35 F.4th 26
1st Cir.2022Background
- From Dec 1, 2012 to Oct 31, 2013 plaintiffs purchased Puerto Rico municipal bond securities (PRMBs, PRCEFs, PROEFs) through Santander during Puerto Rico's recession and before a market crash.
- Fund prospectuses were provided and disclosed investment objectives, risk factors, and tax benefits; they warned about market risks.
- Public sources (e.g., Moody's downgrades in 2012) and industry reports had already warned of Puerto Rico's deteriorating fiscal condition and elevated PRMB risk.
- Santander, alarmed by downgrades, reduced its PRMB inventory while continuing to sell PRMB securities to plaintiffs; plaintiffs later suffered losses after the 2013 market collapse.
- Plaintiffs sued under Section 10(b)/Rule 10b-5 alleging Santander omitted material facts (market deterioration and Santander’s accelerated inventory sell-off); district court dismissed federal claims; appeal limited to federal securities claims.
- First Circuit affirmed: plaintiffs failed to plead an actionable omission or the duty to disclose; court did not reach scienter because omission failed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Santander omitted material facts in violation of Section 10(b)/Rule 10b-5 | Santander failed to disclose (a) worsening Puerto Rico bond-market conditions and (b) that Santander was rapidly divesting its PRMB inventory, rendering prospectus statements misleading | Prospectuses already disclosed risks; omitted information was public or not actionable; no duty to disclose inventory decisions absent special circumstances | No actionable omission; dismissal affirmed |
| Whether public knowledge of the risks negates a duty to disclose / materiality | Even if some information was public, Santander had an ongoing duty to update purchasers at point of sale | Public warnings and ratings downgrades meant risks were "known or readily accessible"; no duty to repeat public information | Publicly known risks need not be reiterated; failure to repeat public information is not a material omission |
| Whether Santander had a special relationship or ongoing duty (e.g., suitability/fiduciary) requiring disclosure of inventory reductions | Santander solicited purchases and knew plaintiffs sought conservative, fixed-income investments, creating a duty to disclose unsuitability and its inventory actions | No allegations of a special relationship, bespoke promises, or particularized instructions; mere solicitation and standard recommendations insufficient | No adequately pleaded special relationship or particularized promises; no duty to disclose of the kind in Tutor Perini |
| Pleading particularity and scienter under PSLRA/Rule 9(b) | Complaint alleged many omissions and market knowledge, supporting scienter and particularity | Complaint is conclusory and lacks specifics about challenged statements, timing, and defendants' state of mind | PSLRA/Rule 9(b) not satisfied; court declines to reach scienter because omission failed to state a claim |
Key Cases Cited
- Mehta v. Ocular Therapeutix, Inc., 955 F.3d 194 (1st Cir. 2020) (de novo review of dismissal under Rule 12(b)(6) in securities context)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading must state a plausible claim)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility standard for complaints)
- Tutor Perini Corp. v. Banc of Am. Sec. LLC, 842 F.3d 71 (1st Cir. 2016) (special-relationship/"Grand Canyon" disclosure theory where adviser knew of imminent market collapse)
- Baron v. Smith, 380 F.3d 49 (1st Cir. 2004) (no duty to repeat information already known to the market)
- Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 575 U.S. 175 (2015) (materiality measured from perspective of reasonable investor)
- Ganem v. InVivo Therapeutics Holdings Corp., 845 F.3d 447 (1st Cir. 2017) (elements for omission and requirement to show omitted fact was necessary to make statements not misleading)
- Hill v. Gozani, 638 F.3d 40 (1st Cir. 2011) (possession of material nonpublic information does not alone create a duty to disclose)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (standard for pleading scienter: strong inference as compelling as opposing inferences)
- ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46 (1st Cir. 2008) (PSLRA and Rule 9(b) pleading particularity requirements in securities fraud actions)