The opinion of the court was delivered by: Gerard E. Lynch, District Judge
In yet another chapter of this litigation concerning alleged accounting improprieties and other fraud at Global Crossing, Ltd. ("GC") and its affiliate Asia Global Crossing Ltd. ("AGC"), Lead Plaintiffs seek to amend the Second Amended Consolidated Class Action Complaint ("Complaint" or "Second Amended Complaint") as to defendants Microsoft Corporation and Softbank Corporation, contending that newly discovered information (further) shows the companies' involvement in the fraud at AGC. Defendants oppose the proposed amendments, contending that they are futile, and specifically that they fail to address the deficiencies that led this Court to previously dismiss all claims against Microsoft and Softbank. See In re Global Crossing Ltd. Secs. Litig. (Microsoft/Softbank Ruling), No. 02 Civ. 910, 2005 WL 1907005 (S.D.N.Y. Aug. 8, 2005). For the following reasons, plaintiffs' motion to amend the complaint will be granted in part and denied in part.*fn1
The allegations of fraud at GC and AGC are described in detail in the Court's prior opinions and need not be repeated here. See, e.g., Microsoft/Softbank Ruling, 2005 WL 1907005; In re Global Crossing Ltd. Secs. Litig. (Andersen Ruling), 322 F. Supp. 2d 319 (S.D.N.Y. 2004); In re Global Crossing Ltd. Secs. Litig. (GC Underwriters Ruling), 313 F. Supp. 2d 189 (S.D.N.Y. 2003). Facts particular to the claims against Microsoft and Softbank are set forth below, taken primarily from allegations in the complaint, and are accepted as true for the purposes of this motion. See Bolt Elec., Inc. v. City of New York, 53 F.3d 465, 469 (2d Cir. 1995).
On September 24, 1999, AGC was formed as a holding company for GC's Asian operations, and two months later, on November 24, it became a wholly-owned subsidiary of a joint venture among GC, Microsoft, and Softbank. (Id. ¶ 200.) As part of this deal, GC, Microsoft, and Softbank entered into a Shareholder Agreement that gave each company the right to appoint one of AGC's directors. (Id. ¶ 205.) Microsoft and Softbank in turn invested $175 million and committed to purchase $100 million in telecommunications capacity from AGC over a three-year period. (Id. ¶ 206.) Following AGC's October 2000 IPO, Microsoft and Softbank each became owners of 15.8% of AGC's common stock. (Id. ¶ 207.)
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 board (id. ¶ 67); and in February 2001, Microsoft appointed Peter Knook, also a Microsoft Vice President, to take Koll's place (id. ¶ 59). During the relevant period, AGC's board was comprised of twelve directors. Microsoft/Softbank Ruling, 2005 WL 1907005, at *13.
Prior to the current proposed amendment to the Complaint, plaintiffs' theory of Microsoft's and Softbank's liability was not that these companies committed any fraudulent acts themselves, but rather that they are liable for the fraudulent actions of their board designees, and of AGC itself, under the agency principle of respondeat superior, and as "controlling entities" under certain federal securities statutes. The underlying liability of the board designees and AGC related to alleged accounting improprieties concerning sales and exchanges of bandwidth by AGC. This Court dismissed claims based on these theories, holding that plaintiffs failed to allege facts from which it could be inferred that either Microsoft or Softbank controlled their respective board designees or AGC itself, and thus failed to properly allege either agency or control-person status. See id. at *9-*11, *13-*14. The Court's rulings were grounded in the view that minority shareholder status and the power to appoint a director (even where a high-level employee is appointed who has the power to veto certain extraordinary corporate actions under the governing shareholder agreement) are insufficient to plead control, absent "concrete factual allegations" as to how control was actually exercised over the director or alleged fraudulent enterprise. The Court emphasized that "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." Id. at *3. In a subsequent ruling addressing similar allegations as to the CIBC defendants, see supra note 1, the Court reaffirmed its ruling on agency liability, noting specifically the misfit between common-law agency principles and the federal securities laws, see CIBC Ruling, 2005 WL 2990646, at *6. However, the Court retreated on the issue of control-person liability, because an intervening Second Circuit decision clarifying the burden of pleading imposed by Fed. R. Civ. P. 8(a) precluded dismissal. Id. at *8.
Plaintiffs did not move the Court to reconsider its prior holding as to Microsoft and Softbank in light of the CIBC Ruling, but instead moved forward on an already-pending motion to amend the Complaint on the basis of new information obtained in course of further investigation into the affairs of GC and AGC. The fruits of that investigation are contained in what is denominated the Proposed Third Amended Consolidated Class Action Complaint ("TAC"). In a nutshell, the proposed amendments in the TAC concern a publicized purported agreement among Microsoft, Softbank, and AGC in connection with the AGC IPO, whereby Microsoft and Softbank each agreed to purchase $100 million of bandwidth on the not-yet completed AGC network (the "November 24, 1999, Capacity Commitment Agreement" or "CCA"). (TAC ¶ 1215; Liebesman Decl. Ex. 4.) Plaintiffs allege that neither Microsoft nor Softbank had any intention of honoring their obligations under the CCA (TAC ¶¶ 1206-1209, 1220-23, 1257-69), and that directly and through their agents on AGC's board, they negotiated under the table to avoid those obligations, keeping the negotiations secret in order to maintain the attractiveness of AGC stock to potential investors. (Pl. Mem. 12-16; TAC ¶¶ 1206-08, 1210, 1224, 1243, 1246, 1248, 1252-54, 1257-69, 1278-80.)
Based on these actions, plaintiffs allege that Microsoft and Softbank intentionally led AGC investors to believe that their investments were backed by a guaranteed $200 million revenue stream for AGC. This revenue stream was important because AGC had reported only $130 million in sales for the nine months preceding its IPO. (TAC ¶ 1206.) Plaintiffs allege that Softbank ultimately "purchased only $14.5 million of the $100 million in capacity that Asia Global Crossing and Softbank had touted to Asia Global Crossing investors" (id. ¶ 1225), that Microsoft purchased only $20 million of the $100 million in capacity it had pledged to buy (id. ¶ 1269), and that the crash of AGC's stock during 2001 and 2002 is directly "attributable to Microsoft and Softbank's failure to provide the promised revenue stream." (E.g., id. ¶ 1306.) On the strength of these new allegations, plaintiffs propose to add the following claims for relief against Microsoft and Softbank:
Claims under Section 10(b) (15 U.S.C. § 78j(b)), based on false statements and the alleged scheme relating to the CCA (Counts XXXVII to XL; TAC ¶¶ 1601-1648); Respondeat superior claims under Section 10(b), Rule 10b-5, and Section 11 (15 U.S.C. § 77k) based on the primary violations of these statutes by Hippeau (Softbank) and Koll (Microsoft) (Counts XLI, XLII, XLVII, XLVIII; TAC ¶¶ 1649-1668, 1697-1708); and Control-person claims under Section 20(a) (15 U.S.C. § 78t) and Section 15 (15 U.S.C. § 77o) based on primary violations of Section 10(b) and Section 11 by Hippeau, Koll, and AGC itself (Counts XLIII to XLVI; TAC ¶¶ 1669-1696).
Microsoft and Softbank vigorously object to plaintiffs' proposed amendments to the complaint, primarily on the ground that they are "futile," that is, that the proposed additional claims are still legally inadequate.*fn2 Ellis v. Chao, 336 F.3d 114, 127 (2d Cir. 2003). Such objections are reviewed similarly to a motion to dismiss for failure state a claim under Fed. R. Civ. P. 12(b)(6). See, e.g., Aetna Casualty & Surety Co. v. Aniero Concrete Co., Inc., 404 F.3d 566, 604 (2005). When reviewing a 12(b)(6) motion to dismiss, the Court must accept "as true the facts alleged in the complaint," Jackson Nat'l Life Ins. Co. v. Merrill, Lynch & Co., 32 F.3d 697, 699-700 (2d Cir. 1994), and may grant the motion only 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." Thomas v. City of New York, 143 F.3d 31, 36 (2d Cir. 1998) (citations omitted). The Court may consider "'any written instrument attached to [the complaint] as an exhibit,' 'any statements or documents incorporated in it by reference,' and any document not incorporated but that is, nevertheless, 'integral' to the complaint because the complaint 'relies heavily upon its terms and effect.'" Yung v. Lee, 432 F.3d 142, 147 (2d Cir. 2005), quoting Chambers v. Time Warner, Inc., 282 F.3d 147, 152-53 (2d Cir. 2002). The Court may also take judicial notice of matters of public record, including the contents of documents required to be filed with the SEC. Kramer v. Time-Warner, Inc., 937 F.2d 767, 774 (2d Cir. 1991). All reasonable inferences are to be drawn in the plaintiff's favor. See In re Indep. Energy Holdings PLC, 154 F. Supp. 2d 741, 747 (S.D.N.Y. 2001).
I. Plaintiff's Respondeat Superior Claims
Microsoft and Softbank argue that the respondeat superior claims fail
because of a partial
settlement that fully releases the Microsoft and Softbank board
designees, Koll and Hippeau, from liability. The theory is that
because Microsoft's and Softbank's liability on the respondeat
superior claims is entirely derivative of Koll and Hippeau,*fn3
the release of these employees is necessarily a release of
their employers. (Microsoft Mem. 17-19; Softbank Mem. 20-21.) This is
so, it is argued, despite language in the settlement agreement that
expressly reserves all rights against non-settling defendants
including Microsoft and Softbank. March 19, 2004, Stip. of Stlmt. ¶
1.E.nnnnnnnn. The Court agrees, and will deny leave to amend as to the
respondeat superior claims.
The parties point to no federal statute or federal common-law ruling addressing this issue, and the Court has found none. However, Microsoft and Softbank note that the majority state common-law rule,*fn4 and the rule adopted by the most recent Restatement,*fn5 is that settlement with an employee extinguishes the liability of the employer where the employer's liability is based on respondeat superior. This rule has been held to apply even where claims against the employer are expressly reserved in the settlement agreement.*fn6 The primary (though not only) rationale for Restatement rule is that where an employer is "liable solely on the basis of [an employee's] tortious conduct," such as in the case of a respondeat superior claim, "there is no direct responsibility to assign to the party to whom liability is imputed," that is, the employer. Restatement § 7 cmt. j. Instead, the employee and employer "are treated as a single unit for the assignment of responsibility" among the alleged tortfeasors, id., with the employee's share of responsibility constituting the entire share of both the employee and employer.
This rationale takes on additional significance in the context of federal securities law: Under the PSLRA, in certain circumstances (including this one), settlement with the employee, no matter the amount of the settlement, reduces any subsequent judgment against the non-settling defendants by the amount corresponding to the share of responsibility of the employee, and thus also of the employer. See 15 U.S.C. § 78u-4(f)(7)(B). Because the employee's share of responsibility is wiped out, "there is no responsibility remaining to be assigned" to the employer, and the Restatement posits that the employer's release is not only warranted as a policy matter, but demanded as "logically required." Id. § 16 Reporter's Note cmt. d.
None of plaintiffs' arguments undermine defendants' claim that this rule is "logically required," as the Restatement posits, or suggests that application of the rule would be undesirable as a policy matter. The arguments that plaintiffs do make are unsound even on their own terms.
Plaintiffs first argue, without explanation or authority, that "state common law, non-securities cases from other jurisdictions involving a principal's right to recover for the torts of its released agent . . . simply do not apply to securities class action lawsuits." (Softbank Reply 14.) However, as Microsoft correctly points out, that plaintiffs' claims happen to arise under the federal securities laws, and are part of a class action, is irrelevant: "[D]octrines of agency and respondeat superior are common law doctrines used to establish vicarious liability under both common law and statutory causes of action. As such, the common law principles . . . apply to the liability of a principal regardless of the underlying substantive basis of legal liability of the agent." (Microsoft Mem. 18.) As for the reference to "state" common law, there does not appear to be any relevant federal statutory or common-law authority on point, and for this reason the Court must by necessity refer to state common-law rulings as persuasive authority in analyzing the respondeat superior issue. Ultimately, this argument is nothing but a subtle attempt by plaintiffs to take the sweet without the bitter, to import common-law principles like respondeat superior into the federal securities context (which the Court previously expressed hesitation about doing, see Microsoft/Softbank Ruling, 2005 WL 1907005, at *3; CIBC Ruling, 2005 WL 2990646, at *5-*6), while at the same time demanding that traditional limitations on those doctrines be ignored. Such selective adoption of common law principles cannot be justified.
Second, plaintiffs appear to suggest that adopting the Restatement rule in this context, and denying leave to amend as to the respondeat superior claims, would constitute judicial "rewriting" of the settlement agreement. (Softbank Reply 14.) That argument is without merit. Judicial resolution of uncertain legal issues regarding the effect of a settlement agreement does not rewrite the parties' agreement. Plaintiffs respond that even if that is so, nullification of the purported "reservation" of claims against Microsoft and Softbank in the settlement agreement warrants rescission of that agreement. (Microsoft Reply 11.) While a mistake of fact or law by the parties may under certain circumstances warrant rescission of a contract, see Restatement (Second) of Contracts §§ 151-58, that doctrine is inapplicable where, as here, there is no mistake, but rather subsequent resolution of an undetermined point of law. As the Second Circuit has pointed out, "[s]uccinctly put, a settlement payment, made when the law was uncertain, cannot be successfully attacked on the basis of any subsequent resolution of the uncertainty." Anita Foundations, Inc. v. ILGWU Nat. Retirement Fund, 902 F.2d 185, 189 (2d Cir. 1990) (quotation marks omitted) (noting also that "uncertainty of a legal position and the desire to avoid the risk of a lawsuit are the impetus for many out-of-court settlements. It simply is inappropriate to equate these settlement agreements with agreements premised upon the misapplication of settled legal principles").
Finally, there is some suggestion in plaintiffs' papers, though the argument is never made expressly, that the release defense advanced by Microsoft and Softbank should be deemed waived. (Softbank Reply 13; Microsoft Reply 10-11.) True enough, neither Microsoft nor Softbank raised this defense at any prior stage of this litigation, including in connection with their motion to dismiss the Second Amended Complaint.*fn7 This has forced the court to write twice, unnecessarily, on the application of respondeat ...