In re Nat'l Century Fin. Enters., Inc. Inv. Litig.

• Decision Date: 26 October 2012
• Docket Number: Case Nos. 2:03–md–1565,2:03–cv–362.
• Citation: 905 F.Supp.2d 814
• Court: U.S. District Court — Southern District of Ohio
• Parties: In re NATIONAL CENTURY FINANCIAL ENTERPRISES, INC., INVESTMENT LITIGATION. Pharos Capital Partners, L.P., Plaintiff, v. Deloitte & Touche, L.L.P., et al., Defendants.

905 F.Supp.2d 814

In re NATIONAL CENTURY FINANCIAL ENTERPRISES, INC., INVESTMENT LITIGATION.Pharos Capital Partners, L.P., Plaintiff,

v.Deloitte & Touche, L.L.P., et al., Defendants.

Case Nos. 2:03–md–1565, 2:03–cv–362.

United States District Court,

S.D. Ohio,

Eastern Division.

Oct. 26, 2012.

Joseph F. Murray, Murray Murphy Moul & Basil, Columbus, OH, Alexander D. Widell, Bickel & Brewer, New York, NY, James S. Renard, Kenneth N. Hickox, Jr., Robert M. Millimet, William A. Brewer, III, Bickel & Brewer, Michael Joseph Collins, Dallas, TX, for Plaintiff.

Andrew L. Goldman, Bartlit Beck Herman Palenchar & Scott, Chicago, IL, Sharon Katz, Davis Polk & Wardwell, Jeffrey Q. Smith, Steven G. Brody, Bingham McCutchen LLP, New York, NY, John K. Villa, Matthew B. Andelman, Robert M. Cary, Craig D. Singer, Williams & Connolly LLP, Washington, DC, Michael Roy Szolosi, Sr., McNamara and McNamara, Thomas Leslie Long, Baker & Hostetler, Matthew L. Fornshell, Ice Miller LLP, Michael Proctor Graney, Simpson Thacher & Bartlett, Columbus, OH, for Defendants.

OPINION AND ORDER

JAMES L. GRAHAM, District Judge.

PlaintiffPharos Capital Partners, L.P. brings this action against defendantCredit Suisse Securities LLC for fraud in connection with a failed $12 million equity investment.In 2002 Pharos purchased preferred stock in National Century Financial Enterprises, Inc. Credit Suisse acted as a co-placement agent on the stock offering, and, according to Pharos, should have told Pharos that National Century was not operating its business in a manner consistent with what was represented to Pharos.

Credit Suisse moves for summary judgment on the grounds that the parties entered into a Letter Agreement in which Pharos acknowledged that it was “a sophisticated institutional investor” who was “relying exclusively” on its own due diligence investigation and who would bear the risk of “an entire loss” of its investment.The Agreement further stated that any non-public information known by Credit Suisse about National Century “need not be provided” to Pharos.

Though Pharos offers many purported reasons for discounting the plain language of the Agreement, “what matters when litigation breaks out is what the parties actually signed.”Rissman v. Rissman,213 F.3d 381, 385(7th Cir.2000).The court finds as a matter of law that Pharos could not have justifiably relied on the alleged misrepresentations and omissions made by Credit Suisse and thus grants summary judgment to Credit Suisse.

I.BACKGROUND

Pharos is a limited partnership that makes private equity investments for its limited partner investors.In 2002 Pharos had four managing partners, whose unanimous consent was required for any proposed investment.Credit Suisse (“CS”)Ex. 73 at PHAROS00002030;Pharos (“Ph.”) Ex. 22, Crants Dep.at 49.Those managing partners were Bob Crants, Mike Devlin, Dale LeFebvre, and Kneeland Youngblood.Ph. Ex. 22, Crants Dep.at 49–50.Crants, a Princeton graduate, and Devlin, a Duke Law School graduate, first met while working at Goldman Sachs.Ph. Ex. 22, Crants Dep.at 20–22;Ph. Ex. 34, Devlin Dep.at 14–15.Before forming Pharos, they formed several other firms together.Ph. Ex. 22, Crants Dep.at 20–22.LeFebvre graduated from Harvard Law School and Harvard Business School, and worked for Morgan Stanley before joining Pharos.CSEx. 73 at PHAROS00002022.Youngblood came to Pharoswith several years of private equity and capital markets experience.Id. at PHAROS00002021.

On February 25, 2002, Bob Crants sent the following email to Heather Nicolau of Credit Suisse,

We haven't seen any deals from you in a while and were wondering what you were working on and what is in the pipeline.Clearly, we are looking for healthcare primarily, but we would like to see anything that is over $10 MM in revenues.I look forward to hearing from you.Thanks.Bob

CSEx. 76.

At the time of the email, Credit Suisse was acting as a co-placement agent for National Century in connection with a $190 million private placement of securities.Credit Suisse and National Century had entered into an Engagement Letter whereby Credit Suisse agreed to act as placement agent, along with the Shattan Group, LLC, and use reasonable efforts to arrange for the private placement of equity securities.CSEx. 54.

Nicolau responded to Crants,

We are currently raising equity and mezzanine for a company called NCFE.It is a profitable healthcare receivables company.Would you be interested in participating in a transaction for this type of company?I can send you some information.

We are also working with a number of public companies.Do you invest in public companies in addition to private?

CSEx. 76.

Crants explained to Nicolau that Pharos did not invest in public companies, and added,

[W]e actually know quite a bit about the healthcare receivables business & would love to take a look.I look forward to getting some materials on it.

Id.Nicolau then sent Pharos a private placement memorandum (“PPM”) for the preferred stock offering.CS Ex. 78, Nicolau Dep.at 115;Ph. Ex. 21.

After receiving the PPM, Pharos requested that Credit Suisse send any “easy to forward due diligence materials.”Ph. Ex. 292.A “data room” of due diligence materials was maintained for potential investors in the private placement offering.Ph. Ex. 299, Nicolau Dep.at 66.Credit Suisse directed the Shattan Group to send three boxes of the data room materials to Pharos on March 1, 2002.Ph. Exs. 52, 241.The materials included: yearly financial audits; unaudited financial data, including income statements and balance sheets; operational materials for National Century and its note-issuing entities, NPF VI and NPF XII; PPMs for note issuances by NPF VI and NPF XII; and debt information.CSExs. 82–84.

Pharos reviewed the due diligence materials and had follow-up communications with Credit Suisse.Ph. Ex. 22, Crants Dep.at 104.Dale LeFebvre emailed Credit Suisse's David Hurwitz on March 5, 2002 asking if the National Century deal was “all it's cracked up to be.”CSEx. 213.Hurwitz responded,

I do believe NCFE is what it is cracked up to be.It's extremely profitable and has been for many years.They are the dominant player in the industry and still have great growth opportunities.I do not remember our group (and we've raised over $5 billion in equity) ever having worked with a company that generates as much cash flow as NCFE.I think there are some initiatives the company needs to undertake regarding systematizing their business, but I believe the company has already made some important steps forward in this regard.Id.In Bob Crants's view, Hurwitz projected a “positive, very bullish outlook on NCFE.”Ph. Ex. 22, Crants Dep.at 123.

Also in March 2002, Crants had a telephone conversation with Credit Suisse's Todd Fasanella, who responded to several lines of inquiry.Crants asked about how the NPF reserve accounts worked; Fasanella gave an answer consistent with what the PPM described.Ph. Ex. 22, Crants Dep.at 124.Crants asked about the market for the NPF notes, and Fasanella said the market had “infinite depth” for AAA-rated notes.Id. at 125.Fasanella stated that “there would be a cost” if the notes were downgraded because there would be less demand for sub-AAA notes.Id.Crants confirmed with Fasanella that National Century itself was not rated and that the NPF trusts were bankruptcy remote.Id. at 125–27.When Crants asked about what would happen if one of National Century's clients went bankrupt, Fasanella gave an “incomplete answer.”Id. at 126.

Pharos reported to Credit Suisse on March 12, 2002 that it had completed its due diligence investigation, and had three remaining items to attend to: (1) conducting a site visit at National Century's offices in Columbus, Ohio; (2) obtaining a list from National Century of three customer references; and (3) reviewing the final terms of equity financing.Ph. Ex. 30.Pharos also stated that it would be able to close on the deal as early as the next week.Id.

At the request of Pharos, Credit Suisse helped arrange a site visit on March 19, 2002, seePh. Ex. 30, and forwarded to National Century a list of questions for which Pharos wanted “to hear the responses directly from management.”CSEx. 81.Three Pharos representatives met directly with three National Century representatives, including CEO Lance Poulsen, for two to three hours.CS Ex. 70, Devlin Dep.at 77–78.They toured National Century's offices and were shown a PowerPoint presentation.No one from Credit Suisse was present, although David Hurwitz listened on the phone while the parties met in the conference room.Id.

The next day, Mike Devlin emailed David Hurwitz to say that Pharos “loved the company and the management team” and was ready to close the deal at quarter's end.Ph. Ex. 251.Devlin also sent an email that day to Lance Poulsen saying that Pharos was “deeply impressed” with National Century, “want[ed] to be a part of it,” and would be ready to close by quarter's end, pending review of closing documents.CSEx. 112.On March 25, 2002, Crants informed Hurwitz that Pharos had completed its due diligence and was “enthusiastic about closing.”Ph. Ex. 252.

The deal between Pharos and National Century did not close as quickly as Pharos had anticipated.Investment bank Goldman Sachs had been considering since May 2001 whether to serve as lead investor on the private equity offering.Pharos was aware of Goldman's potential involvement.CSEx. 120.Indeed, co-investors typically rely on the presence of a lead investor in private equity transactions.CSEx. 121, Expert Report of John A. Krasznekewiczat ¶ 68.After conducting due diligence, Goldman decided not to invest in the National Century offering.CS Ex. 122, DeLuise Dep.at 33, 41.

Pharos continued update its due diligence during April, May, and June of 2002. Ph. Ex. 22, Crants Dep.at 117.Pharos had direct contact with Lance Poulsen during...