Federal Housing Finance Agency as Conservator for the Federal National Mortgage Association et al v. UBS Americas Inc. et al
Filing
113
OPINION AND ORDER: The portion of the January 20 Motion seeking to dismiss plaintiff's claims with regard to the seven issuances identified in note 1, supra, is denied. (Signed by Judge Denise L. Cote on 6/26/2012) (ft)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
------------------------------------------X
:
FEDERAL HOUSING FINANCE AGENCY, etc.,
:
:
Plaintiff,
-v:
:
:
UBS AMERICAS, INC., et al.,
:
Defendants.
:
------------------------------------------X
11 Civ. 5201 (DLC)
OPINION and ORDER
APPEARANCES:
For the plaintiff:
Philippe Z. Selendy
Kathleen M. Sullivan
Adam M. Abensohn
Manisha M. Sheth
Jordan A. Goldstein
Quinn Emanuel Urquhart & Sullivan, LLP
51 Madison Avenue, 22nd Floor
New York, New York 10010-1601
For defendants:
Jay B. Kasner
Scott D. Musoff
Robert A. Fumerton
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
DENISE COTE, District Judge:
This Opinion addresses an issue that was left open by the
Court’s decision of May 4, 2012, granting in part defendants’
January 20 motion to dismiss the Second Amended Complaint.
See
Federal Housing Finance Agency v. UBS Americas, Inc., ___ F.
Supp. 2d ___, No. 11 Civ. 5201 (DLC), 2012 WL 1570856 (S.D.N.Y.
1
May 4, 2012) (the “May 4 Opinion”).
Familiarity with the May 4
Opinion and the facts underlying this litigation is assumed.
The parties’ briefs regarding the motion to dismiss contained
cursory footnotes debating the issue of whether, for seven of
the issuances upon which plaintiff’s claims rely, the Securities
Act’s three-year timeliness bar had passed on September 6, 2008,
when the Government Sponsored Entities (“GSEs”), whose rights
plaintiff asserts, were placed into conservatorship.
An Order
of May 4 directed the parties to submit supplemental briefing
addressed to that issue.
23.
The briefs were fully submitted on May
This Opinion rejects the defendants’ contention that the
Securities Act claims on the seven securities are time-barred.
DISCUSSION
The Housing and Economic Recovery Act of 2008 (“HERA”)
prescribes a three-year statute of limitations, running from the
date of the GSEs’ conservatorship, for “any action” that the
FHFA might bring on their behalf.
12 U.S.C. § 4617(b)(12).
As
recognized in the May 4 Opinion, HERA’s timeliness provision
supplants the limitations periods that generally govern claims
under the Securities Act.
See 2012 WL 1570856, at *2-*5.
The
parties agree however that, subject to certain exceptions not
relevant here, HERA does not revive claims that were time-barred
prior to the conservatorship.
Under Section 13 of the
2
Securities Act, the right to enforce a liability created under
Section 11 generally expires “three years after the security was
bona fide offered to the public.”
15 U.S.C. 77m (emphasis
added).
Thus, the question is whether the seven certificates at
issue 1 were “bona fide offered to the public” more than three
years before September 6, 2008, when FHFA became conservator of
the GSEs.
For present purposes, it is undisputed that if the
offering date is the date that the certificates themselves
became available for purchase, FHFA’s claims are timely.
Defendants point out that each of the seven certificates
was marketed pursuant one of three shelf registration
statements, all of which became effective before August 31,
2005.
Defendants maintain that the effective dates of these
registration statements, not the dates the certificates were
actually marketed for sale, establish the beginning of Section
13’s three-year repose period.
Thus they conclude that the
GSEs’ claims regarding these certificates expired prior
1
The certificates in question pertain to the following
securitizations: Argent Securities Inc. Trust, Series 2006–W3
(“ARSI 2006–W3”); MASTR Asset Backed Securities Trust, Series
2005–WF1 (“MABS 2005–WF1”); MASTR Asset Backed Securities Trust,
Series 2005–FRE1 (“MABS 2005–FRE1”); MASTR Asset Backed
Securities Trust, Series 2005–HE2 (“MABS 2005–HE2”); MASTR
Adjustable Rate Mortgages Trust, Series 2005–8 (“MARM 2005–8”);
Home Equity Mortgage Loan Asset–Backed Trust, Series INABS 2005–
C (“INABS 2005–C”); Home Equity Mortgage Loan Asset–Backed
Trust, Series INABS 2005–D (“INABS 2005–D”).
3
September 6, 2008, making them ineligible for the extension
provided by HERA and therefore untimely.
For the reasons set
forth below, the Court concludes that FHFA’s claims with regard
to these offerings are timely.
I.
Securities Act Shelf Registration
Shelf registration is a process by which securities can be
registered to be offered or sold on a delayed or continuous
basis.
The purpose of shelf registration is to afford the
issuer the “procedural flexibility” to vary “the structure and
terms of securities on short notice” and “time its offering to
avail itself of the most advantageous market conditions.”
Shelf
Registration, SEC Release No. 6499, 1983 WL 408321, at *4 (Nov.
17, 1983) (“SEC Reg. 6499”); see In re WorldCom, Inc. Sec.
Litig., 345 F. Supp. 2d 628, 667 (S.D.N.Y. 2004).
As a general matter, the registration statement for a new
securities offering must include a copy of the prospectus that
will be used to market the securities for sale to the public.
17 C.F.R. § 230.404.
In order to satisfy Section 10(a) of the
Securities Act, 15 U.S.C. § 77j(a), the prospectus must make
detailed disclosures about the securities at issue and, in the
case of asset-backed securities, the underlying asset pools.
See Regulation S-K, 17 C.F.R. § 229.10 et seq.; Regulation AB,
17 C.F.R. § 229.1100 et seq.; see also In re WorldCom, Inc. Sec.
Litig., 345 F. Supp. 2d at 658.
4
The shelf registration process allows certain would-be
issuers to file a generic registration statement with the SEC
that omits the type of detailed information that must generally
be disclosed to purchasers.
230.430A.
17 C.F.R. §§ 230.409, 230.415,
A qualified registrant commits that, at the time of
any offering, it will have made the omitted disclosures in some
form or another, including by filing a post-effective amendment
to the registration statement, filing a prospectus supplement
with the SEC, or filing an annual report pursuant to Section
13(a) or Section 15(d) of the Exchange Act.
§ 229.512.
See 17 C.F.R.
Once this “shelf registration statement” becomes
effective, the issuer can take the registration statement “off
the shelf,” make the required supplemental disclosures, and use
the shelf registration statement to issue securities whenever it
chooses, without the need for further SEC action.
Thus, as in
this case, a single shelf registration statement may be used for
a series of offerings.
SEC Rel. 6499, 1983 WL 408321, at *4.
II. When is a security issued pursuant to a shelf registration
bona fide offered to the public?
As defendants note, the general rule is that the Securities
Act’s three-year repose period “is triggered by the effective
date of the (allegedly false) registration statement.”
P. Stolz
Family P'ship L.P. v. Daum, 355 F.3d 92, 104 (2d Cir. 2004).
This rule presumes, however, that the registration statement
5
includes the information upon which the Section 11 claim is
predicated -- the alleged falsehood -- and thus that the
putative defendant’s exposure begins with the effective date of
the registration statement. 2
presumption may be valid.
For some shelf offerings, this
But, where a shelf registration
statement omits required disclosures that are fundamental to
assessing the value of any offering, it would be illogical to
conclude that a security marketed pursuant to that registration
statement is “bona fide offered to the public” before the
relevant information is disclosed.
As one would expect, SEC regulations confirm the view that
securities issued pursuant to a shelf registration statement
that omits critical disclosures are not bona fide offered to the
public until the omitted information is disclosed.
One of the
chief purposes of shelf registration was to allow companies to
issue stock based on their Exchange Act reports, and thereby
take advantage of the “steady stream of high quality corporate
information continually furnished to the market and broadly
digested, synthesized and disseminated,” while avoiding the
delay that would be entailed by SEC review if the same
2
As defendants observe, the purpose of a statute of repose is to
limit the defendant’s exposure to a defined period. Thus, “a
statute of repose begins to run without interruption once the
necessary triggering event has occurred, even if equitable
considerations would warrant tolling or even if the plaintiff
has not yet, or could not yet have, discovered that she has a
cause of action.” Stoltz, 355 F. 3d at 102-03.
6
information were submitted in a long-form registration
statement.
In re WorldCom, Inc. Sec. Litig., 346 F. Supp. 2d at
667.
Accordingly, before securities may be bona fide offered for
sale, registrants must make additional filings.
Item 512
requires that a shelf registrant undertake
[t]o file, during any period in which offers or sales
are being made, a post-effective amendment to this
registration statement . . . [t]o reflect in the
prospectus any facts or events arising after the
effective date of the registration statement . . .
which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
registration statement.
17 C.F.R. § 229.512(a)(1)(ii) (emphasis added).
Such updating
is deemed to be a new bona fide offering for the purposes of
assessing liability under the Securities Act.
§ 229.512(a)(2).
Id.
Indeed, the Second Circuit has opined that the
requirement of post-registration disclosure would be
“meaningless” absent provisions like Section 229.512(a)(2),
“since purchasers who acquired securities in a shelf offering
more than three years after the initial registration would find
their § 11 claims barred by the time limits of § 13, even if
they bought the securities in reliance on a fraudulent, posteffective amendment to the registration.”
Corp., 962 F.2d 169, 174 (2d Cir. 1992).
7
Finkel v. Stratton
A recent SEC Rule acknowledges that, at the time of a shelf
offering, critical disclosures may be made not only through a
post-effective amendment but also through the filing of a
prospectus supplement.
But again, the filing creates a new
effective date and the offering of the securities becomes an
“initial bona fide offering.”
On December 1, 2005, following
seven years of notice and comment, the SEC formally promulgated
Rule 430B.
Among other things, the rule clarified that, upon
offering securities to the market pursuant to a shelf
registration statement, an issuer may satisfy its mandatory
disclosure obligations by making them in a prospectus supplement
filed with the SEC.
See 17 C.F.R. § 230.430B(d)(2).
As
explained in the SEC Release that accompanied its publication,
the Rule was intended in part to “provide primary shelf eligible
issuers and well-known seasoned issuers with automatic shelf
registration statements the ability to add to a prospectus, by
means other than a post-effective amendment to the registration
statement, more additional or omitted information” than had
previously been allowed.
Securities Offering Reform, SEC
Release No. 33-8591, 2005 WL 1692642, *82 (July 19, 2005) (“SEC
Rel. 33-8591”).
Recognizing that Rule 430B permits issuers to make
disclosures by prospectus supplement that previously would have
8
required a post-effective amendment to the registration
statement, the SEC has declared that
the date on which a form of prospectus is deemed to be
part of and included in the registration statement
pursuant to paragraph (f)(1) of [Rule 430B] shall be
deemed, for purposes of liability under section 11 of
the Act of the issuer and any underwriter at the time
only, to be a new effective date of the part of such
registration statement relating to the securities to
which such form of prospectus relates . . . . The
offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
17 CFR § 230.430B(f)(2).
This provision thus seeks to reconcile
the Section 11 consequences of disclosure by prospectus
supplement with those of disclosure by means of a post-effective
amendment.
The fact that the defendants used prospectus
supplements to accomplish all of their post-effective date
disclosures suggests that, in making the offerings at issue
here, they sought to avail themselves of the liberalized
disclosure framework afforded by Rule 430B.
Both parties question whether the Rule’s broadened
interpretation of what constitutes an initial bona fide offering
is applicable to securities issued pursuant to registration
statements that, like these, were filed before December 1, 2005.
Ultimately, it is not necessary to resolve this issue.
A filing
that represents “a fundamental change in the information set
forth in the registration statement” has always been deemed to
restart the clock on Section 11 claims, 17 C.F.R.
9
§ 229.512(a)(1)(ii), and the fact that such a change may now be
made through a prospectus supplement as opposed to a posteffective amendment does not alter that rule.
The SEC release
that accompanied Rule 430B makes this clear, emphasizing that
for non-issuers such as “directors, signing officers, and
experts,” the new Rule did not intend “the filing of a form of
prospectus . . . [to] result in a later Section 11 liability
date” than that which previously applied, while emphasizing that
for such parties, “the filing of a form of prospectus . . .
reflecting fundamental changes in the information in the
registration statement” would continue to trigger a new offering
date.
See SEC Rel. 33-8591, 2005 WL 1692642, *86; accord In re
Countrywide Fin. Corp. Sec. Litig., No. CV-07-052950-MRP, 2009
WL 943271, at *6 (C.D. Cal. 2009) (noting that, under pre-Rule
430B law, a new offering date was triggered by a filing that
represented a “fundamental change” in the registration
statement).
That standard is plainly met here.
For example, although
Registration Statement 333-124678 is 294 pages long, 285 of
those pages are devoted to setting forth the format for
prospectus supplements to be filed at the time securities are
actually marketed.
The Registration Statement emphasizes that
these templates are meant only to be “illustrative of the type
of disclosure that might be presented for a series of
10
Certificates or Notes.”
And, indeed, the templates omit almost
every material description of the collateral that will underlie
the offerings, including the representations regarding loan-tovalue ratio, owner-occupancy rate and the identities of loan
originators upon which FHFA’s Section 11 claims are predicated.
The remaining nine pages of the Registration Statement likewise
contain little, if any, information that would be material to
assessing the investment-worthiness of the specific
securitizations that might be issued off of it.
The other two
Registration Statements are similarly general.
The information that was material to investors in deciding
whether to purchase the securities at issue was only provided at
the time that each securitization was marketed to the public -in the form of lengthy prospectus supplements that purported to
convey in detail the soundness of the underlying assets.
Thus,
for example, the MABS 2005–WF1 securitization was marketed with
a prospectus of nearly 400 pages setting forth in detail the
information that was left blank in the Shelf Registration
Statement, including such crucial information as loan-to-value
ratios and owner occupancy rates.
The substitution of the blank
spaces in these Shelf Registration Statements with actual data
that a would-be investor could analyze constituted a
“fundamental change” in their content, and thus triggered a new
11
Securities Act liability period t running from the date each
prospectus supplement was filed.
CONCLUSION
The portion of the January 20 Motion seeking to dismiss
plaintiffts claims with regard to the seven issuances identified
in note 1t supra t is denied.
SO ORDERED:
Dated:
New York t New York
June 26 t 2012
United
12
District Judge
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