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IN RE BAAN COMPANY SECURITIES LITIGATION

February 20, 2003

IN RE BAAN COMPANY SECURITIES LITIGATION


The opinion of the court was delivered by: Ellen Segal Huvelle, United States District Judge

  MEMORANDUM OPINION

This is a class action brought on behalf of all persons who purchased or otherwise acquired the securities of Baan Company ("Baan") between January 28, 1997 and October 12, 1998 (the "Class Period").*fn1 Plaintiffs have alleged that defendants*fn2 made materially false and misleading statements about Baan's business, finances and future prospects, in violation of the Securities Exchange Act of 1934, 15 U.S.C. § 78a (1997), specifically sections 10(b), 15 U.S.C. § 78j(b), and 20(a), 15 U.S.C. § 78t(a).*fn3 Two defendants, Vanenburg Group, B.V.*fn4 ("Vanenburg") and J.G. Paul Baan ("Paul Baan"), brought motions to dismiss for lack of personal jurisdiction. In response to these motions, plaintiffs requested discovery limited to the jurisdictional question, which request was granted by Magistrate Judge John M. Facciola. In re Baan Co. Securities Litigation, 81 F. Supp.2d 75 (D.D.C. 2000).

After discovery had been taken, Magistrate Judge Facciola filed a Report and Recommendation on June 11, 2002, recommending that both defendants' motions to dismiss be granted. This Report has now generated a flurry of paper. Plaintiffs have filed objections; defendants have filed responses to these objections, to which plaintiffs have filed a reply. Moreover, plaintiffs have filed two supplemental briefs in further support of their objections, and defendants have responded to each of these supplements.
These pleadings require the Court to address several basic issues. First, the Court must determine the evidentiary standard that plaintiffs must meet at this stage of the litigation in order to survive defendants' motions to dismiss for lack of personal jurisdiction. Next, applying that standard, the Court must decide whether plaintiffs have adduced sufficient evidence to establish "general" personal jurisdiction, and specifically whether such jurisdiction can be established on the theory that Paul Baan and Vanenburg are "control persons" of Baan to which Baan's jurisdictional contacts may be imputed. Finally, if general personal jurisdiction does not exist, the Court will have to determine whether plaintiffs have made an adequate showing of "specific" personal jurisdiction, which exists if Vanenburg and Paul Baan engaged in acts directed at the United States and if the fraud alleged in the Complaint arises from or relates to those acts.
After a careful review of the parties' submissions and the voluminous record amassed in this case, the Court concludes that despite the Magistrate Judge's Report and Recommendation, defendants' motions to dismiss must be denied. While plaintiffs have not demonstrated that general personal jurisdiction is appropriate, they have presented sufficient evidence that defendants were aware of and participated in the fraudulent scheme which is at the heart of this case, and therefore, the Court may assert specific personal jurisdiction over Vanenburg and Paul Baan in a matter consistent with the Fifth Amendment of the U.S. Constitution.

BACKGROUND

The background to this complex and long-running litigation has been set out in previous opinions and need not be exhaustively restated here. The Court instead concentrates on the points salient to the instant motions to dismiss. Baan is a NASDAQ-listed company with offices in the Netherlands and Reston, Virginia. (Second Am. Compl. ["Compl."] ¶¶ 14, 19.) Paul Baan served as chairman of Baan's board of supervisory directors from April 1996 to December 1997. Plaintiffs allege that Baan inflated its reported revenue and earnings by selling software licenses (or "seats") to its affiliates on a consignment basis, whereby Baan agreed to buy back the products if the affiliates were unable to resell them to end-users. (Compl. ¶ 7.) The parties refer to these transactions as "indirect channel" sales. According to the Complaint, Baan violated Generally Accepted Accounting Procedures ("GAAP") and SEC regulations by recognizing these non-final sales as revenue on its balance sheet, and incorporated these misleading revenue figures into its public statements and official filings. Specifically, these misstatements found their way into Baan's formal SEC filings (including the company's annual 20-F and quarterly 6-K forms), as well as press releases, claims made on Baan's website, and news articles, which often included quotes from Baan's officers. See Baan, 103 F. Supp.2d at 5-6. Plaintiffs allege that Baan relied on these false statements to satisfy investor and shareholder EPS ("earnings per share") expectations, and thereby to maintain its stock price at artificially high levels. In addition to deceiving investors, these elevated share prices allowed Baan affiliates to use their Baan stock to secure loans that allowed them to keep participating in the consignment sales, creating a positive feedback loop of deception.
The instant motions to dismiss have been filed by Vanenburg and Paul Baan. Vanenburg is a privately held Dutch company controlled by Paul Baan and his brother Jan. (See Baan's Annual Report to SEC for FY 1997 ("1997 Form 20-F") at 53.) The company is "established under the laws of the Netherlands and is registered to do business only in the Netherlands." (Dep. of J.G. Paul Bann ("Baan Dep.") at 25). It has no offices, places of business, employees, registered agents, telephone listings, or mailing addresses in the United States (Aff. of Herman Frijling ("Frijling Aff.") ¶¶ 3-6), and its Board of Supervisory Directors and Board of Managing Directors have not met in the United States. (Aff. of Paul Baan, July 23, 1999 ("Baan Aff. 7/23/99") at ¶ 7). Paul Baan has been president and managing director of Vanenburg since 1994. Throughout the Class Period, Vanenburg controlled a large block of Baan stock, ranging from 39 to 43 percent, though in November 1998 these holding were reduced to 30 percent. Baan, 103 F. Supp.2d at 5.
In addition to this ownership relationship, Vanenburg and Baan had close business ties. In December 1997 Vanenburg and Baan worked together to form a new affiliate: Baan Midmarket Solutions ("BMS"). Eighty-five percent of this new company was owned by Vanenburg, with Baan owning the remaining 15 percent. See id. Plaintiffs also allege that pursuant to another agreement Baan charged BMS for a variety of expenses (including overhead, salaries, and benefits) associated with operating the affiliate, but that this agreement was actually negotiated not by BMS but by Vanenburg and that Vanenburg paid these expenses itself. (Pls.' Second Supp. Br. at 4-5.) Moreover, the "Software Distribution Agreement" that created BMS and allowed the new entity to act as a non-exclusive distributor of Baan products was signed by Paul Baan on behalf of Vanenburg. (Decl. of Jill M. Levy, Nov. 20, 2002 ["Levy Decl. 11/29/02"], Ex. 5.) Plaintiffs contend that throughout the remainder of the Class Period, BMS became a primary vehicle through which Baan arranged its consignment sales.
In their motions, filed under FED. R. CIV. P. 12(b)(2), Vanenburg and Paul Baan argue that exercising personal jurisdiction over them would violate the Due Process Clause of the Fifth Amendment. They assert that neither defendant has sufficient contacts with the United States to make it foreseeable that they would be haled into court in this country. Plaintiffs respond that personal jurisdiction properly exists over these defendants on two basic theories: (1) because these defendants are "control persons" of Baan, which indisputably has adequate jurisdictional contacts with the United States; and (2) because of Vanenburg's and Paul Baan's own contacts with the United States in connection with the alleged fraud that has given rise to this litigation.
As to the first theory, plaintiffs assert that personal jurisdiction exists over Vanenburg because it owns such a significant portion of Baan's outstanding common shares that it is appropriate to subject Vanenburg to the same liability and jurisdiction as Baan. Plaintiffs allege that Vanenburg was intimately related to Baan, a relationship evidenced by the fact that it acted in partnership with Baan by, for example, forming BMS through which nearly all of the supposedly fraudulent "indirect channel sales" occurred. (Compl. ¶¶ 23, 38, 78.) Moreover, Vanenburg's subsidiary, The Baan Institute, used Baan's logo (Talbot Decl. Ex. 10), and press reports noted the difficulty of distinguishing between Vanenburg and Baan, especially, though not exclusively, when the former was still known as Baan Investments. (Id. ¶ 3). Further, Vanenburg's own financial statements stated that "Vanenburg Group's operations were closely related to those of Baan Company in 1997." (Defs.' Renewed Mot., Tab E, Ex. B at 20.) As such, plaintiffs suggest that Vanenburg and Baan are so related that the latter's undisputed jurisdictional contacts with the United States may properly be imputed the former.*fn5
Plaintiffs assert that jurisdiction exists over Paul Baan, a Dutch citizen without residence or property in the United States (Paul Baan Aff. 7/23/99, at ¶¶ 1-2), on a similar control person theory. Paul Baan was the sole Managing Director of Vanenburg at all times during the Class Period. (Paul Baan Aff. 7/23/99 at ¶ 3.) Though he claimed that his responsibilities in this position were limited (Paul Baan Dep. at 17), he did testify that he was responsible for certain "high level management activities." (Paul Baan Dep. at 18.) Moreover, plaintiffs point to other evidence that they say casts doubt on Paul Baan's testimony that he had little involvement in the day-to-day operations of Baan. Plaintiffs thus cite a May 19, 1995 Prospectus issued in connection with Baan's IPO to allege that Paul Baan effectively controlled Baan, through Vanenburg, from that time forward:

(Defs.' Renewed Mot. to Dismiss, Tab F: May 19, 1995 Prospectus at 10).*fn6

As to specific jurisdiction, plaintiffs argue that Vanenburg and Paul Baan were directly involved in the activity that forms the basis for this suit. To this end, they point to Vanenburg's control over BMS, the vehicle for many of the consignment sales that Baan allegedly used to artificially inflate its revenue figures and its stock price. Plaintiffs also suggest that both Vanenburg and Paul Baan were informed of Baan's dubious accounting and financial reporting practices during the Class Period. For example, Baan's Supervisory Board received a copy of Moret Ernst & Young's ("MEY") 1997 Management Letter warning that there was a risk that Baan was "inappropriately recognizing revenue before all of the relevant revenue recognition criteria are actually met." (Levy Decl. 5/2/02, Ex. 2 at 5.) Moreover, Paul Baan participated in a "Collective Management and Supervisory Board Meeting" at which issues such as Baan's relationship with Vanenburg were discussed. (Levy Decl. 5/2/02, Ex. 10 at 7138.) He was also present for at least one Supervisory Board meeting that was called to review and ratify transactions involving Baan and Vanenburg, including the joint venture agreement that created BMS.*fn7 (Levy Decl. 5/2/02, Ex. 4 at 6959-63.) The Supervisory Board was also responsible for "the appointment of members of [Baan's] Management Board and the senior officers of the Company," as well as for approving the issuance of shares (including those issued in the United ...

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