The opinion of the court was delivered by: Honorable Paul A. Crotty, United States District Judge:
DOCUMENT ELECTRONICALLY FILED DOC #: _________________
The above captioned private securities actions allege, generally, that Federal National Mortgage Association ("FNMA"), its executives, and certain underwriters made material misstatements in FNMA's filings with the Securities and Exchange Commission ("SEC") and in various securities offerings, concerning FNMA's (1) subprime and Alt-A exposure; (2) risk management controls; and (3) core capital financials. While many of the private action plaintiffs have joined the securities class action ("Class Action"), Comprehensive Investment Services, Inc. ("CIS"), Edward Smith ("Smith"), and Liberty Mutual Insurance Co., Liberty Mutual Fire Insurance Co., Peerless Insurance Co., SafeCo Corp., and Liberty Life Assurance Co. of Boston (collectively, "Liberty") are pursuing their own individual actions.*fn1
The eight defendants bring fourteen motions to dismiss the second amended complaints.*fn2
Defendants' motions are GRANTED IN PART and DENIED IN PART. THE SECOND AMENDED COMPLAINTS
I.Class Action's Second Amended Complaint in 08 Civ. 7831
The Court previously held that the Class Action's allegations regarding FNMA's alleged deficient risk control measures were sufficient to state Section 10(b) and Rule 10b-5 claims against FNMA, Daniel H. Mudd ("Mudd"), and Enrico Dallavecchia ("Dallavecchia"), and Section 20(a) claims against Mudd and Dallavecchia. See In re Fannie Mae 2008 Sec. Litig., 742 F.Supp.2d 382, 399 (S.D.N.Y. 2010). Familiarity with the Court's prior opinion is assumed.
The Class Action's Second Amended Complaint adds new factual allegations that defendants failed to disclose adequately FNMA's level of exposure to subprime and Alt-A loans.
II.CIS's Second Amended Complaint in 09 Civ. 6102
In May 2008, CIS purchased 600,000 shares of FNMA's Series T Preferred Stock from Wachovia Securities for $15 million. (CIS SAC ¶¶ 2, 14-15.) On May 13, 2009, CIS filed a single-plaintiff lawsuit in the United States District Court for the Southern District of Texas, against FNMA; Mudd, Dallavecchia, Robert J. Levin ("Levin") and Stephen M. Swad ("Swad") (collectively, the "Individual CIS defendants"); and the CIS Underwriters.*fn3 CIS alleges that FNMA, the Individual CIS defendants, and the CIS Underwriters violated the Texas Fraud in Real Estate and Stock Transaction statute, Section 27.01 of the Texas Business & Commerce Code ("TBCC"), as both primary violators and as aiders and abettors; Wachovia Securities and FNMA committed primary violations of the Texas Securities Act ("TSA"), Texas Revised Civil Statute article 581-33A(2); the Individual CIS defendants violated 581-33F(1) of the TSA; Dallavecchia, Mudd, and the CIS Underwriters violated article 581-33F(2) of the TSA; FNMA, Dallavecchia, and Mudd committed common law fraud; FNMA, the Individual CIS defendants, and the CIS Underwriters made negligent misrepresentations; FNMA, Mudd and Dallavecchia violated Section 10(b) of the Exchange Act and Rule 10b-5; and Mudd and Dallavecchia violated Section 20(a) of the Exchange Act. On July 9, 2009, this action was transferred to this Court.
III.Smith's Second Amended Complaint in 10 Civ. 2781
Smith purchased FNMA's Series S Preferred Stock on or about December 6, 2007, and thereafter suffered substantial losses. (Smith SAC ¶ 13.) On February 26, 2010, Smith filed this action in the United States District Court for the Southern District of California, against FNMA;
Mudd and Dallavecchia (collectively, the "Individual Smith defendants"); and the Smith Underwriters.*fn4 Smith claims that: FNMA and the Individual Smith defendants violated Section 10(b) and Rule 10b-5, committed common law fraud, and violated Sections 1572, 1709 and 1710 of California's Civil Code; FNMA violated Sections 25400 and 25500 of California's Corporate Code; the Individual Smith defendants violated Section 20(a) of the Exchange Act; and all defendants made negligent misrepresentations. On March 12, 2010, this action was transferred to this Court.
IV.Liberty's Second Amended Complaint in 10 Civ. 9184
Liberty raises claims only against Goldman, Sachs & Co. ("Goldman"), which served as lead underwriter for FNMA's Series S and P offerings, and had solicited Liberty's purchase of FNMA's Series S and Series P preferred stock offerings. (Liberty SAC ¶¶ 130, 142.) Liberty claims that Goldman: violated Section 10(b) and Rule 10b-5; violated Massachusetts' securities fraud statute, M.G.L. c. 110A Section 410, and Washington's securities fraud statute, Wash.Rev. Code Sections 21.20.010 and 21.20.430; committed deceptive trade practices in violation of M.G.L. c. 93A, Section 11, and Wash. Rev. Code. Sections 19.86.020 and 19.86.090; committed common law fraud; and made negligent misrepresentations. On December 9, 2010, the case was transferred to this Court.
I.General Motion to Dismiss Standard
When considering a Fed. R. Civ. P. 12(b)(6) motion, the court "must accept as true all of the factual allegations contained in the complaint," and construe the complaint in the light most favorable to the plaintiff. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 572 (2007); see Ashcroft v. Iqbal, 129 S.Ct. 1937, 1950 (2009). The court only "assess[es] the legal feasibility of the complaint"; it does not "assay the weight of the evidence which might be offered in support thereof." Levitt v. Bear Stearns & Co., 340 F.3d 94, 101 (2d Cir. 2003).
To state a facially plausible claim, a plaintiff must plead "factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. "A pleading that offers 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action will not do.' Nor does a complaint suffice if it tenders 'naked assertion[s]' devoid of 'further factual enhancement.'" Id. (citation omitted).
II.Heightened Pleading Standards of Rule 9(b) and the PSLRA
Fed. R. Civ. P. 9(b) requires a heightened pleading standard for complaints alleging fraud: "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." See In re Pfizer Inc. Sec. Litig., 584 F. Supp. 2d 621, 632--33 (S.D.N.Y. 2008). This standard requires the plaintiff to "(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." Stevelman v. Alias Research Inc., 174 F.3d 79, 84 (2d Cir. 1999).
III.Elements of Claims under Section 10(b) and Rule 10b-5
Securities fraud claims under Section 10(b) and Rule 10b-5 must also meet the heightened pleading standards set forth in the Private Securities Litigation Reform Act of 1995 ("PSLRA"). 15 U.S.C. § 78u-4(b). Among other requirements, the PSLRA requires "plaintiffs to state with particularity both the facts constituting the alleged [securities fraud] violation" and the other elements of the Section 10(b) cause of action. Tellabs, 551 U.S. at 313. To effectuate Congress's intent to eliminate baseless lawsuits through the application of rigorous pleading standards, the PSLRA mandates that a plaintiff alleging a Section 10(b) action must: (1) specify each statement alleged to have been misleading and the reason or reasons why the statement is misleading, and (2) state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. 15 U.S.C. § 78u-4(b)(1)-(2); Novak v. Kasaks, 216 F.3d 300, 306 (2d Cir. 2000).
Section 10(b) of the Exchange Act prohibits any person from using or employing "any manipulative or deceptive device or contrivance in contravention" of SEC rules. 15 U.S.C. § 78j(b). Rule 10b-5 prohibits "any device, scheme, or artifice to defraud" and "any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made . . . not misleading . . . ." 17 C.F.R. § 240.10b-5. To state a claim under Rule 10b-5, plaintiffs must allege that defendants "(1) made misstatements or omissions of material fact; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) upon which plaintiffs relied; and (5) that plaintiffs' reliance was the proximate cause of their injury." Lentell v. Merrill Lynch & Co., 396 F.3d 161, 172 (2d Cir. 2005).
A complaint alleging a Rule 10b-5 claim fails if it relies on statements or omissions "that a reasonable investor would [not] have considered significant in making investment decisions." Ganino v. Citizens Utils. Co., 228 F.3d 154, 161 (2d Cir. 2000). "'[T]here must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available.'" Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). "An omitted fact may be immaterial if the information is trivial, or is so basic that any investor could be expected to know it." Ganino, 228 F.3d at 162 (internal citations omitted).
V.Scienter Pleading Standards in Fraud Claims
A plaintiff claiming fraud can plead scienter "either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Lerner v. Fleet Bank, N.A., 459 F.3d 273, 290--91 (2d Cir. 2006). To satisfy Rule 9(b), a plaintiff asserting common law fraud must allege "facts that give rise to a strong inference of fraudulent intent." Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994). "Although speculation and conclusory allegations will not suffice, neither do we require 'great specificity' provided the plaintiff alleges enough facts to support 'a strong inference of fraudulent intent.'" Ganino, 228 F.3d at 169.
Recklessness sufficient to establish scienter involves conduct that is "highly unreasonable and . . . represents an extreme departure from the standards of ordinary care." Chill v. Gen. Elec. Co., 101 F.3d 263, 269 (2d Cir. 1996). The allegations must approximate an actual intent to defraud. Id. "[A] plaintiff pleading a § 10(b) violation based on defendant's recklessness faces two stiff challenges in this Circuit: the strength of the recklessness allegations must be greater than that of allegations of garden-variety fraud, and the inference of recklessness must be at least as compelling as any opposing inferences." In re Bayou Hedge Fund Litig., 534 F. Supp. 2d 405, 415 (S.D.N.Y. 2007).
In order to successfully allege loss causation, a plaintiff must adequately plead facts which, if proven, would show that its loss was caused by the fraud and not by other intervening events. Lentell, 396 F.3d at 174; see also 15 U.S.C. § 78u-4(b)(4).Where a "plaintiff's loss coincides with a marketwide phenomenon causing comparable losses to other investors, the prospect that the plaintiff's loss was caused by the fraud decreases," making it more difficult for a plaintiff to establish loss causation. Lentell, 396 F.3d at 173. To survive a motion to dismiss, however, a plaintiff must only allege either: "(i) facts sufficient to support an inference that it was a defendant's fraud - rather than other salient factors - that proximately caused plaintiff's loss," id. at 177, or (ii) "facts that would allow a factfinder to ascribe some rough proportion of the whole loss to . . . [the defendant's fraud]." Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 158 (2d Cir. 2007).
I.Subprime and Alt-A Disclosures
The Class Action, CIS, Smith, and Liberty have all amended their
complaints to add allegations regarding FNMA's quantitative subprime
and Alt-A exposure disclosures, which closely track (1) allegations
made in an SEC action against Mudd, Dallavecchia, and Thomas Lund, and
(2) statements made in a Non-Prosecution Agreement ("NPA") FNMA
entered into with the SEC .*fn5
Defendants move, pursuant to Fed. R. Civ. P. 12(f), to strike
portions of the plaintiffs' amended pleadings that repeat allegations
contained in the SEC complaint and the NPA.
A.Defendants' Motions to Strike
Under Fed. R. Civ. P. 12(f), a court is permitted to "order stricken from any pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter." "To prevail on a motion to strike, a party must demonstrate that '(1) no evidence in support of the allegations would be admissible; (2) that the allegations have no bearing on the issues in the case; and (3) that to permit the allegations to stand would result in prejudice to the movant.'" S.E.C. v. Lee, 720 F.Supp.2d 305, 340-341 (S.D.N.Y. 2010) (Daniels, J.) (quoting Roe v. City of N.Y., 151 F.Supp.2d 495, 510 (S.D.N.Y. 2001)).
In Lipsky v. Commonwealth United Corp., 551 F.2d 887 (2d Cir. 1976), this Circuit struck a complaint's reference to a SEC consent decree because it was inadmissible under Fed. R. Evid. 410 and, thus, the private action plaintiff could not derive any evidentiary benefit from it. Id. at 893. The Circuit, however, reiterated the strong presumption against striking portions of the pleadings and cautioned that its holding was limited to "the facts of this case." Id. 893-94. Lipsky does not, as defendants argue, stand for the proposition that any factual allegation derived from a government investigation or pleading must be stricken from a private plaintiff's complaint. "There is no absolute rule barring a private plaintiff from relying on government pleadings and proceedings in order to meet the Rule 9(b) and PSLRA thresholds." Lee, 720
F.Supp.2d at 341 (citing Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt. LLC, 376 F.Supp.2d 385, 395 (S.D.N.Y. 2005) (holding that an SEC complaint is an adequate source for a factual allegation)). Thus, "there is nothing improper about utilizing information contained in an SEC complaint as evidence to support private claims under the PSLRA." Id. Indeed, "[i]t makes little sense to say that information from . . . a study [or investigation]- which the [complaint] could unquestionably rely on if it were mentioned in a news clipping or public testimony - is immaterial simply because it is conveyed in an unadjudicated complaint." In re Bear Stearns Mortgage Pass-Through Certificates Litig., No. 08 Civ. 8093 (LTS)(KNF), 2012 U.S. Dist. LEXIS 45679, at *53-55 (S.D.N.Y. Mar. 30, 2012).
The defendants have not satisfied the three elements to prevail on a motion to strike. First, while the SEC complaint and the NPA are not admissible, there is evidence in support of the factual allegations contained within these documents that would be admissible. The Class Action plaintiffs have documentary support for some of their allegations from their limited discovery. In addition, some of the publicly available information supports plaintiffs' allegations.*fn6 Second, the new factual allegations relate to the issues previously raised in the private securities actions.*fn7 Third and finally, it would not prejudice defendants to allow plaintiffs' new allegations to stand because many of these defendants must defend themselves against such claims in the SEC's enforcement action in any event. Defendants' motions to strike the allegations derived from the SEC complaint and NPA are therefore DENIED.
B.The Class Action, CIS, and Smith Have Stated A Claim Against FNMA, Mudd, and Dallavecchia For Misstating FNMA's Subprime And Alt-A Exposure Defendants argue that plaintiffs' Section 10(b) and Rule 10b-5 claims premised on FNMA's quantitative subprime and Alt-A exposure disclosures fail to state a claim for a number of reasons. Almost all of their arguments are identical to those raised in the
SEC enforcement action and, therefore, are rejected for the reasons stated in the Court's prior opinion, familiarity with which is assumed. SEC v. Mudd, 11 Civ. 9202, --- F. Supp. 2d ---, 2012 WL 3306961 (S.D.N.Y. Aug. 10, 2012). Dallavecchia argues, however, that he did not "make" the misstatements at issue within the meaning of Janus Capital Grp., Inc., v. First Derivative Traders, 131 S.Ct. 2296, 2305 (June 13, 2011).
In Janus, the Supreme Court considered whether Janus Capital Management, which served as an investment adviser and administrator for Janus Investment Fund, made the misstatements contained in Janus Investment Fund's mutual fund prospectus. The Supreme Court held that, in a private Section 10(b) or Rule 10b-5 action, "the maker of a statement is the person or entity with the ultimate authority over the statement, including its content and whether and how to communicate it." Id. at 2305. The Court held that while Janus Capital Management "was significantly involved in preparing the prospectus," it did not "make" the statements contained in the prospectus because it did not have ultimate control over the statements, it did not file the prospectus with the SEC, and the statements in the prospectus were not attributed to it. Id.
Plaintiffs allege that Dallavecchia made misstatements on conference calls with investors and in FNMA's SEC filings. Dallavecchia can be found liable for his statements on conference calls because "[o]ne 'makes' a statement by stating it . . . . Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it. And it is the speaker who takes credit-or blame-for what is ultimately said." Janus, 131 S.Ct. at 2302; see also In re Pfizer Secs. Litig., No. 04 Civ. 9866(LTS), 2012 U.S. Dist. LEXIS 39454, at *20-21 (S.D.N.Y. Mar. 22, 2012) (holding that Janus did not foreclose liability for statements the officer defendants made themselves). Plaintiffs adequately allege that Dallavecchia made material misstatements during conference calls with investors on February 27, 2007, May 2, 2007, and August 17, 2007. On February 27, 2007, for example, Dallavecchia stated that only 0.2% of FNMA's Single Family book of business consisted of subprime loans, which he described as "immaterial" and a "prudent engagement." (Class Action SAC ¶¶ 140, 317.)
While it is correct that Dellavecchia did not sign any of the SEC filings at issue, he still may be found to have made a misstatement. In the post-Janus world, an executive may be held accountable where the executive had ultimate authority over the company's statement; signed the company's statement; ratified and approved the company's statement; or where the statement is attributed to the executive. See In re Merck & Co., Sec., Derivative & "ERISA" Litig., MDL No. 1658(SRC), 2011 U.S. Dist. LEXIS 87578, at *102-103 (D.N.J. Aug. 8, 2011) (finding Executive Vice President could be liable for misstatements in SEC filings, which he signed, and quotes attributed to him appearing in articles and reports); In re Pfizer Secs. Litig., 2012 U.S. Dist. LEXIS 39454, at *20-21 (holding that executive defendants could be liable for statements in press releases because they "approved" or "ratified" such statements).
Given Dallavecchia's position as Chief Risk Officer, his knowledge of FNMA's subprime and Alt-A exposure, his participation in drafting relevant disclosures, his position on the disclosure committee, his review of draft filings, the fact that he had individual discussions with Mudd about the SEC filings, and his sub-certification (and, thus, approval) of the SEC filings, a question of fact exists as to whether Dallavecchia had ultimate authority over the misstatements, or ratified and approved the misstatements, contained in FNMA's ...