Not what you're
looking for? Try an advanced search.
Buy This Entire Record For
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
NATWEST FINANCE, INC., F/K/A GLEACHER NATWEST INC.; NATWEST CAPITAL MARKETS LIMITED; NATIONAL WESTMINSTER BANK PLC; MCDONALD INVESTMENTS INC., F/K/A MCDONALD &MDASH; 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.
Gabriel Capital, L.P. ("Gabriel Capital") and Ariel Fund Ltd. ("Ariel
Fund") (collectively "plaintiffs") are suing defendants
NatWest Finance, Inc. ("NatWest Finance"), NatWest Capital Markets
Limited ("NatWest Capital"), National Westminster Bank PLC ("NatWest
Bank"), 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.
In addition, plaintiffs allege that NatWest Bank is 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. Finally, plaintiffs 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.
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
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
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
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.
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.
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."
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.
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 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.
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.
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 ...