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IN RE GLOBAL CROSSING

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"), the Second Amended Consolidated Class Action Complaint includes five counts against Microsoft Corporation and Softbank Corporation. Count XVII is a claim for securities fraud under Section 10(b) and Rule 10b-5 (a) and (c) of the 1934 Securities Exchange Act ("Exchange Act"); Count XVIII is a claim for a violation of Section 11 of the Securities Act of 1933 ("Securities Act"); Count XXI is a claim for control-person liability pursuant to Section 15 of the Securities Act; Count XXII is a claim for control-person liability pursuant to Section 20(a) of the Exchange Act; and Count XXIV is a claim for respondeat superior liability based on violations of Section 10(b) and Rule 10b-5 of the Exchange Act, and Section 11 of the Securities Act. Microsoft and Softbank move to dismiss all five counts, arguing that Lead Plaintiffs ("plaintiffs") have failed to plead respondeat superior or control-person liability, and that plaintiffs' Section 15 and Section 11 claims are time-barred.*fn1 The motions will be granted.

  BACKGROUND

  I. Factual Background

  The facts set forth below, drawn from the complaint,*fn2 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).

  AGC was a pan-Asian telecommunications carrier that provided internet, data, and voice services to wholesale and business customers. On September 24, 1999, AGC was formed as a holding company within GC for GC's operations in Asia. On November 24, 1999, AGC became a wholly-owned subsidiary of a joint venture between GC, Softbank, and Microsoft. (Compl. ¶ 200.) GC and AGC substantially overlapped in directors and management, sharing, for example, Gary Winnick as a common Chairman and Lodwrick M. Cook as a common Co-Chairman. (Id. ¶¶ 29, 34.)

  GC, Softbank, Microsoft, and Goldman Sachs were the shareholders of AGC. (Id. ¶ 27.) GC, Softbank, and Microsoft entered into a Shareholder Agreement that gave each party the right to appoint one or more directors of AGC. (Id. ¶ 205.) Under the Agreement, Microsoft and Softbank each invested $175 million and committed to purchase $100 million in telecommunications capacity from AGC over a three-year period. (Id. ¶ 206.) Following AGC's November 2000 initial public offering ("IPO"), Microsoft and Softbank each became owners of 15.8% of AGC's common stock. (Id. ¶ 207.)

  AGC's IPO Registration Statement announced that AGC "plan[ned] to leverage [its] relationships with [its] founding shareholders." With regard to its "Microsoft and Softbank Relationships," the IPO stated:
Microsoft is a worldwide leader in software, services and Internet technologies for personal and business computing. Softbank is one of the world's Internet leaders, with ownership positions in more than 300 Internet companies. We believe that having Microsoft and Softbank as our founding shareholders will allow us to benefit from the expanding involvement of these companies in Internet-related businesses and their expertise in that field.
(AGC IPO Registration Stmt., Liebesman Decl. Ex. 1, at 53.) The Registration Statement further elaborates that under the by-laws and shareholders agreement, "the affirmative votes of [AGC's] board members appointed by Microsoft and Softbank are required for a number of important business decisions."*fn3 Id. at 19. Pursuant to the Shareholder Agreement, in November 1999, Softbank designated Eric Hippeau, President and Executive Managing Director of Softbank International Ventures (as well as a member of the GC board of directors from September 1999 to November 2001) to serve on the AGC board of directors, which he did until November 2001 (Compl. ¶ 53); in April 2000, Microsoft designated Thomas U. Koll, vice-president of network solutions at Microsoft, to serve on the AGC board of directors (id. ¶ 67); and in February 2001, Microsoft appointed Peter Knook, also a Microsoft vice-president, to succeed Koll as Microsoft's appointee to AGC's board of directors (id. ¶ 59).

  The alleged fraud underlying plaintiffs' complaint has been described from various angles in this Court's previous opinions, and the details will be repeated here only to the extent that they are relevant to Microsoft's and Softbank's motions. 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). At the heart of plaintiffs' allegations is their contention that AGC was integral to GC's alleged scheme to defraud the public and its investors. According to plaintiffs' telling of the alleged scheme, 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. Plaintiffs further contend that most of these transactions were entered into at the very end of a quarterly reporting period, thereby enabling GC and AGC to meet their earnings and revenue targets. Plaintiffs allege that Koll, Knook, and Hippeau signed some of AGC's false and misleading SEC filings, and "caused" AGC to sell securities to investors at artificially inflated prices. (P. Mem. 28; Compl. ¶¶ 53, 59, 67.)

  II. Microsoft's and Softbank's Current Motions

  Microsoft and Softbank move to dismiss all five counts, arguing that plaintiffs have failed to plead respondeat superior or control-person liability, and that plaintiffs' claims under Sections 11 and 15 are time-barred.*fn4 Plaintiffs oppose the motions, arguing in essence that Koll, Knook, and Hippeau acted at the behest of Microsoft and Softbank as instruments in AGC's alleged fraud — and therefore that Microsoft and Softbank should be held accountable for violating federal securities law — and asserting the timeliness of their claims.

  Although there are five counts against Microsoft and Softbank, the issues presented in various counts overlap — Counts XVII, XVIII, and XXIV present the question whether Microsoft and Softbank can be held liable for actions of Knook, Koll, and Hippeau on a theory of respondeat superior,*fn5 whereas Counts XXI and XXII present the question whether Microsoft and Softbank can be held liable for actions of Knook, Koll, and Hippeau on a theory of control-person liability. As the plaintiffs have not alleged sufficient facts as to agency or control-person relationships between Microsoft and Koll or Knook, or between Softbank and Hippeau, the sufficiency of plaintiffs' factual claims as to Koll's, Knook's, and Hippeau's alleged wrongdoing is irrelevant. Moreover, because plaintiffs' claims as to Microsoft and Softbank are dismissed on other grounds, the Court need not reach the argument put forth by both defendants that plaintiffs' Sections 15 and 11 claims are time-barred.

  DISCUSSION

  Plaintiffs argue that Microsoft and Softbank should be held liable under federal securities law because Koll, Knook, and Hippeau participated as their agents in the alleged fraud at AGC.*fn6 Plaintiffs rest the sufficiency of the five counts in the complaint against Microsoft and Softbank on two theories of liability: respondeat superior and control-person liability. Plaintiffs do not allege that Microsoft and Softbank aided and abetted a fraud by AGC or its officers or directors, but rather that each was a primary participant in the fraud. Nor do plaintiffs claim that Microsoft and Softbank are liable because they were minority shareholders of a company that issued false statements. Rather, their basic theory is that, since a corporation can act only through human agents, Koll's, Knook's, and Hippeau's statements and actions are attributable to Microsoft and Softbank because they were statements by the corporations' agents in the course of their employment.

  Plaintiffs' arguments are not without some appeal. While there is authority that makes clear that being a director or officer (let alone being able to appoint a director or officer) or a minority shareholder does not make one a control person of the corporation, or vicariously liable for what the corporation does, Wallace v. Buttar, 239 F. Supp. 2d 388, 396 (S.D.N.Y. 2003); In re Deutsche Telekom AG Sec. Litig., No. 00 Civ. 9475, 2002 WL 244597, at *6-*7 (S.D.N.Y. Feb. 20, 2002), plaintiffs point to some specific facts about this situation that give their theory some equitable weight. First, Microsoft and Softbank were (with GC itself) present at the creation of AGC. Second, the shareholder agreement that Microsoft and Softbank entered into with GC gave Microsoft and Softbank more power than a typical minority shareholder, including the right to designate individuals to sit on AGC's board. Third, AGC's promotional materials touted not only general synergy with Microsoft and Softbank, but the shareholder agreement, which required Microsoft's and Softbank's appointees' approval on certain strategic decisions by AGC. Fourth, Microsoft and Softbank did not designate just any individuals to sit on the board; rather, they each designated company employees to sit on the board. In light of all of these factors, it is not unreasonable for plaintiffs to argue that the investing public might attribute to AGC some of the credibility attaching to Microsoft and Softbank, or indeed that AGC encouraged that perception.

  But plaintiffs' claims ultimately rest on a few bare facts and a number of legally unjustified presumptions. First, the Second Circuit has cautioned against using ordinary common law principles like respondeat superior in interpreting the securities laws. Shapiro v. Cantor, 123 F.3d 717, 720 (2d Cir. 1997). The fraud provisions only apply to one who himself makes statements, or to one to whom statements are fairly attributable. Wright v. Ernst & Young LLP, 152 F.3d 169, 175 (2d Cir. 1998). Second, when acting as directors of AGC, Koll, Knook, and Hippeau had fiduciary duties to act on behalf of the shareholders of AGC itself, not on behalf of the entities that appointed them. Thus, when they acted as directors of AGC, they were not acting within the scope of their employment with Microsoft and Softbank.

  Plaintiffs may well suggest that this is a legal fiction, or that Koll, Knook, and Hippeau may have violated their duties to AGC. Perhaps they did. But the mere fact that they held high positions with Microsoft and Softbank, and were appointed to the AGC board by those corporations, cannot, standing alone, establish that they acted as agents, or acted under the control, of Microsoft and Softbank. Not all actions of an employee are attributable to a corporate employer — the employer is only responsible for its employee's actions that were within the scope of his employment. Koll, Knook, and Hippeau cannot be presumed to have been acting at the direction of their outside employers in their ...


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