Two decisions were recently issued by Judge Gerard E. Lynch (S.D.N.Y.) in the Global Crossing securities class action, and though they reach diverging results, both focus heavily on control person liability. Sounds exciting, doesn't it? No, you say? Well, we must forge ahead anyway. In the first opinion, Judge Lynch tackled J.P. Morgan Chase & Co.’s ("JPMC") argument that it did not act "as a controlling person of its subsidiary J.P. Morgan Chase Securities, Inc. for purposes of Section 15 of the 1933 Securities Act." Judge Lynch rejected this argument, as "Plaintiffs have alleged that [it] is JPMC's wholly owned subsidiary, that the directors of both corporations were ‘interchangeable,’ and that JPMC had direct involvement in the day-to-day operations of" the subsidiary." That wasn't so bad now was it? C'mon, just one more and you'll be ready to pick up your Nugget.
In the second opinion, Judge Lynch eyed Microsoft and Softbank’s position that just because they each became 15.8% owners of Global Crossing’s subsidiary, Asia Global Crossing’s ("AGC") common stock after the IPO, and designated several directors from Microsoft and Softbank (named Koll, Knook, or Hippeau) to sit on the AGC board, that did not make them control persons under the securities laws. The court noted that "at the heart of plaintiffs' allegations is their contention that AGC was integral to Global Crossing's alleged scheme to defraud the public and its investors." But turns out Plaintiffs' allegations were not enough, as Judge Lynch found that "the power to appoint a representative to the AGC board, even combined with minority shareholder status, is insufficient to raise the inference that Microsoft or Softbank controlled Koll, Knook, or Hippeau," and that "Plaintiffs allege no facts from which it could be inferred that these individuals acted at the behest of Microsoft or Softbank in exercising their duties as directors in relation to the ordinary operations of AGC." However, Judge Lynch did note the existence of a proposed amended complaint, which he said "may well cure the deficiencies identified by this opinion of the second amended complaint." Very good, you've earned your Nugget. Don't be shy, go get it, it's free ya' know.
You can read the In re Global Crossing decisions, issued August 8, 2005, at 2005 U.S. Dist. LEXIS 16228 and 2005 U.S. Dist. LEXIS 16232.
Nugget: "Although it is true as defendant points out that plaintiffs' arguments and assertions sometimes seem to ‘blow fog’ more than to provide notice of the claim, once the smoke is clear, sufficient facts remain to allege control-person liability against JPMC."