A lawsuit brought by investors who had purchased securities in three ING Group bond offerings in 2007 and 2008 was largely dismissed in a ruling issued Tuesday, although some allegations regarding the company’s June 2008 offering disclosures did survive.These rulings appeared in a September 14, 2010 order written by Southern District of New York Judge Lewis Kaplan. A copy of his ruling can be found here.
As discussed at greater length here, the ING bond investors first filed their action in February 2009. The allegations related to three ING bond offerings, in June 2007, September 2007, and June 2008, respectively, in which the company raised a total of $4.5 billion. The defendants include the company and two affiliated entities and certain of its directors and officers, as well as the offering underwriters.
The allegations in the plaintiffs’ complaint, as amended, relate to disclosures in the offering documents concerning ING’s own investments in Alt-A and subprime residential backed mortgages, which the plaintiffs allege were "extremely risky," because material portions of the loan pools on which they were based were comprised of lowest quality mortgages. The defendants moved to dismiss.
In his September 14 order, Judge Kaplan addressed each of the three offerings separately, dismissing all of the allegations regarding the June 2007 and September 2007 offerings, and many of the allegations with respect to the June 2008 offering. However, Judge Kaplan denied the motion to dismiss with respect to one part of the allegations concerning the June 2008 offering.
First, Judge Kaplan dismissed the allegations regarding the June 2007 offering on the grounds that they were untimely. Essentially, Judge Kaplan held that information contained in the September 2007 offering documents contained "storm warnings" that were sufficient to put the June 2007 bond offering investors on "inquiry notice," and since the plaintiffs first complaint was not filed until February 2009, more than a year later, the claims were untimely.
With respect to this ruling, Judge Kaplan added that "the facts placing one on inquiry notice need not detail every aspect of the fraudulent scheme, but only enough in the totality of circumstances to establish a probability of the alleged claim," adding that here, "these disclosures did so."
Second, with respect to the September 2007 offering, Judge Kaplan noted that the plaintiffs’ allegations largely relied on industry-wide or market-wide troubles, some of which post-dated the offering. Judge Kaplan said, quoting Twombley, that "absent some factual allegations suggesting that ING assets had been impacted by the general market conditions as the time allegedly misleading statements were made, [the complaint] stops short of the line between possibility and plausibility" that the offering documents were "misleading in a way that required additional disclosures."
Third, Judge Kaplan also granted the defendants’ motions to dismiss with regard to the June 2008 offering in many respects, in particular dismissing the allegations that the offering documents failed to disclose certain loan and loan-backed asset impairments, holding that the impairments themselves were immaterial.
However, Judge Kaplan denied the motion to dismiss with respect to the plaintiffs’ allegations that the offering documents misleadingly described the company’s mortgage-backed assets as "near prime and of high quality" and that the company was "well insulated from the worst effects of the market turmoil." Judge Kaplan found that the complaint’s allegations "sufficiently allege a connection between the general market conditions and ING’s assets" to "plausibly suggest" that "ING’s assets in June 2008 were ‘extremely risky’ and that could impact the company’s performance."
The defendants had argued that the statements were immaterial, a question Judge Kaplan described as a "close call." He observed that the offering documents disclosed "in some detail" the risks the assets posed, but he found that these disclosures were sufficiently "undercut" by other statements, as a result of which he could not conclude as a matter of law that a reasonable investor would find the omitted disclosure immaterial.
Judge Kaplan’s ruling in the ING case is the latest in a series of recent decisions where plaintiffs have suffered full or substantial setbacks in their claims pertaining to the defendant company’s exposures to subprime-mortgage loans and mortgage loan backed assets. Judge Kaplan’s methodical opinion demonstrates that while it is not impossible for plaintiffs to survive dismissal motion in these cases, it is difficult.
The ING case is interesting in part because of the defendant company itself. Later in 2008, after the offerings that were the basis of this lawsuit, the Dutch government made a capital infusion into ING to the tune of 10 billion euros (about $13 billion). Judge Kaplan’s opinion references the bailout, although he ultimately concluded that the later events had not been alleged to have any connection with the earlier offering document disclosures.
Judge Kaplan’s analysis seems to suggest that even though a company may have received a bailout – even a massive bailout – does not mean that claims of securities fraud will not be scrutinized, and a later bailout by itself may mean little with respect to the question whether earlier statements were misleading.
It does seem that the dismissal motion rulings in the subprime and credit crisis-related cases are continuing to run against the plaintiffs. To be sure, a portion of the ING case will be going forward, and I know the name of the game for the plaintiffs is just to live for another day. But all but a small part of this case got knocked out, as seems to have been the case in many recent rulings.
I have in any event added the ING decision to my running tally of subprime and credit crisis dismissal motion rulings, which can be accessed here. Because the dismissal motion was denied at least in part, I added it to the motions denied table.
Special thanks to a loyal reader for providing a copy of the ING ruling.
Don’t Throw Stones: ING may have the oddest corporate headquarters of any company in the world. The building basically looks like a giant glass and steel baskeball shoe on stilts. It is hard enough to imagine any designer having the sheer audacity to present this thing to a client that presumably paid a lot of money for the design. It is even harder to imagine a room full of people saying,, "That’s it! That is exatly the image we were looking for." Perhaps the next project for the team that selected the design was to develop a strategy for getting the bank into U.S. residentail mortgage investments.