Quaak v. Dexia S.A., CIV.A.03-11566-PBS.

• Decision Date: 09 February 2005
• Docket Number: No. CIV.A.03-11566-PBS.,CIV.A.03-11566-PBS.
• Citation: 357 F.Supp.2d 330
• 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

357 F.Supp.2d 330

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.

No. CIV.A.03-11566-PBS.

United States District Court, D. Massachusetts.

February 9, 2005.

Jeffrey C. Block, Berman DeValerio Pease Tabacco Burt & Pucillo, Patrick T. Egan, Berman DeValerio Pease Tabacco Burt & Pucillo, Boston, MA, Michael T. Matraia, Law Office of Michael T. Matraia P.C., Worcester, MA, Nicole Robbins Starr, Berman DeValerio Pease Tobacco Burt & Pucillo, Boston, MA, for Plaintiffs.

Sara Beth Brody, Clifford Chance U.S. LLP, San Francisco, CA, Breton T. Leone-Quick, Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, PC, Boston, MA, Sean Miles Murphy, Clifford Chance U.S. LLP, New York City, Peter M. Saparoff, Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, PC, Boston, MA, James B. Weidner, Clifford Chance U.S. LLP, New York City, for Defendants.

MEMORANDUM AND ORDER

SARIS, 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"), the former chief commercial banker for Lernout & Hauspie Speech Products N.V. ("L & H").¹ Defendant has moved to dismiss, arguing that the claims are time-barred and that their allegations fail to support a claim for primary liability under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated by the Securities and Exchange Commission (SEC), 17 C.F.R. § 240.10b-5. After hearing, the motion to dismiss is DENIED.

II. FACTUAL BACKGROUND

The Second Amended Class Action Complaint alleges the following facts.²

In March of 1997, the Brussels Translation Group N.V. ("BTG") was established, purportedly to develop machine translation software. (¶ 81.) Artesia provided the initial financing to allow BTG to operate. Id. That same year, L & H purported to license software and provide engineering services to BTG in exchange for millions of dollars in fees and royalties. (¶¶ 82, 83.) Artesia loaned BTG $22.9 million. (¶ 81.) It loaned these funds to BTG so that BTG would use them to pay L & H, which would then pass the money off to investors as legitimate L & H licensing revenue. Id. From 1997 through 1999, L & H improperly recorded almost $35 million in revenues from the BTG transaction. (¶ 84.) At the end of the contract, in June 1999, L & H purchased BTG for $59 million. Id. The sole purpose of the BTG transaction was to inflate L & H's reported financial results. (¶ 85.)

Beginning in 1998, Artesia provided L & H and L & H's senior officers — Lernout, Hauspie, and Willaert ("Senior Officers") — with funding for the Language Development Companies ("LDCs") and Cross-Language Development Companies ("CLDCs") in order to expand L & H's generation of fictitious revenue. (¶ 97.) Artesia and L & H agreed that L & H would create a series of holding companies financed by Artesia. (Id.) These holding companies were used to finance multiple LDCs. (Id.)

One such holding company was Radial Belgium N.V. ("Radial"). (¶ 98.) On September 29, 1998, Artesia loaned Radial approximately $6 million, which Radial wired in three $2 million installments to three LDCs. (Id.) These LDCs used all $2 million to pay L & H licensing fees, which L & H booked as $6 million of revenue in the third quarter of 1998. (Id.)

Because Artesia knew that none of these LDCs had any bona fide offices or operations that would have enabled them to develop speech recognition products, and that the money would be used by the LDCs to pay licensing fees to L & H, it refused to lend any money to these LDCs unless the Senior Officers guaranteed these loans by means of credit default swaps. (¶¶ 98-99.) Artesia and the Senior Officers agreed to structure these guarantees in a manner designed to enable L & H fraudulently to conceal the guarantees from the SEC and the investing public. (¶ 99.) In a September 21, 1999 e-mail, P. Rabaey at Artesia wrote to G. Dauwe and other Artesia employees, "The private guarantees ... were not signed by Jo [Lernout], Pol [Hauspie] and Nico [Willaert] so as to avoid possible problems with the SEC. We have therefore no security and look for a solution via credit default swaps." (¶¶ 100, 103.)

Artesia knew that the credit default swaps were highly unusual for individuals on commercial loans and were used on the LDC/CLDC loans specifically to mislead L & H investors. (¶ 119.) An internal Artesia document notes that the reference to the credit default swaps had been deleted from one of the letters of credit issued in connection with the LDC loans and that the letter "was not signed by the borrowers (refused because of possible fiscal and auditing problems when filing the financial statements)." (¶ 120.)

On December 22, 1998, Artesia loaned Language Investment Company ("LIC") — an entity equivalent to Radial — $6 million for the establishment and funding of four more LDCs. (¶ 107.) Again, Artesia knew that the entities were shams and that the loans would be used to pay licensing fees to L & H, and were backed by credit default swaps entered into by the Senior Officers to avoid SEC disclosure problems. (¶¶ 108-109.)

L & H and Artesia continued to perpetuate this fraudulent scheme in 1999. (¶ 111.) On March 31, 1999, L & H set up the Language Development Fund ("LDF") and transferred $12 million to the bank accounts of seven LDCs. (Id.) In the second quarter of 1999, L & H requested that LDF receive a $20 million loan from Artesia. (¶ 113.) Artesia was aware that the $20 million sought by L & H was an integral part of the fraud being perpetrated at L & H. (Id.) B. Ferrand of Artesia wrote in an e-mail dated June 21, 1999:

In view of the fact that [L & H] books the sale of licenses as revenue, it is essential under GAAP rules that LDF be totally independent from [L & H]. Therefore, [L & H] cannot under any circumstances be a party involved in an agreement whose subject is the repayment of the requested financing. A credit default swap with Messrs. Lernout, Hauspie, and Willaert is however possible.

(Id.)

On June 25, 1999, Artesia granted a personal $20 million line of credit to the Senior Officers to take the place of an LDF loan in furtherance of the fraudulent scheme to inflate L & H's revenue and earnings. (¶ 114.) This time, Artesia demanded that the three individuals pledge 650,000 registered shares of L & H as collateral for the loan. (Id.) The vast majority of this $20 million was used to fund six new LDCs, and this money was ultimately booked as revenue on L & H's financial statements. (Id.) L & H did not reveal the source of the funds received by the LDCs in L & H's SEC Form 10-Q for the quarter ended June 30, 1999, or in its SEC Form 10-K for the year ended December 31, 1999. (Id.)

By mid to late 1999, Artesia became increasingly concerned that its loans would not be repaid. (¶ 115.) The loans to Radial and LIC were due on June 30, 1999, and the $20 million personal loan to the Senior Officers was due in October 1999. (Id.) Artesia nonetheless extended the loans to December 15, 1999 and subsequently engaged in multiple discussions with the Senior Officers to track their progress in attracting new investors whose funds would be used by L & H to repay Artesia. (Id.)

After Artesia had begun funding L & H's fraudulent LDC operations through Radial, it knowingly participated in another L & H improper revenue recognition scheme involving Vasco Data Security International ("Vasco"). (¶ 122.) In 1998 and 1999, Vasco entered into two purported licensing agreements for L & H software, for $800,000 and $900,000 respectively. (¶ 123.) In fact, Vasco had no use for the L & H software. (Id.) L & H loaned Vasco $3 million at about the same time. (Id.) L & H insisted that Vasco backdate the second licensing agreement, and recorded revenue for both agreements in 1998, despite the outstanding loan to Vasco. (¶ 126.)

L & H allowed Vasco to repay its $3 million dollar loan in the second quarter of 1999 through a private placement of Vasco stock organized by Artesia at the behest of Lernout and Hauspie. (¶ 124.) Top investors included various L & H related entities, including Mercator and LHIC, a company formed by Lernout and Hauspie. (Id.) On April 15, 1999, Artesia wired approximately $11.5 million, the proceeds of the private placement, to Vasco's account. (¶ 125.)

III. DISCUSSION

A. Sarbanes-Oxley

The principal issue in this motion to dismiss is whether plaintiffs' claims are timely. Prior to the passage of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"),³ Section 10(b) claims had to be "commenced within one year after the discovery of the facts constituting the violation and within three years after such violation." Bamberg, 236 F.Supp.2d at 84 (quoting Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 364, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991)).

Section 804 of Sarbanes-Oxley amends 28 U.S.C. § 1658 by lengthening the statute of limitations for private causes of action alleging fraud, providing:

(a) ... [A] private right of action that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws, as defined in section 3(a)(47) of the Securities Exchange Act of 1934... may be brought 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.

(b) EFFECTIVE DATE. — The limitations period provided by section 1658(b) of title 28, United State Code, as added by this section, shall apply to all proceedings addressed by this section that are commenced on or after the date of enactment of this Act.

(c) NO CREATION OF ACTIONS. — Nothing in this section shall create a new, private right of action.

Public Company Accounting Reform...