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Smith v. First Marblehead Corp.

United States District Court, D. Massachusetts

October 28, 2014

RYAN M. SMITH, ATLAS CAPITAL MANAGEMENT, L.P., ATLAS CAPITAL, L.P., and ATLAS ADVANTAGE MASTER FUND, L.P., individually and on behalf of all others similarly situated, Plaintiffs,
v.
THE FIRST MARBLEHEAD CORP., DANIEL MEYERS, and KENNETH KLIPPER, Defendants

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For Ryan M. Smith, Individually and on Behalf of All Others Similarly Situated, Plaintiff: Ellen T. Noteware, LEAD ATTORNEY, PRO HAC VICE, Berger & Montague PC, Philadelphia, PA; Todd S. Collins, LEAD ATTORNEY, PRO HAC VICE, Berger & Montague, Philadelphia, PA; Leslie R. Stern, Nathaniel L. Orenstein, Berman DeValerio Pease Tabacco Burt & Pucillo, Boston, MA.

For Atlas Capital Management, L.P., Atlas Capital, L.P., Atlas Advantage Master Fund, L.P., Plaintiffs: Leslie R. Stern, Nathaniel L. Orenstein, Berman DeValerio Pease Tabacco Burt & Pucillo, Boston, MA.

For The First Marblehead Corporation, Daniel Meyers, Kenneth Klipper, Defendants: William H. Paine, LEAD ATTORNEY, John J. Butts, Wilmer Hale LLP, Boston, MA; Andrew S. Dulberg, Wilmer Cutler Pickering Hale and Dorr LLP (Bos), Boston, MA.

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MEMORANDUM AND ORDER

Patti B. Saris, Chief United States District Judge.

I. INTRODUCTION

In this proposed class action, plaintiffs contend that First Marblehead Corporation

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(FMD) and two of its executives violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 by misrepresenting the nature of a 2009 transaction and its tax consequences. Defendants move to dismiss, arguing that plaintiffs have not met the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 (PSLRA). See 15 U.S.C. § 78u-4(b)(1)-(2). After hearing, Defendants' Motion to Dismiss (Docket No. 31) is ALLOWED.

II. FACTUAL BACKGROUND

The facts alleged in the First Amended Complaint are taken as true for purposes of this motion to dismiss. See Ashcroft v. Iqbal, 556 U.S. 662, 667, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).

First Marblehead Corporation is a Boston-based company whose shares trade on the New York Stock Exchange. Daniel Meyers, the company's co-founder, served as its Chief Executive Officer and President at all times relevant to this action. Kenneth Klipper, a Certified Public Accountant, has been FMD's Chief Financial Officer and Managing Director since September 2008.

Before the 2008 financial crisis, FMD's business centered around the origination and securitization of private student loans. The company provided services to special purpose statutory trusts that acquired student loans from lenders and issued asset-backed securities. In exchange for these services, FMD was entitled to structural advisory fees and residual interests in the net cash flows from the trusts. GATE Holdings, Inc., a wholly-owned subsidiary of FMD, held FMD's title to these residual interests in securities trusts. In the first half of the 2000s, the bulk of FMD's cash flow came from these structural advisory fees and residuals.

Starting in 2008, FMD's education loan portfolios and the portfolios held by the trusts experienced high rates of default as a result of the economic downturn. In response, the company overhauled its business model. In March 2009, FMD converted GATE Holdings, Inc. into a trust (called the NC Residuals Owners Trust), and sold its ownership interest in the trust to VCG Owners Trust (" the VCG Transaction" ). As part of this transaction, FMD also entered into an Asset Services Agreement with VCG, agreeing to provide advisory and consulting services in return for an asset servicing fee calculated as a percentage of the aggregate outstanding principal balance of loans outstanding in the trusts.

FMD announced the VCG transaction on April 6, 2009 via a Form 8-K filing and press release. According to the press release, the " sale" of FMD's ownership interest in the NC Residuals Owners Trust was " expected to generate a cash refund for taxes previously paid, as the Company has been required to pay taxes on the expected cash flows from the [special purpose statutory trusts] before it actually receives those cash flows." (emphasis added). Similarly, the Form 8-K stated that FMD expected the " sale" to result in a " refund for taxes previously paid" as well as to " eliminate any tax on such income in the future."

The April 2009 Form 8-K filing and press release also announced an Asset Services Agreement with VCG. Under this agreement, FMD promised " to provide certain portfolio services." In exchange, FMD would receive an " annual fee based on the aggregate outstanding principal balance of the student loans owned by the [special purpose statutory trusts]," which " will not be paid until residual cash flows are distributed by the [trusts]." FMD's share price climbed in reaction to the announcement

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of the VCG Transaction, closing 44% above the previous trading day's share price.

The press release included a " Safe Harbor Statement" noting in part that " inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future results, plans, estimates or expectations contemplated by us will be achieved. In particular, the U.S. federal and state income tax consequences ...


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