The opinion of the court was delivered by: Denise Cote, District Judge
Plaintiff Legacy Solutions Inc. ("Legacy") brings this action on behalf of a putative class of all persons who purchased or acquired American Depository Receipts ("ADRs") in Australia & New Zealand Banking Group Limited ("ANZ") during a class period spanning from November 1, 2006 through July 27, 2008 (the "Class Period"). Plaintiff brings claims against ANZ and three ANZ officers and directors under § 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Securities and Exchange Commission ("SEC") Rule 10b-5 and against the three individual defendants under § 20(a) of the Exchange Act.
Plaintiff alleges that ANZ "made numerous materially false and misleading public statements" concerning the quality of its risk management controls with respect to its Equity Finance business. Defendants have moved to dismiss plaintiff's claims pursuant to Rule 12(b)(6) and on the grounds that plaintiff has failed to plead fraud with particularity as required by Rule 9(b) and the Private Securities Litigation Reform Act ("PSLRA"). For the following reasons, defendants' motion to dismiss is granted.
The following facts are taken from the plaintiff's October 28, 2009 Revised Amended Class Action Complaint (the "Complaint") and the documents upon which it relies, including ANZ's public filings with the SEC and the Australian Securities Investments Commission ("ASIC") as well as press releases and media reports about ANZ and its senior directors and officers. The core of the Complaint's allegations are taken from a securities lending review that ANZ published in 2008 (the "2008 SLR"). The 2008 SLR was undertaken to examine ANZ's Equity Finance business in the aftermath of the failure of two brokerage businesses for whom ANZ had provided financing. The 2008 SLR explained that ANZ had failed to address effectively deficiencies identified in prior internal audits of its Equity Finance business. Based on this finding, the Complaint principally accuses ANZ of failing to disclose in its public statements from 2006 to 2008 that it had inadequate internal controls for its Equity Finance unit.
Defendant ANZ is a "major international banking and financial services group" headquartered in Melbourne, Australia. ANZ offers a range of banking and financial services products to individual, small business, corporate, and institutional customers in Australia, New Zealand, and the Asia-Pacific region. As of September 30, 2007, ANZ had 1,327 points of representation worldwide, including in the United States. Among the products offered by ANZ during the Class Period was "Equity Finance," a line of business that the plaintiff alleges to have "posed unacceptable reputational and financial risks" to ANZ.
Plaintiff also names as defendants three corporate officers and directors of ANZ: Charles B. Goode ("Goode"), Michael Roger Pearson Smith ("Smith"), and Peter Marriott ("Marriott") (collectively, the "Individual Defendants").*fn1 Goode was, at all relevant times, the Chairman of the Board of Directors and a member of the Audit Committee, the Risk Committee, and the Governance Committee. Smith was, since October 1, 2007, the Chief Executive Officer, the Executive Director of the Board of Directors, and a member of the Credit and Trading Risk Committee (the "CTR Committee"). Marriott was, at all relevant times, the Chief Financial Officer and Company Secretary.
From the beginning of the Class Period through July 2007, ordinary shares of ANZ stock traded on the New York Stock Exchange ("NYSE") in the form of ADRs. An ADR is a security denominated in U.S. dollars that represents a certain number of shares, or fraction of shares, of ordinary stock in a foreign corporation. The market price of an ADR depends not only upon the market value of the underlying shares of ordinary stock that the ADR represents, but also upon the exchange rate between U.S. dollars and the currency in which the ADR's underlying stock is valued.
In June 2007, ANZ announced its intention to withdraw the listing of its ADRs from the NYSE, and the ADRs were delisted as of July 12. ANZ also applied for deregistration from the SEC as a Foreign Private Issuer of Securities, and this deregistration became effective in October 2007. Thereafter, ANZ's ADRs continued to trade in the United States in the over-the-counter securities market. Addressing ADR holders in its 2007 Annual Report, ANZ asserted that it would "maintain the strong control and financial governance frameworks established under SarbanesOxley compliance."
III. ANZ's Equity Finance Unit
ANZ's Equity Finance unit is a part of "ANZ Custodian Services," which in turn resides within "Working Capital" (formerly known as "Trade and Transaction Services"), which in turn is a subdivision of the "Institutional" Division, one of five divisions of ANZ. ANZ's Equity Finance business was "functionally similar" to "Standard Securities Lending," another product offered by ANZ Custodian Services. Both products involved the lending of securities from one party to another, with cash or other securities serving as collateral, under terms in which legal and beneficial title to the borrowed securities formally changed hands. ANZ engaged in both Equity Finance and Standard Securities Lending with various institutional clients, including managed investment schemes, superannuation funds, financial institutions, and investment managers, among others.
The Equity Finance product began to be offered in late 2001 and was targeted for sale to securities brokers.*fn2 ANZ's securities broker customers in fact engaged in two sets of equity finance transactions: one with ANZ (through which brokers lent securities to ANZ in exchange for cash financing) and another with their own clients (through which brokers obtained title to the clients' securities in exchange for financing their clients' margin securities purchases).
From 2001 onward, ANZ's Equity Finance business grew steadily. A Securities Lending Review conducted in March 2005 ("the March 2005 SLR") revealed that ANZ had amassed a total financial exposure of $771 million through outstanding Equity Finance loans. The March 2005 SLR revealed that ANZ had not established any credit limits on cash borrowing by its Equity Finance clients, however, nor had ANZ developed any internal process to assess or manage counterparty credit risk. The March 2005 SLR recommended that credit limits be imposed on ANZ's lending relationships with existing Equity Finance customers and also advised that no further expansion of the Equity Finance business be undertaken.
Thereafter, ANZ did not accept new customers in its Equity Finance business. Contrary to the other recommendation of the March 2005 SLR, however, "exposures to existing customers were not capped at their current levels and there was [a] substantial delay [in] formally imposing new credit limits on existing customers." Indeed, in February 2006, ANZ began permitting the Equity Finance business to borrow any listed security from its broker clients, without regard to a security's quality or market liquidity; moreover, ANZ did not attempt to cap its borrowing exposure to any individual security. The plaintiff alleges that this relaxation in lending policy "led to ANZ acquiring as loan collateral many large holdings of illiquid securities with small market capitalizations." By August 2007, the amount of cash and securities "loaned by [sic] ANZ Equity Finance customers" peaked at approximately $2 billion. In May 2006, ANZ updated its existing securities lending policy to recognize officially its Equity Finance business, and in July 2006, ANZ developed a lending model that addressed existing "credit risk issues" in Equity Finance. This lending model was not fully implemented until March 2008, however, which according to the plaintiff was "too late for ANZ to avoid massive financial losses on bad Equity Finance loans."
During the Class Period and the years immediately prior, a series of internal audits were conducted into ANZ's Custodian Services group, the unit containing both the Equity Finance and Standard Securities Lending businesses. The plaintiff alleges that, between 2005 and 2007, a series of "three reviews of the control environment conducted by ANZ internal audits" into ANZ Custodian Services resulted in an "adverse or seriously adverse rating as part of each audit" for the ANZ Securities Lending unit. The first internal audit in 2005 (the "2005 Internal Audit") gave "an adverse rating to ANZ Custodian Services and a seriously adverse rating for the ANZ Lending unit in particular." The Audit Committee was made aware of these audit findings in October 2005, and a 2005 "segment report" based on the 2005 Internal Audit was presented to the Board of Directors noting a "new adverse rating" for "Custody, including Securities Lending." In a "follow-up" 2006 internal audit (the "2006 Internal Audit"), ANZ Custodian Services was given a "satisfactory" rating, "based on the perceived progress made in implementing the remediation program" developed after the 2005 Internal Audit.
The following year, however, another internal audit (the "2007 Internal Audit") gave ANZ Custodian Services a "seriously adverse rating," concluding that the program to remediate the problems identified in the 2005 Internal Audit had not been implemented "as effectively as had been understood during the 2006 Internal Audit."*fn3 An Audit Committee meeting held in October 2007 "discussed... at some length" a paper that "specifically address[ed]" the 2007 Internal Audit and that noted that 'management responsible for ANZ Custodian Services had implemented a remediation program (including the use of external consultants) with respect to the issues raised in the 2007 [I]nternal [A]udit." The Risk Committee was also "advised of the seriously adverse rating" from that audit. PricewaterhouseCoopers, the external consultants, conducted a review in late 2007 "identif[ying] that there were significant control issues in relation to the [Standard Securities Lending and Equity Finance] businesses." Nevertheless, the 2007 Annual Report reported "a solid [firm-wide] result based on solid business performance" for the year ending September 30, 2007, "with more subdued growth in Institutional," the division in which Equity Finance resided, than in its other divisions.
According to the Complaint, ANZ's Equity Finance business "began to unravel" about March 17, 2008, when one of ANZ's Equity Finance customers -- Australian brokerage and "margin lending" firm Opes Prime Group Limited ("Opes Prime") -- advised ANZ of serious financial difficulties. Specifically, Opes Prime informed ANZ that an Opes Prime customer had exercised its contractual right to request the return of $95 million of stock that the customer had transferred to Opes Prime. Opes Prime, however, had subsequently lent the stock to ANZ in an Equity Finance transaction, and "Opes Prime had none of the cash or securities needed to accommodate its customer's request." At the time, Opes Prime owed ANZ, its largest creditor, approximately $650 million. Thereafter, on or about March 19, ANZ agreed to loan $95 million to Opes Prime to cover the customer's stock return request and, in exchange, ANZ obtained a lien on $650 million worth of securities held by Opes Prime. Plaintiff alleges that, by making this cash infusion -- even while "Opes required no less than $200 million to stay afloat" -- ANZ knowingly engaged in a "preferential transfer of rights in contemplation of [Opes Prime's] receivership" for the sole purpose of mitigating ANZ's loan losses. Plaintiff alleges that, "had the [$95 million loan] deal not been made[,] ANZ would have had to pay Opes Prime $300 million and wait in line with other Opes Prime creditors."*fn4 Opes Prime entered into receivership on or about March 27, 2008.
Plaintiff maintains that "the Opes Prime scenario was repeated" in early July 2008 when another of ANZ's Equity Finance customers, a margin lending company called Primebroker Securities Limited ("Primebroker") that was similar in operation to Opes Prime, ran out of funds and entered into receivership. As with Opes Prime, ANZ was Primebroker's "primary financier," and ANZ once again sought to obtain liens over its debts with Primebroker. Primebroker entered into receivership on or about July 4, 2008.
On July 28, 2008, the day following the end of the Class Period, ANZ announced in a "Trading Update" that, among other developments, ANZ planned to take significant loss provisions related to soured loans. Specifically, the Trading Update disclosed that ANZ expected loss provisions of about $1.2 billion for the six months ending September 30, 2008, including $375 million as a "Collective Provision" and $850 million in "Group Individual Provisions."*fn5 Of these Individual Provisions, the plaintiff alleges that "no less than $270 million and as much as $350 million related to ANZ's business dealings with Opes Prime and Primebroker."
As a result of these loss provisions, the Trading Update reported that ANZ's anticipated profits for the fiscal year 2008 would fall as much as $800 million, from an estimated $3.9 billion to an estimated $3.1 billion.*fn6 With respect to the need for these loan provisions, the Trading Update quoted Smith as stating, in pertinent part:
... We are... systematically working to reinvigorate our risk management culture and capabilities.
Disappointingly though, it is very apparent that in the past ANZ had allowed the development of small areas of non-core activity in Institutional. We are addressing these issues at an operating level and I will also have the review into securities lending completed next month. While I cannot pre-empt the findings of the review, I do intend to take all the necessary actions to ensure these issues are put behind us once and for all.
While these issues are a priority to fix, the turnaround of Institutional is going to take time. Meanwhile, we are getting on with business. That includes continuing to focus on the opportunities the current market environment is providing including to re-price risk. We will also be investing in our processes, technology and staff.
In a conference call held with investors the same day, Smith explained further that "the main issue we continue to deal with comes from our [I]nstitutional business," including "[a] small number of previously identified exposures... including some commercial property clients and provisions for Prime Broker and Bill Express which are well known," and that "[w]hile we are turning around [I]nstitutional, we still have to deal with a number of legacy issues and this is a challenge that is going to take some time to fix."
That same day, July 28, the market price of ANZ ADRs fell from US$17.24 to US$14.57, a 15.5% loss from the prior day's closing price.*fn7 Since then, the U.S. market price of ANZ ADRs has not recovered.
A few weeks later, on August 22, ANZ published the 2008 SLR conducted by Smith and other senior ANZ personnel, upon which plaintiff relies as the primary source for many of the Complaint's factual allegations. The purpose of the 2008 SLR was to "examine the development and management of Securities Lending within ANZ and its relationship with Brokers including the Opes Prime group." The 2008 SLR disclosed that "there were a number of failures and deficiencies in relation to ANZ's Equity Finance business," and concluded that the Equity Finance business "posed unacceptable reputational and financial risks to ANZ." Moreover, these risks "were compounded by the lack of a proper control environment" and by the failure of "most ANZ staff" to understand and appreciate "the differences between Equity Finance and other types of Securities Lending," such as the reputational risk to ANZ arising from the fact that a broker's insolvency would likely result in ANZ keeping title to the brokers' clients' securities. The 2008 SLR further disclosed that "[t]he deficiencies identified" in Equity Finance by ANZ's earlier internal audits "were not then addressed effectively or in a timely manner" and, more specifically, that "[t]here was a history of procrastinating on decisions to either invest in systems to remedy issues or to exit the business." Although the 2008 SLR concluded that ANZ's Equity Finance activity in recent years was "not consistent with good banking practice," the 2008 SLR ...