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January 4, 1995

GN HOLDINGS, INC., etc., et al., Defendants.

The opinion of the court was delivered by: MILTON I. SHADUR

 Whirlpool Financial Corporation ("Whirlpool") has sued GN Holdings, Inc. ("GN"), W.R. Grace & Co.-Conn. ("Grace"), Kevin ("Kevin") and Michelle Clark (collectively "Clarks") and Robert ("Robert") and Diane Bok (collectively "Boks") to rescind Whirlpool's $ 10 million loan to GN. Because that transaction involved the "sale" of GN's $ 10 million note to Whirlpool for securities laws purposes, Whirlpool brings its claim under the Securities Exchange Act of 1934 ("1934 Act") (Count I), the Illinois Securities Law of 1953 ("Illinois Act") (Count II) and the Securities Act of 1933 ("1933 Act") (Count III).

 All defendants have filed motions to dismiss under Fed. R. Civ. P. ("Rule") 9(b), Rule 12(b)(1) and Rule 12(b)(6). *fn1" Clarks and Boks have also moved for dismissal under Rule 12(b)(2). For the reasons stated in this memorandum opinion and order, the Rule 12(b)(6) motions are granted (so that the other motions are rendered moot) and both the Complaint and this action are dismissed.

 Legal Standards

 As to the current motions, familiar principles applicable to both Rule 9(b)( Kowal v. MCI Communications Corp., 305 U.S. App. D.C. 60, 16 F.3d 1271, 1278 (D.C. Cir. 1994) and Rule 12(b)(6) ( Thompson v. Boggs, 33 F.3d 847, 852 (7th Cir. 1994) require this Court to accept as true all of Whirlpool's well-pleaded factual allegations, drawing all reasonable inferences in its favor. No defendant's motion to dismiss should be granted unless no relief could be granted under any set of facts that could be proved consistent with those well-pleaded allegations ( Hishon v. King & Spalding, 467 U.S. 69, 73, 81 L. Ed. 2d 59, 104 S. Ct. 2229 (1984)).

 Parties to the Litigation

 Whirlpool engages (among other activities) in commercial lending (Complaint P5). GN (formerly CCHP Delaware, Inc., *fn2" id. P6) had been wholly owned by Grace until mid-July 1991 (id. P7). On July 15, 1991 Grace, Clarks and Boks entered into a Shareholders Agreement ("Agreement," Complaint Ex. E) pursuant to which each of the four individuals acquired 12.75% of GN's common stock (a total of 51%) (id.) and Kevin and Robert were elected directors of GN along with two individuals named by Grace and a fifth (independent) director (Complaint P22). Kevin was named GN's President, Chief Executive Officer and Treasurer (Complaint P23).

 Whirlpool-GN Transaction This lawsuit stems from Whirlpool's asserted reliance on false financial projections in making a $ 10 million subordinated loan to GN in July 1991. That loan is evidenced by a Subordinated Term Note (Complaint P6 and Ex. A) calling for quarterly payments of interest only, with the entire principal to be repaid in 1998 (Complaint P26). GN used the loan proceeds to finance its purchase of the assets of the Clarks-Boks-owned Cross Country Healthcare Personnel, Inc. ("Cross Country") and an affiliated corporation (id. PP14, 18) in what will here be termed the "Transaction." n3 At the same time (July 16, 1991) GN also secured additional financing from other sources (id. P24): Loans Heller Financial ("Heller") $40.3 million pursuant to a Senior Term Loan $4.5 million pursuant to a Revolving Loan Preferred Stock Grace $25.2 million for 252 shares Common Stock Clarks and Boks $510,000 for 51 shares Grace $470,000 for 47 shares Heller $ 20,000 for 2 shares

 Clarks and Boks had formed Cross Country in 1986 (id. P14). That corporation carried on its business through three operating subsidiaries engaged in providing hospitals with the services of long-term temporary registered nurses and licensed practical nurses (AAI also provided such services, Memorandum 1), physical therapists, occupational therapists, respiratory therapists and radiological technicians (Complaint P14). Before the Transaction Clarks and Boks had owned all of Cross Country's issued and outstanding stock and had served as the only directors of Cross Country and of each of its subsidiaries and AAI (id. PP16, 17).

 To assist in securing the financing for the contemplated Transaction, Lehman Brothers had worked with GN, Grace, Clarks and Boks in preparing a February 1991 Private Placement Memorandum ("Memorandum," Complaint Ex. C). That Memorandum, provided to Whirlpool during that same month (Complaint P18), included narrative information, historical financial data and projections for the business going forward. Originally the Memorandum valued the Transaction at $ 94.3 million plus a contingent payment of up to $ 9.1 million to Kevin (id. P19). Later, however, Grace, Clarks and Boks reduced the purchase price to $ 86.5 million (id. P20) and ultimately to $ 76.5 million, with Whirlpool's investment set at $ 10 million (id. P21). In the course of that restructuring the Memorandum's initial projections were revised downward via a rider ("Rider") provided to Whirlpool before it invested (id. P21).

 Memorandum and Rider

 Notwithstanding the Memorandum's great detail (it ran to 54 single-spaced pages plus appendices), its text was preceded by a 1-1/2 page boldface statement that included a broad disclaimer of any express or implied representations or warranties as to the accuracy or completeness of the information contained in the Memorandum. That same page cautioned that the Memorandum's market analysis and financial projections represented inherently personal and subjective views of management and that there could be no assurance that management's perceptions were accurate or that the company would perform as projected. Those warnings were essentially reiterated at Memorandum 45:

The projections for 1991 and 1992 have been prepared by Management in good faith based on assumptions which are believed to be reasonable, but no representations are made as to the accuracy of such assumptions. The estimates and assumptions underlying these projections are subject to economic and competitive uncertainties which are beyond the Company's control, and actual results may be higher or lower than those set forth in this memorandum.

 Despite its initial (and later-repeated) hedges, Memorandum 2 went on to describe Cross Country as what Clarks and Boks believed to be "the largest, most respected and most imitated firm in the travel nurse industry." Citing the company's exceptional reputation with health care institutions nationwide, its aggressive marketing and its ground-breaking technology, the Memorandum positioned Cross Country as an industry leader (id. 7-8 ). That industry was described both in terms of the temporary personnel industry generally (coupled with the nursing industry) and more specifically in terms of the travel-nurse segment of temporary personnel (id. 30-34).

 Figures for the general temporary personnel industry had demonstrated an annual growth rate of 8.5% in the average number of temporary employees from 1986 to 1989 (id. 30). Memorandum 31 then went on to describe a growing nursing shortage and cited figures estimating that the demand for nurses would exceed the supply by more than 20% by the year 2000. That shortage, the Memorandum suggested, would pave the way for Cross Country to contract out the services of its professionals to alleviate the strain placed on health care providers. Memorandum 34 cited a study listing travel nursing "as one of the 25 hottest careers for the 1990s" and concluded that "although there are no published statistics on the travel nurse industry, one industry observer estimates the size of the industry at approximately $ 350 million in 1990 and growing in excess of 20% per year."

 That 20% annual growth projection in the "Industry Overview" had been exceeded by Cross Country's own figures presented in the "SUMMARY OF HISTORICAL FINANCIAL RESULTS AND PROJECTIONS" (Memorandum 6). Its revenues had increased from $ 9.7 million in the 1987 fiscal year to $ 30.3 million in 1988 and $ 51.8 million in 1989 (id.). Operating profits in those years had increased commensurately from $ 1.4 million in 1987 to $ 5.3 million in 1988 and $ 9.6 million in 1989 (id.). Extrapolating from those figures, the Memorandum predicted that Cross Country's operating profits would amount to $ 14.6 million in 1990 (adjusted pro forma to reflect the originally contemplated form of the Transaction) and would increase to $ 22.8 million in 1991 and $ 32.4 million in 1992 (id.). Those projections were based on the expressed assumption that the traveling nurse industry was "expected to experience continued rapid growth" due to factors such as (1) the aging population, (2) increasing demands placed on nurses within hospitals, (3) the development of alternative health care delivery systems apart from traditional hospitals and (4) increased awareness that travel nurses provide a cost-effective way for hospitals to deal with varying seasonal occupancy levels (id. 7).

 Having set out those optimistic figures, Memorandum 9 then presented the risks of the venture under the heading "Risk Factors," emphasizing that (1) the Company's continued success was dependent on Chief Executive Officer Kevin Clark, (2) the travel nurse industry was a relatively new one and its continued industry growth was uncertain, (3) the acquisition was highly leveraged and (4) there were potential malpractice liabilities. Most germane to the parties' present disputes is the following language on that page (emphasis in original):

The travel nurse industry is a relatively new one and continued industry growth is uncertain.
The travel nurse market is still in its development stages and there has been limited research conducted on its potential size and viability of the business. The success of the industry is contingent on nursing [sic] shortage. Although studies show that there is a current shortage of nurses in the U.S. and project that this shortage will continue in the foreseeable future, there are no assurances that this shortage will continue over an extended period of time. In addition, the Company's projected growth is dependent in part on its ability to recruit qualified nurses and other health care professionals. No assurance can be given that the Company will be able to retain and recruit the necessary nurses.
The acquisition is a highly leveraged transaction.
The proceeds from the offering of the Senior Notes will be used to provide the debt financing for the acquisition. The Senior Notes are neither secured nor guaranteed. There can be no assurance that cash flow from future operations of the Company will be sufficient to meet its interest and principal obligations.

 As indicated earlier in this opinion, on or after June 17, 1991--before Whirlpool made its decision to purchase the GN note--the Rider revised the projections in the Memorandum downward in recognition of new accounting principles to be adopted to reflect the asset acquisition (Complaint P21 and Ex. D). Net revenue projections were lowered from $ 115.5 million to $ 95.2 million for 1991 and from $ 162 million to $ 114.2 million for 1992. While Whirlpool concedes that those projections were "significantly less optimistic and, therefore, presumably more realistic" (Complaint P21), it points to the fact that discrepancies still remained between the Rider's projections and the ultimate reality as claimed evidence of securities fraud.

 Whirlpool's Complaint

 Count I of Whirlpool's Complaint asserts a claim under 1934 Act § 10(b) *fn5" in conjunction with the SEC's implementation of that section through its Rule 10b-5, 17 C.F.R. § 240.10b-5. To state a claim under Rule 10b-5, a plaintiff must allege that the defendant (1) made an untrue statement of material fact or omitted a material fact that rendered the statements made misleading, (2) in connection with the purchase or sale of a security, *fn6" (3) with the intent to mislead, (4) causing plaintiff's loss ( Schlifke v. Seafirst Corp., 866 F.2d 935, 943 (7th Cir. 1989)).

It shall be a violation of the provisions of this Act for any person:
* * *
F. To engage in any transaction, practice or course of business in connection with the sale or purchase of securities which works or tends to work a fraud or deceit upon the purchaser or seller thereof.
G. To obtain money or property through the sale of securities by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.
H. To sign or circulate any statement, prospectus, or other paper or document required by any provision of this Act knowing or having reasonable grounds to know any material representation therein contained to be false or untrue.
I. To employ any device, scheme or artifice to defraud in connection with the sale or purchase of any security, directly or indirectly.

 Count III charges violations of 1933 Act § 12(2), which imposes liability on the seller or offeror of securities *fn9" whose prospectus or oral communication involves a material misrepresentation or a materially misleading omission. Unlike Rule 10b-5 actions, actions under 1933 Act § 12(2) have no scienter requirement ( Short v. Belleville Shoe Mfg. Co., 908 F.2d 1385, 1391 (7th Cir. 1990)). *fn10"

 Each of the three Counts has an identical thrust, essentially set out in Complaint P38:

Defendants intentionally and knowingly prepared the Projections with misrepresentations and omissions of material facts, including false and misleading assumptions that were used in preparing the Projections.

 With that completing the background, this opinion goes on to consider the legal sufficiency ...

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