244597, at *5-*7 (S.D.N.Y. Feb. 20,
2002); Converse, Inc. v. Norwood Venture Corp., No. 96 Civ.
3745 (HB), 1997 WL 742534, at *3-*4 (S.D.N.Y. Dec. 1, 1997);
Sloane Overseas Fund, Ltd. v. Sapiens Int'l Corp.,
941 F. Supp. 1369, 1378-79 (S.D.N.Y. 1996); Martin v. EVP Second Corp., No.
90 Civ. 7074 (LLS), 1991 WL 131176, at *3 (S.D.N.Y. July 9,
B. Pleading Standard
Section 15 claims are governed by the notice-pleading standard
articulated in Rule 8, Fed.R. Civ. Proc., and must provide
defendants "with fair notice of [plaintiffs'] theory of control."
In re WorldCom, Inc., Sec. Litig., Nos. 02 Civ 3288, 03 Civ.
890, 2004 WL 1097786, at *3 (S.D.N.Y. May 18, 2004). "The
heightened pleading standard under Rule 9(b) or the PSLRA does
not apply because fraud and scienter are not necessary elements
of the claim." In re Vivendi Universal, S.A., No. 02 Civ. 5571,
2003 WL 22489764, at *22 (S.D.N.Y. Nov. 3, 2003).
B. Application to Plaintiffs' Claim
JPMC argues that plaintiffs allegations are insufficient to
sustain a Section 15 control-person claim because plaintiffs have
failed to allege that JPMC "control[led]" Securities. Plaintiffs
argue that the facts alleged in the complaint pertinent to JPMC
are sufficient to establish control.*fn3 Although "it is a well-settled principle of corporate law that
`a parent corporation and its subsidiary are regarded as legally
distinct entities,'" In re WorldCom, Inc., Sec. Litig., 2004 WL
1097786, at *3, plaintiffs point to persuasive authority in which
courts have sustained Section 15 claims against a parent
corporation for the acts of a subsidiary on allegations similar
to those plaintiffs bring here. (P. Mem. 8.) See Pollack v.
Laidlaw Holdings, Inc., No. 90 Civ. 5788, 1995 WL 261518, at *18
(S.D.N.Y. May 3, 1995) ("[As] Laidlaw Holdings controlled both
Laidlaw Equities and Laidlaw Asset Management through one hundred
percent stock ownership and through common officers and directors
. . ., plaintiffs have provided prima facie evidence of Laidlaw
Holdings' status as a controlling person."); Cromer Fin. Ltd. v.
Berger, 137 F. Supp. 2d 452, 484 (2001) (allegations that "EYB
`owned and controlled' FASB and K&W by exercising `direct, daily
supervision, oversight and control' through common personnel and
shared offices" and that "FASB and K&W [was] `the corporate
vehicle through which' EYB provided administrative services to
its clients" sufficient to allege control); see In re Indep.
Energy Holdings, PLC Sec. Litig., 154 F. Supp. 2d 741, 770
(S.D.N.Y. 2001) (allegations that parent company conducted
business through wholly owned subsidiaries with common management
sufficient to allege control); Borden, Inc. v. Spoors Behrins
Campbell & Young, Inc., 735 F. Supp. 587, 591 (S.D.N.Y. 1990)
(allegation that "defendants were sole shareholders of
[plaintiff] clearly meets th[e] standard [of alleging control
because it] strongly suggest[s] that [defendants] had the
potential power to influence and direct [plaintiff's]
activities"); see also In re Enron Corp. Sec., No.
MDL-1446, H-01-3624, 2004 WL 3410449, at *3-4 (S.D. Tex. April 6,
2004). Defendant puts forth In re WorldCom, Inc., Sec. Litig., 2004
WL 1097786, as contrary authority, but as plaintiffs point out,
upon closer inspection, the facts there are distinguishable. In
WorldCom, Judge Cote dismissed a Section 15 claim against a
parent corporation as a control person for its subsidiary, but
only after the plaintiffs "had the benefit of extensive
discovery," leaving only the plaintiffs' "implied assertion" that
the parent was the control person of its subsidiary by virtue of
the parent-subsidiary relationship Id. at *3 & n. 10. The mere
existence of a parent/subsidiary relationship may be an
insufficient basis from which to infer control for allegations of
Section 15 liability, In re WorldCom, Inc., Sec. Litig., 2004
WL 1097786, at *3, but plaintiffs have pled more than that.
Although it is true as defendant points out that plaintiffs'
arguments and assertions sometimes seem to "blow fog" more than
to provide notice of the claim (D. Reply. Mem. 4), once the smoke
is clear, sufficient facts remain to allege control-person
liability against JPMC. Plaintiffs have alleged that Securities
is JPMC's wholly owned subsidiary, that the directors of both
corporations were "interchangeab[le]" (P. Mem. 7), and that JPMC
"had direct involvement in the day-to-day operations of
[Securities]" (Compl. ¶ 1240). These facts, viewed in the light
most favorable to plaintiffs, suggest that JPMC controlled
Securities in general and for the purposes of the transactions at
issue. Under the liberal notice pleading rules, these allegations
are sufficient to state a claim of control under Section 15 of
the Securities Act.
For the forgoing reasons, JPMC's motion to dismiss is denied.