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AIG GLOBAL SECURITIES LENDING v. BANC OF AMERICA SECURITIES

March 31, 2003

AIG GLOBAL SECURITIES LENDING CORP., AS LENDING AGENT FOR CERTAIN AFFILIATED LENDERS, AIG LIFE INSURANCE COMPANY, ALLSTATE LIFE INSURANCE COMPANY, BANK LEUMI USA, BAYERISCHE LANDESBANK, NEW YORK BRANCH, FIRST FLORIDIAN AUTOMOBILE AND HOME INSURANCE COMPANY, FIRST TRENTON INDEMNITY COMPANY, HALIFAX PLC, INTERNATIONAL FINANCE CORPORATION, THE PREMIER INSURANCE COMPANY OF MASSACHUSETTS, SAFECO LIFE INSURANCE COMPANY, SOCIETE GENERALE, AS MANAGER FOR CERTAIN FUNDING LIMITED, THE TRAVELERS INDEMNITY COMPANY AND THE TRAVELERS INSURANCE COMPANY, PLAINTIFFS AGAINST BANC OF AMERICA SECURITIES LLC, AND FIRST UNION SECURITIES, INC. DEFENDANTS.


The opinion of the court was delivered by: John G. Koeltl, United States District Judge

OPINION AND ORDER

This is an action charging securities fraud. The plaintiffs purchased securities in two private offerings of asset-backed securities. The securities were backed by consumer installment contracts entered into by The Heilig-Meyers Furniture Company ("Heilig-Meyers"), a speciality retailer of home furnishings that earned substantial revenues by selling furniture through fixed-term, fixed-payment installment sales contracts. After Heilig-Meyers declared bankruptcy, the plaintiffs in this action sued the two firms from which they purchased the securities and alleged, among other things, securities fraud. The defendants have now moved to dismiss the Complaint.

The plaintiffs are AIG Global Securities Lending Corporation ("AIG"); AIG Life Insurance Company ("AIG Life"); Allstate Life Insurance Company ("Allstate Life"); Banc Leumi USA ("Banc Leumi"); Bayerische LandesBank, New York Branch ("Bayerische LandesBank"); First Floridian Automobile and Home Insurance Company ("First Floridian"); First Trenton Indemnity Company ("First Trenton"); Halifax PLC ("Halifax"); International Finance Company ("IFC"); The Premier Insurance Company of Massachusetts ("Premier"); SAFECO Life Insurance Company ("SAFECO Life"); Societe Generale; The Travelers Indemnity Company ("Travelers Indemnity"); and The Travelers Insurance Company ("Travelers Insurance"), (collectively the "plaintiffs"). The defendants are Banc of America Securities, LLC ("Banc of America") and First Union Securities, Inc. ("First Union") (collectively the "defendants"). The plaintiffs have alleged claims under both the federal securities laws and the New York State common law, arising out of the allegedly false and misleading statements and omissions made in Offering Memoranda and other documents that were used to promote, market and sell the securities to the plaintiffs. The plaintiffs assert four causes of action: (1) violations of § 10b of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (Count 1); (2) violations of § 12(a)(2) of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § 771 (a)(2) (Count 2); (3) common law fraud and deceit (Count 3); and (4) negligent misrepresentation (Count 4).*fn1

The defendants now move to dismiss the Complaint pursuant to Fed.R.Civ.P. 12(b)(6) and Fed R. Civ. P. 9(b) arguing, that with respect to the claim under § 10(b) and Rule 10b-5, the plaintiffs have failed to plead fraud with specificity as required by Rule 9(b) and the Private Securities Litigation Reform Act ("PSLRA"). The defendants also argue that the § 12(a)(2) claims must be dismissed because § 12(a)(2) applies only to public, not private, offerings. Finally, the defendants argue that the plaintiffs' common law claims must also be dismissed for failure to allege fraud with particularity.

I.

On a motion to dismiss, the allegations in the Complaint are accepted as true. See Grandon v. Merrill Lynch & Co., 147 F.3d 184, 188 (2d Cir. 1998). In deciding a motion to dismiss, all reasonable inferences are drawn in the plaintiff's favor. See Gant v. Wallingford Bd. of Educ., 69 F.3d 669, 673 (2d Cir. 1995); Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989). The Court's function on a motion to dismiss is "not to weigh the evidence that might be presented at trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). Therefore, the defendants' motion to dismiss should only be granted if it appears that the plaintiffs can prove no set of facts in support of their claim that would entitle them to relief. See Swierkiewicz v. Sorema, N.A., 122 S.Ct. 992, 998 (2002); Conlev v. Gibson, 355 U.S. 41, 45-46 (1957); Grandon, 147 F.3d at 188; Goldman, 754 F.2d at 1065.

In deciding the motion, the Court may consider documents that are referenced in the Complaint, documents that the plaintiffs relied on in bringing suit and that are either in the plaintiffs' possession or the plaintiffs knew of when bringing suit, or matters of which judicial notice may be taken. Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002); see also Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir. 1993); Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d Cir. 1991); Vtech Holdings Ltd. v. Lucent Techs., Inc., 172 F. Supp.2d 435, 437 (S.D.N.Y. 2001). "[W]hen a plaintiff chooses not to attach to the complaint or incorporate by reference a document upon which it relies and which is integral to the complaint, the court may nonetheless take the document into consideration in deciding the defendant[s'] motion to dismiss, without converting the proceeding to one for summary judgment." Int'l Audiotext Network, Inc. v. AT&T Co., 62 F.3d 69, 72 (2d Cir. 1995) (internal citation and quotation marks omitted); see Yucyco, Ltd. v. Republic of Slovenia, 984 F. Supp. 209, 215 (S.D.N.Y. 1997). Accordingly, the following facts alleged in the Complaint are accepted as true for the purposes of this motion.

Heilig-Meyers, one of the nation's largest publicly held speciality retailers of home furnishings, has its corporate headquarters in Richmond, Virginia. (Compl. ¶ 20.) As of June 30, 1997, Heilig Meyers operated approximately 1,295 retail stores in 38 states, the District of Columbia and Puerto Rico. (Id.) Two years later, as of June 30, 1998, prior to its Chapter 11 Bankruptcy filing, it operated 873 stores in 29 states, the District of Columbia and Puerto Rico. (Id.)

An important part of Heilig-Meyers' operating strategy depended on the use of installment sales, whereby it offered extended payment terms on most merchandise purchased under fixed-term, fixed-payment installment sales contracts (the "Contracts"). (Compl. ¶ 21.) These Contracts provided for the payment by the obligor of finance charges plus a specific total amount of payments equal to the amount financed, and those amounts were payable in substantially equal monthly installments. (Id.) Each contract was secured by the merchandise purchased from the store. (Id.) These Contracts constituted a substantial portion of Heilig-Meyers' sales. (Id.) As of December 31, 1997 the aggregate amount owed under these Contracts was $957,741,000, of which $876, 148, 000 was from principal, while $81,593,000 was from unearned finance charges. (Compl. ¶ 23.)

In February, 1997 the Heilig-Meyers Master Trust (the "Trust") was formed in order to hold a substantial number of these installment sales Contracts and also in order to issue multiple series of asset backed securities. (Compl. ¶ 22.) The Contracts which the Trust held originated and were held at various Heilig-Meyers stores. (Compl. ¶ 23.) The Trust was formed pursuant to a Master Pooling and Servicing Agreement, dated February 26, 1997, and named the MacSaver Funding Corporation as transferor, Heilig-Meyers as servicer, and First Union National Bank, an affiliate of First Union, as trustee. (Compl. ¶¶ 25, 29.) The transferor was responsible for transferring and assigning the installment sales Contracts to the Trust. (Compl. ¶ 27.) The servicer was responsible for all aspects of servicing and administering the Contracts, a task that included billing obligors, collecting payments due under the Contracts, communicating with obligors, investigating and following up on payment delinquencies and defaults, conducting late-stage collections on delinquent and defaulted accounts, and maintaining internal records and databases. (Compl. ¶ 28.) The trustee was responsible for preserving the Trust and its assets. (Compl. ¶ 29.) The trustee's responsibilities included monitoring the servicer and serving as a "backup servicer" that would stand ready and able to ensure a smooth transition to a new servicer should the existing servicer cease to perform its duties. (Id.)

The Trust issued three series of asset backed securities ("the Certificates") during 1997 and 1998. (Compl. ¶ 30.) Each Certificate represents an undivided interest in the Trust, and conferred on a Certificate holder the right to receive, as payments of interest and principal on the Certificates, a portion of the collections on the Contracts, in accordance with the terms and conditions contained in the Pooling and Servicing Agreement and other documents. (Compl. ¶ 30.)

When the Trust issued Certificates, they were first purchased by First Union and Banc of America, and those companies served as underwriters, meaning they purchased the securities for the purpose of promoting, marketing, offering and selling them to investors, including the plaintiffs. (Compl. ¶ 1.) The basis of this lawsuit is the alleged fraud committed by First Union and Banc of America in their role as underwriters of the Heilig-Meyers asset backed securities. (Id.)

In February, 1997 the Trust issued a series of securities called the Variable Funding Certificates, Series 1997-1 ("Series 1997-1 Certificates"). (Compl. ¶ 31.) There were two classes of Series 1997-1 Certificates, Class A-1 and Class A-2, which were purchased for an aggregate original principal amount of $592,000,000. (Id.) First Union purchased all of the Class A-1 Certificates, while Banc of America purchased all of the Class A-2 Certificates. (Id.) At the time of the Trust's two subsequent offerings, which took place in 1998, Banc of America and First Union continued to hold the Series 1997-1 Certificates, and with the proceeds that they eventually received from the 1998 offerings, First Union and Banc of America repaid a significant amount of the principal they had invested in purchasing the Series 1997-1 Certificates. (Id.)

In February 1998 the Trust issued another series of certificates ("Series 1998-1 Certificates") that were divided into four classes of interests, namely (1) Class A 6.125% Asset Backed Certificates, in the aggregate principal amount of $307,000,000; (2) Class B 6.35% Asset Backed Certificates, in the aggregate principal amount of $61,000,000; (3) an interest referred to as the collateral indebtedness interest, having an initial principal balance of $32,000,000; and (4) Class D Asset Backed Certificates, in the original principal amount of $35,000,000. (Compl. ¶ 32.) The defendants purchased all of the 1998-1 Class A and Class B Certificates and resold those Certificates to qualified institutional investors, including the plaintiffs, as part of the 1998-1 Offering ("1998-1 Offering") which began on February 20, 1998. (Compl. ¶ 33.)

The defendants, First Union and the Banc of America, served as the underwriters of the 1998-1 Offering, which sold the Class A and Class B 1998-1 Certificates, and in connection with that offering, drafted a formal Offering Memorandum (the "1998-1 Offering Memorandum"). (Compl. ¶ 36.) In addition, the defendants also prepared summary charts and memoranda containing information about the Offering, the Certificates, the Trust, the Pooling and Servicing Agreement, Heilig-Meyers and the Contracts. (Compl. ¶ 37.) This information, together with information in telephone conferences, was provided to the plaintiffs in connection with the 1998-1 Offering. (Id.)

In August, 1998 the Trust issued another series of certificates ("Series 1998-2 Certificates") that were also divided into four classes of interests, namely (1) Class A Floating Rate Asset Backed Certificates, in the aggregate original principal amount of $230,000,000; (2) Class B Floating Rate Asset Backed Certificates, in the aggregate original principal amount of $50,000,000; (3) an interest referred to as the collateral indebtedness interest, having a principal balance of $31,300,000, and (4) Class D Asset Backed Certificates, in the aggregate original principal amount of $27,055,000. (Compl. ¶ 39.) As with the 1998-1 Offering, the defendants purchased all of the Class A and Class B Series 1998-2 Certificates and resold them in an offering (the "1998-2 Offering") starting on August 20, 1998 to qualified institutional investors, including the plaintiffs. (Compl. ¶ 40.)

The defendants served as the underwriters of the 1998-2 Offering, which sold the Class A and Class B 1998-2 Certificates, and in connection with that offering, drafted a formal Offering Memorandum (the "1998-2 Offering Memorandum"). (Compl. ¶ 43.) In addition, the defendants also prepared summary charts and memoranda containing information about the Offering, the Certificates, the Trust, the Pooling and Servicing Agreement, Heilig-Meyers and the Contracts. (Compl. ¶ 44.) This information, together with information in telephone conversations, was provided to the plaintiffs in connection with the 1998-2 Offering. (Id.)

The various plaintiffs purchased Certificates from one or both of the defendants in connection with one or both of the 1998-1 and 1998-2 Offerings. (Compl. ¶¶ 46-60.)

In early August 2000, Banc of America sought to reassure the Class A and B Certificate holders about the condition of their investments should Heilig-Meyers file for bankruptcy. (Compl. ¶ 62.) The reassurances included statements that represented that in the event of a bankruptcy, First Union Bank, as trustee, was a "warm" back-up servicer, willing and able to assume the role of servicer should Heilig-Meyers cease to perform that function. (Id.) On August 2, 2000 Bank of America issued a public report indicating that even if Heilig-Meyers were to file for bankruptcy, the Class A and Class B Certificates would be paid down after 13 months, a figure based on the then current rate of collection of the Contracts. (Compl. ¶ 63.) The report also asserted that the collection history of the Trust had been sound and stable and that the 1998-1 and 1998-2 Offerings had been structured so as to withstand a significant deterioration in the monthly collection rate. (Id.)

On or about August 10, 2000, Heilig-Meyers informed the trustee that Heilig-Meyers intended to stop performing its role as servicer during the week of August 14, 2000. (Compl. ΒΆ 64.) On August 14, 2000, First Union Bank, the trustee, successfully enjoined, for a period of three ...


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