MEMORANDUM OF OPINION AND ORDER [RegardingEcf Nos. 289; 291; 292; 293; 295]

BENITA Y. PEARSON, District Judge.

Pending before the Court are motions to dismiss pursuant to Fed. R. Civ. Pro. 12(b)(6) and Rule 9(b) filed by Defendants Federal Home Loan Mortgage Corporation, aka "Freddie Mac"; Richard F. Syron; Patricia L. Cook; Anthony S. Piszel; and Eugene M. McQuade (collectively "Defendants"). ECF Nos. 289; 291; 292; 293; 295. The Court has been advised by the record, including the parties' submissions, applicable law, and oral argument. For the reasons explained below, the Court grants Defendants' motions.

I. Background

A. The Parties

Lead Plaintiff, Ohio Public Employees Retirement System (also referred to as "OPERS"), is a state pension fund. Defendant Freddie Mac is a government-sponsored enterprise chartered by Congress. ECF Nos. 166 at 4, ¶1. Its public mission is to support, stabilize, and expand the secondary market for mortgages by purchasing mortgages and mortgage-related securities. Id.; 297 at 13. Under the terms of its charter, Freddie Mac's business is limited to the purchase of home mortgages and securities—it may not originate loans or engage in any other business. Id. at 13-14; see also 12 U.S.C. § 1454. Freddie Mac packages the mortgages into securities and sells them in the capital markets (the "guarantee portfolio"). ECF No. 297 at 14. It also purchases mortgage-related securities created by others (the "retained portfolio"). Id. On November 20, 2007, the value of Freddie Mac's common shares dropped 29% in one day. ECF No. 166 at 6, ¶6. The owners of Freddie Mac shares immediately lost approximately $6.6 billion in share value. Id.

OPERS purchased Freddie Mac's common stock and filed this putative class action on behalf of itself and all others similarly situated and seeking redress for financial loss caused by the alleged material misrepresentations and omissions made by Defendants spanning August 1, 2006 to November 20, 2007, the "class period." ECF No. 166 at 9, ¶13. In addition to suing Freddie Mac, Plaintiff also brings this action against certain Freddie Mac executives. Defendant Richard Syron was Chairman of the Board and Chief Executive Officer, Id. at 11, ¶20, and Defendant Patricia Cook was Chief Business Officer and Executive Vice President for Investments and Capital Markets during the class period. Id. at 13-14, ¶21. Defendant Anthony Piszel was Executive Vice President and Chief Financial Officer, Id. at 15, ¶22, and Defendant Eugene McQuade was President and Chief Operating Officer for most of the class period. Id. at 16, ¶23.

B. Allegations1

The Third Amended Complaint ("TAC") alleges two causes of action. Count 1 alleges a violation of Section 10(b) of the Securities and Exchange Act, 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5, for making false statements of material fact in connection with the purchase or sale of any security. Count 2 alleges a violation of Section 20(a) of the Act, 15 U.S.C. § 78t(a), for control person liability. See ECF No. 166 at 123-127.

Generally, Plaintiff alleges that, during the class period, Defendants misrepresented the amount of products it purchased that were considered "subprime" loans. Id. at 4, ¶3. There is no universally accepted definition of "subprime."2 Id. at 80, ¶182 (citing Freddie Mac's 2Q07 Report); ECF No. 301 at 41. "Subprime" is generally used to describe a loan that is high risk due to a greater likelihood of default, and may "include a combination of high loan-to value ratios, low credit scores or originations using lower underwriting standards such as limited or no documentation of a borrower's income." Id. at 12; ECF No. 166 at 80, ¶182. Plaintiff alleges that Defendants committed fraud when they made statements indicating Freddie Mac's subprime exposure was low despite knowing that Freddie Mac's subprime exposure was high. ECF No. 166 at 5, ¶3. Plaintiff alleges that Defendants

Id. at 4, ¶2.

On November 20, 2007, Freddie Mac issued a press release that Plaintiff alleges revealed, "[f]or the first time, . . . that [Freddie Mac's] investments in subprime and nontraditional mortgage products had subjected [it] to significant risk and caused it to sustain substantial losses." Id. at 89, ¶190. As a result of these "unanticipated revelations," Plaintiff alleges, Freddie Mac stock dropped 29%. Id. at ¶191. This lawsuit followed.

II. Legal Standard

In deciding a motion to dismiss pursuant to Fed. R. Civ. Pro. 12(b)(6), the Court must take all well-pleaded allegations in the complaint as true and construe those allegations in a light most favorable to the plaintiff. Erickson v. Pardus, 551 U.S. 89, 94 (2007) (citations omitted). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations. When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief." Id. at 679. The factual allegations in the complaint "must be enough to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555 (citing authorities).

In other words, claims set forth in a complaint must be plausible, rather than conceivable. Id. at 570. "[W]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged — but it has not `show[n]'— `that the pleader is entitled to relief.'" Iqbal, 556 U.S. at 679 (citing Fed. R. Civ. Pro. 8(a)(2)). The factual allegations in the complaint "must contain something more . . . than . . . merely creat[ing] a suspicion of a legally cognizable right." Twombly, 550 U.S. at 555-56 (quoting 5 C. Wright & A. Miller, Federal Practice and Procedure § 1216, p. 235-236 (3d ed.2004)). In addition to reviewing the claims set forth in the complaint, a court may also consider exhibits, public records, and items appearing in the record of the case as long as the items are referenced in the complaint and are central to the claims contained therein. Bassett v. Nat'l Collegiate Athletic Ass'n, 528 F.3d 426, 430 (6th Cir. 2008); Erie County, Ohio v. Morton Salt, Inc., 702 F.3d 860, 863 (6th Cir. 2012).3

III. Analysis

"Section 10(b) of the Securities Exchange Act of 1934[] and Rule 10b-5 `prohibit fraudulent, material misstatements or omissions in connection with the sale or purchase of a security.'" Zaluski v. United American Healthcare Corp., 527 F.3d 564, 570 (6th Cir. 2008) (quoting PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 680-81 (6th Cir. 2004)). To prevail on Count 1, a successful plaintiff must prove each of the following: "(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Ind. State Dist. Council of Laborers & Hod Carriers Pension & Welfare Fund v. Omnicare, Inc., 583 F.3d 935, 944 (6th Cir. 2009) (quoting Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 157 (2008)). Count 2 requires a predicate Section 10(b) violation. PR Diamonds, 364 F.3d at 696-97. Therefore, failure to adequately plead Count 1 dooms Count 2.

In the case at bar, Plaintiff alleges five types of misstatements: (1) Freddie Mac's subprime exposure; (2) Freddie Mac's underwriting guidelines and its adherence to those guidelines; (3) Freddie Mac's loan analysis software and fraud detection system; (4) Freddie Mac's risk management measures and risk management performance; and (5) Freddie Mac's capital position. Plaintiff alleges that the "primary fraud was Defendants' failure to disclose Freddie Mac's true subprime exposure." ECF No. 166 at 4, ¶3.

Defendants argue that the Third Amended Complaint should be dismissed because Plaintiff fails to allege three essential elements of Count 1—a false material statement or omission, a strong inference of scienter, and loss causation-and, because there is no primary violation, Count 2's claim for secondary or control person liability also fails, as alleged in Count 2. The Court addresses the element of loss causation first.

A. Loss Causation

A plaintiff in a securities fraud class action must plead and prove loss causation. Dura Pharms. Inc. v. Broudo, 544 U.S. 336, 346 (2005). This is essential. Failure to meet this element is fatal to a claim of securities fraud. See D.E. & J. Ltd. P'ship v. Conway, 133 Fed. App'x 994, 999 (6th Cir. 2005) (affirming district court dismissing action for failure to plead loss causation, explaining that "private securities-fraud plaintiffs may recover damages only when they `adequately allege and prove the traditional elements of causation and loss[,]'" quoting Dura, 544 U.S. at 346)); In re KBC Asset Mgmt N.V., 2014 WL 3397593, at *3-5 (6th Cir. July 11, 2014) (affirming district court dismissal for failure to plead loss causation).

Loss causation requires "a causal connection between the material misrepresentation and the loss." Id. at 342. Merely alleging that investors purchased stock at an inflated price is not enough to state a claim—"a plaintiff must show that an economic loss occurred after the truth behind the misrepresentation or omission became known to the market." Omnicare, 583 F.3d at, 944) (citing Dura, 544 U.S. at 346-47). See also D.E. & J. Ltd. P'ship, 133 Fed. App'x at 998-99); In re KBC Asset Mgmt N.V., 2014 WL 3397593, at *3-5).

Defendants argue that Plaintiff's Third Amended Complaint does not adequately plead loss causation. ECF No. 297 at 18.4

Plaintiff advances two theories under which loss causation can be alleged—"(a) a corrective disclosure or a previously undisclosed truth [that] causes a[] decline in the stock price, or (b) the materialization of a concealed risk [that] causes a stock price decline."5 ECF No. 301 at 75.

Regardless of the descriptor affixed to the causation theory, the parties agree that there must be some disclosure or revelation that had previously been concealed from the market. See, e.g., ECF Nos. 301 at 77 (Plaintiff's opposition brief); 318 at 6 (Plaintiff's glossary); 290 at 46 (Defendant Cook's motion brief). As explained below, the Court finds that Plaintiff fails to plausibly plead loss causation.

I.

Plaintiff identifies a press release and a financial report both released by Freddie Mac on November 20, 2007 as the conduits for the alleged materialization or revelation.6 ECF No. 301 at 77, n. 309. Plaintiff submits that on November 20, 2007, Freddie Mac disclosed that

Id. at 77.7 Plaintiff contends that, "[i]n light of this new information," Freddie Mac's stock dropped 29% in a single day. Id. Plaintiff argues that the drop in price "confirms empirically that the market was previously unaware of the full extent of Freddie Mac's exposure to, and risk from, non-traditional mortgages (and risk of falling below its minimum capital requirements), and, thus, loss causation." Id. Defendants contend the drop was caused by the national financial crisis.8 ECF No. 306 at 46.

Regarding the information complained of in Plaintiff's item (a), the Court observes that disclosing a $2 billion loss during the third quarter, by itself, does not reveal that Freddie Mac had concealed its subprime and other nontraditional risk exposure, and, as importantly, Plaintiff does not allege otherwise. As for Plaintiff's item (b), the increased purchases of certain mortgages refers to "[t]otal non-traditional mortgage products, including those designated as Alt-A and interest-only loans," not loans deemed "subprime." See ECF No. 290-22 at 104. Furthermore, before November 2007, Freddie Mac had already disclosed that it was increasing its purchase of non-traditional mortgage products that may default more often:

ECF No. 298-2 at 81 (Freddie Mac's 2006 Annual Report, dated March 23, 2007) (emphasis added). See also ECF No. 298-1 at 81 (2005 Annual Report, dated June 28, 2006). Plaintiff identifies the following portion of the November 20, 2007 financial report as a disclosure of risk that had been previously concealed by Freddie Mac:

See ECF No. 290-22 at 103-104. At oral argument, referring to the passage above, Plaintiff intoned:

ECF No. 325 at 82-83. Contrary to Plaintiff's argument, Freddie Mac's 2006 Annual Report had revealed that it was increasing the number of riskier mortgages that it purchased and that it expected them to default more frequently. November 20, 2007 was not the first time Freddie Mac disclosed its credit risk exposure.

In the Third Amended Complaint, Plaintiff refers to the alleged disclosures as "a newly emerging truth." ECF No. 166 at 123, ¶271. Plaintiff alleges,

Id. at 103, ¶227 (emphasis added). It goes without saying that events occurring after November 20, 2007 did not cause events occurring November 20, 2007.9 Furthermore, Freddie Mac had previously disclosed that it was investing in non-traditional mortgage products. See ECF Nos. 298-2 at 81 (2006 Annual Report); 298-1 at 81 (2005 Annual Report).

Plaintiff also alleges that

ECF No. 166 at 122, ¶271 (emphasis added). Once again, Plaintiff does not identify a portion of the November 20, 2007 press release or financial report that amounted to a relevant partial corrective disclosure.

Almost as an aside, Plaintiff submits that what Defendants meant when they publically used the word "subprime" was not the same as what Defendants meant when they internally used the word "subprime." See ECF No. 301 at 41-43. This, however, is Plaintiff's rationale for the alleged wrongdoing—that Defendants purposefully misled the public about the amount of subprime loans Freddie Mac was exposed to by Defendants' use, or non-use, of the word "subprime." Id. Neither the November 20, 2007 press release nor the financial report, however, altered Defendants' prior definition of subprime. Neither disclosed that previous data regarding the type of loans Freddie Mac had purchased had been incorrect. Neither disclosed that underwriting guidelines, loan analysis software, fraud detection, or risk management measures were faulty or had not been followed. Neither disclosed that Freddie Mac's capital position had previously been misstated.

Plaintiff, in its item (c) above, posits that on November 20, 2007 Freddie Mac disclosed that it was in danger of falling below its minimum capital requirements. ECF No. 301 at 77. Plaintiff does not allege that Freddie Mac inaccurately reported the amount of its core capital base or that Freddie Mac's capital base fell below minimum capital requirements at any point during the Class Period.10 Moreover, Plaintiff does not respond to Freddie Mac's argument that it "cautioned investors that, among other things, house prices could adversely affect the adequacy of its regulatory capital." ECF No. 297 at 69 (quoting its 2005 Annual Report detailing how "[f]actors that could adversely affect the adequacy of our regulatory capital for future periods include . . . changes in the economic environment, such as large interest-rate or implied volatility moves or house-price declines.").

II.

At oral argument, Plaintiff relied on Hawaii Ironworkers Annuity Trust Fund v. Cole, et al., 2011 WL 1257756 (N.D.Ohio March 31, 2011) in support of its position.11 In that case, the lead plaintiff alleged the defendants, a supplier of automotive parts, misrepresented to the public that they were "thriving" despite a severe downturn in the automotive parts industry. Id. at *1. "When the overstatements became known, [defendant] had to redo its financial statements for those [previous] quarters," resulting in a severe stock drop. Id. The court, relying on Dura, denied the defendants' motion to dismiss, finding that the plaintiff had sufficiently alleged loss causation. Id. at *13-14. The court found that, "[w]hile it is true that the purposes of securities actions is "not to provide investors with broad insurance against market losses," Dura, supra, 544 U.S. at 345, it is sufficient that the decline results from revelation of the falsity of prior disclosures." Id. at 13. Applying Dura to the facts, the court in Hawaii Ironworkers recited the allegations in the complaint before it:

Id. The Hawaii Ironworkers court rejected the defendants' argument that the disclosure had to reveal "the misconduct itself," rather than "the economic impact of the fraudulent scheme." Id. The Hawaii Ironworkers court further stated that the "rapid decline of Dana's stock price following the news of inappropriate recognition of price increases in CVS indicates a substantial causal link between the defendants' alleged accounting fraud at CVS and the value of Dana's stock." Id. at 14.

Thus, in Hawaii Ironworkers, the plaintiff alleged, and the court relied on, some revelation to the public that amounted to a correction of previously disclosed information. Plaintiff does not appear to disagree with this reading of Hawaii Ironworkers, and during oral argument presented slides and argued that the "test" in Hawaii Ironworkers included a share price that fell "after the truth became known"; "some partial revelation of `the nature and extent of defendants' fraud'"; and whether "the share price f[e]ll as a result of this revelation." ECF No. 325 at 75-76 (showing slides). Plaintiff submits, and Defendants agree, that a plaintiff is not required to allege that a defendant confessed a fraud. See ECF No. 301 at 75 (Plaintiff's opposition brief) (stating "the loss causation inquiry focuses not on whether the company disclosed `that a fraud was committed per se, but that the truth about the company's underlying condition, when revealed, causes the economic loss.'"). Even so, there must be some revelation or disclosure about the truth of Defendants' previously concealed condition that caused a subsequent loss.

In the instant case, Plaintiff alleges that

ECF No. 166 at 122, ¶270. Although the paragraph above describes the stock price dropping "[w]hen these risks were realized," again, Plaintiff fails to describe a portion of the November 20, 2007 press release or financial report or any other document disclosed to the public that reveals that Freddie Mac had previously released false information. Rather, the information disclosed on November 20, 2007 merely communicated bad news to the public.12

Plaintiff makes much of Syron's statement in the 2006 Annual Report that, "[a]t years end, only 6 percent of our total mortgage portfolio was in nontraditional mortgages and the portfolio's average loan-to-value ratio was 57 percent." ECF No. 301 at 46-47; 325 at 95. Plaintiff contends that the actual number of non-traditional mortgages at that time was 11.1%, and cites to the March 20, 2007 Enterprise Risk Reports in support. ECF No. 301 at 47. However, the Enterprise Risk Report states, "[t]he portfolio is well-diversified and overall risk remains low with the share of untested mortgage products (UMPs) in the portfolio having risen from 10.1 percent at December 31, 2005, to 11.1 percent at December 31, 2006." ECF No. 302-10 at 16 (emphasis added). Even if "untested" and "non-traditional" are synonymous, as Plaintiff alleges, Plaintiff still does not identify information disclosed on November 20, 2007 that reveals to the public that the numbers in the previously released 2006 Annual Report had been misstated. See Kuriakose, 897 F.Supp.2d at 177 ("although some of Freddie Mac's statements were ultimately proven wrong, they `were accompanied by the underlying, accurate financial data, so that [investors] could review the financial information and evaluate the risk for themselves.'").

In summary, Plaintiff does not allege how the disclosures made on November 20, 2007 were corrective or revealed a truth behind the alleged misrepresentations. See Omincare, 583 F.3d at 944 ("a plaintiff must show that an economic loss occurred after the truth behind the misrepresentation or omission became known to the market"). The Court must agree with Defendant Freddie Mac's assessment:

ECF No. 327 at 3-4 (quoting Eaton Corp., 2014 WL 3397593, at *4). The circumstances are no different for the individual Defendants.

The parties agree that, in the Sixth Circuit, loss causation requires some revelation to the public that caused harm. Plaintiff had failed to identify such a revelation. This is fatal to Count 1.

III.

While acknowledging that Sixth Circuit case law requires a revelation, Plaintiff persists in arguing that it has adequately pleaded loss causation under the materialization of a concealed risk theory, a theory not adopted by the Sixth Circuit or persuasive to the Court.13 See ECF No. 301 at 75-76. Plaintiff defines this theory as

ECF No. 318 at 5-6.

Plaintiff presents no binding authority supporting a theory of loss causation that does not require a corrective revelation. See, e.g., In re Almost Family, Inc. Sec. Litig., 2012 WL 443461, at * 10-11 (W.D.Ky. Feb. 10, 2012) (rejecting the plaintiff's materialization of a concealed risk theory, concluding that the plaintiffs "must show some revelation of Defendant's fraud [] in order to satisfy the pleading requirements of loss causation.)." Perhaps more telling, even Plaintiff's definition of materialization of a concealed risk requires a disclosure or revelation of a misstatement or omission.

Because the Third Amended Complaint fails to plead loss causation—a showing of how Defendants' revelations caused Plaintiff's loss, a required element of a PSLRA claim—the Court need not consider whether the other elements are sufficiently pleaded. Additionally, because Plaintiff's claim under § 10(b) and Rule 10b-5 (Count 1) is dismissed, Plaintiff's secondary claim for control person liability under § 20 is also dismissed. See Omnicare, 583 F.3d at 947.

B. Leave to Amend Complaint

Plaintiff, in its brief opposing the individual Defendants' motions to dismiss, requests leave to file an amended complaint if the Court finds the Third Amended Complaint deficient. ECF No. 302 at 98. Permitting Plaintiff to amend the Third Amended Complaint would be futile. Plaintiff is a sophisticated institutional investor. Given the time and the obvious effort invested in this nearly six-year-old case, the Court has no bases to reasonably expect that Plaintiff can produce an improved pleading that would cure the fatal infirmary in the Third Amended Complaint. Moreover, Plaintiff did not file a formal motion for leave to amend, instead requesting permission to amend the complaint "almost as an aside in their brief opposing Defendants' motions to dismiss." See D.E.& J. Ltd. P'ship, 133 Fed.App'x at 1001-02 (affirming the district court's ruling denying the plaintiffs' request to file a fourth amended complaint). A Plaintiff "cannot expect `an advisory opinion from the Court informing them of the deficiencies of the complaint and then an opportunity to cure those deficiencies.'" Id. at 1002 (quoting Begala v. PNC Bank, Ohio, Nat'l Ass'n, 214 F.3d 776, 784 (6th Cir. 2000)). Accordingly, Plaintiff's request to amend the complaint a fourth time is denied.

IV. Conclusion

For the reasons explained above, the Court grants Defendants' Motions to Dismiss. ECF Nos. 289; 291; 292; 293; 295. Accordingly, Plaintiff's Third Amended Complaint is dismissed with prejudice and leave to file a fourth amended complaint is denied.

IT IS SO ORDERED.