In re Nat'l Century Financial Enterprises Inc.

• Decision Date: 13 December 2010
• Docket Number: Case No. 2:03–md–1565.
• Citation: 755 F.Supp.2d 857
• Parties: In re NATIONAL CENTURY FINANCIAL ENTERPRISES, INC., INVESTMENT LITIGATION.
• Court: U.S. District Court — Southern District of Ohio

755 F.Supp.2d 857

In re NATIONAL CENTURY FINANCIAL ENTERPRISES, INC., INVESTMENT LITIGATION.

Case No. 2:03–md–1565.

United States District Court, S.D. Ohio, Eastern Division.

Dec. 13, 2010.

OPINION AND ORDER ON THE MOTIONS FOR SUMMARY JUDGMENT AS TO CREDIT SUISSE'S LIABILITY TO THE NOTEHOLDER PLAINTIFFS UNDER SECTION 1707.43 OF THE OHIO SECURITIES ACT

JAMES L. GRAHAM, District Judge.

Before the court on cross motions for summary judgment is the issue of whether defendant Credit Suisse Securities LLC is liable under Ohio Revised Code § 1707.43 for its role in the sale of asset-backed securities issued by National Century Financial Enterprises, Inc. It is undisputed that National Century committed a massive fraud that cost the plaintiffs (the “Noteholders”) nearly $2 billion.

Credit Suisse served as the initial purchaser for many of National Century's note issuances and then sold the notes to institutional investors like the Noteholders. Credit Suisse also sold notes to some of the Noteholders in the secondary market. The Noteholders allege that Credit Suisse is liable under the Ohio Securities Act both as a seller and as one who has “participated in or aided the seller in any way in making such sale.” O.R.C. § 1707.43(A). The court, however, finds that applying the Ohio Securities Act to the securities transactions here—sales by Credit Suisse in New York to the Noteholders in states outside of Ohio—would be an extraterritorial application that violates the Commerce Clause of the United States Constitution.

I. Background

National Century committed a multi-billion dollar fraud on investors. It issued investment-grade notes, representing them to be backed by health care receivables National Century obtained in the regular course of its business. In reality, a great deal of the accounts receivable that National Century “purchased” were worthless or non-existent receivables from health care companies in which National Century's executives held undisclosed ownership interests. What appeared on paper to be legitimate transactions in fact amounted to little more than transfers of corporate funds into the pockets of National Century's executives. When National Century went bankrupt in November 2002, the Noteholders and other investors suffered substantial losses.

In late 1995, Credit Suisse and National Century entered into a letter agreement whereby Credit Suisse agreed to be National Century's “agent and financial advisor in connection with the marketing” of two $50 million note offerings by NPF VI, one of National Century's wholly-owned, note-issuing entities. See Credit Suisse's Mem. in Opp'n to Pls.' Mots. for Partial Summ. J., Ex. 42, ¶ 1 (hereinafter “CS Opp'n Ex. ___”). The letter agreement called on Credit Suisse to “structure, market and place the [note] Offerings.” Id. Shortly thereafter, in early 1996, Credit Suisse entered into a Placement Agency Agreement with National Century, NPF VI, and the receivables servicer, National Premier Financial Services, Inc. See CS Opp'n Ex. 45. The agreement required Credit Suisse to privately place the notes with qualified institutional buyers in return for a placement fee of 1% of the principal amount of notes sold. See id., pp. 2–4.

The arrangement changed for the later note issuances in which the Noteholders invested. Credit Suisse entered into a series of Purchase and Agency Agreements with National Century, the note-issuing entity (either NPF VI or NPF XII), and the servicer. See CS Opp'n Ex. 44. These agreements defined Credit Suisse as an “initial purchaser” ¹ who would purchase the notes from the issuer at a slight discount, such as 0.6 % less face value of Series NPF XII 2001–1A notes. See id., p. 3. Credit Suisse would then work with a placement agent (Banc One Capital Markets, for example) to place the notes with qualified institutional buyers. See id., p. 2. In no way though was Credit Suisse contractually required to sell the notes, and Credit Suisse says it lost about $130 million in notes it had on hand when National Century collapsed. See Credit Suisse's Mot. for Summ. J., Ex. 143 (hereinafter “CS MSJ Ex. ___”). ²

National Century and its entities were all Ohio corporations. The Credit Suisse Group is a Swiss financial services company. Its subsidiary, Credit Suisse Securities (USA) LLC, is the defendant in this litigation and is a Delaware corporation with its principal place of business in New York. The closings and delivery of notes from NPF VI and NPF XII to Credit Suisse took place in New York. See CS MSJ Ex. 16, at CSFB–2004 0006615; Ex. 227, at CSFB–2004 0015483.

The Noteholders are institutional investors who purchased NPF VI and NPF XII notes. Metropolitan Life Insurance Co., a New York corporation with its principal place of business in New York, purchased a total of $121 million in NPF XII notes from June 2001 to July 2002. All but one purchase was made from Credit Suisse, which sold the notes from its New York office. MetLife purchased $104.5 million of NPF XII Series 2001–1, 2001–2, 2001–4, and 2002–1 notes from Credit Suisse. See Consolidated Mot. of MetLife and Lloyds for Partial Summ. J., Feb. 18, 2009 Aff. of Sarah Gibbs Leivick, Ex. 50. Credit Suisse served as the initial purchaser for all of these notes. MetLife made one purchase from Bear Stearns & Co., which also had its offices in New York. Id. at ML—004916. This purchase occurred in the secondary market and consisted of $16.6 million of NPF XII 2001–2 Series notes for which Credit Suisse had been the initial purchaser.

Lloyds TSB Bank plc is a British public limited company with its principal place of business in London, England and an office in New York. Lloyds purchased from Credit Suisse in New York $60 million of NPF XII 2001–1 Series notes in March 2001. See Consol. MSJ, Leivick Aff., Ex. 89. Lloyds separately invested $68 million in a NPF XII 2000–4 Series variable funding note (“VFN”). In December 2000, Credit Suisse entered into an agreement with NPF XII and a conduit purchaser whereby Credit Suisse committed to purchase an undivided interest in the VFN upon the occurrence of certain events. See CS MSJ Ex. 145. In turn, Credit Suisse and Lloyds entered into a Participation Agreement, signed by both parties in New York, under which Lloyds assumed a $68 million undivided interest in the VFN. See CS MSJ Ex. 219. The Participation Agreement had an original termination date of December 26, 2001, but Credit Suisse and Lloyds renewed the agreement for another year. See CS MSJ Ex. 145, at LL–000217–19 (renewal signed by both parties in New York). On October 31, 2002, the triggering events occurred that required Credit Suisse to purchase its interest in the VFN. On November 5, 2002, Lloyds purchased from Credit Suisse its participation interest in the VFN. See CS MSJ Ex. 217.

The Arizona Noteholder plaintiffs include numerous governmental entities from Arizona and other states, as well as investment funds, banks, insurance companies, trusts and other entities from various states and foreign countries. The Arizona Noteholder plaintiffs collectively purchased over $1.5 billion of NPF VI and NPF XII notes between 1998 and 2002. In a prior order, the court dismissed as time-barred the Ohio Securities Act claims based on the Arizona Noteholders' earliest purchases in 1998 and early 1999. See Dec. 19, 2007 Order, pp. 26–28.

Of the Arizona Noteholders with claims remaining under the Ohio Securities Act, just one has its principal place of business in Ohio: FirstEnergy Health Benefits Trust. FirstEnergy's purchase was made by investment advisor Lincoln Capital in Illinois. According to the complaint, the solicitation of the notes and the decision to purchase took place in Illinois. See City of Chandler Second Am. Compl., ¶ 105QQ. The Arizona Noteholders do not contend that any of their purchases took place in Ohio.

The Arizona Noteholders' purchases fit into three categories: (1) purchases made from Credit Suisse in its capacity as the initial purchaser; (2) purchases made from Credit Suisse of notes circulating in the secondary market; and (3) purchases made from brokers or dealers other than Credit Suisse. These second and third categories include both notes for which Credit Suisse served as the initial purchaser and notes for which PaineWebber Inc., a Delaware corporation with it principal place of business in New York, served as initial purchaser. None of the secondary market purchases from Credit Suisse took place in Ohio, nor did any of the sales by other brokers or dealers occur in Ohio. The majority of the $1.5 billion of notes purchased by the Arizona Noteholders fall into the first category.

MetLife, Lloyds, and the Arizona Noteholders have asserted numerous claims against Credit Suisse for its alleged involvement in National Century's wrongdoing. This opinion focuses on their claims under Ohio Revised Code § 1707.43(A). The parties have filed cross motions for summary judgment and presented oral argument on the issue. To summarize, the Noteholders argue that National Century and Credit Suisse were joint sellers and that Credit Suisse is liable under § 1707.43(A) as a seller and as one who has “participated in or aided the seller in any way in making such sale.” They contend that secondary liability is broad and akin to strict liability, in that scienter need not be shown as to the aider. Credit Suisse challenges liability on several grounds, including standing and statute of limitations. Credit Suisse further argues that the transactions occurred wholly outside of Ohio and, as such, applying the Ohio Securities Act would violate the dormant Commerce Clause.

II. Standard of Review

Under Fed.R.Civ.P. 56(c), summary judgment is proper “if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” See Longaberger...