In an interesting opinion that includes among other things a noteworthy discussion of issues arising under the Morrison v. National Australia Bank case, one of the last securities suits filed as part of the ed credit crisis-related litigation wave has been dismissed. In an August 13, 2012 opinion (here), District of Columbia District Court Judge Amy Berman Jackson has dismissed the securities class action lawsuit that had been filed against the failed Carlyle Capital Corporation in the wake of its March 2008 collapse.



As discussed here, in one of the last cases to be filed as the subprime and credit crisis-related litigation wave wound down, in June 2011, a plaintiff filed a securities class action complaint in the U.S. District for the District of Columbia against certain individual officers and directors of the now defunct Carlyle Capital Corporation (CCC), its investment manager and related entities. The action was filed on behalf of two groups of claimants: those who bought Restricted Depositary Shares (RDS) in the company’s July 2007 RDS offering; and those who purchased Class B shares on the Euronext exchange between the offering and the companies March 2008 demise. The complaint asserts claims under the federal securities laws; for common law misrepresentation; and for violation of the Dutch and UK securities laws.


The complaint alleges that CCC was organized under the laws of Guernsey to profit from the spread between the its portfolio of residential mortgage-backed securities (RMBS)and the cost of financing those assets through short term repurchase agreements and other forms of financing. Its principal place of business was in Washington, D.C. The complaint alleges that the entity was a “house of cards” because it was committed to acquiring “volatile, risk-securities that could only be purchased using massive borrowing with the securities purchased serving as collateral.” The company’s RMBS portfolio deteriorated during 2007, even prior to the company’s offering. The complaint alleges that the deterioration and the liquidly issues associated with the companies repo agreement financing were not disclosed to investors.


The complaint alleges that following the offering, the defendants continued to misrepresent the company’s financial condition, particularly with respect to its RMBS portfolio. Despite the deteriorating market for RMBS, CCG continued to acquire additional RMBS. The complaint alleges that as the marketplace nearly reached a “meltdown” in August 2007, the company did not recognize its portfolio losses. In early 2008, a cascade of margin calls forced the company’s managers to put the company into liquidation under the authority of the Royal Court of Guernsey. The defendants moved to dismiss.


The August 13, 2012 Opinion

In a 67-page opinion, Judge Jackson summarizes her view of the case by saying that “this complaint is an attack on how CCC was managed, and ultimately, it questions the wisdom behind that adoption of its business model in the first place. But chiding CCC with the benefit of hindsight for its failure to resist the stampede to purchase mortgage-backed securities is not the same thing as alleging fraud, particularly given the stringent standards of the PSLRA.”


She first dismissed the aftermarket claims in reliance on the U.S. Supreme Court’s Morrison decision, because they were asserted against a non-U.S. company by shareholders who had purchased their shares on a foreign exchange. However, she rejected the defendants’ efforts to also have the claims asserted on behalf of the RDS investors dismissed in reliance on Morrison. The RDS share offering had actually taken place in the United States, as a result of which, Judge Jackson found, the U.S. securities laws were applicable to those transactions.


In reaching this conclusion, she rejected the prior decisions in the Société Générale case (about which refer here), in which the court had concluded on the basis of Morrison that the U.S. securities laws were not applicable to ADR transactions in the U.S.; and she also rejected the prior decision in the Porsche case (about which refer here), in which the court held that the U.S. securities laws do not apply to derivative transactions in the U.S. where the referenced security traded only on a foreign exchange.


Judge Berman said that in her view the “gloss” on Morrison that these two courts developed is “inconsistent with the bright line test set forth in Morrison, which focuses specifically and exclusively on where the plaintiff’s purchase occurred.” She added that “while defendants’ contention that an investor could not purchase an RDS in the United States without a corresponding overseas transaction may be true, it does not change the fact that a purchase in the United State still took place.” 


But while the claims of the RDS investors were not precluded under Morrison, the claims still were not sufficient to overcome the initial pleading hurdles because, Judge Jackson concluded, the plaintiffs failed to allege an actionable omission or misrepresentation.


The plaintiffs alleged that that the defendants had failed to disclose the financial problems CCC was experiencing just before and at the time of the offering. Judge Jackson said that “it is difficult for the Court to conclude that the Offering Memorandum did not put investors on notice of the fact that CCC’s business model had recently shown signs of major strain given the clear disclosure.” She added that “there is no requirement that negative information be presented with the particular spin that plaintiffs say they would have preferred. What matter is whether the relevant facts were disclosed and were clearly available to plaintiffs.” She added that “the fact that defendants did not use the specific terminology preferred by plaintiffs does not mean the disclosures were misleading.”


Judge Jackson also ruled that the plaintiffs’ common law misrepresentation claims also were insufficient due to the plaintiffs’ failure to establish the existence of a false statement or material omission, and also because the plaintiffs failed to allege individual reliance.



The collapse of the Carlyle fund was swift and substantial. Within just eight months of the July 2007 offering, the company had defaulted on over $16.6 billion of its indebtedness and had been forced into liquidation. Notwithstanding the scale and suddenness of the company’s demise, Judge Jackson required that the plaintiffs establish more than that the fund had what proved to be a deeply flawed business model. In addition, she also found that much of the information that the plaintiffs claimed had been omitted had in fact been disclosed, but the plaintiffs invested in the fund anyway.


While Judge Jackson’s conclusions that the plaintiffs’ allegations were insufficient are interesting, the most interesting part of her opinion may be her analysis of the Morrison issues, particularly as pertains to the claims of the RDS investors. She focused exclusively on the place of the transaction and rejected the suggestion that Morrison should be applied to preclude the RDS investor’s claims because the domestic RDS transactions required a corresponding foreign transaction.


 At the time of the Société Générale and Porsche decisions, they each seemed to suggest that Morrison reached even more broadly than had seemed to be the case when the Supreme Court first issued the decision. However, Judge Jackson’s unwillingness to be influenced by those cases’ “gloss” on Morrison suggests that in the end Morrison might not have as sweeping of a preclusive an effect as those decisions had suggested. To be sure, the Porsche appeal remains pending. But Judge Jackson’s refusal to follow these cases “gloss” and in particular her understanding of Morrison that the analysis must focus exclusively on the place of the transaction at issue appears correct.


I have in any event added the Carlyle Capital decision to my running tally of subprime and credit crisis case dispositions, which can be accessed here.


Goldman Sachs Derivative Suit Dismissed: Just a few days ago, the U.S. Department of Justice said it would not pursue criminal charges against Goldman Sachs or its employees related to allegations the bank deceived investors and Congress about its activities in the subprime mortgage market. On Tuesday, the company got more good news on its legal woes arising out of the subprime meltdown. On August 14, 2012, Judge William H. Pauley III granted the defendants’ motion to dismiss the complaint in the Goldman Sachs Mortgage Servicing Derivative Litigation. Judge Pauley dismissed the complaint with prejudice. A copy of Judge Pauley’s opinion can be found here.


The plaintiffs had sued Goldman, as nominal defendant, and certain of its directors and officers, alleging that the individuals breached their fiduciary duties to the company by failing to ensure that the company’s mortgage servicing operation has sufficient resources to comply with regulatory requirements and by allowing the mortgage servicing operation to employ “robo-signing” on foreclosure documents. The plaintiffs also alleged that the defendants caused the company to accept TARP funds but then failed to comply with the conditions for accepting it, and that the defendants caused the company to include troubled loans in its residential mortgage backed securities.


In his August 14 order, Judge Pauley found that the plaintiffs had failed to plead sufficient facts to establish that a demand on the board to raise these claims would have been futile. Judge Pauley specifically found that the plaintiffs had failed “to raise a reasonable doubt as to a majority of the Board of Directors’ disinterested ness.” The plaintiffs also failed to show that the directors lacked independence or that the decision they were not an exercise of valid business judgment.


The plaintiffs had attempted to argue that directors were not disinterested because they faced a substantial likelihood of liability. Judge Pauley concluded that the plaintiffs had failed to allege any “red flags that would have alerted the Board Defendants of broken controls in Goldman’s mortgage servicing business” or of the company’s inclusion of troubled loans in its RMBS. as would be required to serve as a basis for liability. Judge Pauley emphasized, by contrast to other cases on which the plaintiffs sought to rely, that the mortgage servicing operations were not “central” to Goldman’s operations and represented only a small part of the company’s total revenue, which undercut the plaintiffs’ argument that the director defendants must have known of the weaknesses at the company mortgage servicing operation.


I have added Judge Pauley’s ruling to my list of subprime and credit crisis lawsuit dismissal motion rulings, which again can be found here.


Ancient Lawsuit is Past Sell-By Date: The plaintiffs’ July 2011 filing of a securities class action lawsuit against Fairfax Financial Holdings was noteworthy because the plaintiffs’ filed their complaint more than five years after the end of their purported class period. As I noted at the time in my post about the 2011 filing (here), the plaintiffs anticipated the obvious statute of limitations objections and in their complaint, they argued that the statute of limitations – including the five-year statute of repose – had been tolled by their 2006 filing of a complaint raising the same allegations. That prior complaint had been dismissed because the named plaintiff was a Canadian who could not establish subject matter jurisdiction for his claims under the pre-Morrison standards applicable at the time.


As might have been expected, the defendants moved to dismiss the 2011 action on statute of limitations grounds. And as discussed in Jan Wolfe’s August 14, 2012 Am Law Litigation Daily article (here), on August 13, 2012, Judge John F. Keenan granted the defendants’ motion, base on his ruling that the prior filing may have tolled the running of the two-year statute of limitations, but it did not toll the running of the five-year statute of repose. In his opinion (which can be found here), Judge Keenan said that “the absolute language of the statute of repose plainly precludes judicial circumvention of the repose period, even in class action suits.” He added that “the legislative history suggests that Congress intended statutes of repose to impose an absolute limitation on litigation."


Judge Keenan also indicated that he would have dismissed the case even if not time-barred, holding that the plaintiffs failed to allege facts sufficient to show how the alleged misstatements were material and to plead loss causation.


Jan Wolfe’s article about Judge Keenan’s ruling points out that the issue about whether or not the statute of repose can be tolled is currently on appeal in at least a couple of cases. This clearly is an issue that needs to be sorted out because other district courts have concluded, contrary to Judge Keenan, that the statute of repose can be tolled. For an example of a case in which a court concluded that the statute of repose can be tolled, take a look at my discussion of Judge Laura Taylor Swain’s ruling in the Morgan Stanley Mortgage Pass-Through Certificates case (here, second item in the blog post). For those who are interested in this issue, the question has to do with whether or not the U.S. Supreme Court’s American Pipe opinion – which held that a prior class action filing tolls the running of the statute of limitations – also applies to the statute of repose. The question of so-called American Pipe tolling is an important one that potentially impacts a number of cases. With the appeals now pending in the Second Circuit, there should more developments in this area in the months ahead.