Briarwood Investments, Inc. et al v. Care Investment Trust Inc.

Filing 93

OPINION AND ORDER re: Granting defendants' 78 MOTION for Summary Judgment. The Clerk is directed to enter judgment accordingly. By January 15, 2010, the lead plaintiffs shall submit to this Court a letter addressing which of the redacted documents submitted in opposition to the motion should remain redacted, and the reason (if any) for each document's continued redaction. (Signed by Judge Louis L. Stanton on 12/22/10); (djc) Modified on 12/29/2010 (djc).

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK - - - - - - - - - - - - - - - - - - -X BRIARWOOD INVESTMENTS, INC., Individually and on Behalf of All Others Similarly Situated Plaintiff, - against CARE INVESTMENT TRUST INC., F. SCOTT KELLMAN, ROBERT O'NEILL, and FLINT D. BESECKER, Defendants. - - - - - - - - - - - - - - - - - - -X Defendant Care Investment Trust Inc. filed a registration statement Commission and prospectus in with the Securities with its and initial Exchange public OPINION AND ORDER 07 Civ. 8159 (LLS)

("SEC")

connection

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, securing warehouse financing. BACKGROUND 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
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regarding Care's expectation of

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." Decl. Ex. 1. President and Ashraf Dep. 21:25-22:3, Feb. 5, 2010, Rosenfeld

Besecker worked with Usama Ashraf, a Senior Vice 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

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financing for Care. Estate Capital

On February 15, 2007, Credit Suisse Real CIT with an initial term sheet for

provided

Care's warehouse facility. the SEC its initial

On March 29, 2007, Care filed with statement, which stated in

registration

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, After Credit Suisse provided Care with terms a to final term of sheet. other

comparing

Credit

Suisse's

those

potential lenders, CIT selected Credit Suisse as a warehouse lender for Care because "we thought that Credit Suisse had one of the better proposals." 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 Ashraf Dep. 90:16-17, Kratenstein

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

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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 facilities, internally both approving lenders credit for the "due warehouse diligence"

potential

conducted

investigations of Care.

On May 25, 2007, representatives from

Credit Suisse met with CIT Healthcare employees and prospective Care officers,1 and requested a follow-up meeting to discuss, among other of things, CIT gave warehouse a financing. for On June 4, 2007,

members

presentation

Care's

prospective

directors,2 at which they identified Credit Suisse and UBS as Care's potential warehouse held an lenders. On June 6, 2007, to UBS that

representatives

in-person

session

similar

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
1

Because Care was not yet formally in being (since it was formed only to participate in this transaction), its officers and directors were not yet in office. 2 Care's officers and directors were not yet in office. See note 1 supra.

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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

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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. final documentation process would Ashraf also said that the last several weeks after

receiving internal credit approval. 41.

See Kratenstein Decl. Ex.

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 "hedged on meeting end of month timeline, but will be likely done with approvals by end on [sic] next week or beg of the following week." Kratenstein Decl. Ex. 44.

During the week leading up to the Care IPO CIT continued to cooperate with Credit Suisse and UBS on closing the warehouse financing. Credit Suisse was awaiting approval from its outside UBS

counsel before completing its internal approval process.

was conducting further "due diligence," and on June 18, 2007, Crowley-Piscitell stated to Besecker that she anticipated UBS's approval that week. Care filed with the SEC its final prospectus and

registration statement on June 21, 2007, each of which contained the Disclosure, as quoted above. in its capacity as Each of Credit Suisse and UBS, approved Care's final

underwriter,

prospectus.

The registration statement was declared effective

by the SEC on June 22, 2007. Discussions with both Credit Suisse and UBS continued

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throughout

the

summer

of

2007,

and

Credit

Suisse's

internal

credit committee gave its approval on June 29.

However, by

August 14, 2007, when Care filed its Form 10-Q with the SEC, market conditions had deteriorated and Care had not closed

either warehouse facility.

In its Form 10-Q, Care explained:

Since June 30, 2007, investor concerns surrounding sub-prime mortgage credit risk, hedge fund losses, a large volume of unsuccessful leveraged loan syndications and related impact on the overall credit markets, including widening of credit spreads, have materially impacted liquidity in the debt markets, making financing terms for borrowers less attractive. Consequently, our efforts to negotiate our warehouse facilities on terms favorable to us are taking longer than expected. Should the current market conditions continue, our ability to grow may be impeded. We are in discussions with several financial institutions relating to other short-term financings. Kratenstein Decl. Ex. 89. On October 1, 2007, Care closed its warehouse facility with Credit Suisse, albeit on terms less favorable than those in Credit Suisse's final term sheet. financing deal in late 2007. When this action was brought, Care's stock traded for a third less than its IPO price. The defendants move for summary judgment that the lead UBS declined the warehouse

plaintiffs have presented no evidence sufficient to raise an issue whether the Disclosure contained an untrue statement of material fact, or omitted to state a material fact required to make the disclosure not misleading.

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DISCUSSION Under Federal Rule of Civil Procedure 56(a), "the court shall grant summary judgment if the movant shows that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." "This standard

requires that courts resolve all ambiguities, and credit all factual inferences that could rationally be drawn, in favor of the party opposing summary judgment." Spinelli v. City of New

York, 579 F.3d 160, 166 (2d Cir. 2009) (internal quotation marks omitted). The Disclosure was an expression of opinion; however, in the securities law context, an opinion may be treated as false or misleading "if the speaker does not genuinely and reasonably believe it or if it is without a basis in fact." Kowal v. Int'l

Bus. Machs. Corp. (In re Int'l Bus. Machs. Corp. Sec. Litig.), 163 F.3d 102, 109 (2d Cir. 1998). they are entitled "can to summary to no The defendants argue that judgment that because Care's the lead

plaintiffs

point

evidence

warehouse

financing disclosure was false on the date it was published, let alone sufficient evidence to create an issue of material fact." Defs.' Mem. Law in Supp. of Their Mot. Summ. J. 3. plaintiffs counter that the "Defendants cannot The lead

legitimately

argue that the issues of (i) whether they believed Care would secure warehouse financing shortly after the IPO; and (ii)

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whether such belief was reasonable, pose anything other than material factual questions that are incapable of resolution on this motion." J. 1. I. Care's Disclosure provided in part, "We are currently Lead Pls.' Mem. Law in Opp'n to Defs.' Mot. Summ.

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." 57. Kratenstein Decl. Ex.

Two of the individual defendants testified that the phrase

"shortly after" referred to a time period measured by weeks, as opposed to months. See Besecker Dep., Feb. 24, 2010, 161:13-16,

Rosenfeld Decl. Ex. 2; Kellman Dep., Feb. 17, 2010, 92:8-14, Rosenfeld Decl. Ex. 4. There is no genuine factual question that the defendants reasonably warehouse believed facility the was statement expected to that close the Credit Suisse the

shortly

after

consummation of the Care IPO. Michael informed McDugall, defendants CIT

In an e-mail on June 22, 2007, Chief and Credit Kellman Officer, that the

Healthcare's O'Neill,

Besecker,

warehouse lines would close "Best case -- week after next." Kratenstein Decl. Ex. 70. informed Crowley-Piscitell On that same day, a Friday, McDugall and defendant O'Neill that Credit

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Suisse was "still waiting for last legal docs before they start approval. Decl. Ex. They will have all docs by Monday." 71. Each individual defendant Kratenstein why he

testified

believed that the warehouse facility would close shortly after the Care IPO. See Besecker Dep. 272:1-6, Kratenstein Decl. Ex.

3 ("I had been given updates by both the treasury CIT team in addition to the CIT Healthcare team and those updates indicated that they were making substantial progress with Credit Suisse towards the consummation and closing of a warehouse line of credit."); id. at 272:10-13("I spoke directly with multiple

Credit Suisse individuals who led me to believe that the credit facility would close soon or shortly thereafter."); Kellman Dep. 208:2-6, Kratenstein Decl. Ex. 6 ("Everyone in our team was working to move forward and close those facilities. And so it

was my understanding from the facts and circumstances at the time that those facilities would be closed shortly after the IPO."); O'Neill Dep. 188:2-10, Feb. 19, 2010, Kratenstein Decl. Ex. 7 (his expectation Column that Care would the IPO close was its warehouse on my

facility

with

soon

after

"based

interaction with the internal players with Care and CIT, as well as with the investment bankers"). There is no dispute that representatives of Credit Suisse consented to the language in the Disclosure. See

Counterstatement of Material Facts Opp'n Defs.' Mot. Summ. J. ¶

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68; see also Besecker Dep. 274:7-11, Kratenstein Decl. Ex. 3 ("CS' sign-off" "gave me a lot of confidence" in the

Disclosure). Care

Furthermore, those at Credit Suisse working on the line told Credit Suisse's internal credit

warehouse

committee they believed that the facility would close shortly after the Care IPO: in the memorandum seeking approval of the

loan, dated June 28, 2007, they stated, "If approved, CS would anticipate closing the Facility in July 2007, with initial

funding occurring at that time."

Kratenstein Decl. Ex. 73 at 8.

The authors of the memorandum include Ken Rivkin, Andrew Winer, and Damon Pitler, each of whom was involved in negotiating the Care warehouse facility with CIT. The contemporaneous

statements and actions of Credit Suisse, an ultimate source of the proposed financing, gave the authors of the IPO documents a sound basis for their Disclosure statements, whose specific

language was approved by Credit Suisse as an underwriter. II. With regard to UBS, the Disclosure stated, "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." Kratenstein Decl. Ex. 57. The phrase "soon after,"

as used in the Disclosure, had the same meaning as "shortly after." Besecker Dep. 179:1-5, Rosenfeld Decl. Ex. 2.

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Although

UBS

became

involved

in

the

warehouse

financing

process later than Credit Suisse, its representatives undertook efforts to accelerate the process. In a June 6, 2007, e-mail,

Scott Liebman, Managing Director in UBS's Real Estate Finance division, reported to other UBS employees that "CIT wants to close by month-end," and that "The gameplan is to simultaneously underwrite CIT (and their portfolio) and work on the legal

documentation."

Kratenstein Decl. Ex. 42.

The next day, Harris

e-mailed Crowley-Piscitell and Ashraf, informing them that UBS had retained the same outside counsel as Credit Suisse

(Cadwalder, Wickersham & Taft LLP), and that "it is likely that both the CS and UBS facilities will close at the same time." Kratenstein Decl. Ex. 41. and Harris that "The Ashraf explained to Crowley-Piscitell date UBS had mentioned at the

6/30

diligence was to get their internal credit approvals and not to close the facility." approval from UBS was Id. He added that obtaining internal "so we can focus on the

important,

documentation process which will take several weeks post credit approvals." understanding Id. by Taken together, this evidence reflects an members of both UBS and CIT that internal

approval from UBS was expected around the end of June, with the facility to close several weeks later. There is no conflicting

factual evidence that the defendants did not believe that the UBS warehouse facility would close soon after the Care IPO.

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On June 18, 2007, Harris e-mailed a fellow CIT employee saying that he had "not heard much from UBS other than a couple of requests." Rosenfeld Decl. Ex. 87. The lead plaintiffs

characterize the lack of communication from UBS to Harris as UBS's "withdrawing from the process." 23. The Harris e-mail does not Lead Pls.' Opp'n at 22support that supposition.

Crowley-Piscitell e-mailed Besecker on June 18, 2007, to say that she "Chatted with both CS and UBS today directly. finishing up some of their internal work, no issues UBS is noted. The at

Anticipate approval this week." next day, Scott Liebman

Kratenstein Decl. Ex. 59. Harris to ask, "Who

e-mailed

Cadwalder is CS using? start the process?"

If they haven't started yet, should we That same day,

Kratenstein Decl. Ex. 64.

Aaron Niedermayer, from UBS's Real Estate Finance division, emailed Michael "due Schuman of CIT on the Healthcare Care for assistance facility.

completing

diligence"

warehouse

Kratenstein Decl. Ex. 65.

Finally, on June 22, 2007, the day of

the Care IPO, Harris e-mailed Gail Schragel of UBS, stating, "We appreciate your commitment to closing the facility as quickly as possible." Kratenstein Decl. Ex. 69. Thus, there was a basis

in fact for the defendants' expectations with regard to UBS. Not surprisingly, the defendants relied on the prospective lenders' communications with them, in their belief that the UBS warehouse facility would close soon after the Care IPO.

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Besecker

Dep.

272:25-273:5,

Kratenstein

Decl.

Ex.

3

("I

did

expect that Care would close on the warehouse line of credit soon or shortly thereafter based on conversations directly with UBS folks that CIT had had, that I had had, as well as other monitoring activities by the debt team that occurred throughout the IPO process."); Kellman Dep. 207:17-208:6, Kratenstein Decl. Ex. 6; O'Neill Dep. 189:13-24, Kratenstein Decl. Ex. 7. UBS

consented to a modified version of the Disclosure, which did not state when Care would close the facility, but affirmed that Care expected to close a warehouse facility with UBS. See

Kratenstein Decl. Ex. 55; Statement of Undisputed Material Facts Supp. Mot. Summ. J. ¶¶ 64, 67. underwriter, also approved Care's UBS, in its capacity as an registration statement and

final prospectus, which contained the Disclosure in its final form. See Joint Statement ¶ 35. The lead plaintiffs point to no evidence that either the lenders true. III. The lead plaintiffs say that neither the Disclosure nor belief in it was reasonable, as challenged by a financial or the borrowers doubted that their statements were

expert, who concludes the Disclosure "did not accurately portray Care Investment Trust's ("Care") status in securing warehouse financing." Decl. of Richard W. Payne, III, at 6, Rosenfeld

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Decl. Ex. 123.

Mr. Payne asserts that Care's management was too

inexperienced to conclude t