The opinion of the court was delivered by: Hughes, United States Magistrate Judge.
This matter comes before the Court on two separate motions to dismiss
the complaint filed by Defendants Jackson National Life Insurance Company
("Jackson") and Lazard Freres & Co. LLC ("Lazard"). Plaintiffs submitted
opposition to the motions. The Court reviewed the written submissions and
conducted oral argument on June 21, 1999. The parties consented to the
jurisdiction of the United States Magistrate Judge, pursuant to 28
U.S.C.A. § 636 and FED.R.CIV.P. 73 for the dispositive motion
practice. For the reasons that follow, both motions to dismiss the
complaint are granted.
On March 4, 1997, Plaintiff, Mikael Salovaara, individually and
derivatively, on behalf of South Street Leveraged Corporate Recovery
Funds, L.P., South Street Leveraged Corporate Recovery Fund I, L.P., SSP
Partners, L.P., SSP Advisors, L.P., and SSP, Inc. (collectively, the
"South Street Funds"), filed this action against Jackson National Life
("Jackson"), a company organized under the laws of the State of
Michigan. The South Street Funds are limited partnerships and a
corporation, organized and existing under the laws of the State of
Delaware, with their principal places of business in Wilmington,
Delaware. SSP Advisers, L.P. and SSP Partners, L.P. are collectively
referred to herein as "SSP LPs." The SSP LPs and SSP Inc. are also named
as nominal defendants, but no relief is sought. On March 1, 1999, the
Court entered an order granting leave to Plaintiffs to file a third
amended complaint (the "complaint") joining Lazard as a Defendant.
Plaintiffs essentially allege that Jackson concealed and failed to
disclose material information concerning the value of certain debt
securities to the South Street Funds, and that Jackson was under a duty
to disclose such information to Plaintiffs. As a result of Jackson's
fraudulent conduct, the South Street Funds argue deceptive inducement
into selling the debt securities to Jackson at an artificially low
price, approximately 94% of par. Plaintiffs allege that, while acting as
the South Street Funds's agent in connection
with the sale of the debt securities to Jackson, Lazard failed to
disclose the true market value of the debt securities. Additionally,
Lazard failed to disclose that it provides valuation services to
Jackson. Jackson and Lazard have now filed motions to dismiss, but based
on different grounds.
The SSP LPs are general partners of the South Street Funds. Mr.
Salovaara and Alfred C. Eckert, III own, or control with others, all of
the equity in the SSP LPs. Using the SSP LPs, Mr. Salovaara and Mr.
Eckert invested in the South Street Funds. SSP, Inc., the ultimate
general partner to the South Street Funds, is a corporation owned
entirely and equally by Mr. Salovaara and Mr. Eckert: SSP Inc. is also
the general partner of the SSP LPs. Mr. Eckert is a director of SSP,
Inc.; Mr. Salovaara is not. Gary Hindes and Denise Hindes (the
"Hindeses") were also SSP, Inc. officers. By January 1996, Mr. Eckert and
the Hindeses controlled SSP, Inc. and precluded Mr. Salovaara from
participating in the management of the South Street Funds.
While the parties to this action are familiar with one another though
their involvement in numerous actions pending before various courts (see
infra at 596, 602-03; Jackson Br. at 6; Pl.Br. in Opp'n to Jackson Br. at
6), the instant action arises from a specific transaction (the "Sale") in
which Jackson purchased approximately $52,000,000 in Bucyrus—Erie
International, Inc. ("Bucyrus") debt securities (the "Debt Securities")
from the South Street Funds on March 4, 1996. In February 1996, SSP,
Inc., under the control of Mr. Eckert and the Hindeses, decided to sell
the Debt Securities through Lazard at a price of approximately 93% of par
to Jackson. (Compl. ¶ 32.) Lazard was to receive 1% as the broker
dealer handling the transaction. (Id.) Mr. Salovaara objected vehemently
and sought to enjoin SSP, Inc. from selling the Debt Securities, arguing
that 93% of par did not reflect the true market value of the Debt
Securities. (Id. at 33.) The District Court for the Southern District of
New York denied Mr. Salovaara's request for preliminary relief. (Id.)
Lazard acted as an agent for the South Street Funds and negotiated with
Jackson in connection with the Sale. (Lazard Br. at 2; Pl.Br. in Opp'n to
Lazard Br. at 12.) Plaintiffs allege that Lazard provided an oral opinion
to the South Street Funds representing that the price for the Debt
Securities was a fair and reasonable market value. (Pl.Br. in Opp'n to
Lazard Br. at 13.) The complaint alleges that in providing the oral
opinion, Lazard failed to disclose its conflicting Lazard Market Value
Opinion and that Lazard provided market valuation services to Jackson.
(See Compl. ¶ 55.) As a result of the Sale, Lazard took a fee from
the South Street Funds of no less than $500,000. (Id. ¶ 56.)
As part of the Sale, on February 28, 1996, the South Street Funds and
Lazard entered into an indemnification agreement (the "Indemnification
Agreement"). (Lazard Br. at 4.) The forum selection clause of the
Indemnification Agreement provides that:
This agreement and any claim related directly or
indirectly to this agreement (including any claim
concerning advice provided pursuant to this agreement)
shall be governed and construed in accordance with the
laws of the State of New York (without giving regard
to the conflicts of law provisions thereof). No such
claim shall be commenced, prosecuted or continued in
any forum other than the courts of the State of New
York located in the City and County of New York or in
the United States District Court for the Southern
District of New York.
(See Harasymiak Aff. Lazard Ex. A & B at 2-3.)
On October 23, 1997, Jackson filed a motion to dismiss the complaint
filed here and a motion to transfer this case to the United States
District Court for the District of New York. On November 21, 1997, this
Court granted Jackson's motion to transfer, without deciding the motion
to dismiss. On June 3, 1998, the Honorable Kimba Wood of United States
District Court for the District of New York sua sponte transferred the
case back to the District of New Jersey, holding that it should not have
been transferred to that jurisdiction and that it should not be
consolidated with any pending litigation in that district. (See Pl.Br. in
Opp'n to Lazard motion at 14.) On July 30, 1998, the Court denied
Jackson's motion to dismiss, which had been filed on October 23, 1997.
B. Jackson's Motion to Dismiss
Jackson argues that Plaintiffs' claims against Jackson for violations
of sections 10(b) of the Securities and Exchange Commission Act of 1934
(the "Exchange Act") and 10b-5 of the General Rules and Regulations under
the Act in Count I should be dismissed. Jackson argues that Plaintiffs
failed to identify "any basis for the allegation that Jackson had a duty
to disclose information about Bucyrus to the South Street Funds."
(Jackson Br. at 9.) Similarly, Jackson argues that Plaintiffs' claim for
common law fraud in Count III should be dismissed because Plaintiffs
failed to allege any facts showing that Jackson had a "`duty to speak' so
as to make Jackson's alleged concealment of material facts fraudulent."
(Jackson Br. at 13.) Jackson further argues that, under Rule 23.1 of the
Federal Rules of Civil Procedure, Mr. Salovaara cannot adequately and
fairly represent Plaintiffs derivatively. Finally, Jackson argues that
Mr. Salovaara's claims should be dismissed to the extent that they
purport to be brought by him individually, not merely derivatively on
behalf of the South Street Funds. At oral argument, Plaintiffs agreed to
a voluntary dismissal of Mr. Salovaara's individual claims against
In opposition to Jackson's motion, Plaintiffs argue that the complaint
states a claim for insider trading against Jackson, even though the Debt
Securities bought by Jackson on the basis of undisclosed inside
information constituted debt rather than equity. Plaintiffs further argue
that the complaint states a claim for fraud under New Jersey law.
Plaintiffs base their common law fraud allegation on Jackson's alleged
duty of disclosure to Plaintiffs. Additionally, Plaintiffs argue that
Mr. Salovaara satisfies the representation requirements for derivative
plaintiffs because: he has demonstrated an intent to prosecute this action
vigorously; he has competent legal counsel; and he has not demonstrated
antagonism with the South Street Funds, and its limited partners, with
regard to how to prosecute this case. See FED.R.CIV.P. 23.1.
C. Lazard's Motion to Dismiss
Lazard seeks to dismiss Counts II, IV and V of the complaint pursuant
to FED. R.Civ.P. 12(b)(6). Alternatively, Lazard moves to dismiss the
claims against it pursuant to FED.R.Civ.P. 12(b)(3). Lazard argues that,
under a forum selection clause in the Indemnification Agreement, the
South Street Funds are contractually obligated to resolve any and all
disputes with Lazard, involving the Sale, in either the District Court of
the Southern District of New York or the state courts of New York City
and County. Lazard further argues that, although Mr. Salovaara purports
to bring his claims individually and derivatively, the complaint does not
relating to Mr. Salovaara's alleged individual claims. As noted supra at
597, Plaintiffs have voluntarily dismissed Mr. Salovaara's individual
claims. Because the South Street Funds' claims are governed by the
Indemnification Agreement, Lazard argues, its claims against Lazard
should be dismissed by this Court.
Plaintiffs oppose Lazard's motion, arguing that the Indemnification
Agreement does not cover the allegations set forth in the complaint. They
construe the Indemnificatibn Agreement narrowly arguing that; by its
terms, the agreement is limited to disputes arising from indemnification
claims. Plalntiffs further argue that Lazard's motion is not a motion to
dismiss, but rather a motion to transfer. Should the Court treat Lazard's
motion as a motion to transfer, Plaintiffs argue that transfer is not
warranted because a transfer to the District of New York would result in
duplicative litigation and potentially inconsistent results.
A. Rule 12(b)(6) Standard
A motion to dismiss pursuant to Federal Rule of Civil Procedure
12(b)(6) may be granted only if, accepting all well pleaded allegations
in the complaint as true, and viewing them in the light most favorable to
the plaintiff, the plaintiff is not entitled to relief. Bartholomew v.
Fischl, 782 F.2d 1148, 1152 (3d Cir. 1986). In setting forth a valid
claim, a party is required only to plead "a short plain statement of the
claim showing that the pleader is entitled to relief." See FED.R.Civ.P.
8(a). The Court may not dismiss a count in the complaint unless the
plaintiff can prove no set of facts which would entitle him to relief.
Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).
"The issue is not whether a plaintiff will ultimately prevail but whether
the claimant is entitled to offer evidence to support the claims."
Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90
B. Jackson's Motion to Dismiss
1. The Insider Trading Claim
The first question before the Court is whether Jackson violated
Exchange Act § 10(b) and Rule 10b-5. Section 10(b) of the ...