Phelps v. Stomber
883 F. Supp. 2d 233
D.D.C.2012Background
- CCC issued highly leveraged RMBS via repos; private offerings raised ~$600M; Offering Memorandum disclosed leverage, liquidity cushion, and flexible guidelines.
- Pre-offering board reviewed drafts; June 2007 Supplement disclosed updated losses and reduced share count; Offering postponed.
- Plaintiffs allege securities fraud under 10(b)/20(a) and related common law and UK/Dutch claims.
- Defendants moved to dismiss under Rule 12(b)(6)/9(b) and PSLRA for failure to plead falsity and causation.
- Court granted motions to dismiss federal Offering and aftermarket claims, declined to exercise jurisdiction over some common law aftermarket claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Morrison bars aftermarket 10(b) claims | Phelps argues US nexus via US purchasers | Defendants emphasize foreign exchange trading | Morrison bars aftermarket claims; offering claims survive |
| Whether loss causation is adequately pled | Plaintiffs plead causal connection between omissions and losses | Loss causation inadequately pleaded under Dura | Loss causation not adequately pleaded; counts fail |
| Whether 10(b)/Rule 10b-5 statements/omissions were actionable | OM/Supplement hid pre-offering liquidity crisis | Disclosures, including Supplemental OM, disclosed material facts | No actionable misstatement/omission; no plausible reliance; failure to plead falsity and causation |
| Whether aftermarket omissions were non-domestic under Morrison | Transactions tied to US purchasers; not purely foreign | Trading on foreign exchange; non-U.S. transaction | Aftermarket claims barred under Morrison; Counts VII–VIII dismissed |
| Whether DC law applies to common law claims and whether reliance is shown | US plaintiffs; alternative Dutch claim; Affiliated Ute presumed reliance | DC law governs; Affiliated Ute not applicable to common law | DC law applies; common law claims fail for lack of actionable misstatement and reliance |
Key Cases Cited
- Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010) (bright-line transactional test for 10(b) extraterritoriality)
- XM Satellite Radio Holdings, Inc. Sec. Litig., 479 F. Supp. 2d 165 (2007) (elements of 10(b) claim and materiality; loss causation standards)
- Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 337 (2005) (requires loss causation showing that fraud caused the loss; not just inflated purchase price)
- Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972) (presumption of reliance for omissions in federal securities cases)