STRATTE-MCCLURE v. Stanley
784 F. Supp. 2d 373
S.D.N.Y.2011Background
- SBRS and FA bring a putative securities fraud class action against Morgan Stanley and six officers under the Exchange Act’s 10(b) and related provisions.
- Plaintiffs allege Morgan Stanley undertook a December 2006 subprime trading strategy (short CDS on low-rated CDOs hedged with long CDS on high-rated CDOs) that later deteriorated as subprime assets declined.
- ABX BBB 06-1 Index movements allegedly tied the value of Morgan Stanley’s $13.2 billion swap position to broader subprime trends, implying a larger write-down.
- Morgan Stanley disclosed a $1.9 billion third-quarter markdown but purportedly concealed a larger $4.4 billion exposure, setting up later disclosures.
- Defendants disclosed additional losses in November-December 2007, after the stock price had begun to fall, culminating in a $9.4 billion fourth-quarter writedown; plaintiffs seek to hold defendants liable for alleged misstatements and omissions through December 19, 2007.
- The court grants the motion to dismiss the Amended Complaint in its entirety, with leave to amend solely on loss causation grounds for the third/fourth quarter subprime valuation disclosures.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether misstatements about risk controls are actionable | Stratton (Plaintiffs) contend risk-control statements were false | Morgan Stanley argues such statements are puffery | Misstatements about risk controls are non-actionable puffery |
| Whether disclosures of subprime exposure were misrepresented or omitted | Plaintiffs contend disclosures masked losses and exposure | Disclosures were adequate and not required to enumerate every asset | Omissions theory fails except as to undisclosed losses; some misstatements about valuation may be actionable as to third/fourth-quarter losses |
| Whether third-quarter valuation and November 7, 2007 disclosures were false | Valuation should reflect ABX index movements; Level 3 use understated losses | Valuations based on business judgment; timing alleged to be justified by market movements | Statement of valuation and related disclosures stated a misstatement; restatement potential; factual disputes remain on motion to dismiss for loss causation/scienter |
| Whether the pleadings establish scienter | Defendants had motive and access to information; warnings ignored | No sufficiently particularized evidence of knowledge contradicting public statements | Strong circumstantial evidence of conscious misbehavior or recklessness; scienter adequately pled as to third/fourth-quarter disclosures for multiple defendants |
| Whether plaintiffs state a valid Section 20(a) control-person claim | Control persons liable for primary violations by controlled persons | No predicate violation pled; control liability fails | Section 20(a) claims dismissed; no primary violation pled against Lynch; remaining claims dismissed with prejudice |
Key Cases Cited
- Ashcroft v. Iqbal, 129 S. Ct. 1937 (U.S. 2009) (plausibility standard for pleading; factual allegations required)
- Twombly v. Bell Atl. Corp., 550 U.S. 544 (U.S. 2007) (heightened pleading standard; not mere possibility of relief)
- Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004) (requirement to plead with particularity under Rule 9(b) and PSLRA)
- ATSI Commc'ns., Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (strong inference of scienter; motive+opportunity or conscious misbehavior/recklessness)
- In re Citigroup Inc. Sec. Litig., 753 F. Supp. 2d 206 (S.D.N.Y. 2010) (ABX/TABX-based valuation disputes; sufficiency at motion to dismiss)