In re General Development Corp. Bond Litigation
| Decision Date | 08 July 1992 |
| Docket Number | 91 Civ. 0594 (LMM). MDL No. 890. |
| Citation | 800 F. Supp. 1128 |
| Parties | In re GENERAL DEVELOPMENT CORPORATION BOND LITIGATION. This Document Relates To All Actions. |
| Court | U.S. District Court — Southern District of New York |
Scott Fisher, Garwin, Bronzaft, Gerstein & Fisher, Mordecai Rosenfeld, P.C., New York City, Elwood S. Simon & Associates, P.C., Bloomfield, Mich., for plaintiffs.
Joel F. Hirschhorn, Miami, Fla., for defendant Ehrling.
Bruce W. Keihner, West Palm Beach, Fla.
Robert T. Wright, Mershon, Sawyer, Johnston, Dunwoody & Cole, Miami, Fla., for defendants Askew, Scharffenberger, Pyne, Hatch, Clark, Jr., Manley, Brinckerhoff, Simons.
Howard Weinberg, Davis Markel & Edwards, Miami, Fla., Steven M. Edwards, Davis Markel & Edwards, New York City, for defendant David Brown.
James D. Wing, Alice Lash, Fine, Jacobson, Schwartz, Nash & Block, Miami, Fla., for defendant Mozian.
Bruce Angiolillo, Simpson Thacher & Bartlett, New York City, for defendants PaineWebber, Inc., Merrill Lynch Pierce Fenner & Smith, Inc., Merrill Lynch Capital Markets.
Ronald B. Ravikoff, Frederick W. Sall, Zuckerman, Spaeder, Taylor & Evans, Miami, Fla., for defendant Zdon.
Gilbride, Heller & Brown, P.A. by Lewis N. Brown, Linda H. Gottlieb, Miami, Fla., Seward & Kissel by Mark Hyland, John A. Shutkin, Associate General Counsel, KPMG Peat Marwick, New York City for KPMG Peat Marwick.
Currently pending before this Court are motions arising out of the Class Action Complaint ("Harold Menowitz, on behalf of himself and all others similarly situated, v. David F. Brown et al.") filed in the Southern District of New York on January 25, 1991.1 The Complaint alleges violations of Sections 11 and 15 of the Securities Act of 1933 (the "Securities Act" or the "1933 Act"), 15 U.S.C. §§ 77k and 77o, Sections 10(b) and 20 of the Securities Exchange Act of 1934 (the "Exchange Act" or "the 1934 Act"), 15 U.S.C. §§ 78j(b) and 78t(a), Rule 10b-5 promulgated thereunder, and the common law. Plaintiff's motion for an order certifying the class pursuant to Rule 23 of the Federal Rules of Civil Procedure having been deferred, the Court in this Memorandum and Order addresses motions submitted on behalf of the individual defendants and Defendant KPMG Peat Marwick seeking dismissal of the Complaint. For the reasons that follow, the Defendants' motions are granted and the Complaint is dismissed in its entirety.
The following description of the parties and recital of the factual background of this matter is drawn from the allegations of the Complaint. General Development Corporation ("GDC" or "the Company") is a residential, commercial and industrial real estate developer incorporated in the State of Delaware and headquartered in Miami, Florida. The Complaint alleges that GDC, which filed for Chapter 11 bankruptcy protection on April 6, 1990, is or was engaged in the development, offering, and sale of homesites and other properties located primarily in the state of Florida, and also in the construction and sale of single and multi-family housing, for which GDC provided mortgage financing to purchasers through a subsidiary called GDV Financial Corporation ("GDV" or "GDVFC"). GDC is or was a reporting company registered with the Securities and Exchange Commission (the "SEC") pursuant to the Securities Exchange Act, and the Complaint alleges that, at all relevant times, the bonds issued by the Company pursuant to the public offering that is the subject of the action were traded on the New York Stock Exchange. GDC, having filed for bankruptcy protection, is not a party to this lawsuit.
Plaintiff Harold Menowitz is a purchaser of approximately $450,000 (face value) in bonds issued by The Company in a $110 million public offering (the "Offering") of 12 7/8 % Senior Subordinated bonds (the "Bonds"). The Bonds were issued pursuant to a registration statement (the "Registration Statement"), which included a prospectus dated April 8, 1988 (the "1988 Prospectus").
The individually named defendants (hereinafter collectively the "Individual Defendants") served as senior officers and/or directors of GDC at all relevant times, and were the signatories of assorted documents publicly disseminated by the Company.2 The Complaint alleges that, as of December 31, 1988, Defendants Brown, Ehrling, Askew, Clark, Simons, Brinckerhoff, Hatch, Manley, Pyne and Scharffenberger owned shares of GDC common stock ranging in number from 200 to 357,258. Directors of the Company, and members and chairmen of the various Committees of the Board, received annual fees for their services, and each director received stock appreciation rights and was entitled to the equivalent of $2,500 per annum in tax advice and tax preparation assistance. According to the allegations of the Complaint, "by reason of their stock ownership, management positions and/or membership on GDC's Board of Directors, the Individual Defendants were "controlling persons" of GDC within the meaning of Section 15 of the Securities Act, 15 U.S.C. § 77o, and Section 20 of the Securities Exchange Act, 15 U.S.C. 78t(a)."
Defendants PaineWebber, Inc. ("Paine-Webber") and Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch") (hereinafter collectively the "Underwriter Defendants") were the underwriters in connection with the Offering. The Complaint alleges that "the Underwriter Defendants purportedly conducted or participated in `due diligence' investigations into the business, operations and prospects of GDC as part of their responsibilities as underwriters of the offering, and participated in the preparation of the Registration Statement and 1988 Prospectus."
Defendant KPMG Peat Marwick ("Peat Marwick"), a partnership of certified public accountants, was engaged by the Company to provide independent auditing review during the period relevant to this action. The Complaint alleges that Peat Marwick authorized the inclusion in the 1988 Prospectus of unqualified opinions regarding GDC's financial statements for the four month period ending December 31, 1985, and for the years ending December 31, 1986, and December 31, 1987. Peat Marwick also participated in the filing of the Registration Statement, including the 1988 Prospectus, and in the dissemination of assorted other documents issued to the investing public and to GDC shareholders.
Plaintiffs' recital of GDC's activities during the purported class period, comprising forty-five pages and ninety-six paragraphs of the Complaint, is summarized here only briefly. In essence, Plaintiffs allege that certain documents issued and disseminated by the Company during the purported class period (April 8, 1988 through March 17, 1990), including the 1988 Prospectus as well as Quarterly and Annual Reports to shareholders and other publicly disseminated filings following the issuance of the 1988 Prospectus, misrepresented the Company's financial position and prospects, and contributed to the artificial inflation of GDC bonds.
As factual background, Plaintiffs allege that for over seven years between 1982 and 1989, GDC was engaged in a "comprehensive and far reaching scheme" to solicit and consummate sales of Florida properties to unsophisticated purchasers, usually out-of-state residents with limited education and little or no experience in real estate. Potential customers would frequently be flown to Florida at GDC's expense, met at the airport by GDC sales representatives, and shepherded through the Company's "one-stop" shopping process, whose object was to minimize exposure to outside sources of information and assure the eventual sale of GDC properties at highly inflated rates. In furtherance of its "fraudulent selling practices," GDC allegedly provided customers with appraisals that substantially overestimated the value of GDC properties, encouraged the financing of purchases through GDC subsidiary GDV, and — until 1987, when the practice was halted following discovery by the Federal National Mortgage Association (the "FNMA") — contrived to maintain as current mortgages issued by GDV that would otherwise have gone into default, triggering GDC's buy-back obligations under the terms of its agreements with certain institutional purchasers of GDV-originated mortgages. The Complaint alleges further that GDC systematically breached sales contracts providing for the reimbursement to defaulting purchasers of certain percentages of monies previously paid the Company, and that this practice — along with the Company's failure to honor certain contractual obligations concerning the completion of homesites and homesite improvements — resulted in extensive potential liability in connection with lawsuits filed on behalf of large numbers of disgruntled purchasers of GDC properties.
Plaintiffs' essential argument in support of their federal securities and common law fraud claims is that purchasers of GDC Bonds during the purported class period were injured by the inadequacy of the Company's disclosures with respect to the existence, scope, and potential repercussions of the activities outlined above. The substantive allegations of the Complaint fall into three broad categories:
(1) Misrepresentations about GDC's "competitive advantage and business acumen": Plaintiffs allege that GDC's public filings in connection with the Offering were materially false and misleading insofar as increases in the Company's reported revenues and income, as well as other successes, were described as the result of GDC's "competitive advantage" and the superior "business acumen" of its sales force. As Plaintiffs would have it, the Company's public filings should have revealed that revenues and income were artificially inflated as a result of GDC's illegal selling practices and would not be maintainable following the eventual discovery and cessation of those practices.
(2) Failure to disclose the "true nature" of pending litigation: Plaintiffs allege that...
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