Wafra Leasing Corp.1999-a-1 v. Prime Capital Corp.
| Decision Date | 26 March 2002 |
| Docket Number | No. 01 C 4314.,01 C 4314. |
| Citation | 192 F.Supp.2d 852 |
| Court | U.S. District Court — Northern District of Illinois |
| Parties | WAFRA LEASING CORPORATION 1999-A-1, Plaintiff, v. PRIME CAPITAL CORPORATION, Prime Leasing Corporation, Prime Finance Corporation 1999-A-1, Prime Finance Corporation 1999-A-2, KPMG LLP, Bischoff & Swabowski, Ltd., Mark Bischoff, James Friedman, Vern Landeck, Thomas Ehmann, William Smithburg and John Walter, Defendants. |
Leon Zelechowski, Attorney at Law, Chicago, IL, for Plaintiff.
David S. Waxman, Richard Keith Hellerman, James Alan Chatz, Arnstein & Lehr, Chicago, IL, for Prime Capital Corp., Prime Leasing Corp.
Michael Jon Gill, Andrew Dylan Campbell, Mayer, Brown, Rowe & Maw, Chicago, IL, for Prime Finance Corp.
James R. Figliulo, James H. Bowhay, Michael K. Desmond, Figiulo & Silverman, Chicago, IL, for KPMG LLP.
Ted A. Donner, Bischoff & Swabowski, Ltd., Chicago, IL, for Bischoff & Swabowski, Mark Bischoff.
Lawrence Charles Rubin, Kim Renee Walberg, Shefsky, Froelich & Devine, Ltd., Chicago, IL, for James Friedman, William Smithburg, John Walter.
Miriam Goldman Bahcall, Kevin D. Finger, Ungaretti & Harris, Chicago, IL, for Vern Landeck, Thomas Ehmann.
Wafra Leasing Corporation ("Wafra") invested in a securitization of financial contracts by Prime Capital Corporation and Prime Leasing Corporation (collectively "Prime"), and its investment went bad. Wafra sued Prime and several of its officers and directors, as well as KPMG L.L.P., Prime's auditor, and Bischoff & Swabowski ("B & S"), its attorneys, for securities fraud under § 10(b) and § 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, and several state causes of action. The Prime defendants answered the complaint. KPMG, Mark Bischoff and B & S, and Thomas Ehmann and Vern Landeck move to dismiss Wafra's complaint. I grant the motions in part and deny them in part.
Prime is a specialty finance company that originated and serviced financial contracts including equipment leases, loans and installment purchase agreements. From 1993 to 1999, Prime securitized the financial contracts to raise capital. Wafra invested in the 1999 securitization.
For all of the securitizations, including the 1999 transaction, Prime formed special purpose vehicles ("SPVs"), to which it transferred the financial contracts, and the SPVs would issue and sell promissory notes to third parties using the financial contracts as collateral, with an agreement that Prime would continue to service the financial contracts. The securitizations also required that the proceeds of the financial contracts ("rent payments") be used to make payments of principal and interest on the notes issued by the SPVs. Under the securitization documents, Prime, as the servicer, was authorized to collect payments, and all rent payments were required to be deposited in a "lock-box" account, kept separate from Prime's funds, and turned over to the securitization trustee within two business days. Prime was required to instruct all payers on the financial contracts to make payments directly to the lock-box account, and if payments were misdirected to Prime, Prime was required to turn them over to the lock-box account within two business days. This procedure was described in the Private Placement Memorandum ("PPM"). The money in the lock-box account was the property of the SPVs, not Prime, and was to be used for payment on the notes issued by the SPVs.
However, as early as 1997, according to the complaint, Prime was diverting and misappropriating rent payments belonging to the SPVs by holding the funds for more than two days and commingling the funds with its own. This resulted in shortfalls of money required to be deposited in the lock-box account for the benefit of the SPVs, so Prime allegedly kited misdirected funds from the next month's receipts to pay its investors, which created a shortfall for the next month as well. Wafra alleges that the diversion and misappropriation raises an inference that Prime was insolvent, and that it hid this fact from investors by kiting misdirected payments from the following month.
In May 1999, in the midst of this alleged scheme, Wafra invested in the 1999 securitization. Wafra alleges that Prime's financial stability was critical to its ability to service the contracts and ensure that investors received a full return on their investments. According to the complaint, Prime's financial failure could only lead to a breakdown of the servicing arrangement and a loss to the holders of notes issued by the SPVs. As of the closing on May 4, 1999, Prime's annual Form 10-K report for 1998 had not been filed, so Wafra relied on financial information from the 1997 10-K and on representations of Prime's financial health by various of Prime's officers, the description of the securitization in the PPM, and on opinion and valuation letters from B & S and KPMG, respectively its attorneys and auditors. Nobody disclosed the diversion, misappropriation or kiting prior to the closing.
After the closing, however, certain "red flags" about Prime's financial condition surfaced. The delayed 1998 10-K was issued on May 28, 1999, and included an auditor's report by KPMG dated May 20, 1999—just sixteen days after the closing— in which KPMG stated that Prime had transferred several million dollars to the SPVs in 1999 that were required to have been transferred in 1998. In Prime's August 1999 second quarter quarterly report, Prime reported that it needed more capital to "meet its ongoing liquidity needs." In a July 1999 proxy statement, two and a half months after the closing, Prime disclosed that, in January 1999, more than three months before the closing, its president and CEO had made a loan of $900,000 to Prime. Prime announced in November 1999 that KPMG, its auditor of many years, had resigned, and that KPMG had brought to Prime's attention "the existence of certain irreconcilable differences between the account detail and the general ledger" relating to transactions in prior years, but that KPMG had not required an adjustment. Prime's third quarter report in November 1999 indicated that its liquidity problems had worsened. Despite its financial difficulties, Prime still continued to make the required monthly payments to Wafra.
In April 2000, the securitization trustee notified Prime that there had been several defaults under the indentures and servicing agreements. On June 9, 2000, Prime held a conference call in which Wafra's president participated. Prime's vice president disclosed that Prime had misappropriated funds from the securitization trusts and used some of those funds for its own purposes, and that it would be unable to continue servicing the financial contracts. Wafra says this is the first whiff it had of any wrongdoing. Prime defaulted on the principal payment due to Wafra on June 15, 2000, and, although Wafra continues to receive interest payments, Wafra has not received any principal payments from Prime since May 2000. Wafra claims that it has lost $3.4 million, plus interest and expenses, as a result of the defendants' alleged fraud.
On a motion to dismiss, I accept all well-pleaded factual allegations in the complaint as true and draw all inferences in favor of the non-moving party. Johnson v. Rivera, 272 F.3d 519, 520 (7th Cir.2001). I may not dismiss a complaint for failure to state a claim "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).
Ordinarily, I may not consider facts outside of the complaint on a motion to dismiss, but there is a well-recognized exception: I may consider documents that are referred to in the plaintiff's complaint and that are central to its claim without converting this motion to one for summary judgment. See Menominee Indian Tribe of Wisc. v. Thompson, 161 F.3d 449, 456 (7th Cir.1998); Help At Home Inc. v. Medical Capital, L.L.C., 260 F.3d 748, 752 (7th Cir.2001). But see Berthold Types Ltd. v. Adobe Systems Inc., 242 F.3d 772, 775 (7th Cir.2001). In addition, a plaintiff is entitled to supplement its complaint with factual narration that is consistent with the complaint, and I may consider those additional facts for the purposes of this motion. See Help At Home Inc., 260 F.3d at 752-53.
To state a claim under SEC Rule 10b-5, promulgated under § 10(b) of the Securities Exchange Act of 1934, "a plaintiff must allege that the defendant (1) made a misstatement or omission, (2) of material fact, (3) with scienter, (4) in connection with the purchase or sale of securities, (5) upon which the plaintiff relied, and [that] (6) that reliance proximately caused plaintiff's injuries." In re HealthCare Compare Corp. Secs. Litig., 75 F.3d 276, 280 (7th Cir.1996). The allegations of the complaint must also comply with the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(b).
All of the defendants argue that Wafra's federal securities claims are barred by the statute of limitations, and KPMG argues that certain claims against it are barred by the statute of repose. The Officers and KPMG argue that Wafra's claims fail for a lack of justifiable reliance. The Officers and the Bischoff defendants also argue, for several independent reasons, that Wafra fails to state a claim for securities fraud.
Rule 10b-5 claims are governed by a one-year statute of limitations and a three-year statute of repose. Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 364, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991). The one-year period:
begins to...
To continue reading
Request your trial
-
In re Rent-Way Securities Litigation
...statements and cannot be responsible for omissions in statements that it itself did not make. See Wafra Leasing Corp. v. Prime Capital Corp., 192 F.Supp.2d 852, 867 (N.D.Ill.2002) (". . . a defendant is liable only for those omissions that make its own statements misleading."). Further rega......
-
Rights v. Tellabs Inc.
...the ... statements ... cannot be responsible for omissions in statements that it itself did not make"); Wafra Leasing Corp. v. Prime Capital Corp., 192 F.Supp.2d 852, 867 (N.D.Ill.2002) (explaining that 10b-5(b)'s text "demonstrates that a defendant is liable only for those omissions that m......
-
US v. Schiff
...the ... statements ... cannot be responsible for omissions in statements that it itself did not make"); Wafra Leasing Corp. v. Prime Capital Corp., 192 F.Supp.2d 852, 867 (N.D.Ill.2002) (explaining that 10b-5(b)'s text "demonstrates that a defendant is liable only for those omissions that m......
-
Wafra Leasing Corp. v. Prime Capital Corp.
...25, 2002 Opinion On March 25, 2002, Judge Bucklo granted KPMG's motion to dismiss in part. See Wafra Leasing Corp.1999-A-l v. Prime Capital Corp., 192 F.Supp.2d 852 (N.D.Ill. 2002) ("Wafra I").1 Specifically, Judge Bucklo dismissed the securities fraud claims against KPMG based on the May 4......