Plumbers' Union Local No. 12, et al v. Graham, et al

Filing

OPINION issued by Michael Boudin, Appellate Judge; Jeffrey R. Howard, Appellate Judge and Paul J. Barbadoro, U.S. District Judge. Published. [09-2596]

Case: 09-2596 Document: 00116161334 Page: 1

Date Filed: 01/21/2011

Entry ID: 5520765

United States Court of Appeals
For the First Circuit
No. 09-2596
PLUMBERS' UNION LOCAL NO. 12 PENSION FUND, Individually and on
behalf of all others similarly situated; PLUMBERS' & PIPEFITTERS'
WELFARE EDUCATIONAL FUND; NECA-IBEW HEALTH & WELFARE FUND,
Plaintiffs, Appellants,
v.
NOMURA ASSET ACCEPTANCE CORPORATION; JOHN P. GRAHAM; NATHAN
GORIN; JOHN McCARTHY; DAVID FINDLAY; ALTERNATIVE LOAN TRUST 2006AF1; ALTERNATIVE LOAN TRUST 2006-AF2; ALTERNATIVE LOAN TRUST
2006-AP1; ALTERNATIVE LOAN TRUST AR2; ALTERNATIVE LOAN TRUST AR3;
ALTERNATIVE LOAN TRUST 2006-AR4; ALTERNATIVE LOAN TRUST 2006-WF1;
NOMURA SECURITIES INTERNATIONAL, INC.; GREENWICH CAPITAL MARKETS,
INC.; UBS SECURITIES, LLC; CITIGROUP GLOBAL MARKETS, INC.;
MERRILL LYNCH, PIERCE, FENNER & SMITH, INC.; GOLDMAN, SACHS &
CO.; ALTERNATIVE LOAN TRUST 2006-AR1,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Richard G. Stearns, U.S. District Judge]
Before
Boudin and Howard, Circuit Judges,
and Barbadoro,* District Judge.
Eric Alan Isaacson with whom Arthur C. Leahy, Joseph D. Daley,
Thomas E. Egler, Susan G. Taylor, Nathan R. Lindell, Amanda M.
Frame, Coughlin Stoia Geller Rudman & Robbins LLP, Thomas G.
Shapiro, Adam M. Stewart, Robert E. Ditzion and Shapiro Haber &
Urmy LLP were on brief for appellants.

*

Of the District of New Hampshire, sitting by designation.

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Stephen D. Poss with whom Sarah Heaton Concannon and Goodwin
Procter LLP were on brief for the issuer defendants, appellees
Nomura Asset Acceptance Corporation, John P. Graham, Nathan Gorin,
John McCarthy, David Findlay, Alternative Loan Trust 2006-AF1,
Alternative Loan Trust 2006-AF2, Alternative Loan Trust 2006-AP1,
Alternative Loan Trust 2006-AR1, Alternative Loan Trust 2006-AR2,
Alternative Loan Trust 2006-AR3, Alternative Loan Trust 2006-AR4,
Alternative Loan Trust 2006-WF1.
William H. Pane with whom Mark C. Fleming, Timothy J. Perla
and Wilmer Cutler Pickering Hale and Dorr LLP were on brief for the
underwriter defendants, appellees Nomura Securities International,
Inc., Greenwich Capital Markets, Inc., UBS Securities LLC,
Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner &
Smith Inc., and Goldman, Sachs & Co.

January 20, 2011

Case: 09-2596 Document: 00116161334 Page: 3

BOUDIN, Circuit Judge.
funds1

appeal

from

a

district

Date Filed: 01/21/2011

Entry ID: 5520765

Three union pension and welfare
court

order

dismissing

at

the

complaint stage their putative class action against eight trusts,
the "depositor" that organized them, the trusts' underwriters and
five officers of the depositor.
losses

suffered

when

The lawsuit sought redress for

plaintiffs

acquired

representing mortgage-backed securities.

trust

certificates

The background facts are

largely undisputed.
The lead defendant, Nomura Asset Acceptance Corporation
("Nomura Asset"), played the organizing role in the creation of the
securities at issue in this case.

As depositor, it acquired

mortgages from various banks and transferred them to the eight
trusts, all of which are separate legal entities.

Each trust

pooled the mortgages acquired by it and, with Nomura Asset, issued
trust certificates representing interests in that trust.

Then

Nomura Asset and the trusts worked with underwriters to sell the
certificates to investors.
The certificates constitute securities under the federal
securities laws, and to permit their initial sale, a registration
statement was required, disclosing information about the securities
being offered. One registration statement, filed on July 22, 2005,

1

Plumbers' Union Local No. 12 Pension Fund ("Plumbers' Fund"),
Plumbers' & Pipefitters' Welfare Educational Fund ("Plumbers' &
Pipefitters' Fund") and the NECA-IBEW Health & Welfare Fund ("NECAIBEW Fund").
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covered three trusts (2006-AP1, 2006-AR1, 2006-AR2); the other,
filed on April 16, 2006, covered the remaining five (2006-AF1,
2006-AF2,

2006-AR3,

2006-AR4,

2006-WF1).

These

were

"shelf

registrations," see 17 C.F.R. § 230.415(a) (2010), signaling an
intent to offer securities in the future and containing certain
information about Nomura Asset, the trusts and the securities.
The registration statements were not themselves offerings
and did not become effective until Nomura Asset and the trusts
updated them by filing prospectus supplements that described the
details

of

the

offering

for

each

trust.

The

registration

statements and prospectus supplements (collectively, "offering
documents") explain in detail the characteristics of the mortgages
that Nomura Asset acquired and transferred to each trust.

The

federal securities laws, yet to be discussed, impose liability for
false or misleading statements causing harm to purchasers.
In

this

case,

plaintiffs

bought trust certificates

representing interests in two of the eight trusts; one trust (AP1
trust) was covered by the earlier registration statement and a
September 27, 2005, prospectus supplement; the other (AF1 trust),
by the later of the two registration statements and a May 25, 2006,
prospectus

supplement.

One

of

the

three

plaintiffs

bought

certificates in the AF1 trust, a second in the AP1 trust and the
third in both trusts.

Thereafter, on November 13, 2007, Moody's

downgraded the rating of all of the certificates for all eight

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trusts and the certificates are now worth much less than what
plaintiffs originally paid for them. This lawsuit followed shortly
thereafter.
On January 31, 2008, one of the three union funds filed
suit in state court, asserting violations of sections 11, 12(a)(2)
and 15 of the Securities Act of
77l(a)(2), 77o (2006).

1933, 15 U.S.C. §§ 77k(a),

Section 11 imposes liability for false or

misleading statements contained in a registration statement, id. §
77k(a); section 12(a)(2) imposes similar liability on sellers who
make such statements in a prospectus or oral communication, id. §
77l(a)(2).

Section 15 imposes liability on one who "controls any

person liable" under sections 11 or 12.

Id. § 77o.

The case was removed to federal district court, the other
funds

entered

as

plaintiffs

and

ultimately

a

joint

amended

complaint was filed listing as defendants Nomura Asset, the eight
trusts, the trusts' underwriters and five officers and directors of
Nomura Asset.2

The gravamen of the complaint is that the offering

2

Nomura Securities International, Inc. ("Nomura Securities")
was the sole underwriter for the AF1, AP1, AR1 and AR2 trusts; the
AF2 trust was underwritten by Nomura Securities, Greenwich Capital
Markets, Inc. ("GCM") and Merrill Lynch, Pierce, Fenner & Smith,
Inc. ("Merrill Lynch"); the AR3 trust was underwritten by Nomura
Securities and Goldman, Sachs & Co. ("Goldman"); the AR4 trust was
underwritten by UBS Securities LLC ("UBS") and GCM; and the WF1
trust was underwritten by Nomura Securities and Citigroup Global
Markets, Inc. ("CGMI"). The officers and directors are John P.
Graham, Chief Executive Officer and President of Nomura Asset;
Nathan Gorin, Chief Financial Officer of Nomura Asset; and John
McCarthy and David Findlay, directors of Nomura Asset. (Another
defendant named in the complaint, Shunichi Ito, has apparently
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documents contained false or misleading statements, and as a result
plaintiffs purchased securities whose true value when purchased was
less than what was paid for them.

The suit was cast as a class

action comprised of purchasers of the certificates of the eight
trusts covered by the two registration statements.
Defendants filed motions to dismiss for lack of standing,
Fed. R. Civ. P. 12(b)(1), and for failure to state a claim, Fed. R.
Civ. P. 12(b)(6).

On September 30, 2009, the district court

granted

motions

defendants'

to

dismiss

and

entered

judgment.

Claims related to the trusts whose certificates had been purchased
by none of the named plaintiffs were dismissed for lack of Article
III

standing;

claims

relating

to

the

other

two

trusts

were

dismissed on statutory grounds; and no class was ever certified.
The present appeal followed.
Jurisdiction.

At the outset, plaintiffs say that the

original action brought in state court may have been improperly
removed and that the district court may thus have lacked subject
matter

jurisdiction;

although

plaintiffs

did

not

contest

jurisdiction until they lost the case in the district court, lack
of subject matter jurisdiction can be noticed at any time and
cannot be waived.

United States v. Cotton, 535 U.S. 625, 630

(2002); Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 9394 (1998).

But we conclude that any flaw in the removal was not

never been served with process.)
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one of subject matter jurisdiction and therefore has been waived or
forfeited for lack of a timely objection.

28 U.S.C. § 1447(c)

(2006) (requiring objection within 30 days of removal).
Removal is ordinarily permitted in civil actions where
the same case could originally have been brought in federal court
"[e]xcept as otherwise expressly provided by Act of Congress."
28 U.S.C. § 1441(a).

One exception--section 22 of the Securities

Act, 15 U.S.C. § 77v(a)--is that "no case arising under [the
Securities

Act]

and

brought

in

any

State

court

of

competent

jurisdiction shall be removed to any court of the United States."
However, assuming that this limitation applied,3 we conclude that
section

22's

limitation

would

not

be

one

of

subject

matter

jurisdiction but merely an advantage that a plaintiff could forfeit
by failure to make timely objection.
There are some casual references in reported circuitcourt decisions to section 22 as a limitation on subject matter
jurisdiction, e.g., Emrich v. Touche Ross & Co., 846 F.2d 1190,
1197-98 (9th Cir. 1988) (but the objection was made within 30 days,
so that conclusion was dictum); Westinghouse Credit Corp. v.
Thompson, 987 F.2d 682, 683 (10th Cir. 1993) (but the remand order

3

Whether it applied depends on how one resolves a potential
conflict between section 22 and language in a later statute,
namely, the Class Action Fairness Act's ("CAFA") removal provision.
Compare Luther v. Countrywide Home Loans Servicing LP, 533 F.3d
1031, 1034 (9th Cir. 2008), with Katz v. Gerardi, 552 F.3d 558, 562
(7th Cir. 2009)--a dispute we need not address.
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was unreviewable whatever the defect); yet a larger number of
circuits have held that similarly phrased anti-removal provisions
do not implicate subject matter jurisdiction.4
Civil suits asserting claims under the Securities Act are
within the "arising under" clause of Article III and can easily be
brought as original actions in federal court.

15 U.S.C. § 77v(a).

Although expressed as a bar on removal of such cases from state
court, section 22(a)'s aim is not to preclude hearing such cases in
federal court but instead to "favor[] plaintiffs' choice of forum."
Pinto v. Maremont Corp., 326 F. Supp. 165, 167 n.2 (S.D.N.Y. 1971);
see Cook, Recrafting the Jurisdictional Framework for Private
Rights of Action Under the Federal Securities Laws, 55 Am. U. L.
Rev. 621, 632-34 (2006).
Given that federal courts are otherwise competent to
address federal securities claims and do so all the time, it makes
far more sense to view section 22 as creating a waivable right to
insist on non-removal.

That course achieves the statute's aim to

protect the plaintiff's preference for a state forum, but it
prevents the mischief of allowing a party to sit on an objection,
raising it only if and when the objector is dissatisfied with the

4

See, e.g., In re Norfolk S. Ry. Co., 592 F.3d 907, 912 (8th
Cir. 2010); Vasquez v. N. Cnty. Transit Dist., 292 F.3d 1049, 1062
(9th Cir. 2002); Feichko v. Denver & Rio Grande W. R.R. Co., 213
F.3d 586, 591 (10th Cir. 2000), cert. denied 531 U.S. 1074 (2001);
Belcufine v. Aloe, 112 F.3d 633, 638 (3d Cir. 1997); Williams v. AC
Spark Plugs, 985 F.2d 783, 787 (5th Cir. 1993).
-8-

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result.

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Entry ID: 5520765

Cf. 14C C. Wright et al., Federal Practice & Procedure

§ 3739, at 817-18 (4th ed. 2009) (limiting removal objections to
thirty-day period prevents use of a defect as insurance against
unfavorable developments).
Standing.

The

more

difficult

threshold

question

presented by the appeal is whether plaintiffs can pursue claims, to
the extent claims may be stated, based on offerings in which they
did not participate and against trusts whose certificates they did
not purchase. This issue, styled by defendants primarily as one of
Article III standing and secondarily as a standing issue under the
Securities Act, was resolved in defendants' favor by the district
court.

The issue looks straightforward and one would expect it to

be well settled; neither assumption is entirely true.
It is clear that the named plaintiffs have no claim on
their own behalf based on trust certificates that they did not
buy;5

and

they

bought

defendant trusts.

no

certificates

issued

by

six

of

the

To the extent claims exist based on such

purchases, they belong to the actual purchasers. Since a requisite
of an ordinary case or controversy is an injury to the plaintiff

5

For section 11, see Barnes v. Osofsky, 373 F.2d 269, 273 (2d
Cir. 1967) (Friendly, J.) (an action under section 11 may be
maintained only by "those who purchase securities that are the
direct subject of the prospectus and registration statement")
(internal quotation marks omitted); for section 12(a)(2), see
Pinter v. Dahl, 486 U.S. 622, 644 (1988) (claims under section
12(a)(2) are available only against person who offers or sells the
security to the plaintiff).
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traceable to the defendant, Lujan v. Defenders of Wildlife, 504
U.S. 555, 560-61 (1992), it might follow that there is also no case
or controversy between the named plaintiffs and the trusts from
which they made no purchases.
In

a

properly

Alas, the matter is not so simple.

certified

class

action,

the

named

plaintiffs regularly litigate not only their own claims but also
claims of other class members based on transactions in which the
named plaintiffs played no part.

Yet, here certain defendants,

including six of the eight trusts named as defendants, are not
liable

to

the

named

plaintiffs

on

any

claims.

In

these

circumstances older cases, including a decision of this court, have
refused to allow the case to proceed--whether as a class action or
not--against defendants not implicated in any of the wrongs done to
the named plaintiffs.
Thus, in Barry v. St. Paul Fire & Marine Insurance Co.,
555 F.2d 3 (1st Cir. 1977), aff'd, 438 U.S. 531 (1978), Rhode
Island physicians and patients sought to bring a class action fraud
claim on behalf of all physicians and patients in the state against
four

insurance

policies.

companies

Id. at 5, 13.

for

the

sale

of

certain

insurance

Each of the insurance companies had

almost certainly sold such policies to some members of the class,
but none of the named plaintiffs ever bought that type of policy
from two of the companies.

The district court declined to allow

claims against the latter two companies for the sale of those

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policies and we held there was "no error in the district court's
decision to adhere strictly to the traditional [standing] rules."
Id. at 13; see also Haas v. Pittsburgh Nat'l Bank, 526 F.2d 1083,
1095-96 & n.18 (3d Cir. 1975).
How far Barry extends today may be debatable.

Although

its discussion of the issue was terse and not the main focus of the
decision, its approach had support not only from sister circuit
cases but from statements from the Supreme Court.
F.2d at 13.

See Barry, 555

And several times since Barry the Supreme Court used

Article III concepts in refusing to permit class claims to extend
to

those

suffering

injuries

materially

suffered by the named plaintiffs.

different

than

those

Lewis v. Casey, 518 U.S. 343,

346-49, 358 & n.6 (1996); Blum v. Yaretsky, 457 U.S. 991, 999-1002
(1982).6

For example, Blum stated:
It is axiomatic that the judicial power
conferred by Art. III may not be exercised
unless the plaintiff shows "that he personally
has suffered some actual or threatened injury
as a result of some putatively illegal conduct
of the defendant." . . .
It is not enough
that the conduct of which the plaintiff
complains will injure someone.

6

See also 1 J. McLaughlin, Class Actions § 4:28, at 659-60
(6th ed. 2010) ("In a multi-defendant case, a putative class
representative must allege that he or she has been injured by the
conduct of each defendant to establish standing."); 5 J. Moore et
al., Moore's Federal Practice § 26.63[1][b], at 23-304 (3d ed.
2010) ("If a complaint includes multiple claims, at least one named
class representative must have Article III standing to raise each
claim.").
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457 U.S. at 999 (quoting Gladstone, Realtors v. Vill. of Bellwood,
441 U.S. 91, 99 (1979)).
But the Supreme Court has not been consistent.
Ortiz

v.

Fibreboard

Corp.,

527

U.S.

815

(1999),

and

In

Amchem

Products, Inc. v. Windsor, 521 U.S. 591 (1997), the Supreme Court
ruled that no class should be certified, but in doing so, it
bypassed objections that some settling parties lacked standing,
saying

that

the

class

certification

issues

were

"'logically

antecedent' to Article III concerns," Ortiz, 527 U.S. at 831
(quoting Amchem, 521 U.S. at 612).

And in Gratz v. Bollinger, 539

U.S. 244 (2003), the Court allowed the named class plaintiff to
challenge admissions practices as to college freshman even though
his status would have been that of a transfer student subject to
different rules.

Id. 263-65.

Further, several circuits have cut themselves loose from
a

strict

requirement

that,

in

a

plaintiff

class

action,

no

defendant may be sued unless a named plaintiff has a counterpart
claim against that defendant. Arguing that the class action should
be a flexible instrument, these courts conclude that the class
action should embrace defendants against whom no named plaintiff
has a claim so long as the claims are essentially of the same
character as the claim against a properly named defendant, and that
the sorting out of this issue should be left to Rule 23 criteria

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rather

than

by

use

of

standing

Date Filed: 01/21/2011

Entry ID: 5520765

concepts

on

focusing

named

plaintiffs.7
There is no reason to inventory stray Supreme Court
quotations that can be found on both sides; nor is there a single
recent holding by the Court that with perfect clarity resolves the
issue directly before us.

Indeed, Rule 23 criteria can still be

used as a required tool for shaping the scope of a class action
without abandoning the notion that Article III creates some outer
limit based on the incentives of the named plaintiffs to adequately
litigate issues of importance to them.

See Baker v. Carr, 369 U.S.

186, 204 (1962) (plaintiffs need "such a personal stake in the
outcome

of

the

controversy

as

to

assure

.

.

.

concrete

adverseness").
For the present, Barry--however terse its treatment--is
on our books; and we are inclined (and perhaps required) to follow
its lead--with a qualification that does not affect the outcome in
this case. The qualification, on which we reserve judgment, is one
where the claims of the named plaintiffs necessarily give them--not

7

Payton v. Cnty. of Kane, 308 F.3d 673, 680-81 (7th Cir.
2002), cert. denied, 540 U.S. 812 (2003) (named plaintiffs were
only injured by two counties but may be entitled maintain class
action against seventeen other counties that implemented the same
state statute in a materially identical fashion); Fallick v.
Nationwide Mut. Ins. Co., 162 F.3d 410, 421-24 (6th Cir. 1998)
(although named plaintiff was only a participant in one ERISA plan,
he could represent a class against all of defendant's ERISA plans
where the gravamen of the challenge was a general practice that
affected all plans).
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just their lawyers--essentially the same incentive to litigate the
counterpart claims of the class members because the establishment
of the named plaintiffs' claims necessarily establishes those of
other class members.

The matter is one of identity of issues not

in the abstract but at a ground floor level.

In such a case, which

might include the kind of claims that were present in Payton, 308
F.3d at 680, and Fallick, 162 F.3d at 423, the substance of the
Article III concern may vanish even if in form it might seem to
persist.
Turning

back

to

our

own

situation--claims

based

on

mortgage-backed securities--most district courts have continued to
hold that named plaintiffs must themselves possess claims against
each defendant.

E.g., In re Salomon Smith Barney Mut. Fund Fees

Litig., 441 F. Supp. 2d 579, 604-08 (S.D.N.Y. 2006); In re Eaton
Vance Corp. Sec. Litig., 220 F.R.D. 162, 166-69 (D. Mass. 2004).
Indeed, one court recently found that
[e]very court to address the issue in a
[mortgage-backed security] class action has
concluded that a plaintiff lacks standing
under . . . Article III . . . to represent the
interests of investors in [mortgage-backed
securities] offerings in which the [named]
plaintiffs did not themselves buy.
Me. State Ret. Sys. v. Countrywide Fin. Corp., 722 F. Supp. 2d
1157, 1163 (C.D. Cal. 2010).

Interestingly, a handful of district

court cases have allowed securities claims to proceed in situations
that may fit the possible exception we have outlined above.

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E.g.,

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Entry ID: 5520765

In re Am. Int'l Grp., Inc. 2008 Sec. Litig., No. 08 Civ. 4772(LTS),
2010 WL 3768146, at *22 (S.D.N.Y. Sept. 27, 2010).
In our case, as in others involving mortgage-backed
securities, the necessary identity of issues and alignment of
incentives is not present so far as the claims involve sales of
certificates in the six trusts.

Each trust is backed by loans from

a different mix of banks; no named plaintiff has a significant
interest in establishing wrongdoing by the particular group of
banks that financed a trust from which the named plaintiffs made no
purchases.

Thus, the claims related to the six trusts from which

the named plaintiffs never purchased securities were properly
dismissed, as were the six trusts and defendants connected to only
those six trusts.
Although Nomura Asset is a common defendant with respect
to all eight of the trusts, claims against it as well fail so far
as they are based on the six trusts whose certificates were
purchased by no named plaintiff.

Although Nomura Asset is a

properly named defendant, the named plaintiffs have no stake in
establishing liability as to misconduct involving the sales of
those certificates.

In the Supreme Court's words:

"Nor does a

plaintiff who has been subject to injurious conduct of one kind
possess by virtue of that injury the necessary stake in litigating
conduct of another kind, although similar, to which he has not been

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subject."

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Entry ID: 5520765

Blum, 457 U.S. at 999; see also Lewis, 518 U.S. at 358

n.6.
Adequacy of claims.

The district court held that on the

face of the complaint, no claims were sufficiently stated.

We

review that ruling de novo, accepting as true all well-pled facts
in the complaint and drawing all reasonable inferences in favor of
plaintiffs.
banc).

SEC v. Tambone, 597 F.3d 436, 441 (1st Cir. 2010) (en

But, while this much is clear, the usual difficulty of

parsing and evaluating misrepresentation claims at the complaint
stage in securities cases is further complicated by recent case law
tightening the sieve through which a well-pled complaint must pass.
To state a claim, the complaint must "contain sufficient
factual matter, accepted as true, to 'state a claim to relief that
is plausible on its face,'"

Ashcroft v. Iqbal, 129 S. Ct. 1937,

1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
(2007)); "'naked assertions devoid of further factual enhancement'"
need not be accepted, Maldonado v. Fontanes, 568 F.3d 263, 266 (1st
Cir. 2009) (quoting Iqbal, 129 S. Ct. at 1949); and "[i]f the
factual allegations in the complaint are too meager, vague, or
conclusory to remove the possibility of relief from the realm of
mere conjecture, the complaint is open to dismissal," Tambone, 597
F.3d at 442.
The district court found that of plaintiffs' main efforts
to assert adequate claims, all three failed.

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The statute provides

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Entry ID: 5520765

the blueprint against which a claim must be measured and we start
by

outlining

the

requirements

of

section

11,

which

reads

in

relevant part:
In
case
any
part
of
the
registration
statement, when such part became effective,
contained an untrue statement of a material
fact or omitted to state a material fact
required to be stated therein or necessary to
make the statements therein not misleading,
any person acquiring such security . . .
may . . . sue [enumerated defendants].
15 U.S.C. § 77k(a).
Here, plaintiffs properly alleged that they acquired
securities

pursuant

to

a

registration

statement,

and

defendants--which include the issuer and underwriters, as well as
the

directors

of

Nomura

Asset

and

signers

documents--are those enumerated in section 11.8

of

the

offering

Plaintiffs also

alleged that misstatements or misleading statements were made and
that they were "material," that is, that "'there is a substantial
likelihood

that

a

reasonable

shareholder

important' to the investment decision."

would

consider

it

Milton v. Van Dorn Co.,

961 F.2d 965, 969 (1st Cir. 1992) (emphasis omitted) (quoting
Basic, Inc. v. Levinson, 485 U.S. 224, 231 (1988)).

8

Although the issuer is not explicitly mentioned in the list
of enumerated defendants, because the issuer must always sign
registration statements, 15 U.S.C. § 77f(a), issuers are
permissible defendants under section 11(a)(1), which includes as
defendants "every person who signed the registration statement,"
id. § 77k(a)(1). See 2 T. Hazen, The Law of Securities Regulation
§ 7.3[3], at 218 & n.49 (6th ed. 2009).
-17-

Case: 09-2596 Document: 00116161334 Page: 18

One

qualification

district court's rulings.

is

Date Filed: 01/21/2011

important

to

Entry ID: 5520765

understanding

the

Cautionary statements may "negate any

reasonable reliance," 2 Hazen, supra, § 7.3[1][B], at 216; but this
exception, known as the "bespeaks caution" doctrine, normally
applies only to "forward-looking" statements such as projections or
forecasts and not to "representation[s] of present fact."

Shaw v.

Digital Equip. Corp., 82 F.3d 1194, 1213 (1st Cir. 1996) (emphasis
omitted), abrogated on other grounds by 15 U.S.C. § 78u-4(b)(2); 2
Hazen, supra, § 7.3[1][B], at 215 (citing cases).
This brings us to the individual charges of false or
misleading statements and to the specific allegations of the
complaint.

On this appeal, plaintiffs claim that three sets of

allegations were adequately alleged: one relates to the lending
guidelines, another to appraisal standards and a third to credit
ratings.

The district court disagreed in each case, and we

consider the adequacy of the allegations charge by charge.
The underwriting guidelines.

Plaintiffs first point to

a set of statements in the offering documents implying that the
banks that originated the mortgages used lending guidelines to
determine borrowers' creditworthiness and ability to repay the
loans.

For example, the prospectus supplements for the two trusts

at issue stated that First National Bank of Nevada ("FNBN"), one of
the "key" loan originators for those trusts, used "underwriting
guidelines

[that]

are

primarily

-18-

intended

to

evaluate

the

Case: 09-2596 Document: 00116161334 Page: 19

Date Filed: 01/21/2011

Entry ID: 5520765

prospective borrower's credit standing and ability to repay the
loan, as well as the value and adequacy of the proposed mortgaged
property as collateral."9
In fact, plaintiffs allege, FNBN "routinely violated" its
lending guidelines and instead approved as many loans as possible,
even "scrub[bing]" loan applications of potentially disqualifying
material. Indeed, plaintiffs allege that this was FNBN's "business
model," aimed at milling applications at high speed to generate
profits from the sale of such risky loans to others.

Thus,

plaintiffs say, contrary to the registration statement, borrowers
did not "demonstrate[] an established ability to repay indebtedness
in a timely fashion" and employment history was not "verified."10
Admittedly, warnings in the offering documents state, for
example, that the "underwriting standards . . . typically differ
from, and are . . . generally less stringent than, the underwriting
standards established by Fannie Mae or Freddie Mac"; that "certain

9

The prospectus supplements also stated that "FNBN employs or
contracts with underwriters to scrutinize the prospective
borrower's credit profile"; its guidelines "are applied in a
standard procedure that is intended to comply with applicable
federal and state laws and regulations"; "the prospective borrower
must have a credit history that demonstrates an established ability
to repay indebtedness in a timely fashion"; and "employment history
is verified through written or telephonic communication."
10

Similar claims were made for another "principal originator"
for one of the two trusts, Metrocities Mortgage, LLC, but the basis
for such claims appears to be only that such claims were made
against that company in other litigation. As we are here concerned
only with whether the claim is adequately supported as to some of
the mortgages, we need not pursue this issue further.
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Case: 09-2596 Document: 00116161334 Page: 20

Date Filed: 01/21/2011

Entry ID: 5520765

exceptions to the underwriting standards . . . are made in the
event that compensating factors are demonstrated by a prospective
borrower"; and that FNBN "originates or purchases loans that have
been originated under certain limited documentation programs" that
"may not require income, employment or asset verification."
The district court ruled that, read together with such
warnings, the complained-of assurances were not materially false or
misleading, but we cannot agree.

Neither being "less stringent"

than Fannie Mae nor saying that exceptions occur when borrowers
demonstrate other "compensating factors" reveals what plaintiffs
allege, namely, a wholesale abandonment of underwriting standards.11
That is true too of the warning that less verification may be
employed for "certain limited documentation programs designed to
streamline the loan underwriting process."

Plaintiffs' allegation

of wholesale abandonment may not be proved, but--if accepted at
this stage--it is enough to defeat dismissal.
Defendants

say

that

no

detailed

factual

support

provided for the allegation and that it is implausible.

is

Despite

the familiar generalization that evidence need not be pled at the
complaint stage, see Twombly, 550 U.S. at 555, courts increasingly
11

The same can be said about the warning that "[c]ertain
[m]ortgage [l]oans were underwritten to nonconforming underwriting
standards, which may result in losses or shortfalls to be incurred
on the [o]ffered [c]ertificates." Using "nonconforming" standards
is different than having no standards; and this statement makes it
seem as though only some ("certain") loans were underwritten under
these standards, leaving the impression that most other loans used
"conforming" standards.
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Case: 09-2596 Document: 00116161334 Page: 21

Date Filed: 01/21/2011

Entry ID: 5520765

insist that more specific facts be alleged where an allegation is
conclusory, see Maldonado, 568 F.3d at 266, 274; and the same is
true for implausibility, at least where the claim is considered as
a whole, Twombly, 550 U.S. at 570; see Arista Records LLC v. Doe 3,
604 F.3d 110, 119-21 (2d Cir. 2010).
"Conclusory" and "implausible" are matters of degree
rather than sharp-edged categories.
Twombly, 550 U.S. at 555.

Iqbal, 129 S. Ct. at 1949;

However, the practices alleged in this

case are fairly specific and a number of lenders in the industry
are widely understood to have engaged in such practices.

The

harder problem is whether enough has been said in the complaint-beyond conclusory assertions--to link such practices with specific
lending banks that supplied the mortgages that underpinned the
trusts.

Similar complaints in other cases have cited to more

substantial

sources,

including

statements

from

confidential

witnesses, former employees and internal e-mails.
This is a familiar problem: plaintiffs want discovery to
develop such evidence, while courts are loath to license fishing
expeditions.

While this case presents a judgment call, the sharp

drop in the credit ratings after the sales and the specific
allegations as to FNBN offer enough basis to warrant some initial
discovery aimed at these precise allegations.

The district court

is free to limit discovery stringently and to revisit the adequacy
of the allegations thereafter and even before possible motions for

-21-

Case: 09-2596 Document: 00116161334 Page: 22

summary judgment.

Date Filed: 01/21/2011

Entry ID: 5520765

See, e.g., Miss. Pub. Emps.' Ret. Sys. v. Bos.

Sci. Corp., 523 F.3d 75, 79 (1st Cir. 2008).
Appraisal practices. The complaint also alleges that the
offering documents contained false statements relating to the
methods

used

to

borrowers--the

appraise

ratio

of

the

property

property

value

values
to

of

loan

potential

being

a

key

indicator of risk.

For example, the April 19, 2006, registration

statement

prospectus

and

appraisals"

the

accordance

These in

appraisers

with

"[a]ll

Standards of Professional Appraisal Practice" ("USPAP").
that

in

that

"Uniform

require

conducted

stated

the

turn

were

supplements

"perform

assignments

with

impartiality, objectivity, and independence" and make it unethical
for

appraisers,

among

other

things,

to

accept

an

assignment

contingent on reporting a predetermined result.
The complaint alleges in a single general statement that
the appraisals underlying the loans at issue here failed to comply
with USPAP requirements; but there is no allegation that any
specific bank that supplied mortgages to the trusts did exert undue
pressure, let alone that the pressure succeeded.

The complaint

fairly read is that many appraisers in the banking industry were
subject to such pressure.12

So, unlike the lending standard

12

The complaint cites the testimony of Alan Hummel, the Chair
of the Appraisal Institute, before the Senate Committee on Banking
that appraisers "experience[d] systemic problems with coercion" and
a 2007 survey showing that such pressure was widespread. How many
succumbed and altered appraisals is not specified.
-22-

Case: 09-2596 Document: 00116161334 Page: 23

Date Filed: 01/21/2011

Entry ID: 5520765

allegation, the complaint is essentially a claim that other banks
engaged in such practices, some of which probably distorted loans,
and therefore this may have happened in this case.
On this basis, virtually every investor in mortgagebacked securities could subject a multiplicity of defendants "to
the most unrestrained of fishing expeditions." Gooley v. Mobil Oil
Corp., 851 F.3d 513, 515 (1st Cir. 1988); see also DM Research,
Inc. v. Coll. of Am. Pathologists, 170 F.3d 53, 55 (1st Cir. 1999).
Accordingly,

we

agree

with

the

district

court

that

such

an

allegation--amounting to the statement that others in the industry
engaged

in

wrongful

pressure--is

not

enough.

Several

other

district courts have reached precisely this conclusion.13
Investment ratings. The prospectus supplements set forth
ratings that Standard & Poor's Rating Services, Inc. ("S&P") or
Moody's Investor Services, Inc. ("Moody's") had assigned to the
certificates or stated that the certificates would not be offered
unless they received an "investment grade" rating from S&P (AAA
through BBB) or Moody's (Aaa through Baa3).

13

There is no claim that

See In re IndyMac Mortgage-Backed Sec. Litig., 718 F. Supp.
2d 495, 510 (S.D.N.Y. 2010) (based on plaintiffs' complaint, there
was no reason to infer "that the appraisers of the properties
underlying the [c]ertificates . . . succumbed to [pressure] in any
way that violated USPAP"); accord Boilermakers Nat'l Annuity Trust
Fund v. WaMu Mortg. Pass Through Certificates, Series AR1,
No. C09-00037MJP, 2010 WL 3815796, at *7 (W.D. Wash. Sept. 28,
2010); Tsereteli v. Residential Asset Securitization Trust 2006-A8,
692 F. Supp. 2d 387, 393 (S.D.N.Y. 2010). But cf. In re Wells
Fargo Mortg.-Backed Certificates Litig., 712 F. Supp. 2d 958, 972
(N.D. Cal. 2010).
-23-

Case: 09-2596 Document: 00116161334 Page: 24

Date Filed: 01/21/2011

Entry ID: 5520765

the ratings given were misreported or that the "unless" condition
was not met.

Rather, plaintiffs say that these ratings were

misleading, primarily because they were based on "outdated models,
lowered ratings criteria, and inaccurate loan information."
The

ratings

are

opinions

purportedly

expressing

the

agencies' professional judgment about the value and prospects of
the certificates.

See In re Credit Suisse First Bos. Corp., 431

F.3d 36, 46-47 (1st Cir. 2005), overruled on other grounds by
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007).
An opinion may still be misleading if it does not represent the
actual belief of the person expressing the opinion, lacks any basis
or knowingly omits undisclosed facts tending seriously to undermine
the accuracy of the statement.

Id. at 47; accord In re Apple

Computer Sec. Litig., 886 F.2d 1109, 1113 (9th Cir. 1989), cert.
denied, 496 U.S. 943 (1990).

Liability may on this theory also

extend to one who accurately described the opinion.14
The complaint includes acknowledgments from S&P and
Moody's executives conceding, in hindsight, that the models and
data that the rating agencies were using were deficient.

But the

ratings were not false or misleading because rating agencies should
14

See Lucia v. Prospect St. High Income Portfolio, Inc., 36
F.3d 170, 175-76 (1st Cir. 1994) (underwriters, directors and
advisors can be held liable for accurately reporting study by an
underwriter not party to the suit that, although literally true,
could nevertheless be misleading); cf. 2 A.A. Sommer, Federal
Securities Act of 1933 § 9.02[12][d], at 9-24 (rev. ed. 2010)
(underwriters, directors, officers and issuers can be held liable
for statements of experts included in registration statements).
-24-

Case: 09-2596 Document: 00116161334 Page: 25

Date Filed: 01/21/2011

Entry ID: 5520765

have been using better methods and data. Defendants are not liable
under the securities laws when their opinions, or those they
reported, were honestly held when formed but simply turn out later
to be inaccurate; nor are they liable only because they could have
formed "better" opinions.
*7.

See Boilermakers, 2010 WL 3815796, at

A majority of district courts that have considered the issue

have dismissed similar claims, and the Sixth Circuit affirmed one
such dismissal.15
In addition to claiming that the ratings were faulty, the
complaint also alleges that the ratings agencies produced high
ratings aimed at keeping business, and it quotes individuals at the
rating companies to support that proposition and to suggest that
some inside the company thought that ratings were skewed.16

But,

tellingly, the complaint stops short of alleging expressly that the
leadership of S&P or Moody's believed that their companies' ratings
were false or were unsupported by models that generally captured
the quality of the securities being rated.

15

E.g., J & R Mktg., SEP v. Gen. Motors Corp., 549 F.3d 384,
392-93 (6th Cir. 2008); Boilermakers, 2010 WL 3815796, at *7 ("The
mere fact that the ratings would have been different under a
different methodology is insufficient to state a claim."); IndyMac,
718 F. Supp. 2d at 511-12; Tsereteli, 692 F. Supp. 2d at 395. But
see Wells Fargo, 712 F. Supp. 2d at 973.
16

The strongest examples are from an S&P managing director now
admitting that S&P intentionally inflated ratings and that he "knew
it was wrong at the time" but did it because "[i]t was either that
or skip the business" and from a CEO of Moody's reportedly saying
to his board in 2007 that Moody's was pressured to rate higher and
that sometimes they "drink the kool-aid."
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Case: 09-2596 Document: 00116161334 Page: 26

Date Filed: 01/21/2011

Entry ID: 5520765

The line is admittedly a fine one, but the ratings-inherently opinions and not warranties against error, J & R Mktg.,
549 F.3d at 392-93--were accurately reported by defendants and
nothing more is required so long as the ratings were honestly made,
had some basis, and did not omit critical information.

That a high

rating may be mistaken, a rater negligent in the model employed or
the rating company interested in securing more business may be
true, but it does not make the report of the rating false or
misleading.

If the purchaser wants absolute protection against

errors of opinion, the answer is insurance rather than lawsuits.
As sections 11 and 12 are structured, there is liability
without fault even for those who merely report the statements or
opinions of others; under section 11 this liability for the issuer
is absolute; for other defendants (including the issuer under
section 12), a defense is available for reporting statements of
others if due diligence was exercised. See 15 U.S.C §§ 77k(a)-(b),
77l(a)(2).17

Either way, the absence of a scienter element may

suggest special caution before classifying an accurate report of a
third-party

opinion

as

"misleading"

based

on

implied

representations about subjective intent or qualifications known
only to the third party.

17

See 2 Sommer, supra, § 9.02[12][d], at 9-24; see also In re
WorldCom, Inc. Sec. Litig., 346 F. Supp. 2d 628, 660-61 (S.D.N.Y.
2004) (underwriters can be liable for false and misleading public
filings made by issuer and accountants that were incorporated into
registration statement).
-26-

Case: 09-2596 Document: 00116161334 Page: 27

Seller

or

solicitor

Date Filed: 01/21/2011

allegations.

Entry ID: 5520765

Section

12(a)(2)

permits a plaintiff to sue only a defendant who either sold its own
security to the plaintiff or (for financial gain) successfully
solicited the sale of that security to the plaintiff.
U.S.

at

642-47,

650

&

n.21.

The

district

Pinter, 486

court

dismissed

plaintiffs' section 12(a)(2) claims, concluding that they did not
adequately allege that defendants sold the certificates to the
plaintiffs or solicited the sales. This was apparently because the
complaint used a more ambiguous phrase--that plaintiffs "acquired
the [c]ertificates pursuant and/or traceable to" the offering
documents--found insufficient by a number of courts.

E.g., Pub.

Emps.' Ret. Sys. of Miss. v. Merrill Lynch & Co. Inc., 714 F. Supp.
2d 475, 484 (S.D.N.Y. 2010); Wells Fargo, 712 F. Supp. 2d at 966.
But

the

complaint

also

alleged

that

plaintiffs

"acquired . . . [c]ertificates from defendant Nomura Securities"
and that the "[d]efendants promoted and sold the [c]ertificates to
[the p]laintiffs and other members of the [c]lass" (emphasis
added); these allegations are sufficient to state a claim under
section 12(a)(2) so long as material misstatements or misleading
omissions

are

plaintiffs'

alleged.

section

The

12(a)(2)

district
claims

court's

for

dismissal

failure

to

of

allege

defendants' requisite connections with the sale was in error.
Control person liability.

Finally, the district court

dismissed plaintiffs' section 15 "control person" liability claims

-27-

Case: 09-2596 Document: 00116161334 Page: 28

Date Filed: 01/21/2011

Entry ID: 5520765

because it held that plaintiffs failed to state a violation of the
securities laws to begin with.

Section 15 creates liability for

any individual or entity that "controls any person liable" under
sections 11 or 12.

15 U.S.C. § 77o; see Shaw, 82 F.3d at 1201 n.2.

Because we hold that plaintiffs adequately stated some claims under
sections 11 and 12(a)(2), we also hold that the district court's
dismissal of plaintiffs' section 15 claim was in error.

Given the

"highly factual nature" of the control person inquiry, resolving
that issue on a motion to dismiss is often inappropriate.

2 Hazen,

supra, § 7.12[2], at 343 n.38.
We

affirm

the

dismissal

of

all

claims

based

upon

purchases of the AR1, AR2, AF2, AR3, AR4 and WF1 trusts and all
defendants including those six trusts implicated only as to their
certificates.

As to claims against the AF1 and AP1 trusts and

other remaining defendants, we affirm the dismissal of all claims
save those relating to the statements regarding the lending banks'
underwriting practices but vacate the dismissal of the latter
claims and remand for further proceedings consistent with this
decision. Each party will bear its own costs on this appeal.
It is so ordered.

-28-