Federal Housing Finance Agency v. Barclays Bank Plc, et al
Filing
145
OPINION & ORDER re: 68 MOTION to Dismiss filed by John Carroll, Paul Menefee, Barclays Capital Inc., Michael Wade, Securitized Asset Backed Receivables LLC, Barclays Bank Plc. The defendants' August 17 motion to dismiss is granted with respect to the plaintiff's Virginia Securities Act claims against SABR and the individual defendants and denied in all other respects. (Signed by Judge Denise L. Cote on 11/19/2012) (mro)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
------------------------------------------X
:
FEDERAL HOUSING FINANCE AGENCY, etc.,
:
Plaintiff,
:
-v:
:
BARCLAYS BANK PLC, et al.,
:
Defendants.
:
:
------------------------------------------X
11 Civ. 6190 (DLC)
OPINION & ORDER
APPEARANCES:
For the Plaintiff:
Philippe Z. Selendy
Kathleen M. Sullivan
Christine H. Chung
Jordan A. Goldstein
Quinn Emanuel Urquhart & Sullivan, LLP
51 Madison Avenue, 22nd Floor
New York, New York 10010-1601
For Defendants:
David H. Braff
Brian T. Frawley
Jeffrey T. Scott
Joshua Fritsch
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
DENISE COTE, District Judge:
This is one of sixteen actions currently before this Court
in which the Federal Housing Finance Agency (“FHFA” or “the
Agency”), as conservator for Fannie Mae and Freddie Mac
(together, the “Government Sponsored Enterprises” or “GSEs”),
alleges misconduct on the part of the nation’s largest financial
institutions in connection with the offer and sale of certain
mortgage-backed securities purchased by the GSEs in the period
between 2005 and 2007.1
As amended, the complaints in each of
the FHFA actions assert that the Offering Documents used to
market and sell Residential Mortgage-Backed Securities (“RMBS”)
to the GSEs during the relevant period contained material
misstatements or omissions with respect to the owner-occupancy
status, loan-to-value (“LTV”) ratio, and underwriting standards
that characterized the underlying mortgages.
On the basis of
these allegations, the complaints assert claims under Sections
11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C.
§§ 77k, l(a)(2), o; the Virginia Securities Act, VA Code Ann.
1
The sixteen cases are: FHFA v. UBS Americas, Inc., et al., 11
Civ. 5201 (DLC); FHFA v. JPMorgan Chase & Co., et al., 11 Civ.
6188 (DLC); FHFA v. HSBC North America Holdings, Inc., et al.,
11 Civ. 6189 (DLC); FHFA v. Barclays Bank PLC, et al., 11 Civ
6190 (DLC); FHFA v. Deutsche Bank AG, et al., 11 Civ. 6192
(DLC); FHFA v. First Horizon National Corp., et al., 11 Civ 6193
(DLC); FHFA v. Bank of America Corp., et al., 11 Civ. 6195
(DLC); FHFA v. Citigroup Inc., et al., 11 Civ. 6196 (DLC); FHFA
v. Goldman, Sachs & Co., et al., 11 Civ. 6198 (DLC); FHFA v.
Credit Suisse Holdings (USA), Inc., et al., 11 Civ. 6200 (DLC);
FHFA v. Nomura Holding America, Inc., et al., 11 Civ. 6201
(DLC); FHFA v. Merrill Lynch & Co., Inc., et al., 11 Civ. 6202
(DLC); FHFA v. SG Americas, Inc., et al., 11 Civ. 6203 (DLC);
FHFA v. Morgan Stanley, et al., 11 Civ. 6739 (DLC); FHFA v. Ally
Financial Inc., et al., 11 Civ. 7010 (DLC); FHFA v. General
Electric Co., et al, 11 Civ. 7048 (DLC). The FHFA has also
brought two similar actions, which are pending in federal courts
in California and Connecticut. See FHFA v. Countrywide
Financial Corp., et al., No. 12 Civ. 1059 (MRP) (C.D. Cal.);
FHFA v. Royal Bank of Scotland, No. 11 Civ. 1383 (AWT) (D.
Conn).
2
§ 13.1-522(A)(ii), (C); and the District of Columbia Securities
Act, D.C. Code § 31-5606.05(a)(1)(B), (c).
In six of the cases,
though not this one, the Agency has also asserted claims of
fraud and aiding and abetting fraud against the certain entity
defendants under the common law of New York State (the “Fraud
Claim Cases”).2
The Court has already issued several Opinions addressing
motions to dismiss in other cases brought by the FHFA.3
Familiarity with those Opinions is assumed; all capitalized
terms have the meanings previously assigned to them.
Following this Court’s decision of the motion to dismiss in
FHFA v. UBS, discovery began in all of the coordinated cases.
Briefing of defendants’ motions to dismiss in the remaining
fifteen cases has occurred in two phases, with the motions in
2
As noted in previous Opinions, the plaintiff also pleads
defendants’ statements regarding the credit ratings of the
Certificates as a separate category of misstatement under the
Securities Act. These claims are largely derivative of the
three core representations described above.
3
Federal Housing Finance Agency v. UBS Americas, Inc. et al.,
858 F. Supp. 2d 306 (S.D.N.Y. 2012) (“UBS I”); Federal Housing
Finance Agency v. UBS Americas, Inc., et al., No. 11 Civ. 5201
(DLC), 2012 WL 2400263 (S.D.N.Y. June 26, 2012) (“UBS II”);
Federal Housing Finance Agency v. JPMorgan Chase & Co., et al.,
No. 11 Civ. 7188 (DLC), 2012 WL 5395646 (S.D.N.Y. Nov. 5, 2012)
(“Chase”); FHFA v. Merrill Lynch & Co., et al., No. 11 Civ. 6202
(DLC), 2012 WL 5351188 (S.D.N.Y. Nov. 8, 2012) (“Merrill”); FHFA
v. Deutsche Bank, et al., No. 11 Civ. 6192 (DLC), 2012 WL
5471864 (S.D.N.Y. Nov. 12, 2012) (“Deutsche Bank”); FHFA v.
Goldman Sachs & Co, et al., No. 11 Civ. 6198, 2012 WL 5494923
(S.D.N.Y. Nov. 12, 2012) (“Goldman”).
3
Fraud Claim Cases becoming fully submitted on October 11, 2012.
The motions in this case and the remaining eight cases were
fully submitted November 9, 2012.
Depositions are to begin in
all cases in January 2013, and all fact and expert discovery in
this matter, 11 Civ. 6190 (DLC), must be concluded by December
6, 2013.
Trial in this matter is scheduled to begin in January
2015 as part of the fourth tranche of trials in these
coordinated actions.
This case concerns RMBS Certificates allegedly purchased by
the GSEs between September 2005 and October 2007.
Each of the
GSE Certificates pertains to one of eight securitizations
offered for sale pursuant to one of seven shelf-registration
statements.
The lead defendant is Barclays Bank PLC
(“Barclays”).
Several corporate affiliates of Barclays and
three associated individuals are also defendants.
Barclays
affiliates served as lead or co-lead underwriter for each of the
eight securitizations at issue and as depositor for two of them.
Each individual defendant signed the shelf registration
statement for the Barclays-deposited security.
The defendants’ motion to dismiss presses a number of
arguments that are also pressed by other defendants in these
coordinated actions, many of which have been addressed by this
Court’s previous Opinions.
The Court hereby adopts by reference
the reasoning and, to the extent they are relevant here, the
4
rulings of those prior Opinions.
All capitalized terms have the
meanings previously assigned to them.
The defendants’ motion does, however, present one argument
that has not been addressed in this Court’s prior Opinions.
The
defendants argue that SABR (a Barclays-owned depositor) and the
individual defendants cannot be held liable under the Virginia
Securities Act for misstatements related to securities that they
did not themselves sell to the plaintiff.
The Amended Complaint
asserts primary violations of the Virginia Securities Act by
SABR and Virginia-law control-person claims against the
individual defendants based on their control over SABR.
As a general matter, “Virginia courts will look to
interpretations of the federal securities laws when called upon
to construe the Virginia Securities Act.”
F.3d 421, 428 n.17 (4th Cir. 2004).
Dunn v. Borta, 369
The language in the
Virginia statute that defines the scope of control-person
liability does not differ materially from its federal
equivalent.
§§ 77o.
Compare VA Code Ann. § 13.1-522(C), with 15 U.S.C.
Both provisions impose liability on a person who
“controls” a primary violator.
Defendants do not contend that
the statutes differ in this respect.
Rather, they argue that
the plaintiff’s claims against SABR cannot be sustained under
the Virginia Act’s primary liability provisions and that, for
5
that reason, the Virginia-law control-person claims against the
individual defendants fail as well.
With respect to primary liability, the Supreme Court has
held in the federal context that a plaintiff may assert claims
against a party under Section 12 of the Securities Act, even in
the absence of contractual privity, so long as it is shown that
the defendant “successfully solicit[ed] the purchase, motivated
at least in part by a desire to serve his own financial
interests or those of the securities owner.”
Pinter v. Dahl,
486 U.S. 622, 647 (1988).
The adoption of this rule, which has come to be known as
the “statutory seller” standard, see UBS I, 858 F. Supp. 2d
at 333, was driven in large part by the precise wording of
Section 12, which provides, as relevant here:
Any person who . . . offers or sells a security . . .
by means of a prospectus or oral communication, which
includes an untrue statement of a material fact . . .
shall be liable . . . to the person purchasing such
security from him . . . .
15 U.S.C. § 77l(a)(2).
The Court noted in particular that the Securities Act
defines the terms “offer to sell,” “offer for sale,” or “offer”
to include “every attempt or offer to dispose of, or
solicitation of an offer to buy, a security or interest in a
security, for value.”
15 U.S.C. § 77b(a)(3).
6
From this, it
concluded that “[t]he inclusion of the phrase ‘solicitation of
an offer to buy’ within the definition of ‘offer’ brings an
individual who engages in solicitation, an activity not
inherently confined to the actual owner, within the scope of
§ 12.”
Pinter, 486 U.S. at 643.
Defendants point out, however, that unlike the federal
Securities Act, the Virginia Securities Act omits the term
“offer” from its otherwise identical private liability
provision:
Any person who . . . sells a security by means of an
untrue statement of a material fact . . . shall be
liable to the person purchasing such security from him
. . . .
VA Code Ann. § 13.1-522(A)(ii).
Like the federal statute, the Virginia Securities Act
defines the term “sell” to include “every contract of sale of,
contract to sell, or disposition of, a security or interest in a
security for value.”
VA Code Ann. § 13.1-522(A)(ii).
The word
“offer” is also defined in terms that are identical to the
federal definition.
But, despite making it unlawful to make use
of untrue statements of material fact “in the offer or sale of
any securities,” VA Code Ann. § 13.1-502(2) (emphasis supplied),
the Virginia legislature conspicuously omitted the term “offer”
from the Virginia Securities Act’s private liability provision.
7
It must be assumed that this omission was intentional.
See
United States v. Nordic Vill., Inc., 503 U.S. 30, 36 (1992)
(noting the “settled rule that a statute must, if possible, be
construed in such fashion that every word has some operative
effect”).
Indeed, the Pinter Court observed that in its
original form the federal Securities Act omitted the term “offer
or” from Section 12’s liability provisions but defined “sell”
broadly to include not only transfer of title but also
solicitation.
Pinter, 486 U.S. at 645.
When the statute was
amended in 1954, Congress split “the original definition of
‘sell’ . . . into separate definitions of ‘sell’ and ‘offer’ in
order to accommodate changes” in another section, but added the
words “offer or” to Section 12 in order to “preserve existing
law, including the liability provisions of the Act.”
Id.
The
Court remarked that “had Congress intended liability to be
restricted to those who pass title, it could have effectuated
its intent by not adding the phrase ‘offers or’ when it split
the definition of ‘sell.’”
Id. at 646.
That is precisely what the Virginia legislature did when,
in 1956, it adopted a securities law that paired the language of
Section 12(a)(2) that was in force before 1954 with the federal
law’s post-amendment definitions of “offer” and “sell.”
1956 Va. Acts 589, 600.
See
Since the original promulgation of the
statute, the Supreme Court has called attention to this issue
8
with its decision in Pinter and the Virginia statute’s omission
of the term “offer” has been remarked upon, albeit in dictum, by
the U.S. Court of Appeals for the Fourth Circuit and has
provided the basis for a holding of the state’s trial court.
See Dunn, 369 F.3d at 428 n.17 (“Section 12(2) differs from
section 13.1-522(A),” inter alia, “in that the former imposes
liability for offers as well as sales . . . .”); Atocha Ltd.
P’ship v. Witness Tree, LLC, Nos. 180921 et al., 2004 WL
1665009, at *5 (Va. Cir. Ct. July 16, 2004) (“It is apparent,
therefore, that the Virginia legislature, having distinguished
between sales and offers, chose to impose § 13.1-522 liability
on sellers alone.”)
Yet despite amending the definitions
section of the Virginia Securities Act numerous times, most
recently in 2001, and the private liability section in 1987 and
1997, the Virginia legislature has never seen fit to bring the
scope of private liability under the state’s securities laws
into synch with liability under Section 12(a)(2).
The reason for this inaction is not difficult to fathom.
Virginia has purposefully sought to ensure that the scope of
private liability under its statutes is more limited than that
under federal law by, for example, specifying a statute of
repose that is shorter than the one that pertains under the
federal Securities Act.
See VA Code Ann. § 13.1-522(D).
Requiring contractual privity between plaintiff and defendant in
9
an action under § 13.1-522 is consistent with that purpose.
Consequently parties, including depositors, who do not pass
title to a plaintiff are not liable under § 13.1-522(A)(ii) of
the Virginia Securities Act.4
The claims under this provision
against SABR are therefore dismissed, as are the derivative
control-person claims against the individual defendants.5
4
Relying on SEC Rule 159A, this Court previously concluded that
an issuer is a statutory seller for the purposes of Section
12(a)(2) of the federal Securities Act. See UBS I, 858 F. Supp.
2d at 333 (citing 17 C.F.R. § 230.159A). The SEC rule, however,
rests on the Commission’s conclusion that
an issuer offering or selling its securities in a
registered offering pursuant to a registration
statement containing a prospectus that it has prepared
and filed, or by means of other communications that
are offers made by or on behalf of or used or referred
to by the issuer can be viewed as soliciting purchases
of the issuer's registered securities.
Securities Offering Reform, SEC Release No. 75, 2005 WL 1692642,
at *78 (July 19, 2005). As already explained, the Virginia
Securities Act does not include solicitation within its
definition of “sell.”
5
Because this holding disposes of the plaintiff’s Virginia
Securities Act claims against the individual defendants, it is
not necessary to consider the defendants’ argument that
application of that statute to them would violate the federal
Due Process Clause.
10
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