Miller v. Lazard, Ltd., 05 Civ. 5630(VM).

• Decision Date: 07 February 2007
• Docket Number: No. 05 Civ. 5630(VM).,05 Civ. 5630(VM).
• Parties: Arlette MILLER, Individually and on Behalf of All Others Similarly Situated, Plaintiffs, v. LAZARD, LTD., Bruce Wasserstein, Steven J. Golub, William M., Lewis, Michael J. Castellano and Goldman Sachs & Co., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

473 F.Supp.2d 571

Arlette MILLER, Individually and on Behalf of All Others Similarly Situated, Plaintiffs, v. LAZARD, LTD., Bruce Wasserstein, Steven J. Golub, William M., Lewis, Michael J. Castellano and Goldman Sachs & Co., et al., Defendants.

No. 05 Civ. 5630(VM).

United States District Court, S.D. New York.

February 7, 2007.

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David Avi Rosenfeld, Lerach, Coughlin, Stoia, Geller, Rudman & Robbins, LLP(LIS), Melville, NY, Evan J. Smith, Brodsky & Smith, L.L.C., Mineola, NY, Samuel Kenneth Rosen, Wechsler Harwood LLP, Jeffrey Charles Zwerling, Zwerling, Schachter & Zwerling, New York, NY, for Plaintiffs.

Marc Wolinsky, Adir Gurion Waldman, Wachtell, Lipton, Rosen & Katz, Francis P. Barron, Cravath, Swaine & Moore LLP, New York, NY, Sarah Fern Meil, Attorney at Law, Stockton, NJ, for Defendants.

DECISION AND ORDER

MARRERO, District Court.

I. INTRODUCTION

Lead plaintiffs, Diana B. Lien, Charles F. Lin, and Edward Schonberg, brought this class action along with plaintiffs Lawrence 0. Viands and Nanette Katz (collectively, "Plaintiffs") alleging violations of §§ 11, 12(a)(2), and 15 the Securities Act of 1933, (the "Securities Act" or the "1933 Act"), 15 U.S.C. §§ 77 et seq.; § 10(b) of the Securities Exchange Act of 1934 (" § 10(b)"), 15 U.S.C. 78a et seq. (the "Exchange Act") and Securities and Exchange Commission ("SEC") Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. The complaint names as defendants Lazard Ltd. ("Lazard" or the "Company"), Lazard Freres & Co. ("Lazard Freres") LLC, Bruce Wasserstein ("Wasserstein"), Steven J. Golub ("Golub"), Michael J. Castellano ("Castellano"), and Scott D. Hoffman ("Hoffman") (collectively, the "Lazard Defendants"); and Goldman Sachs & Co. ("Goldman Sachs"); Citigroup Global Markets Inc. ("Citigroup"); Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch"); Morgan Stanley & Co., Inc. ("Morgan Stanley"); Credit Suisse First Boston LLC ("Credit Suisse"); and J.P. Morgan Securities Inc. ("J.P.Morgan") (collectively, the "Underwriter Defendants"). All defendants moved to dismiss the complaint under Federal Rules of Civil Procedure 12(b)(6) ("Rule 12(b)(6)"). and Rule 9(b) ("Rule 9(b)"). The motions assert, that the complaint fails to state a claim upon which relief may be granted and to plead fraud with sufficient particularity.

For the reasons stated therein, the Court grants both the Lazard Defendants' motion to dismiss and the Underwriter Defendants' motion to dismiss in their entirety.

II. BACKGROUND

In ruling on defendants' motion to dismiss pursuant to Rule 12(b)(6), the Court accepts the following facts, which are derived from the allegations contained in the Plaintiffs' Consolidated Amended Complaint, dated October 31, 2005 (the "Complaint") and the documents cited or relied upon for the facts pled therein. See Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir.2002).

A. THE PARTIES

1. Plaintiffs

Plaintiffs assert that they bring this action "on behalf of purchasers of the common stock of Lazard who purchased such shares pursuant and/or traceable to the Company's. Registration Statement and Prospectus ... declared effective on May 4, 2005, as amended ..., issued in connection with the initial public offering of the Lazard common stock (the "IPO"), together with those who purchased shares of Lazard common stock in the open market between May 4, 2005 and May 12, 2005, inclusive (the "Class Period")." (Compl.¶ 1.) (See also Registration Statement (the "Registration Statement") and Prospectus, dated May 5, 2005 (the "Prospectus"), attached as Ex. 1 of Affidavit of Marc Wolinksky in Support of Motion to Dismiss the Complaint, dated April 24, 2006 ("Wolinsky Aff.")).

2. Defendants

Lazard is a financial advisor and asset management firm incorporated under the laws of Bermuda and principally located in New York, New York. The Complaint alleges that, at all relevant times, the following defendants, identified collectively as the "Individual Defendants," held the offices indicated below at Lazard and signed the Registration Statement:

Wasserstein: Chairman of the Board of Directors, Chief Executive Officer, and Chairman of the Executive Committee of Lazard since 2002;

Golub: Vice Chairman, Managing Director, and Chairman of the Financial Advisory Group of the Company;

Castellano: Chief Financial Officer, Principal Accounting Officer, Vice President, and Managing Director;

Hoffman: General Counsel of Lazard since May 2005.

The Complaint alleges that each of the Individual Defendants "had access to . . . adverse undisclosed information about [Lazard's] business . . . via access to internal corporate documents, . . . conversations, and connections with other corporate officers and employees, attendance at management and Board of Directors meetings and committees thereof and via reports and other information." (Compl.¶ 33.)

Before the Class Period, Lazard was a single, privately-held firm. Prior to the IPO, descendants of the founding brothers owned approximately one-third of the Company. Lazard went public by way of private securities offerings (the "Offerings"), including the private offering of Equity Securities Units, a private offering of Lazard Group 7.125 percent Senior Notes, a private placement of securities with IXIS Corporate & Investment Bank, and the IPO.

Goldman Sachs is an investment banking and securities firm, incorporated in Delaware and principally located in New York, New York. Goldman Sachs acted as lead underwriter, sole book-running manager, and representatives of the underwriters for Lazard's IPO.

Citigroup, Lazard Freres, Merrill Lynch, Morgan Stanley, Credit Suisse, and J.P. Morgan, each of which provides various financial services, all acted as underwriters for Lazard's IPO.

B. FACTUAL ALLEGATIONS

Lazard, after substantial expansion since its founding in 1848 and following the merger of its independent "houses" of Lazard in January 2000, eventually focused exclusively on financial services; the independent "houses" became one firm, Lazard LLC. Michel David-Weill ("David-Weill"), a descendant of the founding families, having joined the firm in 1956, became a senior partner in 1977. By 2005, David-Weill was the sole remaining member of the original family who was also a member of the firm.

Wasserstein joined the top management of Lazard in early 2002. The firm restructured its ownership during the second half of 2004. By December of that year, Lazard LLC announced that it would buy out the interests of David-Weill and other descendants of the founding families. The Complaint alleges that the only way the buyout could be completed was by way of an initial public offering.

1. Financial Details of the IPO

Plaintiffs allege that Lazard's Offerings had to raise more than $1.8 billion in order to complete Lazard's reorganization and to buy out David-Weill and other historical partners of the firm. This amount comprised the following: $67 million and $83 million to recapitalize certain Lazard holdings; $56.7 million to repay certain notes; and $1.6 billion for David-Weill and the firm's historical partners. (See id. ¶ 152.)

Lazard's private securities offerings were expected to raise net proceeds of approximately $1.026 billion. This amount translated to a $775 million gap to be filled by the IPO. At $25 per share, Lazard expected gross proceeds of roughly 55 million. Lazard would net approximately $788 million from that sum and achieve the $1.8 billion target. (See id. ¶¶ 53-54.)

Goldman Sachs, as the lead underwriter, was responsible for negotiating an initial offering price for the securities with the issuer. After purchasing shares at a discounted rate from the issuer, the lead underwriter resells those shares at the public offering price; the underwriter's compensation is the difference between the amount the underwriter pays the issuer and the price at which the shares are publicly sold. In a firm commitment underwriting, the lead underwriter owns the securities and is obligated to pay the issuer regardless of whether it can actually resell those shares at the public offering price. The underwriters' discount in this case was $1.25 per share. Thus, Goldman Sachs committed to pay Lazard $23.75 per share regardless of the actual resale price of the shares during the offering. (See id. ¶¶ 55-56.)

2. Road Show for Institutional Investors

Generally, after an underwriter develops indications of interest prior to an initial public offering, the issuer's management begins a "road show" to market the shares by talking with large, often institutional, investors. The goal of such efforts is to convince investors to buy a significant stake in the company on the basis of the details and figures presented. A draft version of a prospectus is issued to assess interest level of the investors.

Plaintiffs allege that the recipients of the preliminary prospectuses indicated that they were willing to purchase an interest in Lazard at a price of approximately $21 or $22 per share, less than initial offering price of $25 per share eventually agreed upon by Wasserstein, Lazard, and Goldman Sachs. Although the stock traded up slightly at $25.10 on May 5, 2005, it fell to a low of 321.61 on May 12, 2005. (See id. ¶¶ 57-59, 71.)

C. SCIENTER ALLEGATIONS

The Complaint accuses both sets of defendants of false and misleading statements in connection with the Lazard IPO, as well as participation in a scheme to defraud. Plaintiffs contend that specific sections within the Prospectus misled potential investors because Defendants did not mention that indications of interest that Lazard obtained during the "road show" were lower than the $25 per share offering price. Plaintiffs also assert that the Prospectus does not mention that the share price determination was based on the price of the buyout, rather than the price the market would bear. Moreover, the Complaint asserts that...