In re Reliance Securities Litigation, MDL 1304.
| Decision Date | 19 April 2000 |
| Docket Number | No. MDL 1304.,Civ. A. No. 99-858-RRM.,MDL 1304. |
| Citation | 91 F.Supp.2d 706 |
| Parties | In re RELIANCE SECURITIES LITIGATION. William Eric Graham, et al., on behalf of themselves and all others similarly situated, Plaintiffs, v. Taylor Capital Group, Inc. f/k/a Cole Taylor Financial Group, Inc., Cole Taylor Bank, Jeffrey W. Taylor; Bruce W. Taylor, Sidney J. Taylor, Lori Cole, Shirley Cole, Cathy Cole Williams, Thomas L. Barlow, Howard B. Silverman, James D. Dolph, J. Christopher Alstrin, Michael Bernick, William S. Race, Ross J. Mangano, Solway F. Firestone, Melvin E. Pearl, Dean L. Griffith, KPMG Peat Marwick, LLP, ABN AMRO Inc. f/k/a the Chicago Corp., and Sandler O'Neill Corporate Strategies, Defendants. |
| Court | Supreme Court of Delaware |
R. Bruce McNew, Taylor & McNew, LLP, Greenville, Delaware; Mark Minuti, Saul, Ewing, Remick & Saul, Philadelphia, Pennsylvania; David B. Kahn, Mark E. King, and Elissa C. Chase, David B. Kahn & Associates, Ltd., Northfield, Illinois; Joseph Casseb, Goode Casseb Jones Riklin Choate & Watson, P.C., San Antonio, Texas; David R. Scott, and Neil Rothstein, Scott & Scott, LLC, Colchester, CT; John Lingner, Kakacek & Lingner, Chicago, Illinois; Michael S. Etkin, and John K. Sherwood, Ravin, Sarasohn, Cook, Baumgarten, Fisch & Rosen, P.C., New York, New York; Bernard Wm. Fischman, Tinsman & Houser, Inc., San Antonio, Texas; Arthur Ungerman, Law Offices of Arthur Ungerman, Dallas, Texas; W.D. Masterson, and William G. Shaw, Jr., Kilgore & Kilgore, Dallas, Texas; William S. Lerach, Helen J. Hodges, Katherine L. Blanck, and Jeffrey D. Light, Milberg Weiss Bershad Hynes & Lerach LLP, San Diego, California; Jeffrey R. Krinsk, Finkelstein & Krinsk, San Diego, California; Henry F. Field, Henry F. Field, Ltd., Chicago, Illinios; Ronald L. Futterman, and Michael I. Behn, Futterman & Howard Chtd., Chicago Illinois; counsel for plaintiffs.
James L. Holzman, and Bruce E. Jameson, Prickett, Jones & Elliott, Wilmington, Delaware; Steven P. Handler, Steve Hoeft, David S. Rosenbloom, and Adam Deutsch, McDermott, Will & Emery, Chicago, Illinois; counsel for defendants J. Christopher Alstrin, Jeffrey W. Taylor, Bruce W. Taylor, Sidney J. Taylor, Taylor Capital Group and Cole Taylor Bank.
Laurie S. Silverstein, and Arthur L. Dent, Potter Anderson & Corroon, LLP, Wilmington, Delaware; David Kristenbroker, Leah J. Domitrovic, Pamela Gregory Smith, and Theresa L. Davis, Freeborn & Peters, Chicago, Illinois; counsel for defendant Melvin E. Pearl.
William H. Sudell, Jr., and Martin P. Tully, Morris, Nichols, Arhst & Tunnell, Wilmington, Delaware; Timothy W. Mountz, Baker & Botts L.L.P., Dallas, Texas; David D. Sterling, Baker & Botts L.L.P., Houston, Texas; counsel for defendant KPMG Peat Marwick LLP.
Francis J. Murphy, Murphy Spadaro & Landon, Wilmington, Delaware; Bruce R. Meckler, James H. Kallianis, Jr., and Christopher E. Kentra, Meckler, Bulger & Tilson, Chicago, Illinois; counsel for defendant Thomas L. Barlow.
Michael D. DeBaecke, Blank Rome Comisky & McCauley, LLP, Wilmington, Delaware; Thomas D. Laue, and Robert H. Griffith, Ungaretti & Harris, Chicago, Illinois; counsel for defendant ABN AMRO Inc., as successor to The Chicago Corporation.
R. Franklin Balotti, Lisa A. Schmidt, and Peter B. Ladig, Richards, Layton & Finger, Wilmington, Delaware; Thomas I. Matyas, Richard M. Hoffman, and Michael A. Kaeding, Wildman, Harrold, Allen & Dixon, Chicago, Illinois; counsel for defendants Irwin Cole, Lori Cole, Shirley Cole, and Cathy Cole Williams.
Henry E. Gallagher, Jr., Connolly Bove Lodge & Hutz LLP, Wilmington, Delaware; John W. Rotunno, Stephen J. O'Neil, and Sarah K. Johnson, Bell, Boyd & Lloyd LLC, Chicago, Illinois; counsel for defendants Solway F. Firestone, Dean L. Griffith, Ross J. Mangano and William S. Race.
Richard D. Kirk, Morris, James, Hitchens & Williams LLP, Wilmington, Delaware; Steven R. Smith, Richard T. Greenberg, and William F. Zieske, Ross & Hardies, Chicago, Illinois; counsel for defendant Howard B. Silverman.
George W. Spellmire, John C. Everhardus, and Jonathan S. Goodman, D'Ancona & Pflaum LLC, Chicago, Illinois; counsel for James D. Dolph.
Lawrence C. Ashby, Ashby & Geddes, Wilmington, Delaware; John L. Hardiman, William L. Farris, and Fraser L. Hunter Jr., Sullivan & Cromwell, New York, New York; counsel for defendants Sandler O'Neill Corporate Strategies and Sandler O'Neill & Partners L.P.
The actions in this litigation arise out of the corporate restructuring and bankruptcy of Reliance Acceptance Group, Inc. ("the Company"). The Company is a Delaware corporation, and was formerly known as Cole Taylor Financial Group, Inc. Plaintiffs (collectively, the "Graham Plaintiffs") are former shareholders of the Company. Defendants (collectively, the "Graham Defendants") are former officers, directors, accountants, financial advisors, and subsidiaries of the Company, and other entities formed in the corporate restructuring. The court will refer to this case, C.A. No. 99-858-RRM, as the "Graham case."
On February 2, 1998, the Graham Plaintiffs filed suit against the Graham Defendants in the U.S. District Court for the Northern District of Illinois, seeking monetary damages for alleged violations of §§ 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C.A. §§ 78j(b), 78n(a), and 78t(a), and for breaches of the Graham Defendants' fiduciary duties under Delaware law.
On December 9, 1999, the Judicial Panel on Multidistrict Litigation ordered that the Graham case be transferred to this court to consolidate discovery and other pre-trial matters with two related cases. Allen v. Taylor, et al., C.A. No. 99-146-RRM (the "Allen case"), is a consolidated adversary bankruptcy proceeding pending in this court involving state law fraudulent transfer claims, fiduciary duty claims, professional malpractice claims, and other related common law claims. Sabbia, et al. v. Reliance Acceptance Group, Inc., et al., C.A. No. 99-859-RRM (the "Sabbia case"), is a consolidated securities action that was filed in the U.S. District Court for the Western District of Texas.
The Graham Defendants have filed motions to dismiss in the Graham case pursuant to Fed.R.Civ.P. 4(m) for failure to serve process within 120 days, Fed R.Civ.P. 12(b)(6) for failure to state a claim upon which relief may be granted, and Fed.R.Civ.P. 9(b) and § 21D(b) of the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C.A. § 78u-4(b)(1, 2), for failure to plead fraud with specificity. This is the court's decision on these motions.
The court draws the following facts from the consolidated amended complaint, as well as from publicly filed documents that are central to plaintiffs' complaint, and that have been attached to one or more defendants' motions to dismiss. See Duferco Steel Inc. v. M/V Kalisti, 121 F.3d 321, 324 n. 3 (7th Cir.1997). For the purposes of a motion to dismiss, the court accepts all allegations in the complaint as true and draws all reasonable inferences in favor of plaintiffs. See Rocks v. Philadelphia, 868 F.2d 644, 645 (3d Cir.1989).
Irwin Cole and Sidney Taylor founded the Company in the early 1980s, and the Company issued stock in a public offering in 1994. The Cole and Taylor families were the Company's largest shareholders, each owning approximately 25% of its outstanding stock. By the early 1990s, Jeffrey Taylor, Bruce Taylor, and Sidney Taylor (collectively, "the Taylor Family") served as the CEO, President, and Chairman of the Executive Committee of the Company, respectively. By the time the events at issue occurred, both Irwin Cole and his daughter Lori Cole (collectively, the "Cole Family") were Directors of the Company, but they had no day-to-day role in its operations.
The Company had two subsidiaries. The first, Cole Taylor Bank (the "Bank"), was a regional lender based in Chicago, with a record of sustained profitability but slow growth.
The Company's second subsidiary, Reliance Acceptance Corp. ("RAC"), was founded in approximately 1992, and was based in San Antonio, Texas. RAC specialized in extending automobile loans to high risk, or "subprime," buyers. From its inception, Howard Silverman served as Chairman of RAC's Board of Directors, and Thomas Barlow served as RAC's CEO.
RAC implemented expedited procedures for authorizing loans, including a program to process loans within one hour. This program was popular with automobile dealers, who could arrange financing for a buyer before he or she left the parking lot. Under this program, RAC expanded its loan portfolio rapidly. From 1993 to 1996, RAC's gross finance receivables grew nearly 20-fold, from $24.4 million to $429 million. Throughout this period of expansion, the Company's annual net income grew from $198,000 in 1993 to $9.6 million in 1995. The Company's stock price rose from approximately $18 per share in 1995 to a high of approximately $31 in the Fall of 1996.
The Company's Board of Directors allegedly received a 1995 report issued by the Federal Reserve Board stating that RAC's loan portfolio was deteriorating. The Federal Reserve Board reported that it had reviewed five of RAC's branch offices, rating four of them "marginal," and the fifth "unsatisfactory." The report disclosed, moreover, that RAC had an approximately 83 % staff turnover annually.
The Company's directors also allegedly received a December 1995 internal audit report that two-thirds of RAC's 36 branch offices were underwriting loans based on incomplete and inaccurate credit investigations. A July 1996 internal report revealed that 55% of RAC's branches were failing to properly investigate credit applications.
According to the Graham Plaintiffs, the loss rate for RAC's loans increased annually, from 4.5% in 1993 to 25.3% in 1996. During...
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