Opinion
03 Civ. 3496 (MBM).
December 14, 2004
STEVEN I. LOCKE, ESQ., Carabba Locke LLP, New York, NY, Attorney for plaintiffs.
RIDLEY M. WHITAKER, ESQ., New York, NY, Attorney for defendants James Collins-Taylor, Louis Bowen, ACL Nominees Ltd., and ACL Holdings Ltd.
PERETZ BRONSTEIN, ESQ., LAURA S. MELLO, ESQ., Bronstein, Gewirtz Grossman, LLC, New York, NY, Attorneys for defendant Maurice Vallat.
OPINION ORDER
Plaintiffs William S. Shanahan and Antares, LLC, sue Maurice Vallat, James Collins-Taylor, Louis Bowen and three corporations — ACL Nominees Ltd., ACL Holdings Limited, and ACL Asia Limited — alleging securities fraud in violation of section 12(2) of the Securities Act of 1933 (Securities Act), sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 (Exchange Act), Rule 10b-5 promulgated thereunder, and state common law. Defendant Vallat moves to dismiss the amended complaint pursuant to Fed.R.Civ.P. 9(b), 12(b)(2), and 12(b)(6). Defendants Collins-Taylor, Bowen, ACL Nominees Ltd., and ACL Holdings Limited move to dismiss the complaint under the above rules, and also under Fed.R.Civ.P. 12(b)(7) and the Private Securities Litigation Reform Act (PSLRA), or in the alternative, under the doctrines of international comity and forum non conveniens. For the reasons set forth below, the motions are denied, with the exception of defendants' motions to dismiss plaintiffs' claims under Section 12(2) of the Securities Act, and Vallat's and the ACL companies' motions to dismiss plaintiffs' claim under Section 20(a) of the Exchange Act, which are granted. Defendants' motion to dismiss plaintiffs' claim for punitive damages is also granted.
I.
The facts, as alleged in plaintiffs' amended complaint, are as follows. Plaintiff Shanahan and his company Antares, LLC, were fraudulently induced by defendants to invest funds in Phoenix Telecommunication Limited (Phoenix).
Plaintiff Shanahan formed Antares, LLC, as a vehicle for his investments in Phoenix Telecommunication Limited. Shanahan owned 99% of the company, and his wife Rose-Marie Fox owned the other 1%. (Am. Compl. ¶ 4).
Defendant ACL was a financial adviser to Phoenix. (Am. Compl. ¶ 6). ACL also served as Phoenix's corporate secretary through August 2000, acted as an escrow agent for Phoenix, and managed Phoenix's financial accounts and records from its incorporation through February 2000. (Id.) Defendant Collins-Taylor was a Director of Phoenix from its incorporation through May, 2001; Collins-Taylor is Executive Director of ACL, and had primary responsibility for ACL's work for Phoenix. (Id. ¶ 7) Defendant Bowen is founder and Managing Director of ACL, and was Collins-Taylor's supervisor at ACL. (Id. ¶ 8) Defendant Vallat was Chairman of Phoenix's Board of Directors in 1998 and 1999, and remained on Phoenix's Board until he was fired by the company in December, 2002. (Id. ¶ 5)
In the amended complaint, plaintiffs refer to ACL Nominees Ltd., ACL Holdings Limited, and ACL Asia Limited collectively as "ACL." Plaintiffs group the three companies together because they allege that defendants Bowen and Collins-Taylor, both directors of ACL, did not distinguish among the three ACL entities in their communications with plaintiffs, and because ACL's promotional materials do not distinguish among the companies. (Am. Compl. ¶ 6).
On or before March 23, 2000, plaintiffs allege, defendant ACL provided defendant Vallat with Phoenix's financial statements for the years 1998 and 1999. (Id. ¶ 18) These statements had been written by Collins-Taylor under Bowen's supervision and were given to Vallat by ACL with the knowledge that Vallat would pass them on to Shanahan, who would use them in deciding whether or not to invest in Phoenix. Bowen and Collins-Taylor advised Vallat that he was to review only the portion of the statements pertaining to his own salary and expenses, and to "rubber stamp" the rest. Vallat forwarded the statements "to New York with the knowledge that they would be provided to Shanahan there," and subsequently discussed with Shanahan his potential investments in Phoenix during a telephonic meeting of the Phoenix Board, in which Shanahan participated. (Id.) By October 25, 2000, on the basis of Phoenix's 1998 and 1999 financial statements, Shanahan had invested a total of $2.2 million in Phoenix in exchange for 22 million shares of the company. (Id. ¶¶ 21-26)
In November, 2000, Phoenix issued financial statements for the year 2000, which had been compiled by Vallat with the help of "an accountant he hired" and which were provided to Shanahan in December 2000 to help him decide whether to make any further investments in the company. (Id. ¶ 27) Between February 1, 2001, and September 19, 2001, Shanahan invested another $1,082,650 in Phoenix at $0.10 per share. (Id. ¶ 28) Plaintiff Antares, LLC, invested $1,756,256 in Phoenix between November 27, 2001 and October 7, 2002, at the same price. (Id. ¶ 29) Plaintiffs allege that they would not have made any of the above investments were it not for the 1998, 1999, and 2000 Phoenix financial statements that defendants provided. (Id. ¶ 30)
Beginning in September, 2002, plaintiffs began to learn about numerous financial improprieties at Phoenix. First, Shanahan learned that ACL had commingled Phoenix's funds in a general account, allowing ACL to lend Phoenix's funds to another company and otherwise mismanage the funds without Phoenix's knowledge or consent, and without disclosure to any of Phoenix's shareholders. (Id. ¶ 36) The same month, Shanahan learned that Collins-Taylor and Bowen had arranged for Phoenix to pay $25,000 to ACL that was owed by a third party — a debt which Phoenix itself had no obligation to pay. (Id. ¶ 39) Though Phoenix and Sino had a similar This payment to ACL was not disclosed in any of the statements provided to plaintiffs. (Id. ¶ 39) Also in September, 2002, Shanahan learned that Phoenix had been paying the entire salary of an ACL employee from October 1998 through September 1999, which was contrary to the percentage payment agreement for that employee that had been disclosed in the 1998 and 1999 Phoenix financial statements. (Id. ¶ 40)
In November, 2002, Shanahan learned that defendant Vallat accepted payment from Phoenix for past due salary, even though Shanahan had already paid Vallat the overdue amount from his own pocket. This so-called "double payment" was not disclosed in the financial statements provided to plaintiffs. (Id. ¶ 37) In December, 2002, Shanahan learned that Vallat had fraudulently issued 1.5 million shares of Phoenix stock to himself in December, 2001. (Id. ¶ 38) Around that time Shanahan learned also that in February, 2000, Vallat, Collins-Taylor, and Bowen had signed a contract to pay Vallat a salary of $9,000 a month from Phoenix. Vallat never disclosed this contract to the Phoenix Board of Directors, and instead obtained a higher salary from the company. (Id. ¶ 41)
Vallat was fired on December 19, 2002, and in January, 2003, sued Phoenix in Hong Kong for back wages he alleged he was owed from 1998 through 2002. (Id. ¶¶ 41, 43) Phoenix's purported underpayments to Vallat were never disclosed to the Phoenix Board or identified as liabilities in the financial statements forwarded by defendants to plaintiffs. (Id. ¶¶ 43-44) Collins-Taylor testified in the Hong Kong labor proceeding that Vallat had always been owed these wages despite their nondisclosure in the financial statements he had helped to compile. (Id. ¶ 48) Vallat was awarded more than $76,000 in back wages by the Hong Kong court — an amount that exceeded Phoenix's liquid assets. Vallat has since threatened to liquidate the company to collect the judgment. (Id. ¶ 50)
Because Phoenix's assets were depleted by the Vallat judgment, Phoenix has been unable to raise money to continue operating, and plaintiffs' more than $5 million investment has become "essentially worthless." (Id. ¶ 51) Plaintiffs allege that if defendants had disclosed Phoenix's liability to Vallat in any of the financial statements provided to them for the years 1998, 1999, and 2000, the company would have been able to plan for or pay the necessary expenses, and avoid the Hong Kong litigation and the subsequent downfall of the company. (Id. ¶¶ 50-51)
II.
This court must view the allegations in the amended complaint in the light most favorable to the nonmoving party, here the plaintiffs. Todd v. Exxon Corp., 275 F.3d 191, 197 (2d Cir. 2001). Dismissal is not warranted "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957).
In their amended complaint, plaintiffs accuse defendants of violating various federal securities laws, including section 12(2) of the Securities Act, sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder. They also allege common law fraud. Defendants respond with two motions alleging assorted bases for dismissal of the entire action, and of each of the various claims contained therein. With the exception of the claim under section 12(2) of the Securities Act and any claims alleged under section 20(a) of the Exchange Act against defendants Vallat and ACL, all of plaintiffs' claims survive. Plaintiffs have adequately pleaded a basis for personal jurisdiction over defendants; their claims are pleaded with the requisite specificity; brought in an acceptable forum; do not violate the principle of international comity; and satisfy the requirements to state a claim under the various statutes at issue, except for section 12(2) of the Securities Act. I have provided brief reasons for these determinations below.
A. Pleading Requirements Under Fed.R.Civ.P. 9(b) and PSLRA
Defendants Vallat, Collins-Taylor, Bowen, ACL Nominees Ltd., and ACL Holdings Limited have moved to dismiss plaintiffs' allegations of fraud for lack of particularity under Fed.R.Civ.P. 9(b). Defendants Bowen, Collins-Taylor, ACL Nominees Ltd. and ACL Holdings Limited also allege that plaintiffs' claims are not pleaded with sufficient particularity under the PSLRA, 15 U.S.C. § 78u-4(b)(1) (2000).
A complaint alleging securities fraud must satisfy Rule 9(b),Ganino v. Citizens Utils. Co., 228 F.3d 154, 168 (2d Cir. 2000), and that rule requires that "the circumstances constituting fraud . . . shall be stated with particularity." Fed.R.Civ.P. 9(b). To comply with Rule 9(b), plaintiffs must "`(1) specify the statements that . . . were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent."Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir. 2000) (quotingShields v. Citytrust Bancorp Inc., 25 F.3d 1124, 1128 (2d Cir. 1994)). Similarly, the PSLRA, which applies to securities fraud claims brought under the Exchange Act only, requires that the complaint "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 74u-4(b) (1); see also Rombach v.Chang, 355 F.3d 164, 170 (2d Cir. 2004). Our Circuit "do[es] not require the pleading of detailed evidentiary matter in securities litigation," In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 72 (2d Cir. 2001), and "malice, intent, knowledge, and other condition of mind of a person may be averred generally."Ganino, 228 F.3d at 168.
This Circuit requires also that plaintiffs must plead scienter in their fraud claims, and "allege facts to support a strong inference of `an intent to deceive, manipulate, or defraud.'" In re Vivendi Universal, S.A. Sec. Litig., No. 02-5571, 2003 U.S. Dist. LEXIS 19431, at *70 (S.D.N.Y. Nov. 3, 2003) (quoting Ernst Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12 (1976)). To prove such intent, plaintiffs must either (a) allege facts to show defendants had "both motive and opportunity to commit fraud," or (b) allege facts constituting "strong circumstantial evidence of conscious misbehavior or recklessness." Ganino, 228 F.3d at 168-69 (quoting Shields, 25 F.3d at 1128).
In addition, plaintiffs are relieved of some of the burden of pleading specific defendants' specific roles in the alleged fraud by virtue of the "group pleading doctrine," which allows plaintiffs "to rely on a presumption that statements in prospectuses, registration statements, annual reports, press releases, or other group-published information, are the collective work of those individuals with direct involvement in the everyday business of the company." In re Oxford Health Plans, Inc. Sec. Litig., 187 F.R.D. 133, 142 (S.D.N.Y. 1999) (internal quotation marks omitted); see also DiVittorio v.Eguidyne Extractive Indus., 822 F.2d 1242, 1247 (2d Cir. 1987);Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir. 1986); In re Philip Servs. Corp. Sec. Litig., No. 98-0835, 2004 U.S. Dist. LEXIS 9261, at *54-*55 (S.D.N.Y. May 19, 2004).
Plaintiffs have satisfied the requirements for particularity and scienter in their securities fraud claims under the above standards. The amended complaint sets forth the alleged fraudulent statements — the omission of some of Phoenix's financial liabilities in the 1998, 1999, and 2000 financial statements provided to plaintiffs. (Am. Compl. ¶¶ 18, 27, 36-37, 39-50) The complaint identifies the authors of those statements (Collins-Taylor, under the supervision of Bowen, and ACL generally for the 1998 and 1999 statements; and Vallat for the 2000 statement), and states when Vallat provided all three statements to Shanahan. (Id. ¶¶ 18, 27) The complaint, by alleging material omissions in the financial statements, but for which plaintiffs would not have invested, specifies why the statements are fraudulent. (Id. ¶ 30) The complaint also alleges sufficient scienter under either the motive and opportunity or the recklessness standard: Defendants were reckless in failing to disclose known financial liabilities to a potential investor that ultimately may have led to the company's insolvency; defendants had opportunity to omit liabilities from the statements by virtue of their collective control over ACL and Phoenix, and motive to do so in order to attract investors to a company in need of financing. Finally, the group pleading doctrine relieves plaintiffs from proving the exact details of Bowen's, Collins-Taylor's, and Vallat's involvement in the 1998, 1999, and 2000 statements, because all three individuals were allegedly involved in the everyday business of Phoenix. (Id. ¶¶ 5, 7, 8)
B. Transaction and Loss Causation
Defendant Vallat has moved to dismiss plaintiffs' claims under section 10(b) of the Exchange Act, and under Rule 10b-5 promulgated thereunder, alleging that the amended complaint fails to allege transaction or loss causation. Defendants Collins-Taylor, Bowen, ACL Nominees Ltd., and ACL Holdings Limited move to dismiss the above claims on the ground that no loss causation is alleged.
A plaintiff must be able to prove causation when alleging securities fraud, and:
[i]t is settled that causation under federal securities law is two-pronged: a plaintiff must allege both transaction causation, i.e., but for the fraudulent statement or omission, the plaintiff would not have entered into the transaction; and loss causation, i.e., that the subject of the fraudulent statement or omission was the cause of the actual loss suffered."Suez Eguity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 95 (2d Cir. 2001); see also id. at 96 ("Loss causation . . . has been likened to the tort concept of proximate cause, meaning that in order for the plaintiff to recover it must prove the damages it suffered were a foreseeable consequence of the misrepresentation.") Loss causation is a "foreseeability finding [that] turns on fairness, policy, and . . . `a rough sense of justice.'" AUSA Life Ins. Co. v. Ernst Young, 206 F.3d 202, 217 (2d Cir. 2000) (quoting Palsgraf v. Long Island R. Co., 248 N.Y. 339, 352 (1928)).
Transaction causation is alleged on the face of plaintiffs' amended complaint: Plaintiffs explicitly allege that but for the allegedly fraudulent financial statements provided by defendants, they would not have invested in Phoenix. (Am. Compl. ¶ 30) The court has no reason to doubt the truthfulness of this statement. Additionally, plaintiffs are entitled to a rebuttable presumption of reliance on the fraudulent statements. Cromer Fin. Ltd. v.Berger, No, 00-2284, 2003 U.S. Dist. LEXIS 10554, at *17 (S.D.N.Y. June 23, 2003).
Loss causation is also apparent from the amended complaint. Plaintiffs allege that defendants' omissions of Phoenix's financial liabilities in the statements defendants provided to them caused plaintiffs to invest, and to end up with an "essentially worthless" investment when one of those liabilities became embroiled in a costly lawsuit. (Am. Compl. ¶ 51) These allegations are sufficient to form a basis for loss causation under the above standard; both plaintiffs and defendants might have foreseen future losses for Phoenix if the unreported liabilities had come due, or indeed if any of the other omissions in the financial statements had caused harm to the company.
C. Control Liability Under Section 20(a) of the Exchange Act
All defendants move to dismiss plaintiffs' claim for securities fraud under section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), which establishes a cause of action for persons in control of fraudulent activity.
To make a prima facie case under section 20(a), plaintiffs must show: "(1) a primary violation by a controlled person; (2) control of the primary violator by the defendant; and (3) that the controlling person was in some meaningful sense a culpable participant in the primary violation." Boguslavsky v. Kaplan, 159 F.3d 715, 720 (2d Cir. 1998) (internal quotation marks omitted). The second element — control over a primary violator — may be established by showing that a defendant "`possessed the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.'" SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1473 (2d Cir. 1996) (quoting 17 C.F.R. § 240.12b-2). The third element of the control person liability test is subject to the heightened pleading standards of the PSLRA: The controlling person's role must be stated with particularity and give rise to an inference of scienter — that is, there must be a strong reason to believe that the controlling person either knew or should have known that the controlled person was committing fraud. See 15 U.S.C. § 78u-4(b)(2); Abbad v. Amman, No. 03-9169, 2004 U.S. App. LEXIS 21033, at *1-*3 (2d Cir. Oct. 8, 2004); Gabriel Capital, L.P. v. Natwest Fin., Inc., 122 F. Supp. 2d 407, 427 (S.D.N.Y. 2000).
Plaintiffs' amended complaint satisfies these requirements as to defendants Bowen and Collins-Taylor. Plaintiffs allege primary violations by Vallat and the ACL companies, such as the failure to disclose or point out various financial liabilities in the Phoenix statements provided to plaintiffs for 1998, 1999, and 2000. (Am. Compl. ¶¶ 36-50) The complaint also alleges that Bowen was in control of all other defendants by virtue of his position as founder and Managing Director of ACL, his participation in ACL's management of Phoenix's affairs, and his direction and supervision of Collins-Taylor and Vallat. (Am. Compl. ¶ 8) Bowen is alleged to have had control over the financial statements provided by ACL to Vallat and plaintiffs; given his level of involvement in ACL's management of Phoenix's affairs, Bowen knew or should have known about any fraudulent conduct that was occurring. Similarly, Collins-Taylor was in control of ACL's Phoenix operations, sat on the Phoenix Board of Directors, and allegedly had direct influence over Vallat's conduct and decisions on the Phoenix Board. (Am. Compl. ¶ 7) The amended complaint sufficiently pleads control liability as to both Bowen and Collins-Taylor. Plaintiffs do not appear to accuse ACL or Vallat of control liability under section 20(a), but to the extent that they do, those claims are dismissed, as the amended complaint does not allege that either ACL or Vallat had control over other persons conducting fraudulent activities.
D. Securities Fraud Under Section 12(2) of the Securities Act
Defendants allege that plaintiffs' claims under section 12(2) of the Securities Act, 15 U.S.C. § 77 l(2), should be dismissed because the transactions at issue involved the private sale of securities from Phoenix to Shanahan, and section 12(2) applies only to public sales and offerings; defendants also argue that plaintiffs' section 12(2) claim is not pleaded with sufficient particularity. The latter argument fails for the reasons stated in Part II.A of this opinion — plaintiffs' securities fraud claims are pleaded with sufficient particularity for the purposes of Fed.R.Civ.P. Rule 9(b), if Rule 9(b) even applies to section 12(2) claims. See In re Ultrafem Inc. Sec. Litig., 91 F. Supp. 2d 678, 690 (S.D.N.Y. 2000) (noting that the Second Circuit has not ruled on whether Rule 9(b) applies to section 12(2) claims).
Section 12(2) gives a buyer a claim against a seller who makes material misstatements or omissions "by means of a prospectus or oral communication." 15 U.S.C. § 77 l(2)). "[T]he phrase `oral communication' is restricted to oral communications that relate to a prospectus," and the definition of a prospectus under the Securities Act "is confined to documents related to public offerings by an issuer or its controlling shareholders."Gustafson v. Alloyd Co., 513 U.S. 561, 567-68, 569 (1995).
The breadth of the Supreme Court's holding in Gustafson has been disputed in this District. Several courts have held thatGustafson excludes "purchasers in private or secondary market offerings" from bringing claims under section 12(2). Saslaw v.Askari, No. 95-7641, 1997 WL 221208, at *6 (S.D.N.Y. Apr. 25, 1997); see also In re WRT Energy Sec. Litig., No. 96-3611, 1997 U.S. Dist. LEXIS 14009, at *16 (S.D.N.Y. Sept. 9, 1997),vacated and remanded on other grounds sub nom. Attard v.McGuire, 75 Fed. Appx. 839, 2003 U.S. App. LEXIS 21098 (2d Cir. 2003). Other courts have held that section 12(2) claims may be more broadly available where plaintiffs allege that a sale defendants define as private is actually public. Fisk v.Super Annuities, Inc., 927 F. Supp. 718, 730 (S.D.N.Y. 1996);cf. Vannest v. Sage, Rutty Co., 960 F. Supp. 651, 655 (W.D.N.Y. 1997) (giving controlling weight to the offerors' intention as to the public or private nature of the sale).
Whether an offering is public within the meaning of the Securities Act depends on "(1) the number of offerees; (2) the sophistication of the offerees, including their access to the type of information that would be contained in a registration statement; and (3) the manner of the offering." ESI Montgomery County, Inc. v. Montenay Int'l Corp., 899 F. Supp. 1061, 1065 (S.D.N.Y. 1995) (quoting United States v. Arutunoff, 1 F.3d 1112, 1118 (10th Cir. 1993)). In ESI, the Court held that if the plaintiffs had alleged a public offering, then it was "premature" for the Court to "assess the weight" of the above factors and decide whether the offering was public or private at the summary judgment stage. Id.
In their amended complaint, plaintiffs state that when plaintiff Shanahan requested the 1998 and 1999 financial statements from Phoenix, "by this point in time millions of shares of Phoenix's had been publicly offered to numerous investors all over the world." (Am. Compl. ¶ 16) On the face of the amended complaint, plaintiffs separate the Shanahan transaction in time from the public offering of Phoenix shares, and do not claim that his purchase was connected with the offering. Additionally, there is no allegation that Phoenix's provision of its 2000 financial statements to Shanahan was in any way connected with a public offering of Phoenix stock. Analysis of whether offering is the public or private is unnecessary, given that plaintiffs themselves do not allege a connection between Phoenix's public offering and the private sales of securities by Phoenix to Shanahan and Antares, LLC. Plaintiffs' section 12(2) claim is therefore invalid under the Supreme Court's holding that the meaning of the term "prospectus" for the purposes of the Securities Act "is confined to documents related to public offerings by an issuer or its controlling shareholders." Gustafson, 513 U.S. at 569.
Plaintiffs' motion to replead this claim under Fed.R.Civ.P. 15(a) is denied. Plaintiffs already have had one opportunity to amend their complaint and did not see fit to alter the allegations underlying their section 12(2) claim at that point. Plaintiffs' request to replead is framed in general terms and applies to all claims in the amended complaint; plaintiffs provide no specific justification for their request to replead the 12(2) claim. Moreover, in the absence of new evidence, there is no feasible way repleading could cure the defect in plaintiffs' 12(2) claim, because the alleged fraudulent statements were not part of a public offering. The section 12(2) claim is therefore dismissed with prejudice.
E. Common Law Fraud
Because plaintiffs have sufficiently pleaded at least one federal securities fraud claim, this court retains supplemental jurisdiction over plaintiffs' common law fraud claim. 23 U.S.C. § 1367.
F. Personal Jurisdiction
Personal jurisdiction under the federal securities laws is measured by the limits of the Fifth Amendment Due Process Clause.SEC v. Softpoint, Inc., No. 95-2951, 2001 U.S. Dist. LEXIS 286, at *6-*7 (S.D.N.Y. Jan. 17, 2001); see also SEC v.Unifund SAL, 910 F.2d 1028, 1033 (2d Cir. 1990). The due process test for personal jurisdiction analysis has two components: A "minimum contacts" inquiry and a "reasonableness" inquiry. Metro. Life Ins. Co. v. Robertson-Ceco Corp., 84 F.3d 560, 567 (2d Cir. 1996).
Defendants Bowen, Collins-Taylor, and ACL erroneously argue that there is no personal jurisdiction over defendants under New York State law, and ignore the application of federal securities laws to this analysis. "Where a case is brought pursuant to federal question jurisdiction and `a defendant resides outside the forum state, a federal court applies the forum state's personal jurisdiction rules `if the federal statute does not specifically provide for national service of process.'" Cromer Fin. Ltd. v. Berger, 137 F. Supp. 2d 452, 473 n. 17 (S.D.N.Y. 2001) (quoting PDK Labs, Inc. v. Friedlander, 103 F.3d 1105, 1108 (2d Cir. 1997)). The Securities Act and the Exchange Act, both implicated in this case, provide for worldwide service of process, making the New York state personal jurisdiction rules irrelevant to the analysis in this case. See 15 U.S.C. § 77v(a); 15 U.S.C. § 78aa.
When personal jurisdiction is assessed under a federal statute, minimum contacts are to be examined between defendants and the forum nation, rather than between defendants and the forum state.Cromer Fin. Ltd. v. Berger, 137 F. Supp. 2d 452, 473 (S.D.N.Y. 2001); Softpoint, 2001 U.S. Dist. LEXIS 286, at *9-*10; see also Chew v. Dietrich, 143 F.3d 24, 28 n. 4 (2d Cir. 1998). Minimum contacts analysis has a specific component, which encompasses whether "defendant has purposefully directed his activities at residents of the forum, and the litigation results from alleged injuries that arise out of or relate to those activities," Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472 (1985) (citation and internal quotation marks omitted), and a general component, which requires defendant to have "continuous and systematic general business contacts" with the forum. Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 416 (1984).
If minimum contacts are established, the court must assess the reasonableness of exercising personal jurisdiction over defendant. That inquiry is determined by weighing the following factors:
(1) the burden that the exercise of jurisdiction will impose on the defendant; (2) the interests of the forum state in adjudicating the case; (3) the plaintiff's interest in obtaining convenient and effective relief; (4) the interstate judicial system's interest in obtaining the most efficient resolution of the controversy; and (5) the shared interest of the states in furthering substantive social policies.Metro. Life. Ins., 84 F.3d at 568.
If personal jurisdiction is established under a federal statute, then pendent personal jurisdiction may be asserted over plaintiffs' state law claim if the state and federal claims "derive from a common nucleus of operative fact," and where the "federal statute authorizes nationwide service of process" even if personal jurisdiction over the state claim is not "otherwise available." IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1056 (2d Cir. 1993).
Following the above analysis, personal jurisdiction exists over all defendants in this case. The amended complaint alleges that Bowen and Vallat visited the United States several times to solicit investors for Phoenix, including one trip in November 1999 that included visits to Texas, Louisiana, and New York. (Am. Compl. ¶¶ 5, 8) All defendants provided Shanahan in New York with the financial statements that have led to this litigation (all defendants were involved in the 1998 and 1999 statements, and Vallat provided the 2000 statement), and all noncorporate defendants contacted Shanahan in New York by telephone, fax, and email while negotiating his investment in Phoenix. (Am. Compl. ¶¶ 15-16, 18)
These contacts are sufficient to establish specific personal jurisdiction: Defendants acted with intent to influence a resident of the United States, and this litigation arises out of defendants' acts. Defendants' frequent business contacts with United States residents through ACL and individually establish general personal jurisdiction. The reasonableness of exercising personal jurisdiction is also evident: Plaintiff Shanahan resides in the United States and works in New York, making this forum convenient for him; "The United States has a substantial interest in the enforcement of its securities laws," Cromer Fin., 137 F. Supp. 2d at 479; New York has a strong interest in a fraud which was perpetrated against one of its citizens; defendants reside in many different countries, "such that the choice of the Southern District of New York for litigation provides both a convenient forum [for plaintiff] and one with expertise in this kind of litigation." Id.
As alleged in the amended complaint, Shanahan has his place of business in New York (Am. Compl. ¶ 2); Antares, LLC is incorporated in Connecticut (Am. Compl. ¶ 4); Vallat is a French citizen now residing in France (Am. Compl. ¶ 5); ACL Nominees Ltd. is a Hong Kong corporation and maintains its principal place of business there (Am. Compl. ¶ 6); ACL Holdings Limited is a British Virgin Islands corporation which wholly owns ACL Asia Limited (Am. Compl. ¶ 6); Phoenix is incorporated in the British Virgin Islands and maintains its principal place of business in Rome (Am. Compl. ¶ 3); Collins-Taylor is a citizen of Great Britain with a business address in Hong Kong (Am. Compl. ¶ 7); and Bowen is a citizen of the United States with a business address in Hong Kong and residences in the United States and Hong Kong (Am. Compl. ¶ 8).
Finally, this court retains pendent personal jurisdiction over plaintiffs' state fraud claims against defendants, because worldwide service of process applies to the Securities Act and the Exchange Act, see 15 U.S.C. § 77v(a) and 15 U.S.C. § 78aa, and because the alleged state and federal claims stem from the same facts. Therefore personal jurisdiction in this district is proper as to all defendants in this case.
G. International Comity
Defendants ACL, Bowen, and Collins-Taylor have moved to dismiss on the ground of international comity, arguing that a proceeding for back pay instituted by defendant Vallat in the Hong Kong Labour Tribunal should bar any action by this court in this matter. (Def. Mem. at 38-40)
International comity is "the recognition which one nation allows within its territory to the legislative, executive, or judicial acts of another nation." Hilton v. Guyot, 159 U.S. 113, 164 (1895). Comity is a rule of "practice, convenience, and expediency," rather than one of law, Somportex, Ltd. v.Philadephia Chewing Gum, 453 F.2d 435, 440 (3d Cir. 1971), and "courts will not extend comity to foreign proceedings when doing so would be contrary to the policies or prejudicial to the interests of the United States." Pravin Banker Assocs. v.Banco Popular Del Peru, 109 F.3d 850, 854 (2d Cir. 1997).
The principle of international comity will permit a court to decline to hear a case only when there is a "true conflict" between the laws of the countries involved. Hartford Fire Ins. Co. v. California, 509 U.S. 764, 798-99 (1993). A true conflict exists between the laws of two countries "only if the laws of one `require conduct that violates [the laws of the other.]'" In re CINAR Corp. Sec. Litig., 186 F. Supp. 2d 279, 291 (E.D.N.Y. 2002) (quoting In re Maxwell Communication Corp., 93 F.3d 1036, 1050 (2d Cir. 1996)) (alteration in original). If a true conflict is found, the court must then apply a seven-factor balancing test to identify the strength of each country's interest in the matter and determine whether the case should be dismissed on comity grounds. In re CINAR, 186 F. Supp. 2d at 291; see also Filetech, S.A. v. Fr. Telecom S.A., 157 F.3d 922, 928-29 (2d Cir. 1998).
In this case, we need look no further than the "true conflict" requirement to determine that the principle of international comity does not require dismissal here. The Hong Kong Labour Tribunal's decision that Vallat was owed back wages by Phoenix has no bearing on this action, which concerns alleged securities fraud by Phoenix against plaintiffs Shanahan and Antares, LLC. The fact that the Hong Kong Tribunal did not award Vallat back pay for 1998 and 1999 does not affect whether or not the nondisclosure of those liabilities in the 1998 and 1999 financial statements constituted securities fraud under United States law, and no foreign law will be violated if this court considers the fact that those liabilities were unreported. That the Securities and Futures Commission in Hong Kong and the Commercial Crime Bureau of the Hong Kong Police have both declined to investigate whether or not Phoenix's actions constituted crimes in Hong Kong also has no bearing on and creates no conflict with the securities laws of this nation. No true conflict is present, and even if one were present, the court would retain this case because the United States has a strong interest in enforcing its own securities laws when one of its residents has alleged a violation thereof. Cromer Fin., 137 F. Supp. 2d at 479.
H. Forum Non Conveniens
Defendants ACL, Bowen, and Collins-Taylor have moved to dismiss the amended complaint also on the ground of forum non conveniens. The parties in this case are located all over the world, but defendants argue that Hong Kong is the most appropriate and convenient forum.
See supra note 4.
The doctrine of forum non conveniens permits a district court "in rare instances," Wiwa v. Royal Dutch Petroleum Co., 226 F.3d 88, 100 (2d Cir. 2000) to dismiss a case otherwise properly brought if moving the case elsewhere "will best serve the convenience of the parties and the ends of justice." Koster v.(American) Lumbermens Mut. Cas. Co., 330 U.S. 518, 527 (1947). In assessing a forum non conveniens motion, the court must engage in a two-step analysis: First, the court must determine if an adequate alternative forum exists, and if one does, the court nonetheless applies a presumption in favor of the plaintiff's choice of forum. Second, the court must weigh factors related to the public interest and the private interests of the parties to determine whether the presumption in favor of the plaintiff's forum is overcome. Iragorri v. Int'l Elevator Inc., 243 F.3d 678, 680 (2d Cir. 2001). "[U]nless the balance is strongly in favor of the defendant, the plaintiff's choice of forum should rarely be disturbed," Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 508 (1947), and the burden of proof to demonstrate inconvenience is on the defendant seeking dismissal. DiRenzo v.Philip Servs. Corp., 232 F.3d 49, 57 (2d Cir. 2000). A plaintiff's choice of forum is given even more weight if the plaintiff has chosen to litigate in the United States, his home forum, and defendants seek to litigate the case in a foreign jurisdiction. Id. at 62-63 ("Our result is not motivated by jingoism, but rather by the sensible consideration that the greater connections a plaintiff has to his chosen forum, the more likely is the inconvenience to him resulting from changing to a foreign forum.").
"An alternate forum will normally be adequate so long as the defendant is amenable to process there," DiRenzo, 232 F.3d at 57, and by that standard, Hong Kong is an adequate alternative forum because the federal securities laws at issue provide for worldwide service of process. Additionally, courts in this district have found Hong Kong to be an adequate alternative forum for litigation of commercial disputes, see, e.g., Yung v.Lee, No. 00-3965, 2002 U.S. Dist. LEXIS 16655, at *6 (S.D.N.Y. Sept. 5, 2002), and plaintiffs have not argued to the contrary.
Having found an adequate alternative forum, the court must apply the presumption in favor of plaintiffs' choice of forum, and then balance the public and private interest factors to decide whether dismissal is appropriate despite the presumption. In Gulf Oil Corp. v. Gilbert, the Supreme Court enumerated five "public interest" factors to assess in considering a forum non conveniens motion:
"the administrative difficulties flowing from court congestion; the `local interest in having localized controversies decided at home'; the interest in having the trial of a diversity case in a forum that is at home with the law that must govern the action; the avoidance of unnecessary problems in conflict of laws, or in the application of foreign law; and the unfairness of burdening citizens in an unrelated forum with jury duty."Piper Aircraft v. Reyno, 454 U.S. 235, 241 n. 6 (1981) (quoting and citing Gilbert, 330 U.S. at 508-09).
Administrative difficulties are not a factor in this case.See Cromer Fin. Ltd. v. Berger, 158 F. Supp. 2d 347, 355 (S.D.N.Y. 2001) ("While the docket of the Southern District is an active one, courts in this district have shown themselves more than able to address the issues that arise in complex actions in an expeditious and comprehensive manner.") Because plaintiffs allege fraud under United States law, committed at least partially in New York against plaintiffs based in New York and Connecticut, New York has a greater public interest in being host to the litigation than does Hong Kong, which is simply the residence and place of business of several (but not all) of the defendants.
The private interest factors elaborated by the Gilbert court also fail to tip the balance in defendants' favor. These factors include: "(1) ease of access to evidence; (2) the availability of compulsory process to compel the attendance of unwilling witnesses; (3) the cost of willing witnesses' attendance; . . . and all other factors that might make the trial quicker or less expensive." DiRenzo, 232 F.3d at 66 (citing Gilbert, 330 U.S. at 508). These factors weigh less clearly in favor of plaintiffs, simply because the parties and the evidence are spread all over the world — plaintiffs are in New York and Connecticut, several defendants are in Hong Kong, one is in France, and Phoenix and many of its documents are in Rome. See supra note 4. But wherever the case is adjudicated, at least some of the parties and witnesses will incur expenses and be inconvenienced by travel. Because neither the public nor the private Gilbert factors weigh in favor of defendants, the court must apply the presumption in favor of plaintiffs' choice of forum, and deny defendants' motion for dismissal on the ground of forum non conveniens.
III.
Defendants ACL, Bowen, and Collins-Taylor also move to dismiss plaintiffs' claim for punitive damages. Under New York law, punitive damages are not available in "the ordinary fraud and deceit case," but they may be available in fraud actions where the fraud "is gross and involves high moral culpability."Walker v. Sheldon, 10 N.Y.2d 401, 405, 223 N.Y.S.2d 488, 499 (1961). See also Lovely Peoples Fashion, Inc. v. Magna Fabrics, Inc., No. 95-8450, 1998 U.S. Dist. LEXIS 11197, at *27 (S.D.N.Y. July 22, 1998) (allowing punitive damages if plaintiffs could plead and prove that defendants engaged in `gross, wanton, or willful fraud or other morally culpable conduct.'") (quotingChina Trust Bank v. Standard Chartered Bank, PLC, 981 F. Supp. 282 (S.D.N.Y. 1997)). There is no need to prove that the fraud is aimed at the general public to recover punitive damages.See id.; Borkowski v. Borkowski, 39 N.Y.2d 982, 983, 387 N.Y.S.2d 233, 234 (1976); Blakeslee v. Rabinor, 182 A.D.2d 390, 392, 582 N.Y.S.2d 132, 134 (1st Dep't 1992).
Plaintiffs have sufficiently pleaded a case for fraud, but have not alleged facts that point to high moral culpability or to gross, wanton, or willful fraud. Defendants have not been convicted of any crime relating to this transaction, either in Hong Kong or in the United States. The dollar value of the information omitted from the Phoenix statements provided to plaintiffs, and defendants' other alleged omissions, appears to be little more than $200,000, while plaintiffs invested more than $5 million in Phoenix. Although these omissions did ultimately lead to a costly litigation and the near-liquidation of Phoenix, defendants do not appear to have acted with greater moral culpability than is involved in an "ordinary" fraud case. Therefore, defendants' motion to dismiss plaintiffs' claim for punitive damages is granted.
* * *
For the reasons set forth above, defendants' motions to dismiss are denied, with the exception of Vallat's and the ACL companies' motions to dismiss a claim under section 20(a) of the Exchange Act against them, and all defendants' motions to dismiss plaintiffs' claims under section 12(2) of the Securities Act, which are granted. Defendants' motion to dismiss plaintiffs' claim for punitive damages is granted.
SO ORDERED.