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In re Stillwater Capital Partners


April 23, 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, alleging federal securities claims, is part of a larger multi-district litigation. It arises out of a number of transactions through which Gerova Financial Group, Ltd. ("Gerova") acquired Allied Provident Insurance Company, Ltd. ("Allied Provident"), the funds managed by Stillwater Capital Parners, LLC and Stillwater Capital Partners, Inc. ("SCP" or the "Stillwater funds"), and the Wimbledon Funds. Plaintiffs' amended complaint alleges, inter alia, violation of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder (Counts I and III); and violation of Section 20(a) of the Exchange Act (Counts II and IV). Defendants now move to dismiss all claims. For the following reasons: (1) Counts I and II as they pertain to Bianco are dismissed; (2) Counts III and IV are dismissed; and (3) Counts I and II as to Gerova, Hirst, Hlavsa, van Roon, and Laslop may proceed.


A. Plaintiffs

The proposed class consists of "all persons who purchased or otherwise acquired Gerova securities from January 8, 2010 through and including February 23, 2011."*fn2

B. Defendants

There are ten named defendants in this action. Gerova was incorporated and had its principal executive offices in Bermuda as of August 30, 2010.*fn3 Gary Hirst was a founding sponsor of Gerova and was appointed its president in October 2007.*fn4 He was Chairman of Gerova's Board of Directors from April 13, 2010 until he resigned in February 2011 and owned Gerova shares both directly and through Allius, Ltd. - one of the initial sponsors of Gerova.*fn5

Arie Jan van Roon was a founding member of Gerova's board until February 2011 and allegedly "owns or owned Gerova shares both directly and through Allius, Noble Investment Fund Limited, and Ho Capital Management LLC."*fn6 Michael Hlavsa served as Chief Financial Officer ("CFO") of Gerova since the company's inception until at least February 2011.*fn7 Joseph J. Bianco was Chief Executive Officer ("CEO") of Gerova from June 2010 until he resigned in February 2011.*fn8

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.*fn9 Plaintiffs allege Count I (violation of Section 10(b)) against each of these defendants and Count II (violation of Section 20(a)) against the individual Gerova defendants.

SCP, Inc. is a New York corporation that acts as investment manager for the Stillwater Funds.*fn10 SCP, LLC is a Delaware limited liability company that manages the business affairs of the Stillwater Funds.*fn11 Jack Doueck was a principal of SCP, a Gerova director, and served on a three-person committee managing the Stillwater Funds after they were acquired by Gerova.*fn12 Richard Rudy is a principal of SCP and sits on the same committee as Doueck.*fn13 Plaintiffs allege Count III (violation of Section 10(b)) against each of these defendants and Count IV (violation of Section 20(a)) against the individual SCP defendants.

C. Gerova's Formation and the January 2010 Transactions

Gerova was formed as a blank check company in March 2007 under the name Asia Special Situation Acquisition Corp.*fn14 Noble Investment Fund Ltd. and Allius Ltd., which were both owned and controlled by van Roon and Hirst, were Gerova's sponsors.*fn15 Through its January 2008 IPO Gerova raised $155 million, and under the terms of its governing documents it was to use the IPO proceeds to acquire an operating entity within two years or it would face liquidation.*fn16

As of November 2009 Gerova had not succeeded in acquiring an operating entity,*fn17 but in December 2009 it began merger negotiations with SCP, "a family of hedge funds" that held illiquid assets.*fn18 Gerova negotiated a deal in which it acquired the Stillwater funds; an 81.5% interest in Amalphis Group Inc. ("Amalphis") the parent company of Allied Provident; and the assets and investments held by the Wimbledon Funds.*fn19 Plaintiffs claim that the counter-parties to the Amalphis and Wimbledon transactions - Rineon Group, Inc. ("Rineon") and Weston respectively - were managed by Gerova insiders and that the related-party nature of these transactions was not disclosed in the proxy statement issued in conjunction with the January 2010 transactions.*fn20 In exchange

for the interest in and assets of SCP, Amalphis, and Wimbledon, Gerova issued "restricted, preferred stock that [Gerova] anticipated later converting into ordinary shares."*fn21

D. Allegedly False and Misleading Statements

Plaintiffs allege that the SCP assets were overvalued "premised on highly questionable assumptions"*fn22 and that "the $541.25 million valuation assigned to the Stillwater assets contradicted a substantially lower valuation by Stillwater . . . just weeks earlier."*fn23 Plaintiffs also allege that the proxy statement did not disclose the distressed nature of the SCP Funds or that SCP was unable "to honor its investors' redemption requests."*fn24 However, Gerova notes that the proxy statement did state that SCP's assets were "distressed and illiquid."*fn25 Plaintiffs argue that the extent of the company's distress, including the amount owed in redemption requests was not properly disclosed.*fn26

Although the proxy statement mentioned the Amalphis and Wimbledon acquisitions, plaintiffs claim that they were "related party transaction[s] with an entity secretly controlled by Gerova insiders"*fn27 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 publicly traded Delaware corporation."*fn28 Plaintiffs allege that Gerova director de Waal and Gerova CFO Hlavsa were two of Rineon's five directors, and that, after the January 2010 transactions, Hlavsa was Rineon's sole director until late 2010.*fn29 Additionally, Rineon was acquired by the investment fund Intigy Absolute Return ("Intigy"),*fn30 which was managed by Axiat, Inc. of which Hirst is president and CEO.*fn31 Plaintiffs also allege that Hirst made a profit of twenty-one million dollars by selling Amalphis to Gerova just six months after he, through Intigy, had purchased it.*fn32 None of these relationships were disclosed in the proxy statement.

Plaintiffs claim that the Wimbledon transaction was a related-party transaction because Gerova acquired it from Weston, which was owned by*fn33 Gerova director van Roon held 59.34% of's voting shares through his ownership of Equities Media Acquisition Corp.*fn34 Futhermore, Hlavsa, Gerova's CFO, was a director and CFO of at the time of the January 2010 transactions.*fn35 Plaintiffs also claim that Bianco was both CEO of Gerova and Chairman of's Board of Directors, and that Laslop was a director of both companies as well.*fn36 As part of the Wimbledon acquisition, Gerova agreed to pay Weston a fee to manage the Wimbledon funds, but the amount of that fee was not disclosed.*fn37

Since the January 2010 transactions, Rineon has ceased all operations and terminated its obligation to report.*fn38 Between June and December 2010, lost 98% of its market capitalization and announced that its financial statements for fiscal years 2007-2009 were unreliable.*fn39

E. Gerova's Collapse

The January 2010 transactions triggered the original Gerova IPO investors' right to demand return of the capital they had invested, which approximately 97.4% of them did.*fn40 This resulted in the "return of $112.4 million of the $115 million raised in the IPO."*fn41 Gerova claims that "the loss of nearly all of its investment capital placed [it] in a more difficult liquidity position immediately following [the January 2010 transactions] than it could have anticipated."*fn42

Following the January 2010 transactions, Gerova's "public float"*fn43 consisted of 300,000 IPO shares and Gerova received a de-listing notice from the New York Stock Exchange - Amex Exchange for failure to comply with the minimum shareholder requirement.*fn44 In April 2010, Gerova shareholders approved conversion of the preferred shares issued as part of the January 2010 transactions into ordinary shares.*fn45 Gerova's share price increased from $7.42 on May 3 to $15.96 on May 18 and share trading volume increased from 3,231 shares per day in April to 167, 132 shares per day in June.*fn46 Plaintiffs allege that this trading volume "far exceed[ed] the plausible volume based on the outstanding float of 300,000 shares."*fn47 Gerova's SEC filings confirmed that approximately 11.5 million additional shares had entered the market since January 2010.*fn48 Because the ordinary shares created through the conversion were unregistered, and Gerova made no additional public offering, plaintiffs assert that the increase in share volume can only be explained as "private stock issuances authorized by Company insiders, or the removal of restrictions on previously-issued insider shares."*fn49

Gerova's January 2010 income statement represented that it had approximately $1.5 billion in assets, "including cash and equivalents of $104 million,"*fn50 even though plaintiffs allege that Gerova was "cash flow insolvent" from the time of the January 2010 transactions*fn51 and was unable to meet its operating expenses.*fn52 However, Gerova contends that it did not experience illiquidity until after the January 2010 transactions, when the redeeming investors were paid out in cash.*fn53 Gerova made investor presentations in both January 2010 and May 2010, which "made nearly identical representations" regarding the acquisitions, except the valuation of the Stillwater funds was adjusted from $541 million to $535 million.*fn54 Doueck testified in a separate action that "Gerova . . . did not have cash available to pay the [insurance] premiums"*fn55 and on June 7, 2011 a Bermuda newspaper reported that Gerova was "served notice for the termination of its lease after failing to pay $49,083.40 in rent and service charges."*fn56

Additionally, Gerova "disclosed that it was suffering from capital constraints" in its June 2010 Form 20-F/A.*fn57

On May 26, 2010, Gerova transferred its real estate assets to Net Five in exchange for a minority interest in the venture.*fn58 Plaintiffs claim that two of the Net Five managers had prior involvement in investment frauds: Robert Willison "handled investor relations for Westmoore Capital . . . a Ponzi scheme halted . . . by the SEC,"*fn59 and Jason Galanis was the subject of an enforcement action by the SEC.*fn60

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,"*fn61 the price of Gerova shares fell from $28.04/share to a low of $5.28/share on February 23, 2011.*fn62 On February 23, 2011, the New York Stock Exchange ceased trading of Gerova stock, and Gerova securities were de-listed on April 18, 2011.*fn63 Gerova terminated its stock registration on June 15, 2011.*fn64 As of October 25, 2011, Gerova's share price was $0.08 and Gerova shares were traded "over-the-counter."*fn65

Between January 2010 and February 15, 2011, Gerova experienced high management turnover, including various CEOs, managing directors, and presidents during that time.*fn66 Plaintiffs claim that they were induced to purchase and retain Gerova shares due to the foregoing misstatements and omissions in the proxy statement and investor presentations.


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."*fn67 The court evaluates the sufficiency of the complaint under the "two-pronged approach" advocated by the Supreme Court in Ashcroft v. Iqbal.*fn68 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.'"*fn69 "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice" to withstand a motion to dismiss.*fn70 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."*fn71 To survive a Rule 12(b)(6) motion to dismiss, the allegations in the complaint must meet a standard of "plausibility."*fn72

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."*fn73 Plausibility "is not akin to a probability requirement;" rather, plausibility requires "more than a sheer possibility that a defendant has acted unlawfully."*fn74

"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."*fn75 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."*fn76 The court may also consider "legally required public disclosure documents filed with the SEC."*fn77


A. Section 10(b) and Rule 10b-5 of the Securities Exchange Act

Section 10(b) of the Securities Exchange Act of 1934 makes it illegal to "use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe . . . ."*fn78 Under Rule 10b-5 one may not "make any untrue statement of a material fact or [] omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading . . . in connection with the purchase or sale of any security."*fn79 "To sustain a private claim for securities fraud under Section 10(b), 'a plaintiff must prove (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.'"*fn80

1. Misstatements or Omissions of Material Fact

In order to satisfactorily allege misstatements or omissions of material fact, a complaint must "state with particularity the specific facts in support of [plaintiffs'] belief that [defendants'] statements were false when made."*fn81 "For the purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it."*fn82 "[A]ttribution within a statement or implicit from surrounding circumstances is strong evidence" of who made the statement.*fn83

"'[A] fact is to be considered material if there is a substantial likelihood that a reasonable person would consider it important in deciding whether to buy or sell shares [of stock].'"*fn84 In situations "[w]here plaintiffs contend defendants had access to contrary facts, they must specifically identify the reports or statements containing this information."*fn85 Mere, "allegations that defendants should have anticipated future events and made certain disclosures earlier than they actually did[,] do not suffice to make out a claim of securities fraud."*fn86 "[A]n omission is actionable when the failure to disclose renders a statement misleading."*fn87

2. Scienter

A plaintiff may plead scienter by "alleging facts (1) showing that the defendants had both motive and opportunity to commit the fraud or (2) constituting strong circumstantial evidence of conscious misbehavior or recklessness."*fn88

"Sufficient motive allegations 'entail concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged.'"*fn89

"Motives that are generally possessed by most corporate directors and officers do not suffice; instead, plaintiffs must assert a concrete and personal benefit to the individual defendants resulting from the fraud."*fn90

"'Where motive is not apparent, it is still possible to plead scienter by identifying circumstances indicating conscious behavior by the defendant, though the strength of the circumstantial allegations must be correspondingly greater.'"*fn91

Under this theory of scienter, a plaintiff must show that the defendant's conduct is "at the least . . . highly unreasonable and [] represents an extreme departure from the standards of ordinary care to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it."*fn92 "To state a claim based on recklessness, plaintiffs may either specifically allege defendants' knowledge of facts or access to information contradicting defendants' public statements, or allege that defendants failed to check information they had a duty to monitor."*fn93

3. Causation

A securities fraud plaintiff is required to "prove both transaction causation (also known as reliance) and loss causation."*fn94 Loss causation is "the proximate causal link between the alleged misconduct and the plaintiff's economic harm."*fn95 "A misrepresentation is 'the proximate cause of an investment loss if the risk that caused the loss was within the zone of risk concealed by the misrepresentations . . . .'"*fn96 Therefore, "to plead loss causation, the complaint[] must allege facts that support an inference that [defendant's] misstatements and omissions concealed the circumstances that bear upon the loss suffered such that plaintiffs would have been spared all or an ascertainable portion of that loss absent the fraud."*fn97

B. Control Person Liability Under Section 20(a) of the Exchange Act

"To establish a prima facie case of control person liability, a plaintiff must show (1) a primary violation by the controlled person, (2) control of the primary violator by the defendant, and (3) that the defendant was, in some meaningful sense, a culpable participant in the controlled person's fraud."*fn98

"Allegations of control are not averments of fraud and therefore need not be pleaded with particularity."*fn99 "Thus, '[a]t the pleading stage, the extent to which the control must be alleged will be governed by Rule 8's pleading standard . . . .'"*fn100 "While a party cannot be held liable for both a primary violation and as a control person, alternative theories of liability are permissible at the pleading stage."*fn101


A. Section 10(b) and Rule 10b-5 of the Securities Exchange Act

1. Gerova and Gerova Officers' Liability

The proxy statement at issue was sent by Gerova to the plaintiffs in order to obtain their approval of the January 2010 transactions and was signed by Hirst.*fn102 Plaintiffs allege that the proxy statement failed to disclose the related-party nature of the Amalphis and Wimbledon transactions,*fn103 which were part of the January 2010 transactions. Plaintiffs also claim that Gerova misstated its own financial health and that of SCP in the proxy statement and in various financial statements.*fn104

Gerova and Hirst contend that some of the complained of omissions had already been disclosed in Gerova's various public disclosures.*fn105 However this in and of itself "would not preclude a finding by a trier of fact that [the information was] disclosed to investors in a materially misleading way."*fn106 Such "scattered disclosures" are not sufficient for defendants to prevail at the motion to dismiss stage.*fn107 "The mere fact that a company has filed with a regulatory agency documents containing factual information material to a proposal as to which proxies are sought plainly does not mean that the company has made adequate disclosure to shareholders."*fn108 The allegations of incomplete disclosures - such as Gerova's failure to disclose the potential exit of the IPO investors - satisfy the pleading requirements for material omissions.

Gerova also argues that certain omissions were not material, including the related-party nature of the transactions. However, these omissions may have mislead investors regarding the actual demand for Gerova shares as well as the risk involved in the January 2010 transactions and the potential liabilities, thus misstating Gerova's "true financial picture."*fn109 These omissions are not so obviously unimportant that their materiality can be successfully challenged at the pleading stage.*fn110

Gerova officers Hirst, Hlavsa, and Bianco argue that they are not liable under Section 10(b) because none of the alleged misstatements or omissions were attributed to them.*fn111 However, Hirst signed "each of the key SEC filings implicated in the Complaint"*fn112 and the proxy statement itself.*fn113 Janus, which involved two separate entities and whether statements of one could be attributed to the other,*fn114 cannot be used to shield Hirst, who signed the documents at issue and thereby "made" the alleged misstatements. In response to an earlier motion in a related case, I decided the issue of attribution on the grounds that Gerova was a special purpose acquisition company, with "no operations and only a few employees" and that its sole business purpose was the acquisition of other companies.*fn115 Construing the allegations in the light most favorable to the plaintiffs and resolving all doubt in plaintiffs' favor, these are "adequate surrounding circumstances" from which a reasonable fact finder could conclude that the statements in the proxy statement were "made" by officers Hirst and Hlavsa.*fn116 Bianco, though, did not become a Gerova officer until June 2010, six months after the proxy statement was sent to shareholders;*fn117 this fact precludes a finding that the statements in the proxy statement and the January and May 2010 financial statements were made by him.

Gerova contends that plaintiffs failed to plead scienter sufficiently. Plaintiffs, in turn, point to Gerova's strong desire to effectuate the January 2010 transactions because it needed to acquire a company or it would be forced to liquidate. Additionally, plaintiffs claim that Gerova was in a dire financial situation, even though Gerova contends that this did not occur until after the January 2010 transactions, when the majority of IPO investors redeemed their investments for cash.

The desire to avoid impending liquidation was also a motivating factor for the Gerova officers. The Amended Complaint pleads these additional facts as the basis for plaintiffs' allegations of the Gerova officers' scienter: (1) the resignations and deferred appointments of seven officers and directors and the replacement of Gerova's entire board of directors except Hirst;*fn118 (2) the alleged personal profits by Gerova insiders from the related-party transactions;*fn119 and (3) Gerova's transfer of all real estate assets to Net Five in exchange for a minority interest in the joint venture.*fn120 Plaintiffs' allegations, taken as true, sufficiently plead that the conduct of the Gerova's officers was "highly unreasonable" and "an extreme departure from the standards of ordinary care . . . ."*fn121

Because Gerova does not argue a lack of reliance, the only element left for plaintiffs to establish is loss causation. Plaintiffs assert that loss causation is shown by the fact that once the Dalrymple Report was released - which contained allegations of the same relatedness and management fees that plaintiffs complain of as having been omitted from the proxy statement*fn122 - Gerova's ordinary shares fell 6.4%.*fn123 The shares dropped an additional "19.4% . . . after Gerova announced it hired a firm to respond to the Dalrymple report," "40.8% after announcements regarding executive resignations," and 31.3% after a prospective president and chairman of the Board of Directors withdrew his name from consideration.*fn124 These allegations satisfy the Second Circuit's rule for pleading loss causation - plaintiffs can show loss causation by showing "'that the defendants' misrepresentations induced a disparity between the transaction price and the true investment quality of the securities at the time of the transaction.'"*fn125

For the foregoing reasons, the motions by Gerova, Hirst, and Hlavsa to dismiss plaintiffs' Section 10(b) claims are denied.

2. SCP and SCP Principals' Liability

Plaintiffs' claim against SCP hinges on the fact that the $541.25 million valuation attributed to the Stillwater Funds was provided by the Stillwater Defendants to Gerova.*fn126 Even assuming, arguendo, that the unaudited pro forma financial statements including the $541.25 million valuation were "made" by SCP, they do not violate Section 10(b). The valuation is surrounded by warnings that the amount was "subject to a post closing adjustment" and was "subject to further management review and may change materially between the preliminary valuation date and the closing date" of the January 2010 transactions.*fn127 Taken in context, these warnings, which occurred throughout the proxy statement and in close proximity to the SCP asset valuation, would not have misled a reasonable investor.*fn128 Because the plaintiffs do not, and cannot, argue that SCP was responsible for the remaining alleged omissions and misstatements in the Gerova proxy statement and financial statements, Count III must be dismissed.

B. Control Person Liability Under Section 20(a) of the Exchange Act

Plaintiffs assert control person liability claims under Section 20(a) of the Exchange Act against the individual defendants: Hirst, van Roon, Hlavsa, Bianco, and Laslop (Count II), and Doueck and Rudy (Count IV). "While a party cannot be held liable for both a primary violation and as a control person, alternative theories of liability are permissible at the pleading stage."*fn129 Because a primary Section 10(b) violation has not been established against SCP, the Section 20(a) claim against Doueck and Rudy necessarily fails. However, as demonstrated above, a primary Section 10(b) violation has been pled against Gerova, which satisfies the first prong of Section 20(a).

The parties agree that Bianco did not assume the role of Gerova CEO until June 2010, after the alleged misstatements and omissions.*fn130 Without more, the 20(a) control person liability claim against him must fail. All other Gerova defendants merely contend that the 20(a) claims against them must be dismissed based on plaintiffs' failure to sufficiently allege a primary violation. Because the 10(b) claim survives against Hirst, Hlavsa, van Roon, and Laslop, the 20(a) claim against them also survives.


For the foregoing reasons, Counts I and II as they relate to Bianco, Count III, and Count IV are dismissed. All other counts remain. The Clerk of the Court is directed to close these motions [Docket Nos. 54, 57, 60].


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