Werner v. Satterlee, Stephens, Burke & Burke

• Decision Date: 28 July 1992
• Docket Number: No. 89 Civ. 5130 (CSH).,89 Civ. 5130 (CSH).
• Citation: 797 F. Supp. 1196
• Parties: Fred WERNER and Paul Oberkircher, as Trustee of the Radiology Medical Associates Money Purchase Pension Trust, Plaintiffs, v. SATTERLEE, STEPHENS, BURKE & BURKE, as Successor to Satterlee & Stephens, Defendant.
• Court: U.S. District Court — Southern District of New York

797 F. Supp. 1196

Fred WERNER and Paul Oberkircher, as Trustee of the Radiology Medical Associates Money Purchase Pension Trust, Plaintiffs, v. SATTERLEE, STEPHENS, BURKE & BURKE, as Successor to Satterlee & Stephens, Defendant.

No. 89 Civ. 5130 (CSH).

United States District Court, S.D. New York.

July 28, 1992.

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Lowey Dannenberg Bemporad & Selinger, P.C., New York City, for plaintiffs (Neil L. Selinger, of counsel).

Kutak Rock, New York City, for defendant (Joseph A. Ingrisano,¹ Robert L. Magielnicki, and Lindsey Miller-Lerman, of counsel).

MEMORANDUM OPINION AND ORDER

HAIGHT, District Judge:

This federal securities action arises out of the failure of the Matthews & Wright Group, Inc. ("M & W"), an underwriter of tax exempt housing bonds, and plaintiffs' attempts to recover money invested in M & W.

Several related actions have been brought in this District, including the Securities and Exchange Commission ("S.E.C.") investigation of M & W. See S.E.C. v. Matthews & Wright Group, Inc., No. 89 Civ. 2877 (RJW).

This case is before the Court on several motions. Defendant Satterlee Stephens Burke & Burke ("Satterlee Stephens") has moved to dismiss on the grounds that the action is barred by the statute of limitations, that the complaint does not plead fraud with particularity, and that the complaint fails to state a claim. Plaintiffs have cross-moved for summary judgment on Satterlee Stephens' statute of limitations defense. The Court consolidated this case with In re Matthews & Wright Group, Inc. Securities Litigation, 87 Civ. 4672 (CSH) ("In re Matthews & Wright") and defendant opposes such consolidation. Plaintiffs move for class certification.

For the reasons set forth below, defendant's motion to dismiss is denied and plaintiff's motion for summary judgment is granted. The motion opposing consolidation is denied and the class is certified.

BACKGROUND

M & W, a Delaware corporation which had its principal place of business in New York, New York, was a holding company which, through its subsidiaries, provided investment and underwriting services, principally in connection with the issuance, sale and trading of municipal securities in both primary and secondary markets. M & W represented in an August 14, 1986 prospectus that it was the 15th largest underwriting firm in the United States in new municipal bond issues and the fourth largest firm in housing bond underwritings, principally to finance multi-family housing. Complaint ¶ 19.

Plaintiff Fred Werner, a resident of New York, purchased 4,000 shares of the common stock of M & W during the class period. Plaintiff Paul Oberkircher is trustee of Radiology Medical Associates Money Purchase Pension Trust, a Pennsylvania pension trust, which purchased 4,000 shares of the common stock of M & W during the class period. Plaintiffs bring this action (i) individually and on behalf of purchasers of M & W common stock between August 14, 1986 through June 26, 1987 pursuant to Rules 23(a) and (b), Fed. R.Civ.P.; and (ii) as assignees under a Settlement Agreement dated January 5, 1989 (the "Settlement Agreement") of the claims of M & W and its wholly-owned subsidiary, M & W Capital, Inc. ("M & W Capital") arising out of and based upon the professional legal counsel rendered by Satterlee Stephens. Complaint ¶¶ 10-11, 13.

Satterlee Stephens is a New York law partnership which is the successor to the partnership known as Satterlee & Stephens. Plaintiffs allege Bernard A. Althoff was the Satterlee Stephens partner responsible for providing legal services to M & W; that Satterlee Stephens acted as general corporate counsel to M & W and participated in sham bond closings in December 1985 and a public offering of M & W stock on August 14, 1986; and that Satterlee Stephens assisted M & W in preparing the registration statement and prospectus for the offering which omitted material information. Complaint ¶¶ 16(a)-(c)-17, 79-92.

The gravamen of plaintiffs' complaint is that securities fraud was committed in connection with the registration and sale to the public of 1.5 million shares of M & W common stock issued in August 14, 1986 (the "Offering") and the sale of M & W common stock on the open market from August 14, 1986 through June 26, 1987 (the "Class Period"). Complaint ¶¶ 5, 78(a)-(o).

Plaintiffs allege that the Offering concealed from the public that M & W's growth was based on a fraudulent scheme in connection with the issuance and sale of approximately $2 billion of municipal bonds. Plaintiffs allege that M & W conducted at least 25 closings in December 1985 and August 1986 in which bonds were to be purchased and held in escrow by M & W. In fact, no consideration ever changed hands at these closings. Once the 1986 Tax Reform Act became effective, the bonds were sold as tax-exempt with no disclosure of their original issuance. The bonds were sold as being for housing projects but the proceeds were in fact used to purchase guaranteed investment contracts ("GIC"). Plaintiff alleges that the bonds were issued without a reasonable expectation that the housing projects would be built. All of these factors meant that it was likely the Internal Revenue Service would deem the bonds taxable securities, which is what has occurred with respect to $380 million of these bonds. Complaint ¶¶ 6, 22-72.

When this information became public the market price of M & W stock, which had been offered at $11 per share and which traded at more than $13 per share during the Class Period, plummeted. As of January 1989, the stock was trading between $.25 to $.50 per share. Complaint ¶¶ 7, 73-76.

After the revelation of the wrongdoing, M & W abandoned the underwriting of municipal bonds. M & W and two of its principals have agreed to the revocation of their licenses as registered broker-dealers as a result of the S.E.C.'s civil suit against M & W, three of its principals, and its legal counsel, Bernard A. Althoff, a partner in Satterlee Stephens. See S.E.C. v. Matthews & Wright Group, Inc., supra. A third principal of M & W pled guilty to criminal charges in the Territory of Guam, where M & W underwrote housing bonds in 1985. See United States v. Goldberg, (C.D.Calif. July 11, 1989). Two attorneys involved in the issuance of M & W bonds have also pled guilty to criminal charges. See United States v. Strauss, (D.Guam January 14, 1988); United States v. Newman, (E.D.Mo. April 12, 1988). Complaint ¶¶ 8-9, 77.

Plaintiffs bring this action as a class action pursuant to Fed.R.Civ.P. 23(a) and (b) on behalf of themselves and all others who purchased M & W shares during the Class Period pursuant to a registration statement dated August 14, 1986. Plaintiffs allege that because the purchasers are so numerous a class action is the best method of proceeding in this case. A class identical to the class in this case was certified by this Court in In re Matthews & Wright on consent of the defendants therein. Complaint ¶ 21.

Count I of the complaint alleges that Satterlee Stephens violated § 10(b) of the Securities and Exchange Act and Rule 10b-5 promulgated thereunder by engaging in a conspiracy and course of business which operated as a fraud on plaintiffs. Plaintiffs allege that Satterlee Stephens made untrue statements of material fact and omitted to state material facts which were required to make statements not misleading. Plaintiffs allege that the purpose of this scheme was to bring about the public offering of M & W common stock, to conceal material adverse information about M & W, and to induce investors to purchase stock at an inflated price. Complaint ¶¶ 93-100.

Counts II and II assert claims for common law fraud and negligent misrepresentation. Count IV asserts claims for negligence and malpractice. Complaint ¶¶ 101-20. Plaintiffs seek an award of damages suffered, including punitive and exemplary damages, and interest. Plaintiffs also seek the costs of this action, including attorneys' fees.

Satterlee Stephens has moved to dismiss on the grounds that the action is barred by the statute of limitations, that the complaint does not plead fraud with particularity and that the complaint fails to state a claim. Plaintiffs have cross-moved for summary judgment on Satterlee Stephens' statute of limitations defense. The Court consolidated this case with In re Matthews & Wright, 87 Civ. 4672 (CSH) and defendant opposes such consolidation. Plaintiffs move for class certification.

DISCUSSION

As the cross-motions on the statute of limitations question present an issue that could be dispositive, these motions will be taken up first. I will then take up the other grounds for dismissal raised in Satterlee Stephens' motion to dismiss. After considering those motions, I will turn to the issues of consolidation and class certification.

I. Statute of Limitations

The statute of limitations to be applied in federal securities cases has undergone recent judicial and legislative transformation.

Previously, the Second Circuit rule was that actions alleging fraudulent violations of the federal securities laws brought in the district courts sitting in New York State were governed by the New York statute of limitations for actions based on common law fraud, including the New York borrowing statute. See Armstrong v. McAlpin, 699 F.2d 79, 86-87 (2d Cir. 1983); Stull v. Bayard, 561 F.2d 429, 431 (2d Cir.1977), cert. denied, 434 U.S. 1035, 98 S.Ct. 769, 54 L.Ed.2d 783 (1978); Arneil v. Ramsey, 550 F.2d 774, 779-81 (2d Cir. 1977).

In 1988, the Third Circuit decided In re Data Access Systems Securities Litigation, 843 F.2d 1537 (3rd Cir.) (in banc), cert. denied, 488 U.S. 849, 109 S.Ct. 131, 102 L.Ed.2d 103 (1988), which held that "the proper period of limitations for a complaint charging violation of section 10(b) and Rule 10b-5 is one year after the plaintiff discovers the facts constituting the violation, and in no event more than three years after such...