Fait v. Regions Financial Corp..

• Decision Date: 23 August 2011
• Docket Number: Docket No. 10–2311–cv.
• Citation: 655 F.3d 105
• Court: U.S. Court of Appeals — Second Circuit
• Parties: Alfred FAIT, Individually and on behalf of all others similarly situated, Plaintiff,Howard M. Rensin, Trustee for the Howard M. Rensin IRA, Plaintiff–Appellant,v.REGIONS FINANCIAL CORPORATION, Regions Financing Trust III, C. Dowd Ritter, Samuel W. Bartholomew, Jr., George W. Bryan, David J. Cooper, Earnest W. Deavenport, Jr., Don DeFosset, James R. Malone, Susan W. Matlock, Charles D. McCrary, Claude B. Nielsen, Jorge M. Perez, Lee J. Styslinger, III, Spence L. Wilson, John R. Roberts, Ernst & Young LLP, UBS Securities LLC, Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wachovia Capital Markets, LLC, Morgan Stanley & Co. Incorporated, Morgan Keegan & Company, Inc., Defendants–Appellees.*

655 F.3d 105

Alfred FAIT, Individually and on behalf of all others similarly situated, Plaintiff,Howard M. Rensin, Trustee for the Howard M. Rensin IRA, Plaintiff–Appellant,

v.REGIONS FINANCIAL CORPORATION, Regions Financing Trust III, C. Dowd Ritter, Samuel W. Bartholomew, Jr., George W. Bryan, David J. Cooper, Earnest W. Deavenport, Jr., Don DeFosset, James R. Malone, Susan W. Matlock, Charles D. McCrary, Claude B. Nielsen, Jorge M. Perez, Lee J. Styslinger, III, Spence L. Wilson, John R. Roberts, Ernst & Young LLP, UBS Securities LLC, Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wachovia Capital Markets, LLC, Morgan Stanley & Co. Incorporated, Morgan Keegan & Company, Inc., Defendants–Appellees.*

Docket No. 10–2311–cv.

United States Court of Appeals, Second Circuit.

Argued: May 9, 2011.Decided: Aug. 23, 2011.

Eric Alan Isaacson, Robbins Geller Rudman & Dowd LLP, San Diego, CA (Darren J. Robbins, Andrew J. Brown, Amanda M. Frame, Robbins Geller Rudman & Dowd LLP, San Diego, CA; Samuel H. Rudman, David A. Rosenfeld, Robbins Geller Rudman & Dowd LLP, Melville, NY, on the brief), for Plaintiff–Appellant.David B. Tulchin (William J. Snipes, on the brief), Sullivan & Cromwell LLP, New York, NY, for Regions and Individual Defendants–Appellees.Kenneth S. Geller, Mayer Brown LLP, Washington, DC (Mauricio A. España, Mayer Brown LLP, New York, NY; Stanley J. Parzon, James C. Schroeder, John J. Tharp, Jr., Mayer Brown LLP, Chicago, IL, on the brief), for Defendant–Appellee Ernst & Young LLP.Scott A. Edelman (Douglas W. Henkin, on the brief), Milbank, Tweed, Hadley & McCloy LLP, New York, NY, for Underwriter Defendants–Appellees.Before: POOLER, B.D. PARKER, and LOHIER, Circuit Judges.B.D. PARKER, JR., Circuit Judge:

This case requires us to consider whether certain statements concerning goodwill and loan loss reserves in a registration statement of Defendant–Appellee Regions Financial Corporation give rise to liability under sections 11 and 12 of the Securities Act of 1933. The United States District Court for the Southern District of New York (Kaplan, J.) concluded that they do not and dismissed the complaint. See Fed.R.Civ.P. 12(b)(6). Plaintiff–Appellant Howard M. Rensin appeals. We conclude that the statements in question were opinions, which were not alleged to have falsely represented the speakers' beliefs at the time they were made. Therefore, we affirm.

BACKGROUND

The following facts, which we assume to be true, are drawn from the amended complaint and documents incorporated by reference. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007); Litwin v. Blackstone Grp., L.P., 634 F.3d 706, 708 (2d Cir.2011). In November 2006, Regions Financial Corporation (“Regions”), a regional bank holding company operating in the South, Midwest, and Texas, acquired another bank holding company, AmSouth Bancorporation (“AmSouth”), in a stock transaction valued at approximately $10 billion. The proxy statement issued in connection with the acquisition disclosed that following the acquisition, Regions would record AmSouth's assets and liabilities at fair value, and that any excess of purchase price over net fair value would be recorded as goodwill.

In February 2008, Regions filed its 2007 Form 10–K wherein it reported $11.5 billion in goodwill, of which $6.6 billion was attributed to the AmSouth acquisition. The 10–K also reported that Regions had increased its loan loss reserves from $142.4 million in the previous year to $555 million. In explaining this increase, the 10–K stated:

Two primary factors led to the increase. Most notably, 2006 included just two months of provision for loan losses added to the portfolio as a result of the November 2006 merger with AmSouth, while the provision recorded in 2007 reflected the results of the newly merged Regions for the full year. Additionally, the provision rose due to an increase in management's estimate of inherent losses in its residential homebuilder portfolio, as well as generally weaker conditions in the broader economy.

J.A. 1026 (Am.Compl.¶ 10).

In April 2008 Regions Financing Trust III (the “Trust”), a Delaware statutory trust and wholly owned subsidiary of Regions, issued 13.8 million shares of Trust Preferred Securities—“hybrid” securities with characteristics of equity and debt—(the “Securities”) in a registered public offering (the “2008 Offering”). The Registration Statement and Prospectus for the 2008 Offering (the “Offering Documents”) incorporated by reference Regions' 2007 Form 10–K and certain additional SEC filings.

In SEC filings reporting its financial results for the first three quarters of the 2008 fiscal year, Regions continued to report goodwill of $11.5 billion and moderate increases to its allowance for credit losses. However, in its fourth quarter results released in January 2009, Regions reported a $5.6 billion net loss, “largely driven by a $6 billion non-cash charge for impairment of goodwill,” and doubled its loan loss provision to $1.15 billion as compared to a year earlier. In the months following these disclosures, the price of the Securities and Regions' stock fell, and credit rating agencies downgraded the company's debt.

Following the 2006 AmSouth merger, serious problems emerged in the housing and residential mortgage markets. Beginning in late 2006, several large mortgage lenders, particularly those making predominantly subprime loans, either filed for bankruptcy protection or significantly scaled back their operations. By 2008, the mortgage market problems had spread to larger, more longstanding banks and lenders. This period was also characterized by rising rates of delinquency and foreclosure on home mortgage loans, and slowed housing sales.

Following the decline in Regions' stock price, Alfred Fait, who purportedly acquired Trust Preferred Securities, filed a putative class-action complaint against Regions, the Trust, and other defendants. Pursuant to a district court order, Rensin was later appointed Lead Plaintiff and filed an amended complaint on November 2, 2009. The amended complaint also named as defendants individual members of the board of directors of Regions who signed the Registration Statement and Regions' 2007 Form 10–K. Additional defendants included Ernst & Young (“E & Y”), which served as Regions' independent public accountant and certified financial statements in Regions' 2007 Form 10–K, as well as the underwriters of the 2008 Offering.

The complaint alleges, in essence, that despite adverse trends in the mortgage and housing markets, particularly in areas where AmSouth's mortgage loans were concentrated, Regions failed to write down “goodwill” and to sufficiently increase “loan loss reserves.” ¹ As a consequence of these failures, the complaint contends, the Offering Documents (either explicitly or by reference to other filings) contained “negligently false and misleading” statements concerning goodwill and loan loss reserves. In particular, the complaint asserts that Regions overstated goodwill and falsely stated that it was not impaired, and “vastly underestimated” Regions' loan loss reserves and failed to disclose that they were inadequate.

Relying on these allegations, the complaint further contends that the Offering Documents incorporated false and misleading certifications by management that Regions' financial statements complied with the Sarbanes–Oxley Act (“SOX”) and were prepared in accordance with GAAP. It also alleges that E & Y falsely certified that Regions' financial results were presented in accordance with GAAP, that E & Y's audits complied with generally accepted accounting standards (“GAAS”), and that Regions maintained effective internal controls. The complaint alleges that these misleading statements and omissions violated sections 11(a), 12(a)(2), and 15 of the Securities Act of 1933 (“Securities Act” or “1933 Act”). See 15 U.S.C. §§ 77k(a), 77 l(a)(2), 77 o.

Defendants moved to dismiss the complaint on the ground that the challenged statements regarding goodwill and the adequacy of loan loss reserves were matters of opinion, which were not actionable because the complaint failed to allege that those opinions were not truly held at the time they were made. Concluding that the challenged statements were ones of judgment and opinion, rather than fact, Judge Kaplan granted defendants' motions and dismissed the complaint. Fait v. Regions Fin. Corp., 712 F.Supp.2d 117, 120–25 (S.D.N.Y.2010). With respect to goodwill, Judge Kaplan observed that “the goodwill reflected in [Regions'] 2007 10–K was the excess of the acquisition price, an objective fact, over the fair value of AmSouth's assets at the time of the acquisition.... [, which] was not a matter of objective fact.” Id. at 122. Instead, “the goodwill stated on [Regions'] balance sheet reflected judgments as to values that were not objectively determinable.” Id. at 123. Thus, “[t]he truth or falsity of that statement ... was a matter of opinion.” Id. Similarly, Judge Kaplan observed that loan loss reserves “reflect management's opinion as to the likelihood of future loan losses and their magnitude.” Id. at 124. Thus, “[w]hether Regions had adequate reserves for its predicted loan losses is not a matter of objective fact,” but instead, “[t]he reserves ... were statements of opinion by defendants as to the portion of the stated value of Regions' loans that would prove to be uncollectable.” Id. For these reasons, Judge Kaplan held that the statements in question were not actionable because the complaint failed to allege that defendants did not honestly hold those opinions at the time they were expressed. This appeal followed.

DISCUSSION

We review a district court's dismissal of a complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) de novo, accepting all factual allegations in the complaint as true and drawing all reasonable...