ECA v. JP Morgan Chase

07 -17 86 -cv
E C A v. JP M o rgan C hase

UN ITED STATES CO UR T OF APPEALS

FOR THE SECOND CIRCUIT

October Term 2008

Heard: October 20, 2008 Decided: January 21, 2009

Docket No. 07-1786-cv

EC A and LO CA L 134 IB EW JOINT
PEN SIO N TR UST O F C HIC AGO,
PEN N SECURITY BA NK & TRUST
CO., EM PIRE LIFE INSURANCE
CO. and BRIAN BARRY, on behalf of
the Barry Family LP, individually, and
on behalf of all others similarly
situated,

Plaintiffs - Appellants,

v.

JP M ORGAN CHASE CO.,

Defendant - Appellee.

Before: KEARSE, SACK, and KELLY, * Circuit Judges.

Appeal from the M arch 30, 2007, judgment of the United States District

Court for the Southern District of New York (Sidney H. Stein, District Judge),

dismissing the Plaintiffs’ Second Amended Complaint for failure to state a claim

*
The Honorable Paul J. Kelly, Jr., of the United States Court of Appeals
for the Tenth Circuit, sitting by designation.
for relief pursuant to Fed. R. Civ. P. 12(b)(6) and for failure to comply with the

heightened pleading standard required by Fed. R. Civ. P. 9(b) and the Private

Securities Litigation Reform Act, 15 U.S.C. § 78u-4. Plaintiffs contend that they

adequately pled materiality and scienter in order to state a claim for securities

fraud.

W e affirm.

Craig Spiegel (Steve W . Berman, Erin K .
Flory, Hagens, Berman, Sobol, Shapiro,
L.L.P, Seattle, W ashington, Joseph H.
W eiss, David C. Katz, Richard Acocelli,
W eiss & Lurie, New York, New York, on
the briefs), for Plaintiffs - Appellants.

Bruce D. Angiolillo (Thomas C. Rice,
George S. W ang, Simpson, Thacher, &
Bartlett, L.L.P., New York, New York, on
the brief), for Defendant - Appellee.

PA UL J. KELLY, JR., Circuit Judge.

Plaintiffs, shareholders of JP M organ Chase & Co. (JPM C), appeal from a

judgment of the United States District Court for the Southern District of New

York, Sidney H. Stein, District Judge, granting JPM C’s Fed. R. Civ. P. 12(b)(6)

motion to dismiss for failure to state a claim. The basis of Plaintiffs’ claim, in

essence, was that they were defrauded by JPM C’s complicity in Enron

Corporation’s financial scandals. In M arch 2005, the district court dismissed

without prejudice Plaintiffs’ First Amended Complaint (FAC) for failure to

sufficiently allege scienter for all but the allegations involving JPM C’s improper

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characterization of certain transactions (the “M ahonia transactions”) as trades,

and for failure to plead materiality adequately with regard to that allegation. See

In re JP M organ Chase Sec. Litig., 363 F. Supp. 2d 595, 619-34 (S.D.N.Y. 2005)

(“JP M organ Chase I”). Plaintiffs then filed a Second Amended Complaint

(SAC). Again, however, the district court concluded that Plaintiffs had only

sufficiently pleaded scienter with respect to JPM C’s characterization of the

M ahonia transactions, but that these transactions were not material. Accordingly,

the district court dismissed the second amended complaint for failure to state a

claim, this time with prejudice. In re JP M organ Chase Sec. Litig., No. 02 Civ.

1282, 2007 W L 950132, at *15 (S.D.N.Y. M ar. 29, 2007) (“JP M organ Chase II”).

Plaintiffs now appeal the district court’s dismissal. Our jurisdiction arises under

28 U.S.C. § 1291, and we affirm.

Background

The facts preceding this appeal, including the precise nature of the

allegations contained in the first and second amended complaints, have been

exhaustively set forth in the district court’s opinions below. See JP M organ

Chase I, 363 F. Supp. 2d at 602-14; JP M organ Chase II, 2007 W L 950132, at *1-

10. Therefore, we will set forth only a brief recitation of the factual background

to this appeal. Because this case presents an appeal from a Fed. R. Civ. P.

12(b)(6) dismissal, the factual allegations in the complaint must be accepted as

true. In re Carter-W allace, Inc., Sec. Litig., 220 F.3d 36, 38 (2d Cir. 2000).

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 A. The First Amended Complaint

In their FA C, Plaintiffs alleged that JPM C 1 and two of its officers, W illiam

Harrison, Jr., and M arc J. Shapiro, defrauded JPM C shareholders by making

deliberate misrepresentations that artificially inflated the price of JPM C stock and

ultimately led to a collapse of JPM C’s share price. JP M organ Chase I, 363 F.

Supp. 2d at 601-03. Plaintiffs alleged that JPM C created disguised loans for

Enron and concealed the nature of these transactions by making false statements

or omissions of material fact in its accounting and Securities and Exchange

Commission (SEC) filings. Id. According to the complaint, JPM C created

“Special Purpose Entities,” among them an entity called M ahonia Ltd., to

facilitate disguised loan transactions with Enron Corporation. Id. at 602-04; FA C

¶¶ 42, 58-61. Allegedly, the creation of M ahonia enabled Enron to conceal its

debt from investors because Enron could report the cash flow from JPM C through

M ahonia to Enron as revenue from prepaid comm odity trades rather than as loan

proceeds. JP M organ Chase I, 363 F. Supp. 2d at 604; FAC ¶¶ 61, 67-69.

Essentially, M ahonia borrowed money from JPM Chase and used that
money to buy gas from Enron; M ahonia w ould then satisfy its debt to
JPM Chase by providing the gas to JPM Chase, which would resell
the gas at a fixed future price back to Enron. In reality . . . neither
the physical commodity nor title to it were ever intended to be
transferred.

1
Except as necessary for clarification, we refer to the defendant as JPM C
even though some of the alleged activities were undertaken by JPM C’s
predecessor, The Chase M anhattan Corporation. Chase M anhattan merged with
JP M organ to create JPM C prior to this litigation and, therefore, the corporate
defendant can be discussed as one entity for most purposes.

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JP M organ Chase I, 363 F. Supp. 2d at 604; see also FAC ¶¶ 71-74. According to

the complaint, the commodity transactions lacked economic substance; while a

financially settled commodity sw ap would eliminate any price risk, the economic

reality is that the transactions were loans. FAC ¶¶ 73-74. Furthermore, JPM C

cooperated with Enron in these deceptive practices by mischaracterizing the

transactions on its financial statements as trading assets rather than as loans. JP

M organ Chase I, 363 F. Supp. 2d at 604-05; FAC ¶¶ 77-80. In return, JPM C

earned exorbitant fees. JP M organ Chase I, 363 F. Supp. 2d at 602; FA C ¶¶ 49-

50, 55. M oreover, the complaint alleged that JPM C repeatedly assured investors

that it maintained high standards of integrity and credit-risk management

throughout the period during which it engaged in transactions with Enron. JP

M organ Chase I, 363 F. Supp. 2d at 608-09, 612; FAC ¶¶ 153-57, 161-62, 168-73.

Following the collapse of Enron, however, the Senate investigated JPM C’s role in

Enron’s fraudulent practices and concluded that JPM C had knowingly engaged in

and actively assisted Enron in its sham transactions; the resulting disclosures

caused JPM C’s stock to suffer significant losses. JP M organ Chase I, 363 F.

Supp. 2d at 608, 613-14; FAC ¶¶ 22, 357-72.

In sum, the FAC alleged that JPM C defrauded its shareholders by, inter

alia, downplaying its Enron-related exposure, failing to disclose alleged violations

of law in connection with the M ahonia and other transactions, falsely portraying

itself as a low-risk company with a reputation for fiscal discipline and integrity,

and improperly accounting for the M ahonia prepays as viable trades rather than as

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impaired loans on its financial statements (thereby failing to disclose the credit

risk). See JP M organ Chase II, 2007 W L 950132, at *2.

The district court evaluated the allegations in light of the heightened

pleading standard under Fed. R. Civ. P. 9(b) and the Private Securities Litigation

Reform Act (PSLRA) and found that the FAC failed to plead with the requisite

particularity that JPM C made a materially false statement or omitted a material

fact, with scienter. JP M organ Chase I, 363 F. Supp. 2d at 619-34. First, the

court found that Plaintiffs had failed to allege scienter with any of the allegations,

except the alleged improper accounting of the M ahonia transactions as trades

rather than loans. 2 Id.; see JP M organ Chase II, 2007 W L 950132, at *3-5.

However, the court found that the allegedly improper accounting of the M ahonia

transactions as trades rather than loans was not material. JP M organ Chase I, 363

F. Supp. 2d at 630-31; see JP M organ Chase II, 2007 W L 950132, at *5.

Accordingly, the court held that the FAC failed to state a claim pursuant to

section 10(b) of the Securities and Exchange Act of 1934 (Exchange Act), 15

U.S.C. § 78j. JP M organ C hase I, 363 F. Supp. 2d at 634. The court also

dismissed Plaintiffs’ other claims for relief, which included claims under section

15 of the Securities Act of 1933 (Securities Act), 15 U.S.C. § 77o; section 11 of

the Securities Act, 15 U.S.C. § 77k; and section 14(a) of the Exchange Act, 15

2
The district court only found adequate allegations of scienter in regard to
JPM C and M r. Shapiro, not M r. Harrison. JP M organ Chase I, 363 F. Supp. 2d at
627-28.

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U.S.C. § 78n(a). Id. at 635-36. Because the district court dismissed the claims

without prejudice, Plaintiffs were permitted to file the SAC.

B. The Second Amended Complaint

As the district court noted in JP M organ Chase II, the SAC consisted

mostly of the same allegations present in the FAC, with three general exceptions.

The SAC made new allegations relating to (1) JPM C’s alleged downplaying of its

Enron-related exposure, (2) JPM C’s alleged misrepresentation of its integrity and

risk management, and (3) the allegedly faulty reporting of the M ahonia

transactions. JP M organ Chase II, 2007 W L 950132, at *6. The latter two are of

the most importance here.

The SAC included new material on Plaintiffs’ allegation that JPM C had

misrepresented its integrity. The SAC pointed to charges in the SEC’s civil

law suit against JPM C accusing JPM C of aiding and abetting Enron, to Senate

hearings where JPM C was accused of “actively assist[ing] Enron,” and to JPM C’s

underwriting of securities issued by W orldCom, see generally In re W orldCom,

Inc., Sec. Litig., 294 F. Supp. 2d 392, 399-400, 403-404 (S.D.N.Y. 2003), to show

that JPM C, in fact, lacked integrity and did not conduct adequate due diligence as

claimed in its statements on sound risk management. Id. at *7; SA C ¶¶ 636-39,

587-604, 188-240. The district court again dismissed Plaintiffs’ allegations

regarding JPM C’s statements on its integrity and risk management strategy as

mere “puffery.” JP M organ Chase II, 2007 W L 950132, at *12. The district court

noted that even if these statements were not puffery, they would not be material.

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Id. Finally, the district court added that the SAC's new focus on the SEC

investigation, the Senate testimony, and the W orldCom evidence was misguided

because those statements pertained to misleading Enron and W orldCom

shareholders, not JPM C shareholders. Id.

The SAC also included new allegations relating to Plaintiffs’ contention

that JPM C made material misstatements in reporting its transactions w ith

M ahonia as viable trading assets. Id. at *8-9. Of particular importance here, the

SA C alleged that not only were the M ahonia transactions wrongfully stated as

viable trades rather than impaired loans, but they also should have been reported

as “related-party transactions” in order to comply with Statement of Financial

Accounting Standards No. 57 (SFA S 57). Id.; SA C ¶¶ 242-54; see also Related

Party Disclosures, Statement of Fin. Accounting Standards No. 57 (Fin.

Accounting Standards Bd. 1982). Plaintiffs alleged that if JPM C had reported the

M ahonia transactions as related-party transactions, it would have led to a chain

reaction which w ould have revealed Enron’s deceptive finances and JPM C’s

alleged complicity. JP M organ Chase II, 2007 W L 950132, at *9; SAC ¶¶ 249-54.

The district court rejected this argument. It found that Plaintiffs properly pleaded

that M ahonia was a “related party” pursuant to SFA S 57, and that JPM C may have

violated generally accepted accounting principles (GAAP) by not reporting the

M ahonia transactions as such. JP M organ Chase II, 2007 W L 950132, at *13.

But, the court noted that merely alleging a GAAP violation is insufficient to

establish scienter, and that Plaintiffs had not alleged any facts suggesting

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fraudulent intent in the GAAP violation. Id. (citing Novak v. Kasaks, 216 F.3d

300, 309 (2d Cir. 2000)). In finding a lack of scienter, the district court noted

that the SEC had not charged JPM C with a violation for failing to comply with

SFAS 57, suggesting that this defeated any claim of recklessness because it

showed that reasonable accountants could differ as to whether SFAS 57 applied to

the M ahonia transactions. Id. The district court then noted that even had scienter

been proven, the failure to disclose these transactions as related-party transactions

would not have been material. According to the district court, the percentage of

JPM C’s assets at issue was “quantitatively immaterial,” and, despite Plaintiffs’

“sw eeping” allegations that proper disclosure w ould have brought about discovery

of Enron’s fraud, Plaintiffs provided no support explaining how the proper

disclosure would have exposed the fraud. Id. at *14.

Having found that the SAC did not sufficiently allege that JPM C acted with

scienter in making any material representations or omissions in connection with

the purchase or sale of securities, the district court dismissed Plaintiffs’ claims

with prejudice. Id. at *15. Plaintiffs appeal the dismissal, presenting several

issues. First, Plaintiffs contend that the district court erred by holding that

JPM C’s financial reporting concerning the M ahonia transactions and assertions

regarding its integrity and risk management were immaterial. Second, Plaintiffs

contend that the district court erred by holding that Plaintiffs did not adequately

plead scienter. Third, Plaintiffs contend that, because we should find materiality

and scienter, the district court erroneously dismissed their additional claims,

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asserted under sections 11 and 15 of the Securities Act and sections 14(a) and 20

of the Exchange Act.

Discussion

W e review de novo the dismissal of a complaint under Rule 12(b)(6),

accepting all factual allegations as true and drawing all reasonable inferences in

favor of the plaintiff. Teamsters Local 445 Freight Div. Pension Fund v. Dynex

Capital Inc., 531 F.3d 190, 194 (2d Cir. 2008); Chambers v. Time W arner, Inc.,

282 F.3d 147, 152 (2d Cir. 2002). “To survive a motion to dismiss, a complaint

must plead ‘enough facts to state a claim to relief that is plausible on its face.’”

Ruotolo v. City of New York, 514 F.3d 184, 188 (2d Cir. 2008) (quoting Bell Atl.

Corp. v. Twombly, 127 S. Ct. 1955, 1974 (2007)); see ATSI Commc’ns, Inc. v.

Shaar Fund, Ltd., 493 F.3d 87, 98 & n.2 (2d Cir. 2007) (applying the Twombly

standard in the context of a securities fraud claim). Any complaint alleging

securities fraud must satisfy the heightened pleading requirements of the PSLRA

and Fed. R. Civ. P. 9(b) by stating with particularity the circumstances

constituting fraud. See Tellabs, Inc. v. M akor Issues & Rights, Ltd., 127 S. Ct.

2499, 2508 (2007); ATSI Commc’ns, 493 F.3d at 99. Under the PSLRA, the

complaint must “specify each statement alleged to have been misleading, [and]

the reason or reasons w hy the statement is misleading,” and “state w ith

particularity facts giving rise to a strong inference that the defendant acted with

the required state of mind.” 15 U.S.C. § 78u-4(b)(1), (2); Tellabs, 127 S. Ct. at

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2508. Therefore, “[w]hile we normally draw reasonable inferences in the non-

movant’s favor on a motion to dismiss,” the PSLRA “establishes a more stringent

rule for inferences involving scienter” because the PSLRA requires particular

allegations giving rise to a strong inference of scienter. Teamsters Local, 531

F.3d at 194.

I. Overview of Applicable Law

Plaintiffs’ principal securities fraud claims are brought pursuant to section

10(b) of the Exchange Act, 15 U.S.C. § 78j(b). This provision makes it unlawful

to “use or employ, in connection with the purchase or sale of any security . . . any

manipulative or deceptive device or contrivance in contravention of such rules

and regulations as the Commission may proscribe.” Id. The SEC rule

implementing the statute, Rule 10b-5, prohibits “mak[ing] any untrue statement of

a material fact or [omitting] to state a material fact necessary in order to make the

statements made, in the light of the circumstances under which they were made,

not misleading.” 17 C.F.R. § 240.10b-5(b) (2008). In order to succeed on a

claim, a “plaintiff must establish that ‘the defendant, in connection with the

purchase or sale of securities, made a materially false statement or omitted a

material fact, with scienter, and that the plaintiff’s reliance on the defendant’s

action caused injury to the plaintiff.’” Lawrence v. Cohn, 325 F.3d 141, 147 (2d

Cir. 2003) (quoting Ganino v. Citizens Utils. Co., 228 F.3d 154, 161 (2d Cir.

2000)); see Lentell v. M errill Lynch & Co., 396 F.3d 161, 172 (2d Cir. 2005); San

Leandro Emergency M ed. Group Profit Sharing Plan v. Philip M orris Cos., 75

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F.3d 801, 808 (2d Cir. 1996). In this case, the parties contest whether the

complaint adequately alleges (1) a false statement or omission of material fact,

and (2) scienter.

A. M ateriality

In order to determine whether a misleading statement is material, courts

must engage in a fact-specific inquiry. Basic Inc. v. Levinson, 485 U.S. 224, 240

(1988). The materiality of a misstatement depends on whether “‘there is a

substantial likelihood that a reasonable shareholder would consider it important in

deciding how to [act].’” Id. at 231-32 (quoting TSC Indus., Inc. v. Northway,

Inc., 426 U.S. 438, 449 (1976)). In other words, in order for the misstatement to

be material, “‘there must be 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.’” Id. (quoting

TSC Indus., 426 U.S. at 449). Therefore, the determination of whether an alleged

misrepresentation is material necessarily depends on all relevant circumstances.

Ganino, 228 F.3d at 162. Because materiality is a mixed question of law and fact,

in the context of a Fed. R. Civ. P. 12(b)(6) motion, “‘a complaint may not

properly be dismissed . . . on the ground that the alleged misstatements or

omissions are not material unless they are so obviously unimportant to a

reasonable investor that reasonable minds could not differ on the question of their

importance.’” Id. (quoting Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir.

1985)) (alteration in original).

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 The SEC has provided internal guidance in Staff Accounting Bulletin

(SA B) No. 99 regarding the determination of materiality. According to SA B No.

99, both quantitative and qualitative factors should be considered in assessing a

statement’s materiality. SA B No. 99 begins the analysis with the quantitative

factor. Under this factor, the SEC considers the financial magnitude of the

misstatement; while SAB No. 99 suggests a percentage threshold below which the

amount is presumptively immaterial, the SEC notes that the challenged amount

can be material even though it is below that percentage threshold of assets,

liabilities, revenues or net income. See SEC Staff Accounting Bulletin No. 99, 64

Fed. Reg. 45150, 45150-52 (1999). SAB No. 99 also sets out qualitative factors

such as, inter alia, (1) concealment of an unlawful transaction, (2) significance of

the misstatement in relation to the company’s operations, and (3) management’s

expectation that the misstatement will result in a significant market reaction. See

id. This Court has deemed SAB No. 99 to be persuasive authority. Ganino, 228

F.3d at 163. While SA B N o. 99 does not change the standard of materiality, w e

consider the factors it sets forth in determining whether the misstatement

significantly altered the “total mix” of information available to investors.

B. Scienter

In order to plead scienter adequately under the PSLRA, a plaintiff must

plead “with particularity facts giving rise to a strong inference that the defendant

acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2) (emphasis

added). The requisite state of mind in a section 10(b) and Rule 10b-5 action is an

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intent “‘to deceive, manipulate, or defraud.’” Tellabs, 127 S. Ct. at 2504 (quoting

Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n.12 (1976)). In addition to

intent, recklessness is a sufficiently culpable mental state for securities fraud in

this circuit. Teamsters Local, 531 F.3d at 194; see also Novak, 216 F.3d at 308-

09. Recklessness is defined as “‘at the least, . . . an extreme departure from the

standards of ordinary care . . . to the extent that the danger was either known to

the defendant or so obvious that the defendant must have been aware of it.’”

Novak, 216 F.3d at 308 (quoting Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d

38, 47 (2d Cir. 1978) (other internal quotation marks omitted)).

According to Tellabs, to qualify as a “‘strong inference,’” the inference of

scienter must be “more than merely plausible or reasonable – it must be cogent

and at least as compelling as any opposing inference of nonfraudulent intent.”

Tellabs, 127 S. Ct. at 2504-05 (quoting 15 U.S.C. § 78u-4(b)(2)). In determining

whether this inference can be reasonably drawn, courts must consider both the

inferences urged by the plaintiff and any competing inferences rationally drawn

from all the facts alleged, taken collectively. Id. at 2504, 2509. Therefore, the

court must ask, “W hen the allegations are accepted as true and taken collectively,

would a reasonable person deem the inference of scienter at least as strong as any

opposing inference?” Id. at 2511. M oreover, the facts alleged must support an

inference of an intent to defraud the plaintiffs rather than some other group.

Kalnit v. Eichler, 264 F.3d 131, 140-41 (2d Cir. 2001).

The requisite scienter can be established by alleging facts to show either (1)

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that defendants had the motive and opportunity to commit fraud, or (2) strong

circumstantial evidence of conscious misbehavior or recklessness. Ganino, 228

F.3d at 168-69; Novak, 216 F.3d at 307. In order to raise a strong inference of

scienter through “motive and opportunity” to defraud, Plaintiffs must allege that

JPM C or its officers “benefitted in some concrete and personal way from the

purported fraud,” Novak, 216 F.3d at 307-08. M otives that are common to most

corporate officers, such as the desire for the corporation to appear profitable and

the desire to keep stock prices high to increase officer compensation, do not

constitute “motive” for purposes of this inquiry. Id. at 307; Kalnit, 264 F.3d at

139. Rather, the “motive” showing is generally met when corporate insiders

allegedly make a misrepresentation in order to sell their own shares at a profit.

Novak, 216 F.3d at 308. Alternatively, if Plaintiffs cannot make the “motive”

showing, then they could raise a strong inference of scienter under the “strong

circumstantial evidence” prong, “though the strength of the circumstantial

allegations must be correspondingly greater” if there is no motive. Kalnit, 264

F.3d at 142 (quoting Beck v. M frs. Hanover Trust Co., 820 F.2d 46, 50 (2d Cir.

1987), overruled on other grounds by United States v. Indelicato, 865 F.2d 1370

(2d Cir. 1989) (en banc)). At least four circumstances may give rise to a strong

inference of the requisite scienter: where the complaint sufficiently alleges that

the defendants (1) “benefitted in a concrete and personal way from the purported

fraud”; (2) “engaged in deliberately illegal behavior”; (3) “knew facts or had

access to information suggesting that their public statements were not accurate”;

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or (4) “failed to check information they had a duty to monitor.” Novak, 216 F.3d

at 311; see Teamsters Local, 531 F.3d at 194.

II. Application of the Law to Plaintiffs’ Allegations

A. JPM C’s Financial Accounting

On appeal, Plaintiffs contend that JPM C made false and misleading

statements or omissions that were material by (1) failing to report the M ahonia

transactions as related-party transactions, and (2) reporting the M ahonia

transactions as trading assets rather than loans. Plaintiffs’ complaint pled that

JPM C’s financial reports w ere false and misleading with regard to the M ahonia

transactions because JPM C did not report them as related-party transactions. 3

SA C ¶¶ 242-54. Specifically, the complaint pled that the failure to identify the

M ahonia transactions as related-party transactions violated GAAP because SFA S

No. 57 required JPM C to disclose related-party transactions. Id. Plaintiffs

contend that the GAAP violation renders the financial statements presumptively

misleading. In addition, Plaintiff’s complaint pled that JPM C’s accounting of

3
According to one text, “[t]he potential problem with related-party
transactions is that their economic substance may differ from their legal form. . . .
As a result of the potential for misrepresentation, financial statement users are
particularly interested in more details about these transactions.” J. David
Spiceland, James F. Sepe, M ark W . Nelson & Lawrence A. Tomassini, I
Intermediate Accounting 124 (5th ed. 2009). According to another text, “[a]
transaction with a related party is not an arm’s-length transaction. . . . M ost
auditors assess inherent risk as high for related parties and related party
transactions, both because of the accounting disclosure requirements and the lack
of independence between the parties involved in the transaction.” Alvin A. Arens,
Randal J. Elder, M ark S. Beasley, Auditing and Assurance Services 216 (12th ed.
2008).

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disguised loans as “trading activities” rather than as loans constitutes a false

statement. SAC ¶¶ 450-52. Again, the complaint refers to the failure to conform

to GAAP and Plaintiffs note that the violation renders the misstatement

presumptively misleading. Id.

1. Failure to Report M ahonia as a Related Party

Plaintiffs’ essential claim with regard to the failure to disclose M ahonia as

a related party is that JPM C violated SFA S 57, which requires that “[f]inancial

statements shall include disclosures of material related party transactions.” 4

Related Party Disclosures, SFA S N o. 57 ¶ 2 (Fin. Accounting Standards Bd.

1982). The district court held that Plaintiffs adequately pled a false or misleading

statement because they alleged that JPM C “created, controlled, and made

decisions on behalf of M ahonia.” JP M organ Chase II, 2007 W L 950132, at *13.

W e agree that Plaintiffs alleged with particularity that M ahonia was a related

party. W e also agree with the district court that Plaintiffs failed to allege

scienter. 5 Id. “[A ]llegations of G AAP violations or accounting irregularities,

4
“W hen related-party transactions occur, companies must disclose the
nature of the relationship, provide a description of the transactions, report the
dollar amounts of the transactions and any amounts due from or to related
parties.” J. David Spiceland et al., I Intermediate Accounting 124 (citing Related
Party Disclosures, SFAS No. 57 (Fin. Accounting Standards Bd. 1982)).
5
However, w e disagree to some extent w ith the district court’s reasoning.
The court stated that the fact that the SEC had not charged JPM C with wrongly
accounting for these transactions shows that reasonable accountants could differ
(continued...)

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standing alone, are insufficient to state a securities fraud claim. . . . Only where

such allegations are coupled with evidence of corresponding fraudulent intent

might they be sufficient.” Novak, 216 F.3d at 309 (internal quotation marks

omitted). Even if there was a GAAP violation, that corresponding evidence is

missing here.

a. M otive and Opportunity

Plaintiffs advance several allegations which, they argue, demonstrate an

adequate motive. First, Plaintiffs argue that JPM C was motivated by a desire to

secure above-market interest rates and fees from Enron. SAC ¶¶ 702-24. JPM C

allegedly charged an interest rate that was three percent higher than its normal

rate and earned excessive fees from other transactions with Enron. SA C ¶¶ 706-

09. Second, Plaintiffs suggest that there was motive to defraud because The

Chase M anhattan Corporation was inflating its stock in anticipation of acquiring

JP M organ in the merger that ultimately resulted in the creation of JPM C. SAC

¶¶ 673-75. Plaintiffs argue that the allegedly artificially inflated stock allowed it

to complete the merger without issuing as many shares as it would have had to

issue otherwise. Third, Plaintiffs suggest that the individual defendants in the

case, M r. Harrison and M r. Shapiro, had motive to defraud because they sought to

5
(...continued)
as to whether SFAS 57 applied in these circumstances— and, therefore, that JPM C
had not acted recklessly. JP M organ Chase II, 2007 W L 950132, at *13. SEC
charges simply are not a prerequisite to pleading recklessness with regard to
accounting and financial reporting violations.

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increase their compensation and bonuses. Plaintiffs allege that the individual

defendants secured significant performance-based compensation benefits based on

Chase’s bargain purchase of JP M organ and based on JPM C’s Enron transactions.

SA C ¶¶ 696-98.

Each of Plaintiffs’ arguments fails. First, the desire to maximize the

corporation’s profits does not strengthen the inference of an intent to defraud

because earning “excessive” fees in a competitive marketplace (for as long as it

lasts)— far from defrauding the shareholders— actually benefits the shareholders.

Earning profits for the shareholders is the essence of the duty of loyalty, and

therefore it would be an unusual case where accomplishment of this objective

constitutes the requisite motive to defraud the shareholders. This is not such a

case. Plaintiff’s argument to the contrary, based on In re Livent, Inc. Noteholders

Sec. Litig., 174 F. Supp. 2d 144 (S.D.N.Y. 2001), is unavailing. In that case,

while the court did find that the excessive fees the investment bank received

provided a strong inference of intent to defraud, the bank’s shareholders did not

bring the suit; rather, the shareholders of the company being charged excessive

fees brought the suit. Id. at 151-53. Therefore, the case is inapposite; while it

supports the contention that excessive fees show motive to defraud another

company’s shareholders, it does not support the argument that excessive fees

show motive to defraud a company’s own shareholders.

Second, in alleging that Chase inflated its stock price in order to reduce the

cost of acquiring JP M organ, Plaintiffs failed to allege a connection between the

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Enron dealings and the acquisition. W hile Plaintiffs rely on Cohen v. Koenig, 25

F.3d 1168, 1170-71, 1173-74 (2d Cir. 1994), that case is inapplicable because it

involved misstatements directly relating to the acquisition of another company.

Here, the fact that the alleged misstatements began eight years before the

acquisition and ended years afterward renders any connection between the events

dubious at best. At most, Plaintiffs allege a generalized desire to achieve a

lucrative acquisition proposal. Such generalized desires fail to establish the

requisite scienter because “the desire to achieve the most lucrative acquisition

proposal can be attributed to virtually every company seeking to be acquired,”

Kalnit, 264 F.3d at 141, or to acquire another. In this case, the link between the

acquisition and the alleged misconduct simply is not close enough to strengthen

the inference of an intent to defraud. 6

Finally, the allegation that M r. Harrison and M r. Shapiro had the requisite

motive because they received bonuses based on corporate earnings and higher

stock prices does not strengthen the inference of fraudulent intent. See Kalnit,

264 F.3d at 139; Novak, 216 F.3d at 307-08. Again, Plaintiffs do not make the

particularized showing that existed in the case on which they rely. In Fla. State

Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 661-62 (8th Cir. 2001), the

6
W e acknowledge that the artificial inflation of stock prices in order to
acquire another company may, “in some circumstances,” be sufficient for scienter.
Rothman v. Gregor, 220 F.3d 81, 92-94 (2d Cir. 2000). But the inquiry is an
“extremely contextual one,” In re Complete M gmt. Inc. Secs. Litig., 153 F. Supp.
2d 314, 328 (S.D.N.Y. 2001), and in this case Plaintiffs simply did not allege a
unique connection between the fraud and the acquisition.

-20-
plaintiffs made a showing of a direct link between the compensation package and

the fraudulent statements because of the magnitude of the compensation and the

defendants’ motive to sweep problems under the rug given one defendant’s

expiring contract. Here, the complaint is much more generalized and appears to

present the type of allegation that Kalnit dismissed as insufficient. If scienter

could be pleaded solely on the basis that defendants were motivated because an

inflated stock price or improved corporate performance would increase their

compensation, “virtually every company in the United States that experiences a

downturn in stock price could be forced to defend securities fraud actions.

‘[I]ncentive compensation can hardly be the basis on which an allegation of fraud

is predicated.’” Acito v. IM CERA Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995)

(quoting Ferber v. Travelers Corp., 785 F. Supp. 1101, 1107 (D . Conn. 1991)).

Therefore, even taking the allegations as a whole, as Tellabs requires, Plaintiffs

have failed to create a strong inference of scienter based on motive and

opportunity.

b. Strong Circumstantial Evidence of Conscious
M isbehavior or Recklessness

Plaintiffs contend that JPM C and the individual defendants knew or had

access to information that M ahonia was a related party, yet violated GAAP by

failing to disclose the M ahonia transactions as related-party transactions.

Plaintiffs argue that they sufficiently alleged JPM C’s knowledge because JPM C

had created and controlled M ahonia. Furthermore, Plaintiffs argue that SFA S 57

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clearly required reporting these transactions as related-party transactions.

Because JPM C knew that M ahonia was related but did not report it as such,

Plaintiffs contend, the allegations in the complaint give rise to a strong inference

of scienter. 7

However, Plaintiffs fail to allege sufficient facts to support an inference

that JPM C knew that the failure to report M ahonia as a related party was

inaccurate. In order to support this inference, Plaintiffs would have to allege

facts show ing that JPM C’s transactions with M ahonia were “material,” because

the disclosure requirements of SFAS 57 only relate to material related-party

transactions. See Related Party Disclosures, SFA S N o. 57 ¶ 2 (Fin. Accounting

Standards Bd. 1982); see also Am. Inst. of C ertified Pub. Accountants,

Codification of Statements on Auditing Standards AU § 334.11 (2008) (“Related

Parties”); Alvin A . Arens et al., Auditing and Assurance Services 216. However,

Plaintiffs did not do so. As discussed more fully below in relation to JPM C’s

accounting for the M ahonia transactions as trading assets rather than as loans,

Plaintiffs failed to plead materiality adequately. Here, the prepay transactions

through M ahonia were, as the district court noted, “a minute fraction of assets” on

JPM C ’s balance sheet. JP M organ Chase I, 363 F. Supp. 2d at 630-31. As

important, if JPM C had disclosed that M ahonia w as a related party, it would only

7
W hile Plaintiffs couch their arguments in terms of “knowledge,” we also
consider whether the complaint adequately alleges recklessness, given our
holdings that recklessness is sufficient to show scienter. See Teamsters Local,
531 F.3d at 194.

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mean that it would have disclosed (1) the nature of the relationship between

JPM C and M ahonia; (2) that JPM C engaged in prepay transactions with M ahonia;

(3) the dollar amount of the transactions with M ahonia; and (4) the amount of

outstanding obligations. See SAC ¶ 245; JP M organ Chase II, 2007 W L 950132,

at *14. These disclosures would not have materially altered the “total mix” of

inform ation available to investors. Basic, 485 U.S. at 231-32. W hile the SAC

pleaded that disclosure of these transactions as related-party transactions w ould

have revealed JPM C’s alleged duplicity with respect to Enron, Plaintiffs fail to

plead this allegation with any particularity. Proof of the facts alleged would not

give a fact-finder a basis on which it could find that such a chain reaction would

have occurred.

Because Plaintiffs have not adequately pleaded that the related-party

transactions with M ahonia were material, they did not adequately plead that JPM C

knowingly or recklessly failed to comply with SFAS 57. Given that they failed to

plead the materiality of the M ahonia transactions, 8 Plaintiffs certainly did not

8
In determining that Plaintiffs fail to plead materiality under SFAS 57, w e
also conclude that Plaintiffs necessarily fail to plead materiality for their Rule
10b-5 claim. The Financial A ccounting Standards Board specifically stated that it
did not “intend to introduce a new concept of materiality.” Related Party
Disclosures, SFA S N o. 57, Appx. A, ¶ 19 (Fin. Accounting Standards Bd. 1982)
(consideration of comments on exposure draft). Therefore, a failure to adequately
plead that the related party transaction was material for purposes of SFAS
57— necessary to show scienter in this case— is also a failure to plead materiality
for purposes of section 10(b) and Rule 10b-5. Accordingly, we hold that
Plaintiffs not only failed to plead scienter regarding the failure to disclose
M ahonia as a related party, but also failed to plead the materiality of the failure to
(continued...)

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plead that defendants had knowledge of the transactions’ materiality. M oreover,

Plaintiffs failed to plead recklessness. To plead recklessness through

circumstantial evidence, Plaintiffs would have to show, “‘at the least, conduct

which is highly unreasonable and which represents an extreme departure from the

standards of ordinary care to the extent that the danger was either known to the

defendant or so obvious that the defendant must have been aware of it.’” Kalnit,

264 F.3d at 142 (quoting In re Carter-W allace, 220 F.3d at 39 (other internal

quotation marks omitted)). Plaintiffs have not done so here.

Finally, we note that Plaintiffs’ arguments regarding scienter— at least

those that rely on JPM C’s alleged intent to defraud— suffer from a basic problem

concerning plausibility. Plaintiffs fail to show an intent to defraud JPM C’s

shareholders rather than Enron’s shareholders. Even if the alleged violation of

SFAS 57 could give rise to an inference of intent to defraud Enron’s shareholders

(on the remote assumption that the JPM C statements might have helped conceal

Enron’s financial quandary), such an intent would not necessarily relate to

JPM C’s shareholders. Indeed, Plaintiffs have argued that JPM C concealed its

transactions w ith Enron in return for excessive fees (w hich, as discussed, actually

inured to Plaintiffs’ benefit). It seems implausible to have both an intent to earn

excessive fees for the corporation and also an intent to defraud Plaintiffs by

losing vast sums of money. See Atl. Gypsum Co. v. Lloyds Int’l Corp., 753 F.

8
(...continued)
disclose M ahonia as a related party.

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Supp. 505, 514 (S.D.N.Y. 1990) (“Plaintiffs’ view of the facts defies economic

reason, and therefore does not yield a reasonable inference of fraudulent intent.”).

As the district court noted, Plaintiffs “fail to allege facts explaining why, if it was

aware of Enron’s problems, [JPM C] would have continued to lend Enron billions

of dollars.” JP M organ Chase I, 363 F. Supp. 2d at 621. Even if JPM C was

actively engaged in duping other institutions for the purposes of gaining at the

expense of those institutions, it would not constitute a motive for JPM C to

defraud its own investors. See Kalnit, 264 F.3d at 141.

2. Accounting for the M ahonia Transactions as Trades Rather
than as Loans

Plaintiffs contend that JPM C’s accounting of disguised loans as “trading

activities” rather than as loans constitutes a false statement. The district court

found that the M ahonia transactions were indeed mischaracterized on JPM C’s

financial disclosures, JP M organ Chase I, 363 F. Supp. 2d at 626. However, the

district court also held that treating the prepaid transactions as trades rather than

as loans was immaterial. Id. at 630.

Plaintiffs allege that the misclassification of the loans was material in light

of the qualitative factors set out in SA B No. 99. First, according to the

complaint, this accounting and reporting misstatement concealed an unlawful

transaction because it hid JPM C’s collaboration with Enron’s illegal activities.

Allegedly, the disclosure of the true nature of the prepay transactions would have

exposed JPM C’s role in the Enron accounting debacle. SAC ¶¶ 249-54.

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Accordingly, the misstatement was material because its purpose was to deceive

investors and conceal misconduct. SA C ¶¶ 249, 254. Second, according to the

complaint, the misstatement was material because, after JPM C’s actions became

public, JPM C stock immediately fell nearly nineteen percent. SA C ¶¶ 251, 588,

603, 606. Third, the complaint alleges that the misstatement was material because

it related to JPM C’s relationship with Enron, a relationship which Plaintiffs argue

constituted a significant aspect of JPM C’s operations and profitability because

Enron was JPM C’s single largest client. SAC ¶¶ 51, 54, 702-19, 726.

Accordingly, Plaintiffs contend that three of SAB No. 99’s qualitative factors

point to the materiality of the alleged misstatement.

However, the classification of the loans as trading assets w as immaterial in

this case. Under the legal standard set forth in Ganino, both quantitative and

qualitative factors must be considered in determining materiality. Here, the

quantitative factor strongly supports JPM C’s argument that the classification

error, if it was one, was immaterial. Although $2 billion in prepay transactions

may sound staggering, the number must be placed in context— reclassifying $2

billion out of one category of trading assets (derivative receivables) totalling $76

billion into another category (loan assets) totalling $212 billion does not alter

JPM C’s total assets of $715 billion. J. App. 406 (JM PC Annual Report 2000).

M oreover, the underlying assets in either classification carry some default risk.

As the district court said about this same information, “[c]hanging the accounting

treatment of approximately 0.3% of JPM Chase’s total assets from trades to loans

-26-
would not have been material to investors.” JP M organ Chase I, 363 F. Supp. 2d

at 631.

W hile G anino held that bright-line numerical tests for materiality are

inappropriate, it did not exclude analysis based on, or even emphasis of,

quantitative considerations. Ganino, 228 F.3d at 164. According to Ganino, an

alleged misrepresentation relating to less than two percent of defendant’s assets,

when taken in context, could be immaterial as a matter of law. Id.; see also

Parnes v. Gateway 2000, Inc., 122 F.3d 539, 547 (8th Cir. 1997) (finding alleged

misrepresentations with regard to two percent of total assets were immaterial as a

matter of law); In re W estinghouse Sec. Litig., 90 F.3d 696, 715 (3d Cir. 1996)

(stating that a misstatement was immaterial where only one percent of assets was

allegedly misclassified). And as the SEC stated in SA B No. 99, “[t]he use of a

percentage as a numerical threshold, such as 5% , may provide the basis for a

preliminary assumption that . . . a deviation of less than the specified percentage

with respect to a particular item on the registrant’s financial statements is unlikely

to be material.” SEC Staff Accounting Bulletin No. 99, 64 Fed. Reg. at 45,151.

Here, the five percent numerical threshold is a good starting place for assessing

the materiality of the alleged misstatement. In this case, the alleged

misrepresentation does not even come close to that threshold. An accounting

classification decision that affects less than one-third of a percent of total assets

does not suggest materiality. However, this preliminary inquiry under the

quantitative factor must be supplemented. See Ganino, 228 F.3d at 163. W e go

-27-
on to consider qualitative factors that might contribute to a finding of materiality.

Contrary to Plaintiffs’ assertions, however, the qualitative factors do not

adequately demonstrate the materiality of the decision to classify the prepay

transactions as loans. O n appeal, Plaintiffs point to three factors set forth in SA B

No. 99 as supporting their argument of materiality. The first qualitative factor is

whether the misstatement concealed an unlawful transaction. Plaintiffs have not

shown that this factor is present. Although they allege that the transaction should

have been described differently, see, e.g., SA C ¶ 261, there is no allegation that

the transaction itself was illegal. The second qualitative factor, the

misstatements’ relation to a significant aspect of JPM C’s operations, also favors

JPM C. W hile Plaintiffs allege that Enron is a “key client” of JPM C, it appears

clear that JPM C’s transactions with Enron were not a significant aspect of

JPM C’s operations, considering the fact that JPM C earned less than .1% of its

revenues from Enron-related transactions each year. See SAC ¶ 54 and J. App.

405 (showing that while JPM C earned $30.1 million and $29.8 million in

relationship revenues from Enron in 1999 and 2000 respectively, it earned

$29.484 billion and $31.557 billion in total net revenues in those years). Finally,

the third qualitative factor that Plaintiffs rely on is the market reaction to the

public disclosures of JPM C’s role in the Enron collapse. SAB No. 99, while

alluding to market reactions as a valid consideration in analyzing materiality,

warned that market volatility alone is “too blunt an instrument to be depended on

in considering whether a fact is material.” SEC Staff Accounting Bulletin No. 99,

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64 Fed. Reg. at 45,152 (internal quotation marks omitted). Indeed, SA B No. 99

limits the usefulness of this factor to instances w here management expects “that a

known misstatement may result in a significant positive or negative market

reaction.” Id. Plaintiffs have not alleged facts that would permit the inference

that JPM C expected that the alleged misclassification of the loans might result in

a significant market reaction. For this reason, the market reaction to Enron’s

collapse and JPM C’s involvement in this collapse does not point towards

qualitative materiality under SA B No. 99.

These qualitative factors are intended to allow for a finding of materiality if

the quantitative size of the misstatement is small, but the effect of the

misstatement is large. See Ganino, 228 F.3d at 163. Here, Plaintiffs have failed

to allege properly that despite the relatively small size of the allegedly misstated

transactions, reporting these transactions as loans instead of trades would have

made a qualitative difference in JPM C’s financial statements. To be sure,

misclassification of assets does matter (as Plaintiffs point out, it has implications

for ratio analysis), but the tenor of the SAC is that JPM C knew that the prepays

were worthless all along— an argument that is not only implausible, but also

counter-intuitive.

Plaintiffs also argue that, had the transactions been reported properly, the

“subterfuge that JPM C and Enron created” would have been exposed, leading to

the public becoming aware of JPM C’s involvement with Enron’s misdeeds. See

SAC ¶¶ 249, 254. As set forth in the complaint, this allegation is w holly

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conclusory. W hile Plaintiffs make the assertion that the proper accounting would

have revealed JPM C’s collusion with Enron, that hardly suggests how the whole

arrangement with Enron would have come to light. 9 And, given that assets in

either category carry some default risk, we cannot reasonably infer that there was

a substantial likelihood that JPM C’s reporting of the transactions as loans rather

than as trades would have been viewed by a reasonable investor as having

significantly altered the total mix of information made available.

B. JPM C’s Statements Regarding Its Integrity and Risk M anagement

Plaintiffs allege that JPM C made numerous misrepresentations regarding its

“highly disciplined” risk management and its standard-setting reputation for

integrity. SAC ¶ 3 (internal quotation marks omitted). Plaintiffs point to

statements such as the assertion that JPM C had “‘risk management processes

[that] are highly disciplined and designed to preserve the integrity of the risk

management process,’” id.; that it “‘set the standard’ for ‘integrity,’” id.; and that

it would “‘continue to reposition and strengthen [its] franchises with a focus on

financial discipline,’” id. ¶ 391 (emphasis omitted). See also id. ¶¶ 336, 354, 380,

400, 472, 474, 479, 481. These statements, according to Plaintiffs, were

misleading because JPM C’s poor financial discipline led to liability in the

9
W e also note that JPM C did in fact make at least some minimal disclosure
regarding the nature of the trades. JPM C’s Annual Report stated, “Loans held for
trading purposes are included in Trading Assets and are carried at fair value, with
the gains and losses included in Trading Revenue.” J. App. 414. So even if JPM C
did not conform to GAAP, it did provide some notice to investors that its trading
assets contained loans.

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W orldCom litigation and involvement in the Enron scandal. Id. at ¶¶ 188-240,

636-39. Furthermore, Plaintiffs argue that the statements were material because

they related to the integrity and risk-management practices of an investment bank.

According to Plaintiffs, the significance of a bank’s reputation is undeniable.

Therefore, because the misleading statements at issue related to the bank’s

reputation, Plaintiffs conclude that the statements would necessarily be relied

upon by a reasonable investor and qualify per se as material.

The statements highlighted by Plaintiffs are no more than “puffery” which

does not give rise to securities violations. See Lasker v. N.Y. State Elec. & Gas

Corp., 85 F.3d 55, 59 (2d Cir. 1996). The statements are too general to cause a

reasonable investor to rely upon them. As in Lasker, these statements did not,

and could not, amount to a guarantee that its choices w ould prevent failures in its

risk management practices. See id. at 58 (“The Company could not guarantee and

did not guarantee . . . that its investment choices w ould yield increased future

earnings.” (internal quotation marks omitted)). JPM C’s statements w ere merely

generalizations regarding JPM C’s business practices. Such generalizations are

“precisely the type of ‘puffery’ that this and other circuits have consistently held

to be inactionable.” Lasker, 85 F.3d at 59; see also San Leandro, 75 F.3d at 811

(stating that “such puffery cannot have misled a reasonable investor”).

Plaintiffs conflate the importance of a bank’s reputation for integrity with

the materiality of a bank’s statements regarding its reputation. W hile a bank’s

reputation is undeniably important, that does not render a particular statement by

-31-
a bank regarding its integrity per se material. In Lasker, it was undisputed that

the “financial integrity” of the utility was important to its investors; but we still

found that the “broad, general” statements regarding the utility’s financial

integrity could not reasonably be relied upon as a guarantee that the company’s

“actions would in no way impact [its] finances.” Lasker, 85 F.3d at 59 (internal

quotation marks omitted). Here also, JPM C’s statement that it “‘set the standard

for best practices in risk management techniques,’” SAC ¶ 336,— like its other

similar statements— is so general that a reasonable investor would not depend on

it as a guarantee that JPM C would never take a step that might adversely affect its

reputation. No investor would take such statements seriously in assessing a

potential investment, for the simple fact that almost every investment bank makes

these statements. See Lasker, 85 F.3d at 58. Finding that JPM C’s statements

constitute a material misrepresentation would bring within the sweep of federal

securities laws many routine representations made by investment institutions. W e

decline to broaden the scope of securities laws in that manner.

C. Plaintiffs’ Other Claims

Because we have concluded that Plaintiffs failed to allege any

misstatements or omissions by JPM C that could be found to be material,

Plaintiffs’ claims under section 14(a) of the Exchange Act and section 11 of the

Securities Act must also fail. See Koppel v. 4987 Corp., 167 F.3d 125, 131-32

(2d Cir. 1999) (section 14(a) claim); M cM ahan & Co. v. W herehouse Entm’t,

-32-
Inc., 65 F.3d 1044, 1047-48 (2d Cir. 1995) (section 11 claim). M oreover, having

found that Plaintiffs failed to state a claim under sections 10(b) and 14(a) of the

Exchange Act and section 11 of the Securities Act, their control person liability

claim pursuant to section 15 of the Securities Act and section 20 of the Exchange

Act must also fail for w ant of a primary violation. See SEC v. First Jersey Sec.,

Inc., 101 F.3d 1450, 1472 (2d Cir. 1996) (“In order to establish a prima facie case

of controlling-person liability, a plaintiff must show a primary violation by the

controlled person.”); DeM arco v. Edens, 390 F.2d 836, 841 (2d Cir. 1968).

III. Conclusion

Because Plaintiffs have failed to adequately plead that JPM C made a

materially false statement or omitted a material fact with scienter, the district

court correctly held that Plaintiffs’ SAC cannot survive JPM C’s Fed. R. Civ. P.

12(b)(6) motion to dismiss.

A FFIR ME D.

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