JOSÉ A. CABRANES, Circuit Judge:
In this appeal we consider, as a matter of first impression, whether the bar on extraterritorial application of the United States securities laws, as set forth in Morrison v. National Australia Bank Ltd., 561 U.S. 247, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010), precludes claims arising out of foreign-issued securities purchased on foreign exchanges, but cross-listed on a domestic exchange (the so-called "listing theory"). We also consider whether the alleged misstatements at issue here are actionable under the securities laws.
We conclude that: (1) the Supreme Court's decision in Morrison precludes claims brought pursuant to the Securities Exchange Act of 1934 ("Exchange Act") by purchasers of shares of a foreign issuer on a foreign exchange, even if those shares were cross-listed on a United States exchange; (2) claims brought under the Securities Act of 1933 ("Securities Act") based on disclosures made in connection with a UBS June 13, 2008 registered rights offering were properly dismissed because they are immaterial and/or inactionable "puffery," as that term is defined in our case law; and (3) Exchange Act claims arising out of defendants' statements regarding positions in, and valuation of, mortgage-related assets were properly dismissed for failure to adequately plead a material misrepresentation or scienter.
Accordingly, we affirm the September 13, 2011 and September 28, 2012 judgments of the United States District Court for the Southern District of New York (Richard J. Sullivan, Judge) dismissing all claims with prejudice.
Plaintiffs, a group of foreign and domestic institutional investors,
Plaintiff Alaska Laborers-Employers Retirement Fund ("Alaska Laborers") also brings this action on behalf of a class that purchased ordinary shares of UBS in connection with the Company's June 13, 2008 Rights Offering (the "Offering"), alleging that the UBS Defendants and a group of Underwriters
Plaintiffs allege that UBS accumulated and overvalued $100 billion in residential mortgage backed securities ("RMBS") and collateralized debt obligations ("CDOs" and, together with RMBS, "mortgage-related assets")
The acquisition of the $100 billion portfolio began with the 2006 launch of Dillon Read Capital Management ("DRCM"), an internal hedge fund
Plaintiffs allege that UBS concealed the scope of the IB's subprime portfolio (disclosing $23 billion rather than $100 billion) and, as the subprime market began to collapse in February 2007, concealed the losses in that portfolio by failing to revalue the mortgage-related assets. Plaintiffs allege that UBS belatedly announced its first mortgage-related write-down of $4 billion on October 1, 2007, and ultimately wrote down the portfolio by $48 billion.
Plaintiffs also allege that UBS made materially misleading statements regarding an alleged scheme in which UBS Swiss bankers traveled in and out of the United States to illegally advise American clients on the purchase of investments.
On February 19, 2009, UBS entered into a Deferred Prosecution Agreement
On September 13, 2011, the District Court dismissed the claims of foreign and domestic plaintiffs who purchased the UBS shares on foreign exchanges.
This timely appeal followed.
We review de novo a district court judgment granting a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), accepting all factual allegations in the complaint as true.
Three foreign institutional investors — plaintiffs Union, IFM, and ATP — and one domestic investor — plaintiff OPEB — purchased their UBS (foreign-issued) ordinary shares on a foreign exchange. The District Court, relying on the Supreme Court's decision in Morrison v. National Australia Bank, dismissed these claims. We address the claims of the foreign and domestic plaintiffs separately.
Morrison answered in the negative the question "whether [§ 10(b) ] provides a cause of action to foreign plaintiffs suing foreign [] defendants for misconduct in connection with securities traded on foreign exchanges."
Plaintiffs argue that, by its express terms, the Morrison bar is limited to claims arising out of securities "[not] listed on a domestic exchange."
Morrison emphasized that "the focus of the Exchange Act is ... upon purchases and sales of securities in the United States."
Perhaps most tellingly, in rejecting this Circuit's "conduct and effects" test in favor of a bright-line rule, Morrison rejected our prior holding that "`the Exchange Act [applies] to transactions regarding stocks traded in the United States which are effected outside the United States....'"
Plaintiff OPEB is a U.S. entity that purchased some of its UBS shares on a foreign exchange by placing a so-called "buy order" in the United States, which was later executed on a Swiss exchange. In addition to advocating the "listing theory," OPEB argues that its purchase satisfies the second prong of Morrison because it constitutes a "purchase ... of [a] security in the United States."
In our decision in Absolute Activist Value Master Fund Ltd. v. Ficeto ("Absolute Activist") we explained that "`[a] securities transaction is domestic [for purposes of Morrison's second prong] when the parties incur irrevocable liability to carry out the transaction within the United States or when title is passed within the United States.'"
Plaintiffs argue that "[w]hen a purchaser is a U.S. entity, `irrevocable liability' is not incurred when the security is purchased on a foreign exchange[; rather it is incurred] in the U.S. where the buy order is placed."
Alaska Laborers alleges that the offering materials
The District Court dismissed Alaska Laborers' claims under §§ 11 and 12(a)(2) of the Securities Act for, among other reasons, failure to allege material misrepresentations.
Plaintiffs need not allege scienter, reliance, or causation.
In assessing § 11 claims, we "conduct a preliminary inquiry into whether plaintiffs' allegations are premised on fraud," or merely on negligence, to determine the appropriate pleading standard.
First, plaintiffs allege that UBS's involvement in the Tax Fraud rendered UBS's statements in the offering materials about compliance, reputation, and integrity materially misleading. It is well-established that general statements about reputation, integrity, and compliance with ethical norms are inactionable "puffery," meaning that they are "too general to cause a reasonable investor to rely upon them."
Second, plaintiffs argue that defendants' failure to disclose the tax scheme violated Regulation S-K, Item 503(c), which requires registrants to include in offering materials "a discussion of the most significant factors that make the offering speculative
The offering materials disclosed that the DOJ was investigating whether, from 2000-2007, UBS client advisors entered the United States to help U.S. clients evade their tax obligations, in violation of U.S. law. Plaintiffs argue, in effect, that, in addition to disclosing the existence of an investigation, defendants were required to disclose that UBS was, in fact, engaged in an ongoing tax evasion scheme.
As we have explained, "[d]isclosure is not a rite of confession,"
In sum, plaintiffs have not pleaded any misstatements in the Offering that give rise to a cause of action under the Securities Act. Accordingly, we affirm the judgment of the District Court dismissing the claims of Alaska Laborers under §§ 11 and 12(a)(2) of the Securities Act.
The District Court dismissed plaintiffs' § 10(b) claims for failure to plead materiality or scienter with respect to the CDO/ RMBS Fraud, and failure to plead materiality as to the Tax Fraud.
A complaint alleging securities fraud under § 10(b) of the Exchange Act must satisfy the heightened pleading requirements of Rule 9(b) and the Private Securities Litigation Reform Act of 1995 (the "PSLRA").
Scienter may be established by facts "(1) showing that the defendants had both motive and opportunity to commit the fraud or (2) constituting strong circumstantial evidence of conscious misbehavior or recklessness."
Plaintiffs plead two categories of misstatements comprising the alleged CDO/ RMBS fraud: (1) statements that UBS avoided "asset concentrations" as a "key pillar" of its risk management strategy; and (2) statements regarding UBS's valuation of its mortgage-related assets. We address each in turn.
Plaintiffs allege that the UBS Defendants represented that "UBS, inter alia: (1) avoided `concentrated positions' of assets; (2) implemented asset portfolio limits, and (3) engaged in limited `proprietary' investing...." at a time when they "knew of and had access to information concerning the $100 billion RMBS/CDO portfolio" and knew "that UBS had no portfolio limits." Plaintiffs aver that these facts support the inference that defendants "knew, or recklessly disregarded, that their representations to investors were materially false and misleading."
As a preliminary matter, plaintiffs do not plausibly allege that UBS's representations regarding asset concentrations were materially misleading. Plaintiffs contend that these statements are material "[b]ecause [UBS] represented that the avoidance of asset concentrations was vital to [its] business and success." But while importance is undoubtedly a necessary element of materiality,
Moreover, UBS did disclose that it was "seeking to expand [its] fixed income business further by pursuing opportunities in... asset-backed securities," and disclosed, for example, increases in the portfolio of as much as 69 billion Swiss francs ("CHF")
In sum, plaintiffs have not plausibly alleged that UBS's representations regarding asset concentrations and risk diversification were materially misleading or that defendants were consciously reckless in making such representations in light of their accumulation of asset-backed securities.
The second category of alleged misrepresentations relates to UBS's statements regarding its valuation of its mortgage-related assets. UBS represented that it employed "mark-to-market accounting," meaning that it valued its mortgage-related
The crux of plaintiffs' argument is that the sale by UBS of certain assets held by its internal hedge fund, DRCM, reflected the need to reduce the stated market value of, or "write down," that class of assets, and that this should have raised "red flags" that the IB's "similar securities" might be at risk. Instead, plaintiffs allege, UBS "disregarded ... observable market inputs and red flags demonstrating that [its] mortgage-related asset portfolio was materially impaired." The District Court found deficient plaintiffs' allegations that the UBS defendants were "reckless" in ignoring these purported red flags. We agree.
As we have explained, to qualify as "reckless conduct" within the meaning of our securities laws, "the decision not to [write down the IB's mortgage-related securities portfolio] must have been highly unreasonable, representing an extreme departure from the standards of ordinary care."
Assuming arguendo that plaintiffs are correct about what defendants should have been doing, this does not create a strong inference that the UBS defendants were reckless in failing to write down the IB's assets, in light of what it knew about DRCM's assets and the subprime market generally. The central premise of these securitized structures was that highly-rated tranches would withstand the devaluation of lower-rated tranches.
Plaintiffs have alleged that there was uncertainty and disagreement within UBS and in the market at large, about the valuation and risk exposure of mortgage-related assets. See, e.g., Joint App'x 101 (an April 2007 UBS internal investigation concluded that "valuation uncertainties in [the] IB ... were not sufficiently transparent and inherent risks not adequately analyzed"). However, the Complaint fails to create a strong inference that the UBS defendants recklessly disregarded known facts contradicting their public valuation of their highly-rated RMBS/CDO assets, or that their behavior represented an extreme departure from the ordinary standards of care.
While the collapse in the entire subprime market revealed UBS's failure to recognize the vulnerability of all its mortgage-related assets to have been poor
We have held that the definition of "materiality" under § 11 of the Securities Act is the same as under § 10(b) of the Exchange Act.
Plaintiffs contend, finally, that the District Court erred in dismissing their Amended Complaint with prejudice because they have not yet amended directly in response to specifically identified pleading defects. We review a district court's denial of leave to amend for abuse of discretion, unless the denial was based on futility, in which case we review that legal conclusion de novo.
Plaintiffs have already had one opportunity to amend their complaint. Although that amendment was not in response to a motion to dismiss identifying particular deficiencies in the pleadings, it is unlikely that the deficiencies raised with respect to the Amended Complaint were unforeseen by plaintiffs when they amended. Moreover, plaintiffs have identified no additional facts or legal theories — either on appeal or to the District Court — they might assert if given leave to amend.
To summarize, we hold that:
Accordingly, we