Opinion
No. 03 Civ. 5384 (SAS).
February 22, 2005
Raymond J. Dowd, Esq., Dowd Marotta LLC, New York, New York, Attorneys for Plaintiffs.
Menachem O. Zelmanovitz, Esq., Rachelle M. Barstow, Esq., Amanda R. Waller, Esq., Morgan, Lewis Bockius LLP, New York, New York, Attorneys for Defendants J.P. Morgan Chase Bank and J.P. Morgan Securities, Inc.
Kevin J. Toner, Esq., Heller Ehrman White McAullife LLP, New York, New York, Attorneys for Defendant Intralinks, Inc.
Harold Hirshman, Esq., Sonnenschein Nath Rosenthal LLP, Chicago, Illinois, Attorneys for Defendant William Blair Company, L.L.C.
Marshall Beil, Esq., Christine M. Fecko, Esq., McGuire Woods LLP, New York, New York, Attorneys for Defendant Banc of America Securities, L.L.C.
Frank H. Wohl, Esq., Lankler Siffert Wohl LLP, New York, New York, Attorneys for Defendant Heller Ehrman White McAuliffe LLP.
MEMORANDUM OPINION AND ORDER
I. INTRODUCTION
This suit arises out of the failed initial public offering of IntraLinks, Inc. ("IntraLinks"), and the subsequent private financing undertaken by the company. Plaintiffs brought this action alleging multiple violations of section 10(b) of the Securities Exchange Act of 1934, of the Employee Retirement Income Security Act of 1974, and state law. In an Order dated July 20, 2004, I dismissed the complaint, in its entirety and with prejudice. Plaintiffs now seek to vacate portions of the July 20 Order relating to IntraLinks' G financing round in 2000, pursuant to Rule 60 of the Federal Rules of Civil Procedure, based on newly-discovered evidence, and allegations that defendants committed a fraud on the court.
II. BACKGROUND
Plaintiffs Adams and Muldoon, with others, co-founded and incorporated IntraLinks in 1996, and served as officers of the company until 2000. All plaintiffs held stock in IntraLinks. Plaintiffs alleged that, sometime in October, 2000, IntraLinks began planning a new round of private financing, the G Round, the details of which were concealed from plaintiffs. The G Round financing heavily diluted the value of plaintiffs' shares. Plaintiffs' complaint alleged that they learned about the G Round only two weeks before its "initial closing [which] occurred on January 31, 2001", and were only able to determine the extent of the dilution of their holdings "after the closing." On the basis of these alleged facts, plaintiffs asserted — among many other claims — a claim for securities fraud, pursuant to Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, arguing that the failure of IntraLinks to disclose the details of the G financing to plaintiffs constituted fraud.
See First Amended Complaint ¶¶ 3, 259, 264.
See id. ¶¶ 3-18, 253.
See id. ¶¶ 230, 231.
See id. ¶ 242.
Id. ¶ 254-55.
See 15 U.S.C. § 78j(b).
Defendants moved to dismiss plaintiffs' Amended Complaint on January 22, 2004. On February 9, 2004, plaintiffs sought leave to file an Order to Show Case which sought, among other things, rescission of the G Round and restoration of the IntraLinks' pre-G Round status quo, and an injunction to prevent IntraLinks from undertaking a proposed short form merger. Plaintiffs contended that IntraLinks had not obtained the necessary shareholder consents to authorize the G Round, and the proposed short form merger was therefore not approved by the required percentage of IntraLinks stock. At a pre-motion conference on February 18, 2004, I denied plaintiffs' request to file an Order to Show Cause, and ordered them to respond to the motion to dismiss, stating that Plaintiffs could, if they wished, file their new claims relating to the proposed short form merger in a separate action.
Plaintiffs promptly filed a new complaint, Adams v. Buck-Luce, which was assigned to Judge Jed Rakoff of the Southern District of New York. In Adams v. Buck Luce, plaintiffs asserted a 10b-5 claim which again sought to enjoin the proposed short form merger, based in part on allegations that the G Round had not been properly authorized.
No. 04 Civ. 1485, filed on February 20, 2004.
No injunction was ordered. In fact, the short form merger took place in June, 2004. Plaintiffs continue to contend that the G Round was not properly authorized, and that the short form merger was therefore improper.
On July 20, 2004, I issued an Opinion and Order dismissing the complaint with prejudice. I found that plaintiffs' 10b-5 claim based on defendants' alleged failure to disclose the details of the G Round was time-barred, because plaintiffs were aware of the alleged fraudulent scheme at least as early as March, 2001 (more than two years prior to the filing of the Complaint) when plaintiffs' counsel wrote to IntraLinks "threatening, in substance, to bring this very claim." I observed that, although plaintiffs alleged that "certain facts regarding the defendants' misconduct did not come to light until January 2004 . . . the fact that plaintiffs continue to gather information regarding [the G Round] does not change the fact that they were on constructive notice of the claim in March of 2001."
See Adams v. IntraLinks, No. 03 Civ. 5384, 2004 WL 1627313 (S.D.N.Y. July 20, 2004).
Id. at *5.
Id.
On the same day (July 20, 2004), plaintiffs filed a third complaint, Adams v. Banc of America Securities, LLC, in New York state court, before Justice Bernard Fried. That complaint also alleges that the short form merger was improper because the G Round was not properly authorized.
Index No. 602297/04.
On August 26, 2004, Judge Rakoff dismissed the Second Amended Complaint in Adams v. Buck-Luce with prejudice. In dismissing plaintiffs' claims that the short form merger violated Rule 10b-5, Judge Rakoff held that plaintiffs had failed to allege causation: "to wit, even if defendants made false and misleading statements to plaintiffs in connection with the [short-form merger] it would not have mattered, since the defendants had sufficient votes to effectuate the merger anyway." Moreover, Judge Rakoff stated that "[t]o the extent . . . that these allegations relate to the G Round offering, they are foreclosed by Judge Scheindlin's dismissal of plaintiffs' prior lawsuit challenging the G Round offering and by concomitant principles of res judicata." On November 29, 2004, Judge Rakoff denied plaintiffs' motion for reconsideration. Plaintiffs have appealed from that order.
Adams v. Buck-Luce, No. 04 Civ. 1485, 2004 WL 2375800, at *2 (S.D.N.Y. Oct. 22, 2004) (citing Grace v. Rosenstock, 228 F.3d 40, 49 (2d Cir. 2000)).
Id.
Plaintiffs now move, inter alia, to vacate portions of my July 20 Order, pursuant to Federal Rule 60(b) and on the basis of newly discovered evidence. This evidence consists of two documents — an amended certificate of incorporation, and a certificate of correction declaring the previous certificate of incorporation void — that have been on file with the Delaware Secretary of State since early March, 2004, but were allegedly not discovered by plaintiffs until November 29, 2004.
In a February 24, 2004 letter, IntraLinks advised certain shareholders of its intention to file these documents, and explained their purpose:
The [G Round] contemplated the approval of an amended and restated certificate of incorporation enabling parts of the transaction (the "Restated Charter"). At that time, the Company obtained written consents approving the Restated Charter from holders of over 70% of the Company's issued and outstanding Common Stock on an as-converted basis, and although holders of a majority of the Common Stock of the Company approved elements of the [G Round], formal written consents from the holders of a majority of the Company's Common Stock were not delivered to the Company. The Company now wishes to eliminate any uncertainty concerning the due authorization of the Restated Charter by seeking and obtaining new approval and consents and then filing the new Charter.
Plaintiffs argue that these certificates are evidence that the G Round was not properly authorized at the time, and therefore did not, technically, take place until the certificates of correction were filed in March 2004, if then. If plaintiffs are correct, this is somewhat contrary to the representations of defendants, who have, throughout this litigation, characterized the G Round as having "closed" on January 31, 2001. Plaintiffs argue that this is evidence of fraud on the part of defendants.
Defendants argue that they have correctly characterized the G Round as having "closed" in 2001. See Defendants' Letter to the Court of January 21, 2005 at 2-4. I make no finding here as to whether the G Round was properly authorized in 2001, or whether, if it was not properly authorized at that time, the March 2004 filings effectively corrected the deficiency. I note, however, that this is clearly a complex issue of Delaware corporate law, and defendants' argument that the G Round was properly authorized in 2001 is colorable, at the very least.
On the basis of this evidence, and the alleged fraud, plaintiffs seek various forms of relief. They request that the Court "(1) vacat[e] any finding of fact relating to the G Round having occurred on January 29, 2001; (2) enter a finding of fact that the issuance of G Round stock was not duly authorized in accordance with Section 228 of the Delaware General Corporation Law; (3) vacate any finding of fact that Plaintiffs were on constructive notice of fraud in the G Round[;] (4) grant the relief originally sought by Plaintiffs' February 18, 2004 Order to Show Cause, and vacat[e] this Court's dismissal of [the 10b-5 claim, and] (5) grant leave to replead 10b-5 claims related to the G Round."
Plaintiffs' Motion to Vacate Judgment.
III. DISCUSSION
1. Plaintiffs' Rule 60 Motion
Under Federal Rule of Civil Procedure 60(b)(2), a court may relieve a party from an order on the basis of "newly discovered evidence which by due diligence could not have been discovered in time to move for a new trial under Rule 59(b)." Under Rule 60(b)(3), a district court may relieve a party from a final judgment for "fraud." In addition, Rule 60(b) allows a court to set aside a judgment for fraud on the court.
See State St. Bank Trust Co. v. Inversiones Errazuriz Limitada, 374 F.3d 158, 176 (2d Cir. 2004).
"To prevail on a motion for relief pursuant to Rule 60(b)(2), a movant must demonstrate that he was justifiably ignorant of the newly discovered evidence despite due diligence." Plaintiffs cannot meet this standard. The documents plaintiffs claim to have discovered were publicly filed. Plaintiffs could certainly have discovered them if they had acted with due diligence. Plaintiffs were well aware that IntraLinks planned to file these documents: plaintiffs in fact attached IntraLinks' February 24, 2004 letter, quoted above, to their opposition to defendants' motion to dismiss. Moreover, plaintiffs were provided with the evidence underlying their claims regarding the G Round — the written consents for the G Round and a capitalization table of the shareholders' holdings — in October 2003.
Id. at 178.
See Plaintiffs' Memorandum of Law in Opposition to Motion to Dismiss at 3; Declaration of Raymond J. Dowd in Support of Opposition to Motion to Dismiss, Ex. A.
See Declaration of Kevin J. Toner, counsel for IntraLinks, in support of Motion to Dismiss, Exs. F and G.
Even if the documents were "newly discovered," they would not affect the outcome of the July 20 Order. In that Order, I held that plaintiffs' claims of fraud relating to the G Round were time-barred because plaintiffs were on constructive notice of the alleged fraudulent scheme in March 2001. Whether or when the G Round was properly authorized is simply irrelevant to that finding.
For the same reasons, plaintiffs' motion must fail if it is construed as a motion under Rule 60(b)(3), on the basis of fraud, or Rule 60(b), on the basis of fraud on the court. "To prevail on a Rule 60(b)(3) motion, a movant must show that the conduct complained of prevented the moving party from fully and fairly presenting his case. These same principles apply when a movant seeks to set aside a judgment on the basis of fraud on the court." Plaintiffs allege that defendants' statements to the Court that the G Round "closed" in January 2001 were false, because the G Round was not properly authorized at that time. Whether or not the G Round financing was authorized was irrelevant to my July 20 Order. Plaintiffs' motion to vacate the July 20 Order must therefore be denied.
See State Street Bank Trust, 374 F.3d at 178 (quotations and citations omitted). See also Davenport Recycling Assocs. v. C.I.R., 220 F.3d 1255, 1262 (11th Cir. 2000) ("Fraud on the court must involve an unconscionable plan or scheme which is designed to improperly influence the court in its decision, preventing the opposing party from fully and fairly presenting his case.") (quotation omitted).
Plaintiffs' request that I grant the relief originally sought in their order to show cause is equally baseless. I declined to consider their order to show cause on the ground that their claims relating to the proposed short form merger should be brought as a separate action; defendants' representations that the G Round had effectively closed in 2001, whether true or false, were irrelevant to that ruling.
Plaintiffs' request that I vacate any finding of fact in my July 20 Order to the effect that the G Round occurred in 2001 simply makes no sense. I made no finding of fact as to when the G Round occurred in that Order: instead, in ruling on defendants' motion to dismiss, I took the statements in the complaint regarding the closing of the G Round as true. Nor is there any basis for granting plaintiffs' request that I now make a finding of fact as to when the G Round closed. As defendants correctly observe, "what Plaintiffs truly seek is an advisory opinion to the effect that Judge Rakoff wrongly decided Adams v. Buck-Luce. This, of course, would be wholly improper." Plaintiffs' recourse is to appeal Judge Rakoff's decision, if they believe it was wrongly decided; better yet, they may wish to take to heart Judge Rakoff's advice that "at most, this case involves state law issues of corporate governance that are best litigated, if at all, in the state courts."
Defendants' Letter to the Court of January 21, 2005 at 8.
Adams v. Buck-Luce, 2004 WL 2375800, at *3.
2. Leave to Amend
Finally, plaintiffs seek leave to plead a new 10b-5 claim. The basis for this claim is that defendants' alleged misrepresentations, made during the course of this litigation, regarding the effective date of the G Round, constitute a violation of Rule 10b-5. This claim is wholly meritless. As Judge Rakoff has already determined, plaintiffs are unable to allege causation: "even if defendants made false and misleading statements to plaintiffs in connection with the [short-form merger] it would not have mattered, since the defendants had sufficient votes to effectuate the merger anyway." Moreover, even if plaintiffs had relied in some fashion on defendants' argument that the G Round effectively closed in 2001, that reliance could not possibly have been reasonable. Plaintiffs had all the information necessary to challenge defendants' characterization of the G Round.
Id. at *2.
See Kregos v. The Associated Press, 3 F.3d 656, 665 (2d Cir. 1993) (holding, in the context of a common law fraud claim, that "it is unreasonable for one to rely on the advice of adversary counsel . . . when both parties are aware that adverse interests are being pursued.").
Plaintiffs also attempt to allege causation by arguing that the Court relied on defendants' characterization of the G Round, in dismissing plaintiffs' complaint and in rejecting plaintiffs' Order to Show Cause as not related to the pending matter. Plaintiffs argue that, because of the Court's reliance on defendants' alleged misrepresentations, plaintiffs were deprived of the remedy of an injunction to block the short form merger. In this Circuit, a plaintiff minority stockholder may make out a 10b-5 claim where he or she, in reliance on misrepresentations by the controlling shareholder, fails to exercise a right to enjoin a merger. Here, the allegation is not that plaintiffs relied on defendants' statements, but that the Court did. Plaintiffs offer no support for this extension of the Goldberg doctrine — an extension which, if accepted, would cause enormous mischief and fly in the face of well-established interpretation of the reliance requirement. Even if the Court relied on uncontestably false information in refusing to enjoin a merger, no plaintiff relied on that misrepresentation to his or her detriment; the crucial element of reliance is clearly absent under plaintiffs' novel, but fatally flawed theory. At best, plaintiffs have a common law tort action, in which they can allege that they were damaged as a result of defendants' false representations. Moreover, defendants' characterization of the G Round was far from uncontestably false: it was at least colorable, and could not support a claim of fraud. Indeed, if plaintiffs' argument were accepted, every colorable but incorrect argument of law made in opposition to an attempt to enjoin a merger would be a new 10b-5 violation. In any case, as noted earlier, defendants' representations regarding the effective date of the G Round were irrelevant to my decision to reject their attempt to enjoin the short form merger as unrelated to the present case. Plaintiffs' proposed amendment would therefore be unable to withstand a motion to dismiss, and must be denied as futile.
See Goldberg v. Meridor, 567 F.2d 209 (2d Cir. 1977).
See Adams v. Buck-Luce, 2004 WL 2375800, at *3 (rejecting plaintiffs' fraud claim based on defendants' representations that the merger was governed by New York, rather than Delaware law: plaintiffs' argument as to choice of law was "a legally doubtful argument at best. Accordingly, any [such representation] even if ultimately found incorrect, could not possibly support an inference of fraudulent scienter sufficient to sustain the instant claim of fraud.").
See Milanese v. Rust-Oleum Corp., 244 F.3d 104, 110 (2d Cir. 2001).
3. Defendants' Request for Sanctions
Defendants have requested, pursuant to section 21(D)(c) of the Private Securities Litigation Reform Act ("PSLRA"), that the Court make findings regarding plaintiffs' and their counsel's compliance with Rule 11 in connection with their filing of the Amended Complaint and the present motion. Section 21(D)(c), entitled "Sanctions for abusive litigation," provides that:
In any private action arising under this chapter, upon final adjudication of the action, the court shall include in the record specific findings regarding compliance by each party and each attorney representing any party with each requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any complaint, responsive pleading, or dispositive motion.
If the court determines that there has been a violation of Rule 11, section 21(D)(c)(2) imposes mandatory sanctions and adopts a rebuttable presumption that the appropriate sanction for noncompliance "is an award to the opposing party of the reasonable attorneys' fees and other expenses incurred."
The present Opinion and Order constitutes a "final adjudication." Accordingly, this Court must make the Rule 11 findings mandated by that statute. Based upon a preliminary review of the record, it seems probable that Rule 11 was violated in this case. "A pleading, motion or other paper violates Rule 11 either when it has been interposed for any improper purpose, or where, after reasonable inquiry, a competent attorney could not form a reasonable belief that the pleading is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification or reversal of existing law." Many of plaintiffs' numerous claims appear to be frivolous, patently unwarranted by existing law and unsupported by any argument for the modification of existing law — although the extreme disorganization of plaintiffs' papers makes it hard to be certain. Some of plaintiffs' claims and arguments, especially on the present motion, seem so ill-defined and incoherent that they are, in the words of the physicist Wolfgang Pauli, `not even wrong.'
Kropelnicki v. Siegel, 290 F.3d 118, 131 (2d Cir. 2002).
See Republic of Venez. v. Philip Morris, Inc., 287 F.3d 192, 196 (D.C. Cir. 2002) (quoting Pauli's phrase).
The statute also provides that "[p]rior to making a finding that any party or attorney has violated Rule 11 of the Federal Rules of Civil Procedure, the court shall give such party or attorney notice and an opportunity to respond." Although plaintiffs state in their reply memorandum of law that they "address the issues raised by the Polar request for sanctions," I can discern no serious attempt in that brief to address the issue of sanctions. Accordingly, plaintiffs and their counsel shall show cause within fourteen days from the date of this Opinion and Order why sanctions should not be imposed under Rule 11. Because sanctions may be imposed against plaintiffs, plaintiffs' counsel or both, any submission must address the conduct of plaintiffs and plaintiffs' counsel independently. Defendants may also file a response within fourteen days of receipt of plaintiffs' submission.
Plaintiffs appear to be under the impression that defendants' request for sanctions is based on Polar Int'l Brokerage Corp. v. Reeve, 196 F.R.D. 13 (S.D.N.Y. 2000), cited at oral argument by the defendants as a case in which this Court made Rule 11 findings pursuant to the PSLRA. Accordingly, plaintiffs attempt to respond to the request for sanctions by distinguishing the facts of Polar. This is not an adequate or even a pertinent response: to respond effectively to defendants' request, plaintiffs must show that each of their relevant filings complied with Rule 11.
IV. CONCLUSION
For the foregoing reasons, plaintiffs' motion is denied. The Clerk of the Court is instructed to close this motion [#39]. Plaintiffs and their counsel may file any opposition to the imposition of Rule 11 sanctions within fourteen days of this Order. If defendants wish to file a reply, they may do so within fourteen days of receiving plaintiffs' response.
SO ORDERED.