New Jersey Carpenters Health Fund v. RALI Series 2006-QO1 Trust et al

Filing 131

OPINION AND ORDER: #100269 For the reasons set forth on this Opinion and Order, the motions to dismiss are GRANTED to the extent that Intervenors' section 12 claims are dismissed, RALI Intervenors' Section 15 claims against the Underwriter Defendants are dismissed, IPERS's claims related to Harborview offerings 2006-10 and 2007-7 are dismissed, and OCERS's claims related to RALI offering 2006-Q06 are dismissed. Having considered Defendants' remaining arguments and found them unavailing, the motions to dismiss are otherwise DENIED. The Mississippi Public Employees' Retirement System ("MissPERS") moved for and was granted leave to intervene in the RALI case. However, it is not named in the RALI SAC, has filed no other pleading, nor responded to the motion to dismiss. These lapses are grounds to dismiss for failure to prosecute, and MissPERS is hereby dismissed. See Lewis v. Rawson, 564 F.3d 569, 576 (2d Cir. 2009). The Clerk of the Court is instructed to close the relevant motion (08cv8781 Dkt. No. 126) (08cv5093 Dkt. No. 152). (Signed by Judge Harold Baer on 4/28/2011) (ab) Modified on 4/29/2011 (ajc).

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
------------------------------------------------------------------------x
NEW JERSEY CARPENTERS HEALTH
:
FUND, et al.,
:
:
Plaintiffs,
:
:
08 CV 8781 (HB)
- against :
:
RESIDENTIAL CAPITAL, LLC, et al.
:
:
Defendants.
:
------------------------------------------------------------------------x
OPINION AND ORDER
NEW JERSEY CARPENTERS VACATION
:
FUND, et al.,
:
:
Plaintiffs,
:
:
08 CV 5093 (HB)
- against :
:
THE ROYAL BANK OF SCOTLAND GROUP, PLC, :
et al.,
:
:
Defendants.
:
------------------------------------------------------------------------x
Hon. Harold Baer, Jr., District Judge:1
These cases both arise from alleged misrepresentations and omissions in the offering
documents for certain mortgage-backed securities the plaintiffs purchased. In brief, the plaintiffs
contend that they were misled as to whether proper guidelines and procedures were observed in the
origination of the loans and their subsequent securitization. Plaintiffs bring claims under sections
11, 12(a)(2) and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77k(a), 77l(a)(2), 77o (2010).2
The background facts and allegations are detailed in two Opinions devoted to the parties’
previous motions to dismiss, New Jersey Carpenters Vacation Fund v. Royal Bank of Scotland
Group, PLC, No. 08 Civ. 5093 (HB), 2010 WL 1172694 (S.D.N.Y. Mar. 26, 2010) and New Jersey

1

Shunit Yaacobi, a 2011 intern in my Chambers, provided substantial assistance in researching and drafting this
Opinion.
2
These provisions impose liability on certain participants in a registered securities offering when the publicly filed
documents used in the offering contain material misstatements or omissions. In re Morgan Stanley Information Fund
Sec.Litig., 592 F.3d 347, 358 (2d Cir. 2010). Section 11 applies to registration statements, and section 12(a)(2) applies
to prospectuses and oral communications. 15 U.S.C. §§ 77k(a), 77 l (a)(2). Section 15 creates liability for individuals or
entities that “control[ ] any person liable” under section 11 or 12. Id. § 77 o.

1

Carpenters Health Fund v. Residential Capital, LLC, No. 08 Civ. 8781 (HB), 2010 WL 1257528
(S.D.N.Y. Mar. 31, 2010). Now before the Court are motions to dismiss a number of parties who
were given leave to intervene in an Opinion and Order dated December 22, 2010.
Defendants in Civil Case No. 08-8781 (the “RALI” case)3 seek dismissal of the entire
Consolidated Second Amended Securities Class Action Complaint (“RALI SAC”) pursuant to
Federal Rules of Civil Procedure 8(a), 12(b)(1) and 12(b)(6). Defendants in Civil Case No. 085093 (the “Harborview” case)4 move to dismiss claims brought by the Intervenors in the
Consolidated Second Amended Securities Class Action Complaint (“Harborview SAC”) pursuant to
Federal Rule of Civil Procedure 12(b)(6).5 For the reasons that follow, the motions are granted in
part and denied in part.
I.

DISCUSSION
A. Legal Standard
To survive a motion to dismiss, a plaintiff must plead “enough facts to state a claim to relief

that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A facially
plausible claim is one where “the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 129
S.Ct. 1937, 1949 (2009). Where the court finds well-pleaded factual allegations, it should assume
their veracity and determine whether they “plausibly give rise to an entitlement to relief.” Id. at
1950. “Rule 8(a)(2) of the Federal Rules of Civil Procedure requires only ‘a short and plain
statement of the claim showing that the pleader is entitled to relief,’ in order to give the defendant
3

The RALI defendants are: Residential Capital, LLC; Residential Funding, LLC; Residential Accredited Loans, Inc.;
Bruce J. Paradis, Kenneth M. Duncan, Davee L. Olson, Ralph T. Flees; Lisa R. Lundsten, James G. Jones, David M.
Bricker; James N. Young, Residential Funding Securities Corporation d/b/a/ GMAC RFC Securities; Goldman, Sachs
& Co.; RBS Securities, Inc. f/k/a Greenwhich Capital Markets, Inc. d/b/a RBS Greenwich Capital; Deutsche Bank
Securities, Inc.; Citigroup Global Markets, Inc.; Credit Suisse Securities (USA) LLC; Bank of America Corporation as
successor-in-interest to Merrill Lynch, Pierce, Fenner & Smith, Inc.; UBS Securities, LLC; JPMorgan Chase, Inc. as
successor-in-interest to Bear Stearns & Co., Inc.; and Morgan Stanley & Co., Inc. (collectively, the “RALI
Defendants”)
4
The Harborview defendants are: The Royal Bank of Scotland Group, PLC; Greenwich Capital Holdings, Inc.;
Greenwich Capital Acceptance, Inc.; Greenwich Capital Financial Products, Inc.; Robert J. McGinnis; Carol P. Mathis;
Joseph N. Walsh, III; John C. Anderson; James M. Esposito; RBS Securities, Inc. f/k/a Greenwich Capital Markets,
Inc., d/b/a RBS Greenwich Capital; Moody’s Investors Service, Inc.; and The McGraw-Hill Companies, Inc.
(collectively, the “Harborview Defendants”, and, together with the RALI Defendants, simply “Defendants”)
5
The RALI intervenors are: Police and Fire Retirement System of the City of Detroit (“PFRS”); Orange County
Employees Retirement System (“OCERS”); Midwest Operating Engineers Pension Trust Fund (“Midwest OE”); and
Iowa Public Employees Retirement System (IPERS) (collectively, “RALI Intervenors”).
The Harborview intervenors are: Laborers’ Pension Fund and Health and Welfare Department of the Construction
and General Laborers’ District Counsel of Chicago and Vicinity (“Chicago Laborers”); Midwest OE; and IPERS
(collectively, “Harborview Intervenors”, and, together with the RALI Intervenors, simply “Intervenors”).

2

fair notice of what the ... claim is and the grounds upon which it rests.” Arista Records, LLC v. Doe
3, 604 F.3d 110, 119 -120 (2d Cir. 2010) (quoting Twombly, 550 U.S. at 555). “[A] complaint
attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations,” but its
“[f]actual allegations must be enough to raise a right to relief above the speculative level.”
Twombly, 550 U.S. at 555.6
B. Claims under section 12(a)(2) are dismissed
The scope of entities that can be liable under section 12 is limited to those who “(1) passed
title, or other interest in the security, to the buyer for value, or (2) successfully solicited the
purchase of a security, motivated at least in part by a desire to serve his own financial interests or
those of the securities’ owner.” In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 359 (2d
Cir. 2010) (internal quotations marks and brackets omitted). An additional limitation on section 12
relief requires that to recover, plaintiffs must have purchased their securities from a proper
defendant in a public offering. See Caiafa v. Sea Containers Ltd., 525 F. Supp. 2d 398, 407-08
(S.D.N.Y. 2007), aff’d, 331 F. App’x 12 (2d Cir. 2009); In re Cosi, Inc. Sec. Litig., 379 F. Supp. 2d
580, 589 (S.D.N.Y. 2005) (citing Gustafson v. Alloyd Co., 513 U.S. 561, 578 (1995).
Intervenors have failed to come up with sufficient allegations that they actually purchased
securities from a defendant in a public offering. See RALI SAC ¶¶ 21-24, Harborview SAC ¶¶ 2123. When asked directly at oral argument, the best that Intervenors could do was to assert that “we
just simply don’t know at this point . . . We don’t know that they were not bought on the offering. . .
there is certainly a very distinct possibility these were part of the offering.” Oral Arg. Hr’g Tr. 2830, Apr. 1, 2011. This language just does not meet the statute’s requirements, and fails to raise
Intervenors’ right to relief above the speculative level. Twombly, 550 U.S. at 555. See also In re
Barclays Bank PLC Sec. Litig, No. 09 Civ.1989 (PAC), 2011 WL 31548, at *5 (S.D.N.Y. Jan. 5,
2011) (citing citing Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance
Corp., 658 F.Supp.2d 299, 305 (D.Mass.2009) (“If plaintiffs did in fact purchase the Certificates
directly from the defendants, they should have said so. An evasive circumlocution does not serve as
a substitute.”)).

6

“Where, as here, the defendant moves for dismissal under Rule 12(b)(1), as well as on other grounds, the court should
consider the Rule 12(b)(1) challenge first since if it must dismiss the complaint for lack of subject matter jurisdiction,
the accompanying defenses and objections become moot and do not need to be determined.” Rhulen Agency, Inc. v.
Alabama Ins. Guar. Ass’n, 896 F.2d 674, 678 (2d Cir. 1990) (internal citations omitted). However, Defendants do not
direct any of their arguments to the Court’s subject matter jurisdiction, so their invocation of Rule 12(b)(1) is moot.

3

In support of their position that their allegations are sufficient, Intervenors rely principally
on two cases that appear to define the outer limit of leniency for pleading section 12 claims. In
Public Employees’ Retirement System of Mississippi v. Goldman Sachs Group, Inc., this Court
found that specific allegations of the exact security purchased along with the date of purchase were
sufficient to survive a motion to dismiss where the complaint had additionally alleged that plaintiffs
“purchased their Certificates directly from” defendants who participated in the initial public
offering. No. 09 Civ. 1110 (HB), 2011 WL 135821, at *8 (S.D.N.Y. Jan. 12, 2011) (emphasis
added). It is true that Intervenors allege the exact security purchased and the date of the purchase.
RALI SAC ¶¶ 19-24; Harborview SAC ¶¶ 19-23. However, the music stops there. Intervenors fail
to adequately allege a direct purchase from a defendant – the best RALI Intervenors can point to is a
paragraph alleging that (1) the securities “were sold” to them between June 28, 2006 and May 30,
2007, and (2) certain defendants underwrote unspecified offerings. RALI SAC ¶ 2. Similarly,
Harborview Intervenors allege that certain defendants “underwrote and sold to Plaintiffs . . . 17.74
billion of Mortgage Loan Pass-Through Certificates,” and that those certificates “were issued in
eight (8) Offerings which took place between April 26, 2006 and October 1, 2007.” Harborview
SAC ¶ 2. These “conclusory legal allegations unsupported by any factual allegations” are
insufficient. Emps. Ret. Sys. of the Gov’t of the Virgin Islands v. J.P. Morgan Chase & Co., et al.,
09 Civ. 3701 (JGK), 2011 WL 1201520, at *7 (S.D.N.Y. March 30, 2011). The fact that the
allegations of purchases by Intervenors, sales by Defendants and sales in offerings all co-exist in the
same paragraph fails, without more, to raise an inference that the Intervenors purchased from a
defendant in a public offering.
Intervenors also point to this Court’s refusal to dismiss a complaint that alleged that the
plaintiffs had “purchased the Certificates ‘pursuant to’ the relevant Offering Documents, that is, in
the relevant offerings. . . . that defendants ‘solicited, sold and distributed’ the Certificates, that they
purchased a specified number of Certificates on specified dates (some of which corresponded to the
initial offering dates) at specified prices, [and] that specific Underwriter Defendants were associated
with each individual offering . . . .” IndyMac Mortg.-Backed Sec. Litig., 718 F. Supp. 2d 495, 502
(S.D.N.Y. 2010). Here, purchases were made months or even years after the public offerings. See
RALI SAC ¶¶ 19-24, 32; Harborview SAC ¶¶ 21-23, 38. Unlike in IndyMac, the purchase dates
here do not correspond to the offering dates and thus cannot be read to provide the necessary
inference that the purchases were made in the public offerings. Because Intervenors have failed to

4

allege any facts to show that they purchased directly from Defendants in a public offering, their
section 12 claims are dismissed.7
C. Failure to state a claim under section 15
The allegations of control in the RALI SAC are insufficient to sustain RALI Intervenors’
section 15 claims. Section 15 requires allegations of (1) a primary violation of the Securities Act
and (2) “control” by the defendant. Rombach v. Chang, 355 F.3d 164, 178 (2d Cir. 2004); 15
U.S.C. § 77o. “Control in this context is not the mere ability to persuade, but almost always means
the practical ability to direct the actions of people who issue or sell securities.” In re Flag Telecom
Holdings, Ltd. Secs. Litig., 352 F. Supp. 2d 429, 458 (S.D.N.Y. 2005) (internal quotations omitted).
The RALI SAC alleges that Residential Funding Securities Corporation (“RFSC”),
Goldman, Sachs & Co., Deutsche Bank Securities, Inc., Citigroup Global Markets, Inc., and UBS
Securities, LLC (collectively, the “Underwriter Defendants”), were “controlling persons” of those
defendants who are otherwise liable under sections 11 and 12, and that they had the “power to
influence, and exercised that power and influence” to cause violations of sections 11 and 12. RALI
SAC ¶ 252. These are the same conclusory allegations brought in the RALI First Amended
Complaint that were found insufficient to state a claim under section 15. See DE 58 at 12. I
previously accepted the allegation that RFSC may have exercised some degree of control as a
subsidiary of defendant Residential Capital, LLC. However, the new RALI SAC fails to improve
on its ancestors’ anemic section 15 allegations. Upon further consideration I conclude that the
RALI SAC provides insufficient factual allegations even as to RFSC. See SAC ¶¶ 45-50. The
allegations that the RALI Underwriter Defendants exercised sufficient control are purely
conclusory, see SAC ¶¶ 252-53, and the section 15 claims against them are dismissed.
D. Diminution in Market Value Constitutes a Cognizable Loss
RALI Defendants argue that RALI Intervenors’ section 11 claim related to offering 2007QS1 should be dismissed because they continue to hold their certificates and to receive the full
monthly principal and interest payments; the mere decline in the certificates’ market value, they
posit, is not an injury for section 11 purposes.8 Harborview Defendants argue more broadly that all
Section 11 and 12 claims should be dismissed for essentially the same reason: Intervenors cannot
7

While the RALI Defendants made this argument on their initial motion to dismiss claims by the named plaintiffs, see
RALI Dkt. No. 39 at 5, those claims relate to purchases that are separate and apart from those addressed here.
8
RALI Defendants also make this argument with regards to OCERS’s investment in 2006-QO6; however OCERS has
conceded that its claims as to 2006-QO6 have been released. RALI Pl.’s Opp’n at 3 n.9. OCERS’s claims related to
that offering are dismissed.

5

allege an injury based solely on a decline in secondary market value when they were warned of the
risks of an illiquid market.
While a plaintiff need not plead damages under Section 11, it must “satisfy the court that [it]
has suffered a cognizable injury under the statute.” In re AOL Time Warner, Inc. Sec. & “ERISA”
Litig., 381 F. Supp. 2d 192, 246 (S.D.N.Y. 2004). As a matter of law, an allegation that an
“investment has declined in value … is a cognizable loss for the purposes of Section 11.” Emps.’
Ret. Sys. of the Gov’t of the Virgin Islands, 2011 WL 1201520 at *13; see also, NJ Carpenters v.
DLJ Mortg. Capital, Inc., No. 08-5633 (PAC), 2010 U.S. Dist. LEXIS 47512, at *14 (S.D.N.Y.
March 29, 2010) (rejecting the notion that actionable damages in a Section 11 claim can only exist
when investors fail to receive a “pass-through” of cash flows). Here, the Harborview Intervenors
allege specific facts supporting the position that Chicago Laborers sold its holdings in 2006-10 and
2006-14 at a loss; Midwest OE sold its holdings in 2006-7, 2006-9, and 2007-7 at a loss; and IPERS
sold its holdings in 2006-9 and 2006-11 at a loss. See Harborview Pl.’s Opp’n at Sched. A; Decl. of
Kenneth M. Rehns, Ex. A., July 30, 2010 (08cv5093 Dkt. No. 118-1); Decl. of Kenneth M. Rehns,
Exs. A, B., July 12, 2010; (08cv5093 Dkt. Nos. 104-1, 104-2). IPERS’s holdings in 2006-12 and
2007-QS1 have declined in value. Harborview SAC ¶¶ 73-74. RALI SAC ¶ 19. These allegations
of injury are sufficient at the pleading stage.
However, Harborview Defendants’ motion to dismiss IPERS’s section 11 and 12 claims
related to offerings 2006-10 and 2007-7 must be granted because certificates purchased in those
offerings were sold at a profit. See Decl. of Kenneth M. Rehns Ex. A, July 30, 2010 (Dkt. No. 1181)(08cv5093); In re AOL Time Warner, 381 F. Supp. 2d at 245-246 (dismissing Section 11 and 12
claims where plaintiff failed to allege an injury); see also Pub. Emps.’ Ret. Sys. of Miss. v. Goldman
Sachs Grp., Inc., 2011 WL 135821, at *9.
E. Claims arising from the purchase of 2006-QS8 are timely
Claims under Section 11 and 12(a)(2) of the ’33 Act are subject to a one-year statute of
limitations, which begins to run upon “the discovery of the untrue statement or omission, or after
such discovery should have been made by the exercise of reasonable diligence.” 15 U.S.C. § 77m.
RALI Defendants assert that PFRS’s claims relating to the 2006-QS8 offering must be dismissed as

6

time-barred because PFRS failed to bring them within one year of being on inquiry notice.9
However, the Supreme Court recently rejected the use of inquiry notice to determine when the
limitations period for a securities fraud claim begins. See Merck & Co. v. Reynolds, 130 S. Ct 1784,
1797 (2010). The Court clarified that the clock starts to tick when “a reasonably diligent plaintiff
would have discovered the facts constituting the violation.” Merck, 130 S.Ct. at 1798 (internal
citations omitted). Applying Merck, the Second Circuit elaborated that a fact is not deemed
discovered until a “plaintiff would have sufficient information about that fact to adequately plead it
in a complaint … with sufficient detail and particularity to survive a 12(b)(6) motion to dismiss.”
City of Pontiac Gen. Emps. Ret. Sys. v. MBIA, Inc., --- F. 3d ----, 2011 WL 677404 at *4 (2d Cir.
Feb. 28, 2011). See also In re Wachovia Equity Sec. Litig., 09 Civ. 4473 (RJS) slip op. at 31
(S.D.N.Y. Mar. 31, 2011) (applying Merck to claims under Sections 11 and 12(a)(2) of the ’33 Act).
RALI Defendants fail to show that a reasonably diligent plaintiff would have discovered the
facts constituting the violation over a year before bringing this action, or by May 18, 2008. They
posit three bases for the purported discovery: (i) delinquency rates for 2006-QS8 approached 15%;
(ii) Bear Stearns had collapsed just days before PFRS’s investment; and (iii) Fitch, two weeks
before PFRS’s investment, put the relevant securities on ratings watch for possible downgrades.
The first basis relies on Plaintiffs’ theory, asserted in the RALI SAC, that high delinquency rates
indicate a failure to adhere to underwriting guidelines. Defendants argue that, by its own logic,
PFRS should have been aware of the alleged misstatements concerning underwriting practices.
However, Plaintiffs’ theory is merely a theory. The only substantiated correlation cited exists
between high delinquency rates and misstatements in the original loan applications – not
misstatements in the offering documents for securities made up of the original loans. See RALI
SAC ¶ 68. This is not enough for me to conclude that PFRS should have discovered the facts
amounting to misstatements and omissions in the 2006-QS8 offering documents. City of Pontiac,
2011 WL 677404 at *4.
It is an even further reach to suggest that a possible ratings downgrade and the collapse of
Bear Stearns should have caused PFRS to discover the misstatements or omissions in the offering
documents for 2006-QS8. Id. Even if these facts would have been sufficient to put PFRS on

9

In securities fraud cases, inquiry notice arises when “circumstances would suggest to an investor of ordinary
intelligence the probability that she has been defrauded.” Staehr v. Hartford Fin. Serv. Group, Inc., 547 F.3d 406, 411
(2d Cir. 2008).

7

inquiry notice, that would not have started the statue of limitations. Merck, 130 S.Ct. at 1798; City
of Pontiac, 2011 WL 677404 at *3.
F. Knowledge does not defeat Intervenors’ claims
RALI Defendants assert that RALI Intervenors’ Section 11 and 12(a)(2) claims related to
offerings 2006-Q06, 2006-Q09, 2006-QS8, 2006-QS18, 2007-Q02, and 2007-Q0S1 (the
“Knowledge Offerings”) must be dismissed because RALI Intervenors had knowledge of the high
delinquency rates at the time they purchased the certificates. A plaintiff may not prevail on a
securities fraud claim under Sections 11 or 12 if a defendant proves that at the time of the securities
purchase, the plaintiff “knew of [the] untruth or omission” alleged as the basis for recovery. 15
U.S.C. §§ 77k(a), 77l(a)(2); In re Barclays, 2011 WL 31548, at *10.
As with their inquiry notice argument, RALI Defendants rely on allegations in the RALI
SAC that delinquency rates exceeding 3.2% indicate a systematic disregard of underwriting
guidelines. They contend that because the RALI Intervenors purchased from the Knowledge
Offerings more than four months after the offering date, when the delinquencies reported on the
then available monthly statements were above 3.2%, RALI Intervenors had knowledge of the
“untruths or omissions” in the guidelines and may not recover under Section 11 or 12(a)(2).
For purposes of this motion to dismiss, the RALI Intervenors’ lack of knowledge is
presumed, and RALI Defendants bear the burden of proving otherwise. See In re Global Crossing,
Ltd. Sec. Litig., 313 F. Supp. 2d 189, 205-206 (S.D.N.Y. 2003). While there may be “cases in
which the facts pled demonstrate that the purchaser must have known the truth,” this is not one of
them. Id. at 206. Defendants cite to monthly reports about the Knowledge Offerings that disclosed
high delinquency rates, as well as cautionary words from ratings agencies in connection with the
origination of the underlying loan pools. Without more, these facts do not prove that the RALI
Intervenors “knew of” the alleged misrepresentations concerning underwriting standards. 15 U.S.C.
§§ 77k(a), 77l(a)(2). This Court has declined to impute knowledge of fraud to plaintiffs who were
aware of declining stock prices. See Global Crossing, 313 F. Supp. 2d at 206. Put another way,
RALI Defendants provide no convincing basis to conclude that rising delinquency rates or adjusted
rating methodologies such as those alleged here defeat the knowledge prong in section 11 or
12(a)(2). For these reasons and those discussed in connection with the inquiry notice arguments,
RALI Defendants’ motion to dismiss claims related to the Knowledge Offerings must be DENIED.

8

G. The repurchase, cure or substitute clause provides no escape hatch
Harborview Defendants note that the offering documents do not purport to verify the
accuracy of loan information; rather they state that if information is incorrect the originator will
repurchase, cure or substitute any non-conforming loans upon request. They argue that, as a result,
Harborview Intervenors should have pled a failure to repurchase, cure or substitute loans in
accordance with the offering documents. This argument employs principles of contract law that are
inapposite in the context of ’33 Act claims, not least because issuers “are subject to ‘virtually
absolute’ liability under section 11, while the remaining potential defendants under sections 11 and
12(a)(2) may be held liable for mere negligence.” In re Morgan Stanley Info. Fund Sec. Litig., 592
F.3d 347, 360 (2d Cir. 2010). Liability is not predicated on compliance with contractual
obligations.
Harborview Defendants rely on a Fifth Circuit decision, Lone Star Fund V (US), LP v.
Barclays Bank PLC, 594 F.3d 383, 389 (5th Cir. 2010), to support their position. That case is
distinguishable because the misstatements were in the underlying “mortgage loan pools”, not in the
Offering Documents as is the case here, and the overwhelming majority of courts in this Circuit
have rejected the Lone Star approach. See, e.g., Emps.’ Ret. Sys. of the Gov’t of the Virgin Islands,
2011 WL 1201520, at *11; City of Ann Arbor Emps. Ret. Sys. v. Citigroup Mortg. Loan Trust Inc.,
No. 08 Civ. 1418 (LDW), 2010 U.S. Dist. LEXIS 137290, *17-19 (E.D.N.Y. Dec. 23, 2010).
H. Failure to allege reliance does not defeat Harborview Intervenors’ claims
A section 11 plaintiff must prove reliance if it purchases the subject securities “after the
issuer has made generally available to its security holders an earning statement covering a period of
at least twelve months beginning after the effective date of the registration statement . . . .” 15
U.S.C. § 77k(a)(5). Harborview Defendants argue that a number of “Distribution Summaries” they
released are the equivalent of an “earning statement” and triggered a requirement to plead reliance.
Their argument is unpersuasive because the regulations that define “earning statement” are specific
and do not appear to contemplate the kind of Distribution Summaries at issue here. See 17 C.F.R.
230.158. Nor can Harborview Defendants point to any judicial decision finding that Distribution
Summaries such as those here are adequate stand-ins. The Distribution Summaries do not constitute
earning statements because they fail to include the “information required” for the traditional earning
statements. See In re WorldCom, Inc. Secs. Litig., 219 F.R.D. 267, 289 (S.D.N.Y. 2003). The
motion to dismiss for failure to plead reliance is DENIED.

9

II.

CONCLUSION
For the foregoing reasons, the motions to dismiss are GRANTED to the extent that

Intervenors' section 12 claims are dismissed, RALI Intervenors' Section 15 claims against the
Underwriter Defendants are dismissed, IPERS's claims related to Harborview offerings 2006-10
and 2007-7 are dismissed, and OCERS's claims related to RALI offering 2006-Q06 are dismissed.
Having considered Defendants' remaining arguments and found them unavailing, the motions to
dismiss are otherwise DENIED.
The Mississippi Public Employees' Retirement System ("MissPERS") moved for and was
granted leave to intervene in the RALI case. However, it is not named in the RALI SAC, has filed
no other pleading, nor responded to the motion to dismiss. These lapses are gounds to dismiss for
failure to prosecute, and MissPERS is hereby dismissed. See Lewis v. Rawson, 564 F.3d 569,
576 (2d Cir. 2009).
The Clerk of the Court is instructed to close the reb:vall1tll~~ (08cv8781 Dkt. No. 126)
(08cv5093 Dkt. No. 152).

SOO~RED
.2011
New ork, New York

Apri

U.S.D.J.

10