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.
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
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 Fund.com.*fn33 Gerova director van Roon held 59.34% of Fund.com's voting shares through his ownership of Equities Media Acquisition Corp.*fn34 Futhermore, Hlavsa, Gerova's CFO, was a director and CFO of Fund.com at the time of the January 2010 transactions.*fn35 Plaintiffs also claim that Bianco was both CEO of Gerova and Chairman of Fund.com's Board of Directors, and that Laslop was a director of both companies as well.*fn36 As part ...