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In Re State Street Bank and Trust Co. Fixed Income Funds Investment Litigation v. State Street Corporation

March 31, 2011


The opinion of the court was delivered by: Richard J. Holwell, District Judge:


This is the Court's third opinion regarding the sufficiency of plaintiff's pleadings in this action, which asserts claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. Previously, the Court dismissed the action with prejudice, holding that it failed to plead adequately the existence of materially false or misleading statements. Yu v. State Street Corp. ("Yu I"), 686 F. Supp. 2d 369 (S.D.N.Y. 2010). The Court later reconsidered the "with prejudice" aspect of its decision, found that the Proposed Second Amended Complaint ("PSAC") adequately pled the existence of at least some materially false or misleading statements, and granted plaintiff leave to amend. Yu v. State Street Corp. ("Yu II"), No. 08 Civ. 8235 (RJH), 2010 WL 2816259 (S.D.N.Y. July 14, 2010). Now before the Court are defendants' motions to dismiss the Second Amended Complaint ("SAC"). For the reasons that follow, defendants' motions to dismiss are GRANTED.


The Court presumes familiarity with its earlier two opinions, and recounts only the factual background necessary for this opinion. All terms defined in the previous opinions retain the same meaning here.

The SAC alleges that several statements in the Fund's offering documents "misrepresented the nature of the securities or investments held by the Yield Plus Fund . . . , misrepresented the description and/or objectives of the Fund and misrepresented the Fund's exposure to risky mortgage-related assets and the risk of investing in the Fund." (SAC ¶ 70.) Two sets of allegations have already been addressed by the Court.

First, the SAC alleges a discrepancy between the publicly-disclosed percentages of mortgage-backed securities held by the Fund and internally-circulated percentages. (See SAC ¶ 70-118.) In Yu II, the Court held that the SAC "states a plausible claim that the percentage tables mis-categorized securities and were materially misleading." 2010 WL 2816259, at *3 (citing In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 360 (2d Cir. 2010)).

Second, the SAC alleges that the Fund overstated the value of its holdings by reporting "inflated values for the Fund's risky mortgage-related securities." (See SAC ¶¶ 141-145.) The Court previously dismissed this claim in Yu I and found on reconsideration that the SAC "does not contain amendments that address the shortcomings identified in [Yu I]." Yu II, 2010 WL 2816259, at *4 n.4; see Yu I, 686 F. Supp. 2d at 379-81.

Third, the SAC makes allegations concerning the investment objective in the Fund's offering documents.*fn1 In particular, the SAC's allegations address three particular phrases. First, the SAC alleges that the prospectus's statement that the Fund would meet its objective by investing in a "diversified portfolio" is materially misleading. (SAC ¶ 119.) This is allegedly misleading because the Fund was "heavily-weighted with investments in risky mortgage-related and/or mortgage-backed securities, including a significant percentage of investments in sub-prime mortgages." (Id. ¶ 120.) According to the SAC, mortgage-backed securities constituted "approximately 40% to more than 85%" of the Fund's portfolio, and "as much as 28.05%" of the Fund was invested in subprime mortgage products. (Id. ¶¶ 121-122.) Instead of "spreading the risks . . . among investments secured by auto loans, credit card receivables, leases, installment contracts, personal property, mortgages, corporate notes, etc., the Yield Plus Fund increasingly saturated its investments in mortgage-related and/or mortgage-backed securities until those investments constituted a substantial majority of the Fund." (Id. ¶ 125.)

Second, the SAC alleges that the prospectus's statement that the Fund sought "liquidity" was materially misleading. Because the Fund became "increasingly invested in mortgage-related and/or mortgage-backed securities . . . all which encompass a great risk of becoming illiquid," the SAC alleges that "Defendants abandoned the Fund's stated objective of seeking 'liquidity.'" (Id. ¶ 127.) According to the SAC, State Street executives were aware no later than the summer of 2007 that "even the AA rated mortgage-related securities were 'very illiquid.'" (Id. ¶ 128.) Nevertheless, State Street did not disclose that the Fund's risks included liquidity risk until December 2007. (Id. ¶ 130.) Furthermore, the SAC alleges that "through its concentration in mortgage-related and/or mortgage-backed securities, much of the Fund's asset base had little price transparency and, therefore, little liquidity." (Id. ¶ 131.)

Third, the SAC alleges that the prospectus's statement that it would meet its objective by investing in "high quality" debt securities was materially misleading because of the Fund's increasing concentration in mortgage-related and mortgage-backed securities, including those related to sub-prime mortgages, over the Class Period.*fn2 The SAC further alleges that State Street management was aware of the increased risk associated with mortgage-related securities in early 2007 and that by the summer of 2007, State Street management was aware that the credit ratings associated with mortgage-related securities were not indicative of their actual quality. (Id. ¶¶ 136-138.)
State Street now brings its motion to dismiss these claims, arguing again that the SAC fails to plead falsity and materiality.*fn3 State Street also renews three arguments contained in its previous motion to dismiss: (1) the certifications signed by defendants James Ross and Mark E. Swanson and attached to the Fund's periodic reports did not contain any untrue statements of material fact; (2) plaintiff's Section 12(a)(2) claims must be dismissed as against the State Street Defendants and Individual Defendants Peter G. Leahy, Ross, and Swanson because these parties are not "sellers" of the Fund; and (3) the "control person" claims under Section 15 must be dismissed. (State Street's Mem. at 9 n.9.) State Street further argues that the alleged losses are not causally connected to the misstatements or omissions alleged here. The Court concludes below that this last contention, that plaintiffs have not alleged loss causation, warrants dismissal of the SAC. Accordingly, the Court finds it unnecessary to consider defendants' alternate grounds for dismissal.


I.Standard for a Motion To Dismiss

To survive a Rule 12(b)(6) motion to dismiss, a complaint must allege "enough facts to state a claim to relief that is plausible on its face." Starr v. Sony BMG Music Entertainment, 592 F.3d 314, 321 (2d Cir. 2010) (quoting Bell Atlantic 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). If the factual averments permit no reasonable inference stronger than the "mere possibility of misconduct," the complaint should be dismissed. Starr, 592 F.3d at 321 (quoting Iqbal, 129 S. Ct. at 1950). In applying this standard of facial plausibility, the Court accepts all factual allegations as true, but it does not credit "mere conclusory statements" or "threadbare recitals of the elements of a cause of action." Iqbal, 129 S. Ct. at 1949. On a motion ...

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