Montcalm County v. McDonald & Co. Securities

• Decision Date: 12 July 1993
• Docket Number: No. 4:90-CV-114.,4:90-CV-114.
• Citation: 833 F. Supp. 1225
• Parties: MONTCALM COUNTY BOARD OF COMMISSIONERS, Plaintiff, v. McDONALD & COMPANY SECURITIES, INC., an Ohio corporation, and Lisa Lowe Chigas (f/k/a Lisa Lowe), an Illinois citizen, Defendants.
• Court: U.S. District Court — Western District of Michigan

833 F. Supp. 1225

MONTCALM COUNTY BOARD OF COMMISSIONERS, Plaintiff, v. McDONALD & COMPANY SECURITIES, INC., an Ohio corporation, and Lisa Lowe Chigas (f/k/a Lisa Lowe), an Illinois citizen, Defendants.

No. 4:90-CV-114.

United States District Court, W.D. Michigan, S.D.

July 12, 1993.

Robert L. DeJong, Lee T. Silver, Douglas W. VanEssen, Gwen E. Buday, Clary, Nantz, Wood, Hoffius, Rankin & Cooper, Grand Rapids, MI, for plaintiff.

John W. Allen, Michael D. Schlack, Howard & Howard, PC, Kalamazoo, MI, for defendants.

OPINION GRANTING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT

HILLMAN, Senior District Judge.

Plaintiff Montcalm County Board of Commissioners ("Montcalm County") filed this action against defendant McDonald & Company Securities, Inc. ("McDonald"), an Ohio corporation, and defendant Lisa Lowe Chigas ("Chigas"). Plaintiff alleges that defendants were negligent and breached their common law fiduciary duties owed to the County. Plaintiff further alleges that defendants breached their statutory duties to plaintiff in connection with the transaction of the Drexel Burnham Lambert ("Drexel Burnham") commercial paper. Subsequently, when Drexel Burnham went bankrupt in 1990, plaintiff lost its investment in Drexel Burnham worth $559,265.81 plus interest. Specifically, the complaint alleges a violation of section 12(2) of the Securities Exchange Act of 1933, 15 U.S.C. § 77l(2); a violation of § 17(a) of the 1933 Act, 15 U.S.C. § 77q; a violation of section 12(1) of the 1933 Act, 15 U.S.C. § 77l(1); a violation of § 15 of the 1933 Act, 15 U.S.C. § 77o; violations of the Michigan Uniform Securities Act, M.C.L. §§ 451.810(a)(1), 451.810(a)(2), and 451.810(b); and violations of the state common law. Plaintiff seeks the return of the balance of its initial investment plus a reasonable investment return.

Presently before the court is defendants' Motion for Summary Judgment pursuant to Fed.R.Civ.P. 56. The motion has been fully and competently briefed by both plaintiff and defendants, including supplemental briefs filed at the request of the court. The court has carefully considered all the arguments and authorities relied upon by the parties in their briefs. For the reasons that follow, the Motion for Summary Judgment is GRANTED with respect to all counts.

I. BACKGROUND

The pertinent facts viewed most favorably to plaintiff are as follows.

Plaintiff Montcalm County is a municipal corporation established under the laws of the State of Michigan. As Montcalm County's Treasurer since 1982, Rosemary Long was responsible for investing the County's surplus funds. Investment of surplus public funds is but one small part of the substantial statutory duties of the county treasurer. The treasurer's primary duty is tax collection. Other duties include sale of dog licenses, inventory of bank boxes, working with township treasurers, and personnel management in the treasurer's office.

Defendant McDonald & Co. is a brokerage firm. Defendant Chigas was one of McDonald & Co.'s registered representatives. Before Chigas was hired by McDonald & Co., she was employed by Ashwell & Company Securities. During her employment at Ashwell & Co., defendant Chigas and Rosemary Long, Montcalm County's treasurer, came to know each other through the Michigan Association of County Treasurers ("MACT"). MACT is a support and information network for Michigan county treasurers. According to plaintiff, Treasurer Long placed trust in defendant Chigas and relied upon her expertise in assisting her in making investment decisions for the County over the years. She also relied on Chigas to keep her informed about securities held by Montcalm County since Chigas would have access to pertinent information from being "in the business." (Long sworn statement at 10, 15, 16, 20-22). On two occasions in 1983, Chigas contacted Long to inform her that there were problems with particular investments and to advise her to sell the investments prior to maturity. On both of those occasions, Chigas reinvested the County's funds, resulting in no loss to Montcalm County. (Long sworn statement at 10, 15-16, 20-22; Long depo. at 49).

In September 1988, defendant Chigas was hired as an investment broker by defendant McDonald & Co., first in its Michigan office, and later in its Chicago office. Chigas continued to provide investment services for Montcalm County and many other of her municipal clients after her change in employment.

Plaintiff alleges that McDonald held itself out to MACT in its advertisements as having "a reputation for carefully selected products." Montcalm County also alleges that it was never given any information about the issuer before purchasing an investment, and never warned of the risks involved in purchasing commercial paper. Long would call Chigas and tell her the County had a certain amount to invest for a designated period. Chigas would then select investments from the investments available that day and quote them to Long.

Beginning in March 1989, Chigas suggested Drexel Burnham Lambert commercial paper for investment to her clients, including plaintiff Montcalm County. At issue in this case are two corporate notes plaintiff purchased on September 13, and September 22, 1989. The first note had a face value of $455,175.11, with a maturity date of June 8, 1990. The second note had a face value of $104,090.70, with a maturity date of February 26, 1990. The total cost was just over $559,000. At the time of issuance, the notes were prime quality commercial paper, rated A-2 by Standard & Poor's and F-2 by Fitch, two standard rating services widely recognized by the industry.

Plaintiff alleges that defendant Chigas made the sales "notwithstanding numerous indications `on the street' that Drexel Burnham was not a wise investment to offer to her customers, and without making any inquiry as to the stability of Drexel Burnham." As part of this allegation, plaintiff referred to two separate listings of the DBL commercial paper on Standard & Poor's "CreditWatch." The first CreditWatch report was issued on December 12, 1988,¹ and the second one was issued on January 30, 1989.² Although the CreditWatch report expressed concern about the "negative implications," inter alia, for Drexel Burnham resulting from a high risk loan to Kohlberg, Kravis, Roberts & Co. for the acquisition of RJR Nabisco, Inc., the CreditWatch report also specifically stated that "Drexel's strong placement and distribution capabilities should enable it to quickly prefund a sizeable portion of the loan commitment, thus limiting its final funding exposure and risk." Regarding the indictment alleging racketeering, conspiracy, securities fraud and other trading-related violations filed against an important Drexel Burnham executive, Michael Milken, the CreditWatch report also stated that "the financial impact of a possible criminal indictment against Drexel, involving potentially high fines and/or a settlement of charges, remains manageable at this time." Moreover, both CreditWatch reports were issued eight and nine months before the commercial paper was purchased. By the time the transaction was made, the DBL commercial paper had been removed from the CreditWatch report.

On November 30, 1989, the Wall Street Journal reported that Standard & Poor's had issued a downgrade of Drexel Burnham commercial paper from A-2 to A-3. On February 13, 1990, the Chairman of the SEC and the Secretary of the Treasury called Drexel Burnham management, demanding that Drexel Burnham seek bankruptcy protection. Drexel Burnham ceased all trading, and later that day, filed Chapter 11 bankruptcy. At that time, its commercial paper was still rated "prime" — A-3/F-3.

On March 6, 1990, plaintiff's attorney met with defendants, and demanded that they guarantee plaintiff's loss by repurchasing the Drexel Burnham notes. Defendants refused. On May 17, 1991, plaintiff filed its ten-count Complaint. Plaintiff seeks rescission of its purchase, and judgment against defendants McDonald and Chigas, jointly and severally, in the amount of $559,265.81, plus interest, attorneys' fees, costs and any other relief as the court deems proper.

Presently before the court is defendants' Motion for Summary Judgment on all counts of the complaint.

II. DEFENDANTS' MOTION TO WITHDRAW ADMISSION

At the threshold of considering defendants' Motion for Summary Judgment, the court must decide whether it should allow the withdrawal of defendants' admission that they offered or sold the Drexel Burnham commercial paper to plaintiff Montcalm County within the meaning of section 12(2) of the 1933 Act. A brief summary of the litigation concerning the issue of defendants' admission is in order.

In the Answer and Affirmative Defenses of Defendants McDonald & Company Securities, Inc., and Lisa Lowe Chigas to the First Amended Complaint of Montcalm County Board of Commissioners, defendants answered two of the allegations as follows:

83. ALLEGATION: McDonald and Lowe solicited the purchase of the Drexel Burnham commercial paper by Montcalm County.

RESPONSE: Defendants deny the allegations contained in paragraph 83 because they are untrue.

84. ALLEGATION: McDonald and Lowe offered or sold the Drexel Burnham commercial paper to Montcalm County, within the meaning of section 12(2) of the 1933 Act.

RESPONSE: Defendants deny the allegations contained in paragraph 84 because they are untrue.

However, several months later, defendants, in their Responses to Plaintiff's First Discovery Requests, admitted that they "offered or sold the Drexel Burnham commercial paper to Montcalm County within the meaning of section 12(2) of the 1933 Act." In subsequent exchanges, including defendants' mediation summary, defendants' Motion for Summary Judgment, and defendants' Responses to Plaintiff's Third Discovery Requests, defendants reinstated their initial position and denied that they were statutory sellers under section 12(2). Mere changes in their later answers,...