The opinion of the court was delivered by: P. Kevin, Castel, District Judge
Plaintiffs Footbridge Limited Trust and OHP Opportunity Limited Trust (the "Funds") assert claims for violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (the "Exchange Act") and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, and a state-law claim for common-law fraud. The claims arise out of plaintiffs' purchase of mortgage-backed securities ("MBS") from Countrywide through two public offerings (the "Securitizations"). Defendants move to strike certain portions of the Second Amended Complaint (the "SAC"). Defendants also move to dismiss the SAC under Rules 9(b) and 12(b)(6), Fed. R. Civ. P. For the reasons stated below, defendants' motion to strike is granted in part and denied in part and the motion to dismiss (Docket No. 37) is granted.
The facts below are taken from the SAC. Non-conclusory factual allegations are taken as true for purposes of this motion. See Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949-50 (2009).
Plaintiff Footbridge Limited Trust ("Footbridge") is a Bermuda Trust with a principal place of business in Connecticut. (SAC ¶ 9.) Plaintiff OHP Opportunity Limited Trust ("OHP") is a Bermuda Trust with a principal place of business in Connecticut. (Id. ¶ 10.) Plaintiffs are investment funds managed by Old Hill Partners, Inc. ("Old Hill"), a Delaware corporation whose principal place of business is not alleged. (Id. ¶ 11.) Old Hill acts as an investment manager for Footbridge and OHP and makes investment decisions on their behalf. (Id.)
Defendant Countrywide Financial Corporation ("CFC") is a Delaware corporation with its principal place of business in California. (Id. ¶ 12.) "CFC, itself or through its subsidiaries, writes, sells, and services single-family home mortgages, home equity loans, commercial mortgages, and subprime mortgages. It also buys and sells mortgages, offers asset management and brokerage services, and provides insurance products." (Id.)
Defendant Countrywide Home Loans, Inc. ("CHL") is a wholly-owned subsidiary of CFC and is a New York corporation with its principal place of business in California. (Id. ¶ 13.) "CHL is engaged primarily in the mortgage banking business, and as part of that business, it originates, purchases, sells, and services mortgage loans." (Id.)
Defendant Countrywide Home Loans Servicing LP ("CHLS") is a wholly-owned subsidiary of CFC and is a limited partnership organized under the laws of Texas with its principal place of business in Texas. (Id. ¶ 14.) "CHLS services mortgage loans that are originated by CHL." (Id.)
Defendant Countrywide Securities Corporation ("CSC") is a wholly-owned subsidiary of CFC and is a California corporation with its principal place of business in California. (Id. ¶ 15.) "CSC trades securities and underwrites offerings of mortgage-backed securities." (Id.)
Defendant CWABS, Inc. ("CWABS") is a Delaware corporation and a limited-purpose finance subsidiary of CFC with its principal place of business in California. (Id. ¶ 16.) CWABS was the Depositor for the SPS1 and SPS2 Securitizations. (Id.)
Defendants CWABS Asset-Backed Certificates Trust 2006-SPS1 (the "SPS1 Trust") and CWABS Asset-Backed Certificates Trust 2006-SPS2 (the "SPS2 Trust) are common-law trusts formed by CWABS under the laws of New York. (Id. ¶¶ 17-18.) The SPS1 Trust and the SPS2 Trust were the Issuing Entities for the SPS1 and SPS2 Securitizations, respectively. (Id.) All claims against the SPS1 Trust and the SPS2 Trust were dismissed without prejudice pursuant to a stipulation and order of voluntary dismissal entered on November 12, 2009. (Docket No. 60.)
Defendant Angelo R. Mozilo is Countrywide's co-founder. (SAC ¶ 19.) Mozilo served as Chairman of CFC's Board of Directors from March 1999 until July 1, 2008. (Id.; Decl. of David Spears, Ex. A, Form DEF 14A for CFC dated Apr. 28, 2006 ("CFC Apr. 2006 Form DEF"), at 8.) Mozilo also served as CEO of CFC from February 1998 until July 1, 2008. (SAC ¶ 19; CFC Apr. 2006 Form DEF at 8.) He was also President of CFC from March 2000 through December 2003 and has been a member of CFC's Board since the time it was founded in 1969. (SAC ¶ 19; CFC Apr. 2006 Form DEF at 8.) Mozilo also served in "other executive roles" until the time he left Countrywide on July 1, 2008. (SAC ¶ 19.)
Defendant David Sambol "joined Countrywide" in 1985 and served as CFC's President and COO from September 2006 until his retirement in 2008. (Id. ¶ 20.) Sambol also served as Chairman, CEO, and a member of the Board of Directors of CHL beginning in 2007. (Id.) Sambol held "numerous management positions in Countrywide companies," including his position as President and COO of CHL and Executive Managing Director for Business Segment Operations from 2004 until 2006. (Id.)
The SAC collectively refers to CFC, CHL, CHLS, CSC, CWABS, the SPS1 Trust, the SPS2 Trust, Mozilo, and Sabol as "Countrywide" or "the Company" or the "Countrywide Defendants." I employ plaintiffs' chosen terminology here.
Defendant Bank of America Corporation ("BofA") is a Delaware corporation with its principal place of business in North Carolina. (Id. ¶ 21.) According to the SAC, CFC "merged into a wholly-owned [BofA] subsidiary on July 1, 2008." (Id. ¶ 259.) BofA "is in the final stages of fully combining its business with that of the Countrywide Defendants." (Id. ¶ 21.)
Defendant BAC Home Loans Servicing, LP ("BAC HLS") is a subsidiary of BofA and is "the continuation of CHLS." (Id. ¶ 22.)
In June and October 2006, plaintiffs purchased over $43 million in residential mortgage-backed securities (the "Securities") from Countrywide through two public offerings (the "Securitizations"). (Id. ¶¶ 1-2.) The Securitizations included CWABS Asset-Backed Certificates, Series 2006-SPS1 (the "SPS1 Securitization"), which plaintiffs purchased on June 27, 2006, and the CWABS Asset-Backed Certificates, Series 2006-SPS2 (the "SPS2 Securitization"), which plaintiffs purchased on August 29, 2006, September 12, 2006, and October 3, 2006. (Id. ¶¶ 2 n.1, 58-60.) The SPS1 and SPS2 Securitizations were "structured through a similar set of agreements." (Id. ¶ 58.) "The mortgage loans underlying the Securities (the "Mortgage Loans") consisted of "credit-blemished, closed-end, fixed-rate loans that were secured by second liens on one- to four-family residential properties." (Id. ¶ 2.)
The Securities were sold in "Classes." (Id. ¶ 61.) "The majority of the Certificates in each Securitization were contained in the 'A' Class." (Id. ¶ 62.) The remaining Certificates were issued in the M-1 through M-9 Classes and the B Class, each of which carried lower ratings. (Id.) Plaintiffs purchased Securities in the M-3, M-4, M-5, M-6, and M-7 Classes for the SPS1 Securitizations and M-4, M-5, and M-7 Classes for the SPS2 Securitizations. (Id. ¶¶ 59-60.)
Countrywide entities "acted in several capacities on the Securitizations." (Id. ¶ 61.) Countrywide issued Mortgage Loans to individuals in connection with the purchase or refinance of residential properties. (Id.) CHL sold, transferred, or otherwise conveyed title to the Mortgage Loans to CWABS, acting as depositer. (Id.) CWABS then sold, transferred, or otherwise conveyed title to the Mortgage Loans to Bank of New York ("BoNY"), acting as Trustee, which held the loans in the SPS1 and SPS2 Trusts for the benefit of Certificateholders. (Id.) The SPS1 and SPS2 Trusts acted as the Issuing Entities and sold the Certificates to investors, including plaintiffs. (Id.)
Three offering documents were distributed to investors with respect to each of the Securitizations. (Id. ¶ 63.) The Pooling and Servicing Agreements (the "PSAs") were entered into by CWABS, CHL, CHLS, and BoNY. (Id. ¶ 63.) A Preliminary Term Sheet provided "summary information about the Securitizations, including a description of the parties, the Classes of Certificates and their credit ratings, the Certificates' credit enhancement provisions, and the characteristics of the pool of Mortgage Loans." (Id. ¶ 64.) The Prospectus and Prospectus Supplement "provided further detail about the Securitizations, including a detailed description of the Mortgage Loans, the Certificates, and the procedures for servicing the loans." (Id.) The Prospectuses were filed with the SEC and their Registration Statements were signed by three Countrywide executives, none of whom are named as defendants. (See id.)
The SAC alleges that the defendants made five categories of material misrepresentations and omissions in the offering documents and other various public statements to plaintiffs. First, plaintiffs allege that the offering documents contained misstatements regarding the percentage of loans that were related to owner-occupied properties included in the Securitizations. Second, plaintiffs allege that defendants made material misrepresentations about the nature and quality of the underwriting guidelines employed by Countrywide in the origination of the Mortgage Loans. Third, plaintiffs allege that defendants made material misrepresentations and omitted material facts regarding the reduced application programs under which some Countrywide borrowers received loans. Fourth, the SAC alleges that the offering documents misrepresented that the Mortgage Loans would not be selected "in a manner that would adversely affect the interests of Certificateholders." (Id. ¶ 123.) Finally, plaintiffs allege that defendants made misrepresentations regarding Countrywide's servicing of the Loans.
Plaintiffs allege that a "corrupt culture" at Countrywide, combined with defendants' "lust for high yields and high profits" motivated defendants to make fraudulent misrepresentations to plaintiffs in order to induce them to invest in the Securities. (See, e.g., id. ¶¶ 40, 48.) Plaintiffs assert that they relied upon the misrepresentations and that they would not have purchased the Securities had they known the truth. (See id. ¶ 36.)
The Securities began to experience "high rates of delinquency and default." (See id. ¶ 223.) This caused a "drastic and rapid loss in [the] value" of plaintiffs' Securities. (Id.) The SAC alleges that the loss in value was "proximately caused by Countrywide's issuance of loans to borrowers who could not afford them." (Id.) Plaintiffs assert that they lost "tens of millions of dollars" as a result of their reliance on Countrywide's misrepresentations and omissions. (Id. ¶ 222.)
I note at the outset that this is not a case where risky, subprime mortgage-backed securities were inserted into a structured investment product without adequate disclosure. Plaintiffs acknowledge that they "knew, and do not deny, that the loans they purchased were risky." (Pl. Opp. Mem. at 3.) Plaintiffs do not dispute that they chose to invest in the Securitizations with knowledge that the loans underlying the Securities were "credit-blemished, closed-end, fixed-rate loans that were secured by second liens on one- to four-family residential properties . . . ." (SAC ¶¶ 2, 56.) Plaintiffs allege that they were misled because the level of risks they faced was higher than they perceived. Plaintiffs assert that defendants made material misrepresentations and omissions regarding the quality of the underlying loans and, more specifically the underwriting guidelines used in the origination process and that those misrepresentations and omissions caused plaintiffs to lose their investments.
On April 23, 2009, plaintiffs filed the complaint asserting claims based on federal securities laws and common law fraud. (Docket No. 1.) Plaintiffs amended the complaint on June 2, 2009. (Docket No. 3.) By letter dated July 6, 2009, defendants requested permission to file a motion to dismiss the amended complaint, setting forth the bases for the proposed motion. (See Docket No. 20; see also Docket Nos. 23, 29.) Following a pre-motion conference held on July 14, 2009, plaintiffs further amended the complaint in response to defendants' pre-motion letter. (Docket No. 32.) Defendants then filed a motion to dismiss on September 18, 2009. (Docket No. 37.) Plaintiffs filed a motion for leave to further amend the complaint on October 30, 2009. (Docket No. 52.) On November 12, 2009, the parties filed a stipulation of voluntary dismissal of the claims against the SPS1 Trust and the SPS2 Trust on November 12, 2009. (Docket No. 60.) On November 23, 2009, I denied plaintiffs' motion to amend to assert 1933 Act Claims. (Docket No. 62.) Thereafter, plaintiffs filed a separate action asserting claims under the 1933 Act, which I accepted as a related case. See Footbridge Ltd. Trust v. Countrywide Fin. Corp., 10 Civ. 367 (PKC) (S.D.N.Y. filed Jan. 15, 2010).
There is original jurisdiction over plaintiffs' federal securities claims brought pursuant to section 10(b) and Rule 10b-5. 28 U.S.C. § 1331. There is also diversity jurisdiction because the citizenship of plaintiffs is diverse from that of defendants and the amount in controversy exceeds $75,000, exclusive of interest and costs. See 28 U.S.C. § 1332. Plaintiffs are citizens of Bermuda and defendants are citizens of Delaware, New York, Texas, and California. (See SAC ¶ 25.) I also have supplemental jurisdiction over plaintiffs' state law claims because they arise from the same set of facts as the federal securities claims. See 28 U.S.C. § 1367(a). Venue is proper because defendants transact business in this district. 15 U.S.C. § 78aa.
Defendants move to strike large portions of the SAC pursuant to Rule 12(f), Fed. R. Civ. P. Rule 12(f) provides that "[t]he court may strike from a pleading . . . any redundant, immaterial, impertinent, or scandalous matter." "Motions to strike are viewed with disfavor and [are] infrequently granted." RSM Prod. Corp. v. Fridman, 643 F. Supp. 2d 382, 394 (S.D.N.Y. 2009). The Second Circuit has instructed that, as a general proposition, "courts should not tamper with the pleadings unless there is a strong reason for doing so." Lipsky v. Commonwealth United Corp., 551 F.2d 887, 893 (2d Cir. 1976).
Defendants first move to strike a series of paragraphs in the SAC that include allegations based on pleadings and settlements in other cases and government investigations. Paragraphs in a complaint which are "based on, or rely on, complaints in other actions that have been dismissed, settled, or otherwise not resolved are, as a matter of law, immaterial within the meaning of Rule 12(f)." RSM Prod., 643 F. Supp. 2d at 403; In re Merrill Lynch & Co., Inc. Research Reports Sec. Litig., 218 F.R.D. 76, 78 (S.D.N.Y. 2003); see also Lipsky, 551 F.2d at 893. Therefore, defendants' motion to strike is granted with respect to the allegations in paragraphs 5, 6, 19, 20, 49, 113, 214, 215, 216(a)-(i), 217, 219, 220, and 221 insofar as they are based on pleadings, settlements, and government investigations in other cases.
Defendants also complain that the SAC is riddled with conclusory allegations relating to what plaintiffs characterize as Countrywide's "corrupt culture." (E.g., id. ¶¶ 48, 55.) Many of the allegations are taken from press reports relating to charges against Countrywide that have no relation to the claims in this case. For example, although the Securitizations included only fixed-rate loans, the SAC includes allegations relating to Countrywide's "non-traditional mortgage offerings, such as Pay Option ARMs." (Id. ¶ 50.) The Securitizations included only "credit-blemished, closed-end, fixed-rate loans that were secured by second liens on one- to four-family residential properties." (SAC ¶ 2.) There are also allegations related to loans underlying other transactions, such as a separate transaction with HSBC. (See id. ¶ 150.)
Plaintiffs claim that even those allegations that are not directly related to the Securitizations provide some evidence in support of their allegations of scienter. Defendants have failed to demonstrate that "no evidence in support of the[se] allegation[s] would be admissible." See Lipsky, 551 F.2d at 893 ("[O]rdinarily neither a district court nor an appellate court should decide to strike a portion of the complaint-on the grounds that the material could not possibly be relevant-on the sterile field of the pleadings alone."). Therefore, defendants' motion to strike paragraphs 30, 38-39, 48, 50, 52-55, 57, 76, 80, 82-83, 88, 90-93, 97-98, 101-03, 106-07, 109, 114-15, 117-20, 123, 128-30, 134-35, 139-42, 173-82, 184, 188, 190-91, 193-202, 204-06, 223-25, 243-44, 246-47, 253, 259, 266, and 273 is denied.
Rule 8(a)(2), Fed. R. Civ. P., requires "'a short and plain statement of the claim showing that the pleader is entitled to relief,' in order to 'give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.'" Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)) (ellipsis in original). To survive a motion to dismiss under Rule 12(b)(6) "a complaint must contain sufficient factual matter accepted as true, to 'state a claim to relief that is plausible on its face.'" Iqbal, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 570); ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir. 2009) (quoting Ruotolo v. City of New York, 514 F.3d 184, 188 (2d Cir. 2008)). "A pleading that offers 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action will not do.'" Iqbal, 129 S.Ct. at 1949 (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955 (2007)). When a complaint's allegations are "merely consistent" with liability, it falls short of alleging a plausible claim for relief. Id. A complaint's legal conclusions are not afforded the presumption of truth. Id. at 1949-50. Only nonconclusory factual allegations are to be accepted as true. S. Cherry St., LLC v. Hennessee Group LLC, 573 F.3d 98, 100 (2d Cir. 2009). "The plausibility standard . . . asks for more than a sheer possibility that a defendant has acted unlawfully." Iqbal, 129 S.Ct. at 1949. Plausibility is present "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id.
Along with the standards of Rule 12(b)(6), "[a]ny complaint alleging securities fraud must satisfy the heightened pleading requirements of the PSLRA and Fed. R. Civ. P. 9(b) by stating with particularity the circumstances constituting fraud." ECA, Local 134, 553 F.3d at 196 (citing Tellabs Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007)).
Rule 9(b) applies to claims of fraud and requires a party to "state with particularity the circumstances constituting fraud or mistake." This pleading threshold gives a defendant notice of the plaintiff's claim, safeguards a defendant's reputation from "improvident" charges and protects against strike suits. See ATSI Commc'ns, Inc. v. Shaar Funds, Ltd., 493 F.3d 87, 99 (2d Cir. 2007). "A securities fraud complaint based on misstatements must (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Id. at 99 (citing Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir. 2000)). Allegations of fraud may be "too speculative even on a motion to dismiss," particularly when premised on "'distorted inferences and speculations.'" Id. at 104 (quoting Segal v. Gordon, 467 F.2d 602, 606, 608 (2d Cir. 1972)).
The PSLRA, for its part, has "imposed heightened pleading requirements and a loss causation requirement upon 'any private action' arising from the Securities Exchange Act." Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 165 (2008) (quoting 15 U.S.C. § 78u-4(b)). It requires a complaint to "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 and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(l).
"The [PSLRA] insists that securities fraud complaints 'specify' each misleading statement; that they set forth the facts 'on which [a] belief' that a statement is misleading was 'formed'; and that they 'state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.'" Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 345 (2005) (quoting 15 U.S.C. § 78u-4(b)(1), (2)). As the Second Circuit has repeatedly required, plaintiffs "must do more than say that the statements . . . were false and misleading; they must demonstrate with specificity why and how that is so." Rombach v. Chang, 355 F.3d 164, 174 (2d Cir. 2004); accord ATSI, 493 F.3d at 99 ("A securities fraud complaint based on misstatements must . . . explain why the statements were fraudulent. Allegations that are conclusory or unsupported by factual assertions are insufficient.") (citations omitted).
The PSLRA also "requires plaintiffs to state with particularity . . . the facts evidencing scienter, i.e., the defendant's intention 'to deceive, manipulate, or defraud.'" Tellabs, 551 U.S. at 313 (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 & n.12 (1976)). To qualify as "strong," the "inference of scienter must be more than merely plausible or reasonable-it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent." Id. at 314.*fn1
In considering a motion to dismiss, a court may consider documents annexed to the complaint or incorporated in the complaint by reference without converting the motion to dismiss into a motion for summary judgment. Rombach, 355 F.3d at 169 (citing Kramer v. Time Warner Inc., 937 F.2d 767, 773 (2d Cir. 1991)).
II. The Plaintiffs' Claims Under Section 10(b) and Rule 10b-5 Are Dismissed
a. The Complaint Fails to Allege Fraud with Particularity
Section 10(b) of the 1934 Act makes it unlawful to "use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe . . . ." 15 U.S.C. § 78j(b). "The SEC rule implementing the statute, Rule 10b-5, prohibits 'mak[ing] any untrue statement of a material fact or [omitting] to state a material fact necessary in order to make the statements made, in light of the circumstance under which they were made, not misleading.'" ECA, Local 134, 553 F.3d at 197 (alterations in original) (quoting Rule 10b-5). As Judge Cote has observed, "[s]section 10(b) of the Exchange Act is designed to protect investors by serving as a 'catchall provision' which creates a cause of action for manipulative practices by defendants acting in bad faith." In re Openwave Sys. Sec. Litig., 528 F. Supp. 2d 236, 249 (S.D.N.Y. 2007) (citing Ernst & Ernst, 425 U.S. at 206). The PSLRA also requires, with respect to allegations of false statements or omissions, that the complaint specify the statements alleged to have been misleading, the reasons for the belief that the statements were misleading and, if the allegation is made upon information and belief, the complaint must state, with particularity, the facts upon which the belief is formed. ATSI, 493 F.3d at 99.
"Statements that are opinions or predictions are not per se inactionable under the securities laws. Statements regarding projections of future performance may be actionable under Section 10(b) or Rule 10b-5 if they are worded as guarantees or are supported by specific statements of fact . . . ." In re Int'l Bus. Mach. Corporate Sec. Litig., 163 F.3d 102, 107 (2d Cir. 1998) (emphasis added) (citations omitted); see also Novak, 216 F.3d at 315 ("Here, the complaint alleges that the defendants did more than just offer rosy predictions; the defendants stated that the inventory situation was 'in good shape' or 'under control' while they allegedly knew that the contrary was true.").
The defendants argue that the SAC fails to allege with particularity that the Fund's statements and omissions amounted to acts of fraud. Plaintiffs' opposition asserts that the SAC alleges five categories of material misstatements and omissions which amounted to ...