I was only away from the office for a few days last week, but while I was away, an absolute cascade of dismissal motion rulings in subprime and credit crisis-related securities cases arrived. A number of the rulings were sufficiently favorable to the defendants that Alison Frankel commented in an April 1, 2010 article in the AmLaw Litigation Daily that "it’s been a truly lousy week for plaintiffs’ lawyers in the securities bar."
But while the defendants did indeed prevail in there motions to dismiss in a number of very high profile subprime and credit crisis-related securities lawsuits, not all of the rulings were favorable to the defendants. In several cases, the dismissal motions were denied, and in other cases enough of the case survived the dismissal motion rulings that the plaintiffs probably consider themselves to have been successful. As discussed further below, there arguably are certain discernable trends amongst all of these rulings.
Dismissal Motions Granted
The dismissal motion rulings that are most favorable to the defendants undoubtedly are the highest profile cases amongst the latest rulings. Here is a brief summary of the defense friendly rulings:
American International Group Derivative Litigation: In a March 30, 2010 opinion (here), Southern District of New York Judge Laura Taylor Swain granted the motion to dismiss the shareholders’ derivative suit that had been filed against American International Group and certain of its individual officers and directors. The plaintiffs claimed that the defendants had failed to properly oversee the company’s credit default contracts and had made certain material misstatements and omissions regarding the company’s financial health and risk management. The plaintiffs also allege waste and breach of fiduciary duty with regard to the company’s dividend increase and share buybacks instituted in the month’s preceding the company’s near collapse and government rescue.
The defendants moved to dismiss on the grounds that the plaintiffs failed to make presuit demand. The plaintiffs contended that because it would have been futile, demand was excused.
Judge Swain granted the defendants’ motion, concluding that because at least of five of the company’s nine June 2009 directors were sufficiently disinterested and independent, demand was not excused.
Of particular interest, in granting the defendants’ motion with respect to plaintiffs’ allegations concerning the alleged failure to oversee the company’s credit default swap exposures, the court specifically observed (in reliance on the Delaware Chancery Court’s February 2009 dismissal of the subprime-related derivative suit filed against Citigroup) that a plaintiff "may not support a claim based on the duty of oversight…merely by identifying signs of general difficulty in the market in which the company participates and asserting that the defendants should be held liable for exercising their business judgment in a manner that appears to have been inconsistent with those indications." Rather a plaintiff must allege that the directors "knew they were not discharging their fiduciary obligations" or "demonstrated a conscious disregard for their obligations."
Merrill Lynch Auction Rate Securities Litigation: In a March 31, 2010 ruling (here), Judge Loretta Preska granted the motion of defendants to dismiss the auction rate securities litigation that had been filed against Merrill Lynch and related entities. Judge Preska’s ruling is the latest in a series of auction rate securities lawsuit dismissals. However unlike many of the dismissals (for example, the dismissal of the UBS auction rate securities lawsuit), the dismissal did not depend alone on the Merrill Lynch’s entry into a regulatory settlement. The dismissal was, rather, on the merits.
Specifically, Judge Preska held, citing the recent ruling in the Raymond James auction rate securities litigation (refer here), that the plaintiffs had failed to allege with sufficient specificity, with respect to the allegedly misleading statements about the securities, "which financial advisors made such statements or when, where and to whom the statements were made."
Judge Preska also rejected the plaintiffs’ arguments that the defendants had engaged in manipulative conduct, holding that as a result of the defendants’ 2006 auction rate securities settlement with the SEC and related disclosures, the defendants’ market-related conduct was fully disclosed. Judge Preska also found that the plaintiffs had not sufficiently pled reliance.
In addition to the ruling in the Merrill Lynch case, in a March 30, 2010 order (here), Southern District of New York Judge Robert Patterson granted the motion of defendant Morgan Stanley to dismiss the individual action Ashland Inc. and related entities had filed against the company, alleging securities violations in connection with the plaintiffs’ purchase of over $66 million of auction rate securities. Judge Patterson found that certain allegations do not involve the "purchase or sale of securities," as they involved only the alleged inducement to hold securities. Judge Patterson also found that the plaintiffs’ allegations failed to support a strong inference of scienter. He also held that the plaintiffs had failed to establish that they had reasonably relied on the supposedly misleading statements.
Fremont General Corporation: In a March 29, 2010 order (here), Central District of California Judge Jacqueline Nguyen granted with prejudice the motion of defendants to dismiss the subprime related securities class action lawsuit that had been filed against Fremont General Corporation.
As noted here and here (scroll down), the court had previously granted the defendants’ motions to dismiss in the Fremont General case. In granting the renewed motion to dismiss, Judge Nguyen noted that renewed pleading "still fails to allege the causes of action with sufficient specificity," observing further that the plaintiffs’ third amended complaint "sets forth virtually no new facts, disregards [the court’s] order not to include certain allegations, and constitutes ‘puzzle pleading’ that made the [prior complaints] so difficult to decipher."
BankUnited Financial Corporation: On March 30, 2010, Southern District of Florida Judge Marcia Cooke entered an order (here), granting the motion of the individual defendants to dismiss the subprime related securities lawsuit that had been filed in connection with the events leading up to the May 21, 2009 closure of BankUnited FSB (for more about which refer here).
In granting the motion, Judge Cooke held that that certain of the statements on which plaintiffs sought to rely were "general, vague, unverifiable statements of corporate puffery." She found that other statements on which plaintiffs sought to rely were forward looking and protected by the safe harbor. She also found that various statements about the bank’s loan underwriting practices on which the plaintiffs sought to rely were not false and misleading. Judge Cooke also concluded that the plaintiffs had not sufficiently pled scienter, holding that the "generalized allegations" on which the plaintiffs sought to rely "do not support a strong inference of scienter, let along a strong one. "
Security Capital Assurance: In a March 31, 2010 order (here), Southern District of New York Judge Deborah A. Batts entered an order granting without prejudice the defendants’ motions to dismiss in the subprime-related securities class action lawsuit that had been filed against Security Capital Assurance, its Corporate parent XL Capital, certain of its individual directors and officers and its offering underwriters.
SCA is a holding company for financial guaranty insurance and reinsurance. SCA was formed by and was still partially owned by XL. As reflected here, the plaintiffs alleged that the defendants had misled investors about SCA’s exposure, through its insurance operations, to securities backed by subprime residential mortgages.
In her 84-page March 31 order, Judge Batts granted defendants’ motion on the grounds that plaintiffs had not sufficiently alleged either scienter or loss causation. In concluding that plaintiffs scienter allegations were insufficient, Judge Batts stated that "plaintiffs’ broad allegations that Defendants received and were aware of information contradicting their public statements because they held management roles is not enough to allege scienter." Judge Batts also noted, based on plaintiffs’ own allegations, "defendants, like so many other institutions floored by the housing market crisis, could not have been expected to anticipate the crisis with the accuracy plaintiffs enjoy in hindsight."
In finding that plaintiffs had not adequately alleged loss causation, Judge Batts stated that "Plaintiffs have not with this Complaint effectively shown that it was the incremental revelation of Defendants’ fraudulent misrepresentations, and not the actions of third parties or other circumstances of the market that caused the decline in SCA’s share price over the Class Period." She adds that "Plaintiffs leave wide periods unaccounted for, and select inconsistent date spreads and wide event windows that permit market noise, and suggest Plaintiffs may be cherrypicking dates that suit their argument."
With respect to whether or not she should allow plaintiffs leave to amend, she noted that "it is not likely that Plaintiffs will be able to establish loss causation." But because "amendment might not be futile," the court allowed plaintiffs leave to amend their complaint.
Dismissal Motion Granted in Part and Denied in Part
In addition to the dismissal motion rulings described above in which the defendants’ motions prevailed, there were also a group of rulings in which the defendants prevailed in part. In some cases, the defendants were successful in having substantial parts of the plaintiffs’ cases dismissed. Nevertheless, in each of the following cases, the plaintiffs were able to preserve at least a part of their case, at least as to some defendants.
Harborview Mortgage Loan Trusts: In a March 26, 2010 order (here), Southern District of New York Judge Harold Baer, Jr. granted in part and denied in part the defendants’ motions to dismiss in the subprime related securities class action lawsuit involving the Harborview Mortgage Loan Trusts. The Trusts had issued certain mortgage backed securities, of which defendant Royal Bank of Scotland was the primary issuer and underwriter. Certain rating agencies that provided ratings of the securities were also named as defendants.
Judge Baer granted the rating agencies’ motions to dismiss on the grounds that they could not, as the plaintiffs’ sought to allege, be held liable under the Securities Act, as underwriters. Judge Baer also dismissed, on the basis of lack of standing, plaintiffs claims based on offerings in which the plaintiffs had not purchased securities. Judge Baer also dismissed plaintiffs’ claims that the RBS defendants had not disclosed conflicts of interest with the rating agencies or the dependence of the ratings on outdated ratings models.
However, while as a result of the rulings described in the preceding paragraph, substantial parts of plaintiffs’ claims did not survive the motion to dismiss, Judge Baer denied defendants motions to dismiss related to "misstatements and nondisclosure of mortgage originators’ ‘disregard’ for loan underwriting standards."
The loan originators in question included certain mortgage lenders whose names "are now synonymous with sub-prime lending and the housing market collapse," including Countrywide, American Home Mortgage Corporation, IndyMac, BankUnited, and Downey Savings. Judge Baer concluded that "plaintiffs have pled sufficient factual allegations to plausibly infer that the underwriting guidelines were disregarded by mortgage originators, and in conflict with the disclosures made in the Offering Documents." Judge Baer found the plaintiffs had alleged that the originators "systematically ignored their stated underwriting practices" and that "plaintiffs have also sufficiently, albeit just barely, connected these allegations to the offerings in question."
Credit-Based Asset Servicing & Securitization, LLC: In a terse, two-page March 31, 2010 order (here), Southern District of New York Judge Jed Rakoff granted in part and denied in part the defendants’ motion to dismiss that had been filed in the C-BASS subprime related securities lawsuit. Background regarding the lawsuit can be found here. The plaintiffs had alleged that the defendants had made material misrepresentations and omissions in the offering documents related to the sale of certain mortgage pass-through certificates.
For reasons that Judge Rakoff will elaborate upon in a forthcoming order, Judge Rakoff granted in part and denied in part the defendants’ dismissal motions. Judge Rakoff granted the dismissal motion as to claims involving offerings in which the plaintiffs had not purchased securities. Judge Rakoff also granted with prejudice the dismissal motions of the underwriter defendants, C-Bass itself and certain mortgage originator defendants. Judge Rakoff also granted without prejudice the dismissal motions of the offering underwriter defendants, as well as the Section 15 claims against certain individual defendants.
Though these rulings resulted in the elimination from the case of a substantial part of plaintiffs’ case, Judge Rakoff went on to rule that, other than the parts dismissed, "all other claims survive." According to an AmLaw Litigation Daily article discussing the decision (here), though Judge Rakoff’s ruling dismissed with prejudice plaintiffs claims on 65 offerings, his ruling also "keeps Merrill and other defendants exposed to liability on 19 mortgage-backed securities offerings."
MBIA: In a March 31, 2010 order (here), Southern District of New York Judge Kenneth Karas granted in part and denied in part the dismissal motions that had been filed in the subprime related securities class action lawsuit that had been filed against MBIA and certain of its directors and officers. MBIA provides insurance to traditional bond and structured finance issuers. As discussed at greater length here, the plaintiffs allege that the defendants misrepresented MBIA’s risk exposure to certain collateralized debt obligations containing residential mortgage-backed securities.
In his March 31 order, Judge Karas granted without prejudice the motions to dismiss of the two individual defendants, finding that the plaintiff had failed to "allege particularized facts sufficient to state a claim based on recklessness against" the two individuals. Judge Karas also dismissed without prejudice plaintiffs’ allegations against MBIA as to claims based on the company’s alleged failure to disclose the lack of certain structural protections for in the insurer in certain of the CDO transactions.
However, Judge Karas otherwise denied MBIA’s motion to dismiss, holding that even though the plaintiff had failed sufficiently to allege scienter as to the two individual defendants, the plaintiff "has alleged particularized facts supporting a strong inference of recklessness as to MBIA." He went on to find that "the inference that MBIA’s officers knew or likely knew that their statements were materially misleading" is "at least as plausible an inference that they were not aware of the potential importance of CDOs-squared to investors."
Dismissal Motions Substantially Denied
In addition to the motions described above in which a least a portion of plaintiffs claims survived the motions to dismiss, there were at least a couple recent dismissal motion rulings in which the plaintiffs’ claims substantially survived the dismissal motions rulings.
iStar Financial, Inc.: In a March 26, 2010 order (here), Southern District of New York Judge Richard Sullivan substantially denied the defendants’ motion to dismiss in the subprime-related securities lawsuit that filed against iStar Financial, certain of its directors and officers, and its offering underwriters. iStar is a real estate investment trut providing commercial real estate loans. The plaintiffs alleged that iStar had failed to disclose losses on certain investments, losses in its loan portfolio, and had misrepresented the carrying value of certain nonperforming loans.
Judge Sullivan denied the defendants motions to dismiss, other than with respect to the Section 12 claims against the individual defendants and the Section 11 claims as to one individual defendant.
In otherwise denying the motion to dismiss plaintiffs’ ’33 Act claims, Judge Sullivan rejected the defendants’ arguments that the quarterly reports and earnings calls preceding the company’s secondary offering put the market on notice of deteriorating loan performance. He stated that the Court is "unable to hold that there was sufficient information in the marketplace to render iStar’s nondisclosures in the registration statement immaterial as a matter of law." Judge Sullivan specifically rejected the underwriter defendants’ motions to dismiss.
Judge Sullivan also found that the plaintiffs had adequately alleged a claim under the ’34 act, specifically finding that the plaintiffs had adequately pleaded scienter, relying on plaintiffs’ allegations that defendants needed to conceal iStar’s deteriorating performance "to secure financing and mating an investment-grade rating."
Evergreen Ultra Short Opportunities Fund: In a March 31, 2010 ruling (here), District of Massachusetts Judge Nathaniel Gorton substantially denied the defendants’ motions to dismiss in the subprime-related securities class action lawsuit filed on behalf of investors who purchased shares of Evergreen Ultra Short Opportunities Fund. The plaintiffs sued the trust that issued the fund’s shares, the fund’s investment manager and its corporate parent, as well as individual members of the trust’s board of trustees. The plaintiffs alleged that the defendants had violated the securities laws by representing the fund as a "safe, liquid and stable investment" when, it was alleged, "it was comprised of illiquid, risky and volatile" mortgage-backed securities.
Judge Gorton denied the defendants’ motions to dismiss, except that he granted the trustees’ motion to dismiss the Section 12 claims that had been filed against them. Judge Gorton specifically found as sufficient plaintiffs’ allegations concerning the offering documents’ statements about the fund’s objectives; the offering documents’ statements about the fund’s limited holdings of illiquid assets; and the offering documents’ statements comparing the fund to certain indices which reflected longer average portfolio durations than the fund.
Discussion
There is little doubt that this line up of dismissal motion rulings reflects some significant defeats for the plaintiffs. The impact of these decisions undoubtedly is magnified by the high-profile nature of several of the cases in which the dismissals were granted.
But while the plaintiffs in some of these cases took some substantial hits, the overall outcome of this long list of dismissal motion rulings is far from just one-sided. There are of course the cases noted above in which the dismissal motions were substantially denied. Moreover, in the cases in which the dismissal motions were denied at least in part, the plaintiffs at least preserved the right to live for another day. Since the name of the game for the plaintiffs’ attorneys in these kinds of cases is just to get past the dismissal motion, the plaintiffs in these cases have preserved at least enough of their case to press on.
Though the plaintiffs did not come away empty handed in all of these cases and won some other motions more or less outright, the balance of these cases still do seem to be running in the defendants’ favor. As I noted in my recent status update on the subprime and credit crisis related securities litigation, the dismissal motion rate on these cases is running far higher than the 33-40% dismissal rate that generally applies to securities class action litigation.
To be sure, as I have frequently noted in the past, there are still many of these cases in which dismissal motions have not yet been heard. But with this recent wave of dismissal motion ruling described above, a significantly greater number of dismissal motions have been addressed, and the rulings do still seem to be running in defendants’ favor, disproportionately to historical norms.
Of course, it should be noted that there have been cases in which plaintiffs have managed to survive renewed dismissal motions based on amended pleadings filed after initial motions have been granted (as noted, for example, here, in connection with the Credit Suisse case).
I have in any event added all of these recent rulings to my now substantially updated register of subprime and credit crisis-related securities class action lawsuit dismissal motion rulings, which can be accessed here.
Very special thanks to the several readers who sent along copies of one or more of the above referenced decisions.
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