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WM High Yield Fund v. O'Hanlon

United States District Court, E.D. Pennsylvania

August 12, 2013

WM HIGH YIELD FUND, et al.
v.
MICHAEL A. O'HANLON, et al

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[Copyrighted Material Omitted]

Page 370

For WM HIGH YIELD FUND, WM INCOME FUND, AT HIGH YIELD FUND, WM VT INCOME FUND, AT INCOME FUND, Plaintiffs: BRIAN M. ROSTOCKI, DAVID E. SELLINGER, JAMES P. MC EVILLY, III, JOHN A. CURSEADEN, JOHN C. KAIRIS, LAUREN E. WAGNER, MARY S. THOMAS, STUART M. GRANT, LEAD ATTORNEYS,STEPHEN G. GRYGIEL, GRANT & EISENHOFER, P.A., WILMINGTON, DE; RALPH N. SIANNI, STEWARTS LAW U.S. LLP, WILMINGTON, DE.

For STELLAR FUNDING, LTD., Plaintiff: DAVID E. SELLINGER, JAMES P. MC EVILLY, III, JOHN A. CURSEADEN, LAUREN E. WAGNER, STUART M. GRANT, LEAD ATTORNEYS, STEPHEN G. GRYGIEL, GRANT & EISENHOFER, P.A., WILMINGTON, DE; RALPH N. SIANNI, STEWARTS LAW U.S. LLP, WILMINGTON, DE.

For MICHAEL A. O'HANLON, Defendant: RICHARD L. SCHEFF, LEAD ATTORNEY, MONTGOMERY MCCRACKEN WALKER & RHOADS LLP, PHILADELPHIA, PA.

For STEVEN R. GARFINKEL, Defendant, Cross Defendant: MAURA FAY MCILVAIN, LEAD ATTORNEY, DILWORTH PAXSON LLP, PHILADELPHIA, PA.

For RICHARD MILLER, Defendant:JAMES J. ROHN, PATRICIA M. HAMILL, LEAD ATTORNEYS, CONRAD O'BRIEN, PHILADELPHIA, PA.

For ANTHONY J. TUREK, Defendant: WILLIAM TAYLOR, LEAD ATTORNEY, COZEN O'CONNOR, PHILADELPHIA, PA; STUART M. GRANT, GRANT & EISENHOFER, P.A., WILMINGTON, DE.

For JOHN P. BOYLE, Defendant: ROBERT E. KELLY, LEAD ATTORNEY, LAW OFFICES OF ROBERT E. KELLY LLC, PHILADELPHIA, PA.

For GERALD COHN, Defendant: MARY MARGULIS-OHNUMA, LEAD ATTORNEY, STILLMAN FRIEDMAN & SHECHTMAN PC, NEW YORK, NY; RICHARD R. HARRIS, LEAD ATTORNEY, LITTLER MENDELSON, PHILADELPHIA, PA; THOMAS A. LEONARD, LEAD ATTORNEY, WILLIAM J. LEONARD, OBERMAYER, REBMANN, MAXWELL & HIPPEL, LLP, PHILADELPHIA, PA; CAROLYN BARTH RENZIN, PRO HAC VICE, ELIZABETH S. WEINSTEIN, STILLMAN FRIEDMAN & SHECHTMAN, NEW YORK, NY; .

For HARRY T.J. ROBERTS, Defendant: JEFFREY M. LINDY, LEAD ATTORNEY, LAW OFFICES OF JEFFREY M. LINDY, PHILADELPHIA, PA.

For DOLPHIN MEDICAL, INC., Defendant: LEAH J. DOMITROVIC, LEAD ATTORNEY, KATTEN, MUCHIN, ZAVIS, ROSENMAN, CHICAGO, IL; RICHARD A. LEVAN, LEAD ATTORNEY, WIGGIN & DANA LLP, PHILADELPHIA, PA.

For UNITED STATES OF AMERICA, Movant: AMY L. KURLAND, LEAD ATTORNEY, U.S. ATTORNEY'S OFFICE, PHILADELPHIA, PA.

For 40/86 ADVISORS, INC., Movant: JAMES P. MC EVILLY, III, LEAD ATTORNEY, GRANT & EISENHOFER, P.A., WILMINGTON, DE.

For RADNET MANAGEMENT, INC., Movant: WILLIAM J. O'BRIEN, LEAD ATTORNEY, DELANY & O'BRIEN, PHILADELPHIA, PA.

For MICHAEL A. O'HANLON, Cross Defendant: RICHARD L. SCHEFF, LEAD ATTORNEY, MONTGOMERY MCCRACKEN WALKER & RHOADS LLP, PHILADELPHIA, PA.

For RICHARD MILLER, Cross Defendant: PATRICIA M. HAMILL, LEAD ATTORNEY, CONRAD O'BRIEN, PHILADELPHIA, PA.

OPINION

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MEMORANDUM

Legrome D. Davis, J.

Plaintiffs [1] -- six institutional Funds that invested in debt securities issued by Diagnostic Ventures, Inc. (DVI, Inc.) [2] -- sue for violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5. They also seek imposition of liability under Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a); Section 18 of the Exchange Act, 15 U.S.C. § 78r; and Pennsylvania's common law of fraud. [3] Jurisdiction is the Exchange Act, 15 U.S.C. § 78aa; federal question, 28 U.S.C. § 1331; and supplemental over the state law claims, 28 U.S.C. § 1367.

Defendant Gerald L. Cohn -- a former director on DVI's Board of Directors and longstanding member of the Board's credit committee -- moves for summary judgment (Doc. Nos. 257, 257-1). Fed.R.Civ.P. 56. The motion asserts that the record does not establish triable disputes as to essential elements of a private

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securities action [4] -- a misrepresentation or omission of material fact and scienter, i.e., a wrongful state of mind. [5] Def. Br., Doc. No. 257-13 at 10-21. This lack of proof, it is contended, defeats the Section 10(b) and Rule 10b-5 [6] claims contained in Count I of the Complaint as well as the the common law fraud claims contained in Count IV of the Complaint. Id. at 10, 26-27.

Defendant Cohn's motion cites Tellabs, Inc. v. Makor Issues & Rights, Ltd. for the rule that an inference of scienter " must be more than merely plausible or reasonable -- it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent." 551 U.S. 308, 314, 324, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). It is contended that " the inference of nonfraudulent intent -- that Mr. Cohn was a victim of management's fraudulent scheme -- would be the more compelling one." Def. Reply Br., Doc. No. 279 at 8; Def. Br., Doc. No. 257-13 at 11-12, 17-20. In Cohn's view, " [t]his is a case about directors who were deceived." Id. at 14. This memorandum agrees.

The motion for summary judgment also contends that Cohn cannot be held liable under the Section 20(a) claims contained in Count II of the Complaint because the record does not establish a threshold requirement -- that he actually controlled DVI, the alleged violator of the securities laws, Section 10(b). [7] An affirmative defense is asserted to both the Section 20(a) and Section 18 [8] claims contained in Count

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III of the Complaint -- that Cohn acted in good faith and was not a culpable participant in the alleged fraud. Def. Br., Doc. No. 257-13 at 22-24. And he had no knowledge that DVI's filings with the Securities and Exchange Commission (SEC) were false or misleading. Id. at 25-26; Def. Reply Br., Doc. No. 279 at 11-13.

Plaintiffs oppose summary judgment, [9] broadly asserting that a group of individually named Defendants -- defined in the Complaint to include Cohn -- signed DVI's " materially false" filings with the SEC and " otherwise were directly and personally involved in the improper and deceptive practices that artificially inflated DVI's reported financial results." Pls. Br., Doc. No. 272 at 4. Cohn, they say, together with the other individual Defendants, " turned a blind eye to the massive fraud being perpetrated on investors." Id.

Cohn's alleged signature on DVI's annual Form 10-K filings with the SEC is the primary basis for the case against him. See Compl. ¶ ¶ 35, 106, 123, 164, 310. However, Plaintiffs more broadly assert that Cohn also signed DVI's quarterly Form 10-Q filings with the SEC for the fiscal years ended June 30, 1999 through June 30, 2002, and signed DVI's first three Form-Q filings for the fiscal year ended June 30, 2003. Pls. Br., Doc. No. 272 at 5-6. The record does not contain the cited documents that are said to exhibit Cohn's signature.

Both sides acknowledge that DVI's independent auditor, Deloitte & Touche LLP, issued and signed unqualified audit opinions [10] for DVI's annual Form 10-K filings with the SEC, certifying the soundness of DVI's financial statements for the fiscal years ended June 30, 1999 through June 30, 2002. Plaintiffs say that Deloitte's audit opinions " falsely represented to investors as fact that its audits of DVI's financial statements were performed in accordance with Generally Accepted Auditing Standards (GAAS) and that DVI's financial statements were fairly presented in accordance with Generally Accepted Accounting Principles (GAAP), which falsely reassured investors as to their accuracy." Pls. Br., Doc. No. 272 at 4. Also, it is averred, they " read and relied on the financial information" contained in DVI's Form 10-K filings, including Deloitte's unqualified audit opinions, which were " false and misleading." Compl. ¶ ¶ 305-308. In Plaintiffs' view, Cohn -- by signing DVI's filings with the SEC -- made the same alleged misstatements or omissions of material fact as those assertedly made by DVI and Deloitte.

As to scienter, Plaintiffs' argument is based primarily on Cohn's " role" or " function and involvement" at DVI. Pls. Br., Doc. No. 272 at 6, 8. It is asserted that " he and his family had a significant personal investment in DVI" and he " was personally involved in using his contacts to facilitate DVI accessing the capital markets for financing." Id. That Cohn was a director

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and member of the Board's credit committee is cited as proof that he " was heavily involved in DVI's daily operations." Id. at 6, 8, 9.

In addition, Plaintiffs say that Cohn either " knew or was reckless in not knowing" that DVI " was processing credit applications in disregard of its own published policies" by making loans without the credit committee's approval. Pls. Br., Doc. No. 272 at 9. Also, they say, Cohn knew that Lisa Cruikshank -- Vice President, Treasury of DVI FS -- resigned " due to her refusal to continue falsifying [loan covenant] compliance reports." Id. at 6, 10. They further say that " by no later than April of 2001," Cohn " was fully aware" that DVI was out of compliance with some covenants to its lender, Fleet Bank. [11] Id. at 6, 9-10. In Plaintiffs' view, this reveals that Cohn was not an " outside director," but rather " was the ultimate insider . . . involved with DVI's daily operations since its inception" as well as DVI's alleged fraud. Id. at 8.

The motion for summary judgment will be granted. The record does not show that under Section 10(b), Cohn made any actionable misstatements or omissions with the requisite scienter. The common law fraud claims fail for similar reasons. The record also establishes that under Section 20(a), he did not exercise actual power or influence over the allegedly controlled violator of the securities laws, DVI. The Sections 18 claims fail as well for several reasons -- including Cohn's good faith and lack of knowledge that DVI's public filings were false or misleading.

I. PROCEDURAL AND FACTUAL BACKGROUND

The Complaint, as filed on July 19, 2004, avers that during August 10, 1999 through August 13, 2003, the Plaintiff Funds invested in DVI's bonds that traded on the New York Stock Exchange (NYSE) -- 9 7/8 percent " Senior Notes," which had been issued in 1997 and 1998.[12] Compl. ¶ ¶ 1, 12, 285. During that four-year period, it is averred that Cohn, individually and together with other DVI officers, directors, and business entities, " engaged in a scheme to falsify DVI's financial results and overstate its earnings by at least $120 million." Id. ¶ 1. This was done to " deceive . . . the investing public as to the true financial condition of DVI," and " artificially inflate and maintain the market price of DVI's securities" -- all in violation of Section 10(b) and

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Rule 10b-5. Id. ¶ ¶ 6, 35, 40, 44, 238-239, 242, 291-299 (Count I).

On August 13, 2003, DVI disclosed its intention to file for bankruptcy protection. Compl. ¶ ¶ 8, 197. On August 25, 2003, DVI, DVI FS, and DVI BC filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware,[13] and the liquidation of assets began. Id. ¶ ¶ 10, 45, 200. On April 7, 2004, the Chapter 11 Examiner, R. Todd Nielson, CPA, issued an investigative report on the Debtors' financial transactions, accounting practices, and potential wrongdoing, among other topics. Id. ¶ 11; Ex'r Rep., dated Apr. 7, 2004, Decl. of James P. McEvilly, III, Ex. 2, Doc. Nos. 274-1 at 6 through 274-3 at 81.

Cohn -- one of the original investors in DVI -- became a director on DVI's Board of Directors from about 1986 until DVI's eventual dissolution sometime after August 25, 2003. Compl. ¶ 35; Feb. 12, 2008 Cohn Dep., 96:1-98:8, 103:5-104:12, 136:2-5, Affidavit of Julian W. Friedman, Ex. A, Doc. No. 257-4 at 5-7, 11. See also Ex'r Rep. at 18, Doc. No. 274-1 at 28; Pls. Omnibus Br. in Opposition to All Defs. Mots. to Dismiss the Compl. at 10, Doc. No. 63 at 31. Cohn served on the Board's credit committee from about 1988 until sometime after August 25, 2003. Feb. 12, 2008 Cohn Dep., 134:17-135:4, Friedman Aff., Ex. A., Doc. No. 257-4 at 11.

It is averred that the group of named individual Defendants, which is defined to include Cohn, " was responsible for or participated in drafting, producing and disseminating the false and misleading statements alleged . . . and orchestrating the deceptive scheme to manipulate the Company's credit and accounting practices and policies." Compl. ¶ ¶ 44, 40-44. As to any actionable statements made specifically by Cohn, the Complaint avers generally that he " signed DVI's Annual Reports on Form 10-K for the fiscal years 1999, 2000, 2001 and 2002." Id. ¶ 35. However, he is named as a signatory to DVI's Form 10-Ks only for the fiscal years 1999, 2000, and 2002. Id. ¶ ¶ 106, 123, 164, 301 (Counts I & II), 306, 310 (Count III) (he is not named as a signatory to DVI's Form 10-K for fiscal year 2001 nor any of its Form 10-Qs). None of the other allegedly false and misleading statements -- including press releases and public announcements -- named Cohn and none was ever publicly attributed to him. See id. ¶ ¶ 104-181 (misstatements).

The Complaint contains some averments as to Cohn's actionable conduct and state of mind, which are based largely on the Examiner's Report:

o In April or May of 2001, Steven R. Garfinkel -- an Executive Vice President and Chief Financial Officer of DVI -- told Cohn that Lisa Cruikshank " was resigning because she was 'uncomfortable about signing collateral statements' certifying that the pledged collateral met Fleet's lending criteria." Compl. ¶ 99.
o During that conversation in April or May of 2001, Garfinkel also told Cohn " DVI was out of compliance on borrowings from Fleet." Compl. ¶ 99.
o Cohn " repeatedly raised this issue" with Michael A. O'Hanlon -- DVI's Chief Executive Officer, President, and Director -- " who assured [Cohn] that he would fix, and later had fixed, the problem but Cohn never

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raised the out-of-compliance problem at any Board meeting." Compl. ¶ 99.
o During a Board meeting in April of 2001, Cohn asked Garfinkel " whether DVI was 'in compliance,' to which Garfinkel responded that DVI 'drifts in and out of compliance' and O'Hanlon added that DVI was 'not in compliance.'" Compl. ¶ 101. Another member of DVI's Board of Directors, Nathan Shapiro who was present at that meeting " inquired whether this was a 'serious problem,'" and O'Hanlon " responded that 'lots of companies are never in compliance; we will get it fixed; let's move on,' or words to that effect, bringing the discussion to a close." Id.
o During a Board meeting in December, 2002, Matthew Goldenberg -- DVI's Vice President, Finance and Securitizations -- asked Garfinkel " if DVI was 'in compliance,'" and " Garfinkel responded that while DVI might be incompliance at the end of the year, it definitely was not in compliance in the interim months." Compl. ¶ 102. Garfinkel explained " that 'Fleet will take great exception to the value and eligibility of their collateral.'" Id.
o " Cohn [was] aware of or recklessly disregarded steps O'Hanlon, Garfinkel, . . . and others took to falsely enhance DVI's reported financial condition and prospects." Compl. ¶ 239.
o Cohn, " as well as other Board members," were " alerted . . . to improper steps taken to mask loan losses and artificially inflate performance in the Securitizations," [14] but " the Board members failed to take any corrective actions and with this knowledge signed the Company's materially false and misleading SEC filings." Compl. ¶ 239.
o Cohn received " Management Letters" authored by DVI's independent auditor, Deloitte, that " criticiz[ed] DVI's . . . improper revenue recognition standards and other poor accounting and financial reporting practices and procedures." Compl. ¶ 242. Cohn " did little, if anything, to address and remedy the concerns raised therein." Id.
o " Cohn as a member of DVI's Credit Committee knew or should have known that DVI was making loans without proper approvals, often to already delinquent borrowers or to new borrowers to mask existing delinquencies." Compl. ¶ 242.

In addition, it is averred that the group of named individual Defendants were " controlling persons of DVI" under Section 20(a). Compl. ¶ ¶ 41, 300-303 (Count II). " By reason of" their positions with DVI, they " controll[ed] the content" of its public statements and " participated in the drafting, preparation, and/or approval of such statements." Id. ¶ ¶ 41, 42-44, 301. Also " [b]y virtue of" their positions, they " had the power to influence and control and did influence and control, directly or indirectly, the decision-making of the Company,

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including the content and dissemination of the various statements which Plaintiffs contend are false and misleading." Id. ¶ 301. And given their " direct involvement in the day-to-day operations" of DVI, they are " presumed to have had the power to control or influence the particular transactions giving rise to the securities transactions" here. Id. ¶ 302. Count II of the Complaint does not contain averments as to any conduct or statements made specifically by Cohn.

The same averments that are marshaled to state a securities fraud claim are used to state a claim under Pennsylvania's common law of fraud. It is averred that Cohn, together with other DVI officers, directors, and DVI's auditor, Deloitte, " engaged in a scheme and made material misrepresentations, or omitted to disclose material facts, to Plaintiffs and the investing public regarding DVI's financial condition." Compl. ¶ ¶ 317, 315-322 (Count IV). Again, no averments are made as to any conduct or statements made specifically by Cohn.

On October 29, 2004, Cohn and other Defendants separately moved to dismiss the Complaint. Fed.R.Civ.P. 12(b)(6); Def. Cohn's Mot., Doc. No. 37. As to Cohn, all claims were dismissed except those asserted under Sections 10(b), 20(a), and 18, and Pennsylvania's common law of fraud. WM High Yield Fund v. O'Hanlon, No. 04-3423, 2005 WL 6788446, at *6, 8, 9-13, 14-15, 17-18 (E.D. Pa. May 13, 2005) (Apr. 29, 2005 Order and May 13, 2005 Amended Mem., Doc. Nos. 108, 112; and Feb. 23, 2006 Order, Doc. No. 165). It was ruled that the Complaint contains plausible averments that Cohn made actionable statements or omissions and engaged in manipulative or deceptive conduct. And as to him, the Rule 10b-5(a),(b), and (c) claims were not dismissed. Id., 2005 WL 6788446, at *6, 8 (also " only Defendants to whom a misleading statement is attributable may be held liable" ). It was also ruled that to the extent Plaintiffs sought to hold Cohn liable under Section 10(b) as a " secondary" violator, those claims were dismissed. Feb. 23, 2006 Order, Doc. No. 165; see also id., 2005 WL 6788446, at *7 (ruling that Cent. Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., 511 U.S. 164, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994) precluded " secondary" or " aiding and abetting" liability).

By Order dated February 26, 2013 (Doc. No. 304), the parties were permitted to supplement their summary judgment papers with concise briefing on significant rulings recently issued by the Supreme Court, our Court of Appeals, and this Court.[15] Neither side submitted supplementary papers. The motion for summary judgment will now be decided.

II. SUMMARY JUDGMENT FINDINGS OF UNDISPUTED MATERIAL FACT

1. Deloitte signed and issued the audit opinions in question, certifying the soundness of DVI's annual financial statements for fiscal years ended June 30, 1999 through June 30, 2002. See WM High Yield Fund v. O'Hanlon, No. 04-3423, 2013 WL 3230667 at *4, Findings ¶ 3 (E.D. Pa. June 27, 2013) (Davis, J., deciding Defendants Deloitte's and Harold Neas' joint motion for summary judgment).

2. Plaintiffs have not identified any specific line-item entry, computation, or

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portion of DVI's annual financial statements for DVI's fiscal years ended June 30, 1999 through June 30, 2002 that allegedly makes Deloitte's unqualified audit opinions materially inaccurate, incomplete, false, misleading, or deceptive. See WM High Yield Fund, 2013 WL 3230667 at *7, Findings ¶ 21.

3. Plaintiffs have not identified any portion of the Examiner's Report that corrected any specific misstatements or omissions of material fact allegedly made by Deloitte, and the Report did not correct any specific misstatements or omissions of material fact allegedly made by Deloitte that affected the market price for DVI's securities. See WM High Yield Fund, 2013 WL 3230667 at *6, Findings ¶ ¶ 19-20, *10, 14.

4. For fiscal year ended June 30, 2003, DVI signed and made the statements contained in its Form 10-Q filings for the first three fiscal quarters (ended March 31, 2003). And the record does not contain any evidence that either Deloitte or Cohn signed any audit opinions or DVI's quarterly financial statements, or otherwise made any public statements by certifying or endorsing DVI's quarterly financial statements. See WM High Yield Fund, 2013 WL 3230667 at *4, Findings ¶ 5.

5. Plaintiffs have not identified any specific line-item entry, computation, or portion of DVI's annual financial statements for DVI's fiscal years ended June 30, 1999 through June 30, 2002, or DVI's quarterly financial statements for DVI's fiscal year ended June 30, 2003, that allegedly makes Cohn's signature on any of DVI's filings with the SEC materially inaccurate, incomplete, false, misleading, or deceptive.

6. The record does not contain any evidence that Cohn signed any of DVI's filings with the SEC -- at any time -- and none of the allegedly false and misleading statements averred in the Complaint was ever publicly attributed to Cohn. See Compl. ¶ ¶ 104-181. See also Def. Cohn's Statement of Facts (SOF), Doc. No. 257-2; Pls. Counter-Statement of Facts (CSOF), Doc. No. 273.

7. Cohn does not deny that he signed some of DVI's annual Form 10-K filings with the SEC for the fiscal years ended June 30, 1999 through June 30, 2002. His position appears to acknowledge as much. See, e.g., Def. Br., Doc. No. 257-13 at 25 (" the Form 10-Ks signed by Mr. Cohn" ), 27 (" Mr. Cohn did not know that the Form 10-Ks that he signed were false." ); Def. Reply Br., Doc. No. 279 at 6 (asking the Court to decide whether " the signing of SEC filings constitute[s] a misstatement under the federal securities laws" ).

8. The record does not contain any evidence that Cohn acted in a misleading, manipulative, deceptive, or fraudulent manner -- and none of the fraudulent conduct averred in the Complaint was ever publicly attributed to him. See Def. Cohn's SOF & Pls. CSOF.

9. The record does not contain evidence of any public conduct or statements made by Cohn that affected the market price for DVI's securities. See Def. Cohn's SOF & Pls. CSOF.

10. The record does not contain any evidence that Cohn signed any documents, made any public statements, or otherwise acted with a mental state embracing intent to deceive, manipulate, or defraud -- or that he acted with conscious, reckless disregard of the interests of the investing public.

11. The record suggests that at all pertinent times Cohn acted honestly and in good faith. The record contains no evidence to the contrary.

12. Gary Pokrzywinski, a portfolio fund manager of WM Advisors -- an investment

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advisor for each of the Plaintiff Funds -- testified as Plaintiffs' Federal Rule of Civil Procedure 30(b)(6) designee. He was " solely" responsible for the analysis that led to Plaintiffs' purchases of DVI's bonds. Nov. 6, 2007 Pokrzywinski Dep., 49:16-21, 78:18-82:12, 294:16-22, Friedman Aff., Ex. BB, Doc. No. 257-12 at 21, 30-33, 43. Def. Cohn's SOF ¶ 105.

13. When asked whether there were " any particular line items in DVI's financial statements" that he believed were " misstated," Pokrzywinski testified:

There was a -- the general workings of the financial statements would seem to be misstated. . . . The general idea of flow of Funds, losses, representation of assets, I mean, just the overall foundation of the financial statement.

Nov. 6, 2007 Pokrzywinski Dep., 326:2-13, 327:19-24, Friedman Aff., Ex. BB, Doc. No. 257-12 at 45-46. He could not identify any specific misstatements. Def. Cohn's SOF ¶ 108.

14. When asked whether DVI incorrectly reported income or loss for any specific year, Pokrzywinsk testified: " It was not representative of what was going on, correct." Nov. 6, 2007 Pokrzywinski Dep., 328:2-6, Friedman Aff., Ex. BB, Doc. No. 257-12 at 46. When asked what should have been the income or loss reported for the years 1999-2003, he testified: " I don't know." Id., 328:7-10, Doc. No. 257-12 at 46-47. When asked for the the basis of that belief, he testified: " That they weren't representative of what was going on at the company, no controls." Id., 328:11-15, McEvilly Decl., Ex. 3, Doc. No. 274-3 at 42. When asked how he came to that conclusion, he testified: " One was indicated by the findings of independent investigation and the examiner's report and -- and, I mean . . . . That was it." Id., 328:16-329:1.

15. When asked whether he relied on " anything other than the Examiner's Report to say that " any financial statement of DVI's was misstated," Pokrzywinski testified: " That would -- that would, I think generally, it would be between the attorney and myself." Nov. 6, 2007 Pokrzywinski Dep., 329:2-22, McEvilly Decl., Ex. 3, Doc. No. 274-3 at 42.

16. When asked whether he ever investigated the accuracy of DVI's financial statements when the Plaintiff Funds were investing in DVI's bonds during the period, July of 1999 to July of 2003, Pokrzywinski testified: " No. We relied on the financial statements." Nov. 6, 2007 Pokrzywinski Dep., 327:5-9, 326:14-327:9, Friedman Aff., Ex. BB, Doc. No. 257-12 at 45-46. See also Def. Cohn's SOF ¶ 107 (He could not recall why he purchased and sold DVI's bonds during that time period).

17. Pokrzywinski read and relied generally on DVI's financial statements, including its SEC filings, in deciding to invest in DVI's bonds. Nov. 6, 2007 Pokrzywinski Dep., 198:2-23, 327:5-9, 348:20-349:19, Friedman Aff., Ex. BB, Doc. No. 257-12 at 38, 45-46, 50. Def. Cohn's SOF ¶ 106.

18. In the mid-1980s, Cohn reviewed analyses of credit applications that had been submitted to DVI requesting loans, and he decided to invest in the company. Feb. 12, 2008 Cohn Dep., 96:1-97:4, 109:15-110:14, Friedman Aff., Ex. A, Doc. No. 257-4 at 5-6, 9.

19. In the 1980s, Cohn invested $200,000 in DVI's preferred and common stock, and $50,000 in equity in DVI. Thereafter, he and his daughter, Cynthia Cohn, invested more in DVI's stock and bonds. They never sold any of their shares, except for 10,000 shares that Cohn had acquired by exercising stock options. He also invested $800,000, and his family's charitable foundation invested another $200,000, in

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DVI bonds that were due in June, 2002. At the request of DVI's senior management in July, 2001, Cohn agreed to extend the maturity date of those bonds to June, 2004. During DVI's bankruptcy, the Cohns lost " nearly the full amount" invested -- about $2,320,000. Def. Cohn's SOF ¶ ¶ 2-3, 8-13.

20. Cohn was a director on DVI's Board of Directors from about 1986 until sometime after August 25, 2003. He was a member of the Board's credit committe from its inception about 1988 " [t]ill the end" of DVI. He was on the Board's audit committee from about 1998 until December 31, 1999, and for some time, on its committee that determined compensation for senior management. Feb. 12, 2008 Cohn Dep., 96:1-98:8, 103:5-104:12, 134:17-136:5, 287:3-4, Friedman Aff., Ex. A, Doc. No. 257-4 at 5-7, 11, 28. Def. Cohn's SOF ¶ ¶ 14-15, 29, 30.

21. During Cohn's tenure on the audit committee, Deloitte never informed the committee that DVI's financial statements were unsound or unreliable, or that DVI had problems in regard to compliance with its loan covenants, inadequate loan loss reserves, financial reporting, the integrity of its management, or any other fraudulent activity alleged in this litigation. Jan. 15, 2008 Richard E. Miller Dep. 140:10-141:6, Friedman Aff., Ex. D, Doc. No. 257-5 at 22-23; Feb. 6, 2008 Nathan Shapiro Dep., 140:19-23, 161:15-162:2, Friedman Aff., Ex. E, Doc. No. 257-5 at 34, 38; Feb. 20, 2008 William S. Goldberg Dep., 151:22-152:4, Friedman Aff., Ex. F, Doc. No. 257-6 at 3-4; Feb. 21, 2008 Goldberg Dep., 456:12-457:13, Friedman Aff., Ex. G, Doc. No. 257-6 at 24-25; Feb. 12, 2008 Cohn Dep., 180:10-181:20, Friedman Aff., Ex. A, Doc. No. 257-4 at 18-19; Feb. 14, 2008 Cohn Dep., 661:2-663:2, Friedman Dep., Ex. C, Doc. No. 257-5 at 5. Def. Cohn's SOF ¶ ¶ 16-17.

22. Deloitte's " management letters" identified issues to be addressed by DVI's Board and management. The letters were distributed to the Board's directors. During Cohn's tenure on the audit committee, Deloitte did not present any issues related to the soundness of DVI's financial reporting. Feb. 6, 2008 Shapiro Dep., 136:4-137:17, 139:18, ...


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