Hershey v. MNC Financial, Inc., Civ. No. JFM-90-3151
Decision Date | 19 August 1991 |
Docket Number | Civ. No. JFM-90-3151,JFM-91-684 and JFM-91-1208. |
Citation | 774 F. Supp. 367 |
Parties | William R. HERSHEY v. MNC FINANCIAL, INC., et al. Marshall WOLF v. MNC FINANCIAL, INC., et al. Alfred ASCH and David Asch v. MNC FINANCIAL, INC., et al. |
Court | U.S. District Court — District of Maryland |
Steven J. Toll, Cohen, Milstein, Hausfeld & Toll, Washington, D.C., Edward Houff, Church and Houff, Baltimore, Md., for William Hershey, et al.
Robert Kershaw, Quinn, Ward & Kershaw, Baltimore, Md., for Marshall Wolf.
Richard Radcliffe, Jr., Baltimore, Md., Richard Greenfield, Greenfield and Ceimicles, Haverford, Pa., for Alfred Asch, et al.
William Utermohlen, Alexander E. Bennett, Arnold and Porter, Washington, D.C., Benjamin Civilletti, Venable, Baetjer & Howard, Baltimore, Md., for MNC Financial, Inc., et al.
In Gollomp v. MNC Financial, Inc., 756 F.Supp. 228 (D.Md.1991), I dismissed three consolidated actions brought by five shareholders of MNC Financial, Inc. ("MNC") against MNC and its former chairman and chief executive officer, Alan P. Hoblitzell, Jr. Plaintiffs in those actions sought to assert (on behalf of all persons who purchased MNC stock between January 17, 1989 and July 24, 1990) federal securities law claims and a claim for the common law tort of negligent misrepresentation. I dismissed the actions without prejudice, essentially on the ground that plaintiffs had failed to allege fraud with sufficient particularity pursuant to Fed.R.Civ.P. 9(b). Plaintiffs noticed an appeal from my decision but subsequently dismissed it.
Presently pending before me are three additional actions brought by MNC shareholders against MNC, Hoblitzell and several other former officers and directors of MNC asserting claims substantially similar to those previously asserted in Gollomp. In Hershey v. MNC, Civil No. 90-3151, plaintiffs seek to represent all persons who purchased MNC stock between January 18, 1990 and October 25, 1990. In Wolf v. MNC, Civil No. 91-684, plaintiff seeks to represent all persons who were owners of the common stock of Equitable Bancorporation ("Equitable") on January 18, 1990, when MNC and Equitable merged. In Asch v. MNC, Civil No. 91-1208, plaintiffs seek to represent all persons who purchased MNC stock between January 17, 1989 and October 25, 1990.1 Defendants have filed motions to dismiss in all three actions.
These actions arise out of a dramatic decrease in the reported earnings of MNC during 1990 as a result of substantial increases which it made to its loan loss reserves because of its deteriorating real estate loan portfolio. This decrease in earnings caused a precipitous drop in the value of MNC's common stock during the class periods. Plaintiffs allege that during those periods MNC and its representatives announced inflated earnings reports (because of understated loan loss reserves) and made various other misrepresentations to the investing public.
In Gollomp both sides agreed that under Fed.R.Civ.P. 9(b) "plaintiffs are required to plead sufficient facts to support a conclusory averment that `defendants' failure to increase the loan loss reserves did not merely constitute the exercise of poor banking judgment but was so lacking in factual basis that it necessarily resulted either from a deliberate intent to defraud or a reckless disregard for the truth.'" 756 F.Supp. at 231. Plaintiffs identified three facts which they contended demonstrated fraud as opposed to mere mismanagement or faulty prognostication: (1) the substantial increase in the loan loss reserves which MNC announced on April 19, 1990; (2) the substantial decrease in the value of MNC stock after the April 19, 1990 announcement; and (3) the allegedly inherent contradiction between MNC's representations that it was conservatively managed and the deterioration of its loan portfolio. I held that these facts, considered individually or collectively, were not sufficient to support plaintiffs' conclusory averment that defendants acted fraudulently.
In the present cases plaintiffs, arguing that Rule 9(b) should be interpreted very liberally (or not applied at all) to claims arising under the federal securities laws,2 invite me to reverse my ruling in Gollomp. Continuing to believe that Gollomp was correctly decided, I decline the invitation. Plaintiffs further argue that assuming the correctness of my ruling in Gollomp, they have now pled sufficiently detailed facts to meet its requirements. They also contend, as did plaintiffs in Gollomp, that Rule 9(b) does not apply to claims which they have asserted under §§ 11, 12 and 15 of the Securities Act of 1933 (the "1933 Act"), 15 U.S.C. §§ 77k, 77l and 77o, and § 14(a) of the Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. § 78n(a), in connection with MNC's Dividend Reinvestment Plan ("DRIP") and the MNC/Equitable merger.
The complaint in Asch is the broadest in temporal scope and, to the extent that it overlaps in time with the complaints in Hershey and Wolf, is virtually identical to them. Therefore, it provides the most convenient basis for summarizing plaintiffs' allegations.
MNC is a bank holding company headquartered in Baltimore. It made a number of real estate loans concentrated in the Baltimore-Washington area in the 1980s. This strategy appeared to pay off as MNC posted healthy earnings through 1989. MNC's real estate loan portfolio was, however, fundamentally unsound. Prompted by stiff competition in the lending market and a desire to realize short-term gains, MNC had funded a variety of ill-conceived real estate projects in the 1980s. Com. ¶¶ 30, 33-35, 38. By early 1989, MNC officials knew, or were reckless in not knowing, that their lending strategy had charted a course for disaster.3
Nevertheless, from January 17, 1989 through October 25, 1990 MNC officials consistently misled the investing public about the bank's financial condition. The scheme, as the plaintiffs describe it, had two separate phases. In the first phase, covering roughly the first fifteen months of the class period, the problems in MNC's real estate loan portfolio were simply whitewashed. The defendants depicted MNC as a healthy, vital institution with a record of consistently strong financial performance. They fraudulently understated loan loss reserves. More generally, they made no acknowledgment of the serious underlying flaws which they either knew about or were reckless in not recognizing. Beginning in March 1990, the second phase commenced and the scheme changed. Rather than ignore the bank's problems, MNC officials embarked upon a scheme to fraudulently minimize the scope of these difficulties. The scheme was to admit small failures in a series of half-truths, so that investors would overlook the impending catastrophe. This scheme was manifested by setting inadequate loan loss reserves and by sugar-coating MNC's deteriorating situation in unduly optimistic statements.
During phase one, the defendants released the 1988 Annual Report, quarterly reports covering the last quarter of 1988 and all quarters of 1989, and advertisements in the financial press. Each of these documents contains a number of statements alleged to be false or misleading. Rather than repeat them all here, I will describe generic categories in which the statements can usefully be placed:
In phase two, MNC released its 1989 Annual Report, quarterly reports for the first three quarters of 1990, and other public pronouncements. I will summarize these statements chronologically:
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