United States District Court, D. Minnesota
JAMES W. SMITH, Jr., on his own behalf and on behalf of those similarly situated, Plaintiff,
QUESTAR CAPITAL CORPORATION, YORKTOWN FINANCIAL COMPANIES, INC. and ALLIANZ LIFE INSURANCE COMPANIES OF NORTH AMERICA, Defendants.
ORDER (1) PRELIMINARILY APPROVING CLASS ACTION SETTLEMENT, (2)
DIRECTING DISTRIBUTION OF THE CLASS ACTION SETTLEMENT NOTICE, (3) SETTING A
FINAL APPROVAL HEARING, AND (4) PRELIMINARILY ENJOINING PARALLEL PROCEEDINGS
SUSAN RICHARD NELSON, District Judge.
This matter came before the Court on the motion for the preliminary approval of a proposed Settlement ("the Motion"), the terms of which are set forth in the Stipulation of Settlement, including the exhibits thereto (the "Settlement Agreement"), which was filed with the Motion. The Court has reviewed and considered the proposed Settlement, the Motion for Preliminary Approval of Proposed Class Action Settlement and Related Orders, filed by Plaintiff, the separate request by Defendants for entry of this Order (1) Preliminarily Approving Class Action Settlement, (2) Directing Distribution of the Class Action Settlement Notice, (3) Setting a Final Approval Hearing, and (4) Preliminarily Enjoining Parallel Proceedings (hereafter, "Preliminary Approval Order"), the points and authorities and supporting declarations and exhibits submitted by Plaintiff in support of preliminary settlement approval, and the record in this action. The Court has also heard and considered the oral arguments of Plaintiff and Defendants at the hearing on preliminary settlement approval.
The Settlement Agreement, a true and correct copy of which is attached as Exhibit 1 to the Declaration of Daniel E. Gustafson in support of preliminary approval of the proposed Settlement, is incorporated by reference and hereby made a part of this Preliminary Approval Order. The capitalized terms used in this Preliminary Approval Order shall have the meanings and/or definitions given to them in the Settlement Agreement, or if not defined therein, the meanings and/or definitions given to them in this Preliminary Approval Order.
This Court hereby finds and concludes as follows:
1. The Action and Underlying Allegations
The Action was commenced by the filing of a Complaint against the Defendants on October 18, 2012 [Docket No. 1]. On August 2, 2013, the Court granted in part and denied in part the Defendants' motion to dismiss [Docket No. 41]. A First Amended Complaint was filed on September 3, 2013 [Docket No. 42] ("the Amended Complaint"). On June 6, 2014, the Court granted in part and denied in part the Defendants' motion to dismiss the Amended Complaint [Docket No. 60]. The Defendants filed an Answer to the Amended Complaint on June 20, 2014 [Docket No. 62].
Through the Amended Complaint, James W. Smith, Jr., on his own behalf and on behalf of those similarly situated, seeks monetary damages in connection with his investment in a $50, 000 note issued in a private placement by DBSI 2008 Notes Corporation and the purchases of other Securities by Settlement Class Members. The Amended Complaint alleges that Questar was one of many broker-dealers that offered and sold notes and other Securities issued by DBSI. The Amended Complaint also asserts claims against Yorktown Financial Companies, Inc., and Allianz Life Insurance Company of North America, as alleged control persons of Questar.
The legal theories of the claims alleged in the Amended Complaint include several different alleged violations of the Minnesota Securities Act, negligent misrepresentation, and breach of contract. The Amended Complaint seeks the certification of a class of all persons and entities to whom Questar offered, distributed, and sold Securities from October 16, 2006 to October 18, 2012 (not limited to purchasers of the 2008 Notes purchased by Smith).
Diversified Business Services & Investments, Inc., and various of its subsidiaries or affiliates (known as "DBSI"), issued or guaranteed the Securities, and have filed for bankruptcy. As part of the bankruptcy proceedings, the bankruptcy court appointed a Trustee who conducted an extensive investigation of DBSI. The Trustee issued a preliminary report and a final report which documented his investigation and findings. The Trustee's investigation included work by professional investigators and other experts, the subpoena and examination of records of many third parties, and over sixty interviews of officers and employees of DBSI, governmental officials and other third parties. In addition to analyzing the Trustee's work product, Class Counsel conducted an independent investigation of the facts underlying the claims alleged in the Amended Complaint and reviewed documents and data provided by the Defendants.
To reach this Settlement, the Parties engaged in arm's-length settlement discussions, including a mediation session led by Arthur Boylan, Sr., a professional mediator and retired United States Magistrate Judge.
2. The Background of the Settlement
Following are the statements of position of the Named Plaintiff and the Defendants. The Named Plaintiff does not agree with or endorse the statement of position of the Defendants, and the Defendants do not agree with or endorse the statement of position of the Named Plaintiff.
1. Named Plaintiff's Position
(a) This class action arises as a result of Defendant broker/dealer Questar Capital Corporation's ("Questar") failure to perform adequate due diligence on a private placement offering of Securities issued by Diversified Business Services & Investments, Inc. ("DBSI"). Questar ignored warnings from due diligence advisors about the grave dangers posed by selling the DBSI-issued securities. These Securities consisted of nothing more than funding for a criminal Ponzi scheme.
(b) Questar offered and sold several million dollars' worth of DBSI Securities to unsuspecting investors starting in or about October 16, 2006. Questar distributed, offered, and sold DBSI Securities even though the offering materials were misleading and omitted information that was required to be disclosed pursuant to the rules and regulations of the Financial Industry Regulatory Authority ("FINRA"), and also specifically the duties and obligations set forth by Questar through its account agreement so as not to mislead the Named Plaintiff and the members of the putative class. As a result of its acts and omissions, Questar violated its duty of care to execute all instructions expressly given it by its customers and a duty to avoid fraudulent conduct. Additionally, Questar violated its duty to conduct due diligence, a special agreement Questar expressly entered into with the Named Plaintiff and the members if the putative class in the Questar New Account Agreement with its customers. Questar ignored the warning signs a reasonable broker would have heeded, or failed to avoid fraudulent conduct and exercise adequate due diligence, which would have shown that DBSI's accounting records and practices reflected the existence of a Ponzi scheme. Questar's acts and omissions violated the Minnesota Securities Act and Minnesota common law.
(c) DBSI is an Idaho corporation with its principal place of business in Idaho. Through various wholly owned operating subsidiaries and Special Purpose Corporations ("SPCs"), DBSI purported to finance the purchase of various real estate ventures. In reality, DBSI used the SPCs to defraud investors like Smith and putative class members. DBSI used the operating subsidiaries to monitor, administer, and service the receivables financings. DBSI was not registered with the Securities and Exchange Commission ("S.E.C.") in any capacity.
(d) Questar, as a broker/dealer, had a duty, pursuant to securities industry rules and regulations, such as FINRA Notice to Members 03-71, to Smith and the members of the putative class to conduct reasonable due diligence in the investments it recommended to clients. Additionally, Questar had a duty, born out of its special agreement with the Named Plaintiff and the members of the putative class, to perform independent in depth due diligence on the DBSI notes. Such reasonable due diligence would have uncovered DBSI for the Ponzi scheme it was.
(e) Notwithstanding the foregoing, the Plaintiffs consider it desirable for the Action to be settled and dismissed, because the Settlement will: (i) provide substantial benefits to the Settlement Class Members; (ii) finally put to rest Plaintiffs' claims and the underlying matters; and (iii) avoid the substantial expense, burdens, and uncertainties associated with discovery, a contested class certification process, summary judgment motions, expert witnesses, and possible trial and a potential finding of no liability against the Defendants on the claims alleged in the Action.
2. Defendants' Position
(a) The Defendants expressly deny any and all wrongdoing alleged in the Action, including the Complaint, the Amended Complaint, all amendments thereto, and all other contentions and allegations made, recognized, explicitly or implicitly, or pursued during the course of the litigation, and do not admit or concede any claimed, actual or potential fault, wrongdoing or liability in connection with any facts or claims which have been or could have been alleged against them in the Action.
(b) The Defendants contend that the Plaintiffs' claims are not cognizable and otherwise are improper as a matter of law, and that the Plaintiffs would suffer failures of proof of fact and of law that would be fatal to their claims if the claims alleged in this Action were challenged by a motion for summary judgment after the completion of discovery or subsequently went to trial.
(c) The Defendants contend that the sales materials used in connection with the solicitation, sale and issuance of the Securities were not false or misleading and that the Defendants completely fulfilled their obligations, if any, to the Settlement Class Members before and after the sale of the Securities.
(d) The Defendants contend that the Settlement Class Members have not suffered any damage or loss as a result of the conduct of the Defendants.
(e) The Defendants contend that this case is not proper to be certified as a contested class action for litigation purposes insofar as manageability, predominance, considerations of procedural due process and other factors would not permit compliance with the provisions and requirements of Federal Rule of Civil Procedure 23 for contested class certification. However, the Defendants do believe, in light of Amchem Products, Inc. v. Windsor, 117 S.Ct. 2231 (1997) and otherwise, that such considerations do not apply to the certification of settlement classes, and that acceptable procedural safeguards have been incorporated into the Settlement Agreement to permit the certification of a class in this Action for settlement purposes only.
(f) Notwithstanding the forgoing, the Defendants consider it desirable for the Action to be settled and dismissed, because the Settlement will: (i) provide substantial benefits to the Settlement Class Members; (ii) confer benefits on the Defendants, including the avoidance of further expense and disruption of the management and operation of the Defendants' respective businesses due to the pendency and defense of the Action; (iii) finally put to rest Plaintiffs' claims and the underlying matters; and (iv) avoid the substantial expense, burdens, and uncertainties associated with discovery, a contested class certification process, summary judgment motions, expert witnesses, and possible trial and a potential finding of liability and damages against the Defendants on the claims alleged in the Action.
Accordingly, it is hereby ORDERED AND ...