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SALOVAARA v. JACKSON NAT. LIFE INS. CO.

July 1, 1999

MIKAEL SALOVAARA, INDIVIDUALLY AND DERIVATIVELY ON BEHALF OF SOUTH STREET LEVERAGED CORPORATE RECOVERY FUND, L.P., ET AL., PLAINTIFFS,
v.
JACKSON NATIONAL LIFE INSURANCE COMPANY, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Hughes, United States Magistrate Judge.

MEMORANDUM OPINION

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.

I. INTRODUCTION

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.

A. Background

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 Defendants.

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 contain allegations 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.

II. DISCUSSION

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 (1974).

B. Jackson's Motion to Dismiss

1. The Insider Trading Claim

The first question before the Court is whether Jackson violated Exchange Act ยง 10(b) and Rule 10b-5. Section 10(b) of the ...


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