DECISION AND ORDER
TABLE OF CONTENTS
I. INTRODUCTION........................................................288
II. BACKGROUND.........................................................291
A. THE PARTIES......................................................292
1. Plaintiffs and the Class............................................292
2. Officer Defendants................................................292
3. Independent Director Defendants...................................292
4. Underwriter Defendants and Senior Notes Underwriter Defendants.....293
B. FACTUAL ALLEGATIONS..........................................293
1. DTA and Net Income........................... 293
2. RTM Strategy ...................................................296
3. MF Global’s Collapse..............................................300
C. PROCEDURAL HISTORY...........................................301
III. LEGAL STANDARD.....................................................301
A. PLEADING STANDARDS: RULE 12(b)(6), RULE 8(a), RULE 9(b), AND THE PSLRA............................................ 301
1. Section 10(b) and Rule 10b-5.......................................302
a. Misstatements or Omissions of Material Fact.....................303
b. Scienter.....................................................305
2. Section 20(a).....................................................306
C. THE SECURITIES ACT.............................................308
1. Section 11 and Section 12(a)(2) .....................................308
2. Section 15(a).....................................................308
IV. DISCUSSION...........................................................309
A PLEADING STANDARDS...........................................309
1. Exchange Act Claims .............................................309
2. Securities Act Claims .............................................310
B. MATERIAL MISSTATEMENTS OR OMISSIONS......................311
1. DTA and Net Income.............................................311
a. Whether the Statements about DTA Are Opinion.................312
b. Whether the CAC Pleads Subjective and Objective Falsity.........313
c. Bespeaks Caution.............................................315
2. RTM Strategy...................................................316
a. False or Misleading Statements.................................316
b. Bespeaks Caution / PSLRA Safe Harbor.........................318
C. EXCHANGE ACT DEFENSES.......................................319
1. Strong Inference of Scienter.......................................319
2. Control Persons Claims ...........................................321
D. SECURITIES ACT DEFENSES......................................321
1. Liability for Forms 10-Q ..........................................321
2. Reliance on Audited Statements....................................322
3. Evidence of Purchase.............................................323
4. Control Persons Claims ...........................................324
V. ORDER ................................................................324
Lead Plaintiffs The Virginia Retirement System and Her Majesty The Queen In Right Of Alberta, along with several other named plaintiffs (collectively, “Plaintiffs”), individually and on behalf of all others similarly situated (the “Class”), filed this Consolidated Amended Securities Class Action Complaint (the “CAC”) against defendants Jon S. Corzine (“Corzine”), J. Randy MacDonald (“MacDonald”), and Henri J. Steenkamp (“Steenkamp”; collectively, the “Officers” or the “Officer Defendants”); defendants David P. Bolger, Eileen S. Fusco, David Gelber, Martin J. Glynn, Edward L. Goldberg, David I. Schamis, and Robert S. Sloan (collectively, the “Independent Directors” or the “Independent Director Defendants”);
I. INTRODUCTION
If ever there was a federal securities fraud case that offered the parties a unique opportunity to depart from scripted litigation strategy and give Rule 1 of the Federal Rules of Civil Procedure a fair chance, this was it: an action that could have served as a prime candidate for litigants to test that exceedingly rare prospect.
At the initial conference on this matter, the Court likened the events surrounding the catastrophic collapse of MF Global Holdings Limited (“MF Global” or the “Company”) in the closing days of October of 2011 to a massive train wreck in which thousands of people — passengers, crew, bystanders, and others — were seriously injured upon sudden impact with a force the
The Court’s train wreck analogy was meant as a hint giving a form of guidance. As the doctrine of res ipsa loquitur suggests, when an unusual accident strikes during the particular defendant’s watch and control over the circumstances, especially in a case of immense magnitude such as the disaster at issue here, some facts about the calamity’s proximate cause may be presumed: at minimum that someone somewhere did something wrong — and presumably not anyone directly hurt by the misfortune. Bearing this premise in mind as a starting point, the Court’s observation suggested a practical framework within which the parties could examine the legal issues the case raises and consider pursuing the exceptional route to the most speedy, economical, and just resolution possible. With the assumption up front that something here went terribly awry, the parties could more easily turn to the search for relevant evidence, thus enabling them much sooner to sort out legal issues and to apportion responsibility in a manner consistent with the fuller record. Unfortunately, the suggestion of such an economical shortcut held no sway. Apparently, efficiency was not in the cards.
And so, before further investigation into Plaintiffs’ claims as to what set in motion such an extraordinary chain of events, Defendants seem convinced that no one named in this lawsuit could possibly have done anything wrong. So confident are they of the validity of this perception that, at what must have amounted to an enormous expenditure of money, time and energy,
MF Global’s demise, however, is not a complete mystery. In their CAC, Plaintiffs compiled an extensive factual recitation, which the Court must accept as true for the purposes of ruling on Defendants’ motions, comprising 695 paragraphs, filling 218 pages, and pleading 14 claims of unlawful conduct arising from the events leading to the eventual disintegration and bankruptcy of MF Global on October 31, 2011. As detailed below, Plaintiffs’ allegations suggest a long, knowing, and consistent course of action on the part of the various Defendants, wrongful conduct that cumulatively produced the harmful outcome that came to pass. Moreover, this account is not based on pure speculation or the traditional pleading foundation grounded primarily upon information and belief. Rather, Plaintiffs’ portrayal of the facts possesses an added measure of reliability and plausibility. It draws heavily from the public record of information generated by various investigations performed by government regulators and congressional committees.
Despite these dire signs of mounting crisis, MF Global continued to issue securities in public exchanges, repeatedly assuring investors that everything at the Company was running smoothly, that it possessed sufficient liquidity to cover its financial exposure, and that it had put in place strong internal controls sufficient to check against any management failures.
Plaintiffs purchased MF Global securities issued while, unknown to them, these circumstances were internally-unfolding and the company was unraveling. They brought suit against the numerous Defendants they claim were aware of the events and contributed to bringing them about, specifically the MF Global officers, directors, and underwriters — all twenty-three of them.
Defendants, all twenty-three of them, now ask the Court to dismiss the complaint — every claim in it. Curiously, they suggest that Plaintiffs’ exhaustive pleadings give Defendants both too much detail and too little — more information than necessary to present a concise statement of the facts, and yet not enough to give Defendants fair notice of why they are being sued. By Defendants’ account, and giving a broad interpretation to the logic and end result of their theories, nothing happened at MF Global for which a single one of the twenty-three Defendants could possibly bear any legal responsibility. As Defendants read the complaint and construe the applicable statutes, nothing in law or legal theory now exists — not even simple negligence principles — under which any of the individuals and entities involved in MF Global’s management, or in its issuance of securities during the Company’s destruction, can be held accountable for any of the wrongdoing that Plaintiffs claim.
Accordingly, upon a review of Defendants’ numerous motions in the light of Plaintiffs’ account of facts which the Court accepts as true, the Court is not persuaded by Defendants’ arguments. In evaluating the application of the law that Defendants argue would allow the outcome they seek at this stage of the litigation, the Court’s assessment may be simply stated: It cannot be. Thus, for the reasons stated below, Defendants’ motions are DENIED.
II. BACKGROUND
Plaintiffs’ asserted claims arise from events that led to the 2011 collapse of MF Global.
A. THE PARTIES
1.Plaintiffs and the Class
Plaintiffs assert that they bring this action “individually and on behalf of a proposed class of persons and entities who purchased or otherwise acquired” certain interests in MF Global between May 20, 2010 and November 21, 2011 (the “Class Period”). (CAC ¶ 1.) The Class consists of persons and entities who acquired, during the Class Period, (1) MF Global’s publicly traded securities; (2) MF Global’s common stock in a June 2010 secondary offering (the “Secondary Offering”); (3) MF Global’s 1.875% Convertible Senior Notes due February 1, 2016 (the “2016 Notes”), issued in February 2011; (4) MF Global’s 3.375% Convertible Senior Notes due August 1, 2018 (the “2018 Notes”), issued in July 2011; (5) MF Global’s 6.25% Senior Notes due August 8, 2016 (the “Senior Notes”), issued in August 2011; and (6) MF Global securities through employee benefit plans.
2. Officer Defendants
Defendant Corzine served as Chairman of the MF Global Board of Directors (the “Board”) and as Chief Executive Officer (“CEO”) of both MF Global and MF Global’s broker-dealer subsidiary, MF Global Inc. (“MFGI”), from March 23, 2010 to November 4, 2011. Defendant MacDonald served as MF Global’s Chief Financial Officer (“CFO”) from April 2008 through March 2011.
3. Independent Director Defendants
The Independent Director Defendants each served on MF Global’s Board during the Class Period. The CAC alleges that the Independent Directors had access to
4. Underwriter Defendants and Senior Notes Underwriter Defendants
The Underwriter Defendants and Senior Notes Underwriter Defendants each served as an underwriter for one or more of the public offerings at issue: the Secondary Offering, the 2016 Notes, the 2018 Notes, and the Senior Notes.
B. FACTUAL ALLEGATIONS
The CAC outlines two categories in which Defendants made material misstatements or omissions: (1) statements about MF Global’s DTA and net income, and (2) statements about MF Global’s risk appetite, internal controls, and liquidity management, particularly in light of the RTM Strategy.
1. DTA and Net Income
“Deferred Tax Assets are losses, credits and other tax deductions that may be used to offset taxable income in the future.” (CAC ¶ 84.) GAAP permits a company to record DTA as assets on its balance sheet, but only to the extent the company is “more likely than not” to realize the DTA. (Id.) The company must take a valuation allowance against — that is, not count as an asset on its balance sheet — the amount of the DTA that the company is not likely to realize.
GAAP requires the company to weigh “all available evidence, both positive and negative,” to determine whether the company should take a valuation allowance against its DTA. (CAC ¶ 92.) That a company suffered cumulative losses in recent prior years is significant negative evidence against recording DTA. In the face of such evidence, the company must have counteracting positive evidence in order to support its decision not to take a valuation allowance against its DTA. Such positive evidence can include tax planning strategies if those strategies are prudent and feasible and would result in later realization of the company’s DTA.
As of the 2010 fiscal year, which ended on March 31, 2010, MF Global had suffered cumulative losses over its previous three fiscal years, both in its U.S. operations and worldwide. During that time, MF Global primarily performed client-based commodities broker services and earned income through commission fees and interest on client accounts. As interest rates fell in the late 2000s, MF Global lost a substantial part of its income base. New CEO Corzine sought to turn around the Company’s fortunes by turning MF Global into an investment bank. The Company implemented a plan to complete that conversion in three to five years.
On May 20, 2010 — the first day of the Class Period — MF Global issued a press release to report its financial results for both the fourth quarter of the 2010 fiscal year and for the full fiscal year. The press release claimed that MF Global’s financial statements were prepared in accordance with GAAP. MF Global did not take a valuation allowance against its DTA. In an investor conference call held that same day, MacDonald indicated that the DTAs in issue were not “as at risk”
On August 5, 2010, MF Global issued a press release with its financial results for the first quarter of the 2011 fiscal year. The results, which claimed to be in accordance with GAAP, showed a small profit. In a conference call held that same day, Corzine emphasized that MF Global had “returned to profitability for the first time in six quarters on a GAAP basis.” (CAC ¶ 339.) While Corzine and MacDonald noted that MF Global would have to write down some of its DTA, MacDonald assured investors that the remaining DTA was “not as at risk.” (CAC ¶ 340.) The next day, August 6, MF Global filed its Form 10-Q for the first quarter of the 2011 fiscal year with the SEC. The Form 10-Q was signed by Corzine and MacDonald and also contained the financial results in the press release, purportedly in accordance with GAAP.
MF Global made similar disclosures in November 2010 (for the second quarter of the fiscal year) and February 2011 (for the third quarter of the fiscal year). The Company continued not to record a valuation allowance against its DTA and to represent that its financial statements were in accordance with GAAP. MF Global’s Form 10-Q for the third quarter of fiscal year 2011, filed with the SEC on February 3, 2011 and signed by Corzine and MacDonald, specifically noted that MF Global had not taken a valuation allowance against its DTA “because the Company believes that it is more likely than not that these deferred tax assets will be realized in the future. Although realization is not assured, the Company anticipates that realization of these assets will occur.” (CAC ¶ 373.)
In May 2011, MF Global disclosed financial information for the fourth quarter of fiscal year 2011 and for the full fiscal year; again, the financial information was purportedly prepared in accordance with GAAP. On its 2011 Form 10-K, filed with the SEC on May 20, 2011 and signed by all Individual Defendants except MacDonald, MF Global reported a DTA valuation allowance of $19.5 million and a net DTA of $108.3 million. The 2011 Form 10-K included the following disclosure about DTA, identical to the disclosure on the 2010 Form 10-K: “We have recorded significant deferred tax assets reflecting our expectation of using these loss carryforwards against future income. If we are not able to generate profits in these jurisdictions in future periods, we may be required to record valuation allowances against these deferred tax assets.” (CAC ¶ 390.)
The 2011 Form 10-K, unlike the 2010 Form 10-K, offered a justification for MF Global’s decision not to take a valuation allowance against the full DTA. The 2011 Form 10-K acknowledged that MF Global
The first is the reversal of existing taxable temporary differences. Second, we forecast sufficient taxable income in the carry forward period. We believe that future projections of income can be relied upon because the income forecasted is based on key drivers of profitability that we began to see evidenced in fiscal 2011. Most notable in this regard are plans and assumptions relating to the significant changes to our compensation structure implemented in fiscal 2011, increased trading volumes, and other macro-economic conditions. Third, in certain of our key operating jurisdictions, we have a sufficient tax planning strategy which includes potential shifts in investment policies, which should permit realization of our deferred tax assets. Management believes this strategy is both prudent and feasible.
(CAC ¶ 392.) MF Global’s Form 10-Q for the first quarter of fiscal year 2012, filed with the SEC on August 3, 2011, included substantially the same disclosures.
The CAC attacks the sufficiency of each category of positive evidence. According to the CAC, GAAP rules generally do not permit projections of future income to overcome the negative evidence from cumulative losses in recent years. The CAC also alleges that MF Global’s new investment strategy, described in detail below, was high-risk and unsustainable, such that MF Global’s “projections of future income were not sufficient ‘positive evidence’ to avoid taking a full valuation allowance against the Company’s U.S. DTA.” (CAC ¶ 121.)
The CAC also claims that projections of increased income from MF Global’s changes in compensation structure “were unreliable and, more importantly, could not have offset the Company’s DTA.” (CAC ¶ 122.) The CAC alleges that MF Global’s increased hiring in certain areas offset layoffs in other areas, such that the Company did not achieve its target compensation-to-revenue ratio.
Finally, the CAC notes that tying MF Global’s tax planning strategies to its “shifts in investment policies” could not offset the Company’s DTA. To the contrary, the CAC claims, “the Company was simply unable to engage in any ‘shifts in investment policies’ without first incurring significant additional liquidity strains or losses ... neither of which was ‘prudent’ or ‘feasible.’ ” (CAC ¶ 135.)
Eventually, MF Global determined that it could no longer avoid taking a valuation allowance against its DTA. On October 25, 2011, MF Global issued a press release with its financial results for the second quarter of fiscal year 2012. The Company reported a loss of $191.6 million. A valuation allowance of $119.4 million against MF Global’s DTA accounted for more than half of the loss. According to Steenkamp, most of that valuation allowance was taken against the Company’s U.S. DTA. The
2. RTM Strategy
When Corzine was named MF Global’s CEO, he faced pressure from credit rating agencies to demonstrate that the Company could be profitable in the future. To achieve this goal, Corzine implemented the RTM Strategy, also known within MF Global as the “Corzine Trade,” beginning in July 2010. As MF Global began to implement the RTM Strategy, Corzine emphasized several times that the Company’s new business plan was done to support the Company’s client-based services. The strategy involved coordination between MFGI and MF Global U.K. Limited (“MFG-UK”), which was MF Global’s affiliate in the United Kingdom. Plaintiffs allege that Corzine “communicated with MFGI and MFG-UK personnel directly to carry out these RTM transactions.” (CAC ¶ 155.)
The RTM Strategy worked as follows: first, MFG-UK purchased European sovereign debt securities on the London Clearing House (“LCH”) exchange. MFG-UK then sold those securities to MFGI. Next, MFGI and MFG-UK entered into an RTM agreement. MFGI thus sold the securities to MFG-UK while the firms simultaneously entered a contract for MFGI to repurchase the securities on the securities’ maturity dates, at the same price plus a pre-negotiated interest payment. MFG-UK, which now owned the securities, then engaged in a similar repurchase transaction with a counterparty through the LCH. The repurchase date on that transaction was scheduled for two days before the securities’ maturity date. MFG-UK thus bore the risk of default on the security, and MFGI was responsible for maintaining liquidity to cover the possible default. MFGI was also expected to provide MFG-UK with funds to cover margin calls or anticipated margin calls from the LCH.
The RTM Strategy provided MF Global with several accounting advantages. First, the RTM transactions could be counted as sales, rather than as loans, even though MFGI and MFG-UK were contractually obligated to repay the final counterparty for the securities. The obligation to repay was thus “de-recognized” — it did not appear as a liability on MF Global’s balance sheet. The RTM transactions also allowed MF Global to report the transactions as gains at the time of the sale, notwithstanding the subsequent obligation to repay the sale price. Finally, because no liability appeared on MF Global’s balance sheet, the RTM transaction did not factor into MF Global’s value-at-risk (“VAR”) calculations. Plaintiffs allege that the RTM Strategy thus allowed MF Global “to invest in high-risk assets while keeping them off its balance sheet, frontload gains and tout misleading VAR metrics — all of which created the artificial appearance of a turnaround in the Company’s ailing business.” (CAC ¶ 146.)
The RTM Strategy also exposed MF Global “to market risk, liquidity risk and capital risk.” (CAC ¶ 160.) Market risk existed due to the possibility that the securities might default or be restructured. MF Global also was subject to margin calls from counterparties and to regulatory capital reserve requirements. When the security traded in the RTM transaction fell in value, MFGI was subject to corresponding margin calls that strained liquidity. A failure to post the required margin could cause MFGI to default on the transaction and require MF Global to repurchase the security at that time.
By mid-September 2010, MF Global had breached that trading limit. Corzine sought to increase the trading limit to $1.5 billion and also took steps to move the RTM transactions off of MF Global’s balance sheet. Roseman again expressed concern over MF Global’s exposure. But despite Roseman’s concern, MF Global’s exposure to sovereign debt continued to increase, reaching $3.5 to $4.0 billion in late October 2010 — even though the trading limit had not yet been increased.
Corzine asked Roseman to request from the Board an increase in the trading limit to $4.75 billion. Roseman expressed concerns about the capital and liquidity risks associated with the increase, and he presented those concerns both to Corzine and to the Board. At a November 2010 meeting, the Board approved the request and increased the trading limit to $4.75 billion.
Even after the November 2010 Board meeting, Roseman continued to express his concerns to Corzine. MF Global eventually dismissed Roseman as CRO in early 2011. Several former MF Global employees believe “that Roseman was fired because he warned senior management that the Company was taking on too much risk.” (CAC ¶ 187.) Other MF Global employees shared Roseman’s concerns. But the person hired to replace Roseman, Michael Stockman (“Stockman”), publicly supported Corzine’s risk management strategy.
In mid-January 2011, the MF Global Board forbade any increase in the European sovereign debt portfolio without express permission from the Board. Yet on February 3, 2011, MF Global exceeded that limit; Corzine, though made aware of the breach, did not inform the Board. Instead, in mid-February 2011, Corzine and Stockman sought an increase in the trading limit from $4.75 billion to $5 billion, with a temporary increase to $5.8 billion until March 31, 2011. Some Board members “expressed concerns about the level of exposure,” but the Board approved the increase. (CAC ¶ 200.) In March 2011, the Board granted a request from Corzine and Stockman to extend the temporary $5.8 billion limit until September 2011.
By April 27, 2011, the trading limits had been breached yet again. Corzine directed Stockman to prepare a request to increase the European sovereign debt trading limit to $9.75 billion. Stockman, for the first time, expressed concerns to Corzine about MF Global’s ability to support its RTM Strategy. The Board approved the request only in part, increasing the trading limit to $6.6 billion.
The Board heard other concerns about MF Global’s risk management during the Class Period. An April 2010 report from the Company’s Internal Audit Department (the “IAD”) noted that technological limitations prevented MF Global from accurately forecasting liquidity risks. A May 2010 report from the IAD expressed concerns with MF Global’s ability to handle the risks associated with its expansion beyond its traditional client facilitation services. Months later, an October 2010 report from the IAD noted the same problems. The October 2010 report “expressed concern that the absence of reliable liquidity reporting tools” and the excessive dependence on assistant treasurer Edith O’Brien (“O’Brien”) to manage li
Technological concerns and limitations lasted into 2011. In March 2011, an IAD report noted that some regulatory reports were produced through spreadsheets that were “typically not secure and [were] susceptible to human error.” (CAC ¶212.) A June 2011 IAD report referred to liquidity monitoring and forecasting as “manual and limited” and also identified “numerous and significant gaps between the policy and existing practices.” (CAC ¶ 213.) Plaintiffs allege that these issues were not addressed
Plaintiffs allege that, in light of the risks that the RTM Strategy posed to MF Global and in light of the Company’s risk management weaknesses, MF Global’s public statements on those subjects were inadequate. In MF Global’s May 20, 2010 press release, Corzine suggested that the Company would seek to expand its activities only after “ensuring] the appropriate controls [were] in place.” (CAC ¶ 325.) Cor-zine made similar representations on a May 20, 2010 investor conference call.
MF Global’s 2010 Form 10-K touted the Company’s risk management. The form also recognized that any new strategies would be conducted within that risk management scheme:
We expect to increasingly recognize trading income as part of our ongoing activity for our clients in various markets, and to selectively increase our risk taking, generally making fuller use of our current risk appetite and operating within the authority delegated by our board of directors.
(CAC ¶ 330.) The 2010 Form 10-K stated that MF Global would “consider the inherent operational risk in new products, systems, and business activities as they are developed or modified.” (CAC ¶ 332.) Finally, the 2010 Form 10-K assured investors that MF Global would maintain sufficient capital and liquidity to respond to the risks of market events. The same disclosure appeared in several of MF Globafl’s subsequent SEC filings.
MF Global’s 2011 Form 10-K contained similar disclosures. The form emphasized that MF Global’s new investment strategies would take place “within the authority delegated by [its] Board of Directors.” (CAC ¶ 400.) The 2011 Form 10-K discussed how MF Global’s Operational Risk Management Framework “establishes an effective environment” to create risk controls and “to help ensure transparency, awareness, and accountability of risks.” (CAC ¶ 407.) According to the 2011 Form 10-K, MF Global operated within “defined risk mandates as delegated by the CRO” and tracked compliance through end-of-day and intra-day monitoring. (CAC ¶ 409.)
The Officer Defendants also stressed MF Global’s commitment to risk management in various other public statements. For example, in an August 5, 2010 earnings call, MacDonald stated that “the Company maintains a strong liquidity position.” (CAC ¶ 346.) Corzine and MF Global also downplayed the risks that the Company faced. Corzine told investors that the Company was “not taking enormous market risk in executing [its] strategy.” (CAC ¶ 349.)
MF Global’s August 6, 2010 Form 10-Q similarly stated that MF Global’s business
MF Global did not openly acknowledge the exposure and risk resulting from the RTM Strategy until its February 3, 2011 Form 10-Q. The disclosure came in response to a request from MF Global’s outside auditor, PricewaterhouseCoopers LLP, for the Company to publicly disclose its RTM exposure. That disclosure read as follows:
The Company also enters into securities financing transactions that mature on the same date as the underlying collateral. The Company accounts for these transactions in accordance with the accounting standard for transfers and servicing and recognizes a gain or loss on the sale/purchase of the collateral assets, and records a forward commitment. The Company derecognizes the collateral assets as sold when the transactions are accounted for as sales, and recognizes the collateral assets as purchased when the transactions are accounted for as purchases. In these transactions, the Company has exposure to the risk of default of the issuer of the underlying collateral assets, such as U.S. government securities or European sovereign debt.
(CAC ¶ 384.) The February 3, 2011 Form 10-Q identified $7.56 billion in derecognized RTM transactions, but contained no further discussions of the specific risks that the RTM Strategy posed. Similarly, the 2011 10-K and the August 3, 2011 Form 10-Q identified the value of derecognized RTM transactions, but did not further disclose any risks from those transactions.
MF Global’s disclosure in its 2011 Form 10-K garnered attention from federal regulators. The Financial Industry Regulatory Authority (“FINRA”) expressed its concern that, because the RTM transactions exposed MF Global to market and credit risks, MF Global might not have enough capital reserves to cover risks caused by the RTM Strategy and to comply with SEC rules. MF Global resisted FINRA’s attempts to change MF Global’s capital requirements, and Corzine made a personal appeal to SEC regulators. But the SEC accepted FINRA’s interpretation of the SEC rules, and FINRA required MF Global to reserve further capital to cover the RTM transactions. On September 1, 2011, MF Global filed a Form 10-Q/A that amended its previous Form 10-Q to comply with FINRA’s ruling.
What MF Global did not disclose, Plaintiffs allege, is that MF Global met those capital requirements only through intracompany transfers. Moreover, the CAC claims, the required change “had a devastating (but undisclosed) impact on the Company’s already-existing liquidity problem” and forced MF Global to rely on more intra-day transfers to meet liquidity demands. (CAC ¶ 236.) The intra-day transfers included use of funds associated with MF Global’s traditional futures commission merchant (“FCM”) activities — including from accounts involving customer funds.
At the same time, MF Global and its officers sought to assure investors that the RTM Strategy posed minimal risks. At a July 9, 2011 conference, Corzine suggested that MF Global’s principal trading activi
Indeed, Corzine and Steenkamp held firm on these claims even while MF Global was on the brink of collapse. On October 24, 2011, MF Global issued a letter from Steenkamp that declared that MF Global’s RTMs posed a “limited market risk.” (CAC ¶ 447.) And on October 25, 2011, Corzine stated on an investor conference call that “the structure of the [RTM] transaction^] themselves essentially eliminates market and financing risk.” (CAC ¶ 452.)
3. MF Global’s Collapse
Just before MF Global filed its October 25, 2011 Form 10-Q — in which the Company took the $119.4 million valuation allowance against its DTA — MF Global’s senior management informed credit rating agencies that it was about to report a substantial loss. As a result, Moody’s downgraded MF Global’s debt to just above junk status.
Moreover, the RTM Strategy began to unravel. MF Global’s counterparties demanded additional margin to cover the transactions, which in turn raised eyebrows among investment exchanges and government regulators. The credit ratings agencies also downgraded MF Global’s debt yet again, with Moody’s and Fitch lowering MF Global’s debt rating to junk status.
MF Global struggled to meet the increased liquidity demands. On October 28, 2011, the Company overdrafted one of its accounts with J.P. Morgan Chase & Co. MF Global transferred money from another account to compensate, but that transfer raised questions about whether MF Global had improperly used segregated customer funds from its FCM operations to cover the overdraft.
MF Global sought to sell off its assets to obtain the necessary liquidity. On October 30, 2011, the Company reached an agreement to sell its assets to another company, Interactive Brokers, for $1 billion. But that deal fell through when the customer funds shortfall came to light. MF Global declared bankruptcy on October 31. In the end, MF Global’s FCM operations had a $1.6 billion shortfall in customer accounts — $900 million in domestic accounts and $700 million in foreign accounts.
On November 3, 2011, Joseph Deangelis brought the first action in this case. (Dkt. No. 1.) The Court has, as necessary, consolidated related actions under this docket. By Order dated January 20, 2012, the Court appointed The Virginia Retirement System and Her Majesty The Queen In Right Of Alberta as Lead Plaintiffs and approved the selection of Bernstein Litowitz Berger & Grossman LLP and Labaton Sucharow LLP as Co-Lead Counsel for all claims brought under the Exchange Act and the Securities Act.
III. LEGAL STANDARD
Plaintiffs’ fourteen-count CAC is divided into five sets of claims. Counts One and Two allege Exchange Act violations against the Officer Defendants; Count One alleges primary violations under Section 10(b) and Rule 10b-5, and Count Two alleges control person violations under Section 20(a).
Counts Three, Four, and Five bring Securities Act claims relating to the Secondary Notes. Count Three alleges Section 11(a) violations by the Individual Defendants and the Underwriter Defendants who underwrote the Secondary Notes. Count Four alleges violations of Section 12(a)(2) against those same Underwriter Defendants. Count Five alleges Section 15(a) control person violations by the Officer Defendants.
Counts Six, Seven, and Eight parallel Counts Three, Four, and Five with respect to the 2016 Notes; these counts allege Securities Act violations against the Individual Defendants and the Underwriter Defendants who underwrote the 2016 Notes.
A. PLEADING STANDARDS: RULE 12(b)(6), RULE 8(a), RULE 9(b), AND THE PSLRA
Rule 12(b)(6) permits dismissal of a complaint for “failure to state a claim upon which relief can be granted.” Fed. R.Civ.P. 12(b)(6). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal,
Federal Rule of Civil Procedure 8(a) (“Rule 8(a)”) requires only a “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed. R.Civ.P. 8(a)(2). Where Rule 8(a)’s pleading standard governs, dismissal is improper as long as the complaint furnishes adequate notice of the basis of the plaintiffs claim and “relief could be granted under [some] set of facts consistent with the allegations.” In re Global Crossing, Ltd. Sec. Litig., No. 02 Civ. 910,
However, plaintiffs claiming securities fraud under the Exchange Act must also satisfy the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) (“Rule 9(b)”) by “staffing] with particularity the circumstances constituting fraud.” Fed.R.Civ.P. 9(b); see ATSI Commc’ns, Inc. v. Shaar Fund, Ltd.,
Exchange Act complaints must also meet the pleading requirements of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). See Kalnit v. Eichler,
B. THE EXCHANGE ACT
1. Section 10(b) and Rule 10b-5
In pertinent part, Section 10(b) declares it unlawful for any person, directly or indirectly, by the use of any means of interstate commerce, the mails, or a national securities exchange,
[t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities arid Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
15 U.S.C. § 78j(b).
Rule 10b-5, promulgated by the SEC to implement Section 10(b), “more specifically delineates what constitutes a manipulative or deceptive device or contrivance.” Press v. Chemical Inv. Servs. Corp.,
(a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5. Section 10(b) operates as a broad prohibition against manipulation, whether in the form of false statements or market manipulation. See United States v. Royer,
Plaintiffs in this case allege misrepresentations or omissions of material fact. To state a claim for misrepresentations or omissions, a plaintiff must allege that the defendant “(1) made misstatements or omissions of material fact, (2) with scienter, (3) in connection with the purchase or sale of securities, (4) upon which the plaintiff relied, and (5) that the plaintiffs reliance was the proximate cause of its injury.” ATSI Commc’ns,
a. Misstatements or Omissions of Material Fact
In order to satisfy Rule 9(b) and PSLRA pleading requirements, “[a] securities fraud complaint based on misstatements must (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were ‘fraudulent.’ ” Id. at 99. An omission is actionable “only when the [defendant] is subject to a duty to disclose the omitted facts.” In re Time Warner Inc. Sec. Litig.,
i. Materiality
Whether a misstatement or omission is material is “an inherently fact-specific finding that is satisfied when a plaintiff alleges a statement or omission that a reasonable investor would have considered significant in making investment decisions.” Litwin v. Blackstone Grp. L.P.,
ii. Bespeaks Caution and PSLRA Safe Harbor
Under the “bespeaks caution” doctrine, “[a] forward-looking statement
Vague disclosures of general risks will not protect defendants from liability. Instead, the relevant cautionary language must be “prominent and specific,” and must directly address “exactly the risk that plaintiffs claim was not disclosed.” Olkey v. Hyperion 1999 Term Trust, Inc.,
The bespeaks-caution doctrine applies only to forward-looking statements. See Iowa Pub. Emps. Ret. Sys.,
The PSLRA contains a safe harbor provision that is “closely related” to the bespeaks caution doctrine. In re General Elec. Co. Sec. Litig.,
iii. Puffery
“Puffery is an optimistic statement that is so vague, broad, and nonspecific that a reasonable investor would not rely on it, thereby rendering it immaterial as a matter of law.” In re General Elec. Co.,
iv. Misstatements of Opinion
In addition to misstatements or omissions of fact, statements of opinion or belief are also actionable under Section 10(b) and Rule 10b-5. See City of Omaha, Neb. Civilian Emps.’ Ret. Sys. v. CBS Corp.,
b. Scienter
Scienter, “a mental state embracing intent to deceive, manipulate, or defraud,” Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
A complaint has sufficiently alleged “motive and opportunity to commit fraud” if it pleads facts showing that the
Where plaintiffs fail to allege scienter through motive and opportunity, the securities fraud claim may still be sufficiently stated by allegations demonstrating “strong circumstantial evidence of conscious misbehavior or recklessness,” Kalnit,
Finally, “in determining whether the pleaded facts give rise to a ‘strong’ inference of scienter, the court must take into account plausible opposing inferences.” Tellabs,
2. Section 20(a)
Section 20(a) of the Exchange Act provides:
Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable ... unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.
15 U.S.C. § 78t(a). Liability for Section 20(a) violations thus is derivative of liability for Section 10(b) violations. See Securities & Exchange Comm. v. First Jersey Sec., Inc.,
To establish the second element of control over the primary violator, a plaintiff must show that the defendant possessed “the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.” 17 C.F.R. § 240.12b-2; see also First Jersey,
Because fraud is not an essential element of a Section 20(a) claim, Plaintiffs need not plead control in accordance with the particularity required under Rule 9(b). See In re Bristol Myers Squibb Co. Sec. Litig.,
However, the heightened pleading standards of the PSLRA apply with respect to the third prong of a Section 20(a) claim, which requires plaintiffs to allege facts demonstrating that the defendant was a culpable participant. See Alstom III,
C. THE SECURITIES ACT
1. Section 11 and Section 12(a)(2)
Section 11 imposes liability on issuers, directors of issuers, and other signers of a registration statement that contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein not misleading. See 15 U.S.C. § 77k(a). Section 12(a)(2) similarly imposes liability for selling or offering a security by means of a prospectus that includes an untrue statement of material fact or omits a material fact necessary to make such statements not misleading. See 15 U.S.C. § 77J(a)(2). Under either section, “a plaintiff must show that the relevant communication either misstated or omitted a material fact.” Iowa Pub. Emps.’ Ret. Sys.,
The Court notes that its previous discussion about misstatements or omissions of material facts with respect to Exchange Act claims applies equally to Securities Act claims, see In re Morgan Stanley Info. Fund Sec. Litig.,
2. Section 15(a)
Section 15(a) of the Securities Act provides that a person who controls a person liable under Section 11 or Section 12
shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.
15 U.S.C. § 77o(a). The provision thus requires proof of “a ‘primary violation’ ” of the statute “and control of the primary violator by defendants.” In re Lehman Bros. Mortg.-Backed Sec. Litig.,
The Second Circuit has reserved decision on whether the proof of “culpable participation” required in Section 20(a) claims also applies to Section 15(a) claims. In re Lehman Bros.,
IY. DISCUSSION
A. PLEADING STANDARDS
1. Exchange Act Claims
Corzine alleges that Counts One and Two should be dismissed for failure to meet the requirements of Rule 8(a), Rule 9(b), and the PSLRA. According to Cor-zine, the CAC is not “simple, concise, and direct.” (Corzine’s Motion, p. 3.)
The CAC separates its list of alleged misstatements into statements made in each fiscal quarter from the fourth quarter of fiscal year 2010 to the second quarter of fiscal year 2012. Within the section for each fiscal quarter, the CAC separates out the statements made with respect to MF Global’s DTA and net income and the statements made with respect to MF Global’s risk appetite, internal controls, and liquidity management. Then, each subsection lists the various alleged misstatements or omissions during that time period and category. Each allegation contains the statement’s source and, where appropriate, highlights through bold text the particular parts of the statement alleged to be inadequate. Finally, each subsection concludes with a paragraph containing reasons why the preceding statements were false or misleading.
The Court finds that the CAC satisfies the particularity requirements of Rule 9(b) and the PSLRA. The CAC “specifically identifies] the date, publication and speaker of each of the alleged misstatements or omissions” and “contain[s] facts supporting the existence and materiality of these problems.” In re NTL, Inc. Sec. Litig.,
The Court also acknowledges that, in some respects, Plaintiffs are stuck between the proverbial rock of Rule 8(a) and the proverbial hard place of Rule 9(b) and the PSLRA. See In re Countrywide Fin. Corp. Sec. Litig.,
The Court is convinced that the CAC sufficiently achieves the goals embodied within Rule 8(a), Rule 9(b), and the PLSRA, which are “to provide a defendant with fair notice of a plaintiffs claim, safeguard his reputation from improvident charges of wrongdoing, and protect him against strike suits.” ATSI Commc’ns,
2. Securities Act Claims
While Exchange Act claims require proof of fraud and must always be pled with particularity, Securities Act claims must be pled with particularity only where “the gravamen of the complaint is plainly fraud.” Rombach,
The Independent Director Defendants seize on this disclaimer to argue that the Securities Act claims do, in fact, sound in fraud and must be pled with particularity. (Independent Directors’ Motion, p. 9-10.) The Independent Directors suggest that Plaintiffs’ claim that any opinions were false when made turns the Securities Act claims into claims requiring proof of fraud, which in turn requires Plaintiffs to plead those claims with particularity under Rule 9(b). See In re Deutsche Bank AG Sec. Litig., No. 09 Civ. 1714,
In the alternative, the Independent Directors argue (Independent Directors’ Motion, p. 10) that the CAC does not sufficiently separate its Exchange Act claims (which do allege fraud) from its Securities Act claims (which purport not to allege fraud). Compare In re Adelphia Commc’ns Corp. Sec. & Derivative Litig., No. 03 MD 1529,
B. MATERIAL MISSTATEMENTS OR OMISSIONS
1. DTA and Net Income
Plaintiffs allege that MF Global’s public statements contained false or misleading statements or omissions about MF Global’s DTA and net income because “the Company failed to timely record a valuation allowance against its U.S. DTA in violation of GAAP.” (CAC ¶¶ 324, 342, 357, 374, 393, 421.) Plaintiffs claim that the valuation allowance should have been taken earlier because
(1) MF Global’s U.S. operations were operating at a three-year cumulative loss as of March 31, 2010; (2) MF Global did not have evidence “of sufficient quality and quantity to counteract [that] negative evidence” since it was relying on, at best, “unsettled” events dependent on future market conditions that had not yet been demonstrated; (3) MF Global’s projections of income were unreliable and dependent on the undisclosed, unsustainable and high-risk Cor-zine Trade (and only 20% of the profits from the Corzine Trade could be recorded as revenues in connection with the Company’s U.S. operations); (4) MF Global’s plans to realize costs savings from changes to the Company’s compensation structure were unreliable and insufficient to offset losses and benefit from the Company’s U.S. DTA, especially since any costs savings were partiallyoffset by increases in payroll expenses due to increased professional headcount; and (5) MF Global did not have “prudent” and “feasible” tax strategies that would have enabled it to avoid recording a full valuation allowance against its U.S. DTA.
(CAC ¶¶ 324, 342, 357, 374, 393, 421.) Defendants claim that the statements made about DTA were not materially false or misleading and raise various arguments in support. The Court addresses these arguments in turn.
a. Whether the Statements about DTA Are Opinion
At the threshold, the Court must determine whether the statements made about MF Global’s DTA were statements of opinion, as the Underwriters and Senior Notes Underwriters (joined by the other defendants) claim. (Underwriters’ Motion, p. 17-19; Senior Notes Underwriters’ Motion, p. 21.) If those statements are opinions, then they are actionable only if they “were both false and not honestly believed at the time they were made.” Fait,
While Fait explained the circumstances under which an opinion can be actionable, it did not comprehensively delineate the difference between a statement of opinion and a statement of fact. At issue in Fait was whether statements about the value of a company’s “goodwill” constituted fact or opinion. See id. at 110. The Second Circuit noted that the value of the company’s goodwill depended on a “determination of the ‘fair value’ of the assets acquired and liabilities assumed, which are not matters of objective fact.” Id. The court also observed that the plaintiff did not identify an “objective standard” that the defendant “should have but failed to use in determining the value of’ the company’s goodwill. Id. The Second Circuit concluded that “the statements regarding goodwill at issue here are subjective ones rather than ‘objective factual matters.’ ” Id. at 111 (quoting I. Meyer Pincus & Assocs., P.C. v. Oppenheimer & Co., Inc.,
Fait also considered whether statements about the company’s reserves to cover for potentially lost loans constituted statements of fact or opinion. See id. at 112-13. The Second Circuit noted that determinations of loan loss reserves, like determinations of goodwill, “reflect management’s opinion or judgment about what, if any, portion of amounts due on the loans ultimately might not be collectible.” Id. at 113. And the court noted that plaintiff again failed to identify “an objective standard for setting loan loss reserves.” Id. Thus, the court ruled that statements about loan loss reserves are opinions, rather than statements of facts. Id.
The Court finds that, under Fait’s reasoning, statements about the realization of DTA are statements of opinion, not of fact. The GAAP standard on which Plaintiffs rely required MF Global’s management to weigh the available evidence and determine whether the DTA was “more likely than not to be realized.” (CAC ¶ 91.) Determining whether to take a valuation allowance against DTA is thus subject to “a very subjective standard.” In re Fannie Mae 2008 Sec. Litig.,
Plaintiffs’ arguments to the contrary (Plaintiffs’ Opposition, p. 12-15) are unpersuasive. While Plaintiff's are correct that the GAAP standard references the presence of “objectively verified” evidence (CAC ¶ 97), the reference relates only to one factor that affects the subjective weighing of positive and negative evidence. The final decision of whether to take a valuation allowance against DTA still requires substantially subjective judgments. Cf. Compuware Corp. v. Moody’s Investors Servs., Inc.,
b. Whether the CAC Pleads Subjective and Objective Falsity
Because the Court concludes that MF Global’s statements about its DTA were opinions, it must next determine whether the statements “were both false and not honestly believed at the time they were made.” Fait,
First, the Court finds that Plaintiffs plausibly allege that MF Global’s statements about its DTA were objectively false. Most significantly, MF Global’s United States operations were in a three-year loss position at the start of the Class Period, which served as significant negative evidence against recognizing the DTA. See Hoff v. Popular, Inc.,
The CAC further alleges weaknesses in the positive evidence that MF Global used to justify its DTA position. According to the CAC, MF Global’s projections of increased income based on the RTM Strategy could not serve as sufficient positive evidence because it was high-risk and unsustainable. See Hoff,
Finally, the fact that MF Global took some small valuation allowances against its DTA during the Class Period makes it more plausible that the Company’s failure to take an allowance against the full value of its DTA was materially misleading. See In re Scottish Re,
To be sure, some courts have dismissed securities fraud complaints that were based on a company’s failure to take a timely valuation allowance against its DTA. But in those cases, the facts pled did not support a plausible claim of falsity. See Kuriakose,
The Court also finds that the CAC plausibly alleges that the Officer Defendants did not honestly believe their stated opinions.
Of course, a person’s mere knowledge of facts that cut against his opinion does not conclusively prove subjective falsity. But at this stage of the proceedings, Plaintiffs need only allege facts giving rise to a reasonable inference of liability. The Court finds that Plaintiffs plausibly allege subjective falsity; a fact finder can later determine whether the evidence sufficiently proves subjective falsity. See Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc.,
c. Bespeaks Caution
The Securities Act Defendants claim that the bespeaks-caution doctrine precludes liability for statements made about MF Global’s DTA. (Underwriters’ Motion, p. 22-24; Senior Notes Underwriters’ Motion, p. 23-24; Securities Act Defendants’ Reply, p. 15-16.) They point to various disclosures the Company made in which it warned investors that it might not return to profitability, that its cost-saving strategies might not be successful, and that it consequently might not realize its DTA.
The Court is not persuaded that these disclosures preclude the alleged misstatements from being material as a matter of law. Rather, the language highlighted by the Securities Act Defendants is “merely a boilerplate litany of generally applicable risk factors.” Slayton,
The disclosures did not specifically reveal the particular risks allegedly known to MF Global and the Officers. See Slay-ton,
2. RTM Strategy
Plaintiffs allege material misstatements and omissions with respect to MF Global’s “risk appetite, internal controls and liquidity management” because
(1) the Officer Defendants’ strategic plan to increase principal risk-taking also materially increased liquidity risks without the necessary corresponding increase in capital, liquidity risk management or internal controls; (2) the primary purpose of the Company’s increased principal trading activity was not to facilitate customer transactions but to engage in non-client-related speculative transactions; (3) Defendants’ representations about available capital and liquidity were unreliable given that: (a) the Company’s liquidity monitoring systems were outdated, (b) the Company had no real-time liquidity monitoring system, and (c) the Company tracked liquidity using informal, manual means compiled from spreadsheets and oral reports; (4) even though the Company’s transformation plan did not involve increasing VAR, the plan involved materially increasing off-balance sheet liquidity risks and leverage levels in connection with investments in Euro sovereign debt through RTM transactions; and (5) MF Global exposed client funds to significant risk by relying on regular inter-company transfers from MF Global’s FCM operations to meet the daily liquidity needs of non-FCM operations.
(CAC ¶¶ 336, 354, 370, 386, 416, 443, 459.) Again, Defendants make various arguments to claim that the statements about the RTM Strategy were not materially false or misleading. The Court addresses these arguments in turn.
a. False or Misleading Statements
Defendants suggest that the alleged misstatements were in fact not misstatements at all. Rather, according to Defendants, MF Global fully disclosed the nature of and risks associated with the RTM Strategy, including the capital, liquidity, and risk management weaknesses that are the focus of the CAC. Plaintiffs respond by highlighting particular disclosures and omissions that they claim to have materially misled investors. The Court finds that CAC sufficiently pleads materially false or misleading statements to plausibly allege that Defendants have committed Securities Act and Exchange Act violations.
First, the CAC pleads actionable misstatements with respect to MF Global’s assurances that the Company operated within specified risk limits. Plaintiffs allege that, contrary to those assurances, Corzine and MF Global repeatedly breached the limits set on investments in European sovereign debt. Under those circumstances, Plaintiffs have alleged material misstatements. See In re Lehman Bros. Sec. & Erisa Litig.,
Second, Plaintiffs plead actionable misstatements about MF Global’s risk controls. MF Global’s public filings and statements described the Company’s internal controls as, among other things, “robust” (CAC ¶ 331), “effective” (id.), “adequate” (CAC ¶ 362), and “comprehensive” and “designed to monitor, evaluate, and manage the risks [MF Global] assume[d]” (CAC ¶402). The CAC pleads contrary information from MF Global’s IAD that undermines the accuracy of those disclosures. For example, the IAD’s reports to the Board reveal numerous weaknesses that undermine the accuracy of MF Global’s public disclosures. See Cornwell v. Credit Suisse Grp.,
Third, Plaintiffs plead actionable misstatements with respect to the risks posed by the RTM Strategy. MF Global’s public statements consistently denied that the RTM Strategy posed a substantial risk to the Company. Among other disclosures, the Officers referred to the risk as “minimal” (CAC ¶¶ 399, 424) and “limited” (CAC ¶ 447), and Corzine told investors that the RTM Strategy “actually makes [MF Global] less risky” (CAC ¶422). The CAC simultaneously alleges that the RTM Strategy exposed MF Global to substantial risk and ultimately contributed to the Company’s collapse. Plaintiffs have thus alleged facts giving rise to a reasonable inference that the statements made about the RTM Strategy’s risks were material misstatements.
While Defendants argue that the CAC merely pleads inactionable fraud by hindsight, see Slayton,
Finally, the CAC pleads actionable misstatements about MF Global’s capital and liquidity management. While MF Global and the Officers repeatedly represented
Defendants argue that the claimed misstatements were mere puffery and emphasize that MF Global was “not required to take a gloomy, fearful or defeatist view of the future.” Rombach,
b. Bespeaks Caution / PSLRA Safe Harbor
Defendants suggest that the Company’s alleged misstatements concerning the RTM Strategy are protected by the bespeaks-caution doctrine and the PSLRA safe harbor for forward-looking statements. They point to disclosures that the Company might increase trading risk, or might not hold sufficient capital or liquidity to meet market demands, as statements that contain “sufficient cautionary language” to defeat any claim of materiality. Iowa Pub. Emps. ’ Ret. Sys.,
The Court rejects this argument for reasons similar to those stated in the above analysis of the DTA statements: the CAC alleges specific information, known to the Officers, which made their disclosures about the risks of the RTM Strategy subjectively false. The Company’s public filings and statements were thus insufficient “in light of the undisclosed hard facts critical to appreciating the magnitude of the risks described.” In re American Int’l Grp., Inc.,
In sum, the Court finds that the CAC sufficiently pleads facts that plausibly allege material misstatements to survive dismissal at this stage.
The Officer Defendants raise several arguments specific to the Exchange Act claims brought against them. The Court addresses these arguments in turn.
1. Strong Inference of Scienter
To state a claim under the Exchange Act, Plaintiffs must plead facts that “give rise to a strong inference of fraudulent intent.” Kalnit,
The Court finds that Plaintiffs have adequately pled scienter as to each of the Officer Defendants.
Corzine and MacDonald suggest that their purchases of MF Global stock during the Class Period negate an inference of scienter. (Corzine’s Motion, p. 23-24; MacDonald’s Motion, p. 15.) To be sure, under some circumstances such purchases might suggest a lack of fraudulent intent. See In re MRU Holdings Sec. Litig.,
The Officers also propose various other inferences about their intent, such as a genuine belief that MF Global would succeed and that the Company’s collapse resulted merely from a flawed business plan. (Corzine’s Motion, p. 23-24; MacDonald’s Motion, p. 15; Steenkamp’s Motion, p. 20-21.) They argue that these inferences are “plausible, nonculpable explanations” that negate an inference of fraudulent intent. Tellabs,
2. Control Persons Claims
For the reasons stated above, the Court finds that the CAC sufficiently pleads a primary violation of Section 10(b) and the scienter required to establish culpable participation under Section 20(a). See Alstom III,
D. SECURITIES ACT DEFENSES
Defendants raise various other arguments in support of their motions to dismiss the Securities Act claims. The Court addresses those arguments in turn.
1. Liability for Forms 10-Q
Section 11 holds a party liable for statements or omissions made in “any part of the registration statement, when such part became effective. ” 15 U.S.C. § 77k(a) (emphasis added). A registration statement includes “any ... document ... incorporated therein by reference.” 15 U.S.C. § 77b(a)(8). The Individual Defendants allege that they are not liable under the Securities Act for statements made in MF Global’s Forms 10-Q because those forms never became “effective” as to them. (Independent Directors’ Motion, p. 11-13.) Plaintiffs counter that the Forms 10-Q became effective as to the Individual Defendants when they were incorporated by reference into the prospectuses that accompanied the offerings of the Secondary Offering, the 2016 Notes, the 2018 Notes, and the Senior Notes. (Plaintiffs’ Opposition, p. 66-68.) The Individual Defendants respond that “prospectus supplements do not themselves become effective as to individuals,” and thus the prospectuses (and the Forms 10-Q incorporated by reference in the prospectuses) did not become effective as to the Individual Defendants. (Independent Directors’ Reply Motion, p. 1-2.)
Under SEC Rule 430B, a prospectus supplement “is deemed to be part of the registration statement” and, “for purposes of liability under [S]ection 11 of the [Securities] Act of the issuer and any underwriter at the time only,” establishes “a new effective date of the part of such registration statement relating to the securities to which such form of prospectus relates.” 17 C.F.R. § 230.430B(f)(2) (emphasis added). The prospectus creates a new effective date for a director or individual signer only under certain limited exceptions. See id. § 230.430B(f)(4). At least one court has read this language to prohibit imposing Section 11 liability on individual defendants for statements made in a prospectus. See In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig.,
The Court need not decide at this juncture whether the Individual Defendants are hable for statements in the Forms 10-Q. No party disputes that the Individual Defendants are liable for statements in the Forms 10-K, and no party disputes that the Underwriters and Senior Notes Underwriters are liable for statements in the Forms 10-Q. In light of the Court’s rulings, discovery on all counts against all Defendants and with respect to all filings will go forward. The Court will have the opportunity to further define the contours of the claims after discovery.
2. Reliance on Audited Statements
Section 11 provides underwriters with an affirmative defense where they “had no reasonable ground to believe and did not believe” that the statements in a public filing misstated or omitted material facts. 15 U.S.C. § 77k(b)(3)(C); see also In re Global Crossing, Ltd. Sec. Litig.,
Underwriters’ reliance on audited financial statements is reasonable “absent red flags that the underwriters were in a position to see.” In re Countrywide Fin. Corp.,
Because the affirmative defense turns on an evaluation of reasonableness, whether the defense is available “is generally a fact issue, rarely suitable for summary judgment, let alone a motion to dismiss.” In re Countrywide Fin. Corp.,
Here, the affirmative defense does not appear on the face of the CAC. Indeed, though Plaintiffs need not allege red flags in their complaint, the CAC alleges that a reasonable investigation into the audited financial statements would have
3. Evidence of Purchase
Several of the Underwriters and Senior Notes Underwriters seek dismissal of the Section 12(a)(2) claims (Counts Four, Seven, Ten, and Thirteen) because the CAC does not specifically allege that any named plaintiff purchased securities from those underwriters. (Underwriters’ Motion, p. 3 n. 2; Senior Notes Underwriters’ Motion, p. 25; Underwriters’ & Senior Notes Underwriters’ Reply, p. 3-4.) “A plaintiff has standing to bring a Section 12 claim only against a ‘statutory seller’ from which it ‘purchased’ a security.” In re Lehman Bros.,
In Count Four, the CAC alleges that a named plaintiff “purchased or otherwise acquired stock from” the relevant underwriters “pursuant to the Secondary Offering Materials.” (CAC ¶ 576 (emphasis added).) In Count Seven, the CAC alleges that a named plaintiff “purchased or otherwise acquired MF Global’s 2016 Notes in the 2016 Notes Offering.” (CAC ¶ 609 (emphasis added).) In Count Ten, the CAC alleges that named plaintiffs “purchased or otherwise acquired MF Global’s 2018 Notes in the 2018 Notes Offering.” (CAC ¶ 643 (emphasis added).) And in Count Thirteen, the CAC alleges that a named plaintiff received title to the 6.25% Senior Notes from the relevant underwriters “in the 6.25% Senior Notes Offering.” (CAC ¶ 678 (emphasis added).) These allegations are sufficient to establish standing against the Underwriters and the Senior Notes Underwriters for the purpose of withstanding a motion to dismiss. See In re Scottish Re,
4. Control Persons Claims
For the reasons stated above, the Court finds that the CAC sufficiently pleads primary violations of Section 11. Even assuming that Plaintiffs must plead the Officers’ culpable participation, but see In re Bear Steams,
The CAC also sufficiently alleges control under Section 15(a) for the same reasons that Plaintiffs adequately pled control under Section 20(a). See Alstom III,
V. ORDER
For the reasons discussed above, it is hereby
ORDERED that the motion (Dkt. No. 368) of defendant Jon S. Corzine to dismiss the Consolidated Amended Securities Class Action Complaint is DENIED; and it is further
ORDERED that the motion (Dkt. No. 360) of defendant J. Randy MacDonald to dismiss the Consolidated Amended Securities Class Action Complaint is DENIED; and it is further
ORDERED that the motion (Dkt. No. 373) of defendant Henri J. Steenkamp to dismiss the Consolidated Amended Securities Class Action Complaint is DENIED; and it is further
ORDERED that the motion (Dkt. No. 357) of defendants David P. Bolger, Eileen S. Fusco, David Gelber, Martin J. Glynn, Edward L. Goldberg, David I. Schamis, and Robert S. Sloan to dismiss the Consolidated Amended Securities Class Action Complaint is DENIED; and it is further
ORDERED that the motion (Dkt. No. 364) of defendants Citigroup Global Markets Inc., Deutsche Bank Securities Inc., Goldman Sachs & Co., J.P. Morgan Securities LLC, Merrill, Lynch, Pierce, Fenner & Smith Incorporated, and RBS Securities Inc. to dismiss the Consolidated Amended Securities Class Action Complaint is DENIED; and it is finally
SO ORDERED.
Notes
. The Officer Defendants and the Independent Director Defendants are, collectively, the “Individual Defendants.”
. The Independent Director Defendants, the Underwriter Defendants, and the Senior Notes Underwriter Defendants are, collectively, the "Securities Act Defendants.” All defendant groups — the Officer Defendants, the Independent Director Defendants, the Underwriter Defendants, and the Senior Notes Underwriter Defendants — are collectively referred to as "Defendants.”
. The Court has reviewed the parties' filings in this matter: Memorandum of Law in Support of Defendant Jon S. Corzine's Motion to Dismiss the Consolidated Amended Securities Complaint, dated October 19, 2012 ("Cor-zine's Motion”) (Dkt. No. 369); Memorandum of Law in Support of Defendant J. Randy MacDonald’s Motion to Dismiss, dated October 19, 2012 ("MacDonald’s Motion”) (Dkt. No. 361); Memorandum of Law in Support of Henri Steenkamp's Motion to Dismiss the Consolidated Amended Securities Class Action Complaint, dated October 19, 2012 ("Steenkamp's Motion”) (Dkt. No. 374); Memorandum of Law in Support of the Independent Directors' Motion to Dismiss the Consolidated Amended Securities Class Action Complaint, dated October 19, 2012 ("Independent Directors' Motion”) (Dkt. No. 358); Memorandum of Law in Support of Underwriters' Motion to Dismiss, dated October 19, 2012 (“Underwriters’ Motion”) (Dkt. No. 365); Memorandum of Law in Support of the Senior Notes Underwriters’ Motion to Dismiss the Consolidated Amended Securities Class Action Complaint, dated October 19, 2012 ("Senior Notes Underwriters’ Motion”) (Dkt. No. 367); Plaintiffs' Omnibus Opposition to Defendants' Motions to Dismiss, dated December 18, 2012 ("Plaintiffs’ Opposition”); Reply Memorandum of Law in Support of the Officer Defendants’ Motions to Dismiss the Consolidated Amended Securities Complaint, dated February l, 2013 ("Officers’ Reply”) (Dkt. No. 454); Defendant Randy J. MacDonald's Reply Memorandum of Law in Further Support of His Motion to Dismiss the Amended Complaint, dated February 1, 2013 ("MacDonald's Reply”) (Dkt. No. 448); Reply Memorandum of Law in Further Support of the Securities Act Defendants’ Motions to Dismiss, dated February 1, 2013 ("Securities Act Defendants' Reply”) (Dkt. No. 450); Supplemental Reply Memorandum of Law in Further Support of the Underwriters' and the Senior Notes Underwriters’ Motion to Dismiss, dated February 1, 2013 ("Underwriters’ and Senior Notes Underwriters’ Reply”) (Dkt. No. 451); and Reply Memorandum of Law in Further Support of the Independent Directors' Motion to Dismiss the Consolidated Amended Securities Class Action Complaint, dated February 1, 2013 (“Independent Directors’ Reply”) (Dkt. No. 452).
. Defendants’ numerous motions and replies generated 184 pages of briefing memoranda, not counting the accompanying voluminous declarations and exhibits.
. Plaintiffs make use of reports issued by the Trustee for the SIPA Liquidation of MF Global Inc., the Trustee for the Chapter 11 Bankruptcy of MF Global Holdings Ltd., and the
. Except where otherwise noted explicitly, the factual summary below is derived from the CAC and the documents cited or relied upon for the facts pled therein, which the Court accepts as true for the purposes of ruling on a motion to dismiss. See Spool v. World Child Int’l Adoption Agency,
. MF Global filed for bankruptcy on October 31, 2011 and is not a party to this action.
. "GAAP is the official standard for accounting accepted by the SEC and is promulgated in part by the Financial Accounting Standards Board ('FASB') and American Institute of Certified Public Accountants ('AICPA').” (CAC ¶ 88.)
. The CAC alleges that MacDonald served as CFO through April 2011, but MF Global’s public filings with the SEC, of which the Court can take judicial notice, see In re Alstom SA Sec. Litig. (Alstom I),
. The CAC mistakenly quotes MacDonald as saying that the DTAs were not “at risk.’’ (CAC ¶ 317.)
. Further to the point, Plaintiffs claim, an MF Global internal document created in September 2011 and presented to the Board in October 2011 suggests that any shifts in investment policies would create large losses, rather than gains. (CAC ¶ 138.)
. Indeed, Plaintiffs allege that Stockman and Corzine refused to authorize an enhancement to MF Global’s risk management system that would improve its technological infrastructure. (CAC ¶ 197-98.)
. At this meeting, Moody’s also learned for the first time that the Company’s RTM transactions were purely proprietary, rather than part of MF Global's client-facilitation business. Moody’s Chief Credit Officer Richard Cantor later testified that this revelation reflected an “increased risk appetite” that was not accompanied by "a parallel increase in capital.” (CAC ¶ 285.)
. O'Brien, who executed the transfer at Cor-zine’s direction, later invoked her Fifth Amendment privilege against self incrimination when she was subpoenaed to appear before a congressional subcommittee.
. Pursuant to an April 24, 2012 order from the Panel on Multidistrict Legislation, separate but related actions for non-securities claims are proceeding under this docket.
. On February 6, 2013, at the request of all parties, Magistrate Judge James C. Francis IV ordered a stay of all proceedings in this action while the parties engaged in voluntary mediation. (Dkt. No. 456.) Magistrate Judge Francis lifted the stay on September 12, 2013. (Dkt. No. 538.)
.Sandler O’Neill & Partners, L.P., one of the Senior Notes Underwriters, is also a defendant in Counts Six and Seven.
. In their various motions to dismiss, no defendant in this action has argued that Plaintiffs have failed to adequately allege reliance and causation. Therefore, the Court will not address these elements any further.
. The Court notes that, to avoid unnecessary duplication, Defendants have adopted each others’ arguments where appropriate. The Court identifies arguments only by the party or parties who briefed the argument, without intending to preclude other defendants from preserving those arguments to the extent they apply to those defendants.
. Indeed, the Independent Directors rely strongly on the district court opinion that Freidus reversed. (See Independent Directors’ Motion, p. 10 (citing In re Barclays Bank PLC Sec. Litig., No. 09 Civ. 1989,
. Statements of opinion are also actionable when "stated as guarantees.” Fait,
. The Court agrees with Plaintiffs (Plaintiffs' Opposition, p. 12 n. 12) that the CAC must only allege subjective falsity as to the Officers, who are "the originator[s] of the opinions expressed in the offering documents.” Federal Hons. Fin. Agency v. UBS Ams., Inc.,
. If such knowledge is sufficient to plead fraudulent intent, then it necessarily must be sufficient to plead mere subjective falsity. See Podany,
. The Officer Defendants characterize Moody’s reaction as confusing and incoherent. (Officers' Reply, p. 2.) But that does nothing more than to raise a question of fact as to whether MF Global’s previous disclosures were inadequate.
. To the extent any of the statements described in this section constitute opinions, the CAC sufficiently pleads the speaker's knowledge of contrary information to give rise to a reasonable inference of subjective falsity. See Abu Dhabi Commercial Bank,
. The parties dispute exactly which of the many alleged misstatements in the CAC are sufficient to give rise to Exchange Act and Securities Act liability. The Court sees no need to resolve those disputes at this time; because the CAC pleads at least some misstatements sufficient to survive dismissal, "the
. The Court thus rejects the MacDonald's claim (MacDonald’s Motion, p. 12-13; MacDonald’s Reply, p. 1) that the CAC’s scienter allegations are improper group pleading. See In re CRM Holdings, Ltd. Sec. Litig., No. 10 Civ. 975,