971 F. Supp. 2d 387
S.D.N.Y.2013Background
- Plaintiffs (institutional investors and an individual) brought class claims arising from OSG’s March 24, 2010 $300 million senior notes offering, alleging the registration statement/prospectus omitted material tax liabilities under I.R.C. § 956; OSG later filed for bankruptcy and the IRS asserted >$35 million tax claim.
- Defendants include OSG officers/directors (Individual Defendants), auditors Ernst & Young (E&Y) and PricewaterhouseCoopers (PwC) (Auditor Defendants), and underwriting banks (Underwriter Defendants).
- The Registration Statement incorporated audited financial statements for 2007–2009; E&Y audited earlier years (2005–2008) and PwC audited 2009 and consented to incorporation.
- Plaintiffs plead Securities Act claims (§§ 11, 12(a)(2), 15) against many defendants and Exchange Act claims (§ 10(b)/Rule 10b-5, § 20(a)) against two officers (Arntzen and Itkin).
- Motions to dismiss: court denied motions by E&Y, PwC, and Underwriters; granted in part and denied in part the Individual Defendants’ motion — Securities Act claims survive; Exchange Act claims against Arntzen and Itkin dismissed for failure to plead scienter, with leave to amend.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether auditors (E&Y, PwC) are liable under Securities Act §11 for incorporated audit opinions and financial statements | Audit opinions effectively certified the financials; tax omission is objective and §11 strict liability applies without alleging subjective disbelief | Audit opinions are statements of opinion; under Fait plaintiffs must plead subjective disbelief for inherently subjective statements | Court: auditors’ motions denied — tax liability is an objective matter, §11 claims pleaded adequately; auditors can raise due-diligence defense later |
| Whether Underwriters’ §11/12 liability should be dismissed based on reasonable reliance and loss-causation | Underwriters marketed securities using the registration statement containing omissions; plaintiffs need not preemptively negate affirmative reliance defense | Underwriters reasonably relied on audited financials and absence of red flags; Offering-period tax portion de minimis, so cannot have caused losses | Court: denied — reasonableness of reliance and proportional loss causation are fact issues for later stages |
| Whether Individual Defendants are "statutory sellers" under §12(a)(2) | Individual Defendants actively prepared and marketed the prospectus and benefited (company survival, continued positions), so they solicited sales | Signing the registration statement alone is insufficient to be a statutory seller | Court: denied dismissal of §12 claims — allegations of active solicitation and financial interest are sufficient at pleading stage |
| Whether plaintiffs pled scienter for §10(b)/Rule 10b-5 against Arntzen and Itkin | Circumstantial evidence (tax expertise, size and duration of omission, GAAP violations, board resignation over tax issue) supports an inference of knowledge/recklessness | Allegations are generalized motive/opportunity or hindsight; no specific facts showing defendants knew of §956 liability during Offering; auditors also missed it | Court: dismissed §10(b) and §20(a) claims against Arntzen and Itkin for failure to plead a strong inference of scienter; leave to amend granted |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (two‑pronged plausibility pleading framework)
- Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004) (Rule 9(b) may apply to §11/12 claims that are premised on fraud)
- Fait v. Regions Fin. Corp., 655 F.3d 105 (2d Cir. 2011) (subjective disbelief required for §11 liability where statements are inherently subjective valuations)
- Pinter v. Dahl, 486 U.S. 622 (1988) (standards for who is a "statutory seller" under §12)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (test for weighing competing inferences to determine whether scienter pleaded)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) (motive and opportunity and circumstantial pleading standards for scienter)