Complaint for Violations of the Federal Securities Laws — McGillivray v. Ready Capital Corporation

Summary

A complaint for violations of the federal securities laws brought by Sean McGillivray against Ready Capital Corporation and its Board of Directors, Case No. 1:21-cv-01152-JGK, in the U.S. District Court for the Southern District of New York, filed February 9, 2021 as Document 1. It alleges violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 14a-9 in connection with Ready Capital's proposed acquisition of Anworth Mortgage Asset Corporation, under which Anworth stockholders would receive $0.61 in cash and 0.1688 shares of Ready Capital common stock per share. The complaint alleges that the Registration Statement filed on February 5, 2021 omits line item projections and details of the financial analysis work by Credit Suisse. It seeks to enjoin the transaction until disclosure is made, or damages, and is signed by Joshua M. Lifshitz.

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“Complaint for Violations of the Federal Securities Laws — McGillivray v. Ready Capital Corporation.” Original at archive.org. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/complaint-no-1-21-cv-01152-dkt-1-s-d-n-y-0f459efc6d/, SHA-256 412e9eb00c404fcc3939606db9c87a46fd868c80a5b41a4e881e6a47047d8bce.

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Case 1:21-cv-01152-JGK Document 1 Filed 02/09/21 Page 1 of 14

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK

SEAN MCGILLIVRAY,
Civil Action No.
Plaintiff,
COMPLAINT FOR VIOLATIONS
v. OF THE FEDERAL SECURITIES
LAWS

READY CAPITAL CORPORATION,
THOMAS EDWARD CAPASSE, JACK JURY TRIAL DEMANDED
JAY ROSS, FRANK P. FILIPPS,
GILBERT NATHAN, ANDREA
PETRO, J. MITCHELL REESE, and
TODD M. SINAI,

Defendants.

Plaintiff Sean McGillivray (“Plaintiff”) by and through his undersigned attorneys, brings

this action on behalf of himself, and alleges the following based upon personal knowledge as to

those allegations concerning Plaintiff and, as to all other matters, upon the investigation of

counsel, which includes, without limitation: (a) review and analysis of public filings made by

Ready Capital Corporation (“Ready Capital” or the “Company”) and other related parties and

non-parties with the United States Securities and Exchange Commission (“SEC”); (b) review and

analysis of press releases and other publications disseminated by certain of the Defendants

(defined below) and other related non-parties; (c) review of news articles, shareholder

communications, and postings on the Company’s website concerning the Company’s public

statements; and (d) review of other publicly available information concerning Ready Capital and

the Defendants.
Case 1:21-cv-01152-JGK Document 1 Filed 02/09/21 Page 2 of 14

SUMMARY OF THE ACTION

1. This is an action brought by Plaintiff against Ready Capital and the Company’s

Board of Directors (the “Board” or the “Individual Defendants”) for their violations of Section

14(a) and 20(a) of the Securities Exchange Act of 1934, 15.U.S.C. §§ 78n(a), 78t(a), and SEC

Rule 14a-9, 17 C.F.R. 240.14a-9, in connection with the Company’s proposed acquisition of

Anworth Mortgage Asset Corporation (“Anworth”) (the “Proposed Transaction”).

2. On December 6, 2020, the Company entered into an Agreement and Plan of

Merger (the “Merger Agreement”) with Anworth. Pursuant to the terms of the Merger

Agreement, Anworth stockholders will receive $0.61 in cash and 0.1688 shares of Ready Capital

common stock per share of Anworth owned (the “Merger Consideration”).

3. On February 5, 2021, in order to convince the Company’s shareholders to vote in

favor of the Proposed Transaction, the Board authorized the filing of a materially incomplete and

misleading registration statement with the SEC on Form S-4/A (the “Registration Statement”), in

violation of Sections 14(a) and 20(a) of the Exchange Act.

4. For these reasons, and as set forth in detail herein, Plaintiff asserts claims against

Ready Capital and the Board for violations of Sections 14(a) and 20(a) of the Exchange Act and

Rule 14a-9. Plaintiff seeks to enjoin Defendants from taking any steps to consummate the

Proposed Transaction unless and until the material information discussed below is disclosed to

Ready Capital shareholders before the vote on the Proposed Transaction or, in the event the

Proposed Transaction is consummated, recover damages resulting from the Defendants’

violations of the Exchange Act.

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Case 1:21-cv-01152-JGK Document 1 Filed 02/09/21 Page 3 of 14

JURISDICTION AND VENUE

5. This Court has subject matter jurisdiction over all claims asserted herein pursuant

to Section 27 of the Exchange Act, 15 U.S.C § 78aa, and 28 U.S.C. § 1331, as Plaintiff alleges

violations of Sections 14(a) and 20(a) of the Exchange Act.

6. This Court has personal jurisdiction over all of the Defendants because each is

either a corporation that conducts business in, solicits shareholders in, and/or maintains

operations within, this District, or is an individual who is either present in this District for

jurisdictional purposes or has sufficient minimum contacts with this District so as to make the

exercise of jurisdiction by this Court permissible under traditional notions of fair play and

substantial justice.

7. Venue is proper under 28 U.S.C. § 1391 because a substantial portion of the

transactions and wrongs complained of herein occurred in this District.

THE PARTIES

8. Plaintiff is, and has been at all times relevant hereto, the owner of Ready Capital

shares.

9. Defendant Ready Capital is incorporated under the laws of Maryland and has its

principal executive offices located at 1140 Avenue of the Americas, 7th Floor, New York, New

York 10036. The Company’s common stock trades on the New York Stock Exchange under the

symbol “RC.”

10. Defendant Thomas Edward Capasse (“Capasse”) is and has been a the Chairman

of the Board and Chief Executive Officer of Ready Capital at all times during the relevant time

period.

3
Case 1:21-cv-01152-JGK Document 1 Filed 02/09/21 Page 4 of 14

11. Defendant Jack Jay Ross (“Ross”) is and has been a director of Ready Capital at

all times during the relevant time period.

12. Defendant Frank P. Filipps (“Filipps”) is and has been a director of Ready Capital

at all times during the relevant time period.

13. Defendant Gilbert Nathan (“Nathan”) is and has been a director of Ready Capital

at all times during the relevant time period.

14. Defendant Andrea Petro (“Petro”) is and has been a director of Ready Capital at

all times during the relevant time period.

15. Defendant J. Mitchell Reese (“Reese”) is and has been a director of Ready Capital

at all times during the relevant time period.

16. Defendant Todd M. Sinai (“Sinai”) is and has been a director of Ready Capital at

all times during the relevant time period.

17. Defendants Capasse, Ross, Filipps, Nathan, Petro, Reese, and Sinai are

collectively referred to herein as the “Individual Defendants.”

18. The Individual Defendants, along with Defendant Ready Capital, are collectively

referred to herein as “Defendants.”

SUBSTANTIVE ALLEGATIONS

Background of the Company

19. Ready Capital is a multi-strategy real estate finance company that originates,

acquires, finances and services small to medium balance commercial (“SBC”) loans, Small

Business Administration (“SBA”) loans, residential mortgage loans, and to a lesser extent,

mortgage backed securities (“MBS”) collateralized primarily by SBC loans, or other real estate-

related investments. Ready Capital’s loans generally range in original principal amounts up to

4
Case 1:21-cv-01152-JGK Document 1 Filed 02/09/21 Page 5 of 14

$35 million and are used by businesses to purchase real estate used in their operations or by

investors seeking to acquire small multi-family, office, retail, mixed use or warehouse properties.

Ready Capital’s acquisition and origination platforms consist of four operating segments: loan

acquisitions, SBC originations, SBA originations, acquisitions and servicing, and residential

mortgage banking. Ready Capital is externally managed and advised by the Ready Capital

Manager, an investment advisor registered with the SEC under the Investment Advisors Act of

1940, as amended.

The Company Announces the Proposed Transaction

20. On December 7, 2020, the Company jointly issued a press release announcing the

Proposed Transaction. The press release stated in part:

NEW YORK and SANTA MONICA, Calif., Dec. 7, 2020 /PRNewswire/ --
Ready Capital Corporation (NYSE:RC) ("Ready Capital"), a multi-strategy real
estate finance company that originates, acquires, finances and services small- to
medium-sized balance commercial loans, and Anworth Mortgage Asset
Corporation (NYSE:ANH) ("Anworth"), a specialty finance REIT that focuses
primarily on investments in residential mortgage-backed securities, announced
today that they have entered into a definitive merger agreement pursuant to which
Ready Capital will combine with Anworth. The combined company is expected to
have a pro forma equity capital base in excess of $1 billion. The combination is
expected to enhance shareholder liquidity and provide for increased operating
leverage across the larger equity base.

Under the terms of the merger agreement, each share of Anworth common stock
will be converted into 0.1688 shares of Ready Capital common stock and $0.61 of
cash consideration. Based on Ready Capital's closing stock price on Friday,
December 4, 2020, the implied offer price is $2.94 per share. Upon the closing of
the merger, Ready Capital stockholders are expected to own approximately 76%
of the combined company's stock, while Anworth stockholders are expected to
own approximately 24% of the combined company's stock. Ready Capital will
also assume Anworth's three outstanding series of preferred stock.

In connection with the merger, Waterfall Asset Management, LLC ("Waterfall"),
Ready Capital's external manager, has agreed to reduce the base management fee
it charges Ready Capital by an aggregate of $4 million over the four quarters
immediately following the closing of the transaction.

5
Case 1:21-cv-01152-JGK Document 1 Filed 02/09/21 Page 6 of 14

Based on the closing prices of Ready Capital's common stock on December 4,
2020, the market capitalization of the combined company would be
approximately $984 million. The combined company will operate under the name
Ready Capital and its shares are expected to continue trading on the New York
Stock Exchange under the existing ticker symbol "RC".

"This merger highlights our continued focus on establishing Ready Capital as an
industry-leading mortgage REIT, with the scale and financial resources to pursue
compelling risk-adjusted returns across its diversified investment platform," stated
Ready Capital Chairman and Chief Executive Officer Thomas Capasse. "The
combined company will be in a more formidable position to execute its business
plan, improve operating and cost efficiencies, and continue growth in a prudent
and profitable manner."

* * *

Timing and Approvals

The transaction has been unanimously approved by each of the Boards of
Directors of Ready Capital and Anworth. The transaction is expected to close by
the end of the first quarter of 2021, subject to the respective approvals by the
stockholders of Anworth and Ready Capital and other customary closing
conditions.

Advisors

Wells Fargo Securities is acting as exclusive financial advisor and Alston & Bird
LLP is acting as legal advisor to Ready Capital. Credit Suisse is acting as
exclusive financial advisor and Greenberg Traurig LLP is acting as legal advisor
to the Board of Directors of Anworth.

FALSE AND MISLEADING STATEMENTS
AND/OR MATERIAL OMISSIONS IN THE REGISTRATION STATEMENT

21. On February 5, 2021, the Company authorized the filing of the Registration

Statement with the SEC. The Registration Statement recommends that the Company’s

shareholders vote in favor of the Proposed Transaction.

22. Defendants were obligated to carefully review the Registration Statement prior to

its filing with the SEC and dissemination to the Company’s shareholders to ensure that it did not

contain any material misrepresentations or omissions. However, the Registration Statement

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Case 1:21-cv-01152-JGK Document 1 Filed 02/09/21 Page 7 of 14

misrepresents and/or omits material information that is necessary for the Company’s

shareholders to make informed decisions regarding whether to vote in favor of the Proposed

Transaction, in violation of Sections 14(a) and 20(a) of the Exchange Act.

Material False and Misleading Statements or Material
Misrepresentations or Omissions Regarding the Company’s Financial Projections

23. The Registration Statement contains projections prepared by the Company’s and

Anworth’s management concerning the Proposed Transaction, but fails to provide material

information concerning such.

24. The SEC has repeatedly emphasized that disclosure of non-GAAP projections can

be inherently misleading, and has therefore heightened its scrutiny of the use of such

projections.1 Indeed, on May 17, 2016, the SEC’s Division of Corporation Finance released new

and updated Compliance and Disclosure Interpretations (“C&DIs”) on the use of non-GAAP

financial measures that demonstrate the SEC’s tightening policy.2 One of the new C&DIs

regarding forward-looking information, such as financial projections, explicitly requires

companies to provide any reconciling metrics that are available without unreasonable efforts.

25. In order to make management’s projections included in the Registration Statement

materially complete and not misleading, Defendants must provide a reconciliation table of the

non-GAAP measures to the most comparable GAAP measures.

1
See, e.g., Nicolas Grabar and Sandra Flow, Non-GAAP Financial Measures: The SEC’s
Evolving Views, Harvard Law School Forum on Corporate Governance and Financial
Regulation (June 24, 2016), available at https://corpgov.law.harvard.edu/2016/06/24/non-gaap-
financial-measuresthesecs evolving-views/; Gretchen Morgenson, Fantasy Math Is Helping
Companies Spin Losses Into Profits, N.Y. Times, Apr. 22, 2016, available at
http://www.nytimes.com/2016/04/24/business/fantasy-mathis-helping-companies-spin-ossesinto-
profits.html?_r=0.
2
Non-GAAP Financial Measures, Compliance & Disclosure Interpretations, U.S. SECURITIES
AND EXCHANGE COMMISSION (May 17, 2017), available at
https://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm.

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Case 1:21-cv-01152-JGK Document 1 Filed 02/09/21 Page 8 of 14

26. Specifically, with respect to the Company’s projections, the Company must

disclose the line item projections for the financial metrics that were used to calculate the non-

GAAP measures, including Core Earnings Per Share.

27. With respect to Anworth’s projections, the Company must disclose the line item

projections for the financial metrics that were used to calculate the non-GAAP measures,

including Core Earnings Per Common Share.

28. Disclosure of the above information is vital to provide investors with the complete

mix of information necessary to make an informed decision when voting on the Proposed

Transaction. Specifically, the above information would provide shareholders with a better

understanding of the analyses performed by the Company’s financial advisor in support of its

opinion.

Material False and Misleading Statements or Material
Misrepresentations or Omissions Regarding Credit Suisse’s Financial Opinion

29. The Registration Statement contains the financial analyses and opinion of Credit

Suisse Securities (USA) LLC (“Credit Suisse”) concerning the Proposed Transaction, but fails to

provide material information concerning such.

30. With respect to Credit Suisse’s Selected Public Companies Analysis – Anworth,

the Registration Statement fails to disclose the individual multiples and metrics for each of the

companies observed in the analysis.

31. With respect to Credit Suisse’s Selected Public Companies Analysis – Ready

Capital, the Registration Statement fails to disclose the individual multiples and metrics for each

of the companies observed in the analysis.

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Case 1:21-cv-01152-JGK Document 1 Filed 02/09/21 Page 9 of 14

32. With respect to Credit Suisse’s Selected Precedent Transactions Analysis, the

Registration Statement fails to disclose the individual multiples and metrics for each of the

transactions observed in the analysis.

33. With respect to Credit Suisse’s Dividend Discount Analysis – Anworth, the

Registration Statement fails to disclose: (i) the terminal values for Anworth; (ii) Anworth’s

estimated book value; and (iii) the number of fully diluted outstanding shares of Anworth

common stock.

34. With respect to Credit Suisse’s Dividend Discount Analysis – Ready Capital, the

Registration Statement fails to disclose: (i) the terminal values for Ready Capital; (ii) the

distributed cash flows for Ready Capital; and (iii) Ready Capital’s estimated book value.

35. When a banker’s endorsement of the fairness of a transaction is touted to

shareholders, the valuation methods used to arrive at that opinion as well as the key inputs and

range of ultimate values generated by those analyses must also be fairly disclosed. Moreover,

the disclosure of projected financial information is material because it provides shareholders with

a basis to project the future financial performance of a company and allows shareholders to

better understand the financial analyses performed by the Company’s financial advisor in support

of its fairness opinion.

36. Without the above described information, the Company’s shareholders are unable

to cast a fully informed vote on the Proposed Transactions. Accordingly, in order to provide

shareholders with a complete mix of information, the omitted information described above

should be disclosed.

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Case 1:21-cv-01152-JGK Document 1 Filed 02/09/21 Page 10 of 14

COUNT I

(Against All Defendants for Violations of Section 14(a)
of the Exchange Act and Rule 14a-9 Promulgated Thereunder)

37. Plaintiff incorporates each and every allegation set forth above as if fully set forth

herein.

38. Section 14(a)(1) of the Exchange Act makes it “unlawful for any person, by the

use of the mails or by any means or instrumentality of interstate commerce or of any facility of a

national securities exchange or otherwise, in contravention of such rules and regulations as the

Commission may prescribe as necessary or appropriate in the public interest or for the protection

of investors, to solicit or to permit the use of his name to solicit any proxy or consent or

authorization in respect of any security (other than an exempted security) registered pursuant to

section 78l of this title.” 15 U.S.C. § 78n(a)(1).

39. Rule 14a-9, promulgated by the SEC pursuant to Section 14(a) of the Exchange

Act, provides that communications with stockholders in a recommendation statement shall not

contain “any statement which, at the time and in the light of the circumstances under which it is

made, is false or misleading with respect to any material fact, or which omits to state any

material fact necessary in order to make the statements therein not false or misleading.” 17

C.F.R. § 240.14a-9.

40. Defendants have issued the Registration Statement with the intention of soliciting

shareholders support for the Proposed Transaction. Each of the Defendants reviewed and

authorized the dissemination of the Registration Statement, which fails to provide critical

information regarding, among other things, the financial projections for the Company.

41. In so doing, Defendants made untrue statements of fact and/or omitted material

facts necessary to make the statements made not misleading. Each of the Defendants, by virtue

10
Case 1:21-cv-01152-JGK Document 1 Filed 02/09/21 Page 11 of 14

of their roles as officers and/or directors, were aware of the omitted information but failed to

disclose such information, in violation of Section 14(a). The Defendants were therefore

negligent, as they had reasonable grounds to believe material facts existed that were misstated or

omitted from the Registration Statement, but nonetheless failed to obtain and disclose such

information to shareholders although they could have done so without extraordinary effort.

42. The Defendants knew or were negligent in not knowing that the Registration

Statement is materially misleading and omits material facts that are necessary to render it not

misleading. The Defendants undoubtedly reviewed and relied upon the omitted information

identified above in connection with their decision to approve and recommend the Proposed

Transaction.

43. The Defendants knew or were negligent in not knowing that the material

information identified above has been omitted from the Registration Statement, rendering the

sections of the Registration Statement identified above to be materially incomplete and

misleading. Indeed, the Defendants were required to be particularly attentive to the procedures

followed in preparing the Registration Statement and review it carefully before it was

disseminated, to corroborate that there are no material misstatements or omissions.

44. The Defendants were, at the very least, negligent in preparing and reviewing the

Registration Statement. The preparation of a Registration Statement by corporate insiders

containing materially false or misleading statements or omitting a material fact constitutes

negligence. The Defendants were negligent in choosing to omit material information from the

Registration Statement or failing to notice the material omissions in the Registration Statement

upon reviewing it, which they were required to do carefully as the Company’s directors. Indeed,

the Defendants were intricately involved in the process leading up to the signing of the Merger

11
Case 1:21-cv-01152-JGK Document 1 Filed 02/09/21 Page 12 of 14

Agreement and the preparation of the Company’s financial projections.

45. The misrepresentations and omissions in the Registration Statement are material

to Plaintiff, who will be deprived of his right to cast an informed vote if such misrepresentations

and omissions are not corrected prior to the vote on the Proposed Transaction.

46. Plaintiff has no adequate remedy at law. Only through the exercise of this Court’s

equitable powers can Plaintiff be fully protected from the immediate and irreparable injury that

Defendants’ actions threaten to inflict.

COUNT II

(Against the Individual Defendants for
Violations of Section 20(a) of the Exchange Act)

47. Plaintiff incorporates each and every allegation set forth above as if fully set forth

herein.

48. The Individual Defendants acted as controlling persons of Ready Capital within

the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their positions

as officers and/or directors of Ready Capital, and participation in and/or awareness of the

Company’s operations and/or intimate knowledge of the incomplete and misleading statements

contained in the Registration Statement filed with the SEC, they had the power to influence and

control and did influence and control, directly or indirectly, the decision making of the

Company, including the content and dissemination of the various statements that Plaintiff

contends are materially incomplete and misleading.

49. Each of the Individual Defendants was provided with, or had unlimited access to,

copies of the Registration Statement and other statements alleged by Plaintiff to be misleading

prior to and/or shortly after these statements were issued and had the ability to prevent the

issuance of the statements or cause the statements to be corrected.

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Case 1:21-cv-01152-JGK Document 1 Filed 02/09/21 Page 13 of 14

50. In particular, each of the Individual Defendants had direct and supervisory

involvement in the day-to-day operations of the Company, and, therefore, is presumed to have

had the power to control or influence the particular transactions giving rise to the Exchange Act

violations alleged herein, and exercised the same. The Registration Statement at issue contains

the unanimous recommendation of each of the Individual Defendants to approve the Proposed

Transaction. They were thus directly involved in preparing this document.

51. In addition, as set forth in the Registration Statement sets forth at length and

described herein, the Individual Defendants were involved in negotiating, reviewing, and

approving the Merger Agreement. The Registration Statement purports to describe the various

issues and information that the Individual Defendants reviewed and considered. The Individual

Defendants participated in drafting and/or gave their input on the content of those descriptions.

52. By virtue of the foregoing, the Individual Defendants have violated Section 20(a)

of the Exchange Act.

53. As set forth above, the Individual Defendants had the ability to exercise control

over and did control a person or persons who have each violated Section 14(a) and Rule 14a-9 by

their acts and omissions as alleged herein. By virtue of their positions as controlling persons,

these Defendants are liable pursuant to Section 20(a) of the Exchange Act. As a direct and

proximate result of Individual Defendants’ conduct, Plaintiff will be irreparably harmed.

54. Plaintiff has no adequate remedy at law. Only through the exercise of this Court’s

equitable powers can Plaintiff be fully protected from the immediate and irreparable injury that

Defendants’ actions threaten to inflict.

PRAYER FOR RELIEF

WHEREFORE, Plaintiff prays for judgment and relief as follows:

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A. Preliminarily and permanently enjoining Defendants and all persons acting in

concert with them from proceeding with, consummating, or closing the Proposed Transaction;

B. Directing the Individual Defendants to disseminate an Amendment to the

Registration Statement that does not contain any untrue statements of material fact and that states

all material facts required in it or necessary to make the statements contained therein not

misleading;

C. Directing Defendants to account to Plaintiff for all damages sustained because of

the wrongs complained of herein;

D. Awarding Plaintiff the costs of this action, including reasonable allowance for

Plaintiff’s attorneys’ and experts’ fees; and

E. Granting such other and further relief as this Court may deem just and proper.

JURY DEMAND

Plaintiff demands a trial by jury on all issues so triable.

Dated: February 9, 2021 Respectfully submitted,

By: /s/ Joshua M. Lifshitz
Joshua M. Lifshitz
Email: jml@jlclasslaw.com
LIFSHITZ LAW FIRM, P.C.
1190 Broadway
Hewlett, New York 11557
Telephone: (516) 493-9780
Facsimile: (516) 280-7376

Attorneys for Plaintiff

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