Shepherd Investments Intern. v. Verizon Commun.

• Decision Date: 01 June 2005
• Docket Number: No. 03C0703.,03C0703.
• Citation: 373 F.Supp.2d 853
• Parties: SHEPHERD INVESTMENTS INTERNATIONAL, LTD., Plaintiff, v. VERIZON COMMUNICATIONS INC., Defendant.
• Court: U.S. District Court — Eastern District of Wisconsin

373 F.Supp.2d 853

SHEPHERD INVESTMENTS INTERNATIONAL, LTD., Plaintiff, v. VERIZON COMMUNICATIONS INC., Defendant.

No. 03C0703.

United States District Court, E.D. Wisconsin.

June 1, 2005.

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Cristina D. Hernandez-Malaby, Kevin M. Long, Michael H. Schaalman, Quarles & Brady LLP, Milwaukee, WI, for Plaintiff.

David J. Hase, Cook & Franke SC, Milwaukee, WI, Francis M. Holozubiec, Robert S. Cohen, Kirkland & Ellis LLP, New York, NY, Robert F. Johnson, Robin S. Jacobs, Cook & Franke SC, Milwaukee, WI, William H. Pratt, Kirkland & Ellis, Chicago, IL, for Defendant.

DECISION AND ORDER

ADELMAN, District Judge.

Plaintiff Shepherd Investments International, Ltd. ("Shepherd"), an arbitrager, brings this action alleging that defendant Verizon Communications Inc. ("Verizon Communications") falsely represented that it intended to go through with an agreement to merge with Northpoint Communications Group, Inc. ("Northpoint"), a provider of digital subscriber line ("DSL") services.¹ Plaintiff contends that defendant violated Wis. Stat. § 100.18 (unfair trade practices) and Wis. Stat. § 551.41 (securities fraud), breached a contract and committed the torts of intentional, negligent and strict liability misrepresentation. Before me now is defendant's motion to dismiss plaintiff's second amended complaint ("Compl.") for lack of personal jurisdiction and failure to state a claim on which relief may be granted.

I. SUBJECT MATTER JURISDICTION

In July 2003, the original plaintiff, Staro Asset Management LLC ("Staro"), brought this action against defendant. I had subject matter jurisdiction under 28 U.S.C. § 1332(a)(1) because the parties were diverse and the amount in controversy exceeded $75,000. All members of Staro were Wisconsin residents. See Cosgrove v. Bartolotta, 150 F.3d 729, 731 (7th Cir.1998) (stating that the citizenship of a limited liability corporation is deemed to be the citizenship of each of its members). Defendant is incorporated in Delaware and has its principal place of business in New York. See 28 U.S.C. § 1332(c)(1) (stating that corporations are citizens of both their state of incorporation and the state where their principal place of business is located).

However, Staro alleged that it brought the action on behalf of Stark Investments Limited Partnership ("Stark") and Shepherd. Fed.R.Civ.P. 17(a) requires that "[e]very action shall be prosecuted in the name of the real party in interest." Thus, in May 2004, pursuant to Fed.R.Civ.P. 17(a) & 21 and with the parties' agreement, I ordered that Stark and Shepherd be substituted as plaintiffs for Staro.

This substitution destroyed diversity because some of Stark's limited partners were citizens of New York and Delaware. See Ind. Gas Co., Inc. v. Home Ins. Co., 141 F.3d 314, 316 (7th Cir.1998) (noting that general and limited partnerships are citizens of every jurisdiction in which any partner is a citizen); see also Hoosier Energy Rural Elec. Co-op., Inc. v. Amoco Tax Leasing IV Corp., 34 F.3d 1310, 1314-15 (7th Cir.1994) (stating that diversity must be "complete," meaning that no plaintiff may be a citizen of the same state as any defendant). In order to preserve diversity, Stark voluntary dismissed its claims under Fed.R.Civ.P. 41(a)(2).

Thus, the only remaining plaintiff is Shepherd, an entity incorporated under the laws of the British Virgin Islands. I have subject matter jurisdiction pursuant to 28 U.S.C. § 1332(a)(2) because Verizon is a "citizen[] of a State" and Shepherd is a "citizen[] or subject[] of a foreign state," and the amount in controversy exceeds $75,000. See JPMorgan Chase Bank v. Traffic Stream (BVI) Infrastructure Ltd., 536 U.S. 88, 122 S.Ct. 2054, 153 L.Ed.2d 95 (2002) (stating that a corporation organized in a foreign state is deemed to be a citizen or subject of such state).

II. FACTS

Defendant is a holding company. The primary business of a holding company is to hold a controlling interest in the securities of other companies. Merriam-Webster's Collegiate Dictionary (10th ed.1999). Defendant holds a controlling interest in numerous subsidiaries. Defendant's subsidiaries provide telecommunications, DSL and related products to consumers. Defendant does not sell consumer products. Rather, its principal function is to raise capital by selling stock. Defendant uses the capital for a variety of purposes including acquiring other companies and financing activities of its subsidiaries. In recent years, defendant has sold much stock. In 2004, it paid over $4.3 billion in dividends to shareholders and was one of thirty companies comprising the Dow Jones Industrial Average.

In 2003, defendant had approximately 15,000 shareholders in Wisconsin. Approximately four times a year, defendant sent solicitations to each of its Wisconsin shareholders requesting that they purchase more of its stock. As a result of these solicitations, many of defendant's Wisconsin shareholders purchased additional stock.

Defendant also sent approximately six other mailings a year to its Wisconsin shareholders. Defendant included in these mailings materials such as dividend checks, annual meeting packets, tax forms, and information about itself. In one mailing, defendant requested that its Wisconsin shareholders contact their representatives in Congress and ask them to support a proposal to reduce taxes on dividend income because "Verizon already pays taxes on this income." (Hernandez-Malaby Aff. Ex. 2.)

In each quarter, defendant deposited approximately 1,400 dividend checks in some 140 Wisconsin banks.

Defendant conducted quarterly conference calls in which Wisconsin financial analysts and institutional investors participated. In these calls, defendant discussed its quarterly financial results. Through such calls, defendant spoke to Wisconsin professionals such as Stark, Northwestern Mutual, Broadview Advisers, Artisan Partners, Nicholas Applegate, Robert W. Baird, Strong Capital Management and the Marshall Fund.

Defendant also operated an interactive web site that included a Direct Invest Program, by which Wisconsin investors could purchase stock. The website stated: "Build your ownership systematically by reinvesting dividends and by making additional investments ... Access your account online to review and manage your investments ... Protect your Verizon Communications stock certificates by turning them in for share safekeeping at no cost ... Establish an IRA that invests in Verizon Communications shares." (Hernandez-Malaby Aff. Ex. 2.) Some Wisconsin residents purchased defendant's stock through this program. Defendant's website also enabled Wisconsin residents to request investment information, and defendant fulfilled such requests by mail, fax or telephone call.

In December 1999, the Wisconsin Department of Financial Institutions ("DFI") granted Verizon, Inc., a predecessor of defendant, a certificate to do business in Wisconsin. In March 2000, Verizon, Inc. changed its name and gave up its right to transact business in Wisconsin.

In July 2003, defendant intervened in a suit in Dane County Circuit Court.

At and prior to the time plaintiff commenced suit, defendant employed lobbyists who lobbied the Wisconsin legislature and state administrative agencies. In its filings with the Wisconsin Ethics Board, defendant stated that it, "Verizon Communications," employed lobbyists who lobbied concerning: "All areas affecting the operation of Verizon and its subsidiaries." See, e.g., Wis. Ethics Bd., Organizations Employing Lobbyists in 2001-2002, available at http://ethics.state.wi.us/scripts/2001Session/OEL2001.asp? prinID=2709. Defendant's filings also indicate that it had a Wisconsin contact concerning its lobbying activities, its "Government Affairs — State Director," who worked out of an office at 100 Communications Drive, Sun Prairie, Wisconsin. (Id.) According to its filing covering the 2001-2002 legislative session, defendant lobbied on twenty-one bills and five administrative rules and spent $101,305 covering 987 hours of activity. Wis. Ethics Bd., Lobbying Effort by Organization, available at http://ethics.state.wi.us/scripts/2001Se ssion/leoel2001.asp?PrinID=2709 & start=V & start2=.²

At the time that plaintiff commenced suit, approximately twenty of defendant's subsidiaries were registered to do business in Wisconsin. Defendant and the subsidiaries maintained a joint website providing information about products sold by the subsidiaries in Wisconsin. Defendant also administered the subsidiaries' employee benefit and stock option plans and combined the reports relating to such plans with its reports.

On August 7, 2000, defendant entered into a merger agreement with Northpoint, pursuant to which it agreed to contribute cash and assets including employees in return for a fifty-five percent interest in a new entity that would solely own Northpoint. Northpoint wished to restrict defendant's freedom to withdraw from the agreement because it feared that if defendant withdrew, it might be forced into bankruptcy. Thus, the agreement included a "material adverse effect" provision, which provided that defendant could opt out of the merger only under specified circumstances.

In the months following the announcement of the merger, plaintiff acquired beneficial ownership of Northpoint 12.875% Senior Notes valued at $9,276,020.25. The notes contained a "change of control" provision that required Northpoint to purchase the notes at a premium if a merger occurred. Defendant, as majority owner of the new entity that would own Northpoint, assumed this obligation pursuant to the merger agreement. (Compl. Ex. A at § 1.5.)

Plaintiff alleges that it purchased Northpoint notes based on defendant's statements to the press and filings with the Justice Department and Federal Trade Commission indicating that it intended to complete the merger by August 7, 2001. Plaintiff alleges that defendant's statements that it...