United States District Court, S.D. New York
December 17, 2004.
IN RE CIT GROUP, INC. SECURITIES LITIGATION. THIS ORDER RELATES TO: ALL ACTIONS.
The opinion of the court was delivered by: JOHN SPRIZZO, Senior District Judge
MEMORANDUM OPINION AND ORDER
Plaintiffs, members of the class of individuals who purchased
CIT Group, Inc. ("CIT") common stock in or traceable to CIT's
July 1, 2002 initial public offering ("IPO"), bring this action
to recover for materially misleading statements made in CIT's
registration statement and prospectus. Plaintiffs seek recovery
pursuant to sections 11, 12(a)(2), and 15 of the Securities Act
of 1933, 15 U.S.C. §§ 77k, 77l, 77o. Defendants, CIT, Albert
Gamper, Jr., and Joseph Leone ("defendants"), bring this motion
to dismiss plaintiffs' complaint for failure to state a claim
upon which relief can be granted pursuant to Rule 12(b)(6) of the
Federal Rules of Civil Procedure.*fn1 For the reasons set
forth below, the Court grants defendants' motion.
On July 1, 2002, CIT, a global finance company, launched an IPO
that resulted in the issuance of 211.6 million shares and the
generation of over $4.8 billion. Consolidated and Amended Class
Action Complaint ("Compl.") ¶¶ 17, 20-21. In connection with that
IPO, CIT prepared, and filed with the SEC, a registration
statement and prospectus. Id. ¶ 18. Defendants Gamper, Jr., and
Leone, who were among other things CIT's Chief Executive Officer and Chief
Financial Officer, respectively, signed that registration
statement. Id. ¶¶ 8-9.
Along with other information, the registration statement and
incorporated prospectus identified risk factors that could
negatively impact CIT and the value of its stock. Id. ¶ 26. One
such factor was the risk of under-performance in the company's
telecommunications portfolio. Id. To guard against such risks,
CIT represented that, as of March 31, 2002, it maintained
consolidated reserves for credit losses in the amount of $554.9
million. Id. ¶ 31. CIT declared that this reserve level had
been "reviewed for adequacy." Id. With regard specifically to
the risk in the telecommunications portfolio, the registration
statement and prospectus stated, "We believe that our loan loss
reserves relating to the telecommunications portfolio are
adequate. However, continued deterioration in the sector could
result in losses beyond current reserve levels." Id. ¶ 26
(alteration in original).
On July 23, 2002, three weeks after the IPO, CIT issued a press
release that announced its results for the quarter ending June
30, 2002. Id. ¶ 22. In that release CIT indicated that it was
taking an additional $200 million loan loss charge in order to
strengthen its telecommunications loan loss reserves.*fn2
Id. Plaintiffs allege that, at the time of the IPO, defendants
were aware that this step would need to be taken. Id. ¶ 28. CIT
common stock closed at $17.53 per share on April 10, 2003, the
date that the initial complaint was filed in this action. Id. ¶
56. The IPO price was $23 per share. Id.
Six class action complaints were filed and, pursuant to a June 23, 2003 order, this Court consolidated these separate actions
into this action and appointed Glickenhaus & Co. as lead
plaintiff. Plaintiffs contend that the statements above regarding
the telecommunications loan loss reserves and the consolidated
loan loss reserves were untrue statements of material fact that
are actionable under sections 11, 12(a)(2), and 15 of the
Securities Act.*fn3 Id. ¶ 18.
In considering a motion to dismiss, a court must accept all of
the allegations set forth in the complaint as true, and must draw
all reasonable inferences in favor of the plaintiffs. Rombach v.
Chang, 355 F.3d 164, 169 (2d Cir. 2004); Halperin v. eBanker
USA.COM, Inc., 295 F.3d 352, 356 (2d Cir. 2002). Dismissal is
appropriate only when it is clear that the plaintiffs can prove
no set of facts "in support of their claims that would entitle
them to relief." Halperin, 295 F.3d at 356. In addition to the
complaint, the court may consider those documents that are
incorporated into the complaint by reference. Rombach,
355 F.3d at 169; Hinerfeld v. United Auto Group, No. 97 Civ. 3533, 1998
U.S. Dist. LEXIS 10601, at *11 (S.D.N.Y. July 15, 1998).
Here, plaintiffs allege that statements concerning CIT's loan
loss reserves made in the registration statement and prospectus
violate sections 11, 12(a)(2), and 15 of the Securities Act.
Section 11 creates a cause of action for purchasers of
securities against issuers, underwriters, signatories, and
directors for registration statements that "contained an untrue
statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements
therein not misleading." 15 U.S.C. § 77k(a). As to issuers the
provision "imposes a form of strict liability," such that
plaintiffs need only show that the misstatements or omissions
were material in order to state a claim. Greenapple v. Detroit
Edison Co., 618 F.2d 198, 203 & n. 9 (2d Cir. 1980); see
also Herman & MacLean v. Huddleston, 459 U.S. 375, 381-82
(1983). But see Rombach, 355 F.3d at 171 (stating that
plaintiffs "need allege no more than negligence to proceed" under
sections 11 and 12(a)(2)).
Section 12 creates liability as against those who "sell? a
security . . . by means of a prospectus or oral communication"
that contains material misstatements or omissions.
15 U.S.C. § 77l(a)(2). Section 15 simply imposes derivative liability
against those who control section 11 or 12 violators. Id. §
77o; Hinerfeld, 1998 U.S. Dist. LEXIS 10601, at *12 n. 4.
Statements will be deemed materially misleading when "`the
defendants' representations, taken together and in context, would
have misled a reasonable investor.'" Rombach, 355 F.3d at 172
n. 7 (quoting I. Meyer Pincus & Assocs. v. Oppenheimer & Co.,
936 F.2d 759, 761 (2d Cir. 1991)). Under this standard the
prospectus must be read as a whole to determine if any
misstatements "would have misled a reasonable investor about the
nature of the [securities]," Olkey v. Hyperion 1999 Term Trust,
Inc., 98 F.3d 2, 5 (2d Cir. 1996) (quoting McMahan & Co. v.
Wherehouse Entertainment, Inc., 900 F.2d 576, 579 (2d Cir.
1990)), and individual statements should not be parsed to
determine if each was "literally true," id.
Here, plaintiffs point to two statements in the registration
statement and prospectus that they claim are materially
misleading. Compl. ¶¶ 18, 32. Plaintiffs advance several theories
as to the misleading nature of these statements. Id.
Plaintiffs first point to CIT's statement that "[w]e believe
that our loan loss reserves relating to the telecommunications portfolio are adequate." Jaffe Decl., Ex. C, at 10, Prospectus
("Prospectus"). Plaintiffs contend that this is a material
misstatement because CIT did not have loan loss reserves that
were devoted solely and explicitly to the telecommunications
portfolio. Compl. ¶ 32; Pls.' Mem. at 6.
This Court cannot agree. The statement, even read in complete
isolation, does not state that CIT had reserves that were
separately maintained as "telecommunications loan loss reserves."
Rather, the clear import of the statement was that among the loan
loss reserves that the company did have, an ample amount could be
devoted to the telecommunications portfolio so as to offset any
probable losses. In fact, on the same page as the allegedly
misleading statement, CIT stated in its prospectus, "We maintain
a consolidated reserve for credit losses on finance
receivables. Our consolidated reserve for credit losses
reflects management's judgment of losses inherent in the
portfolio." Prospectus at 10 (emphasis added). Therefore, the
allegedly misleading statement, taken together with the balance
of the prospectus, would not have misled a reasonable investor.
See, e.g., Lasker v. New York State Elec. & Gas Corp.,
85 F.3d 55, 58-59 (2d Cir. 1996).
Plaintiffs next point to the above statement about the adequacy
of the telecommunications reserves along with those in which CIT
stated that its consolidated loan loss reserves had been
"reviewed for adequacy." Prospectus at 10-11, 32; Compl. ¶¶
18-19, 32. Plaintiffs contend that these statements are
actionable because CIT's loan loss reserves were not, in fact,
adequate. Compl. ¶¶ 18, 32; Pls.' Mem. at 9-10. Plaintiffs argue
that CIT's augmentation of its loan loss reserves three weeks
subsequent to the IPO is evidence of their inadequacy. Pls.' Mem.
This Court disagrees. Although these misstatements may be
actionable under the theory that defendants did not actually
believe them to be true or had no reasonable basis for such a conclusion, In re Int'l Bus. Machs. Corporate Sec. Litig.,
163 F. 3d 102, 107 (2d Cir. 1998); Hinerfeld, 1998 U.S. Dist. LEXIS
10601, at *22 n. 9, they would not be actionable under the
securities laws if they simply represented a failure on the part
of defendants to correctly gauge the adequacy of the loan loss
reserves, Hinerfeld, 1998 U.S. Dist. LEXIS 10601, at *21-22
("The failure to anticipate the extent of necessary reserves,
even if it amounts to mismanagement, is not actionable under
federal securities laws."); see also Olkey, 98 F.3d at 7-8
(stating that claim which amounted to an allegation that
defendants were less skillful at balancing the portfolio than
plaintiffs would have liked was not actionable under the
securities laws); Shapiro v. UJB Fin. Corp., 964 F.2d 272, 281
(3d Cir. 1992) ("[M]ere failure to provide adequate reserves . . .
does not implicate the concerns of the federal securities laws
and is not normally actionable."), unless they were worded so as
to create guarantees on the part of defendants, In re Int'l Bus.
Machs., 163 F.3d at 107; Friedman v. Mohasco Corp.,
929 F.2d 77, 79 (2d Cir. 1991); Milman v. Box Hill Sys. Corp.,
72 F. Supp. 2d 220, 234 (S.D.N.Y. 1999).
Here, plaintiffs' claim that loan loss reserves were inadequate
is nothing more than an assertion that CIT was incorrect or
unskillful in determining exactly what amount of reserves would
be adequate. That this statement could be actionable is even
further undercut by the context in which the statement was made.
The prospectus stated:
The consolidated reserve for credit losses is
intended to provide for losses inherent in the
portfolio, which requires the application of
estimates and significant judgment. . . . We cannot
be certain that our consolidated reserve for credit
losses will be adequate over time to cover credit
losses in our portfolio. . . . [I]f our reserves for
credit losses are not adequate, our business, financial condition and results of operations may
Prospectus at 11. Defendants clearly stated the risk associated
with any unskillfulness on their part and they clearly indicated
that they did not guarantee that loan loss reserves would be
adequate over time. Therefore, this statement is not actionable
under this theory. See Olkey, 98 F.3d at 7-8; Milman,
72 F. Supp. 2d at 234.
Plaintiffs' final allegation is that these statements were
materially misleading because defendants knew when they made
these statements that they were not true.*fn4 Compl. ¶¶ 19,
28. As stated supra, statements about defendants' belief in the
adequacy of loan loss reserves could be actionable if it is
alleged that defendants did not actually believe that loan loss
reserves were adequate, or if defendants had no reasonable
factual basis for their belief. See Virginia Bankshares, Inc.
v. Sandberg, 501 U.S. 1083, 1092-93 (1991); Shapiro,
964 F.2d at 282; Milman, 72 F. Supp. 2d at 234.
Here, plaintiffs argue that defendants could not have actually
believed that loan loss reserves were adequate, Compl. ¶¶ 19, 23,
because defendants decided to increase loan loss reserves just
three weeks after the IPO,*fn5 Compl. ¶ 22; Pls.' Mem. at
23-24. Plaintiffs provide no additional facts from which to infer that
defendants did not believe that reserves were adequate or had no
reasonable basis for such a belief.
That defendants later decided to revise the amount of loan loss
reserves that it deemed adequate provides absolutely no
reasonable basis for concluding that defendants did not think
reserves were adequate at the time the registration statement and
prospectus became effective.*fn6 See Denny v. Barber,
576 F.2d 465, 470 (2d Cir. 1978) (dismissing Rule 10b-5 claim in
which plaintiff simply pointed to later disclosures as evidence
of misstatements in the original disclosures); Milman,
72 F. Supp. 2d at 234 (dismissing section 11 claim where no facts
alleged that defendants did not believe prediction or had reason
to doubt its truth); Hinerfeld, 1998 U.S. Dist. LEXIS 10601, at
*21 (dismissing section 11 claim where allegations that
defendants knew or should have known that reserves were
inadequate were "conclusory and unsupported by additional factual
Plaintiffs also completely fail to plead any facts from which
it could be inferred that defendants' belief in the adequacy of
the reserves was beyond the pale of reason. In fact, the
statements that plaintiffs rely on completely belie this
inference. In the registration statement and prospectus
defendants stated that they believed that loan loss reserves for
telecommunications were adequate, but they also acknowledged a "substantial decline" in
the industry and indicated an understanding that "continued
deterioration in the sector could result in losses beyond current
reserve levels." Prospectus at 10. Given the absence of any facts
to show that defendants did not believe, or have a reasonable
basis to believe, that the reserves were inadequate, this Court
cannot simply draw an inference based upon mere speculation that
this was the case. See In re Time Warner Inc. Sec. Litig.,
9 F.3d 259, 266 (2d Cir. 1993) (finding statements of opinion not
actionable where "the complaint contains no allegations to
support the inference . . . that the favorable opinions were
without a basis in fact"); Hinerfeld, 1998 U.S. Dist. LEXIS
10601, at *21.
Besides finding that plaintiffs have failed to allege any
misstatements in the registration statement and prospectus, this
Court also dismisses this Complaint on the ground that the
alleged misstatements, taken in the context of the registration
statement and prospectus as a whole, were "`so obviously
unimportant . . . that reasonable minds could not differ on the
question of [their] importance.'" I. Meyer Pincus & Assocs. v.
Oppenheimer & Co., Inc., 936 F.2d 759, 763 (2d Cir. 1991)
(quoting Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir.
1985)). This Court finds that, given the extensive cautionary
language that surrounded the statements, Prospectus at 10, the
explanation that the chosen level of reserves was the product of
"estimates and significant judgment," Prospectus at 11, and the
relative unimportance of an additional $240 million charge to
loss reserves in a company with over $27 billion in receivables,
Prospectus at 5, the statements would not have misled a
reasonable investor about the nature of the securities offered.
Olkey, 98 F.3d at 5; In re Allied Capital Corp. Sec. Litig.,
No. 02 Civ. 3812, 2003 WL 1964184, at *5 (S.D.N.Y. Apr. 25, 2003)
(finding that no reasonable investor would have found
misstatements in estimates that overvalued holdings in $237
million worth of assets material in a company that had $2.3 billion in assets).
Because the Court finds that none of the statements complained
of were materially misleading, plaintiffs have failed to state
actionable claims under sections 11 and 12(a)(2) of the
Securities Act. It therefore follows that no cause of action has
been stated under section 15. See, e.g., Hinerfeld, 1998
U.S. Dist. LEXIS 10601, at *24.
Pursuant to this Court's obligation under
15 U.S.C. § 77z-1(c)(1), this Court finds that all parties and attorneys have
complied with the requirements of Rule 11(b) of the Federal Rules
of Civil Procedure.
Based on the foregoing, defendants' motion to dismiss
plaintiffs' Complaint shall be and hereby is granted. The Court
directs the Clerk of the Court to enter judgment dismissing the
Complaint as against defendants CIT, Gamper, Jr., and Leone. A
Pre-Trial Conference shall occur on January 31, 2005 at 3:00 p.m.
in Courtroom 705, 40 Centre Street to determine the status of
this action as against remaining defendants.
It is SO ORDERED.