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March 31, 1999


The opinion of the court was delivered by: Barrington D. Parker, Jr., District Judge.


Plaintiff David Schnell brings this action against Conseco, Inc. ("Conseco") and Sands Brothers & Co., Ltd. ("Sands"), on behalf of a purported class of public investors in NAL Financial Group, Inc. ("NALF") for injuries suffered as a result of Conseco's alleged fraud in violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961, et seq., (Count I), and the manipulation of the market for NALF securities allegedly committed by Sands, in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the Securities Exchange Commission ("SEC") (Count II). Essentially, Schnell alleges that Conseco, with the assistance of Sands, unlawfully effected a series of transactions — principally the sale of convertible debentures in NALF — to gain control of NALF by acquiring its common stock at artificially low prices to the detriment of its remaining public shareholders.

Defendants now move to dismiss plaintiffs claims against them pursuant to Fed. R.Civ.P. 12(b)(6) and 9(b). For the reasons stated below, defendants' motions are granted.


In deciding a motion pursuant to Rule 12(b), the court is, of course, obligated to construe the pleadings in the plaintiff's favor. Cooper v. Parsky, 140 F.3d 433, 440 (2d Cir. 1998); Mills v. Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir. 1993); Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1098 (2d Cir. 1988). The following facts are accordingly construed.

Conseco is a financial services holding company incorporated under the laws of the state of Indiana and engaged in the development, marketing, and administration of annuity, supplemental health, and individual life insurance products. Sands is an investment banking firm that is also a broker and dealer in securities.

NALF is a Delaware corporation, engaged in the purchase, securitization, and servicing of automobile finance contracts to consumers with high credit risks. Through an insurance subsidiary, NALF provides insurance and insurance-related products to automobile dealers and their customers, and, through a remarketing subsidiary, NALF disposes of some of its repossessed and off-lease vehicles. On March 23, 1998, NALF filed a Chapter 11 petition for bankruptcy. No claims are asserted in this action against NALF.

On April 23, 1996, Beneficial Standard Life Insurance Co. ("BSLIC") and Great American Reserve Insurance Co. ("GARCO"), two Conseco subsidiaries, each acquired $5,000,000 worth of 9% Subordinated Convertible Debentures of NALF. The debentures had a life span of eighteen months, expiring in October 1997, and were convertible at any time into NALF common stock at the lesser of $12.00 per share or 80% of the market price of the stock on the date of conversion. NALF also issued to the subsidiaries warrants to purchase 500,000 restricted shares of NALF common stock at an exercise price of $12.65 per share.

By late 1996, approximately $11 million in NALF debentures with conversion features similar to the Conseco debentures were owned by other investors, including Merrill Lynch, Westminster Capital, and Michael Karp. Millions of dollars in warrants similar to those granted to the Conseco subsidiaries in April 1996 were also issued by NALF to other private investors.

Plaintiff contends that the debentures gave Conseco an incentive to artificially depress the price of NALF's stock at the end of the eighteen month conversion period so that Conseco could acquire the shares at the depressed price. In connection with Conseco's purchase of the debentures, Conseco was also allowed to designate one director to NALF's Board of Directors. Plaintiff claims that NALF's May 2, 1996 mailing of a proxy statement to its public stockholders and its electronic filing with the SEC was a result of Conseco's designation of a director to NALF's Board and was in furtherance of Conseco's scheme to defraud.

Plaintiff alleges that through phone calls to investors and dissemination of false opinions on the value of NALF stock, Sands, who has acted as Conseco's investment banker, artificially inflated the price of NALF stock through an illegal "pump and dump" scheme to enable Sands to make increased profits on sales of NALF stock.*fn1 Plaintiff also contends that Sands, which acted as Conseco's financial advisor and received a placement fee in connection with the private placement of Conseco debentures, failed to inform public investors that Conseco itself derived substantial benefits from the Conseco debentures and was positioning itself to acquire NALF at 80% of the market price of NALF stock, which Conseco allegedly expected to be severely depressed at the end of the conversion period.

After Conseco's purchase of NALF shares, plaintiff alleges that defendants began to position NALF to be acquired at a sharp discount by Conseco. Plaintiff contends that after selling NALF stock to the public at artificially inflated prices, Sands took NALF stock off its recommended list and stopped its aggressive efforts to market NALF shares, resulting in a precipitous decline in the stock's value.

On August 21, 1997, NALF and Conseco entered into an Investment Agreement, and a first amendment to the June 23, 1997 Credit Agreement. In the Investment Agreement, Conseco acquired 5,000,000 shares of NALF stock for $5 million, and purchased all of NALF's outstanding convertible debentures held by third parties other than Conseco. The Investment Agreement also provided that Conseco would not "initiate or cooperate in the initiation of any reorganization or liquidation proceeding with respect to the Company under the Bankruptcy Act" until the date of Closing, which was October 1, 1997.

On October 1, 1997, Conseco converted many of the debentures it owned into NALF common stock, which resulted in Conseco's ownership of 73.6% of the company, and agreed to convert its remaining debentures into NALF common stock once the company had sufficient authorized shares available for issuance upon conversion. In addition, NALF's Board of Directors was increased from four to six members and the number of Conseco designees on the Board was raised from one to four. Conseco also agreed that it would not pursue a cash-out merger of NALF's public shareholders prior to March 23, 1998 without the approval of a majority of the company's minority stockholders, and that it would not pursue a cash-out merger prior to December 23, 1998 without the approval of a majority of disinterested NALF Directors.

Plaintiff alleges that on November 29, 1997, Conseco caused NALF to mail to its shareholders and file electronically with the SEC its November 1997 Proxy.*fn2 The proxy disclosed that NALF was continuing to experience serious difficulties, and was mailed with an amendment to the Company's Certificate of Incorporation that increased the number of authorized NALF shares from 50,000,000 to 100,000,000, allegedly to allow Conseco to convert its remaining debentures and increase its control to 86%.

On March 23, 1998, NALF filed a Chapter 11 petition for bankruptcy. Plaintiff alleges that Conseco caused the filing of this petition, and that the filing was improperly intended to enable Conseco to acquire NALF without adequate consideration to its public shareholders.

Plaintiff alleges two claims. First, plaintiff asserts a claim against Conseco for violation of RICO on behalf of himself and a purported class of all other persons and their successors in interest who purchased NALF common stock on or after April 25, 1996, and who still own such stock. Second, plaintiff asserts a claim against Sands, for violation of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, on behalf of himself and a purported class consisting of purchasers of NALF common stock between April 25, 1996 and August 21, 1997. Both ...

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