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In re Stillwater Capital Partners

April 3, 2012


The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.


Master File No. 1:11-2275 (SAS)


This putative class action, which concerns both federal securities claims and state law claims, is part of a larger multi-district litigation. It arises out of plaintiffs' investments in the various Stillwater Funds*fn1 and Stillwater's*fn2 merger agreement with Gerova Financial Group, Ltd. ("Gerova"). Plaintiffs' amended complaint alleges, inter alia, violation of Section 14(a) of the 1934 Securities and Exchange Act (Claim I); violation of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder (Claim II); violation of Section 20(a) of the Exchange Act (Claim III); various breach of fiduciary duty claims (Claims IV-VI); and aiding and abetting breach of fiduciary duty (Claim VII). Defendants now move to dismiss all claims.For the following reasons the motions of SCP, Gerova, and the individual defendants are granted in part and denied in part.


A. Plaintiffs

The proposed class consists of all investors in the SCP Funds, those who sought to redeem their investments in the SCP Funds, and those who received restricted, unregistered Gerova shares as part of the SCP/Gerova merger.*fn4

B. Defendants

There are ten named defendants in this action. Gerova was a "blank check company" formerly known as Asia Special Situation Acquisition Corporation ("ASSAC"), which was formed in March 2007.*fn5 As of the date plaintiffs filed their complaint, Gerova was incorporated in Bermuda with its principal offices in Hamilton, Bermuda.*fn6 Plaintiffs allege the following claims against Gerova: (I) violation of Section 14(a) of the Exchange Act; (II) violation of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder; and (VII) aiding and abetting breaches of fiduciary duty.*fn7 SCP, DE is a limited liability company that is the general partner of the Delaware Funds.*fn8 SCP, NY is a New York corporation that acts as investment manager for the Delaware and Offshore Funds.*fn9 Plaintiffs allege the following claims against these defendants: (I) violation of Section 14(a) of the Exchange Act; (II) violation of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder; and (IV-VI) breach of fiduciary duty of care, breach of fiduciary duty of loyalty, and breach of duty of candor.*fn10

Gary Hirst was a founding director of Gerova and was appointed its president in October 2007; he resigned in February 2011, but is currently serving as a Gerova director.*fn11 Arie Jan van Roon was a founding member of Gerova's board until February 2011 and allegedly "owns or owned Gerova shares through Noble Investment Fund Limited."*fn12 Michael Hlavsa has served as Chief Financial Officer ("CFO") of Gerova since Gerova's inception.*fn13 Keith Laslop was a Gerova director from May 2008 until his resignation on February 10, 2011. He also served as Gerova's Chief Operating Officer ("COO") from June 2010 until at least February 2011.*fn14 Tore Nag was listed in the SCP proxy statement as Gerova's President and COO, however in the Gerova proxy statement, he was listed as COO and Hirst was listed as Gerova President.*fn15 Nag resigned as COO "on or before April 8, 2010."*fn16 Jack Doueck is a principal of SCP, DE and a shareholder of SCP, NY; he was also a Gerova director.*fn17 Richard Rudy is a principal of SCP, DE and a shareholder of SCP, NY.*fn18 Plaintiffs allege the following claims against these individual defendants: (I) violation of Section 14(a) of the Exchange Act; (II) violation of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder; and (III) violation of Section 20(a) of the Exchange Act.*fn19 Plaintiffs also allege the breach of fiduciary duty claims (IV-VI) against Doueck and Rudy by virtue of their positions within SCP, DE;*fn20 and aiding and abetting breaches of fiduciary duty (VII) against Hirst, van Roon, Hlavsa, Laslop, and Nag.

C. Stillwater Funds Management and the Gerova Merger

Plaintiffs were investors in the Stillwater Funds, many of whom were unable to redeem their investments due to the Funds' liquidity problems.*fn21 At the time of the merger between SCP and Gerova, plaintiffs allege that SCP had between $30 million and $110 million in unpaid redemptions.*fn22 In an attempt to solve the illiquidity of their assets and - plaintiffs allege - "seeking $17 million in payments for themselves," SCP sought a merger with Gerova.*fn23 On December 23, 2009, SCP investors received what plaintiffs characterize as a proxy solicitation "jointly issued" by Gerova and SCP.*fn24 The document is entitled "Consent Solicitation Letter" and appears on SCP letterhead.*fn25 While the letter did include a memorandum from Gerova (then called ASSAC),*fn26 Gerova asserts that the solicitation was not sent by both it and SCP, but rather came only from SCP.*fn27

Plaintiffs claim that the proxy solicitation that Gerova sent to its own shareholders was "materially different" from the proxy issued to SCP investors two weeks earlier.*fn28

D. Allegedly False and Misleading Statements

Gerova's merger with SCP was part of a group of transactions including Gerova's acquisition of an 81.5% interest in Amalphis and the assets and investments held by Wimbledon.*fn29 Although the SCP proxy solicitation mentioned these transactions, plaintiffs allege that "the Wimbledon and Amalphis transactions were related party transactions in which Gerova purchased demonstrably overvalued assets from Gerova insiders"*fn30 and that the related-party nature of the transactions was not disclosed.

Plaintiffs claim that the Amalphis transaction was a related-party transaction because the party from which Gerova acquired Amalphis was Rineon, "an inactive holding company" that was acquired by the investment fund Intigy Absolute Return ("Intigy").*fn31 Intigy was managed by Axiat, Inc. of which Hirst is president and chief executive officer ("CEO").*fn32 Plaintiffs allege that Hirst "installed Tore Nag as Rineon's President and Chief Operating Officer, and Michael Hlavsa as Rineon's Chief Financial Officer and Secretary."*fn33 Plaintiffs also allege that Hirst made a profit of $21 million in selling Amalphis to Gerova just seven months after he, through Intigy, had purchased it.*fn34 None of these relationships were disclosed in the proxy sent to SCP investors, and plaintiffs allege that "Rineon was acquired solely to launder Amlaphis onto Gerova's balance sheet and to conceal that Gerova was overpaying Gerova insiders by more than $21 million . . . for Amalphis."*fn35

Plaintiffs also claim that the Wimbledon transaction was a related-party transaction because Gerova acquired it from Weston Capital Asset Management, LLC ("Weston"), which was owned by*fn36 Van Roon, a founding member of Gerova's board and current member during the January 2010 transactions, "held 59.34% of's voting sharesthrough his ownership of Equities Media Acquisition Corp."*fn37 Furthermore, Hlavsa, Gerova's CFO, was a director and CFO of from January 15, 2008.*fn38 Plaintiffs also claim that Joseph Bianco was both CEO of Gerova and Chairman of's board of directors.*fn39 As part of the Wimbledon transaction, Gerova agreed to pay Weston a fee to manage the Wimbledon funds, but the amount of that fee was not disclosed.*fn40 Since the January 2010 transactions, Rineon has ceased all operations and terminated its obligation to report.*fn41 Between June and December 2010, lost 98% of its market capitalization and announced that its financial statements for fiscal years 2007-2009 should not be relied upon.*fn42 Plaintiffs also allege that Gerova spent approximately $23.5 million in "advisory fees . . . paid to insiders at Gerova."*fn43

Finally, plaintiffs allege that the proxy statement failed to disclose three conflicts of interest: (1) that SCP, DE was owed $17 million in management fees; (2) that Gerova agreed to pay this obligation; and (3) that SCP, NY's management contracts were "substantially better" than their pre-merger contracts, because the net asset value from which SCP's performance fees would be measured was reset.*fn44

E. Gerova's Collapse

Following the January 2010 transactions, Gerova's "public float"*fn45 consisted of 300,000 IPO shares and Gerova received a de-listing notice from the NYSE Amex Exchange for failure to comply with the minimum shareholder requirement.*fn46 After the January 2010 transactions, the majority of original Gerova investors voted to redeem their shares for cash rather than obtain shares in the new company.*fn47 Around the same time, Gerova's public float "dramatically increased," but no registration statement was filed.*fn48 On May 26, 2010, Gerova transferred its real estate assets to Net-Five in exchange for a 49% interest in the joint venture with a non-party;*fn49 plaintiffs claim that this transaction "alienated from Gerova all of its real estate assets" and that Gerova has not provided shareholders with any document regarding the transaction other than the joint venture agreement itself.*fn50

Even though Gerova's ordinary share trading volume was low in the beginning of 2010, on June 25, 2010 share volume spiked to almost 1.4 million shares for the day, far in excess of the 300,000 shares outstanding in mid-February.*fn51 Gerova's SEC filings confirmed that approximately 11.5 million additional shares had entered the market since January 2010.*fn52 Because the ordinary shares created through the conversion were unregistered, and Gerova made no additional public offering, plaintiffs assert that this share volume can only be explained as "Gerova's insiders . . . dumping shares of stock into an inflated market, without disclosing such sales to investors."*fn53

After the publication of the "Dalrymple Report" by a short-seller firm on January 10, 2011, which "detailed an array of related party transactions, . . . insiders' relationships . . ., and questioned the valuation of Gerova's assets,"*fn54 the price of Gerova shares fell from a high of $30.09/share to a low of $5.28/share on February 23, 2011.*fn55 On February 24, 2011, the New York Stock Exchange ceased trading of Gerova stock, and Gerova securities were de-listed on April 18, 2011.*fn56

Gerova terminated its stock registration on June 15, 2011.*fn57 As of November 1, 2011, Gerova's share price was $0.06 and they were traded on "pink sheets."*fn58

Between January 2010 and February 15, 2011, Gerova experienced high management turnover, including three different CEOs during that time.*fn59 SCP and Gerova are in negotiations to unwind the SCP/Gerova merger;*fn60 however, plaintiffs assert that this will not allow SCP to recoup all the assets that it originally contributed to Gerova.*fn61


A. Motion to Dismiss

In deciding a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), the court "accept[s] all factual allegations in the complaint as true, and draw[s] all reasonable inferences in the plaintiff's favor."*fn62 The court evaluates the sufficiency of the complaint under the "two-pronged approach" advocated by the Supreme Court in Ashcroft v. Iqbal.*fn63 First, "[a] court 'can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth.'"*fn64 "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice" to withstand a motion to dismiss.*fn65 Second, "[w]hen there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief."*fn66 To survive a Rule 12(b)(6) motion to dismiss, the allegations in the complaint must meet a standard of "plausibility."*fn67 A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."*fn68 Plausibility "is not akin to a probability requirement;" rather, plausibility requires "more than a sheer possibility that a defendant has acted unlawfully."*fn69

"In considering a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6), a district court may consider the facts alleged in the complaint, documents attached to the complaint as exhibits, and documents incorporated by reference in the complaint."*fn70 However, the court may also consider a document that is not incorporated by reference, "where the complaint 'relies heavily upon its terms and effect,' thereby rendering the document 'integral' to the complaint."*fn71 The court may also consider "legally required public disclosure documents filed with the SEC."*fn72

B. Choice of Law

Under New York choice-of-law rules, courts first determine whether there is a substantive conflict between the laws of the relevant choices.*fn73 "In the absence of substantive difference . . . a New York court will dispense with choice of law analysis; and if New York law is among the relevant choices, New York courts are free to apply it."*fn74

1. Internal Affairs Doctrine

New York follows the internal affairs doctrine, which generally requires that "questions relating to the internal affairs of corporations are decided in accordance with the law of the place of incorporation."*fn75 This doctrine "recognizes that only one State should have the authority to regulate a corporation's internal affairs -- matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders -- because otherwise a corporation could be faced with conflicting demands."*fn76


A. Service of Process

Federal Rule of Civil Procedure 4 sets forth the rules applicable to service of process. Rule 4(e) provides that, absent a waiver, an ...

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