12-4353-cv
Central States, S.E. & S.W. Areas Pension Fund v. Fed. Home Loan Mortg. Corp.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY
FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT=S LOCAL RULE 32.1.1. WHEN
CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE
EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION
ASUMMARY ORDER@). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON
ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals for the Second Circuit, held at
the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New
York, on the 5th day of November, two thousand thirteen.
PRESENT: JON O. NEWMAN,
REENA RAGGI,
GERARD E. LYNCH,
Circuit Judges.
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CENTRAL STATES, SOUTHEAST AND SOUTHWEST
AREAS PENSION FUND,
Plaintiff-Appellant,
JINO KURIAKOSE, individually and on behalf of all
others similarly situated, CITY OF AUSTIN POLICE
RETIREMENT SYSTEM,
Plaintiffs,
v. No. 12-4353-cv
FEDERAL HOME LOAN MORTGAGE
CORPORATION, RICHARD SYROM, PATRICIA L.
COOK, ANTHONY S. PISZEL,
Defendants-Appellees,
FEDERAL HOUSING FINANCE AGENCY,
Intervenor-Defendant-Appellee.
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APPEARING FOR APPELLANT: DOUGLAS WILENS (David J. George,
Robert J. Robbins, Robbins Geller
Rudman & Dowd LLP, Boca Raton,
Florida; Samuel H. Rudman, Robbins
Geller Rudman & Dowd LLP, Melville,
New York, on the brief), Robbins Geller
Rudman & Dowd LLP, Boca Raton,
Florida.
APPEARING FOR APPELLEES: JORDAN D. HERSHMAN (Jason D.
Frank, Bingham McCutchen LLP,
Boston, Massachusetts; Kenneth I.
Schacter, Bingham McCutchen LLP,
New York, New York, on the brief),
Bingham McCutchen LLP, Boston,
Massachusetts, for Defendant-Appellee
Federal Home Loan Mortgage
Corporation.
JAMES K. GOLDFARB (Michael V.
Rella, on the brief), Murphy &
McGonigle, P.C., New York, New York,
for Defendant-Appellee Anthony S.
Piszel.
Thomas C. Green, Mark D. Hopson,
Frank R. Volpe, Eric D. McArthur, Sidley
Austin LLP, Washington D.C., for
Defendant-Appellee Richard Syron.
Laura E. Neish, Zuckerman Spader LLP,
New York, New York, for
Defendant-Appellee Patricia Cook.
Howard N. Cayne, Arnold & Porter LLP,
Washington, D.C., for Intervenor
Defendant-Appellee Federal Housing
Finance Agency.
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Appeal from a judgment of the United States District Court for the Southern District
of New York (John F. Keenan, Judge).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED,
AND DECREED that the judgment entered on September 27, 2012, is AFFIRMED.
Central States, Southeast and Southwest Areas Pension Fund (“Central States”) is
the court-appointed lead plaintiff representing a putative class of investors who purchased
securities issued by the Federal Home Loan Mortgage Company (“Freddie”) during the
November 20, 2007 through September 7, 2008 class period. Central States appeals from
the dismissal of its second amended complaint pursuant to Fed. R. Civ. P. 12(b)(6) for
failure to state a claim for securities fraud against Freddie and three of its former officers,
Richard Syron, Anthony S. Piszel, and Patricia L. Cook, in violation of §§ 10(b) and 20(a)
of the Securities Exchange Act of 1934, see 15 U.S.C. §§ 78j(b), 78t(a), and Securities and
Exchange Commission (“SEC”) Rule 10b-5, see 17 C.F.R. § 240.10b-5. Central States
also appeals from the district court’s denial of leave to file a proposed third amended
complaint. We review the dismissal of Central States’ second amended complaint de
novo, see ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007), and
the denial of leave to amend for abuse of discretion, see id. at 108. We assume the parties’
familiarity with the facts and record of prior proceedings, which are set forth in detail in the
district court’s two prior decisions in this case, see Kuriakose v. Fed. Home Loan Mortg.
Corp., No. 08 Civ. 7281(JFK), 2011 WL 1158028 (S.D.N.Y. March 30, 2011); Kuriakose
3
v. Fed. Home Loan Mortg. Corp., 897 F. Supp. 2d 168 (S.D.N.Y. 2012), and which we
reference only as necessary to explain our decision to affirm.
1. Motion to Dismiss
Central States argues that the district court erred in concluding that the dismissal
was warranted because Central States’ second amended complaint failed to plead the loss
causation element of fraud, i.e., “a causal connection between the material
misrepresentation and the loss.” Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341–42
(2005); accord Lentell v. Merrill Lynch & Co., 396 F.3d 161, 172 (2d Cir. 2005); see
15 U.S.C. § 78u–4(b)(4). On de novo review of the record, we agree with the district
court.1
Central States’ theory of loss causation rests on allegations that Freddie’s stock
price plummeted after defendants’ statements that Freddie was adequately capitalized and
had sufficient internal controls were revealed to be false through a series of third-party
news articles and analyst reports beginning in July 2008 and ending with the
announcement that Freddie was being placed into conservatorship on September 7, 2008.
Central States also asserts that Freddie concealed or misrepresented its exposure to high
risk subprime mortgage loans. Central States further alleges that by refuting the negative
characterizations in these partial disclosures and the negative statements in Treasury
1
Because we conclude that Central States has failed adequately to plead loss causation with
respect to the alleged material misstatements, we need not address its arguments
challenging the district court’s determination that it also failed adequately to plead the
materiality and scienter elements of securities fraud. See Lattanzio v. Deloitte & Touche
LLP, 476 F.3d 147, 156–57 (2d Cir. 2007).
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Department press releases, defendants sent “[m]ixed messages” to the market, precluding
the district court from concluding that “investors already knew the truth about Freddie’s
financial condition.” Appellant’s Br. 34.
To plead loss causation, a plaintiff must plausibly allege “that the subject of the
fraudulent statement or omission was the cause of the actual loss suffered, i.e., that the
misstatement or omission concealed something from the market that, when disclosed,
negatively affected the value of the security.” Lentell v. Merrill Lynch & Co., Inc., 396
F.3d at 173 (emphasis in original; internal quotation marks omitted).2 Where, as here, the
plaintiff’s stock purchases and losses coincided with a marketwide phenomenon—the
housing bubble burst—“the prospect that the plaintiff’s loss was caused by the fraud
decreases,” and therefore the plaintiff must plead facts sufficient to show “that its loss was
caused by the alleged misstatements as opposed to intervening events.” Id. at 175
(internal quotation marks omitted); see Dura Pharm., Inc. v. Broudo, 544 U.S. at 345
(explaining that § 10(b) provides cause of action “not to provide investors with broad
insurance against market losses, but to protect them against those economic losses that
misrepresentations actually cause”).
At the outset, we note that on November 20, 2007, the first day of the class period,
Freddie reported a loss of more than $2 billion, causing its stock price to fall from $37.50 at
2
Like the district court, we do not conclusively decide whether the applicable pleading
standard for loss causation is that of Fed. R. Civ. P. 8 or the heightened standard of Rule
9(b) because Central States has failed to plead loss causation even under the more lenient
Rule 8 standard.
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the close of trading on November 19 to $26.74 at the close of trading on November 20.
On the same date, Freddie issued a supplement to its 2006 Annual Report disclosing both
its increased involvement in nontraditional mortgage markets and the “greater credit risks”
from “increased delinquencies and credit losses” involving nontraditional mortgage
products. Freddie Mac, Information Statement Supplement to the 2006 Information
Statement and Annual Report to Stockholders, dated March 23, 2007, at 76 (Nov. 20,
2007), J.A. 789. As the housing bubble burst accelerated over the next year, Freddie’s
stock price declined 57% from $37.50 at the close of trading on November 19, 2007, to
$15.92 on July 2, 2008, the day before Central States alleges that the truth about Freddie’s
true financial condition began to “leak[] out.” SAC ¶ 248. Viewed in this context,
Central States’ pleadings do not plausibly allege that they were not on notice of the true
gravity of Freddie’s situation until corrective disclosures began to be published on July 3,
2008.
First, as the district court correctly noted, Freddie made extensive disclosures about
its investments and internal controls throughout the class period. Thus, Central States had
to allege that the third-party “corrective disclosures” revealed the falsity of Freddie’s own
statements and caused “the decline in stock value that plaintiffs claim as their loss.”
Lentell v. Merrill Lynch & Co., Inc., 396 F.3d at 175 (emphasis in original). In fact,
Central States does not identify how the alleged corrective disclosures “even purported to
reveal some then-undisclosed fact with regard to the specific misrepresentations alleged in
the complaint.” In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501, 511 (2d Cir. 2010)
6
(emphasis added); see Katyle v. Penn. Nat’l Gaming Inc., 637 F.3d 462, 473 (4th Cir.
2011) (“Corrective disclosures must present facts to the market that are new, that is,
publicly revealed for the first time”); FindWhat Investor Grp. V. FindWhat.com, 658 F.3d
1282, 1311 n.28 (11th Cir. 2011) (explaining that corrective disclosure “obviously must
disclose new information”). At most, the cited third-party articles and reports expressed
negative opinions about Freddie’s solvency based on information that was already publicly
available. Such disclosures are not “corrective” for the purpose of pleading loss
causation. See In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d at 512 (“A negative
journalistic characterization of previously disclosed facts does not constitute a corrective
disclosure of anything but the journalists’ opinions.”); cf. In re Merck & Co., Inc. Sec.
Litig., 432 F.3d 261, 270–71 (3d Cir. 2005) (holding that Wall Street Journal’s analysis of
previously available information is not corrective disclosure).
Second, assuming that some articles contained “facts” that contradicted certain of
defendants’ statements, the second amended complaint would still fail to plead loss
causation based on corrective disclosures because Central States had to allege that
Freddie’s “share price fell significantly after the truth became known.” Dura Pharm., Inc.
v. Broudo, 544 U.S. at 347 (emphasis added). The very first alleged “partial disclosure,” a
July 3, 2008 article in the Wall Street Journal, however, itself reports a 40% decline in
Freddie’s stock price before the article was published.3 See SAC ¶ 248(a). According to
3
Because Central States incorporated this article into the complaint by reference, we may
properly consider even those portions of the article not quoted in the complaint. See ATSI
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the article, this significant decline in the value of Freddie’s shares was based on “concern
among investors” about Freddie’s delay in raising $5.5 billion in capital, which the article
attributed to Freddie’s publicly available balance sheet “lack[ing] a strong cushion” and
Freddie’s failure to “fully clear[] up” previously disclosed “‘significant deficiencies’ in its
financial-reporting controls.” Peter Eavis, “A Delay-of-Pain Penalty--- Freddie Mac Falls
As Stock Issue Stalls,” Wall St. J., July 3, 2008, at C14, J.A. 2219–20. An article
reporting on the reasons for a previous decline in stock value based on the same underlying
conduct Central States claims was being concealed cannot plausibly be said to be revealing
this information to the market for the first time.
Indeed, throughout its complaint, Central States alleges that before July 2008,
speculation about Freddie’s insolvency based on inadequate capitalization and insufficient
internal controls caused the stock price to fluctuate. See, e.g., SAC ¶ 219(a)–(c) (alleging
that despite defendants’ positive statements regarding 2007 Annual Report, “potential
problems at Freddie Mac began being heavily discussed in the market, causing its common
stock to drop” and citing to articles from this pre-July 2008 timeframe “speculating on the
problems surrounding the Company” that resulted in corresponding decline in stock
value); see also id. ¶¶ 190, 201, 216, 244, 247 (citing pre-July 2008 drops in stock price
following negative reports about Freddie’s financial condition despite defendants’ positive
statements). As a result, Central States does not plausibly allege a causal connection
between the drop of the share price and the information revealed in the corrective
Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007).
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disclosures.4 See In re Flag Telecom Holdings, Ltd. Sec. Litig., 574 F.3d 29, 36 (2d Cir.
2009) (“[T]o establish loss causation, Dura requires plaintiffs to disaggregate those losses
caused by changed economic circumstances, changed investor expectations, new
industry-specific or firm-specific facts, conditions, or other events, from disclosures of the
truth behind the alleged misstatements.” (internal quotation marks omitted)); see also In re
Merrill Lynch & Co. Research Reports Sec. Litig., 568 F. Supp. 2d 349, 364 (S.D.N.Y.
2008) (holding that plaintiff could not untangle losses from contemporaneous collapse of
Internet sector when he failed to explain issuer’s stock price decline in months before
alleged materialization of risk concealed by the fraud); 60223 Trust v. Goldman Sachs &
Co., 540 F. Supp. 2d 449, 461 (S.D.N.Y. 2007) (finding failure to plead loss causation
where “loss in value of the stock occurred gradually over the course of the entire class
period,” despite continuation of misleading statements, and complaint did “not even refer
to the phenomenon of the gradual loss of the stock’s value, much less attempt to explain it
as related to loss causation”).
Third, Central States challenges the district court’s reliance on Lentell, arguing that
because defendants’ manipulated the financial statements, it was not “unambiguously
apparent” that Freddie was “grossly undercapitalized,” and therefore investors could not
have known that it was at risk of insolvency and conservatorship. Appellant’s Br. 34–35.
4
Although the district court did not address this specific reason in finding that Central
States failed adequately to plead loss causation, this Court may “affirm the district court’s
judgment on any ground appearing in the record, even if the ground is different from the
one relied on by the district court.” ACEquip Ltd. v. Am. Eng’g Corp., 315 F.3d 151, 155
(2d Cir. 2003).
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In support, Central States quotes from an August 16, 2008 article in Barron’s that analyzed
Freddie’s balance sheet and concluded that (1) using the company’s own reported
fair-value figures for its assets, Freddie would have a negative net worth of $5.6 billion;
(2) Freddie’s calculation of its capital levels included deferred tax assets, which would be
useless if Freddie had negative earnings; and (3) Freddie had boosted its capital ratios by
making interest payments on failed mortgages rather than repurchasing them. Not only
does this article fail to disclose any new facts, it does not even disclose a new opinion, as
other publications had, several months prior, expressed similar opinions about Freddie’s
under capitalization. See Jonathan R. Laing, “The Next Government Bailout?”, Barron’s,
March 10, 2008 at 21, J.A. 2199–202 (makes similar observations about Fannie Mae’s
financial statements and observing that Freddie also appears to be under-capitalized); see
also SAC ¶ 219(b) (citing Barron’s article from March 10, 2008). Moreover, Central
States does not allege that the Barron’s analysis was based on anything other than the
application of the author’s own analytical skill to data that Freddie had reported. Thus,
even if under capitalization was not “unambiguously apparent” from Freddie’s valuation of
its assets and liabilities, cf. Lentell v. Merrill Lynch & Co., Inc., 396 F.3d at 177, we agree
with the district court that “all relevant information was already available to investors” and,
therefore, these third-party disclosures were not “corrective.” Kuriakose v. Fed. Home
Loan Mortg. Corp., 897 F. Supp. 2d at 177; cf. Lattanzio v. Deloitte & Touche LLP, 476
F.3d 147, 158 (2d Cir. 2007) (applying Lentell to claim against auditor for financial
statements that were improperly prepared but contained risk warning, and concluding that
10
where it was “unambiguously apparent” that company was in need of desperate measures
and faced risk of bankruptcy, plaintiff failed sufficiently to allege that misstatement
proximately caused loss).
Furthermore, the two September 7, 2008 New York Times articles—one reporting
the FHFA conservatorship and the other discussing likely reasons for the
conservatorship—do not remedy the inadequacy of the second amended complaint. The
fact of the conservatorship was obviously not a corrective disclosure of anything
previously concealed. As for the discussion of reasons for the conservatorship, the
principal reasons given—overstatement of capital cushion and questionable recognition of
deferred tax assets—had been previously revealed to the market. Moreover, in discussing
questions regarding Freddie’s accounting practices, the Times noted, as the second
amended complaint acknowledges, that the accounting decisions were “not necessarily in
violation of accounting rules.” SAC ¶ 292.
Finally, Central States fails to adequately plead a relationship between Freddie’s
subprime mortgage exposure and the corrective stock price drop. While Central States
alleges that Freddie’s misrepresentations regarding its subprime exposure contributed to its
artificially inflated stock price, Central States fails to connect this subprime exposure, or
any alleged misrepresentations regarding it, to the events that are alleged to have caused
the relevant stock price decline. The alleged corrective stock price decline related to
disclosures regarding the federal government’s takeover of Freddie, and Central States
does not connect this takeover to Freddie’s subprime holdings, let alone to any
11
misrepresentations about that subject. As Freddie’s alleged subprime misrepresentations
are never connected to the disclosures responsible for the corrective stock price decline, the
subprime exposure allegations are unavailing to plead loss causation.
In sum, because Central States has failed to meet the pleading requirements for loss
causation, the district court correctly dismissed its second amended complaint for
securities fraud.
2. Motion to Amend
Central States contends that the district court improperly denied it leave to file the
third amended complaint. We disagree. Central States concedes that the
Non-Prosecution Agreement cited in the third amended complaint is not a loss-causing
event, and otherwise fails to allege the existence of any corrective disclosures during the
class period that Freddie’s subprime exposure was vastly understated. Thus, we conclude
that the district court did not abuse its discretion in denying leave to amend. See Acito v.
IMCERA Grp., Inc., 47 F.3d 47, 55 (2d Cir. 1995) (“One good reason to deny leave to
amend is when such leave would be futile.”).
We have considered Central States’ remaining arguments on appeal and conclude
that they are without merit. Accordingly, the judgment of the district court is
AFFIRMED.
FOR THE COURT:
CATHERINE O=HAGAN WOLFE, Clerk of Court
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