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LaSala v. Bordier et CIE

September 11, 2006

JOSEPH P. LASALA AND FRED S. ZEIDMAN, AS CO-TRUSTEES OF THE AREMISSOFT CORPORATION LIQUIDATING TRUST, PLAINTIFFS,
v.
BORDIER ET CIE AND DOMINICK COMPANY, AG, DEFENDANTS.



The opinion of the court was delivered by: Pisano, District Judge

FOR PUBLICATION

OPINION

Plaintiffs, Joseph P. LaSala and Fred S. Zeidman, Co-Trustees (the "Trustees") of the AremisSoft Corporation Liquidating Trust (the "Trust"), brought the instant lawsuit against Defendants, Bordier et CIE ("Bordier") and Dominick Company, AG ("Dominick"), two private Swiss banks, on September 15, 2005. Plaintiffs claim that Defendants aided and abetted the breach of fiduciary duty by former AremisSoft principals, Lycourgos Kyprianou and Roys Poyiadjis and that Defendants violated Swiss money laundering laws. Defendants have filed respective motions to dismiss this action as preempted by the provisions of the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), 15 U.S.C. § 78bb(f)(1), in light of the United States Supreme Court's recent decision in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 126 S.Ct. 1503 (2006). They bring the instant motions pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(h)(3). For the following reasons, the Court finds that SLUSA mandates dismissal of this case.*fn1

I. Factual and Procedural History

AremisSoft was a Delaware corporation with its principal place of business in New Jersey. On March 15, 2002, AremisSoft filed for bankruptcy pursuant to Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. § 101 et seq. Subsequent to the bankruptcy filing, the Court created the Trust. The Trust is a Delaware Trust formed pursuant to three orders issued by the Court in connection with the settlement of the underlying securities fraud class action lawsuit involving AremisSoft, In re AremisSoft Corp. Sec. Litig., No. 01-2486 (JAP) and the First Amended Plan of Reorganization of AremisSoft, In re AremisSoft Corp., No. 02-1336 (JAP). Both the class action settlement and reorganization plan were approved by the Court.

Any and all claims arising out of the purchase or sale of AremisSoft securities from April 22, 1999 through July 27, 2001 and all of AremisSoft's claims arising pre-bankruptcy were assigned to and for the benefit of the Trust. The Court appointed Plaintiffs Joseph P. LaSala and Fred S. Zeidman to act as Trustees of the Trust. Plaintiffs bring the instant lawsuit in that capacity.

Plaintiffs claim that from 1998 through 2001, two former AremisSoft principals, Lycourgos Kyprianou and Roys Poyiadjis*fn2 issued various false and misleading public statements and filings with the Securities and Exchange Commission ("SEC") which essentially made AremisSoft appear more profitable and successful that it was in reality. These misrepresentations allegedly caused the market price of AremisSoft stock to be artificially inflated. Plaintiffs claim that Kyprianou and Poyiadjis sold their AremisSoft stock at the purportedly inflated prices and by doing so, engaged in illegal insider trading by reaping large profits at the expense of the investing public. By the time the truth about AremisSoft's financial condition was revealed, the price of the company's publicly held shares fell dramatically. Accordingly, the public investors who purchased the shares at the allegedly inflated prices, approximately 6,000 persons, suffered loss, which, according to Plaintiffs, is estimated at $500 million.

Plaintiffs allege that Defendants Bordier and Dominick, private Swiss banks, substantially assisted Kyprianou and Poyiadjis in concealing this alleged fraud. According to Plaintiffs, Kyprianou and Poyiadjis employed numerous entities with accounts at Bordier and Dominick to hold and sell their AremisSoft stock. Further, Kyprianou and Poyiadjis allegedly funneled millions of dollars of their proceeds from their AremisSoft stock sales through the accounts at Bordier and Dominick. In addition, Plaintiffs claim that Kyprianou and Poyiadjis used accounts at Bordier and Dominick to substantiate sham corporate transactions that they created in an effort to disguise their fraud.

Specifically, Plaintiffs' claim that in assisting the activities of Kyprianou and Poyiadjis, Defendants Bordier and Dominick (1) aided and abetted the breaches of fiduciary duty to AremisSoft shareholders committed by Kyprianou and Poyiadjis; and (2) violated Articles 305ter and 305bis of the Swiss Federal Code of Criminal Law and various provisions of the Swiss Money Laundering Act.*fn3

Defendants have filed a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(1) and 12(h)(3). They claim that Plaintiffs' claims are preempted by SLUSA.

II. Legal Discussion

A. History of SLUSA

Congress enacted the Private Securities Litigation Reform Act ("PSLRA"), codified in part at 15 U.S.C. §§ 77z-1 and 78u-4, in 1995 in response to a perceived harm to securities markets from frivolous private federal securities class action lawsuits. See, e.g., Merrill, Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 126 S.Ct. 1503, 1510-11 (2006); Rowinski v. Salomon Smith Barney Inc., 398 F.3d 294, 298 (3d Cir. 2005). The PSLRA provided more stringent procedural and substantive requirements on such lawsuits. See, e.g., Dabit, 126 S.Ct. at 1511; Rowinski, 398 F.3d at 298. Unfortunately, an unintended consequence of the PSLRA was that plaintiffs began avoiding federal courts altogether. See, e.g., Dabit, 126 S.Ct. at 1511; Golub v. Hilb, Rogal & Hobbs Co., 379 F. Supp. 2d 639, 642 (D. Del. 2005). Instead, they increasingly brought suit under state law, often in state courts. See, e.g., Dabit, 126 S.Ct. at 1511; Rowinski, 398 F.3d at 298.

In response to the loophole left open by the PSLRA, Congress enacted SLUSA, which essentially designates federal courts as the exclusive venue for class action securities litigation. See 15 U.S.C. § 78a (stating that SLUSA attempts "to prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives" of the PSLRA); Golub, 379 F. Supp. 2d at 642 ("To close this 'loophole', Congress enacted SLUSA, which designates the federal courts as the exclusive venue for nearly all such claims.").

SLUSA achieves this objective by authorizing the removal and federal preemption of certain state law securities class actions brought in state court. See Rowinski, 398 F.3d at 298. SLUSA preemption applies where (1) the matter is a "covered class action"; (2) based on the statutory or common law of any State; (3) alleging a misrepresentation or omission of a material fact or act of deception; (4) in connection with the purchase or sale of a covered security.*fn4 See, e.g., 15 U.S.C. § 78bb(f)(1); Golub, 379 F. Supp. 2d at 642. The definitions of these terms, some of which are in dispute, are explained below.

Although courts, including the Supreme Court in Dabit, speak in terms of "SLUSA preemption," SLUSA does not technically preempt state law causes of action. Instead, it "denies plaintiffs the right to use the class action device to vindicate certain claims." Dabit, 126 S.Ct. at 1514. The effect of SLUSA is to require securities claims to be brought in federal court pursuant to the federal securities laws, such as SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated pursuant to section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). Section 10(b) and Rule 10b-5 prohibit deception, misrepresentation, and fraud "in connection with the purchase or sale of any security." See Dabit, 126 S.Ct. at 1509. Such claims would be subject to the heightened substantive and procedural standards set forth by the PSLRA. The alternative for potential plaintiffs is to bring state law claims individually or as part of a lawsuit not falling under SLUSA's definition of "covered class action."*fn5 See Dabit, 126 S.Ct. at 1514.

B. The Supreme Court's Decision in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 126 S.Ct. 1503 (2006)

The United States Supreme Court recently handed down a significant decision in the SLUSA context. In Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 126 S.Ct. 1503 (2006), the Court was faced with the issue of whether SLUSA preempted state law class action claims, in this case, under Oklahoma law, which a holder-plaintiff lacked standing to bring pursuant to section 10(b) and Rule 10b-5 under the Court's previous holding in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975). In Blue Chip Stamps, the Supreme Court held that the private right of action under Rule 10b-5 is limited to purchasers and sellers of securities, and thus, does not extend to mere holders. See Blue Chip Stamps, 421 U.S. at 731-33, 749. Accordingly, holders of securities lacked standing to bring claims under Rule 10b-5. The Court found that this rule would help curb the special risk of vexatious litigation posed by securities holders. See id. at 739.

The Dabit Court took a broad view of SLUSA and found that even though the plaintiffs lacked the requisite standing to bring a federal securities claim due to their status as holders, as opposed to purchasers or sellers of securities, their state law class action claims were still subject to dismissal under SLUSA. See Dabit, 126 S.Ct. at 1512-15. The Court reached this conclusion by finding that the SLUSA requirement that the fraud be "in connection with the purchase or sale of a covered security" mirrored the requirement as stated in Rule 10b-5. See Dabit, 126 S.Ct. at 1513; see also Rowinski, 398 F.3d at 299 ("This language [a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security] mirrors existing federal securities law under § 10(b) and Rule 10b-5."). The Court found that in Blue Chip Stamps, by holding that the private right of action under Rule 10b-5 was limited to purchasers and sellers of securities, the Court was not defining the phrase "in connection with the purchase or sale" under Rule 10b-5. See Dabit, 126 S.Ct. at 1512. Instead, the Court was defining the scope of a private right of action under Rule 10b-5 based on policy considerations. See id.

The Dabit Court stated that when the Court has previously given meaning to the phrase "in connection with the purchase or sale" pursuant to Rule 10b-5, it has interpreted such language as requiring only that the fraud " 'coincide' with a securities transaction - whether by the plaintiff or by someone else." Dabit, 126 S.Ct. at 1513 (citing United States v. O'Hagan, 521 U.S. 642, 651 (1997)). The Court therefore concluded that the requisite showing for SLUSA preemption is "deception 'in connection with the purchase or sale of any security,' not deception of an identifiable purchaser or seller." Id. (citing O'Hagan, 521 U.S. at 658). Accordingly, in Dabit, the Court held that the state law holder class action claims were preempted by SLUSA, despite the fact that the class members lacked standing to bring Rule 10b-5 claims. In so holding, the Court emphasized that "the magnitude of the federal interest in protecting the integrity and efficient operation of the market for nationally traded securities cannot be overstated." Id. at 1509.

In this case, there is no Blue Chip Stamps problem. Presumably, since Plaintiffs represent a class of purchasers and sellers of AremisSoft stock and not a class of holders, Plaintiffs would have standing to pursue Rule 10b-5 claims against Defendants if they desired to do so. However, Plaintiffs in this case lack a federal securities remedy for a different reason. Plaintiffs presumably have not brought Rule 10b-5 claims against Bordier and Dominick because to do so, they would need to show that these Defendants made fraudulent misrepresentations or omissions which harmed Plaintiffs. See, e.g., Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 177-78 (1994); In re Tyson Foods, Inc., No. 01-425-SLR, 2004 WL 1396269, at *8 (D. Del. June 17, 2004) (holding that corporate principals were not liable under section 10(b) because they did not make or substantially participate in any misrepresentations or omissions). In this case, it was Kyprianou and Poyiadjis, not Bordier and Dominick, who actually made the purported misrepresentations. Thus, to the extent that anyone violated section 10(b) and Rule 10b-5 under the circumstances of this matter, it was Kyprianou and Poyiadjis, not Bordier and Dominick.

Plaintiffs were prohibited from bringing claims against Bordier and Dominick for aiding and abetting these violations of section 10(b) and Rule 10b-5 pursuant to the Supreme Court's decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), in which the Court held that private plaintiffs could not bring aiding ...


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