Allstate Life Ins. Co. v. Robert W. Baird & Co. Inc., s. CV–09–8162–PCT–GMS, CV–09–8174–PCT–GMS.

• Decision Date: 04 November 2010
• Docket Number: Nos. CV–09–8162–PCT–GMS, CV–09–8174–PCT–GMS.,s. CV–09–8162–PCT–GMS, CV–09–8174–PCT–GMS.
• Citation: 756 F.Supp.2d 1109
• Parties: ALLSTATE LIFE INSURANCE COMPANY, Plaintiff,v.ROBERT W. BAIRD & CO., INC., et. al., Defendants.Ronald Covin, et al., Plaintiffs,v.Robert W. Baird & Co., Inc., et al., Defendants.
• Court: U.S. District Court — District of Arizona

ALLSTATE LIFE INSURANCE COMPANY, Plaintiff,
v.
ROBERT W. BAIRD & CO., INC., et. al., Defendants.Ronald Covin, et al., Plaintiffs,
v.
Robert W. Baird & Co., Inc., et al., Defendants.

Nos. CV–09–8162–PCT–GMS, CV–09–8174–PCT–GMS.

United States District Court, D. Arizona.

Nov. 4, 2010.

[756 F.Supp.2d 1122]

Michael Patrick Cillo, Patrick J. Kanouff, Davis & Ceriani P.C., Denver, CO, Michael Joseph Lavelle, Matthew K. Lavelle, Lavelle & Lavelle PLC, Phoenix, AZ, Alain M. Baudry, Jonathan S. Parritz, Paul B. Civello, Maslon Edelman Borman & Brand LLP, Minneapolis, MN, for Plaintiff.Christopher J. Barber, Jonathan D. Miller, Joshua M. Wiersma, Peter J. Meyer, Steptoe & Johnson LLP, Chicago, IL, David Jeremy Bodney James Christopher Moeser, Steptoe & Johnson LLP, David J. Ouimette, Gary L. Birnbaum, Scot L. Claus, Russell Piccoli, Scot L. Claus, Mariscal Weeks McIntyre & Friedlander P.A., Jamey Green Anderson, Robert Clifford Hackett, Thomas M. Quigley, Sherman Howard LLC, Darlene Marie Wauro, John E. Dewulf, Pamela Lynn Judd, Roshka Dewulf & Patten, PLC, Kevin E. O'Malley, Mark Andrew Fuller, Gallagher & Kennedy P.A., Michael J. O'Connor, Jennings Strouss & Salmon PLC, Phoenix, AZ, Abby Risner, David M. Harris, Wendy S. Menghini, Greensfelder Hemker & Gale P.C., St. Louis, MO, Colleen M. Auer, Town of Prescott Valley, Prescott Valley, AZ, Matthew T. Heartney, Ryan M. Nishimoto, Arnold & Porter, Los Angeles, CA, John R. Hoopes, Patricia Ann Alexander, Hoopes & Adams PLC, Chandler, AZ, for Defendants.

ORDER G. MURRAY SNOW, District Judge.

Several motions to dismiss are pending before the Court. First, the Defendants in this action move to dismiss the Amended Complaints filed by Allstate Life Insurance Company and the Class Action Plaintiffs (collectively “Plaintiffs”). ( See Doc. 157–59, 164–65). Defendants then move to dismiss the Counterclaim filed by Counter–Complainant Wells Fargo Bank, ^N.A. ( See Doc. 170, 173–74, 177). As set forth below, the Motions to Dismiss are granted in part and denied in part.¹

BACKGROUND

The instant action arises from the offering and sale of $35 million in revenue bonds (the “Bonds”) used to finance the construction of a 5,000 seat event center in the Town of Prescott Valley, Arizona. Beginning in November 2005, Plaintiffs purchased these Bonds pursuant to a set of offering documents, entitled the “Official Statements.” The Official Statements, which were allegedly prepared and/or circulated by Defendants, contained, among other things, information and disclosures pertaining to the purchase, redemption, financing, debt servicing, and security of the Bonds. ( See Doc. 155, Ex. 1). According to Plaintiffs, however, the Official Statements also omitted critical information, allegedly known to Defendants, that rendered portions of the Statements false or misleading.

I. The Parties

Plaintiffs in this action are individuals and business entities that purchased the Bonds pursuant to the Official Statements. Plaintiff Allstate Life Insurance Company (“Allstate”) invested $2^6.4 million and is the Bondholder with the largest single financial interest in the Bonds. The Class Action Plaintiffs include Bondholders, other than Allstate, who invested approximately $9 million into the Bonds. These Plaintiffs are represented by five retirees: Ronald Covin, Bernard Patterson, Allen Patzke, Walter Krause, and Larry Verhulst. Wells Fargo Bank, ^N.A. (the “Trustee”) was appointed as Indenture Trustee

[756 F.Supp.2d 1123]

for the Bonds in the latter part of 2005. According to the Trustee, it has power to bring claims on the Bondholders' behalf pursuant to its Indenture Agreement with the Bondholders.

Plaintiffs and the Trustee bring claims against multiple defendants, who allegedly failed to disclose material information to purchasers of the Bonds. Defendants Robert W. Baird & Co., Inc. (“Baird”), M.L. Stern & Co., LLC (“Stern”),² and Edward D. Jones & Co., L.P. (“Jones”) were the Underwriters for the Bonds. Plaintiffs and the Trustee contend that these Defendants are at least partially responsible for the misleading information allegedly contained in the Official Statements. Defendants Kutak Rock LLP (“Kutak”) and Stinson, Morrison, Heckler LLP (“Stinson”) are law firms which allegedly prepared and drafted much of the language contained in the Official Statements. In preparing the Official Statements, Kutak acted as bond counsel and Stinson represented the Underwriters.

The Bonds were issued by the Development Authority of the County of Yavapai (the “Authority”),³ and the proceeds were loaned to Defendant Prescott Valley Event Center LLC (“PVEC–LLC”). PVEC–LLC is allegedly owned and controlled by Defendants Global Entertainment Corporation (“Global Entertainment”) and Prescott Valley Signature Entertainment, LLC (“PVSE”). Global Entertainment is owned and controlled by Defendants Richard Kozuback and W. James Treliving. PVSE is allegedly owned and controlled by Defendant Fain Signature Group, LLC (“FSG”), which is owned by Brad Fain and his family. PVSE and FSG (collectively the “Fain Group”) allegedly own a significant amount of commercial real estate in the Prescott Valley area. According to Plaintiffs, Global Entertainment, and the Fain Group also knowingly contributed to the allegedly misleading information contained in the Official Statements.

Sometime before the Bonds were issued, Defendant T.L. Hocking & Associates, which is controlled by Defendant Thomas L. Hocking (collectively the “Hocking Defendants”), and Global Entertainment entered into a partnership to promote and develop small to mid-sized event centers. Pursuant to this arrangement, Global and Hocking approached the Town of Prescott Valley (“Prescott Valley” or the “Town”) in 2004 to promote the construction and financing of the Prescott Valley Event Center. After the Town agreed, financing agreements were prepared and signed, the Official Statements were drafted (allegedly with input from each of the Defendants), the Bonds were issued, and the Event Center was constructed. After the Event Center failed to meet financial expectations and projections, as set forth in the Official Statements, Plaintiffs filed this case.

II. The Alleged FraudA. The Official Statements

The Official Statements provide two sources for paying debt service on the Bonds: (1) the net operating income from the Event Center and (2) certain Transaction Privilege Tax Revenues (“TPT Revenues”), which consist of sales taxes generated by the Event Center, sales taxes created by an “Entertainment District” immediately adjacent to the Event Center, and certain taxes generated in a “Secondary Credit Support Area” located

[756 F.Supp.2d 1124]

near the Event Center, but beyond the Entertainment District. (Doc. 130 at ¶ 6). Accordingly, the amount of money available for servicing the debt owed on the Bonds, at least in large part, depends on the total number of persons attending events at the Center. ( See Doc. 155, Ex. 1 at 12). According to the Official Statements, the Event Center was expected to generate 133 events per year with an average attendance of 3,609 people per event. See id. In total, the Official Statements projected an “annual ... paid attendance [of] approximately 480,000.” Id. Based on these attendance figures, the Official Statements projected that the Event Center's first full year of operation would generate around $5 million in total revenues and just over $4 million for debt servicing on the Bonds. Id. at 18. The Amended Complaints allege that because the amount of money available for paying the debt service on the Bonds was expected to be approximately two times the annual amount due to Bondholders, Fitch Ratings (“Fitch”), an independent rating agency, gave the Bonds an investment-grade “A—” rating. ( See Doc. 188, Ex. 16).

The projections set forth in the Official Statements, however, have not yet materialized, and, according to Plaintiffs, these projections will never materialize. Rather than producing an annual attendance of 480,000, the Event Center has generated attendance closer to 200,000 per year. While the Official Statements projected approximately 133 events with an average attendance of 3,609 per event, the Center has generated approximately 70 events per year with only about 2,857 attendees per event. Where the Official Statements opined that funding available for paying debt service on the Bonds would be approximately two times the annual amount due to Bondholders, the actual amount of net income and TPT Revenue available to pay debt servicing has been substantially less. When it was revealed that the Event Center would not be able to generate the revenue originally projected in the Official Statements, Fitch downgraded the Bonds to junk status.

Though the projections in the Official Statements are forward-looking, Plaintiffs contend that they were fraudulent because Defendants knowingly omitted material information that seriously undermined the Event Center's ability to generate the attendance, event, and revenue figures set forth in the estimates contained in the Official Statements. Specifically, Plaintiffs allege that Defendants conducted, or were at least aware of, two internal feasibility studies suggesting that the Prescott Valley area could not be expected to generate the event and attendance statistics set forth in the Official Statements. Plaintiffs first point to a 2001 Feasibility Report prepared by International Coliseums Company (“ICC”), which later became an affiliate of Global Entertainment. The 2001 ICC Report examined the feasibility of a similarly-sized event center in the nearby community of Prescott, Arizona ⁴ and concluded that an event center in this area could reasonably be expected to generate approximately 78 events per year with an annual attendance of approximately 202,500. (Doc. 188, Ex. 2 at 215). Based on these projections, the 2001 Report concluded that an event center in the greater Prescott area could...