Credit Suisse gets no Janus protection in National Century SJ ruling
The Countrywide mortgage-backed securities investors who have accused Kathy Patrick and her firm, Gibbs & Bruns, of being patsies in Bank of America’s proposed $8.5 billion MBS put-back settlement might want to talk to Credit Suisse about whether Patrick is inclined to collude with bank defendants.
Late Friday, as Jon Stempel reported for Reuters, U.S. District Judge James Graham of Columbus federal court denied Credit Suisse’s motion for summary judgment on federal and common-law securities fraud claims by investors who bought National Century Financial bonds about a decade ago. National Century was supposed to be securitizing healthcare receivables, but those receivables turned out to be largely illusory. The company collapsed and its three leading officials are now serving long prison terms. Patrick represents a group of large National Century noteholders, including PIMCO, who allege that Credit Suisse facilitated the fraud by serving as a manager in some $2 billion in private placements of National Century bonds. Kasowitz Benson Torres & Friedman represents several other National Century noteholders and has worked alongside Gibbs & Bruns in the multidistrict litigation consolidated before Graham.
There’s a lot to digest in the judge’s 115-page summary judgment ruling, including more than you ever wanted to know about the applicability of various state blue-sky securities laws to Credit Suisse’s alleged abetting of fraud at National Century. But the most significant portion of the opinion is Graham’s discussion of why Credit Suisse is potentially responsible for alleged misstatements in National Century’s private placement memos, despite warnings in the memos that the bank didn’t independently verify the information contained within.
The U.S. Supreme Court, you may recall, set a very high bar for securities claims against underwriters in last spring’s decision in Janus Capital v. First Derivative Partners. The Janus ruling held that only those who “make” statements in securities prospectuses are liable under federal securities laws. In the specific facts the court considered, shareholders argued that Janus Capital was responsible for a prospectus promulgated by one of its mutual funds. The justices said, however, that only Janus Investment “made” the allegedly false statements, no matter how much of a behind-the-scenes role Janus Capital had. At the time, the lawyer who argued for shareholders, David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel, told me the high court’s Janus decision was a “roadmap for fraud…. Anyone who makes statements through someone else gets a free pass. That does not promote integrity in the markets.”
So how did Gibbs & Bruns and Kasowitz clear the Janus hurdle? Graham found that the bondholder lawyers presented sufficient evidence that the private placement memos were joint creations of Credit Suisse and National Century. “Credit Suisse’s own witnesses testified of playing a role in drafting and preparing the PPMs and of exercising control over their content,” he wrote. “The PPMs displayed the Credit Suisse name prominently on the front pages and told potential investors that Credit Suisse was ‘specifically designated’ to make representations about the notes.”
Graham also said it was significant that Credit Suisse was responsible for placing the memos in investors’ hands. “Even if Credit Suisse did not author every word in the PPMs, it did communicate them to investors,” he wrote. “It is fraud to knowingly provide false information to another person, regardless of who originally drafted the words.”
Pointing to Credit Suisse’s courting of investors at road shows, in emails and phone conversations, and through summaries of the private placement memos, the judge said Credit Suisse wasn’t protected by disclaimers in the offering documents. “A jury could determine that the noteholders’ reliance upon the PPMs and other written materials was justifiable, even in light of the disclaimers,” he said.
“Judge Graham recognized that disclaimers are ineffective to shield underwriters,” said Patrick. “This may be the first case that applies Janus and concludes that underwriters are liable for offering documents.” Patrick also said she was gratified that after considering the voluminous record in the case (more than 200 depositions and 23 million pages of discovery), Graham was unwilling to let Credit Suisse off the hook. (“The noteholders have submitted clear and convincing evidence from which a jury could reasonably conclude that Credit Suisse knew or should have known of the material aspects of National Century’s fraud,” he wrote. “At best, (Credit Suisse) takes small chips out of the mountain of evidence presented by the noteholders.”)
“This case is not only going to go to trial, it’s going to the jury,” Patrick told me.
Interestingly, one of Credit Suisse’s strategic decisions paid off, though it was a close call. The bank has long argued that New York law should apply to the common-law fraud, negligence, and breach of duty claims. The Gibbs & Bruns group didn’t advocate for any jurisdiction; Kasowitz clients suggested Ohio (where National Century was based) or New Jersey. New York law, through most of the history of the case, offered Credit Suisse a distinct advantage, since the state’s Martin Act was held to pre-empt private causes of action, in favor of cases by the state AG, for negligent misrepresentation and breach of duty to investors. But in December, New York Court of Appeals ruled that the Martin Act does not, in fact, pre-empt cases by private investors.
So when Graham agreed with Credit Suisse and opted to apply New York law to investors’ common-law claims, he said the Martin Act does not shield the bank from negligent misrepresentation and breach of duty allegations. But he proceeded to rule for Credit Suisse on those claims anyway, granting that bank summary judgment under New York’s tough evidentiary standard.
The summary judgment ruling is not automatically appealable, though Credit Suisse’s counsel at Bingham McCutchen can request leave to file an interlocutory appeal. A bank spokesman told Reuters in a statement that Credit Suisse “remains confident that a jury will find based on all the evidence that it should not be held responsible for assisting or committing any wrongdoing.”
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