thank you may please the court your honors my name is bill burdette and i represent the seventeen opponents that were the investors in community central bank they have filed a law this lawsuit in this action against the officers and directors of community central bank a bank that is no longer in existence are you reserving rebuttal time yes your honor we're reserving five minutes of every bottle i think for three reasons we believe that the lower court should be reversed the first is that on the state law claim it was adequately pled for silent fraud we believe that the lower court improperly applied the private securities litigation reform act standards for pleading as opposed to the lesser standard set forth in rule nine b of the federal rules of civil procedure we also believe though that the private securities litigation reform act was properly plugged that the facts giving rise to this complaint the facts of that will get into and during this argument certainly give rise to the fact that there were misleading and false any without any argument or question do so from the from the a pelleas and that point when they have to prove for the state county to prove for that state count is that we have to prove that there was and that is the black case that we discussed that there was actually a material change the made some representation false that had previously been true or at least misleading and that claim was that this company was well capitalized they were making that claim through to november thirteenth of two thousand and nine this company was adequate or was well capitalized which is a term of art in fact they that and during this time in november in december of two thousand and nine the appellee opponents were signing up their stock subscription agreements as of december thirty first when the officers and directors signed the subscription agreements accepting the money taking it out of escrow they also took over sixty percent of the losses for the year that made the company not well capitalized at the time that they took that that was a substantial change the climate roe case that we discussed say that says in michigan you actually have to have a change in you have to disclose a change in circumstances so it would be like if have an agreement to buy a car and the car actually at the time that of the agreement and like i said well i'll buy that car from you know the car was running and was fine and then the from the delivery of the car there was actually no transmission in the car the person selling the car has to disclose in the state of michigan that hey by the way the said there is no transmission here there wasn't any transmission community central bank in fact there they knew that the company was taking all of the loss of they took them on the same day that they signed the stock subscription agreements because you've relied on the black case and the athletes that relied on that case as well it appears yes so you both of you seem to be taking the position that the case supports your respective positions can you tell me why our police are wrong in relying and yes well i think the black case is they actually did indicate in that case there was there was reliance on assurances that there would be indemnity and in the black case in that that case indicated that any subsequent financial change the of a significant matter such as taking sixty percent of your losses for the year that the community central bank did should be disclosed there was no such disclosure it made that claim that they were well capitalized on in caracas no one point out by the way but the claim of well capitalization didn't continue didn't stop just at the third quarter ten k filings for the ten q filings apologize that also continued on december sixteenth community central bank issued their second supplement to the private placement memorandum where they were offering the stock in that they said you need to read this second supplement with the private placement memorandum issued in june that private placement memorandum indicated that they were well capitalized at the top fifteen days later they took ten percent sixty percent of the losses over ten percent or i mean over ten million dollars in losses one was  a federal income tax write off to say that they didn't know at the time of that second private placement memorandum when even they're indicating there may be this possibility in the future in their third quarter ten k or ten q s is is  telling to say that they didn't have any understanding of that but before they execute that stock subscription agreement on the thirty of december thirty first on the same day that they're taking all of these massive losses they should have disclosed that information to these  time that they were executing the stock subscription agreements they were always holding themselves as being well capitalized that they were acting within the bounds of the law and in fact we know that they weren't and this is the allegation under the private securities litigation reform act that this was a full clip would you say well there wasn't any such disclosures your honor that the indication was only that they would be possibly considering the third quarter third quarter report that was issued on november thirteenth two thousand and nine so there's a possibility of a tax write off there was never any indication that that tax write off was actually going to be such a substantial portion of the losses that led to the downfall of this company there was also an indication in the private placement memorandum which was incorporated reference on december sixteenth fifteen days before they signed the stock subscription agreement that they were subject to laws and regulations they were undertaking to describe that they were in this is the cushion or case from the eighth circuit that we cited that they were actually complying with the laws and we know that they want we know that it was false in february of two thousand and ten the office of financial insurance regulation issues reporting you can no longer do those illegal acts that you were doing and  that is that is what about the prior quarter from actual statements including the last one before they took the losses would wouldn't you be able to your clients  the quarterly of filings run enough to give them a reason to further inquire and to find out some of these problems even though their losses have been taken yeah that's correct your honor it's our position that they were there was not sufficient information in those quarterly financial documents in order to be able to make that determination that they withheld this information until the atlantic of the day that they signed the stock subscription agreements took the clients one point seven million dollars that their change their their position didn't change materially and two of these losses were were taken which would suggest that maybe they didn't do anything illegal here well the position was your honor that they were making these representations that they were well capitalized as late as december sixteenth two thousand and nine they were incorporating that statement in and by representation they recorded hawses fifteen days later that doesn't necessarily mean that the company wasn't undergoing those losses as of december sixteenth two thousand and not they knew that this was going on if that you know it's impossible to look at this and say that what was going on i mean it seems like you're saying they're for their filings their quarterly filings or financial information where  we're in compliance with the law at least you haven't said that they were well our our contention is that they were not in compliance with the law because they were not had a quickly describing the fact that they were not well capitalized and as of december sixteenth they were not well capitalized because on december third first they describe themselves as only adequately capitalized it was taken down a notch they had the motivation to take this money because they were running out of there because they were running out of money and they knew that they had to get this money and so they let our clients down to primrose path to say we're fine we're well capitalized we're acting within the law when in fact there was nothing disclosed about the fact that they were under investigation by the office of financial insurance regulation which found that they were not acting within the law which knew that they were not acting consistent with the consistent with the laws and regulations governing banking institutions in the me the interchange the words subject and would you interpret subjects as to say that they are in compliance with the federal state local government i think in making that argument that they need to they are assuming the are making that statement they are assuming the burden of saying that yes we are because it is a given that when someone says hey you know what i'm subject to the laws you know it doesn't you know that's not to simplify that they'd somehow then have no do you disclose the fact that they're acting illegally at the same time or thirty seen indicate that making a general statement of legal compliance is not actionable well that's near the indiana pensions case on the pension board case and that was with regard to medicare part d and in that case the  defendant was making statements that they were reviewing medicare part d and that they understood what was going on and then there was a significant change in the law and as a result of that significant change in the law they were somehow held liable that is a different situation than we have here because there was no significant change in the law there indicating in their undertaking the fact that they have were are subject to these laws when you make that statement it's not simply to say that there are laws that exist because everyone understands that we assume that people know the law and that they are in compliance with it wouldn't investors reading that we need to hold the executives the officers and directors of the company to a higher standard to say that if you're under investigation breaking the law at the time you should full complete briefing by the parties so i don't want to regurgitate anything is in those those papers submitted to you but i do want to highlight a few points for first just a few words about community central banks you understand what we're talking about this is not by any means  chase bank or bank of america or anything like that it's a small regional bank located mccomb county michigan that principally serve businesses and communities in the tri county area around mccomb county judge clay i know is from here with that area but it shouldn't surprise any of you that this is instituted a series of private placements which are private offerings not public stock offerings it was indeed a publicly held corporation but this was an effort by the company to raise private capital to shore up its capital reserves in light of the existing a projected weak economic conditions that were facing the region what is often lost in all of this discussion about what it is that the defendant the defendants apple lease or the bank should have said are the actual disclosures that the bank in fact made it issued a twenty three page private placement memorandum that contained twelve pages of risk disclosures and these were not generic risk disclosures these were detailed comprehensive discussions about all of the challenges that were facing not only the bank and the u s economy but the company specifically with respect to this particular offering and i won't describe all of the risks that were disclosed in the p p m because it would take up all my allot time but generally potential investors were cautioned and warned that if the risks that were fairly disclosed in those people were to materialize the company its business its financial operations and its viability were very much in doubt to place this in context the entire p p m was twenty three pages which means the risk disclosures themselves are more than half of the document and when you add to that the forward looking statements and other appropriate pages that were cautioning investors if you have a very detailed discussion of all the risks it's not possible at all for any investor to have read that document and looked at the public filings of this company that quarter after quarter showed that the company was losing money have now claim that they were somehow misled as to the financial condition of this company it was a but only clear to anyone reading the p p m in those public disclosures that the company was ill it needed money in order to shore up its capital were capable of even investing in this offering and in their their application for the shares they subscribed and they start a fight that they had read and reviewed the complete p p m and that they were sufficiently aware of the company's business affairs and financial condition match that agent as it is their private persons right that's correct you're out on a stock exchange that's correct they were there were approximately two hundred fifty thousand dollars each i believe maybe some did one hundred thousand dollars they were they were in but but thank you for raising that the document public documents actually did in fact disclose that one the bank is is subject to extensive federal and state regulation number one and that there it is it is continuously examined by the the bank of regulatory authorities i think the inference that you're being asked to draw on or the court was being asked to draw on is that that somehow there was some special investigation going on in the bank and that there were regulators  sometimes they find things that need to be corrected sometimes they don't more often they don't and this time period is nothing unusual about that and that fact that that that the biggest subject to that kind of regulation was disclosed and more importantly what was i'll say again some specific criticisms i'm sorry it's seizing upon disclosures that were made after the investment in saying that those things must have been known somehow had to have been known and should have been disclosed much earlier but there's no facts to support that inference and you can't just say well because the regulators three months after the investment issued a report finding certain making certain findings that somehow these officers and directors and again which officer which director you know all of them lumped together somehow they had to know what was going to be in a report of the examiners and that there was going to be specific findings that you can't make that prediction in the law doesn't require us to and that's the problem with with at least that part of the elder it's also the problem frankly around here with this whole valuation allowance argument that is going to ask about that what about yeah well what was the it's hard for i was on a board of a little bank it's hard to believe they wouldn't have known that that asset was going to be written down early as well here's here's what they said in the third quarter first your honor of two thousand they said in if you are on the board and you understand how this works the good the bank did made a determination that the valuation allowance was not necessary at that time they had made that it's a subjective determination as the court knows and that's the courts have found that there was no need for a valuation at that time but they made no guarantee and this was true it was right in the public on there is no guarantee that a valuation allowance might not be required in the future and if it was required in the future it could have a material adverse effect on the financial condition of the company that's three weeks before these people started to invest that's the disclosure that's the material fact the law does not require the determined at the end of the two thousand and nine year that a valuation allowance was necessary the properly recorded it when they were supposed to in the march thirty one two thousand and nine ten k for the financial twelve thirty zero nine the valuation allowance was taken as of two thousand and twelve thirty one or twelve thirty two thousand and nine and they're asking to get this is another inference that because it was taken out that they were recorded as of that date that means that it was known that he or or shortly before that that's not the way financial reporting works in the real world is the core notion that financial reporting companies are given three months at the end of the year to review their books close their books to make those kinds of accounting determinations and once they're made and they have an obligation to timely reported in their ten k and that's all that was done so the let me ask you as to the issue of silent fraud right my understanding the plaintiffs argument is police and under nine b applying the common law or under the p s l or even the higher standard judge murphy's appeals they hadn't even met the lower standard there were no facts pled that would give rise to that to duty of disclosure and it really does tie back to wh i was just saying on the valuation allowance and even on the on the ofer report of examination these are fraud by hindsight allegations there are no facts pled in this complaint in the amended complaint to give  pled sufficient facts to to establish a fraud claim whether it was common law fraud or federal securities fraud so i thought it was proper for the court to do that they had discretion that he did have discretion and he exercises this i don't think it was an abuse of his disc to do that there's a difference between silent fraud and just plain old fraud like somebody said that termites in our house and doesn't tell people it's got a big cry going to foundation and plaster it up well i think i think what's the difference between john i think it's a distinction between making an have the answer for that judge i mean i think the first complaint was drafted it was it was based on alleged omissions not actual fraud misrepresentations and they're silent is is part of that i mean it naturally flows it's the it's the property count i don't have fault them for as a driver i'm just plain old fraud that we're somebody because you have to if you have an affirmative misrepresent the elements are slightly different they don't have to prove they don't have  claim is that there was a material change in the company's financial condition from the time i guess the third quarter when it was well capitalized and sometime in december presumably right around it just before the december thirty one agreements were signed and that the company had an obligation to disclose that to the plaintiffs and did not do so and the michigan law  imposes such a do it right and your honor my contention is that there are no facts to establish that there was this material change within the fourth quarter time period where there had been some obligation to disclose the obligation to disclose end when the books and records are being closed it gets reported as of twelve thirty nine because that's how it that's how they report that and the first time the defendants had an obligation or the company had an obligation to disclose that  and it really does the state if you want to get a distinction between this case and all the cases that are relied upon by the by the appellants the frank case matrix tellabs the difference that you have an every one of those cases there was a corporate insider or the company itself was making a positive optimistic statement about its company and its prospects at a time when there were factual allegations of internal reports and other interview information that showed that th statements were not true you don't have that here you don't have a single positive optimistic statement by anybody in this case by any of the apple these all you have are disclosures being very candid about the challenges that we're facing in this company and how if certain things happened the company would have serious financial difficulty in the plainest unknown from the mix of information publicly or otherwise that the company had from being quote unquote well capitalized to adequately here's what they would have known your honor if they had looked at each quarterly filing by the company leading up to two thousand they would see it because well capitalized is a regulatory term it's term of art and it's a ratio and if they had looked they would have seen the ratio of of it being well capitalized was shrinking quarter by quarter so that's publicly disclosed they were still well caplets it's an absolute true statement the bank was well capitalized what put them from the well capitalized into the adequately capitalized which is the next category low or is this valuation or it so they do you would have been able to see that just as they would have been able to see that the company was losing more money quarter after quarter thank you very much addressing the silent fraud issue i think it's important to look at the actual terminology of rule nine b of the federals of civil procedure it says that knowledge can be purchased pled generally the plaintiffs are the crux of the pelleas argument is that there isn't some allegation of specific knowledge with regard to the silent fraud that these are that these officers and directors did not know and in the fourth quarter before signing the stock a subscription agreement that there was going to be a material change the standard isn't that we have to clearly and we plug that we believe that they knew generally speaking that was in the silent fraud count do you believe that they know is at the same as setting  forth facts alleging actual facts dates times places we don't know that where i mean you're my understanding is you're saying this the plaintiff has had a belief or belief based upon just general stances involving the company the fact that between one there is no requirement that we have to prove that knowledge for silent fraud at the at the time of pleading which is what where we're at we just have to prove plead that there was knowledge and then the particular idiot oh no not with with regard to knowledge with regard to the falsity of the statements we do when we pled the falsity of the statements that the allegation that they were well capitalized as of november thirteenth when they're issuing the quarterly report for the third quarter as of december sixteenth when there incorporating by reference the part private placement memorandum that indicated that they were well capitalized that the december sixteenth second supplement specifically says go back read our june private placement memorandum you can still rely on that indicated that they were well capitalized fifteen days later we know because of their public filings they were not well capitalized our allegation is it was false when they suddenly were well capitalized at the end of the third quarter and on nov thirteenth or allegations it was false that when in december sixteenth they incorporated that statement by reference because they were not out of well capitalized they were only adequately capitalized and that change the specific term of or was very important to whether or not these investors would have continued investment and the standard in the state of michigan for silent fraud is that before the transaction is consummated any subsequently acquired information which he recognizes rendering untrue or misleading previous representations which when made were true or believed to be true so they believed that they were well capitalized at the time but before consummating that transaction there was a subsequent massive change they took all of their losses they backed them up into the as far as they could that year so that they could get these plaintiffs money one point seven million dollars into the bank to try to shore up these losses had they been disclosing had they been honest about that disclosure these investors would not they relied on this concept that they were well capitalized when in fact they were not and that that is the crux of the of the silent fraud now and we believe that these facts are more than sufficient to also satisfy all the pleading requirements under under the private securities litigation reform act because they're saying that we are subject to the laws and  position that means that they are in compliance with those laws that they are not acting illegally that they fact they were under investigation and mr rigby out statement that this was just some sort of standard investigation is without any basis whatsoever i'm sure that most banks when they're being reviewed by by the f d i c or the office of financial insurance regulation have some sort of good it doesn't result in a finding that they're making substandard loans risky loans without any basis whatsoever that they need to get back into compliance with the watch and regulations of the banking industry because they were not this is to say that the officers and directors had no understanding that this bank was in gauging in substandard risky banking practices that were in violation of the law that is in the not an appropriate standard that we want to be imposing on the officers and directors when they're being found that the laws that they were out of compliance we know that that statement was fal litigation indicated that the tax valuation write off was took place after and twelve quarters of analysis where they said that the we're going to look at this for three years and then where it take this valuation this bank said well we don't think of the  necessary nov thirteenth two thousand nine hundred thirty first two thousand and nine they took a tax valuation right off the constituted forty percent of their losses for the year that they didn't know it was necessary at that time it constitutes the fraudulent misrepresentation thank you ok thank you counsel for your arguments this morning we appreciate the case will be submit it and