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GABRIEL CAPITAL, L.P. v. NATWEST FINANCE
May 8, 2000
GABRIEL CAPITAL, L.P., A DELAWARE LIMITED PARTNERSHIP, AND ARIEL FUND LTD., A CAYMAN ISLANDS CORPORATION, PLAINTIFFS,
NATWEST FINANCE, INC., F/K/A GLEACHER NATWEST INC., D/B/A NATWEST CAPITAL MARKETS LIMITED, AND MCDONALD INVESTMENTS INC, F/K/A MCDONALD & COMPANY SECURITIES, INC.; AND STEEL DYNAMICS INC., DEFENDANTS.
The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.:
Plaintiffs Gabriel Capital, L.P. ("Gabriel Capital") and Ariel
Fund Ltd. ("Ariel Fund") have sued defendants NatWest Finance,
Inc. ("NatWest"), McDonald Investments Inc. ("McDonald"), and Steel
Dynamics Inc. ("SDI") for securities fraud arising from plaintiffs'
purchase of certain debt securities (the "Note" or "Notes").
Plaintiffs allege that defendants violated section 10(b) of the
Securities and Exchange Act of 1934 (the "1934 Act"),
15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder,
17 C.F.R. § 240.10b-5, by making or participating in
the making of untrue statements and by omitting material facts in order
to induce plaintiffs to purchase the Notes. Plaintiffs also allege that,
through the same conduct, defendants committed common law fraud,
conspired to commit fraud, and aided and abetted fraud, all in violation
of New York law.
All three defendants have moved to dismiss plaintiffs'
Amended Complaint, pursuant to Fed.R.Civ.P. 12(b)(6), Fed. R.
Civ. P. 9(b), and the Private Securities Litigation Reform Act of
1995 ("PSLRA"), 15 U.S.C. § 78u-4(b)(2). Natwest and
McDonald, both financial institutions, filed a joint motion to
dismiss. SDI, a steel company, filed its own motion to dismiss. All three
defendants argue that plaintiffs have failed to meet the various
requirements for stating a claim of securities fraud.
The facts set forth below are taken from the Amended Complaint
and are assumed to be true for purposes of this motion.
See Harris v. City of New York, 186 F.3d 243, 247 (2d Cir. 1999)
("On a motion to dismiss under Rule 12(b)(6), the court must
accept as true the factual allegations in the complaint, and draw
all reasonable inferences in favor of the plaintiff."). In 1995,
Nakornthai Strip Mill Public Company Limited ("NSM") decided to
construct an experimental mini-mill (the "Mini-Mill") near
Chonburi, Thailand. See Amended Complaint ¶ 9. The Mini-Mill
was to consist of: (1) a compact strip production thin-slab hot
mill (the "Hot Mill") for steel melting, refining, casting, and
hot rolling; (2) a facility (the "DRI facility") for the
production of direct reduced iron ("DRI"), which would be used
along with steel scrap as the raw material for making steel; and
(3) downstream processing facilities for the production of
high-quality pickled and oiled, cold-rolled, galvanized, and other
value-added steel products (the "Finishing Facilities"). See id.
The design of the Mini-Mill was experimental, incorporating new
and unproven technology. See id. The person who persuaded NSM to
construct the Mini-Mill — John W. Schultes (then an
employee of U.S. Steel) — had never built or operated a
mini-mill and only had participated in a feasibility study of the
mini-mill concept. See id.
NSM initially obtained financing for the Mini-Mill from the
Chairman of its Board of Directors, Sawasdi Horrungruang, and a
group of Thai banks. See id. ¶¶ 9, 10. When those sources of
financing dried up, due in part to an economic downturn in
Thailand in 1997, Schultes approached defendant McDonald, an
investment bank with particular expertise in the steel industry;
McDonald agreed to help NSM raise funds in the United States.
See id. ¶ 10.*fn1 McDonald then approached NatWest to become the
lead underwriter. See id. ¶ 11.*fn2
NatWest and McDonald were two of the four initial purchasers of
the Notes, which were distributed in a private placement offering
pursuant to Rule 144A, 17 C.F.R. § 230.144A. See id. ¶ 1. NatWest
and McDonald worked together to market the Notes to institutional
investors, including plaintiffs. See id. ¶ 11. As part of this
marketing effort, NatWest and McDonald prepared an Offering
Memorandum. See id. McDonald prepared detailed slides that were shown
during "road shows." See id. Employees of defendants, including a
McDonald employee named Gary Heasley, actively participated in these
road shows. See id.
McDonald recognized that it needed to have a well-regarded
mini-mill operator serve as a technical advisor to NSM, in order to
induce investors to purchase the Notes. See id. ¶
12. McDonald originally enlisted the help of Nucor Corporation
("Nucor"), which withdrew from the project in October 1997. See
id. McDonald then turned to SDI, the only other mini-mill
operator with the required experience.
See id. Rather than limiting its role to technical advisor, SDI
agreed to become a managing owner of NSM. See id. In exchange
for its participation and promised services, SDI was given shares
representing 10% of the equity in NSM, an annual fee of $2,000,000
(with the first payment made on March 12, 1998), a one-time incentive
fee of $1,300,000 (to be paid no later than March 12, 1999), and a
license to use the NSM technology. See id.
Keith Busse, the CEO of SDI, attended and actively participated
in the road shows. See id. Busse endorsed NSM management,
especially Schultes, and touted the design of the NSM mill as
"A." Id. In addition, Busse affirmed and reiterated the
following representations made by NatWest and McDonald employees:
(1) SDI had verified NSM's concept and operating assumptions; (2)
SDI would be a "managing owner" of NSM; (3) SDI was in "complete
control" of all of NSM's operations (along with McDonald and
other strategic equity investors); and (4) NSM was using
technology that had proven successful at SDI's facilities.
In mid-to-late February 1998, Robert Sherman, an agent and
employee of NatWest, contacted Thomas Mullen, an agent and
employee of plaintiffs, seeking an opportunity to pitch the
Notes. See id. ¶ 13. Mullen referred Sherman to Jack Mayer
and Selin Cebeci, representatives of plaintiffs; Mayer and Cebeci
agreed to meet with Sherman and other representatives of NatWest,
McDonald, and NSM. See id.
On February 26, 1998, Mayer and Cebeci met with Schultes,
representatives of NatWest, including Sherman, and
representatives of McDonald, including Gary Heasley and David
Stickler.*fn3 See id. ¶ 14. At this meeting, defendants
displayed a series of slides used at other road shows,
describing, discussing, and elaborating on the information
contained therein. See id. ¶ 16. In particular, defendants emphasized
the following points:
The Hot Mill, already fully constructed and through
start-up, was producing high quality steel. The proceeds
from the bond offering would be used only to provide
working capital for the facility to begin commercial
operations, and to construct the Finishing Facilities and
DRI Facility. See id. ¶ 16(a).
Under the terms of two "Off-Take Agreements" already in place,
two major German trading companies were obligated to take
100% of NSM's production for the first three years of
operation and 25% for each of five additional years. See
id. ¶ 16(b).
Technology used at NSM was state-of-the-art, proven technology
already employed by SDI. "Defendants emphasized and reiterated
the representations made by SDI at other road shows throughout
the country that SDI was a `managing owner' of NSM, that SDI had
verified the NSM concept and operating assumptions, that SDI had
analyzed and reviewed NSM's design and confirmed that it was
viable, state-of-the-art, and proven, and that SDI, as a
`strategic equity investor' along with defendant McDonald and
other non-Thai entities, was in complete control of operations,
including purchasing, sales, and finance." Id. ¶ 16(c).
NSM's Thai owners and management would not control the funds,
which would be controlled by an independent management company
consisting of representatives of defendants and other non-Thai
entities. "In particular, Gary Heasley, an employee of defendant
McDonald who defendants represented would become NSM's chief
financial officer following the completion of the
Offering, assured plaintiffs that he would be moving to
Thailand and that he would have complete control over
NSM's funds, thus obviating any concerns plaintiffs had
concerning mismanagement, theft, graft, self-dealing or
other issues relating to NSM's existing management." Id.
Scrap metal was available in sufficient quantities in
Thailand at highly advantageous rates. See id. ¶ 16(e).
The NSM mill had an advantageous location relative to the harbor
and a nearby Ford Motor Company plant, which NSM purportedly
would supply with high quality finished steel. See id. ¶
Plaintiffs were given several other documents as part of the
sales pitch. Both prior to and at the February 26 meeting,
NatWest gave plaintiffs several NatWest documents, with the
notation "for internal use only," that purported to be NatWest's
internal analysis of the valuation of the Notes. See id. ¶
15. Shortly after the February 26 meeting, and prior to
plaintiffs' investment decision, defendants gave them the final
Offering Memorandum, dated March 2, 1998. See id. Finally,
defendants gave plaintiffs a magazine published in the Fall of
1997 by the Indiana University-Purdue University Fort Wayne
Alumni Association. The magazine's cover story was titled "Hot
Metal Man — Keith Busse of Steel Dynamics." See id. ¶
17. The article discusses Busse's career in the steel industry,
focusing specifically on his expertise in the mini-mill industry.
See id. SDI provided copies of this magazine to defendants, who then
passed the magazine along to prospective purchasers.*fn4 See id.
After reviewing and relying upon the written materials provided
to them, as well as the oral representations made by defendants,
"plaintiffs together purchased $15.5 million in principal value
of 12% NSM Senior Steel Mortgage Notes due 2006."
Id. ¶ 18. This purchase took place on or about March 2, 1998.
On August 24, 1998, SDI's counsel, Robert S. Walters, sent a
memorandum to NSM regarding serious problems with the Mini-Mill
(the "Walters memo"). See id. ¶ 19. The Walters memo
"concluded, among other things, that `the management and
operational problems at the Mill are so pervasive and fundamental
that, coupled with the further deterioration of the steel markets
in Asia and the enormous debt load that NSM is now carrying, it
is doubtful that NSM can survive under the present
circumstances.'" Id. (quoting Walters memo). In addition, the
Walters memo "asserted that the representations in certain
documents to be filed with the SEC, which included the
representations made in the Offering Memorandum, were
`fundamentally incorrect and misleading,' and `convey the
impression of a Mill that, although facing substantial debt and
start-up uncertainties, is basically sound, with reasonable
prospects for success.' [The Walters memo] stated that this `does
not appear to be justified under the circumstances.'" Id.
(quoting Walters memo).
The Walters memo also detailed a number of problems at the
Mini-Mill, "the majority of which were problems known to the
defendants at the time of the offering and fundamentally
inconsistent with the representations made by the defendants
concerning various aspects of the project." Id. ¶ 20. These
"`The management team is not credible, . . . and . . .
requires a major overhaul." Id. ¶ 20(a) (quoting Walters memo).
"`Financial controls are woefully inadequate; poor accounting
practices abound; checks get written and invoices get paid
without appropriate justification, documentation or signatures;
industry intelligent financial statements cannot be
realistically produced; assets and inventories are valued
above market; and accurate forecasting tools are not
available.'" Id. ¶ 20(b) (quoting Walters memo).
"`Scrap controls are non-existent to poor; quality scrap in the
region is non-existent; and the prices charged by scrap vendors
are outrageous relative to the purported grade. . . . There is
also an enormous dollar value of useless scrap tied up on the
ground.'" Id. ¶ 20(c) (quoting Walters memo).
"`It would appear that the scrap bay cranes cannot adequately
support the volume of raw materials required for the ConSteel
process. Additionally, the scrap bay crane scales do not
correctly reflect the weight of material delivered to the
ConSteel feeding system. Consequently, the proper operation of
the electric arc furnace cannot be maintained.'" Id. ¶ 20(d)
(quoting Walters memo).
"`The single EAF melting battery [electric arc furnace],
with the ConSteel feeding system, is inadequate and will
not deliver the projected tonnages that are represented.
Assuming the correction of certain design deficiencies,
and given the limitation that the furnace cannot be
conventionally charged, it would appear that, even under
optimal operating circumstances, an annual output tonnage
of perhaps 800,000-900,000 tons is more realistic. . . .
[I]t may eventually be necessary to add a second,
conventional, furnace battery in order to provide the
necessary tonnage to properly support the caster and to
better spread the tremendous fixed costs and carrying
charge of the overall Mill.'" Id. ¶ 20(e) (quoting
"`Theft, graft, and corruption need to be seriously
investigated. . . . SDI suspects, but does not have the mandate
or the resources to try to establish, that "sweetheart" deals,
"commissions," and other serious contracting and payment
practices have resulted or continue to result in a material
amount of waste.'" Id. ¶ 20(f) (quoting Walters memo).
"`NSM Management Co. is not operating the way it was envisioned
and still does not have its full complement of members,'
resulting in an authority vacuum." Id. ¶ 20(g) (quoting
SDI did not send the Walters memo to plaintiffs or other
purchasers. See id.
On September 24, 1998, Enron Corp., which had purportedly agreed
to develop an electric power plant in connection with the DRI
facility, presented a report to the NSM Management Company and the
NSM Board (the "Enron Report"). See id. ¶ 21. The Enron Report
"documented the substantial use of proceeds [from the offering] in
ways not disclosed in the Offering Memorandum and a substantial
shortage of funds necessary to complete the DRI and Finishing
Facilities." Id. The Enron Report was not provided to plaintiffs or
other investors. See id.
Soon after the Enron Report, NSM's Board asked for and received
Schultes' resignation. See id. NSM bondholders were subsequently
notified of this resignation in a conference call.
See id. ¶ 22. SDI then invited bondholders to attend a
meeting at its headquarters on October 13, 1998. See id. Selin
Cebeci and Burton Weinstein participated by telephone on behalf
of plaintiffs. See id. At that meeting, Keith Busse, the CEO of
SDI, "provided information to the investors which revealed that
the defendants' representations made prior to the offering were
false and misleading, including the fact that the mill had never
produced high quality steel." Id.
In a letter dated December 30, 1998, Busse notified NSM and NSM
Management Company that SDI was terminating its licensing and
advisory agreements with NSM (the "Busse Letter"). See id. ¶
23. In his letter, Busse "noted that SDI had found a `far less
complete mill, with serious design flaws, without the wherewithal
to complete the project as represented and, even if completed as
represented, without the capacity to produce the output upon
which the financial projections were predicated.'" Id. (quoting
Busse Letter). Busse did not circulate his letter to plaintiffs
or other NSM bondholders. See id.
"Since December 1998, the mill has been shut down; efforts to
construct the DRI facilities have been abandoned; there are
insufficient funds remaining to complete construction of the DRI
and Finishing Facilities; a default has been declared
by the bondholders; and there are no present restructuring plans
or any realistic prospects for restructuring." Id. ¶ 24.
Gabriel Capital and Ariel Fund sued NatWest, McDonald, and SDI,
filing their initial Complaint on October 12, 1999, and serving
their Amended Complaint on November 5, 1999. In their Amended
Complaint, plaintiffs allege that defendants made a number of
false and misleading statements concerning: (1) the status of the
Hot Mill; (2) the design of the Mini-Mill; (3) the ability of NSM
to secure an adequate supply of scrap; (4) the "Off-Take
Agreements; " (5) the management of NSM; and (6) the use of the
proceeds of the offering. See Amended Complaint ¶¶ 25-37.
Plaintiffs also pled justifiable reliance, see id. ¶¶ 38-40,
scienter, see id. ¶¶ 41-46, and causation, see id. ¶ 47.
All three defendants have moved to dismiss the Amended Complaint
pursuant to Rules 9(b) and 12(b)(6). NatWest and McDonald filed a
joint motion to dismiss, while SDI filed its own motion.
A. Applicable Legal Standards
Dismissal of a complaint for failure to state a claim pursuant to
Rule 12(b)(6) is proper only where "it appears beyond doubt that
the plaintiff can prove no set of facts in support of his claim
which would entitle him to relief." Harris v. City of
New York, 186 F.3d 243, 247 (2d Cir. 1999); see also Cooper v.
Parsky, 140 F.3d 433, 440 (2d Cir. 1998) ("The task of the court
in ruling on a Rule 12(b)(6) motion is merely to assess the legal
feasibility of the complaint, not to assay the weight of the
evidence which might be offered in support thereof.") (quotation
marks and citation omitted). Thus, to properly rule on such a
motion, the court must accept as true all material facts alleged
in the complaint and draw all reasonable inferences therefrom in
the nonmovant's favor. See Harris, 186 F.3d at 247.
Nevertheless, "[a] complaint which consists of ...