In a sweeping decision issued on December 20, 2007, the Honorable James Graham of the United States District Court for the Southern District of Ohio denied in virtually every respect motions to dismiss over $1.5 billion in claims filed against Credit Suisse First Boston (“Credit Suisse”) by investors who formerly held AAA rated notes issued by affiliates of now-defunct National Century Financial Enterprises of Columbus, Ohio (NCFE). Gibbs & Bruns represents the largest group of plaintiffs, 32 institutions in all, including investors such as the State of Arizona; mutual funds managed by PIMCO, Dreyfus, Alliance Capital Management; and some of the largest investors in Europe, including the European Bank for Reconstruction and Development, Ofivalmo, and Dexia BIL.
The court’s ruling was highly significant for purchasers of asset-backed notes and purchasers of Rule 144a securities, both of which are areas of keen interest in light of the sub-prime loan crisis. Credit Suisse had argued that disclaimers in the offering memorandum insulated it from liability for fraud in connection with its sale of NCFE notes to investors. Credit Suisse relied, in particular, on a disclaimer stating that it had done no independent investigation of its own. The court categorically rejected this argument: “the disclaimers in the offering materials … do not preclude Plaintiffs from showing that they justifiably relied on Credit Suisse’s alleged misrepresentations.” The court’s ruling went even further and cast doubt on the effectiveness of any disclaimer in any Rule 144a offering. The court observed that disclaimers of this type “would seem beyond credulity,” particularly to investors who knew that Credit Suisse “had helped devise the note programs [and] helped draft the offering materials.” The court also held that “it would defeat the securities laws if parties could escape liability for their own deliberate misrepresentations by including boilerplate disclaimers into offering materials.”
NCFE, which securitized healthcare receivables, collapsed in late 2002. Complaints and criminal indictments allege that NCFE raised billions of dollars that were supposed to be invested only by the purchase of valid healthcare receivables, but substantial amounts of the money were diverted to other uses. Several of NCFE’s officers and employees have since pleaded guilty to fraud or other federal crimes. On March 18, 2008, five former top NCFE executives, Rebecca S. Parrett, Donald H. Ayers, Roger S. Faulkenberry, Randolph H. Speer, and James E. Dierker Jr., were convicted on all charges connected with the collapse of NCFE. Charges included securities and wire fraud, conspiracy to commit fraud, and money laundering. On August 8, 2008, the former CEO of NCFE, Lance Poulsen, was sentenced to 10 years in prison for witness tampering and obstruction of justice, which were charges related to the fraud that precipitated the company’s collapse.
The company’s collapse is one of the largest defaults of AAA rated debts securities in decades. Credit Suisse marketed $3 billion of NCFE’s asset-backed securities. Among the investor plaintiffs are major banks, mutual funds, and insurance companies, along with the State of Arizona and a number of Arizona government entities.
In 2007, we settled our clients’ claims against PricewaterhouseCoopers and Kaye Scholer. Both settlements are confidential, but they raised to $600 million the amount we have recovered for our clients in the NCFE matter. Also included in our settlement total are an April 2006 settlement with JP Morgan Chase, Bank One, and their affiliates, which JP Morgan’s Form 10-K disclosed was in the amount of $425 million. We believe this is the largest civil litigation settlement ever paid by an Indenture Trustee. It adds to additional settlements recovered from Deloitte & Touche LLP and others.