In re National Century Financial Enterprises, Inc., 2:03-md-1565.
| Decision Date | 20 December 2007 |
| Docket Number | No. 2:03-md-1565.,2:03-md-1565. |
| Parties | In re NATIONAL CENTURY FINANCIAL ENTERPRISES, INC., INVESTMENT LITIGATION. |
| Court | U.S. District Court — Southern District of Ohio |
Kathy D. Patrick, Jeffry J. Cotner, Scott Humphries, Gibbs & Bruns, LLP, Houston, TX, David L. Elsberg, Miller & Wrubel P.C., New York, NY, A. William Urquhart, Quinn Emanuel Urquhart Oliver & Hedges, Los Angeles, CA, Rex Lee, Kevin Janus, Quinn Emanuel Urquhart Oliver & Hedges LLP, New York, NY, George E. Ridge, Cooper Ridge & Lantinberg, Jacksonville, FL, Robert N. Kaplan, Jeffrey P. Campisi, Kaplan Fox & Kilsheimer LLP, New York, NY, James Edward Arnold, Clark Perdue Arnold & Scott, Columbus, OH, Harold G. Levison, Richard B. Harper, McCarter & English, Newark, NJ, Jeffrey P. Campisi, Kaplan Fox & Kilsheimer LLP, New York, NY, Kenneth J. Vianale, Kaplan Fox & Kilsheimer LLP, Boca Raton, FL, Steven E. Fineman, Hector D. Geribon, Lieff Cabraser Heimann and Bernstein LLP, New York, NY, Barbara Poulsen, John Edward Haller, Katie L. Tournoux, Shumaker Loop & Kendrick LLP, Colulmbus, OH, Robert H. B. Cawood, Roy L. Mason, Mason, Cawood & Hobbs, P.A., Annapolis, MD, for Plaintiffs.
R. Eric Bilik, C. Todd Willis, David M. Wells, Eric C. Roberson, Brian Edward Dickerson, John Edward Haller, Thomas Fellig, Robert Frederic Brown, Ulmer & Berne LLP, Cincinnati, OH, Luan K. Phan, Paz & Phan LLP, Los Angeles, CA, William A. Escobar, William Chester Wilkinson, John M. Callagy, Stanley H. Wakshlag, Kenny Nachwalter, PA, Miami, FL, Samantha J. Kavanaugh, Brian Paul Miller, Akerman Senterfitt, Miami, FL, Matthew B. Andelman, Williams & Connolly, Washington, DC, Barry Ostrager, Mary Kay Vyskocil, Simpson Thacher & Bartlett LLP, New York, NY, Jessica L. Davis, Roetzel & Andress, Columbus, OH, Lara Turcik, Shazeb Lari, Israel David, Fried Frank Harris Shriver & Jacobson LLP, New York, NY, Julia Tarver Mason, Martin Flumenbaum, Andrew James Ehrlich, Tobias J. Stern, Paul, Weiss, Rifkind, Wharton & Garrison, New York, NY, Jason M. Koral, William J Schwartz, Cooley Godward Kronish LLP, New York, NY, Mina Audrey Kim, Kronish Lieb Weiner & Hellman LLP, New York, NY, Robert Colby Allsbrook, King & Spalding LLP, New York, NY, James M. Garland, Covington & Burling LLP, Washington, DC, David Warren Alexander, Squire Sanders & Dempsey, Columbus, OH, for Defendants.
This matter is before the Court on motions filed by Credit Suisse First Boston LLC (now Credit Suisse Securities LLC) to dismiss the claims made against it in this multi-district litigation. Credit Suisse served as lead underwriter of the NPF VI, Inc. and NPF XII, Inc. securitization programs. The Court finds that the complaints put Credit Suisse at the center of the alleged scheme to defraud National Century Financial Enterprise's investors, and, thus, Credit Suisse's motions to dismiss are largely denied.
This order concerns the complaints filed by the following plaintiffs: Metropolitan Life Insurance Company and Metropolitan Insurance and Annuity Company (collectively "MetLife"); Lloyds TSB Bank PLC; the State of Arizona, the City of Chandler, and Crown Cork & Seal Company (collectively the "Arizona Noteholders"); the New York City Pension Funds; and Pharos Capital Partners, L.P. Though the allegations vary somewhat from complaint to complaint, below is a summary of what the Plaintiffs allege against Credit Suisse.
Plaintiffs allege that Credit Suisse underwrote and managed the notes issued by National Century through the NPF VI and NPF XII securitization programs. Between 1998 and 2002, NPF VI made at least 10 bond issuances and NPF XII made at least 12 bond issuances. During this time, National Century issued approximately $3 billion of debt securities to finance the purchase of accounts receivable from healthcare providers.
The notes were sold to institutional investors who could invest millions, if not hundreds of millions, of dollars in notes. Credit Suisse was the initial purchaser and placement agent for each note issuance. Credit Suisse then created a secondary market for the notes by actively soliciting institutional investors, who were provided with various offerings materials and given sales presentations. Credit Suisse allegedly authored the offering materials in substantial part, and Credit Suisse's representatives allegedly participated in the sales presentations.
Plaintiffs allege that Credit Suisse made numerous misrepresentations and material omissions in the offering materials and sales presentations. These misrepresentations went to the financial soundness of the note programs, the quality of the notes, and, hence, the security of Plaintiffs' investments. According to Plaintiffs, Credit Suisse represented that NPF VI and NPF XII would use the note proceeds to purchase only high-quality accounts receivable, which would serve as collateral for the notes. Further, Credit Suisse represented that indenture trustees would maintain reserve accounts for NPF VI and NPF XII according to strict standards designed to offset the risks associated with buying receivables. Credit Suisse further represented that NPF VI and NPF XII would not engage in related-party transactions; that is, they would refrain from purchasing accounts receivable from healthcare providers in which National Century or its principals held a financial interest.
Plaintiffs contend that Credit Suisse's representations were false and that the NPF VI and NPF XII note programs, though perhaps at one time legitimate, had become a sham by the time Plaintiffs invested in them. In a nutshell, the complaints allege that National Century used Plaintiffs' money to purchase low-quality or even non-existent receivables from healthcare companies that National Century's principals (Lance Poulsen, Donald Ayers, and Rebecca Parrett, collectively "the Founders") controlled or had some financial interest in. These healthcare companies became overfunded because National Century paid them for receivables that had little or no value. The Founders allegedly used their control of the healthcare companies to gain access to the overfunded amounts. In time, the reserves at NPF VI and NPF XII became severely depleted, the alleged wrongdoing was uncovered, and National Century filed for bankruptcy in November 2002, with an alleged aggregate loss to investors of at least $2.6 billion.
The complaints put Credit Suisse alongside National Century's Founders as being at the center of a scheme to defraud investors. Beginning in 1995, National Century selected Credit Suisse to serve as its financial advisor at-large. The Arizona Noteholders' complaints characterize National Century and Credit Suisse as having a "close, broad, and multifaceted relationship" whereby Credit Suisse "continuously enjoyed extensive access to inside information regarding [National Century], its finances, and its operations." See State of Arizona Second Am. Compl., ¶ 96A. Credit Suisse allegedly conducted numerous examinations of National Century's finances and reviewed the results of due diligence investigations performed by third party professionals.
According to the complaints, Credit Suisse's relationship with National Century was lucrative. Credit Suisse allegedly received millions of dollars in investment banking and placement fees for its services. The complaints therefore allege that Credit Suisse had a strong financial incentive to promote NPF VI and NPF XII notes to institutional investors.
Plaintiffs allege that as early as January 1998 Credit Suisse had knowledge that the NPF VI and NPF XII note programs were not operating in the manner described by the offering materials. The details of how Credit Suisse allegedly gained this knowledge will be reviewed below in the Court's discussion of Credit Suisse's scienter, but Plaintiffs allege that Credit Suisse gained extensive knowledge of National Century's operations. The complaints allege that Credit Suisse knew in particular that National Century was purchasing ineligible accounts receivable, not properly maintaining reserve accounts, and engaging in related-party transactions.
Despite this knowledge, Credit Suisse allegedly proceeded to sell notes to Plaintiffs and other investors. When rumors or reports surfaced that there were problems with the NPF VI and NPF XII note programs, Credit Suisse is alleged to have acted swiftly to undermine the reports and reassure investors that their money was safe, even though Credit Suisse allegedly knew NPF VI and NPF XII were a fraud. The complaints allege that in order to preserve its lucrative position and protect the unsold notes it had on its hands, Credit Suisse went so far as to make unsecured loans to National Century when NPF VI's and NPF XII's reserves were depleted.
Metropolitan Life Insurance Company is a New York corporation with its principal place of business in New York. Between June 2001 and July 2002, MetLife purchased a total of $102.6 million of NPF XII notes. In August 2002, MetLife's affiliate, Metropolitan Insurance and Annuity Company, purchased $18.46 million of NPF XII notes.
Lloyds is a British public limited company with its principal place of business in London, England. Lloyds purchased a total of $60 million of NPF XII notes in March 2001. It separately purchased $68 million of NPF XII notes in November 2002 under a Participation Agreement with Credit Suisse.
MetLife and Lloyds filed separate suits in New Jersey federal court but have filed joint briefs and motions since their actions have been consolidated in this multi-district litigation.
MetLife asserts the following claims...
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