According to an article dated January 31, 2008, on January 10, 2008, the First U.S. Circuit Court of Appeals affirmed a district court's dismissal of a securities fraud class action against a college that issued bonds, finding that the investors failed to plead scienter with particularity. … The Private Securities Litigation Reform Act requires that particular facts that give rise to a strong inference of scienter be pled. The First Circuit noted that the recent Supreme Court decision in Tellabs Inc. v. Makor Issues & Rights Ltd. 127 S. Ct. 2499 (2007), see 5 S.Cl.Act.Rep. 122, July 15, 2007), required the court to examine the sufficiency pleadings of scienter in comparison to inferences of non-culpable behavior. The First Circuit found that the plaintiffs failed to plead specific facts that showed the defendants knew that they would suffer from financial difficulty at the time of the issuance of the bonds. The First Circuit affirmed the dismissal of the suit against the defendants, finding that there were insufficient facts that showed scienter on the part of the defendants. Further, the First Circuit noted that the official statement that accompanied the offering fully disclosed risks that the school would not meet its enrollment goals and that it would increase provision of financial aid. The First Circuit also noted that the individual board members were atypical of defendants in securities fraud cases as they did not have any personal interest in the bonds issued for the benefit of the school, a nonprofit organization.
On January 28, 2005, plaintiffs different from the 2000 and the 2004 complaints filed a new complaint under case number 05-CV-10176. On March 11, 2005, Defendant Advest, Inc., filed a motion to dismiss. In April 2005, Judge Richard G. Stearns granted the motion to consolidated 04-CV-11667 and 05-CV-10176. On April 19, 2005, the individual defendants filed a motion to dismiss. On September 30, 2006, Judge Stearns granted the motions to dismiss. On October 5, 2006, the Judge issued an Order of Dismissal and the civil case was terminated. On October 20, 2006, the plaintiffs filed motions to vacate the Order of Dismissal and to amend the complaint. The case was reopened. On December 29, 2006, Judge Stearns denied the plaintiffs' motion to file a second amended complaint and the civil case was terminated again. On January 26, 2007, the plaintiffs filed a notice of appeal to the First Circuit Court of Appeals.
According to the docket 04-CV-11667, on January 20, 2005, the plaintiffs filed an Amended Complaint. On January 20, 2005, February 28, 2005, and March 1, 2005, the defendants filed motions to dismiss the Amended Complaint. In April 2005, before a ruling on the motion to dismiss, all future docket entries were directed to case number 05-CV-10176.
On July 27, 2004, another complaint was filed, case number 04-CV-11667, with identical allegations to the first complaint filed. According to the July 27, 2004 complaint, on November 21, 2000, the plaintiffs first filed the complaint in the U.S. District Court for the District of Massachusetts, 00-CV-12408, against the College, Advest, and certain trustees and officers of College alleging violations of federal and state securities laws and commission of various torts in connection with the issuance and sale of the Bonds. This complaint was subsequently dismissed without prejudice. To induce the voluntary dismissal, without prejudice, of this complaint, the College and all of the defendants named in this action entered into a Standstill and Tolling Agreement dated as of November 21, 2000, and later into a Second Standstill and Tolling Agreement dated as of June 22, 2001. The Tolling Agreements tolled the deadline for commencement of all claims brought by the Plaintiffs in this action through the date of the filing of this Complaint.
According to the first filed complaint, this is an action brought by purchasers of Massachusetts Industrial Finance Agency Revenue Bonds, Bradford College Issue, Series 1998 and their successors. The Defendants in this action are the trustees of Bradford College, its past President and CFO, and the underwriter of the Bonds.
The issuance of the Bonds more than doubled the outstanding deft of the College. As municipal bonds issued by an instrumentality of the Commonwealth of Massachusetts for the benefit of a non-profit institution, the Bonds were exempt from the various registration requirements of the Securities Act of 1933 and those of the Massachusetts Securities Act. Rather, the Bonds were offered by means of an official offering statement dated May 1, 1998 prepared by the sole underwriter of the offering, Defendant Advest, Inc. This Official Statement contained numerous inaccurate and misleading statements, as alleged below.
The Official Statement misleadingly failed to disclose that the College was mired in an ongoing fiscal, financial, and operational crisis. As set forth in detail below, this crisis resulted from, inter alia, an abysmal 40% student retention rate, huge (and increasing) reductions to tuition revenue in the form of financial aid awards, and the complete absence of a viable strategic plan to address these and other problems. In fact, the Defendants’ own analysis, which was not disclosed, concluded that the College had sufficient resources to survive, at most, another 2 to 5 years. In view of the College’s dismal prospects for survival, the Defendants were constrained to resort to misrepresentations, omissions, and half-truths in the Official Statement in order to raise almost $18 million in debt financing that the College could not hope to repay. The Defendants knew material facts were omitted from the Official Statement or recklessly disregarded their obligation to include them.
In particular, the Official Statement failed to make even the barest mention of the College’s “severe and long-standing” student attrition crisis, and the enrollment figures presented in the Official Statement were accordingly misleading. Similarly, the financial aid projections set forth in the Official Statement had no reasonable basis in reality; indeed, those projections were belied by the College’s financial statements and by budgets prepared contemporaneously with bond offering. And contrary to the Official Statement’s references to Bradford’s “strategic plan” and ongoing “strategic initiatives,” the College was in truth bereft of any plan to balance its budget and to staunch its operating losses. Finally, Official Statement misrepresented that the College had committed to contribute its own funds toward the construction project financed by the Bonds, when in reality the Defendants had determined to cut corners on the project in order to place only the funds of the Plaintiffs at risk.
The College’s assumptions of this bond debt accelerated and exacerbated its financial crisis. Even when low enrollment in September 1998 precipitated yet another fiscal emergency, the College’s trustees nevertheless unnecessarily continued to expend funds on new dormitories and thereby recklessly depleted the Bondholder’s collateral. Such reckless actions and omissions by the trustees, occurring at a time when the College was either insolvent or in the zone of insolvency, constituted a breach of their fiduciary duties to the Bondholders as creditors of the College. Inevitably – and predictably- the College determined to shut down. The Plaintiffs bring this action to recover their damages incurred as a result of the Defendants’ violation and breaches.