Slater v. AG Edwards & Sons, Inc.
2013 U.S. App. LEXIS 13845
| 10th Cir. | 2013Background
- Thornburg Mortgage, a highly leveraged residential mortgage lender, relied on securitizations, repurchase agreements (with margin calls and cross-default clauses), commercial paper, and public equity offerings for funding during 2007–08.
- Thornburg originated prime and Alt‑A ("stated income/no ratio") loans and also purchased MBSs; it held $2.9 billion in purchased MBSs backed by Alt‑A loans (disclosed later in Feb 2008).
- Thornburg conducted equity offerings in May, June, September 2007 and January 2008; offering documents incorporated prior SEC filings (10‑Ks, 10‑Qs, and an April 2007 8‑K).
- Investors sued under Section 11 alleging material misstatements/omissions in the offering documents regarding (1) the $2.9 billion Alt‑A MBS exposure, (2) cross‑default provisions in repo agreements, and (3) alleged restatement/misleading 2006 financials.
- The district court dismissed the Section 11 claims; plaintiffs appealed as to the underwriters for the May, June, and September offerings (January‑2008 underwriters were dismissed by stipulation).
- The Tenth Circuit affirmed, holding the offering statements were not misleading and Thornburg had no duty under Regulation S‑K or S‑X to disclose the omitted details; KPMG’s subsequent letters did not render the 2006 financials actionable.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Disclosure of $2.9B purchased Alt‑A MBSs in May/June offerings | Omission misled investors because Thornburg touted benefits from prime spreads while failing to disclose direct Alt‑A exposure | Thornburg’s public filings showed primarily prime, high‑quality assets; Alt‑A exposure was relatively small and not shown to have depressed MBS values contemporaneously | Not misleading; no additional disclosure required; claim dismissed |
| Disclosure of $2.9B purchased Alt‑A MBSs in September offering (Item 303, Reg S‑K) | Item 303 required disclosure because Alt‑A decline threatened liquidity and earnings | Prospectus and incorporated 10‑Qs already warned of liquidity strain and disclosed direct Alt‑A exposure generally; specific $2.9B detail immaterial | No Item 303 violation; omission not required or material |
| Disclosure of $2.9B purchased Alt‑A MBSs under Reg S‑X / GAAP (FAS 107) | Failure to disclose a significant concentration of credit risk in violation of GAAP/Reg S‑X | Plaintiffs failed to plead that Thornburg believed the $2.9B constituted a "significant concentration" or consciously ignored such risk; position was a matter of judgment | No violation pleaded; facts do not show Thornburg viewed holdings as a significant concentration |
| Disclosure of cross‑default provisions in repurchase agreements (Item 303 / misleading statement) | Omission made statements about repo‑funding risks misleading because cross‑default risk could produce cascading defaults | Prospectus warned of margin calls and liquidity limits; statement did not address default consequences and plaintiffs did not plead that triggering was reasonably likely | Not misleading; no duty to disclose cross‑default language under Item 303 absent evidence cross‑defaults were reasonably likely |
| Accuracy of 2006 financials after KPMG letters (Reg S‑X / §11) | KPMG’s March 4 letter indicated 2006/2007 contained material misstatements; incorporated 2006 financials made offerings misleading | KPMG had approved 2006 financials and, after restatement of 2007, issued an audit opinion covering 2007 and 2006 as presenting fairly; Thornburg did not restate 2006 | Plaintiffs failed to plead actionable misstatement of 2006 financials; §11 claim based solely on KPMG letter insufficient |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading must state a plausible claim)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility pleading standard)
- In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347 (materiality standard for §11 parallels §10(b))
- Litwin v. Blackstone Grp., L.P., 634 F.3d 706 (Item 303 duty where a significant portion of assets tied to declining market)
- Oxford Asset Mgmt., Ltd. v. Jaharis, 297 F.3d 1182 (no Item 303 violation where prospectus gave materially complete picture)
- McDonald v. Kinder‑Morgan, Inc., 287 F.3d 992 (duty to disclose arises when omission alters meaning of statement)
- Grossman v. Novell, 120 F.3d 1112 (materiality depends on whether statement altered the mix of available information)
- Herman & MacLean v. Huddleston, 459 U.S. 375 (§11 imposes strict liability for material misstatements/omissions)