In re National Century Fin. Enter., Inc., Inv., No. 2:03-MD-1565.
| Decision Date | 22 July 2008 |
| Docket Number | No. 2:03-MD-1565. |
| Parties | In re NATIONAL CENTURY FINACIAL ENTERPRISES, INC., IVESTMENT LITIGATION. |
| Court | U.S. District Court — Southern District of Ohio |
This matter is before the Court on motions to dismiss filed in this multidistrict litigation by credit rating agencies Moody's Investors Service, Inc. and Fitch, Inc. Plaintiff Lloyds TSB Bank PLC has sued Moody's for the alleged role that Moody's credit ratings played in inducing Lloyds to invest millions of dollars in notes issued by National Century Financial Enterprises, Inc. Plaintiff New York Pension Funds has sued Fitch on the same grounds. Plaintiffs allege that Moody's and Fitch gave the National Century notes their highest credit ratings and that, in reliance on those ratings, Plaintiffs decided to purchase the notes. Plaintiffs lost the value of their investments when National Century went bankrupt amid allegations of a massive financial fraud.
In their respective motions to dismiss, Moody's and Fitch argue that their credit ratings were predictive opinions of creditworthiness. They contend that their credit rating opinions were not guarantees or statements of fact on which Plaintiffs can base a claim for common law fraud or securities fraud under federal and state law. Moody's and Fitch further argue that their credit ratings are protected as expression under the First Amendment.
Lloyds is a British public limited company with its principal place of business in London, England. In March 2001, Lloyds purchased $60 million of Class A notes in the 2001-1 Series issued by NPF XII, a note program of National Century. In November 2002, Lloyds purchased $68 million of Class A notes in the NPF XII 2000-4 Series under a Participation Agreement with defendant underwriter Credit Suisse First Boston.
Lloyds alleges that, as a prospective purchaser of the notes, it received certain private placement memoranda and supplemental memoranda regarding the NPF XII notes. The memoranda stated that the Class A notes in the 2001-1 Series were required to be rated Aaa by Moody's, and Class A notes in the 2000-4 Series were required to be rated Aa3 by Moody's. According to the complaint, an Lloyds Fourth Am. Compl., ¶ 117.
The complaint is silent on whether National Century paid Moody's to rate the notes. The complaint does allege that Moody's was "informed of the rating condition, and knew that the Notes were marketed to potential buyers as including the rating condition." Lloyds Compl., 11115. Lloyds alleges that Moody's "continually received financial and operational information from NPF XII." Id., 11118. Bank One, the Indenture Trustee for the NPF XII note program, was allegedly obligated under the Master Indenture to provide Moody's with a quarterly balance sheet of National Century, quarterly statements of income and retained earnings, and annual audited consolidated financial statements. Moody's is also alleged to have received monthly "Investor Reports" from National Century's financing arm, National Premier Financial Services, Inc. (NPFS), and annually received a randomly-selected Investor Report that had been audited.
The complaint alleges that on June 1, 2001 Moody's issued a publication entitled the "New Issue Report" in connection with its rating of the Series 2001-1 notes. The New Issue Report detailed the factors Moody's had considered in making its rating. The Report allegedly stated that Moody's had considered NPF S's ten-year history performance in purchasing and servicing accounts receivable, and had also considered the various steps National Century had taken to mitigate the risks associated with purchasing accounts receivable from healthcare providers, including: requiring that the receivables purchased have a short average life, setting concentration limits to ensure a diversity of healthcare providers and a diversity of payors on the receivables, requiring that certain levels of reserves be set aside and maintained to offset defaults, and isolating assets from the bankruptcy of the healthcare provider or National Century. See Lloyds Compl., ¶ 120.
Lloyds asserts the following claims against Moody's: violations of Section 10(b) of the Securities Exchange Act, violations of Ohio's and New Jersey's blue sky laws, fraud, negligent misrepresentation, negligence, and gross negligence.
The New York Pension Funds are a group of public pension funds in charge of managing the assets of various New York City employees and retirees. In October 2000, the New York Funds purchased $80 million of 2000-2 Series notes issued by NPF XII. In May 2002, the New York Funds purchased $9.425 million of 2002-1 Series notes issued by NPF XII.
The New York Funds allege that, as prospective purchasers of the notes, they received certain offering materials regarding the NPF XII notes. According to the compliant, the offering materials required that the notes be rated "AAA" by Fitch. This rating was the highest rating possible and indicated that the notes carried the "lowest expectation of credit risk." New York Funds Second Am. Compl., ¶ 199.
The complaint alleges that National Century hired Fitch to "conduct a thorough analysis of the credit risk of the Notes and to provide a credit rating on the basis of that analysis." New York Funds Compl., ¶ 199. Fitch conducted its review of National Century in April 1999. When it rated the notes, Fitch knew that the notes were required by the offering materials to be rated AAA. The complaint alleges that Fitch issued a publication in April 1998 entitled "Rating Guidelines for Health Care Receivables" describing its ratings process. The Rating Guidelines stated that Fitch considered the historical accuracy of the healthcare provider or oversight servicer in estimating the reimbursable amount of receivables, the servicer's experience and management, and the healthcare providers' financials, management, and performance history.
The complaint further alleges that Fitch received financial and operational information about the NPF XII note program. According to the complaint, Bank One was obligated under the Master Indenture to provide Fitch with a quarterly balance sheet of National Century, quarterly statements of income and retained earnings, and audited consolidated financial statements. Fitch is also alleged to have received monthly "Investor Reports" and annually received a randomly-selected Investor Report that had been audited. The complaint quotes an internal memorandum dated June 21, 2001 from National Century's controller, John Snoble, to its president, Lance Poulsen, stating that "the investor reports that have been forwarded to Fitch" showed that the reserve accounts "did not meet the percentage requirements." New York Funds Compl., ¶ 204. The memo advised National Century to "admit [to Fitch] that we have not been in compliance." Id.
The New York Funds allege that Fitch gave the NPF XII notes a rating of AAA despite receiving three anonymous letters that outlined fraudulent activities at National Century. The first letter, dated April 26, 1999, allegedly described National Century as a "fraud" and "Ponzi scheme." New York Funds Compl., ¶ 207. The second letter, dated July 16, 1999, warned that National Century operated "outside the scope of its indentures and normal business practices" and estimated that 50% of its receivables were worthless or nonexistent. Id. The third letter, dated March 29, 2000, urged an investigation into the validity of the receivables. The complaint alleges that Fitch issued a press release on May 19, 2000 stating that it was actively investigating the allegations described in the third letter. Fitch issued an Asset Sales Report on May 22, 2000 stating that Fitch was obtaining "a ton of information" from National Century to determine if "there is any fire to the smoke." Id., ¶ 211. On July 7, 2000, Fitch issued another press release stating that its investigation showed that the allegations in the letters were unfounded.
The complaint states that despite the anonymous letters, the ensuing investigation, and being aware through the Investor Reports of the reserve shortages, Fitch continued to maintain its AAA rating of NPF XII notes. Not until May 23, 2002 did Fitch downgrade the notes, the complaint alleges.
The New York Funds assert the following claims against Fitch: aiding and abetting fraud, negligent misrepresentation, negligence, and gross negligence.
When considering a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), a court must construe the complaint in the light most favorable to the plaintiff and accept all well-pleaded material allegations in the complaint as true. Erickson v. Pardus, ___ U.S. ___, 127 S.Ct. 2197, 2200, 167 L.Ed.2d 1081 (2007) (citing Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974)); Sensations, Inc. v. City of Grand Rapids, 526 F.3d 291, 295 (6th Cir.2008). A motion to dismiss under Rule 12(b)(6) will be granted only if the complaint is without merit due to an absence of law to support a claim of the type made or of facts sufficient to make a valid claim, or where the face of the complaint reveals that there is an insurmountable bar to relief. Rauch v. Day & Night Mfg. Corp., 576 F.2d 697 (6th Cir.1978). Under Rule 8(a)...
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