technology. See id. NSM initially obtained financing for the
Mini-Mill from Horrungruang and a group of Thai banks. See id.
¶ 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. See id. McDonald agreed to help NSM raise
funds in the United States. See id. The SAC states that "McDonald,
in turn, approached defendant NatWest to become the lead underwriter
on the NSM expansion project financing." Id. ¶ 11.
2. The various NatWest defendants
The SAC uses "NatWest" to refer collectively to NatWest Finance,
NatWest Capital, and NatWest Bank. See id. ¶ 6(f). NatWest Bank, an
English corporation with its principal place of business in London, is
engaged in a variety of banking, financial and related activities in
numerous countries, including the United States. See id. ¶ 6(a).
NatWest Bank, acting directly and through its agents and subsidiaries,
served as lead underwriter of the Note offering. See id.
NatWest Capital, an English corporation with its principal place of
business in London, is a subsidiary of NatWest Bank. See id. ¶ 6(b).
The SAC alleges, on information and belief, that NatWest Capital "has no
on-going or regular business operations, but is a corporate form used by
NatWest Bank from time to time to engage in high yield financing
transactions and other capital market activities." Id. NatWest Bank "used
[NatWest Capital] to pose as an `initial purchaser' of the Notes and
provided (or was prepared to provide) the funds to [NatWest Capital] for
this purpose." Id.
NatWest Finance, a Delaware corporation with its principal place of
business (prior to April 1999) in New York, is a wholly-owned subsidiary
of NatWest Group Holdings Corporation ("NatWest Group Holdings"). See id.
¶ 6(c).*fn1 Natwest Group Holdings, in turn, is a wholly-owned
subsidiary of NatWest Bank. See id. NatWest Bank and its subsidiaries are
organized into six main business sectors, one of which is NatWest
Markets. See id. ¶ 6(d). NatWest Finance is one of the businesses in
NatWest Markets, which NatWest Bank describes as its corporate and
investment banking arm. See id. In connection with the Note offering,
NatWest Bank "used [NatWest Finance] to assist it in performing an
investigation of the creditworthiness of NSM, and to market and sell the
Notes to the plaintiffs and other investors." Id.
According to plaintiffs, NatWest Finance is a mere conduit for —
and functions solely to achieve the purposes of — NatWest Bank. See
id. ¶ 6(e). NatWest Finance did not have the authority on its own to
act as the underwriter of the Notes, nor did it have sufficient capital
to purchase the Notes. See id. NatWest Finance ultimately received
approval to act as an underwriter from the Director of NatWest Bank's
Group Risk Department and the Chief Operating Officer of NatWest Bank,
who also has the title of Chief Executive of Group Operations. See id. In
giving its approval, NatWest Bank "limited the after-market trading
permitted in the Notes and required that the bonus pool for the personnel
involved in the transaction be reduced by any losses incurred in the Note
The SAC alleges that, in connection with the marketing, sale and
underwriting of the Notes, NatWest Finance, NatWest Capital and NatWest
Bank "operated as a single integrated enterprise and their business
operations were so intermingled as to substantially disregard the
corporate separation between these entities." Id. ¶ 6(f).
The materials presented by NatWest when it initially offered its
services to NSM referred interchangeably to "NatWest High Yield
Group," "NatWest Markets," "Gleacher NatWest," and "NatWest Group,"
which was described as "`one of the largest and best capitalized
[sic] financial institutions in the world.'" See id.*fn2 In addition,
an August 5, 1997 engagement letter to NSM was sent on behalf of
"Gleacher NatWest Inc. and its affiliates." Id. Three weeks later,
NatWest Capital sent a letter to NSM indicating that it was "highly
confident of [its] ability to sell or place $350 million" of the
Notes. Id. Finally, David Wheeler, one of the principal actors in
the relevant transactions, represented to plaintiffs that he was
an agent of NatWest Finance but was identified on his business card
as the Senior Vice President of Investment Banking for NatWest Bank.
See id. Similarly Max Holmes, who identified himself as a Managing
Director of NatWest Finance, signed an acknowledgment at the closing
on behalf of NatWest Capital. See id.
3. Alleged misrepresentations concerning SDI's role
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 and slides that were shown during "road shows." See id. 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, who agreed to meet with Sherman and other representatives of
NatWest, McDonald, and NSM. See id.
a. The road shows
On or about February 23, 1998, Mayer and Cebeci met with Schultes
(representing NSM), Sherman, Wheeler and Ponte Singh (representing
NatWest), and Gary Heasley (representing McDonald). See id. ¶ 14. At
this meeting (the "February 23 Road Show"), defendants displayed a series
of slides used at other road shows, describing, discussing, and
elaborating on the information contained therein. See id. ¶ 16. The
Opinion details the allegedly fraudulent statements concerning the
Mini-Mill made by defendants at the February 23 Road Show. See Opinion,
94 F. Supp.2d at 496-97.
Defendants also discussed the role of SDI at the Mini-Mill during the
February 23 Road Show. See SAC ¶ 17. They described the pre-eminent
position of SDI in the mini-mill industry and the key role played by
Keith Busse, the CEO of SDI, in starting up and managing that company.
See id. In addition, plaintiffs were given a copy of a magazine article
entitled "Hot Metal Man," which described Busse as the person who had
developed the mini-mill concept and made it successful. See id. Wheeler,
Schultes and Heasley told plaintiffs that Busse had participated in other
road shows and was available by telephone if plaintiffs wanted to speak
directly with him. See id. Finally, Wheeler, Schultes and Heasley
reiterated to plaintiffs a number of statements made by Busse at other
road shows*fn3, attributing those statements to Busse and/or SDI. See
id. The SAC provides specific examples of these statements. See id.
b. SDI's actual role
The SAC alleges that, through its comments at other road shows and its
representations communicated to plaintiffs at the February 23 Road Show,
SDI misled investors as to its actual role in the Mini-Mill and its
assessment of the Mini-Mill's capability. See id. ¶ 12(k). In
November 1997, SDI made clear to NatWest and McDonald that it could
assume only a limited role in helping NSM's management. See id. ¶
12(o). At a meeting of SDI's board of directors on November 12, 1997,
Stickler, Heasley, Wheeler, Holmes, and Schultes all acknowledged that
SDI: (1) would not have a significant manpower commitment; (2) would not
have a permanent or semi-permanent presence in Thailand; and (3) would
have a limited, technical and advisory relationship with NSM. See id.
¶ 12(p). On November 18, 1997, counsel for McDonald forwarded to
counsel for SDI a draft management agreement entitled the "Management and
Technical Assistance Agreement." See id. ¶ 12(q). Counsel for SDI
responded that the word "management" in the title was an overstatement of
SDI's role and sought to have the title changed to "Advisory Services
Agreement." See id. ¶¶ 12(r)-(s). In January 1998, counsel for
McDonald told counsel for SDI that it was too late to change the name of
the agreement because of the many references to the "Management and
Technical Assistance Agreement" in the Offering Memorandum. See id.
¶ 12(t). The preliminary Offering Memorandum was produced in
February and the final Offering Memorandum was produced in March, with
the name of the agreement changed to "Management Advisory and Technical
Assistance Agreement." See id. ¶¶ 12(u)-(v).
The terms of the Management Advisory and Technical Assistance Agreement
(the "SDI Agreement"), which were being negotiated as the road shows took
place, contradict the representations being made by Busse. See id. ¶
12(w). In particular, the SDI Agreement contains the following
Nothing in the agreement shall be deemed to constitute
either party as a "joint venturer or partner of the other
SDI did not intend "to maintain any regular staff
presence or any other permanent or semi-permanent
presence or establishment at NSM's plant in Thailand.
. . ."
The agreement stated that "SDI does not know whether, and
has made no representations to NSM, express or implied,
to the effect that SDI Technology or SDI's techniques and
culture are appropriate for or best suited to NSM's
The agreement stated that no one would make any
misleading statement "regarding the relationship between
SDI and NSM, or state, suggest or imply that SDI manages
NSM, exerts management influence or control over NSM,
[or] supervises the operations of NSM . . ."
The agreement provided that "SDI has undertaken no
independent study or analysis of NSM's proposed
operations, or of its Mill, its proposed Products, its
technology and equipment, its management structure, the
nature of its workforce, its labor relations, the sources
and nature of its raw materials, its markets, its
transportation system, or the impact of its Thai culture,
legal system, or tax laws upon its proposed business or
upon Mill operations."
The SAC alleges that NatWest, McDonald and SDI misrepresented SDI's
role in the Mini-Mill because they knew that they would not be able to
obtain additional financing if NSM's management was in control of the
project. See id. ¶¶ 12(i)-(j). "Busse was aware that SDI's
involvement was critical to the success of the offering and knew or
should have known that his comments on SDI's role in the management of
NSM and its review of the Mill would be repeated by the other defendants
at the road shows Busse did not attend." Id. ¶ 12(j). Similarly,
Busse acquiesced after his suggested changes to the title of the SDI
Agreement were rejected, even though he knew that the other defendants
wanted to keep the original title in order to mislead potential
investors. See id. ¶ 12(r).
c. The Offering Memorandum
NatWest and McDonald prepared an Offering Memorandum for prospective
investors. See id. ¶ 11. The Offering Memorandum contained a
description of SDI's role at the Mini-Mill and a summary of the SDI
Agreement. See id. ¶ 12(x). The SAC alleges that "SDI participated
in drafting and editing these portions of the Offering Memorandum, and
permitted them to convey a misleading impression of SDI's role." Id.
Counsel for SDI reviewed drafts of the Offering Memorandum and submitted
extensive handwritten notations and editorial comments. See id. Some of
SDI's comments were incorporated into the Offering Memorandum and others
were not. See id. SDI also was given the opportunity to review the
Offering Memorandum before it became final. See id. ¶ 12(y).
"Through this process, SDI caused the Offering Memorandum to mislead the
plaintiffs about the actual level of involvement that SDI intended to
have with NSM." Id.
d. The slides
NatWest and McDonald also prepared a series of slides that were shown
to prospective investors during the road shows. See id. ¶ 11. The
SAC alleges that these slides contained the following misrepresentations
made by SDI:
"NSM will be the most advanced, and one of the lowest
costs flat-rolled steel production companies in the
"As a managing owner, [SDI] will have the second largest
equity stake in NSM with a 10% ownership position;"
"SDI will provide managerial and technical support
under a 10-year Management Agreement;" and "Concept
and operating assumptions verified by [SDI]."
Id. ¶ 12(j). In their brief in opposition to SDI's motion to
dismiss, plaintiffs allege for the first time that Busse reviewed the
slides. See Plaintiffs' Memorandum of Law in Opposition to Defendant
Steel Dynamics, Inc.'s Motion to Dismiss the Second Amended Complaint
("Pl. SDI Opp. Mem.") at 2-3.*fn4
4. Sale of the Notes and its aftermath
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." SAC ¶ 18. This purchase took place
on or about March 2, 1998. See id.
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 Opinion discusses in detail the contents
of the Walters Memo. See Opinion, 94 F. Supp.2d at 497-98. SDI did not
send the Walters Memo to plaintiffs or other purchasers. See SAC ¶
On September 24, 1998, Enron Corp. 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
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.
On October 13, 1998, SDI invited bondholders to attend a meeting at its
headquarters. See id. Selin Cebeci and Burton Weinstein participated by
telephone on behalf of plaintiffs. See id. At that meeting, Busse
"provided information to the investors which revealed that the
defendants' representations made prior to the offering were false and
misleading." Id. The SAC details the statements made by Busse at the
October 13 meeting:
NSM Management Company did not have complete control of
NSM's operations. "Not only did they not understand
resource costs, or buy them in the right quantity, they
had no financial controls." Id. ¶ 22(a).
SDI never intended to play a significant role in the
management of NSM. "I think most of you probably
recognize that for legal and [inaudible] and some other
reasons, SDI's role in this transaction was really that
of an advisor, and most specifically, I think, that of a
technical advisor." Id. ¶ 22(b).
SDI had not verified the design of the Mini-Mill or its
operating assumptions. See id. ¶ 22(c).
The Hot Mill was not complete and through start-up and
was not ready to begin commercial operations. "It can't
operate. It doesn't have bricks and mortar, so to speak.
It doesn't have the daily ingredients to operate a mill."
Id. ¶ 22(d).
The Hot Mill was not producing and had not produced
quality steel. See id. ¶ 22(e).
The offering did not provide NSM with sufficient capital
to complete the DRI and Finishing Facilities and to
operate the Mini-Mill, a fact known at the closing. See
id. ¶ 22(f).
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.
B. Procedural History
On November 5, 1999, plaintiffs served an Amended Complaint on
defendants NatWest Finance, McDonald and SDI. On May 8, 2000, this Court
denied a joint motion by NatWest Finance and McDonald to dismiss the
Amended Complaint. See Opinion, 94 F. Supp.2d at 500-08. In that same
Opinion, SDI's motion to dismiss plaintiffs' claims against it for
federal securities and common law fraud, as well as conspiracy to commit
fraud, was granted but its motion to dismiss plaintiffs' claim for aiding
and abetting fraud was denied. See id. at 508-12. Finally, plaintiffs
were granted leave to amend the dismissed claims. See id. at 510-11.
On May 30, 2000, plaintiffs filed the SAC, which contains three changes
relevant to the pending motions. First, plaintiffs attempted to cure the
deficiencies in their claims against SDI. Second, plaintiffs added two
new defendants — NatWest Capital and NatWest Bank — and
alleged that those defendants acted as a single integrated
enterprise with existing defendant NatWest Finance. Third, plaintiffs
stated a claim against NatWest Bank as a controlling person within
the meaning of section 20 of the 1934 Act, 15 U.S.C. § 78t(a),
with respect to the activities of NatWest Finance and NatWest
Capital.*fn5 SDI, NatWest Capital and NatWest Bank now move to
dismiss the SAC pursuant to Rules 9(b) and 12(b)(6).
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, 186 F.3d at 247; 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 conclusory
allegations unsupported by factual assertions fails even the liberal
standard of Rule 12(b)(6)." De Jesus v. Sears, Roebuck & Co., 87 F.3d 65,
70 (2d Cir. 1996) (quotation marks and citation omitted).
A. Motion to Dismiss Filed by SDI
1. Section 10(b) claim Section 10(b) of the 1934 Act states:
It shall be unlawful for any person, directly or
indirectly, by the use of any means or instrumentality of
interstate commerce or of the mails, or of any facility
of any national securities exchange . . . [t]o use or
employ, in connection with the purchase or sale of any
security registered on a national securities exchange or
any security not so registered, any manipulative or
deceptive device or contrivance in contravention of such
rules and regulations as the Commission may prescribe as
necessary or appropriate in the public interest or for
the protection of investors.
15 U.S.C. § 78j(b). Rule 10b-5 sets forth specific practices that are
considered "manipulative or deceptive." See 17 C.F.R. § 240.10b-5.
Among other things, Rule 10b-5 provides that "[i]t shall be unlawful . .
. [t]o make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not misleading."
17 C.F.R. § 240.10b-5(b). To state a claim under section 10(b) and
Rule 10b-5, plaintiffs must allege that in connection with the purchase
or sale of securities: (1) defendants made a false material
misrepresentation or omitted to disclose material information; (2)
defendants acted with scienter; and (3) plaintiffs detrimentally relied
upon defendants' fraudulent acts. See Press v. Chemical Investment