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TRI-STAR FARMS LTD v. MARCONI

September 18, 2002

TRI-STAR FARMS LTD. AND THE CITY OF MIAMI FIRE FIGHTERS' AND POLICE OFFICERS' RETIREMENT TRUST FUND, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
V.
MARCONI, PLC, ROGER HURN, GEORGE SIMPSON, JOHN MAYO, AND STEVE HARE, DEFENDANTS



The opinion of the court was delivered by: Gary L. Lancaster, District Judge

  MEMORANDUM

This is a class action in which plaintiffs allege defendants violated of the federal securities laws. Plaintiffs argue that defendants artificially inflated the market price for Marconi, PLC ("Marconi") securities by issuing fraudulently false and misleading statements in violation of section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated by the Securities and Exchange Commission ("SEC"), 17 C.F.R. § 240-10b-5. Plaintiffs also contend that the individual defendants are liable as controlling persons under section 20(a) of the Exchange Act for Marconi's alleged violations of section 10(b). Plaintiffs seek money damages.

Defendants have filed a motion to dismiss the Consolidated Amended Class Action Complaint ("Complaint")*fn1 pursuant to Fed.R.Civ.P. 12(b)(1) and (6). First, defendants argue that this court lacks subject matter jurisdiction over named plaintiff Tri-Star Farms, Ltd. ("Tri-Star") and any other foreign purchasers of Marconi ordinary shares because their claims are predicated on the purchase of the securities of a foreign company on a foreign exchange and based on the conduct of foreign citizens in a foreign country. Second, defendants argue that the Complaint should be dismissed in its entirety for failure to state a claim upon which relief may be granted.*fn2

Plaintiffs oppose defendants' motion, arguing that the court has subject-matter jurisdiction over the claims of all plaintiffs, including those who purchased Marconi ordinary shares on the London Stock Exchange, because defendants engaged in extensive fraud-related conduct in the United States. Plaintiffs further argue that the Complaint, read in the light most favorable to them, provides sufficient factual support and particularity to survive defendants' motion to dismiss for failure to state a claim upon which relief can be granted.

I. BACKGROUND

Plaintiffs seek to bring this action on behalf of a class comprised of all purchasers of the ordinary shares*fn3 and American Depository Receipts ("ADRs")*fn4 of Marconi between April 10, 2001, the date of the first alleged misrepresentation, and July 5, 2001, the day after Marconi suspended all trading in its shares and issued a profit warning (the "class period"). Named plaintiff Tri-Star Farms Ltd., a foreign corporation, allegedly purchased Marconi ordinary shares at artificially inflated prices during the class period and was damaged thereby. Named plaintiff the City of Miami Fire Fighters' and Police Officers' Retirement Trust Fund allegedly purchased Marconi ADRs at artificially inflated prices during the class period and was damaged thereby. The putative class seeks remedies under the Exchange Act.

Defendant Marconi is a United Kingdom corporation with its executive offices and principal place of business located in London, United Kingdom. According to Marconi's SEC filings, as of August 31, 2000, Marconi had 2.76 billion ordinary shares outstanding. Holders of only 0.15% of those shares are residents of the United States. Marconi ordinary shares trade on the London Stock Exchange. Marconi's ADRs were registered with the SEC and traded in the United States on the NASDAQ market. As of August 31, 2000, Marconi ADRs accounted for approximately 1% of Marconi's total issued share capital. Virtually all holders of Marconi ADRs are United States residents.

The individual defendants are Roger Hurn, Marconi's former Chairman; George Simpson, Marconi's former Chief Executive Officer; John Mayo, Marconi's former Finance Director and Deputy Chief Executive; and Steve Hare, Marconi's Chief Financial Officer.

According to the complaint, Marconi is a global communications and information technology company that supplies advanced communication solutions and key technologies and services for the Internet. The complaint alleges, inter alia, that toward the end of 2000, Marconi's competitors began announcing that the market for telecommunications equipment had collapsed. Although these competitors issued profit warnings and drastically reduced earnings estimates and major Marconi customers warned that they intended to cut capital expenditures, Marconi reassured investors during the class period that its revenues would rise. Marconi also claimed that its geographic and business mix left it relatively immune from the economic downturn and that, unlike its competitors, it saw no need to change its guidance. Plaintiffs allege that these assurances were false and misleading and made without a reasonable basis.

The specific false and misleading statements which form the basis of plaintiffs' complaint were contained in two Form 6-Ks filed with the SEC on April 10 and May 17, 2001*fn5; and in articles published in the Financial Times (London) on April 11, May 18, and June 19, 2001.

On July 4, 2001, Marconi suspended all trading in its shares on the London Stock Exchange for the day while its board met. At the end of the trading day, Marconi belatedly issued a profit warning, disclosing that sales for the year would be fifteen percent lower than the previous year and that its operating profit before exceptional items would be down approximately fifty percent for the year ending March 31, 2002.

Plaintiffs allege that this disclosure of Marconi's true financial condition was devastating to Marconi's shareholders. When trading resumed on July 5, 2001, the price of Marconi's ordinary shares dropped by over fifty percent. Similarly, Marconi's ADRs dropped, on extraordinarily heavy trading volume, from a closing price of $7.03 on July 3, 2001 to a closing price of $3.35 on July 5, 2001.

The complaint alleges that, due to defendants' deceptive and illegal conduct, plaintiffs and the other putative class members purchased their Marconi ordinary shares and/or ADRs at grossly inflated prices and were damaged thereby.

II. DISCUSSION

A. Subject Matter Jurisdiction

1. Standard of Review

When a court considers a motion to dismiss for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1) ("Rule 12(b)(1)"), it must first determine whether the defendant is making a facial or factual jurisdictional attack. In a facial jurisdictional attack, where the defendant asserts that the allegations of the complaint are insufficient to establish jurisdiction, the court must consider the allegations of the complaint as true and draw all reasonable inferences in favor of the non-moving party. Mortensen v. First Fed. Sav. & Loan Ass'n, 549 F.2d 884, 891 (3d Cir. 1977). In a factual jurisdictional attack, where the defendant argues that the court lacks jurisdiction based on evidence outside of the pleadings, the standard of review is very different. "Because at issue in a factual 12(b)(1) motion is the trial court's [actual] jurisdiction — its very power to hear the case — [rather than simply the sufficiency of plaintiff's allegations] there is substantial authority that the trial court is free to weigh the evidence and satisfy itself as to the existence of its power to hear the case." Mortensen, 549 F.2d at 891. Thus, when presented with a factual 12(b)(1) motion, the court may consider evidence outside of the pleadings, id., and need only accept the plaintiffs' uncontroverted allegations as true, Cedars-Sinai Med. Ctr. v. Watkins, 11 F.3d 1573, 1583 (Fed. Cir. 1993) (citing Gibbs v. Buck, 307 U.S. 66, 72 (1939) and 5A Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure §§ 1350, 1363, at 219-20, 457 (2d ed. 1990)).

2. Subject-Matter Jurisdiction Under the Exchange Act

The primary issue in this case involves the extraterritorial reach of the federal securities laws. Specifically, the court must decide whether the Exchange Act confers upon it subject-matter jurisdiction over the claims of Tri-Star and any other foreign class members who purchased ordinary shares of Marconi, a foreign company, on the London Stock Exchange.*fn6

Defendants argue that the court lacks subject-matter jurisdiction over such putative class members because the federal securities laws do not apply to claims of foreign purchasers of securities of a foreign company on a foreign exchange based on conduct of foreign citizens that took place exclusively in a foreign country. Defendants contend that all of the alleged wrongful conduct in this case took place in the United Kingdom and that a finding of subject-matter jurisdiction in this action would establish a predicate for United States ...


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