The opinion of the court was delivered by: John G. Koeltl, District Judge
This action is based on an amended putative class action complaint alleging violations of the federal securities laws related to the collapse of two real estate investment funds, DWS RREEF Real Estate Fund, Inc. and DWS RREEF Real Estate Fund II, Inc. (respectively, "DWS I" and "DWS II"; collectively, the "Funds"). The lead plaintiffs, Pasquale A. La Pietra and Barry King, sue on behalf of themselves and others (the "plaintiffs") who purchased shares of the Funds' common stock between March 8, 2007 and November 17, 2008 (the proposed "class period"). The plaintiffs allege that they were injured by omissions and allegedly false or misleading public statements made in relation to the Funds during the class period and assert claims against the Funds' investment manager, Deutsche Investment Management Americas, Inc. ("DIMA"); the Funds' investment advisor, RREEF America, L.L.C. ("RREEF"); the Funds' president, Michael G. Clark; and the Funds' treasurer and chief financial officer, Paul H. Schubert (collectively, "defendants"). In their amended complaint, the plaintiffs assert (1) violations of § 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, against all defendants; and (2) violations of § 20(a) of the Exchange Act, 15 U.S.C. § 78t, against defendants Clark and Schubert.
The defendants moved to dismiss the amended complaint pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6). The defendants contend that the plaintiffs (1) have not alleged any material omissions or false or misleading statements; (2) have not alleged facts that support a strong inference of scienter; (3) have not claimed to have relied on the allegedly wrongful actions; and (4) have not pleaded loss causation. Defendants Clark and Schubert also move to dismiss the § 20(a) control person liability claim on the grounds that the plaintiffs have failed to plead a primary violation of the securities laws.
In deciding a motion to dismiss pursuant to Rule 12(b)(6), the allegations in the complaint are accepted as true, and all reasonable inferences must be drawn in the plaintiffs' favor. McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir. 2007); Arista Records LLC v. Lime Group LLC, 532 F. Supp. 2d 556, 566 (S.D.N.Y. 2007). The Court's function on a motion to dismiss is "not to weigh the evidence that might be presented at trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). The Court should not dismiss the complaint if the plaintiffs have stated "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). While the Court should construe the factual allegations in the light most favorable to the plaintiffs, "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions." Id.; see also SEC v. Rorech, 673 F. Supp. 2d 217, 221 (S.D.N.Y. 2009).
When presented with a motion to dismiss pursuant to Rule 12(b)(6), the Court may consider documents that are referenced in the complaint, documents that the plaintiff relied on in bringing suit and that are either in the plaintiff's possession or that the plaintiff knew of when bringing suit, or matters of which judicial notice may be taken. See Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002); see also Rorech, 673 F. Supp. 2d at 221. Of particular relevance, the Court may take judicial notice of documents filed with the SEC. See In re Morgan Stanley Info. Fund Secs. Litig., 592 F.3d 347, 354 n.5 (2d Cir. 2010).
The following facts are undisputed, unless otherwise indicated.
The lead plaintiffs each purchased shares of DWS II during the class period. Plaintiff La Pietra purchased shares on October 8, 2007. (Am. Compl. ¶ 23.) Plaintiff King purchased shares on October 13 and 23, 2008. (Am. Compl. ¶ 24.)
DWS I and DWS II were non-diversified, closed-end management investment companies, incorporated in 2002 and 2003, respectively. (Am. Compl. ¶¶ 3, 31-32.) At all relevant times, RREEF and DIMA were indirect, wholly owned subsidiaries of Deutsche Bank AG ("Deutsche Bank"). (Id. ¶¶ 25, 27.) As closed-end funds, each Fund initially issued common shares at a one-time public offering shortly after incorporation, shares that could thereafter be traded on market exchanges. (Id. ¶ 39) At the time each Fund issued its common shares, it also filed a prospectus disclosing information about the Fund to prospective investors (collectively, the "common share prospectuses" or the "prospectuses"). (Stern Decl. Exs. B at i, F at i.)
The stated objective of each Fund was to achieve "total return through a combination of high current income and capital appreciation potential by investing in real estate securities." (Am. Compl. ¶ 40; Stern Decl. Exs. B at i, F at i.) In pursuit of this objective, the common share prospectuses stated that the Funds intended to invest at least 90% of their respective total assets in equity securities issued by real estate companies, with 80% of DWS I's total assets and 70% of DWS II's total assets to be invested in income-producing equity securities issued by real estate investment trusts ("REITs"). (Am. Compl. ¶ 4; Stern Decl. Exs. B at i, F at i.)
The common share prospectuses each stated that the relevant Fund intended to leverage these assets by issuing preferred shares and/or borrowing in an aggregate amount of "approximately 33 1/3% of the Fund's total capital" in the case of DWS I, and "approximately 35%" in the case of DWS II. (Stern Decl. Exs. B at ii, F at ii.) The prospectuses explained, among other things, that preferred shares would "pay dividends based on short-term rates (which would be redetermined periodically by an auction process)"; that the preferred shares and any other borrowing would have seniority over the common shares; and that if a Fund did not maintain sufficient assets to cover twice the liquidation value of the outstanding preferred shares, the Fund could be required to redeem some or all of the preferred shares, and would not be permitted to declare cash dividends or other distribution on the common shares. (Stern Decl. Exs. B at 3-4, 16; F at 3-4.) The prospectuses further noted that they might use interest rate swaps to hedge against interest rate risks, and warned that a decline in interest rates could hurt the value of the common shares. (Stern Decl. Exs. B at 18, F at 19.) The prospectuses noted that management fees would be higher while the Funds used leverage, because the fees paid would be calculated based on the Funds' total managed assets. (Stern Decl. Exs. B at 6, F at 7.)
The prospectuses made detailed disclosures about the risks of investing in the Funds, which were concentrated in real estate and anticipated the use of significant leverage. The prospectuses explained that investors could lose their entire principal amount. (Stern Decl. Exs. B at 4, F at 4.) Investments in the Funds were indirect investments in REITs and other real estate investments. (Stern Decl. Exs. B at 4, F at 4.) The investments were closely linked to the real estate market and the prospectuses presciently noted that "[p]roperty values may fall due to increasing vacancies or declining rents." (Stern Decl. Ex. B at 4; DWS II Definitive Materials 5 (Form 497) (Aug. 27, 2003).) The prospectuses also noted that the leverage used by the Funds created additional risks: there was a likelihood of greater volatility of net asset value and market price for the common shares because changes in the value of the Funds' portfolio would be borne by the common shares and there was the possibility that common share income would fall if the dividend on the preferred shares rose, or that the value of the common shares would fluctuate because the dividend on the preferred shares or the interest rates on any borrowing by the funds varied. (Stern Decl. Exs. B at 6, F at 6-7.)
As indicated in the prospectuses, the Funds issued preferred shares as a means of leveraging their investments. In 2003 and 2004, they issued several series of auction-rate preferred securities ("ARPS"), which paid dividends at a rate set by weekly auctions. (Am. Compl. ¶ 45; Stern Decl. Exs. C, D, G.) As explained in the prospectuses for these preferred shares (the "preferred share prospectuses"), each week, holders of preferred shares could elect to sell their shares at auction. (Stern Decl. Exs. C at 1, D at 1, G at 1.) Potential purchasers would enter bids specifying the number of shares they wanted to purchase and the lowest minimum dividend rate they would accept. (Stern Decl. Exs. C at 11-12, D at 11-12, G at 11-13.) If enough purchasers bid on the shares to cover all shares offered, then the auction would succeed, the shares would be sold to the purchasers, and the clearing rate (the lowest dividend rate at which all the shares could be sold at par) would be applied to the entire issue. (Stern ...