Steginsky v. Xcelera, Inc.
| Decision Date | 14 March 2013 |
| Docket Number | No. 3:12-cv-188 (SRU),3:12-cv-188 (SRU) |
| Court | U.S. District Court — District of Connecticut |
| Parties | GLORIA STEGINSKY, On behalf of Herself and All Others Similarly Situated, Plaintiff, v. XCELERA, INC., et al., Defendants. |
This case concerns an alleged multi-year scheme to deflate a company's stock price so that the company's controlling shareholders could buy out minority shareholders at a bargain-basement price. Gloria Steginsky has sued Xcelera Inc., VBI Corp., Alexander Vik Gustav Vik, OFC Ltd., and Hans Eirik Olav alleging that defendants violated both federal securities law and their common law fiduciary duties to stockholders. Xcelera, VBI, Gustav Vik, and Alexander Vik filed a motion to dismiss for failure to state a claim upon which relief can be granted. OFC Ltd. and Hans Erik Olav failed to file an appearance,1 and plaintiff seeks a default judgment against them. For the reasons set forth below, defendants' motion to dismiss is granted, and plaintiff's motion for default judgment is denied.
A motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6) is designed "merely to assess the legal feasibility of a complaint, not to assay the weight of evidence which might be offered in support thereof." Ryder Energy Distribution Corp. v. Merrill Lynch Commodities, Inc., 748 F.2d 774, 779 (2d Cir. 1984) (quoting Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980)).
When deciding a motion to dismiss pursuant to Rule 12(b)(6), the court must accept the material facts alleged in the complaint as true, draw all reasonable inferences in favor of the plaintiffs, and decide whether it is plausible that plaintiffs have a valid claim for relief. Ashcroft v. Iqbal, 556 U.S. 662, 678-79 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-56 (2007); Leeds v. Meltz, 85 F.3d 51, 53 (2d Cir. 1996).
Under Twombly, "[f]actual allegations must be enough to raise a right to relief above the speculative level," and assert a cause of action with enough heft to show entitlement to relief and "enough facts to state a claim to relief that is plausible on its face." 550 U.S. at 555, 570; see also Iqbal, 556 U.S. at 679 (). The plausibility standard set forth in Twombly and Iqbal obligates the plaintiff to "provide the grounds of his entitlement to relief" through more than "labels and conclusions, and a formulaic recitation of the elements of a cause of action." Twombly, 550 U.S. at 555 (quotation marks omitted). Plausibility at the pleading stage is nonetheless distinct from probability, and "a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of [the claims] is improbable, and . . . recovery is very remote and unlikely." Id. at 556 (quotation marks omitted).
Upon entry of a default for "failure to plead or otherwise defend" against a complaint, a defendant admits every "well-pleaded allegation" of the complaint except those relating to damages. See Trans World Airlines, Inc. v. Hughes, 449 F.2d 51, 63 (2d Cir. 1971), rev'd on other grounds, 409 U.S. 363 (1973); Flaks v. Koegel, 504 F.2d 702, 704 (2d Cir. 1974) (); see also Time Warner Cable of New York City v. Barnes, 13 F. Supp. 2d 543, 547 (S.D.N.Y.1998). Accordingly, the factual allegations of the complaint, except those relating to the amount of damages, will be taken as true. Id.; see also 10A CHARLES WRIGHT, ARTHUR MILLER, & MARY KAY KANE, FEDERAL PRACTIVE § 2688 (3D ED.1998); Fed. R. Civ. P. 8(d). Thus, the threshold for a default judgment mirrors the threshold for a motion to dismiss under 12(b)(6)—courts evaluate whether, when all facts are taken as true, a plaintiff has proven his case as a matter of law.
The facts are drawn both from the complaint and from previous decisions in related cases. Feiner Family Trust v. VBI Corp., 352 Fed. Appx. 461 (2d. Cir. 2009) ("Feiner III"); Feiner Family Trust v. Xcelera.com, 2008 WL 5233605 (S.D.N.Y. 2008) ("Feiner II"); Feiner Family Trust v. VBI Corp., 2007 WL 2615448 (S.D.N.Y. 2007) ("Feiner I"). All alleged facts in the present complaint are taken as true for the purposes of this ruling.
Xcelera is a conglomerate of technology companies controlled by two billionaire brothers, Alexander and Gustav Vik, and their financier father through a company called VBI Corporation (together the "Xcelera Defendants"). In the late 1990s, Xcelera was one of thefastest growing technology groups in the United States. But in 2001 the bubble lifting Xcelera's stock burst and the company's value plummeted.
Faced with a dwindling fortune, the Viks scrambled to minimize their losses. In 2004, Xcelera's stock had fallen from a high of $110 a share to around $1 a share. The brothers decided to stop complying with securities laws in the hopes of getting their stock off an open market. They began by refusing to file quarterly reports with the Securities and Exchange Commission ("SEC"). The brothers reasoned that, once the company was again privately held, they could legally withhold information from shareholders, and, with no way to know the value of their shares, these minority shareholders would sell their stock back to the Viks at a deflated price. By November of 2004, the American Stock Exchange ("AMEX") handed the brothers their first victory: because the company was delinquent in its filing requirements, the AMEX delisted Xcelera. The stock price sank to 25 cents a share. Two years later in November of 2006, the SEC deregistered all of Xcelera's securities. The company was once again private. In the process, the brothers lost about $225 million in stock value.
Freed of federally-mandated reporting requirements, the Viks instructed employees to refuse to disclose any information regarding the company's financial health to shareholders. Any shareholder who contacted the company was denied information regarding the brothers' plans to revive Xcelera and instead were told that they were welcome to sell back their shares at the lowest recorded stock price, 25 cents a share. Frustrated, many investors cut their losses and sold.
Four years and several lawsuits later, the Viks felt they were in a position to finally purchase all the remaining Xcelera shares. By 2010, many of Xcelera's holdings had once again become profitable. The Viks knew this, but shareholders did not. In order to take advantage ofthe company's still-deflated public price, the Viks privately approached a one-time director at Xcelera, Hans Eirik Olav, and asked him to form a shell company through which the Viks could make a tender offer on outstanding shares. Olav agreed. He registered a company, OFC Limited, in Malta, a country that does not require companies to disclose their directors' or shareholders' names. OFC sent a letter to Xcelera shareholders in December of 2010 offering to buy up to 10,000 shares of Xcelera at the last known price, 25 cents. In the letter, OFC reserved the right to transfer shares to its "affiliates," but did not list the name of any affiliate.
Plaintiffs claim that the Viks' original decision to privatize their company was pretextual; their real aim has always been to drive down share prices so they could eventually buy back their company at a bargain-basement price. They then claim that the tender offer was the Viks' attempt to further manipulate Xcelera's stock price so that they could finally gain total control over the company. Plaintiffs make three claims against the Xcelera defendants, OFC, and Olav: First, that the defendants defrauded investors when they secretly schemed to artificially depress the market price of Xcelera stock. This fraud allowed them to manipulate the price of their stock in order to buy shares at low prices. Second, that they controlled OFC and are thus liable for OFC's attempt to trade on inside information when it lowballed investors in 2010. And third, that they breached their fiduciary duties to investors.
This is not the first time a minority shareholder in Xcelera has filed suit against the Viks. Plaintiffs' law firm, Abraham, Fruchter, & Twersky has represented minority shareholders in two other unsuccessful lawsuits against Xcelera. Judge Robert Patterson of the Southern District of New York dismissed the suits on three occasions, and the Second Circuit affirmed dismissal in one of those cases (the other was not appealed). The complaints in those suits were virtually identical to the complaint in this case, save one factual allegation—the tender offer made byOFC. Plaintiffs argue that the addition of an allegation of a tender offer cures whatever defects may have existed in the prior suits.
Two previous suits against Xcelera were dismissed because plaintiffs did not allege sufficient facts to establish an intentional violation of the securities laws. As the Second Circuit explained, "to the extent [plaintiff] submits that defendants' fraudulent intent can be inferred from the fact that their failure to comply with their reporting obligations was the first step in a plan to buy back minority shares at depressed prices, the theory reduces to speculation." Feiner III, 352 Fed. App'x 461, 462 (2d Cir. 2009). According to the complaints in those cases, the Viks never affirmatively offered to buy back any shares, and, thus, both the District Court and the Second Circuit reasoned that jury would be forced to speculate that they someday would. "Absent any allegation of a 'going private' transaction, tender, or scheme to...
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