In Re CP Ships Ltd. Securities Litigation

Citations: 578 F.3d 1306; 2009 WL 2462367Docket: 08-16334

Court: Court of Appeals for the Eleventh Circuit; August 13, 2009; Federal Appellate Court

Original Court Document: View Document

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Allen Germain, an objector-appellant and Canadian citizen, appeals a district court order approving a settlement in a securities class action against CP Ships Ltd., arguing that the court lacked subject matter jurisdiction over foreign stock purchasers and should have declined jurisdiction based on comity. Germain also contends that the notice of settlement was inadequate and that the settlement was not fair, reasonable, or adequate. The district court's decision is affirmed.

CP Ships Ltd., a container shipping company organized under Canadian law and headquartered in the UK, faced allegations of securities fraud following a significant drop in stock price due to operational cost understatements after transitioning to a new accounting system. The class action claims violations of the Exchange Act, specifically Section 10(b) and 20(a). Initially, the district court dismissed the complaint for failing to meet the PSLRA's heightened pleading standards, but the parties later agreed to a $1.3 million settlement, which is a small fraction of the alleged losses of $130 to $180 million. The settlement class includes some foreign claims but excludes Canadian purchasers on the Toronto Stock Exchange (TSX). An objector raised concerns that the settlement could hinder Canadian class members' ability to pursue their claims in Canada, but the court ruled the objector lacked standing to challenge the settlement, and a supplemental notice was issued to address the concerns raised.

The document outlines critical elements regarding the Canadian Actions and the objections raised by Appellant-Objector Allen Germain concerning a settlement. Germain filed objections on September 4, 2008, which the district court overruled while approving the settlement. Germain subsequently appealed the decision. The court first addressed the issue of subject matter jurisdiction, noting that it reviews such matters de novo. The approval of the settlement agreement is reviewed for abuse of discretion, with proponents responsible for demonstrating the settlement's fairness, reasonableness, and adequacy.

The discussion on subject matter jurisdiction distinguishes between facial and factual challenges. Germain's argument was determined to be a facial challenge, as he did not raise any factual challenge before the district court nor request discovery or a hearing on the matter. The court clarified that a facial challenge requires the court to accept the plaintiff's allegations as true, while a factual challenge involves evidence outside pleadings. Germain did not assert any facts disputing jurisdiction, and the district court's review confirmed the existence of substantial fraudulent activity at CP Ships’ Tampa office. The appellate court concluded that there was no basis to remand the case for further investigation into jurisdictional facts, as Germain's challenge did not demonstrate a lack of subject matter jurisdiction.

Germain, a Canadian citizen, contests the jurisdiction of the district court over both his case and that of other foreign investors who purchased securities on the Toronto Stock Exchange (TSX). The Securities Exchange Act lacks explicit provisions regarding its extraterritorial application, necessitating an analysis of Congress's intent regarding the use of U.S. judicial resources for foreign transactions. Courts have established two primary conclusions concerning transnational securities fraud: Congress intended to address harms from actions abroad that significantly impact U.S. investors or markets, and it did not seek to allow the U.S. to serve as a base for fraudulent schemes affecting foreign victims. 

To determine jurisdiction, two tests have emerged: the 'conduct test' and the 'effects test.' The conduct test evaluates whether wrongful acts occurred within the U.S. and whether those acts had a substantial impact on U.S. citizens or markets. The court finds sufficient grounds to assert jurisdiction under the conduct test for foreign class members who purchased on the TSX, as the complaint alleges significant fraudulent actions were committed in the U.S. 

The conduct test requires that the defendant's actions in the U.S. go beyond mere preparation and directly cause the alleged losses. The Second Circuit's ruling in the case of Berger illustrates this principle, where jurisdiction was upheld based on fraudulent activities orchestrated in the U.S. Despite CP Ships being a foreign corporation, the complaint indicates that fraudulent activities related to financial statements occurred in its Tampa, Florida, offices, fulfilling the requirements of the conduct test.

Subject matter jurisdiction is established over CP Ships' actions due to the fraudulent scheme orchestrated by Halliwell and other executives in Tampa. Germain argues against this jurisdiction, citing the 'conduct test' and claiming that the accounting activities in Tampa were only preparatory for misleading statements made outside the U.S. Germain references the Second Circuit's decision in *Morrison v. Nat’l Aust. Bank Ltd.*, which held that actions in Australia were more central to the fraud than those in Florida. In *Morrison*, the court determined that the manipulation of numbers in Florida was not directly responsible for investor harm, as significant processes in Australia led to the dissemination of the misleading information. In contrast, the current case alleges that Halliwell, as COO and later CEO, made materially false statements from Tampa, where key operations and personnel related to the misconduct were based. The Tampa offices housed the accounting department and important executives, indicating that the central activities of the misconduct occurred there. The Complaint also mentions the SAP conversion project, implemented in Tampa, which was used to address the revision of financial results in a press release.

The press release in question is challenged in the Complaint for being false and misleading, as it allegedly minimized the significance of necessary revisions and inaccurately claimed no impact on the Company's 2004 outlook. Issued on May 11, 2004, after Halliwell's promotion to Chief Executive Officer, the release came during a period when he was primarily responsible for both the alleged financial manipulation and the accuracy of the information presented to investors from Tampa. The Complaint asserts that Halliwell exercised control from Tampa, contrasting this case with Morrison, where the executive actions were based in Australia. In this instance, both the manipulation and the executives responsible for financial accuracy were located in Florida, specifically in Tampa, where Halliwell managed the accounting department. While other challenged statements involved Defendants Miles and Webber from England, the Complaint indicates they did not verify the information from Tampa. Unlike Morrison, where there was a lengthy causation chain, the causation in this case was direct and immediate, justifying the district court's subject matter jurisdiction over claims from foreign purchasers.

Regarding the merits, specifically the notice adequacy to the class, Federal Rule of Civil Procedure 23(e)(1)(B) mandates reasonable direct notice to all class members bound by a proposed settlement. Germain contends that the notice failed to adequately inform class members of their rights concerning the Canadian Actions, but this claim is refuted. The Supplemental Notice clearly informs class members about the Canadian Actions, provides contact information, and warns that failure to opt out of the current settlement could jeopardize their participation in the Canadian Actions.

The district court evaluates class action settlements for fairness, reasonableness, and adequacy, considering factors such as the likelihood of trial success, potential recovery range, settlement fairness within that range, litigation complexity, opposition to the settlement, and the stage of proceedings at the time of settlement approval. Germain challenges the settlement's approval, arguing that foreign class members could achieve greater recovery through Canadian Actions, but does not claim the settlement is unfair for reasons beyond this. The court finds that notice to class members was adequate, allowing them to opt out if they wished to pursue the Canadian Actions, which remain speculative. Additionally, there are no claims suggesting the current recovery is unfair. The court concludes that there was no abuse of discretion in approving the settlement and agrees that releases from state claims are generally reasonable. The district court's exercise of subject matter jurisdiction over foreign purchasers' claims is affirmed, and Germain's objections are dismissed. All other unaddressed arguments are rejected without further discussion.