Judge: Investors showed defendants misrepresented subprime involvement

Judge: Investors showed defendants misrepresented subprime involvement

 
NEW YORK — Lead plaintiffs in a class action lawsuit against an investment firm and certain of its executive officers and directors for alleged misrepresentations with regard to the defendants’ investment in subprime mortgage-backed securities have properly shown that the defendants violated federal securities laws in concealing the company’s exposure to such securities, a federal judge ruled March 4 (Briarwood Investments, Inc. v. Care Investment Trust Inc., et al., No. 07-8159, S.D. N.Y.; 2009 U.S. Dist. LEXIS 18963).
 
Lead plaintiffs Alaska Hotel & Restaurant Employees Pension Trust Fund and the Norfolk County Retirement System (collectively, the shareholders) filed an amended class action complaint in the U.S. District Court for the Southern District of New York on behalf of all purchasers of Care Investment Trust Inc. common stock pursuant to the company’s June 22, 2007, initial public offering (IPO).
 
They allege that Care Investment, Chief Executive Officer F. Scott Kellman, Chief Financial Officer Robert O’Neill and director Flint D. Besecker violated Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 by issuing a series of false and misleading statements concealing Care Investment’s business and financial conditions in connection with its investment in subprime mortgage-backed securities.
 
The defendants moved to dismiss the action on April 22, contending that the shareholders failed to properly state a claim for relief.
 
Bespeaks Doctrine
 
Judge Louis L. Stanton, in denying the defendants’ motion to dismiss, held that the lead plaintiffs properly pleaded their Section 11 claim because the defendants’ alleged misrepresentations cannot be protected by the bespeaks doctrine.
 
“The protections afforded by that doctrine are unavailable here. The amended complaint alleges that Care failed to disclose that it ‘was experiencing significant difficulties securing warehouse line on acceptable terms’, and that ‘the Company did not have two lenders lined up to provide warehouse facilities, but rather was struggling to convince a single lender to extend it a warehouse facility on favorable terms’. Thus, to say it expected that there would soon be two such facilities was untrue and misleading,” Judge Stanton said.
 
Judge Stanton also found that the defendants failed to show that the drop in Care stock price after the IPO “was caused by a market-wide downturn, rather than the disclosures of Care’s difficulties obtaining warehouse financing.”
 
Section 12(a)(2) Claim
 
Moreover, Judge Stanton ruled that the shareholders properly showed that the individual defendants were sellers who “solicited lead-plaintiffs’ stock purchases” in making their Section 12(a)(2) claim. “Numerous courts in this circuit hold that on a motion to dismiss, officers and directors of the stock issuer who signed its registration statement are deemed to have solicited the purchase of the offered stock,” he said.
 
The lead plaintiffs have further properly pleaded their Section 15 claim, Judge Stanton held, because they have properly pleaded their Section 11 and 12(a)(2) claims.
 
Counsel
 
The shareholders are represented by Samuel H. Rudman, David A. Rosenfeld and Joseph Russello of Coughlin Stoia Geller Rudman & Robbins in Melville, N.Y., Joel H. Bernstein and Michael W. Stocker of Labaton Sucharow in New York and Jack G. Fruchter of Abraham Fruchter &Twersky in New York.
 
The defendants are represented by Joel G. Chefitz and Andrew D. Kaizer of McDermott Will & Emery in New York.