On January 12, 2009, in the first dismissal motion ruling among the many subprime and credit crisis-related securities lawsuits pending in the Southern District of New York, Judge Shira Scheindlin granted the defendants’ motion to dismiss in the Centerline Holding Company securities case, with leave to amend. A copy of the opinion can be found here.
As detailed more fully here, the plaintiff’s complaint basically alleges that the company and four individual defendants concealed from the investing public that they were structuring a sale of the company’s $2.8 billion portfolio of tax-exempt mortgage revenue bonds to a third party. When the company announced the sale, it also announced that it would be cutting its dividend from $1.68 per share to only 60 cents a share.
The company also disclosed at the same time that it had entered into a related party transaction with a company controlled by its Chairman, Stephen Ross, and its Managing Trustee, Jeff Blau, whereby this separate company agreed to provide Centerline with $131 million in financing in exchange for 12.2 million shares of newly-issued convertible stock that will pay an 11% dividend.
Upon the announcement of this news, the company’s share price declined 25% and the lawsuits followed.
The Motion to Dismiss Ruling
The defendants moved to dismiss the complaint on the ground that the plaintiff had not adequately pled scienter. Judge Scheindlin agreed. Specifically, she concluded that the plaintiff had neither alleged sufficient facts showing that defendants had the motive and opportunity to commit fraud nor adequately pled that defendants acted with recklessness.
The plaintiff had alleged that defendants Ross and Blau were motivated to "engineer" the related party transaction to increase their voting control of the company from 17% to almost 30%; to be paid an 11% coupon rate, "thereby diverting a material portion of the Company’s income to insiders…to the great detriment of shareholders"; and to have the opportunity to nominate an individual trustee.
Judge Scheindlin said that these allegations "do not explain why Ross and Blau would have wanted to fraudulently conceal the news" of their investment or of the bond portfolio sale. She also said that "if they had any motive, it would have been to disclose information about the bond sale and dividend cut sooner," since their preferred shares are only convertible at $10.75 a share, yet after the announcement of the bond sale, the company’s share price declined to $7.70 a share.
The court noted that if Ross and Blau had wanted a "sweetheart" deal, "the would have been motivated to cause information related to the sale of the bond portfolio and dividend cut to be disclosed sooner so that they could have negotiated a lower conversion price."
Judge Scheindlin also found insufficient the allegations that the other two individual defendants were motivated by reason of their high salaries, bonus compensation, equity awards or continued employment.
Judge Scheindlin also held that the plaintiff had not alleged facts sufficient to establish conscious misbehavior or recklessness. Specifically, she noted that "the Complaint does not allege any facts to show that defendants knew they should have disclosed information of the transactions prior to the date of the announcement, but recklessly failed to do so."
The defendants cited an SEC rule (promulgated in implement Section 409 of the Sarbanes Oxley Act) specifying that companies are required to disclose material definitive agreements within four business days of entry into the agreement, and argued that the plaintiff had not alleged that the company had failed to comply with the rule. The plaintiff argued that whether the defendants complied with the SEC’s rule, the company had failed to disclose information about the pending sale information about the pending sale and dividend cut while the company was making other disclosures on those topics, which made those other disclosures "false, inaccurate, incomplete or misleading."
Judge Scheindlin said that even if it were assumed that the statements were misleading, the defendants’ compliance with the SEC’s rule "suggests that Lead Plaintiff has failed to show defendants acted recklessly in omitting such information." She added that defendants conduct cannot be described as "highly unreasonable" when "it is arguable that they did not have a duty to disclose such information before they actually did."
Because she found that the plaintiff had not presented facts to make the Section 10 claims "plausible," Judge Scheindlin dismissed the claims, but she allowed plaintiff 30 days in which to file an Amended Complaint.
The significance of Judge Scheindlin’s opinion is that it is the first dismissal motion ruling in a subprime and credit crisis-related case in the Southern District of New York. A very large number of the subprime and credit crisis-related securities lawsuits overall have been filed in the S.D.N.Y because the financial services industry is concentrated there. By my count, as many as 54 of the 101 subprime and credit crisis-related securities lawsuits that were filed in 2008 were filed in the Southern District of New York.
However, any inferences about the other cases that might be drawn from Judge Scheindlin’s grant of the dismissal motion in the Centerline case probably need to be heavily discounted because the opinion depends so heavily on case-specific allegations and the specifics of the transaction involved. For that reason the case may offer relatively little insight into the prospects for other cases pending in the S.D.N.Y., except to the extent that it illumines the legal standards that will be applied to scienter issues in other cases.
In any event, the ruling was without prejudice, and it remains to be seen whether or not the plaintiffs will be able to amend their pleadings sufficiently to survive a renewed motion to dismiss.
Those readers who may have had the thought, as I did, while reading about this case that the allegations really lend themselves more to a derivative lawsuit alleging breaches of the duty of loyalty and care will want to know that there was a separate derivative lawsuit filed in the S.D.N.Y. against Centerline, as nominal defendants, as well as certain of its directors and officers. A copy of the derivative complaint can be found here.
I have added the recent Centerline opinion to my table of subprime and credit crisis-related securities lawsuit dismissals, dismissal motion denials and settlements, which can be accessed here.
Another 2009 Credit Crisis Lawsuit: In their January 14, 2009 press release (here), plaintiffs’ lawyers announced their initiation of a securities class action lawsuit in the Western District of Washington on behalf of investors who purchased certain WaMu Mortgage Pass-Through Certificates. The Complaint (which can be found here) was filed against the various series of certificates, as well as Washington Mutual bank, WaMu Acceptance Corporation, and certain individuals.
According to the press release, the complaint alleges that the "defendants made material misstatements and omissions in connection with the offerings regarding the collateral underlying the certificates."
The new WaMu case is already the third subprime and credit crisis-related lawsuit filed so far in 2009. Because I thought that some readers might like to separately track the 2009 credit crisis securities lawsuits, I have created a separate spreadsheet (that can be accessed here) on which I will separately track the 2009 credit crisis cases. I will update the spreadsheet as new credit crisis cases are filed.
The addition of the WaMu case brings the total number of subprime and credit-crisis related securities lawsuits that have been filed since 2007 to 144. My list of all of the subprime and credit crisis securities cases can be accessed here.
Special thanks to Adam Savett of the Securities Litigation Watch for providing a copy of the WaMu complaint.
More about Social Networking: In a recent post, I revealed my New Year’s resolution to become more familiar with and involved in the various professional social networking sites, including LinkedIn and Twitter. The prior post elicited a promising initial response, but because I suspect that many readers may not have seen my prior note, I am reprising the message here.
Many readers may be interested to know that between the times when I enter new blog posts, I often add quick notes and links on Twitter. My Twitter site can be accessed here. It is relatively simple to register.
I also remain interested in trying to better develop my LinkedIn network. The LinkedIn button in the right hand margin above will take you to my LinkedIn profile. I am interested in trying to bring readers of this blog into my LinkedIn network, so please let me know if you would like to "connect." I am still learning what I might be able to accomplish with the network, but I proceeding on the theory that the only way to figure it out is to plunge in and try to make it work.