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In re DVI

September 3, 2010


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




This securities fraud class action is brought by shareholders of Diagnostic Ventures, Inc. ("DVI") who allege that Defendants were involved in a scheme of misrepresentations and omissions designed to artificially inflate the price of DVI's securities and conceal deceptive accounting and lending practices. Plaintiffs' Fifth Amended Consolidated Class Action Complaint ("FAC") was filed on April 6, 2006 against directors and officers of DVI, "Special Relationship" entities, independent auditor Deloitte & Touche, LLP, underwriter/lender Merrill Lynch & Co., Inc., and other third-party entities, (FAC, Doc. No. 270-2).*fn1 On May 31, 2005, this Court granted in part and denied in part Defendants' motions to dismiss, (Mem. & Order Mots. Dismiss, May 31, 2005, Doc. No. 181). On April 29, 2008, this Court granted Lead Plaintiffs' Motion for Class Certification, appointing Plaintiffs Cedar Street Fund, Cedar Street Offshore Fund, and Kenneth Grossman as class representatives, (Mem. & Order Class Certification, Apr. 29, 2008, Doc. No. 609).*fn2 Presently before this Court is Defendant Gerald Cohn's Motion for Summary Judgment, (Def.'s Mot. Summ. J., Doc. No. 683).

This Court has previously set forth the relevant history of DVI, and the alleged fraudulent schemes engaged in by DVI, its subsidiaries, its directors and officers, and outside entities. (See Mem. & Order Mots. Dismiss, May 31, 2005, Doc. No. 181; see also Mem. & Order on Class Certification, Apr. 29, 2008, Doc. No. 609.) Accordingly, we incorporate herein the factual background provided in our previous Orders. We now recount only the facts relevant to the instant Motion. Unless stated otherwise, the following facts are not in dispute.

Defendant Gerald "Jerry" Cohn (hereinafter, "Defendant" or "Cohn") was one of the original investors in DVI's predecessor, Diagnostic Ventures, during its formation in the 1980s.*fn3 (Def.'s Statement Undisputed Facts ("SOF") ¶ 2.) He served on DVI's Board of Directors (hereinafter, "Board of Directors" or "Board") from 1986 until DVI's demise. (Id. at ¶ 18.) Defendant has an "extensive background in business matters," and has relationships with "big- shot guys in the business." (Pls.' SOF ¶ 111 (quoting Gerald Cohn Dep. GLC-CA000077, 116, Anic v. DVI, Inc., No. 01-0383, Jan. 29, 2003, attached to Pls.' SOF as Ex. 1 (hereinafter, "Cohn Anic Dep.)).) Defendant previously served on the board of directors of a bank for over twenty-five years, and he made "hundreds of investments over the course of his career." (Id. at ¶¶ 112-13.) At the company's formation, Defendant invested $200,000 in preferred stock and $50,000 in equity. (Def.'s SOF ¶¶ 2, 3.) Over the course of his time at DVI, Defendant also exercised 20,000 stock options, (id. at ¶ 8), purchased approximately 320,000 shares of DVI common stock at an aggregate price of approximately $1 million, (id. at ¶ 9), invested $800,000 in debt obligations, and his family's charitable foundation invested $200,000 in debt obligations, (id. at ¶ 10). With the exception of 10,000 option shares, Defendant never sold any of his stock, and at the time of DVI's bankruptcy, Defendant lost "nearly the full amount" he had invested in DVI.*fn4

(Id. at ¶ 12.)

Since the time that DVI went public in approximately 1986, Defendant was considered a "driving force" of the company. (John Boyle Dep. 1394:3-9, Apr. 22, 2008, attached to Pls.' SOF as Ex. 20.) Throughout his tenure, Defendant was involved in selecting and removing DVI's executives and directors. (Def.'s SOF ¶ 6; Pls.' SOF ¶¶ 125-34 (collecting exhibits).) Furthermore, Defendant was "viewed as the chairman of the [B]oard of [D]irectors." (Pls.' SOF ¶¶ 147, 149 (quoting Boyle Dep. 84:7-9).) As a director, Defendant served on the Credit Committee, Compensation Committee, and International Committee. (Def.'s SOF ¶¶ 23, 33;

Pls.' SOF ¶ 181.). Defendant also served on the Audit Committee from 1998 until December 31, 1999, and returned in 2003.*fn5 (Pls.' SOF ¶¶ 163, 165.) Defendant became a salaried employee of DVI in 1999 "when he began working 40 to 50 hours per week" through his involvement in these committees. (Def.'s SOF ¶ 34 (citing Gerald Cohn Dep. 112:11-14, Feb. 12, 2008, attached to Def.'s SOF as Ex. A).) Defendant's salary ranged from $50,000 to $110,000, and his bonus was between $16,000 and $17,000. (Cohn Dep. 112:16-13:7.) In his capacity as a director, Defendant signed all of DVI's Form 10-Ks, including those for fiscal years ending June 30, 1999, 2000, 2001, and 2002, which are the subject of the instant litigation. (Pls.' SOF ¶ 156.) Plaintiffs claim that these statements contained material misrepresentations "related to DVI's loan loss reserves, reported revenues, asset quality, liquidity position, available capital, and compliance with its loan covenants." (Pls.' Am. Mem. 3 (citing Pls.' SOF ¶¶ 247, 253, 257, 291).)

Defendant also had relationships with investors and customers of DVI. Around the time that DVI went public, Defendant introduced his friend Jay Pritzker to DVI. Pritzker and the Pritzker Organization made substantial investments in the company by purchasing the shares that the underwriter was unable to sell in DVI's public offering and investing in DVI subordinated bonds. (Def.'s SOF ¶¶ 15-16.) Defendant remained the Pritzkers' contact person at DVI. (Mark Hoplamazian Dep. 204:6-14, Apr. 17, 2008, attached to Pls.' SOF as Ex. 42.) Additionally, Defendant had relationships with some of the principals of DVI's customers, including Dolphin, (Pls.' SOF ¶ 195), and Healthcare Integrated Services ("HIS"), (id. at ¶ 208). Defendant also invested in and served on the boards of some of DVI's borrowers, including Reliant Pharmaceuticals, (id. at ¶¶ 226-27), HIS, (id. at ¶ 208), and Physician's Endoscopy LLC ("PELL"), (id. at ¶ 219).

From the early days of the company, Defendant was prominently involved in reviewing and approving loans to DVI's borrowers. Before the Credit Committee was created, Defendant "was shown every credit before it was approved and [he] gave [his] opinion on each one." (Cohn Dep. 111:3-5.) Once the committee was formed, Defendant and Anthony Turek, DVI's Executive Vice President and Chief Credit Officer, were the "executive members" and either Cohn or Turek's vote was "required for an approval." (See Mark Gallagher Dep. 35:3-6, Dec. 7, 2006, attached to Pls.' SOF as Ex. 44.) As one former committee member stated, Cohn had a "dominant presence" on the committee; "[i]f Jerry didnt' like a deal, the deal didn't get done." (Joseph Malott Dep. 147:19-48:13, Sept. 18, 2007, attached to Pls.' SOF as Ex. 109.) The Credit Committee reviewed all domestic loans of $1 million or more. (Def.'s SOF ¶ 25.) Through his involvement in the Credit Committee, Defendant was "ver[y] close to all of the large obligors," (see Steven Garfinkel Dep. 67:7-8, Mar. 25, 2008, attached to Pls.' SOF as Ex. 14), and he gained insight into the borrowers' financial condition, operations, and their ability to repay DVI, (Def.'s SOF ¶¶ 27-28 (citing Cohn Dep. 143:8-47:9)). Defendant also received information regarding DVI's delinquent customers through Month End Delinquent Reports, Board Books, and Watch List reports. (See Pls.' SOF ¶¶ 189, 190, 192 (collecting exhibits).)

Furthermore, as an active member of DVI's Board and committees, Defendant knew about Deloitte & Touche's (hereinafter, "Deloitte") concerns regarding the company's policies for loss allowances and its "compliance with [its] credit facility," among other issues. (See, e.g., FY 1999 Mgmt. Letter from Deloitte, Aug. 6, 1999, attached to Pls.' SOF as Ex. 99; Def.'s Resp. SOF ¶ 169; Pls.' SOF ¶ 172.) Additionally, Defendant knew of DVI's need to raise additional capital as early as October 2001, particularly because the company needed to remain in compliance with the "debt to equity limitation" in its loan agreements, which was viewed as a "serious covenant." (See Pls.' SOF ¶ 263; Def.'s Resp. SOF ¶ 263; Oct. 2001 Capital & Liquidity Report SGM 004745, attached to Pls.' SOF as Ex. 81; see also Bd. of Dir. Minutes, Oct. 22, 2001, attached to Pls.' SOF as Ex. 75 ("Mr. Cohn discussed DVI's need to raise more capital.").) In October 2002, Defendant was told that DVI needed $50 million, (Garfinkel Dep. 1664:14-66:1), and he was again reminded of this problem in April 2003 and July 2003. (Pls.' SOF ¶ 280; Def.'s Resp. SOF ¶ 280; Michael O'Hanlon Dep. 1260:20-61:13, Jan. 28, 2008, attached to Pls.' SOF as Ex. 28.) According to Defendant, however, DVI's executives never told him that DVI was out of cash, (Def.'s Resp. SOF ¶ 279 (citing Garfinkel Dep. 117:17-23, Apr. 1, 2008, attached to Def.'s SOF as Ex. J)), and he first learned of the $50 million "hole" in July 2003, (Def.'s SOF ¶ 89; Def.'s Mem. 16).

With respect to DVI's compliance with loan covenants, Defendant was first informed that DVI was out of compliance in 1999. (Pls.' SOF ¶ 267; Def.'s Resp. SOF ¶ 267.) In March or April 2001, Defendant again learned of a compliance problem when Lisa Cruikshank, DVI's treasury officer, expressed her intention to resign due to an "ethical issue . . . with the Fleet facility and the collateral [DVI was] pledging." (Garfinkel Dep. 83:7-10; Pls.' SOF ¶ 269 (citing Cohn Dep. 288:15-89:22); Def.'s Resp. SOF ¶ 269; Pls.' SOF ¶ 270.) Steven Garfinkel, DVI's Executive Vice President and Chief Financial Officer, told Cohn that DVI was "out of compliance," though he "didn't use the word[s] ineligible collateral" in his conversation with Defendant. (Def.'s Resp. SOF ¶ 268 (quoting Garfinkel Dep. 83:3-10).) Defendant spoke with Michael O'Hanlon, DVI's President and Chief Executive Officer, about this matter, (Cohn Dep. 289:23-90:1), and he also raised the issue of DVI's compliance with Garfinkel and O'Hanlon at the April 10, 2001 Board meeting and the December 3, 2002 Board meeting, (Pls.' SOF ¶ 275; Def.'s Resp. SOF ¶ 275; Garfinkel Dep. 1505:15-06:6).

Defendant Cohn also knew that the SEC began investigating DVI's accounting practices as early as February 2002. (Pls.' SOF ¶ 287.) According to Defendant, he was involved with the investigation that resulted in DVI's bankruptcy; Plaintiffs generally dispute these facts. (Pls.' Resp. SOF ¶¶ 86-110.) In the spring of 2003, Defendant assisted DVI's independent counsel in reviewing a transaction that the SEC was investigating, (see Def.'s SOF ¶¶ 86-87), and in mid-July 2003, he spoke with DVI's directors about the company's $50 million "hole" in its collateral, (id. at ¶ 91). On August 1, 2003, Defendant was told that DVI received a "whistle-blower" letter from an employee in DVI's treasury department that explained DVI's practice of "double-pledging" collateral. (Id. at ¶¶ 93-96 (according to Defendant, "[t]his was the first time that [he] learned that DVI's compliance failures . . . were apparently due to intentional misconduct").) Upon further investigation into these charges, Defendant found out that two employees may have received ...

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