Comprehensive Investment Services, Inc. v. Mudd, 891 F. Supp. 2d 458

Background

Private securities actions allege FNMA, its executives, and certain underwriters made material misstatements in SEC filings and securities offerings about subprime/Alt-A exposure, risk management controls, and core capital.
Plaintiffs include the Class Action, Comprehensive Investment Services (CIS), Edward Smith, and Liberty; Liberty also pursues its own action against Goldman.
Eight defendants moved to dismiss fourteen complaints; motions granted in part and denied in part.
Class, CIS, and Smith amended pleadings to add subprime/Alt-A exposure disclosures; CIS and Smith also assert other state and federal claims.
Court addresses Rule 12(f) motions to strike reliance on SEC/NPA materials and analyzes Section 10(b)/Rule 10b-5, Section 20(a), SLUSA, and related claims.
Court’s ultimate rulings permit some federal claims to proceed against FNMA, Mudd, and Dallavecchia while dismissing many state-law and certain other federal claims.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the SEC/NPA-based allegations may be struck under Rule 12(f).	Plaintiffs rely on SEC/NPA allegations to support claims.	Defendants contend the SEC/NPA materials are inadmissible and should be struck as redundant or immaterial.	Motions to strike denied.
Whether FNMA, Mudd, and Dallavecchia stated misstatements regarding subprime/Alt-A exposure under Rule 10b-5 and PSLRA.	Plaintiffs allege misstatements and scienter supported by disclosed risk disclosures and expert action; Dallavecchia may have ultimate authority.	Defendants argue statements were true/too remote in time or not made by the alleged speaker.	Claims related to subprime/Alt-A disclosures survive as to FNMA, Mudd, and Dallavecchia.
Whether Dallavecchia can be liable as a ‘maker’ of misstatements under Janus Capital.	Dallavecchia had ultimate authority and involvement in disclosures; could be liable.	Under Janus, liability requires ultimate authority over the statement; mere involvement is insufficient.	Dallavecchia’s liability remains a question of fact; he may be held liable.
Whether plaintiffs adequately plead loss causation and reliance for Section 10(b) claims.	Fraud-on-the-market and contemporaneous disclosures support reliance; stock drop linked to misstatements.	Market factors and other events could confound causation; reliance standards avoid liability.	Pleadings sufficent at this stage; loss causation and reliance adequately pled for these claims.
Whether CIS, Smith, and Liberty’s state-law claims are preempted by SLUSA.	State-law claims are distinct from federal securities claims and not covered class actions.	SLUSA preempts state-law claims sounding in fraud in a covered class action consolidated in MDL.	SLUSA precludes CIS/Smith state-law claims against FNMA, Mudd, and Dallavecchia; other non-class-action defendants spared per claim-by-claim analysis.

Key Cases Cited

Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (pleading must contain factual content plausibly suggesting liability)
Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (plausibility standard applies to pleadings)
Tellabs, Inc. v. Makor Issues & Rights, 551 U.S. 308 (U.S. 2007) (PSLRA requires strong inference of scienter)
Basic Inc. v. Levinson, 485 U.S. 224 (U.S. 1988) (materiality and total mix of information)
Ganino v. Citizens Utils. Co., 228 F.3d 154 (2d Cir. 2000) (fraud materiality and fraud-on-the-market considerations)
Janus Capital Grp., Inc. v. First Derivative Traders, 131 S. Ct. 2296 (S. Ct. 2011) (maker of the statement has ultimate authority)
Pac. Invest. Mgmt. Co. v. Mayer Brown LLP, 603 F.3d 144 (2d Cir. 2010) (liability limits for outside professionals in private actions)
In re Bear Stearns Cos., Inc. Sec., Derivative, & ERISA Litig., 763 F. Supp. 2d 423 (S.D.N.Y. 2011) (fraud-on-the-market and materiality considerations)
Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 395 F.3d 25 (2d Cir. 2005) (SLUSA preemption framework and ‘covered class action’ analysis)