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Stark Master Fund Ltd v. Credit Suisse Securities USA LLC

United States District Court, E.D. Wisconsin

September 23, 2019

STARK MASTER FUND LTD. and STARK GLOBAL OPPORTUNITIES MASTER FUND LTD., Plaintiffs,
v.
CREDIT SUISSE SECURITIES USA LLC, Defendant.

          ORDER

          DAVID E. JONES, United States Magistrate Judge.

         Stark Master Fund Ltd. and Stark Global Opportunities Master Fund Ltd. (collectively “Stark”) allege that Credit Suisse Securities (USA) LLC, (“Credit Suisse”) misrepresented the nature of the financing for a proposed merger between Huntsman Corporation and Momentive Specialty Chemicals, f/k/a Hexion Specialty Chemicals, Inc. According to Stark, the Banks’ misrepresentations caused them to retain their position in Huntsman stock and to purchase additional shares. Ultimately, the merger collapsed, and Stark is now suing Credit Suisse[1] for intentional misrepresentation, negligence, strict liability misrepresentation, conspiracy to defraud, and aiding and abetting fraud.

         The Stark plaintiffs are British Virgin Islands corporations, but they trade securities through Stark Offshore Management LLC and Stark Global Opportunities Management LLC, investment managers located in St. Francis, Wisconsin. Credit Suisse is an LLC whose sole member is Credit Suisse (USA), Inc., which is a Delaware corporation with its principal place of business in New York.

         On August 2, 2016, this matter was reassigned to this Court due to the unavailability of Judge Randa. All parties consented to magistrate judge jurisdiction. See 28 U.S.C. § 636(c) and Fed.R.Civ.P. 73(b).

         On August 25, 2017, Credit Suisse filed a motion for summary judgment. ECF No. 159. Briefing on the motion was completed on October 13, 2017. See ECF Nos. 160, 167, 175. Counsel provided oral argument on November 8, 2017 (ECF Nos. 195; 199), and the matter is ripe for decision.

         The Court again extends its appreciation to counsel for their outstanding written and oral advocacy on this case.

         I. FACTUAL BACKGROUND

         Unless otherwise noted, these facts are drawn from the parties’ statements of fact and responses thereto. See ECF Nos. 162, 170, 171, 177. The Court also notes that Credit Suisse has offered a “reply” in support of their own statement of facts. ECF No. 176. This document is neither contemplated nor permitted by this District’s Local Rules. See Civil L. R. 56(b)(3). The Court has therefore ignored it. See also J.M. v. City of Milwaukee, Case No. 16-CV-507-JPS, 2017 U.S. Dist. LEXIS 56075, at *27 n. 8 (E.D. Wis. Apr. 12, 2017) (same).

         Stark Master Fund Ltd. and Stark Global Opportunities Master Fund Ltd. are two funds associated with Stark Investments. Statement of Fact by Credit Suisse Securities (USA) LLC (“CS”), ECF No. 162, ¶ 1. Between 2006 and 2008, Plaintiffs pursued several different investment strategies, including “risk arbitrage” or “risk arb” investments. CS ¶ 2. Risk arbitrage investments carry risks, including the risk of “deal break, ” or the possibility that an announced merger might fail to close. CS ¶ 5; Plaintiffs’ Response to Credit Suisse Securities (USA), LLC’s Statement of Facts (“PRCS”), ECF No. 170, ¶ 5.

         Credit Suisse was familiar with Stark, as it provided banking and brokerage services and collected fees totaling over $100 million between 2006 and 2008. See Stark Plaintiffs’ Statement of Additional Facts (“Stark”), ECF No. 171, ¶ 48; Credit Suisse Securities (USA) LLC’s Response to the Stark Plaintiffs’ Statement of Additional Facts (“CSR”), ECF No. 177, ¶ 48. The “articulated public strategy” of Credit Suisse was not to distinguish itself as different branches or entities but to sell services to customers as a single, global bank. Stark ¶ 64.

         Stark began to acquire Huntsman shares in 2006. CS ¶ 10; PRCS ¶ 10. On June 25, 2007, the Huntsman Board of Directors, on the recommendation of its Transaction Committee, entered into the Basell Merger Agreement, which provided for the acquisition of Huntsman by Basell for $25.25 per share of Huntsman common stock, rejecting a competing offer from Apollo, on behalf of Hexion, of $26.00 per share. CS ¶ 11; Stark ¶¶ 5 & 7.

         As of June 25, 2007, Stark owned approximately 2.9 million Huntsman shares. CS ¶ 12; Stark ¶ 6; CSR ¶ 6. On June 26, 2007, Huntsman publicly announced that it had entered into the Basell Merger Agreement, pursuant to which Huntsman would be acquired by Basell for $25.25 per share. CS ¶ 13. Stark’s investments in Huntsman between 2006 and the announcement of the Basell merger on June 26, 2007, were not made in reliance on any statements about financing for the Hexion Merger because it was not in existence. CS ¶ 14. Stark’s investments in Huntsman before the June 26, 2007, announcement of the Basell merger met or exceeded Stark’s expectations because Huntsman’s stock increased in value following the announcement. CS ¶ 15.

         Apollo badly wanted to do the Huntsman deal. Stark ¶ 9. On July 3, 2007, Huntsman announced that it had received a revised bid from Hexion offering to acquire Hunstman for $27.25 per share. CS ¶ 16; Stark ¶ 10. After the June 26, 2007, announcement of the Basell deal, but before the July 3, 2007, announcement of Hexion’s revised bid for Huntsman at $27.25 a share, Stark acquired additional Huntsman stock, bringing their total holdings of Huntsman stock as of July 3, 2007, to approximately 5.79 million shares. CS ¶ 17. Stark’s purchases of Huntsman shares prior to the July 3, 2007, announcement of Hexion’s revised bid for Huntsman were not made in reliance on any statements about financing for Hexion’s revised offer to acquire Huntsman, which had not been announced at the time. CS ¶ 18.

         On July 8, 2007, Josh Harris of Apollo sent a letter to the Huntsman board of directors which stated, among other things: “As your advisors have agreed with us, our financing commitments are of the highest quality and strength available in U.S. markets. Credit Suisse is a leading lender in this industry and to private equity sponsors generally; they have, to our and their knowledge, never failed to fund a commitment when required to do so. . . . To quote one of your advisors, these papers are ‘rock solid.’ . . . Our proposal is firm, fully financed.” Stark ¶ 24. Stark alleges that this statement was based upon Malcom Price’s email assurance sent to Jordan Zaken on July 6, 2007, that “CS has never walked away from a commitment in a U.S. financing.” Id.; but see CSR ¶ 24 (Credit Suisse disputes that Mr. Harris’s letter was based upon any statement by Credit Suisse).

         Before accepting Apollo’s bid, Huntsman negotiated several conditions to the Apollo offer that tightened up the financing. These included removing the material adverse clause from the Commitment Letter, adding a “hell-or-high-water provision” to the merger, removing any financing outs, securing the right to compel Apollo/Hexion to sue the banks, and allowing the solvency opinion to be delivered by the Huntsman CFO or an outside party. See Stark ¶ 11; CSR ¶ 11. The Vice Chancellor in the Delaware litigation wrote that due to “Apollo’s admittedly intense desire for the deal, ” Huntsman had “significant negotiating leverage, ” and was able to get Hexion “to commit to stringent deal terms” which were “more than usually favorable to Huntsman.” Stark ¶ 12. Notably, the duty to fund would not be conditioned on the banks being able to syndicate part of the debt to other banks. Stark ¶ 13.

         On July 12, 2007, Huntsman announced that it had terminated the Basell Merger Agreement and entered into the Hexion Merger Agreement, pursuant to which Huntsman was to be acquired by Hexion at $28.00 per share. CS ¶ 19; Stark ¶ 10. Aspects consistently considered by Huntsman’s Transaction Committee and Board in reviewing the merger proposals were “the certainty of closing” and the banks’ financing. Huntsman relied on these factors in ultimately terminating the Basell merger and accepting the Apollo-Hexion transaction. Stark ¶ 26; CSR ¶ 26. Promptly upon losing the Huntsman merger opportunity, Basell went out and reached an agreement to acquire another chemical company, Lyondell, and it subsequently closed on that deal in December 2007, in an all-cash transaction with a total value of approximately $20 billion. Stark ¶ 65.

         Stark was aware that even though Huntsman had entered into the Hexion Merger Agreement, there were no guarantees that the merger would close or that Stark would receive the $28.00 per share merger consideration contemplated by the definitive merger agreement. CS ¶ 20. Pursuant to the July 11, 2007, Commitment Letter, Credit Suisse and Deutsche Bank each agreed to provide a fixed amount of financing to Hexion for the Hexion Merger. CS ¶ 21. The Commitment Letter promised that the duty to fund would not be conditioned on the banks being able to syndicate part of the debt to other banks. Stark ¶ 28; see CSR ¶ 28. Banks consider the ability to syndicate debt when engaged in financing leveraged buyout conditions. See Stark ¶ 29; CSR ¶ 29.

         The Commitment Letter contained seven conditions precedent to the Banks’ obligations to fund the Hexion Merger, including receipt of a “customary and reasonably satisfactory” certificate or opinion with respect to solvency of the combined post-merger entity:

The Arrangers shall have received (i) customary and reasonably satisfactory legal opinions, corporate documents and certificates (including a certificate from the chief financial officer of the Borrower or the chief financial officer of Wingspan or an opinion from a reputable valuation firm with respect to solvency (on a consolidated basis) of the Borrower and its subsidiaries on the Closing Date after giving effect to the Transactions) (all such opinions, documents and certificates mutually agreed to be in form and substance customary for recent financings of this type with portfolio companies controlled by affiliates of or funds managed by the Sponsor); and (ii) payment of fees and expenses required to be paid hereunder and/or in the Fee Letter to the extent involved on or prior to the Closing Date.

CS ¶ 22.

         The Commitment Letter also contained a merger clause, a no-oral-modifications clause, and dispute resolution, choice-of-law, and mandatory forum clauses.[2] CS ¶ 23. The Commitment Letter was disclosed to Huntsman’s senior management and Board of Directors before the Hexion Merger Agreement was executed on July 12, 2007. CS ¶ 25. Huntsman did not disclose the Commitment Letter in its Preliminary or Definitive Proxy Statements related to the Hexion Merger, or in any other SEC filing. CS ¶ 26; PRCS ¶ 26. The Commitment Letter was not made public when the deal was announced or at any time during Stark’s investments in Huntsman from 2006, through May 2008. CS ¶ 27; PRCS ¶ 27. Stark did not have a copy of the Commitment Letter while invested in Huntsman from 2006, through May 2008, but expected it would contain industry standard conditions precedent to the Banks’ financing commitments. CS ¶¶ 28-29; PRCS ¶¶ 28-29; see also Transcript of Oral Argument held November 8, 2017, ECF No. 199, at 48; 51; 57; 58. Stark understood that making investments in Huntsman without knowledge of the specific terms and conditions in the Commitment Letter carried risks. CS ¶ 30. The Commitment Letter was first publicly disclosed on October 7, 2008. CS ¶ 31.

         In connection with the Hexion Merger, Huntsman and Hexion issued press releases and made filings with the SEC regarding the announced merger, some of which stated that the merger was fully financed, fully committed, and/or not subject to a financing condition. CS ¶ 32; Stark ¶ 34. Stark would generally review any press release, news report, or SEC filing related to the Hexion Merger shortly after it became publicly available. CS ¶ 8. Stark relied on the information contained in the publicly available documents related to the Hexion Merger, including SEC filings and press releases, in making decisions to acquire and hold Huntsman shares. CS ¶ 9; PRCS ¶ 9.

         Statements that the merger was not subject to a financing condition meant that the buyer, Hexion, would remain contractually obligated under the Hexion Merger Agreement to consummate the transaction even if the financing contemplated under the Commitment Letter was not available and Hexion was unable to obtain alternative financing. CS ¶ 33. Statements that the merger was “fully financed” or had “fully committed” financing meant only that a financing commitment existed whereby Credit Suisse and Deutsche Bank had agreed to provide a fixed amount of financing that the sponsor determined would be sufficient for the deal under a set of terms and conditions stipulated in the Commitment Letter. CS ¶ 34. Stark disagrees and asserts that Mr. Purcell testified that “fully financed” means no financing outs, other than the customary and standard conditions precedent. PRCS ¶ 34.

         On July 12, 2007, Huntsman issued a press release titled “HUNTSMAN TO BE ACQUIRED BY HEXION FOR $28.00 PER SHARE, ” in which Huntsman announced that it had agreed to be acquired by Hexion for $28.00 per share. The press release and the Form 8-K to which to was attached as an exhibit, both contain the following language in a section titled “CAUTIONARY STATEMENTS”:

These statements involve risks and uncertainties including, but not limited to, actions by regulatory authorities, market conditions, the Company’s financial results and performance, consummation of financing, satisfaction of closing conditions, actions by any other bidder and other factors detailed in risk factors and elsewhere in Company’s Annual Reports on Form 10-K and other filings with the Securities and Exchange Commission.

         Stark acknowledged that the press release and Form 8-K disclosed a risk that the transaction might not close because financing might not be available. CS ¶¶ 35-36. Also, on July 12, 2007, Hexion issued a press release titled “Hexion Specialty Chemicals, Inc. To Acquire Huntsman Corporation For $28.00 Per Share in Cash, ” in which Hexion announced that it had entered into an agreement with Huntsman to acquire Huntsman for $28.00 per share. CS ¶ 37. Hexion’s July 12, 2007, press release contains the following language in a section titled “Forward-Looking Statements”:

Important factors that could cause actual results to differ materially from those in the forward looking statements include, but are not limited to: market conditions, availability and terms of acquisition financing, satisfaction of closing conditions, actions by Hexion or Huntsman, economic factors such as an interruption in the supply of or increased pricing of raw materials due to natural disasters, competitive factors such as pricing actions by our competitors that could affect our operating margins, and regulatory factors such as changes in governmental regulations involving our products that lead to environmental and legal matters.

CS ¶ 38. Hexion’s July 16, 2007, Form 8-K contains the following language:

Statements in this Form 8-K that are not strictly historical may be ‘forward-looking’ statements, which involve risks and uncertainties. These include risks and uncertainties relating to financing the merger and satisfaction of the conditions to the merger, among others, as set forth in the companies’ respective filings with the Securities and Exchange Commission.

CS ¶ 39; PRCS ¶ 39. Elizabeth Clark, Stark’s portfolio manager responsible for the Huntsman investments, understood that Hexion’s July 12, 2007, press release disclosed a risk that the transaction might not close for reasons related to the “availability and terms of acquisition financing” and “financing for the merger.” CS ¶ 40. On July 13, 2007, Huntsman filed the Hexion Merger Agreement with the SEC as an exhibit to its Form 8-K filed on the same date. CS ¶ 41.

         Section 5.12 of the Hexion Merger Agreement contains the following language:

[Hexion] shall use its reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to arrange and consummate the Financing on the terms and conditions described in the Commitment Letter including (i) using reasonable best efforts to (x) satisfy on a timely basis all terms, covenants and conditions set forth in the Commitment Letter. . . . If any portion of the Financing becomes unavailable on the terms and conditions contemplated in the Commitment Letter or the Commitment Letter shall be terminated or modified in a manner materially adverse to [Hexion] for any reason, [Hexion] shall use its reasonable best efforts to arrange to obtain alternative financing from alternative sources in an amount sufficient to consummate the Transactions.

CS ¶ 42. Ms. Clark and Michael Keough, another Stark trader involved in the transaction, understood that the Hexion Merger Agreement disclosed the existence of terms and conditions contained in the Commitment Letter. CS ¶ 43. Mr. Keough and Ms. Clark understood that the Hexion Merger Agreement disclosed a risk that Hexion might not be able to draw on the financing committed under the Commitment Letter if the terms and conditions therein were not satisfied. CS ¶ 44.

         The publicly available Merger Agreement also states that “[t]he obligations of the financing sources to fund the commitments under the Commitment Letter are not subject to any conditions other than as set forth in the Commitment Letter.” Stark ¶ 35; see also CSR ¶ 35 (noting that the terms and conditions in the Commitment Letter were not disclosed to the public). Stark’s analysts received and reviewed publicly available documents indicating that the deal was “fully financed.” Stark ¶ 38. Stark relied on public assurances about the security and certainty of the financing.[3] Stark ¶ 41.

         Following the announcement of the Hexion Merger Agreement on July 12, 2007, Stark continued to purchase shares of Huntsman stock through September 19, 2007. CS ¶ 45. At the time the Hexion Merger was announced, MatlinPatterson owned more than 30% of Huntsman’s common stock and had two seats on Huntsman’s board of directors. CS ¶ 46. MatlinPatterson agreed to approve the Hexion Merger so long as it was permitted to sell approximately 57 million of its 76.8 million Huntsman shares before the merger closed. CS ¶ 47. In July and August 2007, Credit Suisse arranged and served as the underwriter for a secondary offering of 56, 979, 062 shares of Huntsman stock that MatlinPatterson had held. CS ¶ 48.

         On July 31, 2007, Huntsman filed a Form S-3 Registration Statement (the “Prospectus”) with the SEC in anticipation of the secondary offering of shares from the MatlinPatterson block. CS ¶ 49. The Prospectus contained a section titled “Risks Related to the Pending Sale of Our Company.” One such risk factor, which appeared in bold and italic typeface was: “If the banks that have provided commitment letters for the funds to complete the Merger are not required or refuse to fund, Hexion will have to seek other financing to complete the Merger, which financing may not be available.” The Prospectus further stated:

Hexion has obtained commitment letters for senior secured credit facilities and a senior secured bridge facility with Credit Suisse and Deutsche Bank to be made available to Hexion and/or one or more of its subsidiaries for purposes of, among other things, financing the Merger Consideration. Hexion’s ability to draw on the proposed loan facility is subject to the satisfaction of certain conditions. . . . Although Hexion expects that it will be able to draw on the proposed loan facility, in the event Hexion is unable to do so, Hexion will be forced to seek substitute financing to raise the necessary funds to pay the Merger Consideration. Such substitute financing may be unavailable. In addition, Apollo is not obligated to contribute additional equity to us or Hexion in order to consummate the Merger.

CS ¶ 50. The Prospectus also identified risk factors related to whether the Hexion Merger would be approved by antitrust authorities. CS ¶ 51.

         Mr. Keough and Ms. Clark understood that the Prospectus disclosed the existence of terms and conditions in the Commitment Letter and a risk that Hexion might not be able to draw on the financing committed under the Commitment Letter. CS ¶¶ 52-53. On August 2, 2007, Stark purchased 6.5 million Huntsman shares from the MatlinPatterson Block from Credit Suisse, at a price below the announced merger price. CS ¶ 57; PRCS ¶ 57; Stark ¶ 45. This purchase brought Stark’s total shares owned to approximately 18.5 million shares. See Stark ¶ 46; CSR ¶ 46.

         Stark voted their Huntsman shares in favor of the proposed merger with Hexion. CS ¶ 60; Stark ¶ 47. The proxy statements filed with the SEC in connection with the Hexion Merger set forth risks regarding financing for the transaction. Both the Preliminary Proxy Statement and the Definitive Proxy Statement, filed by Huntsman with the SEC on August 10, 2007, and September 12, 2007, respectively, contain the following language:

Consummation of the merger is not subject to a financing condition; however, if Hexion’s financing commitments are terminated or not fulfilled and Hexion is unable to find alternative financing arrangements, Hexion may not be able to consummate the Merger. There can be no assurance that these or the ...

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