The opinion of the court was delivered by: VICTOR Marrero, United States District Court.
This case is the lead case in an action regarding alleged violations of the federal securities laws in connection with the initial public offering ("IPO") of common stock of defendant MF Global, Ltd. ("MF Global"). Lead plaintiffs have alleged violations of the Securities Act of 1933 (the "Securities Act"), §§ 11, 12(a)(2), and 15. 15 U.S.C. §§ 77k, 77l(a)(2), and 77. The Corrected Consolidated Class Action Complaint, dated September 12, 2008 (the "CCAC"), names as defendants MF Global and Man Group, PLC (the "Man Group"). The CACC names as individual defendants Kevin R. Davis ("Davis"); Amy S. Butte ("Butte"); Alison J. Carnwath ("Carnwath"); Christopher J. Smith ("Smith"); Christopher Bates ("Bates"); Henri J. Steenkamp ("Steenkamp"); and Edward L. Goldberg ("Goldberg") (collectively, the "Individual Defendants"). The CACC also names numerous underwriter defendants that were allegedly involved in the MF Global IPO: Citigroup Global Markets, Inc.; J.P. Morgan Securities, Inc.; Lehman Brothers, Inc. ("Lehman Brothers"); Merrill Lynch, Pierce, Fenner & Smith, Inc.; UBS Securities, LLC; Credit Suisse Securities (USA) LLC; Deutsche Bank Securities, Inc.; Goldman, Sachs & Co.; Morgan Stanley & Co., Inc.; ABN AMRO Rothschild LLC; Banc of America Securities LLC; BMO Capital Markets Corp.; HSBC Securities (USA), Inc.; Keefe, Bruyette & Woods, Inc.; Sandler O'Neill & Partners, L.P.; Wachovia Capital Markets, LLC; Blaylock & Co., Inc.; Calyon Securities (USA), Inc.; Chatsworth Securities LLC; CL King & Associates, Inc.; Dowling & Partners Securities LLC; E*TRADE Securities LLC; Fortis Securities LLC; Guzman & Co.; ING Financial Markets LLC; Jefferies & Co., Inc.; Lazard Capital Markets LLC; M.R. Beal & Co.; Mizuho Securities USA, Inc.; Muriel Siebert & Co., Inc.; Oppenheimer & Co., Inc.; Piper Jaffray & Co.; Raymond James & Associates, Inc.; RBC Capital Markets Corp.; Robert W. Baird & Co., Inc.; Samuel A. Ramirez & Co., Inc.; SMH Capital Inc.; Stifel, Nicolaus & Co., Inc.; Sun Trust Capital Markets, Inc.; The Williams Capital Group, L.P.; Utendahl Capital Partners, L.P.; Wells Fargo Securities LLC; and William Blair & Co., LLC (collectively, the "Underwriter Defendants").
MF Global, Man Group, the Individual Defendants, and the Underwriter Defendants except for Lehman Brothers,*fn1 have moved to dismiss the CACC pursuant to Federal Rule of Civil Procedure 12(b)(6) ("Rule 12(b)(6)"). For the reasons stated below, the Court grants the motion to dismiss of MF Global, the Individual Defendants, and the Underwriter Defendants in its entirety. The Court also grants the motion to dismiss of the Man Group in its entirety.
Lead plaintiffs are Iowa Public Employees' Retirement System; Policemen's Annuity & Benefit Fund of Chicago; Central States, Southeast, Southwest Areas Pension Fund; and State-Boston Retirement System (collectively, "Plaintiffs"). The CACC alleges that Plaintiffs purchased shares of MF Global "pursuant and/or traceable to the false and misleading Registration Statement and Prospectus and [were] damaged thereby." (CACC ¶¶ 22-25.) Plaintiffs purport to represent a class consisting of "all persons who purchased shares of MF Global common stock pursuant or traceable to the Registration Statement and Prospectus issued in connection with MF Global's IPO." (Id. ¶ 41.)
Before its IPO, MF Global was the brokerage unit of Man Group, a hedge fund. Man Group retains an 18.6% stake in MF Global. MF Global is a broker of exchange-listed futures and options, and "provides execution and clearing services for exchange-traded and over-the-counter derivative products, as well as for non-derivative foreign exchange products and securities in the cash market." (CACC ¶ 26.)
The CACC alleges that, at all relevant times, the following Individual Defendants held the offices indicated below at MF Global and signed the registration statement (the "Registration Statement") and "thereby approved issuance of the Prospectus" (id. ¶¶ 28-34):
Davis: Chief Executive Officer and Director.
Butte: Chief Financial Officer and Director.
Carnwath: Non-Executive Chairman of the Board of Directors.
Smith: Chief Operating Officer, Deputy Chief Executive Officer, and Director.
Steenkamp: Vice President of Corporate Financial Reporting, or Principal Accounting Officer.
The defendants identified above as Underwriter Defendants are named in the CACC as underwriters for the MF Global IPO.
In the spring of 2007, Man Group announced that it would spin off its brokerage business through an IPO on the New York Stock Exchange, in the third quarter of 2007. The Registration Statement for MF Global was filed on May 31, 2007. The shares issued through the IPO began trading on July 19, 2007, and the IPO prospectus (the "Prospectus") was filed on July 20, 2007.
The Registration Statement and Prospectus described, among other things, the relationship between Man Group and MF Global, including the "group risk services agreement" between them "pursuant to which Man Group has agreed to provide [MF Global] with a license to use its global risk-management systems and processes it has used historically to provide [MF Global] with these services." (CACC ¶ 49.)
The Registration Statement and Prospectus also described in general terms MF Global's risk management policies and procedures, noting that "limiting trades for our own account to matched-principal and hedging trades reduces the risk that our employees may execute trades for our account in excess of our exposure limits," but that "[n]evertheless, we are exposed to risks relating to employee misconduct." (Id. ¶ 52.) The materials discussed MF Global's program for monitoring its employees and brokers, its risk management structure, its approach to risk, and its ability to minimize conflicts of interest and promote financial stability by generally refraining from proprietary trading.
In addition, the Registration Statement and Prospectus addressed various factors that might undermine MF Global's risk management efforts, including employee misconduct, human or technological failures, and lack of information.
On February 27, 2008, one of MF Global's registered representatives entered into 15,000 to 20,000 unauthorized contracts for wheat futures, exceeding his authorized trading limit and ultimately resulting in a $141.5 million loss for MF Global when those positions had to be liquidated. MF Global held an investor conference call on February 28, 2008, during which Davis "acknowledged that existing internal controls could have stopped" the errant trades from being processed, but the controls "were turned off in a few cases to allow for speedier transactions by brokers at the firm who traded for themselves or took customer orders by phone." (Id. ¶ 61, quoting Wall Street Journal, Feb. 29, 2009.) Davis also stated that the representative in question had only one "historic customer" who had not traded in "some time." (Id.) Davis told investors that the representative "had not circumvented any risk management procedures," that "in order to speed trades [MF Global] had allowed some internal terminals to not have the buying power control," and that such a policy was a "mistake." (Id. ¶ 62.)
On February 28, 2008, MF Global's stock price dropped 28%, and dropped an additional 17% on February 29, 2008. When MF Global announced its Fourth Quarter 2008 results in April 2008, it reported a pre-tax loss "from $55 million to $65 million primarily attributable to the recently expected bad debt provision." (Id. ¶ 70.) MF Global also announced two independent reviews, one of its proprietary order entry system and one of its overall risk management and control infrastructure, and detailed its efforts to upgrade its risk monitoring systems.
In June of 2008, MF Global filed with the Securities and Exchange Commission ("SEC") a Form 10-K for the fiscal year ending March 31, 2008, in which it disclosed two additional incidents that were the subject of investigations by the Commodity Futures Trading Commission ("CFTC"). MF Global also disclosed that it was cooperating in an investigation by the United States Attorney's Office for the Southern District of New York, the SEC, and the CFTC.
The first of several complaints regarding the representations in the Registration Statement and Prospectus and the alleged failures of risk management as demonstrated by MF Global's $141.5 million loss (the "Trading Incident") was filed on March 6, 2008. Four additional complaints regarding the risk management system and the Trading Incident were subsequently filed, and the Court consolidated all of the actions for coordinated pretrial proceedings. Plaintiffs then filed the CACC, alleging violations of § 11 and 12(a)(2) of the Securities Act against all Defendants, and violations of ...