939 F. Supp. 2d 445
S.D.N.Y.2013Background
- Lead Plaintiff Pennsylvania Public School Employees’ Retirement System sues BoA and current/past BoA officers/directors (Executive Defendants) in a putative class action.
- Court previously dismissed all claims against the Executive Defendants but allowed re-pleading; BoA's Section 10(b)/Rule 10b-5 claim survived.
- Original complaint alleged robo-signing, undisclosed repurchase-liability exposure, manipulated reserves, resisted investor access, concealed MERS usage, and failures to notify MBS purchasers; district court found scienter allegations insufficient.
- Amended Complaint adds that executives knew BoA faced repurchase demands, GAAP/SEC violations, and material internal-control weaknesses, yet issued misleading statements.
- Particularly challenged are Moynihan’s knowledge via a May 13, 2010 FCIC letter; undisclosed repurchase demands and tolling agreements; and GAAP/FAS 5 contingencies disclosures.
- Court addresses motions to dismiss under PSLRA heightened pleading standard and securities-fraud pleading rules; ultimately denies motions as to all claims against the Executive Defendants.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| scienter plausibly alleged for 10(b)/Rule 10b-5 | Plaintiff argues collective facts show conscious recklessness regarding repurchase claims and GAAP violations. | Defendants argue no strong inference of scienter from alleged facts or need to individualize evidence. | Plaintiff’s scienter allegations, taken collectively, state a strong inference of scienter. |
| Repurchase claims and internal-control weaknesses as scienter basis | Plaintiff contends knowledge of repurchase demands and weak controls support scienter. | Defendants contend disclosure of repurchase demands was not necessarily improper and controls were not knowingly defective. | Claims about repurchase demands and internal-control weaknesses plausibly establish scienter for Moynihan; others not shown as strongly. |
| GAAP/SEC regulations violations as scienter basis | GAAP/SEC non-disclosures of potential liabilities reflect fraudulent intent when certifying compliance. | Non-disclosure of contingent liabilities alone not fraud; must show intent/circumstantial fraud. | GAAP/SEC-violation allegations, coupled with awareness of potential liabilities, give rise to strong scienter inference. |
| Section 20(a) control-liability sufficiency | Control-person liability supported by underlying primary violations and culpable participation. | Need for individualized culpable participation with fraudulent conduct and culpable state of mind. | Court denies dismissal of Section 20(a) claims based on new allegations of failures to disclose GAAP violations and repurchase liabilities. |
| Moynihan reconsideration arguments | Moynihan seeks reconsideration of scienter finding based on FCIC letter as evidence of knowledge. | Reconsideration would re-weigh evidence; original factual findings should stand. | Moynihan’s motion for partial reconsideration denied; letter supports, not undermines, prior scienter finding. |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (requires strong inference of scienter; weigh all facts collectively)
- Poirier Pacific Inv. Mgmt. Co. v. Mayer Brown LLP, 603 F.3d 144 (2d Cir. 2010) (plaintiff must plead facts giving rise to a strong inference of intent or recklessness)
- ECA Local 134 IBEW Joint Pension Trust of Chicago v. JPMorgan Chase & Co., 553 F.3d 187 (2d Cir. 2009) (recklessness defined as extreme departure from standard care with known or obvious risk)
- In re JPMorgan Chase Sec. Litig., No. 02 Civ. 1282(SHS), 2007 WL 950132 (S.D.N.Y. 2007) (accounting irregularities alone insufficient; must show fraudulent intent)
- Higginbotham v. Baxter Int’l Inc., 495 F.3d 753 (7th Cir. 2007) (prudence in disclosures; not always required to disclose immediately)