Cornwell v. Credit Suisse Group, 08 Civ. 3758(VM).
| Decision Date | 11 February 2010 |
| Docket Number | No. 08 Civ. 3758(VM).,08 Civ. 3758(VM). |
| Citation | 689 F. Supp.2d 629 |
| Parties | Kevin CORNWELL et al., Plaintiffs, v. CREDIT SUISSE GROUP et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Bernard M. Gross, Deborah R. Gross, The Law Office of Bernard M. Gross, P.C., Philadelphia, PA, Darren J. Robbins, David C. Walton, Coughlin Stoia Geller Rudman & Robbins LLP, San Diego, CA, David Avi Rosenfeld, Samuel Howard Rudman, Robbins Geller Rudman & Dowd LLP, Melville, NY, Beth Ann Kaswan, Thomas Livezey Laughlin, IV, Scott + Scott, L.L.P., Jonathan Gardner, Labaton Sucharow, LLP, New York, NY, William H. Narwold, Motley Rice LLC, Hartford, CT, for Plaintiffs.
Richard W. Clary, Cravath, Swaine & Moore LLP, New York, NY, for Defendants.
DECISION AND ORDER
Lead plaintiffs Kevin Cornwell ("Cornwell"), John M. Grady ("Grady"), Erste-Sparinvest Kapitalanlagegesellchaft m.b.H. ("Erste"), and Irish Life and Permanent plc ("ILP") (collectively, "Lead Plaintiffs") filed a consolidated amended complaint in this action, dated October 20, 2008 (the "Amended Complaint"), naming as defendants Credit Suisse Global ("CSG"), Brady W. Dougan ("Dougan"), Renato Fassbind ("Fassbind"), D. Wilson Ervin ("Ervin"), and Paul Calello ("Calello") (collectively, "Defendants"). Lead Plaintiffs assert claims under § 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b) ("§ 10(b)"), Rule 10b-5 promulgated thereunder ("Rule 10b-5"), 17 C.F.R. § 240.10b-5, and § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a) ("§ 20(a)"). Lead Plaintiffs bring these claims on behalf of themselves and all other persons or entities, except for Defendants, who purchased CSG securities during the period February 15, 2007 through April 14, 2008 (the "Class Period").
By Order dated September 28, 2009, the Court dismissed the Amended Complaint for lack of subject matter jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(1). The Court set forth its reasons in a Decision and Amended Order dated October 5, 2009 ("the Decision").1 Lead Plaintiffs now seek leave from the Court to amend the complaint for a second time.
For the reasons discussed below, Lead Plaintiffs' motion is DENIED in part and GRANTED in part.
Given the extensive factual description in the Decision, the Court will assume the parties' familiarity with the facts of this case and will not reiterate the entire complicated underpinnings of this securities fraud class action.
As necessary to resolve the motion at hand, the essential facts are as follows: CSG is a Swiss-based investment bank invested in financial products whose worth is tied to the housing market in the United States. As is well—documented, that market began deteriorating in 2006, causing huge financial losses for CSG, as indicated by asset markdowns related to the financial results for the fourth quarter of 2007.
Lead Plaintiffs allege that a number of deficiencies in CSG's internal practices, including criminal activity of some of its traders, caused or exacerbated these losses. The fraud at the heart of this claim concerns statements that Defendants made about these matters and CSG's accounting practices in various financial statements, earnings calls, and filings and correspondence with the Securities and Exchange Commission ("SEC"), and in an interview.
As noted in the Decision, Lead Plaintiffs essentially identified five categories of fraud. They alleged misstatements and omissions regarding: (1) CSG's valuation system (including intentional misvaluation by a group of rogue employees in London); (2) its unauthorized placement of assets backed by high-risk loans in client accounts (including criminally prosecuted conduct of two traders in New York); (3) its risk management practices; (4) its subprime exposure (including exposure caused by inadequate hedging practices); (5) and its financial state constituting violations of generally accepted accounting principles ("GAAP"). In short, Lead Plaintiffs allege that Defendants repeatedly misrepresented the magnitude of the epic problems facing CSG.
With these facts established, the Court can now turn to the procedural intricacies of the Amended Complaint.
The Amended Complaint established different groups of aggrieved people as named plaintiffs: (1) Erste and ILP, who each resided outside of the United States and purchased shares of Swiss-based CSG on a foreign stock exchange, and (2) Cornwell and Grady, individuals of unknown residence who purchased CSG shares by buying American depository receipts ("ADRs") on the New York Stock Exchange.2
The Court found it lacked subject matter jurisdiction over securities claims brought by all of these named plaintiffs. The Court evaluated the allegations in the Amended Complaint under the "conduct" and "effects" tests. See Morrison, 547 F.3d at 170-72. The Court focused only on the "conduct" test for the first set of plaintiffs because Erste and ILP were foreign entities who purchased foreign stock on a foreign exchange. See In re SCOR Holding (Switzerland) AG Litiq., 537 F.Supp.2d 556, 562 (S.D.N.Y.2008). The Court found that the heart of this alleged fraud comprised statements made in Switzerland and that it lacked subject matter jurisdiction over claims by these foreign plaintiffs because sufficient fraudulent conduct had not occurred in the United States.
The Court also held that it lacked subject matter jurisdiction over the second set of plaintiffs. The Amended Complaint did not specify where Cornwell and Grady resided and the Court could not simply assume they were United States residents. This deficiency in the Amended Complaint left Cornwell and Grady indistinguishable from the explicitly foreign plaintiffs and the Court could not exercise subject matter jurisdiction over them. The Court went on to find that even assuming Cornwell and Grady were United States residents, the Amended Complaint did not allege adequate effects of the fraud in the United States because information about CSG stock ownership by United States residents was not specified in the Amended Complaint and Defendants represented that only 4.1% of CSG shares were owned by United States residents.
The Court then indicated it would grant Lead Plaintiffs leave to amend their complaint if their request demonstrated that repleading would not be futile. Lead Plaintiffs made such a request on November 9, 2009, through a proposed second amended complaint ("Proposed Complaint"). The Court now considers the sufficiency of the additions and changes found in the Proposed Complaint.
Courts "should freely give leave" to amend a complaint "when justice so requires," Fed.R.Civ.P. 15(a)(2), but McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 200 (2d Cir.2007) (citations omitted).
Upon review of the Proposed Complaint and the papers filed by each party, the Court finds that the filing of the Proposed Complaint would be futile as to the claims of foreign plaintiffs Erste and ILP because it relies upon the same allegations regarding the content and location of the alleged frauds that the Court has already rejected. As to these claims, Lead Plaintiffs have done little more than insert legal conclusions devoid of factual underpinning into the Proposed Complaint, and in those instances where new facts are alleged, the new allegations are legally irrelevant. For example, the Proposed Complaint adds a subsidiary of CSG, Credit Suisse Securities, as a defendant in an attempt to allege that fraudulent conduct was masterminded in New York. (See Proposed Complaint ¶ 46.) But the addition of this defendant does not allow the Court to exercise subject matter jurisdiction over the claims of foreign plaintiffs because that modification does not change the geographic source of the misstatements constituting the alleged fraud in this case.
The Proposed Complaint fails to allege sufficient fraudulent conduct based in the United States to allow this Court to exercise jurisdiction over the claims of foreign plaintiffs. The Court therefore finds that Lead Plaintiffs' request for leave to amend the claims of foreign plaintiffs Erste and ILP would be futile.
The Proposed Complaint contains two new key allegations that would allow the Court to exercise subject matter jurisdiction over claims by Cornwell and Grady: (1) these two plaintiffs are United States residents, , and (2) more than 75.7 million shares of Credit Suisse securities were held by United States institutional investors during the Class Period, representing approximately 11.4% of the outstanding shares of CSG. (See Proposed Complaint ¶¶ 31, 28.)
These allegations cure the defects the Court identified when dismissing the Amended Complaint. Since the Proposed Complaint alleges that Cornwell and Grady are United States residents, the Court finds that the allegations that United States investors hold more than 75 million shares of CSG stock satisfies the "effects" test. See Consolidated Gold Fields PLC v. Minorco, S.A., 871 F.2d 252, 262 (2d Cir.1989) ().3
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