Stephenson v. Deutsche Bank Ag

282 F.Supp.2d 1032

James P. STEPHENSON, Trustee, (02-4845) Ferris, Baker Watts, Inc., (02-3682) E*Trade Securities, LLC, (02-3711) Plaintiffs, v. DEUTSCHE BANK AG, et. al., (02-4845) Deutsche Bank Securities Ltd., et al., (02-3682) Deutsche Bank AG, et. al., (02-3711) Defendants.

Nos. Civ.024845(RJL/AJB), CIV023682(RJL/AJB), CIV023711(RHK/AJB).

United States District Court, D. Minnesota.

September 8, 2003.

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Robert L. Schnell, Jr., James L. Volling, Stephen M. Mertz, Jason K. Walbourn, Jesseca R.F. Grassley, Theodore R. Cheesebrough, Faegre & Benson LLP, Minneapolis, MN, for Plaintiff James P. Stephenson, Liquidating Trustee of MJK Clearing, Inc.

Terrence M. Fruth, Thomas E. Jamison, K. Jon Breyer, Fruth, Jamison & Elsass, P.A., Minneapolis, MN, Charles S. Fax, Richard A. Kirby, Shapiro Sher Guinot & Sandler, Washington, DC, Daniel Marino, Preston Gates Ellis & Rouvelas Meeds, Washington, DC, for Plaintiff Ferris, Baker Watts, Inc.

Terrence M. Fruth, Thomas E. Jamison, K. Jon Breyer, Fruth Jamison & Elsass, P.A., Minneapolis, MN, Marc T.G. Dworsky, Richard C. St. John, James C. Rutten, Munger Tolles & Olson LLP, Los Angeles, CA, Dennis C. Brown, for Plaintiff E*Trade Securities, Inc.

Michael J. Bleck, Michael E. Keyes, David E. Runck, Oppenheimer, Wolff & Donnelly LLP, Minneapolis, MN, James H.R. Windels, Jodi Golinsky, Michael J. Russano, Catheryn A. O'Rourke, Laura Laux Higgens, Davis Polk & Wardwell, New York, NY, for Defendants Deutsche Bank Securities Limited, Deutsche Bank Securities, Inc., and Deutsche Bank AG.

Teresa J. Kimker, Halleland Lewis Nilan Sipkins & Johnson, P.A., Minneapolis, MN, Richard M. Strassberg, Jeffrey A. Simes, Eric D. Musselman, Goodwin Procter LLP, New York, NY, for Defendant Wayne Breedon.

Madge S. Thorsen, Daniel C. Bryden, Kelly & Berens, Minneapolis, MN, Michael J. Dell, Amy Busa, Lauren Freeman-Bosworth, Jonathan M. Wagner, Kramer Levin Naftalis & Frankel LLP, New York, NY, Richard M. Sharfman, Laurence Greenwald, Michele L. Pahmer, Beth Webber, Stroock & Stroock & Lavan LLP, New York, NY, for Defendants Nomura Canada, Inc., Nomura Securities International, Inc., and Scott Reed.

J. Patrick McDavitt, Julie H. Firestone, Briggs and Morgan, P.A., Minneapolis, MN, Joel S. Forman, Karen Lee, Curtis, Mallet-Prevost, Colt & Mosle, New York, NY, for Defendant James Smith.

Jonathan M. Harris, Terrence J. Fleming, Eric J. Peck, Lindquist & Vennum P.L.L.P., Minneapolis, MN, for Defendant A.G. Edwards & Sons, Inc.

John M. Degnan, Murnane, Conlin, White & Brandt, St. Paul, MN, Dominic F. Amorosa, Amorosa Law Office, New York, NY, Michael Q. Carey, Carey & Associates, New York, NY, for Defendant Richard Evangelista.

MEMORANDUM OPINION AND ORDER

KYLE, District Judge.

Table of Contents1
Introduction ........................................................... 1041

Background ...................................................................... 1042
        I. Introduction.......................................................... 1042
       II. The Parties .......................................................... 1042
           A. Plaintiffs ........................................................ 1042
           B. Defendants ........................................................ 1043
      III. Factual Background ................................................... 1044
           A. Securities Lending ................................................ 1044
           B. The Stock Manipulation Scheme ..................................... 1045
              1. The GENI Scheme ................................................ 1046
              2. MJK Is Brought into the Transactions ........................... 1047
              3. Fraud at Native Nations ........................................ 1048
              4. Deutsche Bank Lessens Its Exposure ............................. 1048
              5. The GENI for ICII Switch ....................................... 1049
              6. Nomura Lessens Its Exposure .................................... 1050
           C. The Scheme Collapses .............................................. 1050
       IV. Procedural Background ................................................ 1051
           A. The Amended Complaints ............................................ 1051
              1. James P. Stephenson v. Deutsche Bank AG, et al., Civ. No. 02-4845
                   (RHK/AJB) .................................................... 1051
              2. Ferris, Baker Watts, Inc. v. Deutsche Bank Securities Limited
                   et al., Civ. No. 02-3682 (RHK/AJB) ........................... 1052
              3. E*Trade Securities, LLC v. Deutsche Bank AG, Civ. No. 02-3711
                   (RHK/AJB) .................................................... 1052
           B. Motions Before the Court .......................................... 1052
              1. James P. Stephenson v. Deutsche Bank AG, et al., Civ. No. 02-4845
                   (RHK/AJB) .................................................... 1052
              2. Ferris, Baker Watts, Inc. v. Deutsche Bank Securities Limited
                   et al., Civ. No. 02-3682 (RHK/AJB) ........................... 1053
              3. E*Trade Securities, LLC v. Deutsche Bank AG, Civ. No. 02-3711
                   (RHK/AJB) .................................................... 1053
Standard of Decision ............................................................ 1054
Analysis ........................................................................ 1054
        I. Section 10(b) of the Exchange Act of 1934 and SEC Rule 10b ........... 1055
           A. Market Manipulation ............................................... 1056
           B. Statements and Omissions .......................................... 1057
           C. Conclusion ........................................................ 1058
       II. Section 20(a) of the Exchange Act of 1934 ............................ 1058
      III. Common Law Fraud and Negligent Misrepresentation ..................... 1060
           A. Common Law Fraud .................................................. 1060
           B. Negligent Misrepresentation ....................................... 1061
       IV. Section 12(a)(1) of the 1933 Securities Act .......................... 1062
           A. Sellers and Solicitors ............................................ 1062
           B. Statute of Limitations ............................................ 1064
              1. One-Year Limitations Period .................................... 1064
              2. Three-Year Limitations Period .................................. 1064
           C. Sales and Defenses ................................................ 1065
           D. Conclusion ........................................................ 1066
        V. Section 11 of the 1933 Securities Act ................................ 1066
       VI. Section 9 of the Exchange Act of 1934 ................................ 1066
           A. Statute of Limitations ............................................ 1067
           B. Substantive Challenges ............................................ 1067
      VII. Minnesota Prevention of Consumer Fraud Act ........................... 1068
     VIII. Civil Conspiracy ..................................................... 1070
       IX. RICO and the Reform Act .............................................. 1071
        X. Personal Jurisdiction ................................................ 1072
       XI. Federal Rule of Civil Procedure 8(a)(2) .............................. 1074

Conclusion....................................................... 1075

Introduction

These matters come before the Court on Defendants' motions to dismiss. In these three related actions, Plaintiffs James P. Stephenson, as trustee in bankruptcy for MJK Clearing ("the Trustee"), Ferris, Baker Watts, Inc. ("FBW"), and E*Trade Securities LLC ("E*Trade") have separately sued Defendants Deutsche Bank AG ("Deutsche Bank AG"), Deutsche Bank Securities, Inc. ("Deutsche Bank Securities"), Deutsche Bank Securities Limited ("Deutsche Bank SL"), Wayne Breedon, Nomura Canada, Inc. ("Nomura Canada"),² Nomura Securities International, Inc. ("Nomura"),² Scott Reed,² RBF International, Inc. ("RBF"), Kenneth D'Angelo, Richard Evangelista, GenesisIntermedia, Inc. ("GENI"),³ Ramy El-Batrawi, Ultimate Holdings, Ltd. ("Ultimate Holdings"), Adnan Khashoggi, Bradford Keiller,³ James Smith,² and A.G. Edwards & Sons, Inc. ("A.G. Edwards").⁴⁵

Plaintiffs allege Defendants perpetrated or financed "a wide-ranging and sophisticated securities loan and market manipulation scheme" (Trustee Am. Compl. ¶ 1), that "resulted in the largest failure of a U.S. brokerage firm in at least 30 years" (E*Trade Am. Compl. at 1), producing "losses totaling in excess of $100 million." (FBW Am. Compl. ¶ 2.) As alleged by E*Trade:

What makes this story shocking, even in this post-Enron era, is not the quantum of greed involved, the involvement of a headline grabbing cast of characters including the notorious Saudi arms-dealer Adnan Khashoggi, or the scent of money laundering, but rather the sheer audacity and scope of the fraud .... involv[ing] the deliberate, orchestrated participation of at least a dozen people in manipulating, again in highly coordinated fashion, the market for the securities of at least three separate companies, over a period of two years.⁶

(E*Trade Am. Compl. at 1.)

Plaintiffs assert a variety of claims against Defendants under federal and state securities law, state consumer statutes, common law, and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961, et seq. In response to Plaintiffs' overlapping Amended...