Fjarde AP-Fonden v. Morgan StanleyFjarde AP-Fonden v. Morgan Stanley
Javier Bleichmar (Jonathan M. Plasse, Joseph A. Fonti, Wilson M. Meeks, on the brief), Labaton Sueharow LLP, New York, NY, for Movant-Appellant State Boston Retirement System.
SUMMARY ORDER
State-Boston Retirement System and Fjarde AP-Fonden bring this putative securities fraud class action on behalf of themselves and other similarly situated investors (“Plaintiffs“), against Morgan Stanley, and six of its officers and former officers: John J. Mack, Zoe Cruz, David Sidwell, Thomas Cоlm Kelleher, and Thomas Daula (“Defendants“), pursuant to Sections 10(b),
* * *
We review a district court‘s judgment granting a motion to dismiss pursuant to
Section 10(b) of the Securities Exchange Aсt of 1934, makes it unlawful to “use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of [the] rules and regulations” that thе SEC prescribes.
Securities fraud claims are subject to heightened pleading requirements. A complaint alleging securities fraud must satisfy
The gravamen of Plaintiffs’ complaint is that Defendants made numerous material misstatements and omissions from June 20, 2007 through November 19, 2007 to conceal Morgan Stanley‘s exposure and losses associatеd with a subprime mortgage trade (the “proprietary trade,” which included both a “long” and “short” position). Plaintiffs’ second amended complaint identifies two categories of alleged misrepresentations and omissions made by Defendants: (1) misrepresentations and omissions regarding Morgan Stanley‘s exposure to subprime-related assets (the “exposure claim“) and (2) misrepresentations regarding Morgan Stanley‘s subprime related losses (the “valuatiоn claim“). We affirm the district court‘s dismissal of both claims.
I. Exposure Claim
We first conclude that the district court properly dismissed the exposure claim to the extent it was based on alleged misrepresentations because Plaintiffs did not adequаtely plead any material misrepresentation.2 Plaintiffs have identified four
First, Plaintiffs allege that Sidwell‘s June 20, 2007 statement on an earnings call—to the effect that “concerns early in the quarter [ending May 31, 2007] about whether issues in the subprime market were going to spread [had] dissipated“—was a material misrepresentation. J.A. 498. Read in context, it is clear that this statement did not fraudulently convey that the firm faced no subprime risk. Sidwell‘s statement was related to the аffect of the subprime market on Morgan Stanley‘s broader market outlook, not the trading risk Morgan Stanley faced from the subprime market itself. Moreover, the complaint itself reveals that Sidwell explained that there wеre ongoing risks and weaknesses from the residential mortgage market. He specifically noted there was a “weakness in U.S. residential mortgage markets,” J.A. 318, and that there was a 24 percent decline in credit products revеnues due to “volatility in the mortgage markets,” J.A. 315. Thus the district court correctly concluded that this was not a material misstatement.
Second, Plaintiffs allege that Sidwell‘s June 20, 2007 statement on an earnings call that Morgan Stanley “really did benefit” from cоnditions in the subprime market and “certainly did not lose money in this business” in the second quarter, was a material misrepresentation. J.A. 498-99. The district court correctly concluded that this was a true statement regarding past performance. Sidwell said nothing about future exposure to subprime, but asserted instead that as of the second quarter of 2007 Morgan Stanley did not lose money and in fact did benefit from the subprime market. Even assuming that this statement did imply—as Plaintiffs argue—that Morgan Stanley did not face significant future subprime liability, it still would not be actionable because the allegations only show that, at that time, Morgan Stanley had subprime trading risk, not that it had accrued losses. In sum, Plaintiffs have not plausibly рled how or why this statement was false.
Third, Plaintiffs allege that Kelleher‘s September 19, 2007 statement that Morgan Stanley “remain[ed] exposed to risk exposures through a number of instruments [including] CDOs” was false and misleading because it gave investors the impression that Morgan Stanley was only marginally exposed to the subprime market. J.A. 506-07. This statement was a purely factual recitation of some of the risks Morgan Stanley still faced—and it accurately and truthfully included CDO risk. Kelleher made clear that the risk was not minimal as he noted that Morgan Stanley was a “major market player” in the market with remaining exposure to “subprime[] CDOs” and that the company “may continue to see challenging market conditions in the months ahead.” J.A. 1788. On the facts alleged, it is not plausible that this statement was a material misrepresentation.
II. Valuation Claim
Plaintiffs allege in their valuation claim that Morgan Stanley failed properly to write down the true extent of the losses sustained by the long рosition and that when the true losses came to light, the company‘s stock price declined. We affirm the dismissal of the valuation claim because Plaintiffs failed to plead loss causation.
Loss causation requires plaintiffs to plead that the alleged “misstatement or omission is the ‘proximate cause’ of an investment loss.” Lentell v. Merrill Lynch & Co., 396 F.3d 161, 173 (2d Cir. 2005). In Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005), the Supreme Court held that “an inflated purchase price will not itself constitute or proximately cause the relevant economic loss.” Id. at 342, 125 S.Ct. 1627. Even if a purchaser later sells at a lower price after a corrective disclosure is made, “that lower price may reflect, not the earlier misrepresentation, but changеd economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions, or other events, which taken separately or together account for some оr all of that lower price.” Id. at 342-43, 125 S.Ct. 1627. Thus to establish loss causation, “a plaintiff must allege ... that the subject of the fraudulent statement or omission was the cause of the actual loss suffered,” Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 95 (2d Cir.2001), i.e., that the misstatement or omission conсealed something from the market that, when disclosed, negatively affected the value of the security. See Lentell, 396 F.3d at 173. To allege a corrective disclosure, a plaintiff must allege that the disclosure “reveal[ed] to the mаrket the falsity of the prior [statement].” Id. at 175 n. 4.
Plaintiffs here allege that various analysts made corrective disclosures including predictions that Morgan Stanley would report significant fourth quarter write-downs as a result of the decline in the values of subprime CDOs. These analyst predictions were followed by a drop in Morgan Stanley‘s stock price. But the analyst reports did not disclose any “underlying circumstance that [was] concealed or misstated.” Id. at 173. The analysts did not report that the losses were due to fraudulently concealed losses that actually occurred in the third quarter. Instead, the reports state simply that the write-downs were forthcoming. This, of course, could have been a result of the continued decline in the subprime market during the fourth quarter. Although Plaintiffs need not rule out all competing theories for the decline in stock price, their allegations must “show that [their] loss was caused by the allegеd misstatements as opposed to intervening events.” Id. at 174 (internal quotation marks omitted). Plaintiffs’ allegations failed plausibly to allege that Morgan Stanley‘s drop in stock price was not caused by the intervening market deteriorаtion throughout the financial services industry. For this reason, we affirm the dismissal of Plaintiffs’ valuation claim for failure to plead loss causation.