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

Decision Date02 March 2012
Docket NumberCase No. 2:03–md–1565.
Citation846 F.Supp.2d 828
PartiesIn re NATIONAL CENTURY FINANCIAL ENTERPRISES, INC., Investment Litigation.
CourtU.S. District Court — Southern District of Ohio

OPINION TEXT STARTS HERE

David L. Elsberg, Quinn Emanuel Urquhart Oliver & Hedges, LLP, New York, NY, A. William Urquhart, Quinn Emanuel Urquhart Oliver & Hedges, Los Angeles, CA, Rex Lee, Kevin Janus, Quinn Emanuel Urquhart Oliver & Hedges LLP, Jeffrey P. Campisi, Kaplan Fox & Kilsheimer LLP, New York, NY, George E. Ridge, Cooper Ridge & Lantinberg, Jacksonville, FL, James Edward Arnold, James E. Arnold & Associates Co., LPA, Columbus, OH, for Plaintiff.

Alexandra Greif, Jeffrey Coviello, Katherine E. Russum, Sarah L. Dunn, Simpson Thacher & Bartlett LLP, New York, NY, Philip A. Mirrer–Singer, Simpson Thacher

& Bartlett LLP, Washington, DC, for Defendants.

OPINION AND ORDER ON CREDIT SUISSE'S MOTION FOR SUMMARY JUDGMENT IN THE NOTEHOLDER ACTIONS

JAMES L. GRAHAM, District Judge.

This matter is before the court on the motion of defendants Credit Suisse Securities (USA) LLC and Credit Suisse, New York Branch (together, “Credit Suisse”), for summary judgment on the claims brought by the Noteholder plaintiffs. The Noteholders are institutional investors who collectively purchased nearly $2 billion in notes issued by National Century Financial Enterprises, Inc., through its subsidiaries NPF VI, Inc. and NPF XII, Inc. In most cases, the Noteholders purchased their notes directly from Credit Suisse, which served in the role of initial purchaser and placement agent for National Century. It is undisputed that National Century committed a massive fraud. What is disputed here is the extent to which Credit Suisse can be held liable to the Noteholders for their losses.

According to the Noteholders, the evidence demonstrates that Credit Suisse knew or should have known of the material aspects of National Century's fraud. They argue that Credit Suisse sold the notes despite knowing of various ways in which National Century ran it operations contrary to how those operations were described in the offering materials that Credit Suisse supplied to them, as well as in other communications Credit Suisse made to them. The Noteholders assert numerous claims, including for fraud, negligent misrepresentation, aiding and abetting fraud, violations of Section 10(b) of the Securities Exchange Act of 1934, and violations of the blue sky laws of various states.

Credit Suisse's motion offers a host of reasons why it believes it is entitled to summary judgment. It contends that the evidence demonstrates as a matter of law that Credit Suisse did not know, nor should have known, of National Century's fraud. According to Credit Suisse, National Century deliberately hid the fraud from Credit Suisse and other third parties involved in its operations. Credit Suisse further argues that it did not make any actionable misrepresentations to the Noteholders because it was not the maker of the statements in the offering materials and because its various direct communications with the Noteholders amounted to no more than sales talk and factually accurate descriptions of the note programs. It also contends that the Noteholders cannot establish that they relied upon any alleged Credit Suisse misrepresentation in making their decisions to purchase notes and that, in any event, their purported reliance was not reasonable.

For the reasons set forth below, the court finds that the Noteholders have submitted sufficient evidence in support of their fraud-based claims to create genuine issues of material fact. Thus, Credit Suisse's motion for summary judgment is largely denied.

I. Background

The court provides this overview of undisputed facts regarding National Century's fraud, Credit Suisse's role with National Century, and the Noteholders' purchases. More extensive discussions of the facts and the matters in dispute are reserved for the particular legal issue to which those facts relate.

A. National Century's Fraud

National Century was a privately-held finance company founded in 1990 by Lance Poulsen, Donald Ayers, and Rebecca Parrett in Dublin, Ohio. It provided financing to healthcare providers by purchasing their accounts receivable at a discount under the terms of Sale and Subservicing Agreements. See CS Ex. 11 at NCFE–1865–1642 (template Sale and Subservicing Agreement). 1 Under the Agreements, National Century would purchase only “eligible” receivables—those that satisfied certain criteria designed to ensure the receivables were of high quality. Id. at NCFE–1865–1669 to –1671.

National Century generated cash by issuing notes through special-purpose and wholly-owned subsidiaries. The most prominent of these subsidiaries were NPF VI and NPF XII, in whose issuances all of the Noteholders invested. Each NPF note program operated as a trust under a Master Indenture. See CS Ex. 11 (NPF VI Master Indenture); CS Ex. 12 (NPF XII Master Indenture). The parties to the Indentures were the Trust (either NPF VI or NPF XII), the Servicer (National Premier Financial Services, Inc., also a wholly-owned subsidiary of National Century), and the Trustee (either JPMorgan or Bank One). Credit Suisse was not a party to the Indentures.

The NPF notes typically received the highest ratings by the credit rating agencies and were sold to institutional investors through private placement. The notes were secured by the healthcare receivables owned by NPF VI and NPF XII, see CS Exs. 11, 12 at § 3.01, and the Servicer had an obligation to ensure the note programs purchased only eligible receivables. Id. at § 5.04(b). The Indentures offered further layers of protection to investors. These layers included: maintaining the corporate separateness of the NPF entity from National Century and the Servicer and prohibiting the commingling of funds, see id. at § 4.04; subjecting the NPF entity to various monitoring, reporting, and auditing requirements, see id. at §§ 4.12, 5.04(b); observing concentration limits on the percentage amounts of receivables purchased from certain sources, see id. at § 4.13; establishing various reserve accounts, which were required to be maintained at specified percentage levels of the net value of purchased receivables, see id. at §§ 6.01, 6.02, 6.03; and directing the Trustees to declare an event of default if a party committed a material breach of the Indentures, see id. at §§ 7.01, 8.01.

In reality, National Century committed a multi-billion dollar fraud on investors. The mechanics of the fraud have been thoroughly detailed in orders of this court (in the multidistrict litigation, in the criminal proceedings against National Century's executives, in civil enforcement actions brought by the Securities and Exchange Commission, and in numerous bankruptcy matters appealed to this court), as well as in orders of the Sixth Circuit in the appeals of the criminal convictions, and in orders of the bankruptcy court overseeing the Chapter 11 liquidation of National Century and its subsidiaries. See, e.g., U.S. v. Poulsen, 655 F.3d 492, 498–99 (6th Cir.2011); U.S. v. Faulkenberry, 614 F.3d 573, 577–79 (6th Cir.2010); In re Nat'l Century Fin. Enterprises, Inc., Inv. Litig., 617 F.Supp.2d 700, 705–07 (S.D.Ohio 2009); U.S. v. Poulsen, 568 F.Supp.2d 885, 890–912 (S.D.Ohio 2008); In re Nat'l Century Fin. Enterprises, Inc., Inv. Litig., No. 2:03–md–1565, 2006 WL 469468 at **1–6 (S.D.Ohio Feb. 27, 2006); In re Nat'l Century Fin. Enterprises, Inc., 341 B.R. 198, 209–10 (Bankr.S.D.Ohio 2006).

Briefly stated, a great deal of the accounts receivable that National Century “purchased” were worthless or non-existent receivables from healthcare companies in which National Century's executives held undisclosed ownership interests. What appeared on paper to be legitimate transactions amounted to little more than transfers of corporate funds into the pockets of National Century's executives. In testimony given in the criminal proceedings, a government witness provided a four-year snapshot of the fraud at National Century. He found that National Century had made $1.3 billion in unsecured advances in that time window to eight healthcare providers, seven of which the Founders held an ownership stake. See Poulsen, 568 F.Supp.2d at 900.

The Sixth Circuit summarized the fraud as follows:

The record before us makes unmistakably clear that NCFE's representations were false. NCFE executives lied to investors in sales presentations; they lied to them in the governing documents for bond sales; and they lied to them in monthly investor reports that showed NCFE in full compliance with the obligations recited above. This practice of deception was continuous from approximately 1995 to October 2002, when NCFE ceased operations.

The deception centered on the practice of “advancing.” Contrary to what it told investors, NCFE routinely advanced funds to healthcare providers without obtaining any receivables, much less eligible ones, in return. NCFE apparently just fronted these monies—investor monies—with the hope that someday the provider would pay them back. Indeed, some providers were already so buried in debt that even the hope must have been absent. Moreover, the advances were large and focused on only a handful of providers, which meant that NCFE blew past its concentration limits as well.

Faulkenberry, 614 F.3d at 578.

By the time National Century went bankrupt in November 2002, investors suffered losses of well over $2 billion.

B. Credit Suisse and Its Role with National Century

Defendant Credit Suisse Securities (USA) LLC is an investment bank and broker-dealer that is a subsidiary of the Swiss bank Credit Suisse Group AG. Defendant Credit Suisse, New York Branch, is a branch of the Swiss bank. Both CreditSuisse defendants have their principal places of business in New York.

National Century used various financial institutions to bring its notes to market. See CS Ex. 10 (chart listing all of the NPF note issuances and...

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