Wu v. Stomber

• Decision Date: 13 August 2012
• Docket Number: Civil Action No. 11–2287 (ABJ).
• Citation: 883 F.Supp.2d 233
• Parties: D.J. WU, et al., Plaintiffs, v. John Crumpton STOMBER, et al., Defendants.
• Court: U.S. District Court — District of Columbia

883 F.Supp.2d 233

D.J. WU, et al., Plaintiffs,

v.John Crumpton STOMBER, et al., Defendants.

Civil Action No. 11–2287 (ABJ).

United States District Court,

District of Columbia.

Aug. 13, 2012.

Joel Davidow, Jonathan Watson Cuneo, Cuneo Gilbert & Laduca, LLP, Washington, DC, for Plaintiffs.

Robert A. Van Kirk, Williams & Connolly LLP, Alison C. Barnes, Gary A. Orseck, Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, Washington, DC, for Defendants.

MEMORANDUM OPINION

AMY BERMAN JACKSON, District Judge.

“ We may employ leverage without limit, which may result in the market value of our investments being highly volatile, limit our range of possible investments, and adversely affect our return on investments and the cash available for distributions.”

* * *

“ An investment ... is suitable only for investors who are experienced in analyzing and bearing the risks associated with investments having a very high degree of leverage.”

* * *

“ We cannot assure you that that the Liquidity Cushion will be sufficient to satisfy margin calls on our financed securities that may arise in connection with highly unusual adverse market conditions.”

* * *

“ While borrowing and leverage present opportunities for increasing total return, they have the effect of potentially increasing losses as well.... [A]ny event which adversely affects the value of our investments would be magnified to the extent leverage is employed.”

Carlyle Capital Corporation (“CCC”) Offering Memorandum [Dkt. # 52–3] at 13–14.

This case involves highly leveraged, highly speculative investment products. It raises the question of whether plaintiffs were defrauded under the following circumstances: they bought shares in a company whose sole business consisted of buying residential mortgage-backed securities on margin; the shares were made available only to a restricted group of sophisticated, wealthy investors; the shares were marketed with ominous warnings such as the ones above; and the very risks that were disclosed materialized when conditions in the real estate market and global economy deteriorated in 2008.

The consolidated complaint alleges claims of securities fraud under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and SEC Rule 10b–5, 17 C.F.R. § 240.10b–5. The complaint includes common law fraud and negligent misrepresentation allegations, as well as claims under the laws of the United Kingdom and the Netherlands. As plaintiffs have explained it, the gravamen of the complaint is that the CCC Offering Memorandum was materially false and misleading because while it disclosed that liquidity issues that would threaten the company could occur, it omitted information that would have alerted investors to the fact that those events were already occurring. Plaintiffs also contend that after the Offering, defendants continued to conceal the worsening financial condition of the company until CCC collapsed in March of 2008.

Defendants have moved to dismiss the consolidated complaint pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6) and the Private Securities LitigationReform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u–4, for failure to state a claim upon which relief can be granted. [Dkt. # 51 and # 52]. For the reasons set forth in more detail below, the Court will grant the motions to dismiss.

Essentially, this complaint is an attack on how CCC was managed, and ultimately, it questions the wisdom behind the adoption of its business model in the first place. But chiding CCC with the benefit of hindsight for its failure to resist the stampede to purchase mortgage-backed securities is not the same thing as alleging fraud, particularly given the stringent standards of the PSLRA.

With respect to the counts related to the Offering, the complaint does not plausibly allege a securities fraud claim grounded on omissions because the Offering documents—in particular, the Supplemental Memorandum issued after the initial Offering was postponed—specifically placed buyers on notice of what CCC was doing and the fact that it had recently experienced the very reversals that plaintiffs claim should have been disclosed. So, this action lacks the defining element of fraud: a falsehood. The federal claims also fall short of supporting the necessary allegation that the alleged fraud caused the plaintiffs' losses. The common law claims related to the Offering suffer from the same flaws, and in addition, they fail to set forth facts that would support the element of actual reliance.

As for the claims based on sales of securities in the aftermarket, the federal claims are barred since the shares were purchased on a foreign exchange and not in the United States. And, if the Court were to go on to consider the common law aftermarket claims, it would find those allegations to be devoid of the necessary allegations of reliance as well.

I. BACKGROUNDA. The Parties

1. Plaintiffs

Plaintiffs bring this action pursuant to Federal Rules of Civil Procedure 23(a) and (b)(3) on behalf of two proposed classes. The first proposed class is the “Offering Class,” which the complaint defines as “all persons who purchased or otherwise acquired Class B Shares or Restricted Depository Shares (“RDS”) of CCC in its Offering and were damaged thereby” and a “U.S. Offering” subclass of U.S. residents. Compl. ¶ 30. The second proposed class is the “Aftermarket Class,” which the complaint defines as “all persons who purchased or otherwise acquired Class B Shares of CCC in market purchases from July 4, 2007 through March 17, 2008 ... and were damaged thereby,” and includes a “U.S. Aftermarket Subclass” of U.S. residents. Id. Plaintiffs estimate that there are at least 500 members of the Class. See id. ¶ 31.

The named plaintiffs in this action are:

• Plaintiff E.L. Phelps, a resident of Virginia who purchased (1) 15,789 RDSs in the Offering and (2) 15,000 Class B Shares listed for trading on the Euronext exchange in the aftermarket. Id. ¶ 4;

• Plaintiff M.J. McLister, a resident of Virginia who purchased (1) 26,316 RDSs in the Offering, and (2) 54,225 Class B Shares listed for trading on the Euronext exchange in the aftermarket. Id. ¶ 5;

• Plaintiff D.J. Wu, a resident of Washington, D.C. who purchased (1) 26,316 RDSs in the Offering, and (2) 25,000 Class B Shares listed for trading on the Euronext exchange in the aftermarket. Id. ¶ 6; • Plaintiff S.M. Liss, a resident of Maryland who purchased 15,789 RDSs in the Offering. Id. ¶ 7;

• Plaintiff W.F. Schaefer, a resident of Maryland who purchased 7,895 RDSs in the Offering. Id. ¶ 8;

• Plaintiff Jonathan Glaubach who purchased 500 shares of CCC securities in the Offering. Glaubach Decl. ¶ 4 to Mot. for App't as Lead Pl. [Dkt. # 4–3];

2. Defendants

The consolidated complaint names the following institutional defendants:

• Defendant Carlyle Investment Management, LLC (“CIM”), a Delaware limited liability company with its principal place of business in Washington, D.C. Compl. ¶ 9. Under an investment management agreement with CCC, CIM served as the investment manager of CCC and “had full discretionary investment authority.” Id. According to the Offering Memorandum, CIM was responsible for “the day-to-day management and operations of [CCC's] business.” CCC Offering Memorandum (“Off. Mem.”) [Dkt. # 52–3] at 62–63;

• Defendant T.C. Group, LLC (“TCG”), a Delaware limited liability company with its principal place of business in Washington, D.C. Compl. ¶ 10. According to the complaint, TCG owned 75 percent of CIM. Id.;

• Defendant TC Group Holdings, LLC (“TCG Holdings”), a Delaware limited liability company with its principal place of business in Washington, DC. TCG Holdings was the holding company and managing member of TCG. Id. ¶ 11;

• Defendant CCC, a Guernsey limited company that is currently in liquidation. Id. ¶ 22.¹

The complaint also names two groups of individual defendants. The first group of defendants, who are referred to as the “Carlyle Defendants,” is:

• Defendant William Elias Conway, Jr., a resident of Virginia who served as managing director of CIM, a director of CCC, and the Chief Investment Officer of TCG. Id. ¶ 14;

• Defendant John Crumpton Stomber, a resident of Connecticut who served as the Chief Executive Offer, Chief Investment Officer and President, and a director of CCC, as well as Managing Director of CIM and TCG. Id. ¶ 15;

• Defendant James H. Hance, a resident of North Carolina who served as a Director of CCC from September 14, 2006 and at all relevant times thereafter. Id. ¶ 16. He also served as Chairman of the Board until March 2007 and was a senior adviser to CIM. Id.;

• Defendant Michael J. Zupon, a resident of New York who served as a Director of CCC from September 14, 2006 and at all relevant times thereafter. Id. ¶ 17. According to the complaint, Zupon was a founding member, Chief Investment Officer, and Managing Director and Head of Carlyle's U.S. Leveraged Finance Group and a Partner and Managing Director of Carlyle. Id.

The second group of individual defendants, who are referred to as the “Outside Directors,” is:

• Defendant Robert Barclay Allardice, III, a resident of New York who served as a Director of CCC from September 14, 2006 and at all relevant times thereafter. Id. ¶ 19;

• Defendant Henry Jay Sarles, a resident of Massachusetts who was a Director of CCC from September 14, 2006 and at all relevant times thereafter. Id. ¶ 20;

• Defendant John Leonard Loveridge, a resident of Guernsey who was a Director of CCC from September 14, 2006 and at all relevant times thereafter. Id. ¶ 21.

B. Factual Background1. CCC's business model

As the complaint sets forth, CCC was a closed-end investment fund that was formed as a limited company under the laws of Guernsey on August 29, 2006. Compl. ¶ 40.² Although CCC was technically a separate business entity, the complaint alleges that CCC was “an investment product created and managed at all times by [defendants].” Id. ¶...