Centaur Classic Convertible Arbitrage Fund Ltd. v. Countrywide Financial Corp.
793 F. Supp. 2d 1138
C.D. Cal.2011Background
- Eight institutional affiliates of Argent sue Countrywide Financial and officers for alleged misstatements in the Offering Memorandum for privately placed Debentures in 2007.
- The Debentures were senior unsecured obligations issued under SEC Rule 144A to qualified institutional buyers and were convertible under certain events before maturity.
- Offering proceeds were stated to be used to repurchase Countrywide stock and for general corporate purposes; Plaintiffs purchased during May–November 2007 (the Relevant Period).
- Plaintiffs allege the Offering Memorandum and incorporated SEC filings misrepresented Countrywide's lending/underwriting practices and financial position, inflating Debenture prices before a sharp drop.
- The Court previously dismissed the initial complaint for statute-of-limitations and lack of specificity in the federal claims; state claims were time-barred.
- The SAC asserts two §10(b) claims and §20(a) against Individual Defendants; the Court finds the pleadings meet Rule 9(b) and PSLRA standards and survive dismissal.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Adequacy of §10(b)/§20(a) pleadings | Plaintiffs allege detailed transaction-by-transaction misstatements and omissions and reliance, with scienter. | Defendants contend lack of specificity and improper reliance theories and pleadings fail to meet PSLRA requirements. | SAC adequately pleads §10(b)/§20(a) with particularity. |
| Economic loss and damages methodology | Losses should be measured after netting gains/losses from ongoing trading strategies; detailed method exists but not yet resolvable at this stage. | Netting and strategy-based offsets are improper or premature for damages at motion to dismiss. | Netting approach appropriate in principle but factual issues prevent resolution at this stage. |
| Loss causation | Corrective disclosures caused Debenture prices to fall; market reaction tied to misstatements rather than macro conditions. | Debenture drop due to macro housing/market collapse, not alleged disclosures; Oracle/Nuveen guide post-disclosure analysis. | Loss causation adequately pleaded; factual record required to resolve causation at later stage. |
| Reliance | Continuing misrepresentations were relied upon; plaintiffs identified for each purchase how statements were relied on. | Post-disclosure information undermines reasonable reliance and inputs the trading strategy claim. | Actual reliance adequately pled; can't determine reasonableness post-disclosures at this stage. |
| Scienter | Plaintiffs present detailed e-mails and meetings showing knowledge of wrongdoing; not just group pleading. | Group pleading and mere access to information are insufficient to show scienter. | Pleading supports a strong inference of scienter under PSLRA; individualized allegations strengthen the claim. |
Key Cases Cited
- Stoneridge Investment Partners v. Scientific-Atlanta, 552 U.S. 148 (U.S. 2008) (elements of §10(b) and loss causation framework)
- In re Oracle Corp. Secs. Litig., 627 F.3d 376 (9th Cir. 2010) (loss causation requires market reaction to the truth disclosed, not broader market effects)
- Concha v. London, 62 F.3d 1493 (9th Cir. 1995) (notice pleading standard for securities claims under PSLRA)
- In re Gilead Sciences, Inc. Sec. Litig., 536 F.3d 1049 (9th Cir. 2008) (context for PSLRA scienter and particularized pleading)
- South Ferry LP, No. 2 v. Killinger, 542 F.3d 776 (9th Cir. 2008) (core-operations inference and scienter considerations)