Steginsky v. Xcelera Inc. et al
ORDER denying 40 Motion for Default Judgment; granting 43 Motion to Dismiss. Signed by Judge Stefan R. Underhill on 3/14/13. (Munoz, A.)
UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
GLORIA STEGINSKY, On behalf of
Herself and All Others Similarly Situated,
No. 3:12-cv-188 (SRU)
XCELERA, INC., et al.,
RULING AND ORDER ON MOTION TO DISMISS AND MOTION FOR
This case concerns an alleged multi-year scheme to deflate a company‘s stock price so
that the company‘s controlling shareholders could buy out minority shareholders at a bargainbasement price. Gloria Steginsky has sued Xcelera Inc., VBI Corp., Alexander Vik Gustav Vik,
OFC Ltd., and Hans Eirik Olav alleging that defendants violated both federal securities law and
their common law fiduciary duties to stockholders. Xcelera, VBI, Gustav Vik, and Alexander
Vik filed a motion to dismiss for failure to state a claim upon which relief can be granted. OFC
Ltd. and Hans Erik Olav failed to file an appearance,1 and plaintiff seeks a default judgment
against them. For the reasons set forth below, defendants‘ motion to dismiss is granted, and
plaintiff‘s motion for default judgment is denied.
STANDARD OF REVIEW
A. Motion to Dismiss
On May 14, 2012, plaintiff filed a motion for default entry (doc. #33). The court granted the motion on May 15,
2012 (doc. #35). Three weeks later on June 5, 2012, plaintiff filed the pending motion for default judgment.
A motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6) is designed
―merely to assess the legal feasibility of a complaint, not to assay the weight of evidence which
might be offered in support thereof.‖ Ryder Energy Distribution Corp. v. Merrill Lynch
Commodities, Inc., 748 F.2d 774, 779 (2d Cir. 1984) (quoting Geisler v. Petrocelli, 616 F.2d
636, 639 (2d Cir. 1980)).
When deciding a motion to dismiss pursuant to Rule 12(b)(6), the court must accept the
material facts alleged in the complaint as true, draw all reasonable inferences in favor of the
plaintiffs, and decide whether it is plausible that plaintiffs have a valid claim for relief. Ashcroft
v. Iqbal, 556 U.S. 662, 678-79 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-56 (2007);
Leeds v. Meltz, 85 F.3d 51, 53 (2d Cir. 1996).
Under Twombly, ―[f]actual allegations must be enough to raise a right to relief above the
speculative level,‖ and assert a cause of action with enough heft to show entitlement to relief and
―enough facts to state a claim to relief that is plausible on its face.‖ 550 U.S. at 555, 570; see also
Iqbal, 556 U.S. at 679 (―While legal conclusions can provide the framework of a complaint, they
must be supported by factual allegations.‖). The plausibility standard set forth in Twombly and
Iqbal obligates the plaintiff to ―provide the grounds of his entitlement to relief‖ through more
than ―labels and conclusions, and a formulaic recitation of the elements of a cause of action.‖
Twombly, 550 U.S. at 555 (quotation marks omitted). Plausibility at the pleading stage is
nonetheless distinct from probability, and ―a well-pleaded complaint may proceed even if it
strikes a savvy judge that actual proof of [the claims] is improbable, and . . . recovery is very
remote and unlikely.‖ Id. at 556 (quotation marks omitted).
B. Motion for Default Judgment
Upon entry of a default for ―failure to plead or otherwise defend‖ against a complaint, a
defendant admits every ―well-pleaded allegation‖ of the complaint except those relating to
damages. See Trans World Airlines, Inc. v. Hughes, 449 F.2d 51, 63 (2d Cir. 1971), rev'd on
other grounds, 409 U.S. 363 (1973); Flaks v. Koegel, 504 F.2d 702, 704 (2d Cir. 1974) (―While
a default judgment constitutes an admission of liability, the quantum of damages remains to be
established unless the amount of damages is liquidated or susceptible of mathematical
computation‖); see also Time Warner Cable of New York City v. Barnes, 13 F. Supp. 2d 543, 547
(S.D.N.Y.1998). Accordingly, the factual allegations of the complaint, except those relating to
the amount of damages, will be taken as true. Id.; see also 10A CHARLES WRIGHT, ARTHUR
MILLER, & MARY KAY KANE, FEDERAL PRACTIVE § 2688 (3D ED.1998); Fed. R. Civ. P. 8(d).
Thus, the threshold for a default judgment mirrors the threshold for a motion to dismiss under
12(b)(6)—courts evaluate whether, when all facts are taken as true, a plaintiff has proven his
case as a matter of law.
The facts are drawn both from the complaint and from previous decisions in related
cases. Feiner Family Trust v. VBI Corp., 352 Fed. Appx. 461 (2d. Cir. 2009) (―Feiner III‖);
Feiner Family Trust v. Xcelera.com, 2008 WL 5233605 (S.D.N.Y. 2008) (―Feiner II‖); Feiner
Family Trust v. VBI Corp., 2007 WL 2615448 (S.D.N.Y. 2007) (―Feiner I‖). All alleged facts in
the present complaint are taken as true for the purposes of this ruling.
Xcelera is a conglomerate of technology companies controlled by two billionaire
brothers, Alexander and Gustav Vik, and their financier father through a company called VBI
Corporation (together the ―Xcelera Defendants‖). In the late 1990s, Xcelera was one of the
fastest growing technology groups in the United States. But in 2001 the bubble lifting Xcelera‘s
stock burst and the company‘s value plummeted.
Faced with a dwindling fortune, the Viks scrambled to minimize their losses. In 2004,
Xcelera‘s stock had fallen from a high of $110 a share to around $1 a share. The brothers
decided to stop complying with securities laws in the hopes of getting their stock off an open
market. They began by refusing to file quarterly reports with the Securities and Exchange
Commission (―SEC‖). The brothers reasoned that, once the company was again privately held,
they could legally withhold information from shareholders, and, with no way to know the value
of their shares, these minority shareholders would sell their stock back to the Viks at a deflated
price. By November of 2004, the American Stock Exchange (―AMEX‖) handed the brothers
their first victory: because the company was delinquent in its filing requirements, the AMEX
delisted Xcelera. The stock price sank to 25 cents a share. Two years later in November of 2006,
the SEC deregistered all of Xcelera‘s securities. The company was once again private. In the
process, the brothers lost about $225 million in stock value.
Freed of federally-mandated reporting requirements, the Viks instructed employees to
refuse to disclose any information regarding the company‘s financial health to shareholders. Any
shareholder who contacted the company was denied information regarding the brothers‘ plans to
revive Xcelera and instead were told that they were welcome to sell back their shares at the
lowest recorded stock price, 25 cents a share. Frustrated, many investors cut their losses and
Four years and several lawsuits later, the Viks felt they were in a position to finally
purchase all the remaining Xcelera shares. By 2010, many of Xcelera‘s holdings had once again
become profitable. The Viks knew this, but shareholders did not. In order to take advantage of
the company‘s still-deflated public price, the Viks privately approached a one-time director at
Xcelera, Hans Eirik Olav, and asked him to form a shell company through which the Viks could
make a tender offer on outstanding shares. Olav agreed. He registered a company, OFC Limited,
in Malta, a country that does not require companies to disclose their directors‘ or shareholders‘
names. OFC sent a letter to Xcelera shareholders in December of 2010 offering to buy up to
10,000 shares of Xcelera at the last known price, 25 cents. In the letter, OFC reserved the right to
transfer shares to its ―affiliates,‖ but did not list the name of any affiliate.
Plaintiffs claim that the Viks‘ original decision to privatize their company was pretextual;
their real aim has always been to drive down share prices so they could eventually buy back their
company at a bargain-basement price. They then claim that the tender offer was the Viks‘
attempt to further manipulate Xcelera‘s stock price so that they could finally gain total control
over the company. Plaintiffs make three claims against the Xcelera defendants, OFC, and Olav:
First, that the defendants defrauded investors when they secretly schemed to artificially depress
the market price of Xcelera stock. This fraud allowed them to manipulate the price of their stock
in order to buy shares at low prices. Second, that they controlled OFC and are thus liable for
OFC‘s attempt to trade on inside information when it lowballed investors in 2010. And third, that
they breached their fiduciary duties to investors.
This is not the first time a minority shareholder in Xcelera has filed suit against the Viks.
Plaintiffs‘ law firm, Abraham, Fruchter, & Twersky has represented minority shareholders in
two other unsuccessful lawsuits against Xcelera. Judge Robert Patterson of the Southern District
of New York dismissed the suits on three occasions, and the Second Circuit affirmed dismissal in
one of those cases (the other was not appealed). The complaints in those suits were virtually
identical to the complaint in this case, save one factual allegation—the tender offer made by
OFC. Plaintiffs argue that the addition of an allegation of a tender offer cures whatever defects
may have existed in the prior suits.
A. Alleged Securities Fraud by the Xcelera Defendants: Market Manipulation Claims.
Two previous suits against Xcelera were dismissed because plaintiffs did not allege
sufficient facts to establish an intentional violation of the securities laws. As the Second Circuit
explained, ―to the extent [plaintiff] submits that defendants‘ fraudulent intent can be inferred
from the fact that their failure to comply with their reporting obligations was the first step in a
plan to buy back minority shares at depressed prices, the theory reduces to speculation.‖ Feiner
III, 352 Fed. App‘x 461, 462 (2d Cir. 2009). According to the complaints in those cases, the Viks
never affirmatively offered to buy back any shares, and, thus, both the District Court and the
Second Circuit reasoned that jury would be forced to speculate that they someday would.
―Absent any allegation of a ‗going private‘ transaction, tender, or scheme to take advantage of
depressed share prices, we cannot conclude that Feiner‘s urged inference of scienter is
compelling.‖ Id. The narrow issue in this case is whether the added allegation of a tender offer
that plaintiff received six years after the company‘s alleged fraud cures the problem identified by
both Judge Patterson and the Second Circuit.
To prove securities fraud, a plaintiff must plead sufficient facts to establish a defendant‘s
scienter, that is, deceptive intent. Kalnit v. Eichler, 264 F.3d 131, 138 (2d Cir. 2001). ―Plaintiff
can establish this intent by either (a) alleging facts to show that defendants had both motive and
opportunity to commit fraud, or (b) alleging facts that constitute strong circumstantial evidence
of conscious misbehavior or recklessness.‖ Id. (citations omitted). In either case, ―where
plaintiff's view of the facts defies economic reason it does not yield a reasonable inference of
fraudulent intent.‖ Id. at 140-41.
Plaintiff claims that the 2010 tender offer proves that the Viks were always playing the
long game, that they tanked their stock in 2004 for the express purpose of buying it back cheaply
from shareholders six years later. Otherwise, the logic goes, why would the Viks bother buying
stock they know to be worthless? It must be, plaintiff contends, that the Viks, and by extension
VBI and Xcelera, finally had the opportunity they have awaited, a window in which to take full
ownership of a valuable company without the scrutiny of shareholders, the SEC, or a federal
Even if the Viks now see an economic advantage in owning more Xcelera stock, it does
not necessarily follow that the Viks manipulated the market into yielding that advantage. The
basic problem with the shareholders‘ original complaints was not the absence of one fact – a
tender offer—but instead the absence of some link between the Viks‘ decision to goad the
AMEX and the SEC into taking Xcelera‘s stock off the public market and the Viks‘ subsequent
interest in acquiring minority shares. As Judge Patterson noted, any such link would need to
explain why rational and successful businessmen would intentionally take an almost quarter
billion dollar loss in the hopes of reaping a windfall many years later. See Feiner II at *6.
But the current complaint does nothing to explain how the Viks knew that Xcelera‘s
value would rally years after a market bubble decimated the company‘s stock.2 True, the Second
Plaintiff contends that the manipulation in this case was ―ongoing,‖ and thus that there is no gap in time between
the alleged manipulation and coup de grace of the tender offer. See Trancript of Oral Argument, doc. # 69, at
10:25-11:4. Under this theory, Xcelera defrauded consumers every time it offered to buy stock, a practice that
escalated over time and ended in an all-out bid to buy every remaining share. But both Judge Patterson and the
Second Circuit have already held that Xcelera‘s passive offers to buy complaining customers‘ stock did not
constitute a market manipulation. Thus, if Xcelera had continued to respond to customer complaints in this way – in
other words had never launched a tender offer—there would be no market manipulation as a matter of law. Because
all of the conduct up to tender offer was perfectly legal, plaintiff must still link the tender offer and the Viks‘ 2004
decision to let their stock slide. They must provide some factual basis to believe that in 2004 the Viks manipulated
Circuit suggested that a tender offer might impugn the Viks‘ motive for letting their stock slide,
presumably because a company that let its value tank only to turn around and buy back every last
share likely knew that its fortunes would turn. But just because a fact might shore-up a claim
does not mean that it always will. Here, six years expired between Xcelera‘s depreciation and the
tender offer allegedly designed to reward the Viks for their original market manipulation. Unlike
in cases where a corporate insider‘s takeover attempt follows on the heels of an alleged
manipulation, plaintiff in this case must demonstrate that the Viks knew in 2004 that their
company would rebound. See, e.g., Atchley v. Qonaar, 704 F.2d 355 (7th Cir. 1983) (holding that
jury could draw inference of fraud where plaintiffs alleged that directors depressed stock value
for eight months, then joined together in a tender offer one month later). Plaintiff has to explain
how the Viks knew that Xcelera could nimbly navigate a national recession, a realignment of the
internet technology sector away from products and towards services,3 and the myriad other
obstacles faced by companies that must reinvent their businesses. Short of that, plaintiff at least
has to plead sufficient facts to plausibly claim that the tender offer resulted in a windfall to
defendants that offset their initial and substantial economic losses. Plaintiff has done neither.
In sum, even with the added allegation of a tender offer, plaintiff‘s complaint still ―defies
economic reason.‖ The much more plausible explanation for the Viks‘ decision to let their stock
fall off the public market remains that ―defendants decided that the costs of regulatory
compliance were too high for a company experiencing languishing share price and trading
volume.‖ Feiner III at 461. See also Feiner Family Trust II, 2008 WL 5233605 (S.D.N.Y. 2008)
the market because they knew they could one day buy back their entire company at a low enough price to offset an
almost quarter billion dollar loss.
For a description of Web 2.0, in particular its emphasis on websites that provide services like winnowing content
or linking users, see Richard Guo, Stranger Danger and the Online Social Network, 23 BERK. TECH. L.J. 617, 61920 (2008).
(dismissing complaint because plaintiffs did not establish that ―defendants had a plan to make up
for these losses from a future [attempt to reacquire stocks]‖). The claim of fraud related to an
alleged market manipulation by the Xcelera defendants is therefore dismissed.4
B. Alleged Securities Fraud by the Xcelera Defendants, OFC, and Hans Olav: Insider
Plaintiff also contends that the Viks and Olav traded on inside information when they
made a tender offer on all remaining Xcelera shares. Plaintiff asserts that the Viks and Olav
knew that Xcelera was worth far more than 25 cents a share, but did not disclose that information
to investors. According to plaintiff, this omission amounted to classic insider trading— corporate
insiders made a profit by starving the market of information that would have caused a
shareholder to hold out for a higher price.
But insider trading requires that a company have some obligation to disclose its
confidential financial data to the public. Absent that duty, corporate officers are not in possession
of any ―non-public‖ information, but rather merely know how well their private company is
doing. As the Supreme Court explained in Chiarella v. United States, ―the duty to disclose arises
when one party has information that the other [party] is entitled to know because of a fiduciary
or other similar relation of trust and confidence between them.‖ 445 U.S. 222, 228 (1980)
Here, the Xcelera defendants shed their statutory obligation to disclose financial
information the minute the SEC deregistered its stock. See Polak v. Cont’l Hosts, Ltd., 613 F.
Supp. 153, 157 (S.D.N.Y. 1985) (dismissing section 10b claim because company had no
obligation to file financial information after it was de-registered). Nor did the Xcelera defendants
Plaintiff admitted at oral argument that her claims against OFC and Hans Olav are limited to insider trading related
to the tender offer. See Trancript of Oral Argument, doc. # 69, at 4:17-21 (admitting that ―since [OFC] didn‘t exist
at the earlier time‖ ―claims against OFC‖ ―could be restricted to the time of the tender offer‖).
or Olav bear a common law duty to disclose information to shareholders. Xcelera is a Cayman
Island corporation. Under Cayman Island law, corporations and their directors do not owe duties
to their shareholders. City of Sterling Heights Police & Fire Ret. Sys. v. Abbey Nat’l, PLC, 423 F.
Supp. 2d 348, 364 (S.D.N.Y. 2006) (noting that under English law, neither companies nor
directors owe fiduciary duties to individual shareholders).5 Indeed, the only way that either the
Viks or Olav could have had a duty to disclose information to shareholders is if they had a
―special factual relationship,‖ a rare circumstance that requires ―direct and close contact‖
between the director and shareholder. Peskin v. Anderson,  1 B.C.L.C. 372 ¶ 33. Plaintiff
has not alleged that either the Viks, Olav, or OFC ever communicated directly with the plaintiff,
other than through mass dispatches like letters to stockholders. Without an allegation of even the
most incidental personal contact, plaintiff cannot establish any ―direct and close contact‖
between the defendants and shareholders.
Even if a duty to disclose existed, plaintiff has not pointed to any specific omission,
material misstatement, or confidential information that tilted the scales in this case. As the
Southern District of New York has noted, ―[t]he failure of the . . . complaint to provide any
specific description of the alleged inside information or when it was obtained is grounds in itself
for dismissing this action under Fed. R. Civ. P. 9(b).‖ Stromfeld v. Great Atlantic & Pac. Tea
Co., 496 F. Supp. 1084, 1087 (S.D.N.Y. 1980). For these reasons, the claims of insider trading
against the Xcelera defendants, OFC, and Olav are dismissed.
C. Alleged Breach of Fiduciary Duties
Plaintiff claims that the defendants breached their fiduciary duties to Xcelera‘s minority
shareholders. Normally, a court can exercise supplemental ―jurisdiction over nonfederal claims
Absent a specific statutory command, Cayman Island law tracks British common law. Wilson v. Humphreys, 916
F.2d 1239, 1242 (7th Cir. 1990). Plaintiff does not claim that any Cayman Island statute created a fiduciary duty
between Xcelera and its stockholders.
[when] parties [are] litigating other matters properly before the court.‖ Finley v. United States,
490 U.S. 545, 548 (1989). As already reviewed above, plaintiff‘s nonfederal claims lack merit:
Under Cayman Island law corporations and directors do not owe fiduciary duties to minority
shareholders, and, absent some ―special factual relationship,‖ a shareholder cannot establish a
claim for a breach of a fiduciary duty against individual officers. Despite the obvious weakness
of plaintiff‘s nonfederal claims, however, this court is compelled by Second Circuit precedent to
dismiss pendent claims without prejudice whenever federal claims have been dismissed before
trial. Hefferan v. Corda, 2012 WL 4465320 at *2 (2d Cir. 2012) (relying on United Mine
Workers of America v. Gibbs and remanding with instructions to decline to exercise
supplemental jurisdiction over state law claims where ―federal claims are dismissed before
trial‖); but see United Mine Workers of America v. Gibbs, 383 U.S. 715, 726 (explaining that
―pendent jurisdiction is a doctrine of discretion‖ before laying out scenarios in which district
court judges might decline to exercise jurisdiction over state law claims, including when federal
claims are dismissed before trial). Plaintiff‘s claims against all defendants for a breach of a
fiduciary duty are therefore dismissed without prejudice to refilling in state court.
For the reasons set forth above, defendants motion to dismiss is GRANTED and plaintiffs
motion for default judgment is DENIED.
It is so ordered.
The clerk is directed to close this file.
Dated at Bridgeport, Connecticut, this 14th day of March 2013.
/s/ Stefan R. Underhill
Stefan R. Underhill
United States District Judge
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