In re Global Crossing, Ltd. Securities Litigation
| Decision Date | 22 December 2003 |
| Docket Number | No. 02 Civ.910 GEL.,02 Civ.910 GEL. |
| Citation | 313 F.Supp.2d 189 |
| Parties | In re GLOBAL CROSSING, LTD. SECURITIES LITIGATION |
| Court | U.S. District Court — Southern District of New York |
Jay W. Eisenhofer, Sidney S. Liebesman, Michael, J. Barry, Lauren E. Wagner, and Marlon Q. Paz, Grant & Eisenhofer, P.A., Wilmington, DE, for Lead Plaintiffs Public Employees Retirement System of Ohio and State Teachers Retirement System of Ohio.
Howard W. Goldstein and Peter L. Simmons, Fried, Frank, Harris, Shriver & Jacobson, New York City, for defendants the" April 2000 Underwriters."1
George A. Schieren, Michael D. Torpey, Steven F. Gatti, and Ignatius A. Grande, Clifford Chance US, LLP, New York City, for defendants Merrill Lynch & Co., Inc. and Merrill Lynch, Pierce, Fenner & Smith, Inc.
Kenneth M. Kramer, Richard Schwed, and Amy L. Neuhardt, Shearman & Sterling LLP, New York City, for defendants Morgan Stanley and Morgan, Stanley & Co., Inc.
Thomas P. Ogden and Christopher L. Garcia, Davis, Polk & Wardwell, New York City, for defendants, Donaldson Lufkin & Jenrette, Inc. and Donaldson, Lufkin & Jenrette Securities Corp.
In this consolidation of numerous securities class action lawsuits arising from the allegedly "consistent[ ] and pervasive[]" misrepresentation of the "true financial condition" of Global Crossing, Ltd. (GC), between February 1, 1999 and January 28, 2002 (the "class period") (P. Mem.4), four groups of defendants, all banking institutions that underwrote GC securities or issued fair value opinions in connection with transactions involving those securities, have separately moved to dismiss the counts in which they are named on a variety of grounds. Because the four motions involve similar issues, the plaintiffs have opposed all four in a single Joint Memorandum, and the Court will decide them together. The motions will be granted in part and denied in part. Counts II and VII will be dismissed as time-barred, and the motions will be denied as to the other counts.
Global Crossing was founded in March 1997 for the purpose of building and selling the use of a worldwide fiber optic network for the transmission of internet and telecommunications data. It went public on August 13, 1998, and made several issues of securities throughout the class period. In September 1999, GC acquired Frontier Corporation by exchanging its own shares for Frontier shares. It similarly acquired IXnet, Inc., and its parent IPC Corporation, in early 2000.
A detailed recital of the tale of fraud and deception alleged in the 840-paragraph complaint2 is unnecessary here. Briefly told, the complaint alleges that various officers and directors of Global Crossing participated in the fraudulent misstatement of Global Crossing's assets, obligations, and cash revenues, particularly in the manner in which they accounted for certain transactions involving "indefeasible rights of use" ("IRUs").
An IRU is the "right to use a specified capacity, or bandwidth, over a designated communications cable owned by a telecommunications company for a set period of time." (Compl.¶ 117.) IRU transactions represented a large portion of the Company's revenues during the class period and therefore played a substantial role in determining the market value of its shares. Plaintiffs claim that GC, in order to meet performance expectations and thereby boost the value of its securities, reported as immediate cash revenue (1) income that should have been booked over the 25-year term of each IRU; and (2) income from unneeded reciprocal "swaps" with other carriers of such capacity, notwithstanding that, where cash actually changed hands, it was "round-tripped" in the return half of the swap, thereby yielding no actual revenue.
The former practice violated Financial Accounting Standards Board ("FASB") Statement No. 13, which restricts the circumstances under which a company may report as immediate revenue the total lease payments due under a multiyear lease agreement. When the FASB issued, in "FASB Interpretation No. 43" ("FIN 43"), a clarification of FASB 13 that clearly prevented GC from continuing to book the IRU payments as immediate cash income, GC announced that compliance with FIN 43 "would not have a material impact on the Company's financial position or results of operations." (Compl. ¶ 156 (quoting unattributed source).) But plaintiffs allege that compliance with FIN 43 would, in fact, have been devastating had GC not found a new source of illusory revenue: reciprocal swap transactions with other telecommunications companies. The practice of booking income from swaps as immediate cash revenue is alleged to have violated Accounting Principles Board Opinion No. 29 ("APB 29"), "Accounting for Nonmonetary Transactions." When these sources of income could not be reported immediately as cash revenue under Generally Accepted Accounting Principles ("GAAP"), GC claimed that its own measures of revenue, styled by GC as "pro forma disclosures," "Earnings Before Interest, Taxes, Depreciation, and Amortization" ("EBIDTA"), and "Adjusted EBIDTA," were better measures of its financial health than financial statements according to GAAP. GC's tactics succeeded, plaintiffs claim, in inflating the value of its stock, resulting in steep losses for shareholders when the house of cards collapsed and GC inevitably went bankrupt in early 2002.
Plaintiffs allege that the defendants here, as underwriters of various securities offerings and issuers of "fair value" opinions used to gain shareholder approval for GC's two corporate acquisitions, were at least negligent in not uncovering the illusory basis for GC's revenues and revenue projections, and are therefore liable to plaintiffs under section 11 of the Securities Act, 15 U.S.C. § 77k, and/or section 14 of the Exchange Act, 15 U.S.C. § 78n, for the misstatements they made or endorsed in connection with those offerings or opinions. Specifically, the "April 2000 Underwriters" underwrote secondary offerings of common stock (Count XII) and 6-3/4% preferred stock (Count XIII) on April 3, 2000, and are allegedly liable under Section 11; Merrill Lynch and Morgan Stanley ("the Frontier Defendants") issued fairness opinions which they consented to be used in connection with the Frontier merger Registration Statement and proxy materials, and are allegedly liable under both Section 11 (Count VII) and Section 14 (Count II); and Donaldson, Lufkin & Jenrette ("DLJ") issued fairness opinions which it consented to be used in connection with the IXnet/IPC merger Registration Statement and is allegedly liable under Section 11 (Count XIV).
On a motion to dismiss under Fed.R.Civ.P. 12(b)(6), the Court must accept "as true the facts alleged in the complaint," Jackson Nat'l Life Ins. Co. v. Merrill, Lynch & Co., 32 F.3d 697, 699-700 (2d Cir.1994), and may grant the motion only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Thomas v. City of New York, 143 F.3d 31, 36 (2d Cir.1998) (citations omitted); see also Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir.1996) (). When deciding a motion to dismiss pursuant to Rule 12(b)(6), the Court may consider documents attached to the complaint as exhibits or incorporated in it by reference. Brass v. American Film Techs., Inc., 987 F.2d 142, 150 (2d Cir.1993). The Court may also take judicial notice of matters of public record, including the contents of documents required to be filed with the SEC. Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d Cir.1991). All reasonable inferences are to be drawn in the plaintiff's favor, which often makes it "difficult to resolve [certain questions] as a matter of law." In re Independent Energy Holdings PLC, 154 F.Supp.2d 741, 747 (S.D.N.Y.2001).
Section 11 imposes civil liability on persons preparing materially misleading registration statements. To state a claim under section 11, an injured plaintiff must allege only that a defendant made or participated in making a "material misstatement or omission" in a registration statement for a security the plaintiff acquired; liability for such misstatements extends, among others, to underwriters of securities and to anyone who consented to be "named as having prepared or certified [a] report or valuation which is used in connection with the registration statement." 15 U.S.C. § 77k(4), (5). No intent to defraud need be alleged under section 11. Herman & MacLean v. Huddleston, 459 U.S. 375, 382, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983).
Under section 14, a plaintiff states a cause of action by, inter alia, alleging that a defendant "permit[ted] the use of his name" in a proxy solicitation that violated SEC regulations. 15 U.S.C. § 78n. Negligent misrepresentations may form the basis for a claim under section 14. Wilson v. Great American Industries, Inc., 855 F.2d 987, 995 (2d Cir.1988). The exceedingly detailed complaint makes the required allegations.
Claims under section 11 must be brought "within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence," and in any event no later than three years after the securities in question were offered to the public. 15 U.S.C. § 77m. The three-year limitation is absolute, and applies whether or not the investor could have discovered the violation. Jackson Nat'l Life, 32 F.3d at 704. The same one year/three year limitations period...
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