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In re One Communications Corp.

March 31, 2009

IN RE ONE COMMUNICATIONS CORP.,
THIS DOCUMENT RELATES TO: ONE COMMUNICATIONS CORP., 07 CIV. 3905



The opinion of the court was delivered by: Laura Taylor Swain, United States District Judge

OPINION AND ORDER

This Opinion and Order addresses motions to dismiss claims asserted in one of two consolidated actions. In that action, originally styled One Communications Corp. v. JP Morgan SBIC LLC et al., 07 Civ. 3905 (LTS), Plaintiff One Communications Corp. ("Plaintiff"), successor in interest to CTC Communications Group, Inc. and CTC Communications Acquisition Corporation ("CTC"), seeking monetary relief, asserts claims under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) ("Section 10(b)") and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 ("Rule 10b-5"), and related state common law claims (fraud/intentional misrepresentation and negligent misrepresentation), alleging fraudulent conduct in connection with Plaintiff's acquisition of Lightship Holding, Inc. ("LHI"). Named as defendants are JP Morgan SBIC, LLC ("JP Morgan SBIC"), Sixty Wall Street SBIC Fund, L.P. ("Sixty Wall Street"), The Megunticook Fund II, L.P. ("Megunticook Fund"), The Megunticook Side Fund II, L.P. ("Megunticook Side Fund"), Kevin O'Hare ("O'Hare") and Jeffrey Koester ("Koester"), who were major stockholders, officers and/or directors of Lightship Telecom LLC ("Lightship") and/or its affiliated holding company, Lightship Holding, Inc. ("LHI"), or are alleged to be associated with such stockholders, officers or directors. Plaintiff also asserts claims under section 20(a) of the Securities Exchange Act of 1934 ("Section 20(a)") against JP Morgan SBIC, Sixty Wall Street, the Megunticook Fund and the Megunticook Side Fund. In addition, Plaintiff brings a state law "breach of representations and warranties" claim against the aforementioned defendants and against nominal defendant Mellon Investors Services, LLC ("Mellon"), seeking the release of $7 million in funds held by Mellon as an escrow agent for the purposes of indemnifying claims raised in connection with the merger, on the basis of the aforementioned asserted violations of state and federal law. Lastly, Plaintiff seeks a declaratory judgment pursuant to 28 U.S.C. § 2201 against the same defendants and Verizon New England, Inc. ("Verizon")*fn1 with respect to a billing contract entered into by Lightship and Verizon prior to the acquisition. The Court has jurisdiction of this action pursuant to 28 U.S.C. § 1331 and 15 U.S.C. § 78aa. The Court has supplemental jurisdiction of Plaintiff's remaining state law claims pursuant to 28 U.S.C. § 1367.*fn2

Each of three groups of defendants -- JP Morgan SBIC and Sixty Wall Street ("JP Morgan Defendants"), Megunticook Fund and Megunticook Side Fund ("Megunticook Defendants"), and O'Hare and Koester ("Individual Defendants") -- moves, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, to dismiss Plaintiff's claims in this action for failure to state a claim and, pursuant to Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(b), for failure to plead fraud with the requisite particularity. In addition, the JP Morgan Defendants move, pursuant to Rule 12(b)(1), to dismiss Plaintiff's claims for lack of subject-matter jurisdiction,*fn3 and the Megunticook Defendants move pursuant to Rule 12(b)(2) for dismissal of the One Communications Corp. Complaint on the basis of lack of personal jurisdiction and argue that Plaintiff's escrow agreement claims should be dismissed as duplicative of claims brought in the other action.

The Court has considered thoroughly the arguments and submissions of the parties in connection with these motions. For the reasons that follow, Defendants' motions to dismiss the Complaint in One Communications Corp. are granted.

BACKGROUND

The Court construes all of Plaintiff's well-pleaded, non-conclusory allegations as true in deciding a Rule 12(b)(6) motion to dismiss. The allegations and background facts material to the resolution of the pending motions are as follows.

Local exchange carriers ("LEC's"), more commonly known as local telephone companies, are communications providers that transport calls within particular local calling areas ("LCA's"), the geographic boundaries of which are defined by the LEC. Broadly speaking, the federal Telecommunications Act, passed in 1996, requires LEC's that provided monopoly local telephone service in 1996 to enter into agreements with other LEC's that wish to provide services in those areas, thereby permitting and encouraging competition. See 47 U.S.C. §§ 251, et seq. "Incumbent local exchange carriers" ("ILEC's") are LEC's that provided monopoly local telephone service before passage of the Telecommunications Act of 1996. The LEC's that entered the market thereafter are referred to as "competitive local exchange carriers" ("CLEC's"). (Compl. ¶ 16.)

The agreements between ILEC's and CLEC's are known as interconnection agreements ("ICA's"). ICA's must be approved by the appropriate state public utility commission before they go into effect. See 47 U.S.C. § 252(e)(1). In general, ICA's provide that, when a call originating in one LEC is terminated by another LEC in the same LCA, the terminating LEC receives a "reciprocal compensation" payment from the originating LEC. (Compl. ¶¶ 18, 21.) With respect to calls that are routed from one LCA to another (more commonly known as long distance calls), however, "access charges" are levied on the participating LEC's.*fn4 (Compl. ¶¶ 17, 19.) As would be expected, access charges are usually higher than reciprocal compensation fees. (Id. ¶ 40.)

The billing systems used by LEC's, which keep track of the LCA's as defined by the LEC and others in order to determine how much other LEC's should be billed, pursuant to the ICA's, are known as "carrier access billing systems" ("CABS"). (Compl. ¶ 20.)

Lightship

Lightship Telecom LLC ("Lightship"), a communications provider, was formed in June 1998 and was therefore a CLEC, and operated in New Hampshire, Vermont, Massachusetts and Maine. (Compl. ¶¶ 16, 27.) Lightship Holding, Inc. ("LHI") is a corporation that was formed to hold 100 percent of the stock of Lightship. (Compl. ¶ 26.) Defendant O'Hare was chairman of the LHI board and Chief Executive Officer ("CEO") of Lightship at all relevant times, and Defendant Koester was the Chief Operating Officer ("COO") of Lightship at all relevant times. (Id. ¶¶ 9, 10, 26.)

The JP Morgan Defendants and the Megunticook Defendants each had the right to designate two representatives to sit on the LHI board due to their investments in Lightship or LHI. (Compl. ¶¶ 28-32.) By January 2004, Stephan Oppenheimer ("Oppenheimer") was one of the representatives for the JP Morgan Defendants on the LHI board, and Thomas Matlack ("Matlack") was one of the representatives for the Megunticook Defendants. (Id. ¶ 34.) They were "actively involved in overseeing the financial condition and operations" of Lightship (id. ¶¶ 28, 31), and they "received reports tracking Lightship's financial condition and operations . . . [t]hroughout their respective terms" as directors. (Id. ¶ 34.)

Interconnection Agreement Between Lightship and Verizon - the Maine ICA Verizon was an ILEC in the state of Maine. In or around January 2002, Lightship entered into an ICA with Verizon covering the state of Maine ("Maine ICA").*fn5 (See Decl. of William David Sarratt dated Dec. 17, 2007, Ex. 1.) In the section of the agreement relevant to this action, each party was required to provide reciprocal compensation to the other for calls constituting "Reciprocal Compensation Traffic." (See id., Am. No. 1 § 1.1.1). Reciprocal compensation was to be determined in part based upon "Verizon's LCA's as defined by Verizon." (Id., Appendix B to Am. No. 1).

Alleged Breach of the Maine ICA

Darren Kreitler ("Kreitler") was a billing manager for Lightship at all relevant times. Defendant Koester, the COO of Lightship, was his supervisor. (Compl. ¶ 40.) In late 2004, Kreitler discovered that Lightship's CABS were based on outdated Verizon LCA's that were smaller than Verizon's then-current LCA's. The discrepancies between the sizes of the LCA's resulted in the assessment of access charges for calls that would have been subject to the lower reciprocal compensation fees had they been determined based on the larger LCA's then in use by Verizon. (Id. ¶ 40.) Kreitler told Koester that use of the smaller LCA's and consequent higher billings to Verizon constituted a breach of the Maine ICA, but Koester decided not to change Lightship's existing LCA definitions*fn6 and instructed Kreitler to conceal from Verizon the fact that the higher access charges had anything to do with Lightship's use of the outdated, smaller LCA's rather than Verizon's then-current LCA's. (Id. ¶¶ 41, 74.)

Kreitler nonetheless updated Lightship's LCA template to conform to the then-current Verizon definitions and prepared a preliminary billing for March 2005 that showed a substantial drop in revenue.*fn7 After reviewing the new figures, Koester proposed that Lightship "replace" the lost revenues by creating new, even smaller LCA's for the purposes of assessing intercarrier compensation. (Compl. ¶¶ 48-50.) Kreitler and Defendant Koester met with Defendant O'Hare and Wilson, and "they discussed Lightship's use of the smaller Lightship-created LCAs which were at variance with the LCAs defined by Verizon . . . and Koester's plan to utilize the new billing protocols and have Lightship define its own LCAs." (Id. ¶ 49.) O'Hare and Wilson agreed to implement Koester's proposal. (Id. ¶ 49.) When Koester instructed Kreitler to create smaller LCA's pursuant to the plan, Kreitler again told Koester that the Maine ICA did not allow Lightship to define its own LCA's, but Koester ordered Kreitler to implement the plan anyway and to "let me [Koester] worry about that." (Id. ¶ 51.) Shrinking the LCA's in this manner resulted in an EBITDA increase of $200,000 to $300,000 a month, or $2.4 million to $3.6 million annually.*fn8 (Id. ¶ 45.)

Plaintiff alleges that Lightship's revenues were consistently overstated because its billings were based on improper LCA definitions. (See, e.g., Compl. ¶¶ 43, 59.)

Other Allegedly Improper Billing Practices

The Complaint describes additional billing practices that Plaintiff alleges were improper. With respect to local calls that originated with a third party, transited Verizon's network, and terminated with Lightship, Lightship engaged in "double billing," i.e., it billed both Verizon and the third party for the same reciprocal compensation charges. (Compl. ¶ 53(a).)

During the relevant period, communications regulators in Maine, New Hampshire and Vermont implemented prohibitions on the use of "VNXX services" in connection with Internet usage. VNXX services are services that allow customers from one LCA to dial Internet access phone numbers as if they were making calls from another LCA, thereby avoiding the payment of long distance charges; employing VNXX services in connection with Internet usage allowed certain customers to connect to the Internet without paying long-distance fees. (Compl. ¶¶ 23-24.) Notwithstanding these prohibitions, Lightship continued to provide VNXX service for Internet-bound traffic. (Id. ¶ 53(b).)

Moreover, "[i]n contravention of Federal and state precedent," Lightship "levied terminating access charges on Verizon for calls that originated on Verizon's network and terminated on Lightship's via VNXX service provided by Lightship." (Id. ¶ 53(c).)

The Complaint refers to these allegedly improper billing practices, as well as the aforementioned failure to conform to Verizon's current LCA definitions, as the "Undisclosed Lightship Billing Practices." The Complaint alleges that "various of the Undisclosed Billing Practices" resulted, inter alia, in the improper inflation of Lightship's 2004 EBITDA, as reflected in the company's audited financial statements, by $2.4 million to $3.6 million, as ...


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