Opinion
01 CIV. 2946 (DLC, 01 CIV. 7670 (DLC)
March 9, 2004
Stanley D. Bernstein, Esq., Bernstein Liebhard Lifshitz, LLP, New York, New York, for Plaintiff Marketing Systems International, Ltd., BWI
U. Seth Ottensoser, Esq., Bernstein Liebhard Lifshitz, LLP, New York, New York, for Plaintiff Marketing Systems International, Ltd., BWI
Gregory M. Egleston, Esq., Bernstein Liebhard Lifshitz, LLP, New York, New York, for Plaintiff Marketing Systems International, Ltd., BWI
Howard Zelbo, Esq., Cleary, Gottlieb, Steen Hamilton, New York, New York, for Defendants Star Cruises PLC and Arrasas Ltd.
OPINION AND ORDER
This Opinion grants a motion to dismiss a claim for unjust enrichment as barred by the Securities Litigation Uniform Standards Act of 1998, Pub.L. No. 105-353, 112 Stat. 3227 ("SLUSA"). Kingdom 5-KR-41, Ltd. ("Kingdom"), a Cayman Islands corporation, commenced an action on April 6, 2001, against Star Cruises PLC, a Bermuda corporation, and its wholly owned subsidiary, Arrasas Ltd. (collectively with Star, "Star"), as well as the Bank of New York ("BNY"), a New York corporation, for damages arising out of Star's acquisition of all of the outstanding shares of NCL Holding ASA ("NCL"), a Norwegian corporation. On August 16, 2001, Marketing Systems International, BWI ("MSI"), a Cayman Islands corporation, filed this class action complaint against Star and BNY for violations arising from the same set of facts as those pleaded by Kingdom. Its causes of action track those pleaded by Kingdom, and MSI's case was accepted as related to Kingdom's.
Arrasas was created by Star for the sole purpose of acquiring shares of NCL Holding ASA.
Kingdom's complaint also asserted claims against Tan Sri Lim Goh Tongas ("GT Lim"), a Malaysian citizen who beneficially owns more than half of the outstanding shares of Star. All claims against GT Lim were dismissed on March 20, 2002.
On November 8, 2001, the Honorable Alien Schwartz, to whom these cases were then assigned, ordered that MSI be appointed Lead Plaintiff.
Star now moves for a judgment on the pleadings dismissing MSI's sole claim against it, a claim for unjust enrichment, as preempted by SLUSA. For the reasons stated below, the motion is granted. Background
MSI's complaint also includes a breach of contract claim against the Bank of New York. This claim is not a subject of Star's motion and survives.
In its original complaint, Kingdom alleged violations of the federal securities laws and unjust enrichment against Star, and breach of contract against BNY. In a March 20, 2002 Opinion, Judge Schwartz dismissed all of Kingdom's claims except for its unjust enrichment claim against Star, and the breach of contract claim against BNY. Kingdom 5-KR-41, Ltd, v. Star Cruises PLC, No. 01 Civ. 2940 (AGS), 2002 WL 432390 (S.D.N.Y. Mar. 20, 2002) (the "March Opinion"). Kingdom's securities law claims, filed pursuant to Sections 14e and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(e), 78t(a), were dismissed based on Kingdom's (1) failure properly to plead that Star acted with the requisite scienter in making the alleged misrepresentations contained in Star's SEC filings in connection with its tender offer, and (2) failure to plead that it relied on statements made by Star after the tender offer period. Id. at *8-9.
The parties had stipulated that the March Opinion would apply with equal force to MSI's purported class action. The Court retained jurisdiction over the state law claim against BNY based on the diversity of the parties, and exercised supplemental jurisdiction over the remaining state law claim against Star.
The facts of this case are more comprehensively described in this Court's February 26, 2004 Opinion, which granted BNY's motion to dismiss Kingdom's amended claims for negligence and breach of fiduciary duty.Kingdom 5-KR-41, Ltd, v. Star Cruises PLC, No. 01 Civ. 2940 (DLC), 2004 WL 359138 (S.D.N.Y. Feb. 26, 2004). Familiarity with that Opinion is assumed. Only a brief recitation of the facts relevant to this motion will be included here.
On July 9, 1999, NCL and BNY entered into a Deposit Agreement that created American Depositary Shares ("ADSs") of NCL. MSI was a holder of NCL's ADSs. On January 13, 2000, Star commenced a tender offer to purchase all of the outstanding shares of NCL. In connection with the tender offer, Star filed a Schedule 14D-1 with the Securities and Exchange Commission ("SEC"). The offer was for 35 Norwegian Kroner ("NOK") per share and expired on February 10, 2000.
American Depositary Shares are shares of a foreign corporation that are deposited with an American financial institution and are considered United States securities. The issuance of ADSs is registered with the SEC. Essentially, ADSs allow American investors to trade foreign securities within the United States. The depositary institution issues American Depositary Receipts ("ADRs") to the beneficial owners of the ADSs, who are then free to sell the ADSs on American securities exchanges. ADSs and ADRs will be referred to collectively as "ADSs".
The Schedule 14D-1 stated that Star's intent was to acquire all of the outstanding shares of NCL. The Schedule 14D-1 stated that three Star affiliates intended to transfer their shares to Star, and, provided Star held more than 90% of the outstanding shares following the tender offer, it intended to effect a compulsory acquisition pursuant to Norwegian law "as promptly as practicable" after the tender offer period ended. The Schedule 14D-1 also indicated that Star expected to offer the remaining shareholders a price "equal to" the offer price, but cautioned in bold letters that such a price was not guaranteed. MSI declined to tender its ADSs during the tender offer period.
Under Norwegian securities law, once a shareholder, either alone or together with its subsidiaries, owns more than 90 percent of the outstanding shares of a company listed on the Norwegian Stock exchange, that shareholder has a right to acquire the remaining shares of the company for cash in a "compulsory acquisition." If a minority shareholder objects to the price offered in the compulsory acquisition, that shareholder may initiate a valuation proceeding, in which a Norwegian court will assess the fair market value of the company's shares as of the date of the compulsory acquisition.
At all times relevant to this action, NCL's ordinary shares were registered with and traded on the Oslo Stock Exchange; NCL's ADSs were traded on the New York Stock Exchange.
In a February 16, 2000 press release ("the Press Release"), Star confirmed that it had successfully acquired more than 90% of NCL's shares and intended to commence the compulsory acquisition of the remaining NCL shares. In a June press release, however, Star claimed that it could not commence the acquisition because 10.9% of NCL shares were still held by its three affiliates.
On November 29, Star acquired the necessary NCL shares from its affiliates, and commenced the compulsory acquisition on November 30. The share price offered in the compulsory acquisition was the then-market price of 13 NOK per share.
BNY, which was the Depositary for NCL's ADSs, received notice of the compulsory acquisition and the right to contest the offer price on or about November 30. Pursuant to the terms of the compulsory acquisition offer, shareholders had approximately two months to contest the 13 NOK compulsory offer price and initiate a valuation proceeding under Norwegian law. On December 4, 2000, approximately four days after the compulsory offer, BNY accepted the 13 NOK per share price on behalf of all of the ADSs in its possession.
In its class action complaint, MSI claims that Star was unjustly enriched by acquiring NCL securities in the compulsory acquisition for 13 NOK per share instead of the 35 NOK per share it paid in the tender offer. MSI's complaint alleges that Star's Schedule 14D-1 "contained material misrepresentations and omissions of material facts" regarding the timing of Star's acquisition of its affiliates' shares and the initiation of the compulsory acquisition that were made "with the intention that [MSI] and the Class would rely thereon." It further alleges that Star "had actual knowledge of the materially false and misleading statements and material omissions" set forth in the Schedule 14D-1 and Press Release "and intended to deceive or in the alternative acted with reckless disregard for the truth" when they made the misrepresentations. If Star "had not been misleading," such information would have been "material to [MSI's] decision as to whether to tender its ADSs during the tender offers, and would have tendered its shares to Star before the tender offers expired."
Discussion
SLUSA, enacted in 1998, was passed "in response to a demonstrably unavailing attempt by Congress, through the Private Securities Litigation Reform Act of 1995 (`PLSRA'), Pub.L. 104-67, 109 Stat. 737 (1995) (codified in part at 15 U.S.C. § 77z-1, 78u), to prevent strike suits, described as meritless class actions that allege fraud in the sale of securities." Spielman v. Merrill Lynch, Pierce, Fenner Smith, Inc., 332 F.3d 116, 122 (2d Cir. 2003) (citation omitted); In re WorldCom. Inc. Securities Litigation, No. 02 Civ. 3299 (DLC), 2004 WL 315143, at *3-4 (S.D.N.Y. Feb. 20, 2004) (describing background of SLUSA). SLUSA made federal courts "the exclusive venue for class actions alleging fraud in the sale of certain covered securities." Spielman, 332 F.3d at 123 (citation omitted); see 15 U.S.C. § 77p(b)-(c); 15 U.S.C. § 78bb(f)(1)(A) and (f)(2). To effectuate Congress' purpose in enacting SLUSA, Congress specifically directed courts to interpret SLUSA in an expansive fashion. See In re WorldCom, 2004 WL 315143, at *4.
SLUSA provides for complete preemption of those actions covered by its provisions. SLUSA's preemption provision provides, in pertinent part:
No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging . . . a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security. . . .15 U.S.C. § 78bb(f)(1)(A). SLUSA does not, however, "preclude all state enforcement or private causes of action in securities fraud cases." Spielman, 332 F.3d at 123. A claim will be barred by SLUSA if the defendant shows that the claim is: (1) a covered class action; (2) based on state law; (3) alleging an untrue statement or omission of material fact; (4) in connection with the purchase or sale of a covered security. In re WorldCom. Inc. ERISA Litigation, 263 F. Supp.2d 745, 769 (S.D.N.Y. 2003) (DLC).
Courts in this circuit have consistently rejected plaintiffs' attempts through artful pleading to avoid the clear precepts of SLUSA and its preemption of state law securities claims for damages. As the Second Circuit commanded in Spielman, the "district court must examine the complaint to determine whether the substantive requirements [of SLUSA] have been satisfied." Spielman, 332 F.3d at 124 (emphasis supplied). See Dacey v. Morgan Stanley Dean Witter Co., 263 F. Supp.2d 706, 710 (S.D.N.Y. 2003) (breach of contract claim preempted); Winne v. Equitable Life Assurance Society of U.S., No. 03 Civ. 1689 (GEL), 2003 WL 22434215, at *7-9 (S.D.N.Y. Oct. 27, 2003) (unjust enrichment claim, inter alia, preempted); In re WorldCom, Inc. ERISA Litigation, 263 F. Supp.2d at 770 (negligence claim preempted); Araujo v. John Hancock Life Ins. Co., 206 F. Supp.2d 377, 383 (E.D.N.Y. 2002) (breach of contract and unjust enrichment claims preempted).
MSI does not dispute that this is a covered class action, nor that their unjust enrichment claim is based on state law. MSI's arguments regarding the remaining two criteria for preemption are addressed below.
In its Complaint, MSI seeks to represent all persons other than Kingdom "who held NCL shares and ADSs of NCL and whose shares were acquired in the Compulsory Acquisition" by Star. MSI contends that common questions of law or fact predominate over any questions solely affecting individual members of the purported class.
MSI's federal securities law claims against Star were dismissed in the March Opinion. The sole remaining cause of action by MSI against Star is for unjust enrichment, which MSI itself characterizes as a claim "based on state law." Star argues that Norwegian law should govern the unjust enrichment claim, and that foreign law is "state law" for purposes of SLUSA. MSI does not dispute Star's assertion that Norwegian law should be considered state law under SLUSA.
Untrue Statement of Material Fact
In its complaint, MSI directly links its unjust enrichment claim with the alleged misrepresentations and omissions of material facts contained in Star's Schedule 14D-1 and the Press Release. According to MSI, Star's Schedule 14D-1 contained "materially misleading representations" regarding the timing of the Star affiliates' transfer of their NCL shares to Star, and the timing of and price to be offered at the compulsory acquisition. MSI alleges that Star's misrepresentations were made "with intent to deceive" the ADS holders, and that MSI and other purported class members suffered damages as a result of Star's misrepresentations.
MSI's complaint is premised on Star's purported misrepresentations in connection with its tender offer for the NCL shares. Even if MSI failed adequately to allege Star's scienter in making the misrepresentations, that failure does not prevent the claim from being preempted. Nothing in SLUSA's language suggests that it bars only state law claims that plead a certain level of scienter. In re WorldCom, Inc. ERISA Litigation, 263 F. Supp.2d at 769; Winne, 2003 WL 22434215, at *7-8.
MSI argues that its action is not preempted by SLUSA because it has not alleged any misrepresentations by BNY. In that connection, MSI devotes a considerable portion of its brief detailing its case against BNY, and showing that its allegations against BNY do not satisfy the SLUSA preemption test. Star, however, is only moving for judgment on the pleadings with respect to MSI's claims against itself. Whether or not MSI's claims against BNY are preempted by SLUSA is irrelevant to Star's motion to dismiss the unjust enrichment claim against it.
"In Connection With" a Security
SLUSA's preemption provision applies to claims alleging a misrepresentation "in connection with the purchase or sale of a covered security.'" 15 U.S.C. § 77p(b). Although SLUSA does not define that phrase, courts, including this Court, have looked for guidance to the law interpreting claims brought under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, where parallel statutory language is found. See, e.g., Riley v. Merrill Lynch, Pierce, Fenner Smith, Inc., 292 F.3d 1334, 1342-43 (11th Cir. 2002); In re WorldCom, 263 F. Supp.2d at 770-71; Spielman v. Merrill Lynch, Pierce, Fenner Smith, Inc., No. 01 Civ. 3013 (DLC), 2001 WL 1182927, at *2 (S.D.N.Y. Oct. 9, 2001); see also Spielman, 332 F.3d at 132 (Newman, J., concurring) (noting slight difference in statutory requirements) (collecting cases).
"Covered securities" include those listed on the New York Stock Exchange or on the National Market System Market System of the Nasdaq Stock Market. 15 U.S.C. § 77r(b)(1)(A). It is undisputed that NCL stock was a covered security.
Relief under Section 10(b) is limited to purchasers and sellers of securities. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 731-32 (1975); Lawrence v. Cohn, 325 F.3d 141, 147-48 (2d Cir. 2003). "The terms `buy' and `purchase' each include any contract to buy, purchase or otherwise acquire," and "[t]he terms `sale' and `sell' each include any contract to sell or otherwise dispose of." Blue Chip Stamps, 421 U.S. at 750 n. 3 (citing statutory definitions). A transaction will be considered sufficiently connected to the purchase or sale of stock if a plaintiff demonstrates "an injury as a result of deceptive practices `touching' its purchase or sale of securities."In re Ames Dep't Stores Inc. Stock Litig., 991 F.2d 953, 964 (2d Cir. 1993).
MSI alleges that Star's unjust enrichment occurred in connection with the purchase or sale of NCL stock. In its complaint, MSI seeks to represent all persons "who held NCL shares and ADSs of NCL and whose shares were acquired" in the compulsory acquisition. (Emphasis supplied.)
MSI argues in opposition to this motion that its unjust enrichment claim does not satisfy the "in connection with" requirement because MSI "was a holder of securities . . .and was not induced to purchase or sell securities as a result of the conduct of Defendants." (Emphasis in original.) This argument is unpersuasive. As alleged in its complaint, the gravamen of MSI's unjust enrichment claim is MSI's forced sale of its NCL shares at 13 NOK rather than 35 NOK, and Star's unjust enrichment in acquiring the stock at the reduced rate. This claim sufficiently "touches" the purchase or sale of a security as defined in Blue Chip Stamps to be preempted by SLUSA. See Madison Consultants v. Fed. Dep. Insur. Corp., 710 F.2d 57, 60-61 (2d Cir. 1983) ("forced seller" is a seller under Rule 10-b); Vine v. Beneficial Finance Co., 374 F.2d 627, 633-35 (2d Cir. 1967) (shareholders forced out in short-term merger are "sellers" under Rule 10-b).
Star has shown that MSI's unjust enrichment claim against it is preempted by SLUSA. MSI's action is a class action, asserting a state law claim for unjust enrichment, based on statements contained in Star's Schedule 14D-1 and the Press Release that are alleged to have misrepresented the "timing and price" of the compulsory acquisition, and that were made in connection with Star's acquisition of MSI's share.
Conclusion
For the reasons stated above, the motion by Star Cruises PLC and Arrasas Ltd. for judgment on the pleadings dismissing Marketing System's International Ltd., BWI's claim for unjust enrichment is granted.
SO ORDERED.