Opinion
02 Civ. 3288 (DLC), No. 03 Civ. 6225.
December 15, 2004
Catherine A. Torell, Cohen, Milstein Hausfeld Toll, P.L.L.C., New York, New York, for the Pacific Life Plaintiffs.
Stewart M. Weltman, Matthew K. Handley, Cohen, Milstein Hausfeld Toll, P.L.L.C., Washington, D.C., for the Pacific Life Plaintiffs.
Martin London, Richard A. Rosen, Brad S. Karp, Eric S. Goldstein, Walter Rieman, Joyce S. Huang, Paul Weiss Rifkind Wharton Garrison LLP, Robert McCaw, Peter K. Vigeland, Wilmer Cutler Pickering, New York, New York, for Defendants Citigroup Global Markets, Inc., f/k/a Salomon Smith Barney, Inc., Citigroup Inc., and Jack Grubman.
Jay B. Kasner, Susan L. Saltzstein, Steven J. Kolleeny, Skadden Arps Slate Meagher Flom LLP, New York, NY, for the Underwriter Defendants, J.P. Morgan Chase Co., Bank of America Corp., Deutsche Bank AG, and Lehman Brothers Holdings, Inc.
OPINION ORDER
On August 23, 2004, plaintiffs in Pacific Life Insurance Co. v. J.P. Morgan Chase Co., ("Pacific Life Plaintiffs and Action") filed an untimely amended complaint in violation of a consolidation order of May 28, 2003 in this multi-district litigation. Defendants in the Pacific Life Action have requested that the amended complaint be stricken. For the following reasons, their application is largely granted.
Background
The history of the civil litigation arising from the collapse of WorldCom, Inc. ("WorldCom") has been described in many prior Opinions. See, e.g., In re WorldCom, Inc. Sec. Litig., 315 F. Supp. 2d 527 (S.D.N.Y. 2004); In re WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d 431 (S.D.N.Y. 2003); In re WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d 431 (S.D.N.Y. 2004). Only those events pertinent to the instant motion are described here. Federal Jurisdiction
The WorldCom civil litigation has been assigned to this Court by the Judicial Panel on Multi-District Litigation ("MDL Panel"). In addition to numerous class actions, scores of individual actions ("Individual Actions") were filed in venues across the country raising claims against those employed by or associated with WorldCom. WorldCom itself entered bankruptcy on July 21, 2002, and the defendants in the actions filed in state court removed those actions on the ground, inter alia, that they were related to WorldCom's bankruptcy. Most of the actions filed in state court avoided claims under the Securities Exchange Act of 1934 ("Exchange Act") since such claims were removable on the ground of federal question jurisdiction. For the most part, the actions filed in state court pleaded claims under the Securities Act of 1933 ("Securities Act") and/or state law claims. The plaintiffs hoped to avoid removal to federal court since there was concurrent jurisdiction in federal and state courts over Securities Act claims. See In re WorldCom, Inc. Sec. Litig., 293 B.R. 308, 324-326 (S.D.N.Y. 2003), aff'd, California Pub. Employees' Ret. Sys. v. WorldCom, Inc., 368 F.3d 86, 97 (2d Cir. 2004). The Securities Act claims principally arose out of the sale of WorldCom debt securities, including two massive WorldCom bond offerings: its sale of $5 billion of Notes in May 2000 ("2000 Offering"), and its sale of $11.8 billion of Notes in May 2001 ("2001 Offering"). The latter was the largest public debt offering in the nation's history.
The class actions in the WorldCom securities litigation pending before this Court were consolidated in an Order of August 15, 2002. The class actions and Individual Actions raising securities claims were consolidated for pre-trial purposes through an Order of December 23, 2002. See In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2002 WL 31867720 (S.D.N.Y. Dec. 23, 2002). They are referred to collectively as the Securities Litigation.
On March 3, 2003, this Court denied the motion to remand filed by one of the Individual Actions, reasoning that actions filed in state court that pleaded solely Securities Act claims could nonetheless be removed to federal court as related to WorldCom's bankruptcy. See In re WorldCom, Inc. Sec. Litig., 293 B.R. at 328-30. This Opinion was the basis for the denial of numerous remand motions made by Individual Actions in the Securities Litigation. On May 11, 2004, the Court of Appeals for the Second Circuit affirmed the March 3, 2003 Opinion regarding the propriety of the removal of the Individual Actions as related to WorldCom's bankruptcy. With that ruling, it was clear that the Individual Actions would be returned for trial to the federal courts in the jurisdictions in which they were originally filed and would not be remanded to state court.
Opt Out Period
A class in the consolidated class action was certified under Rule 23(b)(3), Fed.R.Civ.P., on October 24, 2003. See In re WorldCom, Inc. Sec. Litig., 219 F.R.D. 267 (S.D.N.Y. 2003). The opt out period for the class was set to close on February 20, 2004. On December 16, 2003, this Court certified an interlocutory appeal from the denial of remand motions made in certain of the Individual Actions. In re WorldCom, Inc. Sec. Litig., 2003 WL 22953644. The Second Circuit accepted the appeal and issued an Order of February 3, 2004 ("February 3 Order") extending the opt out period for the class action to no earlier than thirty days after its mandate issued. In light of its May 11, 2004 Opinion affirming this Court's remand decision, the Court of Appeals vacated the February 3 Order on June 15. An Order of this Court dated July 16, 2004 extended the deadline for a class member to request exclusion from the class to September 1, 2004.
Consolidation Order of May 28, 2003
An Order of May 28, 2003 ("May 28 Order") gave every action in the Securities Litigation until the later of July 11, 2003, or twenty-one days following their arrival on this Court's docket to amend their pleadings. See In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2003 WL 21242882, at *2 (S.D.N.Y. May 29, 2002). "No further amendment of any complaint in an Individual Action will be permitted without permission of the Court." Id. The May 28 Order also provided that it shall apply to each such case that is subsequently filed in or transferred to this Court unless a party objecting to the consolidation of that case or to any other provision of the Order serves an application for relief from the Order, or from any of its provisions within ten days after the date on which defense counsel mails a copy of the Order to counsel for that party. Id. at *3. In addition, the May 28 Order stated that
the requirement that any defendant named and served in an Individual Action must move, answer or otherwise respond in that action is stayed. If circumstances necessitate action by any Individual Action plaintiff or defendant to protect interests unique to such Individual Action plaintiff or defendant, such plaintiff or defendant may seek relief from the stay by appropriate motion. All defenses of any defendant named and served in an Individual Action, including but not limited to defenses based on lack of personal jurisdiction or lack of subject matter jurisdiction, are hereby preserved.Id. at *2.
After the motions to dismiss the consolidated class action were largely resolved, see In re WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d 431, the defendants began bringing motions to dismiss claims in Individual Actions. The defendants have organized those motions by identifying issues that are common to many Individual Actions. The parties have followed a procedure established by a September 22, 2003 Order ("September 22 Order") in which the motion is addressed to one Individual Action, and other Individual Actions in which the same issue appears are also given an opportunity to be heard both during the initial briefing by filing an amicus brief and through an order to show cause procedure that follows the issuance of an opinion. In the latter process, they are given an opportunity to show why the ruling should not apply as well to their action. During the winter of 2003-2004, there were two phases of such motion practice in which a variety of issues were resolved. See In re WorldCom, Inc. Sec. Litig., 308 F. Supp 2d. 338 (S.D.N.Y. 2004); In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2004 WL 315143 (S.D.N.Y. Feb. 20, 2004); In re WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d 392; In re WorldCom, Inc. Sec. Litig., 308 F. Supp. 2d 214 (S.D.N.Y. 2004).
By letter of September 18, 2003, the defendants stated that the second phase of the proposed motions to dismiss would seek, among other things, to dismiss claims asserted in the Individual Actions on the grounds that "the holding company defendants are not liable under §§ 11 and 12(a) of the Securities Act." At a conference on September 22, 2003, the defendants reiterated their plan to dismiss claims asserted against the Holding Company Defendants in the Individual Actions. The Holding Company Defendants are Bank of America Corp., Deutsche Bank AG, J.P. Morgan Chase Co., Lehman Brothers Holdings Inc., and Citigroup, Inc. ("Citigroup"). The September 22 Order expressly stated the second phase of motions to dismiss were to address the Holding Company Defendants' liability under Sections 11 or 12(a) of the Securities Act. Pursuant to the September 22 Order, the Holding Company Defendants filed their phase II motions on October 27, 2003.
The phase II motions to dismiss also sought to dismiss claims in Individual Actions on the ground that their state law claims were preempted by the Securities Litigation Uniform Standards Act of 1998. This branch of the phase II motion practice was addressed by Opinions of February 20 and April 2, 2004. See In re WorldCom, Inc. Sec. Litig., 308 F. Supp. 2d 236 (S.D.N.Y. 2004); In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2004 WL 692746 (S.D.N.Y. Feb. 20, 2004). The Pacific Life Action was not implicated by this branch of the phase II motion practice.
The holding company defendant Goldman Sachs Group, Inc. ("Goldman Sachs") also joined the phase II motion to dismiss. Goldman Sachs, however, is not named in the Pacific Life Action, either in the original complaint or proposed amended pleading.
Opinions of March 12 and May 18, 2004
A March 12, 2004 Opinion and Order ("March 12 Opinion") addressed one branch of the second tranche of motions to dismiss — whether the parent companies of underwriters for the 2000 and 2001 Offerings could also be named as defendants in Securities Act claims. In re WorldCom, Inc. Sec. Litig., 308 F. Supp. 2d at 342-44. The March 12 Opinion found that there is no basis in the Securities Act or precedent for finding that a holding company of an underwriter is liable under Section 11 of the Securities Act merely because of its parental status and without allegations of participation in the underwriting. Id. at 344. While the March 12 Opinion addressed a motion to dismiss certain Section 11 claims in Individual Action No. 03 Civ. 0890 (DLC),Alameda County Employees' Retirement Ass'n v. Ebbers ("Alameda Action"), pursuant to the September 22 Order all other Individual Action plaintiffs were given the opportunity to submit an amicus brief. Neither the Pacific Life Plaintiffs nor any other plaintiff made such a submission. The Alameda Action had been filed by a law firm now known as Lerach Coughlin Stoia Geller Rudman Robbins ("Lerach Firm"), which requested an opportunity to file an amended pleading to allege liability against the Holding Company Defendants under a vicarious liability theory in the event the motion to dismiss their Section 11 claim was granted. The March 12 Opinion granted the Alameda plaintiffs as well as plaintiffs in other Individual Actions filed by the Lerach Firm leave to amend to afford these plaintiffs one final opportunity to bring claims against the Holding Company Defendants.In re WorldCom, Inc. Sec. Litig., 308 F. Supp. 2d at 345. A March 12 Scheduling Order required any such amendment be filed by March 26.
The Alameda plaintiffs subsequently filed an amended complaint asserting control person claims against the Holding Company Defendants pursuant to Section 15 of the Securities Act. These claims were dismissed in a May 18, 2004 Opinion ("May 18 Opinion"). In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2004 WL 1097786 (S.D.N.Y. May 18, 2004). The May 18 Opinion stated that the mere existence of a parent/subsidiary relationship is an insufficient basis from which to infer control for allegations of Section 15 liability. Id. at *3. As was the case with the March 12 Opinion, no other plaintiff in an Individual Action, including the Pacific Life Plaintiffs, took a position on the issues addressed by the May 18 Opinion.
In accordance with the September 22 Order and the March 12 and May 18 Opinions, on July 23 and 26, the Holding Company Defendants moved to dismiss the Securities Act claims asserted against them in five Individual Actions, Nos. 02 Civ. 8981 (DLC), 03 Civ. 338 (DLC); 04 Civ. 233 (DLC), 04 Civ. 3841 (DLC), and the Pacific Life Action.
The Alameda complaint which was the subject of the March 12 Opinion and the Pacific Life complaint are identical in all material respects for purposes of this motion with one important distinction. The Alameda complaint listed in its caption the names of the subsidiaries of the Holding Company Defendants who underwrote the 2000 and 2001 Offerings. As discussed further below, the Pacific Life Plaintiffs failed to so identify these parties, in addition to, among other things, failing to serve these entities or identify them in court filings. Both theAlemada and Pacific Life complaints claimed that each of the five Holding Company Defendants is liable under Section 11 "through" the acts of a subsidiary that underwrote WorldCom security offerings. For instance, the Alameda complaint alleged that:
Defendant Bank of America Corp., is a large integrated financial services institution that through its controlled subsidiaries (such as defendant Banc of America Securities LLC (collectively "Bank America")) provides commercial and investment banking services, commercial loans to corporate entities, and acts as underwriter in the sale of corporate securities. Bank America was an underwriter of the WorldCom Bonds sold in 5/00 and 5/01.
(Emphasis supplied.) The Pacific Life complaint alleges:
Defendant Bank of America Corp. is an integrated financial services institution that through its controlled subsidiaries and divisions (such as defendant Bank of America Securities LLC (collectively "Bank of America")), provides commercial and investment banking services and commercial loans to corporate entities, and acts as underwriter in sales of corporate securities. Bank of America was an underwriter for the May 2000 Offering. . . . Bank of America also was joint lead manager of the May 2001 Offering.
(Emphasis supplied.)
In a Stipulation and Order endorsed by the Court on August 11 ("August 11 Stipulation"), plaintiffs in the Individual Actions named in the July 23 and 26 motions to dismiss, with the exception of Pacific Life, agreed to dismiss their Securities Act claims against the Holding Company Defendants with prejudice. The August 11 Stipulation stated that "[t]he Court's orders entered in [the March 12 and May 18 Opinions] shall be deemed to have been entered in each of these Plaintiffs' Actions . . . such that all Securities Act pending claims against the Defendants in each of these Plaintiffs' Actions shall be dismissed with prejudice."
In a separate Stipulation and Order dated August 3 ("August 3 Stipulation") and endorsed by the Court on August 12, the Pacific Life Plaintiffs agreed to the dismissal of their complaint pursuant to the March 12 and May 18 Opinions with leave to amendwith respect to claims against the Holding Company Defendants by August 24. The defendants represent that "[i]n order to avoid litigation, [the Pacific Life] plaintiffs agreed voluntarily to dismiss those claims against those defendants." The August 3 Stipulation states in full:
STIPULATION AND ORDER OF DISMISSAL WITH LEAVE TO AMEND
Plaintiffs Pacific Life Insurance Co. and Pacific Financial Products Corporation ("Pacific Life" or "Plaintiffs"), and Defendants J.P. Morgan Chase Co., Bank of America Corporation, Deutsche Bank AG, Lehman Brothers Holdings, Inc. ("Holding Company Defendants") and Defendant Citigroup Inc. (collectively "Defendants") parties to the above-captioned action (the "Parties") hereby stipulate and agree, through their undersigned counsel, that:
(1) Pursuant to this Court's Orders dated March 12, 2004 and/or May 19, 2004 and the above Defendants' motion to dismiss, Plaintiffs' complaint is hereby dismissed with leave to amend it with respect to claims against Defendants by August 24, 2004. If Plaintiffs do not file an amended complaint by August 24, 2004, Plaintiffs' complaint shall be dismissed with prejudice;
(2) The Defendants' participation in this Stipulation is subject to, and without waiver of, any defenses to Plaintiffs' Action not presented herein, including defenses founded on lack of jurisdiction over the person and improper venue; and
(3) Plaintiffs' participation in this Stipulation is subject to, and without waiver of, any rights they may have to appeal the March 12 or May 18 Opinions. Plaintiffs shall have the same appellate rights as they would have if the March 12 and May 18 Opinions had been entered in their individual action.
(Emphasis supplied.)
Meanwhile, with one exception, fact discovery in theSecurities Litigation closed on July 9, 2004, for all parties. The defendants in Individual Actions will be permitted to take discovery of the plaintiffs in Individual Actions on a schedule appropriate to each Individual Action's schedule. The summary judgment motions in the consolidated class action are fully submitted and the trial in that action will begin on February 28, 2005.
Pacific Life Action
The Pacific Life Action was filed in California state court on April 25, 2003. It brought claims under Section 11 of the Securities Act, California Corporation Code § 25400, et. seq., and California Business and Professions Code § 17200, et. seq., as well as common law claims for fraud, aiding and abetting fraud, aiding and abetting breach of fiduciary duty, and negligent misrepresentation. As described in the complaint, the Pacific Life claims arise out of the 2000 and 2001 Offerings of WorldCom bonds and are brought against twelve Underwriter Defendants ("Twelve Underwriter Defendants"), the five Holding Company Defendants, and Jack B. Grubman ("Grubman"). As was true in most of the Individual Actions filed in the Securities Litigation, the Pacific Life Action did not include Exchange Act claims, which would have allowed the defendants to remove their action on the basis of federal question jurisdiction. See In re WorldCom, Inc. Sec. Litig., 293 B.R. at 315.
The Pacific Life complaint also alleges "holders" claims based on plaintiffs' purchases of WorldCom bonds issued in 1996, 1997, 1998 and 1999. Defendants will be submitting phase three motions to dismiss the "holders" claims in certain Individual Actions, including the Pacific Life Action.
The Twelve Underwriter Defendants are: Credit Suisse First Boston Corp., Goldman, Sachs Co., UBS Warburg LLC, Utendahl Capital, Tokyo-Mitsubishi International PLC, Westdeutsche Landesbank Girozentrale, BNP Paribas Securities Corp., Blaylock Partners L.P., Fleet Securities, Inc., ABN/AMNRO Inc., Caboto Holding Sim S.P.A., and Mizuho International PLC.
Grubman was the premier telecommunications sector analyst at Salomon Smith Barney, an affiliate of Citigroup. See In re WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d at 400.
On May 21, 2003 counsel for the Holding Company Defendants and the Twelve Underwriter Defendants filed a notice of removal of the Pacific Life Action. On May 28, the Pacific Life Plaintiffs, the Holding Company Defendants, and certain Underwriter Defendants entered into stipulation and order extending the defendants' time to respond to the complaint. As part of this stipulation, counsel for the defendants agreed to waive service of process on behalf of the Holding Company Defendants and several Underwriter Defendants. In a June 5 motion to remand or abstain, the Pacific Life Plaintiffs stated that their action was "against defendants who promoted the sale of bonds issued by WorldCom." The "defendants" were identified only as the Holding Company Defendants, the Twelve Underwriter Defendants, and Grubman. The Holding Company Defendants and the Twelve Underwriter Defendants opposed this motion on June 16. On June 30, the United States District Court for the Central District of California denied plaintiffs' remand motion, finding that the Pacific Life Action was properly removed on the ground that its claims were related to the WorldCom bankruptcy. On August 6, following a transfer by the MDL Panel, the Pacific Life Action arrived on the Court's docket.
According to the terms of the May 28 Order, any amended complaint in the Pacific Life Action needed to be filed by August 27, 2003. The Pacific Life Plaintiffs never sought relief from the requirements of the May 28 Order and did not file an amended complaint by August 27, 2003. Their sole application for relief from Securities Litigation pretrial orders was an untimely and groundless June 7, 2004 request to extend the July 9 close of fact discovery in the Securities Litigation. This request was denied on the record at a June 10 conference in which counsel for Pacific Life participated.
Pursuant to the August 3 Stipulation, the Pacific Life Plaintiffs filed an amended complaint on August 23, 2004. In a September 1 letter submission, the defendants objected to this filing as improper under Rules 15 and 16, Fed.R.Civ.P. In response to a request by the Pacific Life Plaintiffs, an Order of September 21 required full briefing on the validity of the amended complaint under both Rules 15 and 16. Plaintiffs' reply in support of their motion for leave to file an amended complaint was submitted on October 29.
The Pacific Life amended complaint names six new defendants, asserts new causes of action against existing defendants, and adds more than one hundred pages of new substantive factual allegations. The six new defendants — J.P. Morgan Securities, Inc., Chase Securities, Inc., Banc of America LLC, Lehman Brothers, Inc., Citigroup Global Markets Inc. f/k/a Salomon Smith Barney Inc. ("SSB"), and Deutsche Bank Securities, Inc. (f/k/a Deutsche Banc Alex.Brown, Inc.) (collectively "New Defendants") — were underwriters on the 2000 and 2001 Offerings and are affiliates of the Holding Company Defendants named in the Pacific Life complaint.
In their opposition to the motion for leave to amend, the Underwriter Defendants state that the amended complaint adds five new defendants; they do not include SSB as a new defendant. In its opposition, SSB also states that the amended complaint adds five new defendants; it does not include Deutsche Bank Securities, Inc.
On October 22, 2004, SSB moved to intervene for the limited purposes of opposing the Pacific Life Plaintiffs' motion for leave to file an amended complaint because the plaintiffs' amended complaint would add SSB as a defendant for the first time. This motion is unopposed. It is granted.
The New Defendants were named in virtually every pleading filed by plaintiffs in the Securities Litigation in 2002 and 2003 and they were listed as the underwriters in the Registration Statements accompanying the 2000 and 2001 Offerings. The claims against the New Defendants arise out of the 2000 and 2001 Offerings as well as a December 2000 private placement, and include violations of Sections 11 and 12 of the Securities Act, Section 10(b) of the Exchange Act, California Corporation Code § 25400, et. seq., and California Business and Professions Code § 17200, et. seq., as well as common law claims for fraud, aiding and abetting fraud, conspiracy to commit fraud, aiding and abetting breach of fiduciary duty, and negligent misrepresentation. These are the first Exchange Act claims filed in the entire Securities Litigation against underwriters other than SSB.
The Section 10(b) claim against SSB brought in the WorldCom class action is described in In re WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d at 404-406.
The amended complaint's new claims against the Twelve Underwriter Defendants are also for purported violations of Sections 10(b) and 12 of the Exchange Act as well as a common law conspiracy claim and claims arising from the December 2000 private placement. Again, these are the first Exchange Act claims filed in the Securities Litigation against any of these defendants. New claims against Grubman and SSB include conspiracy to commit common law fraud and violations of Section 10(b)(5) of the Exchange Act.
The amended complaint repleads the Section 11 claims against the Holding Company Defendants arising out of the 2000 and 2001 Offerings and asserts new direct liability claims against these defendants under Section 12 of the Securities Act and Section 10(b) (5) of the Exchange Act as well as a common law claim for conspiracy. The amended complaint also adds a claim against Holding Company Defendants J.P. Morgan Chase Co. and Citigroup for violating Section 20 of the Exchange Act based on the newly alleged predicate violations of Section 10(b) by New Defendants — J.P. Morgan Securities, Inc. and SSB. The Pacific Life Plaintiffs also add claims against the Holding Company Defendants based on the December 2000 private placement of WorldCom bonds. Their April 25, 2003 complaint contained no allegations as to this offering.
Many of the Individual Actions filed by the Lerach Firm had contained Securities Act claims based on the December 2000 private placement. Those claims were among the subjects of the first tranche of motions to dismiss and were dismissed. See In re WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d at 454-455. Pacific Life did not file an amicus brief with respect to that motion practice, or participate in any other way.
The Amended Complaint's Allegations That the Holding Company Defendants Underwrote the 2000 and 2001 Offerings
The following summarizes the amended complaint's allegations that the Holding Company Defendants actually participated in the 2000 and 2001 Offerings. These allegations were purportedly amended and augmented to establish that the Holding Company Defendants were the underwriters of these offerings and are therefore directly liable under Section 11 of the Securities Act.
The amended complaint states that Holding Company Defendant J.P. Morgan Chase Co. "on its own and through subsidiaries and divisions including Defendant J.P. Morgan Securities Inc.," acted as an underwriter in the sale of corporate securities. (Emphasis supplied.) The amended complaint alleges that J.P. Morgan Chase Co.'s own public filings and website illustrate that it held itself out to the public as an integrated entity. The amended complaint alleges that
The allegations that the J.P. Morgan Chase Co. and the other Holding Company Defendants held themselves out to the public as integrated financial companies are not materially dissimilar to those contained in the dismissed Alameda claims.
J.P. Morgan and not its securities subsidiary is listed on the front page as the joint book runner of the May 2001 bond offering prospectus. . . . J.P. Morgan Co. is also listed on the front page of the May 2000 Offering. The Offering Summary for the May 2001 offering lists J.P. Morgan and not its subsidiary as one of the Joint book-runners. It states, `On behalf of J.P. Morgan and SSB as joint book-runners, our joint lead managers, and co-managers, we are excited about the WorldCom credit story and this debt offering.' Similarly, it was J.P. Morgan and not its subsidiary who is listed on the `tombstone' ads for its WorldCom offerings.
The amended complaint alleges that Holding Company Defendant Citigroup "through its corporate control over its subsidiary, Salomon, Citigroup was able to control, and did control, all underwritings." Like the allegations against J.P. Morgan Chase Co., the amended complaint states that through its own filings and website Citigroup held itself out to the investing public as one integrated entity.
The amended complaint alleges that Holding Company Defendant Bank of America Corp. "is an integrated financial services institution that, through its controlled subsidiaries and divisions, . . . acts as underwriter in sales of corporate securities." The amended complaint alleges that in order to comply with the Gramm-Leach-Bliley Act of 1999 ("GLBA"), Bank of America Corp. as well as other Holding Company Defendants were:
Section 103 of the GLBA permits certain types of holding companies to engage in a statutorily provided list of financial activities including underwriting. Gramm-Leach-Bliley Act of 1999, Pub.L. No. 106-102, § 103, 113 Stat. 1338 (1999).
required to and did engage in a high degree of coordination with its securities subsidiaries, including maintaining proper capitalization, which in turn required that the financial holding company directly monitor and control the underwriting activities of its underwriting subsidiaries. In electing to become financial holding companies and the only reason for their becoming financial holding companies, J.P. Morgan Chase Co., Citigroup, Inc., and Bank of America Corp., thereafter became actively involved either directly or indirectly in investment banking and underwriting. As a result, in addition to the foregoing facts regarding these three holding companies publicly portraying themselves as the underwriters for the three offerings alleged herein, these holding companies, as a matter of law and fact, were directly and indirectly involved as underwriters of the offerings with which they were associated regardless of which of their related entities may have purchased and sold the underlying securities.
The amended complaint alleges that Holding Company Defendant Deutsche Bank AG
is an integrated financial services institution that through its controlled subsidiaries and divisions such as Defendant Deutsche Bank Securities Inc., [provides] investment banking services. . . . On its website, Deutsche Bank AG refers to its Investment Banking arm as a global corporate finance division and not a subsidiary.
(Emphasis supplied.) Similar to its contentions against the other Holding Company Defendants, the amended complaint adds further allegations that Deutsche Bank AG held itself out to the public as an integrated financial services company.
The amended complaint contends that Holding Company Defendant Lehman Brothers Holdings, Inc. "was an underwriter" for the 2000 Offering. It alleges that "the face page of the May 2000 offering states that `Lehman Brothers', without reference to any subsidiary, is acting as an underwriter to this offering." The amended complaint also documents how Lehman Brothers Holdings, Inc., through its website and public filings held itself out to the public as one entity.
Discussion
Motions for leave to amend are governed by one of two standards, Rule 15(a) or Rule 16(b), Fed.R.Civ.P. Rule 15(a) provides that once a responsive pleading has been served, a party may amend its pleadings "only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires." Rule 15(a), Fed.R.Civ.P. Under Rule 15(a) plaintiffs have no right to amend their pleadings a second time. Denny v. Barber, 576 F.2d 465, 471 (2d Cir. 1978). Leave to amend "may only be given when factors such as undue delay or undue prejudice to the opposing party are absent." SCS Communications, Inc. v. The Herrick Co., 360 F.3d 329, 345 (2d Cir. 2004) (emphasis in original). A court may also refuse to grant leave to amend under Rule 15(a) on grounds such as bad faith, or futility of amendment. Foman v. Davis, 371 U.S. 178, 182 (1962). "Where it appears that granting leave to amend is unlikely to be productive . . . it is not an abuse of discretion to deny leave to amend." Lucente v. Int'l Bus. Mach. Corp., 310 F.3d 243, 258 (2d Cir. 2002); see also Chill v. Gen. Elec. Co., 101 F.3d 263, 271-72 (2d Cir. 1996). "A proposed amendment to a pleading would be futile if it could not withstand a motion to dismiss pursuant to Rule 12(b)(6)." Oneida Indian Nation of New York v. City of Sherrill, New York, 337 F.3d 139, 168 (2d Cir. 2003).
The standard for amendment of pleadings have been previously addressed in the Securities Litigation. See In re WorldCom, Inc. Sec. Litig., 308 F. Supp. 2d at 345 (granting leave to amend one additional time); In re WorldCom, Inc. Sec. Litig., 308 F. Supp. 2d at 233-34 (denying leave to amend with one exception); In re WorldCom, Inc. Sec. Litig., 303 F. Supp. 2d 385, 390-91 (S.D.N.Y. 2004) (denying leave to amend); In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2003 WL 22831008, at *2-3 (S.D.N.Y. Dec. 1, 2003) (granting leave to amend). The standards recited here are largely taken from these opinions.
Rule 16 "is designed to offer a measure of certainty in pretrial proceedings, ensuring that at some point both the parties and the pleadings will be fixed." Parker, 204 F.3d at 340 (citation omitted). Disregarding the instructions of a scheduling order "would undermine the court's ability to control its docket, disrupt the agreed-upon course of the litigation, and reward the indolent and the cavalier. Rule 16 was drafted to prevent this situation." Id. (citation omitted). Rule 16 requires a different analysis than that undertaken in connection with Rule 15 and its "standards may not be short-circuited by an appeal to those of Rule 15." Id. (citation omitted). "If we considered only Rule 15(a) without regard to Rule 16(b), we would render scheduling orders meaningless and effectively would read Rule 16(b) and its good cause requirement out of the Federal Rules of Civil Procedure." Id. (citation omitted).
New Defendants, Twelve Underwriter Defendants, and Grubman
The Pacific Life Plaintiffs cannot and do not argue that Rule 16(b) does not govern the claims in the amended complaint against the six New Defendants as well as the new claims against the Twelve Underwriter Defendants and Grubman. The May 28 Order gave the plaintiffs until August 27, 2003 to file any amendments to their complaint. They failed do so, and are obligated to establish good cause before being permitted to file an amended complaint. The August 3 Stipulation does not alter this analysis.
The August 3 Stipulation permitted the Pacific Life Plaintiffs to amend their complaint only as against "Defendants," who were expressly defined in the stipulation as the five Holding Company Defendants. Therefore, the August 3 Stipulation did not authorize the Pacific Life Plaintiffs to add the New Defendants, who were not parties to the stipulation and were not defined as "Defendants" therein. The August 3 Stipulation also did not permit the Pacific Life Plaintiffs to add new claims against the Twelve Underwriter Defendants or Grubman.
The new Exchange Act Section 20 claim against two of the Holding Company Defendants is also affected by this analysis. Unless the Pacific Life Plaintiffs establish good cause, they cannot add Exchange Act Section 20 allegations against Holding Company Defendants Citigroup and J.P. Morgan Chase Co. because these claims depend on the pleading of Section 10(b)(5) claims against two of the New Defendants — SSB and J.P. Morgan Securities, Inc.
For several reasons, the Pacific Life Plaintiffs have failed to establish good cause for the new claims against the Twelve Underwriter Defendants and Grubman and the addition of the New Defendants. First, these plaintiffs made a tactical decision not to assert Exchange Act theories of liability against either Grubman or the Twelve Underwriter Defendants (or the Holding Company Defendants) because the inclusion of such claims would have eviscerated their remand motion and imposed upon them heightened pleading standards. See In re WorldCom, Inc. Sec. Litig., 294 F.Supp. 2d 431, 444 n. 17 (S.D.N.Y. 2003).
The Pacific Life Plaintiffs' lone argument in their initial memorandum of law with respect to their diligence in pursuing their Exchange Act claims, is that they are based on newly discovered evidence. This assertion was vigorously contested by the defendants in their opposition, and is not reasserted in plaintiffs' reply. Document production by the defendants in theSecurities Litigation was complete as of October 2003. Exchange Act claims had been filed against Grubman and SSB in other pleadings since the summer of 2002. To the extent any Exchange Act claim could be pleaded in good faith, evidence necessary for the proposed amendments was available to the Pacific Life Plaintiffs well before they filed the amended complaint. In fact, the Pacific Life Plaintiffs' original complaint includes a cause of action for common law fraud. It is abundantly clear that the omission of Exchange Act claims was a tactical decision.
Second, the Pacific Life plaintiffs have not shown good cause for their claims against the New Defendants. Plaintiffs' diligence and good cause arguments with respect to their failure to timely amend their pleading to include the New Defendants turn these concepts on their heads.
While the Pacific Life Plaintiffs' memorandum in support of motion for leave to amend concedes that their original complaint did not specifically identify the six additional parties as defendants, they argue that no amendment was required to add the six New Defendants. They contend that these defendants were already "parties to this litigation" because (1) of their status as wholly owned subsidiaries of previously named defendants; (2) three of newly named defendants — Bank of America Securities LLC, SSB, and J.P. Morgan Securities, Inc. — responded to their discovery requests without objection; and (3) the Holding Company Defendants failed to move with sufficient alacrity to apply the March 11 and May 18 Opinions to the Pacific Life Action. The Pacific Life Plaintiffs contend that the July 23 and 26 motions were the first time that they were put on notice that they failed to name the proper parties for their Section 11 claims.
These arguments are specious. There was no mistake here by the Pacific Life Plaintiffs. The New Defendants are listed by name in the Registration Statements as the underwriters of the 2000 and 2001 Offerings. The New Defendants were identified as defendants in the consolidated class action filed in 2002, as well as in countless Individual Actions filed in 2002 and in 2003 before the filing of the Pacific Life Action.
The Pacific Life Plaintiffs chose not to name the New Defendants as defendants in their lawsuit. They are not listed in the caption of the original complaint. The summons prepared for the original complaint does not name the New Defendants and plaintiffs never served or attempted to serve process on the New Defendants. See In re WorldCom, Inc. Sec. Litig., 2004 WL 540450, at *5 ("[i]t would be highly unusual for counsel to believe that an entity could be held liable when it was not named as a defendant and properly served in the action"). The New Defendants were not included in the parties' agreement for acceptance of service. None of the filings made on behalf of the Pacific Life Plaintiffs or the defendants in this action included the New Defendants. For instance, neither defendants' motion to remove or plaintiffs' motion to remand include the New Defendants. The May 29, 2003 stipulation and order extending defendants' time to answer the Pacific Life complaint did not include the New Defendants.
The first time the plaintiffs defined the "Underwriter Defendants" to include the New Defendants was in their February 25, 2004 request for the production of documents, ten months after filing this action. At that time, the New Defendants were named in approximately 75 other Individual Actions as well as the consolidated class action and were making documents available in all of them. The fact that certain of the New Defendants also responded to the discovery requests in this action does not excuse plaintiffs' two year delay in adding these defendants to their action.
The Pacific Life Plaintiffs argue that they had no notice that they should have named the New Defendants as underwriters of the 2000 and 2001 Offerings until the March 12 Opinion and defendants' July 23 and 26 motion. This argument attempts to rewrite history. In addition to the Registration Statements themselves, and the fact that so many other actions chose to sue the New Defendants, it has long been clear that the parents of the New Defendants — the Holding Company Defendants — believed that they could not be sued in connection with the 2000 and 2001 Offerings. Defendants' September 18, 2003 letter as well as the September 22 hearing and Order made clear the procedure and grounds for the Holding Company Defendants' phase II motion to dismiss. The defendants' October 27, 2003 phase II motion to dismiss informed every participant in the Securities Litigation that the Holding Company Defendants believed that they were not liable for Securities Act violations. The defendants' decision to wait a mere two months following the May 18 Opinion to move to dismiss the Pacific Life and other similar Individual Actions provides no comfort to plaintiffs. During that period, defendants were working intensively to complete fact discovery in the consolidated class action — 82 depositions were taken in June and July alone — as well as preparing expert reports.
Arguments similar to those put forth by the Pacific Life Plaintiffs have been rejected in prior Securities Litigation Opinions. In a January 20, 2004 Opinion, leave to amend claims was found to be "particularly inappropriate because the Plaintiffs have intentionally crafted their complaints to achieve their tactical goals." In re WorldCom, Inc. Sec. Litig., 308 F. Supp. 2d at 234. In a November 21, 2003 Opinion, as well as in the March 19 Opinion, claims against newly named defendants were found not to relate back to the date of the initial complaint because, like here, the new defendants were identified by name in the offering documents giving rise to the claims alleged in the initial complaint, the defendants had been named in other, earlier complaints asserting similar claims, plaintiffs were not required to name them to make their original complaint legally sufficient, and since plaintiffs knew of the proposed defendants and chose not to name them, they were assumed to have intentionally omitted the defendants. In re WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d at 449; In re WorldCom, Inc. Sec. Litig., 2004 WL 540450, at *5 ("because the decision not to name foreign affiliate defendants initially was tactical, claims do not relate back to the original pleading").
In sum, the Pacific Life Plaintiffs made tactical decisions with regard to their claims and the identity of defendants. Their motion to amend comes sixteen months after they filed their original complaint, fourteen months after their remand motion was denied, and nearly a year after the time they were permitted to amend their complaint. They cannot in good faith, and following extensive pretrial motion practice and the close of fact discovery, amend their action to overhaul their legal theories, and add novel claims and new defendants.
Rule 16(b): Holding Company Defendants
Rule 16(b) controls the addition of the claims against the Holding Company Defendants brought under Section 12 of the Securities Act, Sections 10(b)(5) and 20 of the Exchange Act, and the common law. Each of these is a new claim. Rule 15 governs the attempt to replead the Section 11 claim.
The August 3 Stipulation is properly read to permit the Pacific Life Plaintiffs to replead the Section 11 claim, and if they chose a Section 15 claim, against the Holding Company Defendants. The August 3 Stipulation states that any amendment must be accomplished pursuant to the Court's March 12 and May 18 Opinions. The stipulation therefore gave the Pacific Life Plaintiffs the same opportunity provided by the March 12 Opinion to the Alameda plaintiffs and the other Individual Actions filed by the Lerach Firm to replead their Section 11 claim or a vicarious liablity claim under Section 15.
The August 11 Stipulation entered in four other Individual Actions explicitly dismissed with prejudice the Sections 11 and 15 claims against the Holding Company defendants.
Plaintiffs do not present any specific argument to justify their pleading of these new claims against the Holding Company Defendants. Thus, for the reasons already stated, plaintiffs failed to meet their burden under Rule 16. Because of this ruling, there is no need to address the futility arguments presented by the defendants.
Rule 15: Holding Company Defendants
Leave to amend the Section 11 claim against the Holding Company Defendants must be denied under Rule 15 because the proposed amendment fails to state a valid claim. The pleading standard for a Section 11 claim has been described in prior Opinions in the Securities Litigation. In finding that the Alameda Action plaintiffs failed to allege that the Holding Company Defendants were Section 11 underwriters, the March 12 Opinion provided a statutory analysis of what constitutes an underwriter for Section 11 purposes. In re WorldCom, Inc. Sec. Litig., 308 F. Supp. 2d at 342-45. That discussion is incorporated in its entirety herein. As previously stated, mere status as a parent or holding company of an underwriter does not confer upon an entity status as a Section 11 underwriter; an entity has to participate in the underwriting. Id. at 344.
In their initial memorandum of law, the Pacific Life Plaintiffs argued that futility cannot be a basis for denying leave to amend because the August 3 Stipulation purportedly permits them to amend claims against the Holding Company Defendants. The Holding Company Defendants strenuously objected to this argument, and it is not reasserted in plaintiffs' reply memorandum of law. See Oneida Indian Nation of New York, 337 F.3d at 168 ("A proposed amendment to a pleading would be futile if it could not withstand a motion to dismiss pursuant to Rule 12 (b) (6)").
See, e.g., In re WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d at 406-408 (addressing motions to dismiss class action complaint).
The House Report and the Conference Committee Report that accompanied the Securities Act both stated that there must be actual participation in the underwriting at issue by a defendant underwriter. In re WorldCom, Inc. Sec. Litig., 308 F. Supp. 2d at 343. The Conference Committee Report states: "that a person merely furnishing an underwriter money to enable him to enter in to an underwriting agreement is not an underwriter. . . . The test is one of participation in the underwriting undertaking rather than that of a mere interest in it." Id. (citation omitted).
The contention that Citigroup, Deutsche Bank AG and Bank of America Corp. acted "through" controlled subsidiaries does not constitute an allegation that these defendants "participated" in the underwriting of the 2000 and 2001 Offering. Indeed, these allegations are indistinguishable from those found insufficient to state a claim in the March 12 Opinion. See In re WorldCom, Inc. Sec. Litig., 308 F. Supp. 2d at 342-45.
The Pacific Life Plaintiffs never allege directly that J.P. Morgan Chase Co. was an underwriter for either Offering. Instead, they rely on names used in the Registration Statements to bring J.P. Morgan Chase Co. into this action. They simply assert that its predecessor, J.P. Morgan Co., is "listed" on offering documents.
The Pacific Life Plaintiffs allege that on December 31, 2000, J.P. Morgan Co. merged with The Chase Manhattan Corporation and changed its name to J.P. Morgan Chase Co.
The 2000 Registration Statement lists J.P. Morgan Co. on the first page of the Prospectus Supplement as an underwriter, but lists J.P. Morgan Securities Inc. as the underwriter in the internal portion of the document which gives details regarding each underwriter's participation in the 2000 Offering. The Prospectus Supplement for the 2001 Offering lists J.P. Morgan as the joint lead manager of the underwriters on its first page, but identifies J.P. Morgan Securities Inc. and J.P. Morgan Securities Ltd. as the underwriters throughout the document, including in the section identifying each underwriter's participation in the 2001 Offering and their service as joint book running managers for the offering. Its correct legal name having been used in the 2000 Registration Statement, there is an adequate (even if indirect) allegation that J.P. Morgan Co., the alleged predecessor company to Holding Company Defendant J.P. Morgan Chase Co., served as an underwriter for that offering.
The first page of and the internal discussion in the Prospectus Supplement also list Chase Securities Inc. as an underwriter.
The same does not hold true for the 2001 Offering. That Registration Statement does not list J.P. Morgan Chase Co. as an underwriter. Its reference to J.P. Morgan on the first page is insufficient to allege liability when the rest of the document makes it entirely clear that the entities participating in the underwriting are the two subsidiaries.
A similar analysis supports the dismissal of the claim against Holding Company Defendant Lehman Brothers Holdings, Inc. The first page of the Prospectus Supplement for the 2000 Registration Statement lists Lehman Brothers as an underwriter and the internal portion of the document describing each of the underwriters in detail identifies Lehman Brothers Inc. as the underwriter. The Registration Statement makes it clear that the entity participating in the offering is Lehman Brothers Inc. and not the holding company, whose name does not appear in the document.
The amended complaint's allegations that the Holding Company Defendants hold themselves out to the public as integrated entities and do not distinguish between their functions and the functions of their underwriting subsidiaries on their websites and in their public filings are immaterial to proving that a Holding Company Defendant actually participated in the underwriting of the 2000 and 2001 Offerings. The amended complaint's discussion of the GLBA is similarly off point. The fact that the Holding Company Defendants are legally entitled to underwrite securities offerings is a far cry from allegations that they did underwrite these Offerings.
Conclusion
The motion by Citigroup Global Markets Inc. f/k/a Salomon Smith Barney Inc. to intervene is granted.
The Pacific Life Plaintiffs' motion for leave to file an amended complaint is denied with one exception. They are permitted to amend their complaint to add allegations against J.P. Morgan Chase Co. contained within paragraphs 35, 37, and 38 of their amended pleading sufficient to allege that it was an underwriter for the 2000 Offering. The amendment may not identify J.P. Morgan Securities, Inc. as a defendant.
The Holding Company Defendants' motion to dismiss the claims against them in original Pacific Life complaint is granted with one exception. The Section 11 claims against Bank of America Corp., Deutsche Bank AG, J.P. Morgan Chase Co., Lehman Brothers Holdings Inc., and Citigroup, Inc. are dismissed with prejudice, except for the Section 11 claim against J.P. Morgan Chase Co. for the 2000 Offering.
SO ORDERED.