United States Securities & Exchange Commission v. Mudd
885 F. Supp. 2d 654
S.D.N.Y.2012Background
- SEC sued Daniel Mudd, Enrico Dallavecchia, and Thomas Lund for allegedly misleading investors about FNMA’s exposure to subprime and Alt-A loans during 2006–2008.
- Defendants moved to dismiss under Rule 12(b)(6), arguing §3(c) exemption, failure to plead misrepresentation/omission, and lack of scienter or proper Section 17(a)(2) and 20(e) claims.
- FNMA was a government-sponsored enterprise; executives certified and reviewed FNMA’s disclosures and securities filings.
- FNMA disclosed modest subprime exposure in early 2007, but later disclosures and definitions broadened to include additional loan categories; plaintiffs argue the disclosures were misleading.
- Alt-A exposure grew with low-documentation loans; FNMA is alleged to have classified some loans as Alt-A inconsistently and failed to include lender-selected low-documentation loans in Alt-A exposure.
- Post-conservatorship statements added disclaimers about similar loans not classified as Subprime or Alt-A, relevant to materiality and continuing misstatements.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether FNMA is exempt under §3(c) for Counts 1, 3, and 5 | FNMA is not an independent establishment; not exempt | FNMA qualifies as an independent establishment under §3(c) | FNMA is not exempt; §3(c) does not apply |
| Whether FNMA made actionable misrepresentations/omissions about subprime/Alt-A exposure | Disclosures mischaracterized exposure by excluding EA/MCM and lender-selected low-doc loans | Expanded definitions explained subprime/Alt-A; exclusions were accurate | Sufficient factual allegations of misrepresentation/omission survived dismissal |
| Whether Counts 1 and 3 satisfy scienter pleading | Defendants knew or should have known disclosures were inaccurate | Disclosures and metrics negate intent or recklessness | Sufficient scienter alleged to withstand motion to dismiss |
| Whether Section 17(a)(2) claim is adequately pled | Defendants obtained money via false statements in FNMA offering of securities | Not clear there was an offer/sale during Relevant Period | Section 17(a)(2) claim adequately stated given NYSE trading context |
| Whether aiding and abetting liability under §20(e) is adequately pled | Defendants consciously assisted the misstatement | Inaction or lack of duty to act undermines liability | Aiding and abetting claim plausibly stated; substantial assistance shown |
Key Cases Cited
- S.E.C. v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir.1968) (materiality test for omissions and misstatements in securities fraud)
- Basic Inc. v. Levinson, 485 U.S. 224 (Sup. Ct.1988) (materiality standard for omissions or misstatements)
- Ganino v. Citizens Utils. Co., 228 F.3d 154 (2d Cir.2000) (materiality and misrepresentation standards)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir.2000) (strong inference of scienter from knowledge of false statements)
- Stevelman v. Alias Research Inc., 174 F.3d 79 (2d Cir.1999) (specific pleading requirements for fraud claims)
- In re Pfizer Inc. Sec. Litig., 584 F.Supp.2d 621 (S.D.N.Y.2008) (heightened pleading standards for fraud allegations)
- S.E.C. v. Apuzzo, 689 F.3d 204 (9th Cir.2012) (definition of substantial assistance in aiding and abetting)
- In re Bear Stearns Cos. Sec. Litig., 763 F.Supp.2d 423 (S.D.N.Y.2011) (materiality and corrective disclosures in securities cases)
- S.E.C. v. Gabelli, 653 F.3d 49 (2d Cir.2011) (half-truths can support fraud claims when they create misleading impression)
- S.E.C. v. Geswein, 2011 WL 4565898 (N.D.Ohio 2011) (excluded due to lack of official reporter citation)