In re Criimi Mae, Inc. Securities Litigation

• Citation: 94 F.Supp.2d 652
• Decision Date: 30 March 2000
• Docket Number: No. DKC 98-3373.,DKC 98-3373.
• Parties: In re CRIIMI MAE, INC. SECURITIES LITIGATION.
• Court: Court of Appeals of Maryland

94 F.Supp.2d 652

In re CRIIMI MAE, INC. SECURITIES LITIGATION.

No. DKC 98-3373.

United States District Court, D. Maryland.

March 30, 2000.

Charles J. Piven, Law Offices of Charles J. Piven, P.A., Baltimore, MD, Stephen T. Rodd, Abbey and Ellis, New York City, James S. Notis, New York City, Clifford S. Goodstein, Paul D. Young, Milberg, Weiss, Bershad, Hynes & Lerach, New York City, Jordan L. Lurie, James E. Tullman, Los Angeles, CA, for Robert A. Clarke.

Lawrence Joseph Quinn, John B. Isbister, Tydings and Rosenberg, Baltimore, MD, Deborah R. Gross, Gross and Metzger, Philadelphia, PA, for Sandra Bernstein.

Steven J. Toll, Cohen, Milstein, Housfeld and Toll, Daniel A. Small, Washington, DC, for Charles Kubinski, Bruce Montague.

Charles J. Piven, Law Offices of Charles J. Piven, P.A., Baltimore, MD, Peter C. Harrar, Wolf, Haldenstein, Adler, Freeman & Hertz, New York City, for Murray M. Rubin.

John B. Isister, Tydings and Rosenberg, Baltimore, MD, Bernard M. Gross, Gross and Metzger, Philadelphia, PA, Steven G. Schulman, Milberg, Weiss, et al, New York City, Lawrence G. Soicher, New York City, for Vierme, Inc.

Ronald B. Rubin, Timothy Michael Monahan, Rubin & Monahan, Chartered, Rockville, MD, for Irene Mohr.

Steven J. Toll, Cohen, Milstein, Housfeld and Toll, Daniel A. Small, Washington DC, Andrew N. Friedman, Cohen, Milstein, Hausefeld & Toll, Washington, DC, for Charles J. Kitchner, Carol L. Kitchner, Alvin Schindler.

Charles J. Piven, Law Offices of Charles J. Piven, P.A., Baltimore, MD, for Marion K. Elicati, Jeffrey A. Geller, Leonard Frank, Marian Dragonette, Seena Stevens Silverman, Glenn Stevens.

Lawrence Joseph Quinn, John B. Isbister, Tydings and Rosenberg, Baltimore, MD, Leonard Barrack, Daniel E. Bacine, Barrack, Rodos & Bacine, Philadelphia, PA, for Irving L. Mazer.

Andrew N. Friedman, Cohen, Milstein, Hausefeld & Toll, Washington, DC, for Joel M. Cohen, Mary T. Cohen, Elaine Slutsky.

Sherrie R. Savett, Berger & Montague, Philadelphia, PA, Andrew N. Friedman, Cohen, Milstein, Hausefeld & Toll, Washington, DC, for Mary Olive Arllen, Leonard Slutsky.

Burton Finkelstein, Donald J. Enright, Finkelstein, Thompson & Loughran, Washington, DC, for Robert T. Quasius.

Daniel A. Small, Washington, DC, Andrew N. Friedman, Cohen, Milstein, Hausefeld & Toll, Washington, DC, Andrew N. Friedman, Cohen, Milstein, Hausefeld & Toll, Washington, DC, for Brotherhood of Locomotive Engineers Division 269 Pension Fund and Welfare Fund.

Timothy W. Mungovan, Deborah L. Thaxter, Peabody & Brown, Boston, MA, for William B. Dockser, H. William Willoughby.

MEMORANDUM OPINION

CHASANOW, District Judge.

This securities class action was brought on behalf of all persons who purchased securities of Criimi Mae, Inc. ("CMI") during the period from February 20, 1998 through October 5, 1998 (the "class period"). The Defendants are William B. Dockser, Chairman of CMI's board of directors, H. William Willoughby, president of CMI and a member of the board of directors, and Cynthia Azzara, chief financial officer and treasurer of CMI. Plaintiffs allege violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a), and of Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5. Pending before the court is Defendants' motion to dismiss Plaintiffs' Amended and Consolidated Class Action Complaint. The issues have been fully briefed, and the court now rules pursuant to Local Rule 105.6, no hearing being deemed necessary. For the reasons that follow, the motion will be GRANTED.

I. Background

A. CMI's Business

CMI is a commercial mortgage company structured as a self-administered real estate investment trust ("REIT"). CMI's primary business activities include acquiring, originating, securitizing and servicing commercial mortgages and mortgage related assets. According to the complaint, CMI's business focuses on acquiring high-risk subordinated commercial mortgage-backed securities ("CMBS"), and originating and servicing commercial mortgage loans and securitizing the loans into CMBS.

CMBS are created in a process known as "securitization." The securitization is a sale to investors of an interest paying security (such as a bond) that is secured (or "backed") by a portfolio of commercial mortgage loans that have been pooled together. The securities receive cash flow from the pooled loans and pay fixed rates of interest. The securities are issued in various categories (or "tranches") that bear differing degrees of risk. According to the complaint, CMI did not acquire (or retain from its own loan pools) the higher rated securities, but instead acquired lower-rated subordinated CMBS from other issuers and retained the subordinated CMBS that it securitized.¹ Plaintiffs allege that CMI was virtually the only significant purchaser of subordinated CMBS and, as a result, the CMBS were essentially illiquid.

CMI utilized its portfolio of subordinated CMBS to finance its own growth, borrowing funds for its mortgage loan activities and to acquire the subordinated CMBS, and using the subordinated CMBS as collateral.² According to the complaint, the valuation of the CMBS as collateral was highly subjective because they were not widely traded and bore a high degree of risk. Plaintiffs claim that CMI's investment bankers/lenders retained discretion to value the CMBS put up by CMI as collateral and could require CMI to put up more collateral (either in the form of cash or additional CMBS) to secure CMI's outstanding loans when their views changed about the value of the CMBS already pledged.

In addition to the collateral valuation risk, Plaintiffs allege that CMI faced "asset liability mismatch interest rate risk." By making long-term loans at fixed rates and using short-term floating rate borrowings to finance those loans, CMI was vulnerable to increases in short-term interest rates. If short-term interest rates were to rise, the profitability of CMI's long-term loans would fall as the gap between the interest CMI was paying on its short-term borrowings and the interest CMI was earning on its commercial mortgages narrowed. To partially offset this risk and cushion the impact of rising interest rates on its floating rate debt, CMI entered into various "hedging" agreements whereby CMI would be paid money if interest rates rose above a certain level. Under CMI's loan origination agreements with two of its investment bankers, Citibank and Prudential, the investment bankers were responsible for arranging the hedge contracts and providing CMI with written "hedge" reporting.

B. CMI's Bankruptcy

According to the complaint, on or about October 2, 1998, CMI's lenders revalued the CMBS that were serving as collateral for CMI's loans. The lenders called on CMI to provide additional collateral based on a downward revaluation of the CMBS. Because CMI was unable to meet the collateral call, and thus risked default under a substantial portion of its financing arrangements, CMI announced on October 5, 1998 that it was filing for protection under chapter 11 of the bankruptcy code. Trading in CMI stock was halted. When trading resumed on October 7, 1998, the price of CMI stock was 1-5/16. CMI stock was trading at 6-15/16 just prior to the announcement that CMI had filed for bankruptcy, and traded as high as 16-1/8 during the class period.

C. The Alleged Misrepresentations and Omissions

Plaintiffs claim that throughout the class period Defendants caused CMI to file documents with the SEC and issue press releases that operated as a fraud on the market because they omitted material information. The complaint is cumbersome, redundant and largely unhelpful in its presentation of the allegations against Defendants. After careful review, however, the court has boiled the 55 page complaint down to four categories of alleged omissions and misrepresentations by Defendants. First, Plaintiffs allege that Defendants failed to disclose the nature of the relationship between CMI and its lenders. Plaintiffs describe that relationship as one in which the lenders essentially controlled CMI's financial destiny. It is alleged that CMI borrowed money on terms that allowed CMI's lenders "unilaterally and subjectively" to establish the value of the collateral securing those loans (the subordinated CMBS) and to require additional CMBS as collateral (a "collateral call") when their views changed about the value of the CMBS already put up as collateral. This, according to Plaintiffs, left CMI "at the mercy" of its lenders and subject to the risk that it would be faced with collateral calls it could not predict or meet.

Second, it is alleged that Defendants failed to disclose that the subordinated CMBS were "illiquid" and that the illiquidity resulted in an increased likelihood that the collateral would be valued by CMI's lenders at a depressed price and leave CMI with inadequate unencumbered assets to meet collateral calls by its creditors. Third, Plaintiffs allege that Defendants failed to disclose material information regarding CMI's exposure to the risk of interest rate fluctuations. Fourth, Plaintiffs allege that Defendants, in connection with a September 25, 1998 press release, failed to disclose that a recent decline in the market value for CMBS would have a negative effect on their lenders' perception of the adequacy of collateral they held and would prompt a substantial collateral call that CMI could not meet.

II. Applicable Pleading Standards

A. Pleading Requirements of Rules 12(b)(6), 9(b) and the PSLRA for Claims of Securities Fraud

A motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) will not be granted unless "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). In reviewing the complaint, the court accepts all well-pled...