City of Ann Arbor Employees' Retirement System v. MoneyGram International, Inc. et al

Filing 89

ORDER granting in part and denying in part (74) Motion to Dismiss in case 0:08-cv-00883-DSD-JJG (Written Opinion). Signed by Senior Judge David S. Doty on 05/20/2009. Associated Cases: 0:08-cv-00883-DSD-JJG, 0:08-cv-00959-DSD-JJG, 0:08-cv-01026-DSD-JJG, 0:08-cv-01034-DSD-JJG(PJM)

UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA Civil No. 08-883(DSD/JJG) _________________________________ In re MoneyGram International, Inc. Securities Litigation _________________________________ This matter is before the court upon defendants' motion to dismiss the consolidated securities class action complaint. Based ORDER

upon a review of the file, record and proceedings herein, and for the reasons stated, the court grants in part and denies in part defendants' motion.

BACKGROUND In this consolidated securities class action, lead plaintiff Oklahoma Teachers' Retirement System ("lead plaintiff") asserts claims pursuant to sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act") and the Securities and Exchange Commission ("SEC") Rule 10b-5 against defendants MoneyGram International, Inc. ("MoneyGram") and the following individuals: Philip Milne ("Milne"), MoneyGram's former chief executive officer and chairman of the board of directors; David Parrin ("Parrin"), MoneyGram's chief financial officer; Jean Benson ("Benson"),

MoneyGram's controller; William Putney ("Putney"), MoneyGram's former chief investment and former officer members of (collectively MoneyGram's "officer and

defendants");

finance

investment committee, Douglas Rock ("Rock"), Monte Ford ("Ford"), Donald Kiernan ("Kiernan"), Ruiz Montemayor and Albert Teplin (collectively "investment committee defendants"). The 358-page

amended consolidated class action complaint ("complaint") asserts claims on behalf of all persons and entities who purchased or otherwise acquired MoneyGram securities between January 24, 2007, and January 14, 2008 ("class period"). I. General Background During the class period, MoneyGram was a public company traded on the New York Stock Exchange that provided global payment services and products through a network of agents and financial institution customers. (Compl. ¶¶ 20, 21.) MoneyGram consisted of a Global Funds Transfer segment and a Payment Systems segment. The Global Funds Transfer segment provided money transfer services, money orders and bill payment services to consumers. The Payment

Systems segment provided payment processing services - including official check outsourcing services1 - to financial institutions. (Id. ¶ 21; Puls Aff. Ex. B at 2, 4.2)

Official checks included bank checks, cashier checks, teller checks and agent checks. (Id. ¶ 25.) The court considers MoneyGram's SEC filings submitted by defendants without converting this motion to one for summary judgment. See Noble Sys. Corp. v. Alorica Cent. LLC, 543 F.3d 978, 982 (8th Cir. 2008) (court may consider on a motion to dismiss "public records, materials that do not contradict the complaint, or materials that are necessarily embraced by the pleadings" (citations omitted)). 2
2

1

To

use

the

Global

Funds

Transfer

segment's

money

order

service, customers provided funds to a MoneyGram agent who then issued a money order and remitted the funds to MoneyGram.

MoneyGram retained the funds for seven to nine days until the money order was presented for payment. (Compl. ¶¶ 23, 38-39.)

Similarly, the Payment Systems segment's official check outsourcing service allowed financial institutions to issue MoneyGram's

official checks to their customers for use in transactions where the payee required a check drawn on a bank or other third party. (Id. ¶ 25.) The financial institutions also used MoneyGram's (Id.) After

official checks to pay their own obligations.

issuance of an official check, the financial institution remitted the funds to MoneyGram. MoneyGram retained the funds for three to After the check (Id. ¶¶ 35,

five days as the official check was processed.

cleared, MoneyGram settled with the processing bank. 36.)

MoneyGram invested the temporarily remitted money order and official check funds ("investment funds") in an investment

portfolio ("Portfolio") that was monitored and valued by the individual defendants and ten members of MoneyGram's investment department. 3 Various state regulatory and private contractual

obligations required MoneyGram to maintain cash, cash equivalents, Approximately eighty percent of the investment funds came from the official checks, with the remainder from the money orders. (Id. ¶¶ 35, 38.) 3
3

receivables and securities with an investment rating of A or higher on a one-to-one ratio with the amount of outstanding MoneyGram money orders and official checks ("payment service obligations"). (Id. ¶¶ 29-32.) MoneyGram paid its largest financial institution customers a commission based on the average balance of funds generated by the institutions' sale of official check products. (Id. ¶¶ 26, 37.)

The commission was generally calculated according to "a variable rate based on short-term financial indices, such as the federal funds rate." fluctuations (Id. ¶ 37.) on the To mitigate the risk of interest rate rate, MoneyGram "entered into

commission

variable-to-fixed interest rate swaps, whereby MoneyGram paid an average fixed rate of 4.3% and the counterparty paid MoneyGram a variable interest rate on the notional Ex. B at amount 30.) of As the a swap

agreement."4

(Id.;

Puls

Aff.

result,

MoneyGram's net investment revenue from the Portfolio, as relevant here, was "the difference, or `spread,' between the amount

[MoneyGram] earn[ed] on [the Portfolio] and the commissions [it paid] ... net of the effect of the swap agreements." Ex. B at 14.)
4

(Puls Aff.

Gains from the Portfolio were posted as revenue in

An interest rate swap is "an arrangement whereby two parties (called counterparties) enter into an agreement to exchange periodic interest payments. The dollar amount the counterparties pay each other is an agreed-upon periodic interest rate multiplied by some predetermined dollar principal, called the notational principal amount." John Downes & Jordan Elliot Goodman, Dictionary of Finance and Investment Terms 700 (7th ed. 2006). 4

MoneyGram's Global Funds Transfer segment and Payment Systems segment. (Compl. ¶ 28.)

MoneyGram's daily net cash settlements followed a pattern in which some days MoneyGram experienced net cash inflows and other days net cash outflows. MoneyGram used repurchase agreements to

fund any shortfalls and generally paid the agreements back the following net cash inflow day. "uncommitted [credit] The repurchase agreements were with various banks [that]

facilities

require[d] specific securities to be designated as collateral for borrowings under the agreements." at 32.) (Id. ¶ 242(3); Puls Aff. Ex. O

Whether to accept securities as collateral was at the

discretion of MoneyGram's counterparties. MoneyGram relied on credit ratings from Moody's Corporation ("Moody's"), Standard & Poor's ("S&P") and Fitch Ratings ("Fitch"). (Id. ¶ 54.) If these agencies split ratings by rating a security

differently, MoneyGram disclosed the highest rating from either Moody's or S&P to the SEC and state regulators but relied on the lowest rating for internal valuations. (Id. ¶¶ 54, 236.)

To determine the "fair value" of its investment securities ("fair value determination method"), MoneyGram generally relied on third party pricing services that priced the securities based upon quoted market prices, broker pricing, matrix pricing, indices and pricing models. If no third party pricing service would provide If no brokers

pricing, MoneyGram obtained pricing from brokers. 5

would price a security, or if MoneyGram disagreed with a third party's pricing, MoneyGram internally priced the security using available market information, pricing models and its own stated assumptions about how a similar market participant would price a security. (Id. ¶¶ 56, 238.) assessed whether a security was other-than-

MoneyGram

temporarily impaired ("OTTI") on a monthly basis, considering potential impairment indicators such as credit rating downgrades, accelerating default rates on the underlying collateral, changes in cash flow performance and MoneyGram's intent and ability to hold the security long enough to recover its amortized cost ("impairment review process"). If MoneyGram determined that a security was

OTTI, the loss became "a realized loss through an impairment charge in the income statement." (Puls Aff. Ex. B at 15.) Temporary

impairments were recognized as equity on MoneyGram's balance sheet and labeled as unrealized losses. By January 24, 2007, the investment securities in the

Portfolio were reportedly valued at $5.85 billion. The majority of these securities allegedly

(Compl. ¶ 47.) asset-backed ("MBS") and

were

securities

("ABS"),

mortgage-backed

securities

collateralized debt obligations ("CDO") that were collateralized in

6

part

by

residential

mortgage-backed

securities

("RMBS")

and

commercial mortgage-backed securities ("CMBS").5
5

(Id. ¶¶ 44, 47.)

These instruments are concisely explained as follows:

The issuer of mortgage-backed and other forms of assetbacked securities in structured finance transactions is typically a special-purpose vehicle, or "SPV." ... These securities are customarily categorized as [MBS], [ABS], [CDO], or ABS CDO. MBS are securities whose payment derives principally or entirely from mortgage loans owned by the SPV. ABS are securities whose payment derives principally or entirely from receivables or other financial assets - other than mortgage loans - owned by the SPV. Industry participants refer to transactions in which SPVs issue MBS or ABS as "securitization." The term "securitization" also technically includes CDO and ABS CDO transactions. CDO securities are backed by and thus their payment derives principally or entirely from - a mixed pool of mortgage loans and/or other receivables owned by an SPV. ABS CDO securities, in contrast, are backed by a mixed pool of ABS and/or MBS securities owned by the SPV, and thus their payment derives principally or entirely from the underlying mortgage loans and/or other receivables ultimately backing those ABS and MBS securities.... The classes, or "tranches," of MBS, ABS, CDO, and ABS CDO securities ... are typically ranked by seniority of payment priority. The highest priority class is called senior securities. In MBS and ABS transactions, lower priority classes are called subordinated, or junior, securities. In CDO and ABS CDO transactions, lower priority classes are usually called mezzanine securities .... The senior and many of the subordinated classes of these securities are more highly rated than the quality of the underlying receivables.... This is accomplished by allocating cash collections from the receivables first to pay the senior classes and thereafter to pay more junior classes .... In this way, the senior classes are highly overcollateralized to take into account the possibility ... of delays and losses on collection. (continued...) 7

Over $1.65 billion of these securities were backed by subprime or Alt-A mortgages.6 (Id. ¶ 52.)

Shortly before and during the class period, the housing and mortgage industry that ballooned between 1996 and 2005

deteriorated.

(Id. ¶¶ 49-50.)

Sales of existing homes dropped,

housing prices fell, the subprime mortgage industry collapsed and mortgage defaults and foreclosures surged. (Id. passim) As a

result, the value of MBS and CDO supported by subprime and Alt-A mortgages plummeted and the market for these securities froze. (Id. ¶ 91.) This lawsuit arises out of defendants' public

statements during the class period regarding the effect of this market collapse on the Portfolio. II. Class Period On January 24, 2007, MoneyGram issued a press release

detailing its 2006 revenue, noting that 2006 was the strongest year

(...continued) Steven L. Schwarcz, Protecting Financial Markets: Lessons from the Subprime Mortgage Meltdown, 93 Minn. L. Rev. 373, 376-78 (2008) (citing Downes & Goodman, supra). The prime rate is the "base rate that banks use in pricing commercial loans to their best and most creditworthy customers." Downes & Goodman, supra, 538. "Prime borrowers as a group generally receive the same terms from most lenders, while subprime borrowers are sorted into a number of different risk classes.... Borrowers who have prime credit scores but cannot provide full income documentation, or otherwise pose a higher risk, are considered `Alt-A' borrowers." Todd J. Zywicki & Joseph D. Adamson, The Law and Economics of Subprime Lending, 80 U. Colo. L. Rev. 1, 7 (2009) (citations omitted). 8
6

5

in

MoneyGram's

history

and

predicting

that

average

Portfolio (Id. ¶

balances in 2007 would be between $6.0 and $6.3 billion. 110.)

At an earnings conference call that day, Milne noted that

"[w]e continued to be very disciplined ... and while the yield curve remains challenging, (Id. ¶ 111.) we are managing the [P]ortfolio

effectively."7

Milne also indicated that "we are

focused on building shareholder value over the long-term and our investments today are an important part of this process as we capitalize on the many opportunities In response to we a see in the global the

marketplace."

(Id.)

question

about

challenging environment for the Portfolio, Milne stated: [I]t's been 3 years now that we've been in this type of environment and our [P]ortfolio managers have done just an outstanding job continuing to get some spread for us. I think the other thing in looking to `07 [is that] what we're seeing for a yield curve is pretty much the consensus. It'll continue to be flat. So that's the most I can predict at this moment. (Id.) Parrin added that "we're going to keep playing defense," and focus on not introducing risk into the Portfolio while "grow[ing] the heck out of the money transfer and bill payment businesses." (Id.) On March 1, 2007, MoneyGram filed with the SEC its 2006 Form 10-K ("2006 10-K"), which provided a comprehensive overview of the company for fiscal year ended December 31, 2006.
7

(Id. ¶ 118; Puls

All alterations are in the complaint. 9

Aff. Ex. B.)

MoneyGram reported $1.2 billion in total revenue,

$124.1 million in net income, $358.9 million in unrestricted assets,8 a fair value of the Portfolio's available-for-sale ("AFS") investments of $5.7 billion and $5.2 million in OTTI securities. (Puls Aff. Ex. B at 20, 27, 33, F-20.) Of the Portfolio's reported

$43.1 million in total unrealized losses, $23.2 million came from RMBS, $2.1 million from CMBS and $7.8 million from other ABS. (Id. at F-21; Compl. ¶ 118(a).) One ABS and one investment security

with unrealized losses greater than twenty percent of amortized cost accounted for $0.1 million of the Portfolio's unrealized loss. The remaining $43.0 million in unrealized losses related "to securities with an unrealized loss position of less than 20 percent of amortized cost, the degree of which suggests that the[]

securities do not pose a high risk of being [OTTI]." Ex. B at F-22.)

(Puls Aff.

Moreover, unrealized losses of $22.6 million in

RMBS, $1.3 million in CMBS and $5.8 million in ABS came from securities with aged unrealized losses of twelve months or more. (Id. at F-21.) Securities with "Moody's equivalent rating[s] of

Aaa, Aa, A or Baa or a [S&P] equivalent rating of AAA, AA, A or BBB," ("investment grade securities"), accounted for $26.3 million of the unrealized losses, with the remainder of losses comprised of $6.6 million from U.S. government agency fixed income securities, MoneyGram's unrestricted assets were "cash and cash equivalents, receivables, and investments [that] exceed[ed] all payment service obligations." (Puls Aff. Ex. B at 33.) 10
8

$7.8 million from ABS and $2.3 million from preferred securities. (Id.) MoneyGram recognized these as unrealized losses because they were "caused by liquidity discounts and risk premiums required by market participants in response to temporary market conditions, rather than a fundamental weakness in the credit quality of the issuer or underlying assets or changes in the expected cash flows from the investments." (Compl. ¶ 118(b).9) MoneyGram also

affirmed that it had "both the intent and ability to hold these investments to maturity." (Id.)

The 2006 10-K indicated that MoneyGram generally determined the fair value of a security "based on quoted market prices." (Puls Aff. Ex. B at F-13.) MoneyGram further revealed that it

valued investments that were not readily marketable "based on cash flow projections that require a significant degree of management judgment as to default and recovery rates of the underlying investments." (Id. at F-14.) MoneyGram accordingly cautioned that "these estimates may not be indicative of the amounts we could realize in a current market exchange. The use of different market

assumptions or valuation methodologies may have a material effect on the estimated fair value amounts of these investments." (Id.)

The complaint does not emphasize this language in paragraph 118(b), but emphasizes identical language in later paragraphs. (See id. ¶ 142(d).) 11

9

MoneyGram

also

disclosed

that

its

management

determined

whether a security is OTTI based on a "case-by-case evaluation of the underlying reasons for the decline in fair value" that included a monthly review of all securities using a screening process to identify those securities for which fair value falls below established thresholds for certain time periods, or which are identified through other monitoring criteria such as ratings downgrades. A monthly meeting is held to discuss those securities identified by the screening process. Based on this meeting, management makes an assessment as to whether any of the securities are [OTTI]. In making this assessment, management considers both quantitative and qualitative information, as well as the Company's intent and ability to hold an investment to recovery. If the Company does not have the intent or the ability to hold the investment until recovery, an investment with a fair value less than its carrying value will be deemed [OTTI]. (Compl. ¶ 118(b).) The document then identified the assessment

factors considered by management and stated that when "an adverse change in expected cash flows occurs, and if the fair value of a security is less tha[n] its carrying value, the investment is written down to fair value." methodology "inherent required risks and (Id.) MoneyGram warned that its judgment" including that presented in

"professional uncertainties,"

"[c]hanges

circumstances and critical assumptions such as a continued weak economy, a more pronounced economic downturn or unforeseen events." (Id.) MoneyGram further noted that "for securitized financial

assets with contractual cash flows (e.g. [ABS]), projections of 12

expected future cash flows may change based upon new information regarding the performance of the underlying collateral," and that "[a]dverse changes in estimated cash flows in the future could result in impairment losses to the extent that the recorded value of such investments exceeds fair value for a period deemed to be other-than-temporary." (Id.)

The 2006 10-K also provided that "any ratings downgrade could increase our cost of borrowing or require certain actions to be performed to rectify such a situation. A downgrade could also have an effect on our ability to attract new customers and retain existing customers." (Id. ¶ 119(2).) Moreover, the 2006 10-K

indicated that a "wholly owned subsidiary" of MoneyGram was acting as "collateral advisor for a pool of investment securities owned by a third party. Deterioration in the value or performance of this

investment pool, while not directly related to [MoneyGram's] own performance, could adversely affect the business and prospects of the collateral advisor." (Id. ¶ 398; Puls Aff. Ex. B at 15.)

As required by the Sarbanes-Oxley Act of 2002 ("SOX") Milne and Parrin certified in the 2006 10-K that they: Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under [their] supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared. 13

(Compl. ¶ 118(c).) At a conference call and presentation on March 7, 2007, an unidentified MoneyGram representative stated that "you've seen a lot of headline risk out there ... in equities [and] bonds, but I don't think there's really been any changes since we've had our last earnings call that would really impact the [P]ortfolio at this point one way or another outside of that range." (Id. ¶ 123.)

On April 18, 2007, MoneyGram issued a press release detailing its financials and projections for the first quarter ended March 31, 2007 ("1Q07"). (Id. ¶ 136.) At an earnings conference call on

the same day, Milne stated that "[w]e continue to be disciplined in managing [the Portfolio], which we expect to average roughly $6.0 to $6.3 billion in 2007." (Id. ¶ 137.)

The 1Q07 Form 10-Q10 ("1Q07 10-Q") filed by MoneyGram on May 10, 2007, reported total revenue of $310.1 million, net income of $29.8 million, unrestricted assets of $341.8 million, a fair value of the Portfolio's AFS investments of $5.5 billion and $978,000 in OTTI securities. (Puls Aff. Ex. C at 9-10, 19.) Of the

Portfolio's reported $58.0 million in total unrealized losses, RMBS accounted for $18.6 million, CMBS for $1.0 million and other ABS for $31.1 million. (Id. at 9; Compl. ¶ 142(a).) The 1Q07 10-Q

disclosed that $3.1 million of the unrealized losses came from one

A Form 10-Q is a quarterly report that provides a continuing view of a company's financial position. (Puls. Aff. Ex. C.) 14

10

MBS and one ABS with unrealized losses greater than twenty percent of amortized cost. The remainder of unrealized losses consisted of $43.0 million in investment grade securities, $9.4 million in U.S. government agency fixed income securities, $2.4 million in ABS and $0.1 million in RMBS. In addition, unrealized losses of $17.8

million in RMBS, $622,000 in CMBS and $6.4 million in ABS came from securities with aged unrealized losses of twelve months or more. (Puls Aff. Ex. C at 10.) MoneyGram reiterated that it had the

"intent and ability to hold the[] investments [accounting for the unrealized losses] to maturity." (Compl. ¶ 142(d).) The Form

included the required SOX certifications from Milne and Parrin. (Id. ¶ 142(e).) MoneyGram announced its financial results for the quarter ended June 30, 2007, ("2Q07") in a July 18, 2007, press release, in which Milne stated "we continue to be pleased with year over year performance of [the Portfolio] that allows us to continue to invest in our money transfer platform." (Id. ¶ 161.) In a same-day

earnings conference call, an analyst questioned the effect of the turmoil in the subprime mortgage market on the Portfolio's value. In response, Parrin acknowledged that some of the Portfolio's securities were backed by subprime mortgages, but noted that they were "typically A rated or better," and that he had "seen very little impact from what has been going on in the marketplace from the rating agencies or otherwise 15 on those levels of the

securities."

(Id. ¶ 162.)

Responding to a follow-up question

about potential permanent impairment of the Portfolio's securities backed by subprime mortgages, Parrin stated: I think our current view at this point in time is that it would be temporary. And there's been a lot of noise going on in the marketplace as it has had an impact on that. And we just got to get that to settle down. Again, when we look at these assets and where we are buying at the high end, we feel pretty comfortable with where we sit on the collateral and the types of losses that have been experienced by both types of collateral we own. (Id.) On August 9, 2007, MoneyGram filed its 2Q07 Form 10-Q ("2Q07 10-Q"). (Id. ¶ 173; Puls Aff. Ex. D.) That document identified

$333.3 million in total revenue, $32.4 million in net income, $297.1 million in unrestricted assets, a $5.6 billion fair value of the Portfolio's AFS investments and $517,000 in additional OTTI. (Puls Aff. Ex. D at 9-10, 20.) Of the Portfolio's $116.7 million

in total unrealized losses, $32.4 million came from RMBS, $5.8 million from CMBS and $68.0 million from other ABS. Compl. ¶ 173(a).) (Id. at 9;

Four ABS with unrealized losses greater than

twenty percent of amortized cost accounted for $5.1 million of the unrealized losses. The remainder of unrealized losses consisted of $90.5 million in investment grade securities, $17.5 million in U.S. government agency and fixed income securities and $3.6 million in other ABS. (Compl. ¶ 173(d).) 16 Moreover, unrealized losses of

$27.1 million in RMBS, $534,000 in CMBS and $10.7 million in ABS came from securities with aged unrealized losses of twelve months or more. (Puls Aff. Ex. D at 11.) MoneyGram explained that:

Temporary market conditions at June 30, 2007 and December 31, 2006 are primarily due to changes in interest rates and credit spreads due to market conditions caused by subprime mortgages and excess leverage in the credit market. [MoneyGram] regularly monitors [the Portfolio] to ensure that investments that may be [OTTI] are identified in a timely manner and that any impairments are charged against earnings in the proper period.... Given the facts and circumstances, [MoneyGram] has determined the securities [causing the unrealized loss] were temporarily impaired when evaluated [considering factors such as the financial condition and near-term and long-term prospects of the issuer] at June 30, 2007. [MoneyGram] has both the intent and ability to hold these investments to maturity. (Compl. ¶ 173(d).) The 2Q07 10-Q also addressed the Portfolio's exposure to the subprime mortgage market. MoneyGram indicated that $384.0 million

of the Portfolio's fair value consisted of "securities that are collateralized by subprime mortgages which are classified in `Other [ABS].'" (Id. ¶ 173(e).) Ninety-seven percent of those securities reportedly had a credit rating of A or higher. also noted that eighty-eight percent of the (Id.) MoneyGram were

securities

collateralized by mortgages originating before 2006, "which is significant as the loss experience in pre-2006 collateral appears to be much lower than more recent vintages of subprime mortgages." (Id.) In addition, MoneyGram disclosed that of the $68.0 million 17

in unrealized losses attributable to the Portfolio's ABS, $6.6 million came from these securities with (Id.) "direct exposure to

subprime mortgages as collateral."

Finally, MoneyGram

represented that the "Other [ABS]" category included $620.1 million in CDO that were "backed by diversified collateral pools that may include subprime mortgages of various vintages," but that $576.7 million of these securities had credit ratings of A or better. (Id.) Milne and Parrin again made the required SOX certifications. (Id. ¶ 173(h).) Milne gave a presentation on September 11, 2007, indicating that the Portfolio "continues to perform as we would expect."11 (Compl. ¶ 192.) In that presentation, Milne reiterated the

Portfolio's $384-million exposure to subprime mortgages in the "other ABS" category and disclosed specifics about the Portfolio's RMBS and CDO. According to Milne, none of the $1.5 billion in RMBS Milne, however, disclosed

were securitized by subprime mortgages.

that $646.0 million of the RMBS had Alt-A mortgages as collateral, of which ninety-nine percent were rated A or better. (Puls Aff.

Ex. I.) Milne also revealed that the "other ABS" category included $191.0 million in high grade CDO and $429.0 million in mezzanine

MoneyGram disclosed the presentation in a Form 8-K, which provides a report of unscheduled or material events or corporate changes. (Puls Aff. Ex. I.) 18

11

CDO with some exposure to the subprime market.12 Compl. ¶ 193.)

(Puls Aff. Ex. I;

Ninety-three percent of the high-grade CDO and

ninety-two percent of the mezzanine CDO were rated A or higher. (Puls Aff. Ex. I.) An October 17, 2007, press release regarding MoneyGram's financial results for the quarter ended September 30, 2007,

("3Q07") announced that MoneyGram had "retained JP Morgan to complete a strategic review of its Payment Systems business."13 (Compl. ¶ 213.) MoneyGram also indicated that at the end of 3Q07

it drew down the balance of its $197.0 million senior credit facility to fund the acquisition of PropertyBridge, Inc. - an electronic payment processing services provider in the real estate management industry and to invest in cash equivalents to

supplement MoneyGram's unrestricted assets.

The press release

noted that MoneyGram's management considered unrestricted assets "as providing additional [were] (Id.) met assurance during that regulatory in the and other of

requirements investments."

fluctuations

value

The press release continued that:

Net unrealized [Portfolio] losses during the third quarter increased by approximately $230.0 million, a result of the illiquidity in MoneyGram defined "high grade CDO[] as those having collateral with an A- or better average rating at purchase," and mezzanine CDO as "those having collateral with a BBB/BBB- average rating at purchase." (Puls Aff. Ex. O at 12.)
13 12

Ex. J.)

MoneyGram filed the press release in a Form 8-K. (Puls Aff. 19

the market for subprime [ABS] and CDO[]. The increase in net unrealized losses reduced unrestricted assets; however, this was partially offset by the additional borrowing. Unrestricted assets were $285.7 million at the end of the third quarter. (Id.) At a conference call that day, Parrin stated that the

Portfolio's "securities are purchased for the long term and outside of a small part used for repo's not an integral to our daily liquidity." (Id. ¶ 214.) Parrin also explained that MoneyGram (Id.) In

drew down its credit facility "as a matter of prudence."

addition, Parrin commented on MoneyGram's method of Portfolio valuation and OTTI assessment: MoneyGram classifies its [Portfolio] as available for sale and we have a very disciplined approach to determine fair value in accordance with Generally Accepted Accounting Principles [("GAAP")]. It is not a new approach nor is it one that allows us to ignore the facts of the marketplace. We cannot and do not price the securities at our discretion. .... [W]e have a disciplined approach to valuate whether a security in an unrealized loss position is temporarily impaired or permanently impaired. A temporary impairment is reflected on our balance sheet through equity while permanent impairment is reflected through our income statement. An important consideration of this valuation is [MoneyGram's] intent and ability to hold the securities. A review of our quarterly

20

financial statement shows that we have recorded other than temporary impairments over time, based on this disciplined approach. (Id.) In response to questions, Milne reported that most of the

Portfolio's securities were "still performing," that JP Morgan's strategic review might result in altering the strategy for the Portfolio and that he had "not seen any [securities downgrades] that have had a direct impact on the [Portfolio]." (Id.)

On October 18, 2007, MoneyGram's stock price dropped 11.4 percent from $22.56 to $19.98 per share and Moody's downgraded MoneyGram's debt rating to the lowest possible investment grade. (Id. ¶ 218.) The following day, Fitch downgraded MoneyGram's (Id. ¶ 219.)

credit rating to one level above "junk" status.

MoneyGram filed its 3Q07 Form 10-Q ("3Q07 10-Q") on November 7, 2007, reporting total revenue of $341.6 million, net income of $34.3 million, unrestricted assets of $285.7 million, a fair value of the Portfolio's AFS investments of $5.3 billion and $4.6 million in additional OTTI securities.14 (Puls Aff. Ex. O at 9, 11, 23.)

MoneyGram disclosed that $5.1 billion of the Portfolio's fair value consisted of investment $3.7 grade securities. the (Compl. ¶ 236.)

Nevertheless,
14

billion

of

Portfolio's

securities

The other-than-temporary impairments experienced in 3Q07 came from "two investments backed primarily by home equity loans and one security backed by a diversified asset-backed pool, including home equity loans, manufactured housing loans and aircraft leases." (Id. ¶ 237.) The impairments resulted from credit rating downgrades and "the tight credit market for commercial paper." (Id.) 21

experienced unrealized losses, with $1.7 billion experiencing aged unrealized losses for twelve months or more. 13.) (Puls Aff. Ex. O at

Of the Portfolio's reported $337.3 million in unrealized

losses, $24.7 million came from RMBS, $20.7 million from CMBS and $281.2 million from other ABS. (Id.) Forty-nine securities

classified as "other ABS" and four classified as "CMBS" had unrealized losses greater than twenty percent of amortized cost and accounted for $145.3 million of the unrealized losses. (Compl.

¶ 239.) These securities constituted twenty-six mezzanine ABS CDO, seven high-grade ABS CDO, three subprime MBS and seventeen ABS with a broad range of collateral type. investment grade rating (Id.) accounted (Id.) for Securities with an million of the

$321.6

unrealized losses.

In addition, unrealized losses of $19.3

million in RMBS, $1.6 million in CMBS and $34.7 million in ABS came from securities with aged unrealized losses of twelve months or more. MoneyGram explained that: The unrealized losses were caused by a general lack of liquidity in the [ABS] market and deterioration in the broader credit markets (the "market disruption"). This market disruption was triggered by concerns surrounding subprime [MBS], but also extended to other [ABS] in the market. [MoneyGram] believes that the unrealized losses generally are caused by liquidity discounts and risk premiums required by market participants in response to current market conditions. Market conditions at September 30, 2007 primarily reflect wider credit spreads due to heightened concerns regarding the risk of securities backed by mortgage-based collateral, historically low levels of activity in the 22

related market for these securities and a tighter credit market. These market conditions have not adversely impacted the cash flow performance of these securities at this time, nor have any adverse changes in expected future cash flow performance been identified at this time based on information available through the date of this filing. [MoneyGram] believes at this time that these market conditions are temporary and will improve on a gradual basis. (Id.) The 3Q07 10-Q also detailed the Portfolio's exposure to subprime mortgages. Specifically, MoneyGram disclosed that as of

September 30, 2007, $336.2 million of the Portfolio consisted of securities collateralized by subprime mortgages and classified as "other ABS." MoneyGram reported that nearly all of these

securities had investment grade ratings.

In addition, eighty-nine

percent of the subprime ABS were pre-2006 vintage, ten percent were 2006 and one percent was 2007. MoneyGram emphasized that "industry loss experience in pre-2006 vintages appears to be much lower than the 2006 and 2007 vintages." (Puls Aff. Ex. O at 11.) The 3Q07

Form-10Q also reported that the Portfolio contained $501.0 million in CDO with indirect exposure to subprime mortgages. (Id. at 12.)

Thirty percent of these were high-grade CDO and the remainder were mezzanine. (Id.) Ninety-five percent of each class of CDO were (Id.)

reported as investment grade.

MoneyGram further disclosed in the 3Q07 10-Q its method for rating the Portfolio's securities and provided additional detail 23

regarding its fair value determination method and impairment review process. MoneyGram first reported that it used the highest rating

from either Moody's or S&P if the ratings agencies had split ratings, and that it believed the ratings changes for ABS had not materially affected the fair value of the securities as of

September 30, 2007. revealed for the

(Compl. ¶ 236.) time the

Second, MoneyGram fully of its fair value

first

details

determination method, noting that as of December 31, 2006, thirdparty pricing services priced sixty-three percent of the Portfolio, brokers priced thirty-five percent and MoneyGram internally priced two percent, but that by September 30, 2007, these percentages had changed to fifty-eight, twenty-seven and fifteen, respectively.15 MoneyGram predicted that the increase in internal valuations would continue for the foreseeable future. (Id. ¶ 238.) Third,

MoneyGram supplemented its prior explanations of the impairment review process as follows: [C]hanges in individual security values are regularly monitored to identify potential impairment indicators, such as credit rating downgrades, accelerating default rates on underlying collateral and changes in cash flow performance. The process includes a monthly global assessment of [the Portfolio] given current market conditions, as well as a monthly review of all securities using a screening process to identify those securities for which fair value falls below established thresholds for certain time periods, or which The complaint alleges that MoneyGram knew about the increase in internal pricing as early as July 1, 2007. (Id. ¶ 239.) 24
15

are identified through other monitoring criteria such as credit ratings downgrades. [MoneyGram] evaluates the facts related to the individual securities identified as a result of this process, including cash flow performance, actual default rates compared to default rates assumed in determining expected cash flows, subordination available as credit protection on [MoneyGram's] investment and the impact of any credit rating downgrades on expected future cash flows. [MoneyGram] also considers its intent and ability to hold the security for a time sufficient to recover its amortized cost. [MoneyGram] utilizes a buy and hold strategy for [the Portfolio], and generally does not utilize [the Portfolio] for liquidity purposes. While this strategy does not factor into the pricing of securities, it does factor into [MoneyGram's] assessment of other-than-temporary impairments. [MoneyGram] believes that if cash flows continue to perform as expected, [it] will be able to recover its amortized cost prior to or upon maturity or call of the security. (Id. ¶ 239.) MoneyGram cautioned, however, that some of its

judgments made in the impairment review process could be erroneous and that it might later experience realized losses by determining that securities considered temporarily impaired were actually OTTI. (Id.) The 3Q07 10-Q also stated that MoneyGram's shift towards investing more heavily in short-term securities enhanced the

Portfolio's liquidity and reduced its use of repurchase agreements. As a result, by the end of 3Q07 MoneyGram had no outstanding amounts under the repurchase agreements. Ex. O at 32.) (Id. ¶ 242(3); Puls Aff.

25

Finally, complete including a

MoneyGram

affirmed of

its the

hiring Payment

of

JP

Morgan

to

strategic review of

review "the

Systems and

segment, capital

[P]ortfolio

strategy

implications," confirmed the $197.0 million credit facility draw down, disclosed a commitment letter it had obtained from JP Morgan Chase Bank on October 31, 2007, for a $150.0 million 364-day unsecured revolving credit facility and noted that further credit rating downgrades may give two of its largest financial institution customers the right to terminate their contracts. O at 23, 33, 35, 37.) outcome of JP (Puls Aff. Ex.

MoneyGram specifically cautioned that the strategic review might change its

Morgan's

determination that some of the Portfolio's securities were only temporarily impaired and cause it to recognize realized losses through impairment charges on the income statement. In addition, the 3Q07 Form-10Q contained the (Id. at 42.) required SOX

certifications from Milne and Parrin.

(Compl. ¶ 241.)

On November 8, 2007, Euronet, a MoneyGram competitor, sent a letter to Milne expressing an interest in purchasing MoneyGram. MoneyGram did not immediately disclose the letter to the public. (Id. ¶ 244.) Unrelated to the Euronet letter, Moody's downgraded

MoneyGram's credit rating to junk status on November 16, 2007, and MoneyGram's stock price fell 7.4 percent. (Id. ¶ 245.)

On December 4, 2007, MoneyGram received a second letter from Euronet offering to buy MoneyGram in a stock-for-stock transaction 26

at a forty-three percent premium.

(Id. ¶¶ 256-57.)

After a board

meeting a week later, MoneyGram responded that it would enter discussions with Euronet upon "the execution of a mutual Euronet

confidentiality and standstill agreement."

(Id. ¶ 257.)

rejected MoneyGram's conditions the following day. On December 13, 2007, after Euronet threatened to go public with its offer, MoneyGram issued a press release16 commenting on the letter,

discussing Euronet's offer and MoneyGram's response, noting that JP Morgan's strategic review continued, revealing that MoneyGram was discussing financing alternatives with potential investors and stating that: MoneyGram has not yet concluded its valuation of [the Portfolio] as of November 30, 2007. As previously disclosed, MoneyGram's comments regarding its financial results for the full year 2007 are subject to risks including the risk of additional material changes in the market value of securities and/or permanent impairments of [P]ortfolio securities. As a result, investors should not expect that MoneyGram's financial results will be consistent with its previously announced 2007 outlook. (Compl. ¶¶ 256-57.) MoneyGram's stock price rose 15.9 percent (Id. ¶ 258.)

after disclosure of Euronet's offer.

16

Ex. Q.)

MoneyGram filed the press release in a Form 8-K. (Puls Aff. 27

On December 21, 2007, MoneyGram issued another press release17 in the form of a letter from Milne to one of MoneyGram's investors who was upset about MoneyGram's refusal to consider Euronet's offer. The press release specified that the strategic review of

the Payment Systems segment included consideration of the future of the segment itself, Portfolio valuation in a "dislocated market," adjustment of the Portfolio's strategy and optimization of

financial flexibility to support the money transfer business. (Compl. ¶ 263.) Further, as part of the strategic review,

MoneyGram would provide "additional disclosure and transparency surrounding the [Portfolio] and Payment Systems business." (Id.)

Referring to the Euronet proposal, the press release commented that MoneyGram refused "to engage in a public dialogue" because it was not the proper way to communicate, (Id.) nor did it serve the

shareholders' best interests. stated:

Finally, the press release

We believe our core business is very strong and provides significant growth opportunities in the future. We recognize that the uncertainty surrounding [the Portfolio] has affected our stock price and it is no surprise to see prospective buyers view this as an opportunity to acquire our business at a value that might be less than what our shareholders deserve. We remain open to genuine proposals from third parties when we can explore them on

MoneyGram filed the press release in a Form 8-K. Second Aff. Ex. T.) 28

17

(Puls

terms that provide us the ability to maximize shareholder value. (Id.) Beginning on December 21, 2007, the SEC requested information related to the 2006 10-K and 3Q07 10-Q. (Id. ¶ 265.) As part of

that inquiry, the SEC seized the records, computers and notes from MoneyGram's investment department on an unidentified date in winter 2007. (Id.) On January 14, 2008, the last day of the class period, MoneyGram issued a press release18 updating the Portfolio's status, identifying a potential investor, discussing the investment

negotiations, addressing credit facilities and announcing the conclusion of the strategic review of the Payment Services segment. (Compl. ¶ 270.) With respect to the Portfolio, MoneyGram announced completion of its November 30, 2007, valuation, which resulted in $571.0 million in additional unrealized losses due largely to the deterioration in value of ABS that "were negatively impacted by changes in the credit ratings of the securities or the[ir]

underlying collateral." (Id.) MoneyGram further disclosed that in January 2008 it sold $1.3 billion of the Portfolio's securities, resulting in approximately $200 million in realized losses.

According to MoneyGram, those losses, combined with significant anticipated
18

future

realized

and

unrealized

losses,

did

not

Ex. R.)

MoneyGram filed the press release in a Form 8-K. (Puls Aff. 29

immediately affect its cash flow, but created the need for longterm equity and debt capital. Therefore, MoneyGram disclosed its exclusive negotiations with an investment group led by Thomas H. Lee Partners, L.P.

("Investors") for a comprehensive recapitalization of the company. The negotiations contemplated a capital infusion consisting of $750 to $850 million in equity from the Investors and $550 to $750 million in debt from third parties that would add to the $350 million outstanding or available under MoneyGram's then-existing credit agreement. The Investors' equity infusion was expected to

result in a sixty to sixty-five percent initial equity interest in MoneyGram. The transaction was conditioned on MoneyGram's

liquidation of a significant portion of the Portfolio's ABS, MBS and CDO, with the resulting portfolio being comprised primarily of highly liquid assets. (Id.) The following day, MoneyGram's stock

price fell 49.5 percent, and by January 22, 2008, that number had risen to 66 percent. III. (Id. ¶ 272.)

Post-Class Period On February 12, 2008, MoneyGram announced in a press release

that

it

had

reached

an

agreement

with

the

Investors

for

a In

comprehensive recapitalization of the company.

(Id. ¶ 273.)

addition to detailing the recapitalization, the press release noted

30

that

MoneyGram

had

sold

an

additional

$500

million

of

the

Portfolio's securities, resulting in realized losses of $180.0 million. (Id.)

MoneyGram requested an extension of time to file its 2007 Form 10-K ("2007 10-K") on February 29, 2008, noting that its accounting and finance departments had devoted significant time and resources to "comprehensive recapitalization and other matters." (Id.

¶ 274.)

The request further predicted that MoneyGram expected to

record $1.2 billion in other than temporary impairments for the quarter ended December 31, 2007 ("4Q07"). (Id.)

MoneyGram announced an amended agreement with the Investors on March 10, 2008, in due to MoneyGram's agreement. failure (Id. to ¶ meet 277.) certain That

conditions

the

earlier

announcement also reported that MoneyGram, as required by the earlier agreement, sold certain Portfolio securities at a "total loss of approximately $1.6 billion, including $1.2 billion of other-than-temporary impairments recorded in the fourth quarter 2007 as a charge to earnings and realized losses of approximately $350 million in the first quarter of 2008." (Id.) On March 17,

2008, another MoneyGram press release indicated that the $1.6 billion in losses caused it to fall out of "compliance with the minimum net worth requirements of the states in which it is licensed to conduct its money transfer and other payment services business." (Id. ¶ 278.) The comprehensive recapitalization was 31

successfully completed on March 25, 2008.

(Id. ¶ 279.)

That same

day, MoneyGram filed its 2007 10-K, noting that the SEC's inquiry had become a formal investigation into MoneyGram's financial

statements and other disclosures.

(Id. ¶ 280.)

After the market closed on March 28, 2008, Rock, Ford and Kiernan tendered their resignations effective March 25, 2008. (Id. ¶ 283.) MoneyGram's board of directors eliminated the finance and

investment committee on April 25, 2008. (Id.) MoneyGram announced the resignations of Putney and Milne on April 8, 2008, and June 19, 2008, respectively. (Id. ¶¶ 284-85.) As of October 3, 2008, the

date the complaint was filed, MoneyGram's stock was trading at $1.41 per share. Beginning (Id. ¶ 287.) in March 2008, four securities class action

complaints were filed in this district.

On July 22, 2008, the

court consolidated these actions and named Oklahoma Teachers' Retirement System lead plaintiff. Lead plaintiff filed the amended consolidated class action complaint on October 3, 2008. The

complaint asserts a claim against all defendants pursuant to § 10(b) of the Exchange Act and SEC Rule 10b-5, alleging that they deceived the investing public, artificially inflated and maintained the market price of MoneyGram's publicly-traded securities and caused lead plaintiff and other class members to purchase those securities at the inflated prices. The complaint further alleges

"controlling person" claims against the individual defendants 32

pursuant to § 20(a) of the Exchange Act.

Defendants now move to

dismiss the action pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6), and the Private Securities Litigation Reform Act of 1995 ("Reform Act"), 15 U.S.C. § 78u-4.

DISCUSSION I. Standard of Review A complaint typically must contain only "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). This statement does not require detailed factual allegations so long as it "give[s] the defendant fair notice of what the ... claim is and the grounds upon which it rests." generally Conley v. Gibson, 355 U.S. 41, 47 (1957). accepts all facts and inferences in a A court most

light

favorable to the plaintiff and will dismiss the complaint pursuant to Rule 12(b)(6) only if its allegations fail "to raise a right to relief above the speculative level." Twombly, 550 U.S. 554, 555 (2007). Bell Atlantic Corp. v. In § 10(b) and Rule 10b-5

actions, however, the Reform Act requires the complaint to identify the allegedly false statements or omissions of material fact and explain why they were misleading. 15 U.S.C. § 78u-4(b)(1)

Moreover, a plaintiff must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." Id. § 78u-4(b)(2). 33

II.

Securities Fraud A. Section 10(b) Claim

Section 10(b) of the Exchange Act prohibits the use of "any manipulative or deceptive device or contrivance" in violation of the SEC's rules and regulations "in connection with the purchase or sale of any security." Id. § 78j(b). SEC Rule 10b-5 makes it

unlawful "for any person ... to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading." 5. 17 C.F.R. § 240.10b-

To state a claim under § 10(b) and Rule 10b-5, a plaintiff must "(1) a (2) material misrepresentation (3) a or omission by the the

allege

defendant;

scienter;

connection

between

misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Stoneridge Inv.

Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761, 768 (2008) (citation omitted). Defendants argue that the complaint

does not adequately allege any misrepresentations or omissions, facts giving rise to a strong inference of scienter or loss causation. 1. GAAP Violations

Lead plaintiff maintains that violations of GAAP by MoneyGram support its misrepresentation 34 and scienter allegations.

Specifically, lead plaintiff alleges that GAAP violations during the class period caused MoneyGram to misrepresent its comprehensive income, unrestricted assets and shareholders' equity. (Compl.

¶¶ 119(1), 124(1), 138(1), 143(1), 163(1), 174(1), 217(1), 242(1), 437, 440.) Lead plaintiff also asserts that MoneyGram violated (Id.)

GAAP through certain nondisclosures.

"GAAP are the official standards adopted by the American Institute of Certified Public Accountants," and derive from

nineteen sources that are organized into a five-level hierarchy to determine the appropriate accounting treatment in a given

situation. In re K-Tel Int'l, Inc. Sec. Litig., 300 F.3d 881, 88990 (8th Cir. 2002) (quotation omitted); see also Bolt v. Merrimack Pharm., Inc., 503 F.3d 913, 917 n.6 (4th Cir. 2007). Financial

Accounting Standards ("FAS") published by the FAS Board ("FASB") and SEC rules are at the top of that hierarchy, consensus positions of the FASB Emerging Issue Task Force ("EITF") are in the third level, FASB Staff Positions ("FSP") are in the fourth level and FASB Statements of Financial Accounting Concepts ("Concepts") are at the bottom. See Bolt, 503 F.3d at 917 n.6; Mark J. Hanson,

Becoming One: The SEC Should Join the World in Adopting the International Financial Reporting Standards, 28 Loy. L.A. Int'l & Comp. L. Rev. 521, 552 n.223 (2006). of rules." K-Tel, 300 F.3d at 890. GAAP are not "a canonical set Instead, they are "general

principles" that "tolerate a range of `reasonable' treatments, 35

leaving

the

choice

among

alternatives

to

management."

Id.

(quotations omitted). The complaint generally maintains that defendants violated GAAP related to MoneyGram's (1) fair value determinations and method for making those determinations, (2) impairment review process and the results of that process and (3) disclosures about the Portfolio's risk exposure. (See Compl. ¶¶ 119(1), 124(1),

138(1), 143(1), 163(1), 174(1), 217(1), 242(1), 437-97.) a. Fair Value

Lead plaintiff first argues that MoneyGram overstated the fair value of the Portfolio's AFS securities in violation of FAS 115, which requires that periodic unrealized losses in the fair value of AFS securities because of temporary impairments be recorded and recognized in comprehensive income on the balance sheet. ¶¶ 441-42; see also, e.g., id. ¶¶ 119(1)(b), 138(1)(a).) (Id. Lead

plaintiff relies on the following allegations to support its argument: (1) the market for MBS and ABS had declined conspicuously since mid-2006 and continued its decline throughout the class period; (2) credit rating agencies downgraded certain MBS in the first half of 2007 and several subprime mortgage originators declared bankruptcy; increased (3) MoneyGram's 2007; unrealized (4) credit losses ratings

substantially

throughout

agencies downgraded additional ABS in September and October 2007 and banks in the United States wrote down the fair value of 36

billions of dollars of ABS; (5) MoneyGram amended its credit agreement with JP Morgan Chase Bank at the beginning of January 2008 in contemplation of experiencing more than $1.5 billion in unrealized losses on the Portfolio's securities in 2007;

(6) MoneyGram eventually recognized $1.2 billion in unrealized losses for 2007; and (7) MoneyGram's recognition of unrealized losses on the Portfolio's AFS securities lagged behind the market. (Id. ¶¶ 443-47.) respects. These allegations are deficient in several

First, the allegations do not directly connect the

general external market conditions and ratings downgrades to the actual ABS, MBS and CDO in the Portfolio. Second, the crescendo in unrealized losses during 2007 may merely have reflected the growing deterioration of the market. Third, the complaint does not

identify market participants with securities of similar kind and quality whose recognition of unrealized losses substantially

differed from MoneyGram's.

Nevertheless, as discussed below, the

court determines that other allegations in the complaint permit an inference that MoneyGram overstated the fair value of the

Portfolio's AFS securities and thus violated FAS 115 by not timely and adequately recognizing unrealized losses on the Portfolio's MBS and other ABS. The complaint further asserts that MoneyGram violated GAAP by concealing (1) its fair value determination method until the 3Q07 10-Q, (2) the specifics of its disagreements with third-party 37

pricers until after the class period,19 (3) its disagreements with broker pricing, (4) the growing necessity for internal pricing due to the illiquidity of the market for the Portfolio's securities and (5) the difficulty of internal pricing. (Id. ¶¶ 449, 451, 458; see also, e.g., id. ¶ 119(1)(a).) Of the five GAAP identified in the

complaint, three are Concepts that are too general to permit a meaningful assessment of whether MoneyGram's fair value

determination method and its omissions related to that method violated GAAP.20 which allegedly The remaining two GAAP are FAS 107 and FAS 115, "require disclosure of the major types and

maturities of securities in the [Portfolio]."

(Id. ¶ 454.)

These

GAAP, however, do not address lead plaintiff's allegations related to MoneyGram's fair value determination method and the lack of

In response to an SEC inquiry, MoneyGram disclosed in a March 3, 2008, letter that in the 3Q07 10-Q it priced thirteen securities differently from the third party pricers. MoneyGram's $85.2 million fair value determination for those securities was $14.2 million higher than that of the third parties. (Id. ¶ 451.) The Concepts note, among other things, that "the primary objective of financial reporting is to provide information that is useful to current and potential investors," "relevance and reliability are the two primary qualities that make accounting information useful for decision-making," neutrality is an element of reliability, and "expectations of an entity's management are often useful and informative, [but] the marketplace is the final arbiter of asset and liability values." (Id. ¶¶ 452-53, 455.) 38
20

19

disclosures related to the use of that method.

Therefore, the

complaint's allegations do not support violation of GAAP based on MoneyGram's fair value determination method and related omissions.21 b. Impairments

FAS 115 also requires a periodic review of securities that experience unrealized losses to determine whether those securities are OTTI. Securities deemed OTTI must be identified as realized

losses in net income during the period in which the impairment occurred. (See id. ¶ 462; see also id. ¶ 465 (referring to EITF FSP 115-1 and 124-1 note that if fair values

Issue No. 99-20).)

are not readily determinable, an investor should consider certain impairment indicators, including "(1) a significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee, (2) a significant adverse change in the regulatory, economic, or technological environment of the investee, and (3) a significant adverse change in the general market condition of [the] industry in which the investee operates." (Id. ¶¶ 463-64.) Lead plaintiff argues that MoneyGram violated GAAP in 2Q07 and 3Q07 because its impairment review process failed to timely

identify OTTI securities.
21

(See id. ¶ 461; see also, e.g., id.

The complaint also alleges that MoneyGram violated GAAP by overstating its unrestricted assets during 1Q07, 2Q07 and 3Q07 by overstating the fair value of the AFS securities. (Id. ¶ 473-79.) This allegation, however, is included in the court's discussion of FAS 115 above. 39

¶ 138(c).)

Specifically, lead plaintiff alleges that the three

impairment indicators were present during 2007 and that MoneyGram should have recognized additional other-than-temporary impairments before 4Q07. described This argument is subject to the same deficiencies with respect to MoneyGram's fair value

above

determinations. concludes that

Again, however, as discussed below, the court the complaint's other allegations permit an

inference that MoneyGram's application of, or deviation from, the impairment review process resulted in a failure to timely recognize some of the Portfolio's securities as OTTI.22 The complaint further alleges that MoneyGram violated GAAP and the disclosure requirements of SEC Form 8-K during 2Q07, 3Q07 and 4Q07 by not timely disclosing impairments to its AFS securities. A Form 8-K must be filed within four business days of an event triggering its disclosure requirements. The impairment of

securities under GAAP is a triggering event that requires, among other things, disclosure of the date a company concluded a material change of the securities' status was required and a description of

The complaint also maintains that MoneyGram knew before its 3Q07 financial disclosures that it lacked the intent and ability to hold the impaired securities to maturity and thus violated GAAP by falsely claiming otherwise. (Id. ¶¶ 468-70.) If MoneyGram's 3Q07 statement regarding its intent and ability to hold the impaired securities was false, however, it is irrelevant that those statements also violated GAAP. GAAP violations are instructive only to the extent they evince fraud. Accordingly, the court considers the facts supporting this allegation in its general discussion of falsity and scienter below. 40

22

the

impaired

assets (Id.

and ¶

the 492.)

circumstances Lead

leading

to

that that

determination.

plaintiff

argues

MoneyGram's monthly impairment review process should have revealed "large and growing" impairments to the Portfolio's AFS securities, particularly in October 2007, and that those impairments should have been disclosed in a Form 8-K. As noted above, the complaint's allegations permit an inference that MoneyGram should have

recognized earlier impairments.

The complaint, however, contains

no allegations that MoneyGram concluded a security was impaired and failed to disclose that impairment. Absent such allegations, the

complaint does not support a violation of GAAP based upon a failure to file a timely Form 8-K.23 c. Risk Exposure

Lead plaintiff further alleges that MoneyGram violated GAAP throughout the class period by (1) failing to adequately disclose the Portfolio's exposure to the market value decline for MBS and other ABS, (2) using only the highest rating of split agency ratings and (3) partially concealing the manner in which risk exposure drove unrealized losses. also, e.g., id. ¶ 119(1)(c).) (Id. ¶¶ 480, 484, 486-87; see

The complaint again relies on two

Lead plaintiff also asserts that MoneyGram had a duty to disclose in a Form 8-K the September 24, 2007, draw down of its senior credit facility. (Id. ¶¶ 217(1)(g), 242(1)(g), 496.) The complaint, however, does not identify a SEC rule requiring such disclosure. Therefore, this allegation does not support a violation of GAAP. 41

23

Concepts that are too general to permit a meaningful and useful determination of whether MoneyGram's conduct violated GAAP. id. ¶¶ 481-82.) (See

The remaining GAAP are FAS 107 and FAS 115, which,

as stated earlier, allegedly "require disclosure of the major types and maturities of securities in the [Portfolio]." FAS 107 additionally recommends disclosure of (Id. ¶ 483.) quantitative (Id.)

information about the market risks to securities.

Throughout the class period, however, MoneyGram disclosed the "major types" of securities in the Portfolio - namely, CMBS, RMBS and other ABS - and there is no indication that GAAP required more specific disclosures. Moreover, MoneyGram's ratings disclosures

and alleged concealment of the effect of the Portfolio's exposure to the subprime and Alt-A mortgage market on unrealized losses do not relate to the disclosure of "major types" of securities.24 To support its contention that MoneyGram failed to fully disclose how risk exposure drove unrealized losses, the complaint selectively quotes from the 3Q07 10-Q and concludes that MoneyGram "failed to acknowledge that the market-based liquidity discounts and risk premia were largely because of the growing numbers of mortgage delinquencies and defaults." (Id. ¶¶ 488-89.) The quoted language, however, omits MoneyGram's statements in the same paragraph that the "unrealized losses were caused by a general lack of liquidity in the [ABS] market and deterioration in the broader credit market," which was "triggered by concerns surrounding subprime [MBS], but also extended to other [ABS] in the market." (Puls Aff. Ex. O at 13.) In addition, in the middle of the cited paragraph, the complaint omitted MoneyGram's recognition that "[m]arket conditions at September 30, 2007 primarily reflect wider credit spreads due to heightened concerns regarding the risk of securities backed by mortgage-based collateral, historically low levels of activity in the related market for these securities and a tighter credit market." (Id.) The significance of the (continued...) 42
24

Therefore, these allegations do not support violation of GAAP. 2. Misrepresentations and Omissions

Mere allegations of fraud do not satisfy the Reform Act's falsity pleading requirements. In re Hutchinson Tech., Inc., Sec.

Litig., 536 F.3d 952, 958 (8th Cir. 2008) (citation omitted). Rather, the circumstances of alleged fraud must be particularly stated so as to include matters such as the time, place and contents of the representations, the identity of the person who made the statement and what he or she obtained or gave up by making the statement - in other words, the "`who, what, when, where, and how.'" K-Tel, 300 F.3d at 890 (quoting Parnes v. Gateway 2000, The complaint must

Inc.,