Opinion
Civil No. 99-116(MJD/JGL)
March 6, 2002
James R. Safely, Thomas B. Hatch, Randall Tietjen, Kari Thoe Crone, Bethany D. Krueger and John P. Morgan, Robins, Kaplan, Miller Ciresi LLP, for and on behalf of Plaintiffs.
Geoffrey P. Jarpe, Maslon Edelman Borman Brand LLP, Howard Schiffman and Adam Proujansky, Dickstein Shapiro Morin Oshinsky LLP, for and on behalf of Defendants Gleacher NatWest, Inc., NatWest Capital Markets Limited and National Westminster Bank plc.
David I. Gindler and Richard H. Zelichov, Irell Manella LLP, Charles N. Nauen and Eric C. Tostrud, Lockridge Grindal Nauen P.L.L.P. and Robert S. Walters, Barrett McNagny for and on behalf of Defendant Steel Dynamics, Inc.
MEMORANDUM OPINION AND ORDER
This is a securities fraud case, in which Plaintiffs allege that the Defendants made a number of misrepresentations and omissions concerning the offering of notes to finance a steel mini-mill in Thailand. Before the Court are the motions of Defendants Gleacher NatWest, Inc., NatWest Capital Markets Limited and National Westminister Bank, plc and of Steel Dynamics, Inc. for summary judgment.
Factual Background
In December 1997, the Nakornthai Strip Mill Public Company Limited ("NSM") completed the construction of the first part of a steel mini-mill (the "NSM Mill"). NSM had run out of cash, and was unable to secure financing in Thailand because of an economic crisis in that country. As a result, NSM decided to raise money in the U.S. by making an offering of debt securities ("NSM Notes"). The Plaintiffs (collectively referred to as "IDS") are investment funds that purchased approximately $62 million of the NSM Notes in March 1998. Defendant National Westminster Bank plc is a banking institution that is headquartered in London, England that was the lead underwriter in the NSM Note offering at issue in this case. Defendants NatWest Capital Markets Limited and Gleacher NatWest, Inc. were agents of the National Westminster Bank plc (collectively referred to as "NatWest"). Defendant McDonald Investments, Inc. f/k/a McDonald Company Securities ("McDonald") was also an underwriter for the note offering.
The NSM Notes were considered high-risk, non-investment grade notes given the fact that NSM already had an enormous debt, and because the NSM Mill had no operating history and was located in Thailand. The NSM Notes were offered only to "Qualified Institutional Buyers"; institutional investors holding more than $100 million in assets that are qualified under federal law to trade high-risk, unregistered securities in private markets. Each named plaintiff is a "Qualified Institutional Buyer".
In January 1998, representatives of NatWest and McDonald invited IDS to attend an informal presentation concerning the NSM Notes. IDS thereafter attended a formal presentation, or road show, on February 11, 1998. Keith Busse, President of Defendant Steel Dynamics, Inc. ("SDI"), attended both meetings. SDI owns a successful steel mill in Indiana, and because of its expertise in operating a steel mini-mill, SDI was asked to provide consulting services by NatWest and McDonald. IDS alleges that SDI's presence at the meetings, and affirmation of the steel mini-mill, is central to its claims of securities fraud because SDI's success with its own steel mini-mill provided credibility to the NSM Note transaction.
Mr. John Schultes, President and CEO of NSM, made the major presentation concerning the NSM Mill at the road show. In his presentation, Schultes represented that the NSM mill provided a "[s]ignificant cost advantage versus most global competitors", with a "[w]orld class management team and significant strategic equity partners". Gindler Decl., Ex. 9 at IDS0002910. He further represented that the NSM Mill had "technological enhancements over existing mini-mills [that] allow for even greater operating efficiencies and significantly higher quality". Id. at IDS0002911. It was further represented that SDI was a 10% managing owner that would provide "managerial and technical support under a 10-year Management Agreement" Id. at IDS0002917, and that the "concept and operating assumptions [were] verified by Steel Dynamics, Nucor, Hylsa, Preussag and Klockner". Id. at IDS0002926.
Although Busse did not make a formal presentation, he is alleged to have interjected himself on several points, making positive comments concerning the technological capabilities of the NSM Mill, the cost advantage, and about SDI's commitment to the deal. Koehl Dep. at 492-493. Busse may have also reviewed and commented on the slide show prior to its presentation. Busse Dep. at 457-458.
In addition to the road show presentations, NatWest and McDonald prepared and distributed a number of memoranda; one dated February 9, 1998, a supplemental offering memoranda dated February 27, 1998, and a final Offering Memorandum ("OM") dated March 2, 1998. SDI was sent drafts of the offering memoranda, and did provide comments on those portions referring to SDI and its role in the transaction. Walters Dep. at 154-161.
The role of SDI in the transaction is defined in a separate agreement between SDI and the NSM Management Co. titled the "Management Advisory and Technical Assistance Agreement" (hereinafter the "Advisory Agreement"). Crone Decl. Ex. 12. NatWest and McDonald originally wanted SDI to assume the management of the NSM Mill, but SDI did not have the personnel to undertake the management. Walsh Decl. Ex. 19 at 5. Thereafter, SDI agreed to provide consulting and training, and also agreed to become a member of a management company; the manager of which was an individual from McDonald, David Stickler. Walsh Decl. Ex. 25; Crone Decl. Ex. 12.
The Advisory Agreement further provided that:
2.3 The parties agree that SDI has undertaken no independent study or analysis of NSM's proposed operations, or of its Mill, its proposed Products, its technology and equipment, its raw materials, its markets, its transportation system, or the impact of its Thai culture, legal system, or tax laws upon its proposed business or upon Mill operations. SDI does not know whether, and has made no representations to NSM, express or implied, to the effect that SDI Technology or SDI's techniques and culture are appropriate for or best suited to NSM's needs SDI's undertaking herein, is solely to make available to Management Co., and, through Management Co. to NSM, it own understandings, experience, and know-how, based upon its own operations, for Management Co.'s and/or NSM's use, rejection, modification or adaptation as Management Co. and/or NSM deems appropriate. The parties likewise agree that SDI shall have no ongoing monitoring or oversight functions over NSM's Mill operations.
Crone Decl. Ex. 12. The Advisory Agreement further provided that "SDI has been granted no authority, does not intend to exercise any such power or authority, and is undertaking no obligations to directly or indirectly manage, control or supervise any of NSM's management or operating personnel or any of NSM's policies, practices or procedures . . ." Id. § 2.4.
For its contributions to the NSM Mill, SDI was given reciprocal rights to technical information and assistance, an annual fee of $2 million dollars, a one-time payment of $1.3 million payable upon the start-up of the Finishing Facilities, and would be reimbursed its costs. Id. at §§ 3.1 and 4.1. SDI was also to receive a 10% equity interest in NSM, the receipt of which would result in taxable income. The Thai tax liability amounted to $5.4 million, which was paid by NSM from the proceeds of the offering. Healy Dep. 1068-1070 and 1075-1079. IDS asserts that at no time prior to purchasing the NSM was it given a copy of the Advisory Agreement, or were otherwise informed of SDI's true role in this transaction. Koehl Decl. ¶ 4
IDS alleges that after reviewing the OM, and listening to road show presentations, as well as reviewing the slides, IDS made the decision to purchase 12% Senior Mortgage Notes, 121/4% Senior Subordinated Mortgage Notes, with Warrants to Purchase Ordinary Shares of NSM in the aggregate amount of $62 million on March 12, 1998. Koehl Decl. ¶ 5; Crone Decl. Ex. 21 at 24-25.
On May 7, 1998, IDS's analyst, Michael Koehl called Busse to discuss the NSM Mill. Koehl Dep. at 1159. During this conversation, the two discussed the operations of the mill and the problems it was experiencing, and what SDI was going to do to address such problems. Koehl Dep. at 1168-1217; Busse Dep. at 1137. One topic discussed was that the NSM Mill was behind schedule for the melt-shop ramp up. Koehl Dep. at 1167-1168. Busse also told Koehl that SDI was going to step up its involvement at the NSM Mill, and that he was shocked at the disarray. Id. at 1169-1173. Busse also told him that NSM Management had no sense of urgency. Id. at 1176. From this conversation, Koehl walked away with the impression that he "wasn't happy with what I was hearing, but that the potential was there for this thing to get back on track because a lot of what we talked about were managerial things that seemingly would have been fixable in shorter order than if, had there been a massive technical problem with the mill itself." Id. at 1202.
In October 1998, a meeting of bondholders was held at SDI's plant in Indiana. Koehl Dep. at 1218. At this meeting, Busse informed the attendees of the developments concerning the NSM Mill. Walsh Decl. Ex. 47. Specifically, Busse discussed the failing economy in Thailand, then proceeded to discuss major problems occurring because of bad management. Id. For example, Busse informed the attendees that the furnace had a hole burned through the top, and when it was repaired, the old, defective refactories were reinstalled in the furnace. Id. at 17. Busse commented that SDI made recommendations to the NSM Management Company, but that their recommendations were completely ignored. Id. at 19.
After this meeting, the price of the NSM Notes plummeted. Cobb Aff., Ex. A. The NSM Mill shut down in December 1998, and NSM is in default on the Notes. Koehl Decl. ¶ 15.
In the Third Amended Complaint, IDS has asserted claims of securities fraud pursuant to federal and state law against all defendants, as well as a claim of fraud and negligent misrepresentation, and a claim that defendants violated the Minnesota Consumer Fraud Act. IDS's claims of securities fraud are based on a number allegations of misrepresentations or omissions contained in, or concerning, the information provided to IDS at the road shows and in the OM. Recently, the Court allowed IDS to amend its Complaint to allow IDS to seek punitive damages.
Standard for Summary Judgment
Summary judgment as a matter of law is appropriate when no genuine issue of material fact exists in the record. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-250 (1986). A fact is material if resolving disputes concerning that fact affects the outcome of the case. See Anderson, 477 U.S. at 248. A dispute is genuine if, based on the evidence, a reasonable jury could return a verdict for either party. See id. at 252. On a motion for summary judgment, the Court views all evidence and inferences in a light most favorable to the nonmoving party. See id., 477 U.S. at 250. The moving party carries the burden to demonstrate the absence of any genuine issue of material fact. Fed.R.Civ.P. 56(b); Celotex, 477 U.S. at 323.
NatWest's Motion for Summary Judgment
1. Preemption
NatWest argues that IDS's state law securities fraud claims, Counts III, IV and VI, must be dismissed as they are preempted by the National Securities Markets Improvement Act ("NSMIA"), Pub.L. No. 104-290, 110 Stat. 3416 (1996) codified in part at 15 U.S.C. § 77r.
Preemption analysis begins with the acknowledgment of the Supremacy Clause of the U.S. Constitution, which provides that the laws of the United States "shall be the supreme Law of the Land; . . . any Thing in the Constitution or Laws of any state to the Contrary notwithstanding." Art. VI, cl. 2. State law that conflicts with federal law is thus considered to be "without effect." Cipollone v. Liggett Group, Inc., 505 U.S. 504, 516 (1992) (citing McCulloch v. Maryland, 4 Wheat. 316, 427 (1819)). "Consideration of issues arising under the Supremacy Clause "starts with the assumption that the historic police powers of the States [are] not to be superseded by . . . Federal Act unless that [is] the clear and manifest purpose of Congress." Id. (citing Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947)).
Thus, to determine whether the NSMIA preempts state securities fraud claims, the Court must look to Congress' intent in passing such legislation.
Congress' intent may be "explicitly stated in the statute's language, or implicitly in its structure and purpose." . . . In the absence of an express congressional command, state law is preempted if that law actually conflicts with federal law . . . or if federal law so thoroughly occupies a legislative field "`as to make reasonable the inference that Congress left no room for the States to supplement it.'"
Id. (citations omitted).
A. Explicit Preemption
The applicable provisions of NSMIA provide the following:
(a) Scope of exemption
Except as otherwise provided in this section, no law, rule, regulation, or order, or other administrative action of any State or any political subdivision thereof —
(1) requiring, or with respect to, registration or qualification of securities, or registration or qualification of securities transactions, shall directly or indirectly apply to a security that —
(A) is a covered security; or
(B) will be a covered security upon completion of the transaction;
(2) shall directly or indirectly prohibit, limit, or impose any conditions upon the use of —
(A) with respect to a covered security described in subsection (b) of this section, any offering document that is prepared by or on behalf of the issuer; or
(B) any proxy statement, report to shareholders, or other disclosure document relating to a covered security or the issuer thereof that is required to be and is filed with the Commission or any national securities organization registered under section 78o-3 of this title, except that this subparagraph does not apply to the laws, rules, regulations, or orders, or other administrative actions of the State of incorporation of the issuer; or
(3) shall directly or indirectly prohibit, limit, or impose conditions, based on the merits of such offering or issuer, upon the offer or sale of any security described in paragraph (1).
(b) Covered securities
For purposes of this section, the following are covered securities:
(1) Exclusive Federal registration of nationally traded securities
A security is a covered security if such security is —
(A) listed, or authorized for listing, on the New York Stock Exchange or the American Stock Exchange, or listed, or authorized for listing, on the National Market System of the Nasdaq Stock Market (or any successor to such entities);
(B) listed, or authorized for listing, on a national securities exchange (or tier or segment thereof) that has listing standards that the Commission determines by rule (on its own initiative or on the basis of a petition) are substantially similar to the listing standards applicable to securities described in subparagraph (A); or
(C) is a security of the same issuer that is equal in seniority or that is a senior security to a security described in subparagraph (A) or (B).
(2) Exclusive Federal registration of investment companies
A security is a covered security if such security is a security issued by an investment company that is registered, or that has filed a registration statement, under the Investment Company Act of 1940.
(3) Sales to qualified purchasers
A security is a covered security with respect to the offer or sale of the security to qualified purchasers, as defined by the Commission by rule. In prescribing such rule, the Commission may define the term "qualified purchaser" differently with respect to different categories of securities, consistent with the public interest and the protection of investors.
(4) Exemption in connection with certain exempt offerings
A security is a covered security with respect to a transaction that is exempt from registration under this subchapter pursuant to —
(A) paragraph (1) or (3) of section 77d of this title, and the issuer of such security files reports with the Commission pursuant to section 78m or 78o(d) of this title;
(B) section 77d(4) of this title;
(C) section 77c(a) of this title, other than the offer or sale of a security that is exempt from such registration pursuant to paragraph (4), (10), or (11) of such section, except that a municipal security that is exempt from such registration pursuant to paragraph (2) of such section is not a covered security with respect to the offer or sale of such security in the State in which the issuer of such security is located; or
(D) Commission rules or regulations issued under section 77d(2) of this title, except that this subparagraph does not prohibit a State from imposing notice filing requirements that are substantially similar to those required by rule or regulation under section 77d(2) of this title that are in effect on September 1, 1996.
NatWest argues that the NSMIA's preemption provisions apply in this case because the NSM Notes are "covered securities" and IDS are "qualified purchasers" as defined by the NSMIA. NatWest further argues that the NSMIA preempts state laws that "directly or indirectly prohibit, limit or impose any condition upon" the use of an offering document that is prepared by or on behalf of the issuer, and it preempts state laws that "directly or indirectly prohibit, limit or impose conditions, based on the merits of such offering or issuer, upon the offer or sale" of a covered security. 15 U.S.C. § 77r (a)(2) and (3). Because IDS's state law claims involve, in part, alleged misrepresentations contained in the OM, such claims would, if successful, impose limits on the use of an offering memorandum by subjecting defendants to civil damages for misstatements contained therein. Similarly, the claims based on misrepresentations contained in the slide show or with respect to oral statements, would impose limitations and conditions upon the offer and sale of a covered security by proscribing false or misleading statements with respect to the merits of the offer or sale of such security.
Assuming without deciding that the NSM Notes are "covered securities" and that IDS are "qualified purchasers", the Court finds that the state securities fraud claims are not preempted pursuant to the NSMIA, because the statute specifically preserves such claims:
(c) Preservation of authority
(1) Fraud authority
Consistent with this section, the securities commission (or any agency or officer performing like functions) of any State shall retain jurisdiction under the laws of such State to investigate and bring enforcement actions with respect to fraud or deceit, or unlawful conduct by a broker or dealer, in connection with securities or securities transactions.15 U.S.C. § 77r(c)(1).
NatWest responds that this provision actually supports preemption, because the language refers only to securities fraud actions instituted by state agencies, not private actions, as is the case here. This interpretation is not supported by the congressional purpose or the legislative history of the NSMIA, however.
The NSMIA was passed "in order to promote efficiency and capital formation in the financial markets." Pub.L. No. 104-290, 110 Stat. 3416 (1996). The Second Circuit noted that to promote such efficiency, the NSMIA was enacted primarily to:
preempt state "Blue Sky" laws which required issuers to register many securities with state authorities prior to marketing in the state. By 1996, Congress recognized the redundancy and inefficiencies inherent in such a system and passed NSMIA to preclude states from requiring issuers to register or qualify certain securities with state authorities.
Lander v. Hartford Life Annuity Insurance Company, 251 F.3d 101, 109 (2nd Cir. 2001).
The legislative history shows that by passing the NSMIA, Congress intended that the Act have no effect on private civil actions under state law. "It is also the Committee's intention not to alter, limit, expand, or otherwise affect in any way any State statutory or common law with respect to fraud or deceit, including broker-dealer sales practices, in connection with securities and securities transactions." H.R. 104-622, at 34, reprinted in 1996 U.S.C.C.A.N. 3877, 3897. See, Zuri, 177 F. Supp. at 193. As support for its position, NatWest cites the Court to the decision of the Ninth Circuit in Myers v. Merrill Lynch Co., Inc., 1999 WL 696082 (N.D.Cal. 1999) aff'd, 249 F.3d 1087 (9th Cir. 2001). Myers, however, involved a state statute that placed limitations on the practice of penalty bids, where no federal law imposed a similar limitation. The court found that because the SEC Regulations specifically contemplated that penalty bids would be used, state law prohibiting such practice was preempted.
Based on its facts, Myers is distinguishable from this case. More importantly, Myers does not stand for the proposition that private causes of action asserting state law securities fraud claims are preempted, while state actions are not.
Further, the Court finds that the NSMIA was not intended to preempt state securities fraud claims because in enacting the NSMIA, Congress did not amend the savings clauses of the 1933 and 1934 Securities Act, which provide that the rights and remedies provided by such Acts shall be in addition to all other rights and remedies that exist at law or in equity. 15 U.S.C. § 77p(a) and 78bb(a).
B. Implied Preemption
NatWest argues that the NSMIA implicitly preempts state securities fraud claims because such claims pose an obstacle to the statute's purpose of creating a federal scheme for the regulation of securities offerings. As noted above, the purpose of the NSMIA is to establish a single, federal scheme for the regulation and qualification of securities. Allowing state fraud claims to proceed does not impede this purpose, because federal law prohibits the same conduct.
2. Merits of the Claims
NatWest also argues that they are entitled to summary judgment, because the OM contains the following provision:
NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, IS MADE BY THE INITIAL PURCHASERS AS TO THE ACCURACY OR COMPLETENESS OF THE INFORMATION SET FORTH HEREIN, AND NOTHING CONTAINED IN THIS OFFERING MEMORANDUM IS, OR SHOULD BE RELIED UPON AS, A PROMISE OR REPRESENTATION, WHETHER AS TO THE PAST OR FUTURE. THE INITIAL PURCHASERS DO NOT ASSUME ANY RESPONSIBILITY FOR THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION.
OM at iii. The OM further provides that the statements, estimates and projections contained therein are those of NSM, not of NatWest. NatWest thus argues that the statements made in the OM cannot be attributed to NatWest, and thus IDS cannot meet its burden that NatWest made material false or misleading statements.
The above quoted disclaimer does not state that the initial purchasers made no representations in the OM. Rather, the disclaimer provides that the initial purchasers make no warranty as to the accuracy or completeness of the statements contained therein. In addition, the OM provides that it contains "certain statements, estimates and projections by the issuers" not that all such statements, estimates and projections were provided by the issuers. OM at iii (emphasis added). Because NatWest was an initial purchaser, it is an "insider or affiliate" and a specific connection need not be made between the alleged misrepresentations and NatWest. Luce v. Edelstein, 802 F.2d 49, 55 (2nd Cir. 1986).
NatWest also argues that it merely assisted in the drafting of the Offering Memorandum, therefore it cannot be held liable for alleged misrepresentations or omissions that were not specifically attributed to NatWest. The cases that NatWest has cited in support of this argument are factually distinguishable from this case because they involve either attorneys or accountants that drafted the document at issue, but were not initial purchasers or otherwise a participant in the sale of the securities. In this case, NatWest is an initial purchaser, and as discussed above, may be held liable for the alleged misrepresentations or omissions in the OM. Gabrielson v.Capital, L.P. v. NatWest Finance, Inc., 94 F. Supp.2d 491, 501-503 (S.D.N.Y. 2000).
Finally, NatWest argues that the OM superseded any statements made at the road shows, and that the OM provided any investment decision must be based solely on information contained in the OM:
No dealer, salesperson, or other person has been authorized in connection with the offering made hereby to give any information or to make any representation not contained in this Offering Memorandum, and, if given or made, such information or representation must not be relied upon as having been authorized by the Notes Issuers, the Company or by the Initial Purchasers.
Thus, any alleged misrepresentations that are not contained in the OM cannot form the basis of a securities fraud claim. The cases cited by NatWest stand for the proposition that a securities fraud claim cannot be based on an oral representation that is later contradicted by a written document or offering memorandum. See eg., Platsis v. E.F. Hutton Co., 642 F. Supp. 1277, 1298 (W.D.Mich. 1986); In re Hyperion Securities Litigation, No. 93 Civ. 7179 (MBM), 1995 WL 422480 at *7 (S.D.N.Y. July 14, 1995). NatWest has not shown which, if any, alleged misrepresentations are contradicted by the OM. Until such a showing is made, NatWest is not entitled to summary judgment.
In response to NatWest's motion, IDS asserts that notwithstanding the disclaimer language in the OM, it was reasonable for IDS to rely on any statements made at the road shows and in particular, in the OM. In support, IDS notes that certain NatWest employees testified at their depositions that it was reasonable for investors to rely on the information contained in the OM. See eg., Goldthorpe Dep. at 139, 229-30; Wheeler Dep. 1050, 1514.
Genuine issues of material fact exist as to whether IDS reasonably relied on the alleged misrepresentations made at the road shows, in the slide show and in the OM. Accordingly, summary judgment in favor of NatWest is not appropriate. SDI's Motion for Summary Judgment
1. Loss Causation
SDI argues that it is entitled to summary judgment as to all of IDS's claims against it, as IDS cannot prove that any alleged misrepresentation or omission attributed to SDI caused IDS's losses. SDI argues that on May 7, 1998, two months after IDS purchased the NSM Notes, Busse notified IDS of certain problems facing NSM. However, rather than sell the NSM Notes at that time, which were trading at a premium, IDS made the conscious decision to hold on to the Notes, attributing the problems to the usual start up problems. SDI thus argues that after the May 7th call, IDS made a "second investment decision" to keep the Notes, and that this decision severed any causal connection between SDI's actions and IDS's losses.
SDI principally relies on Nye v. Blyth Eastman Dillon Co., 588 F.2d 1189, 1198 (8th Cir. 1978) to support its argument that IDS cannot show a causal connection between its losses and the alleged fraudulent conduct of SDI. In Nye, the Eighth Circuit held that in determining damages from a Rule 10b-5 violation,
[t]he relevant time period is the date the [plaintiffs] no longer relied on the misrepresentations in making their investment decisions. Thereafter, the [plaintiffs] had a reasonable time in which to make a `second investment decision' to either hold the shares or sell them and reinvest the proceeds elsewhere. . . . Any increase or decrease in the value of the stock after a reasonable time is causally unrelated to the initial decision to purchase and can serve to neither decrease nor increase the amount of damages.
Id. 588 F.2d at 1198.
IDS argues that the second investment decision doctrine does not apply because damages in this case are measured at the time of the initial purchase, not when the alleged fraud had been discovered. IDS asserts that in this case, the NSM Notes were worthless when initially purchased, because the investment was not as it was represented. In a more recent Eighth Circuit decision, the court again discussed the proper measure of damages in securities fraud cases.
In securities fraud cases, damages are determined in accordance with the extent to which a plaintiff is actually damaged as a result of the defendant's fraudulent conduct. Actual damages are generally measured by determining the plaintiff's out-of-pocket loss, which is in turn measured by the difference between the purchase price of the security and its actual value. In Harris v. American Investment Co., the court recognized that the actual value of the security may be determined either on the date of purchase or on the date the fraud was discovered. The court acknowledged that in some cases, especially when the security is traded publicly, it may be difficult to ascertain the value of the security transferred in connection with the fraudulent and in such cases the value may be determined on the date the fraud is discovered. In any event, `the function of the court `is to fashion the remedy best suited to the harm.'
Harris v. Union Electric Company, 787 F.2d 355, 367 (8th Cir. 1986) (citing Harris v. American Investment Co. 523 F.2d 220, 225 (8th Cir. 1975), cert. denied, 423 U.S. 1054 (1976)).
The Court agrees that the facts of this case do warrant summary judgment on behalf of SDI based on application of the second investment decision doctrine. In cases in which the securities at issue were not publicly traded, but were sold in a private placement such as in this case, there is no market in which to sell the security once the fraud is uncovered. See, Alexander v. Evans, 1993 WL 427409 at *12 (S.D.N Y 1993) (holdings acquired through private placement are restricted, therefore no market to sell interests once fraud discovered). IDS has put forth evidence that the NSM Notes had little or no market value in May 1998, because only a small number were being traded, and IDS was one of the largest holders of the notes at that time. Koehl Decl. ¶ 11. If IDS had attempted to sell them, the price would have gone down, and after a time, no bids would have been available. SDI has not put forth any evidence to the contrary.
2. Source of Misleading Statements
SDI also asserts that it is entitled to summary judgment because IDS cannot show that any SDI employee, particularly Keith Busse, made any material misrepresentations. It argues that it only had a peripheral role in the NSM Notes transaction; merely providing consulting services. However, IDS has put forth evidence to show that a reasonable jury could find that SDI's true role was misrepresented to IDS to induce its participation in the NSM Notes transaction through misrepresentations or omissions, made by or attributed to, SDI.
At the road show, SDI was described, not as a consultant, but as a "10% Managing Owner" working under a management agreement. Crone Decl. Ex. 13, IDS002916 and IDS0002917. IDS representatives believed that based on the information provided them at the road show and in the OM, and in particular by assurances given them by Busse, SDI would be "on the ground, sleeves rolled up" making sure the NSM Mill succeeded. Merrill Dep. 605. Investors were not provided a copy of the Advisory Agreement, which clearly defined SDI's role as a consultant and further provided how limited its role would be.
SDI also argues that it did not draft the slide show documents, therefore it cannot be held liable for any alleged misrepresentations contained therein. There is evidence suggesting that SDI was given the opportunity to comment on the slide show prior to its presentation. Busse admitted that he was sent the slide show materials before they were presented, and may have commented on such slides. Busse Dep. 1457. One such slide provided that SDI had verified the NSM Mill's concept and operating assumptions. Crone Decl. Ex. 13., IDS 0002926. In his deposition, Busse stated that SDI didn't verify anything, as that was not SDI's role. Busse Dep. 133-136. Yet, Busse never made this fact clear to IDS before the closing. By attending the road shows, a reasonable jury could find that the representations concerning SDI could be attributable to SDI, given the fact that SDI did not state otherwise, and did not provide any information contradicting the slides.
There is also evidence that SDI was sent portions of the drafts of the OM that discussed SDI's role in the transaction. Walters Dep. 154-161; Gindler Decl. Exs. 14 and 15. This evidence shows that SDI's counsel believed that comments in the drafts, which appear in the final, are misleading as to SDI's role in the transaction.
SDI also argues that Busse's comments were all true, therefore IDS claims of fraud and misrepresentation must fail. The Court finds that genuine issues of material fact exist in the record as to whether such statements were, in fact, true. The Court further finds genuine issues of fact exist on the record as to whether SDI acted with the requisite intent.
3. Minnesota Securities Act
Finally, SDI asserts that it is entitled to summary judgment on the Minnesota Securities Act ("MSA") claims because SDI did not actually sell the NSM Notes to IDS.
IDS responds that SDI can be liable under the MSA if its participation in the transaction was a substantial factor, citing to Anders v. Dakota Land Development Co., 380 N.W.2d 862 (Minn.Ct.App. 1986) (relying on federal law as a useful guide in defining a seller of securities). SDI asserts that the substantial factor test was overruled in Pinter v. Dahl, 486 U.S. 622 (1988). What the Court rejected in Pinter however, was the "substantial factor test" to the extent it held those liable who only tangentially were involved in the sale or purchase of a security. The Court specifically held that § 12(1) liability extends to those who "successfully solicits the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner." Pinter, 486 U.S. at 647. Accordingly, SDI's has failed to show it is entitled to summary judgment with respect to the MSA.
SDI further argues that IDS's MSA claim, to the extent it imposes secondary liability upon "agents" who materially aid in the fraud, must be dismissed as "agents" are defined in the statute as an "individual". Minn. Stat. §§ 80A.23, Subd. 3, and 80A.14, Subd. 3. At first glance, it would appear that a corporation cannot be an agent, as the term is defined in § 80A.14. However, in reviewing Minnesota case law addressing secondary liability of an agent pursuant to § 80A.23, Subd. 3, the courts do not interpret this statutory provisions as not applying to corporations. See, Jenson v. Touche Ross Co., 335 N.W.2d 720 (Minn. 1983); Norwest Bank Hastings v. Clapp, 394 N.W.2d 176 (Minn.Ct.App. 1986). Rather, the courts focused on whether the alleged agent, both corporations, represented the seller in effecting or attempting to effect purchases or sale of securities. See, eg., Jenson, 335 N.W.2d at 728.
Pursuant to the rules of statutory construction, Minn. Stat. § 645.17, the Court finds that limiting secondary liability to natural persons under § 80A.23, Subd. 3 would lead to an absurd result. Accordingly, SDI is not entitled to summary judgment on that basis.
IT IS HEREBY ORDERED that the motions of Gleacher NatWest Inc., NatWest Capital Markets Limited, and National Westminister Bank plc and of Steel Dynamics Inc. are DENIED.