News: Gibson Dunn Won two nationwide securities class action cases consolidated for trial

On Thursday, February 11, 2010, San Diego Superior Court Judge Joan M. Lewis issued a complete defense verdict in favor of Gibson Dunn's clients Vestin Mortgage, Vestin Realty Mortgage I, Inc., and Vestin Realty Mortgage II, Inc. (collectively, "Vestin") after an eleven-day bench trial.

The case involved two nation-wide classes of individuals who had (a) invested in one of two real estate mortgage funds that were organized as LLCs and (b) voted against a 2006 merger of those mortgage funds into publicly traded corporations operating as REITs. Plaintiffs and the classes contended that the 2006 mergers constituted "roll up" transactions under the LLCs' Operating Agreements, entitling the dissenters to certain rights, including a cash payout.

Under the LLCs' Operating Agreements, the mergers would have been roll ups if they resulted in a significant adverse change in the companies' investment objectives.

The plaintiffs' case had focused on a drafting difference between the original LLCs' prospectuses and the merger prospectuses. Each contained a bullet-point summary of the companies' principal investment objectives. However, the merger prospectuses contained only three of the original four bullet points summarizing the investment objectives. Specifically, the original LLCs' prospectuses had listed "preservation and return of your capital contributions" as an investment objective; the merger prospectuses did not.

The plaintiffs contended that the mere fact that the phrase "preservation and return of your capital contributions" did not appear in the merger prospectuses established a significant adverse change in the companies’ investment objectives.   In addition, they argued that a publicly traded company by definition could not preserve and return capital, and that the companies had in fact become risky and volatile investments following the mergers, as contrasted with the prior ultra-conservative nature of the investment.

Judge Lewis rejected all of plaintiffs' theories and concluded that the mergers were not roll ups and therefore there was no breach of contract. The court's tentative Statement of Decision adopts virtually all of the arguments and fact findings proposed by Gibson Dunn. Notably, the court explained:

"The difference in language between the Fund and the REIT prospectuses had no effect on the companies themselves or on the company's actual day-to-day business, investment policies, or investment objectives;"

"The REIT prospectuses contained factual descriptions of how the companies sought to preserve and return capital that were virtually identical to the same descriptions in the Fund prospectuses;"

"Plaintiffs (through their expert) conceded that the Funds and the REITS both followed the exact same investment policies, which were the 'means for achieving its objectives.'"

The court also noted at least 10 instances where plaintiffs' liability expert agreed with Gibson Dunn's arguments or otherwise undermined the plaintiffs' theories.

The Gibson Dunn trial team was led by Los Angeles partner Bill Wegner, and included Los Angeles partner Marcellus McRae, Palo Alto partner George Brown, Los Angeles associates Kahn Scolnick and Alison Klingel, San Francisco associate Matt Kahn, Palo Alto associate Joshua Dick, Palo Alto paralegal Josh Ismael, and former Palo Alto paralegal Ariane Richard.  Many others assisted over the course of the trial preparation effort, including Ted Boutrous, Joe Guzzetta, Darin Sands, Molly Cutler, Sarah Brown, Ann Elias, Brian Jensen, and former Los Angeles associate Sarah Wetzstein.