OPINION AND ORDER
LAURA TAYLOR SWAIN, District Judge.
Plaintiffs have filed a Third Amended Complaint ("TAC") asserting claims on behalf of a putative class of investors against various Bear Stearns entities, Structured Asset Mortgage Investments II, Inc., ("SAMI"), and several individuals for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the "33 Act"), 15 U.S.C. §§ 77k, 77l(a)(2), 77o, in connection with the sale of mortgage-backed security ("MBS") pass-through certificates ("Certificates")
I. Mortgage-Backed Security Allegations
The following facts are taken from the TAC, the documents incorporated by reference therein, and other documents of which the Court may properly take judicial notice. Plaintiffs' factual allegations are taken as true for purposes of this motion practice.
On March 10, 2006, and March 31, 2006, SAMI Depositor and Bear Stearns Depositor, respectively, filed Registration Statements with the Securities and Exchange Commission ("SEC") indicating their intention to sell $50 billion in MBS Certificates. (TAC ¶ 4.)
In brief, an MBS is created when a "depositor" buys an inventory of mortgages (or "loan pool") from a primary lender (or "originator").
Because the value of an MBS depends on the ability of the borrowers to repay the principal and interest on the underlying loans as well as the adequacy of the collateral in the event of default, thorough assessments of the borrowers' creditworthiness and the homes' values are paramount. (Id. ¶ 3.) To this end, the MBS packaging process has three principal levels of quality control. First, underwriting and appraisal standards are crafted to assist the originator in weeding out excessively risky loan applications; second, the depositor reviews the loan pools to ensure that they meet the originator's stated underwriting standards (id. ¶¶ 55-58); and third, the Rating Agencies review the securities' risk profiles and assign ratings. (Id. ¶¶ 6, 184-85.)
The TAC details a systemic breakdown at each level, one that resulted largely from the misalignment of incentives in the MBS industry. Under the traditional mortgage investment model, the loan originator held the mortgage to maturity and made its profits from the borrower's payment of interest and repayment of principal-an arrangement that gave the originator an economic interest in ensuring that (1) the borrower had the financial wherewithal to repay the promissory note, and (2) the underlying property had sufficient value to cover the lender's losses in the event of default. (Id. ¶¶ 44-47, 168.) With the advent of securitization, originators quickly parted with the mortgages — and the attendant risk of default — by selling them to investors. (Id. ¶ 169). The primary source of profit shifted from borrowers' interest payments to loan fees and sales revenue. Largely free from the risk of defaults, originators began pushing high-risk loan products and deviating from underwriting and appraisal standards in an attempt to maximize loan volume. (Id. ¶¶ 169-70). Wall Street banks like Bear Stearns, which profited enormously from the packaging and sale of MBS, were content to overlook the widespread degradation of underwriting and appraisal practices. (Id. ¶¶ 56-67, 171.) The final guarantors of the securities' quality, the Rating Agencies, were equally compromised. The Rating Agencies' models were outdated and failed to properly account for the increased riskiness of new loan products. (Id. ¶ 196.) Compounding the problem, banks such as Bear Stearns shopped for Rating Agencies willing to assign their securities top credit ratings, pitting the Agencies against each other
A. Misrepresentations and Omissions Regarding Underwriting Standards and Appraisals
Plaintiffs allege that the Offering Documents misrepresented and omitted material facts regarding the underwriting standards applied by the loan originators. EMC Mortgage Corp. ("EMC"),
EMC was an originator of loans for the BSABS 2007-HE4, BSMF 2006-AR1, BSMF 2006-AR4, BSMF 2006-AR5, BALTA 2006-6, BALTA 2006-8, and BALTA 2007-1 trusts. (Id. ¶ 82.) The Offering Documents represented that: "Each mortgaged property relating to an EMC mortgage loan has been appraised by a qualified independent appraiser" in accordance with the "Uniform Standards of Professional Appraisal Practice." (Id. ¶ 84.) The Offering Documents further represented that "underwriting standards are applied to evaluate the prospective borrower's credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral" and elaborated that:
(Id. ¶ 83.) The Prospectus Supplement also stated that, while certain loans did not require income verification, the originators would "obtain a telephonic verification of the borrowers' employment without reference to income" and that "[b]orrower's assets are verified." (Id. ¶ 85.)
EMC systematically disregarded its own underwriting and appraisal standards and prioritized the pursuit of loan volume over loan quality. (Id. ¶ 86.) According to one study, EMC breached its representations and warranties with respect to 89% of its loans by providing misrepresentations about borrower income, employment, and assets, and by failing to adhere to its own mortgage lending guidelines. (Id. ¶ 88.) According to Matt Van Leeuwen, a former mortgage analyst with EMC, Bear Stearns forced EMC analysts to rush their loan analyses so that Bear Stearns would not have to hold the loans on its books. (Id. ¶ 92.) Mr. Van Leeuwen further revealed that EMC analysts were allowed to falsify missing loan data, that the documentation level of the loans was often incorrectly identified, and that Bear Stearns would declare the loan "fit" rather than investigating to fill in the missing information. (Id.) As of the date of the TAC, 98% ($7.3 billion) of the $7.45 billion of the initially
BSRM was an originator of loans for the BSMF 2006-AR1, BSMF 2006-AR4, BSMF 2006-AR5, and BSABS 2007-HE4 trusts. (Id. ¶ 94.) The Prospectus Supplements described stringent underwriting standards. For example, the Prospectus Supplement for the BSMF Series 2006-AR1 Certificate Offering stated:
(Id. ¶ 95) (emphasis in original.) The Prospectus Supplements also described BSRM's prudent underwriting standards for loans that required less documentation. (Id. ¶ 97.) However, BSRM systematically disregarded its own underwriting and appraisal standards to maximize loan volume. (Id. ¶ 98.) As of the date of the TAC, almost 100% ($3.74 billion) of the $3.75 billion of the initially AAA-rated Certificates from the above four trusts had been downgraded to or below speculative "junk" status. (Id. ¶ 99.)
Countrywide was an originator of loans for the SAMI 2006-AR6, SAMI 2006-AR7, BALTA 2006-6, BALTA 2007-1, BSARM 2006-4, BSARM 2007-3, and BSARM 2007-1 trusts. The Prospectus Supplements describe Countrywide's rigorous, stated underwriting standards. For example, the Prospectus Supplement for the SAMI 2006-AR6 offering stated that Countrywide evaluates "the prospective borrower's credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral" by verifying employment history and appraising the property, in a manner "conform[ing] to Fannie Mae or Freddie Mac appraisal standards then in effect." (Id. ¶¶ 101-102.) The Prospectus Supplement represented that loans requiring less documentation were "limited to borrowers with excellent credit histories" and that the loan application would be "reviewed to determine that the stated income is reasonable for the borrower's employment and that the stated assets are consistent with the borrower's income." (Id. ¶ 103.)
However, in an effort to originate as many loans as possible, Countrywide routinely and systematically violated its stated underwriting standards. (Id. ¶ 104.) According to a confidential witness ("CW1"), a senior Countrywide underwriter, Countrywide regularly designated loans made to unqualified borrowers as "prime." (Id. ¶ 105.) According to a second confidential witness ("CW2"), Countrywide created a computer system that identified high risk loans and routed them out of the normal loan approval process; instead of being rejected, the loans were reviewed to evaluate whether they should require a higher price or higher interest rate. (Id. ¶ 106.) Other confidential witnesses ("CW3" and
AHM was an originator of loans for the SAMI Series 2006-AR5 trust. The Prospectus Supplement for that trust represented that:
(Id. ¶ 127) (emphasis in original). The Prospectus Supplement further represented that there would be "compensating factors such as higher credit score or lower loan-to-value requirements" for loans requiring less documentation. (Id. ¶ 129.) However, AHM systematically disregarded its underwriting guidelines and regularly approved low documentation loans in the absence of sufficient compensating factors in order to maximize its loan volume. An internal report circulated in October 2005 relaxed the underwriting standards by no longer requiring verification of income sources on stated-income loans, reducing the time required to have elapsed since the borrower was last in bankruptcy or credit counseling, reducing the required documentation for self-employed borrowers, and broadening the acceptable use of second and third loans to cover the property value. (Id. ¶ 131.) According to confidential witnesses CW6, CW7, and CW8, each of whom held senior positions at AHM, it was commonplace to overrule underwriters' objections in order to complete a loan. (Id. ¶ 134-36.) Senior Executives encouraged loan officers to make risky loans, including stated-income loans, where neither the assets nor the income of the borrower were verified, "No Income" loans, which allowed for loans to be made without any disclosure of the borrowers' income or assets, and "No Doc" loans, which allowed loans to be made to borrowers who did not disclose their income, assets or employment history. (Id. ¶ 132.) AHM's mortgage practices have also been the focus of several criminal probes and at least one AHM sales executive has admitted that he regularly falsified clients' income or assets, with AHM's knowledge, to get loans approved. (Id. ¶¶ 138-139.) On August 6, 2007, AHM filed for bankruptcy. (Id. ¶ 137.) As of the date of TAC, 77% ($687 million) of the initially AAA-rated Certificates issued from the SAMI Series 2006-AR5 trust had been downgraded to or below speculative "junk" status. (Id. ¶ 140.)
Wells Fargo was an originator of loans for the BALTA 2006-8 and BSARM 2007-1 trusts. The BSARM 2007-1 Prospectus
(Id. ¶ 143) (emphasis in original). The Prospectus Supplement also disclosed that Wells Fargo's "modified" underwriting standards "permit different underwriting criteria, additional types of mortgaged properties or categories of borrowers ... and include certain other less restrictive parameters." (Id. ¶ 144.) Finally, the Prospectus Supplement stated that in order to qualify for participation in Wells Fargo's mortgage loan purchase program:
(Id. ¶ 146) (emphasis in original).
However, Wells Fargo systematically disregarded its stated underwriting and appraisal standards. According to a confidential witness ("CW9"), loan officers applied "intense" pressure on underwriters to approve risky loans and rewarded "high producers." (Id. ¶ 148.) Another confidential witness and former Wells Fargo employee ("CW10") states that the mortgage unit would loosen its underwriting standards at the end of the year to meet the origination goals; those employees who did not approve risky loans "wouldn't be around very long." (Id. ¶ 150.) According to CW11, Wells Fargo instituted a program in 2006 called "courageous underwriting," which CW11 described as "following the guidelines but also finagling the guidelines if it meant getting the loan approved." (Id. ¶ 152.) According to CW12, a former Wells Fargo Home Mortgage employee who was employed as a Loss Mitigation Supervisor from 1999 through 2004, and as an REO Supervisor from July 2006 through May 2008, some of the information in the loans was "blatantly falsified." (Id. ¶ 153.) As of the date of the TAC, 93.6% ($2.08 billion) of the initially AAA-rated Certificates issued from the BALTA 2006-8 and BSARM 2007-1 trusts had been downgraded to or below speculative "junk" status. (Id. ¶ 156.)
FMC was an originator of loans for the BSABS 2007-HE3 trust. The BSABS 2007-HE3 Prospectus Supplement represented that:
(Id. ¶ 158 (emphasis in original).) The underwriting was not consistently monitored by FMC's supposed rigorous quality control process; rather, FMC's "underwriting personnel" regularly modified mortgage loan applications in order to increase the volume of loans and resulting fees. (Id. ¶ 159.) The rising rate of foreclosures and delinquencies resulting from these practices forced FMC to file for bankruptcy in November 2007. (Id. ¶ 163.) According to press reports, an undercover operation resulted in fraud charges against 24 defendants, including brokers, business owners and appraisers who dealt regularly with FMC. (Id. ¶ 164.) As of the date of the TAC, 64.4% ($461.1 million) of the initially AAA-rated Certificates issued by the BSABS 2007-HE3 trust had been downgraded to or below speculative "junk" status. (Id. ¶ 165.)
Six other originators — Aegis Mortgage Corporation, Mid America Bank, U.S. Bank, NA, Provident Funding Associates, L.P., Synovus Mortgage Corporation, and American Mortgage Express Corp. d/b/a American Residential Mortgage Corp. — contributed loans to several of the offerings at issue. The Prospectus Supplements for those trusts contained untrue statements and omitted material facts. (Id. ¶ 167.) As a result of these originators' high-risk lending practices, 100% ($1.89 billion) of the initially AAA-rated Certificates backed by loans originated by these six entities had been downgraded to or below speculative "junk" status as of the date of the TAC. (Id. ¶ 176.)
B. Misrepresentations Regarding Appraisals
In each Prospectus Supplement, Defendants included Loan-to-Value ("LTV") ratios that were based on inflated appraisals of the collateral. (Id. ¶¶ 177-78.) The LTV ratio expresses the loan amount as a percentage of the collateral's value. For example, if an individual seeks to borrow $90,000 to pay for a house worth $100,000, the LTV ratio is 90%; however, if the home appraisal is artificially elevated to $120,000, the LTV ratio drops to 75%. (Id. ¶ 178.) Lower LTV ratios are indicative of less risk.
The Offering Documents represented that the appraisals were conducted in accordance with Fannie Mae and Freddie Mac appraisal standards. (Id. ¶ 179.) Contrary to those representations, many appraisals were inflated, which resulted in class members paying more for the Certificates than they were worth. (Id. ¶¶ 178-80.)
C. Misrepresentations and Omissions Regarding The Certificates' Credit Support
The Offering Documents also contained material misrepresentations concerning "credit support" or "credit enhancement," which provides holders of senior Certificates with a degree of protection should there be a shortfall in payments received on the mortgage loans. (Id. ¶¶ 181-82.) Because the originators regularly disregarded their own underwriting and appraisal standards, the supposed credit support was insufficient to cover the heightened risk of loss. (Id. ¶ 183.)
D. Bear Stearns' Failure to Conduct Due Diligence
Prior to making bulk purchases of loans from third-party originators, Bear Stearns sent information about the loans to the Rating Agencies to enable them to advise Bear Stearns as to the appropriate purchase price. (Id. ¶ 54.) Once the Rating Agency's analysis was complete, Bear Stearns submitted its bids; if the mortgage originator accepted the bid, Bear Stearns often retained third-party due diligence firms such as Clayton Holdings and Bohan Group, ostensibly to comb through the loan pools and eliminate loans that violated the underwriting standards. (Id. ¶ 55.) However, executives at these firms have characterized Bear Stearns' due diligence process as lax and haphazard. (Id. ¶ 56.) Investment banks like Bear Stearns directed the due diligence firms to drastically decrease the number of loans that they evaluated (id. ¶ 63), and routinely ignored the numerous "red flags" about flaws in subprime mortgage loans. (Id. ¶ 64.) According to documents filed with the Financial Crisis Inquiry Commission, Clayton reviewed 19,248 Bear Stearns loans from January 2006 to June 2007, and initially rejected 4,494 (23%) of them; Bear Stearns waived the exceptions related to 1,295 (29%) of those loans. (Id. ¶ 65.) During that same period, Clayton reviewed 53,131 EMC loans, and initially rejected 7,277 (13.7%); EMC waived the exceptions related to 3,628 (50%) of those loans. (Id.)
E. Misrepresentations and Omissions Regarding The Certificates' Ratings
Each of the Certificates was provided a rating by Standard & Poor ("S & P") and Moody's. (Id. ¶ 184.) The Offering Documents stated that the Certificates' ratings:
(Id.) All of the ratings set forth in each of the Prospectus Supplements were within "Investment Grade" range for Moody's (Aaaa through Baa3) and S & P (AAA through BBB.) (Id. ¶ 185.)
These ratings were premised on false representations that the originators had complied with the underwriting guidelines. (Id.) Moreover, Rating Agency executives have since admitted that the ratings were based on inaccurate data (id. ¶ 187), and relied on deficient statistical models. (Id. ¶¶ 188-195.) The Rating Agencies succumbed to market pressure to lower their standards. According to former Moody's Managing Director Jerome S. Fons, securities issuers were free to shop around for the Rating Agency that would give them the highest rating and "typically chose the agency with the lowest standards, engendering a race to the bottom in terms of rating quality." (Id. ¶ 195.) These unreliable ratings made it impossible for class members to accurately assess the risk of the Certificates and caused class members to pay more for the Certificates than they were worth at the time of the Offerings. (Id. ¶ 186.)
II. Procedural History
On August 20, 2008, Plaintiff New Jersey Carpenters Health Fund ("NJ Carpenters") filed a complaint (the "Original Complaint") in New York state court, asserting claims against Bear Stearns and Structured Asset Mortgage Investments II, Inc. ("SAMI"), for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the "33 Act"), 15 U.S.C. §§ 77k, 77l(a)(2), 77o, in connection with the sale of MBS Certificates that were offered for
Thereafter, this action accreted parties and offerings as follows. On May 15, 2009, NJ Carpenters filed its first consolidated class action complaint ("FAC") with Plaintiff Boilermaker Pension Trust ("Boilermaker"),
On October 29, 2010, Plaintiffs filed their third consolidated class action complaint ("TAC"), adding as named plaintiffs the Police and Fire Retirement System of the City of Detroit ("Detroit"), the Oregon Public Employee Retirement Fund ("OPERS"), the Iowa Public Employees' Retirement System ("IPERS"), the City of Fort Lauderdale Police & Fire Retirement System ("Fort Lauderdale"), and the San Antonio Fire and Police Pension Fund ("San Antonio"). The parties, offerings, and claims in each complaint are as follows ("X" designates offerings that were listed in the class definition even though no named Plaintiff purchased from that offering):
Offering/Trust Original FAC Pension Trust SAC TAC (10/29/2010) Compl. (5/15/2009) Compl. (2/19/2010) (8/20/2008) (7/9/2009)BSMF 2006-AR1 NJ Carpenters NJ Carpenters NJ Carpenters NJ CarpentersSAMI 2006-AR5 Boilermakers Boilermakers BoilermakersSAMI 2006-AR6 Boilermakers Boilermakers, Boilermakers, MissPERS MissMPERSSAMI 2006-AR7 X Pension TrustX IPERS, OPERSBSABS 2007-HE3 X X IPERSBSABS 2007-HE4 X X IPERS
BSMF 2006-AR4 X X San AntonioBSMF 2006-AR5 X X San AntonioBALTA 2006-6 X MissPERS MissPERS, IPERSBALTA 2006-8 X X OPERS, DetroitBALTA 2007-1 X X IPERS, OPERSBSARM 2006-4 X MissPERS MissPERSBSARM 2007-1 X X Ft. LauderdaleBSARM 2007-3 X MissPERS MissPERS
Plaintiffs bring this action on behalf of "all persons or entities who purchased or otherwise acquired beneficial interests in the Certificates" issued in the above-mentioned offerings. (TAC ¶¶ 1, 204.)
Defendants now move to dismiss the TAC, arguing that (1) all of Plaintiffs' claims are time-barred by the applicable statute of limitations and that certain claims are barred by the statute of repose, (2) Plaintiffs have failed to allege any actionable misrepresentation or omission, (3) Plaintiffs' failure to allege a primary violation or plead facts demonstrating that any Individual Defendant is a control person requires dismissal of the Section 15 claim, (4) Plaintiffs have failed to allege any cognizable injury, (5) Plaintiffs' sole remedy under the Offering Documents is repurchase or replacement of non-complying loans, and (6) Plaintiffs lack standing to sue on behalf of purchasers of individual tranches within each offering that no named Plaintiff purchased.
Sections 11, 12(a)(2), and 15 of the Securities Act impose civil liability on certain persons when communications in connection with a registered securities offering contain material misstatements or omissions. 15 U.S.C. §§ 77k, 77l(a)(2), 77o; In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 358 (2d Cir.2010). Section 11 provides a cause of action for material misstatements and omissions in registration statements; Section 12(a)(2) provides a cause of action for material misstatements and omissions in prospectuses and oral communications. 15 U.S.C. §§ 77k, 77l(a)(2); see also In re Morgan Stanley, 592 F.3d at 358-59. Section 15 provides a cause of action against "[e]very person who ... controls any person liable under [Sections 11 or 12(a)(2)] of this title." 15 U.S.C. § 77o. A claim under Section 15, therefore, can only succeed if a plaintiff can first demonstrate liability under Section 11 or Section 12. See In re Morgan Stanley, 592 F.3d at 358.
"[S]ections 11 and 12(a)(2) create three potential bases for liability based on registration statements and prospectuses filed with the SEC: (1) a misrepresentation; (2) an omission in contravention of an affirmative legal disclosure obligation; and (3) an omission of information that is necessary to prevent existing disclosures from being misleading." In re Morgan Stanley, 592 F.3d at 360; see also 15 U.S.C. §§ 77k(a), 77l(a)(2). For a misstatement or omission to be actionable under Section 11 or 12(a)(2), a defendant must have a duty to disclose the information, and the omitted or misstated information must be material to the investor. In re Morgan Stanley, 592 F.3d at 360. Where a plaintiff establishes any of the three bases of liability, "the general rule in a Section 11 [or Section 12(a)(2)] case is that an issuer's liability ... is absolute."
On a motion to dismiss a complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), the Court "accept[s] as true all factual statements alleged in the complaint and draw[s] reasonable inferences in favor of the non-moving party." McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir.2007). The movant bears the burden of demonstrating that the complaint fails to state a claim upon which relief may be granted. Lerner v. Fleet Bank, N.A., 318 F.3d 113, 128 (2d Cir.2003). To survive a Rule 12(b)(6) motion, a complaint must "plead enough facts to state a claim that is plausible on its face." Ruotolo v. City of New York, 514 F.3d 184, 188 (2d Cir.2008) (internal quotation marks omitted) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (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, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009). "Where a complaint pleads facts that are merely consistent with a defendant's liability, it stops short of the line between possibility and plausibility of entitlement to relief." Id. (internal quotations and citations omitted).
I. Timeliness of Plaintiffs' Claims
Claims brought under Section 11 and Section 12(a)(2) are subject to the twopronged timing provision of Section 13 of the Securities Act. 15 U.S.C. § 77m. The first prong of Section 13 is a statute of limitations, which provides that claims must be brought within one year of "the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence." Id. The statute of limitations may be tolled based on equitable considerations for up to three years, at which point a plaintiffs claim is extinguished by Section 13's second prong — the statute of repose — which provides that "[i]n no event shall any such action be brought ... more than three years after the security was bona fide offered to the public." Id. (emphasis added).
Defendants argue that each of Plaintiffs' claims is time-barred by the statute of limitations because various news reports and other publicly accessible information placed Plaintiffs on inquiry notice more than one year prior to the filing of the operative complaint. Defendants further argue that the claims first asserted by Plaintiffs with standing more than three years after the initial offerings are barred by the statute of repose.
A. Statute of Limitations
The Court must first determine whether the inquiry notice standard is still applicable, or whether, as Plaintiffs contend, it was rendered inoperative by the Supreme Court's decision in Merck & Co. v. Reynolds, ___ U.S. ___, 130 S.Ct. 1784, 176 L.Ed.2d 582 (2010).
Plaintiffs argue that the Supreme Court's recent ruling in Merck & Co. v. Reynolds, ___ U.S. ___, 130 S.Ct. 1784, 176 L.Ed.2d 582 (2010), invalidated inquiry notice as a statute of limitations measuring point in securities cases. In Merck, the Supreme Court rejected the inquiry notice standard in the context of a claim brought under Section 10(b) of the Securities Act of 1934 ("34 Act"), holding that "the discovery of facts that put a plaintiff on inquiry notice does not automatically begin the running of the limitations period." Id. at 1798. Rather, the Court held, "the limitations period does not begin to run until ... a reasonably diligent plaintiff would have discovered `the facts constituting the violation,'... irrespective of whether the actual plaintiff undertook a reasonably diligent investigation." Id. at 1792 (quoting 28 U.S.C. § 1658(b)). The Second Circuit elaborated on Merck in City of Pontiac Gen. Emps. Ret. Sys. v. MBIA, Inc., 637 F.3d 169 (2d Cir.2011), holding that a fact is not deemed "discovered" for limitations purposes until "a reasonably diligent plaintiff would have sufficient information about that fact to adequately plead it in a complaint." Id. at 175. Put differently, "the reasonably diligent plaintiff has not `discovered' one of the facts constituting a securities fraud violation until he can plead that fact with sufficient detail and particularity to survive a 12(b)(6) motion to dismiss." Id.
The question before the Court is whether the Supreme Court's invalidation of the inquiry notice standard for '34 Act claims extends to claims brought under Sections 11 and 12(a)(2) of the '33 Act. The Court concludes, in accord with the majority of judges in this district, that it does. See In re Wachovia Equity Sec. Litig., 753 F.Supp.2d 326, 370-71, n. 39 (S.D.N.Y. 2011) (applying Merck to claims under Sections 11 and 12(a)(2) of the '33 Act); New Jersey Carpenters Health Fund v. Residential Capital, LLC, Nos. 08 CV 8781(HB), 08 CV 5093(HB), 2011 WL 2020260, at *4 (S.D.N.Y. May 19, 2011); Brecher v. Citigroup Inc., 797 F.Supp.2d 354, 367 (S.D.N.Y.2011); but see In re IndyMac Mortgage-Backed Securities Litigation, 793 F.Supp.2d 637, 648 (S.D.N.Y. 2011) (holding that Merck is limited to claims brought under the '34 Act). The limitations provisions for '33 Act and '34 Act claims are functionally identical.
In light of Merck and City of Pontiac, the Court finds that Defendants' focus on inquiry notice is misplaced. The operative question is no longer when a reasonable plaintiff would have known that she had a likely cause of action and inquired further. Rather, the question is whether a plaintiff could have pled '33 Act claims with sufficient particularity to survive a 12(b)(6) motion to dismiss more than one year prior to the filing of the operative complaint. Whether sufficient facts existed at that time is, by definition, a fact-intensive inquiry and, thus, generally illsuited for resolution at the motion to dismiss stage. Cf. In re Dreyfus, No. 98 Civ. 4318(HB), 2000 WL 10211, at *3 (S.D.N.Y. Jan. 6, 2000) ("[T]he issue of constructive knowledge and inquiry notice should more properly be resolved by the trier of fact at a later stage in this litigation."). Accordingly, a motion to dismiss will only be granted where "uncontroverted evidence irrefutably demonstrates [that the] plaintiff discovered or should have discovered" facts sufficient to adequately plead a claim. Newman v. Warnaco Group, Inc., 335 F.3d 187, 193 (2d Cir.2003) (quoting Nivram Corp. v. Harcourt Brace Jovanovich, Inc., 840 F.Supp. 243, 249 (S.D.N.Y.1993)).
1. Timeliness of the Original Complaint
Defendants provide the following pre-August 2007 documents in support of their claim that the statute of limitations began to run more than one year before the August 20, 2008, filing of the Original Complaint by NJ Carpenters: 1) two news articles documenting a mortgage fraud scheme in Alaska (Exs. LL, MM);
Defendants' own motion papers persuasively explain why a complaint assembled from the information contained in the above exhibits would not survive a 12(b)(6) motion. The bulk of these exhibits canvass general, industry-wide practices that are not merely "untethered to the transactions that are the subject of [the Original] Complaint" (Defs' Memo, at 16), but are unconnected to any of the entities that were involved in the origination, packaging, and sale of the BSMF 2006-AR1 trust.
More significantly, even though evidence of improprieties and irresponsible risk-taking in the MBS industry began to emerge in early 2007, there is no indication that the BSMF 2006-AR1 Certificates declined in value. Indeed, according to Defendants' chart detailing Certificate downgrades, the earliest downgrade of any Certificate issued from the BSMF 2006-AR1 trust occurred on December 14, 2007, and the earliest downgrade of a AAA-rated Certificate (the only Certificates any Plaintiff held) from that trust occurred on June 19, 2008. (Ex. ZZ.) The fact that the Certificates retained their ratings amidst growing concerns about the MBS industry is significant for two reasons.
First, absent a decline in the Certificates' ratings (or some other indicator of a
Because Defendants have failed to show that NJ Carpenters could have pled facts sufficient to survive a 12(b)(6) motion in August 2007, the Court concludes that the Original Complaint was timely.
2. Timeliness of Subsequent Complaints
Defendants also allege that the FAC (filed May 15, 2009) and the Pension Trust Complaint (filed July 9, 2009) are untimely. Defendants marshal publicly available sources that refer to missteps, misfortunes, and malefactions of corporations involved in the packaging and sale of the securities at issue here, including: 1) two complaints from May and July 2007 against Countrywide for violating Truth in Lending laws and misrepresenting the quality of its mortgage investments (Ex. MMM, NNN); 2) the collapse of Bear Stearns in March 2008 (FAC ¶ 105); and 3) AHM's worsening financial condition as a result of its investment in subprime mortgages. (Ex. NN.) In addition, Defendants catalogue more than 900 downgrades to investment grade Certificates issued by the 13 trusts added after the Original Complaint. (See Defs' Memo, at 37; Ex. ZZ.)
It is not clear that a complaint whose allegations were supported solely by this body of information would survive a Rule 12(b)(6) motion. The two complaints against Countrywide detail conduct that is only tangentially related to the TAC's allegations concerning underwriting practices and improper appraisals. (See Ex. MMM (suit alleging deceitful lending practices); Ex. NNN (suit alleging insider trading, artificial inflation of stock prices, and misrepresentations concerning stock prospects)).
Defendants' downgrade figure is also severely misleading. First, it characterizes hundreds of "negative watches" as downgrades even though the latter do not constitute rating changes.
Accordingly, the Court finds that the subsequent complaints were timely filed.
B. Statute of Repose
Defendants further argue that Plaintiffs' claims are untimely to the extent they were first asserted by actual buyers from offerings more than three years after the offering date. The Court recently addressed this very argument in In re Morgan Stanley Mortg. Pass-Through Certificates Litigation, 810 F.Supp.2d 650 (S.D.N.Y.2011). That decision concluded that, under the tolling rule announced in American Pipe & Construction Co. v. Utah, 414 U.S. 538, 94 S.Ct. 756, 38 L.Ed.2d 713 (1974), the commencement of the original class action tolled the statute of repose for all members of the putative class, even where the original named plaintiffs lacked standing to bring some of the claims. In re Morgan Stanley, 810 F.Supp.2d at 665-71. Here, named Plaintiffs had asserted claims on behalf of purchasers of Certificates from each of the 14 trusts as of July 19, 2009, Pension Trust Complaint-less than three years after each of the offerings' issuance dates.
II. Pleading Actionable Misrepresentations/Omissions
The Court will address Defendants' arguments that Plaintiffs have failed to state viable claims of misrepresentations or omissions as they relate to the three categories of allegations — underwriting standards, appraisals, and investment ratings — made in the TAC.
A. Misrepresentations and Omissions Regarding Underwriting Standards
Defendants first contend that Plaintiffs fail to meet their pleading burden under Twombly and Iqbal by failing to proffer facts linking the alleged disregard for underwriting standards with the decline in the Certificates' value. This contention is without merit. The Complaint is replete with public reports and detailed statements by numerous confidential witnesses
Defendants next contend that the Offering Documents contained "robust risk disclosures" (Defs' Memo. at 15), including disclaimers that a downturn in the housing market could adversely affect the value of Plaintiffs' Certificates, and that the originators would grant exceptions from stated underwriting guidelines. These warnings, Defendants contend, "bespoke caution." Under the "bespeaks caution" doctrine, "[c]ertain alleged misrepresentations in a stock offering are immaterial as a matter of law because it cannot be said that any reasonable investor could consider them important in light of adequate cautionary language set out in the same offering." See Halperin v. eBanker USA.com, Inc., 295 F.3d 352, 357 (2d Cir.2002).
The "bespeaks caution" doctrine is inapposite to the market-downturn disclosure. The doctrine only applies where a plaintiff alleges that the defendant made misleading statements about the possibility that future, unforeseen events could undermine an investment's value; it does not apply to cases, such as this, where a plaintiff alleges omissions or misrepresentations of historical fact — i.e., that the underwriting standards were followed. P. Stolz Family Partnership L.P. v. Daum, 355 F.3d 92, 97 (2d Cir.2004). The doctrine is also inapposite to the disclaimer that exceptions had been granted. For the "bespeaks caution" doctrine to shield a seller from liability, the "cautionary language
Accordingly, the Court finds that the TAC properly states a claim as to the underwriting allegations.
B. Misrepresentations and Omissions Regarding Appraisals
Defendants also argue that Plaintiffs' appraisal-related allegations fail to state a claim. According to the allegations in the TAC, the Offering Documents represented that the property appraisals conformed to the Uniform Standard of Professional Appraisal Practice ("USPAP") and were conducted by "qualified independent appraisers." (TAC ¶¶ 80, 84, 96, 102.) In fact, originators systematically disregarded their stated appraisal standards, and strong-armed appraisers to inflate property values. (See, e.g., id. ¶¶ 58, 109-10, 121, 154, 190.) In moving to dismiss the appraisal-related claims. Defendants rely principally on Tsereteli v. Residential Asset Securitization Trust 2006-A8, 692 F.Supp.2d 387 (S.D.N.Y.2010), which held that property appraisals and corresponding LTV ratios are "subjective opinion[s]" that are "actionable under the Securities Act only if the [plaintiff] alleges that the speaker did not truly have the opinion at the time it was made." Id. at 393-94. Defendants argue that the appraisal claims fail because the TAC does not allege that any Defendants were involved in appraising properties or knew that the loans underlying the Certificates were based on "inflated appraisals."
Defendants' argument misses the mark. Plaintiffs do not merely allege that the appraisal amounts were incorrect; they allege that the appraisals were not conducted in accordance with the industry standards identified in the Offering Documents. The former allegation differs from the latter in the same way the statement "the cook baked a delicious cake" differs from the statement "the cook followed the cake recipe on the box": the former is opinion, the latter an assertion of fact. Likewise, the conclusion that a house is worth $500,000 may be a statement of subjective opinion, but the assurance that the $500,000 figure was reached in accordance with a body of professional appraisal standards is a statement of verifiable fact.
Second, to the extent the TAC does bring a claim based on the inaccuracy of the appraisal values — as opposed to appraisal methodology used — Plaintiffs have pled facts supporting an inference that these opinions were not only objectively false, but also subjectively false. Because the appraisal "opinions" were expressed by both the originators and Bear Stearns (by incorporating the originators' representations into the Offering Documents), Plaintiffs can state a claim by showing that either one disbelieved the appraisal amounts. Cf. In re Twinlab Corp. Sec. Litig., 103 F.Supp.2d 193, 203 (E.D.N.Y. 2000) (liability under '33 Act may attach
Accordingly, the TAC's allegations that the Offering Documents failed to disclose the allegedly rampant violation of appraisal standards is sufficient to state a claim.
C. Misrepresentations and Omissions Regarding Investment Ratings
Defendants further contend that the TAC fails to state a claim regarding the investment ratings.
(TAC ¶ 184.) The Offering Documents also stated that "[i]t is a condition to the issuance of each class of Offered Certificates that it receives at least the ratings set forth [in the prospectus supplement] from S & P and Moody's." (Id.) The TAC alleges that the Offering Documents failed to disclose that the ratings process relied on inaccurate mortgage loan data, stale delinquency, and outdated models, and that the ratings process was compromised by conflicts of interest. While the TAC does not allege that the Offering Documents misstated the ratings that the Agencies assigned to the Certificate, Plaintiffs argue that Defendants nonetheless had a duty, under 17 C.F.R. § 230.408(a),
It is well-settled that investment ratings are subjective opinions and, accordingly, only actionable where "the speaker did not truly believe the statements at the time it was made public," see, e.g., N.J. Carpenters Health Fund v. DLJ Mortg. Capital, Inc., No. 08 Civ. 5653, 2010 WL 1473288, at *7-8 (S.D.N.Y. Mar. 29, 2010); In re IndyMac Mortg.-Backed Sec. Litig., 718 F.Supp.2d 495, 511-12 (S.D.N.Y.2010), or if the speaker "knowingly omits undisclosed
Plaintiffs have not, however, adequately pled a claim based on the theory that the Rating Agencies disbelieved their ratings. The TAC includes excerpts of reports from 2007 and 2008 in which Moody's and S & P personnel admitted that, in hindsight, their rating models and procedures were flawed. (See, e.g., TAC ¶ 187 (quoting Moody's Managing Director as saying: "There is a lot of fraud that's involved there, things that we didn't see... We're sort of retooling those to make sure that we capture a lot of the things that we relied on in the past that we can't rely on, on a going forward basis."); id. ¶ 193 (quoting former S & P Managing Director as saying: "[E]vents have demonstrated that the historical data we used and the assumptions we made significantly underestimated the severity of what has actually occurred.")). These retrospective remarks are insufficient to support an inference that the Rating Agencies disbelieved the ratings at or before the time of the offerings. Plumbers' Union, 632 F.3d at 775.
However, Plaintiffs also argue that Defendants could not reasonably have believed that the ratings were accurate because "the information Bear Stearns provided to the Rating Agencies regarding the loans underlying the pools at issue was faulty and inaccurate." (Pls' Opp. at 22.) Unlike Plaintiffs' allegations about the conflict of interest
This missing information is crucial. If Bear Stearns knowingly fed incomplete or inaccurate information to the Rating Agencies, or discovered after the Agencies rated the Certificates that they did so based on defective loan data, it follows that Bear Stearns could not have reasonably believed that the ratings accurately reflected the Certificates' risk. In either case, the ratings' unqualified reproduction in the Offering Documents would constitute an actionable misrepresentation and omission.
III. Section 15 Claim
Defendants move to dismiss all claims against the Individual Defendants. In order to establish a prima facie Section 15 claim, a plaintiff must show (1) control, and (2) an underlying violation of Section 11 or Section 12(a)(2). In re Lehman Bros. Mortgage-Backed Securities Litigation, 650 F.3d 167 (2d Cir.2011). As explained above, the complaint's allegations are sufficient to state claims for primary
The Second Circuit has defined control as "the power to direct or cause the direction of the management and policies of [the primary violators], whether through the ownership of voting securities, by contract, or otherwise." In re Lehman Bros., 650 F.3d at 185 (quoting SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1472-73 (2d Cir.1996)). While the Second Circuit has yet to address the question of whether a plaintiff bringing a Section 15 claim must allege "culpable participation," a majority of judges in this District-including the undersigned-have held such an allegation is not required. Plumbers' & Pipefitters' Local No. 562 Supplemental Plan & Trust v. J.P. Morgan Acceptance Corp. I, No. 08 Civ. 1713(ERK), 2012 WL 601448, at *20-21 (E.D.N.Y. Feb. 23, 2012); In re Deutsche Bank AG Securities Litigation, No. 09 Civ. 1714(DAB), 2011 WL 3664407, at *11 (S.D.N.Y. Aug. 19, 2011); In re Refco, Inc. Securities Litigation, 503 F.Supp.2d 611, 637 n. 24 (S.D.N.Y.2007); American High-Income Trust v. Alliedsignal, 329 F.Supp.2d 534, 549 (S.D.N.Y.2004). Here, Plaintiffs have alleged that Individual Defendants are (1) officers or directors of the Depositors who (2) each signed one or both of the Registration Statements at issue. These allegations satisfy Plaintiffs' obligation to plead control. See, e.g., In re Flag Telecom Holdings, Ltd. Sec. Litig., 352 F.Supp.2d 429, 457 (S.D.N.Y.2005) (officers or directors of defendant corporation who signed the Registration Statement exercised control), abrogated on other grounds, 574 F.3d 29 (2d Cir.2009); In re Philip Servs. Corp. Sec. Litig., 383 F.Supp.2d 463, 485 (S.D.N.Y.2004) (same).
Accordingly, the Court finds that Plaintiffs have adequately pled a Section 15 claim.
IV. Pleading of Cognizable Injury
Plaintiffs allege that the value of the Certificates at issue has diminished greatly since their original offering, as has the price at which Plaintiffs and other members of the Class could dispose of them. Plaintiffs have also realized losses by disposing of many of the Certificates at as little as one-third of their purchase price. The decline in value and the losses that Plaintiffs suffered as a result of the sale of their Certificates are alleged with specificity.
Defendants contend that the Offering Documents disclosed the risk that the Certificates could diminish in value, and that purchasers might be forced to sell them at a loss. In light of these disclosures, Defendants argue that Plaintiffs can only show cognizable injury if they demonstrate that pass-through payments were missed. This argument is essentially the same one Defendants made in support of their contention that Plaintiffs had failed to state a claim based on underwriting practices, and it fails for the same reason — the Offering Documents' generic disclosures about market fluctuations did not advise purchasers that the Certificates' value would decline due to noncompliance with appraisal and underwriting guidelines. Plaintiffs' allegations regarding the Certificates' decline in value and their resale at a loss identify legally cognizable injuries. See In re Morgan Stanley, 810 F.Supp.2d at 670-72; New Jersey Carpenters Health Fund v.
Accordingly, the Court denies Defendants' motion to the extent it seeks to dismiss the TAC for failure to plead a legally cognizable injury.
V. The "Sole Remedy" Provision
In each securitization, the mortgage loan seller made representations and warranties in the mortgage loan purchase agreement ("MLPA") regarding each loan, including representations that "at the time of origination, each Mortgaged Property was the subject of an appraisal which conformed to the underwriting requirements of the originator of the Mortgage Loan" and that "each Mortgage Loan was originated in accordance with the underwriting guidelines of the related originator." (See, e.g., BALTA 2006-6 MLPA, § 7, attached as Ex. KK to the Robins Decl.) The MLPA further provided that:
(Id. § 7(xxvii).) The Prospectus for BALTA 2006-6 recited the general content of certain representations that each mortgage seller made, described the seller's obligation under the MLPA to cure violations of the representations, or repurchase or substitute loans whose characteristics are inconsistent with the representations, and described the obligations of the master servicer or trustee in connection with the enforcement of the seller's obligations under the MLPA; the Prospectus provides that the obligations described "will constitute the sole remedies available to securityholders or the trustee for a breach of any representation by a Seller or for any other event giving rise to the obligations as described above." (See BALTA 2006-6 Prosp. at 20-25, attached as Ex. G to the Robins Decl.)
Relying on Lone Star Fund V (U.S.), L.P. v. Barclays Bank PLC, 594 F.3d 383 (5th Cir.2010), Defendants argue that, even if Plaintiffs have adequately pled material misrepresentations or omissions, the sole remedy for breach of any representations or warranties is for the seller to repurchase or replace the particular nonconforming loans.
Defendants' reliance on Lone Star is misplaced. There, the plaintiffs discovered a number of delinquent mortgages in the loan pools and brought a misrepresentation claim based specifically on the breach of a representation in a prospectus supplement that there were "no delinquent loans." 594 F.3d 383, 388. The prospectus supplement contained a "sole remedy" provision, similar to that in the BALTA 2006-6 documentation, providing that the defendant would "substitute or repurchase" delinquent loans. The Fifth Circuit affirmed the dismissal of the claim, holding that the plaintiffs could not state a misrepresentation claim based on the limited number of delinquencies that had been identified because the defendant never represented that the pools were "absolutely
Nor are the claims in the instant case as limited as those in Lone Star. Here, Plaintiffs point not only to seller representations as to the conformity of specific loans, but to representations in the Registration Statement and other Offering Documents concerning the underwriting and appraisal practices that were employed in constituting the pools. Rather than claiming a limited number of deviations from the underwriting and appraisal standards, Plaintiffs claim that the representations were belied by systemic noncompliance. While the "sole remedy" clause could be read as an acknowledgment of occasional underwriting violations, it cannot be read as an acknowledgment of the pandemic of violations that Plaintiffs allege. See City of Ann Arbor Employees' Retirement System v. Citigroup Mortg. Loan Trust Inc., 08 No. 1418(LDW), 2010 WL 6617866, at *7 (E.D.N.Y. Dec. 23, 2010) (distinguishing Lone Star on the same grounds); Emps. Ret. Sys. of the Gov't of the Virgin Islands v. J.P. Morgan Chase & Co., et al., 804 F.Supp.2d 141, 151-52 (S.D.N.Y.2011) (same); Boilermakers Nat. Annuity Trust Fund v. WaMu Mortg. Pass Through Certificates, Series AR1, 748 F.Supp.2d 1246, 1256 (W.D.Wash.2010) (same).
Moreover, preclusion of statutory remedies through limiting language in the Offering Documents would violate the well-established rule that "individual security holders may not be forced to forego their rights under the federal securities laws due to a contract provision." McMahan & Co. v. Wherehouse Entm't, Inc., 65 F.3d 1044, 1051 (2d Cir.1995); see also 15 U.S.C.A. § 77n (West 2010) ("Any condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this subchapter... shall be void.").
Accordingly, Defendants' argument that the "sole remedy" language precludes Plaintiffs' damages claims under Sections 11 and 12(a)(2) fails.
VI. Tranche Standing
Although not raised in their moving papers, Defendants argue in post-briefing letters that the named Plaintiffs lack
Plaintiffs argue that they have standing to sue as to every tranche because at least one named Plaintiff purchased from every offering; the tranches in each offering were constituted from "a single pool of mortgages" and the Certificates from each tranche were "issued pursuant to identical Offering Documents containing the exact statements Plaintiffs allege [are] untrue." (Pls' Jan. 4, 2012, Letter at 5.) Thus, Plaintiffs contend, the untrue statements and omissions in the Offering Documents regarding the quality of the underlying loan pool negatively affected all tranches within each respective offering in a like manner. See Genesee County Employees' Retirement System v. Thornburg Mortg. Securities Trust 2006-3, 825 F.Supp.2d 1082, 1211-14 (D.N.M.2011) (rejecting tranche-based standing).
A. Constitutional Standing
To have standing under Article III, "a plaintiff must allege an actual or threatened injury to himself that is fairly traceable to the allegedly unlawful conduct of the defendant." Lamar Advertising of Penn, LLC v. Town of Orchard Park, New York, 356 F.3d 365, 373 (2d Cir.2004) (citation omitted). This requirement is "no less true with respect to class actions than with respect to other suits." Lewis v. Casey, 518 U.S. 343, 357, 116 S.Ct. 2174, 135 L.Ed.2d 606 (1996); Central States Southeast and Southwest Areas Health and Welfare Fund v. Merck-Medco Managed Care, L.L.C., 433 F.3d 181, 199 (2d Cir.2005). To bring suit on behalf of a class, the named plaintiffs "must allege and show that they personally have been injured, not that injury has been suffered by other, unidentified members of the class to which they belong and which they purport to represent." Warth v. Seldin, 422 U.S. 490, 502, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975). Put differently, the named plaintiff "must be a part of that class, that is, he must possess the same interest and suffer the same injury shared by all members of the class he represents." Schlesinger v. Reservists Committee to Stop the War, 418 U.S. 208, 216, 94 S.Ct. 2925, 41 L.Ed.2d 706 (1974). "[I]f none of the named plaintiffs purporting to represent a class establishes the requisite of a case or controversy with the defendants, none may seek relief on behalf of himself or any other member of the class." O'Shea v. Littleton, 414 U.S. 488, 494, 94 S.Ct. 669, 38 L.Ed.2d 674 (1974).
It is uncontested here that at least one named Plaintiff purchased securities from every offering. It is likewise uncontested that each tranche within a given
Defendants' central contention — that named Plaintiffs lack standing to sue over losses in the tranches which they did not purchase because an investor is not injured when a security she does not hold declines in value — reflects an excessively narrow view of the standing requirements for a lead plaintiff.
Defendants' assertion that named Plaintiffs lack standing over tranches they did not purchase because each tranche differs in its particularities is no more convincing. Arguing that named Plaintiffs lack standing because each tranche has, for example, a unique CUSIP number and a different interest rate is akin to asserting that the hypothetical plaintiff who drove a red two-door model lacks standing to sue on behalf of those who were driving the blue four-door model with the same faulty brake design. They are, in short, legally inconsequential distinctions. Defendant has identified no substantive differences among the tranches that would warrant treatment of the tranches as separate securities here for Article III standing purposes.
Once, as here, a named plaintiff has established that she suffered the same species of injury as the members of the class, traceable to the same unlawful conduct by a defendant, she has fulfilled the requirements of constitutional standing. Having satisfied Article Ill's standing criteria, the dissimilarities between the tranches is an issue appropriately left to the class certification stage. See 7AA Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1785.1, at 388-89 (2d ed. 2005) ("Representative parties who have a direct and substantial interest have standing; the question whether they may be allowed to present claims on behalf of others who have similar, but not identical, interests depends not on standing, but on an assessment of typicality and adequacy of representation.").
B. Statutory Standing
Section 11(a) provides that where "any part of the registration statement ... contained an untrue statement of a material fact or omitted to state a material fact... any person acquiring such security" may sue. 15 U.S.C.A. § 77k(a) (West 2010). Section 12(a)(2) similarly provides that, where an individual "offers or sells a security ... by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact," that individual will be liable to "the person purchasing such security." 15 U.S.C.A. § 77l(a)(2) (West 2010). The dispute here centers on the meaning of the phrase "such security" in either section. Relying on Maine State Retirement Sys., WaMu, and Plumbers, Defendants interpret "such security" to
The text of Sections 11 and 12(a)(2) does not support Defendants' interpretation. While the phrase "such security" has no grammatical referent in Section 11(a), the text makes clear that the only prerequisite to filing suit is the presence of a misrepresentation or omission in its registration statement. Section 12(a)(2) is even clearer: there, the referent of "such security" is "a security [sold] ... by means of a prospectus or oral communication" that contains a material misrepresentation or omission. Neither makes any reference to the characteristics of the security outside the flaw in its offering documents. There is no mention of common rates of return, equivalent ratings, shared interest rates, or investors' needs and expectations. Cf. Maine State Retirement Sys., 2011 WL 4389689, at *7 (emphasizing that the tranches "provided a different investment opportunity with unique characteristics" to allow each investor to choose the security "that best matched its needs"). In short, there is nothing in the record that indicates that the differences between the tranches that the Defendants' identify warrant treating the tranches — which were issued pursuant to the same, allegedly defective Offering Documents — as "different" securities for the purpose of Sections 11 and 12(a)(2). See, e.g., In re Countrywide Financial Corp. Securities Litigation, 588 F.Supp.2d 1132, 1165-66 (C.D.Cal.2008) ("[Section 11] grants standing to anyone who buys `such security' — one traceable to a defective registration statement."); see also In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288(DLC), 2004 WL 540450, at *6-7 (S.D.N.Y. Mar. 19, 2004) (purchasers of one type of debt security (domestic) had standing to pursue claims of purchasers of a second type of debt security (foreign) issued pursuant to the same registration statement); In re Fleming Cos. Sec. & Derivative Litig., No. 5-03-MD-1530 (TJW), 2004 WL 5278716, at *49 (E.D.Tex. June 10, 2004) ("purchasers of one type of security have standing to sue on behalf of purchasers of other types of security issued pursuant to a single registration statement"); see also In re CitiGroup Bond Litig., 723 F.Supp.2d 568, 584-85 (S.D.N.Y.2010) (named plaintiff has standing under Sections 11 and 12(a)(2) to bring suit based on offerings from which it did not purchase where alleged misrepresentations were in a registration statement common to all offerings); accord In re Am. Int'l Group, Inc., 741 F.Supp.2d 511, 538 (S.D.N.Y.2010).
The Court recognizes that the dissimilarities between the tranches can be highly relevant to those who purchased them; but there is nothing in the text of Sections 11 and 12(a)(2) that enables the Court to assign any statutory standing significance in this case to the mere fact that the securities differ in their bibliographic, payment priority, or rate of return particulars. As with constitutional standing, to the extent these differences are relevant, they may be appropriately addressed at the class certification stage.
Defendants' motion to dismiss the TAC is granted without prejudice insofar as
This opinion and order resolves docket entry no. 138.