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State law breach of contract claims by companies alleging that an investment bank took kickbacks in initial public offerings are not pre-empted by federal securities laws, a Southern District of New York judge has ruled. Judge Shira A. Scheindlin refused to grant a motion to dismiss made by Credit Suisse First Boston Corp., ruling that state contract claims are not blocked by the Securities Litigation Uniform Standards Act of 1998 because they do not allege a “material misrepresentation or omission of a material fact.” Such claims of misrepresentations or omission must be brought under federal law, which pre-empts state law claims of the same nature because of securities law reforms of the last several years. The decision in MDCM Holdings Inc. v. Credit Suisse, 01 Civ. 9333 represents the clearing of a significant hurdle for lead plaintiff Mortgage.com and more than 100 other companies seeking class action status. They claim that the investment bank violated contracts by taking kickbacks from favored customers who were steered stock in initial offerings. The MDCM case is distinct from the hundreds of initial public offering cases brought by shareholders that have been consolidated before Scheindlin for discovery purposes. Preparing in 1999 to go public under the ticker symbol MDCM, Mortgage.com entered into an underwriting agreement with Credit Suisse in which it agreed to sell the investment bank more than 7 million shares of common stock for $7.44 per share. The public offering price was $8 per share, and the agreement called for Credit Suisse to receive the difference between the two prices as compensation. The offering, which raised $59.5 million for Mortgage.com and generated more than $4 million in compensation for Credit Suisse, resulted in the company’s stock increasing in value, at one point, to over $22 per share. But Mortgage.com, now known as MDCM Holdings, later alleged that the surge in the stock’s price largely benefited Credit Suisse, because the bank required customers to pay the price listed in the prospectus and then share, directly or indirectly, in the profits made by those customers. Mortgage.com also contended that Credit Suisse intentionally underpriced the stock knowing it would benefit from the “pop” following the opening of trading. Leading a class of companies whose stock increased in value by more than 15 percent in the first 30 days following initial offerings made during 1998, 1999 and part of 2000, Mortgage.com made three claims for breach of contract and a fourth claim for unjust enrichment, all under state law. Credit Suisse moved to dismiss, arguing that MDCM’s state law claims were barred by the Securities Litigation Uniform Standards Act (SLUSA), 15 U.S.C. �� 77p and 78bb(f). Credit Suisse also alleged that MDCM lacked standing to bring suit, that the company failed to identify a contractual provision that had been breached, that the unjust enrichment claim must fail and that a claim for breach of fiduciary duty was pre-empted under the New York State’s securities statute, the Martin Act. Judge Scheindlin began with the Private Securities Litigation Reform Act of 1995 (PSLRA), which heightened pleading standards and limited recoveries for actions brought under the Securities Act of 1933 and the Securities Exchange Act of 1934. But when the PSLRA led to a flood of suits in state courts, Scheindlin said, Congress responded by passing SLUSA in 1998. “The purpose of SLUSA was to make federal court the exclusive venue, and federal law the exclusive remedy, for most securities class actions,” she said. The statute mandates federal pre-emption of state claims where there is an allegation of a “misrepresentation or omission of a material fact,” or the defendant has used “any manipulative or deceptive device or contrivance” in “connection with the purchase or sale of a covered security.” Scheindlin said Credit Suisse’s motion to dismiss must fail because MDCM’s complaint does not allege any “misrepresentations or omissions.” “MDCM only alleges that Credit Suisse signed numerous contracts in which it promised to do one thing but then did another,” she said. She added that fraud arises only in the context of contracts where a defendant secretly intended not to perform or knew it would be unable to perform when they signed the agreement. “MDCM has not alleged that Credit Suisse had such an intent and, to prevail on its breach of contract claims, MDCM need not offer any evidence about Credit Suisse’s mental state,” she said. “Under its current claims, it only needs to prove that Credit Suisse did not satisfy the requirements laid out in the underwriting agreements. Therefore, the contract claims do not involve allegations of misrepresentations by Credit Suisse.” STANDING Scheindlin went on to find that MDCM has standing to bring suit and that the company had alleged “viable claims” of breach of contract, breach of good faith and breach of fiduciary duty. She also found that the company had properly stated a claim for unjust enrichment and that the Martin Act does not pre-empt the claim of breach of fiduciary duty. Steven J. Toll, Linda P. Nussbaum and Susan R. Schwaiger of Washington, D.C.-based Cohen, Milstein, Hausfeld & Toll represented MDCM. Robert W. McCaw and Fraser L. Hunter Jr. of D.C.-based Wilmer, Cutler & Pickering represented Credit Suisse.

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