Vallejo Sanitation & Flood Control District v. Fuld
903 F. Supp. 2d 152
S.D.N.Y.2012Background
- Eight consolidated Lehman securities actions in California allege false/misleading offering documents and GAAP disclosures related to Repo 105, real estate valuations, liquidity, risk management, and concentrations of credit risk.
- Plaintiffs rely heavily on the Examiner’s Report from the Lehman bankruptcy to support claims under the Securities Act, Exchange Act, and California law.
- CFAC mirrors many E/D Class Action I allegations but adds items drawn from the Examiner’s findings and dimensions not fully resolved in that action.
- Motions to dismiss target timeliness under Section 13, the sufficiency of Section 11/10(b) allegations, Section 15, and California state-law claims including Sections 25400, 25500, and 25504.
- Key issues center on Repo 105 accounting treatment, capital adequacy metrics (net leverage, VaR, stress tests), liquidity disclosures, and whether alleged misstatements were material and made with scienter.
- The court grants some motions and denies others, concluding partial success for CFAC and that several claims are time-barred or inadequately pled.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Timeliness under Section 13 | Plaintiffs contend some purchases fall within three-year repose. | Defendants argue three-year repose bars claims; several purchases untimely. | Section 13 repose time limits applied; several claims dismissed as untimely. |
| Sufficiency of remaining Section 11 claims | CFAC alleges misstatements/omissions and GAAP violations mirroring E/D Class Action I with improvements. | Many allegations fail to show misstatement, injury, or scienter; pre-purchase purchases complicate causation. | Sufficiency sustaining some Section 11 claims; others dismissed for lack of stated misstatement or causation. |
| Section 15 liability | Plaintiffs seek controlling-person liability for individual officers. | Controlling liability requires controlling a primary violator; arguments about privity and signatories are unfounded. | Section 15 claims adequately pled where based on liable primary violators; otherwise not. |
| Exchange Act: 10b-5 scienter and material misstatements | CFAC asserts scienter via Repo 105, CRE concentrations, valuation, liquidity, GAAP deviations. | Argues lack of motive and insufficient strong inference of scienter; some pre-2007 claims invalid. | scienter adequately pled for several claims (Repo 105, CRE concentrations, GAAP-related misstatements in certain periods), but not for all asserted theories. |
| California Corporations Code claims viability | Claims under 25400/25500/25504.2/25504.1 allege false/misleading statements and control/liability. | Lack of privity, proper seller, and SLUSA concerns bar state-law claims; some sections require strict privity or other elements not met. | Several sections (25400/25500; 25504/25504.1) dismissed for lack of privity or failure to plead willful intent; 25504.2 dismissed for EY as practitioner without violation of 25401. |
Key Cases Cited
- In re Lehman Bros. Sec. and Erisa Litig., 799 F.Supp.2d 258 (S.D.N.Y. 2011) (district court decision cited for context on E/D Class Action I analysis)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (requires a strong inference of scienter; balancing competing inferences)
- McMahon v. Marsh & McLennan Cos., 158 Cal.App.4th 226 (Cal. Ct. App. 2007) (privity considerations for California §25400/25500 claims)
- In re BISYS Sec. Litig., 397 F.Supp.2d 430 (S.D.N.Y. 2005) (GAAP/ scienter pleading standards in securities cases)
- Moss v. Kroner, 129 Cal.Rptr.3d 220 (Cal. Ct. App. 2011) (privity requirement for California Section 25501 §25504 claims)