Quaak v. Dexia, S.A., Civil Action No. 03-11566-PBS.

• Decision Date: 08 August 2006
• Docket Number: Civil Action No. 03-11566-PBS.
• Citation: 445 F.Supp.2d 130
• Parties: Hans A. QUAAK, Atillio Po and Karl Leibinger, on behalf of themselves and those similarly situated, Plaintiffs, v. DEXIA, S.A. and Dexia Bank Belgium (formerly known as Artesia Banking Corp., S.A.), Defendants.
• Court: U.S. District Court — District of Massachusetts

445 F.Supp.2d 130

Hans A. QUAAK, Atillio Po and Karl Leibinger, on behalf of themselves and those similarly situated, Plaintiffs, v. DEXIA, S.A. and Dexia Bank Belgium (formerly known as Artesia Banking Corp., S.A.), Defendants.

Civil Action No. 03-11566-PBS.

United States District Court, D. Massachusetts.

August 8, 2006.

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Allison K. Jones, Jeffrey C. Block, Glen DeValerio, Nicole Robbins Starr, Patrick T. Egan, Berman DeValerio Pease Tabacco Burt & Pucillo, Boston, MA, James P. Bonner, Patrick L. Rocco, Shalov Stone & Bonner, New York, NY, for Plaintiffs.

David M. Lindsey, James W. Halter, Jeff E. Butler, Joel M. Cohen, Kara Morrow, Maryana A. Kodner, Thomas Teige Carroll, James B. Weidner, Clifford Chance U.S. LLP, New York, NY, Breton T. Leone-Quick, Peter M. Saparoff, Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, PC, Boston, MA, for Defendants.

MEMORANDUM AND ORDER

SARIS, United States District Judge.

I. INTRODUCTION

Class plaintiffs bring claims for securities fraud against Dexia Bank Belgium ("Dexia"), the successor to Artesia Banking Corp., S.A. ("Artesia Banking"), the former chief commercial banker for Lernout & Hauspie Speech Products N.V. ("L & H"). Defendant Dexia moves to dismiss Plaintiffs' Third Amended Complaint ("TAC") on grounds that the amendments to the complaint are time-barred and fail to state claims under the securities laws. After hearing and review of the briefs, the motion is DENIED.

II. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

A. Procedural Posture

This action is the latest episode in the long-running serial of the alleged fraud at Lernout & Hauspie Speech Products N.V. ("L & H").¹ This securities fraud class action, brought against the former chief commercial banker for L & H, was filed on August 19, 2003. Defendant moved to dismiss, and this Court denied that motion on February 9, 2005. See generally Quaak v. Dexia, S.A., 357 F.Supp.2d 330 (D.Mass. 2005). The legal issues involved, particularly the question of scheme liability under the securities laws, were, however, quite cutting edge, and this Court was persuaded to certify several questions to the First Circuit. (Docket No. 79.) The First Circuit accepted the interlocutory appeal and scheduled arguments for this spring.

After the parties briefed the appellate issues, but before the oral argument, Plaintiffs moved to file the Third Amended Complaint, which makes new factual allegations and alleges two new causes of action. After extensive briefing by both sides, the Court allowed the motion to amend, and Plaintiffs filed the TAC on March 14, 2006. Shortly thereafter, on March 29, 2006, the First Circuit vacated its order granting leave to appeal, leaving this Court to decide whether to recertify any or all of the questions to the First Circuit. (Docket No. 204.) Defendant now moves to dismiss the TAC and to recertify the questions previously accepted by the First Circuit for interlocutory appeal.

B. Taking a Different TAC

The Court fully detailed the factual background of the Second Amended Complaint ("SAC") in its Order denying Defendant's motion to dismiss. Quaak, 357 F.Supp.2d at 332-34. I assume familiarity with those facts. In brief, Plaintiffs allege that L & H could not have committed its wide ranging fraud without the intimate involvement of Defendant (formerly known as Artesia Banking) as architect of the fraudulent scheme.² Central to these allegations was the claim that Defendant made numerous fraudulent loans to L & H in an effort to bolster L & H's stock price, something Defendant had a powerful incentive to do because it would result in more business from L & H. (TAC ¶ 13.)

The TAC, however, adds significant factual allegations and two causes of action based on what the Plaintiffs term "recently-produced documents" (TAC ¶ 15). To begin, the TAC alleges that Artesia Banking directly benefitted from the increase in the price of L & H stock by selling hundreds of thousands of shares itself. Artesia Banking made over $10 million in profit from sales of L & H stock in sales from 1996 through September 26, 2000. (TAC ¶ 14.)

Additionally, beginning in March 1999, Artesia Banking exercised absolute control over the operations of a wholly-owned subsidiary called Artesia Securities.³ (TAC ¶¶ 15, 173-185.) The complaint alleges that Artesia Banking caused its agent Artesia Securities to issue glowing recommendations for L & H stock. (TAC ¶¶ 15, 149.) In other words, Artesia Banking caused Artesia Securities, in particular an analyst named Paul Verelst, to issue reports encouraging readers to buy L & H stock and to reprint false financial data. (TAC ¶¶ 151-172.) Artesia Securities had knowledge that its representations concerning L & H stock were false, and shared its parent's motivation to increase the stock price. (TAC ¶¶ 252-253.)

The fraudulent scheme perpetrated by L & H and, collectively, the Artesia Entities either inflated the value of L & H stock or artificially maintained its value given the sad reality of L & H's poor financial condition. (TAC ¶¶ 224, 226.) When the truth came out, the stock dropped precipitously and became worthless, causing damages to the class members. (TAC ¶ 228.)

Along with these new facts, the TAC asserts two new causes of action against Defendant. The SAC contained one claim (Count I) against Defendant for violating § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. The TAC adds a claim (Count II) for violation of § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), on grounds that Artesia Banking (now owned by Defendant) was a "controlling person" with respect to Artesia Securities, and that Artesia Securities issued materially false and misleading analyst reports concerning L & H in violation of § 10(b). (TAC ¶¶ 278-284.) The TAC also adds a third claim for insider trading (Count III) in violation of § 20A of the Exchange Act, 15 U.S.C. § 78t-1(a), on grounds that Artesia Banking sold millions of dollars worth of L & H stock while in possession of material nonpublic information. (TAC ¶¶ 285-295.)

Defendant moves to dismiss the new claims on a variety of grounds and argues for recertification of the questions previously accepted by the First Circuit on interlocutory appeal.

III. DISCUSSION

A. Standard of Review

For purposes of this motion, the Court takes as true "the well-pleaded facts as they appear in the complaint, extending [the] plaintiff every reasonable inference in his favor." Coyne v. City of Somerville, 972 F.2d 440, 442-43 (1st Cir.1992) (citing Correa-Martinez v. Arrillaga-Belendez, 903 F.2d 49, 51 (1st Cir.1990)). A complaint should not be dismissed under Fed. R.Civ.P. 12(b)(6) 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.'" Roeder v. Alpha Indus., Inc., 814 F.2d 22, 25 (1st Cir.1987) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)). Although the Private Securities Litigation Reform Act ("PSLRA") imposes a heightened pleading requirement upon the plaintiffs with respect to some of their allegations, the First Circuit has cautioned in this regard that "even under the PSLRA, the district court, on a motion to dismiss, must draw all reasonable inferences in the plaintiff's favor." Aldridge v. A.T. Cross Corp., 284 F.3d 72, 78 (1st Cir.2002).

B. Timeliness

Defendant moves to dismiss the new counts on the ground that they are timebarred. With respect to the claim arising from the allegedly fraudulent analyst reports, the Court has already determined that the lengthened statute of limitations for fraud in the Sarbanes-Oxley Act of 2002 applies to this litigation, 28 U.S.C. § 1658(a). Quaak, 357 F.Supp.2d at 336. As such, in this case, the statute of limitations will have run five years after the alleged fraud occurred. 28 U.S.C. § 1658(a)(2). Artesia Securities issued its last allegedly fraudulent analyst report concerning L & H on January 10, 2000, more than five years before the March 14, 2006 filing of the TAC. With respect to the new insider trading claim, a five-year statute of limitations also applies. 15 U.S.C. § 78t-1(b)(4). The last allegedly illegal sale of L & H stock by Artesia Banking occurred on September 26, 2000, also more than five years prior to the filing of the TAC. All parties agree, therefore, that the new allegations in the TAC are timebarred unless they "relate back" to the earlier complaint.

Federal Rule of Civil Procedure 15(c) governs whether new allegations in an amended complaint which would otherwise be time-barred may proceed on grounds that they relate back to an earlier timely pleading. In pertinent part, the rule states, "An amendment of a pleading relates back to the date of the original pleading when ... (2) the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth in the original pleading." Fed.R.Civ.P. 15(c). In applying this test, the critical inquiry is "`whether adequate notice of the matters raised in the amended pleading has been given to the opposing party within the statute of limitations' by the general fact situation alleged in the original pleading." Stevelman v. Alias Research, Inc., 174 F.3d 79, 87 (2d Cir.1999) (citation omitted); Lind v. Vanguard Offset Printers, Inc., 857 F.Supp. 1060, 1068 (S.D.N.Y.1994) ("The relation back doctrine is designed to ensure that an opposing party has been given adequate notice, for statute of limitations purposes, of the claim arising out of the transaction or occurrence which spawned the litigation.").

The rule is generally construed liberally so long as the defendant has not been prejudiced by the amendment. See In re Campbell Soup Co. Sec. Litig., 145 F.Supp.2d 574, 602 (D.N.J.2001); Pucci v. Litwin, 828 F.Supp. 1285, 1296 (N.D.Ill. 1993). See also 6 Charles Alan Wright, Arthur R. Miller & Mary Kay...