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LEWIS v. CIB MARINE BANCSHARES

August 18, 2005.

DENNIS LEWIS, MARK SELVAGGIO, MARY SELVAGGIO, ANTHONY SELVAGGIO, GARY NEVINS, MICHELE NEVINS, JAMES R. SCHUETT, HARRY ALTON, DORIS ALTON, BERNIE E. MYLER, LINDA R. MYLER, and JAMES HAUSMAN, on behalf of themselves and all others similarly situated, Plaintiffs,
v.
CIB MARINE BANCSHARES, INC., JOSE ARAUJO, JOHN MICHAEL STRAKA a/k/a J. MICHAEL STRAKA, DONALD M. TRILLING, DEAN M. KATSAROS, W. SCOTT BLAKE, NORMAN E. BAKER, HOWARD E. ZIMMERMAN, STEVEN T. KLITZING, DONALD STRAKA, and KPMG, LLP, Defendants.



The opinion of the court was delivered by: MICHAEL McCUSKEY, District Judge

OPINION

On June 23, 2005, a Motion of CIB Defendants to Transfer this Action Pursuant to 28 U.S.C. § 1404(a) (#79) was filed by Defendants CIB Marine Bancshares, Inc. (CIB), Jose Araujo, J. Michael Straka, Donald M. Trilling, Dean M. Katsaros, W. Scott Blake, Norman E. Baker, Howard E. Zimmerman, Steven T. Klitzing, and Donald Straka (collectively the CIB Defendants). The CIB Defendants also filed a Memorandum in Support (#80) and supporting exhibits. On July 5, 2005, Plaintiffs, Dennis Lewis, Mark Selvaggio, Mary Selvaggio, Anthony Selvaggio, Gary Nevins, Michele Nevins, James R. Schuett, Harry Alton, Doris Alton, Bernie E. Myler, Linda R. Myler, and James Hausman, filed their Response to the CIB Defendants' Motion to Transfer (#91). This court has carefully reviewed the arguments of the parties and the documents submitted by the parties. Following this careful and thorough review, the CIB Defendants' Motion to Transfer (#79) is GRANTED.

FACTS

  This case was originally filed in this court on January 21, 2005, by Plaintiff Dennis Lewis. On April 12, 2005, this court entered an Order (#46) which consolidated this case with Sollberger v. CIB Marine Bancshares, Inc., Case No. 05-1012, which had been filed in Peoria. This court also transferred the Sollberger case to this court, and the case was assigned Case No. 05-2090. The consolidated cases were referred to Magistrate Judge John A. Gorman for further proceedings. On May 31, 2005, Judge Gorman entered an Order (#70) which stayed discovery in both federal cases and in two related cases filed in state court.

  On June 3, 2005, Plaintiffs filed their First Consolidated Complaint (#72) in this case against the CIB Defendants and CIB's outside accounting firm, KPMG, LLP (KPMG). Plaintiffs sought recovery on behalf of themselves, and all others similarly situated, "who purchased common stock of CIB Marine Bancshares, Inc." between April 12, 1999 and April 12, 2004. Plaintiffs alleged that, during the stated class period, the CIB Defendants engaged in unsafe, unsound, illegal and deceptive acts and practices, including hazardous lending practices and lax collection policies. Plaintiffs alleged that the CIB Defendants "issued and caused to be disseminated to the Plaintiffs, false and misleading Annual Reports, financial statements, letters to the shareholders and press releases all of which falsely portrayed CIB's loans, allowances for loan losses, net income, book value and resultant financial condition." Plaintiffs therefore alleged that the CIB Defendants knowingly or recklessly made, caused, or permitted misleading material statements about CIB's operations, financial position, and financial performance, and knowingly or with reckless disregard for the truth made, caused, or permitted CIB to engage in unsafe, unsound and illegal banking and lending practices, and permitted management to operate and engage in those practices that were detrimental to Plaintiffs and the class. Plaintiffs alleged that, during the class period, there were misleading statements regarding factors relating to CIB's growth strategy, loan credit quality, loan review procedures, and financial performance, among other alleged false and misleading statements. Plaintiffs alleged that the misleading statements were made in filings with the Securities and Exchange Commission (SEC), private placement memoranda, letters sent by CIB to shareholders between 1999 and 2003, and press releases. Plaintiffs alleged that, as a result, CIB's securities traded at artificially high levels during the Class Period, and Plaintiffs and class members were damaged thereby.

  Plaintiffs also alleged that KPMG was retained by CIB to perform a wide range of accounting services, including auditing CIB's Consolidated Financial Statements and preparing an Independent Auditor's Report for inclusion in CIB's Annual Report. Plaintiffs alleged that KPMG operates through accounting partners who are licensed in various states, including Wisconsin. Plaintiffs alleged that the KPMG partner in charge of CIB's audits during the Class Period was Richard A. Brown, managing partner for KPMG's Milwaukee, Wisconsin, office. Plaintiffs alleged that "CIB and the Individual Defendants' choice of Mr. Brown and KPMG's Milwaukee, Wisconsin, office was intentional. They wanted someone with a national reputation who would allow them to continue to raise money through private placement offerings, but who would not aggressively audit CIB's financial statements or investigate doubtful banking practices and procedures." Plaintiffs alleged that KPMG made representations that were materially false and misleading. Plaintiffs further alleged that these false and misleading representations were included in its Independent Auditors' Reports which were included in Private Placement Offering Memoranda and CIB's Annual Reports filed with the SEC. Plaintiffs alleged that KPMG "knew and intended that Plaintiffs and other class members would receive and rely on the representations contained in these documents including the representations made by KPMG." Plaintiffs alleged that John Bean, president of CIB-Chicago, "attempted on numerous occasions to alert Mr. Brown and KPMG to the problems that existed in the loan portfolio at the Chicago branch and was rebuffed until late in 2003." Based upon these allegations, Plaintiffs asserted claims against the CIB Defendants and KPMG under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b),78t(a) and Rule 10b-5 promulgated by the SEC, 17 C.F.R. § 240.10b-5.

  In their First Consolidated Complaint (#72), Plaintiffs alleged that venue is proper in this district because "[s]ubstantial acts in furtherance of the acts alleged herein have occurred within this District and CIB has offices and does business in this District." Plaintiffs also stated that CIB operates Central Illinois Bank in Champaign, Illinois as a wholly owned subsidiary and that the individual Defendants therefore have and currently do business in Champaign County and are subject to personal jurisdiction here. Plaintiffs further alleged that a large number of the outstanding shares of CIB are owned by residents of this district and that the lead Plaintiff, Dennis Lewis, is a resident of Champaign County as is at least one of the individual Defendants.

  On June 17, 2005, this court entered an Order (#74) which, among other things, appointed Dennis Lewis as lead plaintiff and appointed Joseph W. Phebus as lead plaintiffs' attorney. On June 17, 2005, this court also dismissed the Sollberger case, based upon the filing of the First Consolidated Complaint and based upon a stipulation entered by Plaintiff Lewis and Plaintiff Sollberger. Plaintiff Sollberger is not a party to this action and no longer has a case pending before this court. On June 23, 2005, the CIB Defendants filed a Motion to Transfer this Action Pursuant to 28 U.S.C. § 1404(a) (#79). In their Memorandum in Support of their Motion, the CIB Defendants first noted that CIB is a Wisconsin corporation headquartered in Pewaukee, Wisconsin, which is in the Eastern District of Wisconsin. The CIB Defendants argued that, based upon the allegations of Plaintiffs' First Consolidated Complaint, Plaintiffs have implicitly acknowledged the significance of events which occurred outside of this district. The CIB Defendants noted that Plaintiffs acknowledged in their Complaint that CIB maintained its corporate headquarters in Wisconsin throughout the alleged class period. The CIB Defendants argued that this fact has considerable significance because the documents that lie at the heart of Plaintiffs' claim were prepared in Wisconsin. The CIB Defendants attached the affidavit of Defendant Steven T. Klitzing. Klitzing stated that he is the Chief Financial Officer of CIB and has held that position since 1993. Klitzing stated that CIB's headquarters has been located in Pewaukee, Wisconsin, since 1998. Pewaukee is located approximately 20 miles west of Milwaukee, Wisconsin. Klitzing stated that, from 1998 to the present, CIB's shareholder mailings, private placement memoranda, press releases and SEC filings, along with other financial disclosure documents, have for the most part been prepared at CIB's Pewaukee headquarters or its Brookfield, Wisconsin, office, which is approximately 15 miles west of Milwaukee. Klitzing stated that most of the originals of these documents and numerous other CIB corporate records have been and continue to be maintained at CIB's Pewaukee headquarters, its Brookfield office, or in off-site storage in Cedarburg, Wisconsin, approximately 22 miles northwest of Milwaukee.

  Klitzing stated that CIB's reporting functions have been generally located in CIB's Pewaukee headquarters or its Brookfield office at all times relevant to this lawsuit. CIB's controller and internal auditor work in CIB's Pewaukee offices and have worked there since at least April 1999. Klitzing stated that Stephen C. Bonnell served as the Chief Credit Officer of CIB between 1999 and February 2004. Klitzing stated that, as Chief Credit Officer, Bonnell was ultimately responsible for the Bank's decision to extend credit and set loan reserves. Bonnell was also responsible for the final decisions on loan risk ratings over the life of a loan and oversaw loan policy-related issues, including setting policies regarding risk analysis and loan validation. The loan review functions of the subsidiary banks reported to Bonnell until April 2003, when the loan review function started reporting directly to the Board. Bonnell's chief assistant was John Meade, who worked with Bonnell on credits, collection, workout and loan review. Klitzing stated that, as CFO, he consulted with both Bonnell and Meade to address various financial reporting issues with loan-related matters contained within the SEC filings. Klitzing stated that neither Bonnell nor Meade is still employed by CIB or its subsidiaries. Klitzing stated that Bonnell currently lives in Rockford, Illinois and Meade lives in Sussex, Wisconsin, approximately 23 miles northwest of Milwaukee.

  Klitzing stated that KPMG has served as CIB's outside auditor since 1999 and, as such, performed reviews and, where required, audits of financial information disclosed in CIB's SEC filings. Klitzing stated that KPMG's work was performed under the supervision of partners working out of KPMG's Milwaukee and Chicago offices by accountants working out of those offices. This is consistent with the allegations of Plaintiffs' First Consolidated Complaint that it was KPMG's Milwaukee office involved in the audits.

  Klitzing finally stated that, in 2004, CIB sold its Chicago-area banking subsidiary to First Banks, Inc. Klitzing stated that this transaction involved the transfer of substantially all of CIBC-hicago's banking operations, including CIB-Chicago's headquarters in Mt. Prospect, Illinois, and its 16 branches located within Chicago and its suburbs. Klitzing stated that, after the transfer, many of the former employees of CIB-Chicago continued to perform the same functions as First Bank employees.

  Based upon these facts, the CIB Defendants argued that the key events in this case took place outside of this district and the key evidence is located outside of this district. The CIB Defendants contended that Bonnell and Meade are important witnesses because they had the ultimate responsibility for loan risk ratings and individual loan grades and because Bonnell also oversaw loan policy-related issues, including setting policies regarding risk analysis and loan validation, and the loan review functions of the subsidiary banks reported to him until April 2003. The CIB Defendants also noted that relevant audits of CIB's financial records were conducted outside this district, in Milwaukee and Chicago by KPMG and by CIB's internal auditor in Wisconsin. The CIB Defendants argued that, in their First Consolidated Complaint, Plaintiffs repeatedly attribute the losses underlying the claims of financial nondisclosure to CIB's banking operations outside of Champaign and this district. The CIB Defendants noted that Plaintiffs refer repeatedly to CIBC-hicago as the particular source of purportedly exaggerated growth and of nonperforming loans. The CIB Defendants further recognized that Plaintiffs cite John Bean, CIB-Chicago's former president, as a purported source of information about problems at CIB-Chicago. The CIB Defendants argued that former CIB-Chicago employees are likely to reside in the Chicago area, including John Bean, who resides in Arlington Heights, Illinois. The CIB Defendants also noted that, consistent with Plaintiffs' venue allegations, only one of the individual Defendants, Dean Katsaros, resides in this district.

  Based upon the facts presented, the CIB Defendants argued that the case should be transferred because: (1) Plaintiffs' choice of forum is entitled to little weight because Plaintiffs have sued as class representatives on behalf of a nationwide class and because the material events leading to the litigation occurred elsewhere; (2) the Eastern District of Wisconsin would provide easier access to proof and witnesses; and (3) the Eastern District of Wisconsin is a more convenient forum for the majority of the individual Defendants, since four of the Defendants live and work in and around Milwaukee and two others reside in Chicago, a short drive from Milwaukee. The CIB Defendants also argued that transfer would be proper in this case because there is no compelling public interest in maintaining the case here. The CIB Defendants specifically argued that key third party witnesses are located outside this district. They noted that Bonnell, Meade and Bean will be key witnesses, based upon Plaintiffs' allegations. The CIB Defendants contended that these witnesses do not reside in this district, are no longer employed by CIB, and cannot be compelled to appear because they live more than 100 miles from the Urbana courthouse. The CIB Defendants further noted that all three of these witnesses can be compelled to testify in the Eastern District of Wisconsin because the Milwaukee courthouse is less than 100 miles from their residences. The CIB Defendants also noted that former employee witnesses from CIB-Chicago could be subpoenaed to testify at a trial held in Milwaukee but not one held in the Central District of Illinois.

  On July 5, 2005, Plaintiffs filed their Response (#91). Plaintiffs acknowledged that this lawsuit has many connections to Wisconsin. However, Plaintiffs contended that the CIB Defendants have understated the connections this case has with this district. Plaintiffs noted that all of the named Plaintiffs reside in this district, that the named Plaintiffs own a significant amount of CIB stock, that 40% of the CIB sales took place here and that 40% of the plaintiff class resides here.*fn1 Plaintiffs further noted that one individual Defendant, several present and past directors of CIB, and numerous present and former officers and employees of Central Illinois Bank, CIB's largest banking subsidiary, reside in this district. Plaintiffs argued that, under the facts here, the CIB Defendants have not met their heavy burden to show that the transferee district is clearly more convenient.*fn2 Plaintiffs further argued that this case should not be transferred because: (1) Plaintiffs' choice of forum should be given substantial consideration by this court; (2) material events took place in this district; (3) it is premature to identify where most of the material witnesses are located; (4) the location of documents does not favor transferring this case; and (5) the convenience of the parties favors Plaintiffs' forum. Plaintiffs also contended that the interests of justice favor this forum, arguing that the Eastern District of Wisconsin is substantially burdened with more cases and is more prone to congestion than this district.

  In making these arguments, Plaintiffs noted that Plaintiffs and other members of the class bought CIB stock in this district and were injured here. Plaintiffs also argued that, during the time in question, CIB had its largest number of banking facilities in this district. Plaintiffs argued that the First Consolidated Complaint makes clear that the fraudulent conduct occurred at each branch bank. Plaintiffs stated that, "[w]hile the fraud was directed from the corporate headquarters in Wisconsin, fraudulent activities took place on a daily basis in most of the branch banks located outside Wisconsin." Plaintiffs have not presented any evidence to dispute the CIB Defendants' contention that Bonnell, Meade and Bean cannot be compelled to appear and testify in Urbana, but dispute that Bonnell and Meade will be material witnesses in this case. In addition, Plaintiffs asserted that documents relevant to this matter are located in this district because the loan files at issue here, as well as Board of Directors minutes, are located at each subsidiary branch including the Central Illinois Bank locations here in ...


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