Defendant Care Investment Trust Inc. filed a registration statement and prospectus with the Securities and Exchange Commission ("SEC") in connection with its initial public offering (the "Care IPO"). Defendants Kellman, O'Neill, and Besecker each signed the registration statement.
The issue on the defendants' motion for summary judgment is whether Care's registration statement and prospectus contained materially false or misleading statements, in violation of sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77k, 77l (a)(2), 77o, regarding Care's expectation of securing warehouse financing.
The following facts are not disputed, except where noted. Care Investment Trust is a real estate investment trust, managed by CIT Healthcare LLC, a wholly owned subsidiary of CIT Group Inc. ("CIT"). Care provides mortgage financing to healthcare-related facilities and invests in healthcare-related real estate assets. The individual defendants are former Managing Director and Head of Real Estate for CIT Healthcare and former Care CEO F. Scott Kellman, former CFO, Treasurer, and Secretary of Care Robert O'Neill, and former President of CIT Healthcare and current director on Care's board Flint Besecker. The lead plaintiffs are UNITE HERE National Retirement Fund and Norfolk County Retirement System, who are pursuing this claim on behalf of a putative class consisting of purchasers of stock in reliance on Care's IPO documents.
CIT decided to fund Care by warehouse financing (also known as a "warehouse facility" or "warehouse line"), which "is typically a form of short-term financing that is provided by one or more banks." Ashraf Dep. 21:25-22:3, Feb. 5, 2010, Rosenfeld Decl. Ex. 1. Besecker worked with Usama Ashraf, a Senior Vice President and Assistant Treasurer of CIT, to formulate a financing strategy for Care. Cathleen Crowley-Piscitell, Chief Risk Officer of CIT Healthcare, and William Harris, an Assistant Vice President in Strategic Finance for CIT, were also part of the team implementing Care's debt strategy.
In January and February 2007, representatives of CIT met with several banks, including Credit Suisse Securities (USA), LLC, also an underwriter for Care's IPO, to discuss warehouse financing for Care. On February 15, 2007, Credit Suisse Real Estate Capital provided CIT with an initial term sheet for Care's warehouse facility. On March 29, 2007, Care filed with the SEC its initial registration statement, which stated in relevant part, "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 lenders." Joint Statement of Facts ¶ 26. CIT and Credit Suisse continued to negotiate, and on April 26, 2007, Credit Suisse provided Care with a final term sheet. After comparing Credit Suisse's terms to those of other potential lenders, CIT selected Credit Suisse as a warehouse lender for Care because "we thought that Credit Suisse had one of the better proposals." Ashraf Dep. 90:16-17, Kratenstein Decl. Ex. 2.
While in negotiations with Credit Suisse, CIT also sought an additional warehouse lender who would match Credit Suisse's terms for Care. UBS Real Estate Securities Inc., an affiliate of Care IPO underwriter UBS Securities LLC, sent CIT an initial term sheet on May 7, 2007. On May 11, 2007, Care filed with the SEC its first amended registration statement, which contained the same language regarding warehouse financing as the initial registration statement. UBS sent CIT a revised term sheet on May 18, 2007. By May 23, 2007, CIT selected UBS as Care's second warehouse lender, believing that UBS's terms most closely matched those of Credit Suisse.
Before internally approving credit for the warehouse facilities, both
potential lenders conducted "due diligence" investigations of Care. On
May 25, 2007, representatives from Credit Suisse met with CIT
Healthcare employees and prospective Care officers,*fn1
and requested a follow-up meeting to discuss, among other
things, warehouse financing. On June 4, 2007, members of CIT gave a
presentation for Care's prospective directors,*fn2 at
which they identified Credit Suisse and UBS as Care's potential
warehouse lenders. On June 6, 2007, UBS representatives held an
in-person session similar to that earlier conducted by Credit Suisse.
Recognizing that the warehouse financing might not close by the date of the Care IPO, CIT circulated a draft registration statement on June 6, 2007, which stated in relevant part:
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 the 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. There is no assurance, however, that we will be able to close these facilities on terms favorable to us, if at all.
Kratenstein Decl. Ex. 53. Shortly thereafter, each of Care's underwriters, including Credit Suisse and UBS, consented to the use of that language. Certain minor changes were made to the draft registration statement, including the addition of a clause stating that Care expected to close its warehouse facility with UBS "soon after the consummation" of the IPO. These changes were included in Care's second amended registration statement, filed with the SEC on June 7, 2007. The second amended registration statement contained the following disclosure, the one in issue in this case (the "Disclosure"):
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 the 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 the 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.
Kratenstein Decl. Ex. 57.
CIT employees continued to work toward securing the warehouse lines. Ashraf e-mailed Crowley-Piscitell and Harris on June 8, 2007, discussing the "due diligence" session with UBS, and mentioned that a UBS representative suggested June 30, 2007, as the date by which UBS would provide internal credit approval for the warehouse facility. Ashraf also said that the final documentation process would last several weeks after receiving internal credit approval. See Kratenstein Decl. Ex. 41. Also on June 8, 2007, Crowley-Piscitell e-mailed Besecker to say that her meeting with Credit Suisse "went very well," and that Credit Suisse ...