JAMES O. BROWNING, District Judge.
The Court will dismiss the SEC's allegations based upon the statement in the 2007 Form 10-K and to Thornburg Mortgage's outside auditor that Thornburg Mortgage successfully met its margin calls without violating its lending agreements, and did not sell assets to meet margin calls. The Court will also dismiss the SEC's allegations that Starrett engaged in a scheme to defraud the investing public, and that the Defendants schemed to defraud Thornburg Mortgage's outside auditor in connection with the 2007 Form 10-K.
On the other hand, the Court has determined that the SEC has sufficiently alleged that the representation that Thornburg Mortgage had the intent and ability
The Court will also allow certain claims to proceed against Goldstone and Simmons individually. The SEC has sufficiently alleged that Goldstone and Simmons failed to disclose the material information to KPMG before the 2007 Form 10-K was filed that the collapse of a European hedge fund would negatively impact Thornburg Mortgage's financial condition. The SEC has sufficiently alleged that Simmons misrepresented to KPMG the purpose of certain transactions Thornburg Mortgage used to satisfy margin calls before the 2007 Form 10-K was filed. The SEC has also sufficiently alleged that Goldstone materially misrepresented Thornburg Mortgage's financial condition after the 2007 Form 10-K was filed. The SEC has sufficiently alleged that Goldstone and Simmons materially misled KPMG by not providing correspondence confirming that Thornburg Mortgage experienced an event of default in the two weeks before the 2007 Form 10-K was filed, and that Simmons misrepresented that unforeseen events had an unexpected negative financial impact on Thornburg Mortgage after the 2007 Form 10-K was filed.
The SEC alleges that the Defendants — Larry A. Goldstone, Clarence G. Simmons, III, and Jane E. Starrett — were involved in fraudulent misrepresentations and omissions made in connection with the Thornburg Mortgage, Inc. 2007 Form 10-K Annual Report, filed May 21, 2012 (Doc. 37-2)
At the time of the allegations set forth in the Complaint, Goldstone, as Thornburg Mortgage's president and chief executive officer ("CEO"), and also one of Thornburg Mortgage's directors, signed and certified Thornburg Mortgage's filings with the SEC, and exercised control over Thornburg Mortgage's management, general operations, and policies. Complaint 17, at 6. Simmons, as senior executive vice-president, chief financial officer ("CFO"), and one of Thornburg Mortgage's directors, signed and certified Thornburg Mortgage's filings with the SEC, and exercised control over Thornburg Mortgage's management, general operations, and policies. Complaint ¶ 18, at 6-7. Starrett was Thornburg Mortgage's chief accounting officer ("CAO"), and as such, was responsible for Thornburg Mortgage's financial reporting and served as Thornburg Mortgage's principal contact with its outside auditor. Complaint ¶ 19, at 7. Starrett became a certified public accountant in 1976, but her license has been inactive since 1989. See Complaint ¶ 19, at 7.
Thornburg Mortgage's lending operations focused on "jumbo" and "super-jumbo" adjustable-rate mortgage ("ARM") securities, and also purchased ARM securities third parties originated.
As part of Thornburg Mortgage's auditing process in 2007, Thornburg Mortgage had to assess whether it had the intent and ability to hold its ARM securities until maturity or when they recovered their value on the market — referred to as an "other-than-temporary impairment ... analysis" ("OTTI analysis").
In August, 2007, disruptions in the housing and financial markets led Thornburg Mortgage to receive approximately two billion
Thornburg Mortgage received approximately $650 million in margin calls from January through the middle of February, 2008. See Complaint ¶ 28, at 9. Thornburg Mortgage received approximately $300 million in margin calls in the last two weeks of February, 2008, which it could not timely meet. See Complaint ¶ 3, at 2; id. ¶ 29, at 9. Thornburg Mortgage was late in meeting margin calls, in violation of its reverse repurchase agreements, with Credit Suisse First Boston ("Credit Suisse"), Greenwich Capital Markets, Inc. ("Greenwich"), and Citigroup Global Markets Limited. Complaint ¶ 29, at 9. On February 21, 2008, a senior vice-president with Thornburg Mortgage's structured finance group informed the Defendants that, in connection with Thornburg Mortgage's anticipated capital raise: "`[Credit Suisse] is willing to withdraw from the underwriting group since
Citigroup Global's margin call on February 21, 2008 was the largest of the three Thornburg Mortgage could not immediately meet — $196 million. See Complaint ¶ 33, at 10. In response to Thornburg Mortgage's inability to meet the Citigroup
In the last week of February, 2008, Thornburg Mortgage had to sell the interest only portions of its ARM loans ("I/O Strip Transactions") to generate sufficient cash to meet the margin calls it received in the second half of the month.
The Defendants planned to quickly raise cash to satisfy Thornburg Mortgage's future margin calls after filing the 2007 Form 10-K. See Complaint ¶ 32, at 10. The Defendants did not plan to disclose that Thornburg Mortgage was late in meeting margin calls. See Complaint ¶ 32,
The Defendants "scrambled" to meet Thornburg Mortgage's margin calls before filing the 2007 Form 10-K. Complaint ¶ 30, at 9-10. In an electronic mail transmission from Goldstone dated February 22, 2008, which Simmons and Starrett received, Goldstone stated:
Complaint ¶ 30, at 10 (alteration in original)(quoting Feb. 22 BOD Email at 2). Goldstone also discussed strategies that would allow Thornburg Mortgage "`to keep [its] current situation quiet while we deal with it'" in the same electronic mail transmission. Complaint ¶ 31, at 10 (alteration in original)(quoting Feb. 22 BOD Email at 2). Goldstone also stated: "`Hopefully our disclosure will be a simple one, meaning all margin calls have been met.'" Complaint ¶ 31, at 10 (quoting Feb. 22 BOD Email at 3).
Goldstone and Simmons also learned, on February 27, 2008, that a large European hedge fund with substantial MBS holdings, similar to those Thornburg Mortgage held, was collapsing. See Complaint ¶ 38, at 12. Goldstone anticipated that European hedge fund's collapse would negatively impact Thornburg Mortgage's ARM Securities, and sent an electronic mail transmission to Simmons on February 27, 2008, in which he said:
Complaint ¶ 38, at 12 (quoting Electronic Mail Transmission from Larry Goldstone to Clay Simmons at 2 (February 27, 2008, 3:48 p.m.), filed May 21, 2012 (Doc. 37-21)("Feb. 27 Goldstone/Simmons Email")). Simmons sent an electronic mail transmission to Goldstone, and others, regarding the potential collapse of a European hedge fund, stating: "`This makes it even more critical to be done with Citi today so we can get the K filed.'" Complaint ¶ 39, at 12 (quoting Electronic Mail Transmission from Clay Simmons to Patrick Feldman and Larry Goldstone at 2, (February 27, 2008, 8:08 a.m.), filed May 21, 2012 (Doc. 37-20)("Feb. 27 Simmons/Feldman Email")). Later on February 27, 2008, Simmons sent an electronic mail transmission to Starrett, in which he stated: "`I gave [Thornburg's SEC Reporting manager] a 6:00 AM Thursday deadline to file the K. I do not want there to be any issues based on Thursday activity.'" Complaint ¶ 40, at 12 (alteration in original)(quoting
Thornburg Mortgage filed its 2007 Form 10-K on February 28, 2008, approximately twelve hours after sending its last payment to Citigroup Global and meeting its outstanding margin calls. Complaint ¶ 3, at 6; id. ¶ 41, at 12. Goldstone, Simmons, and Starrett drafted and reviewed Thornburg Mortgage's 2007 Form 10-K before filing it, and Goldstone and Simmons signed the Form 10-K. See Complaint ¶ 7, at 3. In the 2007 Form 10-K, Goldstone and Simmons represented that Thornburg Mortgage had successfully met its margin calls without selling any assets. See Complaint ¶ 7, at 3; 2007 Form 10-K at 35 ("[D]espite these challenges, we successfully continue to meet all margin calls, we maintain existing short-term financing facilities with our existing finance counterparties and we have successfully added new financing capacity since year end."); id. at 39 ("In the event that we cannot meet future margin calls from our available cash position, we might need to selectively sell assets in order to raise cash. To date, no such sales have been required...."). Thornburg Mortgage's 2007 Form 10-K accounted for the I/O Strip Transactions as the issuance of secured debt.
Thornburg Mortgage began receiving margin calls at 6:00 a.m. on February 28, 2008. See Complaint ¶ 41, at 12-13. Thornburg Mortgage's stock prices fell after the 2007 Form 10-K was filed. See
In the afternoon of February 28, 2008, Goldstone appeared on Street Signs on the Consumer News and Business Channel ("CNBC"). Complaint ¶ 98, at 28. On Street Signs, Goldstone stated that: (i) he did not believe Thornburg Mortgage would need to sell assets; (ii) Thornburg Mortgage had "`met all of [its] lending requirements'"; and (iii) Thornburg Mortgage had "`liquidity and cash available to continue to support the portfolio.'" Complaint ¶ 98, at 28 (alterations in original). (quoting Street Signs: Interview with Larry Goldstone at 3:54-4:09 (CNBC television broadcast February 28, 2008), filed May 21, 2012 (Doc. 37-1)).
On the evening of February 28, 2008, Thornburg Mortgage received a default notice from J.P. Morgan Chase Bank, N.A. for an unpaid margin call J.P. Morgan had issued to Thornburg Mortgage earlier that day. Complaint ¶ 41, at 13. At the end of day on February 28, 2008, Goldstone, Simmons, and Starrett confirmed, via electronic mail transmission, that the "`top messages [they] reinforced in the market'" were: "`We have met all margin calls to date, and we expect to continue to do so. We have sufficient operating cash, and we don't expect to sell assets to meet margin calls. We returned to profitability during the fourth quarter despite a tough market.'" Complaint ¶ 96, at 28 (alterations in original).
By the morning of February 29, 2008, Thornburg Mortgage had received over $200 million in margin calls. See Complaint ¶ 41, at 13. Because of the additional margin calls, on March 3, 2008, Thornburg Mortgage filed a Form 8-K announcing that it had received $270 million in margin calls, most of which it could not meet, and that it had received a default
On March 7, 2008, Thornburg Mortgage filed another Form 8-K, and announced that it had received over $1.77 billion in margin calls since December 31, 2007, and that it did not have sufficient cash to cover $610 million of its outstanding margin calls. See Complaint ¶ 46, at 13-14. Thornburg Mortgage also announced that it would restate its 2007 Form 10-K. See Complaint ¶ 11, at 4; id. ¶ 46, at 14. In the restated 2007 Form 10-K, filed March 11, 2008, Thornburg Mortgage recognized a loss of $427.8 million in ARM securities, a loss in the fourth quarter of 2007, and a qualification that Thornburg Mortgage might not be able to continue as a going concern without restructuring or new capital. See Complaint ¶ 11, at 4; id. ¶ 46, at 14. By March 11, 2008, Thornburg Mortgage's stock price had fallen over ninety-percent from what it was on February 28, 2008. See Complaint ¶ 47, at 14. Thornburg Mortgage filed for Chapter 11 bankruptcy on May 1, 2009. See Complaint ¶ 48, at 14.
As part of Thornburg Mortgage's 2007 audit, Thornburg Mortgage's auditor, KPMG, assessed whether Thornburg Mortgage's OTTI analysis was accurate. See Complaint ¶ 49, at 14-15.
On February 20, 2008, Starrett and Simmons reviewed and approved, and circulated to Goldstone, KPMG's "year-end going concern analysis," which "repeatedly represented
Complaint ¶ 74, at 22 (quoting Going Concern Analysis at 12, filed May 21, 2012 (Doc. 37-23)
In an electronic mail transmission from Goldstone to Starrett and Simmons on February 21, 2008, Goldstone stated that Thornburg Mortgage planned to meet the Citigroup Global margin call by "`[h]aving Citi sell a $100 million Interest Only security that may generate $20 to $25 million.... We may undertake additional asset sales depending on how market conditions evolve over the next few weeks[.]'" Complaint ¶ 66, at 19 (alterations in original)(quoting Feb. 21 BOD Email at 2). Simmons informed KPMG that it had entered into the I/O Strip Transactions to take advantage of opportune pricing. See Complaint ¶ 65, at 19. On February 25, 2008, Starrett stated, in an electronic mail transmission to Goldstone and Simmons, that: "`
Complaint ¶ 54, at 16 (quoting Feb. 25 Goldstone/Starrett Email at 2-3). Goldstone responded: "`Got it. Understand it. Thanks.'" Complaint ¶ 55, at 16 (quoting Feb. 25 Goldstone/Starrett Email at 2).
The Defendants each signed Thornburg Mortgage's February 27, 2008 management representation letter to KPMG, in which they stated that: (i) Thornburg Mortgage was in compliance with all aspects of its contractual obligations that would have a material effect on its consolidated financial statements in the event of a noncompliance; (ii) Thornburg Mortgage had the intent and ability to hold its impaired securities for a sufficient period of time to allow for them to recover their value in the market; (iii) Thornburg Mortgage had experienced no subsequent events requiring it to adjust or disclose its financial statements; and (iv) Thornburg Mortgage's financial statements disclosed all matters of which the Defendants were aware were relevant regarding Thornburg Mortgage's ability to continue as a going
On March 3, 2008, KPMG requested evidence from the Defendants "that the events subsequent to filing were unforeseeable catastrophic events," such as "correspondence with lenders/attorneys/shareholders, emails." Electronic Mail Transmission from Jennifer Hall to Larry Goldstone, Jane Starrett, Clay Simmons, Shawn Buniel at 2 (March 3, 2008 11:44 p.m.), filed May 21, 2013 (Doc. 37-28)("Mar. 3 Hall Email"); Request for Correspondence at 3-4, filed May 21, 2012 (Doc. 37-28). See Complaint ¶ 100, at 29. KPMG also requested a "position paper" which "provide[d] the Company's assessment of the ability to hold securities for the foreseeable future as of August 27, 2008, including but not limited to.... Correspondence with counter parties for the two weeks prior to filing, along with supporting evidence." Request for Correspondence at 4. See Complaint ¶ 100, at 29 ("Thornburg's outside auditor sent an email ... requesting, among other items, all correspondence between Thornburg and its lenders during the two-week period leading to the... Form 10-K."). At the time, the auditor was considering whether to restate Thornburg Mortgage's financial statements and was reevaluating the validity of its audit opinion. See Complaint ¶ 99, at 29. Goldstone and Simmons were aware of the Citigroup Global Letter, but did not provide it to the auditor. See Complaint ¶ 101, at 29. KPMG did not become aware of the Citigroup Global Letter while preparing its restatement. See Complaint ¶ 101, at 29. Simmons reviewed and approved an analysis to the auditor that explained Thornburg Mortgage's margin calls on February 28, 2008, and the corresponding collapse in the mortgage market, were part of "`an unforeseeable catastrophic decline in mortgage market valuations.'" Complaint ¶ 102, at 29 (quoting ABX Index Moves Late February at 2-3, filed May 21, 2012 (Doc. 37-25)("Position Paper")). The analysis continued to state: "`Due to a number of factors including
The SEC contends that the Defendants misrepresented and/or engaged in a scheme to deceive, or aided and abetting material misrepresentations of Thornburg Mortgage's financial condition to, KPMG and the investing public regarding Thornburg Mortgage's financial situation as stated in the 2007 Form 10-K. See Complaint ¶ 5, at 3; id. ¶ 13, at 5. The SEC contends that the Defendants "violated, or aided and abetted the violation of, and, unless restrained and enjoined, will continue to violate or aid and abet the violation of" the following statutes and federal rules: (i) 15 U.S.C § 77q(a), also known as § 17(a) of the Securities Act of 1933, 15 U.S.C. §§ 77a-77bbb ("the Securities Act"); (ii) 15 U.S.C. §§ 78j(b), 78m(a), 78m(b)(2), and 78m(b)(5), also known as §§ 10(b), 13(a), 13(b)(2), and 13(b)(5) of the Securities Exchange
The SEC's first, second, third and fourth claims for relief are related to alleged violations of § 17(a) of the Securities Act and § 10(b) and rule 10b-5 of the Exchange Act. The SEC's first claim for relief that the Defendants' actions violated, and will continue to violate if not enjoined, Exchange Act Section 10(b) and rule 10b-5. See Complaint ¶¶ 106-108, at 31. The SEC's second claim for relief is alleged alternatively against Goldstone and Simmons, and asserts that Goldstone and Simmons are liable as control persons under § 20(a) of the Exchange Act for Thornburg Mortgage's violations of § 10(b) and rule 10b-5 of the Exchange Act. See Complaint ¶¶ 109-112, at 31-32. The SEC's fourth claim for relief alleges that the Defendants violated § 17(a) of the Securities Act and committed fraud in the offer or sale of securities, and that the Defendants will continue to violate § 17(a) of the Securities Act if not enjoined. See Complaint ¶¶ 117-119, at 33-34. The SEC's third claim for relief is alleged against all Defendants, alternatively, and asserts that the Defendants are liable for aiding and abetting Thornburg Mortgage's violations of § 10(b) and rule 10b-5 of the Exchange Act. The SEC asserts that the Defendants "each aided and abetted the fraud violations of Thornburg, in that they knowingly or recklessly provided substantial assistance to Thornburg in committing these reporting violations." Complaint ¶¶ 113-116, at 32-33.
The SEC's eighth and ninth claims for relief allege violations of § 13(a) and rules 12b-20 and 13a-1 of the Exchange Act — false SEC filings. The SEC asserts that Thornburg Mortgage, "an issuer of securities registered pursuant to Section 12 of the Exchange Act," filed a materially false and misleading annual report with the SEC. Complaint ¶ 129, at 36. The SEC's eighth claim for relief asserts that the Defendants aided and abetted Thornburg Mortgage's violations of § 13(a) and rules 12b-20 and 13a-1 of the Exchange Act, by "knowingly or recklessly provid[ing] substantial assistance to Thornburg in committing these reporting violations." Complaint ¶¶ 130-131, at 36. Alternatively, the SEC also asserts that Goldstone and Simmons are liable as control persons for Thornburg Mortgage's false SEC filings, under § 20(a) of the Exchange Act. See Complaint ¶¶ 132-135, at 37.
The SEC's tenth and eleventh claims for relief relate to alleged false SEC filings. The SEC's tenth claim for relief asserts that the Defendants aided and abetted Thornburg Mortgage's violation of § 13(b)(2) of the Exchange Act, by "knowingly or recklessly provid[ing] substantial assistance to Thornburg['s]" failure to keep "books, records, and accounts which,
The SEC's fifth claim for relief alleges that the Defendants falsified books, records, or accounts, in violation of § 13(b)(5) and rule 13b2-1 of the Exchange Act. The SEC asserts that the Defendants "knowingly circumvented or knowingly failed to implement a system of internal accounting controls to assure that Thornburg's financial statements were prepared in conformity with GAAP or knowingly falsified or caused to be falsified books, records, or accounts of Thornburg," in violation of § 13(b)(5) and rule 13b2-1 of the Exchange Act. Complaint ¶¶ 12-122, at 34. The SEC's sixth claim for relief asserts that Goldstone and Simmons "each falsely certified in connection with Thornburg's 2007 10-K," in violation of rule 13a-14 promulgated under the Exchange Act, and that they will continue to violate rule 13a-14 if not enjoined. Complaint ¶¶ 123-125, at 34-35.
The SEC's seventh claim for relief asserts that the Defendants deceived auditors, in violation of rule 13b2-2 promulgated under the Exchange Act, and will in the future violate rule 13b2-2 if not enjoined. See Complaint ¶¶ 126-128, at 35-36.
The SEC contends that the Defendants were "scrambling" to meet Thornburg Mortgage's outstanding margin calls before filing the 2007 Form 10-K, "so they could claim in [the 2007 Form 10-k] ... to have successfully met all margin calls." Complaint ¶ 38, at 12. The SEC contends that the Defendants misrepresented in the 2007 Form 10-K that Thornburg Mortgage had successfully met all of its margin calls without selling any assets. See Complaint ¶¶ 5, 7 at 3; id. ¶ 59, at 17; id. ¶ 65, at 19. The SEC asserts that the Defendants either knew, or were reckless in not knowing, that Thornburg Mortgage was late in margin call payments under its reverse repurchase agreements, as Goldstone and Simmons had received the Citigroup Global Letter on or about February 21, 2008, which declared Thornburg Mortgage in default. See Complaint ¶ 60, at 17. The SEC asserts that the Defendants' electronic mail transmissions in the final two weeks of February, 2008, demonstrate that Thornburg Mortgage was late in meeting margin calls, was relying on the cooperation and forbearance of its lenders to meet margin calls, and had entered into payment plans with its lenders. See Complaint ¶ 61, at 18. The SEC asserts that Simmons has conceded that, if the 2007 Form 10-K contained the "truth relating to Thornburg's financial position," Thornburg
The SEC also asserts that the Defendants should have recognized the I/O Strip Transactions as sales, rather than as the issuance of secured debt, to avoid misleading investors in the 2007 Form 10-K. The SEC contends that the Defendants "each knew, or were reckless in not knowing," that Thornburg Mortgage entered into the I/O Strip Transactions to meet margin calls, as the Defendants' electronic mail transmission on February 21, 2008, demonstrates. Complaint ¶ 66, at 19. The SEC also contends that the Defendants have, in the past, characterized I/O Strip Transactions as sales, and not as the issuance of secured debt, as the Defendants accounted for the Thornburg Mortgage's I/O Strip Transaction in the 2007 Form 10-K. See Complaint ¶ 37, at 11. The SEC highlights that, in electronic mail transmissions discussing the I/O Strip Transactions, the Defendants refer to the transactions as "sales" or state that the I/O Strips were "sold" to meet margin calls. Complaint ¶¶ 67-69, at 19-20. The SEC contends that the I/O Strip Transactions were "in form sales and contemporaneously referred to as sales." Complaint ¶ 69, at 20.
The SEC also contends that the Defendants misrepresented in the 2007 Form 10-K that Thornburg Mortgage had the intent and ability to hold its ARM securities until their value was recovered in the market. The SEC asserts that the OTTI analysis was "directly contradicted by Thornburg's severe liquidity crisis and exposure to declarations of default by lenders who then could have seized the company's ARM Securities collateral," and by Thornburg Mortgage's use of I/O Strip Transactions to meet margin calls. Complaint ¶ 8, at 3-4; id. ¶¶ 51-52, at 15. The SEC asserts that the Defendants "knew, or were reckless in not knowing," that the I/O Strip Transactions informed the OTTI analysis. Complaint ¶ 71, at 21. The SEC contends that Starrett provided "clear accounting guidance" to Goldstone and Simmons, which indicates that the Defendants knew that "`selling some assets call[ed] into question [Thornburg's] intent and having to sell them to meet margin calls or reduce exposure, call[ed] into question [the company's] ability to hold them.'" Complaint ¶ 70, at 20 (alterations in original)(quoting Feb. 25 Goldstone/Starrett Email at 2).
Similarly, the SEC asserts that, just as the Defendants' OTTI analysis was fraudulent, the Defendants knew, or were reckless in not knowing, that Thornburg Mortgage was required to recognize a loss of approximately $400 million in its ARM securities in the 2007 Form 10-K, because Thornburg Mortgage could not hold those assets to maturity. See Complaint ¶ 70, at 20-21; id. ¶ 85, at 25.
The SEC asserts that Starrett "accurately" relayed this information to Goldstone and Simmons in an electronic mail transmission on February 25, 2008. Complaint ¶ 56, at 16; id. ¶ 70, at 20-21; id. ¶ 85, at 25. The SEC contends that, if the Defendants had properly accounted for an impairment of $427.8 million in its ARM securities in the 2007 Form 10-K, Thornburg Mortgage would have suffered a net loss of approximately $357 million, instead of a net profit of sixty-five million dollars in the fourth quarter of 2007, an annual net loss of approximately $1.3 billion, instead of $875 million, and losses per share of $10.94, instead of $7.48. See Complaint ¶¶ 8, 12, at 4, 5; id. ¶¶ 86-88, at 25-26. The SEC asserts that, because Thornburg
The SEC asserts that Goldstone and Simmons "continued to project a materially false image of Thornburg's financial condition and to perpetuate the materially false image they had presented in the Form 10-K" in the days and hours after filing the 2007 Form 10-K. Complaint ¶ 93, at 27. The SEC asserts that Goldstone "knew, or was reckless in not knowing," that his electronic mail transmission to the investor relations department on February 28, 2008 was misleading, because Thornburg Mortgage had violated reverse repurchase agreements the previous week. Complaint ¶ 95, at 27. The SEC also asserts that Goldstone's electronic mail transmission to the investor relations department became false within "approximately one hour of his instructions," as Thornburg Mortgage received escalating margin calls that exceeded Thornburg Mortgage's liquidity, consisting of approximately forty million dollars in cash at that time. Complaint ¶ 95, at 27. The SEC asserts that Goldstone knew, or was reckless in not knowing, that, inconsistent with the "`top messages'" the Defendants "`reinforced in the market,'" on February 28, 2008, Thornburg Mortgage did not have sufficient cash to meet the margin calls it received that day. Complaint ¶¶ 96-97, at 28. The SEC similarly asserts that Goldstone knew, or was reckless in not knowing, that Thornburg Mortgage did not have liquidity and cash sufficient to support its margin calls on February 28, 2008, contrary to his statements on Street Signs. See Complaint ¶ 98, at 28.
The SEC contends that the Defendants made misrepresentations and omissions to KPMG. The SEC asserts that the Defendants "misrepresented and/or concealed the fact that" Thornburg Mortgage had violated reverse repurchase agreements, and was at risk of having its ARM securities seized as collateral by its lenders, and that Thornburg Mortgage was required to enter into I/O Strip Transactions to meet margin calls in the last two weeks of February, 2008. Complaint ¶ 51, at 15; id. ¶ 79, at 23. The SEC asserts that the Defendants' misrepresentations and omissions precluded the auditor from having "critical information to evaluate Thornburg's OTTI analysis of its ARM Securities and to determine whether Thornburg had the intent and ability to hold those securities until maturity or their value recovered
Regarding Thornburg Mortgage's overall financial situation, the SEC asserts that the Defendants' repeated statements in Thornburg Mortgage's going-concern analysis that Thornburg Mortgage "successfully continued to meet all margin calls" was materially false and misleading, given Thornburg Mortgage's failure to timely meet the Credit Suisse, Citigroup Global, and Greenwich margin calls. Complaint ¶ 72, at 21. The SEC also asserts that the Defendants either knew, or were reckless in not knowing, that the statements in the going-concern analysis that Thornburg Mortgage had "returned to profitability in the fourth quarter," were false, because of the Defendants' improper OTTI analysis of the ARM securities. Complaint ¶ 73, at 21-22. The SEC contends that, had the Defendants disclosed the truth of Thornburg Mortgage's liquidity crisis and exposure to default and cross-defaults, KPMG would have questioned its OTTI analysis in the 2007 Form 10-K, and the Defendants' plan to raise additional cash would have been undermined. See Complaint ¶ 2, at 2; id. ¶ 52, at 15-16. The SEC also asserts that the Defendants' February 27, 2008 management representation letter to KPMG misrepresented that Thornburg Mortgage was not in violation of its reverse repurchase agreements, that Thornburg Mortgage was in compliance with all aspects of its reverse repurchase agreements which would have an effect on its financial statements in the event of noncompliance, that Thornburg Mortgage had the intent and ability to hold its impaired securities until their value recovered in the market, that Thornburg Mortgage had not experienced subsequent events which would require it to adjust its financial statements, and that the financial statements disclosed all matters relevant to Thornburg Mortgage's ability to continue as a going concern. See Complaint ¶¶ 57-58, at 17.
Regarding the I/O Strip Transactions, the SEC contends that the Defendants either "knew, or were reckless in not knowing," that the "circumstances of the I/O Strip Transactions were important information" that KPMG needed to know to properly review Thornburg Mortgage's OTTI analysis regarding its ARM securities. Complaint ¶ 71, at 21. The SEC asserts that Simmons misrepresented to KPMG that Thornburg Mortgage entered into the I/O Strip Transactions to take advantage of opportune pricing. See Complaint ¶ 65, at 19.
The SEC contends that the Defendants' statement in the going-concern analysis that Thornburg Mortgage "`has the ability and intent to hold its Purchased ARM assets until recovery,'" based upon Thornburg Mortgage's "ongoing profitability, liquidity position and ability to continue to make margin calls," was a misrepresentation. Complaint ¶ 12, at 4-5; id. ¶ 74, at 22 (quoting Going Concern Analysis at 12).
The SEC also contends that Goldstone and Simmons knew, or were reckless in not knowing, that failing to inform the auditor that the impending collapse of a European hedge fund, of which Goldstone and Simmons became aware on February 27, 2008, would "likely further depress the price of Thornburg's ARM Securities and trigger additional margin calls." Complaint ¶ 76, at 22. The SEC contends that the collapse of the European hedge fund was "material information that" Goldstone and Simmons should have provided to the auditor to allow it to properly review Thornburg Mortgage's OTTI analysis of its ARM securities. Complaint ¶ 78, at 23. The SEC asserts that Simmons "improperly failed to update" his previous statement to KPMG expressing his belief that the MBS market had "reached its lowest point and ... [would] not likely [] deteriorate further." Complaint ¶ 77, at 22-23.
The SEC asserts that Goldstone and Simmons perpetuated Thornburg Mortgage's false 2007 Form 10-K subsequent to its filing. The SEC contends that Goldstone and Simmons failed to provide the "critical" Citigroup Global Letter in response to the Request for Correspondence. Complaint ¶ 99, at 29. The SEC also contends that the Position Paper, which Simmons approved, falsely stated that the collapse of the European hedge fund was "`unexpected'" and that Thornburg Mortgage's margin calls after the filing of the 2007 Form 10-K were "`unforeseeable.'" Complaint ¶ 105, at 30 (quoting Position Paper at 2). The SEC asserts that Simmons was aware that the hedge fund was collapsing on February 27, 2008, and understood at that time that the collapse would likely "have a negative impact on the price of Thornburg's ARM Securities." Complaint ¶¶ 38-40, at 12, id. 104, at 30. The SEC asserts that Simmons "continued to deceive the company's auditor" "in an attempt to defend Thornburg's improper OTTI analysis and failure to recognize the losses associated with its ARM Securities." Complaint ¶ 105, at 30.
Goldstone and Simmons move to dismiss the SEC's eleven claims against them. See Goldstone & Simmons MTD at 9. Goldstone and Simmons assert that the SEC has failed to allege a plausible claim against them in the Complaint, and assert that the SEC's allegations of fraud fail to meet the requirements of rule 9(b) of the Federal Rules of Civil Procedure. See Goldstone & Simmons MTD at 8. Goldstone
Goldstone and Simmons assert that the claims against them are "facially invalid in at least five respects:" (i) the Thornburg Mortgage 2007 Form 10-K was not misleading, and that the Defendants had no duty to "disclose incidental details about how Thornburg met its margin calls or to attempt to predict the extent of future margin calls," Goldstone & Simmons MTD at 9-10; (ii) the Complaint "fails to allege facts demonstrating that Defendants prepared the 10-K with any intent to defraud investors," Goldstone & Simmons MTD at 10; (iii) the Complaint fails to allege plausible facts that Goldstone acted with fraudulent intent to misrepresent Thornburg Mortgage's "ability to support its portfolio with cash and liquidity during an interview on Street Signs and in instructions he gave to the Company's investor relations department on February 28, 2008," Goldstone & Simmons MTD at 11; (iv) the information Goldstone and Simmons withheld regarding the means Thornburg Mortgage used to meet its margin calls and the European hedge fund "rumor," and related issues was not material in light of the full disclosures in the 2007 Form 10-K, was not relevant to Thornburg Mortgage's financial conditions, and would not have changed the auditors' view on Thornburg Mortgage's OTTI analysis, Goldstone & Simmons MTD at 11; (v) the SEC has not sufficiently alleged facts to support Goldstone and Simmons' liability as "control persons," because the SEC has not adequately alleged a primary securities violation and has not sufficiently alleged that Goldstone and Simmons had "actual knowledge that they substantially assisted Thornburg in its alleged commission of the securities fraud, books and records violations, and internal control violations at issue," Goldstone & Simmons MTD at 11-12. Goldstone and Simmons also join in Starrett's arguments set forth in the Starrett MTD, and incorporate by reference all of Starrett's arguments into the Goldstone & Simmons MTD. See Goldstone & Simmons MTD at 12 n. 1.
First, Goldstone and Simmons assert that the SEC has failed to state a claim in connection with representations and omissions in Thornburg Mortgage's 2007 Form 10-K. Goldstone and Simmons contend that Thornburg Mortgage's disclosures therein were accurate and not misleading, and further contend that the SEC has not plausibly alleged that Goldstone and Simmons made misrepresentations and omissions with fraudulent intent. Goldstone and Simmons assert that, under federal securities laws, "a statement or omission is material only if there is a `substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available' to the public." Goldstone & Simmons MTD at 37 (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976)(secondary quotations omitted)(citing Basic Inc. v. Levinson, 485 U.S. 224, 238, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988))). Goldstone and Simmons assert that the 2007 Form 10-K contained "extensive disclosures concerning the facts that mattered to investors," specifically: (i) "the receipt of more than $300 million in margin calls following a sharp downturn in the MBS market on February 14, 2008"; and (ii) "Thornburg's diminished liquidity, and the risks that the MBS market could decline further and subject Thornburg to additional
Goldstone and Simmons note that Thornburg Mortgage reported in the 2007 Form 10-K that, beginning on February 14, 2008, "there was a `sudden adverse change in mortgage market conditions' that `resulted in a decline in [the] estimate fair value' of Thornburg's `mortgage securities backed by Alt-A mortgage loan collateral.'" Goldstone & Simmons MTD at 17 (quoting 2007 Form 10-K at 37, 114). Goldstone and Simmons assert that the market's "immediate, negative reaction" to the 2007 Form 10-K, as seen through analysts' reports and Thornburg's subsequent "unprecedented" amount of margin calls, demonstrates the "robustness of these disclosures." Goldstone & Simmons MTD at 27-30, 32-33, 37 (citing Yalman Onaran, Thornburg Mortgage May Have to Sell Assets to Meet Margin Calls, Bloomberg, Feb. 28, 2008, filed May 21, 2012 (Doc. 37-36)("Feb. 28 Bloomberg"); Feb. 28 Dow Jones Newswire; Thornburg Mortgage, Inc., 10-K Provides Update on Still Challenging Financial Conditions, Bear Stearns, Feb. 29, 2008, filed May 21, 2012 (Doc. 37-19)("Feb. 29 Bear Stearns"); Thornburg Mortg., Volatility Prompts Additional Margin Calls, Jefferies & Company, Inc., Feb. 28, 2008, filed May 21, 2012 (Doc. 37-18)("Feb. 28 Jefferies")).
Goldstone and Simmons assert, thus, that "additional details regarding the precise manner in which margin calls were met and the receipt of a boilerplate reservation of rights letters from Citi" were immaterial. Goldstone & Simmons MTD at 38. Goldstone and Simmons assert that, in Fulton Cnty. Emps. Ret. Sys. v. MGIC Inv. Corp., 675 F.3d 1047 (7th Cir. 2012) (Easterbook, J.), the United States Court of Appeals for the Seventh Circuit "rejected a nearly identical attempt to impose unnecessary disclosure requirements on a public company." Goldstone & Simmons MTD at 38. Goldstone and Simmons assert that, in Payne v. DeLuca, 433 F.Supp.2d 547, 594 (W.D.Pa.2006), a United States District Judge for the Western District of Pennsylvania rejected the plaintiffs' argument that the defendants should have disclosed "the difficulty it had meeting" loan covenants, because no specific GAAP provision required a company to disclose the difficulty it experiences in meeting financial obligations, and the defendants had made other robust disclosures. Goldstone & Simmons MTD at 39. Goldstone and Simmons also assert that the Court reached a similar conclusion in In re Thornburg Mortg., Inc. Sec. Litig., 824 F.Supp.2d 1214 (D.N.M.2011)(Browning, J.), where the Court found that the defendants' failure to disclose the extent of its Alt-A MBS holdings used as collateral for repo loans was not a material omission, because the defendants disclosed its "`actual, realized liquidity issues and that it might not be able to recover from them in the future.'" Goldstone & Simmons MTD at 39 (quoting In re Thornburg Mortg., Inc. Sec. Litig., 824 F.Supp.2d at 1266). Goldstone and Simmons assert that, in light of these three decisions, "where the gravamen of a company's bad news is disclosed, the disclosure of additional, incidental details is unnecessary." Goldstone & Simmons MTD at 39-40.
Goldstone and Simmons also assert that they did not have a duty to disclose the information allegedly omitted from the 2007 Form 10-K. Goldstone and Simmons
Goldstone and Simmons contend that they did not have a duty to disclose the I/O Strip Transactions in the 2007 Form 10-K, because those transactions were not sales, but rather were "the issuance of secured debt." Goldstone & Simmons MTD at 41 (quoting Complaint ¶¶ 37, 65, 69). Goldstone and Simmons assert that under GAAP, "the creation and transfer of an interest-only strip is indisputably a secured borrowing, not a sale of assets." Goldstone & Simmons MTD at 41 (Statement of Financial Accounting Standards No. 140 ¶ 9, at 3, filed May 21, 2012 (Doc. 37-32)("SFAS 140")); Statement of Financial Accounting Standards No. 166 ¶ 26C(b), at 5, filed May 21, 2012 (Doc. 37-33)("SFAS 166"). Goldstone and Simmons contend that the SEC's allegations are conclusory regarding the I/O Strip Transactions having depleted Thornburg Mortgage's liquidity to meet margin calls and ability to hold its ARM Securities to maturity. Goldstone and Simmons also assert that the SEC has provided "no basis to conclude the disclosure of the I/O Strip Transactions was necessary to make the 10-K not misleading." Goldstone & Simmons MTD at 42.
Goldstone and Simmons contend that the assessment whether to recognize $427.8 million in impaired assets as a loss is an "inherently subjective judgment about management's intent and ability."
Goldstone and Simmons assert that they determined that the $427.8 million decline in value of Thornburg Mortgage's ARM securities was temporary, and therefore, did not charge it against income but instead disclosed that Thornburg Mortgage was accounting for the decline as "`gross unrealized loss.'" Goldstone & Simmons MTD at 26 (quoting 2007 Form 10-K at 100). Goldstone and Simmons assert that the 2007 Form 10-K "clearly set forth how and why TMA made that determination, explaining that the OTTI assessment `requires management judgment,'" including judgments based upon various market factors which are known to fluctuate. Goldstone & Simmons MTD at 26 (quoting 2007 Form 10-K at 98-103). Goldstone and Simmons point out that KPMG did not disagree the OTTI analysis in the 2007 Form 10-K. See Goldstone & Simmons MTD at 27 (citing 2007 Form 10-K at 81-82).
Goldstone and Simmons also assert that they had not duty to disclose the payment plans for Thornburg Mortgage's margin calls. Goldstone and Simmons first assert that the 2007 Form 10-K does not "contain a statement that Thornburg `complied with its lending agreements,'" as the SEC contends it does. Goldstone & Simmons MTD at 42 (quoting Complaint ¶ 60, at 17-18). Goldstone and Simmons also assert that Thornburg Mortgage was not in breach of its reverse repurchase agreement with Citigroup Global, because the Citigroup Global Repo Agreement "required margin calls to be met on the same business day `unless otherwise agreed between the Parties,'" and Citigroup Global and Thornburg Mortgage had agreed to another deadline. Goldstone & Simmons MTD at 43 (quoting Citigroup Global Repo Agreement § 5.8, at 11).
Goldstone and Simmons assert, thus, that Citigroup Global was incorrect to characterize Thornburg Mortgage as being in breach in a boilerplate statement in the Citigroup Global Letter. Goldstone & Simmons MTD at 19. Goldstone and Simmons also assert that the SEC has not alleged facts which demonstrate that they received the Citigroup Global Letter, as the electronic mail transmission containing the Citigroup Global Letter was not sent to Goldstone or Simmons. See Goldstone & Simmons MTD at 19 (citing Electronic Mail Transmission from Arlene Hamilton to nfellersþburgmortgage.com (February 22, 2008, 9:38 a.m.), filed May 21, 2012 (Doc. 37-7)("Feb. 22 Hamilton/Fellers Email"); Complaint ¶ 34, at 10-11). Contrary to the SEC's contention that Goldstone and Simmons received the Citigroup Global Letter, Goldstone and Simmons contend that the electronic mail transmissions referenced in the Complaint demonstrate that Goldstone was "traveling by plane, when the letter was sent, and out of town the rest of the week." Goldstone & Simmons MTD at 19 (citing Complaint ¶ 60, at 17-18; Feb. 21 BOD Email at 2; Feb. 22 BOD Email; Feb. 25 BOD Email).
Moreover, Goldstone and Simmons assert that the SEC has not identified any legal requirement "to disclose precisely how margin call obligations are met." Goldstone & Simmons MTD at 43. Goldstone and Simmons contend that there is not "any sound reason why disclosures of
Goldstone and Simmons also contend that the SEC is seeking to make them liable for failing to predict the future, through the SEC's allegation that the 2007 Form 10-K's statement that "`Thornburg had the intent and ability to hold its ARM Securities until their value recovered in the market'" was "knowingly and recklessly false." Goldstone & Simmons MTD at 44 (quoting Complaint ¶ 8, at 3-4)(citing Complaint ¶¶ 41-48, 51, at 12-15). Goldstone and Simmons assert that they could not have predicted that creditors would issue additional margin calls which could not be met without selling assets. See Goldstone & Simmons MTD at 44. Goldstone and Simmons also assert that "the federal securities laws do not provide a cause of action for failing to foresee future events." Goldstone & Simmons MTD at 45 (citing Fulton Cnty. Emps. Ret. Sys. v. MGIC Inv. Corp., 675 F.3d at 1050; In re Radian Sec. Litig., 612 F.Supp.2d 594, 619 (E.D.Pa.2009); City of Phila. v. Fleming Cos., Inc., 264 F.3d 1245, 1260 (10th Cir. 2001)). Goldstone and Simmons assert that courts addressing claims in the context of the recent financial crisis have "rejected the proposition that corporate officers should have anticipated and disclosed what the crisis would ultimately do to their companies." Goldstone & Simmons MTD at 45 (citing Fulton Cnty. Emps. Ret. Sys. v. MGIC Inv. Corp., 675 F.3d at 1050). Goldstone and Simmons contend that the SEC has not alleged any facts from which one "could plausibly conclude that it was obvious before the filing of the 10-K that Thornburg would soon be overwhelmed by margin calls." Goldstone & Simmons MTD at 46. Goldstone and Simmons assert that the internal documents to which the SEC cites in the Complaint indicate that "February 2008 was a highly unpredictable time for Thornburg." Goldstone & Simmons MTD at 46. Goldstone and Simmons contend that prices in the MBS market declined suddenly, and note that many lenders left the mortgage financing business altogether, while others increased margin requirements. See Goldstone & Simmons MTD at 15 (citing Thornburg Mortgage, Inc. 3rd Quarter 2007 Form 10-Q at 5, filed May 21, 2012 (Doc. 37-14)("2007 Form 10-Q")). Goldstone and Simmons assert that the SEC is attempting to make them liable for securities fraud "on the mere occurrence of a major adverse event soon after a public statement," a basis for liability which courts have rejected. Goldstone & Simmons MTD at 46 (citing Fox v. Equimark Corp., 782 F.Supp. 295, 300 (W.D.Pa.1991)).
Second, Goldstone and Simmons assert that the SEC's scienter allegations are inherently implausible. See Goldstone & Simmons MTD at 56. Goldstone and Simmons contend that the SEC has not alleged
Goldstone and Simmons also assert that the SEC has failed to allege any facts which demonstrate the they "believed the statements in the 10-K were false or misleading at the time they were made." Goldstone & Simmons MTD at 48 (citing Grossman v. Novell, Inc., 120 F.3d 1112, 1124 (10th Cir.1997)). Goldstone and Simmons note that, before filing the 2007 Form 10-K, Thornburg Mortgage successfully raised cash in the third quarter of 2007, notwithstanding general MBS market turmoil. See Goldstone & Simmons MTD at 16 (citing 2007 Form 10-Q at 9-10). Goldstone and Simmons contend that the Feb. 22 BOD Email demonstrates that Goldstone was concerned about the unpredictability in the mortgage markets, but also that he had a plan to raise cash which he believed would provide Thornburg Mortgage a "`cushion'" of close to $300 million before Thornburg Mortgage filed the 2007 Form 10-K. Goldstone & Simmons MTD at 20 (quoting Feb. 22 BOD Email)(citing Feb. 21 BOD Email; Complaint ¶ 29, at 9). Goldstone and Simmons also assert that Goldstone expressed confidence that Thornburg Mortgage's lenders would agree to payment plans in the weeks preceding the filing of the 2007 Form 10-K. See Goldstone & Simmons MTD at 21 (citing Feb. 22 BOD Email). Goldstone and Simmons contend that the Feb. 25 BOD Email further demonstrates Goldstone's confidence that Thornburg Mortgage would raise the funds it needed to meet its ongoing margin calls. See Goldstone & Simmons MTD at 21 (citing Feb. 25 BOD Email). Goldstone and Simmons further assert that the facts in the Complaint show that: (i) "Thornburg had successfully met all margin calls by the time of the 10-K filing"; (ii) "had not violated its lending agreements"; (iii) "did not sell assets to satisfy its margin calls"; and (iv) "that Defendants believed all of that to be so." Goldstone & Simmons MTD at 59 (emphasis in original)(citing Feb. 21 BOD Email; Feb. 22 BOD Email; Feb. 25 BOD Email).
Goldstone and Simmons also assert that, because the SEC has not shown that the allegedly omitted facts were material, the SEC has failed to plausibly allege that they acted with scienter. See Goldstone & Simmons MTD at 50 (citing City of Dearborn Heights v. Waters Corp., 632 F.3d 751, 757-58 (1st Cir.2011); Rosenberg v. Gould, 554 F.3d 962, 966 (11th Cir.2009); In re Parmalat Sec. Litig., 684 F.Supp.2d 453, 475 (S.D.N.Y.2010)). Goldstone and Simmons assert that the electronic mail transmissions to which the SEC cites indicate that they did not believe the allegedly omitted information was significant, especially in light of the gravity which Goldstone
Regarding the SEC's allegations that the Defendants "`should have' reached a different conclusion in their OTTI analysis based on the facts available to them," Goldstone and Simmons contend that this standard is insufficient to state a claim for negligence, and even more insufficient to state a claim for fraud. Goldstone & Simmons MTD at 48-49 (quoting Complaint ¶ 51, at 15; id. ¶ 71, at 21; id. ¶ 82, at 24)(citing City of Omaha v. CBS Corp., 679 F.3d 64 (2d Cir.2012)). Goldstone and Simmons additionally contend that the complexity of the OTTI analysis undercuts the SEC's allegations of scienter. See Goldstone & Simmons MTD at 50. Goldstone and Simmons assert, further, that the SEC's allegations that the OTTI guidance at the time was "`clear' defies reality." Goldstone & Simmons MTD at 51. Goldstone and Simmons point out that, at the time, the SEC had recommended that the current OTTI guidance be modified or eliminated in favor of a "more uniform system of impairment testing standards for financial instruments." Goldstone & Simmons MTD at 51 (citing SEC Market-to-Market Study). Goldstone and Simmons also assert that the SEC has "grossly mischaracterize[d]" Starrett's February 25 electronic mail transmission, in which she stated that "`some assets' would `call into question' Thornburg's `intent and ability' to hold `all assets' until maturity." Goldstone & Simmons MTD at 51 (internal alterations omitted)(quoting Feb. 25 Goldstone/Starrett Email). Goldstone and Simmons assert that the SEC's falsely characterizes of this electronic mail transmission as "clear guidance" that the value of all of Thornburg Mortgage's ARM Securities was impaired, as the electronic mail transmission indicates only that Thornburg Mortgage may not be able to hold assets until maturity if some assets were sold, and did not indicate that Thornburg Mortgage's impairment would be OTTI if Thornburg Mortgage decided to sell a portion of its assets instead. Goldstone & Simmons MTD at 51 (quoting Complaint ¶ 12, at 4; id. ¶¶ 54-56, at 15; id. ¶ 70, at 20-21; id. ¶ 85, at 25). Goldstone and Simmons also assert that the GAAP does not support the SEC's allegations in the Complaint, because SFAS 115 does not state that a company's sale of some securities calls into question the company's intent and ability to hold all of its securities for purposes of an OTTI analysis. See Goldstone & Simmons MTD AT 51-52 (citing Complaint ¶ 12, at 4; id. ¶¶ 54-56, at 15; id. ¶ 70, at 20-21; id. ¶ 85, at 25). Goldstone and Simmons also assert that SFAS 115 indicates only that an OTTI should be recognized when a company intends to sell a specifically identified security before its value has recovered and that the OTTI analysis only extends to that individual security. See Goldstone & Simmons MTD at 52 (citing FASB Staff Position FAS 115-1 and FAS 124-1, filed May 21, 2012 (Doc. 37-35)("FAS 115-1 & 124-1"); Thornburg Mortgage, Inc. 2007 Form 10-K/A, filed May 21, 2012 (Doc. 37-13)("2007 Form 10-K/A"). Goldstone and Simmons argue, therefore, that GAAP does not support the SEC's contention that Thornburg Mortgage should have taken an impairment, because it might need to sell some portion of its portfolio. Goldstone & Simmons MTD at 52 (citing Complaint ¶ 70, at 20-21; id. ¶ 85, at 25).
Goldstone and Simmons also argue that, even if their judgment was wrong, "`allegations of GAAP violations or accounting irregularities, standing alone, are insufficient to state a securities fraud claims.'" Goldstone & Simmons MTD at 52 (quoting City of Phila. v. Fleming Cos., Inc., 264 F.3d at 1261)(citing In re Int'l Rectifier
Rather than sufficiently alleging a fraudulent scienter, Goldstone and Simmons assert that the Complaint and documents upon which it relies "show that Thornburg was succeeding in cash and capital-raising efforts that would help it avoid selling ARM securities," and that the allegation that the Defendants intended to deceive investors in the OTTI analysis is "flatly implausible." Goldstone & Simmons MTD at 53-54 (citing Feb. 22 BOD Email; Feb. 25 BOD Email; Feb. 27 Goldstone/Simmons Email).
Goldstone and Simmons also assert that the SEC has read too much into the electronic mail transmissions which they exchanged when the SEC "speculates that Mr. Simmons implicitly acknowledged misleading the investing public." Goldstone & Simmons MTD at 55 (quoting Complaint ¶ 10, at 4). Goldstone and Simmons assert that Simmons' statements in an electronic mail transmission to Goldstone on February 28, 2008, regarding the market's reaction to the 2007 Form 10-K, are "inscrutabl[e]," noting that Simmons did not complete his second sentence. Goldstone & Simmons MTD at 28, 55 (citing Feb. 28 Simmons/Goldstone Email at 2). Goldstone and Simmons assert that the SEC's "nefarious interpretation of Mr. Simmons' statement is far less plausible than alternative, innocent explanations." Goldstone & Simmons MTD at 55. Goldstone and Simmons contend that Simmons was referring to Thornburg Mortgage's "still-undisclosed plans to raise cash and capital rather than to a fraudulent scheme mentioned nowhere else in the documents," when Simmons mentioned that "if they only knew." Goldstone & Simmons MTD at 55-56. Goldstone and Simmons assert that this "obvious alternative explanation" renders the SEC's allegations implausible. Goldstone & Simmons MTD at 56 (citing Ashcroft v. Iqbal, 556 U.S. 662, 682, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).
Goldstone and Simmons assert that various electronic mail transmissions cited in the Complaint reveal that the market's negative reaction to the 2007 Form 10-K was a surprise to them. See Goldstone & Simmons MTD at 55. Goldstone points out that he took efforts to "try to `calm the panic'" after Thornburg Mortgage's stock price fell eighteen-percent on February 28, 2009. Goldstone & Simmons MTD at 28 (quoting Feb. 28 IR Email at 2)(citing Complaint ¶ 94, at 27).
Goldstone and Simmons also assert that trying to save Thornburg Mortgage does not demonstrate fraudulent scienter. Goldstone and Simmons assert that the "desire to save one's company is a standard motive possessed by all corporate executives," and that a desire to save Thornburg Mortgage could only be evidence of fraudulent scienter if the SEC had also alleged that Goldstone and Simmons would personally benefit from Thornburg Mortgage's salvation. Goldstone & Simmons MTD at 56 (citing Brecher v. Citigroup, Inc., 797 F.Supp.2d 354, 370 (S.D.N.Y.2011)). Goldstone and Simmons assert that the SEC has, rather, alleged "only the type of generic desire that could be attributed to any responsible
Third, Goldstone and Simmons also assert that the SEC has not sufficiently alleged that Goldstone made misstatements knowingly or recklessly to Street Signs after the 2007 Form 10-K was filed. See Goldstone & Simmons MTD at 57. Goldstone and Simmons assert that the SEC is wrong to characterize Goldstone's comments as misstatements, because Goldstone, in addition to recognizing that Thornburg Mortgage had only forty million dollars available in cash on February 28, 2008, also expressed in an electronic mail transmission to the Board of Directors that Thornburg Mortgage "expected to generate $25 million from stock sales within two days, another $60 million from a securitization by March 3rd, and $25-$50 million from a preferred stock sale by" the following Monday, which totals "`$150 to $175 million of liquidity while [Thornburg] work[ed] on a capital raise' (of between $300 to $500 million)." Goldstone & Simmons MTD at 57-58 (quoting Feb. 28 BOD Email). Goldstone and Simmons assert that the SEC left out Goldstone's plans for raising cash when it alleged that Goldstone's statements on Street Signs were false, because Thornburg Mortgage had only forty million dollars in cash at the time. Goldstone & Simmons MTD at 58. Goldstone and Simmons assert that the "additional sources of liquidity provide precisely the type of `obvious alternative explanation,' consistent with a non-culpable state of mind, that establishes this claim's insufficiency under the basic plausibility standards of Twombly, ... and Iqbal." Goldstone & Simmons MTD at 58 (citing Bell Atl. Corp. v. Twombly, 550 U.S. at 567, 127 S.Ct. 1955; Ashcroft v. Iqbal, 556 U.S. at 682, 129 S.Ct. 1937).
Goldstone and Simmons also assert that Goldstone's statements should be "evaluated in light of the qualifying statements he made in the CNBC interview," under the "`bespeaks caution' doctrine" — the rule that, the more a speaker qualifies a statement, the less people will be misled if the statement turns out to be false. Goldstone & Simmons MTD at 58 (quoting Genesee Cnty. Emps.' Ret. Sys. v. Thornburg Mortg. Sec. Trust, 2006-3, 825 F.Supp.2d 1082, 1127 (D.N.M.2011)(Browning, J.)). Goldstone and Simmons point out that Goldstone warned on Street Signs that "`this mortgage market continues to be a slippery slope,'" and "`we're just not seeing the bottom of the environment ... the market continues to trend lower,'" which Goldstone and Simmons assert any reasonable investor would understand as a qualification on Goldstone's statements regarding Thornburg Mortgage's liquidity. Goldstone & Simmons MTD at 28, 58 (quoting Street Signs at 00:40-52).
Regarding the SEC's allegation that Goldstone's direction to Thornburg Mortgage's investor relations department was a knowing or reckless misstatement, Goldstone and Simmons assert that the SEC has failed to allege that Thornburg Mortgage had received, or Goldstone was informed of, "any additional margin calls before he sent his `calm the panic' email instructions to the investor relations department," and the SEC's allegation is therefore baseless. Goldstone & Simmons MTD at 59 (quoting Complaint ¶¶ 94-97, at 27-28). Goldstone and Simmons contend that the SEC's allegation is an improper
Turning to the SEC's allegations based upon misrepresentations and omission to KPMG, Goldstone and Simmons similarly assert that the SEC has failed to state a plausible claim for relief under rule 13b2-2. Goldstone and Simmons contend that the SEC has engaged in "impermissible `shotgun pleading' that incorporates `all or nearly all antecedent allegation[s] by reference [to] each subsequent claim for relief or affirmative defenses.'" Goldstone & Simmons MTD at 60 (alterations in original)(quoting SEC v. Fraser, No. CV-09-00443-PHX-GMS, 2010 WL 5776401, at *9 (D.Ariz., Jan. 28, 2010)(internal quotations omitted)). Goldstone and Simmons assert that the SEC's reliance on shotgun pleading is, without more, a "sufficient basis to dismiss this claim under Rule 9(b)." Goldstone & Simmons MTD at 60 (citing SEC v. Fraser, 2010 WL 5776401, at *9; SEC v. Patel, No. 07-cv-39-SM, 2009 WL 2015794, at **1-2 (D.N.H. July 7, 2009)). Goldstone and Simmons assert that the SEC's scattered allegations of their misrepresentations and omissions to KPMG "do not come close to meeting the minimum pleading requirements of Rule 8 and Rule 9(b)." Goldstone & Simmons MTD at 60.
Goldstone and Simmons first point out that the SEC brings many of the same allegations against them for deceiving KPMG as it did for securities fraud: (i) "fraudulent omissions concerning Thornburg's purported violation of lending agreements"; (ii) "the Citi reservation of rights letter"; (iii) "the I/O Strip Transactions"; (iv) "not selling assets to meet margin calls"; and (v) "Thornburg's alleged precarious financial condition." Goldstone & Simmons MTD at 60-61. Goldstone and Simmons assert that these allegations suffer from the same pleading deficiencies as the SEC's securities fraud claims, and the Court should dismiss the claims on that basis. See Goldstone & Simmons MTD at 61.
Goldstone and Simmons also assert that the SEC has not alleged that KPMG was unaware of Thornburg Mortgage's financial difficulties which Goldstone and Simmons alleged omitted in their communications with KPMG. Goldstone and Simmons assert that the 2007 Form 10-K "disclosed Thornburg's difficulties in obtaining financing, the fact that Thornburg had received $300 million in margin calls since February 14th, the $427.8 million in gross unrealized losses that Thornburg considered temporary, and the declining prices in the MBS market that could lead to more margin calls." Goldstone & Simmons MTD at 23-25, 61. Goldstone and Simmons assert that the SEC cannot allege that KPMG was unaware of these facts, and Goldstone and Simmons point out that the SEC acknowledges that "an unnamed partner at the audit firm discussed the I/O Strip Transactions with Mr. Simmons." Goldstone & Simmons MTD at 61 (citing Complaint ¶ 65, at 19).
Regarding Goldstone and Simmons' failure to include the rumored upcoming collapse of a large European hedge fund, Goldstone and Simmons assert that they had no duty to disclose this "rumor," and that Simmons had no obligation to update his opinion of the MBS in light of the rumor. Goldstone & Simmons MTD at 62 (citing Complaint ¶ 38. at 12; id. ¶¶ 77-78, at 22-23). Goldstone and Simmons point out that the electronic mail transmission which they received on February 27, 2008 indicated that a Thornburg Mortgage employee, Patrick Feldman, had spoken with a contact who indicated that a large European repo client would collapse, but the contact would not give details beyond stating that the client owned "`billions that presumably would have to get sold.'" Goldstone & Simmons MTD at 22 (quoting Feb. 27 Simmons/Feldman Email at 2)(citing Complaint ¶¶ 38-40, at 12). Goldstone and Simmons assert that the federal securities laws impose no "duty to disclose rumors." See Goldstone & Simmons MTD at 63 (citing In re Synchronoss Sec. Litig., 705 F.Supp.2d 367, 421 (D.N.J.2010)). Goldstone and Simmons assert that, to the contrary, had they disclosed the alleged rumor "`before completing the steps necessary to determine just what had happened,' they `might more plausibly have been accused of deceiving' the auditor." Goldstone & Simmons MTD at 53 (quoting Higginbotham v. Baxter Int'l, Inc., 495 F.3d 753, 760-61 (7th Cir.2007)).
Goldstone and Simmons also assert that the SEC has not alleged that, because Simmons' opinion regarding the state of the MBS market and MBS price deterioration changed because of the European hedge fund rumor, and, therefore, the SEC has not established that Simmons had a duty to update his opinion on the MBS market. See Goldstone & Simmons MTD at 63. Goldstone and Simmons contend that the SEC has not alleged "facts demonstrating that the European hedge fund rumor was trustworthy, much less material," and therefore their failure to disclose the rumor did not render their previous statements false. Goldstone & Simmons MTD at 63-64 (citing SEC v. Todd, No. 03CV2230 BEN (WMc), 2007 WL 1574756, at *15 (S.D.Cal. May 30, 2007); SEC v. Autocorp Equities, Inc., No. 2:98-CV-00562 PGC, 2004 WL 1771608, at *6 (D.Utah Aug. 4, 2004)). Goldstone and Simmons point out that, later on February 27, 2008, Goldstone sent Simmons an electronic mail transmission regarding final changes to the 2007 10-K, and stated that UBS AG had mentioned that a "`large Alt-A hedge fund in Europe' was `blowing
Goldstone and Simmons also assert that the SEC mischaracterizes the record in its allegation that auditors "specifically request[ed]... all correspondence between Thornburg and its lenders during the two week period" before the 2007 Form 10-K was filed. Goldstone & Simmons MTD at 64 (quoting Complaint ¶ 99, at 29). Goldstone and Simmons contend that the March 3 electronic mail transmission to which the SEC refers makes no such request, but rather asked Thornburg Mortgage for a position paper which presented evidence that "`events subsequent to the filing were unforeseeable catastrophic events.'" Goldstone & Simmons MTD at 64 (quoting Request for Correspondence at 2-3). Goldstone and Simmons assert that KPMG mentioned correspondence as an example of evidence that Thornburg Mortgage could include in a position paper, but did not specifically request Thornburg Mortgage to produce all correspondence and letters. See Goldstone & Simmons MTD at 64 (citing Request for Correspondence at 3). Goldstone and Simmons assert that the Citigroup Global Letter "was immaterial because it had no impact on Thornburg's financial statements," and is thus insufficient to support a claim under rule 13b2-2. Goldstone & Simmons MTD at 65.
Last, regarding the SEC's claims under rule 13b2-2, Goldstone and Simmons argue the SEC has not alleged that Simmons' "attribution of the February 28th margin calls to `unforeseeable' circumstances" was misleading or false. Goldstone & Simmons MTD at 65 (quoting Complaint ¶¶ 102-105, at 29-30). Goldstone and Simmons note that Goldstone stated that Thornburg Mortgage would experience similar problems as those plaguing the European hedge fund, but "`a little more gradually,'" and that Thornburg Mortgage "`should be ready for it.'" Goldstone & Simmons MTD at 65 (quoting Feb. 27 Goldstone/Simmons Email). Goldstone and Simmons, thus, assert that they did not believe that the European hedge fund collapse "would have immediate, serious consequences for Thornburg," and that their correspondence evidences that Thornburg Mortgage's February 28th margin calls were unforeseeable to Goldstone and Simmons. Goldstone & Simmons MTD at 65. Goldstone and Simmons also note that the Position Paper contained evidence which demonstrated that mortgage markets experienced "sudden, stastically unlikely and steep" declines on February 27, 2008. Goldstone & Simmons MTD at 31 (citing Position Paper).
Goldstone and Simmons contend that, because the SEC has failed to sufficiently allege that a primary violation of securities laws, the SEC's claims for aiding and abetting and control-person liability must fail. See Goldstone & Simmons MTD at 65-66 (citing SEC v. Lucent Techs., Inc., 363 F.Supp.2d 708, 718 (D.N.J.2005)(Walls, S.J.); In re Thornburg Mortg. Sec. Litig., 695 F.Supp.2d at 1189). Goldstone and Simmons also assert that the SEC has failed to plausibly allege that they "knowingly provided substantial assistance" to the commission of any primary violation. Goldstone & Simmons MTD at 66 (quoting 15 U.S.C. § 78t(e)). Goldstone and Simmons argue that they must have had actual knowledge for the SEC to succeed on their claim for aiding and abetting, and argue that the SEC has failed to allege that they had actual knowledge of any primary violation. See Goldstone & Simmons
Starrett asserts that the SEC's claims that she "made false statements in TMI's 2007 Form 10-K ... and deceived TMI's outside auditor KPMG LLP ... are absolutely false." Starrett MTD at 10. Starrett contends that the SEC has failed to show that she made "any false statement, either in the 10-K or to KPMG." Starrett MTD at 11 (emphasis in original). Starrett also asserts that the SEC has failed to allege facts which support her having the requisite scienter. See Starrett MTD at 13. Starrett argues that, because the SEC's allegations of reporting violations, record-keeping violations, and deceit of auditors are derivative of its fraud-based claims, these claims fail to sufficiently allege that Starrett committed fraud. See Starrett MTD at 13. Starrett asserts that the SEC's allegations for internal controls violations are insufficiently pled, because the SEC did not "specify which internal controls Ms. Starrett allegedly circumvented, how she supposedly did so, or how better controls would have prevented the alleged problems with TMI's financial reporting." Starrett MTD at 14.
Starrett asserts that the SEC has failed to meet the heightened pleading standard of rule 9(b) of the Federal Rules of Civil Procedure which applies to its claims under § 17(a) of the Securities Act, and § 10(b) of the Exchange Act. See Starrett MTD at 14. Starrett also asserts that, because the SEC "does not differentiate its factual allegations among different claims, but instead alleges a single, unified course of conduct that it `incorporate[s] by reference' into each of its eleven claims for relief," the SEC's claims which are not alleging fraud — § 13 and rules 13b2-1 and 13b2-2 of the Exchange Act — are subject to the rule 9(b)'s heightened pleading standard. Starrett MTD at 15 (quoting Complaint ¶¶ 120, 126, 129, 136)(citing In re Daou Sys., Inc., 411 F.3d 1006, 1027 (9th Cir.2005)).
Starrett first asserts that the SEC has failed to allege particular facts which show that the statements she made in the 2007 Form 10-K were false when made. See Starrett MTD at 16. Starrett contends that, contrary to the SEC's allegation, the statement that Thornburg Mortgage "`successfully continued[d] to meet margin calls'" was true when made. Starrett MTD at 16 (quoting Complaint ¶ 5, at 3). Starrett points out that the SEC concedes that Thornburg Mortgage had "`execute[ed] [sic] its plan to pay all outstanding margin calls before filing its Form 10-K,'" including the Citi margin call, and thus Thornburg Mortgage's statement that it had successfully met all margin calls was true at the time. Starrett MTD at 16-17 (quoting Complaint ¶ 6, at 3; id. ¶¶ 35, 38 at 11-12).
Starrett also asserts that Thornburg Mortgage's statement that it "`did not sell any assets to meet margin calls'" was true when made, even without the additional disclosure that I/O Strip Transactions were taken to meet those margin calls. Starrett MTD at 17 (quoting Complaint ¶ 65, at 19). Starrett points out that the SEC acknowledges that the 2007 Form 10-K accounted for the I/O Strip Transactions as issuances of secured debt. Starrett also points out that the SEC has not alleged that KPMG was unaware of the I/O Strip Transactions, or that KPMG disagreed with Thornburg Mortgage's accounting for them. See Starrett MTD at 17 (citing Complaint ¶ 37, at 11; In re Bausch & Lomb, Inc., Sec. Litig., 592 F.Supp.2d 323, 341 (W.D.N.Y.2008)). Starrett also asserts that the I/O Strip
Starrett also asserts that Thornburg Mortgage's statement that it had the intent and ability to hold its ARM Securities until recovery was true when made. Starrett contends that the SEC is seeking to hold her liable for a misrepresentation based upon the "unprecedented deluge of margin calls immediately after the 10-K filing," which is "quintessential fraud-by-hindsight." Starrett MTD at 19 (emphasis in original)(internal quotations omitted). Starrett asserts that there are no bright lines for assessing whether a company has both the intent and ability to hold impaired assets until recovery, but rather that companies are required to use discretion in judging market conditions when determining whether they have the intent and ability to hold impaired assets. Starrett contends that Thornburg Mortgage was making discretionary judgments regarding its impairments at a time of "extraordinary global market turmoil and uncertainty," which "cuts against the conclusion" that Thornburg Mortgage's statements regarding the future of its impairments was false when made. Starrett MTD at 19 (citing Fait v. Regions Fin. Corp., 712 F.Supp.2d 117, 123 (S.D.N.Y. 2010), aff'd 655 F.3d 105 (2d Cir.2011)).
Starrett also asserts that the SEC's contention that Thornburg Mortgage's statement of its ability to hold its assets was false overlooks the fact that Thornburg Mortgage "satisfied all outstanding margin calls prior to filing its 10-K." Starrett MTD at 20 (citing Complaint ¶ 6, at 3). Starrett points out that Thornburg Mortgage was not notified in advance of filing the 2007 Form 10-K that its lenders would issue a wave of margin calls, a "disaster scenario," which cannot be anticipated. Starrett MTD at 20 (citing SFAS 115 ¶ 16, at 4). Starrett also points out that the SEC alleges that Thornburg Mortgage expected a "significant infusion of cash within days of the 10-K filing," and thus Thornburg Mortgage's judgment that it had the ability to hold its impaired assets was reasonable. Starrett MTD at 21 (citing Complaint ¶ 32, at 10). Starrett also notes that KPMG agreed with Thornburg Mortgage's assessment of its intent and ability to hold its assets. See Starrett MTD at 21 (citing 2007 Form 10-K at 81).
Starrett asserts that Thornburg Mortgage's statements could not have been materially false in light of the other disclosures in the 2007 Form 10-K under the "`bespeaks caution doctrine.'" Starrett MTD at 21-22 (quoting Grossman v. Novell, Inc., 120 F.3d at 1120-2)(citing 2007 Form 10-K at 25, 39, 53). Starrett asserts that, because Thornburg Mortgage disclosed its "reduced liquidity, the risk of additional margin calls if prices of mortgage-backed
Starrett also asserts that the SEC fails to allege particular facts which support its assertion that Starrett made false statements to, or hid information from, KPMG. See Starrett MTD at 23. Starrett first contends that the SEC concedes that she was unaware of the Citigroup Global Letter, which Starrett asserts was "only a formality and, as such, is neither material nor subject to a duty of disclosure." Starrett MTD at 23-24 (citing Complaint ¶ 34, at 10-11; id. ¶ 101, at 29). Starrett also asserts that the SEC concedes that she was unaware of the European hedge fund rumor, and she contends that there is no obligation to disclose mere rumors about possible market events. See Starrett MTD at 24 (citing Complaint ¶ 6, at 3; id. ¶¶ 38, 39, at 12; id. ¶¶ 76, 78, 80, at 22-23; id. ¶ 104, at 30).
Starrett also contends that the SEC fails to allege that she had the familiarity with the reverse repurchase agreements, or expertise, such that she would question whether Thornburg Mortgage's payment plan with Citigroup Global violated its reverse repurchase agreement. Starrett also points out that the Court has rejected the argument that, "because a particular `default provision in the RPAs was eventually triggered, the provision was material and thus should have been disclosed,'" and that the Court has concluded that the "`failure to disclose a contract provision, without alleging that the provision is unique, cannot constitute a material omission.'" Starrett MTD at 25 (quoting In re Thornburg Mortg., Inc. Sec. Litig., 695 F.Supp.2d at 1222-23). Starrett contends that the SEC alleges only that she was generally aware of the reverse repurchase agreements and that she was informed that the lenders had agreed to the plans, but not that any information would have put her on notice of Thornburg Mortgage's potential violation of a reverse repurchase agreement. See Starrett MTD at 25.
Starrett also asserts that the SEC fails to show that she withheld material information from KPMG regarding Thornburg Mortgage's "`margin call situation.'" Starrett MTD at 26 (quoting Complaint ¶ 32, at 10; id. ¶ 57, at 16-17). Starrett asserts that the 10-K disclosures which KPMG reviewed in connection with the audit disclosed the "amount of margin calls during the last two weeks of February 2008," and the SEC has not alleged that Thornburg Mortgage's disclosures were inaccurate or misleading. Starrett MTD at 26 (emphasis in original). Starrett contends that Thornburg Mortgage had no duty to disclose that it satisfied some of its margin calls pursuant to negotiated payment plans. See Starrett MTD at 27.
Starrett also asserts that the SEC "cherry-picked an incomplete set of emails allegedly evidencing a scheme to withhold information from KPMG." Starrett MTD
Starrett also asserts that she did not make any of the alleged misstatements or omission in the 2007 Form 10-K. Starrett asserts that "only the `person or entity with ultimate authority over the [false] statement, including its content and whether and how to communicate it' can be held liable for misstatements under Rule 10b-5 and Section 10(b)." Starrett MTD at 29 (quoting Janus Capital Grp., Inc. v. First Derivative Traders, ___ U.S. ___, 131 S.Ct. 2296, 2302, 180 L.Ed.2d 166 (2011)). Starrett contends that she cannot be liable for any misstatements or omission in the 2007 Form 10-K, because she only prepared the statement on behalf of Thornburg Mortgage, and did not have the ultimate authority over the contents of the 2007 Form 10-K, or "whether and how to communicate that content." Starrett MTD at 29. Starrett contends that, because the SEC excluded her from its control-person claims, the SEC has admitted that Starrett "`did not exercise control over ... the specific activities upon which Thornburg's violations are based.'" Starrett MTD at 29 (citing Complaint ¶ 134, at 37; id. ¶ 142, at 39; SEC v. Kelly, 817 F.Supp.2d 340, 344 (S.D.N.Y.2011) (McMahon, J.); Haw. Ironworkers Annuity Trust Fund v. Cole, No. 3:10CV371, 2011 WL 3862206, at *5, 2011 U.S. Dist. LEXIS 98760, at **15-16 (W.D.Ohio, Sep. 1, 2011)). Starrett asserts that the failure to allege that she had ultimate authority over the contents of the 2007 From 10-K warrants the Court's dismissal of the SEC's claims against her regarding the 2007 Form 10-K. See Starrett MTD at 29.
Starrett additionally contends that the SEC's failure to allege that she filed or signed, or that her name appears anywhere on, the 2007 Form 10-K also warrants dismissal of the SEC's allegations arising from the 2007 Form 10-K against her. Starrett asserts that the SEC has not alleged that Starrett filed or signed, or that her name appears on, the 2007 From 10-K, and the SEC has not alleged that Starrett was a key person "whose services were instrumental" to Thornburg Mortgage's operations. Starrett MTD at 30 (citing Janus Capital Grp., Inc. v. First Derivative Traders, 131 S.Ct. at 2302; Kerr v. Exobox Techs. Corp., No. H-10-4221, 2012 WL 201872, at **11-12, 2012 U.S. Dist. LEXIS 7523, at **30-33 (S.D.Tex. Jan. 23, 2012); City of Roseville
Starrett contends that the SEC has failed to allege particularized facts which would support an inference that she acted with fraudulent scienter in preparing the 2007 Form 10-K. Starrett asserts that the SEC must plausibly allege that Starrett had a mental state "`embracing intent to deceive, manipulate, or defraud'" including "`knowing or intentional misconduct' and recklessness," to be liable under § 10(b). Starrett MTD at 31 (quoting City of Phila. v. Fleming Cos., Inc., 264 F.3d 1245, 1258 (10th Cir.2001)). Starrett asserts that the United States Court of Appeals for the Tenth Circuit is "`cautious about imposing liability for securities fraud based on reckless conduct,'" which is conduct that is "`an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.'" Starrett MTD at 31 (quoting City of Phila. v. Fleming Cos., Inc., 264 F.3d at 1260). Starrett contends that she may have fraudulent scienter based upon a non-disclosure only if she had "`knowledge of a fact that was so obviously material that the defendant must have been aware both of its materiality and that its non-disclosure would likely mislead investors.'" Starrett MTD at 32 (quoting City of Phila. v. Fleming Cos., Inc., 264 F.3d at 1261).
Starrett contends that the SEC has not established that she had the requisite scienter through its allegations that "Starrett either knew (or was reckless in not predicting) the unprecedented margin call crisis that unfolded after the 10-K filing." Starrett MTD at 32 (emphasis in original)(citing Complaint ¶¶ 9, 12, 14, at 4-5). Starrett asserts that the Tenth Circuit has rejected this basis of liability, finding that "`there is no reason to assume that what is true at the moment plaintiff discovers it was also true at the moment of the alleged misrepresentation.'" Starrett MTD at 32 (quoting City of Phila. v. Fleming Cos., Inc., 264 F.3d at 1260). Starrett asserts that, when the 2007 Form 10-K was filed, she knew that: (i) "all outstanding margin calls had been met in full," Starrett MTD at 33 (citing Complaint ¶ 6, at 3; id. ¶ 35, at 11); (ii) Thornburg Mortgage "had a `cushion' of available cash to meet additional margin calls in the short term," Starrett MTD at 33 (quoting Electronic Mail Transmission from Clay Simmons to Nyira Gitana, re: FW:TMA update (February 21, 2008, 9:30 a.m.), filed May 21, 2012 (Doc. 38-3)("Feb. 21 BOD Email")
Starrett also contends that the negative disclosures in the 2007 Form 10-K negate any plausible inference of scienter. Starrett asserts that Thornburg Mortgage's negative disclosures in the 2007 Form 10-K undermine any inference that the Defendants "intentionally or recklessly misled the investing public or KPMG." Starrett MTD at 34 (citing Plumbers and Pipefitters Local Union No. 719 Pension Trust Fund v. Conseco, Inc., No. 09 Civ. 6966 (JGK), 2011 WL 1198712, at **6-8 (S.D.N.Y. Mar. 30, 2011); In re HomeBanc Corp. Sec. Litig., 706 F.Supp.2d 1336, 1357-58 (N.D.Ga.2010)). Starrett points out that the market's negative response to the 2007 Form 10-K demonstrates that it understood the impact of Thornburg Mortgage's negative disclosures: (i) Thornburg Mortgage's "precarious financial condition"; (ii) the "margin call activity"; (iii) Thornburg Mortgage's "dwindling liquidity"; and (iv) the "significant risks TMI faced due to turmoil in the market for mortgage-based securities." Starrett MTD at 33 (citing 2007 Form 10-K at 34-35, 48-49; Complaint ¶¶ 9, 32, at 4, 10).
Starrett points out that the 2007 Form 10-K discloses that Thornburg Mortgage had received margin calls "in excess of $300 million" and had met those calls at the time the 2007 Form 10-K was filed. Starrett MTD at 34 (quoting 2007 Form 10-K at 38-39). Starrett asserts that, because of the negative nature of this disclosure, the omission of any disclosures related to the terms of Thornburg Mortgage's reverse repurchase agreement or the use of proceeds from I/O Strip Transactions to meet margin calls was immaterial. See Starrett MTD at 34-35 (citing Complaint ¶ 31, at 10; id. ¶¶ 65, 66, at 19). Starrett also contends that the 2007 Form 10-K fully disclosed Thornburg Mortgage's liquidity constraints when it stated that "`our liquidity position was severely impacted by the mortgage market events during the third quarter and fourth quarter of 2007,'" and that the "`sudden decline in the valuation of [Thornburg's Alt-A mortgage securities] has left us with reduced readily available liquidity to meet future margin calls.'" Starrett MTD at 35 (quoting 2007 Form 10-K at 39, 52-53). Starrett asserts that Thornburg Mortgage fully disclosed the risk of a default on its reverse repurchase agreements and foreclosure through the statement: "If we do not have sufficient unpledged assets or liquidity to meet these [Repo loan] requirements, we may need to sell assets under adverse market conditions or at losses.... Alternatively, the lender may terminate the lending agreement and sell
Starrett asserts that the analysis whether Thornburg Mortgage had the "intent and ability to hold its ARM Securities until maturity or until their value recovered," requires a complex accounting judgment, undermining the SEC's allegations of fraudulent scienter. Starrett MTD at 37 (quoting Complaint ¶ 12, at 4-5). Starrett contends that the "OTTI analysis is far from straightforward." Starrett MTD at 38 (citing Meyer v. St. Joe Co., 2011 WL 3750324, at *12, 2011 U.S. Dist. LEXIS 94576, at *37). Starrett contends that the OTTI analysis "requires the holder of impaired securities to make subjective, complex judgment and to predict a future value of the impaired assets," which is far from the SEC's description of the OTTI analysis as "`clear accounting guidance.'" Starrett MTD at 38 (quoting Complaint ¶ 12, at 5). Starrett points out that the SEC is aware that OTTI guidance was complex and dependent upon factors that "`vary from case to case.'" Starrett MTD at 38-39 (quoting SEC Staff Accounting Bulletin No. 59, filed May 21, 2012 (Doc. 38-6)("SAB 59")
Starrett asserts that, because this statement was based upon her "reasonable belief in the accuracy of the information at her disposal ... and the undisputed complexity of OTTI accounting judgments, she did not have the requisite mental state to support securities fraud liability." Starrett MTD at 37 (citing City of Omaha v. CBS Corp., 679 F.3d at 68-69; In re Bristol-Myers Squibb Sec. Litig., 312 F.Supp.2d 549, 567-68 (S.D.N.Y.2004); 2007 Form 10-K at 41). Starrett asserts that numerous federal courts have "refused to attribute scienter in cases involving difficult accounting judgments that later turn out to have been erroneous, and have dismissed securities fraud cases as a result." Starrett MTD at 39 (citing In re Fannie Mae 2008 Sec. Litig., 742 F.Supp.2d at 408-09; City of Omaha v. CBS Corp.; In re BellSouth
Starrett also asserts that Thornburg Mortgage's restatement on March 11, 2008 undermines an inference of fraudulent scienter. Starrett argues that the restatement "`standing alone, does not support an inference of scienter.'" Starrett MTD at 42 (quoting In re Thornburg Mortg., Inc. Sec. Litig., 695 F.Supp.2d at 1202-03). Starrett contends that punishing Thornburg Mortgage "`when subsequent events disclose errors'" in its original 2007 Form 10-K would defeat "`the core purpose of the securities laws.'" Starrett MTD at 42 (quoting In re Segue Software, Inc. Sec. Litig., 106 F.Supp.2d 161, 170 (D.Mass. 2000)). Starrett contends that the Court has acknowledged the "unpredictable volatility of the market during 2007 and 2008," and credited Thornburg Mortgage for disclosing "`material facts quickly, after reasonable investigation.'" Starrett MTD at 43 (quoting In re Thornburg Mortg., Inc. Sec. Litig., 695 F.Supp.2d at 1212).
Starrett also argues that the SEC has not adequately alleged that she possessed a motive to mislead investors. Starrett asserts that the SEC's allegations that the Defendants were "motivated by `imminent plans to raise additional cash and thereby alleviate [Thornburg's] liquidity crisis'" does not adequately plead the concrete and particular facts necessary to show a motive to mislead. Starrett MTD at 43 (alteration in original)(quoting Complaint ¶ 4, at 2)(citing City of Phila. v. Fleming Cos., Inc., 264 F.3d at 1261-62, 1269). Starrett contends that the SEC has not alleged that she personally benefitted from the alleged misconduct, either through having sold stock or because her compensation was contingent on Thornburg Mortgage's performance reported in the 2007 Form 10-K. See Starrett MTD at 43 (citing In re N. Telecom Ltd. Sec. Litig., 116 F.Supp.2d 446, 462 (S.D.N.Y.2000)).
Starrett asserts that the SEC has failed to allege facts showing that she had actual knowledge of Thornburg Mortgage's alleged violation of §§ 10(b) and 13(a), and rules 13a-1 and 12b-2 of the Exchange Act, and, thus, the SEC has not sufficiently pled a claim for aiding and abetting against Starrett. See Starrett MTD at 44
Starrett further contends that the SEC has not alleged sufficient facts to show that she knowingly violated, or aided and abetted, Thornburg Mortgage's alleged violation of the internal control provisions, in §§ 13(b)(5) and 13(b)(2) of the Exchange Act. Starrett first asserts that the SEC "relies on impermissible puzzle pleading" by incorporating by reference the Factual Background into its claims for relief, "paraphrasing the relevant securities law provisions, and then stating that Defendants violated these provision." Starrett MTD at 45 (citing Complaint ¶¶ 120-122, at 34; id. ¶¶ 136-39, at 37-38). Starrett asserts that this pleading tactic is improper because it leaves the Court and the Defendants to decipher which facts apply to which stated violation and claim for relief. See Starrett MTD at 45-46 (citing SEC v. Fraser, No. CV-09-00443-PHX-GMS, 2009 WL 2450508, at *14, 2009 U.S. Dist. LEXIS 70198, at **45-46 (D.Ariz. Aug. 11, 2009)). Starrett further contends that "internal controls" within the meaning of the Exchange Act refers to policies and procedures, and the SEC has not "identified any policies or procedures, let alone alleged that relevant controls were flawed or circumvented," or that superior controls could have been implemented. Starrett MTD at 46 (citing 17 C.F.R. § 240.13a-15(f)). Starrett thus contends that the SEC has made only "[u]nsupported, conclusory assertions" which "satisfy neither the plausibility nor the particularity pleading standards of the Federal Rules." Starrett MTD at 46 (citing SEC v. Fraser, 2009 WL 2450508, at **14-15, 2009 U.S. Dist. LEXIS 70198, at **47-48).
Starrett also asserts that internal controls need not be perfect to satisfy § 13(b)(2)'s requirements. Starrett points out that KPMG concluded that Thornburg Mortgage's internal controls were adequate. She also contends that the evaluation of the sufficiency of internal controls "`is inevitably a highly subjective process in which knowledgeable [sic] individuals can arrive at totally different conclusions.'" Starrett MTD at 48 (quoting SEC v. World-Wide Coin Inv., Ltd., 567 F.Supp. 724, 751 (N.D.Ga.1983)). Starrett asserts that KPMG's and Thornburg Mortgage's evaluation of the internal controls as effective "refutes the notion that deficient internal controls had caused the error in the 10-K." Starrett MTD at 47 (citing In re Bausch & Lomb, Inc. Sec. Litig., 592 F.Supp.2d at 341).
Starrett also contends that the SEC did not plausibly allege that she knowingly violated, or aided and abetted, Thornburg Mortgage's alleged violation of the record keeping provisions in §§ 13(b)(5), 13(b)(2)(A), and rule 13b2-1 of the Exchange Act. Starrett asserts that the Complaint does not clearly set forth which of the Defendants' conduct forms the basis of the SEC's claims under §§ 13(b)(5), 13(b)(2)(A), and rule 13b2-1 of the Exchange Act, and thus the Complaint does not meet rule 9(b)'s pleading requirements. See Starrett MTD at 47-48. Starrett also contends that the SEC has not shown that the Defendants "knew that TMI's OTTI
Last, Starrett contends that the SEC has not alleged sufficient facts to allow a plausible inference that she concealed material information, or otherwise misled KPMG, in violation of Exchange Act rule 13b2-2. Starrett contends that the information allegedly withheld from KPMG was "either: (i) not in Starrett's possession," such as the Citigroup Global Letter; (ii) "disclosed to KPMG," such as Thornburg Mortgage's margin call situation; and/or (iii) "not material," such as the I/O Strip Transactions. Starrett MTD at 49. Starrett thus asserts that the SEC has not alleged sufficient facts to make its claim against her under Exchange Act rule 13b2-2 plausible. See Starrett MTD at 49 (citing SEC v. Espuelas, 579 F.Supp.2d at 487).
The Defendants request that the Court take judicial notice of the documents they attached to their motions to dismiss. See Request for Judicial Notice in Support of Defendants' Motions to Dismiss Complaint, at 1-2, filed May 21, 2012 (Doc. 39)("Request for Judicial Notice"). The documents fall into the following categories:
Request for Judicial Notice at 1-2. The Defendants assert that the Court should "consider the full text of Defendant's email communications and Thornburg's SEC filings, which are partially quoted in, and are integral to the theories of, the SEC Complaint." Request for Judicial Notice at 2-3 (citing In re Thornburg Mortg., Inc. Sec. Litig., 695 F.Supp.2d at 1188; City of Phila. v. Fleming Cos., Inc., 264 F.3d at 1251 n. 4; GFF Corp. v. Assoc.'d Wholesale Grocers, 130 F.3d 1381, 1384 (10th Cir. 1997)). The Defendants also assert that the Court "`may take judicial notice of ... documents that are required by law to be filed with the SEC,' such as Forms 10-K and Forms 10-K/A." Request for Judicial Notice at 3 (quoting In re Bausch & Lomb,
The Defendants thus assert that, because the accounting standards "`are not subject to reasonable dispute,'" and are "`capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned,'" the Court may properly take judicial notice of those documents. Request for Judicial Notice at 3 (quoting Fed.R.Evid. 201(b)(2)). The Defendants also assert that the Court may take "judicial notice of news reports demonstrating the market's awareness of certain facts and of events widely reported during the financial crisis." Request for Judicial Notice at 4 (citing Lane v. Page, 649 F.Supp.2d 1256, 1301 (D.N.M.2009) (Browning, J.)). The Defendants assert that "a court may take judicial notice of historical stock price information and movement in stock price indexes." Request for Judicial Notice at 4 (citing Katyle v. Penn Nat. Gaming, Inc., 637 F.3d 462, 466 (4th Cir.2011); La Grasta v. First Union Sec., Inc., 358 F.3d 840, 842 (11th Cir.2004); In re Acterna Corp. Sec. Litig., 378 F.Supp.2d 561, 572 (D.Md. 2005)).
The SEC asserts that the Defendants are attempting to "prematurely get to the merits of this case" by arguing that their version of the facts, as supported by documents "not alleged at all" in the Complaint and "interpreted the way they argue they should be, show that they did not make any misstatements or intend to deceive." Plaintiff's Response to the Motion to Dismiss on behalf of Defendants Larry Goldstone and Clarence G. Simmons at 11-12, filed June 20, 2012 (Doc. 50)("Response to Goldstone & Simmons MTD"). The SEC asserts that the Complaint does not allege fraud-by-hindsight, but rather sets forth that Goldstone and Simmons knew, or recklessly disregarded, material information "when they filed Thornburg's Form 10-K, a filing timed to fall within the narrow window after which Thornburg had managed to meet its outstanding margin calls — ... through their lenders' forbearance." Response to Goldstone & Simmons MTD at 12. The SEC asserts that its allegations against Goldstone also demonstrate his knowledge after the 2007 Form 10-K was filed, before he spoke on Street Signs. The SEC argues that the Complaint sets forth the Defendants' "intent to mislead in several ways, perhaps most strikingly in their email acknowledge[ing] that they were `purposely' not telling KPMG about the lending agreement breaches." Response to Goldstone & Simmons MTD at 12. In its Response to Goldstone & Simmons MTD, the SEC addresses issues in the Goldstone & Simmons MTD which overlap with those raised in the Starrett MTD. See Response to Goldstone & Simmons MTD at 10.
The SEC contends that the Defendants make numerous references to the attached documents "for the truth of statements made therein." Response to Goldstone & Simmons MTD at 15 (citing Decl. of Stephen McKenna in Opposition to Defendants' Motion to Dismiss, filed June 20, 2012 (Doc. 51)("McKenna Decl.")). The SEC asserts that the Defendants' reference to the attached documents is an attempt to generate an evidentiary record, which the SEC contends is inappropriate for the Court to consider on a motion to dismiss. See Response to Goldstone & Simmons MTD at 16 (citing Sutton v. Utah State Sch. for the Deaf & Blind, 173 F.3d 1226, 1236 (10th Cir.1999); In re Network Equip. Techs., Inc., Litig., 762 F.Supp. 1359, 1363 (N.D.Cal.1991)). The SEC also contends that Goldstone & Simmons have attempted to demonstrate a disputed issue of fact, which the SEC asserts is an inappropriate inquiry for the Court when ruling on a motion to dismiss. See Response to Goldstone & Simmons MTD at 15 (citing Goldstone & Simmons MTD at 11).
The SEC contends that it may plead scienter generally. See Response to Goldstone & Simmons MTD at 13 (citing Fed. R.Civ.P. 9(b); SEC v. Gordon, No. 09-CV-0061, 2009 WL 1652464, at *3 (N.D.Okla. June 11, 2009); SEC v. Arnold, No. 03-CV-0328-REB-OES, 2007 WL 2786428, at *3 (D.Colo. Sept. 24, 2007)). The SEC contends that the Complaint has put the Defendants on adequate notice of the claims against them, and thus has satisfied rule 9(b)'s pleading standard. See Response to Goldstone & Simmons MTD at 18 (citing Odom v. Microsoft Corp., 486 F.3d 541, 553 (9th Cir.2007); Schwartz v.
The SEC asserts that it has specifically identified the allegations against each Defendant, and, thus, the Court should not dismiss the Complaint on grounds that the SEC inappropriately engaged in "`puzzle pleading'" or "`shotgun pleading.'" Response to Goldstone & Simmons MTD at 19 (quoting Starrett MTD at 36-37; Goldstone & Simmons MTD at 53). The SEC contends that it has put the Defendants on notice of its allegations that the 2007 Form 10-K contained misstatements, and that the Defendants made materially misleading statements to Thornburg Mortgage's investors and to KPMG, making the SEC's allegations in the Complaint sufficient under rules 8(a)(2) and 9(b). See Response to Goldstone & Simmons MTD at 19-20 (citing SEC v. Das, No. 8:10CV102, 2010 WL 4615336, at *6 (D.Neb. Nov. 4, 2010); In re Williams Sec. Litig., 339 F.Supp.2d 1242, 1261 (N.D.Okla.2003)). The SEC asserts that the Tenth Circuit has specifically approved of "incorporating paragraphs of a complaint" into claims against defendants. Response to Goldstone & Simmons MTD at 20 (citing Schwartz v. Celestial Seasonings, Inc., 124 F.3d at 1253).
The SEC also disputes the Defendants' assertion that rule 9(b) applies to the SEC's claims under § 13 because they "purportedly `sound in fraud.'" Response to Goldstone & Simmons MTD at 20 (quoting Goldstone & Simmons MTD at 29; Starrett MTD at 6). The SEC asserts that case law has not clearly established such a rule. See Response to Goldstone & Simmons MTD at 20 (citing Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1105 (9th Cir.2003); Schwartz v. Celestial Seasonings, Inc., 124 F.3d at 1251-52; In re Thornburg Mortg., Inc. Sec. Litig., 695 F.Supp.2d at 1190; SEC v. Sys. Software Assocs., Inc., 145 F.Supp.2d 954, 958 (N.D.Ill.2001)).
The SEC contends that it has alleged facts that, if proven true, would support its claims of fraud against the Defendants and entitle the SEC to relief. See Response to Goldstone & Simmons MTD at 21-24. The SEC contends that the ninety-percent drop in Thornburg Mortgage's stock price on March 11, 2012, when it admitted that it "violated lending agreements and restated its materially misleading financial statements by ... recognizing the massive losses associated with its ARM Securities," is evidence that the 2007 Form 10-K did not tell "the whole story" when compared with the eighteen-percent drop in Thornburg Mortgage's stock prices on the day the 2007 Form 10-K was filed. Response to Goldstone & Simmons MTD at 24 (citing Complaint ¶ 47, at 14; Goldstone & Simmons MTD at 21).
The SEC asserts that it sufficiently alleged material misstatements and omissions in connection with the 2007 Form 10-K. The SEC asserts that the Defendants' argument that the 2007 Form 10-K was "`accurate and not misleading,'" is "belied by the restatement, which by definition corrects prior inaccurate statements." Response to Goldstone & Simmons MTD at 24 (quoting Goldstone & Simmons MTD at 30)(citing SEC v. Kelly, 663 F.Supp.2d 276, 285 (S.D.N.Y.2009)). The SEC asserts that the Defendants' "`extensive disclosure about the bottom-line bad news for Thornburg'" does not make the 2007 Form 10-K accurate and not misleading. Response to Goldstone & Simmons MTD at 26 (quoting Complaint ¶ 24, at 8). The SEC contends that the Defendants' failure to disclose that it had not met margin calls from three lenders in accordance with the terms of their reverse repurchase agreements, and that its underlying assets collateralizing
The SEC contends that the Defendants had a duty to disclose the omitted information. The SEC first asserts that it has alleged not only a duty to disclose, but also that the Defendants "materially misstated Thornburg's income by over $400 million and reported a profit instead of a loss," an allegation which the SEC contends that the Defendants "conveniently overlook ... in arguing no duty to disclose." Response to Goldstone & Simmons MTD at 28. The SEC also asserts that the Defendants have misstated the Tenth Circuit's holding in Connett v. Justus Enters. of Kan., Inc., because the Tenth Circuit imposes liability for a failure to disclose when "`the duty to disclose exists and the withheld information is material,'" Connett, 68 F.3d at 385, and not only when a "`previous statement is false or later turns out to be false.' [(Goldstone & Simmons MTD at 33)]." Response to Goldstone & Simmons MTD at 28. The SEC contends that an omission "may be actionable even if the statement that requires disclosure of the omission is true." Response to Goldstone & Simmons MTD at 28-29 (citing Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Mgmt., LLC, 595 F.3d 86, 92 (2d Cir.2010); SEC v. Gabelli, 653 F.3d 49, 57 (2d Cir.2011); SEC v. First Am. Bank & Trust Co., 481 F.2d 673, 678 (8th Cir. 1973)). The SEC asserts that the proper standard to apply is: "`[W]hen defendants voluntarily disclose information, they have a duty to disclose additional material facts only to the extent that the volunteered disclosure was misleading as to a material fact.'" Response to Goldstone & Simmons MTD at 29 (emphasis added)(quoting In re Thornburg Mortg., Inc. Sec. Litig., 695 F.Supp.2d at 1209)(secondary quotation omitted).
The SEC also contends that Thornburg Mortgage's statement that it had met all margin calls created a duty to disclose that it had not met the margin calls within the terms of its reverse repurchase agreements, and was not in default only through lender forbearance. The SEC asserts that Thornburg Mortgage should have stated only that it successfully met margin calls if it had complied with the terms of its reverse repurchase agreements. The SEC argues that the Defendants do not escape liability for this omission simply because the 2007 Form 10-K did not state that Thornburg Mortgage had complied with its reverse repurchase agreements. See Response to Goldstone & Simmons MTD at 31 (citing Goldstone & Simmons MTD at 35).
The SEC also contends that the existence of the Citigroup Global Letter evidences that Thornburg Mortgage was in breach of its reverse repurchase agreement with Citigroup Global, and that the Defendants have improperly asked the Court to interpret the language of the Citigroup Global Letter in a light favorable to the Defendants. See Response to Goldstone & Simmons MTD at 31-32 (citing Goldstone & Simmons MTD at 36; Citigroup Global Repo Agreement). The SEC asserts that Thornburg Mortgage's breach of the Citigroup Global Repo Agreement and its reverse repurchase agreements with two other lenders was material information, because it "`would inform investors that, at any moment, Thornburg Mortgage, Inc., could be broke which would tend to influence how one might invest money.'" Response to Goldstone & Simmons MTD at 32 (quoting In re Thornburg Mortg., Inc. Sec. Litig., 695 F.Supp.2d at 1214-15). The SEC argues that the Defendants' assertion they were not in breach of the reverse repurchase agreements is a factual question appropriate for a jury to decide, and is not an assertion that the Court should consider
The SEC contends that it has not alleged fraud-by-hindsight, because the Defendants' misrepresentations and omissions were concerning past margin calls and income. The SEC asserts that its allegations of the Defendants' fraud in filing the 2007 Form 10-K arise out of the Defendants' knowledge of past events, including Thornburg Mortgage's liquidity crisis, its exposure to default and cross-default notices, its receipt of the Citigroup Global Letter, and that the Defendants had conducted I/O Strip Transactions to meet margin calls. The SEC first contends that the Defendants have provided citations to cases which analyze scienter under "the heightened standard of the [Private Securities Litigation Reform Act of 1996, Pub.L. No. 104-67, 109 Stat. 737 (1995)(codified as amended in scattered sections of 15 U.S.C.)("PSLRA") ], which is inapplicable here as the SEC need only plead scienter generally." Response to Goldstone & Simmons MTD at 34 (citing SEC v. Kovzan, 807 F.Supp.2d at 1039 n. 6). The SEC also asserts that the Defendants' reliance on City of Phila. v. Fleming Cos., Inc., is inappropriate, because, in that case, the plaintiffs "failed to plead any particular facts by which the court could plausibly infer that two defendants even knew about the litigation," whereas the SEC has pled that the Defendants "knew or were reckless in not knowing that the statements in Thornburg's Form 10-K regarding liquidity, margin calls, and income were false at the time they were made." Response to Goldstone & Simmons MTD at 35-36 (citing 264 F.3d at 1263; Complaint ¶ 38, at 12; id. ¶ 40, at 12; id. ¶ 30, at 9-10). The SEC further argues that the margin calls Thornburg Mortgage received on February 28, 2008, were not "`unprecedented.'" Response to Goldstone & Simmons MTD at 36 (quoting Goldstone & Simmons MTD at 1, 22; Starrett MTD at 1, 10, 23). The SEC contends that the approximately $200 million in margin calls which Thornburg Mortgage received on February 28, 2008, cannot be unprecedented, given that Citigroup Global issued a margin call of $196 million only two weeks prior, and six months earlier Thornburg Mortgage received two billion dollars in margin calls. See Response to Goldstone & Simmons MTD at 36 (citing Complaint ¶¶ 26, 29, 33, at 8-10).
The SEC also contends that it has sufficiently alleged that the Defendants acted with fraudulent scienter: "an intent to deceive, manipulate, or defraud — in other words, acted with a mental state known as scienter." Response to Goldstone & Simmons MTD at 37 (quoting In re Thornburg Mortg., Inc. Sec. Litig., 695 F.Supp.2d at 1187). The SEC asserts that it is not bound by the "`strong inference' of scienter" standard which rules fraud cases under the PSLRA. Response to Goldstone & Simmons MTD at 38 (quoting Tellabs,
The SEC contends that the Defendants' "negative disclosures" do not "`negate any inference of scienter.'" Response to Goldstone & Simmons MTD at 39 (quoting Goldstone & Simmons MTD at 40). The SEC asserts that the Defendants' disclosure of Thornburg Mortgage's future risk of default does not negate the falsity of its statement that it had "`successfully' met the margin calls" and that it had the "intent and ability to hold the ARM Securities until recovery," and the Defendants' failure to "recognize an income statement loss of approximately $428 million for Thornburg's ARM Securities." Response to Goldstone & Simmons MTD at 40 (citing Complaint ¶¶ 5, 7, at 3; id. ¶ 11, at 4; id. ¶ 32, at 10; id. ¶ 38, at 12; id. ¶¶ 53-54, at 16; id. ¶¶ 68-71, at 20-21; id. ¶¶ 79-80, at 23; id. ¶ 83, at 24). The SEC asserts that the Defendants' negative disclosures do not negate the existence of their motive to make false statements: "to keep the margin call situation quiet and then quickly raise additional cash." Response to Goldstone & Simmons MTD at 41 (citing Complaint ¶ 32, at 10). Finally, the SEC asserts that the Defendants' negative disclosures do not remedy the falsity of other statements they made, specifically the SEC's allegations that the Defendants "failed to disclose ... specific material facts currently in" Thornburg Mortgage's possession. Response to Goldstone & Simmons MTD at 41-42 (citing In re Neopharm, Inc. Sec. Litig., No. 02 C 2976, 2003 WL 262369, at *13 (N.D.Ill. Feb. 7, 2003)). The SEC contends that, in SEC v. Bankatlantic Bancorp, Inc., No. 12-60082-Civ., 2012 WL 1936112 (S.D.Fla. May 29, 2012), the United States District Court for the Southern District of Florida rejected a defendant's argument that its negative disclosures, which the SEC asserts were more fulsome than those which the Defendants made here, could not undermine an inference of fraudulent scienter. See Response to Goldstone & Simmons MTD at 42-43 (citing 2012 WL 1936112, at **11, 17).
The SEC asserts that, by alleging that the Defendants knew that Thornburg Mortgage had not successfully met its margin calls, that Thornburg Mortgage had entered into the I/O Strip Transactions to meet its margin calls, and that Thornburg Mortgage did not have the intent and ability to hold certain assets until recovery or maturity, the SEC has adequately alleged that the Defendants "believed the statements in the Form 10-K were false or misleading." Response to Goldstone & Simmons MTD at 45 (citing Goldstone & Simmons MTD at 41; Complaint ¶ 11, at 4; id. ¶ 53, at 16). The SEC contends that City of Omaha v. CBS Corp. is readily distinguishable, because there the complaint contained only conclusory allegations, whereas the SEC has provided "specific detail" and the Complaint "references to specific correspondence and statements of the Defendants evidencing their
The SEC contends that the nature of the OTTI analysis does not undercut the Defendants' scienter. The SEC first contends that the Defendants rely on "extrinsic documents for the truth of the statements therein — that OTTI analysis can be complex and GAAP does not provide bright line rules" — to assert that they lacked fraudulent intent in their OTTI analysis. Response to Goldstone & Simmons MTD at 46-47. The SEC contends that, regardless of the objective complexity of the OTTI analysis, the Complaint sets forth that Starrett and Goldstone understood the OTTI analysis and its application to their impairments. See Response to Goldstone & Simmons MTD at 47-48 (citing Complaint ¶¶ 54-55, at 16). The SEC asserts that the Defendants would have the Court "parse the meaning" of an electronic mail transmission Starrett sent to Goldstone regarding the OTTI analysis, an inappropriate exercise at this stage, to find that the Defendants did not have an intent to withhold information from KPMG. Response to Goldstone & Simmons MTD at 48 (citing Goldstone & Simmons MTD at 44; Complaint ¶ 53, at 16; Wood v. Wood, No. 3:10-0122, 2010 WL 2813760, at *3 (S.D.W.Va. July 16, 2010); Am. Plastic Equip., Inc. v. Toytrackerz, LLC, No. 07-2253-DJW, 2008 WL 917635, at *1 (D.Kan. Mar. 31, 2008)). The SEC contends that "it is beyond dispute that Thornburg restated its financials on March 11, 2008" to take a $427,800,000.000 impairment on its ARM Securities portfolio, thus evidencing that Thornburg Mortgage should have accounted for its unrealized losses as OTTI impairments in the 2007 Form 10-K. Response to Goldstone & Simmons MTD at 49 (citing Complaint ¶ 11, at 4).
The SEC asserts that, while the Defendants are correct that GAAP violations do not alone state a securities fraud claim, "`allegations of GAAP violations are ... extremely probative of scienter.'" Response to Goldstone & Simmons MTD at 49 (quoting Carpenters Health & Welfare Fund v. Coca-Cola Co., 1:00-CV-2838, 2002 WL 34089163, at **14-15, 2002 U.S. Dist. LEXIS 28072, at *48 (N.D.Ga. Aug. 20, 2002)(secondary quotation omitted)). The SEC asserts that the United States Court of Appeals for the Eighth Circuit has rejected the argument that accounting analyses are too complex for a defendant to have the requisite scienter for a securities fraud claim and held that the complexity of the relevant accounting analyses was a factual question that the Court should not decide on a motion to dismiss. See Response to Goldstone & Simmons MTD at 50 (citing Fla. State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 649, 662, 666-67 (8th Cir.2001)). The SEC contends that neither the holding in Funke v. Life Fin. Corp., nor SEC v. Espuelas are applicable, because in neither of those cases did the plaintiffs allege that the "defendants withheld and misrepresented information to company auditors and the investing public in order to avoid having to take an impairment on assets that would have turned a reported ... profit to a loss," as the SEC has alleged here. Response to Goldstone & Simmons MTD at 51 (citing Funke v. Life Fin. Corp., 237 F.Supp.2d at 468; SEC v. Espuelas, 579
The SEC contends that, because the Complaint "quotes a document where Defendants acknowledge `purposely' not telling their auditors about margin calls," the Complaint does not support Goldstone and Simmons' arguments that they "hoped to raise additional capital and to meet their expected additional margin calls." Response to Goldstone & Simmons MTD at 52 (citing Goldstone & Simmons MTD at 47; Complaint ¶ 53, at 16). The SEC argues that, even though the Defendants disclosed a large unrealized loss, disclosing an unrealized loss while also stating that Thornburg has the intent and ability to hold those assets until recovery "is not the same as disclosing a realized loss." Response to Goldstone & Simmons MTD at 53 (citing Goldstone & Simmons MTD at 47).
The SEC argues that Simmons' statement, "[i]f they only knew," is strong evidence of fraudulent scienter. Response to Goldstone & Simmons MTD at 53. The SEC contends that the Court should not, at this stage, attempt to divine meaning from the electronic mail transmission containing this statement, beyond the meaning the SEC attaches to the statement in the Complaint. The SEC also asserts that it has set forth evidence of a fraudulent scheme in other portions of the Complaint, noting that it has alleged that Starrett confirmed to Goldstone and Simmons that the Defendants would purposely not relate certain information to KPMG. See Response to Goldstone & Simmons MTD at 54 (citing Complaint ¶ 5, at 3; id. 30, at 10; id. ¶ 53, 57-58 at 16-17; id. ¶ 64, at 18-19).
The SEC asserts that its allegation that the Defendants were motivated to commit securities fraud by a desire to save Thornburg Mortgage is sufficient to raise an inference of fraudulent scienter. See Response to Goldstone & Simmons MTD at 55 (citing Complaint ¶ 4, at 2; In re Thornburg Mortg., Inc. Sec. Litig., 695 F.Supp.2d at 1202). The SEC asserts that it is reasonable to infer that the Defendants had a motive to mislead, because they were "inextricably financially intertwined with the continued viability of the company." Response to Goldstone & Simmons MTD at 55-56 (citing In re Thornburg Mortg., Inc. Sec. Litig., 695 F.Supp.2d at 1195).
The SEC contends that it has sufficiently alleged that Goldstone made material misstatements on Street Signs on February 28, 2008. The SEC contends that Goldstone's statements on Street Signs were misrepresentations, because Goldstone did not state that he "expected or hoped to have liquidity and cash available to continue to support the portfolio, he said `we have the liquidity and cash available to continue to support the portfolio.'" Response to Goldstone & Simmons MTD at 57 (quoting Complaint ¶ 98, at 28). The SEC asserts that this statement was
The SEC argues that the Complaint sufficiently alleges that the Defendants deceived KPMG. The SEC asserts that Goldstone and Simmons' arguments regarding the SEC's "`shotgun pleading'" are without merit, because Goldstone and Simmons clearly define the SEC's allegations regarding their deceit of KPMG in the Goldstone & Simmons MTD. Response to Goldstone & Simmons MTD at 59 (quoting Goldstone & Simmons MTD at 53)(citing Goldstone & Simmons MTD at 53-54). The SEC contends that it has alleged several facts of which the Defendants were aware, but KPMG was not. The SEC points out that it alleges that KPMG was not aware of Thornburg Mortgage's breach of three reverse repurchase agreements, the $427.8 million in unrealized losses that should have been realized, and of the purpose of the I/O Strip Transactions. See Response to Goldstone & Simmons MTD at 60 (citing Complaint ¶ 29, at 9; id. ¶¶ 38-39, at 12; id. ¶¶ 65-69, at 19-20; id. ¶¶ 72-73, at 21; id. ¶¶ 76-77, at 22; Complaint ¶ 83, at 24).
Regarding the SEC's allegation that KPMG would have reached a different conclusion had it been aware of the allegedly withheld information, the SEC contends it is logical to allege, as the SEC has, that KPMG would have questioned Thornburg Mortgage's OTTI conclusion and disagreed with it. See Response to Goldstone & Simmons MTD at 61 (citing Goldstone & Simmons MTD at 55). The SEC asserts that the authorities upon which the Defendants rely in arguing that the Complaint is internally inconsistent — by alleging that KPMG would have first questioned and then disagreed — are inapposite, either factually or legally. See Response to Goldstone & Simmons MTD at 61.
In response to the Defendants' assertion that the SEC has not shown that the information withheld from KPMG was material, the SEC asserts that it "has alleged multiple facts that establish the materiality of Defendants' misstatements and omissions to auditors." Response to Goldstone & Simmons MTD at 62. The SEC points out that it has alleged that the failure to recognize $427.8 million in losses resulted in a restatement, which is only necessary for material misstatements. See Response to Goldstone & Simmons MTD at 62. The SEC further argues that Goldstone & Simmons had a duty to disclose the rumored imminent collapse of a large European hedge fund, because, the SEC asserts, it alleges that the Defendants knew that the collapse of the European hedge fund "would further depress the prices of Thornburg's ARM Securities and trigger additional margin calls." Response to Goldstone & Simmons MTD at 62-64 (citing Goldstone & Simmons MTD at 55-56; Complaint ¶¶ 38-39, at 12; id. ¶¶ 76-77, at 22-23). The SEC thus argues that it is
The SEC further asserts that Simmons had a duty to correct his previous statements to KPMG — that "he believed the MBS market had reached its low point and further deterioration in prices was unlikely" — because rule 13b2-2 "`imposes a duty on corporate officers to clarify previous statements that are misleading in the absence of some material fact,'" and because Simmons became aware that the value of Thornburg Mortgage's ARM Securities would decrease more after his initial statement to KPMG as a result of "margin calls and haircuts." Response to Goldstone & Simmons MTD at 64-65 (quoting SEC v. Autocorp Equities, Inc., 2004 WL 1771608, at *6) (citing Complaint ¶ 39, at 12).
The SEC argues that Goldstone and Simmons' contention regarding whether KPMG requested the Defendants to disclose all correspondence is an argument regarding the facts of this case, and thus not an appropriate issue to be raised on a motion to dismiss. The SEC contends that the Court must take as true that KPMG requested all of Thornburg Mortgage's correspondence with its lenders in the weeks before the 2007 Form 10-K was filed and should not delve into an evidentiary query of the documents which the Defendants have filed with the Court. See Response to Goldstone & Simmons MTD at 65 (citing Goldstone & Simmons MTD at 57-58). Moreover, the SEC argues that, were the Court to conduct a factual inquiry regarding the validity of the SEC's allegation, the Court would find that the record supports the SEC's claim. See Response to Goldstone & Simmons MTD at 66 (citing Request for Correspondence).
The SEC contends that the Defendants' assertion that the Citigroup Global Letter was immaterial is without merit, because arguing "that the breach was immaterial because it `would [not] have a material effect on [Thornburg's] financial statements' is circular." (Response to Goldstone & Simmons MTD at 66)(alterations in original)(quoting Goldstone & Simmons MTD at 58). The SEC contends that it is "inconceivable" that KPMG would not want to see the Citigroup Global Letter. Response to Goldstone & Simmons MTD at 66. The SEC contends that it need not establish whether Simmons' characterization of the February 28, 2008, margin calls as unforeseeable was "`false or misleading,'" as the Defendants argue it must, because the Court need only inquire whether this allegation, if true, supports a claim for fraud. Response to Goldstone & Simmons MTD at 66-67 (quoting Goldstone & Simmons MTD at 58). The SEC further contends that it has established that Simmons' statement was false, because it has set forth in the Complaint an electronic mail transmission exchange between Goldstone and Simmons on February 27, 2008, in which they discuss how Thornburg Mortgage is likely to receive additional margin calls. See Response to Goldstone & Simmons MTD at 67.
Lastly, the SEC contends that it has adequately alleged control-person liability, and that Goldstone and Simmons aided and abetted Thornburg Mortgage's violations of the securities laws. The SEC asserts that dismissing the control-person claim is inappropriate, because the SEC
The SEC contends that the Complaint adequately alleges that the Defendants, including Starrett, "embarked on a scheme to mislead their auditors and the public to raise cash to address the Company's liquidity crisis." Plaintiff's Response to Defendant Jane Starrett's Motion to Dismiss at 8, filed June 20, 2012 (Doc. 49)("Response to Starrett MTD"). The SEC asserts that Starrett reviewed and approved materially false and/or misleading statements published in the 2007 Form 10-K, specifically, that Thornburg Mortgage: (i) had "successfully continued to meet margin calls"; (ii) "did not sell any assets to meet its margin calls"; (iii) "had the intent and ability to hold certain securities until their value recovered in the market"; and (iv) "had returned to profitability in the fourth quarter to the tune of $65 million in net income." Response to Starrett MTD at 8. The SEC notes that it addressed the arguments the Defendants all raised in its Response to Goldstone & Simmons MTD, and incorporates those arguments into its Response to Starrett MTD. See Response to Starrett MTD at 12-13 n. 3.
The SEC first argues that the Complaint contains particularized facts which demonstrate that the Thornburg Mortgage 2007 Form 10-K contained materially false and misleading statements, that Starrett made false statements to, and concealed information from, KPMG, and that Starrett participated in a "scheme" which violated rule 10b-5 of the Exchange Act. Response to Starrett MTD at 13, 32. The SEC contends that Starrett overlooked the Complaint's allegation that she engaged in "an accounting fraud resulting in the overstatement of net income by $422 million in the fourth quarter." Response to Starrett MTD at 13 (citing Complaint ¶¶ 86-87, at 25-26). The SEC contends that, because the Court is ruling on a motion to dismiss, Thornburg Mortgage's restatement on March 11, 2008, alone defeats any assertion that the net income reported in the 2007 Form 10-K was not false, because a "`complaint pleads facts or misleading statements with sufficient particularity if it alleges that there was a restatement correcting earlier corporate filings and identifies the restated financials.'" Response to Starrett MTD at 14 (quoting SEC v. Espuelas, 579 F.Supp.2d at 472 (citing In re FirstEnergy Corp. Sec. Litig., 316 F.Supp.2d 581, 594, 595 (N.D.Ohio 2004))).
The SEC further contends that it alleged particularized facts which demonstrate that Thornburg Mortgage's statement that it had successfully met all margin calls was false when made. The SEC points out that it alleges that: (i) Thornburg Mortgage was late in meeting margin calls under the terms of its reverse repurchase agreements with at least three lenders; (ii) Thornburg Mortgage
The SEC contends that the Complaint sets forth sufficient, particularized facts to demonstrate that Thornburg Mortgage's statement — that it did not sell assets to meet its margin calls — was misleading. The SEC points out that it alleges that: (i) Thornburg Mortgage was required to sell I/O Strips, portions of its Securitized ARM Loans, to meet its margin calls; (ii) each Defendant characterized the I/O Strip Transactions as sales, yet the transactions were accounted for as the issuance of secured debt; (iii) Starrett acknowledged that Thornburg Mortgage sold I/O Strips to meet its margin calls; (iv) Goldstone advised Simmons and Starrett that Thornburg Mortgage planned to meet the Citigroup Global margin call by having Citigroup Global sell a $110 million I/O securities; and (v) Starrett informed Goldstone and Simmons that selling some assets calls into question Thornburg Mortgage's intent and ability to hold its assets to maturity. Response to Starrett MTD at 17 (citing Complaint ¶¶ 36-37, at 11; id. ¶ 54, at 15; id. ¶¶ 66-68, at 19-20). The SEC asserts that Thornburg Mortgage's statement that it did not sell any assets to meet its margin calls was misleading, even if the I/O Strip Transactions were not sales, because Thornburg Mortgage's statement led investors to believe that Thornburg Mortgage was not required to dispose of any assets. See Response to Starrett MTD at 18 (citing SEC v. Gabelli, 653 F.3d at 57; Complaint ¶ 65, at 19).
The SEC argues that the Complaint sets forth particularized facts which demonstrate that Thornburg Mortgage's statement that it had the intent and ability to hold its ARM securities until recovery was false and misleading. The SEC asserts that Thornburg Mortgage's March 11, 2008, restatement defeats Starrett's assertion regarding the veracity of Thornburg Mortgage's intent and ability to hold its ARM Securities, because the restatement "reflects that Thornburg had determined that its previous statement that it had the intent and ability to hold these assets to maturity was false." Response to Starrett MTD at 19 (citing Complaint ¶ 11, at 14; SEC v. Espuelas, 579 F.Supp.2d at 472).
The SEC contends that it has not alleged "`fraud by hindsight,'" but has rather alleged that Starrett, Goldstone, and Simmons "had specific information prior to filing the Form 10K that rendered their statement" regarding Thornburg Mortgage's intent and ability to hold its ARM securities fraudulent. Response to Starrett MTD at 19 (quoting Starrett MTD at 10). The SEC points out that it has alleged that: (i) Thornburg Mortgage received two billion dollars in margin calls in August, 2007, which resulted in Thornburg Mortgage's default on certain reverse repurchase agreement, and required Thornburg Mortgage to sell twenty-two million dollars of its MBS; (ii) Thornburg Mortgage paid approximately $360 million in margin calls during November, 2007, and $650 million in margin calls in January and February, 2008; (iii) immediately before Thornburg Mortgage filed its 2007 Form 10-K, in the second half of February Thornburg Mortgage received more than $300 million in margin calls; (iv) Thornburg Mortgage could not timely meet its latest margin calls and thus violated its reverse repurchase agreements with at least three lenders; (v) Thornburg Mortgage's late payments could have triggered defaults and cross-default notices from Thornburg Mortgage's lenders, which could have allowed those lenders to seize and sell the ARM Securities that Thornburg Mortgage used as collateral for its loans; (vi) Citigroup Global sent Thornburg
The SEC contends that Starrett's assertion — that the "`highly judgmental and predictive nature of the intent and ability to hold inquiry cuts against'" finding her statements were false — is "without support and defies common sense." Response to Starrett MTD at 22 (quoting Starrett MTD at 10). The SEC contends that such a position would make "any claim based upon a GAAP provision involving judgment... immune from suit" and is "not the law." Response to Starrett MTD at 22 (citing In re RAIT Fin. Trust Sec. Litig., No. 2:07-cv-03148, 2008 WL 5378164, at *7 (E.D.Pa. Dec. 22, 2008)). The SEC contends that this argument raises a factual question, which is not appropriate for the Court to address when ruling on a motion to dismiss. See Response to Starrett MTD at 22 (citing In re Burlington Coat Factory, 114 F.3d 1410, 1421 (3d Cir.1997); In re Ambac Fin. Group, Inc. Sec. Litig., 693 F.Supp.2d 241, 273 (S.D.N.Y.2010)). The SEC further argues that Starrett cannot "purport to have exercised good faith in making a difficult and subjective judgment when, in fact, she concealed and misrepresented the most critical information relating to that judgment from KPMG." Response to Starrett MTD at 23.
The SEC similarly asserts that Starrett's argument that the "`issuance of several hundred million dollars in margin calls by multiple lenders ... is akin to an unexpected `run on a bank'" and thus could not have been factored into Thornburg Mortgage's OTTI analysis raises a factual question that the Court should resolve at trial, and not on a motion to dismiss. Response to Starrett MTD at 23 (quoting Starrett MTD at 12). The SEC further contends that the post-2007 Form 10-K margin
The SEC contends that Starrett's assertion that Thornburg Mortgage had the intent and ability to hold its ARM Securities until maturity, based upon its expected "`significant infusion of cash within days of the 10-K filing,'" is a circular argument, because such an influx of cash would be based upon the fraudulent statements in the 2007 Form 10-K. Response to Starrett MTD at 24 (quoting Starrett MTD at 12)(citing Complaint ¶ 32, at 10). The SEC contends that Starrett's assertion that Thornburg Mortgage's intent and ability to pay was "`thoroughly examined and agreed to by KPMG'" is "wholly misleading," because essential information was withheld from KPMG, and, further, the restatement demonstrates that the OTTI analysis in the 2007 Form 10-K was false. Response to Starrett MTD at 24 (quoting Starrett MTD at 12)(citing Complaint ¶¶ 53, 57-58, at 16-17; id. ¶¶ 72-74, 76-80, at 21-24).
The SEC contends that Starrett's assertion — that the statements in the 2007 Form 10-K are not misleading because of other statements — "fails for a variety of reasons." Response to Starrett MTD at 25 (citing Starrett MTD at 12-13). The SEC contends that the "bespeaks caution doctrine," upon which Starrett relies, "has been specifically rejected in connection with a statement related to FAS 115 and an `other than temporary' impairment analysis." Response to Starrett MTD at 25 (quoting In re RAIT Fin. Trust Sec. Litig., 2008 WL 5378164, at **7-8). The SEC contends that "`inclusion of general cautionary language regarding a prediction [does] not excuse [an] alleged failure to reveal known material adverse facts.'" Response to Starrett MTD at 25 (alterations in original)(quoting In re Sprint Corp. Sec. Litig., 232 F.Supp.2d 1193, 1222 (D.Kan.2002)). The SEC contends that the bespeaks caution doctrine applies only to forward-looking statements, but that it has alleged that the statements in the 2007 Form 10-K and the OTTI analysis were false when made. See Response to Starrett MTD at 25-26 (citing Complaint ¶ 12, at 4-5; Grossman v. Novell, Inc., 120 F.3d at 1123). The SEC contends that Thornburg Mortgage's OTTI analysis was "one of the most critical statements in the Form 10-K," because it allowed Thornburg Mortgage to report what should have been a $357 million loss as a sixty-five million dollar gain. Response to Starrett MTD at 26 (citing Ganino v. Citizens Utils. Co., 228 F.3d at 164).
The SEC further contends that it has adequately alleged particular facts which show that Starrett made false statements to, and omitted material information from, KPMG. The SEC points out that it has alleged that: (i) Starrett misrepresented and/or failed to disclose to KPMG Thornburg Mortgage's precarious financial condition, its violations of its reverse repurchase agreements, its reliance on its lenders' forbearance, and the use of I/O Strip Transactions to satisfy margin call payments late; (ii) Starrett stated in an electronic mail transmission that with-holding
The SEC asserts that Starrett "appears to argue that ... she is blameless because she did not understand the [reverse repurchase] agreements." Response to Starrett MTD at 28. The SEC asserts that there "is no legal basis for this argument" and, additionally, that it need "only allege that Ms. Starrett made false statements to [Thornburg Mortgage's] auditors" to plead a violation of rule 13b2-2, and not that Starrett was familiar with the specificity of the reverse repurchase agreements, margin call negotiations, or that she had particular expertise. Response to Starrett MTD at 28-29 (citing Starrett MTD at 15-16). The SEC contends that it has alleged that Starrett was aware that Thornburg Mortgage was in violation of its reverse repurchase agreements, specifically through alleging that Starrett was aware that Thornburg Mortgage's lenders were concerned about its delay in meeting margin calls and were requiring that the delay be disclosed, and through alleging that Starrett signed a letter to KPMG stating that Thornburg Mortgage had complied with all contractual agreements. See Response to Starrett MTD at 29 (citing Complaint ¶ 64, at 18-19; id. ¶ 19, at 7; id. ¶¶ 53, 57, at 16-17). The SEC contends that Starrett's assertion that the violations were unimportant, and that not all contractual details need to be disclosed, is misplaced, as the SEC asserts it is arguing that Thornburg Mortgage's violations of its reverse repurchase agreements were material violations, which needed to be disclosed, and is not arguing that every detail of Thornburg Mortgage's reverse repurchase agreements and margin call negotiations should have been disclosed. See Response to Starrett MTD at 29-30 (citing Starrett MTD at 15-16; Complaint ¶ 26, at 8; id. ¶ 41, at 12-13).
The SEC contends that it has alleged particularized facts which demonstrate that Starrett made false representations to KPMG regarding Thornburg Mortgage's margin call situation. The SEC asserts that it has alleged, contrary to Starrett's assertion, that she withheld Thornburg Mortgage's violation of its reverse
The SEC asserts that Starrett's argument regarding the electronic mail transmission in which she acknowledges purposefully withholding from KPMG "merely raises a timing point .... [and] is simply false." Response to Starrett MTD at 32 (citing Starrett MTD at 18). The SEC asserts that the mail evidences that the Defendants "had no intention of ever telling the auditors about Thornburg's failure to timely satisfy the margin calls, that Thornburg sold assets ... to meet margin calls, or the true nature of Thornburg's financial condition if the margin calls were paid." Response to Starrett MTD at 32. The SEC contends that Starrett's statement in the electronic mail transmission that Thornburg Mortgage would have to inform KPMG of the margin call situation if Thornburg Mortgage was unable to meet its margin calls does not negate that she withheld material information from KPMG. The SEC argues that, if Thornburg Mortgage did not satisfy its margin calls, "there would be no way to hide" Thornburg Mortgage's default and the seizures of its assets by its lenders from KPGM, making disclosure to KPMG useless at that point. Response to Starrett MTD at 33.
The SEC contends that it has alleged particularized facts which demonstrate that Starrett engaged in a scheme to violate Exchange Act rule 10b-5. The SEC asserts that its allegations against Starrett are not based upon her being the "`maker'" of the misrepresentation in the 2007 Form 10-K, but is rather premised on her "scheme liability." Response to Starrett MTD at 33-34 (quoting Starrett MTD at 20)(citing SEC v. United States Envtl., Inc., 155 F.3d 107, 110-12 (2d Cir.1998); SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1471-72 (2d Cir.1996); SEC v. St. Anselm Exploration Co., No. 11-cv-00668, 2012 WL 1045707, at *6 (D.Colo. Mar. 28, 2012); SEC v. Lee, 720 F.Supp.2d 305, 333-34 (S.D.N.Y.2010); Britton v. Parker, No. 06-cv-01797, 2007 WL 2871003, at *4 (D.Colo. Sept. 26, 2007); Shriners Hospitals for Children v. Qwest Commc'ns Int'l, Inc., No. 04-CV-0781, 2005 WL 2350569, at *6 (D.Colo. Sept. 23, 2005); In re AOL Time Warner, Inc. Sec. & ERISA Litig., 381 F.Supp.2d 192, 217, 229 (S.D.N.Y. 2004); In re Global Crossing, Ltd. Sec. Litig., 322 F.Supp.2d 319, 335-37 (S.D.N.Y.2004)).
The SEC contends that it has adequately alleged particular facts which demonstrate that Starrett acted with scienter. The SEC asserts that Starrett's scienter is demonstrated by her statement: "We have purposely not told [the auditors] about the margin calls." Response to Starrett MTD at 36 (quoting Complaint ¶ 53, at 16). The SEC asserts that there is "no doubt that Ms. Starrett was aware that the Form 10-K contained misstatements at the time it was made," given the SEC's allegations that: (i) Goldstone informed Starrett on February 21, 2007 that Thornburg Mortgage could not timely meet its Citigroup Global Repo Agreement, yet the 2007 Form 10-K stated that Thornburg Mortgage had successfully met all margin calls; (ii) Goldstone informed Starrett that Thornburg Mortgage had used I/O Strip Transactions to meet its margin calls, yet the 2007 Form 10-K stated that Thornburg did not sell any assets to meet margin calls; (iii) Starrett knew that Thornburg Mortgage did not have the intent and ability to hold its ARM securities until recovery, because Thornburg Mortgage was in violation of its reverse repurchase agreements and had used I/O Strip Transactions to meet margin calls, yet the 2007 Form 10-K stated that Thornburg Mortgage had the intent and ability to hold its ARM securities until recovery. See Response to Starrett MTD at 36-37 (citing Complaint ¶ 53, at 16; id. ¶¶ 60-64, at 17-19; id. ¶¶ 66-71, at 19-20; id. ¶ 79, at 23).
The SEC contends that any "negative disclosures" in the 2007 Form 10-K do not negate Starrett's scienter. Response to Starrett MTD at 38 (citing Starrett MTD at 25). The SEC asserts that the statements to which Starrett points "contain conditional language regarding what may occur under certain circumstances" and thus "do not refute the false statements alleged in the Complaint." Response to Starrett MTD at 39 (citing Starrett MTD at 26). The SEC contends that the cases to which Starrett cites, in support of her assertion that Thornburg Mortgage's negative disclosures "`undermine any inference that Defendants intentionally or recklessly misled the investing public or KPMG,'" are inapposite, because both cases applied the PSLRA's heightened
The SEC contends that Starrett's argument that the complexity of the OTTI analysis precludes finding that she had scienter is irrelevant, because the SEC alleges that Starrett did not properly consider the information at her disposal, and withheld information from KPMG. Response to Starrett MTD at 40 (citing Starrett MTD at 28). The SEC contends that, because it is not alleging that Thornburg Mortgage "mistakenly applied the relevant accounting knowledge," whether "the accounting rules being violated were simple or complex has no effect on whether these allegations adequately allege scienter." Response to Starrett MTD at 41.
The SEC argues that Thornburg Mortgage's quick restatement does not "`undermine[] an inference of scienter,'" because KPMG forced the restatement. Response to Starrett MTD at 41 (quoting Starrett MTD at 33)(citing Complaint ¶ 99, at 29). The SEC contends that Thornburg Mortgage's rapid financial unraveling reveals "just how precarious Thornburg's financial situation was," and that "`acknowledging one's wrongdoing does not excuse it." Response to Starrett MTD at 41 (alterations omitted)(quoting In re Sonus Networks, Inc. Sec. Litig., No. Civ.A.04-10294, 2006 WL 1308165, at *17 (D.Mass. May 10, 2006)).
The SEC contends that its allegation that the Defendants' motivation was a desire for Thornburg Mortgage to survive the mortgage crisis evidences their scienter, and that the Court "`should not ignore such motives when considering the totality of factual circumstances that might potentially give rise to a strong inference of scienter.'" Response to Starrett MTD at 42 (quoting In re Thornburg Mortg., Inc. Sec. Litig., 695 F.Supp.2d at 1202)(citing Complaint ¶ 4, at 2; Starrett MTD at 32). The SEC contends that Starrett's lack of alleged "`pecuniary gain,'" Starrett MTD at 34-35, does not negate her scienter, as a "`lack of insider trading does not always negate or weaken inference of scienter,'" In re Thornburg Mortg., Inc. Sec. Litig., 695 F.Supp.2d at 1194. See Response to Starrett MTD at 42. The SEC contends that the financial crisis affecting the United States of America in February, 2008, provided another motive for the Defendants, filling the "`gap left by a lack of suspicious insider-trading activity: survival.'" Response to Starrett MTD at 42 (quoting In re Thornburg Mortg., Inc. Sec. Litig., 695 F.Supp.2d at 1194). The SEC contends that the Defendants' scienter may be inferred, because they were "inextricably financially intertwined with the continued viability" of Thornburg Mortgage. Response to Starrett MTD at 42 (citing In re Thornburg Mortg., Inc. Sec. Litig., 695 F.Supp.2d at 1195).
The SEC contends that it has alleged particularized facts which demonstrate the Starrett acted with knowledge, or reckless disregard of, the fact that she was aiding or abetting Thornburg Mortgage's primary violation of the securities laws. See Response to Starrett MTD at 43 (citing Starrett MTD at 35). The SEC also contends that it need not allege that Starrett
The SEC asserts that it has alleged sufficient facts to demonstrate that Starrett falsified books, records, and accounts in violation of certain internal control provisions, and aided and abetted Thornburg Mortgage's violation of those control provisions. See Response to Starrett MTD at 43. The SEC contends, contrary to Starrett's assertion, that it need not "suggest improved controls or explain the effect of improved controls," and that allegations of Starrett's intentional misrepresentations to and concealment of information from KPMG are sufficient to show her violation of internal controls. Response to Starrett MTD at 45 (citing Starrett MTD at 37; Complaint ¶ 57, at 16-17). The SEC contends that making false statements to KPMG is a violation of Thornburg Mortgage's internal controls that many courts have recognized. See Response to Starrett MTD at 45 (citing SEC v. Retail Pro, Inc., 673 F.Supp.2d 1108, 1142 (S.D.Cal. 2009); SEC v. Shapiro, No. 4:05cv364, 2008 WL 819945, at *6 (E.D.Tex., Mar. 25, 2008)). The SEC also asserts that Starrett's improper performance of the OTTI analysis violated Thornburg Mortgage's internal controls. See Response to Starrett MTD at 45 (citing Complaint ¶ 51, at 15). The SEC contends that, contrary to Starrett's assertion, whether KPMG determined Thornburg Mortgage's internal controls were relevant is not relevant to the SEC's allegations, because KPMG came to its conclusion on the basis of the Defendants' misrepresentations and omissions, thereby undermining any statement by KPMG regarding the adequacy of Thornburg Mortgage's internal controls. See Response to Starrett MTD at 46 (citing Starrett MTD at 37-38; Complaint ¶¶ 51, 53, 57, 59, at 15-17; id. ¶¶ 99-103, at 29-30). The SEC further contends that the Complaint does not support Starrett's assertion that the "`Defendants knew that Thornburg's OTTI accounting was incorrect, or acted unreasonably or recklessly with respect to the impairment analysis.'" Response to Starrett MTD at 46 (emphasis in original)(quoting Starrett MTD at 39). The SEC points out that it alleges that Starrett "knowingly falsified Thornburg's records and the management letter provided to KPMG, and that she participated in misrepresenting Thornburg [Mortgage]'s income." Response to Starrett MTD at 47-48 (citing SEC v. Delphi Corp., No. 06-14891, 2008 WL 4539519, at *20
Goldstone and Simmons contend that the SEC's strategy is "to mischaracterize and quote documents out of context, then demand that the Court ignore these distortions because it would supposedly be `premature' to `weigh the evidence' at the motion to dismiss stage." Reply Brief in Support of Motion to Dismiss on Behalf of Defendants Larry Goldstone and Clarence G. Simmons at 8, filed July 20, 2010 (Doc. 59)("Goldstone & Simmons Reply")(quoting Response to Goldstone & Simmons MTD at 4-7). Goldstone and Simmons contend that the SEC's pleading tactic is an "implicit acknowledgement that the documents on which the Complaint is based defeat Plaintiff's claims," and is "entirely at odds with firmly established case law." Goldstone & Simmons Reply at 8 (citing Ashcroft v. Iqbal, 556 U.S. at 679, 129 S.Ct. 1937).
Goldstone and Simmons contend that the federal securities laws "do not require companies to make absolute statements about risks that have not yet materialized, so long as the possibility of those risks materializing is disclosed." Goldstone & Simmons Reply at 9 (citing Grossman v. Novell, Inc., 909 F.Supp. 845, 850 (D.Utah, 1995), aff'd, 120 F.3d 1112 (10th Cir.1997)). Goldstone and Simmons further contend that the SEC's reliance on "the word `successfully'... demonstrates sheer desperation, as this word is often found to be nothing more than "inactionable puffery." Goldstone & Simmons Reply at 9, 17 (citing Grossman v. Novell, Inc., 120 F.3d at 1121-22). Goldstone and Simmons contend that the "biggest defect" in the Complaint is that the 2007 Form 10-K disclosed "the bottom line bad news for Thornburg in every material respect." Goldstone & Simmons Reply at 11. Goldstone & Simmons contend that the SEC's assertion that the Court should not consider the market's negative reaction to the 2007 Form 10-K as evidence that it disclosed Thornburg Mortgage's dire financial situation is "contrary to a host of decisions in which courts have taken judicial notice" of analysts' reports and financial publications "at the Rule 12(b)(6) stage to determine what the market knew and whether it was misled." Goldstone & Simmons Reply at 12 (citing Response to Goldstone & Simmons MTD at 5, 20-23). Goldstone and Simmons argue that where "publicly available analyst and news reports demonstrate that the defendant's statement were not misleading, courts do not hesitate to grant motions to dismiss." Goldstone & Simmons Reply at 12 (citing Herring v. Teradyne, Inc., 242 Fed.Appx. 469, 471 (9th Cir.2007)). Goldstone and Simmons argue that both Fulton Cnty. Emps. Ret. Sys. v. MGIC Inv. Corp. and Payne v. DeLuca "could hardly be more on point," because in both cases the courts dismissed a plaintiff's claims that a defendant's failure to disclose its margin calls and difficulty in meeting financial obligations was fraud, and, therefore, the Court should dismiss the SEC's allegations of fraud based upon the same actions. Goldstone & Simmons Reply at 12-13 (citing Fulton Cnty. Emps. Ret. Sys. v. MGIC Inv. Corp., 675 F.3d at 1048-49; Payne v. DeLuca, 433 F.Supp.2d at 594).
Goldstone and Simmons also contend that the SEC's allegation that Thornburg Mortgage did not successfully fulfill its reverse repurchase agreements is problematic, because Thornburg Mortgage's reverse repurchase agreements "uniformly permitted Thornburg to work out payment plans with its lenders." Goldstone & Simmons Reply at 15, 15 n. 8 (citing Citigroup
Goldstone and Simmons assert that, notwithstanding the Citigroup Global Letter, because Thornburg Mortgage arranged a payment plan for all of its margin calls, "there was no material non-compliance with the Repo Agreements to disclose." Goldstone & Simmons Reply at 15. Goldstone and Simmons further argue that the Court need not accept the SEC's interpretation of the Citigroup Global Repo Agreement indicating that Thornburg Mortgage was in breach and assert that, because Citigroup Global accepted Thornburg Mortgage's payment plan, pursuant to § 5.8, at 11 of the Citigroup Global Repo Agreement, the SEC's allegation that Thornburg Mortgage was in breach is "fatally undermine[d]." Goldstone & Simmons Reply at 16. Goldstone and Simmons further assert that Thornburg Mortgage's statement that it "successfully" met margin calls, when taken in the context of other negative disclosures in the 2007 Form 10-K, demonstrates that Thornburg Mortgage's statements regarding its financial condition in the 2007 Form 10-K were not materially misleading. Goldstone & Simmons Reply at 16-17 (citing 2007 Form 10-K at 36).
Goldstone and Simmons also argue that they cannot be liable for their statements regarding Thornburg Mortgage's intent and ability to holds its ARM securities, because the statement that Thornburg Mortgage had the "`intent and ability to hold its ARM securities until their value recovered' ... is plainly forward-looking." Goldstone & Simmons Reply at 17-18 (internal alterations omitted)(quoting Response to Goldstone & Simmons MTD at 24-25). Goldstone and Simmons assert that the SEC has only alleged that they expected to possibly receive additional margin calls after the 2007 Form 10-K was filed, not that they actually knew that "Thornburg would be hit with enormous new margin calls shortly after filings its 10-K and be declared in default by repo lenders who had previously agreed to payment plans"; thus, the SEC has not alleged any basis upon which the Court could find that Goldstone and Simmons did not believe their OTTI analysis was accurate. Goldstone & Simmons Reply at 18 (citing Response to Goldstone & Simmons MTD at 12-15; Fait v. Regions Fin. Corp., 655 F.3d 105, 112 (2d Cir.2011)). Goldstone and Simmons also assert that the SEC has conceded that Thornburg Mortgage's I/O Strip Transactions were properly characterized as debt transactions, that the SEC has not alleged any reason why those transactions would cast doubt on Thornburg Mortgage's OTTI analysis, and, thus, that the SEC has not alleged a reason why the sales should have been disclosed other than they were in the 2007 Form 10-K, as a form of debt financing. See Goldstone & Simmons Reply at 18-19 (citing Response to Goldstone & Simmons MTD at 20; Complaint ¶ 37, at 11; Goldstone & Simmons MTD at 34, 35, 37).
Goldstone and Simmons contend that its March 11, 2008, restatement does not render the 2007 Form 10-K materially misleading, because Thornburg Mortgage "merely recognized losses on Thornburg's Purchased ARM assets that had already been fully disclosed and explained in detail in the 10-K." Goldstone & Simmons Reply at 19-20 (citing Response to Goldstone & Simmons MTD at 16-17; 2007 Form 10-K at 38. 97-102). Goldstone and Simmons assert that, because the SEC stated that "`Thornburg's restatement ... was forced by Thornburg's auditors," the restatement cannot be construed as an admission by Goldstone and Simmons that the 2007
Goldstone and Simmons contend that the SEC's scienter theory "is predicated on negligence and is therefore facially insufficient to support a fraud claim." Goldstone & Simmons Reply at 10, 21. Goldstone and Simmons assert that the SEC has alleged nothing more than that they failed to act with reasonable care in their OTTI analysis, and that, to be culpable for securities fraud, the SEC would have had to allege their recklessness — "`an extreme departure from the standards of ordinary care,'" — and that Thornburg Mortgage's OTTI analysis presented "`a danger of misleading buyers or sellers'" of which they either knew, or which should have been obvious to Goldstone and Simmons. Goldstone & Simmons Reply at 21 (quoting City of Phila. v. Fleming Cos., Inc., 264 F.3d at 1258). Goldstone and Simmons contend that, because the Complaint sets forth that Thornburg Mortgage had successfully met its margin calls by the time the 2007 Form 10-K was filed and planned to raise more capital within a few days, the plausibility that they recklessly disregarded known risks is low. See Goldstone & Simmons Reply at 22 (citing Goldstone & Simmons MTD at 10-15, 50-51). Goldstone and Simmons contend that Simmons' Feb. 21 Email to BOD evidences his belief that Thornburg Mortgage had successfully met, and would continue to successfully meet, its margin calls. See Goldstone & Simmons Reply at 22-23 (citing Feb. 21 BOD Email at 2).
Goldstone and Simmons assert that the SEC dwells too much on the word "sold" in internal electronic mail transmission regarding the I/O Strip Transactions, and contends that the SEC has not alleged that any Defendant believed the Transactions were the sale of assets. Goldstone & Simmons Reply at 23 (citing Feb. 22 BOD Email at 2)
Goldstone and Simmons contend that the SEC has not shown that they believed their OTTI analysis was incorrect, and assert that, in City of Omaha v. CBS Corp., the United States Court of Appeals for the Second Circuit found that the absence of allegations establishing that the defendants did not believe their financial statements were true when made precluded the defendants from liability under the securities laws. See Goldstone & Simmons Reply at 23-24 (citing 679 F.3d at 68). Goldstone and Simmons argue that the SEC's only allegations supporting Goldstone's and Simmons' scienter are based upon their "`failure to properly consider'" certain facts, which Goldstone and Simmons assert is insufficient to establish scienter when the OTTI analysis is based upon "management's opinion about future events and no facts are alleged showing that management disbelieved that opinion." Goldstone & Simmons Reply at 24-25 (quoting Response to Goldstone & Simmons MTD at 37-38)(citing Fait v. Regions Fin. Corp., 655 F.3d at 112). Goldstone and Simmons also argue that the SEC has "mischaracterize[d] Defendants' point about the complexity of the OTTI judgment" by asserting that complexity is not a defense to scienter. Goldstone & Simmons Reply at 25 (citing Response to Goldstone & Simmons MTD at 25). Goldstone and Simmons assert that, when an accounting judgment is complex and one on which reasonable minds may disagree, plaintiffs must allege more than disagreement with the judgment by hindsight. See Goldstone & Simmons Reply at 25 (citing City of Omaha v. CBS Corp., 679 F.3d at 68; SEC v. Price Waterhouse, 797 F.Supp. at 1241). Goldstone and Simmons contend that the complexity of the OTTI analysis does not require the Court to engage in a
Goldstone and Simmons contend that the SEC has not shown that they had a motive to keep the margin call situation "`quiet,'" because Thornburg Mortgage's "`extensive disclosure of `bad news' about its financial condition and prospects ... undercuts the Complaint's scienter theory." Goldstone & Simmons Reply at 28 (quoting Goldstone & Simmons MTD at 20-21). Goldstone and Simmons argue that the SEC bases its scienter allegations in part on Simmons' "inscrutable, incomplete email" on February 28, 2008, in which he states: "If they only knew." Goldstone & Simmons Reply at 29 (citing Response to Goldstone & Simmons MTD at 44-45). Goldstone and Simmons contend that the Court should not refrain from determining the meaning of Simmons' electronic mail transmission, as they assert the SEC would have the Court do, and should either accept Goldstone and Simmons' interpretation of the statement as expressing frustration about the market's reaction to the 2007 Form 10-K, or not allow the SEC to base allegations on the statement at all. See Goldstone & Simmons Reply at 29. Goldstone and Simmons similarly contend that the other electronic mail transmissions on which the SEC relies for its scienter allegations, do not support a finding of scienter, when read "in context and in their entirety." Goldstone & Simmons Reply at 30 (citing Response to Goldstone & Simmons MTD at 45; Feb. 21 Burns/Goldstone Email; Feb. 22 BOD Email; Feb. 25 Goldstone/Starrett Email). Goldstone and Simmons argue that the electronic mail transmissions on which the SEC relies evidence an "intent to ensure appropriate disclosure," which is "flatly inconsistent with an intent to defraud." Goldstone & Simmons Reply at 30.
Goldstone and Simmons contend that the SEC has not alleged any facts which demonstrate that Goldstone was aware that Thornburg had received margin calls it would not be able to satisfy on February 28, 2008, when Goldstone spoke to Thornburg Mortgage's investor relations department and on Street Signs. See Goldstone & Simmons Reply at 10. Goldstone and Simmons assert that J.P. Morgan did not inform Thornburg Mortgage that it would not agree to a payment plan for its margin call, as other lenders had done, until the evening of February 28th. See Goldstone & Simmons Reply at 31 (citing Goldstone & Simmons MTD at 50-53). Goldstone and Simmons contend that Goldstone's
Goldstone and Simmons contend that the SEC's allegations that they deceived KPMG are conclusory, or based on immaterial issues. See Goldstone & Simmons Reply at 32. Goldstone and Simmons assert that the SEC has implicitly conceded that it has no basis for its allegation that KPMG "would have reached a different OTTI conclusion had it received the information Defendants allegedly failed to disclose." Goldstone & Simmons Reply at 10. Goldstone and Simmons argue that the SEC's allegations under rule 13b2-2 are based on speculation, and are insufficient to support the SEC's claims. See Goldstone & Simmons Reply at 32 (citing 17 C.F.R. § 240.13b2-2; Complaint ¶ 83, at 24; Response to Goldstone & Simmons MTD at 52-53). Goldstone and Simmons contend that the SEC does not dispute, and "therefore concedes," that KPMG was aware of many negative facts regarding Thornburg Mortgage's financial situation, including its $300 million in margin calls, its use of payment plans to satisfy those margin calls, the I/O Strip Transaction, the $427.8 million in unrealized losses, Thornburg Mortgage's difficulties in obtaining financing, and the possibility of more margin calls. Goldstone & Simmons Reply at 32-33 (citing Goldstone & Simmons MTD at 50-51, 54). Goldstone and Simmons argue that any information withheld from KPMG cannot have been material in light of its knowledge of Thornburg Mortgage's financial situation.
Goldstone and Simmons contend that Thornburg Mortgage's alleged breaches of the reverse repurchase agreements was immaterial, because the reverse repurchase agreements gave its "lenders discretion to agree to payment plans rather than declare a default." Goldstone & Simmons Reply at 33 (citing Response to Goldstone & Simmons MTD at 51; Goldstone & Simmons MTD at 37). Goldstone and Simmons also argue that Thornburg Mortgage's alleged failure to recognize unrealized losses on ARM securities is based on the SEC's conclusory allegation that the Defendants reached the wrong OTTI conclusion, "coupled with unfounded speculation about what KPMG would have done," and is similarly insufficient to state a claim. Goldstone & Simmons Reply at 33 (citing Ashcroft v. Iqbal, 556 U.S. at 678, 129 S.Ct. 1937; Response to Goldstone & Simmons MTD at 51). Goldstone and Simmons contend that KPMG knew of the I/O Strip Transactions, and that Thornburg Mortgage was in the process of paying off $300 million in margin calls. Further, given the context of "an historic financial crisis," Goldstone and Simmons assert that "it is patently incredible for Plaintiff to assert that KPMG was somehow deceived as to the use of proceeds from those transactions." Goldstone & Simmons Reply at 33-34 (citing Complaint ¶ 65, at 19; 2007 Form 10-K at 37-38, 86; Response to Goldstone & Simmons MTD at 51). Goldstone and Simmons contend that the SEC has cited to no authority which requires them to disclose "unconfirmed rumors to auditors," which they
Goldstone and Simmons assert that Thornburg Mortgage's issuing of a restatement defeats the SEC's auditor deception claim. Goldstone and Simmons contend that the SEC has not shown that Goldstone actually received the Citigroup Global Letter, and argue it was unclear whether KPMG had requested "all correspondence with repo lenders." Goldstone & Simmons Reply at 35-36 (citing Response to Goldstone & Simmons MTD at 56-57 n. 16; Deposition of Larry A. Goldstone, taken Mar. 16, 2010, at 12:17-19, 13:6-9, filed June 20, 2012 (Doc. 51-2)("Goldstone Depo."); Goldstone & Simmons MTD at 37, 57). Goldstone and Simmons further contend that the Citigroup Global Letter was immaterial, and thus need not be disclosed to KPMG, because it "had no impact whatsoever on Thornburg's financial statements." Goldstone & Simmons Reply at 36 (citing Goldstone & Simmons MTD at 37). Goldstone and Simmons argue that the SEC has mischaracterized the facts upon which it relies to contend that Simmons' statements that "unforeseeable circumstances" caused the February 28, 2008 margin calls was fraudulent. Goldstone & Simmons Reply at 36 (citing Response to Goldstone & Simmons MTD at 57-58). Goldstone and Simmons contend that the "European hedge fund rumor," and Goldstone's electronic mail transmission on February 27, 2008, in which he relates that the rumor is "a warning that Thornburg would be subject to increases in haircuts," do not support a reasonable inference that Simmons expected increased margin calls after the 2007 Form 10-K was filed. Goldstone & Simmons Reply at 36 (citing Response to Goldstone & Simmons MTD at 27-28).
Goldstone and Simmons contend that the SEC's allegations of aiding-and-abetting, and of control-person liability, must fail "as a matter of law," because the SEC has not sufficiently pled a primary securities law violation. Goldstone & Simmons Reply at 11. Goldstone and Simmons further contend that the pleading standard the SEC sets forth for its aiding-and-abetting allegations is based upon cases which pre-date the Dodd-Frank Act, and thus the SEC is incorrect in arguing that it need only plead that the Defendants were reckless as to the commission of a primary securities law violation. Goldstone and Simmons contend that, under the current Exchange Act, the SEC must plead that they "knowingly" provided substantial assistance to another who violated securities laws to survive a motion to dismiss. Goldstone & Simmons Reply at 37 (citing 15 U.S.C. § 78u-4(f)(10)(A)).
Starrett joins in the arguments set forth in the Goldstone & Simmons Reply, and makes her own, against the SEC's Response to Starrett MTD. See Defendant Jane Starrett's Reply in Support of Motion to Dismiss, at 7, filed July 20, 2012 (Doc. 57)("Starrett Reply"). Starrett first contends that the SEC is now attempting
Starrett asserts that the SEC has disingenuously re-cast its allegations against her as premised on scheme liability. Starrett points out that the word "scheme" is only used one time in the first 105 paragraphs of the Complaint, and when mentioned, is "articulated ... in the alternative, and ... co-extensively with the misrepresentations," which Starrett contends is a cryptic allegation of scheme liability. Starrett Reply at 9 (citing Complaint ¶ 5, at 3). Starrett further asserts that this allegation of scheme liability supports the Defendants' assertion that the Court should dismiss the Complaint because the SEC used improper puzzle pleading. See Starrett Reply at 9-10 (citing Starrett MTD at 14 n. 4, 36).
Starrett contends that, even if the Complaint alleges scheme liability, it has failed to state a valid claim. Starrett asserts that, to allege that she engaged in a scheme which violated rule 10b-5(a) or (c), the SEC must allege that her conduct was "both (i) inherently deceptive, and (ii) distinct from any alleged misrepresentations or omissions." Starrett Reply at 10 (citing SEC v. Kelly, 817 F.Supp.2d at 342-44; SEC v. Lucent Techs., Inc., 610 F.Supp.2d 342, 359-61 (D.N.J.2009)). Starrett asserts that the facts which the SEC alleges in support of her scheme liability fail to state a claim under established case law. See Starrett Reply at 11 (citing JSR at 27-28). Starrett contends that the SEC relies upon the same facts to allege that she engaged in a scheme as the SEC relies upon to assert that the Defendants made fraudulent misrepresentations and omissions, and thus, these allegations fail to satisfy the second requirement of properly pleading scheme liability. See Starrett Reply at 11-12 (citing Complaint ¶¶ 5, 8 at 3-4; id. ¶ 75, at 22; id. ¶¶ 86-87, at 25-26; Joint Status Report at 27-28). Starrett contends that in SEC v. Kelly, the Honorable Colleen McMahon, United States District Judge for the Southern District of New York found that Janus Capital Grp., Inc. v. First Derivative Traders precluded finding a defendant primarily liable under rule 10b-5(b), because the SEC's allegations of scheme liability were improperly based upon the same facts that the SEC alleged demonstrated a primary violation. See Starrett Reply at 12 (citing SEC v. Kelly, 817 F.Supp.2d at 342-43). Starrett asserts that the same rationale applies here, as she contends that Janus Capital Grp., Inc. v. First Derivative Traders precludes her from being primarily liable under rule 10b-5, and because the SEC has alleged the same facts for her primary liability and scheme liability. See Starrett Reply at 12, 12 n. 6 (citing Lentell v.
Starrett also contends that many of the facts upon which the SEC relies are not inherently deceptive, and, thus, do not support its allegation of scheme liability. Starrett argues that the I/O Strip Transactions "were completely legitimate and the SEC does not contend otherwise." Starrett Reply at 13 (citing SEC v. Lucent Techs., Inc., 610 F.Supp.2d at 360-61). Starrett asserts that "any company faced with $300 million in margin calls in the midst of a market-wide credit crisis would have to ... `scramble' to satisfy those obligations," and, thus, Thornburg Mortgage's alleged scrambling was not inherently deceptive. Starrett Reply at 13 (citing 2007 Form 10-K at 38-39). Starrett also contends that the alleged "`misrepresentations to auditors'" do not support the SEC's allegation of scheme liability, because "any such misrepresentation" was not directed at the investing public. Starrett Reply at 13 (citing SEC v. Lucent Techs., Inc., 610 F.Supp.2d at 360).
Starrett contends that the SEC can allege only scheme liability against her, yet has failed to properly allege scheme liability, because the SEC has not alleged that Thornburg Mortgage committed a primary securities violation. See Starrett Reply at 14 (citing SEC v. Lucent Techs., Inc., 610 F.Supp.2d at 361; Anixter v. Home-Stake Prod. Co., 77 F.3d 1215, 1225 (10th Cir. 1996)). Starrett asserts that the use of the term "successfully" in the 2007 Form 10-K was not false or misleading, because the 2007 Form 10-K as a whole sets forth that Thornburg Mortgage had been subject to margin calls while the market experienced extraordinary disruption, and thus a reasonable investor could not have concluded that Thornburg Mortgage met its margin calls "`in the normal course of business, ... consistent with the terms of the lending agreements.'" Starrett Reply at 15 (quoting JSR at 8). Starrett further argues that the SEC has stretched the meaning of "successfully ... into a specific assertion of technical legal compliance [which] has no basis in law, fact, or in common usage, and should be rejected." Starrett Reply at 15. Starrett further argues that, contrary to the SEC's contention, Thornburg Mortgage's failure to disclose the I/O Strip Transactions as asset sales was not materially misleading. Starrett contends that the 2007 Form 10-K did not state that Thornburg Mortgage had not sold any assets to meet its margin calls, but rather, the language of the 2007 Form 10-K clearly sets forth that Thornburg Mortgage did not have to sell any ARM securities at a loss to meet margin calls. See Starrett Reply at 15 (citing 2007 Form 10-K at 39, 53). Starrett contends that, unlike selling impaired assets, the I/O Strip Transactions resulted in a net gain to Thornburg Mortgage. See Starrett Reply at 15 (citing Starrett MTD at 9; Complaint ¶¶ 36-37, at 11; id. ¶ 67, at 19-20). Starrett similarly contends that the Feb. 25 Goldstone/Starrett Email, when read in context, demonstrates that Starrett was referring only to the sale of impaired ARM securities, and not the I/O Strip Transactions. See Starrett Reply at 16 (citing Complaint ¶ 36, at 11; Starrett MTD at 9). Starrett contends that the SEC has improperly relied upon the Defendants' colloquial reference to the I/O Strip Transactions as "sales" to assert that the Transactions were asset sales, which ignores "relevant accounting guidance" that specifies transactions should be reported "`in accordance with their substance.'" Starrett Reply at 16 (citing Joint Status Report at 2, 10; Public Company
Starrett contends that the bespeaks caution doctrine renders Thornburg Mortgage's statement regarding its intent and ability to hold its impaired ARM securities until recovery immaterial. Starrett asserts that In re RAIT Fin. Trust Sec. Litig. is inapposite. Starrett contends that, in In re RAIT Fin. Trust Sec. Litig., the defendant's cautionary language did not concern its present-day financial reporting practices and conformity with GAAP, unlike Thornburg Mortgage's cautionary language, which "directly related to its `intent and ability to hold' prediction.'" Starrett Reply at 17 (citing 2008 WL 5378164, at **6-8). Starrett contends that the time at which Thornburg Mortgage's intent and ability prediction was made, December 31, 2007, does not negate that it was a forward-looking statement rather than, as the SEC contends, a statement of what the Defendants currently believed. Starrett asserts that in In re Sprint Corp. Sec. Litig., the United States District Court for the District of Kansas rejected the same argument when made by the SEC, finding that to hold a defendant liable for such statements would render all predictions outside the scope of the bespeaks causation doctrine, and the defendant's statements were "`clearly predictive in nature.'" Starrett Reply at 18 (quoting 232 F.Supp.2d at 1221). Starrett contends that Thornburg Mortgage's statement regarding its intent and ability to hold its impaired Purchased ARM Securities to maturity is equally "speculative and contingent upon future events." Starrett Reply at 18. Starrett further contends that Thornburg Mortgage's negative disclosures were "specific, precisely tailored to its `intent and ability to hold' prediction, and warned investors of the ... risks of default and forced asset sales that subsequently materialized," and thus not of a general cautionary nature which would be insufficient to correct a misleading statement. Starrett Reply at 18-19 (citing In re Sprint Corp. Sec. Litig., 232 F.Supp.2d at 1222; 2007 Form 10-K at 24, 38). Starrett further contends that, because Thornburg Mortgage's negative disclosures were made at the same time as the 2007 Form 10-K, the negative disclosures are all the more likely to have clarified any misleading elements of the 2007 Form 10-K. See Starrett MTD at 19 (citing In re Sprint Corp. Sec. Litig., 232 F.Supp.2d at 1222). Starrett asserts that the SEC has ignored SEC v. Perry, No. CV-11-1309 R, 2012 WL 1959566 (C.D.Cal. May 31, 2012), in which similar statements regarding a company's OTTI analysis were found to be "`optimistic prediction[s]... necessarily contingent on future events and accompanied by meaningful, tailored cautionary language,'" and, thus, under the bespeaks caution doctrine, "`immaterial as a matter of law.'" Starrett Reply at 19 (quoting 2012 WL 1959566, at *7). Starrett asserts that the Court should also find that the bespeaks caution doctrine precludes Thornburg Mortgage's intent and ability analysis from being materially misleading. See Starrett Reply at 19.
Starrett asserts that under § 20(e) of the Exchange Act, applicable at the time
Starrett argues that the SEC's assertion that the complexity of the OTTI analysis is not relevant in establishing her scienter is contrary to well-established case law. See Starrett Reply at 20 (citing JSR at 34). Starrett contends that the complexity of the OTTI analysis, which requires "the exercise of nuanced judgment," demonstrates that Thornburg Mortgage's OTTI analysis was not "`an egregious departure from the range of reasonable business decisions,'" and thus defeats the SEC's allegations regarding Starrett's scienter. Starrett Reply at 21 (quoting In re Radian Sec. Litig., 612 F.Supp.2d at 606, 615, 618)(citing In re Fannie Mae 2008 Sec. Litig., 742 F.Supp.2d at 408-09).
Starrett contends that the facts in the Complaint do not support the SEC's allegation that she failed to properly consider the information before her. Starrett asserts that the SEC has not alleged that she knew, or had reason to know, of the Citigroup Global Letter, and she contends, rather, that the SEC has admitted she was unaware of the Letter. See Starrett Reply at 21-22 (citing Joint Status Report at 7, 9, 13, 21 n. 14; Response to Goldstone & Simmons MTD at 37-38, 38 n. 12). Starrett similarly contends that the SEC has not alleged that she was aware of the European hedge fund rumor, and, thus, that she could not have considered this rumor in her analysis. See Starrett Reply at 22 (citing Joint Status Report at 13-14, 21, 21 n. 14; Response to Goldstone & Simmons MTD at 38, 38 n. 12). Starrett further argues that the I/O Strip Transactions were irrelevant to the OTTI analysis, because the analysis only "concerned Purchased ARM Assets," not the Transactions, and thus the Transactions could not have "called into question [Thornburg's] stated intent and ability to hold Purchased ARM Assets until their value recovered or maturity." Starrett Reply at 22 (citing Feb. 25 Goldstone/Starrett Email). Starrett further argues that the SEC is incorrect in asserting that she did not consider Thornburg Mortgage's precarious financial condition, because the OTTI analysis required Starrett to "consider not only [Thornburg's] existing liquidity, but also its expected cash inflows from its planned capital raise and other liquidity-boosting endeavors." Starrett Reply at 22-23 (citing Joint Status Report at 14; Response to Goldstone & Simmons MTD at 37; Starrett MTD at 24).
Starrett contends that the negative disclosures in the 2007 Form 10-K turn the SEC's allegations of scienter into an argument that Thornburg Mortgage could have disclosed more, which, she asserts, is "impermissible `fraud by hindsight.'" Starrett Reply at 23 (citing In re Fannie Mae 2008 Sec. Litig., 742 F.Supp.2d at 402; Joint Status Report at 17, 31; Response to Goldstone & Simmons MTD at 22). Starrett asserts that the SEC has not alleged that she had a motive to commit fraud, because the SEC has not shown that she was one of Thornburg Mortgage's "`key personnel,'" that she was "`inextricably financially intertwined with the continued viability of the company,'" and, thus, a desire to save Thornburg Mortgage would motivate her. Starrett Reply at 23-24 (citing
Starrett contends that the SEC has not adequately alleged that she misled KPMG in violation of rule 13b-2, because the SEC has not alleged that she "plausibly ... acted unreasonably in making a false statement or omission." Starrett Reply at 24-25 (citing Joint Status Report at 20, 22). Starrett contends that the SEC is incorrect in arguing that it need only allege that she made false statements to KPMG regardless of the reasonableness of her statements. See Starrett Reply at 25 (SEC v. Espuelas, 579 F.Supp.2d at 486; SEC v. Leslie, No. C 07-3444, 2010 WL 2991038, at *28, 2010 U.S. Dist. LEXIS 76826, at *83 (N.D.Cal., July 29, 2010)). Starrett contends that she did not fail to disclose information to KPMG, because Thornburg Mortgage had satisfied its outstanding margin calls when the 2007 Form 10-K was filed. She also contends that the SEC has not alleged that she acted unreasonably because: (i) the SEC does not allege that she was familiar with Thornburg Mortgage's reverse repurchase agreements or margin call negotiations, or could assess whether reverse repurchase agreements were violated; (ii) the SEC concedes she was unaware of the Citigroup Global Letter; (iii) the SEC's allegations regarding the I/O Strip Transactions are meritless; and (iv) the 2007 Form 10-K contained extensive negative disclosures about Thornburg Mortgage's margin calls, liquidity constraints, and default risks. See Starrett Reply at 25.
Starrett further argues that the SEC has not adequately alleged that she violated any particular internal controls at Thornburg Mortgage, or that she knowingly falsified Thornburg Mortgage's records, or that she participated in misrepresenting Thornburg Mortgage's income. Starrett asserts that the SEC has not pointed to any case law which would make her culpable for violating internal controls because of intentional misrepresentation and omissions to KPMG. See Starrett Reply at 26 (citing Joint Status Report at 38; Starrett MTD at 37). Starrett further argues that the SEC has not shown that she knowingly participated in books and records violations, because the OTTI accounting guidance was "`flawed and confusion,'" which Starrett contends the SEC's policies dictate should weigh against finding a books-and-records violation. Starrett Reply at 26 (quoting FASB Apr. 21, 2009 minutes)(citing SAB 99, at 7-8).
The Court held a hearing on July 31, 2012. See Transcript of Hearing, taken July 31, 2012 ("Tr."). The Defendants suggested that the parties proceed through what the Defendants identify as two alleged material misrepresentations and three alleged material omissions in the 2007 Form 10-K. See Tr. at 5:14-23(Lee). The Defendants would then address Goldstone's
The Defendants stated that the Complaint sets forth two alleged material misstatements in the 2007 Form 10-K: (i) the statement that "`[w]e have successfully continued' or `we successfully continue to meet all margin calls'"; and (ii) "the specific income statement effect of the $428 million of gross unrealized loss." Tr. at 11:8-16(Lee).
The Defendants asserted that the SEC has conceded that Thornburg Mortgage met all its margin calls when the 2007 Form 10-K was filed, and, thus, its allegation of a material misstatement is based upon the use of the word "successfully" alone. Tr. at 12:14-22(Lee). The Defendants asserted that the term "successfully" was not misleading in light of the "other disclosures elsewhere in the 10-K [which] clearly and starkly" illustrated Thornburg Mortgage's true and perilous financial situation. Tr. at 12:23-14:10(Lee). The Court inquired why the word "successful" was included in the 2007 Form 10-K at all, and the Defendants asserted that Thornburg Mortgage intended to relay that it "represented a real challenge to have received the market calls," but that Thornburg Mortgage had met its margin calls and was "highly optimistic about its prospects." Tr. at 14:23-15:13 (Court, Lee). The Court inquired why the 2007 Form 10-K did not state that Thornburg Mortgage would be unable to satisfy future margin calls, and the Defendants pointed out that, at the time, Thornburg Mortgage had satisfied all of its margin calls. See Tr. at 16:18-23 (Court, Lee). The Defendants expressed that the term "successfully" is intended to relate management's "sense of accomplishment of having actually met the margin calls" and was also "a classic example of the kind of puffery that is ... not the basis of a securities fraud case." Tr. at 17:1-7(Lee). The Defendants asserted that, at four different places in the 2007 Form 10-K, there were "abundant stark[,] really extraordinarily negative disclosures about the distress the company was in ... [which] was not lost on the market." Tr. at 13:8-14:10(Lee)(citing 2007 Form 10-K at 27). See Tr. at 15:14-16:17(Lee)(citing 2007 Form 10-K at 38-39); Tr. at 17:17-18:9(Lee)(citing 2007 Form 10-K at 48-49); Tr. at 18:10-21(Lee)(citing 2007 Form 10-K at 114). The Defendants pointed to a financial report which related that Thornburg Mortgage's "`share tumbled more than 15% Thursday after the company said renewed difficulty with mortgage pricing have spurred $300 million of margin calls recently and that it may have to sell assets at distressed prices to meet more calls.'" Tr. at 19: 2-6(Lee)(quoting Feb. 28 MarketWatch). The Defendants noted that Bloomberg detailed Thornburg Mortgage's financial difficulties on February 28, 2008:
Tr. at 20:11-16(Lee)(quoting Feb. 28 Bloomberg).
The SEC responded that the 2007 Form 10-K did not contain "all the negative disclosures that it needed to, to not be materially misleading." Tr. at 21:18-20 (McKenna). The SEC contended that, because the 2007 Form 10-K misstated Thornburg Mortgage's income at $427.8 million, the negative disclosures do not render the misrepresentations immaterial. See Tr. at 22:18-23:1 (McKenna). The SEC asserted that it does not agree with the Defendants' characterization of the 2007 Form 10-K as "extraordinarily negative." Tr. at 23:3-12 (Court, McKenna). The SEC further asserted that it is not alleging fraud by hindsight, but has rather based its allegations on the information which the Defendants had when the 2007 Form 10-K was filed. See Tr. at 23:19-24:8 (McKenna). The SEC conceded that Thornburg Mortgage had met all of its margin calls at the time the 2007 Form 10-K was filed, but asserted that the Defendants "knew that they failed to meet mar[gin] calls in accordance with the agreement ... [a]nd ... were subject to having their assets seized by Citi." Tr. at 24:19-25 (McKenna). The SEC asserted that the Defendants cannot truthfully have stated that they had the intent and ability to hold their assets to maturity when they knew that Citigroup Global could seize their assets at any time. See Tr. at 25:1-4 (McKenna).
The Court inquired whether the seizure of a company's assets is a normal risk whenever a margin call was issued, and the SEC contended that it is not. See Tr. at 25:5-17 (Court, McKenna). The Court inquired whether the SEC's allegations were based upon the Defendants' statements being misleading, or that they failed to add that they were in breach of their reverse repurchase agreements, and the SEC responded that the Defendants cannot truthfully "proclaim to investors, [w]e successfully met our margin calls[,] ... when you know in the back of your mind," that Thornburg Mortgage could have been declared in default were it not for the lenders' forbearance. Tr. at 26:9-16 (McKenna). The Court stated that it does not believe the Defendants' use of the word "successfully" conveyed much information to investors and inquired what the SEC believes that word means. Tr. at 26:17-25 (Court). The SEC contended that Thornburg Mortgage met Citigroup Global's margin call "[p]ursuant to Citi's forbearance." Tr. at 30:4-5 (McKenna). The SEC explained that, in the Feb. 21 BOD email, Goldstone differentiates between the margin calls Thornburg Mortgage had met — describing them as "successful" — and Citigroup Global's margin call, which Goldstone does not describe as a "successful" satisfaction. Tr. at 29:4-10, 17-25, 30:11-16 (McKenna). The SEC contended that MarketWatch and Bloomberg did not "disclose what we're saying should have been disclosed, which is that Thornburg was in breach of its lending agreements when it worked to meet the $300 million in margin calls." Tr. at 31:1-9 (McKenna). The SEC asserted that the analysts' reports in MarketWatch and Bloomberg merely mirrored Thornburg Mortgage's statement in the 2007 Form 10-K and thus do not address the SEC's allegation that the material disclosures were omitted therefrom. See Tr. at 31:10-15 (McKenna). The SEC stated that removing the term "successfully" from the 2007 Form 10-K would not have rendered it accurate, but rather, Thornburg Mortgage would still need to disclose that it met its margin calls while in violation of its reverse repurchase agreements and with
The SEC contended that the market's reactions, as seen through the analysts' reports, does not evidence that Thornburg Mortgage made all necessary disclosures, because, after Thornburg Mortgage announced that it had experienced a fourth quarter loss rather than a profit and that its impairments were OTTI, Thornburg Mortgage's stock fell much more than it did after the 2007 Form 10-K was filed. See Tr. at 33:23-34:12 (McKenna). The Court re-directed the SEC to Thornburg Mortgage's statement regarding having met its margin calls and inquired whether the SEC believes the market would have reacted differently had it known that Thornburg Mortgage was in breach of three of its reverse repurchase agreements. See Tr. at 34:16-35:2 (Court). The SEC answered that the market would have reacted more negatively than it did had Thornburg Mortgage disclosed that it was in breach of its reverse repurchase agreements, that it had to scramble to negotiate payment plans, and that its lenders allowed it to keep its assets by forbearance only. See Tr. at 35:3-8 (McKenna). The SEC further asserted that, at the motion to dismiss stage, the Court should not be parsing out the facts underlying the allegations set forth in the Complaint. See Tr. at 35:9-20 (McKenna).
The Defendants responded that the SEC is conflating misstatements and omissions. See Tr. at 36:2-8(Lee). The Court stated that is was uncertain how a margin call of the magnitude of Citigroup Global's — $200 million — could not have put the Defendants on notice that Thornburg Mortgage's assets were at risk. See Tr. at 36:19-23 (Court). The Defendants responded that they disclosed the risks Thornburg Mortgage was facing, including the possibility of more margin calls. See Tr. at 37:4-13(Lee). The Defendants also stated that, in Grossman v. Novell, Inc., the Tenth Circuit found that a defendant's statement that it had "substantial success relating to the merger integration" was inactionable corporate optimism and puffery, and could not serve as a basis for a securities fraud charge. Tr. at 37:20-38:2(Lee).
The Court inquired how the Defendants would respond to the allegation that failing to disclose Thornburg Mortgage's breaches was a material omission rather than to the allegation that Thornburg Mortgage stating it had successfully met its margin calls was a material misrepresentation. See Tr. at 38:3-6 (Court). The Defendants stated that they had no duty to disclose the breaches, because the statement that Thornburg Mortgage had met its margin calls successfully was not materially misleading, and, therefore, that the Defendants did not need to make a further disclosure to avoid a misleading representation. See Tr. at 38:7-17(Lee). The Defendants stated that, without the term "successfully" imparting the particular meaning which the SEC attaches to it, the 2007 Form 10-K is not materially misleading. Tr. at 38:18-39:3 (Court, Lee). The Defendants noted that a margin call alone does not mean that Thornburg Mortgage is in breach of its reverse repurchase agreements and pointed out that the Citigroup Global Repo Agreement allows the parties to reach a different agreement to satisfy margin calls; therefore, Thornburg Mortgage was not in breach of the Citigroup Global Repo Agreement. See Tr. at 39:14-40:13 (Court, Lee)(citing Citigroup Global Repo Agreement at 11).
The Defendants asserted that the SEC's guidance in Form 8-K "specifically" provides that "the mere possibility that a lender could declare an event of default does not trigger a disclosure under the SEC's own disclosure rules." Tr. at 43:24-44:5(Lee). The Defendants argued that the Citigroup Global Letter was not a declaration of default, which they would have been required to disclose, but, rather, a "reservation of rights letter, which said we could at some point in the future declare you in default, but we are not declaring you in default." Tr. at 45:13-16(Lee). The SEC disagreed and asserted that the Citigroup Global Letter was a declaration of default, because Citigroup Global could immediately declare default after Thornburg Mortgage breached the Citigroup Global Repo Agreement, and, because Thornburg Mortgage did not have a "cure period." Tr. at 45:19-46:2 (McKenna). The Defendants responded that they had reached an agreement for a payment plan with Citigroup Global, and, thus, they did not need to respond to the Citigroup Global Letter and state that they did not believe Thornburg Mortgage was in breach. See Tr. at 46:17-21(Lee).
The Defendants asserted that, in the Feb. 21 BOD Email, Goldstone states that Thornburg Mortgage had "`successfully negotiated a resolution and payment plan with Citigroup Global in order to satisfy the call by the end of next week.'" Tr. at 27:18-21(Lee)(quoting Feb. 21 BOD Email at 2). The Defendants asserted that this statement undermined any notion that Thornburg Mortgage was in breach as of February 21, 2008. See Tr. at 47:22-48:1(Lee). The Defendants noted that, in Goldstone's Feb. 22 BOD Email, he similarly relates that Thornburg Mortgage was reaching agreements with all of its lenders for payment plans, which the Defendants asserted demonstrates that Thornburg Mortgage was neither modifying nor in breach of its reverse repurchase agreements. See Tr. at 48:7-49:3(Lee)(citing Feb. 22 BOD Email at 2).
The Court stated that it believes the word "successfully" does not carry any additional meaning and is likely puffery, and, thus, does not convert Thornburg Mortgage's statement regarding having met its margin call situations into a misleading statement. Tr. at 49:8-14 (Court).
The SEC noted that the cases on which the Defendants rely to assert that the term "success" is immaterial are merger cases, and the statement of having success with a merger is different from the Defendant's statements regarding successfully meeting margin calls. Tr. at 72:2-15 (McKenna). The SEC pointed out two cases the Court should consider regarding the materiality of that statement: In re Gen. Elec. Co. Sec. Litig., 857 F.Supp.2d 367 (S.D.N.Y.2012), and Billhofer v. Flamel, 663 F.Supp.2d 288 (S.D.N.Y.2009) (Haight, J.). See Tr. at 72:16-22 (McKenna).
The Defendants turned to the SEC's second alleged misrepresentation in the 2007 Form 10-K: that "Thornburg's income statement should have recognized approximately $428 million in losses from impairments to its ARM securities." Tr. at 50:5-8(Lee). The Court inquired whether GAAP would allow a company to report a comprehensive income or loss, or unrealized loss, in one period, and then report the same transactions as OTTI in a subsequent period, and the Defendants stated that would be an appropriate accounting practice. See Tr. at 51:2-17 (Court, Lee). The Defendants explained that determining how to account for losses is a period specific determination. See Tr. at 51:21-24(Lee). The Defendants asserted that how an impairment is reflected is an "inherently a subjective judgment" and asserted that, in the 2007 Form 10-K, Thornburg Mortgage's impairments for the period were disclosed as gross unrealized losses of $427.8 million on ARM securities. Tr. at 52:4-54:1(Lee)(citing 2007 Form 10-K at 40-41, 90).
The Court inquired whether Thornburg Mortgage "just got this one wrong ... or estimated wrong on this," because its analysis of its impairments was based upon its belief that it could hold those assets until they recovered. Tr. at 54:2-4 (Court). The Defendants stated that that they had "estimated wrong," but that their analysis was not wrong at the time the 2007 Form 10-K was filed. Tr. at 54:5-13(Lee). The Court questioned how it could consider that evidence at this point, "given that it turned out to be wrong[.]" Tr. at 54:15-17 (Court). The Defendants stated that its analysis was not materially misleading in light of Thornburg's disclosure that its Purchased ARM Securities suffered a $427.8 million in "gross unrealized losses." Tr. at 54:18-55:1(Lee). The Defendants argued that the investing public understood that the analysis "was a judgment-based decision hinging on management's intent and ability," and thus "not materially misleading." Tr. at 55:1-8(Lee). Regarding the SEC's allegations of scienter, the Defendants contended that "there is no possible inference of scienter where the company, at the directional leadership" of the Defendants, plainly disclosed its "accounting judgments, its accounting systems, its accounting methodology." Tr. at 55:9-56:3(Lee)(citing 2007 Form 10-K at 100-01).
The Court questioned whether the 2007 Form 10-K provided a reader with any
The Defendants reiterated that KPMG "signed off on this particular accounting treatment" as of the date the 2007 Form 10-K was filed. Tr. at 57:1-5, 57:8-15 (Lee, Court). The Defendants further asserted that the SEC has not made any allegations which demonstrate that they "disbelieved their accounting judgments." Tr. at 57:4-7(Lee).
The Defendants then addressed the bespeaks caution doctrine, stating that that doctrine applies to whether Thornburg Mortgage's OTTI analysis in the 2007 Form 10-K was materially misleading. See Tr. at 57:18-21 (Marks). The Court inquired whether other cases had applied the bespeaks caution doctrine to a company's OTTI accounting analysis, and the Defendants stated that cases had analyzed "similar" statements. Tr. at 58:13-19 (Court, Marks). The Defendants stated that, under Grossman v. Novell, Inc., a "forward-looking statement" is not actionable for securities fraud if accompanied with "highly specific ... very factual" statements which "directly address the predictive statement." Tr. at 58:20-59:2 (Marks). The Defendants stated that, in SEC v. Perry, The Honorable Judge Rael, United States District Judge for the Central District of California, found that a defendant's statements that its liquidity was sufficient to satisfy its operating requirements, "and meet our obligations and commitments in a timely and cost-effective manner," were not actionable for securities fraud under the bespeaks caution doctrine. Tr. at 59:3-18 (Marks, Court). The Defendants contended that the OTTI analysis is a similar forward-looking statement, and that, given the entirety of what was disclosed — including risks facing the mortgage-backed securities market, interest rate changes, real estate value drops, and other economic fluctuations — it was "an immaterial statement with respect to the bespeaks-caution doctrine." Tr. at 60:10-61:1 (Marks). The Defendants asserted that, in the 2007 Form 10-K, Thornburg Mortgage's disclosures of its "the then-existing liquidity, the description of the amount of margin calls that the company has incurred up to that point," would allow a reasonable investor to weigh whether Thornburg Mortgage's OTTI analysis was correct. Tr. at 61:4-12 (Marks). For purposes of the bespeaks caution doctrine, the Defendants argued that Thornburg Mortgage's disclosure of its impairments as unrealized losses, set against the backdrop of Thornburg Mortgage's financial situation, was cautionary language that directly addressed its OTTI analysis. See Tr. at 61:18-62:4 (Marks). The Defendants pointed out that the 2007 Form 10-K specifically informs investors "that Thornburg may need to sell assets at a loss to satisfy lenders," and detailed on its balance sheet the exact amount that may need to be sold. Tr. at 61:5-12 (Marks). The Defendants asserted that these statement were specific and of a cautionary nature sufficient to satisfy the bespeaks caution doctrine, making Thornburg Mortgage's OTTI analysis immaterial. See Tr. at 62:13-18 (Marks).
The Defendants contended that the cases to which the SEC has cited for the proposition that the bespeaks caution doctrine does not apply are inapposite. See Tr. at 62:19-23 (Marks). The Defendants asserted the cases to which the SEC cited involve "historical financial data, a historical fact, not a predictive statement." Tr.
The Court stated that it is troubled by the Feb. 25 Goldstone/Starrett Email, in which Starrett states that "`some assets would call into question Thornburg's intent and ability to hold all assets until maturity.'" Tr. at 64:11-14 (Court)(quoting Feb. 25 Goldstone/Starrett Email at 2). The Defendants asserted that, in the context of the entire electronic mail transmission, Starrett was referring to "all assets with negative marks," meaning Thornburg Mortgage's impaired ARM securities. Tr. at 64:11-65:21 (Court, Marks). The Court inquired whether Starrett's statement in the Feb. 25 Goldstone/Starrett Email indicated that the Defendants should have considered it more likely that Thornburg Mortgage would have to sell its impaired ARM securities, given that Thornburg Mortgage sold those after the 2007 Form 10-K was filed. See Tr. at 66:1-18 (Court, Marks). The Defendants conceded that their position would be more tenuous if Thornburg Mortgage had sold its ARM securities on February 29, 2008, or March 1, 2008, but argued that the 2007 Form 10-K states that Thornburg Mortgage was experiencing "reduced liquidity and ... may receive additional margin calls that we can't meet" and in such a situation "may need to sell assets at a loss." Tr. at 67:3-13 (Court, Marks). The Defendants asserted that, in the Feb. 25 Goldstone/Starrett Email, Starrett was referring to the situation disclosed in the 2007 Form 10-K: If Thornburg Mortgage received more margin calls which it could not meet, it may need to sell "negative-mark assets," including the ARM securities, at a loss, and would then need to re-assess Thornburg Mortgage's OTTI analysis. Tr. at 67:22-68:1 (Marks).
The SEC responded that within days of the 2007 Form 10-K being filed, KPMG determined that Thornburg Mortgage should have recognized a $427.8 million loss on its income statement in the fourth quarter of 2007. See Tr. at 73:1-7 (McKenna). The SEC asserted that it has set forth in the Complaint that the Defendants did not believe Thornburg Mortgage could hold its impaired assets until maturity or recovery. See Tr. at 73: 8-15 (McKenna). The SEC noted that it alleges that, before the 2007 Form 10-K was filed, Thornburg Mortgage's assets were subject to seizure, and, therefore, it is not reasonable for the Defendants to assert that they believed they could hold those assets until maturity. See Tr. at 73:14-18 (McKenna). The SEC stated that it alleges that the Defendants were conspiring to withhold information from KPMG, and to manipulate the timing of filing the 2007 Form 10-K so that it could be filed in the narrow window when Thornburg Mortgage had no outstanding margin calls. See Tr.
Regarding the Defendant's assertion that disclosing a $427.8 million impairment as an unrecognized loss was immaterial, the SEC asserted that the $427.8 million was one-third of Thornburg Mortgage's total losses for 2007, and, therefore, not recognizing such a loss "is a material misstatement." Tr. at 74:15-75:17 (McKenna). The SEC asserted that KPMG's agreement with Thornburg Mortgage's OTTI analysis is irrelevant, because KPMG was not informed of many things, and noted that KPMG, subsequent to the events after the 2007 Form 10-K was filed, changed its opinion of Thornburg Mortgage's ability to continue as a going concern. See Tr. at 75:18-76:3 (McKenna).
Regarding the bespeaks caution doctrine, the SEC contended that the Defendants have cited no cases which support their conclusion that "a $400 million swing in net income is immaterial as a matter of law." Tr. at 76:9-15 (Kasper). The SEC argued that the Defendants' OTTI analysis is not a forward-looking statement, because it "wasn't ... saying ... this is what's going to happen in the future. It was saying as of 12/31/07 here's how much net income we had, and that statement was false." Tr. at 77:1-5 (Kasper). The SEC contended that the Defendants' cautionary language was not "exceedingly specific," because the 2007 Form 10-K contains material omissions. Tr. at 77:6-12 (Kasper). The SEC asserted that the Defendants' distinction between In re RAIT Fin. Trust Sec. Litig. and SEC v. Perry is incorrect, because the "true distinction between those cases is the nature of the statements that were involved." Tr. at 77:13-21 (Kasper). The SEC contended that, in In re RAIT Fin. Trust Sec. Litig., a misstated accounting made under FAS 115, just as the SEC alleges the Defendants committed, and was specifically found to satisfy the pleading requirements fraud. See Tr. at 77:22-78:5 (Kasper). The SEC contended that in In re RAIT Fin. Trust Sec. Litig., the extent of the defendant's disclosures did not render the misstated accounting immaterial, because the misstatement alone was fraudulent. See Tr. at 78:6-13 (Kasper). The SEC asserted that, in In re RAIT Fin. Trust Sec. Litig., the alleged misstatement was that the "company's financial statements complied with GAAP," which the SEC contended is akin to its allegations regarding the correctness of Thornburg Mortgage's OTTI analysis. Tr. at 78:18-22 (Kasper). The SEC contended that SEC v. Perry is distinguishable from the facts set forth in the Complaint, because in that case, the defendant's statement was a true, forward-looking statement, not a representation regarding the company's current financial status, such as the OTTI analysis is. See Tr. at 78:23-79:10 (Kasper).
Regarding the Feb. 25 Goldstone/Starrett Email, the SEC asserted that there is no "consistent way" to read the email which supports the Defendants' contention that Starrett was referring only to the sale of impaired assets. Tr. at 79:11-25 (Kasper). The SEC argued that Starrett was "plainly" saying that selling some assets, not just those with "negative marks," was "substantially the same as selling all assets." Tr. at 79:25-80:3 (Kasper).
The Defendants agreed that the key cases regarding the bespeaks caution doctrine and Thornburg Mortgage's OTTI analysis are In re RAIT Fin. Trust Sec. Litig. and SEC v. Perry. See Tr. at 80:10-13 (Marks). The Defendants contended that the OTTI analysis is a forward-looking statement, but the Court noted that OTTI analysis in the 2007 Form 10-K did not include any specific information that would allow a reader to reach a different
The Court inquired how, in light of the February 28, 2008 electronic mail transmissions exchanged between the Defendants, the market's reaction to the 2007 Form 10-K and Thornburg Mortgage's need to sell assets was a surprise to the Defendants. See Tr. at 83:11-20 (Court). The Defendants responded that Thornburg Mortgage's disclosures in the 2007 Form 10-K, which specifically outlined that Thornburg Mortgage's margin calls could exceed its liquidity and that it would have to sell assets at a loss, render Thornburg Mortgage's OTTI analysis immaterial under the bespeaks caution doctrine. See Tr. at 83:21-84:10 (Marks). The Defendants also asserted that their surprise to the margin calls is evidenced by the lack of any allegation in the Complaint which shows that Thornburg Mortgage had an outstanding margin call, or knew a lender intended to make a margin call, when the 2007 Form 10-K was filed. See Tr. at 85:18-25 (Marks).
The Court inquired how the OTTI analysis could be a forward-looking statement, because it represented that Thornburg Mortgage's analysis was consistent with GAAP at the time, and the Defendants responded that it is a forward-looking statement, because the OTTI analysis is based upon the Defendants' predictions of future inflows, outflows, margin calls, and the market. See Tr. at 84:20-85:13 (Court, Marks). The Court inquired if the bespeaks caution doctrine had been applied to GAAP principles, and the Defendants stated that it had been, in In re RAIT Fin. Trust Sec. Litig. See Tr. at 86:8-19 (Court, Marks). The Defendants asserted, thus, that there is not "any dispute that the bespeaks-caution doctrine can apply to a forward-looking statement; that is, a GAAP statement." Tr. at 86:21-23 (Marks).
The Court stated that it is inclined to find that the statements in the 2007 Form 10-K do not satisfy the bespeaks caution doctrine. See Tr. at 88:25-89:2 (Court). The Court stated that it is not certain
The Defendants responded that the SEC has improperly based its allegation of a rule 10b-5 violation on the theory that Thornburg Mortgage "should" have recognized its unrecognized gross losses in the fourth quarter of 2007, which the Defendants contended is a standard for negligence, but not fraud. Tr. at 89:17-90(Lee). The Defendants asserted that there is no allegation in the Complaint which asserts that they were reckless in the OTTI analysis. See Tr. at 90:1-3(Lee). The Defendants further argued that the SEC has not sufficiently alleged scienter, because the Complaint alleges only that the Defendants withheld information from KPMG as evidence that the Defendants intended to deceive KPMG. See Tr. at 90:11-15(Lee). The Defendants asserted that, in City of Omaha v. CBS, the Second Circuit found that allegations that defendants should have begun interim impairment testing earlier was insufficient to plausibly establish an inference that the defendants did not believe "their statements [] regarding CBS' good will at the time they made them." Tr. at 90:18-91:11(Lee).
The Court stated that it is nonetheless inclined to allow the SEC's claims that the OTTI analysis was materially misleading to go forward. See Tr. at 91:17-19 (Court). The Court expressed that whether the Defendants had the requisite scienter may depend on how the Feb. 25 Goldstone/Starrett Email is interpreted, but noted that the Court's role is not to adopt a specific interpretation at this point. See Tr. at 91:19-24 (Court).
The Defendants then turned to the issue of scienter, specifically as seen in a number of electronic mail transmissions that they exchanged in the weeks up to and immediately after the 2007 Form 10-K was filed. See Tr. at 92:7-12(Lee). The Court stated that it does not understand how the margin calls after the 2007 Form 10-K was filed caught the Defendants by surprise, noting specifically that the Defendants' electronic mail transmissions were exchanged on February 28, 2008 and after the 2007 Form 10-K was filed. See Tr. at 68:11-16 (Court). The Defendants asserted that, based upon the electronic mail transmissions collectively, the Defendants' conversations before the margin calls "clearly demonstrates the defendants' lack of scienter and ... also addresses the issue of whether there is any scienter to support the accounting for gross unrealized losses." Tr. at 92:13-20(Lee). The Defendants stated that, in the Feb. 21 BOD email, Goldstone expressed an intent to be completely transparent with the market regarding Thornburg Mortgage's financial situation and plans for the coming weeks. See Tr. at 93:6-95:9 (Lee, Court). The Court agreed that the Feb. 21 BOD Email provides evidence that Goldstone did not intend to deceive investors, but the Court questioned whether it could decide, based on the Feb. 21 BOD Email, that Goldstone did not have the requisite scienter as a matter of law. See Tr. at 95:10-13
Turning to the Feb. 22 BOD Email, the Defendants contended that the SEC has taken out of context Goldstone's statement when he says that "`[w]e don't want to disclose our current circumstance.'" Tr. at 96:5-15(Lee)(quoting Feb. 22 BOD email at 1). The Court inquired to what Goldstone was referring when he mentions "prosup disclosure issues" in the Feb. 22 BOD Email, and the Defendants stated that a "prosup" is short-hand for a "prospectus supplement," a public disclosure that is required when a company does a securitization. Tr. at 96:21-97:3 (Court, Lee). The Defendants conceded that, if Thornburg Mortgage had filed a prospectus supplement at the time of the Feb. 22 BOD Email, Thornburg Mortgage would have had to disclose the margin calls. See Tr. at 97:4-9(Lee). The Defendants contended, nonetheless, that Goldstone's electronic mail transmission, as a whole, is "consistent with ... transparent disclosure," because Goldstone admits that Thornburg Mortgage will disclose the margin calls, but that the manner in which the margin calls will be disclosed will depend on how the coming weeks develop. Tr. at 97:8-16(Lee). The Defendants contended that the Feb. 22 BOD Email illustrates that they "understood what their disclosure obligations were, and they intended to meet their disclosure obligations." Tr. at 97:17-23(Lee). The Defendants explained that, in the remainder of the Feb. 22 BOD Email, Goldstone expresses optimism with Thornburg Mortgage's plans for meeting its margin calls, and expressed that he does not believe Thornburg Mortgage will need to sell assets, and, therefore, demonstrates how the margin calls caught the Defendants by surprise. See Tr. at 97:24-98:24(Lee).
The Defendants then turned to the Feb. 25 BOD Email and noted that Goldstone again informed the Board of Directors that he expected Thornburg Mortgage to raise sufficient funds to satisfy all outstanding margin calls by the end of the following week. See Tr. at 99:3-19(Lee). The Defendants noted that Goldstone expresses that his meeting with the underwriters went very well, and that Thornburg Mortgage was doing very well, despite the difficult market at the time, but that Thornburg Mortgage must continue to raise money. See Tr. at 99:20-100:8(Lee). The Defendants contended that this electronic mail transmission demonstrates a "complete absence of scienter, a belief in the company's future intent and ability and a belief that their [] plans to move past this immediate issue ... and to continue to emerge from that with a strengthened liquidity position." Tr. at 100:9-24(Lee). The Defendants contended that the "snippets" in the Defendants' electronic mail transmissions on which the SEC has focused "bear no resemblance whatsoever to the overall intent and content of the e-mails." Tr. at 100:19-24(Lee).
The Defendants also asserted that the SEC has taken Starrett's statement in the Feb. 25 Goldstone/Starrett Email out of context when the SEC asserts that the Defendants purposely did not tell KPMG about Thornburg's margin calls. See Tr. at 101:3-11(Lee). The Defendants contended that the electronic mail transmission chain evidences that the Defendants'
The Court inquired whether the Defendants were putting KPMG in a difficult situation to audit Thornburg Mortgage's finances by not telling KPMG about the Citigroup Global margin call three days before the 2007 Form 10-K was filed. See Tr. at 107:16-108:17 (Court, Lee). The Defendants admitted that their actions put KPMG "in a time crunch," but maintained that the time crunch was not an attempt to preclude KPMG from accurately auditing Thornburg Mortgage. Tr. at 108:18-109:1(Lee). Court inquired why the Defendants did not inform KPMG of the Citigroup Global margin call with a qualification that they believed the margin call would be resolved before the 10-K is issued, and the Defendants confirmed that they could have disclosed the Citigroup Global margin call with that information. See Tr. at 109:2-8 (Court, Lee). The Court stated that the question is not whether the Defendants "could have" informed KPMG, but, rather, is why they chose to not inform KPMG. Tr. at 109:9-11 (Court). The Defendants countered that they were planning on Thornburg Mortgage raising sufficient funds to satisfy the Citigroup Global margin call, and, for that reason, they did not disclose the Citigroup Global margin call to KPMG. See Tr. at 109:12-15(Lee). The Defendants asserted that they did not "prematurely ring the alarm bell on ... their failure to satisfy a margin call" because they were planning to "satisfy the margin call." Tr. at 109:19-22(Lee). The Defendants asserted, therefore, that the relevant question is whether they were required to inform KPMG of the
The Defendants then turned to the Feb. 27 Simmons/Feldman Email, which the SEC alleges evidences that the Defendants made a material omission by not disclosing the "rumor of a European hedge fund blowing up." Tr. at 112:21-113:12(Lee). The Defendants contended that they had no duty to disclose the rumor. See Tr. at 113:12-14(Lee). The Defendants contended that the Feb. 27 Simmons/Feldman Email evidences that the rumor was "solely a rumor" at the time and that the Defendants did not have any details, and, indeed, were "`not even really supposed to know about this situation.'" Tr. at 113:15-114:4(Lee)(quoting Feb. 27 Simmons/ Feldman Email at 2). The Defendants stated that Simmons' statement in the Feb. 27 Simmons/Feldman Email — "`[t]his makes it even more critical to be done with Citi today so we can get the K filed'" — is not evidence of fraudulent intent, as the email does not explain what "this" is, and Thornburg Mortgage had to file the 2007 Form 10-K by February 28, 2008, regardless of any situation in Europe. Tr. at 114:5-20 (Lee, Court)(quoting Feb. 27 Simmons/Feldman Email at 2).
The SEC responded, and stated that its theory "is that Thornburg was deceiving their auditors, was trying to get the K filed in the narrow window in which they were able to meet their margin call so they could report that." Tr. at 115:18-21 (McKenna). The SEC asserted that the
The Defendants countered that the SEC's attempt to make an issue out of when the 2007 Form 10-K was filed is surprising, because the 2007 Form 10-K had to be filed before February 29th, 2008, and, therefore, filing a day early does not evidence scienter. See Tr. at 118:12-18(Lee). The Defendants asserted that a number of other companies filed form 10-Ks around the same time as when Thornburg Mortgage filed the 2007 Form 10-K, and, therefore, the timing of Thornburg Mortgage's filing is not "highly unusual," as the SEC contends. Tr. at 119:1-6(Lee). See Tr. at 120:18-21(Lee)(citing Compilation of 10-K filings made before market opened/after market closed on February 27-28, 2008, filed May 21, 2012 (Doc. 37-31)("10-K Compilation")). The Court stated that a reasonable inference appears to be that Thornburg Mortgage filed the 2007 Form 10-K to avoid having to disclose more margin calls. See Tr. at 119:8-13 (Court). The Defendants countered that the documents upon which the SEC relies in making that allegation do not support the allegation of fraud. See Tr. at 119:14-15(Lee). The Defendants asserted that the electronic mail transmissions reveal that they believed they would meet all Thornburg Mortgage's margin calls successfully. See Tr. at 119:15-25(Lee). The Defendants contended that they had no way of knowing Thornburg Mortgage would receive as many margin calls as it did following the filing of the 2007 Form 10-K. See Tr. at 120:1-5(Lee). The Defendants noted that "the chairman of the SEC said investment banks' capital cushions are sound five days before Bear Stearns collapsed. This was an extraordinary time." Tr. at 120:6-12(Lee).
The Defendants then turned to the Feb. 28 BOD Email. See Tr. at 121:3-6(Lee).
The Defendants then turned to the Electronic Mail Transmission from Owen Lopez to Thornburg Board of Directors (February 29, 2008, 9:24 a.m.), filed May 21, 2012 (Doc. 37-26)("Feb. 29 Lopez BOD Email"). See Tr. at 122:1-2(Lee). The Defendants contended that the electronic mail transmission chain in the Feb. 29 Lopez BOD Email demonstrates that the "wave of margin calls the company received after the K was totally unexpected." Tr. at 122:3-8(Lee). The Defendants contended that the "only reasonable reading of this e-mail" is that Goldstone did not expect the margin calls that Thornburg Mortgage received. Tr. at 122:24-123:1(Lee). The Court stated that, although the electronic mail transmission chain evidences a disappointment with the market's outcome, the chain does not demonstrate surprise. See Tr. at 123:8-12(Lee). The Defendants asserted that surprise and disappointment are not distinguishable, and that the Feb. 29 Lopez BOD Email indicates that Goldstone felt as though "all these efforts we had to not only meet the margin calls but to position ourselves for the future ... are not ... now or may not now be sufficient." Tr. at 123:21-25(Lee). The Defendants asserted that the electronic mail transmissions do not support a reasonable inference of fraudulent intent necessary to support an action under rule 10(b), as Goldstone initiated the disclosure of the negative developments with Thornburg Mortgage. See Tr. at 124:1-8(Lee).
The Defendants then turned to Feb. 28 Simmons/Goldstone Email. The Defendants contended that Goldstone expressed optimistically that Thornburg Mortgage would be able to hold its assets to maturity. See Tr. at 124:21-125:7(Lee). The Defendants also contended that Simmons' statement — "`[i]f only they knew'" — is a fragment which the SEC has construed to indicate a fraudulent intent. Tr. at 125:8-13(Lee)(quoting Feb. 28 Simmons/Goldstone Email at 2). The Defendants asserted that the "most plausible reading" of Simmons' statement is that he was referring to the Defendants' "efforts to build a cash cushion to raise liquidity to ensure the company was well poised for the future." Tr. at 125:14-19(Lee). The Defendants asserted that the electronic mail transmissions evidence that they had a good faith belief in their intent and ability to hold their assets to maturity, and that they did not have fraudulent scienter as the SEC alleges in other aspects of the Complaint. See Tr. at 126:5-16(Lee). The Defendants asserted that, even if the Court determines that they made a material omission, the evidence demonstrates that the Defendants acted without scienter. See Tr. at 126:23-127:11 (Court, Lee).
The Defendants then addressed the SEC's allegations of scienter regarding the Defendants' OTTI analysis. See Tr. at 128:11-17 (Marks). The Defendants stated that, in two previous instances, federal courts have granted motions to dismiss similar allegations of fraudulent OTTI analyses. See Tr. at 128:18-25 (Marks). The Defendants contended that, in In re Fannie Mae 2008 Sec. Litig., the plaintiffs made the same allegation as the SEC has: that Fannie Mae's OTTI statement was fraudulently false and a violation of rule 10b-5, because "the defendants had information that should have told them to take that impairment charge earlier." Tr. at 129:9-14 (Marks). The Defendants noted
The Defendants also noted that, regarding the SEC's allegations that they should have had knowledge of negative market reactions because of the rumor that a European hedge fund would be collapsing, Starrett had no knowledge of that rumor. See Tr. at 133:1-10 (Marks).
The Court inquired whether the Defendants understand that the SEC must comply with rule 9(b) when alleging fraud, and the Defendants stated that they believe rule 9(b) applies to the SEC's Complaint. See Tr. at 133:12-22 (Court, Marks). The Court inquired what the difference is between a complaint subject to rule 9(b) and a complaint that the PSLRA governs. See Tr. at 133:19-22 (Court, Marks). The Defendants initially stated that they believe the standard under rule 9(b) is higher than that which the PSLRA imposes. See Tr. at 134:2-4 (Court, Marks). The Defendants stated that, in the Tenth Circuit, the SEC must allege particular facts to demonstrate scienter. See Tr. at 134:5-13 (Marks). The Court stated that rule 9(b) allows plaintiffs to plead scienter generally, which appears to be a different standard than the PSLRA imposes. See Tr. at 134:14-21 (Court). The Defendants asserted that, as the SEC alleges, the SEC must plead that the "[D]efendants acted with an intent to deceive and manipulated a fraud; in other words, acted with a mental state known as scienter." Tr. at 135:2-7 (Marks). The Defendants conceded that the PSLRA requires more than rule 9(b) in the Tenth Circuit, but nonetheless contended that the SEC must plead facts showing scienter. See Tr. at 135:17-20 (Marks); id. at 136:10-20 (Marks).
The Defendants then contended that they were not "squeezing" KPMG. Tr. at 136:24-137:4 (Marks, Court). The Defendants asserted that KPMG hold the power to sign off on their audit or delay, and Thornburg Mortgage has "no way to force the auditors," and that attempting to force KPMG into a decision would be ineffective. Tr. at 137:4-11 (Marks). The Court asked: "[W]hat is the business reason for not telling your auditors about something that's going to appear in the narrative section of the 10-K three days later?" Tr. at 137:12-14 (Court). The Defendants asserted that "there's a tremendous amount of confusion about what's being communicated in e-mail." Tr. at 137:17-18 (Marks). The Defendants asserted that KPMG was not unaware that "during the January 2008
Regarding the Feb. 25 Goldstone/Starrett Email, the Court asked counsel for Starrett, Jerry Marks, whether he knows to what Goldstone was referring when he mentioned the "KPMG situation." Tr. at 138:15-25 (Marks, Court)(citing Feb. 25 Goldstone/Starrett Email at 3). Mr. Marks stated that he understands that Goldstone was experiencing "communication issues between the audit partner and Thornburg over the course of the audit nature, including various issues being blown out of proportion or delayed in getting a response." Tr. at 139:1-6 (Marks).
Regarding Starrett's statement "`[w]e have purposely not told them about the margin calls so that we don't escalate an issue which we believe will be put to rest by the time they have to issue their opinion,'" the Defendants contended that the SEC cannot allege that KPMG "somehow had no idea that Thornburg was receiving hundreds and hundreds of millions of dollars in margin calls during January and February, 2008," and, therefore, the Feb. 25 Goldstone/Starrett Email does not evidence that the Defendants were attempting to hide margin calls from KPMG. Tr. at 139:23-140:9 (Marks). The Defendants noted that KPMG was aware that Thornburg Mortgage received $300 million in margin calls between February 14th, 2008, and when the 2007 Form 10-K was filed, but the Defendants conceded that KPMG might not have been aware of those margin calls until after the Feb. 25 Goldstone/Starrett Email was sent. See Tr. at 140:10-141:3 (Marks, Court). The Defendants contended that the Complaint does not allege that the Defendants told KPMG nothing about the margin calls. See Tr. at 141:8-11 (Marks). The Defendants stated that the SEC's allegation is that they did not tell KPMG about the Citigroup Global Letter, that Thornburg Mortgage was paying its margin calls over time, or the European hedge fund collapsing. See Tr. at 141:12-18 (Marks).
The Court inquired whether the Defendants are suggesting that KPMG knew about the margin calls, but did not know the details of the margin calls. See Tr. at 142:10-16 (Court). The Defendants stated that the SEC is alleging that they purposefully did not tell KPMG about that Thornburg Mortgage arranged to pay the Citigroup Global margin call over time. See Tr. at 143:1-4 (Marks). The Defendants asserted that the SEC is alleging that they had a duty to tell KPMG about the payment plan for the Citigroup Global margin call. See Tr. at 143:5-11 (Marks). The Defendants contended that they ultimately disclosed Thornburg Mortgage's $300 million in margin calls to KPMG and that information about the margin calls was included in the 2007 Form 10-K. See Tr. at 143:12-16 (Marks). The Defendants contended, therefore, that the SEC inaccurately includes the Feb. 25 Goldstone/Starrett Email as evidence that the Defendants were "keeping KPMG in the dark about the margin calls entirely." Tr. at 143:17-21 (Marks). The Defendants asserted that the Feb. 25 Goldstone/Starrett Email refers to an issue of timing and that inferring that KPMG was completely unaware of Thornburg Mortgage's margin calls is unreasonable. See Tr. at 144:9-16 (Marks).
The Defendants then addressed their position regarding the requisite state of mind the SEC must allege Starrett possessed. See Tr. at 144:17-20 (Marks). The Defendants noted that the SEC concedes it is not bringing a cause of action under rule 10b-5(b) against Starrett, which the Defendants stated is the principle method of asserting securities liability.
The Court inquired what the Defendants' opinion is of the SEC's argument that the Court should dismiss very few cases for failing to allege scienter at the motion to dismiss stage. See Tr. at 145;19-23 (Court). The Defendants conceded that it is difficult to dismiss a complaint for the lack scienter allegations, unless the Court agrees with the Defendants that the OTTI analysis is a speculative determination. See Tr. at 145:24-146:4 (Marks). The Defendants noted that the OTTI analysis is done "in the context of literature that then, subsequent, because it was questioned and confusing, was redone." Tr. at 146:4-11 (Marks). The Defendants asserted that their OTTI analysis could be a mistake, or negligence, or "even gross negligence," but the analysis was not fraud. Tr. at 146:12-18 (Marks).
The Court stated that it does not understand the importance of the Defendants' position that they were surprised by the market's reaction to the 2007 Form 10-K. See Tr. at 146:21-24 (Court). Mr. Marks noted that counsel for Goldstone and Simmons, Randall Lee, emphasized that the Defendants were surprised by the market's reaction, but that he does not believe their surprise is "important or critical or relevant" to their defense. Tr. at 146:25-147:7 (Marks, Court). Mr. Marks stated that nobody could predict how the market would react in 2008. See Tr. at 147:8-12 (Marks). Mr. Marks contended that the Defendants' core argument is that, even if their OTTI analysis was false, it either was covered by the bespeaks caution doctrine or was not fraudulent. See Tr. at 148:13-20 (Marks).
The Defendants then addressed the SEC's allegations arising from Goldstone's statements to Street Signs and Thornburg Mortgage's investor relations department, on February 28, 2008, after Thornburg Mortgage filed the 2007 Form 10-K. See Tr. at 149:1-10 (Valentine). The Defendants asserted that the SEC has failed to allege that Goldstone knew, before making those statements, that Thornburg Mortgage had received margin calls it would be unable to meet without selling assets at a loss. See Tr. at 149:11-16 (Valentine). The Defendants contended that the SEC has not alleged that, when Goldstone told the investor relations department on February 28, 2008, at 5:29 a.m., that all of Thornburg Mortgage's margin calls were met, that Thornburg Mortgage had sufficient operating cash, and that Thornburg Mortgage has not sold assets to meet margin calls, those statements were at that time untrue. See Tr. at 150:4-16 (Valentine)(citing Feb. 28 IR Email). The Defendants contended that the SEC has alleged that Thornburg Mortgage had forty million dollars in cash on the morning of February 28, 2008, and noted that the SEC has not alleged that, as of the time of the Feb. 28 IR Email, Thornburg Mortgage had received "even one margin call that would call into question Thornburg Mortgage's ability to meet margin calls in the future." Tr. at 150:17-21 (Valentine). The Defendants asserted that, at the time the Feb. 28 IR Email was sent, Thornburg Mortgage had successfully worked out payment plans with its lenders and had not been declared in default. See Tr. at 151:2-6 (Valentine). The Defendants noted that the SEC concedes that Thornburg Mortgage did not receive a default notice from
The Defendants turned to Goldstone's allegedly false statements on Street Signs: "`We don't think we have to sell more, no. We have liquidity and cash available to continue to support the portfolio.'" Tr. at 152:14-17 (Valentine)(quoting Street Signs at 3:54-4:09). The Defendants confirmed that Thornburg Mortgage had not received the J.P. Morgan margin call when Goldstone spoke on Street Signs. See Tr. at 152:20-25 (Valentine, Court). The Court inquired at what time on February 28, 2008, Thornburg Mortgage received the first margin call, but the Defendants stated that the SEC has not alleged in the Complaint the exact time at which Thornburg Mortgage began receiving margin calls on that day. See Tr. at 152:8-14 (Valentine). The Defendants contended that the SEC has not alleged that, even if Thornburg Mortgage had received margin calls before Goldstone spoke on MarketWatch, Goldstone believed his statements were untrue at the time. See Tr. at 152:15-19 (Valentine). The Defendants asserted that the SEC has not alleged that they "lacked confidence in the company's ability to actually execute" the transactions which the Defendants believed would raise between $450 million and $675 million by the end of the week. Tr. at 153:20-154:7 (Valentine).
The Defendants asserted that the Feb. 29 Lopez/BOD Email is the only document that the SEC cites in the Complaint which reflects Goldstone's realization that Thornburg Mortgage will not be able to meet its margin calls with payment plans and was sent after the J.P. Morgan margin call. See Tr. at 154:8-155:13 (Valentine). The Defendants contended that the SEC has not alleged in the Complaint that Goldstone realized Thornburg Mortgage would not be able to meet its margin calls before the morning of February 29, 2008. See Tr. at 155:14-18 (Valentine). The Defendants also asserted that, even though Goldstone knew Thornburg Mortgage had only forty million dollars in cash on February 28, 2008, the SEC has not alleged that Goldstone was aware of the full extent of Thornburg Mortgage's margin calls on that date. See Tr. at 155:19-156:3 (Valentine).
The Defendants also noted that Goldstone's statements on Street Signs were made during an "unscripted interview," which should not be held to as high of a standard as Form 10-Ks, which lawyers and auditors vet. Tr. at 156:4-8 (Valentine)(citing Plumbers and Pipefitters Local Union No. 719 Pension Fund v. Zimmer Holdings, Inc., 679 F.3d 952).
The Defendants also asserted that the bespeaks caution doctrine should apply to Goldstone's statements on Street Signs. See Tr. at 156:16-20 (Valentine). The Defendants contended that Goldstone's statements were forward-looking, and that he took "pains to make it clear what the risks were, [and] how bad the market was." Tr. at 156:21-157:7 (Valentine).
The SEC responded that the Complaint refutes the Defendants' position that Goldstone was unaware of Thornburg Mortgage's margin calls when he spoke on Street Signs and to the investor relations department. See Tr. at 158:8-15 (McKenna). The SEC pointed to its allegation in paragraph 9 of the Complaint, at page 4 in
The SEC also stated that Goldstone gave instructions to Thornburg Mortgage's investor relations department "an hour or so before he became aware of the additional margin calls" that exceeded Thornburg Mortgage's cash on hand. Tr. at 161:9-23 (McKenna, Court). The SEC contended, however, that they have alleged that, by the end of February 28, 2008, the investor relations department reported to Goldstone that they informed the investors that Thornburg Mortgage had met all of its margin calls, did not expect to sell assets to meet margin calls, and had returned to profitability. See Tr. at 161:24-162:5 (McKenna)(citing Complaint ¶ 96, at 28). The Court inquired why the SEC interpreted Goldstone's third message point to the investor relations department — "`No assets sales to meet margin calls'" — as a forward looking statement, given that, at the time, the message point could be interpreted as accurately stating only that Thornburg Mortgage had not yet sold assets to meet its margin calls. Tr. at 162:9-15 Court)(quoting Feb. 29 IR Email at 2). The SEC conceded that it is "not sure," and that Goldstone's message point could have been a statement in hindsight or forward-looking. Tr. at 162:16-19 (McKenna). The SEC asserted that, at the motion to dismiss stage, neither it nor the Defendants can definitively know what Goldstone meant with his message points to the investor relations department. See Tr. at 162:22-163:7 (McKenna).
Regarding Goldstone's statements on Street Signs, the SEC pointed out that, during the interview, placards beneath Goldstone report that Thornburg Mortgage posted a sixty-five million dollar profit and that the disclosure that Thornburg Mortgage might have to sell assets is a "standard disclosure[]." Tr. at 163:9-164:5 (McKenna). The SEC admitted that it is not sure whether Goldstone created the placard. See Tr. at 164:6-9 (Court, McKenna). The SEC asserted, however, that the placard undermines the Defendants'
The SEC then turned to the Feb. 21 BOD Email, and the SEC contended that it does not understand how the Defendants can allege, based on this electronic mail transmission in which Goldstone states that Thornburg Mortgage will be issuing further disclosures, that it is "implausible to say that he had an intent to deceive anybody or ... was ... showing reckless disregard." Tr. at 165:23-166:7 (McKenna). The SEC also contended that the Defendants have misstated the standard for a motion to dismiss by alleging that the SEC must demonstrate it is more probable than not that Goldstone had fraudulent intent. See Tr. at 166:8-13 (McKenna).
Turning to the Feb. 22 BOD Email, the SEC asserted that it does not agree that KPMG was aware of Thornburg Mortgage's margin calls at the time of the electronic mail transmission. See Tr. at 166:14-25 (McKenna, Court). The SEC asserted that it believes KPMG was unaware of the Citigroup Global Letter and that Thornburg Mortgage had made late payments at the time of the Feb. 25 Goldstone/Starrett Email. See Tr. at 167:3-10 (McKenna). The SEC conceded that it does not know whether KPMG was aware of Thornburg Mortgage's margin calls at the time of the Feb. 25 Goldstone/Starrett Email. See Tr. at 167:11-13 (Court, McKenna). The Court stated that KPMG must have known of Thornburg Mortgage's margin calls by the time the 2007 Form 10-K was filed, because of KPMG's assistance with certain sections of it, and the SEC conceded that KPMG must have known of some margin calls, because margin calls are part of Thornburg Mortgage's daily operations. See Tr. at 167:14-25 (Court, McKenna). The SEC contended, however, that it is unclear whether KPMG was aware of the Citigroup Global margin call. See Tr. at 167:25-168:1 (McKenna). The SEC conceded that KPMG knew Thornburg Mortgage had received $300 million in margin calls by the time the 2007 Form 10-K was filed, but asserted that its "allegation is [KPMG] had not been informed that Thornburg had not been able to meet those on a timely basis and had to rely on the lenders." Tr. at 168:1-7 (McKenna).
The Court stated that the "guts" of the SEC's case appears to be that KPMG knew Thornburg Mortgage had received $300 million in margin calls, but the Defendants concealed from KPMG Thornburg Mortgage's plan to meet the margin calls with payment plans, which the SEC stated is an accurate characterization. Tr. at 168:8-16 (Court, McKenna). The Court inquired why the details of Thornburg Mortgage's payment plans were material disclosures, if KPMG did not inquire of Thornburg Mortgage how it planned to meet the $300 million in margin calls. See Tr. at 168:17-20 (Court). The SEC contended that KPMG was interested in the details of Thornburg Mortgage's margin calls, and that Thornburg Mortgage issued a restated 10-K demonstrates that the details were material and of interest to KPMG. See Tr. at 168:21-169:6 (McKenna). The SEC contended that the Defendants were attempting to keep KPMG "in the dark" and to not disclose the details of Thornburg Mortgage's payment plans if the Defendants could avoid disclosing them. Tr. at 169:8-20 (McKenna). The Court inquired how the Defendants' desire to avoid disclosing negative information demonstrates fraudulent intent and how it
The SEC also contended that Goldstone's statement that Thornburg Mortgage should have "`sufficient cash to allow us to avoid selling any assets at a loss which should allow us to avoid any issues with KPMG'" demonstrates his intent to mislead KPMG. Tr. at 171:17-22 (quoting Feb. 22 BOD Email at 3). The SEC noted that Goldstone goes on to say: "`By the way, the KPMG comment about `going concern' issues that was dismissed as a formality at the last Audit Committee meeting is apparently bigger issue than I had been led to believe.'" Tr. at 171:23-172:1 (McKenna)(quoting Feb. 22 BOD Email at 3). The SEC contended that this statement, in conjunction with Goldstone's other statements, demonstrates an intent to deceive KPMG. See Tr. at 172:2-4 (McKenna).
The Court inquired how the SEC responds to the Defendants' contention that the Feb. 22 BOD Email demonstrates that they believed Thornburg Mortgage would raise sufficient cash to meet its margin calls without selling any assets at the time of the Feb. 22 BOD Email. See Tr. at 172:5-11 (Court); id. at 172:15-19 (Court)("[I]t says `That should be sufficient cash to allow us to avoid selling assets at a loss.' That's about as firm a statement as you're going to get." (quoting Feb. 22 BOD Email at 3)). The SEC responded that the Defendants' knowledge of the lenders' forbearance, KPMG's unawareness of Thornburg Mortgage's reliance on lender forbearance, the Defendants' statements to investors, and the timing of when the 2007 Form 10-K was filed raise a plausible inference that the Defendants were aware that Thornburg Mortgage's financial situation was much worse than they represented. See Tr. at 172:20-173:4 (McKenna). The SEC asserted that the Defendants have inconsistently alleged that they believed Thornburg Mortgage would be able to meet its margin calls and that they gave adequate cautionary language to represent Thornburg Mortgage's precarious position in the 2007 Form 10-K. See Tr. at 173:6-16 (McKenna).
The SEC then turned to the Feb. 25 Goldstone/Starrett Email and posited that, when Goldstone states that he has been "stewing all weekend" about the KPMG situation, Goldstone meant that he has been wondering all weekend whether the Defendants would "be able to pull this off." Tr. at 173:24-174:4 (McKenna). Regarding the Defendants' contention that, when Goldstone references to the KPMG situation, he is referring to his unhappiness with KPMG's work, the SEC asserted that such an inference is not reasonable based on the allegations in the Complaint. See Tr. at 174:5-13 (Court, McKenna). The SEC asserted that the Complaint alleges a "scheme to mislead KPMG and keep them in the dark so that they can issue a ... relatively clean 10-K and raise more money to keep things going" with a clean audit opinion. Tr. at 174:17-175:2 (McKenna).
The SEC then turned to the Defendants' assertion that they intended to be transparent,
The SEC contended that the Feb. 27 Simmons/Feldman Email further demonstrates that the Defendants were doing all they could to file the 2007 Form 10-K within a particular window in which Thornburg Mortgage would appear solvent. See Tr. at 175:21-176:4 (McKenna). The SEC asserted that, in the Feb. 27 Simmons/Starrett Email, in which Simmons states that "`I do not want there to be any issues based on Thursday activity'" and also mandates a deadline of 6:00 a.m., February 28, 2008, for filing the 2007 Form 10-K, Simmons demonstrates a desire to file the 2007 Form 10-K in a specific window that will allow Thornburg Mortgage to avoid reporting the margin calls he expects to receive. Tr. at 176:5-16 (McKenna)(quoting Feb. 27 Simmons/Starrett Email at 2). The Court asked whether the Feb. 27 Simmons/Starrett Email demonstrates scienter, given that "any prudent person about to file at 10-K [would] probably instruct their staff the same way," so that the information in the 10-K would be accurate, notwithstanding any market fluctuations after the 10-K is filed. Tr. at 176:17-22 (Court); id. at 176:24-177:2 (Court). The SEC conceded that the Court's analysis is accurate, but contended that, in the context of its allegations in the Complaint, the timing of Thornburg Mortgage's filing the 2007 Form 10-K demonstrates their efforts to "fit the filing into this narrow window," which the Defendants would not have done had Thornburg Mortgage not been experiencing financial difficulty. Tr. at 177:3-12 (McKenna).
The SEC contended that the Feb. 27 Goldstone/Simmons Email, in which Goldstone discusses an "Alt-A hedge fund in Europe ... blowing up this afternoon," demonstrates that Goldstone and Simmons knew that Thornburg Mortgage would soon experience more margin calls. Tr. at 177:14-179:7 (McKenna, Court). The SEC contended that the Feb. 27 BOD Email, in which Goldstone states that Thornburg Mortgage was "`able to meet all of those recent margin calls yesterday and we were able to get a clean audit opinion to go with it,'" demonstrates that Goldstone had a scheme to not tell KPMG about Thornburg Mortgage's margin calls so as to manipulate its audit opinion. Tr. at 179:8-22 (McKenna)(quoting Feb. 27 BOD Email at 2).
Regarding the Feb. 29 Lopez/BOD Email, which the Defendants assert is the first electronic mail transmission that demonstrates Goldstone knew Thornburg Mortgage would not be able to meet its margin calls, the SEC asserted that it has shown that, because of the amount of cash Thornburg Mortgage had on hand, Goldstone should have known Thornburg Mortgage would not be able to meet its margin calls earlier. See Tr. at 179:24-180:7 (McKenna). The SEC also contended that the Feb. 29 Lopez/BOD Email demonstrates that the Defendants made the wrong OTTI analysis. See Tr. at 180:5-14 (McKenna). The Court inquired whether margin calls could ever surprise the Defendants, given that Thornburg Mortgage experienced margin calls frequently. See Tr. at 180:15-22 (Court). The SEC agreed, and noted that the Goldstone and Simmons' electronic mail transmissions regarding a European hedge fund demonstrate that they expected additional margin
The SEC had two responses to the Defendants' contention that Thornburg Mortgage could have met the Citigroup Global and UBS AG margin calls, but that the J.P. Morgan default notice was its doom. See Tr. at 181:1-7 (Court, McKenna). The SEC asserted that the Defendants should have known that Thornburg Mortgage could not meet its margin calls when UBS AG issued a margin call of sixty million dollars, because Thornburg Mortgage had only forty million dollars on hand to meet the margin call. See Tr. at 181:7-12 (McKenna). The SEC also asserted that the Defendants cannot honestly allege that the J.P. Morgan default notice was a "game-changer and/or unprecedented," because Thornburg Mortgage received two billion dollars in margin calls in August, 2007, for which it had to sell assets to meet. Tr. at 181:13-23 (McKenna). The SEC asserted that the J.P. Morgan default notice "may have been a game-changer in the last two weeks, but it wasn't a game-changer in the last six months." Tr. at 181:21-23 (McKenna).
The SEC then turned to the Feb. 28 Simmons/Goldstone Email, in which Simmons states: "`I guess the recent developments section did not go over well. If only they knew[.]'" Tr. at 182:3-7 (McKenna). The SEC asserted that the electronic mail transmission is not "cryptic," but, rather, Simmons is telling Goldstone: "Imagine what they would have done had they known that we purposefully withheld them from our auditor; imagine what they would have done if they'd known that ... we entered into I/O strip transactions that we didn't have to technically call assets sales in order to meet these margin calls?" Tr. at 182:9-17 (McKenna). The SEC asserted that its proposed inference — that the Feb. 28 Simmons/Goldstone Email demonstrates Goldstone's and Simmons' plan to hide information from the market and KPMG — is the most reasonable inference to be drawn from that electronic mail transmission. See Tr. at 182:18-22 (McKenna).
The SEC also noted that it has alleged that KPMG asked the Defendants whether Thornburg Mortgage was in breach of any contracts or had noncompliance issues with its lender agreements, which, the SEC asserted, should have prompted the Defendants to disclose Thornburg Mortgage's inability to timely meet its margin calls. See Tr. at 183:6-14 (Kasper)(citing Complaint ¶ 58, at 17). The SEC pointed out that it has alleged that the Defendants "each misrepresented and/or failed to disclose that violation." Tr. at 183:17-21 (Kasper).
The SEC also asserted that it has adequately alleged in the Complaint that Starrett had scienter. See Tr. at 184:3-10 (Kasper). The SEC contended that the complexity of Thornburg Mortgage's accounting decisions does not establish that Starrett lacked fraudulent intent as a matter of law under § 10(b) of the Exchange Act. See Tr. at 184:11-16 (Kasper).
Regarding the relevant pleading standard the SEC must meet when alleging fraudulent intent, the SEC contended that, unlike private litigants under the PSLRA, it "need not show a strong inference of scienter, and, in fact, cases have been distinguished on that specific point." Tr. at 184:17-185:10 (Kasper)(citing SEC v. Mozilo, No. CV09-3994HFWNABX, 2009 WL 3807124 (C.D.Cal. Nov. 3, 2009); SEC v. Arnold). The SEC asserted that under rule 9(b), the SEC can allege scienter generally. See Tr. at 185:11-13 (Kasper)(citing SEC v. Arnold). The SEC contended that its case is far different from that in Kuriakose v. Fed. Home Loan Mortg. Corp., because it has adequately alleged
The SEC asserted that it has always alleged that the Defendants were engaging in a scheme to commit fraud, and that the Complaint "makes it perfectly clear that it was a scheme and that the defendants were aware that it's a scheme." Tr. at 186:17-25 (Kasper). The SEC conceded that it has not, and cannot, in light of Janus Capital Grp., Inc. v. First Derivative Traders, "make such [] an argument... that Ms. Starrett was a maker" of a fraudulent statement, but asserted that it has always alleged that Starrett participated in a scheme to defraud. Tr. at 178:12-20 (Kasper). The SEC contended that it has not alleged scheme liability as a "backdoor change of course," but, rather it has always alleged that the Defendants, including Starrett, engaged in a fraudulent scheme. Tr. at 187:1-10 (Kasper).
Turning to the Request for Judicial Notice, the SEC informed the Court that it objects to the Defendants' request. See Tr. at 188:7-8 (McKenna). The SEC contended that thirty of the statements of which the Defendants have requested the Court take judicial notice contain hearsay or are not statements subject to judicial notice. See Tr. at 188:7-12 (McKenna). The SEC also noted that the Defendants' did not style the Request for Judicial Notice as a motion. See Tr. at 188:13-17 (McKenna).
The Defendants requested permission to file a surreply addressing scheme liability, and aiding-and-abetting allegations. See Tr. at 189:11-190:5 (Marks). The SEC stated that it does not object to the Defendants submitting a surreply, as long as it is allowed an opportunity to argue against the Defendants' surreply. See Tr. at 190:8-19 (Kasper). The Court granted the Plaintiff's Motion for Permission to File Surreply or, in the Alternative, for the Court to disregard New Arguments Raised in Defendant Jane Starrett's Reply in Support of Motion to Dismiss, filed July 28, 2012 (Doc. 61), and gave the Defendants permission to file a surreply as well. See Tr. at 190:20-24 (Court).
The Defendants asserted that there is "nothing wrong" with "a company trying to do everything that they can legally within their power to satisfy all their margin calls under these trying times before they get their K in." Tr. at 191:5-17 (Marks). The Defendants also asserted that the decision to not tell KPMG about the Citigroup Global margin call was a judgment call and, therefore, could demonstrate that the Defendants had poor judgment, but does not demonstrate fraud. See Tr. at 191:18-192:10 (Marks). The Defendants contended that companies make decisions about what to tell their auditors all the time and that the nature of working with auditors involves similar judgment-based decisions. See Tr. at 192:11-16 (Marks). The Defendants noted that the SEC has conceded that KPMG knew of Thornburg Mortgage's $300 million in margin calls by the time it filed the 2007 Form 10-K, and, therefore, if KPMG was concerned with Thornburg Mortgage's margin calls, KPMG could have raised that issue with the Defendants. See Tr. at 192:17-23 (Marks). The Defendants contended that there is "no question" that KPMG knew about Thornburg Mortgage's $300 million
The Defendants also contended that the SEC has taken a "few liberties" while describing the facts alleged in the Complaint. Tr. at 195:19-196:1 (Valentine). The Defendants asserted that paragraphs 96 and 97 of the Complaint do not allege, as the SEC has asserted, that Goldstone was "fully aware of everything that was happening with the margin calls." Tr. at 196:1-9 (Valentine). The Defendants asserted that inferring from the Complaint that Goldstone was aware of Thornburg Mortgage's margin calls as they were received is different from asserting in the Complaint that Goldstone knew of the margin calls. See Tr. at 196:10-16 (Valentine).
Regarding the SEC's allegation of auditor deception, the Defendants also asserted that the Complaint does not specifically allege that KPMG was unaware of certain information. See Tr. at 196:17-24 (Valentine). The Defendants contended that there is "no reason to believe that" the SEC will acquire more information as the case progresses, because the SEC has already been investigating Thornburg Mortgage for four years. Tr. at 197:2-11 (Valentine). The Defendants asserted, therefore, that the reason the SEC has not alleged specific facts in the Complaint is because the SEC does not have more specific information. See Tr. at 197:12-18 (Valentine). The Defendants also asserted that the SEC's allegation that KPMG "would have disagreed with the company's OTTI conclusion if KPMG had received all of the supposedly omitted information," falls short of stating a claim under rule 13b2-2, because that rule requires materiality, and the SEC has not alleged that KPMG would have altered its OTTI conclusion if the Defendants informed KPMG of Thornburg Mortgage's I/O Strip Transactions and payment plans. Tr. at 197:19-198:11 (Valentine). The Defendants contended that, if the SEC cannot make that allegation after investigating Thornburg Mortgage for four years, there is "no reason that the plaintiff should be given the benefit of the doubt in this case that KPMG would have reached a different conclusion." Tr. at 198:12-20 (Valentine). The Defendants asserted that the Court should take a very skeptical view of the aspects of the Complaint which they have alleged lack sufficient facts. See Tr. at 198:21-199:2 (Valentine).
The Court stated that it believes the pleading standard under rule 9(b) could be substantially different from that required in the PSLRA. See Tr. at 199:7-23 (Court). The Court also stated it believes some of the Defendants' electronic mail transmission are evidence of benign business-related conduct, but also noted that, taken together, the electronic mail transmissions
Regarding the SEC's allegations against Starrett, the Defendants noted that the SEC has conceded that it is not alleging that Starrett made a false statement under rule 10b-5, but, rather, the SEC is alleging scheme liability against Starrett. See Tr. at 201:10-20 (Marks). The Defendants contended that the SEC has not pleaded sufficient facts to allege scheme liability against Starrett. See Tr. at 202:1-3 (Marks). The Defendants noted that the SEC's theories of liability against Starrett are interrelated, because, if the SEC has not sufficiently pleaded scheme liability, then it must allege that Starrett had actual knowledge of the fraud to implicate her for aiding and abetting. See Tr. at 202:1-9 (Marks). The Defendants contended that, under Janus Capital Grp., Inc. v. First Derivative Traders, Starrett cannot be primarily liable under rule 10b-5(b) unless she made a false statement. See Tr. at 203:2-6 (Marks). The Defendants contended that, because the SEC has conceded that Starrett is not primarily liable for making a statement, the SEC cannot attempt to make her primarily liable through scheme liability, because that would undermine Janus Capital Grp., Inc. v. First Derivative Traders' holding. See Tr. at 203:7-204:6 (Marks)(citing SEC v. Kelly). The Defendants also contended that, under SEC v. Kelly, a necessary element of scheme liability is that a defendant committed an inherently deceptive act. See Tr. at 204:7-12 (Marks). The Defendants contended that their statements regarding successfully meeting margin calls, the OTTI analysis, Thornburg Mortgage's I/O Strip Transactions, and omissions to KPMG are not inherently deceptive acts. See Tr. at 204:13-19 (Marks). The Defendants also asserted that, to allege scheme liability, the SEC must allege that the Defendants committed acts separate from and in addition to the primary deception. See Tr. at 205:6-17 (Marks)(citing WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039 (9th Cir.2011), cert. denied ___ U.S. ___, 132 S.Ct. 2713, 183 L.Ed.2d 68 (2012)). The Defendants asserted that SEC v. Lucent Techs., Inc. also holds that the SEC cannot allege scheme liability on false statements or omissions without also alleging that the Defendants committed inherently deceptive acts. See Tr. at 205:18-22 (Marks). The Defendants contended that the SEC has not alleged that they committed deceptive acts separate from the false statements, and, therefore, the SEC has failed to sufficiently allege scheme liability. See Tr. at 205:23-206:4 (Marks). The Defendants contended that the cases on which the SEC has relied do not address the interrelationship of scheme liability and inherently deceptive acts. See Tr. at 206:5-18 (Marks).
The Defendants asserted, therefore, that the SEC must allege aiding-and-abetting liability against Starrett, because the SEC has failed to adequately allege scheme liability. See Tr. at 206:19-207:2 (Marks). The Defendants asserted that, in the Tenth Circuit, to state a claim for aiding and abetting, the SEC must allege a primary violation of the securities laws by another, that Starrett had knowledge of the violation, and that Starrett substantially assisted another to violate securities laws. See Tr. at 207:3-11 (Marks)(citing Anixter v. Home-Stake Prod. Co.). The Defendants contended that the SEC's reliance on Geman v. SEC for the proposition that it need only allege recklessness or willful disregard to state a claim for aiding and abetting is misplaced, because that case does not discuss Anixter v. Home-Stake
The SEC asserted that, to state a claim for scheme liability, it must allege "something other than a misrepresentation." Tr. at 209:8-15 (Kasper). The SEC contended that it has stated a claim of scheme liability against Starrett, pointing to its allegations that Starrett made misrepresentations to KPMG. See Tr. at 209:16-210:1 (Kasper)(citing SEC v. Kearns, 691 F.Supp.2d 601, 618 (D.N.J.2010)). The SEC contended that it has alleged that the Defendants engaged in deceptive conduct before filing the 2007 Form 10-K through entering into the I/O Strip Transactions and misrepresenting to KPMG that they entered into I/O Strip Transactions to take advantage of favorable pricing. See Tr. at 210:12-211:3 (Kasper).
The SEC also asserted that, under Geman v. SEC, the standard for aiding and abetting in the Tenth Circuit is knowledge or recklessness. See Tr. at 211:7-12 (Kasper). The SEC noted that Geman v. SEC is more recent than Anixter v. Home-Stake Prod. Co. See Tr. at 211:133-15 (Kasper). The SEC asserted that numerous cases support Geman v. SEC's standard for aiding and abetting in the Tenth Circuit. See Tr. at 211:16-24 (Kasper)(citing SEC v. Nacchio; SEC v. Intelliquis Int'l, Inc.; SEC v. Autocorp Equities, Inc., 292 F.Supp.2d 1310).
The SEC contends that it has always, and successfully, alleged scheme liability against Starrett. See Plaintiff's Surreply to Defendant Jane Starrett's Reply in Support of Motion to Dismiss, filed August 2, 2012 (Doc. 63)("SEC Surreply"). The SEC contends that it explicitly alleges Starrett's liability under § 17(a) of the Securities Act and rule 10b-5(a), and (c) of the Exchange Act, the provisions which encompass scheme liability. See SEC Surreply at 6, 6 n. 2. The SEC asserts that it need not use the word "scheme" throughout the Complaint to allege scheme liability against Starrett. See SEC Surreply at 6-7 n. 3 (citing In re Salomon Analyst AT & T Litig., 350 F.Supp.2d 455, 464 (S.D.N.Y.2004)). The SEC contends that the Complaint specifically alleges that Starrett, with Goldstone and Simmons, "scheme[d] to raise additional liquidity to satisfy" margin calls "in order to preserve their lucrative positions at Thornburg." SEC Surreply at 7. The SEC asserts that the following allegations in the Complaint set forth the Defendants' scheme: (i) Starrett's electronic mail transmission stating that the Defendants were purposefully withholding information from the auditor, in paragraph 53, at page 16; (ii) Goldstone's electronic mail transmission endorsing a plan that allowed Thornburg Mortgage to keep its situation quiet, in paragraph 31, at page 10; (iii) Thornburg Mortgage's haste to satisfy margin calls before filing the 2007 Form 10-K, in the hopes of avoiding full disclosures, in paragraph 30, at pages 9-10; (iv) Thornburg Mortgage's use of the I/O Strip Transactions to misleadingly state that it did not sell assets to meet margin calls, in paragraphs 65-66, at page 19; (v) the timing the 2007 Form 10-K's filing, in a window in which it had satisfied all of its margin calls, in paragraph 41, at pages 12-13; and (vi) Thornburg Mortgage's plan to quickly raise cash after filing the 2007 Form 10-K to meet upcoming margin calls, in paragraph 32, at page 10. See SEC Surreply at 7-8.
The SEC asserts that it has alleged both scheme liability, and aiding and abetting, against the Defendants, as the SEC has argued that the Defendants made material
The SEC additionally notes that it references in the Complaint § 17(a) of the Securities Act and rule 10b-5(a) and (c) of the Exchange Act, which create liability for scheming to defraud. See SEC Surreply at 10 (citing Complaint ¶¶ 107, 118, at 31, 33-34). The SEC cites to SEC v. Lucent Techs., Inc., 610 F.Supp.2d 342, SEC v. Simpson Capital Mgmt., 586 F.Supp.2d 196 (S.D.N.Y.2008), In re Royal Dutch/Shell Transp. Sec. Litig., and In re Global Crossing, Ltd. Sec. Litig., as holding that it must allege that Starrett "committed a deceptive act or manipulative act... in furtherance of the alleged scheme to defraud ... with scienter." SEC Surreply at 11 (internal quotations omitted). The SEC also contends that courts have found that allegations similar to those in the Complaint sufficiently state a cause of action for scheme liability. See SEC Surreply at 11 (citing SEC v. Kearns, 691 F.Supp.2d at 618). The SEC asserts that Starrett may be liable for the fraudulent statements which Goldstone and Simmons made. See SEC Surreply at 12 (citing SEC v. Lucent Techs., Inc., 610 F.Supp.2d at 350; In re Global Crossing, Ltd. Sec. Litig., 322 F.Supp.2d at 335). The SEC contends that rule 10b-4(a) and (c) sets broad parameters for scheme liability, and, therefore, the SEC need not allege that Starrett engaged in egregious conduct. See SEC Surreply at 12 (citing In re Parmalat Sec. Litig., 376 F.Supp.2d 472 (S.D.N.Y.2005)).
The SEC also asserts that it need not allege that Starrett committed a deceptive act completely separate from Goldstone and Simmons' fraudulent statements to be liable for participation in a fraudulent scheme. See SEC Surreply at 13. The SEC asserts that, "at most, the cases require that in order to allege scheme liability a plaintiff must prove some conduct beyond the misrepresentation to investors." SEC Surreply at 13 (citing Lopes v. Viera, No. 1:06-CV-01243, 2012 WL 691665, at *6 (E.D.Cal. Mar. 2, 2012); SEC v. Stoker, 865 F.Supp.2d 457, 467-68 (S.D.N.Y.2012); In re Alstom SA Sec. Litig., 406 F.Supp.2d 433, 475 (S.D.N.Y. 2005)). The SEC additionally asserts that Starrett's conduct was deceptive independent of the 2007 Form 10-K. See SEC Surreply at 13-14. The SEC contends that deceptive conduct that constitutes a fraudulent scheme can include "the misstatement or omission alleged to violate Rule 10b-5 itself" without violating the holding of Janus Capital Grp., Inc. v. First Derivative Traders. SEC Surreply at 14, 15 n. 12 (citing Lopes v. Viera, 2012 WL 691665, at *6; SEC v. Stoker, 865 F.Supp.2d at 467-68; In re Royal Dutch/ Shell Transp. Sec. Litig., 2006 WL 2355402, at *8; In re Alstom SA Sec. Litig., 406 F.Supp.2d at 475). The SEC asserts that, by alleging that Starrett misrepresented Thornburg Mortgage's financial position to its auditors, the SEC has alleged that Starrett engaged in a distinct act sufficient to support scheme liability. See SEC Surreply at 15.
The SEC contends that Starrett's argument that the Defendants' scheme was not inherently deceptive fails. See SEC Surreply at 15 (citing Starrett Reply at 7). The SEC asserts that Starrett has not challenged the allegedly deceptive nature
The SEC also contends that Starrett's misrepresentations to the auditors support a claim of scheme liability, even though the statements were not made directly to the investing public, because Starrett's misrepresentations "were part and parcel of the scheme to raise additional cash and were necessary for the fraudulent Form 10-K." SEC Surreply at 16 (citing SEC v. Kearns, 691 F.Supp.2d at 618; SEC v. Lee, 720 F.Supp.2d at 334).
Starrett contends that the SEC is attempting to shift its position and recast its Complaint as setting forth an allegation of scheme liability against her. See Defendant Jane Starrett's Response to the SEC's Surreply on the Issue of Alleged Scheme Liability at 5, filed August 13, 2012 (Doc. 66)("Starrett Surreply"). Starrett also contends that the SEC Surreply demonstrates that it cannot state a claim for scheme liability against her. See Starrett Surreply at 5-6.
First, Starrett asserts that the Supreme Court has drawn bright lines between primary and secondary liability, and "maker" and "scheme" liability. Starrett Surreply at 6 (citing Janus Capital Grp., Inc. v. First Derivative Traders; Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008); Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994)). Starrett asserts that primary liability requires the SEC to plead either that she made a false statement, under rule 10b-5(b), or she was part of a fraudulent scheme to defraud, under rule 10b-5(a) and (c). See Starrett Surreply at 6. Starrett asserts that, under Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., rule 10b-5's private right of action does not encompass suits against aiders and abettors who substantially assist in making a fraudulent statement, but do not make the statement. See Starrett Surreply at 6 (citing 511 U.S. at 180, 114 S.Ct. 1439). Starrett contends that, under Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., scheme liability does not implicate those who scheme to create a false statement of material fact. See Starrett Surreply at 6 (citing 552 U.S. at 160-63, 128 S.Ct. 761). Starrett contends that, under Janus Capital Grp., Inc. v. First Derivative Traders, one who does not make a false statement cannot be held primarily liable for that statement under rule 10b-5(b). See Starrett Surreply at 7 (citing 131 S.Ct. at 2301, 2302, 2302 n. 6).
Starrett also contends that scheme liability requires the SEC to allege that she engaged in inherently deceptive conduct which is distinct from fraudulent misrepresentations, as opposed to conduct which is fraudulent only because of subsequent misrepresentations about the conduct. See Starrett Surreply at 7-10 (citing SEC v. Kelly, 817 F.Supp.2d at 342-44; SEC v. Lucent Techs., 610 F.Supp.2d at 345-61). Starrett contends that the SEC's allegations against her are "`nothing more than a reiteration of the misrepresentations and omissions' that underlie the SEC's failed Rule 10b-5(b) claim," and, therefore, the Court should dismiss the allegations.
Starrett contends that there is nothing inherently deceptive about sending internal company electronic mail transmissions and asserts that, if internal company electronic mail transmissions could support a claim of scheme liability, the scope of scheme liability would be boundless. See Starrett Surreply at 10. Starrett similarly contends that scrambling to raise cash and receiving margin calls after filing a Form 10-K are not inherently deceptive acts. See Starrett Surreply at 10-11.
Starrett also contends that the conduct which the SEC alleges demonstrates a fraudulent scheme is not distinct from the Defendants' alleged misrepresentations. Starrett notes that the SEC has alleged that the Defendants entered into I/O Strip Transactions, scrambled to meet margin calls, and withheld information from KPMG so that they could make a misleading statement in the 2007 Form 10-K. See Starrett Surreply at 11 (citing SEC Surreply at 3-4, 9; Complaint ¶¶ 4, 5, 7, 65, at 2, 3, 19).
Starrett asserts that the cases upon which the SEC relies are distinguishable, because in those cases, the plaintiffs alleged scheme liability was based upon acts that were both inherently deceptive and distinct from misrepresentations. See Starrett Surreply at 12-14. Starrett notes that SEC v. Kearns was decided before Janus Capital Grp., Inc. v. First Derivative Traders, and asserts, therefore, that SEC v. Kearns is not on point with the most recent Supreme Court law. See Starrett Surreply at 12.
On August 31, 2012, the SEC filed its Plaintiff's Supplemental Brief in Opposition to Defendants' Motions to Dismiss (Doc. 68)("SEC Supp."). The SEC first alleges that the Defendants' arguments go beyond the allegations in the Complaint and improperly contest the merits of the SEC's allegations. See SEC Supp. at 5. The SEC notes that the Defendants, combined, attach fifty-five exhibits to their motions to dismiss, and the SEC asserts that the Defendants are requesting the Court to "tread well beyond the confines of a Rule 12(b) analysis and invade the province of the fact finder." SEC Supp. at 6. The SEC contends that the Defendants' counsel proffered their own interpretations of many documents at the hearing. The SEC contends that factual arguments are wholly inappropriate at this stage. See SEC Supp. at 6. The SEC notes that the Defendants rely upon documents not referenced in the Complaint for their theory that KPMG was aware of all of Thornburg Mortgage's margin calls. See SEC Supp. at 6-7 (citing Starrett MTD at 17-18). The SEC contends that, at this stage, its allegation that the Defendants purposefully did not tell KPMG about Thornburg Mortgage's margin calls and its default notices is uncontroverted. See SEC Supp. at 7 (citing Complaint ¶¶ 5, 55, at 3, 16).
The SEC also contends that the Defendants made contradictory assertions at the hearing. For example, the SEC contends that the Defendants asserted that the Feb. 28 Simmons/Goldstone Email is cryptic, because Simmons' statement does not have a period at its end, but the Defendants also argued that the market's negative reaction to the 2007 Form 10-K surprised Simmons. See SEC Supp. at 7 (citing Goldstone & Simmons MTD at 48). The SEC also contends that the meaning of Goldstone's reference to the KPMG situation, Mr. Marks' discussion of his experience with other audit firms, the playing of the Street Signs, and Goldstone's counsel's statement that he did not know about a
The SEC also asserts that the Court should not subject the Complaint to a higher scrutiny because the SEC has been investigating Thornburg Mortgage over the past four years. The SEC notes that an SEC investigation is "not akin to nor a substitute for litigation discovery." SEC Supp. at 8 (citing SEC v. Monterosso, 746 F.Supp.2d 1253, 1262 (S.D.Fla.2010)). The SEC contends that whether it has been investigating Thornburg Mortgage before filing this lawsuit is irrelevant to whether the Court should dismiss the Complaint. The SEC further contends that, because it is not subject to the PSLRA, it need only allege scienter generally. See SEC Supp. at 8-9 (citing SEC Response to Goldstone & Simmons MTD at 28-29).
The SEC also asserts that it has alleged that the Defendants breached the Citi Agreement. The SEC contends that, even if the Citigroup Global Agreement allows the parties to work out a payment plan, the SEC has not alleged in the Complaint that Thornburg Mortgage and Citigroup Global agreed to a payment plan, and, therefore, the SEC's allegation that Thornburg Mortgage was in breach of its reverse repurchase agreements is uncontroverted. See SEC Supp. at 9 (citing Complaint ¶¶ 4, 29, 34, 58, 72, at 2, 9, 10-11, 17, 21; Goldstone & Simmons MTD at 35-36). The SEC contends that its allegation that Thornburg Mortgage was in breach of the Citigroup Global Agreement is plausible, because the Citigroup Global Agreement requires Thornburg Mortgage to pay margin calls on the day it receives them, which Thornburg Mortgage did not. The SEC also notes that Thornburg Mortgage received the Citigroup Global Letter before filing the 2007 Form 10-K. See SEC Supp. at 9. The SEC asserts that, notwithstanding any payment plan, the Citigroup Global Letter demonstrates that Citigroup Global could have declared Thornburg Mortgage in default at any time. See SEC Supp. at 10. The SEC contends that, if the Defendants "knew or reasonably should have known that Thornburg's ARM Securities were subject to seizure and sale by its lenders, it was an extreme departure from the standard of ordinary care" to represent that Thornburg Mortgage had the intent and ability to hold its assets until they recovered their value. SEC Supp. at 10-11.
The SEC asserts that it has sufficiently alleged that Thornburg Mortgage's statement that it had "successfully" continued to meet all margin calls was materially misleading, and the SEC notes that the Defendants could not explain the term "successfully" at the hearing. SEC Supp. at 11. The SEC contends that Thornburg Mortgage describing itself as successfully meeting margin calls was not "vague puffery," as the Defendants assert, as it is possible to objectively measure whether Thornburg Mortgage met its margin calls within the terms of its reverse repurchase agreements. SEC Supp. at 11. The SEC asserts that other courts have found similar statements actionable for fraud, where the purpose of such disclosures was "`to assure investors that there were no serious difficulties in [a defendant's] access to short-term financing,'" which allegedly was not accurate. SEC Supp. at 12 (quoting In re Gen. Elec. Co. Sec. Litig., 857 F.Supp.2d at 402). The SEC contends that it has similarly alleged that the Defendants represented that Thornburg Mortgage successfully met its margin calls,
The SEC also asserts that it has stated a claim under rule 10b-5(a) or (c) for scheme liability. The SEC asserts that it has alleged that the Defendants' scheme involved lying to auditors, entering into transactions so as to mislead investors, and timing the filing of the 2007 Form 10-K so as to raise money on a fraudulent Form 10-K. See SEC Supp. at 13. The SEC contends that SEC v. Kelly stands for the limited proposition that a plaintiff who has failed to sufficiently plead liability based upon misrepresentations cannot salvage its case by attempting to plead scheme liability instead. See SEC Supp. at 13. The SEC contends, on the other hand, that it has always alleged that Starrett engaged in a scheme to defraud. See SEC Supp. at 13. The SEC further contends that it has set forth that Starrett committed inherently deceptive acts through withholding information from KPMG and timing the filling of the 2007 Form 10-K to be after Thornburg Mortgage satisfied its last margin call. See SEC Supp. at 14. The SEC contends that Starrett is attempting to set a standard that scheme liability must be premised on acts completely separate from alleged misrepresentations, and the SEC asserts that "there is no support for the position that that additional action be wholly unrelated to any alleged misrepresentation." SEC Supp. at 14. The SEC argues that SEC v. Lucent Techs., Inc. "makes clear that a Defendant can be held liable for a scheme whose purpose was to make a misstatement." SEC Supp. at 15 (citing 610 F.Supp.2d at 359). The SEC also contends that SEC v. Kearns is directly on point, noting that the fact it was decided before Janus Capital Grp., Inc. v. First Derivative Traders is irrelevant, because SEC v. Kearns discusses the scope of scheme liability, which the Supreme Court did not discuss in Janus Capital Grp., Inc. v. First Derivative Traders. See SEC Supp. at 15. The SEC contends that SEC v. Kearns "clearly stands for the proposition that allegations of misleading auditors in connection with fraudulent public statements — alleged here — state a claim under subsections (a) and (c) of Rule 10b-5." SEC Supp. at 15.
The SEC also asserts that, if the Court dismisses its allegation of primary liability against Starrett, the SEC need not demonstrate that Starrett had actual knowledge to succeed on an allegation of aiding and abetting. The SEC asserts that, in the Tenth Circuit, recklessness is sufficient for an aiding-and-abetting violation. See SEC Supp. at 16 (citing Geman v. SEC, 334 F.3d at 1196; SEC v. Intelliquis Int'l, Inc., 2003 WL 23356426, at **13-14). The SEC contends that, even in Anixter v. Home-Stake Prod. Co., a case upon which Starrett relies, the Tenth Circuit held that recklessness satisfies the knowledge requirement of an aiding-and-abetting claim. See SEC Supp. at 16. The SEC contends that SEC v. Rivelli, No. 05-cv-1039, 2010 WL 2775623, at *4 (D.Colo., July 14, 2010), ignores the Tenth Circuit's holding in Geman v. SEC regarding aiding-and-abetting liability. See SEC Supp. at 16.
On August 31, 2012, Goldstone and Simmons filed their Supplemental Brief in Support of Motion to Dismiss on Behalf of Defendants Larry Goldstone and Clarence G. Simmons (Doc. 69)("Goldstone & Simmons Supp."). Goldstone and Simmons assert that the SEC has not met its burden in alleging that they committed fraud through Thornburg Mortgage's OTTI analysis, in which the Defendants stated that Thornburg Mortgage would not need to sell MBS assets at a loss to meet potential future margin calls. Goldstone and Simmons assert that the SEC must assert that they did not believe their OTTI analysis
Goldstone and Simmons assert that the SEC has not "even attempted to plead the second prong" of the scienter requirement for "statements of opinion or belief," which requires alleging that the Defendants' OTTI analysis was subjectively false at the time it was made. Goldstone & Simmons Supp. at 8 (citing Lane v. Page, 581 F.Supp.2d at 1126; Genesee Cnty. Emps.' Ret. Sys. v. Thornburg Mortg. Sec. Trust, 2006-3, 825 F.Supp.2d at 1178). Goldstone and Simmons assert that, in Fait v. Regions Fin. Corp., the Second Circuit determined that similar allegations, based upon the defendants' knowledge of adverse market conditions, failed to sufficiently allege that the defendants did not believe statements regarding company good will at the time they were made. See Goldstone & Simmons Supp. at 8-9 (citing 655 F.3d at 111-113). Goldstone and Simmons assert that the Second Circuit, and other district courts, have reached the same conclusion in the context of securities claims. See Goldstone & Simmons Supp. at 9-10 (citing City of Omaha v. CBS Corp., 679 F.3d 64, 68 (2d Cir.2012); Phelps v. Stomber, 883 F.Supp.2d 188 (D.D.C.2012); In re Deutsche Bank AG Sec. Litig., No. 09-Civ-1714 (DAB), 2012 WL 3297730, at *2 (S.D.N.Y. Aug. 10, 2012)). Goldstone and Simmons assert that the SEC's allegations regarding the Defendants' OTTI analysis fail for the same reason: the SEC's alleges that the Defendants should have known that their OTTI analysis was wrong. See Goldstone & Simmons Supp. at 10 (citing Response to Goldstone & Simmons MTD at 38). Goldstone and Simmons also contend that their disclosures in the 2007 Form 10-K regarding Thornburg Mortgage's OTTI analysis undercut the SEC's allegations, because the Defendants explained that the OTTI analysis is based on accounting policy, and they included charts "quantifying and itemizing the unrealized losses for investors to examine themselves." Goldstone & Simmons Supp. at 10-11 (citing 2007 Form 10-K at 40-41, 89, 99, 100, 110).
Goldstone and Simmons also assert that the SEC has not distinguished its allegations of fraud from innocent conduct. Goldstone and Simmons contend that the SEC has alleged no facts which demonstrate that the Defendants were reckless with their OTTI analysis. See Goldstone & Simmons Supp. at 11-12. Goldstone and Simmons contend that the SEC's allegations that the Defendants should have known facts, and that they failed to properly consider information before them, are allegations of negligence, but not recklessness. See Goldstone & Simmons Supp. at 12-13 (citing City of Phila. v. Fleming Cos., Inc., 264 F.3d 1245, 1260 (10th Cir. 2001); Complaint ¶¶ 51-52, 71, at 15-16, 21). Goldstone and Simmons note that the SEC has not alleged that the Defendants' OTTI analysis "deviated substantially from the standard approach taken by public company accountants in applying the rule."
Goldstone and Simmons assert that the SEC raised for the first time at the hearing its theory that Starrett schemed to withhold information about Thornburg Mortgage's margin calls from KPMG until shortly before filing the 2007 Form 10-K. Goldstone and Simmons assert that this theory does not address whether the 2007 Form 10-K was misleading. Goldstone and Simmons assert, rather, that the Feb. 25 Goldstone/Starrett Email, upon which the SEC relies for this theory, demonstrates that the Defendants believed their OTTI analysis was correct. See Goldstone & Simmons Supp. at 15. Goldstone and Simmons also assert that the Feb. 25 Goldstone/Starrett Email fails to support the SEC's allegation of scienter, because the SEC conceded at the hearing that the Defendants disclosed the information in the Feb. 25 Goldstone/Starrett Email to KPMG before Thornburg Mortgage filed the 2007 Form 10-K. See Goldstone & Simmons Supp. at 15-16. Goldstone and Simmons similarly assert that the Feb. 22 BOD Email does not support the SEC's allegations of scienter, because Goldstone stated in the electronic mail transmission that whether the Defendants would disclose Thornburg Mortgage's margin calls to KPMG would "`depend on where we are next week,'" indicating that Goldstone planned to make "all necessary disclosures at the appropriate time." Goldstone & Simmons Supp. at 15 n. 9 (quoting Feb. 22 BOD Email at 2). Goldstone and Simmons also assert that the SEC has not alleged how the Defendants' delayed disclosure to KPMG constituted a scheme to defraud. See Goldstone & Simmons Supp. at 15-16.
Goldstone and Simmons assert, therefore, that the Complaint is "`merely consistent... with liability,'" but that the SEC's theory of liability is too general and encompasses both fraudulent and innocent
Starrett filed her Defendant Jane Starrett's Supplemental Brief in Support of Motion to Dismiss on August 31, 2012. See Doc. 70 ("Starrett Supp."). Starrett asserts that the SEC must allege that she had actual knowledge of a primary securities violation to survive a motion to dismiss the SEC's aiding-and-abetting allegations, and her OTTI analysis is not actionable for fraud unless she subjectively disbelieved it, which, she contends, the SEC has not alleged. See Starrett Supp. at 5.
Starrett contends that the SEC must plead that she had actual knowledge of Goldstone's or Simmons' security violations to allege that she aided and abetted those violations. See Starrett Supp. at 6 (citing 15 U.S.C. § 78t(e); Anixter v. Home-Stake Prod. Co., 77 F.3d at 1225; SEC v. Rivelli). Starrett contends that, because the PSLRA requires private litigants to allege that the defendants had actual knowledge to state a claim for aiding-and-abetting liability, the SEC, similarly, must allege that Starrett had actual knowledge to hold her liable for aiding and abetting the violations of another. See Starrett Supp. at 6-7 (citing Pub.L. 104-67 § 104, 109 Stat. 737; Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. at 191, 114 S.Ct. 1439; SEC v. Rivelli, 2010 WL 2775623, at *4; SEC v. Lucent Techs., Inc., 610 F.Supp.2d at 362). Starrett asserts that the SEC has not alleged that she had actual knowledge of an alleged primary security violation, and, therefore, contends that the SEC has failed to state a claim for aiding-and-abetting liability against Starrett. See Starrett Supp. at 8.
Starrett asserts that Geman v. SEC, upon which the SEC relies, does not address Anixter v. Home-Stake Prod. Co., and does not establish that allegations of recklessness are sufficient to state a claim for aiding and abetting liability. See Starrett Supp. at 8. Starrett also asserts that the district court cases upon which the SEC relies — SEC v. Nacchio and SEC v. Autocorp Equities, Inc. — pre-date SEC v. Rivelli and SEC v. Lucent Techs., Inc., 610 F.Supp.2d 342, and, therefore, do not address "the effect of Section 20(e) [of the Exchange Act]'s `knowingly' requirement." Starrett Supp. at 9. Starrett also notes that, in SEC v. Nacchio and SEC v. Autocorp Equities, Inc., the plaintiffs alleged that the defendants had actual knowledge of the securities violations, and, therefore, the courts did not need to address whether allegations of recklessness alone were sufficient. See Starrett Supp. at 9 (citing SEC v. Nacchio, 614 F.Supp.2d at 1172; SEC v. Autocorp Equities, Inc., 292 F.Supp.2d at 1332). Starrett also asserts that the district court in SEC v. Intelliquis Int'l, Inc. did not address Anixter v. Home-Stake Prod. Co., did not address the interrelationship of a recklessness standard for aiding-and-abetting liability and Section 20(e) of the Exchange Act, and "appeared to find that the defendant in fact had actual knowledge." Starrett Supp. at 9.
Starrett also contends that the 2010 amendment to § 20(e) of the Exchange Act, which adds the words "or recklessly" to the statute's knowledge requirement,
Starrett also asserts that the SEC must allege that she actually disbelieved her OTTI analysis, as the OTTI analysis is a statement of opinion or belief, and not a factual statement. See Starrett Supp. at 10 (citing Va. Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1091, 1095, 111 S.Ct. 2749, 115 L.Ed.2d 929 (1991)). Starrett asserts that the subjective disbelief in a statement of opinion or belief regarding an accounting judgment is necessary to establish that the judgment was "`untrue' within the meaning of the Securities Act and the Exchange Act." Starrett Supp. at 11 (citing City of Omaha v. CBS Corp., 679 F.3d at 67-69; Fait v. Regions Fin. Corp., 655 F.3d at 112 n. 5). Starrett asserts that the necessity of pleading that she subjectively disbelieved the OTTI analysis establishes a heightened pleading standard for a misrepresentation or opinion claim under § 10(b) of the Exchange Act. See Starrett Supp. at 11-12 (citing Podany v. Robertson Stephens, Inc., 318 F.Supp.2d 146, 158 (S.D.N.Y.2004)).
Starrett contends that the SEC has not pled that she disbelieved that Thornburg Mortgage's impaired ARM securities were other than temporarily impaired when Thornburg Mortgage issued its OTTI analysis. See Starrett Supp. at 12. Starrett contends that the OTTI analysis was not an "objectively determinable fact, but rather a statement of opinion." Starrett Supp. at 13. Starrett notes that, in the 2007 Form 10-K, the Defendants describe the OTTI analysis as an "`accounting estimate' that `require[d] complex management judgment,'" and, thereby, "heightened its subjective nature." Starrett Supp. at 13 (quoting 2007 Form 10-K at 39, 41). Starrett asserts that the SEC's allegation that the Defendants "could have or should have reached a different opinion or that the opinion reached by them was unreasonable does not satisfy the `subjective falsity' prong of the applicable pleading standard." Starrett Supp. at 14. Starrett also asserts that the SEC cannot rely on Thornburg Mortgage's restatement to state a claim of fraud against the Defendants, because, "[a]t most, a restatement of financial results can support a claim that previously issued financials contained objectively false or inaccurate statements." Starrett Supp. at 15 (emphasis in original)(citing In re Fannie Mae 2008 Sec. Litig., 742 F.Supp.2d at 408; SEC v. Espuelas, 579 F.Supp.2d at 472). Starrett contends that the restatement of an opinion does not lead to a plausible inference that the Defendants subjectively disbelieved their OTTI analysis. Last, Starrett asserts that the OTTI analysis was a cautionary statement and, therefore, not actionable unless the Defendants were guaranteeing the OTTI analysis. See Starrett Supp. at 16 (citing In re MRU Holdings Sec. Litig., 769 F.Supp.2d at 510-11).
On September 10, 2012, the SEC provided notice to the Court of SEC v. Sells, No. C 11-4941 CW, 2012 WL 3242551 (N.D.Cal. Aug. 10, 2012). See Notice of Supplemental Authority, filed September 10, 2012 (Doc. 71)("SEC 1st S.A."). The SEC asserts that the case supports its
On September 11, 2012, the SEC withdrew its reliance on In re Gen. Elec. Co. Sec. Litig., which it cited on page 8 of the SEC Supp. See Plaintiff's Withdrawal of Reliance on Cited Authority, filed September 11, 2012 (Doc. 72)("SEC W/D"). The SEC explains that the court recently reconsidered its previous opinion in In re Gen. Elec. Co. Sec. Litig., and determined that General Electric's chief executive officer was not liable for his statement that General Electric had successfully met its commercial paper needs, because that statement was one of opinion, "and not actionable because the statement was true and plaintiff had not alleged that [the chief executive officer] believed otherwise." SEC W/D at 1. The SEC also notes that the court determined that, because the plaintiffs explicitly disclaimed that the chief executive officer acted knowingly, the court could not find that the chief executive officer subjectively did not believe his statement. The SEC contends, nonetheless, that its case is not hampered by the court's reconsideration, because it alleges that the Defendants knew that Thornburg Mortgage had not "successfully" met its margin calls when the Defendants stated otherwise in the 2007 Form 10-K. SEC W/D at 2.
On September 11, 2012, Starrett responded to the SEC 1st Supp. Auth. See Defendant Jane Starrett's Response to Notice of Supplemental Authority, filed September 11, 2012 (Doc. 73)("Starrett Resp.-1st S.A."). Starrett contends that SEC v. Sells "underscores that the Complaint fails to state a claim for scheme liability against Ms. Starrett." Starrett Resp.-1st S.A. at 1 (emphasis in original). Starrett notes that the conduct in SEC v. Sells was both inherently deceptive and distinct from any alleged misrepresentation or omission, as the defendants orchestrated fictitious product sales, created false documentation of those sales, and forged signatures from customers and sales representatives. Starrett contends that Judge Wilken relied upon the defendants' deceptive conduct beyond misrepresentations in finding them liable for a scheme to defraud. See Starrett Resp.-1st S.A. at 1. Starrett also asserts that SEC v. Sells is distinguishable, because, unlike the SEC, the plaintiff in SEC v. Sells relied exclusively on scheme liability under 10b-5(a) and (c), and did not allege that the defendants also were primarily liable for misrepresentations. See Starrett Resp.-1st S.A. at 2.
On September 21, 2012, Goldstone and Simmons responded to the SEC W/D. See Defendants Larry Goldstone and Clarence G. Simmons's Response to Plaintiff's Withdrawal of Reliance on Cited Authority, filed September 21, 2012 (Doc. 74)("G/S
On January 8, 2013, the SEC notified the Court of SEC v. Familant, 910 F.Supp.2d 83 (D.D.C.2012) (Boasberg, J.). See Notice of Supplemental Authority, filed January 8, 2013 (Doc. 116)("SEC 2nd S.A."). The SEC asserts that this case "directly challenges the holding in SEC v. Kelly," upon which Starrett relies. SEC 2nd S.A. at 1. The SEC notes that in SEC v. Familant, the Honorable James E. Boasberg, United States District Judge for the District of Columbia, determined that SEC v. Kelly interprets scheme liability too narrowly and was incorrectly decided. The SEC contends that it has "alleged actions in furtherance of the scheme that are independent of any misstatement" and that SEC v. Familant demonstrates that Starrett's reliance on SEC v. Kelly is misplaced. SEC 2nd S.A. at 2.
On January 10, 2013, Starrett responded to the SEC 2nd S.A., asserting that SEC v. Familant is inapposite. See Defendant Jane Starrett's Response to Notice of Supplemental Authority at 1, filed January 10, 2013 (Doc. 119)("Starrett Resp.-2nd S.A."). Starrett notes that the defendants in SEC v. Familant engaged in inherently deceptive conduct, which "`no innocent business dealings could explain,'" and, therefore, is distinguishable from the SEC's allegations against Starrett, because the SEC "has not alleged any such inherently deceptive conduct by Ms. Starrett." Starrett Resp.-2nd S.A. at 1-2 (quoting 910 F.Supp.2d at 92-93). Starrett contends that the SEC has not alleged any deceptive acts beyond alleged misrepresentations and omissions, and, thus, the SEC has not plausibly alleged that Starrett engaged in a scheme to defraud investors. See Starrett Resp.-2nd S.A. at 2.
On January 11, 2013, the Defendants notified the Court of MHC Mut. Conversion Fund, L.P. v. United W. Bancorp, Inc., 913 F.Supp.2d 1026 (D.Colo.2012). See Notice of Supplemental Authority, filed January 11, 2013 (Doc. 12)("Defendants 1st S.A."). The Defendants explain that the United States District Court for the District of Colorado determined that the defendants' OTTI judgment was a statement of "an opinion, not a matter of objective fact, because the `determination of OTTI reflects the entity's judgment regarding multiple factors." Defendants 1st S.A. at 1-2 (quoting MHC Mut. Conversion Fund, L.P. v. United W. Bancorp., Inc., 913 F.Supp.2d at 1034-36). The Defendants further explain that the court held that the plaintiffs asserting violations of securities laws based on opinions must allege that the opinions are both objectively and subjectively false. See Defendants 1st S.A. at 2 (citing MHC Mut. Conversion Fund, L.P. v. United W. Bancorp, Inc., 913 F.Supp.2d at 1037; Wolfe v. Aspenbio Pharma., Inc., Civil No. 11-cv-00165-REB-KMT, 2012 WL 4040344, at *8 (D.Colo. Sept. 13, 2012)).
The SEC responded to the Defendants' 1st S.A. on January 17, 2013. See Plaintiff's Response to Defendants' Notice of Supplemental Authority, filed January 17, 2013 (Doc. 123)("SEC Resp.-Defendants 1st S.A."). The SEC asserts that MHC Mut.
On March 25, 2013, the Defendants notified the Court of SEC v. Benger, 931 F.Supp.2d 908, No. 09 C 676, 2013 WL 1150587 (N.D.Ill. Mar. 21, 2013). See Defendants' Notice of Supplemental Authority, filed March 25, 2013 (Doc. 155)("Defendants 2nd S.A."). The Defendants assert that the Honorable Jeffrey Neal Cole, United States Magistrate Judge held, in SEC v. Benger, that a "scheme claim must encompass inherently deceptive conduct beyond misrepresentations and not merely `activities' in furtherance thereof." Defendants 2nd S.A. at 1 (emphasis added in original)(quoting 931 F.Supp.2d at 915-16, 2013 WL 1150587, at *7). The Defendants explain that Judge Cole found that the SEC's allegations of inherently deceptive conduct encompassed only allegations of concealment, and held that, if concealment could support a claim under rule 10b-5(a) and (c), "`every 10b-5(b) violation could be charged as a 10b-5(a) and (c) violation as well.'" Defendants 2nd S.A. at 2 (quoting 931 F.Supp.2d at 915, 2013 WL 1150587, at *7).
On April 1, 2013, the SEC responded to the Defendants 2nd S.A. See Plaintiff's Response to Defendants' Notice of Supplemental Authority, filed April 1, 2013 (Doc. 158)("SEC Resp.-Defendants 2nd S.A."). The SEC contends that the Defendants have mischaracterized SEC v. Benger's holding, as the SEC contends that the court "merely recites that `other Circuits have determined that a defendant may only be liable as part of a fraudulent scheme based upon misrepresentations and omissions under Rules 10b-5(a) or (c) when the scheme also encompasses conduct beyond those misrepresentations or omissions.'" SEC Resp.-Defendants 2nd S.A. at 1 (quoting SEC v. Benger, 931 F.Supp.2d at 913, 2013 WL 1150587, at *5). The SEC contends that the Complaint is distinguishable from the facts in SEC v. Benger, because the SEC alleges "significant [] conduct in furtherance of the scheme, including withholding information from Thornburg's auditors." SEC Resp.-Defendants 2nd S.A. at 1-2 (citing SEC Surreply a 7-8). The SEC also asserts that the scheme the Defendants allegedly engaged in is distinguishable from that in SEC v. Benger, as the SEC contends the Defendants engaged in a complicated scheme, and not a simple scheme based on a single misrepresentation. See SEC Resp.-Defendants 2nd S.A. at 2 (citing SEC v. Benger, 931 F.Supp.2d at 914-15, 2013 WL 1150587, at *6).
On April 1, 2013, the Defendants notified the Court of SEC v. St. Anselm Exploration Co., 936 F.Supp.2d 1281, 11-cv-00668, 2013 WL 1313765 (D.Colo. Mar. 29, 2013)(Blackburn, J.). See Defendants' Notice of Supplemental Authority, filed April 1, 2013 (Doc. 159)("Defendants 3rd S.A."). The Defendants assert that SEC v. St. Anselm Exploration Co., 936 F.Supp.2d at 1281, 2013 WL 1313765, "adds to an emerging consensus among the circuits (including the Tenth) that scheme liability
On April 8, 2013, the SEC responded to the Defendants 3rd S.A. See Plaintiff's Response to Defendants' Notice of Supplemental Authority, filed April 8, 2013 (Doc. 160)("SEC Resp.-Defendants 3rd S.A."). The SEC contends that SEC v. St. Anselm Exploration Co., 936 F.Supp.2d 1281, 2013 WL 1313765, does nothing more than cite the correct standard for alleging scheme liability and determine that it was not satisfied, based upon facts which are distinguishable from those set forth in the Complaint. See SEC Resp.-Defendants 3rd S.A. at 1. The SEC distinguishes the Complaint by noting that it has alleged that Starrett made misrepresentations to KPMG and that the Defendants engaged in multiple forms of deceptive conduct independent of the misrepresentations in the 2007 Form 10-K. See SEC Resp.-Defendants 3rd S.A. at 2.
On April 22, 2013, the SEC notified the Court of SEC v. Syron, 934 F.Supp.2d 609 (S.D.N.Y.2013) (Sullivan, J.). See Notice of Supplemental Authority, filed April 22, 2013 (Doc. 165)("SEC 3rd S.A."). The SEC asserts that SEC v. Syron establishes that a public filing can be the source of a misrepresentation if an investor could plausibly be misled by the filing, even if the filing could just as plausibly be read to not mislead investors. The SEC also asserts that SEC v. Syron "reiterates the `well settled' law `that so called half truths — literally true statements that create a materially misleading impression — will support claims for securities fraud." SEC 3rd S.A. at 1-2 (quoting SEC v. Syron, 934 F.Supp.2d at 629, 2013 WL 1285572, at *17)(citing SEC v. Syron, 934 F.Supp.2d at 626-28, 2013 WL 1285572, at **15-16). The SEC contends, therefore, that it has stated a plausible claim for securities fraud, because investors could have been misled by the Defendants' OTTI analysis in the 2007 Form 10-K, which, although possibly accurate, "does not excuse" Thornburg Mortgage's reliance on lender forbearance. SEC 3rd S.A. at 1-2.
On April 29, 2013, the Defendants responded to the SEC's 3rd S.A. See Defendants' Response to Plaintiff's Notice of Supplemental Authority, filed April 29, 2013 (Doc. 166)("Defendants Resp.-SEC 3rd S.A."). The Defendants assert that SEC v. Syron is readily distinguishable, because the court determined that the defendants' disclosures were ambiguous and obscured billions of dollars in subprime MBS exposure. See Defendants' Resp.-SEC 3rd S.A. at 1 (citing 934 F.Supp.2d at 616-17, 628-29, 2013 WL 1285572, at **4, 17). The Defendants contend that the SEC has alleged that the OTTI analysis — which the Defendants' assert is a statement of opinion — was misleading, but not ambiguous. The Defendants also assert that the 2007 Form 10-K "made crystal clear not only the company's unrealized losses ... but also the associated risks, disclosing" many aspects of Thornburg Mortgage's precarious financial position. Defendants Resp.-SEC 3rd S.A. at 1-2. The Defendants assert, therefore, that
On June 11, 2013, the SEC notified the Court of IBEW Local 90 Pension Fund v. Deutsche Bank AG, No. 11 Civ. 4209(KBF), 2013 WL 1223844 (S.D.N.Y. Mar. 27, 2013) (Forrest, J.). See Notice of Supplemental Authority, filed June 11, 2013 (Doc. 180)("SEC 4th S.A."). The SEC asserts that this case "runs contrary" to Starrett's contention that an allegation of scheme liability "cannot coexist with allegations of material misstatements and omissions." SEC 4th S.A. at 1 (citing 2013 WL 1223844, at *8). The SEC notes that the scheme alleged in IBEW Local 90 Pension Fund v. Deutsche Bank AG consisted of defendants increasing short term profits through acquiring poor quality mortgages, and pooling the mortgages into other securities without disclosing the mortgages and the securities' poor quality. See SEC 4th S.A. at 1-2 (citing 2013 WL 1223844, at *13). The SEC also contends that IBEW Local 90 Pension Fund v. Deutsche Bank AG distinguishes City of Omaha v. CBS Corp. and Fait v. Regions Fin. Corp., because, unlike the plaintiffs in those cases, the plaintiffs in IBEW Local 90 Pension Fund v. Deutsche Bank AG made specific allegations that the defendants had "nonpublic information that contradicted their public statements and knew that the assets at issue were `far riskier than an investor might reasonably suppose.'" SEC 4th S.A. at 2 (quoting 2013 WL 1223844, at *15). The SEC contends that its allegations in the Complaint are similarly specific and sufficient to state a claim for fraud against the Defendants. See SEC 4th S.A. at 2.
On June 18, 2013, the Defendants responded to the SEC 4th S.A. See Defendants' Response to Notice of Supplemental Authority, filed June 18, 2013 (Doc. 183)("Defendants Resp.-4th S.A."). The Defendants assert that IBEW Local 90 Pension Fund v. Deutsche Bank AG does not controvert Starrett's position that "scheme liability requires allegations of inherently deceptive conduct beyond misrepresentations or omissions." Defendants' Resp.-4th S.A. at 1. The Defendants contend that the SEC has improperly reiterated its misrepresentation and omission allegations as allegations of scheme liability. The Defendants contend that, although the court in IBEW Local 90 Pension Fund v. Deutsche Bank AG held that misrepresentations and omissions may "`be part of ... the fraudulent scheme,'" the court did not hold that misrepresentations and omissions alone would suffice to state a claim for scheme liability. Defendants' Resp.-4th S.A. at 1-2 (quoting 2013 WL 1223844, at *8). The Defendants also assert that IBEW Local 90 Pension Fund v. Deutsche Bank AG supports their position that the SEC must demonstrate a disparity between internal non-public communications and the validity of the Defendants' public statements to succeed on a misrepresentation and omission claim. See Defendants' Resp.-4th S.A. at 2 (citing 2013 WL 1223844, at **13-14).
Rule 12(b)(6) authorizes a court to dismiss a complaint for "failure to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). "The nature of a Rule 12(b)(6) motion tests the sufficiency of the allegations within the four corners of the complaint after taking those allegations as true." Mobley v. McCormick, 40 F.3d 337, 340 (10th Cir.1994). The sufficiency of a complaint is a question of law, and when considering a rule 12(b)(6) motion, a court must accept as true all well-pleaded factual allegations in the complaint, view those allegations in the light most favorable to the non-moving party,
A complaint need not set forth detailed factual allegations, yet a "pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action" is insufficient. Ashcroft v. Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (citing Bell Atl. Corp. v. Twombly, 550 U.S. at 555, 127 S.Ct. 1955). "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Ashcroft v. Iqbal, 556 U.S. at 678, 129 S.Ct. 1937. "Factual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact)." Bell Atl. Corp. v. Twombly, 550 U.S. at 555, 127 S.Ct. 1955 (citation omitted).
To survive a motion to dismiss, a plaintiff's complaint must contain sufficient facts that, if assumed to be true, state a claim to relief that is plausible on its face. See Bell Atl. Corp. v. Twombly, 550 U.S. at 570, 127 S.Ct. 1955; Mink v. Knox, 613 F.3d 995, 1000 (10th Cir.2010). "A claim has facial plausibility when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (citing Bell Atl. Corp. v. Twombly, 550 U.S. at 556, 127 S.Ct. 1955). "Thus, the mere metaphysical possibility that some plaintiff could prove some set of facts in support of the pleaded claims is insufficient; the complainant must give the court reason to believe that this plaintiff has a reasonable likelihood of mustering factual support for these claims." Ridge at Red Hawk, LLC v. Schneider, 493 F.3d 1174, 1177 (10th Cir.2007)(emphasis omitted). The Tenth Circuit stated:
Robbins v. Okla. ex rel. Dep't of Human Servs., 519 F.3d at 1247 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. at 570, 127 S.Ct. 1955)(internal citations omitted).
Generally, the sufficiency of a complaint must rest on its contents alone. See Casanova v. Ulibarri, 595 F.3d 1120, 1125 (10th Cir.2010); Gossett v. Barnhart, 139 Fed.Appx. 24, 24 (10th Cir.2005)(unpublished)("In ruling on a motion to dismiss, the district court is limited to the facts pled in the complaint.").
The Court has previously ruled that, when a plaintiff references and summarizes statements from defendants in a complaint for the purpose of refuting the statements in the complaint, the Court cannot rely on documents the defendants attach to a motion to dismiss which contain their un-redacted statements. See Mocek v. City of Albuquerque, No. Civ. 11-1009, 2013 WL 312881, at **50-51 (D.N.M. Jan. 14, 2013)(Browning, J.). The Court reasoned that the statements were neither incorporated by reference nor central to the plaintiff's allegations in the complaint, because the plaintiff only cited the statements to attack their reliability and truthfulness. See 2013 WL 312881, at **50-51. Additionally, the Court has ruled that, when determining whether a statute of limitations has run in an action alleging fraud and seeking subrogation from a defendant,
Rule 201 of the Federal Rules of Evidence allows a court to, at any stage of the proceeding, take notice of "adjudicative" facts that fall into one of two categories: (i) facts that are "generally known within the territorial jurisdiction of the trial court"; or (ii) facts that are "capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." Fed.R.Evid. 201(b), (f). "Adjudicative facts are simply the facts of the particular case." United States v. Wolny, 133 F.3d 758, 764 (10th Cir.1998)(quoting Advisory Committee Notes to rule 201). A court has discretion to take judicial notice of such facts, regardless of whether requested. See Fed. R.Evid. 201(c). On the other hand, if a party requests that the court take judicial notice of certain facts and supplies the necessary information to the court, judicial notice is mandatory. See Fed.R.Evid. 201(d). Also, if the parties timely request an opportunity to be heard, the Court must grant such an opportunity "as to the propriety of taking judicial notice and the tenor of the matter noticed." Fed.R.Evid. 201(e).
Judicial notice may be taken during any stage of the judicial proceeding, including on a motion to dismiss. See 21B Charles Alan Wright & Kenneth W. Graham, Fed. Practice & Procedure § 5110, at 294 & n. 17 (2d ed.2005). While ordinarily, a motion to dismiss must be converted to a motion for summary judgment when the court considers matters outside the complaint, see Fed.R.Civ.P. 12(d), matters that are judicially noticeable do not have that effect, see Duprey v. Twelfth Judicial Dist. Court, 760 F.Supp.2d 1180, 1192-93 (D.N.M.2009)(Browning, J.)(citing Grynberg v. Koch Gateway Pipeline Co., 390 F.3d 1276, 1279 n. 1 (10th Cir.2004)). Also, when considering a motion to dismiss, "[t]he court may take judicial notice of its own files and records, matters of public record, as well as the passage of time." Logan v. United States, 272 F.Supp.2d 1182, 1184 n. 1 (D.Kan.2003). The documents judicially noticed, however, should not be considered for the truth of the matters asserted therein:
Tal v. Hogan, 453 F.3d 1244, 1265 n. 24 (10th Cir.2006)(alterations omitted) (citations omitted)(internal quotation marks omitted).
Applying these principles, in Genesee Cnty. Emps. Ret. Sys. v. Thornburg Mortg. Sec. Trust, in the context of a securities class action, the Court took judicial notice of news publications regarding the MBS crisis against which the plaintiffs' allegations were set. See 825 F.Supp.2d at 1166. Additionally, In re Thornburg Mortg., Inc. Sec. Litig., another securities class action, the Court took judicial notice of documents which disclosed the securities held by a person in a particular entity, and/or any changes in those holdings. See 2009 WL 5851089, at **3-4. The Court took notice of the existence of the documents and the statements contained therein, but not the truth of the documents' contents. The Court found that rule 201(d) compelled it to take judicial notice of the documents, because the documents, which were on file with the SEC, were "`capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned,'" and the defendants intended to use the documents to prove that they did not engage in insider trading, contrary to the plaintiffs' allegations. 2009 WL 5851089, at *3 (quoting Fed.R.Evid. 201(b)).
A plaintiff must plead "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R.Civ.P. 8(a)(2). Fraud claims, however, must meet more stringent standards. See Fed.R.Civ.P. 9(b). "In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Fed.R.Civ.P. 9(b). "The requirements of Rule 9(b) must be read in conjunction with the principles of Rule 8, which calls for pleadings to be `simple, concise, and direct, ... and to be construed as to do substantial justice.'" Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1252 (10th Cir.1997).
"With respect to rule 9(b)'s scope, a court should require parties to plead a cause of action with particularity when that cause of action contains allegations grounded in fraud." Two Old Hippies, LLC v. Catch the Bus, LLC, 784 F.Supp.2d 1200, 1207 (D.N.M.2011)(Browning, J.)(citing 2 James William Moore, Jeffrey A. Parness & Jerry E. Smith, Moore's Fed. Practice § 9.03(1)(d), at 9-20 (3d ed.2008)). On the other hand, a plaintiff may plead claims based on negligent or innocent misrepresentations, to the extent those claims do not require proof of fraud, in accordance with the more relaxed standards of rule 8(a). See Tricontinental Indus., Ltd. v. Pricewaterhouse Coopers, LLP, 475 F.3d 824, 833 (7th Cir.2007)(recognizing that rule 9(b)'s heightened pleading standard does not apply to negligent misrepresentation claims); Gen. Elec. Capital Corp. v. Posey, 415 F.3d 391, 395-96 (5th
"The primary motives that animate rule 9(b) help illuminate the reason for limiting the rule's reach to claims grounded in fraud." S2 Automation LLC v. Micron Tech., 281 F.R.D. 487, 494 (D.N.M.2012)(Browning, J.). First, the requirement of pleading with particularity protects the defendants' reputations from the harm attendant to accusations of fraud or dishonest conduct. See United States ex rel. Harrison v. Westinghouse Savannah River Co., 352 F.3d 908, 921 (4th Cir. 2003)("Rule 9(b) protects defendants from harm to their goodwill and reputation." (internal quotation marks omitted)); Guidry v. Bank of LaPlace, 954 F.2d 278, 288 (5th Cir.1992)("[The particularity requirement] stems from the obvious concerns that general, unsubstantiated charges of fraud can do damage to a defendant's reputation."). Second, the requirement to plead with particularity puts defendants on notice of the allegedly fraudulent conduct so that they can formulate a defense. See United States ex rel. Harrison v. Westinghouse Savannah River Co., 352 F.3d at 921. A related goal of rule 9(b) is to prevent the plaintiffs from tagging on specious fraud claims to their pleadings in an attempt "to induce advantageous settlements or for other ulterior purposes." Banker's Trust Co. v. Old Republic Ins. Co., 959 F.2d 677, 683 (7th Cir. 1992).
The Tenth Circuit has fleshed out the components necessary for a successful rule 9(b) pleading. In Sheldon v. Vermonty, 246 F.3d 682, 2000 WL 1774038 (10th Cir.2000)(unpublished table decision), the Tenth Circuit held that the plaintiff had alleged with sufficient particularity a violation of the Securities Exchange Act of 1934. See 2000 WL 1774038, at *4. The Tenth Circuit concluded that the complaint
2000 WL 1774038, at *5 (citations omitted)(internal quotation marks omitted). "At a minimum, Rule 9(b) requires that a plaintiff set forth the who, what, when, where and how of the alleged fraud." United States ex rel. Schwartz v. Coastal Healthcare Grp., Inc., 232 F.3d 902, 2000 WL 1595976, at *3 (10th Cir.2000)(unpublished table decision). "To survive a motion
Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 727-28, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). The Securities Act deals with the initial issuance of securities, and with the required contents of registration statements and prospectuses. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. at 728, 95 S.Ct. 1917. The Exchange Act, on the other hand, is primarily known for prohibiting fraud in connection with the purchase or sale of securities. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. at 728-29, 95 S.Ct. 1917.
Section 17(a) of the Securities Act requires substantially the same elements of proof as Section 10(b) of the Exchange Act. See SEC v. Wolfson, 539 F.3d at 1256. Under § 17(a) of the Securities Act, it is
15 U.S.C. § 77q(a).
Under § 10(b) of the Exchange Act, it is unlawful for
15 U.S.C. § 78j(b). Pursuant to the authority Congress granted the SEC under § 10(b) of the Exchange Act, the SEC promulgated rule 10b-5, which makes it
17 C.F.R. § 240.10b-5.
SEC v. Wolfson, 539 F.3d at 1256 (citing Geman v. SEC, 334 F.3d at 1192). Unlike private litigants bringing a cause of action under the PSLRA, the SEC need not prove "reliance or injury in enforcement actions." Geman v. SEC, 334 F.3d at 1191.
"The principal difference between § 17(a) and § 10(b) lies in the element of scienter, which the SEC must establish under § 17(a)(1), but not under § 17(a)(2) or § 17(a)(3).... By contrast, § 10(b) always requires a showing of scienter." SEC v. Wolfson, 539 F.3d at 1256-57 (citing Aaron v. SEC, 446 U.S. 680, 697, 100 S.Ct. 1945, 64 L.Ed.2d 611 (1980)). Additionally, under § 17(a) of the Securities Act, the SEC must prove that the fraud occurred "`in the offer or sale of any securities,'" rather than "`in connection with the purchase or sale of any security.'" SEC v. Wolfson, 539 F.3d at 1256 n. 12 (quoting 15 U.S.C. § 77q(a); 15 U.S.C. § 78j(b)).
"The purpose of both [§ 10(b) and § 17(a)] is protection of investors from fraudulent practices." SEC v. Int'l Chem. Dev. Corp., 469 F.2d 20, 26 (10th Cir.1972). "In cases of alleged misstatements in public filings submitted to the Commission, the scope of the two sections is essentially coextensive because the fraudulent conduct touches upon both purchases and sales of publicly-traded securities." SEC v. Wolfson, 539 F.3d at 1257 (citing SEC v. Power, 525 F.Supp.2d 415, 419-20 (S.D.N.Y.2007)).
"To satisfy the first element of a 10b-5 claim, a plaintiff must allege facts showing the defendant made an untrue statement of material fact, or failed to state a material fact necessary for make the statements that were made not misleading." Grossman v. Novell, Inc., 120 F.3d at 1119 (citing 17 C.F.R. § 240.10b-5). The statement or omission must not merely be false now; rather, it must have been false at the time that the document containing it was created. See Grossman
A statement of fact is material if "`a reasonable person would consider it important in determining whether to buy or sell'" securities. Genesee Cnty. Emps. Ret. Sys. v. Thornburg Mortg. Sec. Trust, 825 F.Supp.2d at 1126 (quoting Schaffer v. Evolving Sys., Inc., 29 F.Supp.2d 1213, 1220-21 (D.Colo.1998)(citing Grossman v. Novell, Inc., 120 F.3d at 1119)). In a similar context — a claim under § 14 of the Exchange Act — the Supreme Court has said that a statement or omission is material if there is a "substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available" to the public. TSC Indus., Inc. v. Northway, Inc., 426 U.S. at 449, 96 S.Ct. 2126. Courts in the Tenth Circuit should "not hesitate to dismiss securities claims pursuant to Rule 12(b)(6) where the alleged misstatements or omissions are plainly immaterial." McDonald v. Kinder-Morgan, Inc., 287 F.3d at 997 (quoting Grossman v. Novell, Inc., 120 F.3d at 1118). The Tenth Circuit, in the context of securities fraud claims under § 10b-5 and rule 10b-5 of the Exchange Act, has identified two categories of statements that are, as a matter of law, not materially misleading: vague statements of corporate optimism and "statements considered immaterial because other documents available to the investing public `bespoke caution' about the subject matter of the alleged misstatement at issue." Grossman v. Novell, 120 F.3d at 1120. The Supreme Court, however, has recently emphasized that "[a]ny approach that designates a single fact or occurrence as always determinative of an inherently fact-specific finding such as materiality, must necessarily be overinclusive or underinclusive." Matrixx Initiatives, Inc. v. Siracusano, ___ U.S. ___, 131 S.Ct. 1309, 1318, 179 L.Ed.2d 398 (2011) (quoting Basic Inc. v. Levinson, 485 U.S. at 236, 108 S.Ct. 978). Likewise, the Supreme Court reiterated that it was "careful not to set too low a standard of materiality, for fear that management would bury the shareholders in an avalanche of trivial information." See Matrixx Initiatives, Inc. v. Siracusano, 131 S.Ct. at 1318 (internal quotation marks omitted) (quoting Basic Inc. v. Levinson, 485 U.S. at 231, 108 S.Ct. 978). In analyzing materiality in the context of a 12(b)(6) motion to dismiss, a court should consider whether the "allegations suffice to `raise a reasonable expectation that discovery will reveal evidence' satisfying the materiality requirement, and to `allo[w] the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.'" Matrixx Initiatives, Inc. v. Siracusano, 131 S.Ct. at 1323 (citations omitted)(quoting Ashcroft v. Iqbal, 129 S.Ct. at 1949; Bell Atl. Corp. v. Twombly, 550 U.S. at 556, 127 S.Ct. 1955).
"Alleged omissions create another hurdle for the plaintiff. Unlike statements, omissions are actionable only if the plaintiff can establish that the defendant had a duty to disclose the omitted information." Genesee Cnty. Emps' Ret. Sys. v. Thornburg Mortg. Sec. Trust, 825 F.Supp.2d at 1127 (citing McDonald v. Kinder-Morgan, Inc., 287 F.3d at 998 (stating that, in the context of the Exchange Act, "a duty to disclose arises only where both the statement made is material, and the omitted fact is material to the statement in that it alters the meaning of the statement.")). See also Basic v. Levinson, 485 U.S. at 239 n. 17, 108 S.Ct. 978
"The `bespeaks caution' rule is an application of the common-sense principle that the more a speaker qualifies a statement, the less people will be misled if the statement turns out to be false." United States v. Nacchio, 519 F.3d at 1161-62, vacated in part, United States v. Nacchio, 555 F.3d 1234 (10th Cir.2009) (en banc). "At bottom, the `bespeaks caution' doctrine stands for the `unremarkable proposition that statements must be analyzed in context' when determining whether or not they are materially misleading." Grossman v. Novell, Inc., 120 F.3d at 1120 (quoting Rubinstein v. Collins, 20 F.3d 160, 167 (5th Cir.1994)). See Halperin v. eBanker USA.com, Inc., 295 F.3d 352, 357 (2d Cir.2002) (holding that, under the bespeaks caution doctrine, "certain alleged misrepresentations in a stock offering are immaterial as a matter of law because it cannot be said that any reasonable investor could consider them important in light of adequate cautionary language set out in the same offering."). Plaintiffs can overcome cautionary language if the "language did not expressly warn or did not directly relate to the risk that brought about plaintiffs' loss." Halperin v. eBanker USA.com, Inc., 295 F.3d at 359. See Panther Partners, Inc. v. Ikanos Commc'ns, Inc., 538 F.Supp.2d 662, 669 (S.D.N.Y.2008) (Crotty, J.) ("[G]eneral risk disclosures in the face of specific known risks which border on certainties do not bespeak caution."). Furthermore, the bespeaks caution doctrine normally applies only to forward-looking statements such as projections or forecasts, and not to representations of present fact. See Plumbers' Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 632 F.3d 762, 773 (1st Cir. 2011); Iowa Pub. Emps. Ret. Sys. v. MF Global, Ltd., 620 F.3d 137, 142 (2d Cir. 2010). Similarly, the bespeaks caution doctrine does not apply to statements which "may be construed as indicating the speakers' beliefs concerning then-present factual conditions." Grossman v. Novell, Inc., 120 F.3d at 1123. A court may properly apply the bespeaks caution doctrine when considering a motion to dismiss. See Grossman v. Novell, Inc., 120 F.3d at 1120 n. 7.
Scienter "refers to the mental state embracing intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n. 12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). When asserting a claim under § 17(a)(1) of the Securities Act or § 10(b) of the Exchange Act, the SEC must establish at least recklessness, but the SEC must establish only negligence for a claim under §§ 17(a)(2) or 17(a)(3) of the Securities Act. See SEC v. Smart, 678 F.3d 850, 857 (10th Cir.2012)("Section 10(b) and § 17(a)(1) require the SEC to establish at least recklessness, whereas negligence is sufficient for § 17(a)(2) and § 17(a)(3)."); SEC v. Wolfson, 539 F.3d at 1256; C.E. Carlson, Inc. v. SEC, 859 F.2d 1429, 1435 (10th Cir.1988).
The Tenth Circuit has defined recklessness sufficient to state a claim under § 10(b) of the Exchange Act as "`conduct that is an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendants or is so obvious that the actor must have been aware of it.'" Dronsejko v. Thornton, 632 F.3d at 665 (quoting City of Phila. v. Fleming Cos., Inc., 264 F.3d at 1257-58). The Tenth Circuit has emphasized that it "`is the danger of misleading buyers that must be actually known or so obvious that any reasonable man would be legally bound as knowing.'" City of Phila. v. Fleming Cos., 264 F.3d at 1260 (emphasis in original)(quoting Schlifke v. Seafirst Corp., 866 F.2d 935, 946 (7th Cir.1989). In other words, when asserting a defendant's liability for an omission,
City of Phila. v. Fleming Cos., 264 F.3d at 1261. The Tenth Circuit has held that "`divergence between internal reports and external statements on the same subject' and `disregard of the most current factual information before making statements' can be factors supporting scienter." In re Level 3 Commc'ns, Inc. Sec. Litig., 667 F.3d at 1345 (quoting Frank v. Dana Corp., 646 F.3d 954, 959 n. 2 (6th Cir.2011)(holding that inconsistencies between internal reports and defendants' public statements did not evidence scienter, because "some of the critical terms at issue" in the reports were "open to multiple interpretations," and, therefore, the "strongest inference" the Tenth Circuit could "draw is that defendants were negligent in failing to put together the pieces" (citing Ind. Elec. Workers' Pension Trust Fund IBEW v. Shaw Grp., Inc., 537 F.3d 527, 540 (5th Cir.2008)). See Ind. Elec. Workers' Pension Trust Fund IBEW v. Shaw Grp., Inc., 537 F.3d at 540 (holding that corporate officers' receipt of internal reports did not demonstrate scienter because the reports did not necessarily include information inconsistent or at odds with the corporation's public statements).
Primary liability under § 10(b) of the Exchange Act is "limited in its reach to `only the making of a material misstatement (or omission) or the commission of a manipulative act.'" SEC v. Wolfson, 539 F.3d at 1257 (quoting Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver,
Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. at 191, 114 S.Ct. 1439 (emphasis in original). Secondary actors, therefore, may be liable under § 10(b) of the Exchange Act "so long as they themselves made a material misstatement or omission (or committed some other fraudulent act), and each of the remaining elements of liability under § 10(b) are satisfied." SEC v. Wolfson, 539 F.3d at 1257-58 (citing Cent. Bank of Denver, N.A., v. First Interstate Bank of Denver, N.A., 511 U.S. at 191, 114 S.Ct. 1439; Anixter v. Home-Stake Prod. Co., 77 F.3d at 1226). See Anixter v. Home-Stake Prod. Co., 77 F.3d at 1226-27 ("[I]n order for accountants to [be primarily liable under § 10(b)], they must themselves make a false or misleading statement (or omission) that they know or should know will reach potential investors.").
"[T]he maker of a statement is the entity with authority over the content of the statement and whether and how to communicate it." Janus Capital Grp., Inc. v. First Derivative Traders, 131 S.Ct. at 2303. In Janus Capital Grp., Inc. v. First Derivative, the Supreme Court discussed the scope of liability under rule 10b-5 for those who, "`directly or indirectly, ... make any untrue statement of a material fact' in connection with the purchase or sale of securities." 131 S.Ct. at 2301 (quoting 17 C.F.R. § 240.10b-5(b)). Looking to the usage and definition of the verb "make," the Supreme Court determined that, in rule 10b-5(b), "`[t]o make any ... statement' is thus the approximate equivalent of `to state.'" 131 S.Ct. at 2302. The Supreme Court reasoned that a person or entity's control over the statement proscribes liability, because, without control over the statement, "a person or entity can merely suggest what to say, not `make' a statement in its own right." 131 S.Ct. at 2302. The Supreme Court stated that this interpretation is "supported by our recent decision in Stoneridge," in which the Supreme Court found that entities that agreed to arrangements which allowed another company to mislead its auditor and investors could not be liable for the false statements, because "`nothing [the defendants] did made it necessary or inevitable for [the company] to record the transactions as it did.'" Janus Capital Grp., Inc. v. First Derivative Traders, 131 S.Ct. at 2303 (emphasis added in original)(quoting Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. at 152-53, 128 S.Ct. 761)(citing Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. at 166-67, 128 S.Ct. 761). In Janus Capital Grp., Inc. v. First Derivative Traders, the Supreme Court ruled that an investment adviser and administrator that was "significantly involved in preparing" a prospectus which contained fraudulent statements
Before Janus Capital Grp., Inc. v. First Derivative Traders, the Tenth Circuit stated that a person may be primarily liable for an alleged misstatement or omission if the person was "so involved in creating or communicating the offending misstatement (or omission) that he can fairly be said to have caused it to be made," and he "knew or should have known that the statements would reach investors." SEC v. Wolfson, 539 F.3d at 1261, 1261 n. 18 (citing Anixter v. Home-Stake Prod. Co., 77 F.3d at 1226 n. 10). It is unclear whether this standard still applies after Janus Capital Grp., Inc. v. First Derivative Traders. In Janus Capital Grp., Inc. v. First Derivative Traders, the Supreme Court rejected an interpretation of rule 10b-5(b) that would impose liability for misstatements and omissions on those who "create" the statements. 131 S.Ct. at 2303. The Supreme Court determined that this interpretation would conflict with its previous decisions by allowing "private plaintiff's to sue a person who provides the false or misleading information that another person then puts into the statements." 131 S.Ct. at 2303. In SEC v. Wolfson, the Tenth Circuit held that a non-employee consultant
Section 10(b) of the Exchange Act makes it unlawful to "use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device." 15 U.S.C. § 78j(b). "[C]onduct itself can be deceptive," and there is no requirement that "there must be a specific oral or written statement before there could be liability under § 10b or Rule 10b-5." Stoneridge Inv. Partners v. Scientific-Atlanta, Inc., 128 S.Ct. at 769. "Fraud by conduct is a violation of Rule 10b-5(a) and (c)." O'Connor v. R.F. Lafferty & Co., 965 F.2d 893, 898 (10th Cir.1992). Although the Supreme Court has rejected a private cause of action for aiding and abetting securities violations, the Supreme Court has expressly reserved a cause of action for secondary actors based upon deceptive and manipulative conduct.
Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. at 191, 114 S.Ct. 1439 (emphasis added). See Stoneridge Inv. Partners v. Scientific-Atlanta, Inc., 128 S.Ct. at 772-73 (discussing
Although the Tenth Circuit has not used the term "scheme liability," "the two circuit courts that traditionally see the most securities cases[,] the Second and Ninth Circuits," along with a majority of the other circuits, have adopted the term to describe the liability rule 10b-5(a) and (c) creates. Nicholas Fortune Schanbaum, Scheme Liability: Rule 10b-5(a) and Secondary Actor Liability after Central Bank, 26 Rev. Litig., 183, 197 (Winter 2007). See Pub. Pension Fund Grp. v. KV Pharm. Co., 679 F.3d 972, 987 (8th Cir. 2012)("Claims brought under Rules 10b-5(a) and (c) are generally referred to as `scheme liability' claims."); In re DVI, Inc. Sec. Litig., 639 F.3d 623, 643 n. 29 (3d Cir.2011)("We refer to claims under Rule 10b-5(a) and (c) as `scheme liability claims' because they make deceptive conduct actionable, as opposed to Rule 10b-5(b), which relates to deceptive statements."); Pac. Inv. Mgmt. Co. v. Mayer Brown, LLP, 603 F.3d 144, 151 (2d Cir.2010)(addressing whether a plaintiff's "allegations in the complaint are sufficient to state a claim for `scheme liability' under Rule 10b-5(a) and (c)"); Desai v. Deutsche Bank Sec., Ltd., 573 F.3d 931, 938 (9th Cir.2009)("Misrepresentations and most omissions fall under the prohibition of Rule 10b-5(b), whereas manipulative conduct typically constitutes `a scheme ... to defraud' in violation of Rule 10b-5(a) or a `course of business which operates ... as a fraud or deceit upon any person' in violation of Rule 10b-5(c)."); In re Mut. Funds Inv. Litig., 566 F.3d 111, 129 (4th Cir.2009)(identifying a claim alleging that defendants "carried out a plan, scheme and course of conduct which was intended to and, ... did ... deceive the investing public" as a claim of "scheme liability"); Pugh v. Tribune Co., 521 F.3d 686, 696 (7th Cir.2008)(finding that a private plaintiff may not assert a claim of "scheme liability" under § 10(b) of the Exchange Act against a defendant who "participated in a fraudulent scheme but had no role in preparing or disseminating Tribune's financial statements or press releases"); Regents of Univ. of Co. v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372, 378-79 (5th Cir.2007)(recognizing a claim of scheme liability under rule 10b-5(a) for a defendant's allegedly deceptive conduct, but finding that the plaintiff's failed to demonstrate reliance).
The Second, Eighth, and Ninth Circuits have held that scheme liability encompasses only actions which include deceptive conduct beyond assistance with a material misstatement or omission. See Pub. Pension Fund Grp. v. KV Pharma. Co., 679 F.3d 972, 987 (8th Cir.2012)("We join the Second and Ninth Circuits in recognizing a scheme liability claim must be based on conduct beyond misrepresentations or omissions actionable under Rule 10b-5(b)."); WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d at 1057 ("A defendant may only be liable as part of a fraudulent scheme based upon misrepresentations and omissions under Rules 10b-5(a) or (c) when the scheme also encompasses conduct beyond those misrepresentations or omissions."); Lentell v. Merrill Lynch & Co., 396 F.3d 161, 177 (2d
Consistent with the Supreme Court's description of manipulative conduct in the context of § 10(b) of the Exchange Act as a "term of art," Santa Fe. Indus., Inc. v. Green, 430 U.S. at 476, 97 S.Ct. 1292, "scheme liability requires proof of participation in an illegitimate, sham, or inherently deceptive transaction where the defendant's conduct or role has the purpose and effect of creating a false appearance." SEC v. St. Anselm Exploration Co., 936 F.Supp.2d at 1299, 2013 WL 1313765, at *15 (citing SEC v. Daifotis, No. C 11-00137 WHA, 2011 WL 2183314, at *9 (N.D.Cal. June 6, 2011)). See Pub. Pension Fund Grp. v. KV Pharma. Co., 679 F.3d at 987 (finding that the plaintiffs' allegations that corporate officers were aware of misrepresentations and omissions that a company made is insufficient to state a claim for scheme liability). This restriction on scheme liability recognizes "the importance of maintaining a distinction among the various Rule 10b-5 claims from one another, [and] that the lines dividing the different claims are [] `carefully maintained' and are `well-established.'" WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d at 1057 (quoting Desai v. Deutsche Bank Sec. Ltd., 573 F.3d 931, 941 (9th Cir.2009)).
For example, in SEC v. Kelly, Judge McMahon determined that a claim of scheme liability failed because, apart from the defendant's public representations about its advertising transactions, the transactions were not inherently deceptive. See 817 F.Supp.2d at 344. Similarly, in SEC v. Lucent Techs., Inc., the Honorable William H. Walls, Senior United States District Judge for the District of New Jersey, held that, because the sales at issue "were legitimate business transactions and the customers purchased the product from [defendants] with every intention of using it or selling it to end customers," the SEC's allegation that the defendants schemed to defraud by not disclosing certain details of the transactions was an improper attempt to re-cast a rule 10b-5(b) claim as one for scheme liability. 610 F.Supp.2d at 360-61. Additionally, as long as inherently deceptive conduct is present, a claim for scheme liability does not fail, because the alleged scheme was in furtherance of a misrepresentation or omission. In SEC v. Familant, Judge Boasberg held that allegations that the defendants had used false transactions to overstate a company's performance sufficiently pleaded scheme liability, notwithstanding that the goal of the scheme was a misrepresentation in accounting statements. Judge Boasberg expressly rejected a reading of scheme liability which would preclude allegations of a scheme to make a misrepresentation or omission. See 910 F.Supp.2d at 94. Judge Boasberg based this conclusion on his finding that the neither § 10(b) nor rule 10b-5 of the Exchange Act's language precluded liability for a scheme to defraud through public misrepresentations, the Supreme Court has interpreted the nearly-identical language of § 17(a) of the Securities Act as creating multiple forms of liability which are not limited by one another, and that the SEC wrote rule 10b-5 specifically and unambiguously to create liability for schemes, as well as for misstatements and omission. 910 F.Supp.2d at 94-96 (citing United States v. Naftalin, 441 U.S. 768, 773, 99 S.Ct. 2077, 60 L.Ed.2d 624 (1979)).
With the passage of the PSLRA in 1995, the SEC, but not private plaintiffs, may bring a cause of action for aiding and abetting a securities violation.
15 U.S.C. § 78t(e). The Tenth Circuit has not explicitly discussed the meaning of "substantial assistance," but has indicated that an actor who plays a "significant" or "central" role in a primary violation, or is "intricately involved" in a primary violation, without sufficient involvement to be primarily liable, may be liable for aiding and abetting a securities violation. Anixter v. Home-Stake Prod. Co., 77 F.3d at 1226 n. 10 (internal quotations omitted)(discussing the distinction between primary liability and aiding-and-abetting liability post Cent. Bank of Denver v. First Interstate Bank of Denver, N.A.).
The phrase "or recklessly" was added to § 20(e) of the Exchange with the Dodd-Frank Act in 2010, and the Dodd-Frank Act does not indicate that Congress intended for this amendment to apply retroactively. See Black v. M & W Gear Co., 269 F.3d 1220, 1228 n. 3 (10th Cir. 2001)("The presumption against retroactive application of a statute applies `absent clear congressional intent favoring' retroactive application of the new statute ... [a]nd it applies to amended statutes as well as new statutes."); Lytes v. DC Water & Sewer Auth., 572 F.3d 936, 939-40 (D.C.Cir.2009)(explaining that a court should not apply a statute to conduct occurring before its enactment if to do so would "affect [] substantive rights, liabilities, or duties [on the basis of] conduct arising before [its] enactment.")(quoting Landgraf v. USI Film Prods., 511 U.S. 244, 278, 114 S.Ct. 1483, 128 L.Ed.2d 229 (1994)).
On the other hand, the Tenth Circuit's decisions on aiding-and-abetting liability after the passage of § 20(e) of the Exchange Act indicate that the Tenth Circuit allowed allegations of recklessness to satisfy its state-of-mind requirement. In Anixter v. Home-Stake Prod. Co., after the Supreme Court removed a private cause of
Geman v. SEC is more instructive regarding the requisite state of mind for an aiding-and-abetting claim in the Tenth Circuit before the Dodd-Frank Act. In Geman v. SEC, the Tenth Circuit was presented with the question whether the evidence before the SEC was sufficient to find that a defendant was "responsible for aiding and abetting the record keeping failures of a firm. 334 F.3d at 1195. The Tenth Circuit reviewed the evidence, and determined that it established a "sufficient factual basis for the conclusion that Geman aided and abetted the violations with a state of mind of recklessness, if not willful disregard." 334 F.3d at 1196. The Tenth Circuit, therefore, affirmed the SEC's finding that Geman was liable for aiding and abetting. Although the Tenth Circuit did not set forth the elements of an aiding-and-abetting claim, as it did in Anixter v. Home-Stake Prod. Co., the issue of aiding-and-abetting liability was squarely before the Tenth Circuit, and, accordingly, the Tenth Circuit's pronouncement that recklessness was sufficient demonstrates that, even before the Dodd-Frank Act, the state of mind of recklessness was sufficient for the SEC to allege a claim for aiding and abetting in the Tenth Circuit.
Section 20(a) of the Exchange Act provides for control-person liability:
15 U.S.C. § 78t(a). To establish a defendant's liability as a controlling person, a plaintiff must prove two things: (i) a primary violation of the securities laws, and (ii) that the defendant had "control" over the primary violator. Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1107 (10th Cir.2003). "The second element of the prima facie case [under § 20(a)] requires that the plaintiffs plead facts from which it can be reasonably be inferred that the individual defendants were control persons."
"The Tenth Circuit observed that § 20(a) `has been interpreted as requiring only some indirect means of discipline or influence short of actual direction to hold a controlling person liable.'" Lane v. Page, 649 F.Supp.2d at 1306 (D.N.M.2009)(quoting Richardson v. MacArthur, 451 F.2d 35, 41 (10th Cir.1971)). This showing requires the plaintiff to specify facts which "indicate that the defendants had `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.'" Adams v. Kinder-Morgan, Inc., 340 F.3d at 1108 (quoting Maher v. Durango Metals, Inc., 144 F.3d at 1306). See 17 C.F.R. § 230.405 ("The term control (including the terms controlling, controlled by and under common control with) means 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.").
In Adams v. Kinder-Morgan, Inc., the Tenth Circuit addressed whether certain individuals involved in Kinder-Morgan, Inc. qualified as control persons for the purposes of Section 20(a) liability. First, the Tenth Circuit held that the directors were; not, ipso facto, control persons.
Adams v. Kinder-Morgan, Inc., 340 F.3d at 1108 (citing Dennis v. Gen. Imaging, Inc., 918 F.2d 496, 509-10 (5th Cir.1990); Burgess v. Premier Corp., 727 F.2d 826, 832 (9th Cir.1984); Cameron v. Outdoor Resorts of Am., Inc., 608 F.2d 187, 195 (5th Cir.1979)). On the other hand, the Tenth Circuit held that being a significant executive within the corporation, with ultimate management authority over a primary violator, is a control person:
Adams v. Kinder-Morgan, Inc., 340 F.3d at 1108 (quoting Maher v. Durango Metals, Inc., 144 F.3d at 1305; citing In re Ribozyme Pharms., Inc. Sec. Litig., 119 F.Supp.2d 1156, 1167 (D.Colo.2000)). A high-ranking position within the corporation, however, standing alone, is unlikely to satisfy the "control" element of a control-person claim, unless the circumstance of
In Genesee Cnty. Emps. Ret. Sys. v. Thornburg Mortg. Sec. Trust, the Court determined that plaintiffs had stated a claim for control-person liability against RBS Securities for the actions of its affiliate in acquiring, owning, and transferring mortgage assets and selling interests in those assets or bonds secured by those assets. See 825 F.Supp.2d at 1099, 1221-22. The court noted that the plaintiffs had alleged that RBS Securities had the "practical ability to direct the actions" of its affiliate, and the RBS Securities' executives significantly overlapped with those of its affiliate, sufficient to demonstrate control over the affiliate. 825 F.Supp.2d at 1222. Also, in In re Thornburg Mortg., Inc. Sec. Litig., the Court found that plaintiffs sufficiently alleged that Thornburg Mortgage's CEO and COO, its CFO, and its Chief Lending Officer, could be liable as control persons for alleged misstatements in Thornburg Mortgage's reporting of its financial performance. See 695 F.Supp.2d at 1217-18. Similarly, in Lane v. Page, the Court found that plaintiffs sufficiently alleged that a real estate company was liable as a control person over a development company, because the plaintiffs alleged that the real estate company possessed a 92.5% ownership stake in the company, and, pursuant to a joint venture agreement, the real estate company possessed power to approve major decisions involving a proposed merger. See 649 F.Supp.2d at 1309-10.
Section 13(a) of the Exchange Act requires "[e]very issuer of a security registered pursuant to section 78 of this title" to file with the SEC
15 U.S.C. § 78m(a). In accordance with the authority Congress granted the SEC to issue "rules and regulations ... as necessary or appropriate for the proper protection of investors and to insure fair dealing in the security," 15 U.S.C 78m(a), the SEC implemented rules 12b-20 and 13a-1 to enforce § 13(a). Exchange Act rule 13a-1 requires an issuer of securities to
17 C.F.R. § 240.13a-1. Rule 12b-20 requires the issuer of a security to include in the annual report "such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made not misleading." 17 C.F.R. § 240.12b-20). Additionally, § 13(b)(2) of the Exchange Act requires the issuer of securities to
15 U.S.C. § 78m(b)(2). The SEC interprets § 13(b)(2) of the Exchange Act as not including an element of scienter. See Promotion of the Reliability of Financial Information and Prevention of the Concealment of Questionable or Illegal Corporate Payments and Practices, Exchange Act Release No. 34-15570, 16 S.E.C. Docket 1143, 1979 WL 173674, at *10 (February 15, 1979)("SEC Release No. 34-15570"). Additionally, the statute does not require perfection, and the legislative history "reflects that `standards of reasonableness' are to be used in applying this provision." SEC Release No. 34-15570, 1979 WL 173674, at *10 (quoting Foreign Corrupt Practices Act of 1977, Pub.L. 95-213, S. Rep. 95-114, 1997 U.S.C.C.A.N. 4098, 4105 (1977)). Courts interpreting these provisions have determined that they create aiding-and-abetting and control-person liability, but not primary liability against individual persons. See SEC v. Quinlan, 373 Fed.Appx. 581, 585 (6th Cir.2010)(holding that a district court properly found a defendant liable for aiding and abetting a company's violation of § 13(b)(2) and rule 12b-20 of the Exchange Act); SEC v. Black, 2008 WL 4394891, at *2, *14 (N.D.Ill. Sept. 24, 2008)(finding that the SEC is entitled to summary judgment on its allegations of control-person liability against a defendant for violations of § 13(a) of the Exchange Act).
On the other hand, § 13(b)(5) and rules 13b2-1 and 13a-14 of the Exchange Act create liability for individual persons. Section 13(b)(5) of the Exchange Act makes it unlawful for a person to "knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account described in paragraph (2)." 15 U.S.C. § 78m(b)(5). Similarly, rule 13b2-1
Exchange Act rule 13b2-2 "provides that directors or officers shall not make or cause to be made a materially misleading statement or omission to an accountant in connection with SEC filings, among other things." SEC v. Espuelas, 698 F.Supp.2d 415, 436 (S.D.N.Y.2010). Specifically, the rule states:
17 C.F.R. § 240.13b2-2. Notably, rules 13b2-2(a) and (c)(1) do not proscribe a scienter requirement. The Ninth Circuit and Second Circuit have split on whether the SEC must plead and establish a defendant's scienter to succeed on a claim for materially false statements or omissions made to an auditor, and the Tenth Circuit has not reached the issue. The Ninth Circuit holds that, "[t]o be liable, one must `knowingly' make false statements." SEC v. Todd, 642 F.3d 1207, 1219 (9th Cir.2011)(quoting United States v. Goyal, 629 F.3d 912, 916 n. 6 (9th Cir.2010)). See United States v. Goyal, 629 F.3d at 916 n. 6 ("[L]iability under Rule 13b2-2 ... requires that a false statement to an auditor be made knowingly."). Notably, the Ninth Circuit's precedent requiring a scienter element in rule 13b2-2(a) and (c)(1) originates from its decision in United States v. Goyal, a criminal matter. In United States v. Goyal, the Ninth Circuit reasoned that the United States must establish that a defendant knowingly deceived auditors to be criminally liable under the rule, because 15 U.S.C. § 78m(b)(4) and (5), under which the SEC promulgated rule 13b2-2, imposes criminal liability for only those who "`knowingly'" violate § 13(b)(2)'s provisions. United States v. Goyal, 629 F.3d at 916 n. 6 (quoting 15 U.S.C. § 78m(b)(5)). The Ninth Circuit held that the SEC could not promulgate a rule which encompassed criminal liability beyond the scope of § 13(b)(2)'s allowance, and, therefore, the United States must establish a knowing scienter when alleging a criminal violation of rule 13b2-2. See United States v. Goyal, 629 F.3d at 916, 916 n. 6.
Indeed, when promulgating rule 13b2-2, the SEC rejected a request to include a scienter requirement for those who make material misstatements or omissions to auditors:
SEC Release No. 34-15570, 1979 WL 173674, at *12. See SEC Release No. 34-15570, 1979 WL 173674, at *10 (noting that the congressional history of Exchange Act Section 13 does not indicate the necessity of pleading violator's scienter). Further, when rules 13b2-2(b) and (c) were added to in 2003, as part of the Sarbanes-Oxley Act, Pub.L. No. 107-204, 116 Stat. 745 (2002), and the SEC, again, explicitly stated that the amendment does not alter rule
The Court finds the Second Circuit's interpretation of rule 13b2-2(a) and (c) persuasive and consistent with the Supreme Court's guidance regarding administrative interpretations. In Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 65 S.Ct. 1215, 89 L.Ed. 1700 (1945), the Supreme Court held that an administrative agency's interpretation of its rules "becomes of controlling weight unless it is plainly erroneous or inconsistent with the regulation." 325 U.S. at 413, 414, 65 S.Ct. 1215. More recently, in Chevron, U.S.A., Inc. v. Nat'l Res. Def. Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), the Supreme Court stated that, if "Congress has not directly addressed the precise question at issue .... [and] the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute." 467 U.S. at 843, 104 S.Ct. 2778.
"Statutory construction must begin with the language employed by Congress and the assumption that the ordinary meaning of that language accurately expresses the legislative purpose." Park `N Fly, Inc. v. Dollar Park & Fly, Inc., 469 U.S. 189, 194, 105 S.Ct. 658, 83 L.Ed.2d 582 (1985)(citing American Tobacco Co. v. Patterson, 456 U.S. 63, 68, 102 S.Ct. 1534, 71 L.Ed.2d 748 (1982)). The first step in construing a statute requires the court to "determine whether the language at issue has a plain and unambiguous meaning with regard to the particular dispute in the case." Robinson v. Shell Oil Co., 519 U.S. 337, 340, 117 S.Ct. 843, 136 L.Ed.2d 808 (1997). The inquiry stops there "if the statutory language is unambiguous and `the statutory scheme is coherent and consistent.'" Robinson v. Shell Oil Co., 519 U.S. at 340, 117 S.Ct. 843 (citing United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 240, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989)). Whether the statutory language is plain on its face or ambiguous "is determined by reference to the language itself, the specific context in which that language is used, and the broader context of the statute as a whole." Robinson v. Shell Oil Co., 519 U.S. at 341, 117 S.Ct. 843 (citing Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 477, 112 S.Ct. 2589, 120 L.Ed.2d 379 (1992)).
Congress has not specifically addressed the state of mind necessary for personal civil liability under § 13(b)(2). Scienter, however, was not added to § 13(b)(2) until the Foreign Corrupt Practices Act in 1988, and was added in accordance with congressional intent to hold only those who knowingly violate the section criminally liable. The congressional intent in adding an element of scienter to § 13(b) evidences that Congress intended to heighten the requirements for holding directors and officers criminally liable under the section, but the congressional history bears no indication that Congress intended to change any elements of § 13(b) beyond those necessary for criminal liability. See H.R. Rep. 100-576, at 916, (1988)(Conf. Rep.), reprinted in 1988 U.S.C.C.A.N. 1547, 1949 ("The Conferees intend to codify current [SEC] enforcement
The Court grants in part, and denies in part, the Defendants' motions. The Court will take judicial notice of the documents which the SEC references in the Complaint, and which are central to its allegations. The Court will also take judicial notice of the documents which contain information that may be verified by resort to sources that accuracy of which is not reasonably in dispute.
The Court will dismiss the SEC's allegation of securities law violations in part. The Court has determined that the statement in the 2007 Form 10-K that Thornburg Mortgage had successfully met margin calls was not misleading, and, accordingly, the omission of any discussion of the payment plans and Thornburg Mortgage allegedly being in violation of its reverse repurchase agreements was not material. The Court has also determined that Thornburg Mortgage did not sell assets to meet margin calls, and that statement, therefore, was not materially misleading in the 2007 Form 10-K. The Court will dismiss the SEC's allegations that the Defendants deceived the investing public and KPMG through those statements and omissions. The Court concludes that the SEC has failed to state a claim of scheme liability against Starrett, and the Court will, accordingly, dismiss the SEC's allegations of a primary securities violation based upon an alleged scheme to defraud against Starrett. The Court also determines that the SEC has failed to sufficiently allege that the Defendants engaged in manipulative or coercive conduct to deceive KPMG.
The Court will not, however, dismiss most of the SEC's allegations regarding the OTTI analysis in the 2007 Form 10-K. The Court will not dismiss the SEC's allegations that Goldstone and Simmons are primarily liable and liable as control persons for, and that the Defendants aided and abetted, a false OTTI analysis in the 2007 Form 10-K and to KPMG. The Court determines that the Defendants were aware of objective financial factors which undermined the veracity of the statement in the 2007 Form 10-K, the Going Concern Analysis, and the management representation letter that Thornburg Mortgage had the intent and ability to hold its impaired ARM securities until maturity, or until their value recovered in the market. The SEC has alleged that the Defendants knew that Thornburg Mortgage had experienced difficulty in timely meeting margin calls in February, 2008, that Thornburg Mortgage had diminished cash and liquidity at the
The SEC has sufficiently alleged that Goldstone and Simmons misrepresented Thornburg Mortgage's financial condition after the 2007 Form 10-K was filed. The SEC has sufficiently alleged that Goldstone's statements through the investor relations department and on Street Signs perpetuated a false representation of Thornburg Mortgage's OTTI analysis. Additionally, in so far as Goldstone's statements represent that Thornburg Mortgage had met its margin calls and its lenders were fine after the 2007 Form 10-K was filed, Goldstone's statements were false by the afternoon of February 28, 2008, and Goldstone had a duty to correct the truth of his statement as the day progressed. Further, the SEC has sufficiently alleged that Goldstone and Simmons' failure to respond to the Request for Correspondence with the Citigroup Global Letter materially misled KPMG regarding Thornburg Mortgage's communications with its lenders and its ability to timely meet margin calls before the 2007 Form 10-K was filed. Last, the SEC has sufficiently alleged that Simmons misrepresented that the negative financial events Thornburg Mortgage experienced after the 2007 Form 10-K was filed were unexpected, and caused by unforeseen factors, given that Goldstone and Simmons were aware that the European hedge fund was collapsing and that it would trigger additional margin calls for Thornburg Mortgage.
The Defendants request the Court to take judicial notice of documents in the following categories:
Request for Judicial Notice at 1-2. The Defendants assert that the Court may properly consider the full text of their electronic mail transmissions and Thornburg Mortgage's SEC filings, which are referenced and quoted in the Complaint. See Request for Judicial Notice at 2-3. The Defendants assert that the Court may take judicial notice of the documents which federal law requires Thornburg Mortgage to file with the SEC, including the 2007 Form 10-K, 2007 Form 10-K/A, records and reports of administrative bodies, testimony before legislative bodies, and public agency filings. See Request for Judicial
There are three limited exceptions to the rule that the sufficiency of a complaint must rest on its contents alone: (i) documents that the complaint incorporates by reference, see Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. at 322, 127 S.Ct. 2499; (ii) "documents referred to in the complaint if the documents are central to the plaintiff's claim and the parties do not dispute the documents' authenticity," Jacobsen v. Deseret Book Co., 287 F.3d at 941; and (iii) "matters of which a court may take judicial notice," Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. at 322, 127 S.Ct. 2499. The SEC does not incorporate any documents by reference into the Complaint, although it does reference a number of correspondences between the Defendants, statements which Goldstone made publicly, Thornburg Mortgage's reverse repurchase agreements, Thornburg Mortgage's public filings around the time of the events set forth in the Complaint, and a publicly-available accounting principle. The Court will consider documents that fall into these categories when ruling on the Defendants' motions to dismiss. Additionally, the Defendants have requested the Court to take judicial notice of a number of documents, which, the Court concludes, are "capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." Fed.R.Evid. 201(b). The Court will take judicial notice of those documents, but will not consider those documents for the truth of the matters asserted therein.
The Court will consider the electronic mail transmissions, referenced in the Complaint, which the Defendants have provided to the Court. The SEC references these electronic mail transmissions as evidence of the Defendants' knowledge and scienter regarding the allegedly false statements and omissions in the 2007 Form 10-K, to the investing public, and to KPMG. Accordingly, the Court determines that these electronic mail transmissions fall into the category of "documents referred to in the complaint" which are "central to the plaintiff's claim," and, the SEC does not "dispute the documents' authenticity." Jacobsen v. Deseret Book Co., 287 F.3d at 941. See Response to Goldstone & Simmons MTD at 13-14 (conceding that the Court may consider "documents to which the complaint refers, if the documents are central to the plaintiff's claims
The Court will consider certain documents which the SEC references in the Complaint regarding Thornburg Mortgage's obligations in its reverse repurchase agreements. The SEC references these documents to support its allegation that Thornburg Mortgage was in breach of its
The Court will also consider certain documents which contain the Defendants' allegedly false or misleading statements and omissions, forming the basis of the SEC's allegations. Although the SEC contends that the Defendants should not have played the Street Signs at the hearing, the Court notes that the SEC quotes from the interview in the Complaint as part of its allegation that Goldstone made false and misleading statements after the 2007 Form 10-K was filed. See Complaint ¶ 93, at 28; SEC Supp. at 7. The Street Signs, therefore, contains an interview which is central to the SEC's allegations, and the SEC has not challenged the authenticity of the recording. The Court will, accordingly, consider the following materials in ruling on the Defendants' motions to dismiss: (i) the Going Concern Analysis, which the SEC references on pages 21-22, in paragraphs 72 and 74 of the Complaint; (ii) the 2007 Form 10-K, which the SEC discusses throughout the Complaint; (iii) the Street Signs, which the SEC quotes on page 28, in paragraph 98 of the Complaint; (iv) the Position Paper, which the SEC references and quotes on pages 29-30, in paragraphs 102-13 of the Complaint; and (v) the Request for Correspondence, to which the SEC contends the Defendants responded with false and misleading information and omissions, on page 29, in paragraph 100 of the Complaint.
The Court will take judicial notice of the news publications which the Defendants have provided to the Court. The Court has previously determined that it may take judicial notice of facts regarding the financial markets in the context of a federal securities lawsuit. See Genesee Cnty. Emps. Ret. Sys. v. Thornburg Mortg. Sec. Trust, 825 F.Supp.2d at 1166-67. Accordingly, the Court will take judicial notice of the following documents, which the Court has determined contain facts which are "capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned," Fed.R.Evid. 201(b): (i) Dow Jones Averages February 1, 2008-May 1, 2008, Yahoo! Finance (May 11, 2012), filed May 21, 2012 (Doc. 37-12)("Dow Jones Averages"); (ii) Feb. 28 Dow Jones Newswire; (iii) Feb. 28 MarketWatch; and (iv) Feb. 28 Bloomberg. Additionally, although the Defendants' attorneys prepared the 10-K Compilation, the Court determines that the accuracy of its contents may be readily determined by sources whose accuracy is not reasonably questioned, as the Defendants have provided the Court with links to world wide web sites that verify the date and time at which the various companies filed their 2007 Form 10-Ks. See 10-K Compilation at 2-7. Accordingly, the Court will take judicial notice of the 10-K Compilation.
On the other hand, the Court will not take judicial notice of the various analysts' reports attached to the Motions to Dismiss. Although these reports contain some information the accuracy of which may not reasonably be questioned, such as
The Court will take judicial notice of Thornburg Mortgage's public filings which the Defendants have attached to their motions to dismiss. The Court determines that, because law requires Thornburg Mortgage to file these publicly available documents, and they contain representations from Thornburg Mortgage, the public filings themselves and the existence of the statements therein are "capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." Fed.R.Evid. 201(b). Accordingly, the Court will take judicial notice of: (i) the 2007 Form 10-K/A; (ii) the 2007 Form 10-Q; (iii) Excerpts of the Thornburg Mortgage, Inc., 2007 Form 8-K (March 3, 2008), filed May 21, 2012 (Doc. 37-15)("Mar. 38-K"); (iv) Exhibits to the Mar.3 8-K, filed May 21, 2012 (Doc. 37-17)("Mar.3 8-K Exs."); (v) Thornburg Mortgage, Inc. 2007 Form 8-K (Feb. 28, 2008), filed May 21, 2012 (Doc. 37-16)("Feb.28 8-K")
The SEC and Goldstone and Simmons have provided to the Court the Deposition of Larry A. Goldstone (taken March 16, 2010). See Doc. 51-2, filed June 20, 2012; Doc. 60-4, filed July 20, 2012. The SEC attached portions of the Goldstone Depo. to its Declaration of Stephen McKenna in Opposition to Defendants' Motion to Dismiss, and Goldstone & Simmons provided the Court the unredacted Goldstone Depo. as an exhibit to the Goldstone & Simmons Reply. The Defendants have not requested the Court to take judicial notice of the Goldstone Depo. See Request for Judicial Notice at 1-2. Although the SEC makes references to Goldstone's knowledge and scienter throughout the Complaint, which the Goldstone Depo. may support, the SEC does not reference the Goldstone Depo. in the Complaint. The Court, therefore, cannot properly consider the Goldstone Depo. as a document central to the SEC's allegations the accuracy of which the parties do not dispute. The Court is reluctant to take judicial notice of the Goldstone Depo., because it does not contain or address facts which the Court can verify by reference to sources whose accuracy is not in dispute. The Goldstone
Last, the Defendants have requested the Court to take judicial notice of certain SEC publications, Financial Accounting Standards, and government reports. These documents are publicly available, the Court determines these documents' discussion of GAAP may be "accurately and readily determined from sources whose accuracy cannot be reasonably questioned." Fed.R.Evid. 201(b). Indeed, the Financial Accounting Standards Board is responsible for issuing the standards which create GAAP. See Generally Accepted Accounting Principles, Black's Law Dictionary 753 (9th ed.2009). Accordingly, the Court will take judicial notice of: (i) SFAS 140; (ii) SFAS 166; (iii) FAS 115-1 & 124-1; (iv) FAS 115-2 & 124-2; (v) the March 16 FASB Minutes; (vi) the April 2 FASB Minutes; (vii) the Glassman Speech; (viii) AU 411.06; (ix) Public Company Accounting Oversight Board, AU § 332, filed May 21, 2012 (Doc. 38-7)("AU 332"); (x) Securities and Exchange Commission, Current Accounting and Disclosure Issues in the Division of Corporation Finance, November 30, 2006, filed May 21, 2012 (Doc. 38-8)("SEC Nov. 2006 Paper"); (xi) Securities and Exchange Commission, SEC Office of the Chief Accountant and FASB Staff Clarifications on Fair Value Accounting, Sept. 30, 2008, filed May 21, 2012 (Doc. 38-9)("Sept. 08 SEC Clarifications"); (xii) SAB 59; and (xiii) the Market-to-Market Study.
The SEC alleges that the following items in, or related to, the 2007 Form 10-K were materially misleading: (i) the statement that "Thornburg had successfully met all of its margin calls without selling any assets"; Complaint ¶ 7, at 3; 2007 Form 10-K at 35; (ii) the statement that Thornburg Mortgage had not sold assets to meet margin calls, see Complaint ¶ 37, at 11; id. ¶ 66, at 19; 2007 Form 10-K at 39; (iii) the OTTI analysis, which represented that Thornburg Mortgage had the intent and ability to hold its impaired ARM securities until maturity or their value recovered in the market, see Complaint ¶ 8, at 3-4; id. ¶¶ 51-52, at 15; id. ¶ 70, at 20-21; id. ¶ 85, at 25; 2007 Form 10-K at 38, 100; (iv) Goldstone's communication to Thornburg Mortgage's investor relations department on February 28, 2008, at 5:29 a.m., that Thornburg Mortgage had met its margin calls, its "lenders are fine," and Thornburg Mortgage had "sufficient operating cash," Feb. 28 IR Email at 2; Complaint ¶¶ 94-95, 97, at 27-28; and (v) Goldstone's statements on Street Signs that he did not believe Thornburg Mortgage would have to sell assets, that Thornburg Mortgage had "met all of [its] lending requirements" and had "liquidity and cash available to continue to support the portfolio," Complaint ¶ 98, at 28; Street Signs at 3:54-4:09. The SEC contends that the Defendants' electronic mail transmissions exchanged around the time that Thornburg Mortgage filed the 2007 Form 10-K
The Court notes, initially, that the SEC has not engaged in improper puzzle pleading in the Complaint. The Tenth Circuit has specifically approved of "incorporating paragraphs of a complaint" into securities allegations against defendants. Schwartz v. Celestial Seasonings, Inc., 124 F.3d at 1253. The Court will not dismiss the Complaint on the basis of the SEC's pleading each count through incorporation of the preceding paragraphs. If the plaintiff had to repeat every paragraph in every count, a lengthy complaint already would become unreasonably too long, elevating form over substance.
The SEC asserts that the Defendants made a fraudulent statement in the 2007 Form 10-K when they "falsely represented that Thornburg `successfully continue[d] to meet all margin calls.'" Complaint ¶ 59, at 17 (quoting 2007 Form 10-K at 35). The SEC contends that Goldstone "knew, or was reckless in not knowing," that this statement was false, because Thornburg Mortgage had been in violation of its Citigroup Global Repo Agreement in February. The Defendants' most compelling argument against the SEC's allegations of fraud based upon these statements is that they were true when made. The Defendants point out that the SEC has not alleged that "even a single margin call was outstanding at the time of filing, or that any lender was dissatisfied with TMI's payment of any margin call." Starrett MTD at 16-17. Indeed, the SEC pleads in the Complaint, and conceded at the hearing, that, at the time that Thornburg Mortgage filed the 2007 Form 10-K. Thornburg Mortgage had met all of its outstanding margin calls. See Complaint ¶ 3, at 6; id. ¶ 41, at 12; Tr. at 24:9-13 (Court, McKenna)(Court: "So you don't agree ... that it's undisputed that Thornburg had met all margin calls by the time they filed the 10-K?" McKenna: "No, we would agree with that statement."). The Court concludes that the statement that Thornburg Mortgage had successfully met its margin calls in the 2007 Form 10-K was not materially misleading and, therefore, the Defendants had no duty to disclose further information
"To satisfy the first element of a 10b-5 claim, a plaintiff must allege facts showing the defendant made an untrue statement of material fact, or failed to state a material fact necessary for make the statements that were made not misleading." Grossman v. Novell, Inc., 120 F.3d at 1119 (citing 17 C.F.R. § 240.10b-5). The statement that Thornburg Mortgage had successfully met its margin calls as of February 28, 2008, at the time it filed the 2007 Form 10-K was true. Although the SEC does not dispute the veracity of the statement, it contends that the Defendants had a duty to disclose that Thornburg Mortgage was in breach of its reverse repurchase agreements, because it could not meet its margin calls on or after the day they were issued. See Complaint ¶ 60, at 17; Response to Goldstone & Simmons MTD at 33; Response to Starrett MTD at 14-15. The SEC cites to Thornburg Mortgage's reverse repurchase agreements, which allow lenders to declare a default and seize Thornburg Mortgage's ARM Securities. See Complaint ¶ 24, at 8 ("Thornburg's lenders under the repo agreements had the right to seize and sell the ARM Securities as collateral for their loans."). As the Defendants point out, however, the Citigroup Global Repo Agreement expressly allowed Thornburg Mortgage to negotiate payment plans for margin calls, allowing Thornburg Mortgage to meet margin calls over a period of time. See Goldstone & Simmons MTD at 43; Citigroup Global Repo Agreement § 5.8, at 11 ("Where any equivalent Collateral falls to be repaid or redelivered ... unless otherwise agreed between the parties, it shall be delivered on the same Business Day."). Similarly, while the Greenwich Repo Agreement and Credit Suisse Repo Agreement allow the lenders to declare an event of default and seize Thornburg Mortgage's assets if Thornburg Mortgage does not satisfy margin calls within one business day, the right to declare a default is an option, and is not a mandatory occurrence, if Thornburg Mortgage fails to pay margin calls on the same business day or the day after they are issued. See Greenwich Repo Agreement § 11(a), at 8 ("The nondefaulting party may, at its option ... declare an Event of Default to have occurred."); Credit Suisse Repo Agreement § 11(a), at 7 (same). Additionally, although Thornburg Mortgage's failure to timely pay the Citigroup Global margin call triggered Citigroup Global's right to declare Thornburg Mortgage in default, the SEC has expressly alleged that the Citigroup Global Letter was not evidence that Thornburg Mortgage was in default. See Complaint ¶ 34, at 11 ("Citigroup reserved the right to declare Thornburg in default .... [and] also made clear that Citigroup, by not immediately exercising its rights under its repo agreement with Thornburg, was not waiving its right to declare Thornburg in default or amending the underlying [] agreement."); Citigroup Global Letter at 3 ("CITI hereby expressly reserves its rights to declare an Event of Default.... CITI's failure or delay ... shall in no way constitute or be construed to constitute a waiver, amendment, acceptance or modification of any of our rights under any provision of the Agreement."). That Thornburg Mortgage had difficulty in meeting margin calls as they became due, therefore, does not render misleading the statement that Thornburg Mortgage had met its margin calls without a declaration of default at the time the 2007 Form 10-K was filed.
Moreover, the Court does not believe that the word "successfully" conveys a meaning in the 2007 Form 10-K which renders misleading the statement that Thornburg Mortgage had met its outstanding margin calls. Initially, the word, as an adverb describing Thornburg Mortgage's recent ability to meet margin calls
The Court concludes, therefore, that the statement that Thornburg Mortgage had met its margin calls as of the time it filed the 2007 Form 10-K was true when made and not materially misleading on its own. Further, because Thornburg Mortgage's reverse repurchase agreements allowed Thornburg Mortgage to negotiate payment plans for margin calls, the statement that Thornburg Mortgage had met its margin calls "successfully" was not rendered misleading by the Defendants' omissions of Thornburg Mortgage's payment plans and that an event of default had occurred. "[A] duty to disclose arises only where both the statement is material, and the omitted fact is material to the statement in that it alters the meaning of the statement." McDonald v. Kinder-Morgan, Inc., 287 F.3d at 998. Because the omitted information regarding Thornburg Mortgage's payment plans does not alter the statement that Thornburg Mortgage met its margin calls without a declaration of default before it filed the 2007 Form 10-K, the Defendants had no duty to disclose the details of Thornburg Mortgage's payment plans. Most Wall Street lending agreement between big banks and big borrowers — and even single mortgage debts
The Court, therefore, will dismiss the SEC's allegations in Counts 1, 3, 4, and 8, against the Defendants for their, and Thornburg Mortgage's, alleged violations of § 17(a) of the Securities Act, § 10(b), rule 10b-5 of the Exchange Act, § 13(a) and rules 12b-20, and 13a-1 of the Exchange Act, and Counts 2, 6, and 9 against Goldstone and Simmons, under § 20(a) and rule 13a-14 of the Exchange Act, to the extent those allegations are based upon the statement in the 2007 Form 10-K that Thornburg Mortgage had met its margin calls at that time.
The SEC contends that the statement in the 2007 Form 10-K that Thornburg Mortgage had not been required to sell assets to meet margin calls was misleading in light of Thornburg Mortgage's issuance of the I/O Strip Transactions. See Complaint ¶ 37, at 11; id. ¶¶ 65-66, at 19; 2007 Form 10-K at 39. In support of this allegation, the SEC cites to the Defendants' reference of the I/O Strip Transactions as sales. See Complaint ¶ 37, at 11 ("[T]he transactions were in form the sale of I/O strips and have been characterized as `sales' by each of the Defendants."); id. ¶ 66, at 19 (referencing Goldstone's statement in the Feb. 21 BOD Email that Thornburg Mortgage planned to meet the Citigroup Global margin call by "`having Citi sell a $110 million Interest Only security that may generate $20 to 25 million'" and that Thornburg Mortgage "`may undertake additional asset sales depending on how market conditions evolve over the next few weeks'" (quoting Feb. 21 BOD Email at 2)). The Defendants contend that the I/O Strip transactions are "indisputably" the issuance of secured debt and not asset sales. Goldstone & Simmons MTD at 41 (citing SFAS 140 ¶ 9, at 3). See SFAS 166 ¶ 26C(b), at 5; Starrett Reply at 17. The Defendants contend, therefore, that Thornburg Mortgage's use of I/O Strip Transactions to meet its margin calls does not render the statement that Thornburg Mortgage had not sold assets to meet margin calls materially misleading. See Goldstone & Simmons MTD at 42; Starrett Reply at 17.
The SEC concedes that the I/O Strip Transactions were accounted for as the issuances of secured debt in the 2007 Form 10-K. See Complaint ¶ 37, at 11. Notably, the SEC alleges that the I/O Strip Transactions were "in form the sale of assets similar to Thornburg's ARM Securities to meet margin calls," but it does not allege that the I/O Strip Transactions
A fact is material if "a reasonable person would consider it important in determining whether to buy or sell" securities. Genesee Cnty. Emps. Ret. Sys. v. Thornburg Mort. Sec. Trust, 825 F.Supp.2d at 1126 (internal quotations omitted). The Supreme Court has described a material omission as one which creates a "substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information available" to the public. TSC Indus., Inc. v. Northway, Inc., 426 U.S. at 449, 96 S.Ct. 2126. The Defendants only had a duty to disclose the I/O Strip Transactions in the 2007 Form 10-K if the omission of the statement would alter the meaning of Thornburg Mortgage's statement that it had not sold assets to meet margin calls. See McDonald v. Kinder-Morgan, Inc., 287 F.3d at 998. The Court cannot reasonably infer that the failure to disclose that Thornburg used I/O Strip Transactions to meet its margin calls would have altered the information in the 2007 Form 10-K, or was necessary, in light of the circumstances, to make the 2007 Form 10-K not misleading. See 15 U.S.C. § 77q(a) (making the omission of any fact "necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading"); 15 U.S.C. § 78j(b) (same). SFAS 166 specifically excludes from the definition of assets that are accounted as sales interest-only strips created from loans, such as the I/O Strip Transactions at issue here. See SFAS 166 at 3, 5 ("[A] transferor should account for the transfer as a sale only if it transfers an entire financial asset.... [An] interest-only strip [created by a transferor from a loan] does not meet the definition of an entire financial asset."); Complaint ¶ 36, at 11 ("Thornburg was required to sell certain portions of its Securitized ARM Loans, ... (`I/O Strip Transactions')."). Although SFAS 166 was issued in 2009, after the events set forth in the Complaint, the Financial Accounting Standards Board's issued SFAS 166 as an amendment to SFAS 140 for the purpose of "clarify[y] the objective" of SFAS 140. SFAS 166 at 3. SFAS 140 was in place in September, 2000, and discusses when transfers should be accounted as sales. SFAS 166. See SFAS 140 at 2. The Defendants' classification of the I/O Strip Transactions, therefore, as secured debt, and not asset sales, was not misleading, as the objective of the accounting guidance in place at the time was that the transfer of interest-only strips did not constitute a sale. Conversely, had the Defendants classified the I/O Strip Transactions as sales, the 2007 Form 10-K may have been materially misleading, as such an accounting
Just as the Court cannot conclude that classifying the I/O Strip Transactions as secured debt was materially misleading, the Court cannot infer that omitting any discussion of the I/O Strip Transactions from the statement that Thornburg Mortgage had not sold assets to meet margin calls was a material omission. The SEC contends that, even if the I/O Strip Transactions were not asset sales, "Thornburg was obliged to disclose these transactions (however characterized) and that they were undertaken to meet margin calls." Response to Starrett MTD at 18. The SEC asserts that failing to disclose the I/O Strip Transactions "implied to investors that [Thornburg's] cash and liquidity was sufficient to meet margin calls without dissipating assets." Response to Goldstone & Simmons MTD at 30. This proposed inference, however, is true: Thornburg Mortgage met its margin calls without dissipating assets. The Court concludes, therefore, that the failure to reference the I/O Strip Transactions in relation the statement that Thornburg Mortgage did not sell assets to meet margin calls was not a material omission, and, further, the classification of the I/O Strip Transactions as secured debt was not materially false or misleading. Similarly, as the Court concludes that the Defendants accurately reported the I/O Strip Transactions as secured debt in the 2007 Form 10-K, the omitting discussion of the transactions in connection with Thornburg Mortgage's ability to meet margin calls without selling assets is not "inherently deceptive" conduct that would support a claim for scheme liability. SEC v. St. Anselm Exploration Co., 936 F.Supp.2d at 1299, 2013 WL 1313765, at *15
The Court, therefore, will dismiss the SEC's allegations in Counts 1, 3, 4, and 8, against the Defendants for their, and Thornburg Mortgage's, alleged violations of § 17(a) of the Securities Act, § 10(b), rule 10b-5 of the Exchange Act, § 13(b)(5) and rule 13b2-1 of the Exchange Act, § 13(a) and rules 12b-20, 13a-2, and 13a-4 of the Exchange Act, § 13(b)(2) of the Exchange Act, and Counts 2, 6, 9, and 11 against Goldstone and Simmons, under § 20(a) and rule 13a-14 of the Exchange Act, to the extent those allegations are based upon the statement in the 2007 Form 10-K that Thornburg Mortgage did not sell assets to meet margin calls and Thornburg Mortgage's accounting of the I/O Strip Transactions as the issuance of secured debt rather than sales.
The SEC asserts that the Defendants misrepresented in the 2007 Form 10-K that Thornburg Mortgage had the intent and ability to hold its ARM securities until maturity, or until their value recovered in the market. See Complaint ¶ 3, at 3-4; id. ¶¶ 51-52, at 15. The SEC asserts that the Defendants should have factored the significance of Thornburg Mortgage using the I/O Strip Transactions to meet margin calls into the OTTI analysis. See Complaint ¶ 71, at 21. Similarly, the SEC contends that, because Thornburg Mortgage's ARM securities were other-than-temporarily impaired, Thornburg Mortgage should have recognized a loss of approximately $400 million in the value of those securities, and should not have reported a net profit in the 2007 Form 10-K, or a fourth quarter profit. See Complaint ¶¶ 8, 11, 12 at 4-5, id. ¶ 70, at 20-21; id. ¶ 85, at 25; id. ¶ 86-88, at 25-26. The SEC contends that, because this accounting in the 2007 Form 10-K was false and was incorporated
The Defendants contend that they cannot be liable for fraud based upon a false OTTI analysis, because the OTTI analysis is "inherently subjective." Goldstone & Simmons MTD at 26. See Starrett MTD at 39-41. The Defendants also note that the Financial Accounting Standards Board has since determined that the OTTI guidance in place in February, 2008 was unsatisfactory and difficult to apply, and the Defendants assert that the SEC's allegations fail to demonstrate that the Defendants, disclosed a false OTTI analysis with scienter. See Starrett MTD at 41-42. The Defendants also assert that the bespeaks caution doctrine protects their OTTI analysis of the ARM securities in the 2007 Form 10-K, because the 2007 Form 10-K discloses that the ARM securities were impaired and that Thornburg Mortgage had not yet recognized their loss in value. See Starrett MTD at 22. Starrett also alleges that the SEC has not pleaded sufficient facts to demonstrate that she had knowledge of the false OTTI analysis in the 2007 Form 10-K. See Starrett MTD at 44. In the end, taking all reasonable inferences in the SEC's favor, the Court concludes that the facts in the Complaint allege that the OTTI analysis in the 2007 Form 10-K could have been materially misleading and that the Defendants are liable for this allegedly fraudulent misstatement.
Although GAAP are "far from being a canonical set of rules that will ensure identical accounting treatment of identical transactions," the principles which govern how a company conducts an OTTI analysis are instructive in the Court's rejection of the Defendants' argument that the OTTI analysis is subjective judgment which cannot form the basis of a fraudulent misrepresentation. Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 544, 99 S.Ct. 773, 58 L.Ed.2d 785 (1979). SFAS 115, which the SEC cites in the Complaint, see Complaint ¶¶ 49-50, at 14-15, explains that, "if it is probable that the investor will be unable to collect all amounts due according to the contractual terms of a debt security not impaired at acquisition, an other-than-temporary impairment shall be considered to have occurred." SFAS 115 at 4. SAB 59 provides guidance regarding the meaning of "other than temporary" and explains that the term is not a synonym for "permanent," but, rather, the Financial Accounting Standards Board "consciously chose the phrase `other than temporary' because it did not intend that the test be `permanent impairment' as has been used elsewhere in accounting practice." SAB 59 at 3. SAB 59, which the SEC staff members issued as an interpretation of accounting rules and legal matters, explains that "[t]here are numerous factors to be considered in [an OTTI] evaluation and their relative significance will vary from case to case." SAB 59 at 3. The SEC lists the following factors as relevant to an OTTI analysis:
SAB 59 at 3. Similarly, the American Institute of Certified Public Accountants ("AICPA") notes that an OTTI analysis
AU 332 ¶ .47, at 3. The AICPA lists the following as examples of factors that may weigh on an OTTI analysis:
AU 332 ¶ .47, at 3.
The foregoing descriptions of factors that may be relevant to an OTTI analysis demonstrate that, although the OTTI analysis involves subjective judgment, it must be based upon objective factors known to those persons assessing the nature of an impairment. The SEC and the AICPA list objective factors that are determinative whether an impairment is temporary, including the length of time that an asset has been impaired, the financial condition of the issuer, the presence of adverse conditions specific to the asset's market, whether dividends have been reduced or eliminated and interest payments made, and whether the company recorded losses from the security in the period subsequent to the reporting period.
Although the Defendants make much of the subjective judgment that they must use in an OTTI analysis, that the analysis involves judgment does not preclude it from being materially misleading as a matter of law. As the Tenth Circuit has explained, even though the OTTI analysis in the 2007 Form 10-K could be a interpreted as a statement of opinion or belief, "such statements of opinion or belief must rest on `a factual basis that justifies them as accurate, the absence of which renders them misleading.'" Grossman v. Novell, Inc., 120 F.3d at 1123 (quoting Va. Bankshares, Inc. v. Sandberg, 501 U.S. at 1093, 111 S.Ct. 2749). It is that factual basis, or, rather, the lack thereof, underlying the
As the Tenth Circuit has held, the SEC must "set forth what is false or misleading about a statement, and why it is false. In other words, the [SEC] must set forth an explanation as to why the statement or omission complained of was false or misleading." Grossman v. Novell, Inc., 120 F.3d at 1124 (internal quotations omissions). The SEC's allegations sufficiently set forth why the OTTI analysis in the 2007 Form 10-K was false or misleading: The SEC contends that the Defendants knew that Thornburg Mortgage did not have the intent and ability to hold its ARM securities until maturity, or until their value recovered, because of the margin calls Thornburg Mortgage received from August, 2007, through February 28, 2008, because of Thornburg Mortgage's inability to immediately meet margin calls as they were due, its use of the I/O Strip Transactions to satisfy margin calls, and because of Goldstone and Simmons' awareness that the collapse of a European hedge fund would cause Thornburg Mortgage to receive additional margin calls.
The Defendants also assert that an allegation of fraud based upon the OTTI analysis is an attempt to allege impermissible "fraud by hindsight," Starrett MTD at 19, because of their inability to
Grossman v. Novell, Inc., 120 F.3d at 1124 (emphasis in original)(internal quotations omitted). The SEC's allegations, however, are not based upon the occurrence of a "catastrophic event" after the filing of the 2007 Form 10-K. The SEC is careful to point out that, "[g]iven the financial decline of Thornburg beginning in August 2007," and its "severe liquidity crisis and exposure to additional margin calls," the statement that Thornburg Mortgage had the intent and ability to hold its ARM securities until maturity was false when made. Complaint ¶¶ 81, 84, 86, at 24-25. These allegations are based upon past events, of which the Defendants were aware before they "drafted, reviewed, and approved" the 2007 Form 10-K. Complaint ¶ 86, at 25. Accordingly, the basis for the SEC's allegation that that OTTI analysis was fraudulent is not an attempt to hold the Defendants liable by hindsight or for their lack of prescience.
The Defendants cite to Fulton Cnty. Emps. Ret. Sys. v. MGIC Inv. Corp. and In re Radian Sec. Litig. to contend that the SEC is attempting to hold them liable for forces beyond their control. See Goldstone & Simmons MTD at 45-46; Starrett MTD at 33. These cases are readily distinguishable. The facts of which the SEC has alleged the Defendants were aware, and Thornburg Mortgage's financial condition at the time the 2007 Form 10-K was filed, are far more severe than those set forth in Fulton Cnty. Emps. Ret. Sys. v. MGIC Inv. Corp. The United States Court of Appeals for the Seventh Circuit determined that the defendants' statement that a company had "substantial liquidity" was true, because the company had $150 million in reserves, it had met $435 million in margin calls, and, because of the overall turmoil in subprime securities markets at the time, the defendants had no reason to foresee future margin calls. 675 F.3d at 1049. Here, on the other hand, the SEC has alleged that Thornburg Mortgage had only forty million dollars available in cash at the time the 2007 Form 10-K was filed, that it had experienced margin calls in excess of a billion dollars in the last seven months, that it had to sell assets at a loss to meet margin calls, that Goldstone and Simmons knew more margin calls were coming, and that Thornburg Mortgage could not pay its margin calls on the day
Additionally, a false OTTI analysis would be material. The Court cannot see how the incorrect OTTI analysis — which allowed Thornburg Mortgage to inaccurately report a net profit of approximately sixty-five million dollars in the fourth quarter of 2007, instead of a net annual loss of approximately $1.3 billion — would be of no interest to a reasonable person determining whether to buy or sell Thornburg Mortgage securities. See Genesee Cnty. Emps. Ret. Sys. v. Thornburg Mortg. Sec. Trust, 825 F.Supp.2d at 1126; Complaint ¶¶ 8, 12, at 4-5; id. ¶¶ 86-88, at 25-26. The Defendants assert the bespeaks caution doctrine protects the OTTI analysis, given the "candid" disclosures in the 2007 Form 10-K. Starrett MTD at 22. The Defendants point to the following disclosures in the 2007 Form 10-K:
Starrett MTD at 21 (quoting 2007 Form 10-K at 25, 35). See Goldstone & Simmons MTD at 24-25. The bespeaks caution doctrine protects defendants from allegations of fraud based upon statements which, when analyzed in context, are not materially misleading, because of adequate cautionary language accompanying the statements. See Grossman v. Novell, Inc., 120 F.3d at 1120; Halperin v. eBanker USA.com, Inc., 295 F.3d at 357. The language from the 2007 Form 10-K contains cautionary warnings. The SEC can overcome this cautionary language, however, if the language "did not expressly warn or did not directly relate to the risk that brought about plaintiffs' loss." Halperin v. eBanker USA.com, Inc., 295 F.3d at 359. Initially, the bespeaks caution doctrine does not apply to statements "indicating the speakers' beliefs concerning then-present
Another initial obstacle to the bespeaks caution doctrine protecting the OTTI analysis is the number of statements in the 2007 Form 10-K which bolster the OTTI analysis. For example, regarding the OTTI analysis specifically, the 2007 Form 10-K states: "All of these market value losses are unrealized and there has been no deterioration in the actual credit performance of our assets." 2007 Form 10-K at 35. The 2007 Form 10-K continues: "[W]e began to see financing conditions improve and, despite the challenging market for financing, we continue to maintain existing short-term financing facilities.... [T]he credit quality of our originated and acquired loan portfolios continues to perform extremely well and their performance is consistent with our historical expectations[.]" 2007 Form 10-K at 35. The 2007 Form 10-K also states that the likelihood of the impaired ARM securities declining further in value is low: "Our current credit assessment of these mortgage securities in our portfolio suggests a low possibility of future downgrades and even less risk of actual losses." 2007 Form 10-K at 38. Weighing the negative disclosures in the 2007 Form 10-K in the context of the statements expressing confidence in Thornburg Mortgage's ability to perform and to maintain the value of its assets, the Court does not believe that the context protects the OTTI analysis from being materially misleading. See Grossman v. Novell, Inc., 120 F.3d at 1120 ("[S]tatements must be analyzed in context when determining whether or not they are materially misleading." (internal quotations omitted)).
Additionally, the negative disclosures and cautionary language in the 2007 Form 10-K do not expressly warn against the events which rendered the OTTI analysis allegedly false. Although the 2007 Form 10-K states that Thornburg Mortgage may experience future margin calls, which it may not be able to meet, and which may require it to sell assets at a loss, and that Thornburg Mortgage was operating with "reduced readily available liquidity to meet future margin calls," the 2007 Form 10-K does not disclose many of the facts which made its OTTI analysis allegedly false. 2007 Form 10-K at 39. To the extent the OTTI analysis is a forward-looking statement expressing a projection that Thornburg Mortgage will be able to meet its future margin calls, the statements in the 2007 Form 10-K do not warn of the imminent possibility that, if Thornburg Mortgage receives more than forty million dollars in margin calls in the near future, it will depend on lenders agreeing to payment plans to avoid losing portions of its ARM securities. The statement that Thornburg Mortgage's liquidity was "reduced," therefore, was conservative if not an understatement. 2007 Form 10-K at 39. In the context of other statements which express confidence in Thornburg Mortgage's ability to maintain a profitable portfolio, the cautionary language in the 2007 Form 10-K does not render the OTTI analysis immaterial as a matter of law. The Court does not see in the 2007 Form 10-K the robust cautionary language that would have made the reader assess the OTTI analysis with a grain of salt. The Court concludes, therefore, that the allegations in the Complaint suffice "to raise a reasonable expectation that discovery
Primary liability under § 17(a) of the Securities Act and § 10(b) of the Exchange Act attaches to two categories of actors: those who are makers of fraudulent statements or omissions, and those who scheme to defraud. In this matter, the SEC has alleged that Goldstone and Simmons are liable for making the allegedly false OTTI analysis in the 2007 Form 10-K, and that Starrett is liable for scheming to defraud through her participation in the OTTI analysis. See Tr. at 178:12-20 (Kasper). The Court concludes that, under Janus Capital Grp., Inc. v. First Derivative Traders, the SEC has alleged sufficient facts to hold Goldstone and Simmons liable for the allegedly false OTTI analysis in the 2007 Form 10-K. On the other hand, the Court does not find that the SEC has alleged sufficient facts to hold Starrett liable for scheming to defraud investors through her participation in the OTTI analysis included in the 2007 Form 10-K.
"[T]he maker of a statement is the entity with authority over the content of the statement and whether and how to communicate it." Janus Capital Grp., Inc. v. First Derivative Traders, 131 S.Ct. at 2303. In Janus Capital Grp., Inc. v. First Derivative, the Supreme Court discussed the scope of liability under rule 10b-5 as encompassing those who "`directly or indirectly,... make any untrue statement of a material fact' in connection with the purchase or sale of securities." 131 S.Ct. at 2301 (quoting 17 C.F.R. § 240.10b-5(b)). Goldstone and Simmons signed the 2007 Form 10-K, see 2007 Form 10-K at 78, and the SEC has alleged that Goldstone and Simmons, but not Starrett, "signed and certified" the 2007 Form 10-1, Complaint ¶ 7, at 3. The Supreme Court has emphasized that signing and certifying a publicly filed report indicates that a person had "authority over the content of the statement and whether and how to communicate it." Janus Capital Grp., Inc. v. First Derivative Traders, 131 S.Ct. at 2303. Similarly, the Supreme Court has cited with approval the Tenth Circuit's decision in Anixter v. Home-Stake Prod., Co., in which the Tenth Circuit determined that an accountant could be held primarily liable for making a false statement included in the accountant's "Auditor's Report," which the accountant signed. Janus Capital Grp., Inc. v. First Derivative Traders, 131 S.Ct. at 2305 n. 11 (citing Anixter v. Home-Stake Prod. Co., 77 F.3d at 1220, 1220 n. 4). The SEC has conceded that Starrett cannot be liable as the maker of an allegedly false OTTI analysis, and the Court agrees with that concession. Cf. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. at 152-53, 128 S.Ct. 761 (rejecting a theory of primary liability for false and misleading statements which would hold an entity liable that contributed to, but did not control, whether and how false statements were made). The Court concludes that the SEC's allegations that Goldstone and Simmons signed and certified the 2007 Form 10-K are sufficient to hold them primarily liable for the allegedly false OTTI analysis contained therein.
On the other hand, the Court does not agree with the SEC that it has alleged a scheme to defraud within the meaning of § 17(a) of the Securities Act or § 10(b) of the Exchange Act. Within the context of § 10(b) of the Exchange Act, manipulative
The SEC agrees with the Defendants that a claim for scheme liability requires "allegations that defendant's actions were deceptive independent of any fraudulent statement made to the investing public." SEC Surreply at 14. The SEC defines the scheme as one "to deceive ... the investing public to believe, that Thornburg had successfully met all margin calls and that the company was not required to sell any assets to meet its margin calls." Complaint ¶ 5, at 3. The SEC also characterizes the scheme was including a plan to "quickly raise substantial cash in the days following the Form 10-K filing so as to have sufficient liquidity to meet future margin calls." Complaint ¶ 32, at 10. The SEC alleges the following acts in furtherance of this scheme: (i) Starrett "drafted an email stating that they were `purposely' withholding information from the auditors"; (ii) Starrett's receipt of an electronic mail transmission from Goldstone which endorses a "plan which would allow Thornburg `to keep [its] current situation quiet while we deal with it'"; (iii) Thornburg Mortgage having "`scrambled' to satisfy margin calls before filing the Form 10-K to avoid having to make `full disclosures with respect to these margin calls'"; (iv) Thornburg Mortgage using the I/O Strip Transactions "to allow it to misleadingly claim that it had not sold assets"; (v) Thornburg Mortgage filing the 2007 Form 10-K "twelve hours after satisfying the last margin calls, at 4 a.m. in New Mexico, and began receiving additional margin calls two hours later"; and (v) Thornburg Mortgage having "planned to quickly raise cash after the Form 10-K was filed to meet future margin calls." SEC Surreply at 3-4 (citing Complaint ¶¶ 30-32, at 9-10; id. ¶ 41, at 12-13; id. ¶ 53, at 16; id. ¶¶ 65, 66 at 19). The Court will analyze separately whether the Defendants' dealings with KPMG constituted a scheme to deceive, as the Defendants' representations to auditors are not relayed to the investing public. See SEC v. Lucent Techs., Inc., 610 F.Supp.2d at 360 ("If the investing public has no knowledge that an issuer
The fatal problem with the SEC's allegations of scheme liability is that, apart from the alleged misrepresentations and omissions to auditors, none of the conduct the SEC references in furtherance of the scheme is inherently deceptive. The Defendants' scrambling to meet margin calls before filing the Form 10-K evidences nothing more than that they wanted Thornburg Mortgage's margin calls satisfied before filing the Form 10-K, which, in a time of economic downturn in Thornburg Mortgage's MBS market, is not an easy task. The allegation that the Defendants filed the Form 10-K so as to avoid disclosing the details of its margin calls asserts a primary violation, for which the Court cannot hold Starrett liable, as Starrett was not the maker of any statement or omission regarding Thornburg Mortgage's margin calls. Additionally, the Court has determined that the disclosure of the I/O Strip Transactions as the issuance of secured debt rather than the sale of assets was not materially misleading. Last, Starrett's participation in a plan to quickly raise cash after filing the 2007 Form 10-K is not deceptive conduct; indeed, it appears as though the Defendants had successfully raised cash and met margin calls under increased liquidity constraints in the past. That the plan encompassed using a fraudulent 2007 Form 10-K as a basis for raising cash indicates only that Starrett's conduct was not deceptive apart from an allegedly fraudulent statement. The Court must recognize the important distinction between conduct that is actionable under rule 10b-5(a) and (c) — for scheming to defraud, and that which is actionable under rule 10b-5(b) — for makers of false statements and omissions. See WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d at 1057. The Court cannot soundly conclude that the conduct in which the SEC asserts Starrett engaged to further a fraudulent scheme was "illegitimate, [a] shame, or inherently deceptive," as none of the actions the SEC alleges are deceptive, apart from the allegedly false OTTI analysis in the 2007 Form 10-K. SEC v. St. Anselm Exploration Co., 936 F.Supp.2d at 1299, 2013 WL 1313765, at *15. Accordingly, the Court dismisses the SEC's allegations in Count 1, 3, 4, 5, 8, and 10 against Starrett for the alleged violations of § 17(a) of the Securities Act, and §§ 10(b), 13(a), 13(b)(2), 13(b)(5), rules 10b-5, 12b-20, 13b2-1 of the Exchange Act, to the extent the allegations are based upon primary liability for participating in a fraudulent scheme to misrepresent Thornburg Mortgage's OTTI analysis in the 2007 Form 10-K.
Goldstone and Simmons contend that the SEC has failed to allege that, even if the OTTI analysis was false or misleading, they acted with scienter in its representation. The Defendants make a number of arguments, asserting that the SEC must allege that they subjectively disbelieved the OTTI analysis, see Goldstone & Simmons MTD at 53; Starrett MTD at 48, that the negative disclosures in the 2007 Form 10-K defeat any inference of scienter, see Goldstone & Simmons Reply at 28; Starrett MTD at 34, that the complexity of the OTTI analysis defeats any inference of
The SEC asserts that the fraudulent OTTI analysis in the 2007 Form 10-K was a violation of § 17(a) of the Securities Act and § 10(b) of the Exchange Act. "Section 10(b) and § 17(a)(1) require the SEC to establish at least recklessness, whereas negligence is sufficient for § 17(a)(2) and § 17(a)(3)." SEC v. Smart, 678 F.3d at 857. "In alleging fraud or mistake .... [m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Fed.R.Civ.P. 9(b). "In securities fraud cases, although speculation and conclusory allegations will not suffice, great specificity is not required if the plaintiff alleges enough facts to support a strong inference of fraudulent intent." Sheldon v. Vermonty, 2000 WL 1774038, at *5. Additionally, the Court has determined that recklessness satisfies the state of mind requirement for aiding-and-abetting liability in the Tenth Circuit at the time of the events alleged in the Complaint. See Geman v. SEC, 334 F.3d at 1196. In the context of the § 10(b) of the Exchange Act, recklessness is an "extreme departure from the standards of ordinary care, [] which presents a danger of misleading buyers or sellers that is either known to the defendants or is so obvious that the actor must have been aware of it." Dronsejko v. Thornton, 632 F.3d at 665.
A claim for aiding and abetting under § 10(b) of the Exchange Act, as the SEC has alleged here, requires the SEC to prove: (i) the existence of a primary violation of the securities laws by another; (ii) knowledge or recklessness of the primary violation by the alleged aider and abettor; and (iii) substantial assistance by the alleged aider and abettor in achieving the primary violation. See Anixter v. Home-Stake Prod. Co., 77 F.3d at 1226; Geman v. SEC, 334 F.3d at 1196. The Defendants have alleged that the SEC cannot properly allege primary and aiding-and-abetting liability against them. See Starrett MTD at 31. The Defendants base this allegation on the Supreme Court's announcement of a "clean line" in Janus Capital Grp., Inc. v. First Derivative Traders, 131 S.Ct. at 2302 n. 6, between those primarily liable and those who aid and abet securities law violations. The Supreme Court's concern with creating a clean line, however, was expressed in the context of limiting primary liability to those who make statements, as opposed to those who aid and abet the statements another made; the Supreme Court was concerned with the scope of primary liability, not the scope of pleading allegations. Nothing about this
The SEC's allegations of the Defendants' role in preparing the OTTI analysis are sufficient to allege that they provided substantial assistance to its false representation. For example, the SEC contends that the Defendants did not factor the I/O Strip Transactions into the OTTI analysis, see Complaint ¶ 69, at 20, that Goldstone and Simmons did not consider the collapse of a European hedge fund into the OTTI analysis, see Complaint ¶ 76, at 22, and that the Defendants ultimately reviewed and approved the 2007 Form 10-K's allegedly false OTTI analysis, see Complaint ¶ 86, at 25. The SEC has, therefore, alleged that Starrett, through her contribution to Thornburg Mortgage's accounting underlying the OTTI analysis, and Goldstone and Simmons, who reviewed and approved the OTTI analysis, played significant roles and were intricately involved in crafting its misrepresentation. See Anixter v. Home-Stake Prod. Co., 77 F.3d at 1226 n. 10. Accordingly, even if the facts reveal that the Goldstone and Simmons are not primarily liable as the makers of the OTTI analysis, these allegations sufficiently allege that the Defendants substantially contributed to Thornburg Mortgage's false statement.
The Defendants' attacks on the SEC's allegations of scienter similarly fail. The Court is not persuaded by the Defendants' arguments that the SEC has failed to allege that they subjectively disbelieved the OTTI analysis and that the complexity of the OTTI analysis undercuts allegations of scienter. As the Supreme Court noted in Va. Bankshares, Inc. v. Sandbert, liability for a defendants' false statements of opinion or belief is premised upon finding that the statements "were made with knowledge that [the defendants] did not hold the beliefs or opinions expressed." 501 U.S. at 1090, 111 S.Ct. 2749. Although the complexity of the OTTI analysis may prove fatal to the SEC's allegations at the summary judgment stage, at the motion to dismiss stage, the SEC has alleged sufficient facts to sufficiently demonstrate that the Defendants did not believe, or were reckless in believing, that the impairment on Thornburg Mortgage's ARM securities was not other than temporary. Although the OTTI analysis involves judgment, the Defendants' use of judgment is based upon objective factors. The SEC has alleged that, in light of the margin calls which Thornburg Mortgage received beginning
The Defendants also contend that the negative disclosures in the 2007 Form 10-K undercut any allegations of scienter and that the SEC has taken their electronic mail transmissions out of context in alleging fraudulent intent. See Goldstone & Simmons MTD at 55-56; Starrett MTD at 34, Goldstone & Simmons Reply at 28. Neither argument is persuasive at this stage. Taken in context, the 2007 Form 10-K contains negative disclosures, but, as the Court has discussed, those disclosures do not expressly warn of the risks which rendered the OTTI analysis allegedly false. The Defendants cite to Kuriakose v. Fed. Home Loan Mortg. Corp. to assert that the SEC has failed to allege they acted with fraudulent intent because of the subjective nature of the OTTI analysis, and because the disclosures in the 2007 Form 10-K undercut an allegation of scienter. Judge Keenan's finding that the plaintiffs had failed to state a claim of fraud based upon the OTTI analysis at issue in Kuriakose v. Fed. Home Loan Mortg. Corp., however, is readily distinguishable. First, the plaintiffs were subject to the heightened pleading standards of the PSLRA, which required the plaintiffs to meet a heightened pleading standard. Second, in Kuriakose v. Fed. Home Loan Mortg. Corp., Judge Keenan determined that the defendant's disclosure of the "allegedly fraudulent accounting decisions not to take impairments on certain RMBS ... gave the public sufficient information to question Freddie Mac's accounting decisions." 2011 WL 1158028, at *12. Here, on the other hand, the SEC has alleged that, even though the impaired ARM securities were disclosed in the 2007 Form 10-K, the 2007 Form 10-K did not disclose the financial factors which objectively undermined the statement that Thornburg Mortgage would be able to hold its impaired assets until maturity. The SEC's allegations in this matter, therefore, are more fulsome and distinguishable from those in Kuriakose v. Fed. Home Loan Mortg. Corp.
Moreover, the electronic mail transmissions, even when read in their entirety, do not defeat the SEC's allegations of scienter. For example, the SEC points to the Feb. 22 BOD Email, which Simmons and Starrett received, in which Goldstone expresses a desire to avoid disclosing Thornburg Mortgage's margin calls until they are satisfied. See Feb. 22 BOD Email at 2. This electronic mail transmission sets forth that Goldstone planned to time the filing of the 2007 Form 10-K so that Thornburg Mortgage could state "we had margin calls and all have been met." Feb. 22 BOD Email at 2. Although this plan is not inherently deceptive, it evidences a desire control Thornburg Mortgage's disclosures, notwithstanding the measures the Defendants used to avoid negative disclosures. "[D]efendants cannot ignore obvious warning signs, the investigation
The Defendants assert that the decisions in City of Omaha v. CBS Corp. and Fait v. Regions Fin. Corp. counsel that the Court should dismiss the Complaint. City of Omaha v. CBS Corp. is a PSLRA case, and, therefore, the plaintiffs' allegations in that matter are distinguishable because the plaintiffs were held to a higher pleading standard. See, e.g., In re Parmalat Sec. Litig., 414 F.Supp.2d 428, 432 (S.D.N.Y.2006) ("[T]he heightened pleading requirements of the PSLRA do not apply to claims under Rule 10b-5[]."). Additionally, the plaintiffs' allegations are substantively distinguishable from the SEC's. The plaintiffs in City of Omaha v. CBS Corp. alleged only that, at some undetermined earlier date, the defendants "had knowledge of events or circumstances which would have required them to reach the conclusion" that they should have performed an impairment analysis earlier. 679 F.3d at 68. The complaint was "devoid even of conclusory allegations that defendants did not believe in their statements of opinion regarding CBS's goodwill at the time they made them." 679 F.3d at 68. Here, on the other hand, the SEC has alleged that the Defendants were aware of particular adverse facts, including the difficulty with which Thornburg Mortgage met its margin calls and its heavily reduced liquidity, and the SEC has alleged that the Defendants knew these specific facts negatively impacted the OTTI analysis. These allegations, in a rule 9(b) case, which "does not require specific knowledge regarding the defendant's state of mind," Midgley v. Rayrock Mines, Inc., 374 F.Supp.2d at 1047, evidence an intent to control the manner in which negative disclosures are made and create a "strong inference," Sheldon v. Vermonty, 2000 WL 1774038, at *5, that the Defendants disbelieved the OTTI analysis in the 2007 Form 10-K. Similarly, Fait v. Regions Fin. Corp. is distinguishable, as the goodwill analysis which the plaintiffs alleged contained fraudulent misstatements and omissions "reflected judgments as to values that were not objectively determinable." 655 F.3d at 109. Here, the OTTI analysis, while it incorporates subjective judgments, is also based upon objective facts. See SAB 59 (explaining that, when conducting an OTTI analysis, the "financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuers," and the "length of time and the extent to which the market value has been less than cost," should be weighed); AU 332 (stating that whether an "entity recorded losses from the security subsequent to the end of the reporting period" should be considered in an OTTI analysis). Goodwill, on the other hand, is "an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized." Fait v. Regions Fin. Corp., 655 F.3d at 110. Additionally, the
Last, the Defendants contend that trying to save Thornburg Mortgage is not a fraudulent motive. See Goldstone & Simmons MTD at 56; Starrett MTD at 43. Motive is a factor which the Court may consider in assessing allegations of scienter, but motive and opportunity alone are not dispositive on the issue. "[C]ourts must look to the totality of the pleadings to determine whether the plaintiffs' allegations permit a strong inference of fraudulent intent. Allegations of motive and opportunity may be important to that totality, but are typically not sufficient...." City of Phila. v. Fleming Cos., 264 F.3d at 1261-62. Whether the Defendants would personally benefit from saving Thornburg Mortgage may, at a summary judgment stage, help to defeat allegations of scienter, but the Tenth Circuit has not adopted a standard as a matter of law which requires that scienter be divorced from any altruistic effect that a fraudulent statement may have. "[T]o establish scienter," the SEC must demonstrate that the defendants "knew of the potentially material fact, and [] knew that the failure to reveal the potentially material fact would likely mislead investors." City of Phila. v. Fleming Cos., 264 F.3d at 1261. The federal securities laws do not shield parties simply because a fraudulent statement did not pad their personal pocketbook: The federal securities laws protect "investors from fraudulent practices." SEC v. Int'l Chem. Dev. Corp., 469 F.2d at 26. Accordingly, the Court will not dismiss Counts 1, 3, 4, 8, and 10 alleging that Goldstone and Simmons committed primary violations, and that the Defendants aided and abetting Thornburg Mortgage's violations of § 17(a) of the Securities Act, §§ 10(b), 13(a), 13(b)(2), and rules 10b-5, 12b-20, 13a-1, and 13b2-1 of the Exchange Act, rule 13b2-1, to the extent the allegations are based upon the OTTI analysis in the 2007 Form 10-K. Similarly, the Court will not dismiss Counts 5 and 6, alleging that the Defendants falsified books, records, and accounts, in violation of § 13(b)(5) and rule 13b2-1 of the Exchange Act, and that Goldstone and Simmons signed false certifications, in violation of rule 13a-14 promulgated under the Exchange Act, to the extent those allegations are based upon the OTTI analysis in the 2007 Form 10-K.
The SEC alleges that Goldstone and Simmons are liable, as control persons, for Thornburg Mortgage's fraud in violation of § 10(b) and rule 10b-5 of the Exchange Act, Thornburg Mortgage's
To establish a defendant's liability as a control person, a plaintiff must prove two things: (i) a primary violation of the securities laws, and (ii) that the defendant had "control" over the primary violator. Adams v. Kinder-Morgan, Inc., 340 F.3d at 1107. The SEC has satisfied the first prong. Regarding the second prong, the SEC has alleged that Goldstone and Simmons, in their respective positions as Thornburg Mortgage's CEO and CFO, controlled Thornburg Mortgage's management, general operations, and policies, and the electronic mail transmissions referenced in the Complaint indicate Goldstone and Simmons' authority at Thornburg Mortgage support the SEC's allegations. See Complaint ¶ 17, at 6. The SEC has alleged that Goldstone's position as CEO allowed him to negotiate with Thornburg Mortgage's lenders, see Complaint ¶ 61, at 18, and empowered him to orchestrate payment plans, see id. ¶ 68, at 20. Similarly, the SEC has alleged that Simmons, as CFO, ordered the filing of the 2007 Form 10-K before a certain time, indicating that he controlled high-level Thornburg Mortgage management and operations. See Complaint ¶ 40, at 12. These facts sufficiently allege that Goldstone and Simmons possessed the "power to direct or cause the direction of management and policies," and, accordingly, may be liable as control persons for Thornburg Mortgage's alleged violations of federal securities laws. Adams v. Kinder-Morgan, Inc., 340 F.3d at 1108 (internal quotations omitted). The Court will not, therefore, dismiss the SEC's allegations against Goldstone and Simmons for control-person liability in counts 2, 9, and 11, to the extent those allegations are based upon Thornburg Mortgage's alleged misrepresentation of the OTTI analysis in the 2007 Form 10-K.
The SEC alleges that Goldstone perpetuated a misrepresentation of Thornburg Mortgage's financial condition after the 2007 Form 10-K was filed through Thornburg Mortgage's investor relations department and on CNBC's Street Signs. Specifically, the SEC alleges that the following statements, which Goldstone directed Thornburg Mortgage's investor relations department to decimate in connection with the 2007 Form 10-K, were materially misleading: (i) "`[a]ll margin calls met'"; (ii) "`[l]enders are fine'"; and (iii) "`[w]e still have sufficient operating cash[.]'" Complaint ¶¶ 94-95, at 27 (alterations in original)(quoting
Goldstone correctly points out that, at the time he conveyed key message points to the investor relations department, those statements were true. Thornburg Mortgage had met its outstanding margin calls without selling assets and in compliance with its reverse repurchase agreements at the time the 2007 Form 10-K was filed. The SEC's alleges, however, that Goldstone's statements through the investor relations department continued throughout the day on February 28, 2008. See Complaint ¶¶ 96-97, at 28 (alleging that the investor relations department reported to Goldstone at the end of the day on February 28, 2008, that it had reinforced his messages regarding Thornburg Mortgage's financial condition in the market). Accordingly, although the statement that Thornburg Mortgage had met its margin calls and that lenders were "fine" was true at 5:29 a.m. on February 28, 2008, the SEC is not alleging impermissible fraud by hindsight with its contention that Goldstone's statements "became false within one hour." Complaint ¶¶ 94-95, at 27. See Goldstone & Simmons MTD at 52 (arguing that the SEC is alleging impermissible fraud by hindsight). Rather, Goldstone's electronic mail transmissions indicate that he intended for the investor relations department to communicate messages throughout the day regarding Thornburg Mortgage's financial condition, specifically to counteract the market's negative
Further, although the Court may consider the negative disclosures in the 2007 Form 10-K to assess whether the bespeaks caution doctrine shields these disclosures from material falsity, the disclosure in the 2007 Form 10-K are not sufficiently specific and cautionary to warn investors of Thornburg Mortgage's severe lack of liquidity and cash in the face of expected increased margin calls. Cf. Grossman v. Novell, Inc., 120 F.3d at 1121 ("[T]he statements complained of are all contained in press releases or interview statements, and were made in conjunction with a registration statement that contained many explicitly risk factors and warnings which Grossman has not challenged as inadequate."). The negative disclosures in the 2007 Form 10-K did not "expressly warn or ... directly relate to the risk" that Thornburg Mortgage would receive margin calls in excess of its cash on hand, and be dependent on lender forbearance to meet margin calls after the 2007 Form 10-K to avoid selling assets. Halperin v. eBanker USA.com, Inc., 295 F.3d at 359. Accordingly, the SEC has sufficiently alleged that Goldstone's statements to investors
Similarly, Goldstone's statements on Street Signs on the afternoon of February 28, 2008, are, in part, misleading. Just as the OTTI analysis could have misled investors that Thornburg Mortgage had the intent and ability to hold its ARM securities until maturity, notwithstanding Thornburg Mortgage's limited cash on hand and strained liquidity, the statements on Street Signs reinforced a materially false representation of Thornburg Mortgage's ability to continue to meet margin calls without selling assets. See Street Signs at 3:49-56 (Goldstone responding to the question whether Thornburg Mortgage will need to sell more assets to meet margin calls, as it did in August, 2007: "We don't think we'll have to sell more, no."). Goldstone contends that this statement is his "off the cuff" opinion, and, therefore, cannot sustain a claim for a securities violation. Goldstone & Simmons Reply at 31. The context of the interview, however, is not an informal conversation regarding Goldstone's subjective beliefs alone. Rather, the interview is in specific discussion of Thornburg Mortgage's 2007 Form 10-K, in which Thornburg Mortgage represents that it has the intent and ability to hold its ARM securities to maturity or until their value recovers in the market. Goldstone's statements, in reference to the 2007 Form 10-K, that Thornburg Mortgage would not need to sell assets to meet margin calls, because it had sufficient liquidity and cash to support the portfolio, could have led investors to believe that Thornburg Mortgage had more cash on hand and I/O Strips to use to meet future margin calls, and that Goldstone had no reason to expect margin calls in excess of those Thornburg Mortgage met in February, 2008. The Court cannot soundly conclude, at the motion to dismiss stage, that a reasonable investor would have considered Goldstone's representation of Thornburg Mortgage's financial position unimportant when determining whether to buy or sell Thornburg Mortgage securities. See Genesee Cnty. Emps. Ret. Sys. v. Thornburg Mortg. Sec. Trust, 825 F.Supp.2d at 1126. Accordingly, in so far as Goldstone's statement that Thornburg Mortgage would not need to sell assets reinforced the OTTI analysis in the 2007 Form 10-K, the statement could have been materially misleading. On the other hand, interpreting Goldstone's statement that Thornburg Mortgage had "met all of [its] lending requirements" as a reference to the 2007 Form 10-K, that statement was accurate in the context of the margin calls discussed in the 2007 Form 10-K, and, therefore, would not have materially misled investors regarding Thornburg Mortgage's financial position as represented in the 2007 Form 10-K. Street Signs at 3:54-4:09.
Additionally, the Court concludes that Goldstone's statements on Street Signs could have been materially misleading, separate from any discussion of the 2007 Form 10-K. Specifically, the SEC has alleged that, by the time Goldstone spoke on Street Signs, Thornburg Mortgage had received margin calls in excess of its cash on hand. See Complaint ¶ 98, at 28. Therefore, although it may have been true when the 2007 Form 10-K was filed that Thornburg Mortgage had met its margin calls, by the afternoon of February 28, 2008, Thornburg Mortgage had no longer "met all of [its] lending requirements," it did not have sufficient cash to meet incoming margin calls, and its liquidity was increasingly strained. Street Signs at 3:54-4:09. The falsity of these statements at the time undercuts Goldstone's expression that he
Goldstone points out, correctly, that the SEC has not alleged that he was specifically aware of the margin calls Thornburg Mortgage received throughout the day on February 28, 2008. See Goldstone & Simmons MTD at 59. Goldstone contends, therefore, that even if the statements through the investor relations department were false or he incurred a duty to disclose further, he lacked the requisite scienter to be liable for securities fraud. Discovery may indeed reveal that Goldstone was unaware of the margin calls which Thornburg Mortgage received throughout the day on February 28, 2008. The SEC's allegations, however, do not require Goldstone's knowledge; the SEC's allegations may survive with a showing of recklessness. See SEC v. Smart, 678 F.3d at 857 ("Section 10(b) and § 17(a)(1) require the SEC to establish at least recklessness."). "`[D]ivergence between internal reports and external statements on the same subject' and `disregard of the most current factual information before making statements' can be factors supporting scienter." In re Level 3 Commc'ns, Inc. Sec. Litig., 667 F.3d at 1345 (quoting Frank v. Dana Corp., 646 F.3d at 959 n. 2). The SEC has alleged that Goldstone knew, or was reckless in not knowing, that Thornburg Mortgage had received margin calls in excess of its cash on hand by the afternoon of February 28, 2008. See Complaint ¶ 98, at 28. The SEC has further alleged that at the time Goldstone appeared on Street Signs, he knew that Thornburg Mortgage forty million dollars in available cash was insufficient to meet margin calls on the level of those it received in February, 2008, that Thornburg Mortgage had decreased liquidity because it had already used I/O Strip Transactions to meet margin calls, and that Goldstone and Simmons expected Thornburg Mortgage to continue to receive increased margin calls because of the European hedge fund's collapse. These facts present a "divergence between internal reports and external statements on the same subject," and indicate that Goldstone was plausibly "disregard[ing] the most current factual information before making statements" regarding Thornburg Mortgage's financial condition on February 28, 2008. In re Level 3 Commc'ns, Inc. Sec. Litig., 667 F.3d at 1345 (internal quotation omitted). This divergence and disregard indicate
Goldstone points out that he expected Thornburg Mortgage to be able to negotiate payment plans to meet its ongoing margin calls. See Goldstone & Simmons MTD at 59-60. Although this confidence may be real, Goldstone continued to represent that Thornburg Mortgage had met its margin calls and had sufficient cash, even after Thornburg Mortgage received margin calls in excess of its cash on hand. Regardless of whether he knew of Thornburg Mortgage's margin calls, the SEC has alleged that he expected more margin calls, and that it was at least reckless for Goldstone to not check if Thornburg Mortgage could still meet its margin calls before he stated, and allowed the investor relations department to state, that Thornburg Mortgage would be able to meet those margin calls with its cash and liquidity and without selling assets. See Complaint ¶ 98, at 28. These allegations are sufficient to state a reckless disregard of objective facts which rendered Goldstone's statements false. Dronsejko v. Thornton, 632 F.3d at 665 (defining recklessness in the context of Exchange Act Section 10(b) as "conduct that ... presents a danger of misleading buyers or sellers that is either known to the defendants or is so obvious that the actor must have been aware of it").
The Court concludes, therefore, that the SEC has sufficiently alleged that Goldstone misrepresented Thornburg Mortgage's financial condition through the investor relations department and on Street Signs, after the 2007 Form 10-K was filed, and that he did so with scienter. The Court will not dismiss the SEC's allegations in Counts 1 and 4, for the violation of § 17(a) of the Securities Act and § 10(b) and rule 10b-5 of the Exchange Act, to the extent those allegations are based on Goldstone's statements through the investor
The SEC alleges that the Defendants deceived KPMG, in violation of rule 13b2-2 promulgated under the Exchange Act. Specifically, the SEC alleges that the following actions deceived KPMG regarding the company's financial condition in February, 2008: (i) the February 20, 2008 Going Concern Analysis, which informed KPMG that Thornburg Mortgage had successfully met its margin calls, returned to profitability in the fourth quarter, and had the intent and ability to hold its ARM securities until their value recovered in the market or maturity, see Complaint ¶ 52, at 15-16; id. ¶¶ 72-73, at 21-22; (ii) the February 27, 2008, management representation letter, which did not inform KPMG that Thornburg Mortgage was in violation of its reverse repurchase agreements, and falsely stated that Thornburg Mortgage had not experienced subsequent events which impact its financial statements, and that the financial statements disclosed all matters related to Thornburg Mortgage as a going concern, see Complaint ¶¶ 57-58, at 17; (iii) Simmons' representation to KPMG that Thornburg Mortgage entered into the I/O Strip Transactions to take advantage of opportune pricing, rather than to meet margin calls, see Complaint ¶ 71, at 21; (iv) Goldstone and Simmons' failure to inform KPMG of the Citigroup Global Letter in response to the Request for Correspondence, see Complaint ¶¶ 100-101, at 29; and (v) the Position Paper, which stated that the collapse of a European hedge fund and the margin calls Thornburg Mortgage received after the 2007 Form 10-K was filed were unexpected, see Complaint ¶¶ 38-40, at 12; id. ¶¶ 99, 104-05, at 29-30. The Defendants assert that these alleged misstatements and omissions are immaterial, and that the SEC has failed to allege that the Defendants acted with scienter. To the extent that the misrepresentations and omissions to KPMG are identical to the misrepresentations and omissions that the SEC alleges the 2007 Form 10-K contained, the Court's analysis of their materiality is very similar. Accordingly, the Court concludes that the Defendants had no duty to disclose that Thornburg Mortgage violated its reverse repurchase agreements, because it had not violated its reverse repurchase agreements in February, 2008, and the Court will dismiss the SEC's allegations in Count 7 to the extent they are based upon that misrepresentation or omission. The Court also concludes that, as Thornburg Mortgage was not in breach of its reverse repurchase agreements on February 20, 2008, the Defendants did not misrepresent that Thornburg Mortgage successfully continued to meet margin calls at that time in the Going Concern Analysis. The Court also concludes that the SEC has not adequately alleged that the Defendants took action to "coerce, manipulate, mislead, or fraudulent influence" KPMG in connection with its audit, and the Court will therefore dismiss the SEC's allegations in Count 7 under rules 13b2-2(b) and (c)(2) promulgated under the Exchange Act. On the other hand, the SEC has stated a plausible claim that the Defendants deceived KPMG before and after the 2007 Form 10-K was filed through material misstatements and omissions, in violation of rules 13b2-2(a) and (c)(1) promulgated under the Exchange Act.
Exchange Act rule 13b2-2 makes it unlawful for any director or officer to
17 C.F.R. § 240.13b2-2(a), (b). The SEC alleges that the Defendants' Going Concern Analysis, dated February 20, 2008, falsely stated that Thornburg Mortgage recognized a fourth-quarter profit in 2007, and had the intent and ability to hold its ARM securities to maturity and omitted material discussion of Thornburg Mortgage's difficulty meeting margin calls. See Complaint ¶ 74, at 22. The SEC also alleges that the Defendants' management representation letter, dated February 27, 2008, falsely stated that Thornburg Mortgage was in compliance with its reverse repurchase agreement, that it had the intent and ability to hold its impaired securities until their value recovered, Thornburg Mortgage had not experienced recent events which required it to adjust its financial statements, and that the financial statements disclosed all matters relevant to Thornburg Mortgage's ability to continue as a going concern. See Complaint ¶ 57, at 17. Goldstone and Simmons did not inform KPMG of the impending collapse of a European hedge fund. See Complaint ¶¶ 76-77, at 22-23. The SEC also alleges that Simmons misrepresented the true purpose of the I/O Strip Transactions to KPMG. The materiality of the alleged misrepresentations and omissions overlap: the SEC alleges that, had KPMG known the true reason for the I/O Strip Transactions, of Thornburg Mortgage's difficulty meeting margin calls, and of the collapse of a European hedge fund, KPMG would have disagreed with Thornburg Mortgage's OTTI analysis and its profitability in the fourth quarter of 2007.
Just as the Court concludes that the OTTI analysis in the 2007 Form 10-K was material, the Court concludes that the Defendants' misrepresentations and omissions to the auditors which furthered a false OTTI analysis and represented that Thornburg Mortgage had disclosed all material financial events were materially misleading. The OTTI analysis allowed Thornburg Mortgage to report a net profit of approximately sixty-five million dollars in the fourth quarter of 2007, instead of a net annual loss of approximately $1.3 billion, a difference which the Court believes a reasonable investor would find important. See Genesee Cnty. Emps. Ret. Sys. v. Thornburg Mortg. Sec. Trust, 825 F.Supp.2d at 1126; Complaint ¶¶ 8, 12, at 4-5; id. ¶¶ 86-88, at 25-26. The Defendants contend that their OTTI analysis was not materially misleading, because KPMG was aware of Thornburg Mortgage's margin calls before the 2007 Form 10-K was filed. Although the SEC has conceded that KPMG knew Thornburg Mortgage experienced margin calls in February, 2008 — to the extent it was disclosed in the 2007 Form 10-K — the SEC contends, nonetheless, that the Defendants omitted information regarding the payment plans, the purpose of the I/O Strip Transactions,
The Defendants are attempting to minimize the importance they themselves attached to the omitted information. For example, in the Feb. 25 Goldstone/Starrett Email, Starrett confirms with Goldstone that they have "purposely not told [the auditors] about the margin calls so that we don't escalate an issue which we believe will be put to rest by the time they have to issue their opinion." Feb. 25 Goldstone/Starrett Email at 2. Starrett's statement demonstrates that the information they withheld from KPMG — Thornburg Mortgage's payment plans, for example — would impact KPMG's opinion. Were the payment plans truly immaterial the Defendants would have no reason to hide their existence. The Feb. 22 BOD Email similarly demonstrates the importance of Thornburg Mortgage's payment plans in relation to its financial statements: Goldstone states that they "don't want to disclose our current circumstances until it is resolved." Feb. 22 BOD Email at 2. Additionally, Thornburg Mortgage's lenders found its delay in meeting margin calls significant to their ongoing financial relationship: "[Credit Suisse] is willing to withdraw from the underwriting group since they realize their attorneys will probably not agree to anything short of disclosing the delay in meeting their margin call earlier this week." Feb. 21 Burns/Goldstone Email at 2. It is likely that discovery will confirm that Thornburg Mortgage's difficulty in meeting margin calls was material to the OTTI analysis, and, therefore, the omission of that discussion was material, in both the Going Concern Analysis and in the management representation letter. See Matrixx Initiatives, Inc. v. Siracusano, 131 S.Ct. at 1323.
Goldstone and Simmons contend that the collapsing European hedge fund was only an "unconfirmed rumor," which they had no duty to disclose to KPMG, but their own electronic mail discussion of the "rumor" demonstrates its importance. Goldstone & Simmons Reply at 34. For example, Simmons' response to the news of the hedge fund's collapse is his directive for Thornburg Mortgage to file the 2007 Form 10-K as soon as possible, indicating that he knows the collapse will impact Thornburg Mortgage's financial statements. See Feb. 27 Simmons/Feldman Email at 2 ("This makes it even more critical to be done with Citigroup Global today so we can get the K filed."). Goldstone also indicated that he expected the hedge fund's collapse to negatively impact Thornburg Mortgage: "They got hit with 20 point haircuts on Alt-A AAA's overnight. I think we will get this a little more gradually, but we should be ready for it." Feb. 27 Goldstone/Simmons Email at 2. Just as Goldstone and Simmons considered the collapse of the hedge fund and the increased margin calls which would accompany it relevant to the 2007 Form 10-K, the Court concludes that KPMG would have found the hedge fund's collapse relevant and material in assessing Thornburg Mortgage's ability to meet margin calls without selling assets going forward. See Genesee Cnty. Emps. Ret. Sys. v. Thornburg Mortg. Sec. Trust, 825 F.Supp.2d at 1126. The Court notes that the SEC's allegations establish that only Goldstone and Simmons were aware of the collapsing European hedge fund, and that they became aware of the collapse on February 27, 2008. See Complaint ¶¶ 76, 78, at 22-23.
The SEC's last allegation of a misrepresentation or omission to KPMG before the 2007 Form 10-K was filed relates to Simmons' statement that Thornburg Mortgage entered into the I/O Strip Transactions to take advantage of favorable pricing, but not to meet margin calls. See Complaint ¶ 65, at 19. The SEC contends that, had KPMG known of the true purpose of the I/O Strip Transactions, it would have disagreed with Thornburg Mortgage's OTTI analysis, but the materiality of that omission may be weaker than the others. Regardless of whether Simmons informed KPMG that the I/O Strip Transactions were used to meet margin calls, KPMG could infer, as the SEC asserts the Court should infer, that the I/O Strip Transactions decreased Thornburg Mortgage's liquidity and, accordingly, diminished its ability to continue to meet margin calls without selling assets. On the other hand, in the context of the total mix of information available to KPMG, it may not have been apparent that the I/O Strip Transactions were significant in relation to Thornburg Mortgage's ability to meet margin calls, because Simmons' statement hid the purpose of the Transactions and, therefore, minimized Thornburg Mortgage's strained liquidity. See TSC Indus., Inc. v. Northway, Inc., 426 U.S. at 449, 96 S.Ct. 2126 (defining an omission as material if there is a "substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available"). Discovery may indeed reveal that, in the context of all information available to KPMG, Simmons' misrepresentation of the purpose for the I/O Strip Transactions was immaterial, because KPMG could accurately assess Thornburg Mortgage's liquidity knowing that they occurred, regardless of their stated purpose. On the other hand, Simmons' statement could have caused KPMG to believe that Thornburg Mortgage had no need to sell I/O Strips to meet its margin calls and would have, therefore, overstated Thornburg Mortgage's financial condition. In so far as Simmons' misrepresentation of the reason for the I/O Strip Transactions "alters the meaning" of the OTTI analysis in the Going Concern Analysis and management representation letter, the Court concludes that the misrepresentation was material. McDonald v. Kinder-Morgan, Inc., 287 F.3d at 998. The Court will not, therefore, accept the Defendants' argument that the information allegedly omitted from the Going Concern Analysis and management representation letter regarding Thornburg Mortgage's intent and ability to hold its ARM securities to maturity was immaterial. The Court has determined that rules 13b2-2(a) and (c)(1) do not require the SEC to allege that the Defendants acted with scienter, and, therefore, the SEC's allegations which establish that the Defendants materially misled KPMG suffice to state a claim under
The SEC alleges that, after the 2007 Form 10-K was filed, Goldstone and Simmons failed to provide the "critical" Citigroup Global Letter in response to the Request for Correspondence, Complaint ¶¶ 100-101, at 29, and Simmons misrepresented to KPMG that the margin calls Thornburg Mortgage received were "unforeseeable" and attributable to an "unexpected collapse" of the European hedge fund, Complaint ¶¶ 103-105, at 30, and, in so doing, deceived KPMG in violation of rule 13b2-2. Goldstone and Simmons contend that the Citigroup Global Letter was immaterial, because KPMG did not request all correspondence, but, rather, indicated that correspondence such as the Citigroup Global Letter may be relevant in its determination whether to restate its opinion, and the Citigroup Global Letter did not impact Thornburg Mortgage's financial statements. See Goldstone and Simmons Reply at 35-36. The SEC concedes that Starrett was not aware of the Citigroup Global Letter and, accordingly, cannot be liable for failing to disclose it to KPMG. See Complaint ¶ 101, at 29. Simmons also contends that he accurately reported that the margin calls after the 2007 Form 10-K was filed were unforeseeable, as he and Goldstone expected Thornburg Mortgage would receive more gradually the margin calls which the European hedge fund's collapse precipitated. See Goldstone & Simmons MTD at 65. The SEC has not alleged that Goldstone or Starrett made a misrepresentation to KPMG in the Position Paper. Although the SEC alleges that Goldstone, Simmons, and Starrett received the Request for Correspondence, the SEC specifically alleges that only Simmons reviewed and approved the Position Paper, and Simmons alone misrepresented his awareness of the European hedge fund's collapse. See Complaint ¶¶ 102-105, at 30 ("Simmons continued to deceive the company's auditor during its restatement work by attributing Thornburg Mortgage's February 28th margin calls to `unforeseeable' circumstances...."). Accordingly, the Court will analyze whether Goldstone and Simmons' failure to provide the Citigroup Global Letter materially misled KPMG, and whether Simons materially misrepresented that Thornburg Mortgage's margin calls after the 2007 Form 10-K was filed were unforeseeable. The Court determines that the SEC has sufficiently alleged that the omission and misrepresentation materially misled KPMG in violation of rules 13b2-2(a) and (c)(1) promulgated under the Exchange Act.
The Court does not agree that the Citigroup Global Letter was immaterial to KPMG in response to the Request for Correspondence. Although Goldstone and Simmons contend that the Request for Correspondence did not require them to produce the Citigroup Global Letter, see Goldstone & Simmons MTD at 64, the Request for Correspondence specifically requested a position paper discussing the
The Position Paper, also, demonstrates that omitting the Citigroup Global Letter could have materially misled KPMG. The
The Court also concludes that Simmons' characterization of the European hedge fund's collapse as "unexpected" and of the margin calls after the 2007 Form 10-K was filed as "unforeseeable" could have materially misled KPMG. Position Paper at 2. KPMG informed the Defendants that the "Question at hand," on March 3, 2008, was "[w]hat did management know before, during, and after the filing, and what should management have known," given that KPMG's discussion with management before the 2007 Form 10-K was filed indicated that the events on "August 28th through March 3rd were not and could not have been reasonably anticipated." Request for Correspondence at 3. Simmons' response to the question related that "management ha[d] reason to believe that the liquidity situation would improve over the following weeks" after February 27th, 2008, but that "a number of factors including the unexpected collapse of a major hedge fund in Europe" caused the mortgage market to collapse significantly further.
It is not clear to the Court that the SEC is attempting to hold the Defendants liable under rules 13b2-2(b) and (c)(2) of the Exchange Act for taking "any action to coerce, manipulate, mislead, or fraudulent influence any independent public or certified public accountant" in connection with Thornburg Mortgage's audit. 17 C.F.R. § 240.13b2-2(b), (c)(2). The conduct that the SEC alleges violates rule 13b2-2 relates to misrepresentations and omissions; the SEC alleges that the Defendants misrepresented Thornburg Mortgage's financial condition and the OTTI analysis in the Going Concern Analysis and the management representation letter, that Goldstone and Simmons concealed the Citigroup Global Letter and the European hedge fund's collapse from KPMG, and that Simmons misrepresented the purpose of the I/O Strip Transactions and whether the margin calls were expected in the Position Paper. The SEC has stated rules 13b2-2(b) and (c)(2) are violated through conduct such as:
68 F.R. 31820-01, 31823, 2003 WL 21218518. The SEC has noted that the facts of a particular case will determine whether a defendant's conduct is coercion, manipulation, or fraudulent influence that the rule is intended to encompass, see 68 F.R. 31820-01, 31823, 2003 WL 21218518, but the Court sees no indication that the Defendant's alleged misrepresentations and omissions rise to the level of the rules' prohibited conduct. Although the OTTI analysis is somewhat similar to providing "an inaccurate or misleading legal analysis," 68 F.R. 31820-01, 31823, 2003 WL 21218518, had the SEC intended for rules 13b2-2(b) and (c)(2) to encompass providing a false accounting opinion, the SEC would have no reason to refer to false legal analyses instead. The Court concludes, therefore, that the SEC's allegations that the Defendants made material misrepresentations and omissions to KPMG in connection with KPMG's audit fail to state a claim for relief under rules 13b2-2(b) and (c)(2) promulgated under the Exchange Act.
In sum, the Court dismisses the SEC's allegations in Count 7 in part. The Court will dismiss any allegations based upon violations of rules 13b2-2(b) and (c)(2) promulgated under the Exchange Act. The Court will also dismiss the allegations that the Defendants deceived KPMG through misrepresenting that Thornburg Mortgage successfully continued to meet its margin calls and not disclosing that Thornburg Mortgage was in violation of its reverse repurchase agreements deceived KPMG. The Court will not dismiss the SEC's allegation that Defendants deceived KPMG in the Going Concern Analysis through misrepresenting the OTTI analysis and that Thornburg Mortgage returned to profitability in the fourth quarter 2007. The Court will also not dismiss the SEC's allegations that the management representation letter misrepresented the OTTI analysis, and that Thornburg Mortgage had not experienced events between February 20, 2008 and February 27, 2008, which caused it to adjust its financial statements or impacted its ability to continue as a going concern. The Court will not dismiss the SEC's allegations that Simmons' misrepresented the purpose of the I/O Strip Transactions and that he had no reason to expect increased margin calls after the 2007 Form 10-K was filed. The Court will also not dismiss the SEC's allegations that Goldstone and Simmons deceived KPMG through not providing the Citigroup Global Letter in response to the Request for Correspondence.
The Court, therefore, grants the motions to dismiss in part and denies them in part. The Court will dismiss the SEC's allegations in Counts 1, 2, 3, 4, 6, 8, and 9 to the extent they are based on the statement in the 2007 Form 10-K that Thornburg Mortgage had successfully met its margin calls at the time the 2007 Form 10-K was filed. The Court will also dismiss the SEC's allegations in Counts 1, 2, 3, 4, 6, 8, 9, and 11 to the extent they are based upon the statement in the 2007 Form 10-K that Thornburg Mortgage did not sell assets to meet margin calls. The Court will also dismiss the allegations in Counts 1, 3, 4, 5,
The Court, therefore, grants the motions to dismiss in part and denies them in part. The Court will dismiss the SEC's allegations in Counts 1, 2, 3, 4, 6, 8, and 9 to the extent they are based on the statement in the 2007 Form 10-K that Thornburg Mortgage had successfully met its margin calls at the time the 2007 Form 10-K was filed. The Court will also dismiss the SEC's allegations in Counts 1, 2, 3, 4, 6, 8, 9, and 11 to the extent they are based upon the statement in the 2007 Form 10-K that Thornburg Mortgage did not sell assets to meet margin calls. The Court will also dismiss the allegations in Counts 1, 3, 4, 5, 8, and 10 to the extent they are based upon Starrett's primary liability for participating in a fraudulent scheme to misrepresent the OTTI analysis in the 2007 Form 10-K. The Court will also dismiss the SEC's allegations in Count 7 to the extent they are based upon the Defendants' statement to KPMG that Thornburg Mortgage had not violated its reverse repurchase agreements and continued to meet its margin calls. The Court will dismiss the SEC's allegations in Count 7 under Exchange Act rule 13b2-2(b) and (c)(2) because the SEC has not alleged that the Defendants used manipulation or coercion to influence KPMG's audit.
The Court will not dismiss the allegations in Counts 1, 2, 3, 4, 5, 6, 8, 9, 10, and 11 against Goldstone and Simmons for the misrepresented OTTI analysis in the 2007 Form 10-K, and against the Defendants for aiding and abetting the representation of a false OTTI analysis. The Court will not dismiss the SEC's allegations in Counts 1 and 4 to the extent they are based on Goldstone's misrepresentation of Thornburg Mortgage's financial condition through the investor relations department and on Street Signs after the 2007 Form 10-K was filed.
The Court will also not dismiss the SEC's allegations in Count 7 against the Defendants to the extent they are based upon the OTTI analysis in the Going Concern Analysis and the management representation letter. The Court will not dismiss the SEC's allegation in Count 7 to the extent it is based upon Goldstone and Simmons' failure to factor the European hedge fund's collapse into the management representation letter's OTTI analysis or disclose that information to KPMG. The Court will also not dismiss the SEC's allegation that Simmons' misrepresented to KPMG that Thornburg Mortgage entered into the I/O Strip Transactions to take advantage of favorable pricing. The Court will also not dismiss the allegations in Count 7 that Goldstone and Simmons' failure to disclose the Citigroup Global Letter in response to Correspondence was a material omission. The Court will not dismiss that Simmons' misrepresented in the Position Paper that Mortgage's increased margin calls were unexpected and
10-K, Black's Law Dictionary 1607 (9th ed.2009).
Shelf registration, Wikipedia (May 18, 2013, 12:59 p.m.), http://en.wikipedia.org/wiki/Shelf_registration.
