Massachusetts Mutual Life Insurance Company v. Residential Funding Company, et al
Filing
280
Judge Mark G. Mastroianni: MEMORANDUM AND ORDER entered. For the reasons, Pltf's Motions for Partial Summary Judgment are ALLOWED. Granting (251) Motion for Partial Summary Judgment in case 3:11-cv-30035-MGM; granting (280) Motion for Partia l Summary Judgment in case 3:11-cv-30039-MGM; granting (270) Motion for Partial Summary Judgment in case 3:11-cv-30044-MGM; granting (255) Motion for Partial Summary Judgment in case 3:11-cv-30047-MGM; granting (287) Motion for Partial Summary Jud gment in case 3:11-cv-30048-MGM; granting (352) Motion for Partial Summary Judgment in case 3:11-cv-30094-MGM; granting (333) Motion for Partial Summary Judgment in case 3:11-cv-30126-MGM; granting (237) Motion for Partial Summary Judgment in case 3:11-cv-30127-MGM; granting (231) Motion for Partial Summary Judgment in case 3:11-cv-30141-MGM; granting (345) Motion for Partial Summary Judgment in case 3:11-cv-30215-MGM; granting (360) Motion for Partial Summary Judgment in case 3:11-cv-30285-MGM Associated Cases: 3:11-cv-30035-MGM et al.(Finn, Mary)
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY,
Plaintiff,
v.
RESIDENTIAL FUNDING COMPANY,
LLC, et al.,
Defendants.
MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY,
Plaintiff,
v.
DB STRUCTURED PRODUCTS, INC., et al.,
Defendants.
MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY,
Plaintiff,
v.
RBS FINANCIAL PRODUCTS INC., et al.,
Defendants.
MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY,
Plaintiff,
v.
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Civil Action No. 11-30035-MGM
Civil Action No. 11-30039-MGM
Civil Action No. 11-30044-MGM
Civil Action No. 11-30047-MGM
DLJ MORTGAGE CAPITAL, INC., et al.,
Defendants.
MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY,
Plaintiff,
v.
CREDIT SUISSE FIRST BOSTON
MORTGAGE SECURITIES CORP., et al.,
Defendants.
MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY,
Plaintiff,
v.
J.P. MORGAN SECURITIES LLC, et al.,
Defendants.
MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY,
Plaintiff,
v.
GOLDMAN SACHS MORTGAGE
COMPANY, et al.,
Defendants.
MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY,
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Civil Action No. 11-30048-MGM
Civil Action No. 11-30094-MGM
Civil Action No. 11-30126-MGM
Plaintiff,
v.
IMPAC FUNDING CORPORATION, et al.,
Defendants.
MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY,
Plaintiff,
v.
HSBC BANK USA, NATIONAL
ASSOCIATION, et al.,
Defendants.
MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY,
Plaintiff,
v.
COUNTRYWIDE FINANCIAL
CORPORATION, et al.,
Defendants.
MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY,
Plaintiff,
v.
MERRILL LYNCH, PIERCE, FENNER &
SMITH, INC. et al.,
Defendants.
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Civil Action No. 11-30127-MGM
Civil Action No. 11-30141-MGM
Civil Action No. 11-30215-MGM
Civil Action No. 11-30285-MGM
MEMORANDUM AND ORDER REGARDING
PLAINTIFF’S MOTIONS FOR PARTIAL SUMMARY JUDGMENT
11-30035-MGM (Dkt. No. 251); 11-30039-MGM (Dkt. No. 280); 11-30044-MGM (Dkt. No. 270);
11-30047-MGM (Dkt. No. 255); 11-30048-MGM (Dkt. No. 287); 11-30094-MGM (Dkt. No. 352);
11-30126-MGM (Dkt. No. 333); 11-30127-MGM (Dkt. No. 237); 11-30141-MGM (Dkt. No. 231);
11-30215-MGM (Dkt. No. 345); 11-30285-MGM (Dkt. No. 360)
October 29, 2014
MASTROIANNI, U.S.D.J.
I.
INTRODUCTION
Massachusetts Mutual Life Insurance Company (“Plaintiff”) filed eleven related actions
against various defendants (“Defendants”), 1 asserting violations of the Massachusetts Uniform
Securities Act (“MUSA”), Mass. Gen. Laws ch. 110A, § 410, for misstatements and omissions
contained in the offering documents of residential mortgage-backed securities (“RMBS”). Presently
before the court are Plaintiff’s motions for partial summary judgment, filed in all eleven cases, in
which it seeks to preclude Defendants from asserting a “loss causation” affirmative defense. For the
following reasons, the court agrees with Plaintiff that a loss causation affirmative defense is not
available and that it is appropriate for the court to resolve the issue at this stage. Accordingly, the
court will allow Plaintiff’s motions for partial summary judgment.
II. BACKGROUND
Plaintiff explained in its Local Rule 56.1 Statement of Uncontested Material Facts that “there
are no material facts that relate to its Motion for Partial Summary Judgment of Defendants’ Loss
Causation Defense” because “[t]he Motion raises a pure question of law.” 2 (11-30035-MGM, Dkt.
1
Defendants include the eleven above-captioned corporate defendants as well as thirty-three individual defendants.
In opposing Plaintiff’s motions, Defendants state that they “do not necessarily agree with” Plaintiff’s Local Rule 56.1
Statement and, elsewhere in their brief, include deposition testimony from Plaintiff’s employees allegedly showing that a
loss causation defense would be “fatal” to Plaintiff’s claims. (11-30035-MGM, Dkt. No. 264, Defs.’s Opp’n to Pl.’s Mot.
for Partial Summ. J., at 18 & n.15.) The court, however, agrees with Plaintiff that this additional evidence is not properly
before the court because Defendants failed to submit their own Statement of Material Facts, as required by Local Rule
2
4
No. 252, Pl.’s Statement of Uncontested Material Facts Pursuant to Local Rule 56.1.) In any event,
the following background, largely taken from Judge Ponsor’s ruling on Defendants’ motions to
dismiss, provides context for the present dispute.
These actions arise out of the sale of RMBS certificates between 2005 and 2007. All
of the certificates at issue were created in a largely identical multi-step securitization
process. Loan originators originated mortgage loans to borrowers who were buying
or refinancing homes. A sponsor bought loans from the originators and aggregated
them into a loan pool, which usually contained thousands of loans. The sponsor
then sold the pool to a depositor, who transferred the loans to a trust. The trust
issued certificates to the depositor, who sold the certificates to the underwriting
financial institutions for resale to investors, such as Plaintiff. Defendants in these
actions include institutions that served as sponsors, depositors, and underwriters of
the loans.
When sold, certificates were accompanied by offering documents that included a
prospectus and prospectus supplement.
The offering documents provided
descriptions of the certificates, summary loan information on the underlying loans,
and summary descriptions of the third-party originators’ loan underwriting
guidelines. Plaintiff alleges that the offering documents at issue in these cases
misstated or omitted certain material facts . . . .
Massachusetts Mut. Life Ins. Co. v. Residential Funding Co., LLC, 843 F. Supp. 2d 191, 198
(D.Mass. 2012). Specifically, Plaintiff alleged, as to one category of misstatements, that “Defendants
represented that the loans were underwritten using prudent underwriting standards, but, in fact, loan
originators systematically disregarded their stated loan underwriting guidelines.” Id.
Plaintiff brought these eleven actions in 2011, seeking to rescind the RMBS purchases under
Section 410 of the MUSA. On February 14, 2012, Judge Ponsor granted in part and denied in part
Defendants’ motions to dismiss. 3 As relevant for present purposes, Judge Ponsor explained in his
ruling that
56.1. Regardless, evidence purportedly showing the merits of a loss causation defense as a factual matter is irrelevant to
whether such a defense is available as a matter of law under the MUSA.
3 Specifically, Judge Ponsor dismissed the claims of misstatements or omissions regarding owner-occupancy rates, the
section 410(a) claims against non-underwriter Defendants, and the section 410(b) claims against Defendants whose
control liability stemmed from primary violations by the non-underwriter Defendants, but denied the motions to dismiss
in all other respects. Id. at 197-98, 204-207, 215. Although the ruling only addressed nine of the eleven cases, the
parties subsequently stipulated to apply it to the two remaining cases. (11-30215-MGM (Dkt. No. 101); 11-30285-MGM
(Dkt. No. 27).)
5
[t]o state a claim under MUSA section 410(a), Plaintiff must show that (1)
Defendants offered or sold securities in Massachusetts; (2) by making an untrue
statement of, or omitting, any material fact; (3) Plaintiff did not know of the untruth
or omission; and (4) Defendants knew or should have known of the untruth or
omission. Marram [v. Kobrick Offshore Fund, Ltd., 809 N.E2d 1017, 1026 (Mass.
2004)]. Plaintiff does not need to prove negligence, scienter, reliance, or loss
causation. Id. at 1026-27. Furthermore, the buyer’s sophistication is irrelevant to a
MUSA claim, and the buyer has no duty to investigate or verify a statement’s
accuracy. Id. at 1027.
Massachusetts Mut., 843 F. Supp. 2d at 200. As to Plaintiff’s allegations regarding the underwriting
guidelines, Judge Ponsor held that the complaints adequately alleged “wholesale abandonment of
underwriting standards” sufficient to overcome certain disclosures contained in the offering
documents which might otherwise defeat Plaintiff’s claims of material misstatements: “Plaintiff has
alleged in each of the complaints a widespread abandonment of underwriting guidelines by these
specific Defendants and poor performance of the loans.” Id. at 202 (citing Plumbers’ Union Local
No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 632 F.3d 762, 773-74 (1st Cir. 2011)). In
response to Defendants’ argument that “the poor performance of the loans is due solely to the
economic downturn,” Judge Ponsor explained that “this is a question of fact that cannot be resolved
on a motion to dismiss.” Id.
Following Judge Ponsor’s ruling on the motions to dismiss, Plaintiff filed motions to strike
various affirmative defenses asserted in Defendants’ answers to the complaints. On October 17,
2012, Judge Neiman granted Plaintiff’s motions to strike in part and denied them in part. In re
Massachusetts Mut. Life Ins. Company’s Motions to Strike, 2012 WL 5077642 (D.Mass. Oct. 17,
2012). One of the affirmative defenses Plaintiff sought to strike was loss causation. Judge Neiman,
however, declined to strike the defense, explaining that “[i]t is simply too early to decide that this
affirmative defense is barred.” Id. at *4. 4
4
Judge Neiman’s ruling on the motions to strike only applied to nine of the eleven cases. Judge Ponsor, however, made
reciprocal rulings in the remaining cases. (11-30215-MGM (Dkt. No. 129); 11-30285-MGM (Dkt. Nos. 109 and 110).)
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III.
STANDARD OF REVIEW
When ruling on a motion for summary judgment, the court must construe the facts in a light
most favorable to the non-moving party. Benoit v. Tech. Mfg. Corp., 331 F.3d 166, 173 (1st Cir.
2003). Summary judgment is appropriate when "there is no genuine issue as to any material fact"
and "the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). An issue is
"genuine" when the evidence is such that a reasonable fact-finder could resolve the point in favor of
the non-moving party, and a fact is "material" when it might affect the outcome of the suit under the
applicable law. Morris v. Gov't Dev. Bank, 27 F.3d 746, 748 (1st Cir. 1994). The non-moving party
bears the burden of placing at least one material fact into dispute after the moving party shows the
absence of any disputed material fact. Mendes v. Medtronic, Inc., 18 F.3d 13, 15 (1st Cir. 1994)
(discussing Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986)). Moreover, a party may move for
partial summary judgment. See Fed. R. Civ. P. 56(a) (“A party may move for summary judgment,
identifying each claim or defense – or the part of each claim or defense – on which summary
judgment is sought.”); Advisory Committee Notes on 2010 Amendments to Fed.R.Civ.P. 56(a)
(“The first sentence is added to make clear at the beginning that summary judgment may be
requested not only as to an entire case but as to a claim, defense, or part of a claim or defense.”).
IV.
ANALYSIS
Plaintiff argues that Defendants are barred, as a matter of law, from asserting a loss
causation affirmative defense. In support, Plaintiff contends that a loss causation affirmative
defense is incompatible with the plain language of the MUSA, and Massachusetts case law makes
clear that loss causation is irrelevant, as does case law interpreting similar statutes in other states.
Plaintiff additionally argues that such a defense is inconsistent with the remedy of rescission
provided by the MUSA, and the history of the MUSA, when compared with federal securities law,
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confirms that it is unavailable. In response, Defendants argue that while loss causation is not an
element plaintiffs must prove, it can be asserted by defendants as an affirmative defense.
Defendants contend that an amendment to federal securities law clarified that a loss causation
defense was always available and the MUSA should be interpreted in coordination with federal law.
Defendants further assert that a loss causation defense is not inconsistent with the remedy of
rescission, most states have not decided whether a loss causation defense is available under similar
laws, and the plain language of the MUSA does not preclude a loss causation defense. Finally,
Defendants urge the court not to decide the issue at this time.
As an initial matter, it is clear that this issue – whether loss causation is available as an
affirmative defense – has not yet been resolved in these cases. As Defendants explain, Judge
Ponsor’s statement that “Plaintiff does not need to prove negligence, scienter, reliance, or loss
causation,” Massachusetts Mut., 843 F. Supp. 2d at 200, merely addressed elements a plaintiff need
not prove without resolving the affirmative defense issue. 5 In addition, Judge Ponsor’s statement
that “this is a question of fact that cannot be resolved on a motion to dismiss,” id. at 202, also
addressed Plaintiff’s burden to prove its case and not a possible affirmative defense Defendants may
assert. Plaintiff had alleged, in support of its allegation that Defendants misstated material facts with
regard to the underwriting guidelines, that the poor performance of the loans could only be
explained by widespread abandonment of underwriting standards. Id. at 200. Accordingly, while
Judge Ponsor intimated that Defendants may be able to attempt to rebut Plaintiff’s material
misstatement claim as to the underwriting standards by showing that the economic downturn caused
5
Similarly, many of the cases cited by Plaintiff only address whether a plaintiff must prove loss causation, not whether a
defendant may assert a loss causation affirmative defense. Clearly, however, an element a plaintiff does or does not have
to prove is distinct from an affirmative defense that a defendant would have the burden to prove. See, e.g., I.P. Lund
Trading ApS v. Kohler Co., 163 F.3d 27, 37 (1st Cir. 1998) (“[T]his court has not previously decided whether a showing
of non-functionality is an element of the claim of the party seeking protection, or whether functionality is an affirmative
defense on which the defending party has the burden.”). Thus, although perhaps relevant to the availability of a loss
causation affirmative defense, many of the cases cited by Plaintiff are not directly on point.
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the poor loan performance, he did not indicate that Defendants may assert a free-standing loss
causation affirmative defense.
In ruling on Defendants’ motions to strike, Judge Neiman explicitly declined to resolve the
loss causation issue. See In re Massachusetts Mut. Life Ins. Company’s Motions to Strike, 2012 WL
5077642, at *4. As Judge Neiman explained, he agreed “with Defendants that, to the extent
[Marram, 809 N.E.2d at 1025] stands for the proposition that a plaintiff need not prove the cause of
its loss, does not necessarily mean that a lack of causation is not an affirmative defense.” Id. at *3.
This court, as mentioned, agrees that a plaintiff not being required to prove an element does not
necessarily equate to the preclusion of an affirmative defense. By qualifying his statement with the
phrase “to the extent that decision stands for . . . ,” Judge Neiman seems to have recognized that
Marram may stand for a broader proposition. 6 This court concludes that Marram does stand for a
broader proposition.
In Marram, the Supreme Judicial Court explained the general purposes of M.G.L. c. 110A, §
410(a)(2): 7 “The statute’s thrust is both ‘redressive’ and ‘preventive.” Marram, 809 N.E.2d at 1025
(quoting Shulman, Civil Liability and Securities Act, 43 Yale L.J. 227, 227 (1933)). “It aims, of
course, to compensate the buyer for a loss.” Id. “More importantly,” the court explained, “it
creates a strong incentive for sellers of securities to disclose fully all material facts about the security.
6
Judge Neiman also indicated earlier in his decision that he was reluctant to preclude an affirmative defense at the
motion to strike stage if the issue was unclear. See id. at *1, 3.
7
The statute provides that
[a]ny person who . . . offers or sells a security by means of any untrue statement of a material fact or
any omission to state a material fact necessary in order to make that statements made, in the light of
the circumstances under which they are made, not misleading, the buyer not knowing of the untruth
or omission, and who does not sustain the burden of proof that he did not know, and in the exercise
of reasonable care could not have known, of the untruth or omission, is liable to the person buying
the security from him, who may sue either at law or in equity to recover the consideration paid for the
security, together with interest at six per cent per year from the date of payment, costs, and reasonable
attorneys’ fees, less the amount of any income received on the security, upon the tender of the
security, or for damages if he no longer owns the security. Damages are the amount that would be
recoverable upon a tender less the value of the security when the buyer disposed of it and interest at
six per cent per year from the date of disposition.
MASS. GEN. LAWS ch. 110A, § 410(a)(2).
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Section 410(a)(2) ‘provide[s] a heightened deterrent against sellers who make misrepresentations by
rendering tainted transactions voidable at the option of the defrauded purchaser,’ regardless of the
actual cause of the investor’s loss.” Id. (emphasis added) (quoting Casella v. Webb, 883 F.2d 805,
809 (9th Cir. 1989)). Contrary to Defendants’ argument, the court does not read this statement as
merely describing a plaintiff’s burden (or lack thereof) to prove its claim.
The Marram opinion used direct and specific language, explaining that tainted transactions
are voidable “regardless of the actual cause of the investor’s loss.” Id. Thus, on its face, the
statement seemingly applies to both a plaintiff’s burden to prove its case and a defendant’s possible
affirmative defense, i.e., that loss causation is simply irrelevant regardless of whether its existence
can be proven by a plaintiff or its non-existence can be proven by a defendant. Put another way, if a
defendant were allowed to assert a loss causation affirmative defense and was successful, then the
transaction would not be voidable “regardless of the actual cause of the investor’s loss.” Moreover,
the statement appears in the portion of the decision discussing the MUSA’s general purposes, not in
the subsequent discussion of a plaintiff’s burden to prove the prima facie elements of its claim. See
id. at 1025-27.
The citations directly following the “regardless” statement in Marram also support a broader
reading than Defendants suggest. The court cited Kaminsky, An Analysis of Securities Litigation
under Section 12(2) and How it Compares with Rule 10b-5, 13 Hous. L.Rev. 231, 239 (1979),
quoting the following in a parenthetical:
[Section] 12[2] [of the federal Securities Acts of 1933] is designed to induce sellers to
be assiduous in insuring full disclosure to the buyer by threatening the seller with
liability almost as an insurer in the event that there has been any material inaccurate
disclosure or nondisclosure in the sale traceable in any way to the seller’s carelessness
or affirmative wrongdoing.
Id. In addition, the Marram court cited J.C. Long, Blue Sky Law § 9:24, at 9-38, quoting the
following in a parenthetical: “The Securities Act was intended to reverse the age-old concept of
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caveat emptor and replace it with the concept of caveat venditor or seller beware.” Id. Moreover,
the Casella case quoted in Marram explained that “[s]ection 12(2) ‘is a broad anti-fraud measure’ . . .
intended to provide a heightened deterrent against sellers who make misrepresentations by rendering
tainted transactions voidable at the option of the defrauded purchaser regardless of whether the loss
is due to the fraud or to a general market decline.” Casella, 883 F.2d at 808-809 (emphasis added;
citation omitted). In support of this statement, the Ninth Circuit, in turn, cited Randall v. B.J.
Loftsgaarden, 478 U.S. 647, 659 (1986), in which the Supreme Court explained, also regarding
Section 12(2) of the Securities Act of 1933, that “by enabling the victims of prospectus fraud to
demand rescission upon tender of the security, Congress shifted the risk of an intervening decline in
the value of the security to the defendants, whether or not that decline was actually caused by the
fraud.” Id. (emphasis added). In support of this statement, the Supreme Court cited Thompson,
The Measure of Recovery under Rule 10b-5: A Restitution Alternative to Tort Damages, 37
Vand.L.Rev. 349, 369 (1984), which stated:
Rescission thus has an obvious advantage over out of pocket recovery because it
permits a plaintiff to shift the risk of a declining market to the defendant. Consider
the following hypothetical: Defendant misrepresents that certain stock possesses
qualities that make it worth $10 more per share than it would be worth without those
qualities and plaintiff purchases the stock, relying on the misrepresentation. After
discovering the fraud, plaintiff will want to recover for the amount attributable to the
fraud and can do so under an out of pocket measure. If, however, plaintiff discovers
the fraud after world events have driven down the price of all stocks, the plaintiff
can choose to unwind the sale, return the depreciated stock, and receive back
undepreciated cash, recovering not only the loss caused by the misrepresentation,
but also the loss caused by the decline in the market.
Id. (emphasis added.) Accordingly, the statement in Marram that a tainted transaction is voidable
“regardless of the actual cause of the investor’s loss,” especially when read in the context of the
cases and secondary sources directly and indirectly referenced therein, strongly indicates that a loss
causation affirmative defense is not available under section 410(a)(2) of the MUSA.
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Importantly, Section 12(2) of the federal Securities Act of 1933, codified at 15 U.S.C. § 77l,
on which the MUSA was modeled and which many of the sources cited in Marram addressed, was
amended in 1995 by the Private Securities Litigation Reform Act (“PSLRA”) to specifically include a
loss causation affirmative defense. See Pub. L. No. 104-67, § 105, codified at 15 U.S.C. § 77l(b).
The parties, of course, interpret the amendment’s effect on the MUSA in different ways. Plaintiff
argues that the amendment confirmed that prior to 1995 a loss causation affirmative defense was
not available under Section 12(2) and, because the MUSA has not similarly been amended, it does
not include such a defense. Defendants, on the other hand, argue that the PSLRA merely “clarified”
that a loss causation affirmative defense has always been available under Section 12(2), relying on a
Senate Report which stated that the law was being amended “to clarify that defendants may raise the
absence of ‘loss causation’ as an affirmative defense.” S. Rep. No. 104-98, at 23 (1995).
Accordingly, Defendants argue, the MUSA, which should be read “in coordination” with Section
12(2), Marram, 809 N.E.2d at 1025, also has always included a loss causation affirmative defense.
The Defendants’ interpretation of the prior version of Section 12(2) lacks support in case
law. The one case Defendants cite, Wilson v. Ruffa & Hanover, P.C., 844 F.2d 81 (2d Cir. 1988),
vacated on reargument, sub. nom. Wilson v. Saintine Exploration & Drilling Corp., 872 F.2d 1124
(2d Cir. 1989), addressed the potential liability of non-selling collateral participants under Section
12(2), holding that even if the defendant was not an offeror or seller of securities, it could still be
liable if the plaintiff proved loss causation. Id. at 84-86. The Second Circuit did not state that loss
causation was an element or affirmative defense as to direct claims against offerors, sellers, or those
who control them, and those are the direct claims at issue in these cases as alleged by Plaintiff. 8 In
fact, the Second Circuit recognized that Section 12(2) provided a remedy of rescission for claims
8
Judge Ponsor dismissed the claims against the non-underwriter Defendants because Plaintiff failed to adequately allege
that they were offerors or sellers of securities, as required by both the MUSA and Section 12(2). See Massachusetts Mut.
Life Ins. Co., 843 F. Supp. 2d at 205-07.
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against actual offerors or sellers “and thus compensates for all losses, whether or not caused by the
misstatement.” Id. at 84. Later in the decision, the Second Circuit explained:
We do not mean to suggest, of course, that plaintiffs must demonstrate loss
causation or transaction causation in suits against actual sellers or those who control
them. In drafting Section 12(2), Congress obviously sought to provide a heightened
deterrent against sellers who make misrepresentations, by rendering tainted
transactions voidable at the option of the defrauded purchaser regardless of whether
the loss is due to the fraud or to a general market decline. Yet this heightened
deterrent is expressly directed only at actual sellers and those who control them. We
recognized this fact when, in extending the scope of Section 12(2) beyond its plain
terms to collateral participants, we required that scienter must be proven as to them
although a showing of negligence would suffice as to sellers. Lanza v. Drexel & Co.,
479 F.2d [1277, 1298 (2d Cir. 1973)]. For similar reasons, we believe that a showing
of loss causation is necessary to hold collateral participants liable under Section
12(2). 9
Id. at 86 (emphasis in original). Following Pinter v. Dahl, 486 U.S. 622, 650-51 (1988), in which the
Supreme Court held that non-selling collateral participants could not be held liable under Section
12(1), the Second Circuit vacated its original decision in Wilson but reached the same result on the
ground that the defendant was not an offeror or seller under Section 12(2). See Wilson v. Saintine
Exploration & Drilling Corp., 872 F.2d at 1127. Defendants, therefore, have not cited or relied on
any case which interprets the pre-1995 version of Section 12(2) in the manner they suggest.
This court is not persuaded that loss causation has always been technically available due to
the use of the word “clarify” in the Senate Report. Even assuming that the word was intended to
signify a retrospective interpretation of the statute, rather than merely describing a prospective
change, the views contained in a Senate Report in 1995 shed no light on the intent of the 1933
Congress. As the Supreme Court has explained, “[p]ost-enactment legislative history (a
contradiction in terms) is not a legitimate tool of statutory interpretation.” Bruesewitz v. Wyeth
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The Second Circuit essentially imported the requirements for an implied right of action under Section 10(b) of the
Securities Exchange Act of 1934 into a Section 12(2) claim against non-selling collateral participants. See id. at 86 (“We
recognize that our holding renders actions against collateral participants under Section 12(2) essentially identical to
actions under the ‘catch-all’ Section 10(b).”); see also Wilson v. Saintine Exploration & Drilling Corp., 872 F.2d at 1127
(“In our original opinion, we held that a suit against a collateral participant under Section 12(2) had to meet the
requirements of a Section 10(b) action.”).
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LLC, 131 S.Ct. 1068, 1081 (2011). “Real (pre-enactment) legislative history is persuasive to some
because it is thought to shed light on what legislators understood an ambiguous statutory text to
mean when they voted to enact it into law.” Id. “But post-enactment legislative history by
definition ‘could have no effect on the congressional vote.’” Id. (quoting District of Columbia v.
Heller, 554 U.S. 570, 605 (2008)). Obviously, the fact that the statement was made over sixty years
after enactment renders it especially immaterial. 10 More fundamentally, as Plaintiff points out, if
Section 12(2) always included a loss causation affirmative defense, then there would have been no
need to amend the statute.
This conclusion – that prior to 1995, Section 12(2) did not include a loss causation
affirmative defense and, thus, the MUSA does not include one either – finds support in two recent
decisions from the Southern District of New York. In Fed. Hous. Fin. Agency v. HSBC North Am.
Holdings Inc. (“FHFA”), 988 F. Supp. 2d 363 (S.D.N.Y. 2013), a decision regarding multiple related
actions, the court addressed at the summary judgment stage whether the Virginia and Washington
D.C. securities statutes, which are substantially similar to the MUSA, provide a loss causation
defense. The court first explained that, unlike the current version of Section 12(2), “neither the
Virginia nor the D.C. Blue Sky law explicitly contain a loss causation defense.” Id. at 367. Similar to
§ 410(a)(2) of the MUSA, the “only two defenses explicitly provided [under the Virginia law] absolve
a defendant of liability if the purchaser knew of the ‘untruth or omission’ at issue or if the defendant
proves that ‘he did not know, and in the exercise of reasonable care could not have know, of such
untruth or omission.’” Id. at 368 (quoting Va.Code Ann. § 13.a-522(A)); see also Marram, 809
N.E.2d at 1027-28 (identifying the same two affirmative defenses under the MUSA). The court also
10
Defendants also point to a 1933 article in the New York Times written by the Chief of the FTC’s Securities Division,
as well as a statement made by the FTC Commissioner in 1934, in further support of their interpretation of Section
12(2). Plaintiff asserts that these sources do not support Defendants’ reading of the statute. In any event, these are also
post-enactment sources which provide little, if any, insight into the views of Congress in enacting the legislation. See id.
More importantly, Defendants have not identified, and the court cannot find, any case law relying on these sources or
interpreting Section 12(2) as Defendants do. Thus, while the sources may be interesting, they provide no authority and,
therefore, the court will not rely on them.
14
explained that the defendants did not cite any Virginia case law interpreting the statute as including a
loss causation defense. FHFA, 988 F. Supp. 2d at 368. “Moreover,” the court explained, “as FHFA
observes, a loss causation defense would be somewhat at odds with the statute’s rescission remedy,
which allows a plaintiff to essentially return the security for the full purchase price, without any
reduction based on intervening and unrelated changes in the security’s value.” Id. The court then
addressed the defendants’ argument that the PSLRA “clarified that [a loss causation defense] had
always been part of the law” and therefore the Virginia law should be interpreted similarly. Id.
(emphasis in original). “First, and perhaps most critically,” the court explained, “the ‘33 Act did not
include a loss causation defense before the enactment of the PSLRA.” Id. (citing Randall, 478 U.S.
at 659; Wilson v. Saintine Exploration & Drilling Corp., 872 F.2d at 1126). The court also found
that the defendants’ reliance on the Senate Report “is a meagre thread on which to hang an
argument. There is no justification for treating the Senate’s use of the term ‘clarify’ in 1995 as a
controlling interpretation of the meaning of the Securities Act of 1933.” Id. at 369. Accordingly,
the court held that there was no basis to believe that Virginia courts would incorporate the changes
to Section 12(2) into the state law. Id. The court reached the same conclusion with regard to the
D.C. law, which, like the MUSA, is also based on the Uniform Securities Act. Id. at 369-70. In
addition, in Nat’l Credit Union Admin. Bd. v. Morgan Stanley & Co., Inc., 2014 WL 1673351
(S.D.N.Y. April 18, 2014), the Southern District of New York similarly held that the Illinois and
Texas securities laws did not include loss causation defenses. Id. at *3-7. The court finds these two
decisions persuasive.
Accordingly, while Defendants are correct that courts construing the MUSA should look to
federal law for guidance, it is unreasonable to conclude that a provision explicitly contained in the
federal statute but missing from the state statute should nonetheless govern the latter. See Marram,
809 N.E.2d at 1025 (“[W]e look to Federal decisions under § 12(2), as well as to the plain language
15
of the statute and decisions of our appellate courts, for our interpretation of G.L. c. 110A,
§ 410(a)(2).” (emphasis added)). As Plaintiff points out, when the language of Section 12(2) and the
MUSA conflict, courts have not hesitated to construe the two differently. See, e.g., Fed. Home
Loan Bank of Boston v. Ally Fin., Inc., 2013 WL 5466631, at *5 (D.Mass. Sept. 30, 2013)
(“Although coordination between the federal and state securities statutes is desirable, . . . here the
plain language of the state statute makes clear that is this respect the scope of the state statute is
broader than that of the federal statute. The state statute makes no reference to a prospectus and
imposes liability on any person who offers or sells a security by means of any untrue statement of a
material fact or omission.” (citation and internal quotation marks omitted)).
Defendants contend that, contrary to Plaintiff’s argument, the plain language of the MUSA
does not prohibit a loss causation defense. The court agrees with Plaintiff, however, that the explicit
inclusion of two affirmative defenses in § 410(a)(2) implies that a loss causation defense is not
available. See Marram, 809 N.E.2d at 1027-28. Granted, Defendants argue that other courts have
permitted affirmative defenses which were not explicitly contained in securities statutes. That may
be so, but it does nothing to explain why a loss causation defense should be available here. 11
Similarly, although Defendants argue that courts “should not accept the literal meaning of the words
of a statute without regard for that statute’s purpose and history,” Sterilite Corp. v. Continental Cas.
Co., 494 N.E.2d 1008, 1010 (Mass. 1986), they have not shown how preclusion of a loss causation
defense is inconsistent with the purpose and history of the MUSA. If anything, such preclusion
11
Defendants also argue that loss causation was a defense at common law and thus was subsumed within the rescission
remedy in both Section 12(2) and the MUSA, whereas Plaintiff argues that loss causation was irrelevant at common law.
Compare 1 Henry Campbell Black, et al., A Treatise on the Rescission of Contracts and Cancellation of Written
Instruments § 68 (2d ed. 1929) (explaining that “[t]he essential elements of a fraudulent misrepresentation, justifying
rescission,” include the requirement that the misrepresentation resulted in “loss, damage, or injury to him [that] must be
shown as a consequence of it”); with 12A Long, Blue Sky Law § 9:117.39 (2014) (“[L]oss causation never was a part of
common law rescission.”). The court is more convinced by Plaintiff’s argument, at least as it pertains to Massachusetts
common law. See Reisman v. KPMG Peat Marwick LLP, 787 N.E.2d 1060, 1074 (Mass.App.Ct. 2003) (explaining that
loss causation is irrelevant in claims of common law fraud). In any event, even if the court were convinced by
Defendants’ argument regarding loss causation at common law, they have not demonstrated that such a defense was
automatically incorporated into either Section 12(2) or the MUSA.
16
seems entirely consistent with the purpose and history of the statute, as explained in Marram. See
Marram, 809 N.E.2d at 1025-26. 12
Lastly, the court is not convinced that it should defer ruling on this issue. Defendants
suggest the court should wait until at least jury instructions when they will request the court allow
the defense to go to the jury. This approach, Defendants assert, would save judicial resources
because, if the court were reversed on appeal for improperly permitting a loss causation defense,
there would be no need for a new trial. Rather, Defendants explain, the court could simply excise
that portion of the special verdict form which reduced Plaintiff’s recovery commensurate with a
successful loss causation defense. The court concludes, however, that Defendants’ approach is
much less efficient. Contrary to Defendants’ argument, judicial resources are not saved by
permitting a complex issue to remain lurking in these cases when the court is convinced that the
Supreme Judicial Court would not recognize this defense. Moreover, these cases are distinguishable
from Cohesive Technologies v. Waters Corp., 130 F. Supp. 2d 157 (D.Mass. 2001), upon which
Defendants rely. Unlike the issue in that case, the loss causation question does not represent a
“disputable legal issue of first impression,” in which “the legal theory advanced by the movant is
supported not by existing law but by a reasonable argument for extension or modification of existing
law.” Id. at 160. In contrast, as explained, the court believes that Marram addresses this issue.
Moreover, two recent cases out of the Southern District of New York persuasively resolved this
exact issue under similar statutes, in response to the same arguments regarding Section 12(2). In
addition, the court concludes, it is entirely appropriate to decide this issue at this time. The issue has
12
Indeed, the Senate Report Defendants rely on disapproved of the result, absent loss causation, that “issuers have been
put in the position of insuring shareholders and purchasers against normal market risk.” S. Rep. No. 104-98, at 23
(1995). This statement, however, conflicts with the suggestion in Marram that the MUSA “is designed to induce sellers
to be assiduous in insuring full disclosure to the buyer by threatening the seller with liability almost as an insurer in the
event that there has been any material inaccurate disclosure or nondisclosure in the sale traceable in any way to the
seller’s carelessness or affirmative wrongdoing.” Marram, 809 N.E.2d at 1026 (quoting Kaminsky, supra, at 239).
17
been extensively briefed and argued, discovery is essentially completed, and comprehensive
summary judgment motions in the cases are just ahead.
V.
CONCLUSION
For these reasons, Plaintiff’s motions for partial summary judgment (11-30035-MGM (Dkt.
No. 251); 11-30039-MGM (Dkt. No. 280); 11-30044-MGM (Dkt. No. 270); 11-30047-MGM (Dkt.
No. 255); 11-30048-MGM (Dkt. No. 287); 11-30094-MGM (Dkt. No. 352); 11-30126-MGM (Dkt.
No. 333); 11-30127-MGM (Dkt. No. 237); 11-30141-MGM (Dkt. No. 231); 11-30215-MGM (Dkt.
No. 345); 11-30285-MGM (Dkt. No. 360)) are ALLOWED.
It is So Ordered.
_/s/ Mark G. Mastroianni________
MARK G. MASTROIANNI
United States District Judge
18
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