In re Metropolitan Securities Litigation
| Citation | 532 F.Supp.2d 1260 |
| Decision Date | 05 November 2007 |
| Docket Number | No. CV-04-0025-FVS.,CV-04-0025-FVS. |
| Parties | In re METROPOLITAN SECURITIES LITIGATION. |
| Court | U.S. District Court — District of Washington |
THIS MATTER is before the Court on four motions to dismiss brought by the various Defendants. In view of this procedural posture, the Court must accept all factual allegations set forth in the Complaint as true for the purposes of, the present order. Epstein v. Wash. Energy Co., 83 F.3d 1136, 1140 (9th Cir.1996). The following statement of facts, is accordingly drawn from the pleadings.
This is a class action brought by investors against the former accountants, the Qualified Independent Underwriter, and certain officers and directors of Metropolitan Mortgage & Securities Company ("Metropolitan"), Summit Securities ("Summit"), and their subsidiaries. The Plaintiff's allege that Metropolitan and Summit were affiliated securities companies. Both owned a number of subsidiaries, collectively referred to as the "Met Group." After the collapse of Metropolitan and Summit in 2004, their securities became virtually worthless. SCAC ¶ 12. This suit followed.
The present action is a consolidation of two previously filed actions, Hall et al. v. Metropolitan Mortgage & Securities Co. Inc., et al, CV-04-28-FVS and Cauvel et al. v. Metropolitan Investment Securities Company, Inc, et al, CV-04-25-FVS. When the Court consolidated the cases on August 11, 2004, it appointed Keith Cauvel, Arthur Becker, Venus Hafford Weber, Eva Drauhn, George Saylor, Becklyn Wilkey, and Floyd Bodner (collectively, "the Saylor Group") as Lead Plaintiff's for the proposed class pursuant to 15 U.S.C. § 78u4 (a)(3)(B). (Ct.Rec.121.) By the same order, the Court appointed Hagens Berman LLP and Gordon Thomas Honeywell Malanca Peterson & Daheim LP as Co-Lead Counsel. Id.
The First Amended Complaint1 ("FAC") in Cauvel, Ct. Rec. 11, named as Defendants Metropolitan, Summit, Metropolitan Investment Securities, Inc. ("MIS"), Ernst & Young, LLP, and a number of former Metropolitan and Summit officers and directors. It alleged claims under Section 10(b) of the Securities and Exchange Act of 1934 ("the Exchange Act" or "the 1934 Act") and Sections 11, 12, 15, and 20 of the Securities Act of 1933 ("the Securities Act" or "the 1933 Act"). (Ct. Rec.11.) Following the consolidation of Cauvel with Hall, on December 17, 2004, the Plaintiff's moved to file an amended complaint. (Ct.Rec.150.) The Plaintiff's attached their proposed Consolidated and Amended Class Action Complaint ("CAC") to the motion to amend. The Court granted the motion on January 20, 2005, Ct. Rec. 178, and the Plaintiff's filed the CAC on March 11, 2005. (Ct.Rec.209.) The CAC named Pricewaterhousecoopers, LLP and Roth Capital Partners, LLC as Defendants for the first time. The CAC dropped the claim previously asserted under the 1934 Act, and instead alleged a claim under Washington State's Securities Act ("WSSA").
On October 6, 2006, the Court approved a partial settlement that dismissed a number of Defendants. (Ct.Rec.406.) The Court also granted the Plaintiff's permission to file a second consolidated and amended complaint. (Ct.Rec.404). The Plaintiff's filed their Second Consolidated and Amended Class Action Complaint ("SCAC") on October 10, 2006.
The SCAC asserts a total of thirteen claims. Pursuant to Section 11 of the 1933 Act, the Plaintiff's allege that, as a result of the Defendants' negligence, certain registration statements issued by Metropolitan and Summit contained material misrepresentations and omissions. The Plaintiffs bring an additional Section 11 claim against Metropolitan and Summit's former auditors and underwriter, alleging that the misrepresentations in the registration statements amounted to fraud. SCAC ¶¶ 758-782. Pursuant to Section 12 of the 1933 Act, the Plaintiff's allege that the Met Group's former officers and directors sold securities using prospectuses that contained misrepresentations. Pursuant to Section 15 of the 1933 Act, the Plaintiffs allege that the Met Group's former officers and directors exercised control over the parties responsible for the Section 11 and Section 12 violations. Finally, pursuant to Washington State's Securities Act, the Plaintiff's allege that all of the Defendants made false statements in connection with the sale of securities.
The Plaintiff's propose to certify two different classes. The Federal Claims Class would bring only federal claims and consist of all persons who purchased investment debentures and preferred stock from Metropolitan and investment certificates and preferred stock from Summit pursuant to nine registration statements (the "Registration Statements") that became or were effective from February 13, 2001 to December 15, 2003 ("the Class Period"). SCAC ¶ 40. The State Claims Class would bring only state law claims and consist of all persons who purchased investment debentures and preferred stock from Metropolitan and investment certificates and preferred stock from Summit pursuant to the Registration Statements that became or were effective during the Class Period "but which were not listed or authorized for listing on the National Market System of the NASDAQ market system." SCAC ¶ 40 (emphasis added). Class certification is not before the Court at this time.
The Plaintiff's allege that Metropolitan focused on buying high risk home mortgages after its founding in 1953. SCAC ¶ 43. In 1973, Metropolitan Investment Securities, Inc. ("MIS"), a broker-dealer, was formed as a wholly owned subsidiary of Metropolitan. SCAC ¶ 46. Metropolitan later expanded into other areas of business, including insurance. SCAC ¶ 48. Summit was created as another wholly owned subsidiary in 1990. SCAC ¶ 49. Summit became a "near mirror image" of Metropolitan after it was acquired by National Summit Corporation in 1994. SCAC ¶ 50.
Metropolitan and Summit originally focused on different business activities. Metropolitan was primarily involved in residential mortgage loans and selling various kinds of receivables, while Summit's primary areas of business were commercial lending and property development. SCAC ¶ 55. Metropolitan's earnings in the mid-1990s could not keep pace with its rapid growth, however, and Metropolitan became "very thinly capitalized." SCAC ¶ 85. As a result, Metropolitan changed its practices to reflect those of Summit in 2000. SCAC ¶ 56.
Functioning as "a single enterprise focused on commercial lending," Metropolitan and Summit aggressively pursued commercial lending, writing $20430 million dollars in commercial loans every month during much of 2001 and 2002. SCAC ¶¶ 86-87. In an effort to increase this amount to $100 million a month, the companies engaged in increasingly risky ventures. SCAC ¶¶ 88-90. The SCAC describes sixteen "representative transactions" to illustrate the Met Group's practices. ¶¶ SCAC 455-619.
With its commercial real estate investments generating little return, the Met Group was unable to pay the significant annual rates of return on its securities, leading it to issue yet more securities as a source of cash. SCAC ¶ 148. The Met Group thus became wholly dependant on cash acquired from the sale of securities. SCAC ¶ 130. Its practices required, both unqualified financial statements from the Met Group's auditors and continual regulatory approval. SCAC ¶ 130. During the time period identified by the proposed class, the Met Group made nine securities offerings. MIS acted as the sales brokerage for all of these sales.
In 1995, the Securities Division of the Washington State Department of Financial Institutions ("DFI") conducted an audit and examination of the Met Group that disclosed numerous regulatory violations, unsound business practices, and conflicts of interest. SCAC ¶ 62. DFI and the Met Group subsequently entered into a Memorandum of Understanding ("MOU") that imposed special requirements on the Met Group. By 1998, the Met Group was disregarding the terms of the MOU. SCAC ¶ 63.
"In late 1999, Metropolitan "sought to escape the supervision of the Washington State regulators" by "listing its debentures on a national securities exchange for the express purpose of achieving preemption as a `covered security' under federal law." SCAC ¶¶ 64-65. Metropolitan accordingly listed its debentures on Tier I of the Pacific Stock Exchange. SCAC ¶ 66. In January 2002, Metropolitan listed its preferred stock, Series E-7, on the American Stock Exchange. SCAC ¶ 72. "Thus Metropolitan was able to achieve complete preemption of regulation by the DFI." SCAC ¶ 73.
On December 31, 2002, Metropolitan filed its Annual Report (Form 10-K) with the SEC. The report explained that the IRS intended to disallow certain tax benefits Metropolitan had claimed based on its involvement in the Foreign Leverage Investment Program ("FLIP"). The report further indicated that Metropolitan could lose up to $28 million if, following an audit, the IRS ultimately disallowed the FLIP transaction's tax benefits. The report also stated that a complete review had not taken place at the time of the report and Metropolitan could not "reasonably estimate a loss, if any, associated with this transaction." Metro. Mortgage & Sec. Co., Annual Report (Form 10-K), at 28 (December 31, 2002).
In October 2002 and March 2003, the Met Group sought SEC approval for two new securities offerings, one for Metropolitan and the, other for Summit. SCAC ¶¶ 131-13a In investigating the registration statements underlying the securities, the SEC...
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