Plaintiffs-Appellants appeal from a judgment of the United States District Court for the Southern District of New York (Harold Baer, Jr., Judge), entered on September 25, 2009, dismissing plaintiffs' putative securities class action complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim.
The opinion of the court was delivered by: Straub, Circuit Judge:
Landmen Partners, Inc. v. The Blackstone Group, L.P.
Before: MINER, CABRANES, and STRAUB, Circuit Judges.
We conclude that the District Court erred in dismissing plaintiffs' complaint because plaintiffs plausibly allege that material information was omitted from, 1 or misstated in, defendants' initial public offering registration statement and prospectus in violation 2 of Sections 11 and 12(a)(2) of the Securities Act of 1933. VACATED and REMANDED.
14 Plaintiffs-Appellants appeal from a judgment of the United States District Court for the 15 Southern District of New York (Harold Baer, Jr., Judge), entered on September 25, 2009, 16 dismissing plaintiffs' putative securities class action complaint pursuant to Federal Rule of Civil 17 Procedure 12(b)(6) for failure to state a claim. See Landmen Partners Inc. v. Blackstone Group, 18 L.P., 659 F. Supp. 2d 532 (S.D.N.Y. 2009). We conclude that the District Court erred in dismissing 19 plaintiffs' complaint because plaintiffs plausibly allege that material information was omitted from, 20 or misstated in, defendants' initial public offering registration statement and prospectus in violation 21 of Sections 11 and 12(a)(2) of the Securities Act of 1933. Accordingly, we vacate the District 22 Court's judgment and remand for further proceedings.
Because this is an appeal from a motion to dismiss under Federal Rule of Civil Procedure 26 12(b)(6), the following facts, which we assume to be true, are drawn from plaintiffs' Consolidated 1 Amended Class Action Complaint as filed on October 27, 2008. See Slayton v. Am. Express Co., 2 604 F.3d 758, 766 (2d Cir. 2010). Where relevant, however, we include information from Securities 3 and Exchange Commission ("SEC") filings by the Blackstone Group, L.P. ("Blackstone") to which 4 plaintiffs refer in their complaint, particularly the Form S-1 Registration Statement ("Registration 5 Statement") and Prospectus filed by Blackstone in connection with its June 21, 2007 initial public 6 offering ("IPO"). See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007) 7 ("[C]courts must consider the complaint in its entirety, as well as other sources . . . , in particular, 8 documents incorporated into the complaint by reference, and matters of which a court may take 9 judicial notice."); see also ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) 10 ("[W]e may consider . . . legally required public disclosure documents filed with the SEC, and 11 documents possessed by or known to the plaintiff and upon which it relied in bringing the suit.").
12 Lead plaintiffs Martin Litwin, Max Poulter, and Francis Brady, appointed by the District 13 Court on September 15, 2008, bring this putative securities class action on behalf of themselves and 14 all others who purchased the common units of Blackstone at the time of its IPO. Plaintiffs seek 15 remedies under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 ("Securities Act"), 15 16 U.S.C. §§ 77k, 77l(a)(2), 77o, for alleged material omissions from, and misstatements in, 17 Blackstone's Registration Statement and Prospectus.*fn2 Defendants are Blackstone and Blackstone executives Stephen A. Schwarzman, Michael A. Puglisi, Peter J. Peterson, and Hamilton E. James 2 (collectively referred to herein as "Blackstone").
3 Blackstone is "a leading global alternative asset manager and provider of financial advisory 4 services" and "one of the largest independent alternative asset managers in the world," with total 5 assets under management of approximately $88.4 billion as of May 1, 2007. Blackstone is divided 6 into four business segments: (1) Corporate Private Equity, which comprises its management of 7 corporate private equity funds; (2) Real Estate, which comprises its management of general real 8 estate funds and internationally focused real estate funds; (3) Marketable Alternative Asset 9 Management, which comprises its management of hedge funds, mezzanine funds, senior debt 10 vehicles, proprietary hedge funds, and publicly traded closed-end mutual funds; and (4) Financial 11 Advisory, which comprises a variety of advisory services. The Corporate Private Equity segment 12 constitutes approximately 37.4% of Blackstone's total assets under management ($33.1 billion of 13 $88.4 billion), and the Real Estate segment constitutes approximately 22.6% of Blackstone's assets 14 under management ($20 billion of $88.4 billion). According to Blackstone, "[b]oth the corporate 15 private equity fund and the two real estate opportunity funds (taken together) . . . are among the 16 largest funds ever raised in their respective sectors." Blackstone further represents to prospective 1 investors that its "long-term leadership in private equity has imbued the Blackstone brand with value 2 that enhances all of [its] different businesses and facilitates [its] ability to expand into 3 complementary new businesses."
4 In preparation for its 2007 IPO, Blackstone reorganized its corporate structure. Prior to the 5 IPO, Blackstone's business was operated through a large number of separately owned predecessor 6 entities. On March 12, 2007, just prior to the launch of the IPO, Blackstone was formed as a 7 Delaware limited partnership and eventually became the sole general partner of five newly formed 8 holding partnerships into which the majority of the operating predecessor entities were contributed. 9 Blackstone receives a substantial portion of its revenues from two sources: (1) a 1.5% management 10 fee on its total assets under management and (2) performance fees of 20% of the profits generated 11 from the capital it invests on behalf of its limited partners. Under certain circumstances, when 12 investments perform poorly, Blackstone may be subject to a "claw-back" of already paid 13 performance fees, in other words, the required return of fees which it had already collected.
14 On March 22, 2007, Blackstone filed its Form S-1 Registration Statement with the SEC for 15 the IPO. Blackstone filed several amendments to its Registration Statement, and the Prospectus, 16 which formed part of the Registration Statement, finally became effective on June 21, 2007. At this 17 time, 153 million common units of Blackstone were sold to the public, raising more than $4.5 18 billion. The individual defendants and other Blackstone insiders received nearly all of the net 19 proceeds from the IPO.
20 Plaintiffs principally allege that, at the time of the IPO, and unbeknownst to non-insider 21 purchasers of Blackstone common units, two of Blackstone's portfolio companies as well as its real 5 1 estate fund investments were experiencing problems. Blackstone allegedly knew of, and reasonably 2 expected, these problems to subject it to a claw-back of performance fees and reduced performance 3 fees, thereby materially affecting its future revenues.
In 2003, a consortium of investors that included Blackstone purchased an 88% interest in 6 FGIC Corp. ("FGIC"), a monoline financial guarantor, from General Electric Co. for $1.86 billion.
FGIC is the parent company of Financial Guaranty, which primarily provides insurance for bonds.
Although municipal bond insurance traditionally constituted the majority of Financial Guaranty's 9 business, in the years leading up to Blackstone's IPO it began writing "insurance" on collateralized 10 debt obligations ("CDOs"),*fn3 including CDOs backed by sub-prime mortgages to higher-risk 11 borrowers. Financial Guaranty also began writing "insurance" on residential mortgage-backed 12 securities ("RMBSs")*fn4 linked to non-prime and sub-prime mortgages. This "insurance" on RMBSs 13 and CDOs was in the form of credit default swaps ("CDSs").*fn5
By the summer of 2007, FGIC, as a result of Financial Guaranty's underwriting practices, 2 was exposed to billions of dollars in non-prime mortgages, with its total CDS exposure close to $13 3 billion. From mid-2004 through mid-2007, factors including rising interest rates, the adjustment of 4 interest rates on sub-prime mortgages, and a substantial slowing of property-value appreciation (and 5 in some markets, property-value depreciation) caused many borrowers to be unable to refinance their 6 existing loans when they could not meet their payment obligations. As a result, beginning in 2005, 7 there was a significant increase in mortgage-default rates, particularly for sub-prime mortgage loans.
By early 2007, before the IPO, some of the top mortgage lenders with sub-prime mortgage exposure 9 began revealing large losses and warned of future market losses. All of these symptoms, plaintiffs 10 allege, provided a strong indication that the problems plaguing sub-prime lenders would generate 11 substantial losses for FGIC on the CDSs it issued to its counterparties. This likelihood was allegedly 12 exacerbated because, in many instances, FGIC's CDS-counterparties were able to demand 13 accelerated payments from FGIC even before a default event occurred on the underlying referenced 14 assets.
Blackstone's 23% equity interest in FGIC was worth approximately $331 million at the time 16 of the IPO. Plaintiffs allege that, due to this significant interest, Blackstone was required to disclose 17 the then-known trends, events, or uncertainties related to FGIC's business that were reasonably 18 likely to cause Blackstone's financial information not to be indicative of future operating results.
Following the IPO, in a March 10, 2008 press release, Blackstone announced its full-year and 2 fourth-quarter 2007 earnings. The company's Corporate Private Equity segment reported 2007 3 revenues of $821.3 million, down 18% from 2006 revenues. "Most significantly, Blackstone 4 reduced the value of its portfolio investment in [FGIC], . . . which accounted for $122.2 million, or 5 69%, of the decline in revenues for the year." Blackstone reported that its "Corporate Private Equity 6 fourth quarter revenues of ($15.4) million were negative, as compared with revenues of $533.8 7 million for the fourth quarter of 2006," a change "driven primarily by decreases in the value of 8 Blackstone's portfolio investment in [FGIC] . . . and lower net appreciation of portfolio investments 9 in other sectors as compared with the prior year."
Freescale Semiconductor, Inc. ("Freescale"), is a semiconductor designer and manufacturer. 12 In 2006, Blackstone invested $3.1 billion in Freescale, the single largest investment by a Blackstone 13 corporate private equity fund since 2004. The Freescale investment accounted for 9.4% of the 14 Corporate Private Equity segment's assets under management and 3.5% of Blackstone's total assets 15 under management.*fn6
Shortly before the IPO, in March 2007, Freescale lost an exclusive agreement to manufacture 2 wireless 3G chipsets for its largest customer, Motorola, Inc. ("Motorola"). The loss of this exclusive 3 agreement followed two years of manufacturing and production problems for Freescale. On April 4 25, 2007, Freescale's management held an analysts' call, on which it stated that "revenue[s] in our 5 wireless business were negatively impacted by a sales decline due to weak demand in our largest 6 customer Motorola. . . . During the last several weeks of the quarter, our main wireless customer 7 began to reduce their orders." Plaintiffs allege that "[t]hese adverse facts had a material adverse 8 effect on Freescale's business and, concomitantly, the ...