## Facts

- MDCM Holdings, Inc. (formerly Mortgage.com) retained Credit Suisse First Boston Corp. (CSFB) to underwrite its initial public offering (IPO).
- Under the underwriting agreement, MDCM sold 7,062,500 shares to CSFB at a 7% discount from the public offering price.
- MDCM alleged its stock nearly doubled in value within two weeks after the IPO and asserted this reflected deliberate IPO underpricing.
- MDCM sued on behalf of a putative class of internet-related and high-technology issuers whose CSFB-underwritten IPO shares rose at least 15% over the offering price within 30 days (January 1, 1998 to October 31, 2000).
- MDCM alleged CSFB used “hot” IPO allocations to favored customers to obtain profit-sharing benefits (e.g., customers directing lucrative trades to CSFB after realizing IPO gains).
- MDCM alleged CSFB intentionally underpriced IPOs to generate aftermarket price increases, enabling CSFB to extract additional value through customer profit-sharing, while issuers received reduced offering proceeds.
- The amended complaint asserted New York state-law claims for (1) breach of express underwriting terms, (2) breach of the implied covenant of good faith and fair dealing, (3) breach of fiduciary duty, and (4) unjust enrichment.
- CSFB moved to dismiss, arguing the claims were preempted by the Securities Litigation Uniform Standards Act of 1998 (SLUSA) and that MDCM lacked standing.

## Issues

1. Whether SLUSA preempts a covered class action by issuers asserting state-law contract, fiduciary-duty, and unjust-enrichment claims against an IPO underwriter based on alleged underpricing and profit-sharing practices.
2. Whether the issuer sufficiently alleged an injury traceable to the underwriter’s conduct to establish standing.

## Decision

- The court denied CSFB’s motion to dismiss.
- The court held SLUSA did not preempt MDCM’s state-law claims because they were not based on misrepresentations, omissions, or deceptive devices in connection with the purchase or sale of covered securities as pleaded.
- The court held MDCM adequately alleged injury (lost IPO proceeds and diverted value) and therefore had standing to sue and to seek class treatment.

## Legal Principles

- SLUSA preempts certain state-law covered class actions only when the claims, as pleaded, allege a material misrepresentation or omission, or the use of a manipulative or deceptive device, in connection with the purchase or sale of covered securities.
- State-law claims grounded in the issuer–underwriter relationship (contractual duties, the implied covenant of good faith and fair dealing, fiduciary obligations, and unjust enrichment) are not preempted by SLUSA when they do not depend on investor-facing misrepresentation or omission allegations.
- Under New York law, every contract includes an implied covenant of good faith and fair dealing prohibiting conduct that deprives the other party of the contract’s benefits.
- At the pleading stage, unjust enrichment may be asserted in the alternative to contract claims where the plaintiff alleges the defendant retained benefits that equity and good conscience require be returned.
- Allegations of reduced offering proceeds and diverted economic value constitute a concrete injury sufficient for standing when plausibly linked to the defendant’s underwriting conduct.

## Conclusion

The court allowed an issuer-led putative class action to proceed on New York contract, fiduciary-duty, and unjust-enrichment theories arising from alleged IPO underpricing and underwriter profit-sharing, holding that SLUSA did not preempt the pleaded claims and that the issuer adequately alleged standing.


MDCM Holdings, Inc. v. Credit Suisse First Boston Corp., 216 F. Supp. 2d 251 (S.D.N.Y. 2002)