United States District Court, S.D. Iowa, Central Division
AVIVA LIFE AND ANNUITY COMPANY and AVIVA LIFE AND ANNUITY COMPANY OF NEW YORK, Plaintiffs,
STEVEN H. DAVIS, STEPHEN DICARMINE, and JOEL SANDERS, Defendants
For Aviva Life and Annuity Company, Aviva Life and Annuity Company of New York, Plaintiffs: Alfred S Lurey, LEAD ATTORNEY, PRO HAC VICE, Stephen E Hudson, PRO HAC VICE, KILPATRICK TOWNSEND & STOCKTON LLP (GA), ATLANTA, GA; John T Clendenin, LEAD ATTORNEY, NYEMASTER GOODE PC, DES MOINES, IA; Helen K. Michael, PRO HAC VICE, KILPATRICK TOWNSEND & STOCKTON LLP (WDC), WASHINGTON, DC.
For Steven H Davis, Defendant: Diana M. Watral, Kevin T. Van Wart, Steven N. Serajeddini, LEAD ATTORNEYS, PRO HAC VICE, KIRKLAND & ELLIS LLP, Chicago, IL; Kendra Lou Mills Arnold, Matthew Whitaker, LEAD ATTORNEYS, WHITAKER HAGENOW & GUSTOFF LLP WHG, Des Moines, IA.
For Joel Sanders, Defendant: Christopher C. Gartman, Kathryn A. Coleman, Ned H. Bassen, LEAD ATTORNEYS, PRO HAC VICE, HUGHES HUBBARD & REED, LLP, New York, NY; Kendra Lou Mills Arnold, Matthew Whitaker, LEAD ATTORNEYS, WHITAKER HAGENOW & GUSTOFF LLP WHG, Des Moines, IA.
For Stephen DiCarmine, Defendant: Christopher C. Gartman, Kathryn A. Coleman, Ned H. Bassen, LEAD ATTORNEYS, PRO HAC VICE, HUGHES HUBBARD & REED, LLP, New York, NY; Kendra Lou Mills Arnold, Matthew Whitaker, LEAD ATTORNEYS, WHITAKER HAGENOW & GUSTOFF LLP WHG, Des Moines, IA; Austin V Campriello, Kathryn Emily Gebert, Mary Beth Buchanan, PRO HAC VICE, BRYAN CAVE LLP (NY), New York, NY.
JAMES E. GRITZNER, Chief United States District Judge.
This matter comes before the Court on motions to dismiss by Defendants Steven H. Davis (Davis), Stephen DiCarmine (DiCarmine), and Joel Sanders (Sanders). Plaintiffs Aviva Life and Annuity Company and Aviva Life and Annuity Company of New York (collectively, Aviva) resist. A hearing on the motions was conducted on March 13, 2014. Attorneys Helen Michael, Stephen Hudson, and John Clendenin appeared on behalf of Aviva. Attorney Mary Beth Buchanan appeared on behalf of DiCarmine; attorney Kathryn Coleman appeared on behalf of Sanders; and attorney Diana Watral appeared on behalf of Davis. Attorney Matthew Whitaker was present on behalf of DiCarmine, Sanders, and Davis (collectively, Defendants). The motions are fully submitted and ready for disposition.
A. Factual Background
Davis, DiCarmine, and Sanders are former managers of Dewey and LeBoeuf
LLP (Dewey), which was created  in 2007 and was, until recently, one of the country's largest law firms. Davis was the Chairman and head of the executive committee and managed Dewey's day-to-day operations, with the ability to act with the full authority of Dewey's Executive Committee and the authority to borrow funds on Dewey's behalf. DiCarmine was the Executive Director of Dewey, with broad authority over Dewey's operations. Sanders was the Chief Financial Officer of Dewey, with broad authority over Dewey's financial affairs. Davis was a partner in the law firm, whereas DiCarmine and Sanders were salaried employees.
Shortly after Dewey's inception in 2007, Dewey, through Davis as the firm's chairman, offered large compensation guarantees to many of the partners without disclosing the guarantees to the public, investors, or the rest of the partners. Dewey failed to meet profit projections in 2008, so Dewey used 2009 revenues to make payments on 2008 compensation guarantees. Profits fell again in 2009, and by 2010, Dewey owed the partners approximately $100 million. Despite these problems, Dewey continued to provide additional compensation guarantees to their partners.
In 2009 and 2010, Dewey and Defendants sought out institutional investors to purchase notes issued by Dewey. Dewey and Defendants used materials to convince investors to purchase the notes which materials allegedly did not mention compensation guarantees and materially misrepresented Dewey's true financial situation. On April 16, 2010, Aviva claims it relied on these misrepresentations in purchasing $35 million in Dewey notes (the Note Purchase Agreement).
In October 2011, DiCarmine disclosed to Dewey's partners that approximately one hundred of Dewey's three hundred partners had compensation guarantees. In January 2012, Davis disclosed to the partnership that the 2011 profits would not be distributed due to lower than expected profits and the deferred compensation due under the compensation guarantees. The news caused numerous partners to leave Dewey, and was quickly followed by additional revelations that Dewey had misstated its 2010 and 2011 financial statements and that Defendants had used Dewey's profits for questioned payments to themselves and other partners.
Aviva sold the notes in May 2012, for $19,270,000, to Sea Port Group Securities, LLC (Sea Port Group). Sea Port Group in turn sold the notes to LJF Holdings.
On May 28, 2012, Dewey filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the Southern District of New York, No. 1:12-bk-12321-MG (the Dewey Bankruptcy). The bankruptcy court confirmed Dewey's Chapter 11 liquidation plan on February 27, 2013, No. 1:12-bk-12321- ECF No. 144, and the plan became effective on March 22, 2013. LJF Holdings signed a settlement release wherein they released Dewey from any
and all liability on any securities claims LJF Holdings had the right to bring.
B. Procedural Background
Plaintiffs filed the instant action in this Court on December 14, 2012, claiming Defendants violated various federal and Iowa state securities laws connected with the sale of the Dewey notes. Defendants waived service. Plaintiffs' claims against Defendants arise under § § 10(b) and 20(a) of the Securities and Exchange Act of 1934, 15 U.S.C. § § 78j(b) and 78t(a), and Rule 10b-5 promulgated by the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5. Federal jurisdiction over these claims is established pursuant to 28 U.S.C. § 1331 and 15 U.S.C. § 78aa(a). Supplemental jurisdiction over Plaintiffs' state law claims for violation of Iowa Code § § 502.509(2) and (7) is established pursuant to 28 U.S.C. § 1367(a).
Pursuant to a Joint Stipulation, the Court entered an Order on March 7, 2013, allowing Defendants to file motions to transfer venue that did not constitute an appearance and providing that following the Court's resolution of those motions, Defendants would have thirty days to either answer or move to dismiss Aviva's Complaint. This Court denied Defendants' motions to transfer venue on September 9, 2013.
Defendant Davis filed his Motion to Dismiss on October 9, 2013, as did Defendants DiCarmine and Sanders in a joint motion. Plaintiffs jointly responded to Defendants' motions on November 20, 2013. Defendants filed their reply briefs on December 11, 2013, and Defendant Sanders filed a notice of additional authority on that date. Plaintiffs responded to the notice of additional authority on December 23, 2013. On March 11, 2014, Plaintiffs filed a request that the Court take judicial notice of a copy of a New York State Court indictment against Defendants and Zachary Warren (the Indictment), as well as a copy of the Securities and Exchange Commission's (SEC) Complaint against Defendants, Francis Canellas, and Thomas Mullikin in the Southern District of New York (SEC Complaint). A hearing was held in this matter on March 13, 2014, at which time the propriety of taking judicial notice of these public documents was considered, for purposes of Fed.R.Evid. 201(e), and Defendants agreed that this Court can take judicial notice of the Indictment and SEC Complaint for purposes of the present motions.
A. Article III Standing
Defendants argue that Plaintiffs' Complaint should be dismissed because Plaintiffs
lack Article III standing to bring their claims. Defendants contend that Plaintiffs are not the proper party to bring the claims at issue because Plaintiffs sold the notes and some of their rights to a third party in May 2012. The extent of this assignment is in dispute. Plaintiffs respond that when they sold the notes to Sea Port Group, they retained the right to bring the securities claims at issue. Plaintiffs direct the Court to Section A of the Transfer Agreement, to the definition of " Transferred Rights," which Plaintiffs assert only transferred those claims that are " permitted to be assigned under applicable law." Davis Mem. in Support of Mot. to Dismiss, Ex. C p. 2, ECF No. 55-4. Plaintiffs assert that because the federal securities claims at issue were not assignable under applicable law, the claims must remain with Plaintiffs under settled legal principles.
First, it is widely accepted that " federal law governs the assignability of claims under the federal securities laws." Bluebird Partners, L.P. v. First Fidelity Bank, N.A.,85 F.3d 970, 974 (2d Cir. 1996) (citing In re Nucorp Energy Sec. Litig., 772 F.2d 1486, 1489 (9th Cir.1985); Lowry v. Baltimore & Ohio R.R. Co., 707 F.2d 721, 727 (3rd Cir.) (en banc) (Garth, J., concurring); In re Saxon Sec. Litig., 644 F.Supp. 465, 473-74 (S.D.N.Y. 1985); Gulfstream III Assocs., Inc. v. Gulfstream Aerospace Corp., 995 F.2d 425, 437 (3rd Cir. 1993)). Second, it is widely accepted that claims under § 10(b) are not automatically assigned with the sale of securities. Id.  However, as has been noted by other ...