Securities and Exchange Commission v. Stifel Nicolaus & Co Inc et al

Filing 28

ORDER Granting in Part and Denying in Part Motions to Dismiss 15 and 16 . Further ordering that motions for more defiinite statement are denied as moot. (cc: all counsel) ((cef), C. N. Clevert, Jr.)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
UNITED STATES SECURITIES
AND EXCHANGE COMMISSION,
Plaintiff,
v.

Case No. 11-C-0755

STIFEL, NICOLAUS & CO., INC. and
DAVID W. NOACK,
Defendant.
ORDER GRANTING IN PART AND DENYING IN PART
MOTIONS TO DISMISS (DOCS. 15, 16)
The Securities and Exchange Commission sues Stifel, Nicolaus & Co., Inc. and its
former Senior Vice President, David W. Noack, for alleged violations of Section 10(b) of
the Securities Exchange Act of 1934, Rule 10b-5 thereunder, and Section 17(a) of the
Securities Act of 1933 in connection with the sale of collateralized debt obligations to five
eastern Wisconsin school districts. In addition, the SEC asserts that Stifel violated Section
15(c)(1)(A) of the Exchange Act and that Noack aided and abetted that violation. The
defendants move to dismiss under Fed. R. Civ. P. 9 and 12(b)(6).1
A motion to dismiss under Rule 12(b)(6) challenges the sufficiency of the complaint
to state a claim upon which relief may be granted. See Fed. R. Civ. P. 12(b)(6). The
complaint has to contain a short and plain statement of the claim showing that the pleader
is entitled to relief. Fed. R. Civ. P. 8(a)(2). However, enough facts must be set forth to
state a claim that is plausible on its face. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570,

1
The defendants filed their m otions to dism iss separately, but Noack adopted Stifel’s briefs and
argum ents, so the m otions are treated together as one.

127 S. Ct. 1955, 1974 (2007); St. John’s United Church of Christ v. City of Chicago, 502
F.3d 616, 625 (7th Cir. 2007). The “allegations must plausibly suggest that the plaintiff has
a right to relief, raising that possibility above a ‘speculative level’; if they do not, the plaintiff
pleads itself out of court.” EEOC v. Concentra Health Servs., Inc., 496 F.3d 773, 776 (7th
Cir. 2007) (citing Bell Atl., 550 U.S. at 555-56, 569 n.14). When considering a Rule
12(b)(6) motion, the court is to construe the complaint in the light most favorable to the
plaintiff, accepting as true all well-pleaded facts and drawing all possible inferences in the
plaintiff’s favor. Tamayo v. Blagojevich, 526 F.3d 1074, 1081 (7th Cir. 2008).
Federal Rule of Civil Procedure 12(e) allows a party to move for a more definite
statement before filing an answer if the complaint "is so vague or ambiguous that the party
cannot reasonably prepare a response."

The motion must point out the defects

complained of and the details desired. Fed. R. Civ. P. 12(e). A Rule 12(e) motion is
disfavored and is not a substitute for discovery. Coleman v. Majestic Star Casino, LLC, No.
2:11-CV-391-PPS-PRC, 2012 WL 1424396, *1 (N.D. Ind. Apr. 24, 2012). However, it may
be used to put a defendant on notice regarding which claims apply to what parties. Id.
Here, defendants attack the Complaint on procedural and substantive grounds.
PLEADING WITH PARTICULARITY UNDER RULE 9
The allegations in the Complaint concern fraud and thus must satisfy special
pleading requirements. The SEC acknowledges the pleading standard of Fed. R. Civ. P.
9(b), which means that it must “state with particularity the circumstances constituting fraud.”
To set forth the circumstances of fraud with particularity, the plaintiff must state “the
identity of the person who made the misrepresentation, the time, place and content of the
misrepresentation, and the method by which the misrepresentation was communicated to
2

the plaintiff.” Vicom, Inc. v. Harbridge Merch. Servs., Inc., 20 F.3d 771, 777 (7th Cir. 1994)
(internal quotation marks omitted). Put another way, a complaint has to identify “the ‘who,
what, when, where, and how’ of the fraud.” Pirelli Armstrong Tire Corp. Retiree Med.
Benefits Tr. v. Walgreen Co., 631 F.3d 436, 441-42 (7th Cir. 2011). However, courts and
litigants should not take an overly rigid view of the dictates of Rule 9(b). See id. at 442.
“The purposes of the pleading requirement are to protect a defending party’s reputation
from harm, to minimize strike suits, and to provide detailed notice of a fraud claim to a
defending party,” 2 James William Moore, Moore’s Federal Practice § 9.03[1][a], at 9-15
(3d ed. 2012) (footnotes omitted), and “to force the plaintiff to do more than the usual
investigation before filing his complaint,” Ackerman v. Nw. Mut. Life Ins. Co., 172 F.3d 467,
469 (7th Cir. 1999).
Defendants contend that certain allegations of fraud must be dismissed, struck from
the Complaint, or repleaded or supplemented with a more definite statement because they
fail to meet Rule 9(b) requirements through lack of precise dating and failure to identify the
specific individuals to whom statements were made.
A.

Specificity as to the Date Statements Were Made
Defendants argue that the contentions in paragraphs 73, 75, 79, 81, 87, 89, 91, 93,

95, and 103 of the Complaint suffer from a failure to identify when fraudulent statements
may have been made. Defendants note that they need the dates to determine, for
instance, whether such statements were made while Noack worked at Stifel and whether
such statements were made before or after the first, second, or third transactions at issue.
(Doc. 17 at 7-8.)

3

The SEC responds that the Complaint asserts, among other things, that the
misrepresentations occurred before school districts invested in 2006 and that Noack was
acting on behalf of Stifel at the time he made the statements. (See Doc. 20 at 8.) The
SEC points to paragraphs that set forth specific dates for other statements (such as in
Doc. 1 ¶¶ 77, 83) as support for the time frame of 2006. In addition, the Complaint
charges that Noack worked for Stifel from 2000 to 2007. (Doc. 20 at 8 (citing Doc. 1 ¶¶ 17,
71).)
Plaintiffs are not absolutely required to plead specific dates of fraudulent acts
“provided they use some alternative means of injecting precision and some measure of
substantiation into their allegations of fraud.” 2 Moore, supra, § 9.03[1][b], at 9-18, cited
in Pirelli Armstrong Tire Co., 631 F.3d at 442. But here, as to the paragraphs challenged
by defendants, the SEC has failed to provide any precision regarding a date or a
sufficiently narrow time frame to satisfy Rule 9(b). “Sometime in 2006 or before” or
“sometime before one of the three transactions” are too imprecise for Rule 9(b) purposes.
Thus, defendants’ motions to dismiss or strike the claims in the following paragraphs
are granted. However, the SEC will be allowed to amend the Complaint if it believes that
it can set forth more specific dating for these statements.

4

Compl. ¶

Allegation

Sufficient re Date?

73

“Noack represented that the CDO
investm ents were “Treasury-like,” and he
claim ed that they were virtually risk-free.
For exam ple, before the first deal, Noack
told W est Allis-W est Milwaukee to think of
these investm ents like Treasury bonds due
to the quality of the com panies in the
portfolio. He represented that only
Treasury securities would be a safer
investm ent. Sim ilarly, Noack represented
to W aukesha that the CDO investm ents
were sim ilar to Treasury securities
because the portfolio was com prised of
AAA and AA corporate debt.”

No. “[B]efore the first deal” is not
sufficiently precise to satisfy Rule 9(b)
regarding statem ents to W est Allis-W est
Milwaukee. Further, from other
docum ents in the record it appears that
W aukesha was not part of the “first deal”
with W est Allis-W est Milwaukee, drawing
into question whether the statem ent
occurred prior to the first of the three
transactions or the first transaction
involving W est Allis-W est Milwaukee.

75

“Noack represented that 30 of the 105
com panies in the portfolio would have to
default before the School Districts would
begin to lose their principal. For example,
Noack m ade that representation to
W aukesha, am ong possible others.”

No. No specificity, precision, or tim e
fram e; likely sometim e before one of the
three transactions but that is not specific
enough.

79

“Noack represented that it would take 8.5
tim es historically norm al default levels
for the School Districts to lose m oney,
which only happened during the Great
Depression. For exam ple, Noack m ade
that representation to the School Districts
before the second deal.”

No. The second transaction occurred on
Septem ber 29, 2006. Even if the SEC
lim ited this to the year 2006, “before the
second deal” leaves m any m onths, which
is too im precise to satisfy Rule 9(b) in
this case.

81

“Noack represented that there had not
been a default since Enron in 2000. For
exam ple, he m ade that representation to
Kim berly, am ong possible others.”

No. No tim e fram e is given nor any other
m eans of determ ining the date with
relative precision.

87

“Noack represented that there was a
short-term m ark-to-m arket risk, but that it
was not a long-term risk because the
School Districts would still get their m oney
back after seven years. For exam ple, he
m ade that representation to Kenosha,
am ong possible others.”

No. No tim e fram e is given nor any other
m eans of determ ining the date with
relative precision.

89

“Noack represented that, of the top 800
com panies in the world, 100 of them would
have to go under before the School
Districts would suffer any principal loss.
For exam ple, he m ade that representation
to Kenosha, am ong possible others.”

No. No tim e fram e is given nor any other
m eans of determ ining the date with
relative precision.

5

91

No. No tim e fram e is given nor any other
m eans of determ ining the date with
relative precision.

93

“Noack represented that the country would
have to fall further into financial trouble
than the Great Depression before the
investm ents would be affected. But even
in that scenario, according to Noack, the
School Districts would get their principal
back after seven years and did not have to
worry about losing principal. For exam ple,
he m ade that representation to W est
Allis-W est Milwaukee. He sim ilarly told
other School Districts that it would take a
Great Depression for the investm ents to
fail.”

No. No tim e fram e is given nor any other
m eans of determ ining the date with
relative precision.

95

“Noack represented that if any of the
highly-rated portfolio credits struggled, the
portfolio m anager would sim ply replace
that credit with another stronger credit to
m aintain the AA rating. For exam ple, he
m ade that representation to W hitefish Bay
and to Kim berly, am ong possible others.”

No. No tim e fram e is given nor any other
m eans of determ ining the date with
relative precision.

103

B.

“Noack represented that, if the investm ents
failed, they would all be in bread lines
together. For exam ple, he m ade that
representation to W aukesha, am ong
possible others.”

“In an affidavit executed in 2008, Noack
adm itted under oath that he had m ade
statem ents and representations to the
School Districts to persuade them to enter
into the CDO transactions. He stated under
oath that he had no reason to dispute that
he had m ade statem ents to the School
Districts such as “[i]t takes 20 out of these
100 com panies to default before it gets
to your AA level,” and “[t]here would need
to be ‘15 Enrons’ before you would be
im pacted,” and others like them . Noack
further adm itted that certain of his
statem ents to the School Districts were
inaccurate.”

No. No tim e fram e is given nor any other
m eans of determ ining the date with
relative precision.

Specificity as to Whom the Statements Were Made
Next, defendants argue that the requirement regarding identification of the “who” of

an allegedly fraudulent statement includes identification of “to whom” each statement was
made, citing DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990), and Roberts v.
6

McCarthy, 2:11-CV-00080, 2011 WL 1363811, *3 (D. Nev. Apr. 11, 2011). According to
defendants, the allegations in paragraphs 73, 75, 77, 79, 81, 83, 85, 87, 89, 91, 93, 95, 97,
99, and 103 do not satisfy Rule 9(b) pleading requirements because they do not
adequately specify to whom the statements were made. While some of these statements
are identified as having been made to the “School Districts,” those claims fall short;
defendants are not provided with the names of the individuals to whom the statements
were made.
DiLeo does not discuss expressly a requirement of identifying the recipient of a
fraudulent statement. However, the case sets forth the oft-quoted phrase that Rule 9(b)
requires “the who, what, when, where, and how: the first paragraph of any newspaper
story.” 901 F.2d at 627. But the court did not add that “who” means identification of both
the speaker and the listener. See id. Similarly, Roberts does not address whether the
plaintiff must identify the person to whom a statement is made, although in a parenthetical
it cites another case for the proposition that identification of the listener is required when
the alleged fraud is that of a corporation. Nevertheless, Moore’s Federal Practice suggests
that Rule 9(b) often requires allegations regarding “[t]he persons or entities to whom the
misrepresentation was communicated.” 2 Moore, supra, § 9.03[b], at 9-18. But notably,
even Moore’s indicates that identification of the entity to whom the statement was made
(not an individual at the entity) is acceptable.
Here, in large part, the SEC’s allegations of “who” are sufficient. Who made the
statement is generally more important than who heard it, cf. Vicom, Inc., 20 F.3d at 777
(stating that because fair notice is the most basic consideration underlying Rule 9(b) a
fraud pleading must reasonably notify the defendant of his role in the fraud), and the SEC
7

identifies the speaker as Noack for all statements. Plus, for many challenged statements
the SEC identifies at least one school district to whom a statement was aimed.
Though defendants submit that the Complaint should name the individual at the
school district who heard alleged misrepresentations, the absence of these names may be
a matter for discovery rather than a basis for dismissal or striking portions of the Complaint.
Here, the allegations naming a particular school district are sufficient.

Moreover,

assertions in the Complaint identify the individuals to whom misrepresentations were made
as school board members, providing even more detail to the defendants.
In addition, for allegations naming the “School Districts” together as the listeners,
the Complaint defines the term “School Districts” as five particular school districts in the
State of Wisconsin: School District of West Allis-West Milwaukee, Kenosha School District
No. 1, School District of Waukesha, Kimberly Area School District, and School District of
Whitefish Bay. (Doc. ¶¶ 1, 18.) Thus, if allegations indicate that a statement was made
to the “School Districts,” the Complaint is read as a whole to indicate that the statement
was made to all five school districts, and that is sufficient as well.2
However, in certain instances the Complaint asserts that a statement was made to
“possible others.” Such a reference is too vague to satisfy Rule 9(b). Additionally, some
paragraphs assert a statement by Noack in general, followed by examples of the statement
being made to a particular school district. Only the examples are sufficiently pled under
Rule 9(b) unless the general statement is accompanied by other precise facts that describe

2

Of course, when repleading dates the SEC will need to identify the date the statem ent was m ade to
each of the five school districts.

8

it more particularly, such as where and when the statement occurred or that it was indeed
made to all five school districts.
The SEC submits that when the Complaint is analyzed, it should be understood that
statements not specifying a particular school district as recipient were made to all five
school districts unless otherwise noted. But here, that is not acceptable. This case is not
one in which the listener or recipient discussed in a complaint may be identified easily.
Five school districts are involved. Moreover, the Complaint includes over 200 paragraphs
of allegations. Hence, this case warrants particularity, not just assumptions that certain
statements were made to all five school districts.
In short, the identification of a school district as the recipient of a fraudulent
statement is acceptable even if an individual at the school district is not named. But in this
case, with five different school districts involved, the SEC needs to identify at the least
which school districts heard the statements.
Thus, the rulings as to each challenged statement are as follows:
Compl. ¶
73

Allegation

Sufficient re “to Whom”?

“Noack represented that the CDO
investm ents were “Treasury-like,” and he
claim ed that they were virtually risk-free.
For exam ple, before the first deal, Noack
told W est Allis-W est Milwaukee to think of
these investm ents like Treasury bonds due
to the quality of the com panies in the
portfolio. He represented that only
Treasury securities would be a safer
investm ent. Sim ilarly, Noack represented
to W aukesha that the CDO investm ents
were sim ilar to Treasury securities
because the portfolio was com prised of
AAA and AA corporate debt.”

Yes as to the statem ent m ade to W est
Allis-W est Milwaukee and the separate
statem ent m ade to W aukesha. No as to
the first sentence of the paragraph to the
extent it m ay have been m ade to others.

9

75

“Noack represented that 30 of the 105
com panies in the portfolio would have to
default before the School Districts would
begin to lose their principal. For example,
Noack m ade that representation to
W aukesha, am ong possible others.”

Yes as to the statem ent m ade to
W aukesha. No as to “possible others.”

77

“Noack represented that it would take ‘15
Enrons’ for the School Districts to lose
m oney. For exam ple, at a m eeting of the
school board of W hitefish Bay on
Novem ber 15, 2006, Noack stated: “And it
gives added com fort that, you know, it
takes 15 defaults for us to start losing
m oney and we have som ebody watching
over every com pany, every day, for seven
years, and if it starts to look like it’s going
that way, they get out of it. The only way –
the real – you need 15 Enrons. You need
som ething to happen that big overnight.’
The audio was recorded.”

Yes as to the statem ent m ade to
W hitefish Bay. No as to the first
sentence of the paragraph to the extent
the statem ent m ay have been m ade to
others.

79

“Noack represented that it would take 8.5
tim es historically norm al default levels
for the School Districts to lose m oney,
which only happened during the Great
Depression. For exam ple, Noack m ade
that representation to the School Districts
before the second deal.”

Yes. The allegation is that the statem ent
was m ade to all five school districts. No
as to the first sentence of the paragraph
to the extent it m ay have been m ade to
others.

81

“Noack represented that there had not
been a default since Enron in 2000. For
exam ple, he m ade that representation to
Kim berly, am ong possible others.”

Yes as to the statem ent m ade to
Kim berly. No as to “possible others.”

83

“Noack represented to W hitefish Bay
during a m eeting on Novem ber 15, 2006
that W est Allis-W est Milwaukee had
already done two deals, and ‘if there is a
hiccup in one of the investm ents, we would
slow down.’ The audio was recorded.”

Yes.

10

85

“Noack represented that the third deal
would involve an investm ent in only
investm ent-grade com panies. During a
m eeting of the school board of W aukesha
on Novem ber 27, 2006, which was
videotaped, Noack stated to the school
board: ‘[A]gain, we’re only investing in
higher grade com panies. If you look at the
balance sheets of investm ent grade
com panies in the world today, which is
805, they’re doing better than ever.’ Noack
later said at that sam e m eeting: ‘[T]he
odds of, again, it takes twenty out of these
hundred com panies to default before it
gets to your AA level.’”

Yes as to the statem ent to W aukesha.
Moreover, all W aukesha school board
m em bers present at the m eeting can be
assum ed to have heard the statem ents,
providing even the level of specificity that
defendants argue for. No as to the first
sentence to the extent it m ay relate to
other school districts.

87

“Noack represented that there was a
short-term m ark-to-m arket risk, but that it
was not a long-term risk because the
School Districts would still get their m oney
back after seven years. For example, he
m ade that representation to Kenosha,
am ong possible others.”

Yes as to the statem ent m ade to
Kenosha. No as to “possible others.”

89

“Noack represented that, of the top 800
com panies in the world, 100 of them would
have to go under before the School
Districts would suffer any principal loss.
For exam ple, he m ade that representation
to Kenosha, am ong possible others.”

Yes as to the statem ent m ade to
Kenosha. No as to “possible others.”

91

“Noack represented that, if the investm ents
failed, they would all be in bread lines
together. For exam ple, he m ade that
representation to W aukesha, am ong
possible others.”

Yes as to the statem ent m ade to
W aukesha. No as to “possible others.”

93

“Noack represented that the country would
have to fall further into financial trouble
than the Great Depression before the
investm ents would be affected. But even
in that scenario, according to Noack, the
School Districts would get their principal
back after seven years and did not have to
worry about losing principal. For exam ple,
he m ade that representation to W est
Allis-W est Milwaukee. He sim ilarly told
other School Districts that it would take a
Great Depression for the investm ents to
fail.”

Yes as to the first statem ent as m ade to
W est Allis-W est Milwaukee. No as to the
second statem ent, as it does not indicate
that it was m ade to all four other school
districts— “other School Districts” is
vague as to whether it is all four or just
som e of them .

11

95

“Noack represented that if any of the
highly-rated portfolio credits struggled, the
portfolio m anager would sim ply replace
that credit with another stronger credit to
m aintain the AA rating. For exam ple, he
m ade that representation to W hitefish Bay
and to Kim berly, am ong possible others.”

Yes as to the statem ent m ade to
W hitefish Bay and Kim berly. No as to
“possible others.”

97

“Noack m isrepresented the initial
perform ance of the first investm ent. On or
about August 14, 2006, Noack attended a
W est Allis-W est Milwaukee school board
m eeting to propose an additional
investm ent in the GOAL Program . A
school board m em ber asked Noack how
the first investm ent was perform ing.
Noack responded that the investm ent was
‘on course.’”

Yes as to statem ent m ade to W est AllisW est Milwaukee. No as to the first
sentence to the extent it m ay have been
m ade to anyone else.

99

“On Novem ber 15, 2006, Stifel and Noack
told W hitefish Bay’s school board that
they had com pleted two deals already with
W est Allis-W est Milwaukee. He stated:
‘So, we are phasing it in and if there is a
hiccup in one of the investm ents, we would
slow down, Okay?’”

Yes. Moreover, all W hitefish Bay school
board m em bers can be assum ed to have
heard or seen the statem ent, providing
even the level of specificity that
defendants argue for.

103

“In an affidavit executed in 2008, Noack
adm itted under oath that he had m ade
statem ents and representations to the
School Districts to persuade them to enter
into the CDO transactions. He stated
under oath that he had no reason to
dispute that he had m ade statem ents to
the School Districts such as “[i]t takes 20
out of these 100 com panies to default
before it gets to your AA level,” and “[t]here
would need to be ‘15 Enrons’ before you
would be im pacted,” and others like them .
Noack further adm itted that certain of his
statem ents to the School Districts were
inaccurate.”

Yes. Use of the defined term “School
Districts” indicates that the statem ents
were allegedly m ade to all five school
districts.

SUBSTANTIVE CHALLENGES
The SEC does not disagree that its claims require that an alleged misrepresentation
or omission be material. See SEC v. Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir.
1999) (stating that violations of § 10(b), § 17(a)(1)-(3), and Rule 10b-5 require a material
misrepresentation or material omission as to which the individual had a duty to speak).
12

A misrepresentation is material if there is a substantial likelihood that the statement or
omitted fact “would have been viewed by the reasonable investor as having significantly
altered the ‘total mix’ of information made available.” Basic Inc. v. Levinson, 485 U.S. 224,
231-32 (1988) (internal quotation marks omitted). Materiality “depends on the significance
the reasonable investor would place on the withheld or misrepresented information” and
is a fact-specific inquiry. Id. at 240.
Defendants contend that various alleged misrepresentations, even if pled properly,
were immaterial as a matter of law because they were (1) puffery; (2) opinion, including
predictions of future performance and generic statements about risk; or (3) as to West
Allis-West Milwaukee contradicted by written offering documents. Thus, no reasonable
investor would have considered the information significant.
In addition, defendants contend that certain allegations of omission must be
dismissed because defendants had no duty to disclose the allegedly omitted information.
A.

Puffery
“Mere sales puffery is not actionable under Rule 10b-5," Eisenstadt v. Centel Corp.,

113 F.3d 738, 745-46 (7th Cir. 1997), because it is not material. Typically, puffery involves
optimistic rhetoric and promotional sales talk that is devoid of substantive information and
contains no useful information upon which a reasonable investor would base a decision
to invest. See Searls v. Glasser, 64 F.3d 1061, 1066 (7th Cir. 1995); In re Midway Games,
Inc. Sec. Litig., 332 F. Supp. 2d 1152, 1164 (N.D. Ill. 2004). It includes “general, optimistic
statements that are not capable of being objectively verified.” In re Midway Games, Inc.
Sec. Litig., 332 F. Supp. 2d at 1164. “[L]oosely optimistic statements that are so vague,
so lacking in specificity, or so clearly constituting the opinions of the speaker, that no
13

reasonable investor could find them important to the total mix of information available,”
may be found immaterial as a matter of law and a basis for granting a motion to dismiss.
Id. (internal quotation marks omitted).
Defendants maintain that the statements in paragraphs 73, 75, 77, 79, 81, 83, 85,
89, 91, 93, 95, 97, 99, and 103 of the Complaint are immaterial and nonactionable puffery.
They argue that phrases like “‘treasury-like, ‘higher-grade,’ ‘bread lines,’ ‘financial trouble,’
‘on course,’ and ‘hiccup’ all exemplify a lack of precision such that a reasonable investor
could not find the information to be material. There is no way to define these phrases, and
no way to quantify them.” (Doc. 17 at 10.) Defendants further assert that such phrases
were merely optimistic rhetoric. (Id. at 12.)
However, defendants pull those words out of the sentences that give them context
and help determine their substantive meaning. Moreover, for the reasons set forth below
the court finds that, with one exception, the challenged allegations are more than puffery.
As for the one exception, the court agrees that the alleged statement regarding bread lines
is hyperbole and too vague for a reasonable investor to rely upon it. Therefore, the motion
to dismiss will be granted as to that one allegation (paragraph 91) and it is dismissed as
a matter of law.

14

Compl. ¶

Allegation

Puffery?

73

“Noack represented that the CDO
investm ents were “Treasury-like,” and he
claim ed that they were virtually risk-free.
For exam ple, before the first deal, Noack
told W est Allis-W est Milwaukee to think of
these investm ents like Treasury bonds due
to the quality of the com panies in the
portfolio. He represented that only
Treasury securities would be a safer
investm ent. Sim ilarly, Noack represented
to W aukesha that the CDO investm ents
were sim ilar to Treasury securities
because the portfolio was com prised of
AAA and AA corporate debt.”

No. Treasury bonds are generally
believed by the public to be very low-risk
investm ents. See, e.g., Treasury Bills,
Notes and Bonds Have Risk, Too,
www.usatoday.com /m oney/perfi/colum nis
t/krantz/2007-08-24-treasury-risk_N.htm
(viewed Aug. 28, 2012) (“W hen you lend
m oney to the governm ent by buying a
Treasury bill, note or bond, you're getting
an investm ent backed by the full faith and
credit of the U.S. governm ent. In other
words, you'll get your interest and
principal back unless the U.S.
governm ent fails.”); W hat You Should
Know/Risks of Investing in Bonds,
www.investinginbonds.com /learnm ore.as
p?catid=38id=383 (viewed Aug. 28,
2012) (“It’s All Relative to ‘Riskless’
Treasury Yields: Bonds issued by the
U.S. Treasury are backed by the full faith
and credit of the U.S. governm ent and
therefore considered to have no credit
risk.”). Com parison to Treasury bonds
conveys substantive, useful inform ation
that a reasonable investor would consider
in the total m ix when deciding whether to
invest.

75

“Noack represented that 30 of the 105
com panies in the portfolio would have to
default before the School Districts would
begin to lose their principal. For example,
Noack m ade that representation to
W aukesha, am ong possible others.”

No. Noack was providing a m eaningful
com putation to describe the safety of the
investor’s principal. The statem ent can
be considered one of substantive, useful
inform ation that a reasonable investor
would consider. The preciseness of the
statem ent adds to its usefulness to the
investor, suggesting that Noack looked at
the 105 com panies in the portfolio to
m ake this assessm ent.

15

77

“Noack represented that it would take ‘15
Enrons’ for the School Districts to lose
m oney. For exam ple, at a m eeting of the
school board of W hitefish Bay on
Novem ber 15, 2006, Noack stated: “And it
gives added com fort that, you know, it
takes 15 defaults for us to start losing
m oney and we have som ebody watching
over every com pany, every day, for seven
years, and if it starts to look like it’s going
that way, they get out of it. The only way –
the real – you need 15 Enrons. You need
som ething to happen that big overnight.’
The audio was recorded.”

No. Taken in context of the entire
paragraph, “15 Enrons” relates to “15
defaults” before W hitefish Bay would lose
m oney on the investm ent. Moreover,
taken in context with the rest of the
paragraph, references to Enron could
relate to how Enron was m anaged, and
Noack’s statem ent that “we have
som ebody watching over every com pany”
suggested that m anagers of the
investm ents at issue would take
m easures to prevent defaults from such
com panies from affecting the investm ent.
A reasonable investor could see this as
substantive, useful inform ation in the total
m ix for decision m aking.

79

“Noack represented that it would take 8.5
tim es historically norm al default levels
for the School Districts to lose m oney,
which only happened during the Great
Depression. For exam ple, Noack m ade
that representation to the School Districts
before the second deal.”

No. Again, Noack was providing a
m eaningful com putation to describe the
safety of the investor’s principal. The
statem ent can be considered one of
substantive, useful inform ation that a
reasonable investor would consider.
Again, the preciseness of the statem ent
adds to its usefulness to the investor,
suggesting that Noack had actual data
from which he m ade the rem ark. Noack
did not refer to “10 tim es” or “100 tim es”
or som e rounded num ber that suggests
vagueness or opinion, but instead used
“8.5 tim es,” suggesting that his com m ent
was not puffery.

81

“Noack represented that there had not
been a default since Enron in 2000. For
exam ple, he m ade that representation to
Kim berly, am ong possible others.”

No. A reasonable investor could
consider this com m ent to have been
backed up by actual data— Noack had an
actual year and nam ed the defaulting
com pany. A reasonable person would
find the length of tim e from the last prior
default to the tim e of investm ent to be
substantive, useful inform ation to
consider in the total m ix of inform ation
relied upon in m aking an investm ent.

16

83

“Noack represented to W hitefish Bay
during a m eeting on Novem ber 15, 2006
that W est Allis-W est Milwaukee had
already done two deals, and ‘if there is a
hiccup in one of the investm ents, we would
slow down.’ The audio was recorded.”

No. Regardless of whether “hiccup”
alone could be vague, it was not vague in
context of this sentence. Taken in a light
favorable to plaintiff, Noack was
representing that another school district
had com pleted two deals and that if
circum stances following either had
caused any m eaningful question about
the investm ents he would suggest m ore
tim e or consideration before additional
investm ents. A reasonable person would
find this to be substantive, useful
inform ation in determ ining whether to
invest in a sim ilar investm ent to those
m ade previously by the other districts.

85

“Noack represented that the third deal
would involve an investm ent in only
investm ent-grade com panies. During a
m eeting of the school board of W aukesha
on Novem ber 27, 2006, which was
videotaped, Noack stated to the school
board: ‘[A]gain, we’re only investing in
higher grade com panies. If you look at the
balance sheets of investm ent grade
com panies in the world today, which is
805, they’re doing better than ever.’ Noack
later said at that sam e m eeting: ‘[T]he
odds of, again, it takes twenty out of these
hundred com panies to default before it
gets to your AA level.’”

No. The statem ent regarding twenty
defaults is sim ilar to the thirty or fifteen
defaults discussed above and is
actionable. W hile “higher grade
com panies” could be considered vague
in isolation, it is not vague in context, as
Noack’s fuller statem ent related or
com pared the “higher grade com panies”
to 805 “investm ent grade com panies,”
which he suggested were perform ing
well. Taken in plaintiff’s favor, the “higher
grade com panies” are or are sim ilar to
805 identifiable investm ent-grade
com panies. A reasonable investor would
find this useful inform ation in determ ining
whether to invest.

89

“Noack represented that, of the top 800
com panies in the world, 100 of them would
have to go under before the School
Districts would suffer any principal loss.
For exam ple, he m ade that representation
to Kenosha, am ong possible others.”

No. Again, Noack was providing a
m eaningful com putation to describe the
safety of the investor’s principal. The
statem ent can be considered one of
substantive, useful inform ation that a
reasonable investor would consider.

91

“Noack represented that, if the investm ents
failed, they would all be in bread lines
together. For exam ple, he m ade that
representation to W aukesha, am ong
possible others.”

Yes. The statem ent is one of hyperbole
and sales talk, devoid of real substance
and one on which a reasonable investor
would not rely for investm ent decision
m aking.

17

93

“Noack represented that the country would
have to fall further into financial trouble
than the Great Depression before the
investm ents would be affected. But even
in that scenario, according to Noack, the
School Districts would get their principal
back after seven years and did not have to
worry about losing principal. For exam ple,
he m ade that representation to W est
Allis-W est Milwaukee. He sim ilarly told
other School Districts that it would take a
Great Depression for the investm ents to
fail.”

No. The statem ent that the school
districts would not lose their principal and
would get it back in seven years was
precise, useful inform ation on which a
reasonable investor would rely. It
reflected the safety of the investm ents as
well as the tim e fram e for recovery of
principal. The com m ent about a financial
situation as bad as or worse than the
Great Depression is also substantive
enough to be actionable. The econom ic
conditions of the Great Depression have
been docum ented such that a reasonable
investor could use a com parison with that
era in assessing risk to the proposed
investm ent.

95

“Noack represented that if any of the
highly-rated portfolio credits struggled, the
portfolio m anager would sim ply replace
that credit with another stronger credit to
m aintain the AA rating. For exam ple, he
m ade that representation to W hitefish Bay
and to Kim berly, am ong possible others.”

No. This was a precise, not vague,
statem ent about the ability of the portfolio
m anager to replace the contents of the
portfolio. In addition, it indicated that the
portfolio m anager was m onitoring the
perform ance of the credit in the portfolio.
This was substantive, useful inform ation
for a reasonable investor to consider in
the total m ix.

97

“Noack m isrepresented the initial
perform ance of the first investm ent. On or
about August 14, 2006, Noack attended a
W est Allis-W est Milwaukee school board
m eeting to propose an additional
investm ent in the GOAL Program . A
school board m em ber asked Noack how
the first investm ent was perform ing.
Noack responded that the investm ent was
‘on course.’”

No. W hile “on course” in isolation could
be vague, it m ust be considered in
context as a response to the question
about how the prior investm ent was
perform ing for purposes of considering a
second investm ent. “On course” could
reasonably be interpreted to m ean “as
anticipated” or “as expected.” Taken in
context, a different response m ight have
suggested m ore tim e or consideration
before additional investm ents, whereas
“on course” suggested that the
perform ance of the first investm ent
caused no concern regarding a second
investm ent. A reasonable person would
find this to be substantive, useful
inform ation in determ ining whether to
invest in an investm ent sim ilar to that
m ade previously.

99

“On Novem ber 15, 2006, Stifel and Noack
told W hitefish Bay’s school board that
they had com pleted two deals already with
W est Allis-W est Milwaukee. He stated:
‘So, we are phasing it in and if there is a
hiccup in one of the investm ents, we would
slow down, Okay?’”

No. See the discussion regarding
paragraphs 83 and 97.

18

103

B.

“In an affidavit executed in 2008, Noack
adm itted under oath that he had m ade
statem ents and representations to the
School Districts to persuade them to enter
into the CDO transactions. He stated
under oath that he had no reason to
dispute that he had m ade statem ents to
the School Districts such as “[i]t takes 20
out of these 100 com panies to default
before it gets to your AA level,” and “[t]here
would need to be ‘15 Enrons’ before you
would be im pacted,” and others like them .
Noack further adm itted that certain of his
statem ents to the School Districts were
inaccurate.”

No. See the discussion regarding
paragraphs 75 and 77.

Forward-Looking Opinion
Defendants contend that some of the alleged misrepresentations are mere opinions

or forecasts that are not actionable in the face of written disclosures that “bespeak
caution.” (Doc. 17 at 17.) According to defendants, written disclosures given to the school
districts included cautionary statements, and as a matter of law the school districts could
not rely upon projections about the future that could not be verified.
The court disagrees. First, the written disclosures, except for those involving West
Allis, are not in the record. Thus, accepting defendants’ argument would require outside
evidence, which is not proper on a motion to dismiss or in the record before the court.
Second, the court disagrees that the following statements are mere opinion or unverifiable
forecasts.

19

Compl. ¶

Forward Looking Opinion?

79

“Noack represented that it would take 8.5
tim es historically norm al default levels
for the School Districts to lose m oney,
which only happened during the Great
Depression. For exam ple, Noack m ade
that representation to the School Districts
before the second deal.”

No. This statem ent involves historical
default levels, not a projection of what
future default levels would be. The
com m ent that it would require 8.5 tim es
the historical default levels for a loss of
m oney involves a m easurem ent of the
investm ent against past standards. It
was not a projection of whether future
default levels would be higher or lower
than historical levels.

83

“Noack represented to W hitefish Bay
during a m eeting on Novem ber 15, 2006
that W est Allis-W est Milwaukee had
already done two deals, and ‘if there is a
hiccup in one of the investm ents, we would
slow down.’ The audio was recorded.”

No. Taken in the light m ost favorable to
plaintiff, Noack was not predicting
whether a “hiccup” would or could occur.
Instead, he was assuring W hitefish Bay
that he and Stifel would not push another
investm ent if som ething was awry in the
previous one of W est Allis-W est
Milwaukee. Noack’s assurances about
his own and Stifel’s conduct is different
from an unverifiable prediction about
whether a hiccup would or could occur.

95

“Noack represented that if any of the
highly-rated portfolio credits struggled, the
portfolio m anager would sim ply replace
that credit with another stronger credit to
m aintain the AA rating. For exam ple, he
m ade that representation to W hitefish Bay
and to Kim berly, am ong possible others.”

No. In addition to any prediction as to
what the portfolio m anager would do, this
was a representation of what the portfolio
m anager could do. Taking the facts in
plaintiff’s favor, the abilities of the
portfolio m anager (i.e., whether he or she
had the authority to replace credit in the
portfolio) should be verifiable. Moreover,
the statem ent suggests that replacem ent
would have no negative effect, which
should be verifiable.

99

C.

Allegation

“On Novem ber 15, 2006, Stifel and Noack
told W hitefish Bay’s school board that
they had com pleted two deals already with
W est Allis-W est Milwaukee. He stated:
‘So, we are phasing it in and if there is a
hiccup in one of the investm ents, we would
slow down, Okay?’”

No. See discussion of paragraph 83.

West Allis-West Milwaukee Offering Documents
When an allegedly inaccurate, oral statement is contradicted by an accurate, written

statement, the written statement controls, rendering the oral statement immaterial and not
actionable. See Carr v. CIGNA Sec. Inc., 95 F.3d 544, 547 (7th Cir. 1996); Assocs. in
20

Adolescent Psychiatry v. Home Life Ins. Co., 941 F.2d 561, 571 (7th Cir. 1991)
(“Documents that unambiguously cover a point control over remembered (or
misremembered, or invented) oral statements.”). An investor who knew the truth should
not be permitted to say that an inconsistent oral statement significantly altered the total mix
of information considered in investing. Acme Propane, Inc. v. Tenexco, Inc., 844 F.2d
1317, 1322 (7th Cir. 1988). Moreover, “securities laws are designed to encourage the
complete and careful written presentation of material information. A seller who fully
discloses all material information in writing should be secure in the knowledge that it has
done what the law requires.” Id.
However, the issuer must disclose the truth clearly before a lie becomes immaterial.
Pommer v. Medtest Corp., 961 F.2d 620, 624-25 (7th Cir. 1992) The contradiction must
be on point: a conflict between “X” and “not-X,” such as the difference between a written
document saying “this is a risky investment” and an oral statement by the person handing
out the document that “this is a safe investment.” See Carr, 95 F.3d at 547. Documents
trump oral statements only when they unambiguously cover the same point. See Assocs.
in Adolescent Psychiatry, S.C., 941 F.2d at 571. And obscurity of the written statement in
a lengthy document may be considered. See Acme Propane, Inc., 844 F.2d at 1323 (“A
three-page Reserve Estimate is not so long that such a statement is too obscure to find.”).
Defendants contend that the written offering documents relating to the first West
Allis-West Milwaukee transaction contained express written disclosures such that any
contrary oral misrepresentation cannot be actionable. Notably, defendants include with
their motion the ninety-three page Tribune Limited $10,000,000,000 Secured Note
Programme, and the 143-page Tribune Limited Supplemental Programme Memorandum,
21

which they say were given to West Allis-West Milwaukee. (See Doc. 17 Ex. A.) Moreover,
defendants contend that the alleged misrepresentations in paragraphs 73, 75, 77, 79, 87,
89, 91, 93, and 103 are not material because:
•

The initial prospectus stated that the investment “involves substantial risks” and
warned that “[e]ach prospective investor should ensure that it fully understands the
nature of the transaction into which it is entering and the nature and extent of its
exposure to the risk of loss of all or a substantial part of its investment.” (Doc. 17
Ex. A at 6.)

•

The initial prospectus provided that “[n]o person has been authorised to give any
information or to make any representation other than those contained in this
Programme Memorandum and/or in the relevant Supplemental Programme
Memorandum.” (Id. at 3 (emphasis deleted).)

•

The supplemental prospectus said that “[p]urchasers of Notes should conduct such
independent investigation and analysis regarding the issuer, the Notes, the Swap
Counterparty, the Investment Advisor . . . as they deem appropriate to evaluate the
merits and risks of an investment in the Notes” (id. at 95), warned of “clear and
substantial risks inherent in investing in or holding the Notes” (id. at 95), stated that
the investor would be “exposed to the credit risk” of certain corporations and
obligations (id. at 95-96), and noted that every substitution to the portfolio “may
result in an increased risk” of defaults (id. at 96).
Documents submitted with a motion to dismiss may be considered part of the

pleadings if they are "referred to in the plaintiff's complaint and are central to his claim."
188 LLC v. Trinity Indus., Inc., 300 F.3d 730, 735 (7th Cir. 2002) (internal quotation marks
22

omitted); see also Tierney v. Vahle, 304 F.3d 734, 738 (7th Cir. 2002). When a plaintiff
has referred to a document submitted by a defendant with its motion to dismiss, a court
may consider the document rather than having to convert the motion to one under Fed. R.
Civ. P. 56; the exception prevents parties from surviving a motion to dismiss by artful
pleading or by simply failing to attach relevant documents. 188 LLC, 300 F.3d at 735
The SEC does not object to consideration of documents on file regarding the motion
to dismiss. Instead, it defends its case based on the merits.
The court agrees with the SEC’s position as follows.
Compl. ¶

Allegation

Contrary to Written Disclosure?

73

“Noack represented that the CDO
investm ents were “Treasury-like,” and he
claim ed that they were virtually risk-free.
For exam ple, before the first deal, Noack
told W est Allis-W est Milwaukee to think of
these investm ents like Treasury bonds due
to the quality of the com panies in the
portfolio. He represented that only
Treasury securities would be a safer
investm ent. Sim ilarly, Noack represented
to W aukesha that the CDO investm ents
were sim ilar to Treasury securities
because the portfolio was com prised of
AAA and AA corporate debt.”

No. Although the written disclosures
warned of risks generally, they did not
com pare the investm ent to the level of
risk of Treasuries.

75

“Noack represented that 30 of the 105
com panies in the portfolio would have to
default before the School Districts would
begin to lose their principal. For example,
Noack m ade that representation to
W aukesha, am ong possible others.”

No. Although the written disclosures
warned of risks generally, they did not
quantify the am ount of risk regarding how
m any com panies would need to default
before the loss of principal occurred.

23

77

“Noack represented that it would take ‘15
Enrons’ for the School Districts to lose
m oney. For exam ple, at a m eeting of the
school board of W hitefish Bay on
Novem ber 15, 2006, Noack stated: “And it
gives added com fort that, you know, it
takes 15 defaults for us to start losing
m oney and we have som ebody watching
over every com pany, every day, for seven
years, and if it starts to look like it’s going
that way, they get out of it. The only way –
the real – you need 15 Enrons. You need
som ething to happen that big overnight.’
The audio was recorded.”

No. Although the written disclosures
warned of risks generally, they did not
quantify the am ount of risk, such as by
com paring the level of defaults to the
failure of Enron for purposes of when the
school districts m ay start to lose
principal.

79

“Noack represented that it would take 8.5
tim es historically norm al default levels
for the School Districts to lose m oney,
which only happened during the Great
Depression. For exam ple, Noack m ade
that representation to the School Districts
before the second deal.”

No. Although the written disclosures
warned of risks generally, they did not
quantify the am ount of risk with any
calculation using historical default data.
The precise num ber stated is not
contradicted by the written disclosure.

87

“Noack represented that there was a
short-term m ark-to-m arket risk, but that it
was not a long-term risk because the
School Districts would still get their m oney
back after seven years. For example, he
m ade that representation to Kenosha,
am ong possible others.”

No. Although the written disclosures
warned of risks generally, they did not
contradict that the investor would get
principal back after seven years or
discuss the difference between a shortterm and long-term risk.

89

“Noack represented that, of the top 800
com panies in the world, 100 of them would
have to go under before the School
Districts would suffer any principal loss.
For exam ple, he m ade that representation
to Kenosha, am ong possible others.”

No. Although the written disclosures
warned of risks generally, they did not
quantify the am ount of risk regarding how
m any com panies would need to fail
before the loss of principal occurred.

91

“Noack represented that, if the investm ents
failed, they would all be in bread lines
together. For exam ple, he m ade that
representation to W aukesha, am ong
possible others.”

Previously dism issed on other grounds.

24

93

No. Although the written disclosures
warned of risks generally, they did not
contradict that the investor would get
principal back after seven years or
discuss or com pare the risk of losing
principal to conditions like the Great
Depression.

103

D.

“Noack represented that the country would
have to fall further into financial trouble
than the Great Depression before the
investm ents would be affected. But even
in that scenario, according to Noack, the
School Districts would get their principal
back after seven years and did not have to
worry about losing principal. For exam ple,
he m ade that representation to W est
Allis-W est Milwaukee. He sim ilarly told
other School Districts that it would take a
Great Depression for the investm ents to
fail.”
“In an affidavit executed in 2008, Noack
adm itted under oath that he had m ade
statem ents and representations to the
School Districts to persuade them to enter
into the CDO transactions. He stated
under oath that he had no reason to
dispute that he had m ade statem ents to
the School Districts such as “[i]t takes 20
out of these 100 com panies to default
before it gets to your AA level,” and “[t]here
would need to be ‘15 Enrons’ before you
would be im pacted,” and others like them .
Noack further adm itted that certain of his
statem ents to the School Districts were
inaccurate.”

No. Although the written disclosures
warned of risks generally, they did not
quantify the am ount of risk regarding how
m any com panies would need to default
before the loss of principal occurred or
com pare the level of defaults to the
failure of Enron regarding when the
school districts m ay start to lose
principal.

Omissions
Generally, silence is not actionable absent a duty to speak. See Chiarella v. United

States, 445 U.S. 222, 232 (1980). A duty to speak may arise from a relationship between
parties, id. at 228, 232, or from a duty to speak the whole truth when certain statements
are made, see 15 U.S.C. §§ 78j(b), 77q(a)(2); 17 C.F.R. § 240.10b-5. For instance, Rule
10b-5 states that
[i]t shall be unlawful for any person, directly or indirectly, by the use of any
means or instrumentality of interstate commerce, or of the mails or of any
facility of any national securities exchange . . . to omit to state a material fact
necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading . . . in
connection with the purchase or sale of any security.

25

Thus, once Noack and Stifel began speaking, they had a duty to speak truthfully and not
omit material facts.
Defendants argue that the claims in paragraphs 8, 105-111, 125, 132, 134, 142, and
146 must be dismissed as a matter of law because the SEC alleges no duty to speak on
the part of defendants. This argument is rejected in view of other paragraphs in the
Complaint that are based on the defendants’ duty to speak the whole truth. For instance,
in paragraph 8 of the Complaint the SEC charges that defendants “did not disclose that the
portfolio in the first transaction performed poorly from the outset, with a number of the
credits suffering downgrades within weeks of closing.” Paragraph 108 contains similar
omissions. Those alleged omissions could be deemed necessary to complete Noack’s
comments in paragraphs 83 and 97 about prior investments being on course and that
future investments would slow if there were hiccups. Likewise, in paragraph 106 the SEC
asserts that “Stifel and Noack did not disclose to each of the School Districts that they
could lose their entire investment if only a fraction of the portfolio defaulted," which could
be necessary in conjunction with statements asserted in paragraphs 75 and 79 regarding
how many defaults would be needed before a loss of principal occurred.
However, the matching of omissions to statements that would be misleading without
the omitted information is not clear.3 Under Rule 9(b) the responsibility for pairing an
omission with a statement that otherwise is misleading is plaintiff’s, not this court’s or
defendants. Without a connection between an asserted omission and a statement creating
a duty to speak the complete truth, the allegations of omissions fail to meet the

3

Although a couple alleged om issions are paired with affirm ative statem ents (see Doc. 1 ¶¶ 97, 98,
146, 147), for the m ost part they are not.

26

requirements of Rule 9(b) that fraud be pled with particularity. Thus, the motions to dismiss
and to strike will be granted as to these allegations, though the SEC will be given leave to
replead.
CONCLUSION
Therefore,
IT IS ORDERED that defendants’ motions to dismiss or strike (Docs. 15, 16) are
granted in part and denied in part as set forth above.
IT IS ORDERED that defendants’ motions for more definite statement (Docs. 15,
16) are denied as moot.
IT IS FURTHER ORDERED that the SEC may replead the dismissed or struck
allegations to address the problems discussed above by filing an amended complaint
within twenty-one days. If no amended complaint is filed, the case will proceed on the
original Complaint minus those paragraphs.
Dated at Milwaukee, Wisconsin, this 14th day of September, 2012.
BY THE COURT

/s/ C. N. Clevert, Jr.
C. N. CLEVERT, JR.
CHIEF U. S. DISTRICT JUDGE

27