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GABRIEL CAPITAL, L.P. v. NATWEST FINANCE

October 13, 2000

GABRIEL CAPITAL, L.P., A DELAWARE LIMITED PARTNERSHIP, AND ARIEL FUND LTD., A CAYMAN ISLANDS CORPORATION, PLAINTIFFS
V.
NATWEST FINANCE, INC., F/K/A GLEACHER NATWEST INC.; NATWEST CAPITAL MARKETS LIMITED; NATIONAL WESTMINSTER BANK PLC; MCDONALD INVESTMENTS INC., F/K/A MCDONALD — COMPANY SECURITIES, INC.; AND STEEL DYNAMICS INC., DEFENDANTS. NATWEST FINANCE, INC., THIRD-PARTY PLAINTIFF, V. JOHN W. SCHULTES, AND GABRIEL CAPITAL CORPORATION, AND SELIN CEBECI, AND JACK MAYER, AND EZRA MERKIN, AND JOHN DOES 1-50, THIRD-PARTY DEFENDANTS.



The opinion of the court was delivered by: Shira A. Scheindlin, United States District Judge.

    OPINION AND ORDER

On May 8, 2000, this Court denied a motion to dismiss filed by NatWest Finance and McDonald and granted in part and denied in part a motion to dismiss filed by SDI. See Gabriel Capital, L.P. v. NatWest Finance, Inc., 94 F. Supp.2d 491 (S.D.N.Y. 2000) (the "Opinion"). On May 30, 2000, plaintiffs filed their second amended complaint (the "SAC"). In the SAC, plaintiffs attempted to cure the deficiencies in their allegations against SDI and added claims against two new defendants-NatWest Capital and NatWest Bank. SDI, NatWest Capital and NatWest Bank all have moved to dismiss the SAC pursuant to Fed.R.Civ.P. 9(b) and 12(b)(6).

This case illustrates the tension between the heightened pleading requirements in securities fraud cases and the realistic limitations on the ability of plaintiffs to make specific factual allegations prior to the opportunity to obtain full discovery. Plaintiffs have filed a 61-page complaint containing a wealth of detailed allegations. While the length of a complaint alone is no guarantee of its adequacy, this complaint provides sufficient detail to state the claims it purports to plead. Common sense requires that courts remember the purpose of a pleading — to state a claim and provide adequate notice of that claim. A pleading is not a trial and plaintiffs are not required to marshal their evidence and sustain a verdict at this stage. To require further pleading by these plaintiffs would be a misguided exercise. As the sheer weight of this Opinion makes clear, I have studied plaintiffs' allegations and defendants' arguments in great detail. Plaintiffs have plead facts sufficient to establish each and every element of their claims and placed defendants on reasonable notice of those claims. This case now warrants full discovery.

I. BACKGROUND

A. Facts

Because the Opinion exhaustively summarized the allegations in the Amended Complaint, see Opinion, 94 F. Supp.2d at 495-98, I will discuss only those portions of the SAC relevant to the pending motions. All facts alleged in the SAC are assumed to be true. 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.").

1. General background

Nakornthai Strip Mill Public Company Limited ("NSM") owns a steel mill near Chonburi, Thailand. See SAC ¶ 9. In 1995, John W. Schultes, then an employee of U.S. Steel, persuaded Sawasdi Horrungruang, the Chairman of the Board of Directors of NSM, to construct a mini-mill (the "Mini-Mill") at the same site. See id. The design of the Mini-Mill was experimental, incorporating new and unproven 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 transaction." Id.

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 provisions:

Nothing in the agreement shall be deemed to constitute either party as a "joint venturer or partner of the other Party."
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 needs."
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."

Id.

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 world;"
"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 ¶ 19.

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 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.

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. ¶ 24.

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).

II. DISCUSSION

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 ...


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