In re Unicapital Corp. Securities Litigation
| Decision Date | 29 June 2001 |
| Docket Number | No. 00-2556-CIV.,No. 00-2412-CIV.,No. 00-2454-CIV.,No. 00-2367-CIV.,No. 00-2129-CIV.,No. 00-2268-CIV.,No. 00-2560-CIV.,00-2129-CIV.,00-2268-CIV.,00-2367-CIV.,00-2412-CIV.,00-2454-CIV.,00-2556-CIV.,00-2560-CIV. |
| Citation | 149 F.Supp.2d 1353 |
| Court | U.S. District Court — Southern District of Florida |
| Parties | In re UNICAPITAL CORPORATION SECURITIES LITIGATION. |
Kenneth Vianale, Maya Saxena, Milberg, Weiss, Bershad, & Lerach, LLP, Boca Raton, FL, for the Plaintiff.
Keith Olin, Morgan, Lewis & Bockius, LLP, Miami, FL, for Defendant Unicapital Corporation.
Lewis Murphy, Steel, Hector & Davis, Miami, FL, for Defendant Jonathan New.
Tracy Nicholas, Holland & Knight, LLP, Miami, FL, Evan Chesler; Keith Hummel, Cravath, Swaine & Moore, New York City, for Underwriter Defendants.
Thomas Cimino, Vedder, Preic, Kaufman & Kammholz, Chicago, IL, for Defendant Robert New.
Richard Jackson, Stearns, Weaver, et. al., Miami, FL, for Defendant Stuart Cauff.
ORDER & MEMORANDUM OPINION ON MOTIONS TO DISMISS
THIS CAUSE is before the Court upon the separate motions to dismiss filed by (1) Robert New;1 (2) Jonathan New; (3) Stuart Cauff (collectively the "Individual Defendants"); and (4) Morgan Stanley Dean Witter & Co., Salomon Smith Barney, Inc., and Friedman, Billings, Ramsey Group, Inc. (collectively the "Underwriters"). The motions have been fully briefed, and they are ripe for adjudication.
This is a putative class action lawsuit, which arises from Unicapital Corporation's ("Unicapital") brief existence as a publicly-traded company. Counts I and II of the amended class action complaint assert claims under §§ 11 and 12(a)(2) of the Securities Act of 1933 (the "Securities Act"), respectively. Count IV of the amended class action complaint asserts a claim pursuant to § 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and the Security and Exchange Commission's (the "SEC") Rule 10b-5. Additionally, Counts III and V of the amended class action complaint assert claims for controlling person liability against the Individual Defendants under § 15 of the Securities Act and § 20(a) of the Exchange Act, respectively. In order to assess the viability of these claims, it is necessary to set forth in some detail the formation, structure, and operation of Unicapital as a publicly-traded company.2
"Unicapital was founded in 1997 to create a national consolidator and operator of equipment leasing and specialty finance business serving the commercial market." Prospectus at 4. Unicapital's founders, Jonathan J. Ledecky and Robert New, did not break into the equipment leasing and financing business in a gradual manner. Rather, within a year of its formation, Unicapital went public and purchased a number of existing equipment leasing companies and related businesses (the "targeted companies") and consolidated them. See id. at 6-8 (). The purchase of the targeted companies was financed primarily by an initial public offering of 28 million shares of common stock on May 14, 1998 (the "1998 public offering"), which raised approximately $532 million in capital. In financial parlance, Unicapital undertook what is known as a "roll-up,"—the acquisition and consolidation of a number of companies in a field of business, which is often financed by an initial public offering.3
In conjunction with the 1998 public offering, Unicapital, in accordance with the Securities Act, filed its registration statement and prospectus with the SEC.4 Those documents contained pro forma financial statements for Unicapital, which combined the assets and liabilities of the targeted companies.5 See Prospectus at F-4 to F-15. As shown in the pro forma balance sheets, the acquisition of the targeted companies yielded total assets of $674,649,000.00. See id. at F-6. An adjustment was made to this figure, chiefly by the addition of $470,215,000.00 worth of goodwill, resulting in adjusted total assets of $1,174,400,000.00. Id.
The prospectus explained the $470,215,000.00 figure as follows:
Approximately $470.2 million, or 40%, of [Unicapital's] pro forma total assets as of March 31, 1998, after giving effect to [the 1998 public offering], consists of goodwill arising from the acquisitions of the [targeted companies]. Goodwill is an intangible asset that represents the difference between the aggregate purchase price for the net assets acquired and the amount of such price allocated to such assets for purposes of [Unicapital's] pro forma balance sheets.
Id. at 17. In terms of the $559.5 million, which Unicapital paid to purchase the targeted companies, the prospectus accounted for the goodwill figure as follows:
$21.8 million of the purchase price [was] allocated to aircraft under operating leases and $33.2 million to a deferred tax liability to be established upon the conversion from S Corporation or partnership status of certain of the [targeted companies] and the remaining purchase price in excess of book value of assets acquired [was] allocated to goodwill.
Id. at F-12 (emphasis supplied). In other words, $470,215,000.00, or 84%, of the $559.5 million price that Unicapital paid to acquire the targeted companies, and establish its operations, was attributed to goodwill. Unicapital's pro forma financial statements also provided that the goodwill was to be amortized "over a 15 to 40 year period." Id. at 31 n. 3.
Unicapital's stated goal was "to become a leading consolidator and operator of equipment leasing and specialty finance businesses." Id. at 5.6 Upon completion of the roll-up of the targeted companies, Unicapital had acquired and consolidated twelve entities from the leasing and specialty finance industry. Unicapital organized those entities into five departments: (1) the computer and telecommunications equipment leasing department, which included lease financing for computers, workstations, servers, telephone systems, switches, networks, peripherals, and related high-technology equipment; (2) the large ticket leasing and structured finance department, which covered leases for equipment with a purchase price in excess of $5,000,000.00, such as aircraft, satellites, rail and other transportation equipment; (3) the middle market leasing department, which generally included leases for equipment with a purchase price of between $250,000.00 and $5,000,000.00, such as construction and manufacturing equipment; (4) the small ticket leasing department, which covered leases for equipment with a purchase price of less than $250,000.00; and (5) the lease servicing department, which was responsible for lease administration and processing services. See id. at 6-8. These departments were further divided into practice groups. See generally Amend. Compl. at 13-14.
Of particular import to the instant case is the large ticket leasing and structured finance department, which the parties refer to in the moving papers as the Big Ticket Division.7 Initially, three of the targeted companies, Cauff, Lippman Aviation, Inc. ("Cauff Lippman"), Municipal Capital Markets Group, Inc. ("MCMG"), and the NSJ Group ("NSJ"), were integrated into the Big Ticket Division. See Prospectus at 6-7. MCMG, a financing company, was purchased by Unicapital for $14 million, with one-half of the purchase price being cash and one-half Unicapital common stock. Both Cauff Lippman and NSJ provided lease financing for used commercial jet aircraft and jet aircraft engines. Cauff Lippman was purchased for $80 million ($48 million in cash and $32 million in Unicapital common stock). Additionally, Stuart Cauff, the president of Cauff Lippman, became the chief executive officer of the Big Ticket Division. See id. at 103. NSJ was purchased for $26.7 million ($16 million in cash and $10.7 million in Unicapital common stock). Through the purchases of Cauff Lippman and NSJ, Unicapital acquired a fleet of aircraft "includ[ing] B727s, B737-200s, [and] DC-9s, many of which had Pratt & Whitney JT8D engines." Amend. Compl. at ¶ 81. That fleet formed the bulk of the leasing inventory for the Big Ticket Division.
Early on, the Big Ticket Division (, its aircraft leasing group, designated as the "Air Group") appeared profitable. In 1998, that sector "purportedly contributed the lion's share of revenue and profitability to [Unicapital]—$348.5 of $511 million, or nearly 70%, in revenues and $41.5 million of $57 million in profits." Id. at ¶ 38. The Big Ticket Division rapidly expanded its original fleet of aircraft. By July of 1998, Unicapital had spent an additional $143 million to purchase more airplanes for the Big Ticket Division's fleet. See id. at ¶ 86. Eventually, Unicapital "expend[ed] over $1 billion to acquire 45 commercial jet aircraft to increase [its Big Ticket Division's] Air Group's portfolio to 70 commercial aircraft." Id. "[B]y all measurements, the [1998 public offering] was a tremendous success, raising over half a billion dollars, and the [c]ompany seemed poised for increasing growth and profitability—especially in its most profitable aircraft leasing division." Id. at ¶ 40.
Unicapital's success, and in particular that of the Big Ticket Division, was short-lived. After enjoying immediate success in 1998, its first year of operation, Unicapital experienced an extremely volatile year in 1999. At that time, its stock price dipped as low as $1.875 per share from the opening price of $19.00 per share during the 1998 public offering. See Amend. Compl. at ¶¶ 120-143 (chronicling Unicapital's 1999 fiscal year). At the outset of 2000, Unicapital's prospects again looked strong, and its stock price rebounded somewhat, after Unicapital reported favorable 1999 fourth quarter earnings. See id. at ¶¶ 141-143. The optimism attributable to those numbers, however, did not last...
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