Mdcm Holdings, Inc. v. Credit Suisse First Boston Corporation

216 F.Supp.2d 251 (S.D. New York 2002)

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Nature of the Case

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Facts

Mortgage.com (P) a company that specialized in providing online mortgage services, was one of the many Internet-related and high technology companies that went public in the late 1990s. In July 1999, P's Board of Directors authorized the corporation to enter into an underwriting agreement with D, one of the nation's leading underwriters. They executed an agreement, and that same day, shares in P were issued to the public and began trading on the NASDAQ National Market under the ticker symbol 'MDCM.' P sold 7,062,500 shares of common stock to D for $7.44 per share, exactly 7% less than the public offering price of $8.00 per share. D exercised an option under the underwriting agreement and acquired 379,375 additional shares for the same price. P's IPO generated gross proceeds of approximately $59.5 million. The compensation for D's service was $4,167,450. Two weeks after the IPO, P's stock had almost doubled in value. On August 26, the stock price hit $22-3/4 per share, closing at $15-3/8 per share. The complaint alleges that D used this stupid and irrational desire for internet stocks to enrich itself by requiring that customers who wanted to purchase IPO shares pay it the prospectus price plus, directly or indirectly, a share of profits that the customers realized. D's actual compensation was thus far greater than the amount agreed upon by the issuers in the underwriting agreements. P asserts that D purposefully underpriced certain securities in order to guarantee that those shares would rise in value once issued to the public. P should have realized additional gross proceeds of $54 million to $109 million. P instituted this class action against D. The Complaint alleges that Credit Suisse breached the explicit terms of the underwriting agreements in a number of ways. D did not sell the IPO shares to the public as the contract requires, but instead directed shares to favored customers. D did not sell the IPO shares for the price provided in the prospectus but instead required purchasers to pay a higher price. D violated implied covenants of good faith and fair dealing that accompanied its performance of the underwriting agreements. D allegedly violated these covenants by underpricing the IPO shares so that it could allocate undervalued shares to favored clients and receive additional compensation. D owed fiduciary duties of loyalty, due care and fair dealing to the issuers. These duties arose because D was the underwriter of the IPOs and had superior knowledge and expertise, receipt of confidential information, and acted as an agent and advisor to the issuers. D violated those duties by allocating shares to favored customers and sharing in the profits made by those customers. P also asserts a claim of unjust enrichment against D on the ground that the issuers 'conferred benefits upon D in connection with their IPOs which, in the circumstances ... would be inequitable for D to retain.' P also alleges that the profit-sharing compensation from favored customers unjustly enriched D. D argues that P's complaint should be dismissed because Ps state law claims are barred by SLUSA, 15 USC 77p.