SANDRA S. BECKWITH, Senior District Judge.
This matter comes before the Court on the following motions: Defendants' motion to dismiss (Doc. No. 78), Defendants' supplemental motion to dismiss (Doc. No. 79); Plaintiffs' motion to file an amended consolidated class action complaint (Doc. No. 83), Plaintiffs' motion to strike extraneous documents and references filed in support of Defendants' motion to dismiss (Doc. No. 90), and Plaintiffs' motion to file a surreply brief in opposition to Defendants' motion (Doc. No. 99). For the reasons that follow Defendants' motion to dismiss and supplemental motion to dismiss are
Generally speaking, this is a securities fraud class action against Fifth Third Bancorp. and other individual and institutional defendants arising out of alleged material misrepresentations and omissions by the Defendants during the period from October 19, 2007 to June 17, 2008. The consolidated complaint is comprised of or has under its umbrella essentially four different lawsuits involving four different subclasses of owners or purchasers of securities—First Charter Bank Stock, Fifth Third common stock, Fifth Third Preferred B stock, and Fifth Third Preferred C stock. The Court will address the specifics of the alleged misrepresentations and omissions in the course of its analysis of Defendants' motion to dismiss. The basic theme of the complaint, however, is that during the class period, Fifth Third represented that it followed conservative lending policies and had adequate capital reserves. The complaint alleges that in reality, however, during the class period Fifth Third abandoned its conservative lending policies and embarked on an aggressive campaign to originate what amounted to sub-prime loans. Moreover, the complaint alleges that despite being a de facto sub-prime lender, Fifth Third failed to set aside adequate loan loss reserves and misleadingly blamed the deteriorating credit quality of its loan portfolio on the downturn in the macro credit market instead of its own poor lending practices. Thus, the complaint alleges, the price of Fifth Third securities was artificially inflated during the class period and abruptly collapsed on June 17, 2008 when Fifth Third announced that it would to have raise capital through new securities offerings, cutting its dividends, and selling off non-core business assets.
On August 15, 2007, Fifth Third's Board of Directors approved the acquisition of
The complaint alleges that the registration/proxy statement filed with the SEC contained the following material misrepresentations and omissions:
Complaint ¶ 106. Fifth Third failed to correct any of these alleged misstatements and omissions prior to the final closing of the First Charter acquisition on June 6, 2008. Id. ¶ 108-110.
On June 18, 2008, Fifth Third issued a press release stating that it needed to strengthen its capital position in light of deteriorating credit trends. Therefore, Fifth Third stated that it was going to raise $1 billion in Tier 1 capital by issuing convertible preferred shares. Fifth Third also announced that it was going to reduce its quarterly dividend from $.44 per share to $.15 per share and that it was going to raise another $1 billion in capital by selling non-core businesses. After Fifth Third made this announcement, the price of its shares dropped from $12.73 to $9.26 on heavy volume. Id. ¶¶ 111-12.
The claims of the Preferred B sub-class plow much of the same ground as the First Charter sub-class. The claims of this subclass, however, specifically relate to filings Fifth Third submitted to the SEC in October 2007 in conjunction with its public offering of 34,500,000 shares of 7.25% Fifth Third Preferred B stock. The Preferred B prospectus incorporated by reference its Form S-3 automatic shelf registration statement of March 26, 2007, which in turn was signed by the Director Defendants. The offering itself was underwritten by the Underwriter Defendants. Id. ¶ 158.
The Preferred B prospectus included certain financial data for the six months ended June 30, 2007 and June 30, 2006, including Fifth Third's provision for loan and lease losses of $205 million and $149 million respectively. The prospectus also reported non-performing assets of $706 million as of September 30, 2007 and a loan loss provision of $139 million for the third quarter of 2007. Id. ¶¶ 159-60. The complaint alleges, however, that despite reporting these numbers, the prospectus was materially misleading because it failed to disclose that Fifth Third's non-performing assets were rapidly increasing as a result of its deficient lending practices. The complaint also alleges that the prospectus was materially misleading because Fifth Third failed to increase its loan loss provision to cover the losses. Therefore, the complaint alleges, Fifth Third overstated its income. Id. ¶ 161. Additionally, the Preferred B sub-class alleges that the prospectus was misleading because it contained substantially the same materially misleading misrepresentations and omissions listed, supra at 696, for the First Charter sub-class. Id. ¶ 162. The Preferred B sub-class alleges that when Fifth Third made its June 18, 2008 announcement concerning the need to raise additional capital, the price of Preferred B shares dropped from $18.00 per share to $ 16.64 per share. Id. ¶ 163.
On April 28, 2008, Fifth Third filed with the SEC a prospectus for its offering of Preferred C shares, each share of which represented an undivided interest in an underlying trust consisting of $400,000,000 in junior subordinated notes. Complaint ¶¶ 188-89. The Preferred C prospectus incorporated by reference Fifth Third's Form 10-K for December 31, 2007 and Forms 8-K filed on January 14, 2008, February 25, 2008, February 28, 2008, and April 23, 2008. Id. ¶ 190. The Preferred C prospectus also incorporated by reference Fifth Third's shelf registration statement of March 26, 2007, which had been signed by the Director Defendants. Id. ¶ 191. The Underwriter Defendants were the underwriters for the Preferred C offering.
Similar to the Preferred B prospectus, the Preferred C prospectus reported provisions
The Fifth Third common stock subclass presents the most comprehensive set of allegations, taking approximately 150 pages of the complaint to set forth. The gist, however, is that Fifth Third falsely blamed its deteriorating loan portfolio on external factors, presumably beyond its control, such as declining real estate markets in Florida and Michigan and the subprime credit crisis, when in fact the problem was created when it abandoned conservative lending practices in order to generate revenue from new loan originations. Complaint ¶ 223. The specific material misstatements and omissions alleged by this sub-class can be adequately summarized as follows:
On June 18, 2008, when Fifth Third announced the steps it intended to take to raise additional capital, the price of Fifth Third common stock dropped from $12.73 per share to $9.26 per share on unusually heavy volume. Id. ¶ 453.
As stated above, this case is the consolidation of four separate securities class actions into one lawsuit.
1. First Charter sub-class, represented by lead plaintiff Edwin Shelton:
Count Defendants I—violations of Section 11 Fifth Third of the Securities Act of 1933, 15 U.S.C. § 77k Kevin Kabat Christopher Marshall Daniel Poston [collectively "the Individual Defendants"] Darryl F. Allen John F. Barrett James P. Hackett Gary R. Heminger Joan R. Herschede Allen M. Hill Robert L. Koch III Mitchel D. Livingston III, Ph.d Hendrik G. Meijer George A. Schaefer, Jr. John J. Schiff, Jr. Dudley S. Taft Thomas W. Traylor [collectively "the Director Defendants"] Ulysses L. Bridgeman, Jr. James E. Rogers Count Defendants II. violations of Section Fifth Third 12(a)(2) of the Securities Act, 15 U.S.C. § 77l III. violations of Section 15 The Individual Defendants of the Securities Act of 1933, 15 U.S.C. § 77o IV. violations of Section Fifth Third The Individual 14(a) of the Securities Defendants Exchange Act of 1934, 15 U.S.C. § 78n(a) and SEC Rule 14a-9, 17 C.F.R. § 240.14a-9 V. violations of Section The Individual Defendants 20(a) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78t(a)
2. Preferred B sub-class, represented by Plaintiffs Jacqueline Dinwoodie and Jeffery J. Wacksman:
Count Defendants VI. violations of Section 11 Fifth Third of the Securities Act of 1933, 15 U.S.C. § 77k Fifth Third Capital Trust VI The Individual Defendants The Director Defendants UBS Securities LLC Citigroup Global Markets, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Morgan Stanley & Co., Inc. Wachovia Capital Markets LLC Banc of America Securities LLC Credit Suisse Securities (USA) LLC [the latter seven defendants collectively "The Preferred B Underwriters VII. violations of Section Fifth Third 12(a)(2) of the Securities Act of 1933, 15 U.S.C. § 77l Fifth Third Capital Trust VI The Preferred B Underwriters VIII. violations of Section Fifth Third 15 of the Securities Act of 1933, 15 U.S.C. § 77o The Individual Defendants
The Preferred C sub-class, represented by Plaintiff Leon C. Loewenstine:
Count Defendants IX. violations of Section 11 Fifth Third of the Securities Act of 1933, 15 U.S.C. § 77k Fifth Third Capital Trust VII Marshall The Director Defendants The Underwriter Defendants UBS Securities LLC Citigroup Global Markets, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Morgan Stanley & Co., Inc. Wachovia Capital Markets LLC Banc of America Securities LLC Credit Suisse Securities (USA) LLC Barclays Capital, Inc. Fifth Third Securities [the latter nine defendants collectively "the Preferred C Underwriters"] X. violations of Section Fifth Third 12(a)(2) of the Securities Act of 1933, 15 U.S.C. § 77l Fifth Third Capital Trust VII The Preferred C Underwriters XI. violations of Section 15 The Individual Defendants of the Securities Act of 1933, 15 U.S.C. § 77o
The Fifth Third Common Stock sub-class, represented by co-Lead Plaintiffs Local 295/Local 851 IBT Employer Group Pension Trust and Welfare Funds and District No, 9, I.A. of M & A Pension Trust [collectively "the Pension Trust Funds"]:
Count Defendants XII. violations of Section Fifth Third 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5 The Individual Defendants XIII. violations of Section The Individual Defendants 20 of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a).
On July 15, 2009, Defendants filed an omnibus motion and memorandum to dismiss the consolidated class action complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. (Doc. No. 78). The Underwriter Defendants filed a supplemental memorandum in support of the motion to dismiss which asserted additional grounds for dismissal of the claims peculiar to them. In response, Plaintiff's moved to file an amended consolidated complaint to clarify their Section 11 claims against the Underwriter Defendants. Doc. No. 83. Plaintiffs filed a memorandum in opposition to the motion to dismiss on September 25, 2009. Doc. No. 88. Additionally, Plaintiffs simultaneously filed a motion to strike extraneous documents and exhibits attached to Defendants' motion to dismiss. Doc. No. 90. Generally speaking, the alleged extraneous documents and exhibits are newspaper articles
Principal briefing on Defendants' motion to dismiss and Plaintiffs' motion to strike was completed on November 13, 2009. On November 16, 2009, however, Plaintiffs filed a motion to file a sur-reply brief (Doc. No. 99) on the grounds that Defendants' reply brief relied heavily on a Sixth Circuit decision, Indiana State Dist. Council of Laborers & Hod Carriers Pension & Welfare Fund v. Omnicare, Inc., 583 F.3d 935 (6th Cir.2009), that was issued after they filed their memorandum in opposition to the motion to dismiss. Briefing on Plaintiffs' motion to file a sur-reply brief was completed on December 23, 2009. The parties subsequently have filed several notices of supplemental authority which they contend support their respective positions. Doc. Nos. 105-07.
Each of the pending motions has been fully briefed and is ready for disposition.
The Court first addresses Plaintiffs' motion to strike since it potentially affects the resolution of Defendants' motion to dismiss.
Defendants' motion to dismiss relies on three categories of exhibits (47 exhibits in total) that are extraneous to the complaint: SEC filings, press releases, news reports, and stock quotations. The relevance of SEC filings and stock quotations in a securities fraud case is fairly self-evident. Defendants rely on the press releases and news reports to set forth the global credit crisis that overlapped the class period to establish fully the context in which Plaintiffs' claims arise. Defendants contend that the Court can consider all of this information in ruling on their motion to dismiss. Plaintiffs do not object to the Court's consideration of Defendants' submission of documents referenced in the complaint and historical price data. Doc. No. 90, at 2. These unobjectionable documents are Defendants' exhibits 20, 25, and 27-47. Id. Plaintiffs, however, object to the Court's consideration of news articles and SEC filings and a conference call transcript which predates the class period. The objectionable documents are Defendants' exhibits 1-24 and 26. Id. at 3-4.
With respect to the news articles, Plaintiffs acknowledge that the Court may properly take judicial notice that there has been an economic downturn. Doc. No. 90, at 8 n. 7. Plaintiffs, however, argue that Defendants are improperly attempting to use these articles to shift the blame for the decline of Fifth Third's stock price on the global financial climate rather than their own fraud. Plaintiffs contend that what Defendants are really asking is for the Court to resolve disputed factual questions in their favor on a motion to dismiss. Plaintiffs then argue that the SEC filings and the conference call transcript are not integral to the complaint and must be disregarded. Plaintiffs contend that if the Court does consider these exhibits, Defendants' motion to dismiss will have been converted to a motion for summary judgment. If that occurs, Plaintiffs argue that they will be entitled to conduct discovery on the matters raised by or related to the exhibits.
In deciding a Rule 12(b)(6) motion, the trial court may consider, in addition to the allegations in the complaint, "other materials that are integral to the complaint, are public records, or are otherwise appropriate for the taking of judicial notice." Wyser-Pratte Mgmt. Co., Inc. v. Telxon Corp., 413 F.3d 553, 560 (6th Cir.2005). Plaintiffs are correct, however, that although SEC filings are public documents, the Sixth Circuit requires that they be integral to the complaint to be considered on a Rule 12(b)(6) motion. Bovee v. Coopers & Lybrand, C.P.A., 272 F.3d 356, 360-61 (6th
Defendants argue that the pre-class period SEC filings and the conference call transcript are integral to the complaint because the complaint faults Fifth Third for not recognizing danger signs about subprime lending before the class period. Defendants note that the complaint also cites other SEC filings and conference call transcripts that pre-date the class period. Plaintiffs reply, however, that they are entitled to rely on factual information that pre-dates the class period because the complaint has to establish each element of their claims on the first day of the class period.
As explained further below, infra at 716-27, the Court need not resolve this motion because the complaint fails to establish a strong inference of scienter even in the absence of Defendants' additional materials describing the extent of the global credit crisis. See Konkol v. Diebold, Inc., 590 F.3d 390, 403 (6th Cir.2009) (defendant does not have burden under PSLRA to provide non-fraudulent explanation for his statements). Accordingly, Plaintiffs' motion to strike is MOOT.
The Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4, enacted by Congress to curb abuses in securities class action litigation, imposes pleading requirements more stringent than the Federal Rules of Civil Procedure. "[A] short and plain statement of the claim showing that the pleader is entitled to relief," Fed.R.Civ.P. 8(a)(2), is not sufficient in a private suit to recover damages for violations of the securities laws. Where the claim is based on material misstatements and omissions, as in this case, the complaint must "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1)(B). Additionally, if the claim requires proof of scienter, i.e., a showing of intent to defraud, the complaint must "with respect to each act or omission alleged. . . state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). Claims sounding in fraud must also comply with Fed.R.Civ.P. 9(b)—that is, the complaint must "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Frank v. Dana Corp., 547 F.3d 564, 570 (6th Cir.2008).
In Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007), the Supreme Court established the procedure for resolving a Rule 12(b)(6) motion where the PSLRA applies. First, the trial court must accept all factual allegations in the complaint as being true. Id. at 322, 127 S.Ct. 2499. Second, "courts must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice. Id. Where the claim requires proof of scienter, the court must consider the complaint as a whole, and not each individual allegation in isolation, to determine
Counts I, VI, and IX of the complaint assert claims for violations of Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k. Counts II, VII, and X of the complaint assert claims for violations of Section 12(a)(2) of the Securities Act of 1933, 15 U.S.C. § 77l. Counts III, VIII, and XI of the complaint assert claims for violations of Section 15 of the Securities Act of 1933, 15 U.S.C. § 77o. These claims only concern the First Charter, Preferred B and Preferred C subclasses.
Section 11 of the Securities Act imposes liability on persons who sign securities registration statements containing untrue statements of material fact or omissions of material fact. J & R Marketing, SEP v. General Motors Corp., 549 F.3d 384, 390 (6th Cir.2008). "Section[ ] 11 ... impose[s] a duty to disclose additional facts when a statement of material fact made by the issuer is misleading, and. . . impose[s] liability for failing to fulfill that duty of disclosure as well as for misstating a material fact." Id. In order to state a claim for relief under Section 11, the plaintiff must allege facts showing that: (1) he purchased a registered security, either directly from the issuer or in the aftermarket following the offering; (2) the defendant participated in the offering in a manner sufficient to give rise to liability under Section 11; and (3) the registration statement contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading. In re Morgan Stanley Information Fund Sec. Lit., 592 F.3d 347, 358-59 (2nd Cir.2010).
In Herman & MacLean v. Huddleston, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983), the Supreme Court explained that:
Id. at 382-83, 103 S.Ct. 683. A Section 11 plaintiff is not required to plead or prove that the defendant acted with scienter. Id. at 383, 103 S.Ct. 683.
Section 12(a)(2) of the Securities Act of 1933 is similar to Section 11 in that it imposes liability against a seller of securities by means of a prospectus or oral communications containing materially misleading statements or omissions. Morgan Stanley, 592 F.3d at 360. Section 12(a)(2)
Defendants proffer four reasons why the complaint fails to state claims for violations of the Securities Act. First, Defendants argue that the complaint fails to set forth any materially misleading statements or omissions. Second, Defendants contend that to the extent that these claims sound in fraud, they fail to meet Rule 9(b)'s requirement to plead fraud with particularity. Third, Defendants claim that the complaint fails to adequately plead loss causation. Fourth, Defendants argue that Plaintiffs in the Preferred B and Preferred C subclasses lack standing to assert Section 12 claims.
Section 11 and Section 12 both require that the misstatement or omission at issue be material. An omission or misrepresentation is material if there is a substantial likelihood that a reasonable investor would have viewed the omitted or misrepresented fact as having significantly altered the total mix of information available. Basic, Inc. v. Levinson, 485 U.S. 224, 232, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). The Supreme Court has cautioned, however, that "[s]ome information is of such dubious significance that insistence on its disclosure may accomplish more harm than good." TSC Ind., Inc. v. Northway, Inc., 426 U.S. 438, 448, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976). Imposing liability for some omissions or misstatements would cause management "simply to bury the shareholders in an avalanche of trivial information that is hardly conducive to informed decisionmaking." Id. at 448-49, 96 S.Ct. 2126. Materiality presents a mixed question of law and fact requiring "delicate assessments" of the inferences a reasonable shareholder would draw from a given set of facts. Id. at 450, 96 S.Ct. 2126. It is only if the omissions or misstatements are "so obviously important to an investor, that reasonable minds cannot differ on the question of materiality is the ultimate issue appropriately resolved as a matter of law [by the court]." Id. (internal quotation marks omitted). In Thiemann v. OHSL Fin. Corp., No. C-1-00-CV-793, 2001 WL 34128240 (S.D.Ohio July 25, 2001) (Beckwith, J.), this Court stated that "[t]he inverse proposition of this holding is that only when a misstatement or omission is so obviously unimportant that reasonable minds cannot differ on the question of materiality that the ultimate issue is appropriately resolved as a matter of law by the court."). Id. at *6; see also In re Westinghouse Sec. Lit., 90 F.3d 696, 707 n. 8 (3rd Cir.1996) (same).
The parties agree that the alleged misstatements and omissions at issue for these subclasses concern Fifth Third's loan loss provisions, charge-offs, non-performing assets, capital ratios, and underwriting standards. And, for the First Charter sub-class, the misstatements and/or omissions also concern the consideration paid for First Charter shares in the acquisition.
Loan loss provisions, charge-offs and non-performing assets are related concepts in this case in that the complaint alleges that throughout the class period Fifth Third either purposefully delayed recognizing delinquent loans as non-performing assets or that Fifth Third should have recognized delinquent loans as non-performing assets sooner than it actually did, as in the case of loans delinquent for 30 to 89 days. As a result of allegedly not recognizing loans as non-performing assets properly, Fifth Third's reserves for losses were inadequate with the consequent effect that net income was overstated on its financial statements.
In Mayer v. Mylod, 988 F.2d 635 (6th Cir.1993), the Court held that the following allegations were sufficient to state claims for material misrepresentations and omissions:
Id. at 637, 639. These allegations are substantially similar to the allegations that the First Charter, Preferred B, and Preferred C sub-classes assert against Fifth Third with respect to its loan portfolio and loan loss reserves. Since these kinds of statements were material in Mayer, the Court must conclude that the similar allegations in this case are material as well.
Several courts have held that where a bank touts but then abandons its conservative loan underwriting standards without disclosing the change, statements concerning its lending policies are materially misleading. See, e.g., In re Countrywide Fin. Corp. Deriv. Lit., 554 F.Supp.2d 1044, 1072, 1076-77 (C.D.Cal.2008) (finding that the underwriting practices of a mortgage originator would be among the most important information on which investors rely); In re Washington Mut., Inc. Sec., Deriv. & ERISA Lit., 259 F.R.D. 490, 505-06 (W.D.Wash.2009); but see In re Security Capital Assur., Ltd. Sec. Lit., No. 7 Civ. 11086(DAB), 729 F.Supp.2d 569, 597-98, 2010 WL 1372688, at *28 (S.D.N.Y. Mar. 31, 2010) (statement that a corporation employs conservative underwriting policies amounts to puffery that is not actionable). Countrywide and Washington Mutual are identical to this case in that not only did plaintiffs allege that those financial institutions failed to disclose a change to more risky lending practices, the banks in those cases also provided financial incentives to its employees which emphasized loan quantity over loan quality, thereby increasing the banks' exposure to defaults. Countrywide, 554 F.Supp.2d at 1058-59. Similarly, in Mayer, the Court held that the defendant made a material misstatement when, inter alia, in light of the bank's deteriorating loan portfolio and the likelihood of increases in non-performing assets and charge-offs, he commented that its loan portfolio was "soundly underwritten." 988 F.2d at 636-37, 639. Accordingly, the Court concludes that statements concerning the soundness or reliability of Fifth Third's underwriting standards or practices are material. Additionally, the Court holds that it would be a material omission, if, as the complaint alleges, Fifth Third concealed that it was relaxing its underwriting standards.
The final category of misstatement at issue here is the consideration Fifth Third was to pay for First Charter shares. As stated, the registration statement indicated that Fifth Third would pay $31 for each First Charter share, to be paid by a combination of cash and Fifth Third shares. The First Charter subclass claims that the consideration paid for their shares was not $31 because the price of Fifth Third stock was inflated due to the alleged misstatements and omissions. It would seem to go without saying that any misrepresentation concerning the consideration a shareholder would receive for his shares in a merger or acquisition would be material information which would affect his voting decision. Defendants argue that the registration statement was not misleading as to consideration because it never guaranteed a value of $31 per share. Moreover, Defendants argue, the registration statement explained the conversion ratio to First Charter shareholders and warned them that the price of Fifth Third stock could increase or decrease before the closing date because of a number of factors. In response, Plaintiffs point out that the First Charter board approved the merger specifically on the basis that the consideration paid by Fifth Third would equal $31 per First Charter share. Additionally, to the extent the complaint was unclear or ambiguous, Plaintiffs' brief clarifies that they are not claiming that the registration statement was misleading as to the conversion ratio or whether there would be a fluctuation in Fifth Third stock prior to the merger. Rather, Plaintiffs claim that because Fifth Third shares allegedly were artificially inflated during the class period, due to the alleged misstatements and omissions, their consideration did not actually equal $31 per share. Another way of stating it would be that Plaintiffs are claiming that had the price of Fifth Third stock not been artificially inflated during the class period, they would have received more Fifth Third shares in exchange for their First Charter shares.
With that understanding of the complaint, the Court concludes that Plaintiffs state a claim that the First Charter registration statement was materially misleading as to consideration. As just stated, it is self-evident that a shareholder would find statements concerning the consideration to be paid for his shares in a merger
Defendants argue that even if the alleged misstatements and omissions set forth in the complaint are material, many of them are protected by the PSLRA safe harbor, which excepts forward-looking statements from liability. In particular, Defendants argue that statements concerning Fifth Third's loss reserves are necessarily forward-looking since the adequacy of reserves is contingent upon future events.
The PSLRA safe harbor:
Zaluski v. United American Healthcare Corp., 527 F.3d 564, 572 (6th Cir.2008) (quoting Helwig v. Vencor, Inc., 251 F.3d 540, 547-48 (6th Cir.2001)). In order to be meaningful, the cautionary statements cannot be boilerplate. Helwig, 251 F.3d at 558. Rather, "the cautionary statements must convey substantive information about factors that realistically could cause results to differ materially from those projected in the forward-looking statements, such as, for example, information about the issuer's business." Id. at 558-59 (quoting H.R. Conf. Rep. No. 04-369, at 43 (1995), U.S.Code Cong. & Admin.News 1995, pp. 730, 742).
With that standard in mind, several of the alleged misstatements and omissions set forth in the complaint concerning Fifth Third's reserves and capitalization are forward-looking and, although not accompanied by meaningful cautionary language, there are no facts pled which demonstrate that the statements were made with actual knowledge of their falsity. In re Compuware Securities Lit., 301 F.Supp.2d 672, 683 (E.D.Mich.2004). Specifically, the following statements fall within the safe harbor:
1. Defendant Marshall's statement during the April 22, 2008 conference call that "I wouldn't expect us to do anything out of the ordinary and certainly nothing resembling the extreme capital raises you've seen from some of our more stressed peers. . . We don't think that's—we think of ourselves as being in an entirely different category and don't need to do any of those things," Complaint ¶ 284, is by definition a forward-looking statement because it is a projection concerning Fifth Third's capital structure. See 15 U.S.C. § 78u-5(i)(1)(A); see also Harris v. Ivax Corp., 182 F.3d 799, 803 (11th Cir.1999) (statement that company is "well-positioned" was forwardlooking).
2. Defendant Marshall's statements during an October 19, 2007 conference call concerning whether Fifth Third would have a sale of non-performing assets in the fourth quarter and whether restructuring troubled debt would reduce the growth in nonperforming assets are projections or predictions and thus are forward-looking statements. Complaint ¶ 368.
3. Defendant Marshall's statements in the January 22, 2008 conference call concerning Fifth Third's targeted and expected level of Tier 1 capital is a projection and is thus forward-looking. Complaint ¶ 400.
4. Defendant Marshall's statement in the April 22, 2008 conference call that "we expect our capital to be comfortably within our targets" is a projection and is thus forward-looking. Complaint ¶ 427.
These statements are all forward-looking, and, though lacking meaningful cautionary
Defendants next argue that Plaintiffs' Section 11 Securities Act claims sound in fraud and that, therefore, they must comply with Rule 9(b) of the Federal Rules of Civil Procedure and plead these claims with particularity. Fraud is not an element of Securities Act claims. In re Charles Schwab Corp. Sec. Lit., 257 F.R.D. 534, 548 (N.D.Cal.2009). Defendants are correct, however, that Securities Act claims sounding in fraud must comply with Rule 9(b). Indiana State Dist. Council of Laborers & Hod Carriers Pension & Welfare Fund v. Omnicare, Inc., 583 F.3d 935, 948 (6th Cir.2009). The complaint denies that the Securities Act claims allege fraud, Complaint ¶ 89, and Plaintiffs rely on that disclaimer in arguing that they do not have to comply with Rule 9(b). A blanket disavowal in the complaint that the claims do not allege fraud, however, is insufficient to rescue them from the requirements of Rule 9(b). California Pub. Emp. Ret. Sys. v. Chubb Corp., 394 F.3d 126, 160 (3rd Cir.2004) ("The one-sentence disavowment of fraud contained within Plaintiffs' section 11 Count—Count II of the Second Amended Complaint—does not require us to infer that the claims are strict liability or negligence claims, and in this case is insufficient to divorce the claims from their fraudulent underpinnings."); In re Alstom S.A. Secs. Lit., 406 F.Supp.2d 402, 410 (S.D.N.Y.2005) ("Plaintiffs cannot so facilely put the fraud genie back in the bottle."). Moreover, Plaintiffs' allegation that their Securities Act claims do not sound in fraud is a legal conclusion that the Court does not have to accept as being true. Lewis v. ACB Business Services, Inc., 135 F.3d 389, 405 (6th Cir.1998).
Nevertheless, upon review of the motion to dismiss, it appears to the Court that in arguing that the complaint fails to comply with Rule 9(b), Defendants rely on their contention that the allegations concerning the Section 11 claims fail to establish scienter. See Doc. No. 89, at 100 (stating that "for all of the reasons explained ... supra, Plaintiffs failed to plead scienter against any defendant."). As just stated, however, the requirement to plead fraud with particularity does not require the complaint to plead intent to defraud with particularity. Accordingly, to the extent
Defendants' Rule 9(b) argument also adverts to the section of its brief which contends that the complaint fails to plead any actionable misstatements or omissions. See id. That section of the brief, however, is not framed in the context of Rule 9(b) and, other than Defendants' general assertion that the Section 11 claims do not comply with Rule 9(b), they fail to specify how and why the complaint lacks the requisite specificity. Accordingly, the Court concludes that Defendants are not entitled to dismissal of these claims for failure to comply with Rule 9(b).
Defendants also argue that Plaintiffs' Securities Act claims are subject to dismissal on the grounds that the complaint shows on its face that their losses were not caused by the Defendants' alleged misstatements and omissions. Defendants contend that the complaint fails to allege facts connecting the revelation of a secret fraud to the decline in the price of Fifth Third stock. Thus, Defendants argue that the complaint only shows that the price of Fifth Third stock declined after the revelation of bad news, which is insufficient to show loss causation.
"Loss causation" refers to the plaintiffs burden to "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. Defendants, however, correctly recognize that loss causation is not an element of a Securities Act claim but rather an affirmative defense to it. Id. at 947. Where a Rule 12(b)(6) motion is based on an affirmative defense, the complaint must show on its face that the claim is barred by the defense. Riverview Health Inst. LLC v. Medical Mut. of Ohio, 601 F.3d 505, 513 (6th Cir.2010). "In a situation involving an affirmative defense, the claim is stated adequately, but in addition to the claim the contents of the complaint includes matters of avoidance that effectively vitiate the pleader's ability to recover on the claim. In such a situation the complaint is said to have a built-in defense and is essentially self-defeating." Id. (quoting 5B Wright & Miller, FEDERAL PRACTICE & PROCEDURE § 1357 (3d ed.2004))(internal quotation marks, ellipses and brackets omitted).
The complaint attributes the decline in Fifth Third stock solely to the June 18, 2008 press release in which Fifth Third announced that in order to strengthen its capital position in light of deteriorating credit trends, it was going to issue $1 billion in new convertible preferred shares, cut its dividend, and sell certain non-core businesses. Complaint ¶ 111. The Court agrees with Defendants that on its face the complaint fails to establish loss causation with respect to many of the misrepresentations and omissions alleged because the press release did not contain any disclosures or corrections addressed to them. See, e.g., Omnicare, 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."); D.E. & J.L.P. v. Conaway, 133 Fed.Appx. 994, 1000-01 (6th Cir. 2005) (loss causation not established when company announced filing of bankruptcy petition because bankruptcy announcement did not disclose any prior misrepresentations to the market); In re Britannia Bulk Holdings Inc. Sec. Lit., 665 F.Supp.2d 404, 419-20 (S.D.N.Y.2009) (granting defendants' Rule 12(b)(6) motion on affirmative defense of loss causation because sole disclosure upon which plaintiffs relied did not "reveal to the market the falsity" of its offering documents); In
1. Failure to disclose sales quotas and bonuses to encourage origination of risky loans. There is no loss causation because the press release did not disclose that such programs were in place or that Fifth Third was revising or eliminating such programs in order to strengthen the quality of its loan portfolio.
2. Failure to disclose that Alt-A loan portfolio was the same or similar to subprime loans. There is no loss causation because Fifth Third did not announce that it had misstated or mis-evaluated the characteristics of its Alt-A loan portfolio.
3. Failure to disclose that Alt-A loan portfolio had "layered risk factors." Again, there is no loss causation because there was no disclosure amending or modifying Fifth Third's description of its Alt-A portfolio.
4. Failure to disclose aggressive marketing of high loan-to-value loans. There is no loss causation because there was no disclosure that Fifth Third was discontinuing marketing high loan-to-value loans or that it was modifying its marketing strategy with respect to such loans.
5. Aggressively marketing real estate loans to European borrowers with unverifiable credit histories. There is no loss causation because Fifth Third did not announce that it was discontinuing marketing such loans or that it was modifying its marketing strategy with respect to such loans.
6. Failure to disclose inability to sell loans on secondary market. There is no loss causation because Fifth Third did not announce that it was unable to sell its loans on the secondary market in the press release.
7. Failure to disclose deteriorating credit quality of loan portfolio. There is loss causation with respect to this alleged misrepresentation or omission because Fifth Third's need to restructure its capital position was, according to the press release, due to "continued deterioration in credit trends."
8. Failure to identify non-performing loans. There is no loss causation because Fifth Third did not disclose any accounting changes with respect to non-performing loans.
9. Overstatement of income. There is no loss causation because Fifth Third did not announce that it was restating its earnings.
10. Deterioration in Tier 1 capital/need to raise capital. There is loss causation with respect to these misrepresentations or omissions because the press release specifically states that Fifth Third was issuing preferred securities to bolster its Tier 1 capital.
11. Failure to disclose the need to raise additional capital. There clearly is loss causation for this alleged omission because the topic of the press release was Fifth Third's need to bolster its capital position.
Accordingly, Defendants' motion to dismiss Plaintiffs' Securities Act claims is well-taken and is GRANTED with respect to alleged misstatements or omissions 1-6, and 8-9, as identified above.
In summary, the Section 11 and Section 12(a) claims of the First Charter subclass are dismissed, except for claims relating to omissions and misstatements concerning the consideration to be paid for First Charter shares in the acquisition, failure to disclose deteriorating quality of Fifth Third's loan portfolio, failure to disclose
Defendants also proffer additional grounds for dismissal of Plaintiffs' Section 12(a)(2) claims of the Preferred B and Preferred C sub-classes. Defendants first argue that the claims of the Preferred B Plaintiffs, Dinwoodie and Wacksman, should be dismissed for lack of standing because they purchased their shares on the open market, below the offering price, and not pursuant to the prospectus. Defendants also argue that the claims against the Underwriter Defendants should be dismissed as to both subclasses because the complaint fails to identify from which underwriter Plaintiffs purchased their shares. In response, Plaintiffs argue that the Preferred B Plaintiffs have standing, even though they concede that they purchased their shares on the open market, because the prospectus for that offering was in effect at the time of their purchases. In response to Defendants' arguments concerning Plaintiffs' failure to identify a specific underwriter from whom they purchased their shares, the class representatives for these sub-classes have tendered affidavits clarifying that point. In reply, however, Defendants argue that Plaintiffs cannot correct by affidavit deficient factual allegations in the complaint. Moreover, Defendants point out that, according to their affidavits, both Dinwoodie and Wacksman purchased their Preferred B shares from Raymond James & Associates, who is not a defendant in this case. Therefore, Defendants argue that the 12(b)(2) claims of the Preferred B subclass against all of the Underwriter Defendants should be dismissed. Defendants also point out that according to his affidavit, the Preferred C class representative, Loewenstine, purchased his shares only from UBS Securities, Inc. Therefore, Defendants argue, while UBS is a defendant in this case, the 12(a)(2) claims of the Preferred C sub-class should be dismissed as to the remaining Underwriter Defendants.
Initially, the Court agrees with Defendants that since the Preferred B class representatives did not purchase their shares from an underwriter who is a defendant in this case, their Section 12(a)(2) claims against all of the Underwriter Defendants must be dismissed for failure to state a claim. See In re WorldCom, Inc. Sec. Lit., 346 F.Supp.2d 628, 659 (S.D.N.Y. 2004) ("To be liable as a seller, the defendant must be the "buyer's immediate seller; remote purchasers are precluded from bringing actions against remote sellers."); In re Royal Ahold N.V. Sec. & ERISA Lit., 351 F.Supp.2d 334, 406 (D.Md.2004) ("In order to state a claim under § 12(a)(2), the complaint must allege by whom the plaintiffs were solicited and from whom they purchased shares; these assertions must be supported by specific factual allegations demonstrating a direct relationship between the defendant and the plaintiff-purchaser."); see also Akerman v. Oryx Comm., Inc., 810 F.2d 336, 344 (2nd Cir.1987) (holding that, absent scienter, Section 12(a)(2) requires privity between the buyer and seller).
Similarly, according to his affidavit, the Preferred C class representative, Loewenstine, purchased his shares from UBS only. Accordingly, the claims of the Preferred
With regard to the overall standing of the Preferred B sub-class, Section 12(a)(2) applies only to purchases made through initial offerings and not to aftermarket trading. Gustafson v. Alloyd Co., Inc., 513 U.S. 561, 115 S.Ct. 1061, 131 L.Ed.2d 1 (1995). The majority of courts who have considered this issue has concluded that purchasers who buy their shares on the secondary market lack standing to assert Section 12(a)(2) claims. E.g., Rosenzweig v. Azurix Corp., 332 F.3d 854, 870-71 (5th Cir.2003); Joseph v. Wiles, 223 F.3d 1155, 1161 (10th Cir.2000) (stating that Section 12(a)(2) gives "a cause of action only to individuals who purchase securities directly from a person who sells the securities by means of a prospectus."); Ballay v. Legg Mason Wood Walker, Inc., 925 F.2d 682, 689 (3rd Cir.1991); Caiafa v. Sea Containers Ltd., 331 Fed.Appx. 14, 16-17 (2nd Cir.2009); In re Enron Corp. Sec., 529 F.Supp.2d 644, 659 n. 1 (S.D.Tex. 2006); In re Cosi, Inc. Sec. Lit., 379 F.Supp.2d 580, 588-89 (S.D.N.Y.2005); In re Hayes Lemmerz Int'l, Inc., 271 F.Supp.2d 1007, 1029 (E.D.Mich.2003). In re Sterling Foster & Co., Inc. Sec. Lit., 222 F.Supp.2d 216, 244 (E.D.N.Y.2002) (noting
Accordingly, Defendants' motion to dismiss the Section 12(a)(2) claims of the Preferred B sub-class is well-taken and is
The First Charter subclass, Preferred B sub-class, and the Preferred C subclass asserts claims against Fifth Third and the Individual Defendants (Defendants Kabat, Marshall, and Poston) for controlling person liability for the alleged misstatements and omissions identified in the complaint pursuant to Section 15 of the Securities Act, 15 U.S.C. § 77o. (Counts III, VIII, and XI). Section 15 imposes joint and several liability on "controlling persons" for violations of Section 11 or Section 12 of the Act committed by persons they control. Sanders Confectionery Prod., Inc. v. Heller Fin., Inc., 973 F.2d 474, 485 (6th Cir.1992); Herm v. Stafford, 663 F.2d 669, 679 (6th Cir.1981). In order to state a claim for control person liability, the plaintiff must plead sufficient facts to
Accordingly, to the extent the Court has already dismissed Plaintiffs' Section 11 and Section 12 claims, the corresponding Section 15 claims are dismissed as well.
Defendants also argue that the Plaintiffs' Section 15 claims should be dismissed because the complaint fails to specify how each of the Individual Defendants participated in the challenged disclosures. Defendants argue that the complaint's allegations that they exercised control "by virtue of their executive and/or directorial positions of the Company" and "by virtue of their sponsorship and/or positions as trustees of Fifth Third Capital Trust" are insufficient to establish control person liability.
Defendants are correct that an executive or director is not liable under Section 15 as a controlling person simply because of his position with the company. Frank v. Dana Corp., 649 F.Supp.2d 729, 746 (N.D.Ohio 2009); Lansing Automakers' Federal Credit Union v. MCG Portfolio Mgmt. Corp., No. 5:89-CV-52, 1991 WL 238974, at *3 (W.D.Mich. Sept. 12, 1991). Rather, to be liable as a control person, the defendant must have exercised some degree of control or influence over the operations of the company to be liable as a controlling person. Picard Chem., Inc. Profit Sharing Plan v. Perrigo Co., 940 F.Supp. 1101, 1134 (W.D.Mich.1996).
In their motion, the Individual Defendants essentially highlight allegations which tend to show that Plaintiffs claim controlling person liability simply because they are executives of Fifth Third. The Court notes, however, that the complaint alleges that each of the Individual Defendants reviewed, approved, and signed allegedly false and misleading filings with the SEC, including registration/proxy statements, shelf registration statements, Forms 10-K, 10-Q, and 8-K. Complaint ¶¶ 43-45. These allegations are sufficient to establish that the Individual Defendants are liable as controlling persons. Knollenberg v. Harmonic, Inc., 152 Fed.Appx. 674, 685 (9th Cir.2005); see also In re Lehman Bros. Sec. & Erisa Lit., 684 F.Supp.2d 485, 495 (S.D.N.Y.2010) (individual defendants who were officers and directors of company who signed registrations statements were controlling persons under Section 15); In re Calpine Corp. Sec. Lit., 288 F.Supp.2d 1054, 1081 (N.D.Cal.2003) (complaint failed to state a claim for controlling person liability where there are no allegations that individual defendants signed or helped prepare allegedly false and misleading shelf registration statement and prospectus); In re Enron Corp. Sec., Deriv. & ERISA Lit., 258 F.Supp.2d 576, 598 (S.D.Tex.2003) (persons who sign financial documents and registration statements are controlling persons).
Accordingly, Defendants' motion to dismiss the surviving Section 15 claims on the grounds that the complaint alleges liability based solely on Defendants' positions as executives of Fifth Third is not well-taken and is
The First Charter sub-class alleges that Fifth Third and the Individual Defendants violated Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a),
Section 14(a) of the Securities Exchange Act authorizes the Securities and Exchange Commission ("SEC") to promulgate rules for the solicitation of proxies and prohibits violations of those rules. Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1086, 111 S.Ct. 2749, 115 L.Ed.2d 929 (1991). SEC Rule 14a-9 prohibits the solicitation of proxies by means of materially false or misleading statements or omissions. 17 C.F.R. § 240.14a-9. In order to state a claim for a violation of Rule 14a-9, the plaintiff must allege facts establishing the following elements "(1) a proxy statement contained a material misrepresentation or omission, which (2) caused plaintiffs injury, and (3) that the proxy solicitation itself, rather than the particular defect in the solicitation materials, was an essential link in the accomplishment of the transaction." In re Marsh & McLennan Companies, Inc. Sec. Lit., 536 F.Supp.2d 313, 320-21 (S.D.N.Y. 2007). "Omission of information from a proxy statement will violate Section 14(a) and Rule 14a-9 if either the SEC regulations specifically require disclosure of the omitted information in a proxy statement, or the omission makes other statements in the proxy statement materially false or misleading." Id. at 321 (internal brackets omitted).
The Court has already addressed supra at 705-07, whether the complaint alleges any material misstatements or omissions. Those same rulings apply as well to Plaintiffs' Section 14(a) claims. Similarly, the Court has already addressed whether the alleged misstatements and omissions sound in fraud and must be pled with particularity. Accordingly, Defendants' motion to dismiss Plaintiffs' Section 14(a) claim is well-taken and is
The First Charter sub-class also asserts claims for control person liability against the Individual Defendants for the alleged Section 14(a) violations. Like Section 15, controlling person liability under Section 20(a) for violations of Section 14(a) is derivative. In re Affiliated Computer Serv. Deriv. Lit., 540 F.Supp.2d 695, 704 (N.D.Tex.2007). Accordingly, to the extent the Court has dismissed Plaintiffs' Section 14(a) claims, Defendants' motion to dismiss the corresponding Section 20(a) claims is well-taken and that claim is dismissed as well. Otherwise, the motion to dismiss is not well-taken and is
The overwhelming bulk of the complaint is devoted to the claims of the Fifth Third sub-class arising under Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5, although the First Charter subclass also has claims arising under Sections 14 and 20(a) of the Act. The Court starts, however, by analyzing Defendants' motion to dismiss Plaintiff's Section 10(b) claims.
The complaint alleges that Fifth Third and the Individual Defendants violated
Defendants' motion raises three grounds for dismissing Plaintiffs' Section 10(b) and Rule 10b-5 claims. First, Defendants contend that the complaint fails to identify any actionable misstatements or omissions. Second, Defendants argue that the complaint fails to raise a strong inference of scienter. Third, Defendants argue that the complaint fails to show loss causation. The Court has more or less addressed the issues of materiality and loss causation in the preceding sections.
Scienter, as the Court has already stated, is a state of mind indicating intent to defraud. In Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007), the Court explained how to determine whether the complaint meets the PSLRA's scienter requirement:
Id. at 314, 127 S.Ct. 2499. In Helwig v. Vencor, Inc., 251 F.3d 540 (6th Cir.2001), the Sixth Circuit provided a non-exhaustive list of factors trial courts should consider when determining whether the complaint adequately pleads facts showing scienter:
Id. at 552 (overruled on other grounds by Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007)). In considering whether scienter has been adequately pled, the relevant question "is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard." Tellabs, 551 U.S. at 322-22, 127 S.Ct. 2499.
Before addressing Defendants' specific arguments concerning scienter, the Court notes that nowhere does the complaint allege insider trading, a divergence between internal reports and external statements, bribery, quick settlement of lawsuits, deceptive disclosures of negative accounting information, or interested directors concealing impending sales of stock. The complete absence of six of the nine Helwig factors, particularly the lack insider trading, suggests that the complaint faces an uphill climb to establish that any of the Defendants acted with scienter. See PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 691 (6th Cir.2004) (absence of insider trading works against an inference of scienter).
Defendants' general contention that the complaint fails to sufficiently allege scienter in turns raises a number of subarguments or issues. Defendants argue further that: 1) the most compelling inference is that Fifth Third, along with may other financial institutions, was a victim of the global economic crisis; 2) Plaintiffs' may not rely on "group pleading" to establish scienter; 3) the complaint fails to adequately allege that Defendants had a motive and opportunity to commit securities fraud; 4) the complaint fails to demonstrate conscious or reckless misbehavior by any Defendant; 5) scienter cannot be established by signing a public disclosure; and 6) Plaintiffs' miscellaneous remaining allegations fail to establish scienter.
Defendants argue that the most plausible inference from the complaint is that they failed to predict the severity of the global economic downturn that began near the end 2007. Defendants attached to their motions a number of news articles and reports which were the subject of Plaintiffs' motion to strike. As indicated, Plaintiffs' do not object to the Court taking judicial notice that there was an economic
Defendants next argue that Plaintiffs may not rely on "group pleading" to establish that they acted with scienter. "Under the group pleading doctrine, the identification of the individual sources of statements is unnecessary when the fraud allegations arise from misstatements or omissions in group-published documents, such as Annual Reports, prospectuses, registration statements, press releases, or other `group published information' that presumably constitute the collective actions of those individuals involved in the day-to-day affairs of the corporation." Durgin v. Mon, 659 F.Supp.2d 1240, 1253 (S.D.Fla.2009). Defendants contend that the PSLRA abolished group pleading and that, therefore, the complaint must allege particular facts to establish each Defendant's scienter. In response, Plaintiffs do not deny that they rely on group pleading, at least in part, to establish scienter but they contend that some courts have allowed it post-PSLRA and, in any event, that there is no binding Sixth Circuit opinion prohibiting group pleading. Plaintiffs further contend, however, that the complaint contains sufficient factual allegations to give rise to a strong inference of scienter as to each of the Individual Defendants.
The Sixth Circuit has not decided whether group pleading survives the enactment of the PSLRA. There are divergent opinions among the district courts of the Sixth Circuit about the continued viability of group pleading and, moreover, they even appear to disagree as to which position represents the majority opinion within the Circuit. Compare In re First-Energy Corp. Sec. Lit., 316 F.Supp.2d 581, 599 (N.D.Ohio 2004) (finding that an "overwhelming majority" of district courts within the Sixth Circuit allow group pleading in post-PSLRA cases), with D.E. & J Ltd. P'ship v. Conaway, 284 F.Supp.2d 719, 731 n. 12 (E.D.Mich.2003) (district courts still allowing group pleading have done so without explanation or relied on pre-PSLRA authority). More recently, however, Judge Rice has concluded that group pleading is "antithetical" to the PSLRA's requirement that the complaint state with particularity facts giving rise to a strong inference of scienter. In re Huffy Corp. Sec. Lit., 577 F.Supp.2d 968, 984-87 (S.D.Ohio 2008).
This Court agrees with Judge Rice that group pleading, if it properly existed in the Sixth Circuit before, does not survive the PSLRA. The PSLRA requires the complaint to state "with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2)(emphasis added). As Judge Rice point out in Huffy Corp., use of the phrase "the defendant" can only be understood to mean each defendant in a multiple-defendant case because "it is inconceivable that Congress intended liability of any defendants to depend on whether they all were sued in a single action or were each sued alone in several separate actions." 577 F.Supp.2d
Accordingly, Plaintiffs cannot rely on group pleading to establish that the Individual Defendants acted with scienter.
Defendants next argue that the complaint inadequately pleads a motive and opportunity to commit securities fraud. Defendants argue that in attempting to establish scienter the complaint relies on motives common to all corporations and executives generally, such as a desire to secure lucrative bonuses and stock options, but fails to plead facts demonstrating a motive to commit fraud.
In PR Diamonds, the Court held that in order to demonstrate motive, the complaint "must show concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged." 364 F.3d at 690. Moreover, Defendants correctly argue that the complaint must allege motives to commit fraud as opposed to motives common to corporations and executives generally. Thus, some motives, are insufficient as a matter of law to establish scienter, such as a desire for the company to appear successful and an executive's desire to protect his position in the company and increase his compensation. Id.
Consequently, in light of PR Diamonds, several of the complaint's allegations fail to establish motive to commit securities fraud as a matter of law. Most obviously, the complaint's allegations that the Individual Defendants were motivated to commit fraud in order to secure lucrative bonuses, stock and stock options fail because they relate to the general desire of an executive to increase his compensation. Complaint ¶¶ 466-71.
The complaint also alleges that Defendants were motivated to commit securities fraud to lower the cost of borrowing on notes Fifth Third issued during the class period and to inflate the cost of Fifth Third stock to fund future acquisitions, such as the First Charter merger. Complaint ¶¶ 465(a)-465(b). In PR Diamonds, the Court held that the allegation that the defendants were motivated to engage in fraud to forestall the company's default on a loan and to preserve its line of credit was suggestive of scienter, but alone did not establish a strong inference. 364 F.3d at 690. In Ley v. Visteon Corp., 543 F.3d 801 (6th Cir.2008), however, the Court appeared to retreat from or at least limit that aspect of PR Diamonds by stating that the complaint must still provide particularized allegations concerning the credit facility to distinguish it from an ordinary business motive and to support an inference of fraud. Id. at 813-14. In this case, although the complaint recites the rates at which Fifth Third issued its notes, it fails to explain why there is a connection between the alleged inflated price of Fifth Third stock and the interest rates of its corporate notes or what rates Fifth Third might have had to have pay on its notes
Thus, Plaintiffs' motive and opportunity allegations fail to support an inference of scienter.
Defendants next argue that the complaint fails to allege facts showing conscious misbehavior or recklessness on their part. This argument addresses the complaint's reliance on confidential witnesses, Defendants' access to reports and information concerning the composition of Fifth Third's loan portfolio, the imputation of knowledge based on their positions, and participation on internal committees, to establish scienter.
The complaint cites twelve confidential witnesses to support Plaintiffs' contention that Fifth Third abandoned its conservative lending standards in order to boost revenue through risky loan origination. Complaint ¶¶ 288-341. The allegations of these confidential witnesses occupy twenty pages of the complaint, but in general they recount that Fifth Third became a de facto subprime lender, waived lending standards, enforced sales quotas, and manipulated the loan loss reserves to conform earnings to targets.
Confidential witnesses may assist securities fraud plaintiffs establish scienter so long as they are not vague and conclusory. Ley, 543 F.3d at 811. In other words, the confidential witnesses must provide enough information to establish their basis of knowledge of the alleged misconduct ("what, when, where, and how") and they must establish that the defendants were aware of the misconduct. Id.; Konkol v. Diebold, Inc., 590 F.3d 390, 400-01 (6th Cir.2009) (stating that "generalized statements cannot substitute for specific facts through which a factfinder can strongly infer that the Defendants themselves knew of or recklessly disregarded the falsity of the earnings statements, especially because the majority of the Confidential Witnesses are not identified as having any contact or interaction with any of the Defendants."); Frank, 649 F.Supp.2d at 747-48. Allegations that the defendant "must have known" about the misconduct due to his position are insufficient to establish scienter. Frank, 649 F.Supp.2d at 747-48.
Assuming without deciding that the complaint sufficiently establishes each confidential witness's basis of knowledge, there are no facts alleged from which it can be inferred that the confidential witness had sufficient contact with any of the Defendants to impute their knowledge of misconduct to the Defendants. In re Metawave Comm. Corp. Sec. Lit., 629 F.Supp.2d 1207, 1217 (W.D.Wash.2009) (finding confidential witnesses failed to establish scienter where they did not connect their knowledge of product defects to the defendants); Hubbard v. BankAtlantic Bancorp, Inc., 625 F.Supp.2d 1267, 1289 (S.D.Fla.2008) (confidential witnesses did not establish scienter because they failed to connect vice president of lending's disregard of lending guidelines to the defendants);
CW-1 was a vice president for mortgage compliance in Fifth Third's Cincinnati headquarters from 2004 until November 2007. He says that he attended monthly risk management meetings with "senior officers" from the compliance, quality control, and underwriting departments. CW-1 states that these meetings generated reports detailing the kinds and types of loans generated, the amount of reserves, and delinquencies. These reports were distributed upwards to Fifth Third's "most senior leadership," including Defendant Kabat. CW-1 says that these meetings established that Fifth Third was engaged in subprime lending and that the compliance department was concerned about the risky loans Fifth Third was generating. Finally, CW-1 alleges that "when the economy started to turn in early 2007, Fifth Third executives began to increase the pressure on loan officers to close deals." Complaint ¶¶ 290-91. Although CW-1 reports facts showing that Fifth Third was engaging in subprime lending, that there were reports confirming this fact, and that there was concern in some departments about Fifth Third's lending practices, he does not connect any of this information to any of the Individual Defendants. CW-1 does not allege that he met with or reported any of these problems to the Defendants. Indeed, CW-1 does not even mention Defendants Marshall and Poston and his only allegation concerning Defendant Kabat is that monthly reports were distributed to him. Scienter, however, cannot be inferred from the mere fact that the defendant had access to information. PR Diamonds, 364 F.3d at 687-88.
CW-2 was an underwriting supervisor for Fifth Third from 2003 to March 2007. CW-2 also reports that Fifth Third disregarded its lending standards and originated subprime loans. CW-2 also recounts that Fifth Third imposed strict sales quotas and that managers often overrode underwriters' rejections of loans. CW-2 also states that he attended a meeting in Florida in 2006 in which Defendants Kabat and Marshall discussed lending guidelines. After Kabat and Marshall left the room, John McGinty, the head of mortgage operations in Florida, told the attendees that he had authority to override the guidelines. Complaint ¶¶ 292-96. CW-2, however, fails to establish scienter. First, all of CW-2's information pre-dates the class period and, thus, is irrelevant. Malin, 499 F.Supp.2d at 141-42 (scienter not established where confidential witnesses left the company prior to the start of the class period). Second, CW-2 makes no mention at all of Defendant Poston. Third, CW-2's only mention of Defendants Kabat and Marshall is that they apparently emphasized Fifth Third's lending guidelines and that after they were gone, another executive stated that the guidelines could be waived or overridden. None of CW-2's allegations imputes knowledge of Fifth Third's deficient lending practices to the Individual Defendants. Accordingly, C2's allegations fail to establish scienter.
CW-3, a retail mortgage underwriter in Florida from 2004 to September 2008 provides the most comprehensive set of allegations concerning Fifth Third's alleged subprime lending practices, and pressures and incentives to generate those loans, complaint ¶¶ 297-307, and yet he too fails to connect any of his knowledge of this activity to the Individual Defendants. CW-3 attributes all of this activity to John McGinty, who is not a defendant in the case, or to "executive management in Cincinnati." CW-3's allegations fail to establish scienter.
CW-5 was vice president of operations of Fifth Third's Ft. Myers office from early 2005 to mid-2007. CW-5 relates the alleged pressure to generate new loans and the loosening or waiving of approval guidelines to meet quotas. Complaint ¶¶ 312-15. Like CW-3, however, CW-5's information predates the class period. Additionally, like the other confidential witnesses, CW-5 attributes the quotas to unidentified "Fifth Third executives in Cincinnati" but fails to detail the Individual Defendants' knowledge of or participation in this activity. Therefore, CW-5's allegations fail to establish scienter.
CW-6 was a wholesale account executive who worked in North Carolina from mid-2006 to February 2007. CW-6 also reports on the pressure to generate sales and the malleability of Fifth Third's lending guidelines. Complaint ¶¶ 316-18. CW-6's information, however, pre-dates the class period and does not connect his knowledge to the Individual Defendants. Thus, CW-6's allegations fail to establish scienter.
CW-7 was a senior compliance specialist who worked in the Cleveland hub from October 2007 to October 2008. CW-7 says that Fifth Third was making documentation and stated income loans until late 2007 and 100% LTV loans until early 2008. Complaint ¶ 319. CW-7's allegations, however, do not establish scienter because there are no allegations connecting this information to the Individual Defendants.
CW-8 claims that from 2006 to December 2007, his job was to find new customers with low to moderate incomes and that Fifth Third approved stated income and no documentation loans. CW-8 also reports the need to find loopholes to get loans approved for high risk borrowers and the intense sales pressure. Complaint 11320. CW-8's allegations, however, do not establish scienter because there are no allegations connecting this information to the Individual Defendants.
CW-9 was a vice president and outside origination manager for Fifth Third in Naples, Florida from 1996 to mid-2007. C9 also reports the pressure to generate risky loans. He also states that Fifth Third used a computer program to track mortgages called "ACAPS." CW-9 alleges that senior management, including the Individual Defendants, could access ACAPS to track sales data and performance. ACAPS also flagged documentation that was missing from mortgage applications to remind the sales persons and underwriters to obtain the missing documentation. Complaint ¶¶ 321-27. Although CW-9 finally is a witness who makes specific allegations concerning the Individual Defendants, the only allegation is that they had access to information concerning loans being generated. As previously stated, however, the fact that the Individual Defendants had access to ACAPS does not establish scienter. CW-9 fails to proffer any other facts connecting his information to the Individual Defendants. Accordingly, CW-9's allegations fail to establish scienter.
CW-10 also recounts how Fifth Third generated and approved subprime loans in Michigan, but he too fails to connect this information to the Individual Defendants.
CW-11 was a vice president and regional manager for Fifth Third's retail division in Florida from May 2006 to February 2008. He also discusses sales quotas and pressure from "corporate headquarters" and "senior management" in Cincinnati, and disregard of lending guidelines. CW-11 also claims that by February 2008, defaults had become such a problem that "senior management" decided to book them on the branch balance sheets rather than the mortgage department in order to conceal the full extent of the problem. Complaint ¶¶ 334-39. CW-11's allegations fail to establish scienter, however, because he does not connect any of this activity to the Individual Defendants.
Finally, CW-12 states that he was the performance reporting manager for Fifth Third's mortgage department from 2000 to 2006. CW-12 claims that during this time, "the CEO and CFO of the Company" would discuss whether Fifth Third's earnings were tracking projections, and, if not, the CFO would direct CW-12 to reduce the loan loss reserves until earnings met the projections. Complaint ¶¶ 340-41. CW-12's allegations fail, like others before him, because his information pre-dates the class period. Moreover, CW-12 does not identify the CEO or the CFO and, since they are unidentified, presumably they were not Defendants Kabat and Marshall. Therefore, CW-12 fails to connect this alleged misconduct to the Individual Defendants. Accordingly, CW-12's allegations fail to establish scienter.
In summary, for the foregoing reasons, the confidential witnesses fail to establish scienter.
The complaint alleges that Fifth Third violated Generally Accepted Accounting Principles ("GAAP") and Financial Accounting Standards ("FAS") concerning setting aside reserves for potential credit losses. Complaint ¶¶ 345-55. Accounting violations, "standing alone, do not create an inference of scienter, much less a strong one." PR Diamonds, 364 F.3d at 694. If, however, the accounting errors are "sufficiently basic and large, their existence, in combination with other factors, may support the requisite scienter inference." Id. In order to establish scienter based on accounting violations, the Sixth Circuit has indicated that the complaint must allege "extreme `in your face facts' that `cry out' scienter." Konkol, 590 F.3d at 399.
In this case, Fifth Third's alleged GAAP and FAS violations concerning loan loss reserves fail to establish scienter. The complaint gives no indication as to the magnitude of these errors or by how much income was overstated as a result of the errors. Indiana Elec. Workers' Pension Trust Fund IBEW v. Shaw Group, Inc., 537 F.3d 527, 536 (5th Cir.2008) (complaint failed to plead scienter based on GAAP violations where there was no estimate on how much earnings were overstated). Significantly, nowhere does the complaint indicate that Fifth Third was required to restate its financial statements because of accounting errors. In re The Goodyear Tire & Rubber Co. Sec. Lit., 436 F.Supp.2d 873, 893 (N.D.Ohio 2006) (noting that "accounting irregularities" that required company to restate earnings do not automatically establish scienter); In re Credit Acceptance Corp. Sec. Lit., 50 F.Supp.2d 662, 680 (E.D.Mich.1999) (accounting errors concerning loan loss reserves did not establish scienter where none of the financial statements issued during class period had to be restated). Moreover, accounting for loan loss reserves is not the sort of simple accounting concept the violation of which creates an inference of scienter. The Sixth Circuit has observed that FAS 5, which addresses
Accordingly, the Court concludes that Fifth Third's alleged accounting errors were not basic, and because Plaintiffs have not alleged any facts concerning the magnitude of the alleged accounting violations, the alleged violations do not create a strong inference of scienter.
Defendants also argue that scienter is not established because they signed certifications required by the Sarbanes-Oxley Act. Generally speaking, the Sarbanes-Oxley Act requires executives who sign reports with the SEC to certify that they have reviewed the report and that it does not contain any untrue material misstatements or omissions. 15 U.S.C. § 7241(a). "[A] Sarbanes-Oxley certification is only probative of scienter if the person signing the certification was severely reckless in certifying the accuracy of the financial statements." Ley, 543 F.3d at 812 (internal quotation marks omitted). In order for a Sarbanes-Oxley certification to establish scienter, the complaint must allege facts demonstrating that the defendant knew or should have known that the report contained false statements. Konkol v. Diebold, Inc., 590 F.3d 390, 402-03 (6th Cir.2009).
As the Court's discussion of the confidential witnesses demonstrates, the complaint fails to connect up the alleged errors in financial statements and reports with the Individual Defendants. Moreover, the fact that Fifth Third was not required to restate in financial statements indicates that their Sarbanes-Oxley certifications are not probative of scienter. See, e.g., Garfield v. NDC Health Corp., 466 F.3d 1255, 1266-67 (11th Cir.2006) (accounting irregularities must be glaring for Sarbanes-Oxley certification to create inference of scienter); Frank v. Dana Corp., 649 F.Supp.2d 729, 742 (N.D.Ohio 2009) (same); In re Dell Inc., Sec. Lit., 591 F.Supp.2d 877, 896 (W.D.Tex.2008) (Sarbanes-Oxley certifications did not raise inference of scienter where accounting error had only small impact on net income). Therefore, the complaint's allegations concerning Defendants' Sarbanes-Oxley certifications fail to establish scienter
The complaint also attempts to establish scienter through Defendants' access to information
Scienter, however, cannot be inferred merely because of the defendants' positions in the company or the fact that they had access to the company's financial information. PR Diamonds, 364 F.3d at 688. Instead, "the [c]omplaint must allege specific facts and circumstances suggestive of their knowledge." Id. Specifically, the complaint must contain "detailed facts regarding the financial reports, how they were used, and their connection to the defendants." Konkol, 590 F.3d at 397. Moreover, without more, allegations that the defendants participated in committee meetings to discuss the company's financial information do not establish a strong inference of scienter. Id. at 398.
In this case, concerning financial information, it is clear that the complaint relies only on the fact of Defendants' access to such data to establish a strong inference of scienter. See Complaint ¶¶ 465(g)-(k). Most tellingly, the complaint alleges that "[s]ince Defendants Kabat and Marshall had all of the relevant information regarding underwriting and credit quality at their fingertips through ACAPS, they either knew or were reckless in not knowing that the poor credit quality of the loans the Company had been originating and the poor credit quality of the loan portfolio were the sources of non-performing assets and not general economic conditions[.]" Complaint ¶ 465(k). There are no factual allegations, however, that Defendants actually read or reviewed information available on the ACAPS system and that their review of the available information was sufficiently comprehensive to appreciate the alleged precarious quality of Fifth Third's loan portfolio. Since the complaint relies entirely on Defendants' mere access to financial data, these allegations fail to support a strong inference of scienter.
Plaintiffs also rely heavily on Defendants' establishment of and service on the Corporate Credit Committee. The complaint notes that the purpose of the committee was to ensure that senior executives were focused on credit quality. Id. ¶ 465(c). The complaint also relies on statements made by Kabat and Marshall that credit reviews of Fifth Third's loan portfolio had recently been performed. Id. ¶¶ 465(l), (r). However, the complaint fails to allege that the credit review raised red flags from which the Defendants knew or should have know that the credit quality of Fifth Third's loan portfolio was deteriorating. See PR Diamonds, 364 F.3d at 686-87 ("Courts typically look for multiple, obvious red flags before drawing an inference that a defendant acted intentionally or recklessly."); Ley, 543 F.3d at 817 (complaint must identify specific red flags to create a strong inference of scienter). Indeed, as Defendants point out in their reply brief, the complaint indicates just the opposition-review of the loan portfolio did not raise any red flags to Defendants. E.g., Complaint ¶ 224 ("We had an ongoing effort there, but the review that we just went through didn't result in any need to change any of our treatment of any of those portfolios.") (statement of Defendant Marshall in July 23, 2007 Watch List article). The complaint's allegations that Defendants should have known of the deteriorating status of Fifth Third's loan portfolio simply from their review of it and their service on committees is tantamount to an allegation of fraud by hindsight and thus is insufficient to establish scienter.
Viewing the complaint its entirety, as Tellabs requires, the Court is persuaded
Also cutting strongly against a finding of scienter is the fact that much of the information that Plaintiffs claim was concealed was actually reported. For instance, while the complaint alleges that Fifth Third was originating loans to borrowers with subprime-equivalent FICO scores, Fifth Third in fact disclosed in several 8-K filings the FICO and Alt-A composition of its loan portfolio. Fifth Third also reported the LTV ratio of its portfolio in several 8-K filings. The complaint never alleges that the figures reported by Fifth Third were false or inaccurate. Moreover, the fact that Fifth Third was engaged in Alt-A lending at all should have been a red flag to any investor who was concerned about credit quality because by definition documentation supporting the creditworthiness of these borrowers was lacking. Fifth Third continually reported increases in non-performing assets throughout the class period and the complaint admits that Fifth Third actually increased its loan loss reserves during this time. Plaintiffs complain that Fifth Third misled investors because it actually decreased its reserves as a percentage of non-performing assets throughout the class period but this phenomenon was specifically noted by one of the analysts in the April 22, 2008 conference call. Complaint ¶ 429. Thus, the information was actually disclosed and available if percentage of reserves to nonperforming assets was truly important to investors. Plaintiffs complain that Fifth Third should have recognized loans delinquent for 30 to 89 days as non-performing and set aside reserves accordingly, and yet none of the accounting authorities they cite required Fifth Third to account for delinquent loans in this manner.
Tellabs requires the inference of scienter to be "at least as compelling" as any other inference. Defendants contend that the most compelling inference to be drawn from the complaint is that Fifth Third, along with many other financial institutions, was overwhelmed by the magnitude of the collapse of the credit market. While Plaintiffs dispute Defendants' use of extraneous materials to establish the size and impact of this event, even the complaint admits that as early as 2006, there were "many indicators pointing to significant problems in subprime mortgage performance." Complaint ¶ 9. Thus, the complaint itself supports the inference that the decline in the macro-credit market, as Defendants Kabat and Marshall stated in several conference calls, and not fraud, is the reason behind the decline in Fifth Third's share value.
Even if the collapse of the credit market is not the strongest inference to be drawn from the complaint, another equally compelling inference is that Fifth Third simply made a lot of risky loans and failed to estimate loan loss reserves accurately. The worst this establishes, however, is that
Accordingly, for all of the above reasons, Defendants' motion to dismiss Plaintiffs' Section 10(b) and Rule 10b-5 claims is well-taken and is
Like Section 15 of the Securities Act, Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a), imposes liability for securities violations on "control persons." PR Diamonds, Inc. v. Chandler, 364 F.3d 671, 696 (6th Cir.2004). Section 20(a) . . . establishes two requirements for a finding of control person liability. First, the "controlled person" must have committed an underlying violation of the securities laws or the rules and regulations promulgated thereunder. Second, the "controlling person" defendant in a Section 20(a) claim must have directly or indirectly controlled the person liable for the securities law violation. "Control" is defined as "the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise." Id. at 696-97 (quoting in part 17 C.F.R. § 230.405). Where, as in this case, however, the Court has dismissed the underlying Section 10(b) claims, it must also dismiss the Section 20 claims because there is no underlying securities violation. PR Diamonds, 364 F.3d at 697-98; Omnicare, 583 F.3d at 947.
Accordingly, Defendants' motion to dismiss Plaintiffs' Section 20 claims is welltaken and is
In conclusion, Defendants' motion to dismiss is
1. Plaintiffs' Section 11, Section 12, and Section 14(a) claims to the extent they relate to alleged misstatements and omissions concerning:
2. The Section 12(b)(2) claims of the Preferred B sub-class;
5. The Section 10(b) and Rule 10b-5 claims of the Fifth Third Sub-class;
Defendants' motions to dismiss are not well-taken and are
1. The Section 11 claims of the First Charter subclass, Preferred B sub-class, and Preferred C sub-class and the Section 14(a) claims of the First Charter sub-class concerning:
2. The corresponding Section 15 claims of the First Charter sub-class, Preferred B sub-class, and Preferred C sub-class, and the Section 20 claims of the First Charter sub-class.
Defendants' filed an omnibus motion to dismiss (Doc. No. 78) and in conjunction with that pleading the Underwriter Defendants filed a supplemental motion to dismiss (Doc. No. 79) in which they highlighted that the complaint only asserts claims against them pursuant to Section 12(a)(2) on behalf of the Preferred B and Preferred C sub-classes. Indeed, their memorandum specifically states that "[t]here are no claims against the Underwriter Defendants under Section 11 of the Securities Act[.]" Doc. No. 79, at 2. Upon reading the supplemental motion to dismiss, Plaintiffs moved to amend the complaint on the grounds that through a scrivener's error, they omitted to name the Underwriter Defendants in their Section 11 claims. Plaintiffs, however, believe that, fairly read, the existing complaint asserts Section 11 claims against the Underwriter Defendants, and, thus, an amended complaint is not strictly necessary. In that regard, Plaintiffs' note that paragraphs 5 and 6 of the complaint specifically name the Underwriter Defendants as defendants for the Preferred B and Preferred C sub-classes.
The Underwriter Defendants' oppose Plaintiffs' motion for leave to amend. They contend that Plaintiffs' decision not to assert Section 11 claims against them was strategic and that they only moved for leave to amend when it became apparent that their Section 12(a)(2) claims are subject to dismissal on standing grounds. In any event, the Underwriter Defendants argue that Plaintiffs' motion for leave to amend is moot because their Section 11 claims were subject to dismissal based on the grounds advanced in the omnibus motion to dismiss.
On review of the complaint, and construing the pleadings so as to do substantial justice, Fed.R.Civ.P. 8(e), the Court agrees with Plaintiffs that, fairly read, the complaint names the Underwriter Defendants as Defendants as to their Section 11 claims. Moreover, the Court finds it difficult to arrive at the conclusion that, having asserted Section 11 claims against the Underwriter Defendants before the various lawsuits were consolidated, they omitted those claims against the Underwriters in the consolidated complaint for strategic reasons. Accordingly, Plaintiffs' motion for leave to file an amended consolidated class action complaint is
Finally, Plaintiffs have filed a motion to file a sur-reply brief in response to the
Having read the proposed sur-reply brief, the Court generally agrees with Plaintiffs that Omnicare does not set forth any new rules of law. However, whether this case is identical to or distinguishable from Omnicare is somewhat beside the point. The Court has in fact only relied on Omnicare for well-established principles of securities law and none if its rulings have turned on whether this case is on all fours with Omnicare. Thus, the parties' analyses of the specific applicability of Omnicare to this case are largely inconsequential. Nonetheless, in the interest of granting Plaintiffs a fair opportunity to respond to Omnicare, the Court grants leave to file a sur-reply. However, nothing in Plaintiffs' sur-reply alters the Court's rulings on Defendants' motions to dismiss.
E.g. Doc. No. 82-37, at 3-4 (Transcript of January 22, 2008 analysts' conference call). These cautionary statements are not meaningful because they fail to impart any substantive information about factors that could cause results to differ from the forward looking statements. Consequently, the cautionary statements are merely boilerplate.