980 F. Supp. 2d 564
S.D.N.Y.2013Background
- Plaintiffs (shareholders who bought Bank of America stock during Feb 25–Aug 8, 2011) allege BoA and four officers omitted disclosure that an AIG fraud/securities suit was imminent and that the potential loss could be as high as ~$10 billion, violating §10(b)/Rule 10b-5 and §20(a).
- BoA’s 2010 Annual Report and subsequent filings disclosed extensive MBS activity (2004–2008 origination/securitization ~ $2.1 trillion; $963 billion sold to private parties) and broad, specific warnings about rising MBS-related litigation and that accruals cover only probable and estimable losses.
- Prior to the class period, BoA and AIG entered a tolling agreement; AIG provided a detailed claim analysis and publicly disclosed much of its MBS portfolio and losses; media outlets reported AIG was preparing suits and identified BoA as a major target.
- AIG filed suit on Aug 8, 2011 seeking rescission or at least ~$10 billion; BoA stock fell sharply that day (but contemporaneous market-wide factors—S&P downgrade—also moved bank stocks).
- Plaintiffs contend omission rendered BoA’s risk disclosures and certain specific statements misleading and that BoA violated GAAP (ASC 450) and Item 303; defendants moved to dismiss for failure to plead a material misstatement/omission and scienter.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether omission of imminence and amount of AIG suit was a material omission under §10(b)/Rule 10b-5 | AIG suit’s imminence and potential ~$10B exposure were material and defendants failed to disclose them, rendering risk disclosures misleading | Information about AIG’s potential suit and magnitude was already in the public domain and BoA’s filings truthfully disclosed broad MBS litigation risk and limits on accruals | Dismissed: omissions immaterial as a matter of law because the substance was publicly available and BoA’s disclosures already conveyed the risk and inability to estimate some losses |
| Whether specific BoA statements (e.g., about legacy risk, settlements, exposure affecting profits) were rendered misleading by omission | Those statements implied no similar, material claim existed and misrepresented progress mitigating MBS litigation risk | Statements were truthful, qualified, and distinguished between representation/warranty claims and fraud/securities claims; BoA warned unsettled risks remained | Dismissed: statements not rendered misleading when read in context with disclosures and public information |
| Whether ASC 450 (GAAP) required disclosure/estimation of AIG claim | ASC 450 required either accrual or disclosure of reasonably possible losses with an estimate/range; AIG claim was reasonably possible and thus needed particularized disclosure | The potential AIG loss was inestimable (plaintiff’s own alleged range 0–$10B) so ASC 450 did not mandate a quantified estimate; BoA had disclosed that some matters could not be estimated | Dismissed: ASC 450 did not require greater particularity; BoA’s disclosures satisfied GAAP requirement to state that an estimate could not be made |
| Whether Item 303 required disclosure and whether scienter is adequately alleged; §20(a) control-person liability | Item 303 required disclosure of known trends/uncertainties reasonably likely to have material effect; defendants acted recklessly/with consciousness of wrongdoing supporting scienter and control-person liability | Plaintiffs fail to allege management actually knew filing was imminent or that loss was reasonably likely/estimable; public disclosures and BoA’s SEC responsiveness negate a strong inference of scienter | Dismissed: Item 303 not shown to apply; scienter not pleaded with particularity; §20(a) fails because no primary §10(b) violation and no strong inference of scienter |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility standard for pleading)
- Ashcroft v. Iqbal, 556 U.S. 662 (legal conclusions not presumed true on a motion to dismiss)
- Basic Inc. v. Levinson, 485 U.S. 224 (materiality: "total mix" standard)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (standard for evaluating competing inferences on scienter)
- ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (private securities pleading requirements)
- Kalnit v. Eichler, 264 F.3d 131 (recklessness standard and strength of circumstantial allegations for scienter)
- Novak v. Kasaks, 216 F.3d 300 (particularity for pleading access to contrary information)
- Chill v. Gen. Elec. Co., 101 F.3d 263 (recklessness as extreme departure from ordinary care)
- Halperin v. eBanker USA.com, Inc., 295 F.3d 352 (assessing generic risk disclosures and materiality)
- Panther Partners Inc. v. Ikanos Commc’ns, Inc., 681 F.3d 114 (Item 303 requires present knowledge and reasonable likelihood of material effect)
- ECA Local 134 IBEW Joint Pension Trust of Chicago v. J.P. Morgan Chase Co., 553 F.3d 187 (contextualizing quantitative materiality)