774 F. Supp. 2d 584
S.D.N.Y.2011Background
- Securities Act claims alleging misstatements in Yield Plus Fund offering documents (Sections 11, 12(a)(2), 15).
- SAC alleged misrepresentations about fund holdings, investment objectives, liquidity, and quality of debt securities, including mortgage-related assets and subprime exposure.
- Two prior opinions narrowed/focused issues: miscategorization of mortgage-backed securities (percentages) and overstatement of asset values; some claims were previously dismissed or left for amendment.
- Court concluded at this stage that loss causation must be proven under Sections 11/12(a)(2) and that the statute’s framework ties damages to depreciation in NAV caused by concealment-related risk.
- Defendants argued NAV, not market price, is the mechanism for mutual funds, so misstatements could not cause loss causation; plaintiff proposed alternatives like concealment of non-diversification risk or a ‘run on the fund.’
- Court held that loss causation was facially negated by the plaintiffs’ theory under the statutory framework and dismissed the SAC with prejudice.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether loss causation is pleaded for Sections 11/12(a)(2). | Yu argued the concealed risks from non-diversification and illiquidity caused NAV declines and investor redemptions. | State Street argued NAV cannot be inflated by misstatements and declines were due to market forces, not concealment. | Yes; but loss causation was facially negative and claims dismissed. |
Key Cases Cited
- Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (U.S. 2005) (loss causation framework; corrective-disclosure paradigm)
- Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005) (two-prong loss causation; forecast of concealed risk; materialization required)
- In re Morgan Stanley Information Fund Securities Litigation, 592 F.3d 347 (2d Cir. 2010) (loss causation in mutual fund context; loss caused by depreciation in NAV)
- In re Charles Schwab Corp. Securities Litigation, 257 F.R.D. 534 (N.D. Cal. 2009) (court accepted alternative theories of loss causation beyond corrective disclosure)
- In re Salomon Smith Barney Mutual Fund Fees Litigation, 441 F. Supp. 2d 579 (S.D.N.Y. 2006) (loss causation evaluation in mutual fund claims)
- In re IAC/InterActiveCorp, 478 F. Supp. 2d 574 (S.D.N.Y. 2007) (court consideration of loss causation framework and applicable standards)