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In re RAIT Financial Trust Securities Litigation

December 22, 2008

IN RE RAIT FINANCIAL TRUST SECURITIES LITIGATION


The opinion of the court was delivered by: Legrome D. Davis, J.

MEMORANDUM

Presently before the Court are four separate motions to dismiss*fn1 (Doc. Nos. 70-77), Lead Plaintiff's Opposition in response to these motions to dismiss (Doc. No. 78), four separate replies to this response*fn2 (Doc. Nos. 87-90), Defendants RAIT Financial Trust, Betsy Z. Cohen, Daniel G. Cohen, Ellen J. DiStefano, and Jack E. Salmon's Supplemental Brief Noting New Authority (Doc. No. 94), Lead Plaintiff's Response to this Supplemental Brief (Doc. No. 97), Defendants' Second Supplemental Brief (Doc. No. 101), and Lead Plaintiff's Response to this Second Supplemental Brief (Doc. No. 105). For the reasons set forth below, Defendants' Motions are granted in part and denied in part.

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

Defendant RAIT Financial Trust ("RAIT") was founded in 1997 by Defendant Betsy Z. Cohen ("Betsy Cohen") as a real estate investment trust ("REIT") that provides financing for home builders, mortgage lenders, and other real estate companies. On June 8, 2006, Defendant RAIT announced plans to merge with Taberna Realty Finance Trust ("Taberna"), another REIT, after Taberna's failed initial public offering ("IPO") in April 2006. Betsy Cohen's son, Defendant Daniel G. Cohen ("Daniel Cohen"), served as the Chairman and CEO of Taberna. Like RAIT, Taberna also originated financing for companies involved in the real estate industry. This financing often took the form of trust preferred securities (TruPS), which Taberna would then structure into collateralized debt obligations (CDOs). On December 11, 2006, the merger between RAIT and Taberna closed, and Taberna became a wholly-owned subsidiary of RAIT. Betsy Cohen retained her position as Chairman of RAIT but vacated the position of Chief Executive Officer ("CEO"), which Daniel Cohen subsequently filled. Defendant Jack E. Salmon ("Salmon") took the position as Chief Financial Officer ("CFO"), while Ellen J. DiStefano ("DiStefano) served as the Chief Accounting Officer ("CAO").

Through the merger with Taberna, RAIT acquired Taberna's interest in various CDO entities. According to Plaintiffs, many issuers of the TruPS that collateralized RAIT's CDOs were companies specializing in homebuilding, subprime mortgage lending, or Alt-A mortgage lending, three markets that crashed throughout the period at issue in this action. After RAIT announced on July 31, 2007, that one of these issuers, American Home Mortgage Investment Corporation ("AHM"), defaulted on approximately $95 million of financing provided by RAIT, the price of RAIT's common stock fell by $5.72 per share. Days later, on August 2, 2007, Plaintiffs claim that Defendant Daniel Cohen publicly disclosed that RAIT had $377 million in exposure from investments such as TruPS in the crashing homebuilder and mortgage markets.

During the period between the merger announcement on June 8, 2006, and Daniel Cohen's public disclosure on August 2, 2007, Plaintiffs assert that RAIT and its officers, trustees, underwriters, and auditor made several false and misleading statements of material fact to investors regarding RAIT's exposure to losses resulting from Taberna's business. Lead Plaintiff Brahman Capital Corporation brings this class action on behalf of itself and all persons or entities that acquired securities of Defendant RAIT from June 8, 2006 through August 3, 2007. Employees' Retirement System of the State of Rhode Island ("ERS") has also joined this action as the Additional Named Plaintiff. In the Complaint, Plaintiffs assert claims against a variety of defendants under both the Securities Act of 1933 ("Securities Act") and the Securities Exchange Act of 1934 ("Exchange Act"). (Compl. ¶ 12.)

Plaintiffs' claims based on the Securities Act seek redress for securities purchased in the January 2007 Common Stock Offering*fn3 and the July 2007 Preferred Stock Offering.*fn4 Specifically, Count One is brought pursuant to section 11 of the Securities Act against Defendant RAIT, the Officer Defendants,*fn5 the Trustee Defendants,*fn6 and the Common Stock Underwriter Defendants*fn7 for false statements of material fact made in the Registration Statement for the January 2007 Common Stock Offering. (Id. ¶¶ 163-78.) Count Two is brought pursuant to section 12(a)(2) of the Securities Act against RAIT and the Common Stock Underwriter Defendants for false statements of material fact made in the Registration Statement for the January 2007 Common Stock Offering. (Id. ¶¶ 179-87.) Count Three is brought pursuant to section 15 of the Securities Act against Defendants Daniel Cohen, Betsy Cohen, and Salmon as persons having control of RAIT's security violations alleged in Count One. (Id. ¶¶ 188-96.) Count Four is brought pursuant to section 11 of the Securities Act against Defendant RAIT, the Officer Defendants, the Trustee Defendants, Grant Thornton LLP ("Grant Thornton"), and the Preferred Stock Underwriter Defendants*fn8 for false statements of material fact made in the Registration Statement for the July 2007 Preferred Stock Offering. (Id. ¶¶ 197-214.) Count Five is brought pursuant to section 12(a)(2) of the Securities Act against RAIT and the Preferred Stock Underwriter Defendants for false statements of material fact made in the Registration Statement for the July 2007 Preferred Stock Offering. (Id. ¶¶ 215-23.) Count Six is brought pursuant to section 15 of the Securities Act against Defendants Daniel Cohen, Betsy Cohen, and Salmon as persons having control of RAIT's security violations alleged in Count Four. (Id. ¶¶ 224-32.) All claims pursuant to the Securities Act are based in strict liability and negligence and not in fraud or intentional misconduct. (Id. ¶¶ 163, 179, 188, 197, 215, 224.)

Plaintiffs' claims based on the Exchange Act seek redress for securities purchased throughout the class period. Count Seven is brought pursuant to section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder for fraudulent activity and misleading statements by Defendants RAIT, Daniel Cohen, Betsy Cohen, and Salmon. (Id. ¶¶ 403-09.) Count Eight is brought pursuant to section 20(a) of the Exchange Act against Defendants Daniel Cohen, Betzy Cohen, and Salmon as persons having control of RAIT's violations alleged in Count Seven. (Id. ¶¶ 410-16.)

All Defendants now bring four separate motions to dismiss Plaintiffs' Complaint: one by Grant Thornton, one by both the Common Stock and Preferred Stock Underwriter Defendants, one by the Trustee Defendants, and one by both RAIT and the Officer Defendants.

II. LEGAL STANDARD

A motion to dismiss for lack of standing is properly brought pursuant to Federal Rule of Civil Procedure 12(b)(1). Ballentine v. U.S., 486 F.3d 806, 810 (3d Cir. 2007). In evaluating a motion to dismiss brought pursuant to Federal Rule of Civil Procedure 12(b)(1), we must accept as true all factual allegations set forth in the complaint and must construe those facts in favor of the nonmoving party. Id. (citing Warth v. Seldin, 422 U.S. 490, 501 (1975)). On a motion to dismiss for standing, the plaintiff "'bears the burden of establishing' the elements of standing." Id. (citing FOCUS v. Allegheny County Court of Common Pleas, 75 F.3d 834, 838 (3d Cir. 1996)). However, "general factual allegations of injury resulting from the defendant's conduct may suffice." Id. (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992)).

Under Federal Rule of Civil Procedure 12(b)(6), a complaint may be dismissed for "failure to state a claim upon which relief can be granted." When evaluating a motion to dismiss brought pursuant to Federal Rule of Civil Procedure 12(b)(6), we must accept as true all factual allegations set forth in the complaint. See Malia v. General Electric Co., 23 F.3d 828, 830 (3d Cir. 1994). However, "[f]actual allegations must be enough to raise a right to relief above the speculative level," Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1965 (2007), and a court "need not credit a complaint's 'bald assertions' or 'legal conclusions.'" Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir. 1993) (internal quotation marks omitted). In other words, "'stating . . . a claim requires a complaint with enough factual matter (taken as true) to suggest' the required element." Phillips v. County of Allegheny, 515 F.3d 224, 234 (3d Cir. 2008) (quoting Twombly, 127 S.Ct. at 1965) (ellipses in original). Therefore, a claim may be dismissed when the facts alleged and the reasonable inferences drawn therefrom are legally insufficient to support the relief sought. See Pennsylvania ex rel. Zimmerman v. PepsiCo, Inc., 836 F.2d 173, 179-80 (3d Cir. 1988). However, a claim for securities fraud is subject to the particularity requirements of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4(b).*fn9

In dealing with any motion to dismiss, the court may look to the allegations made in the complaint, the exhibits attached to the complaint, and any documents whose authenticity no party questions and whose contents are alleged in the complaint. Pryor v. Nat'l Collegiate Athletic Ass'n, 288 F.3d 548, 560 (3d Cir. 2002). Documents attached to a defendant's motion to dismiss may only be considered if they are referred to in the plaintiff's complaint and if they are central to the plaintiff's claims. Id.

III. DISCUSSION

In their motions to dismiss, Defendants raise a host of issues as grounds for dismissal.

We will address each challenge to the claims in turn.

A. Plaintiff Standing (Counts Four through Six)

All Defendants allege that, because Plaintiffs only purchased securities in the January 2007 Common Stock Offering, Plaintiffs have no standing to bring claims for security violations associated with the July 2007 Preferred Stock Offering. Therefore, Defendants assert that Plaintiffs' claims for violations of the Securities Act arising out of the July 2007 Preferred Stock Offering in Counts Four through Six must be dismissed.

In order to establish constitutional standing, a plaintiff must demonstrate the following:

(1) [A]n injury-in-fact, which is an invasion of a legally protected interest that is (a) concrete and particularized, and (b) actual or imminent, not conjectural or hypothetical; (2) a causal connection between the injury and the conduct complained of; and (3) that it must be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.

Winer Family Trust v. Queen, 503 F.3d 319, 325 (3d Cir. 2007); see also Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992). In class action suits, "[n]amed plaintiffs who represent a class must allege and show that they personally have been injured, not that injury has been suffered by other, unidentified members of the class to which they belong and which they purport to represent." Klein v. Gen. Nutrition Cos., 186 F.3d 338, 345 (3d Cir. 1999) (citing Lewis v. Casey, 518 U.S. 343, 357 (1996)). In other words, at least one named plaintiff must have standing to pursue each claim stated in the complaint. Thus, in the instant action, either Lead Plaintiff or the Additional Named Plaintiff must have purchased securities that are traceable to the allegedly false or misleading statements of material fact in order to proceed on their claims for violations of the Securities Act.

In the Complaint, Plaintiffs expressly state that "Lead Plaintiff and members of the Class purchased RAIT Common Stock issued in, or traceable to, the January 2007 Registration Statement." (Compl. ¶ 176.) When referencing the July 2007 Preferred Stock Offering, Plaintiffs only state that "[m]embers of the Class purchased RAIT Preferred Stock issued pursuant or traceable to the July 2007 Registration Statement" and thus fail to state that any named plaintiff purchased such stock. (Compl. ¶ 212.) Therefore, it appears that no named plaintiff purchased any securities traceable to the July 2007 Registration Statement. Indeed, Plaintiffs point to no portion of the Complaint in their Response to Defendants' Motions to Dismiss that alleges purchases of securities by either Lead ...


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