Turner v. First Wisconsin Mortg. Trust
| Decision Date | 04 August 1978 |
| Docket Number | Civ. A. No. 75-C-235. |
| Citation | 454 F. Supp. 899 |
| Parties | Blanche TURNER, Plaintiff, v. FIRST WISCONSIN MORTGAGE TRUST, First Wisconsin National Bank Holding Company, First Wisconsin Mortgage Co. and James E. Lieck, Defendants. |
| Court | U.S. District Court — Eastern District of Wisconsin |
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Lowell E. Sachnoff and Franklin G. Allen, Chicago, Ill., for plaintiff; Sachnoff, Schrager, Jones & Weaver, Ltd., Chicago, Ill., and David J. Schoetz, Burke & Schoetz, Milwaukee, Wis., of counsel.
Laurence C. Hammond, Jr., Milwaukee, Wis. and Bernard J. Nussbaum and Otis H. Halleen, Chicago, Ill., for defendant First Wisconsin Mortgage Trust.
Joseph DuCoeur, Tefft W. Smith and Howard J. Swibel, Kirkland & Ellis, Chicago, Ill., for proposed additional defendants Robert W. Baird & Co. Inc., Goldman Sachs & Co., and Robert A. Uihlein, Jr.
David E. Beckwith, Maurice J. McSweeney, Allen W. Williams, Jr., and Robert A. DuPuy, Milwaukee, Wis. and H. Templeton Brown, Ray H. Greenblatt, Lee N. Abrams, and Franklin P. Auwarter, Chicago, Ill., for defendants First Wisconsin Corp., First Wisconsin Mortgage Co. and First Wisconsin National Bank; Foley & Lardner, Milwaukee, Wis. and Mayer, Brown & Platt, Chicago, Ill., of counsel.
This suit is an action for damages and injunctive relief arising out of the allegedly fraudulent course of conduct engaged in by the defendants from December 1971 through April 1974, which plaintiff alleges was violative of various provisions of the Securities Act of 1933 (the "1933 Act") and the Securities Exchange Act of 1934 (the "1934 Act"). Jurisdiction is alleged pursuant to § 27 of the 1934 Act, 28 U.S.C. § 78aa, and § 22 of the 1933 Act, 15 U.S.C. § 77v, with pendent jurisdiction over the state law claims. The action was originally commenced in the United States District Court for the Southern District of New York, on March 17, 1975, and was transferred by stipulation of the parties to the United States District Court for the Eastern District of Wisconsin, the Honorable Myron L. Gordon, judge presiding, on April 28, 1975. It was subsequently transferred to this branch of the court.
There are presently five motions before the Court: (1) plaintiff's motion for leave to file a first amended complaint and to add parties defendant, filed October 29, 1975; (2) plaintiff's motion for leave to add the First Wisconsin National Bank of Milwaukee as an additional party defendant, filed March 23, 1976; (3) plaintiff's motion for class certification, filed September 11, 1975; (4) plaintiff's motion for leave to file a revised first amended complaint and to add parties plaintiff, filed October 4, 1976; and (5) plaintiff's motion for a protective order, filed March 22, 1976. The motions will be discussed separately below. Since there are now three complaints in the record, for purposes of clarity the Court notes that in the remainder of this decision, unless otherwise specifically stated, it is referring to the first amended complaint.
The original complaint was brought by the plaintiff Blanche Turner to enforce liabilities created under § 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), and under Rule 10b-5 of the Securities and Exchange Commission ("SEC"), 17 C.F.R. § 240.10b-5. The defendants named therein are the First Wisconsin Mortgage Trust ("FWMT" or the "Trust"), the First Wisconsin Mortgage Company ("FWMC"), James E. Liek (improperly named in the complaint as James E. Lieck), and the First Wisconsin Corporation ("FWC") (improperly named in the complaint as the First Wisconsin National Bank Holding Company). The action was brought on behalf of all purchasers of shares of the FWMT from December 1971 to the date of filing of the complaint which was March 17, 1975. Plaintiff alleges that the defendants established the FWMT and caused its shares to be issued to the public for the benefit of the other defendants, knowing that the FWMT lacked an adequate and competent staff, and thereafter that they engaged in a fraudulent scheme to induce members of the public to purchase shares of the FWMT by falsifying its financial reports by making untrue statements of material facts or omitting to state material facts while making and failing adequately to review a series of improvident loans.
The proposed first amended complaint, which was filed October 29, 1975, and which is discussed hereinafter, contains numerous changes, although it remains a claim for relief arising out of the alleged fraudulent course of conduct engaged in by defendants to artificially inflate the value of shares of the FWMT and thereby to induce the members of plaintiff's class to purchase shares of the Trust which, absent the fraud engaged in by the defendants, they would not have purchased.
Plaintiff seeks, first, to amend the class which she claims to represent to include all persons who purchased shares of the trust from the initial public offering in December 1971 through April 1974. The plaintiff herself purchased 100 shares on August 22, 1972 (see pp. 13, 16, 21-22 of Turner deposition taken December 18, 1975), and the present court record indicates that she still owns those shares.
The plaintiff also seeks to add five defendants to this action. They are: Hal C. Kuehl, who until March 1975 was the chairman of the Board of Trustees of the FWMT, the president of the First Wisconsin National Bank of Milwaukee (the "Bank"), and the executive vice-president of the FWC; Max H. Karl, who similarly until March 1975 was an officer of the FWMT, the Bank, and the FWC; Robert A. Uihlein, Jr., who was also until March 1975 an officer of the FWMT, of the Bank, and of the FWC; Robert W. Baird & Co. Incorporated ("Baird"), an investment banking and brokerage company which managed the underwriting of the public offering of Trust shares in December 1971 and on March 1, 1973; and Goldman Sachs & Co., a registered broker-dealer which along with Baird was engaged in managing the underwriting of the 1971 and 1973 public offerings.
The plaintiff claims that the Trust was created by the FWC effective November 3, 1971; that it engaged primarily in short term construction, development, and land acquisition loans in which the Bank was the lead lender; that the Bank is a subsidiary of the FWC and competes with the Trust for loans; that the FWMC is controlled by the FWC and the Bank, staffed by Bank employees, and is an investment advisor to the Bank and to the Trust; and that the FWC and the Bank at all relevant times controlled the management and activities of the Trust and of the FWMC. The plaintiff also sets out at length the general conduct which she claims constituted deception and fraud practiced by the defendants in connection with the purchase and sale of shares of the Trust. Said conduct includes: inadequate and incompetent staffing of the Trust; making of false and misleading financial statements to induce purchase of shares of the Trust; causing the Trust to borrow large sums from the Bank and from other affiliates of the FWC on disadvantageous terms; causing false statements to be made in the December 1971 prospectus, to wit, that the trustees of the Trust would exercise independent judgment in regard to loans proposed by the FWMC, that the FWMC would not control the Trust and would instead be subject to the supervision of the Trust, and that the Trust would require commitments for long term financing before making construction loans; causing the February 1973 prospectus, the 10-K forms, the annual reports, and other statements to contain false and inflated statements of the value of the Trust assets, whereas in fact the defendants caused the Trust to accrue income from unsound loans which should have been in nonaccrual status, caused the Trust to record fees for commitments to lend when received rather than over the term of the commitment, and caused the Trust to carry inadequate amounts in allowance for losses. Plaintiff asserts that as a result of the aforesaid conduct, the market value of the Trust shares has declined drastically since the spring of 1973. She claims to have learned of said course of conduct initially at the annual meeting of the shareholders held in December 1974 when certain shareholders threatened publicly to sue the Trust.
The proposed first amended complaint contains seven separate counts. Count I charges that the course of conduct engaged in by the defendants during the relevant period resulted in the dissemination of untrue statements of material facts and omissions to state other material facts, in violation of § 10b of the 1934 Act and Rule 10b-5. 15 U.S.C. § 78j(b) provides:
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