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Briarwood Investments Inc. v. Care Investment Trust Inc.

March 4, 2009

BRIARWOOD INVESTMENTS INC., INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
v.
CARE INVESTMENT TRUST INC., F. SCOTT KELLMAN, ROBERT O'NEILL, AND FLINT D. BESECKER, DEFENDANTS.



Opinion and Order

In this putative class action alleging violations of §§ 11, 12(a)(2) and 15 of the Securities Act of 1933 based on claimed misleading statements in the corporate defendant's initial public offering documents, defendants move pursuant to Fed. R. Civ. P. 12(b)(6) to dismiss the amended complaint for failure to state a claim upon which relief can be granted.

For the reasons which follow, the motion is denied.

BACKGROUND

The facts set forth below, which are presumed to be true on this motion to dismiss, are drawn from the allegations of the amended complaint and the documents referenced therein. Defendant Care Investment Trust Inc. provides mortgage financing to companies operating healthcare-related facilities and it invests in healthcare-related real estate assets. See Amend. Compl. ¶¶ 7, 18. The individual defendants are Care's CEO (F. Scott Kellman), its CFO (Robert O'Neill), and a director on its board (Flint D. Besecker), each of whom signed the Registration Statement filed with the Securities and Exchange Commission ("SEC") in connection with Care's initial public offering ("IPO"). See id. ¶¶ 8-11.

The lead-plaintiffs prosecuting this case are investors who purchased Care common stock pursuant or traceable to the company's IPO, after which the value of Care's stock declined substantially. See ¶¶ 6, 48.

The IPO began on June 22, 2007, the same date on which Care's Prospectus, which forms part of the Registration Statement, became effective. See id. ¶¶ 1, 20. More than 15 million shares of Care common stock were sold to the public at $15.00 per share during the IPO, from which Care received about $210 million in net proceeds. See id. ¶ 20.

According to the Prospectus (at pp. 2-5, 9), Care's plan was to grow its business by using most of the IPO proceeds to acquire an initial portfolio of assets consisting of mortgage loans secured by healthcare facilities and, thereafter, to finance new investments by borrowing against or "leveraging" the assets in its portfolio.

The amended complaint alleges that the Registration Statement and Prospectus (collectively, the "Offering Documents") were negligently prepared and, as a result, omitted facts which rendered specified statements materially misleading.*fn1

It attacks the statements in the Prospectus (at p. 10) that:

We will use short-term financing, in the form of warehouse facilities. Warehouse lines are typically collateralized loans made to borrowers who invest in securities and loans and, in turn, pledge the resulting securities and loans to the warehouse lender. We are currently negotiating a warehouse facility with Column Financial Inc., an affiliate of Credit Suisse Securities, LLC, an affiliate of one of our underwriters, which we expect to be in place shortly after consummation of this offering. We are also currently negotiating a warehouse facility with UBS Real Estate Securities Inc., an affiliate of one of our underwriters, which we expect to be in place soon after consummation of this offering. There is no assurance, however, that we will be able to close these facilities on terms favorable to us, if at all.

The amended complaint claims that those statements were materially misleading because they:

. . . failed to disclose that the Company was experiencing significant difficulties securing warehouse lines on acceptable terms, and that -- at the time of the IPO -- it had only one lender to negotiate with as opposed to two lenders as represented in the Offering Documents. In the Offering Documents, Care Investment disclosed that it was separately negotiating a warehouse facility with Column Financial Inc. ("Column Financial") and UBS Real Estate Securities Inc. ("UBS Real Estate"), both of which are affiliates of certain underwriters of the IPO. At the time of the IPO, however, UBS Real Estate's commercial real estate securities group was nothing more than a shell and the group was virtually non-existent. Thus, the Company did not have two lenders lined up to provide warehouse facilities, but rather was struggling to convince a single lender to extend it a warehouse facility on favorable terms. This information was material because any delay in obtaining the financing would have a direct and adverse material impact on the Company's ability to provide financing to other companies in the healthcare industry, thereby delaying the Company's ability to leverage the capital raised in the IPO and hindering the Company's growth rate as a result. And, with only one potential lender available to the Company, the Company's ability to obtain a warehouse facility on favorable terms was drastically reduced.

Amend. Compl. ¶ 33.

The amended complaint alleges that the "Company's difficulties in securing warehouse facilities and other sources of funding were first disclosed to the public after the IPO in its Form 10-Q" issued on ...


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