The Police and Fire Retirement System of the City of Detroit v. Goldman Sachs & Co. et al

Filing 85

OPINION: For the foregoing reasons, Defendants' motion to dismiss is denied, except with respect to PFRS's claim that the offering documents misled investors as to the rating agencies' opinions, for which the motion is granted. PFRS's motion to amend is denied. SO ORDERED. (Signed by Judge Miriam Goldman Cedarbaum on 3/27/2014) (ajs)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
----------------------------------X
THE POLICE AND FIRE RETIREMENT
SYSTEM OF THE CITY OF DETROIT,
Individually and on Behalf of All
Others Similarly Situated,
OPINION

Plaintiff,
-against-

10 Civ. 4429 (MGC)
GOLDMAN, SACHS & CO., GOLDMAN
SACHS MORTGAGE COMPANY, GS
MORTGAGE SECURITIES CORP., DANIEL
L. SPARKS, MICHELLE GILL, and
KEVIN GASVODA,
Defendants.
----------------------------------X
APPEARANCES:
WOLF HALDENSTEIN ADLER FREEMAN & HERZ LLP
Attorneys for Plaintiff
270 Madison Avenue
New York, New York 10016
By: Lawrence P. Kolker, Esq.
Michael Liskow, Esq.
KOHN, SWIFT & GRAF, PC
Attorneys for Plaintiff
One South Broad Street, Suite 2100
Philadelphia, Pennsylvania 19107
By: Joseph C. Kohn, Esq.
Denis F. Sheils, Esq.
William E. Hoese, Esq.
Barbara L. Moyer, Esq.
SULLIVAN & CROMWELL LLP
Attorneys for Defendants
125 Broad Street
New York, New York 10042

1

By: Richard H. Klapper, Esq.
Theodore Edelman, Esq.
Michael T. Tomaino, Jr., Esq.
Matthew A. Peller, Esq.
D. Andrew Pietro, Esq.

Cedarbaum, J.
The Police and Fire Retirement System of the City of
Detroit (“PFRS”) sues Goldman, Sachs & Co. (“GS”), Goldman Sachs
Mortgage Co. (“GSMC”), GS Mortgage Securities Corp (“GSM”), and
three individuals (collectively, “Defendants”) for violations of
Sections 11 and 15 of the Securities Act of 1933.

Defendants

move to dismiss the complaint on the grounds that it fails to
plead economic loss, fails to allege any actionable
misrepresentations, and is barred by the applicable statute of
limitations.

For the reasons that follow, that motion is

denied, except with respect to PFRS’s claim that the offering
documents misled investors as to the rating agencies’ opinions.
PFRS also seeks leave to amend its complaint to add allegations
regarding two additional trusts securitized by GSM.

That motion

is denied as futile.
BACKGROUND
PFRS alleges as follows: On June 15, 2007, PFRS purchased
Mortgage-Backed Certificates, Class 6A-1, from the GSR Mortgage
Loan Trust 2007-4F (the “Trust”) at a face value of
$1,800,000.00.

GS served as an underwriter in the sale of the

2

certificates.

GSMC, a subsidiary of GS, purchased the loans

underlying the certificates from a variety of originators and
sponsored the offerings.

GSM, a subsidiary of GSMC, securitized

the mortgages as the depositor of the certificates.

GSM issued

over $790 million worth of certificates pursuant to the offering
documents through the Trust.
groups.

The loans are divided into two

Loan Group 1 had an aggregate scheduled principal

balance of $707,936,373, and Loan Group 2 had an aggregate
scheduled principal balance of $82,164,370.

The pool of loans

underlying PFRSs’ certificates was “Collateral Group 6.”

80.6%

of the loans in that group were originated by Countrywide Home
Loans Servicing, LP (“Countrywide”).

Other loan originators for

the Trust as a whole included Washington Mutual Bank, Goldman
Sachs Mortgage Conduit Program, SunTrust Mortgage Inc., and
American Mortgage Network.

In mid-2009 the certificates were

downgraded both by Fitch and S&P from AAA to CCC (i.e. “junk”)
status, allegedly destroying their value.
On December 11, 2008, NECA-IBEW Health & Welfare Fund
(“NECA”) filed a complaint against the defendants asserting
violations of Sections 11, 12(a)(2), and 15 of the ’33 Act.
These claims included the 2007-4F Trust at issue here.

Counsel

for NECA published a Private Securities Litigation Reform Act
(“PSLRA”) Notice in Business Wire on December 11, 2008,
notifying purchasers of securities, including purchasers of the
3

2007-4F Trust, that a class action lawsuit had been filed on
their behalf.

I dismissed NECA’s claims pertaining to the 2007-

4F Trust on January 28, 2010 for lack of standing.

On March 31,

2010, NECA filed a third amended complaint that no longer
asserted claims regarding the Trust.

As its claims were no

longer covered by the proposed class action, PFRS moved to
intervene in the NECA action on April 26, 2010.
motion on May 27, 2010.

I denied the

PFRS filed this action on June 3, 2010.

PFRS’s complaint has been dismissed twice before with leave
to amend, largely on the basis that PFRS had failed to allege
that defendants’ alleged misrepresentations caused injury to
PFRS.

Since that time, however, the Second Circuit has issued

an opinion in NECA-IBEW Health & Welfare Fund v. Goldman Sachs &
Co., 693 F.3d 145 (2d Cir. 2012), cert. denied, 133 S.Ct. 1624
(2013).

That opinion has significantly changed the landscape of

the pleading standards for loss causation and is discussed
below.
DISCUSSION
I.

Pleading Economic Loss
The absence of loss causation is an affirmative defense,

and lack of loss causation is therefore generally “unavailing as
a means of defeating a motion to dismiss pursuant to Rule
12(b)(6).”

In re Morgan Stanley Info. Fund Sec. Litig., 592

F.3d 347, 359 n.7 (2d Cir. 2010).
4

PFRS now makes the following loss allegations:
1. It purchased its certificates (face value of $1.8
million) for $1,785,337.50 on June 15, 2007.
2. PFRS sold the certificates on October 5, 2009, for a
(post-adjustment) price of $943,398.37.
3. The “book value” at that time was $1,109,275.41.
4. Thus, the difference between the book value and adjusted
sale price constitutes its damages of $165,877.05.
The Second Circuit concluded in NECA that “it is not just
plausible -- but obvious -- that mortgage-backed securities . .
. would suffer a decline in value as a result of (1) ratings
downgrades and (2) less certain future cash flows” even if the
securities did not miss an interest payment.

693 F.3d at 166.

The court also concluded that the possibility that a secondary
market for the certificates might not exist was irrelevant
because, inter alia, that risk was a “liquidity risk” rather
than the “credit risk” that led to the alleged loses.
167.

Id. at

The court ultimately found allegations that “a sale on the

date the first lawsuit was filed would have resulted in a loss
of at least 55 to 65 cents on each dollar amount purchased”
sufficient to allege injury.

Id. at 155.

After NECA, the fact that PFRS (1) received payments
throughout the life of the certificates, and (2) was arguably
aware of the risk that there would not be a secondary market for
5

its certificates, is immaterial.

Defendants attempt to

distinguish NECA by arguing that the PFRS complaint “does not
adequately plead a decline in value as a result of any alleged
misrepresentations,” and does not adequately define “book
value.”

However PFRS’s loss allegations are more detailed than

NECA’s, which pass muster under the governing case law.

Under

NECA, PFRS has alleged a plausible injury.
Defendants also argue that PFRS has standing to bring
claims only on behalf of plaintiffs who purchased certificates
for the same tranche that it did.

However, Defendants concede,

as they must, that this argument is precluded by NECA’s holdings
on “class standing” and simply maintain, for preservation
purposes, that the holding was “in error.”
II.

Pleading Actionable Misrepresentations

Defendants next argue that PFRS does not plead any
actionable misrepresentations.

PFRS must plead one of three

bases for liability: “(1) a material misrepresentation; (2) a
material omission in contravention of an affirmative legal
disclosure obligation; or (3) a material omission of information
that is necessary to prevent existing disclosures from being
misleading.”

Litwin v. Blackstone Grp., L.P., 634 F.3d 706,

715–16 (2d Cir. 2011).

The complaint identifies several types

of misstatements or omissions which are discussed below.

6

A. Underwriting Guidelines
PFRS alleges that the offering documents misleadingly
represented that the originating lenders applied certain
underwriting standards when making the loans underlying the
certificates.

In fact, according to PFRS, the lenders

systematically failed to apply those standards.
Defendants argue that these allegations do not state a
claim because the offering documents included warnings that many
underlying loans had been issued “pursuant to alternative
lending programs” that did not necessarily require verification
of borrower-provided information.

PFRS alleges, however, that

the practices of the originating lenders were “completely at
odds with what defendants represented” in the offering
documents.

For example, PFRS cites the following statement from

the offering documents as misleading: “[T]he originating lender
makes a determination about whether the borrower’s monthly
income (if required to be stated) will be sufficient to enable
the borrower to meet its monthly obligations on the mortgage
loan.”

The complaint alleges that in reality “the originators

extended mortgages to borrowers without regard to their ability
to pay their mortgage obligation” and that originators coached
borrowers to falsely inflate their incomes and inflated those
incomes themselves.

7

These allegations concern not only the documentation the
originators used, but also whether the originators sought in
good faith to ensure, with whatever information they were
provided, that the people to whom they lent were likely able to
pay.

Defendants’ disclosures did not alert PFRS that this kind

of behavior could occur.

N.J. Carpenters Health Fund v. DLJ

Mortg. Capital, Inc., No. 08 Civ. 5653 (PAC), 2010 WL 1473288,
at *6 (S.D.N.Y. Mar. 29, 2010) (“DLJ”) (cautionary language did
not “make clear the magnitude of the risk”); N.J. Carpenters
Vacation Fund v. Royal Bank of Scotland Grp., PLC, 720 F. Supp.
2d 254, 270 (S.D.N.Y. 2010) (“[D]isclosures that described
lenient, but nonetheless existing guidelines about risky loan
collateral, would not lead a reasonable investor to conclude
that the mortgage originators could entirely disregard or ignore
those loan guidelines.”) (internal citation omitted).
Defendants next assert that the underwriting policies were
simply “‘guidelines’ from which originators had discretion to
deviate.”

However, as the Second Circuit has explained,

“‘saying that exceptions occur’ [in underwriting guidelines]
does not reveal what [PFRS} alleges, ‘namely, a wholesale
abandonment of underwriting standards.’”

N.J. Carpenters Health

Fund v. Royal Bank of Scotland Grp., PLC, 709 F.3d 109, 125 (2d
Cir. 2013) (“N.J. Carpenters”) (internal citation omitted).

8

Further, Defendants argue that the PFRS’s claims are
insufficient because the allegations regarding deviations from
loan underwriting are not linked to the specific loans
underlying the certificates.

However, the Second Circuit has

determined that somewhat similar allegations -- regarding
widespread deviations in underwriting guidelines by the relevant
underwriters, coupled with ratings downgrades and high
delinquency rates in the loans held by the plaintiff -- can
survive a motion to dismiss.
23.

N.J. Carpenters, 709 F.3d at 121-

Although PFRS does not allege high delinquency rates in the

loans, that distinction is not dispositive.

Since the NECA

court held that a ratings downgrade is a cognizable injury,
whether PFRS was also injured through loan delinquencies is
immaterial.

PFRS has alleged that underwriters for loans in the

Trust systematically abandoned their underwriting standards; it
has adequately alleged that it was injured, and it has alleged
that the misrepresentation and the injury are related.

That is

sufficient.
Finally, Defendants argue that under SEC Regulation AB,
they are only required to disclose known deviations from stated
underwriting guidelines and contend that the complaint did not
offer sufficient support for the assertion that Defendants knew
that the lenders were deviating from their underwriting
guidelines.

See Item 1111 of SEC Regulation AB, 17 C.F.R. §
9

229.1111(a)(3) (in relevant part requiring disclosure of
“underwriting criteria used to originate . . . the pool assets,
including to the extent known, any changes in such criteria”).
However, Item 1111 can shield Defendants only with respect to
omissions, not misstatements.

See Fed. Hous. Fin. Agency v. UBS

Americas, Inc., 858 F. Supp. 2d 306, 333 (S.D.N.Y. 2012).

The

PFRS complaint alleges that the description of underwriting
standards contained in the offering documents was affirmatively
misleading because the loan originators were not following these
standards at all.

Regulation AB does not apply.

The

allegations regarding deviations from underwriting practices are
actionable.
B. Appraisal Practices and Loan-to-Value Ratios
The complaint alleges that representations regarding
appraisal practices within the offering documents were
misleading because “appraisers were ordered by loan originators
to give pre-determined inflated appraisals that would result in
approval of the loan” and in fact gave in to these demands.
Further, PFRS alleges the loan-to-value (“LTV”) ratios provided
in the offering documents were false because they were based
upon these inflated appraisals, which are used to determine the
“value” used in the ratios.
As appraisals involve “subjective opinion based on the
particular methods and assumptions the appraiser uses,” they are
10

actionable only if the complaint “alleges that the speaker did
not truly have the opinion at the time it was made public.”
Tsereteli v. Residential Asset Securitization Trust 2006-A8, 692
F. Supp. 2d 387, 393 (S.D.N.Y. 2010).

While this is a difficult

burden that many courts have found to be lacking, see, e.g.,
id.; DLJ, 2010 WL 1473288, at *7–8, allegations of such
knowledge are nevertheless sufficient to survive a motion to
dismiss.

Emps.’ Ret. Sys. of Gov’t of the Virgin Islands v.

J.P. Morgan Chase & Co., 804 F. Supp. 2d 141, 153 (S.D.N.Y.
2011) (“J.P. Morgan”); see also Fed. Hous. Fin. Agency., 858 F.
Supp. 2d at 328.
PFRS’s complaint comes closer to the latter decisions.

For

instance, PFRS alleges that the appraisals underlying the Trust
were not simply inflated, but that they were inflated because
the appraisers succumbed to orders by loan originators to give
inflated appraisals.

PFRS has met its burden.

Defendants finally argue that PFRS’s allegations
functionally allege fraud and that the allegations lack
sufficient specificity to satisfy Rule 9(b).

Where claims are

“premised on allegations of fraud,” Rule 9(b) pleading standards
apply even where fraud is not a necessary element of the cause
of action.

Rombach v. Chang, 355 F.3d 164, 171 (2d Cir. 2004).

The present allegations of knowing falsity by appraisers and
loan originators do not amount to allegations of fraud by the
11

actual Defendants.

Although PFRS occasionally alleges knowledge

of falsity by certain Defendants with respect to upholding
underwriting standards, that knowledge is never an important
part of the complaint, which explicitly disclaims that it is
premised on fraud.

See In re Atlas Air Worldwide Holdings, Inc.

Sec. Litig., 324 F. Supp. 2d 474, 503 (S.D.N.Y. 2004) (declining
to apply Rombach where any allegations regarding defendants’
scienter were not necessary to state claim under Section 11).
PFRS has stated a claim based on inflated appraisals and,
as a result, has also stated a claim based on the LTV ratios
that were based on those appraisals.
C. Credit Ratings
PFRS alleges that the offering documents failed to disclose
that the credit ratings assigned to the Trust “were not the
result of the ratings agencies’ independent analysis and
conclusion.”

The ratings were also allegedly inaccurate because

they “were based on outdated assumptions, relaxed ratings
criteria, and inaccurate loan information.”
Credit ratings, like appraisals and LTV ratios, are
opinions, and therefore a ratings agency must knowingly make a
false statement in order for the opinion to be actionable.

See

J.P. Morgan, 804 F. Supp. 2d at 154 (citing Tsereteli, 692 F.
Supp. 2d at 395); DLJ, 2010 WL 1473288, at *7–8.

Unlike its

appraisal allegations, PFRS does not clearly allege the ratings
12

agencies’ knowledge of the ratings’ falsity at the time they
were made. Its allegations that ratings agencies “repeatedly
eased their ratings standards in order to capture more market
share of the ratings business,” and quotation of a former S&P
director who stated the credit ratings models had not been
updated on a timely basis do not meet this threshold.
Defendants’ motion to dismiss this particular claim is granted.
D. Truth of Underlying Loan Documents
The offering documents represented that the loan
originators had warranted that the documentation of underlying
loans was free from fraud.

PFRS alleges that these

representations were misleading because the loan originators
were systematically and routinely falsifying the incomes of the
borrowers.

Further, it alleges that the loan documentation

contained other misrepresentations understating borrowers’ debts
and misrepresenting borrowers’ employment status and the
occupancy of the purchased properties.

Defendants argue, citing

to no pertinent authority, that the offering documents simply
relayed statements made by the originators to Defendants and
that those statements are therefore not actionable.
Even if these statements were initially made by the
originators, Defendants echoed these representations to
investors.

“If defendants were correct that a party could

transform the Securities Act’s strict liability regime into one
13

that required scienter simply by attributing factual information
in the offering materials to a non-defendant third-party, th[e]
purpose [of Section 11] would be significantly undermined.”
Fed. Hous. Fin. Agency, 858 F. Supp. 2d at 329.

PFRS has stated

a claim based on the truth of the underlying loan documents.
E. Adverse Investments
Finally, PFRS argues that GS should have disclosed its
engagement in credit-default swaps because GS was simultaneously
“betting that borrowers would default on the very same kinds of
loans underlying the Certificates.”

Defendants argue that they

had no duty to disclose this information, and that their
omission is therefore not actionable.

“A duty to disclose

arises whenever secret information renders prior public
statements materially misleading.”

In re Time Warner Inc. Sec.

Litig., 9 F.3d 259, 268 (2d Cir. 1993).

It is difficult to

perceive how an investor in the Trust would not find such
information -- that the entity selling certificates was betting
against those very same assets -- material.
Defendants also argue that the offering documents
“expressly disclosed the possibility that Goldman Sachs could
enter into credit default swaps” by stating that “[t]he Sponsor
and its affiliates may from time to time have economic interest
in the performance of the Mortgage Loans included in the Trust
Fund or in other securitization trusts that may include a
14

residual interest, other classes of certificates, or interests
in the form of derivatives.”

Such a generalized disclosure that

Defendants might have an “economic interest” in the Trust is not
sufficient to place investors on notice that Defendants had
already taken an adverse interest at the time the offering
documents were issued.
III. Statute of Limitations
A. When did the period begin to run?
Defendants argue that PFRS’s claims are time-barred because
PFRS was on notice of its claims more than one year prior to its
initiating this suit on June 3, 2010.

Claims filed under

Sections 11 and 15 of the Securities Act of 1933 must be
“brought within one year after the discovery of the untrue
statement or the omission, or after such discovery should have
been made by the exercise of reasonable diligence.”

15 U.S.C.

§ 77m.
In a case relating to the Exchange Act of 1934, the Supreme
Court held that the limitations period does not begin to run
until the plaintiff discovers, or a reasonably diligent
plaintiff would have discovered, the violation.
Inc. v. Reynolds, 599 U.S. 633, 653 (2010).

Merck & Co.,

It is an open

question in this circuit whether the Merck holding should be
extended to the ’33 Act or whether the stricter “inquiry notice”
standard continues to apply.

See Dodds v. Cigna Sec., Inc., 12
15

F.3d 346, 350 (2d Cir. 1993) (limitations period begins if
“circumstances would suggest to an investor of ordinary
intelligence the probability that she has been defrauded,” and
the investor does not make an inquiry at that time).

Under

either standard, the start date is the same: the date the NECA
complaint was filed on December 11, 2008.
PFRS contends that it was not put on notice until the
ratings downgrades of the certificates in 2009, but it is hard
to see how the filing of the NECA complaint, which included the
Trust, did not provide that notice.
Defendants for their part contend that news and litigation
regarding problems in the housing market, and concerning
Countywide in particular, put PFRS on inquiry notice much
earlier than the filing of the NECA complaint, especially since
some of these reports are included in PFRS’s complaint.

Courts

considering similar situations have differed on whether (1)
public information on general problems with a loan originator is
sufficient to charge a party with inquiry notice and (2) the
question of notice can and should be answered at the motion to
dismiss stage.

Compare Pension Trust Fund for Operating Eng’rs

v. Mortg. Asset Securitization Transactions, Inc., No. Civ.A.
10-898 (CCC), 2012 WL 3113981, at *7 (D.N.J. July 31, 2012)
(“The sheer volume of reports, articles, and lawsuits concerning
the mortgage lending industry and MBS available prior to
16

February of 2009 alone would be more than sufficient to put
Plaintiff on inquiry notice of its claims”); with Pub. Emps.’
Ret. Sys. of Miss. v. Merrill Lynch & Co., 714 F. Supp. 2d 475,
480 (S.D.N.Y. 2010) (question of when inquiry notice arose is a
factual question not suitable for a 12(b)(6) motion); and Pub.
Emps. Ret. Sys. of Miss. v. Goldman Sachs Grp., No. 09 Civ. 1110
HB, 2011 WL 135821, at *9 (S.D.N.Y. Jan. 12, 2011) (“[P]ublicly
available documents generally related to the weakening and
outright disregard for underwriting guidelines by subprime
originators . . . does not ‘relate directly’ to the
misrepresentations and omissions alleged in the [Second Amended
Complaint].”).
On balance, while it is conceivable that an investor of
ordinary intelligence would have been put on notice of the
violation PFRS alleges based on prior news and litigation, the
material Defendants have submitted is not sufficient to warrant
such a finding at this point.

The question of notice is a fact-

intensive one that will be best resolved a later stage of this
litigation.
Defendants also argue that the complaint fails to
sufficiently “allege the time and circumstances of [the]
discovery of the material misstatement or omission upon which
his claim is based.”

In re Direxion Shares ETF Trust, 279

F.R.D. 221, 231 (S.D.N.Y. 2012).
17

It is a close question whether

the complaint adequately alleges whether the ratings downgrades
put PFRS on notice of its claims.

In this case, however, I have

held that it is the earlier filing of the NECA complaint that
put PFRS on notice.

Under the circumstances, there is no reason

to compel PFRS to amend its complaint simply to incorporate this
ruling.
Because PFRS was on notice of its claims not later than
December 11, 2008 and because PFRS filed its complaint more than
a year later, on June 3, 2010, PFRS must toll the one-year
statute of limitations to proceed with this action.
B. American Pipe Tolling
Relying on American Pipe & Construction Co. v. Utah, 414
U.S. 538 (1974), PFRS argues that the statute of limitations was
tolled from the filing of the NECA complaint to January 28,
2010, when I held that NECA lacked standing to assert claims
based on, inter alia, the certificates in the Trust.

In

American Pipe, the Supreme Court held that when class action
status has been denied because of the putative classes’ failure
to fulfill the numerosity requirement, the limitations period
should be tolled for any members of the putative class who then
move to intervene on their own behalf.

Id. at 552-53.

The

Court reasoned that a contrary rule would deprive class actions
of the efficiency and economy of litigation that Rule 23 aims to
achieve.

Id. at 553.
18

It remains an open question in this circuit whether
American Pipe applies when the class representative lacked
standing to bring the claims on which another party now wants to
sue.

Compare N.J. Carpenters Health Fund v. DLJ Mortgage

Capital, Inc., No. 08 Civ. 5653, 2010 WL 6508190, at *2
(S.D.N.Y. Dec. 15, 2010) (“[W]here a Plaintiff lacks standing—
there is no case. And if there is no case, there can be no
tolling”); with In re Wachovia Equity Sec. Litig., 753 F. Supp.
2d 326, 372 (S.D.N.Y. 2011) (“[A]dditional Plaintiffs should not
be punished for their failure to anticipate or timely remedy the
standing deficiencies of the original . . . Complaint.”).
The reasoning in In re Wachovia is more persuasive.

First,

there is no constitutional issue with applying American Pipe
tolling to the standing context because new plaintiffs would be
“deemed by virtue of the invocation of Rule 23 to have commenced
this action on the date the original complaint was filed.”

In

re Morgan Stanley Mortg. Pass-Through Certificates Litig., 810
F. Supp. 2d 650, 669 (S.D.N.Y. 2011).
Second, the same considerations of both efficiency and
fairness support applying American Pipe tolling to this context.
NECA issued a PSLRA Notice on the same day it filed its original
complaint.

The Notice advised purchasers of the seventeen

certificates on which NECA was suing, including PFRS, that a
class action had been filed on their behalf.
19

PFRS should not be

punished because it did not anticipate that NECA lacked standing
to sue on the 2007-4F certificates.

A contrary ruling would

force putative class members to “make protective filings to
preserve their claims in the event that those representatives
were determined not to have standing,” In re IndyMac MortgageBacked Sec. Litig., 793 F. Supp. 2d 637, 646 (S.D.N.Y. 2011),
which “would breed needless duplication of motions” and “deprive
Rule 23 class actions of the efficiency and economy of
litigation which is a principal purpose of the procedure.”
American Pipe, 414 U.S. at 553–54.

Since American Pipe tolling

is applicable here, PRFS’s motion is timely.
IV.

Section 15 Claims
Defendants argue that PFRS’s Section 15 claims should be

dismissed because there is no underlying Section 11 violation
and because the complaint does not “adequately plead facts
supporting an inference that Goldman Sachs or the individual
defendants ‘controlled’ any of the alleged primary violators.”
As I have ruled above, PFRS has adequately pled an
underlying Section 11 violation.

As for control, PFRS alleges

that each individual defendant was a director and/or senior
officer of GSM and each signed the relevant registration
statement.

This is sufficient.

See In re Bear Stearns Mortg.

Pass-Through Certificates Litig., 851 F. Supp. 2d 746, 773
(S.D.N.Y. 2012).

GSMC is also a proper defendant for purposes
20

of Section 15 because GSMC owned GSM, which is potentially
liable under Section 11.
Defendants argue, however, that GSMC was dismissed in its
entirety following the first motion to dismiss.

Although the

written opinion could arguably be read that way, since it
granted Defendants’ motion to dismiss “with respect to the
claims against [GSMC] in open court,” the oral argument
transcript shows that GSMC was dismissed because it was not a
defendant within the confines of Section 11; there was no
discussion of Section 15.
V. Motion to Amend
The certificates for the new trusts (2007-8 and 2007-0A1)
that PFRS seeks to add to its complaint were issued to the
public in May of 2007 and July of 2007.
new claims was made on December 26, 2012.

The motion to add these
Unless the claims for

the new trusts relate back to the original PFRS action (filed
June 3, 2010), PFRS’s amendment would be time barred under
Section 13’s three-year cutoff, referred to as a “statute of
repose.”

Even if relation-back applies, a claim regarding the

2007-OA1 certificates (issued on May 7, 2007) is still timebarred if American Pipe tolling does not apply to the statute of
repose.
The Second Circuit has determined that American Pipe
tolling may not be used to toll the period of repose under
21

Section 13, and that a party intervening in a case may not use
relation-back in order to press a claim that has otherwise
expired under the statute of repose.

Police & Fire Ret. Sys. of

City of Detroit v. IndyMac MBS, Inc., 721 F.3d 95 (2d Cir.
2013).

The court did not address a situation, like this one, in

which plaintiffs seek to use relation-back to add new claims to
their own complaint that would otherwise be barred by the
statute of repose.

Nevertheless, the court’s ruling controls

here: the court rejected the idea that Rule 23 permitted tolling
of the statute of repose because such a use of the rule would
improperly “enlarge or modify a substantive right and violate
the Rules Enabling Act.”

Id. at 109.

Under the logic of

IndyMac, permitting relation-back under Rule 15 would similarly
violate the Rules Enabling Act.

Since PFRS can apply neither

relation-back nor tolling to the statute of repose, both of its
new claims are barred by the statute of repose as untimely.

Its

motion to amend must therefore be denied as futile.
It is worth noting that Defendants also argue that Indymac
precludes applying American Pipe tolling to the one-year statute
of limitations where the original complaint was dismissed for
lack of standing because of dicta contained in a footnote
stating that “[w]here the named plaintiff's claim is one over
which federal jurisdiction never attached, there can be no class
action.”

Indymac, 721 F.3d at 111 n.21 (quoting Crosby v.
22

Bowater Inc. Ret. Plan for Salaries Employees of Great N. Paper,
Inc., 382 F.3d 587, 597 (6th Cir. 2004) citing Walters v. Edgar,
163 F.3d 430, 432 (7th Cir. 1998))).
However, “Indymac never decided whether American Pipe
tolling applied despite the initial plaintiff’s lack of standing
because it found that American Pipe tolling does not apply to
Section 13’s statute of repose under any circumstances.”

Monroe

County Emps.’ Ret. Sys. v. YPF Sociedad Anonima, No. 13 Civ. 842
(SAS), 2013 WL 5548833, at *1 (S.D.N.Y. Oct. 8, 2013).

Crosby

and Walters suggest at most that it would have been
impermissible to permit PFRS to intervene in NECA’s action once
the portions of NECA’s claim encompassing the Trust had been
dismissed for lack of standing.
Pipe tolling.

Neither case concerns American

As the Indymac court itself acknowledged, while a

statute of repose affects a plaintiff’s underlying right, a
statute of limitations simply “limit[s] the availability of
remedies.”

721 F.3d at 107.

Tolling the statute of limitations

here does not impermissibly revive an action for which there was
no standing.

It simply affects whether PFRS, which clearly has

standing to pursue this action, has a remedy for the violations
it has alleged.
CONCLUSION
For the foregoing reasons, Defendants’ motion to dismiss is
denied, except with respect to PFRS’s claim that the offering
23

documents misled investors as to the rating agencies’ opinions,
for which the motion is granted.

PFRS’s motion to amend is

denied.
SO ORDERED.
Dated:

New York, New York
March 27, 2014

S/______________________________
MIRIAM GOLDMAN CEDARBAUM
United States District Judge

24