City of Pontiac Policemen's & Firemen's Retirement System v. UBS AG
2014 U.S. App. LEXIS 8533
| 2d Cir. | 2014Background
- Plaintiffs (foreign and domestic institutional investors) sued UBS AG and officers/directors alleging securities fraud tied to (1) accumulation/overvaluation of RMBS/CDO mortgage-related assets (~$100bn) and (2) a cross-border Swiss private-banking tax-evasion scheme. Some UBS ordinary shares were cross-listed on the NYSE but purchased on foreign exchanges.
- Alaska Laborers separately challenged disclosures in UBS’s June 13, 2008 rights offering under the Securities Act.
- The district court dismissed claims by investors who bought on foreign exchanges, dismissed Securities Act claims relating to the Offering, and dismissed Exchange Act § 10(b) claims for failure to plead material misstatements or scienter.
- On appeal the Second Circuit addressed (1) whether Morrison’s extraterritoriality rule allows § 10(b) claims based on foreign-issued shares that are cross-listed on a U.S. exchange (the “listing theory”), (2) whether placing a U.S. buy order for foreign securities makes the transaction domestic, and (3) whether alleged statements were actionable/material and whether scienter was adequately pleaded.
- The court affirmed dismissal with prejudice: Morrison bars § 10(b) suits by purchasers of foreign-issued shares bought on foreign exchanges even if cross-listed; a U.S. buy order alone does not make the transaction domestic; Offering statements were puffery/immaterial; and CDO/RMBS and tax-related § 10(b) claims failed to plead materiality or a strong inference of scienter.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Extraterritorial scope of § 10(b) for foreign-issued shares cross-listed on a U.S. exchange (listing theory) | Listing on NYSE brings claims within Morrison’s first prong (transactions in securities listed on domestic exchanges) | Morrison’s focus is on the location of the transaction; cross-listing does not convert a foreign transaction into a domestic one | Listing theory rejected; Morrison bars § 10(b) claims by purchasers of foreign-issued shares bought on foreign exchanges even if cross-listed |
| Whether placing a buy order in the U.S. for foreign securities incurs irrevocable liability in U.S. (Morrison second prong/domestic transaction) | A U.S. purchaser who places the buy order incurs irrevocable liability in the U.S., making the transaction domestic | Placement of a buy order in the U.S., without more, is insufficient to show irrevocable liability occurred in the U.S. | Buy order placement alone insufficient; OPEB’s transactions were foreign and claims dismissed |
| Securities Act (§§11,12(a)(2)) liability for Offering statements about compliance/reputation amid DOJ investigation | Offering statements (ethics, compliance, WMI not servicing U.S. clients) were false or misleading because UBS engaged in cross-border tax scheme and concealed ongoing misconduct | Statements were aspirational/general (puffery); Offering disclosed DOJ investigation and potential liabilities; no duty to confess unadjudicated wrongdoing | Offering statements are immaterial/puffery or adequately disclosed; Securities Act claims dismissed |
| § 10(b) claims re CDO/RMBS valuation and risk-concentration statements — materiality and scienter | UBS accumulated ~$100bn RMBS/CDOs while representing avoidance of undue concentrations and using mark-to-market valuation; defendants knew or recklessly disregarded impairments | Statements about diversification were general; valuation disputes and hindsight business errors do not establish recklessness or strong inference of scienter | § 10(b) claims dismissed for failure to plead actionable misstatements, materiality, or a strong inference of scienter |
Key Cases Cited
- Morrison v. Nat’l Austl. Bank, 561 U.S. 247 (2010) (limiting private § 10(b) actions to transactions in securities listed on domestic exchanges or domestic transactions in other securities)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (requirement that inference of scienter be cogent and at least as compelling as any opposing inference)
- Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012) (domestic-transaction test: irrevocable liability or transfer of title occurs in U.S.)
- Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011) (an individual ‘‘makes’’ a statement only if he or she is the actual maker of the statement)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (plausibility standard for Rule 12(b)(6) pleadings)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) (standards for pleading scienter; motive/opportunity and circumstantial evidence of recklessness)