598 F. App'x 25
2d Cir.2015Background
- Plaintiffs (Fjarde AP‑Fonden and State‑Boston Retirement System) brought a putative securities‑fraud class action against Morgan Stanley and several officers under Section 10(b) and Rule 10b‑5 and Section 20(a).
- Complaint alleged defendants made material misstatements and omissions from June–November 2007 to conceal Morgan Stanley’s exposure and losses on a proprietary subprime mortgage trade (an asserted long and short position).
- Two categories of claims: (1) exposure claim — misstatements/omissions about Morgan Stanley’s exposure to subprime‑related assets; (2) valuation claim — failure to write down true losses on the long position.
- District Court dismissed the second amended complaint under Fed. R. Civ. P. 12(b)(6); plaintiffs appealed.
- On appeal, the Second Circuit reviewed de novo, applying heightened pleading standards for securities fraud (Rule 9(b) and the scienter/loss‑causation doctrines), and affirmed dismissal.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether specific public statements were materially false or misleading (Exposure claim: statements by Sidwell and Kelleher) | Statements understated Morgan Stanley’s subprime exposure and misled investors about risk and potential losses. | Statements, read in context, were truthful or nonactionable (forward‑looking, statements of past performance, or cautionary/contextualized risk disclosures). | Court held plaintiffs failed to plead any actionable material misstatement; dismissal affirmed. |
| Whether alleged omissions/failure to disclose required Item 303 disclosures (related claim resolved in companion opinion) | Omitted known trends/uncertainties about subprime exposure that Item 303 required be disclosed. | Plaintiffs failed to plead facts supporting a strong inference of scienter necessary to make the omission actionable. | District court dismissal affirmed on scienter grounds (addressed in separate opinion). |
| Whether Morgan Stanley’s valuation of long positions concealed losses such that corrective disclosures caused plaintiffs’ losses (Valuation claim: loss causation) | Analysts’ reports and subsequent stock drop were corrective disclosures revealing the falsity of prior valuations, causing investors’ losses. | Stock decline was explained by intervening market deterioration and analyst predictions of future write‑downs, not revelation of previously concealed third‑quarter losses. | Court held plaintiffs failed to plead loss causation — analyst reports did not reveal previously concealed facts; dismissal affirmed. |
| Pleading particularity and scienter under Rule 9(b)/Iqbal/Twombly for securities fraud | Complaint met particularity and alleged facts supporting scienter (false statements and motive/knowledge). | Allegations were conclusory or lacked specific factual support as to falsity and defendants’ intent/knowledge. | Court found allegations insufficiently particular and lacking required scienter for the claims at issue. |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (plausibility standard for pleading)
- Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005) (loss causation principle; inflated purchase price alone insufficient)
- Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005) (loss causation and proximate cause in securities fraud)
- ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (elements of a Section 10(b) claim)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) (particularity requirements for alleging misstatements)
- Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004) (market‑wide statements and pleading falsity with specificity)
- Ganino v. Citizens Utils. Co., 228 F.3d 154 (2d Cir. 2000) (Rule 9(b) requires particularized allegations for securities fraud)