STMicroelectronics v. Credit Suisse Group
2011 U.S. Dist. LEXIS 37966
| E.D.N.Y | 2011Background
- STMicroelectronics alleges Credit Suisse Group (CSG) controls Credit Suisse Securities (CSS) and is liable as a controlling person for CSS brokers' breach of ST's investment mandate to buy only SLARS.
- ST opened an account with CSS in 2006 to invest in SLARS and funded it with over $450 million by August 2007.
- CSS brokers Tzolov and Butler purchased non-SLARS (including subprime ARS and CDOs) and misrepresented holdings as SLARS, with non-conforming investments reaching 37% by Nov 2006 and 100% by Feb 2007.
- ST discovered the fraud in July 2007 and demanded liquidation of non-conforming holdings; brokers later continued unauthorized purchases despite ST's objections.
- CSG management allegedly knew or ignored warning signals; FINRA/arbitration awarded ST over $406 million against CSS in 2009, confirmed by the SDNY in 2010; CSS appealed.
- ST filed this federal action in August 2008 seeking to amend to add primary liability under Section 10(b) and Rule 10b-5, along with related state-law claims; PSLRA discovery stay issues were raised.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does ST plead sufficient control by CSG over CSS for §20(a)? | ST plead sufficient mix of ownership, overlap, and control by CSG over CSS. | CSG contends insufficient direct control over CSS’s brokers to satisfy §20(a). | Yes; ST sufficiently pleads control to sustain §20(a). |
| Has ST pled culpable participation by CSG for §20(a) liability? | CSG's failure to supervise and incentive structures show conscious misbehavior. | CSG argues no culpable participation beyond passive oversight. | Yes; allegations support culpable participation, enabling §20(a) liability. |
| May ST pursue §10(b) primary liability against CSG via agency theory? | CSS acted as a primary violator's agent; agency theory supports §10(b) liability. | CSG argues collateral estoppel and lack of agency binding; efficacy unclear. | Yes; suit may proceed on actual agency theory; collateral estoppel notually bar §10(b). |
| Do collateral estoppel and state-law claims bar unjust enrichment and aiding/abetting fraud? | Unjust enrichment barred by arbitration result; aiding/abetting not barred. | Collateral estoppel applies to related state-law claims. | Unjust enrichment barred; aiding/abetting survives; conversion remains viable. |
| Should the court stay or dismiss for failure to join CSS as an indispensable party? | CSS is not indispensable; action may proceed separately from CSS arbitration. | Judicial economy favors stay/dismissal due to related proceedings. | Rule 12(b)(7) dismissal or stay denied; action to proceed. |
Key Cases Cited
- Boguslavsky v. Kaplan, 159 F.3d 715 (2d Cir.1998) (sets §20(a) damages cannot exceed primary violator’s arbitration award; supports control/agency theory)
- First Jersey Sec., Inc. v. Western World Ins. Co., 101 F.3d 1450 (2d Cir.1996) (establishes elements of §20(a) and that controlling liability is separate from primary liability)
- Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87 (2d Cir.2001) (clarifies control-based liability under §20(a))
- In re Parmalat Sec. Litig., 594 F. Supp. 2d 444 (S.D.N.Y.2009) (discusses agency, control, and limits on liability in global corporate structures)
- WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d 392 (S.D.N.Y.2003) (addresses pleading requirements for §20(a) in the context of control relationships)
- Marbury Mgmt., Inc. v. Kohn, 629 F.2d 705 (2d Cir.1980) (brokerage supervising liability standard shifting burden to employer to show supervision)
- Fletcher v. Atex, Inc., 68 F.3d 1451 (2d Cir.1995) (apparent authority guidance in agency analysis)
- In re CINAR Corp. Sec. Litig., 186 F. Supp. 2d 279 (E.D.N.Y.2002) (cites authority on pleading and agency principles in securities cases)