Dougherty v. Carver Federal Sav. Bank, 110

• Decision Date: 30 April 1997
• Docket Number: D,No. 110,110
• Citation: 112 F.3d 613
• Parties: Robert L. DOUGHERTY, on his own behalf and on behalf of all those similarly situated; Norman Gomberg; Joseph Uminer, Plaintiffs-Appellants, v. CARVER FEDERAL SAVINGS BANK; Capital Resources, Inc.; Capital Resources Group, Inc.; Richard T. Greene; M. Moran Weston; David R. Jones; Benjamin W. Watkins; Herman Johnson; Biswarup Mukherjee; Howard R. Dabney; Margaret R. Lewis, Defendants-Appellees. ocket 96-7131.
• Court: U.S. Court of Appeals — Second Circuit

Page 613

112 F.3d 613

Robert L. DOUGHERTY, on his own behalf and on behalf of all

those similarly situated; Norman Gomberg; Joseph

Uminer, Plaintiffs-Appellants, v. CARVER FEDERAL SAVINGS BANK; Capital Resources, Inc.;

Capital Resources Group, Inc.; Richard T. Greene; M. Moran

Weston; David R. Jones; Benjamin W. Watkins; Herman

Johnson; Biswarup Mukherjee; Howard R. Dabney; Margaret

R. Lewis, Defendants-Appellees.

No. 110, Docket 96-7131.

United States Court of Appeals, Second Circuit.

Argued Sept. 4, 1996.

Submitted Nov. 14, 1996.

Decided April 30, 1997.

Richard A. Finberg, Pittsburgh, Pennsylvania (Eric T. Smith, Malakoff Doyle & Finberg, Pittsburgh, Pennsylvania; Bruce E. Gerstein, Barry S. Taus, Garwin, Bronzaft, Gerstein & Fisher, New York City; James E. Bauman, Mallery & Zimmerman, Milwaukee, Wisconsin, of counsel), for Plaintiffs-Appellants.

Daniel A. Pollack, New York City (Martin I. Kaminsky, Edward T. McDermott, Raymond L. Bruce, Pollack & Kaminsky, New York City; Clark R. Silcox, Steele, Silcox & Browning, Washington, DC, of counsel), for Defendants-Appellees.

Richard H. Walker, Washington, DC (Jacob H. Stillman, Susan S. McDonald, Angel Yang, Paul Gonson, Securities and Exchange Commission, Washington, DC, of counsel), submitted a brief on behalf of The Securities and Exchange Commission as Amicus Curiae.

Aaron B. Kahn, Washington, DC (Carolyn J. Buck, Thomas J. Segal, Office of Thrift Supervision, Washington, DC, of counsel), submitted a letter brief on behalf of The Office of Thrift Supervision as Amicus Curiae.

Before: FEINBERG, CARDAMONE, and McLAUGHLIN Circuit Judges.

CARDAMONE, Circuit Judge.

This appeal arises out of the conversion by defendant Carver Federal Savings Bank (Carver or Bank) from the mutual to the stock form of ownership in the fall of 1994. In connection with that transaction, Carver issued 2,314,375 shares of common stock to investors at a price of $10 per share. Plaintiffs Robert L. Dougherty, Joseph Uminer and Norman Gomberg each subscribed for and purchased Carver stock at the $10 price, purchasing respectively $150,000, $86,800 and $350,300 worth of Carver stock, only to see the stock lose a substantial portion of its value in the first week of public trading.

Plaintiffs then brought separate securities fraud class actions in the United States District Court for the Southern District of New York (Motley, J.) alleging that the offering circular used by Carver to sell its stock contained material misstatements and omissions in violation of federal and state securities laws. Because the Office of Thrift Supervision (OTS) approved Carver's application to convert to stock form, the district court, relying on 12 U.S.C. § 1464(i)(2)(B), which designates the Court of Appeals as the exclusive forum for judicial review of final OTS conversion approvals,

dismissed the plaintiffs' claims for lack of subject matter jurisdiction in an opinion reported at 909 F.Supp. 197 (1996). OTS approval of Carver's conversion from mutual form to stock form did not decide the issues raised by plaintiffs' securities fraud claims. Hence, we reverse.

BACKGROUND

A. Legislative Enactments and Regulatory Framework for Conversion in Savings and Loan Industry

To put this case in proper perspective, it is helpful to discuss briefly at the outset the conversion process in general and the manner in which the regulatory framework governing such conversions has evolved.

1. Conversion Process in General. Federal savings associations come in two forms--mutual associations and stock associations. Mutual associations differ from ordinary stock corporations in that they have no stock or shareholders, but instead are operated for the mutual benefit of their depositors, who elect the board of directors. Stock savings associations, in contrast, are like ordinary stock corporations--they are owned and controlled by persons holding their stock. See Ordower v. Office of Thrift Supervision, 999 F.2d 1183, 1185 (7th Cir.1993) (discussing mutual form of ownership); Charter Fed. Savings & Loan Ass'n v. Office of Thrift Supervision, 912 F.2d 1569, 1570 (11th Cir.1990) (same). The present action arises from defendant Carver's decision to convert from mutual form to stock form. In a conversion of this sort, a mutual association exchanges its mutual charter for a stock charter and issues stock to investors, who then become the owners of the association.

2. Evolution of the Regulatory Framework. The regulatory and legislative environment for such conversions has varied over the years. Initially, all federal savings associations were in mutual form. When Congress first enacted the Home Owners' Loan Act of 1933 (HOLA), 12 U.S.C. § 1461 et seq., permitting the formation of federal savings associations, it provided for only one form of charter--the mutual charter--and provided no mechanism for converting to stock form. This changed in 1948, when the legislature amended HOLA to permit federal mutual associations to convert to state stock associations. See Charter Fed. Savings & Loan Ass'n, 912 F.2d at 1571.

The initial experience with conversions raised troubling problems. In this initial period, the question of who owned the net worth that had been accumulated over years and how to dispose of it in a conversion to a stock corporation was not well regulated. There was great temptation to raid the billions of dollars in industry accumulation of net worth. In fact, an independent study commissioned by Congress revealed that in the majority of pre-1963 conversions, the group of insiders initiating the conversion appropriated "a large part" of the net worth. S.Rep. No. 93-902 (1974) (additional views of Sen. William Proxmire), reprinted in 1974 U.S.C.C.A.N. 6136, 6137. As a result a moratorium was placed on conversions in 1963.

A decade later, Congress began to lift the ban, which was completely eliminated in 1976. See Charter Fed. Savings & Loan Ass'n, 912 F.2d at 1571. Conversions resumed under a new set of comprehensive regulations adopted by the Federal Home Loan Bank Board. Initially, concerned with insider abuse, federal regulators were wary of conversions. As time went on these officials became increasingly attracted to the procedure as a means for shoring up the capital position of undercapitalized savings associations. This trend became more pronounced with the advent of the savings and loan crisis of the late 1970s and early 1980s. Faced with the prospect of widespread savings association failures, federal regulators loosened the conversion regulations to make it easier and more attractive for banks to take advantage of the procedure to raise capital. See Conversions From Mutual to Stock Form, 59 Fed.Reg. 22,725, 22,725-26 (1994) (to be codified at 12 C.F.R. pts. 563b & 575) (interim final rule with request for comments, May 3, 1994) (discussing evolution of regulatory environment) [hereafter Proposed 1994 Regulations ].

In this environment, conversions became very popular. Over 300 federal savings institutions converted between 1990 and 1994 Eventually, Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Pub.L. No. 101-73, 103 Stat. 183 (1989), which restructured the regulation of the savings association industry by, inter alia, abolishing the Federal Home Loan Bank Board (Bank Board) and vesting many of its functions in the newly-created Office of Thrift Supervision, see FIRREA § 301 (establishing OTS), § 401 (abolishing Bank Board). With time, the thrift under-capitalization problem abated and the industry returned to solvency. With the crisis past, the OTS, concerned anew with insider abuses, tightened its conversion procedures through interim final rules issued in May 1994, see Proposed 1994 Regulations, supra, 59 Fed.Reg. at 22,725. Those rules were adopted in final form in November 1994. See Conversions from Mutual to Stock Form, 59 Fed.Reg. 61,247 (1994) (to be codified at 12 C.F.R. pts. 563b & 575) (final rule, Nov. 30, 1994). Carver's conversion to stock form took place in the midst of this regulatory rule-tightening, but was completed before the adoption of the final rule.

raising nearly $5 billion in the process, see Mutual Depository Institution Conversion Protection Act of 1994: Hearings on S. 1801 Before the Senate Comm. on Banking, Housing and Urban Affairs, 103 Cong. (1994) (statement of Jonathan L. Fiechter, Acting Director, Office of Thrift Supervision), and in the decade between 1984 and 1994, the number of savings associations in mutual form nationwide dropped by roughly 56 percent. See Mutual-to-Stock Conversions of State Nonmember Savings Banks, 59 Fed.Reg. 30,357 (1994) (FDIC notice and request for comments) (noting decrease to 1,100 mutual associations in 1994 from more than 2,500 in 1984).

B. The Carver Federal Savings Conversion

In early 1994, defendant Carver was one of the largest African-American owned financial institutions in the United States, but had not yet converted from mutual to stock form. Although the mutual form of ownership has certain advantages--among other things, it offers near-complete takeover protection--Carver, like many other mutual banks, decided to convert to stock form to raise capital by selling its stock to investors. Converting to stock form allows a savings bank to operate in a more traditional manner, provides the capital necessary to acquire branches more readily and strengthens the bank's ability to recruit and retain quality managers using stock-based incentives such as employee stock option plans. See C. Thomas Long et al., Conversions and Securities Offerings of Savings and Loan Associations, C418 ALI-ABA 411, 421-422 (1989) (discussing advantages and disadvantages of converting to stock form).

As a federally-chartered savings bank, Carver could not convert from mutual to stock form without securing the prior written approval of the OTS. Under the OTS regulations in effect in 1994, a mutual...