Steginsky v. Xcelera Inc.

• Citation: 741 F.3d 365
• Decision Date: 27 January 2014
• Docket Number: Nos. 13–1327–cv, 13–1892–cv.,s. 13–1327–cv, 13–1892–cv.
• Parties: Gloria STEGINSKY, Plaintiff–Appellant–Cross–Appellee, v. XCELERA INC., VBI Corporation, Alexander M. Vik, Gustav M. Vik, Defendants–Appellees–Cross–Appellants, Hans Eirik Olav, Ofc Ltd., Defendants–Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

741 F.3d 365

Gloria STEGINSKY, Plaintiff–Appellant–Cross–Appellee,

v.XCELERA INC., VBI Corporation, Alexander M. Vik, Gustav M. Vik, Defendants–Appellees–Cross–Appellants,Hans Eirik Olav, Ofc Ltd., Defendants–Appellees.

Nos. 13–1327–cv, 13–1892–cv.

United States Court of Appeals,Second Circuit.

Argued: Oct. 30, 2013.

Decided: Jan. 27, 2014.

Jeffrey S. Abraham (Philip T. Taylor, on the brief), Abraham, Fruchter & Twersky, LLP, New York, NY, for Plaintiff–Appellant–Cross–Appellee.

Peter J. Macdonald (David F. Olsky, Jacob Press, Wilmer Cutler Pickering Hale and Dorr LLP, and Charles W. Pieterse, Whitman Breed Abbott & Morgan LLC, on the brief), Wilmer Cutler Pickering Hale and Dorr LLP, New York, NY, for Defendants–Appellees–Cross–Appellants.

Before: WALKER, CABRANES, and PARKER, Circuit Judges.

JOHN M. WALKER, JR., Circuit Judge:

Plaintiff Gloria Steginsky, a former minority shareholder of Xcelera Inc., appeals the dismissal of her securities fraud claims by the United States District Court for the District of Connecticut (Stefan R. Underhill, District Judge ). Her complaint alleged that Xcelera insiders purchased Xcelera stock by making a tender offer through a shell corporation without disclosing any information about Xcelera's financial state. We hold that the duty of corporate insiders to either disclose material nonpublic information or abstain from trading is defined by federal common law and applies to unregistered securities, and that the district court thus erred in dismissing plaintiff's insider trading claims. We VACATE the dismissal of her insider trading claims under sections 10(b), 20(a), and 20A(a) of the Securities Exchange Act, and of her pendent nonfederal claims for breach of fiduciary duty. However, we AFFIRM the dismissal of her market manipulation claims, and of her insider trading claims under section 14(e) of the Securities Exchange Act.

BACKGROUND

Because the district court dismissed plaintiff's claims on the pleadings, we must accept the complaint's factual allegations as true for the purposes of this appeal. See ATSI Commc'ns Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir.2007). Plaintiff Gloria Steginsky was a minority shareholder of Xcelera who sold her 100,010 shares in 2011 pursuant to a tender offer for $0.25 per share. She alleges violations of securities law and breaches of fiduciary duty by six defendants. Defendant Xcelera is a Cayman Islands holding corporation, based in Connecticut, with operating subsidiaries and financial interests in the computer and software industries. At all relevant times, Xcelera has been controlled by the three “Vik defendants”: Alexander Vik is Chairman of the Board and Chief Executive Officer; Gustav Vik is Director, Executive Vice President, Secretary, and Treasurer; and VBI Corporation (owned by Alexander and Gustav's father, Erik Vik) is Xcelera's majority shareholder.¹ Defendant OFC Ltd. is incorporated in Malta and was created by the Vik defendants in 2010 as a vehicle to make a tender offer for Xcelera shares. Finally, defendant Hans Eirik Olav is an Xcelera Director who was listed as the OFC contact person with respect to the tender offer.

According to the complaint, Xcelera common stock traded on the American Stock Exchange for a high of $110/share in 2000 during the so-called dotcom bubble. In 2004, after the price plummeted to around $1/share, the Vik defendants began to refuse to make required filings with the Securities Exchange Commission (“SEC”). Because of this non-compliance, the American Stock Exchange delisted Xcelera stock in 2004, and the price then dropped to around $0.25/share. In 2006, the SEC revokedthe registration of all Xcelera securities. Since 2005, none of the defendants have disclosed any information concerning Xcelera's financial condition.

After the de-registration of Xcelera securities by the SEC, investors were told by the company that they could sell their stock back to Xcelera for $0.25/share. In December 2010, OFC made a tender offer for Xcelera stock, listing Olav as the contact person, at $0.25/share. The complaint alleges that OFC is only a shell company, and that the tender offer was in fact orchestrated by Xcelera and the Vik defendants, who have previously used Maltese companies to conceal their identities. No information about Xcelera's financial conditions was disclosed in connection with the tender offer. In April 2011, plaintiff sold her 100,010 shares of Xcelera common stock to OFC pursuant to the tender offer.

In February 2012, plaintiff filed the complaint in this case, alleging breach of fiduciary duty and violations of sections 10(b), 14(e), 20A(a), and 20(a) of the Securities Exchange Act through both market manipulation and insider trading. In June 2012, Xcelera and the Vik defendants moved to dismiss, and plaintiff sought a default judgment against OFC, who had failed to appear. ² The district court properly applied an identical standard in assessing the two motions and accepted all of the complaint's factual allegations as true. SeeFed.R.Civ.P. 12(b)(6); Trans World Airlines, Inc. v. Hughes, 449 F.2d 51, 69 (2d Cir.1971) (“[A] default judgment entered on well-pleaded allegations in a complaint establishes a defendant's liability.”), rev'd on other grounds,409 U.S. 363, 93 S.Ct. 647, 34 L.Ed.2d 577 (1973). The district court concluded, however, that plaintiff failed to state a claim as a matter of law, and therefore dismissed both her market manipulation and insider trading claims. It then concluded that it was “compelled” to dismiss the pendent fiduciary duty claims without prejudice to refiling in state court. Although the district court did not expressly address the §§ 20A(a) and 14(e) claims, it then denied plaintiff's motion for default judgment and granted defendants' motion to dismiss the complaint in its entirety. Steginsky v. Xcelera, Inc., No. 3:12–cv–188, 2013 WL 1087635 (D.Conn. Mar. 14, 2013). Plaintiff appeals the dismissal of her claims, and defendants cross-appeal the district court's decision to not exercise supplemental jurisdiction over the pendent claims.

DISCUSSION

We review de novo a district court's dismissal of a complaint under Rule 12(b)(6), accepting the complaint's factual allegations as true and drawing all reasonable inferences in the plaintiff's favor. ATSI, 493 F.3d at 98. A complaint alleging securities fraud must “state with particularity the circumstances constituting [the] fraud.” Fed.R.Civ.P. 9(b). Private securities fraud actions also must meet the heightened pleading requirements of the Private Securities Litigation Reform Act (“PSLRA”). When plaintiff alleges a false statement or omission, the complaint must specify “the reason or reasons why the statement is misleading” and must “state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u–4(b)(1). Additionally, when a cause of action requires proof of scienter, the complaint must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Id. § 78u–4(b)(2)(A).

Plaintiff raises three types of claims, which we address in turn: (1) securities fraud through market manipulation; (2) securities fraud through insider trading; and (3) breach of fiduciary duty.

I. Market Manipulation Claims

Plaintiff's theory of market manipulation is that defendants manipulated the price of Xcelera stock downward by refusing to make required SEC filings starting in 2004, causing Xcelera to be delisted by the American Stock Exchange in 2004 and then deregistered by the SEC in 2006. Defendants could then buy back Xcelera stock at artificially depressed prices. “Market manipulation requires a plaintiff to allege (1) manipulative acts; (2) damage (3) caused by reliance on an assumption of an efficient market free of manipulation; (4) scienter; (5) in connection with the purchase or sale of securities; (6) furthered by the defendant's use of the mails or any facility of a national securities exchange.” ATSI, 493 F.3d at 101. “Because a claim for market manipulation requires a showing of scienter, the PSLRA's heightened standards for pleading scienter also apply.” Id. at 102.

Plaintiff's counsel has previously asserted this theory while representing other minority shareholders in a different suit against Xcelera and the Vik defendants, which described the same refusal to make SEC filings. In a summary order in that case, we affirmed the district court's denial of leave to amend the complaint to add securities law claims, concluding that “[a]bsent any allegation of a ‘going private’ transaction, tender offer, or scheme to take advantage of depressed share prices, we cannot conclude that [the] urged inference of scienter is compelling.” Feiner Family Trust v. VBI Corp., 352 Fed.Appx. 461, 464 (2d Cir.2009). In this case, the inference of fraud is strengthened by new allegations regarding the 2010 tender offer that were absent from the earlier suit, although the scheme remains somewhat implausible due to the six-year gap between the alleged decision to depress the stock in 2004 and the effort to repurchase stock in 2010.

But we need not determine whether the market manipulation claims are adequately pled because it is plain that these claims are not timely filed. A securities fraud claim must be filed “not later than the earlier of—(1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation.” 28 U.S.C. § 1658 (emphasis added). Plaintiff argues that the complaint was filed within two years of the tender offer, which was a fact necessary to establish scienter, and she points to the Supreme Court's discussion of the onset of the two-year period in Merck & Co., Inc. v. Reynolds, 559 U.S. 633, 130 S.Ct. 1784, 176 L.Ed.2d 582 (2010). But in Merck, “no one doubt[ed] that [the complaint] was filed within five years of the alleged violation.” Id. at 638, 130 S.Ct. 1784. In this case,...