The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge
Teamsters Local 445 Freight Division Pension Fund ("Teamsters")
brings this action on behalf of open market purchasers of certain
Certificates offered by Bombardier Capital Mortgage
Securitization Corporation ("BCM") and Bombardier Capital Inc.
("BCI"). The Certificates were secured by pools of manufactured
housing installment sales contracts and mortgage loans. The
gravamen of plaintiff's allegations is that defendants engaged in
a scheme to defraud investors through misrepresentations and omissions
regarding the integrity of BCI's underwriting standards for loan
origination in order to amass large volumes of manufactured
housing loans for immediate profit in the asset-backed securities
market.*fn1 Plaintiff is alleging violations of sections
10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule
10b-5 of the Securities and Exchange Commission.*fn2
All defendants other than Gillespie*fn3 now move to
dismiss the Complaint, arguing that it fails to state a cause of
action for securities fraud, that Teamsters' claims are
time-barred, and that Teamsters does not have standing to pursue
the vast majority of the claims asserted.*fn4 For the
following reasons, defendants' motion is denied as to BCI, BCM,
Peters, and Assell, but granted as to BI and Beaudoin. II. THE COMPLAINT
The following allegations are drawn from the Complaint and
presumed to be true for purposes of this motion.
On May 10, 2002, Teamsters purchased $250,000 par value Series
2000-A Class A-2 Certificates for a total investment of
$234,826.*fn5 On February 7, 2005, Teamsters filed a
Complaint pursuant to Rule 23(a) and (b)(3) of the Federal Rules
of Civil Procedure, defining a class of all purchasers of the
Series 2000-A Certificates, who purchased their shares between
January 7, 2000 and May 6, 2004.*fn6 On April 15, 2005,
plaintiff amended the Complaint to expand the class to include
purchasers of Series 1998-A, 1998-B, 1998-C, 1999-A, 1999-B and
2001-A Certificates, and enlarge the class period to include
purchases between February 7, 2000 and February 7, 2005.*fn7
Bombardier, Inc. ("BI") is a Canadian corporation operating
multinational business divisions, principally engaged in the
manufacture and sale of aircraft, recreational vehicles, railroad trains, and
locomotive engines.*fn8 BCI, a wholly owned subsidiary of
BI, is a financial services company principally engaged in the
financing and leasing of BI's products, as well as the financing
and leasing of manufactured housing (also known as "mobile
homes") to consumers.*fn9 Plaintiff alleges that the "sole"
purpose of BCM, a wholly owned limited purpose subsidiary of BCI,
was to issue the Certificates.*fn10 BI, BCM, and BCI will
hereafter be referred to collectively as "Bombardier."*fn11
Laurent Beaudoin was the President, Chief Executive Officer, and
Chairman of the Board of Directors of BI.*fn12 Brian Peters
and Lawrence F. Assell were directors and/or officers of
BCI.*fn13
Plaintiff alleges that, beginning in 1997, Bombardier rushed to
originate a massive number of mobile home loans and then, between
January 1998 and January 2001, packaged these loans for issuance in the
asset-backed securities market through a number of separate
certificate offerings.*fn14 Each series of Certificates had
the same basic structure and was divided into classes which were
assigned specific pools of mobile home collateral and came due on
different dates.*fn15 Bombardier was drawn to this market by
the "financial allure of `gain on sale' accounting," which
allowed it, "as the issuer of securitized assets, to book future
expected profits on those securities as current income, boosting
reported earnings."*fn16
From 1998 to 2001, Bombardier issued false statements to
investors regarding the "strict and prudent" underwriting
standards used in the origination of the collateral supporting
the Certificates.*fn17 The Certificate Offering Document or
Prospectus for each series of Certificates contained an identical
description of underwriting standards.*fn18 Each Prospectus
stated that Bombardier's Credit Department would adhere, with
limited deviation, to certain underwriting guidelines, such as requiring each loan applicant to demonstrate
stability of employment and residence, excluding applicants with
debt-to-income ratios in excess of 45%, and applying the Fair
Isaac Credit Organization ("FICO") credit scoring
system.*fn19 Each Prospectus also disclosed the delinquency
rates for the loans constituting the collateral for the Series
2000-A offering as 2% in 1998 and 8.14% in January
2000.*fn20 These "purported rigorous underwriting standards"
and delinquency disclosures led, in material part, to the
assignment of high ratings to the Certificates by various rating
agencies.*fn21 Additionally, this description of
Bombardier's underwriting guidelines, repeated in each
Prospectus, was the only description of the origination of
Certificate collateral upon which purchasers relied.*fn22
Plaintiff alleges that, in fact, BCI's senior management
disregarded underwriting standards in favor of volume loan
purchases, infecting the pool of collateral with loans to
"patently uncreditworthy" borrowers.*fn23 Defendants recruited a senior management team, including Ronald Peace,
Daniel J. Bialon, and Dan Stout, who directed employees to focus
on loan volume and disregard underwriting standards.*fn24
Bombardier systematically purchased "large quantities of facially
defective and deficient mobile home loans," including loans to
applicants with no assets, no evidence of employment, debt
exceeding income, and poor FICO scores.*fn25 Additionally,
by linking low reports of delinquencies and repossessions to
employee compensation, the management of BCI created incentives
for underreporting.*fn26 At Stout's direction, repossessions
were re-categorized as "re-financings" in order to avoid
reporting.*fn27 Thus, Bombardier's reported delinquency
figures were systematically understated.*fn28
Bombardier's systematic practice of purchasing "bad paper"
through reckless underwriting led to a rapid increase in the percentage
of delinquencies.*fn29 In early 2000, Bombardier's
management began to realize that reckless underwriting practices
had caused increasing rates of delinquencies and
foreclosures.*fn30 In response, Peace, Bialon, and Stout
were replaced, and in April 2000, Bombardier disclosed certain
understatements of delinquencies and claimed that the problems
had been corrected.*fn31
However, Bombardier did not disclose its improper underwriting
practices between 2001 and 2003 in its Form 8-K filings or
otherwise.*fn32 In the Series 2001-A Prospectus supplement,
BCI and BCM explained worsened delinquency rates as arising from
collection problems.*fn33 In September, 2001, Bombardier
left the manufactured housing asset-backed securities industry
and, in a press release, attributed the cause of its exit to
market conditions.*fn34 In its March 19, 2002 Annual Report,
BI explained portfolio downgrades by reference to the "slowdown of the U.S. economy."*fn35
On December 16, 2002, the Series 2000-A Certificates were
downgraded below investment grade.*fn36 On December 27,
2002, Certificate prices declined by an average of
13.25%.*fn37 On February 25, 2003, the 1998-C and 1999-A
Series Certificates were downgraded below investment grade. On
March 5, 2003, the Certificates declined an average of 27%,
resulting in an average price decline of 38% from December 24,
2002.*fn38
Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a
motion to dismiss should be granted only if "`it appears beyond
doubt that the plaintiff[s] can prove no set of facts in support
of [their] claim[s] which would entitle [them] to
relief.'"*fn39 The task of the court in ruling on a Rule
12(b)(6) motion is "merely to assess the legal feasibility of the
complaint, not to assay the weight of the evidence which might be offered in support
thereof."*fn40 When deciding a motion to dismiss, courts
must accept all factual allegations in the complaint as true, and
draw all reasonable inferences in plaintiffs' favor.*fn41
Courts generally do not consider matters outside the pleadings
but may consider documents attached to the pleadings, documents
referenced in the pleadings, or documents that are integral to
the pleadings.*fn42 Moreover, courts "may take judicial
notice of well-publicized stock prices without converting the
motion to dismiss into a motion for summary judgment."*fn43
B. Section 10(b) and Rule 10b-5
Only an actual purchaser or seller of a security has standing
to sue under section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder.*fn44 The purpose of this rule, in a
misrepresentation case, is to "limit? the class of plaintiffs to
those who have at least dealt in the security to which the
prospectus, representation, or omission relates."*fn45 A
putative class representative lacks standing to bring a claim if
it did not suffer the injury that gives rise to that
claim.*fn46
In order to maintain a class action, Plaintiffs must
first establish that they have a valid claim with
respect to the shares that they purchased. If the
named plaintiffs have no cause of action in their
own right, their complaint must be dismissed, even
though the facts set forth in the complaint may show
that others might have a valid claim.*fn47 Where plaintiffs bring multiple claims, at "least one named
plaintiff must have standing to pursue each claim
alleged."*fn48
A named plaintiff in a class action that purchased securities
from one issuer does not have standing to bring claims on behalf
of purchasers of securities from a different issuer.*fn49
Additionally, courts have held that a class action plaintiff does
not have standing to bring claims on behalf of purchasers of
different securities where those claims are based on different
factual allegations and legal theories.*fn50
2. Statute of Limitations and Statute of Repose
Section 804(a) of the Sarbanes-Oxley Act of 2002 states that:
a private right of action that involves a claim of
fraud, deceit, manipulation, or contrivance in
contravention of a regulatory requirement concerning
the securities laws, as defined in section 3(a)(47) of the Securities Exchange Act of 1934
(15 U.S.C. ยง 78c(a)(47), may be brought not later than
the earlier of
(1) 2 years after the discovery of the facts
constituting the violation; or
(2) 5 years after such violation.*fn51
"Discovery of facts for the purposes of this statute of
limitations `includes constructive or inquiry notice, as well as
actual notice.'"
*fn52
A plaintiff in a federal securities case will be
deemed to have discovered fraud for purposes of
triggering the statute of limitations when a
reasonable investor of ordinary intelligence would
have discovered the existence of the fraud. . . .
Moreover, when the circumstances would suggest to an
investor of ordinary intelligence the probability
that she has been defrauded, a duty of inquiry
arises, and knowledge will be imputed to the investor
who does not make such an inquiry.*fn53
To be placed on inquiry notice, plaintiffs "need not be able to
learn the precise details of the fraud, but they must be capable
of perceiving the general fraudulent scheme based on the
information available to them."
*fn54 "The issue that the Court must consider is . . . whether Plaintiffs `had
constructive notice of facts sufficient to create a duty to
inquire further into that matter. An investor does not have to
have notice of the entire fraud being perpetrated to be on
inquiry notice.'"
*fn55
However, available information must establish "a probability,
not a possibility" of fraud to trigger inquiry notice.*fn56
Moreover, on a motion to dismiss, "[u]nless Defendants can
produce `uncontroverted evidence [that] irrefutably demonstrates
when plaintiff discovered or should have discovered the
fraudulent scheme,' they cannot satisfy the heavy burden of
establishing inquiry notice as a matter of law."*fn57 The
Court of Appeals has been "decidedly reluctant to foreclose ?
claims as untimely absent a manifest indication that plaintiffs
could have learned the facts underpinning their allegations"
prior to the statutory limitations period.*fn58 Facts triggering a duty to inquire are frequently termed "storm
warnings."*fn59 Once sufficient storm warnings appear,
"plaintiffs must exhibit `reasonable diligence' in investigating
the possibility that they have been defrauded. If they fail to
meet this obligation, plaintiffs will be held to have had
`constructive knowledge' of the fraud against them."*fn60
Section 804(a)(2) of the Sarbanes-Oxley Act is a statute of
repose which requires that a plaintiff bring a section 10(b) or
Rule 10b-5 claim within five years of the violation of the
securities laws, regardless of when the plaintiff discovered the
violation.*fn61 The period of repose begins when the last
alleged misrepresentation was made.*fn62
3. Prima Facie Case To state a prima facie case for securities fraud under section
10(b) of the Exchange Act*fn63 and Rule 10b-5 promulgated
thereunder, a plaintiff must allege that "`the defendant, in
connection with the purchase or sale of securities, made a
materially false statement or omitted a material fact, with
scienter, and that plaintiff's reliance on defendant's action
caused injury to the plaintiff.'"*fn64 The requisite
scienter, or state of mind, in an action under section 10(b) and
Rule 10b-5 is "`an intent to deceive, manipulate or
defraud.'"*fn65
Securities fraud actions are subject to the heightened pleading
requirements of Federal Rule of Civil Procedure 9(b).*fn66
In addition, a plaintiff alleging securities fraud under section
10(b) and Rule 10b-5 must satisfy the heightened pleading
standards of the Private Securities Litigation Reform Act of 1995 ("PSLRA").*fn67 To plead a material misrepresentation
or omission under the PSLRA "the complaint [must] specify each
statement alleged to have been misleading, the reason or reasons
why the statement is misleading, and, if an allegation regarding
the statement or omission is made on information or belief, the
complaint shall state with particularity all facts on which that
belief is formed."*fn68 ...