N.J. Carpenters Health Fund v. Royal Bank of Scotland Grp., PLC

• Decision Date: 01 March 2013
• Docket Number: Docket No. 12–1707–cv.
• Citation: 709 F.3d 109
• Parties: NEW JERSEY CARPENTERS HEALTH FUND, on behalf of itself and all others similarly situated, Plaintiff–Appellant, v. The ROYAL BANK OF SCOTLAND GROUP, PLC, Greenwich Capital Holdings, Inc., Greenwich Capital Markets, Inc., dba RBS Greenwich Capital, Wachovia Capital Markets, LLC, sued herein as Wachovia Securities, LLC, Deutsche Bank Securities, Inc., NovaStar Mortgage Funding Trust, Series 2006–3, NovaStar Mortgage Funding Trust, Series 2006–4, NovaStar Mortgage Funding Trust, Series 2006–5, NovaStar Mortgage Funding Trust, Series 2006–6, NovaStar Mortgage Funding Trust, Series 2007–1, NovaStar Mortgage Funding Trust, Series 2007–2, NovaStar Mortgage Funding Corporation, Scott F. Hartman, Gregory S. Metz, W. Lance Anderson, Mark A. Herpich, NovaStar Mortgage Inc., RBS Securities, Inc., Wells Fargo Advisors, LLC, fka Wachovia Securities LLC, Defendants–Appellees, Moodys Investors Service, Inc., The McGraw–Hill Companies, Inc., Defendants.
• Court: U.S. Court of Appeals — Second Circuit

709 F.3d 109

NEW JERSEY CARPENTERS HEALTH FUND, on behalf of itself and all others similarly situated, Plaintiff–Appellant,

v. The ROYAL BANK OF SCOTLAND GROUP, PLC, Greenwich Capital Holdings, Inc., Greenwich Capital Markets, Inc., dba RBS Greenwich Capital, Wachovia Capital Markets, LLC, sued herein as Wachovia Securities, LLC, Deutsche Bank Securities, Inc., NovaStar Mortgage Funding Trust, Series 2006–3, NovaStar Mortgage Funding Trust, Series 2006–4, NovaStar Mortgage Funding Trust, Series 2006–5, NovaStar Mortgage Funding Trust, Series 2006–6, NovaStar Mortgage Funding Trust, Series 2007–1, NovaStar Mortgage Funding Trust, Series 2007–2, NovaStar Mortgage Funding Corporation, Scott F. Hartman, Gregory S. Metz, W. Lance Anderson, Mark A. Herpich, NovaStar Mortgage Inc., RBS Securities, Inc., Wells Fargo Advisors, LLC, fka Wachovia Securities LLC, Defendants–Appellees,Moodys Investors Service, Inc., The McGraw–Hill Companies, Inc., Defendants.

Docket No. 12–1707–cv.

United States Court of Appeals, Second Circuit.

Argued: Dec. 12, 2012.

Decided: March 1, 2013.

Joel P. Laitman (Michael Eisenkraft, Christopher Lometti, on the brief), Cohen Milstein Sellers & Toll, New York, N.Y., for Plaintiff–Appellant.

Thomas C. Rice (Alan C. Turner, on the brief), Simpson Thacher & Bartlett LLP, New York, N.Y., for Defendants–Appellees The Royal Bank of Scotland Group, PLC, Greenwich Capital Holdings, Inc., Greenwich Capital Markets, Inc., Wachovia Capital Markets, LLC, Deutsche Bank Securities, Inc., RBS Securities, Inc., Wells Fargo Advisors, LLC.

William F. Alderman (Steven J. Fink, on the brief), Orrick, Herrington & Sutcliffe LLP, San Francisco, CA, for Defendants–Appellees NovaStar Mortgage Funding Trust, Series 2006–3, NovaStar Mortgage Funding Trust, Series 2006–4, NovaStar Mortgage Funding Trust, Series 2006–5, NovaStar Mortgage Funding Trust, Series 2006–6, NovaStar Mortgage Funding Trust, Series 2007–1, NovaStar Mortgage Funding Trust, Series 2007–2, NovaStar Mortgage Funding Corporation, Scott F. Hartman, Gregory S. Metz, W. Lance Anderson, Mark A. Herpich, NovaStar Mortgage Inc.

David R. Stickney, Ann M. Lipton, Bernstein Litowitz Berger & Grossman LLP, San Diego, CA, for Amicus Curiae National Association of Shareholder and Consumer Attorneys, in support of Plaintiff–Appellant.

David C. Frederick, Wan J. Kim, Gregory G. Rapawy, Kellogg Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Washington, D.C., for Amicus Curiae National Credit Union Administration Board, in support of Plaintiff–Appellant.

Steven R. Paradise, Michael V. Rella, Lauren E. Leahy, Vinson & Elkins L.L.P., New York, N.Y., for Amicus Curiae Securities Industry and Financial Markets Association, in support of Defendants–Appellees.

Before: KATZMANN, PARKER, and WESLEY, Circuit Judges.

KATZMANN, Circuit Judge:

This case requires us to determine whether the Plaintiff–Appellant, New Jersey Carpenters Health Fund (“the Fund”), has stated plausible claims under §§ 11 & 12(a)(2) of the Securities Act of 1933 (“the '33 Act”), 15 U.S.C. § 77a et seq. Subject to certain enumerated exceptions, §§ 11 & 12(a)(2) of the '33 Act impose liability whenever a security's registration statement or prospectus contains a material misrepresentation or omission. Id.§§ 77k & 77 l(a)(2). Here, the Fund claims that the registration statement and the prospectus (collectively, the “offering documents”) for a mortgage-backed security contained material misstatements and omissions because those documents reported standards for underwriting mortgages that the relevant underwriter had supposedly abandoned. The Fund bases its conclusion about abandonment on three factual allegations: (1) that a disproportionately high number of the mortgages included in the security defaulted; (2) that rating agencies downgraded the security's ratings after changing their methodologies to account for lax underwriting; and (3) that prior employees of the relevant underwriter have attested to systematic disregard of the reported underwriting standards during the relevant time periods.

The United States District Court for the Southern District of New York (Batts, J.) concluded that these allegations failed to state a claim under §§ 11 & 12(a)(2) of the '33 Act. It also held that, even as the representative for a putative class, the Fund lacked standing to pursue claims based on securities in which it had not invested. Thus, the district court dismissed the Fund's complaint in its entirety, entering judgment in favor of the Defendants–Appellees. The Fund now appeals from that judgment. For the reasons set forth below, we hold that the Fund's factual allegations permit us to draw the reasonable inference that the Defendants–Appellees are liable under §§ 11 & 12(a)(2) of the '33 Act. Furthermore, we vacate the district court's holding that the Fund, as the representative of a proposed class, lacked standing to assert claims based on securities in which it had not invested. After the district court entered its judgment, this Court issued an opinion that addressed the issue of class-standing. See NECA–IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir.2012). Thus, we instruct the district court to reconsider the issue of standing presented here in light of that recent opinion. In sum, we reverse the district court's judgment in part, vacate it in part, and remand the case for further proceedings consistent with this Opinion.

BACKGROUND

A. The Underlying Securities

According to the Fund's Consolidated First Amended Securities Class Action Complaint (“FAC”), on May 25, 2006, Defendant–Appellee NovaStar Mortgage Funding Corporation (“NMFC”) filed a registration statement and prospectus with the Securities and Exchange Commission (“SEC”) on Form S–3. On June 16, 2006, NMFC amended the registration statement and prospectus, using Form S–3/A. Issuers like NMFC may register and offer securities on “a continuous or delayed basis in the future” for up to “three years” after the “initial effective date of the registration statement.” 17 C.F.R. § 230.415(a)(1) & (a)(5). ¹ Typically, an issuer commences a “continuous or delayed” offering by filing an initial “shelf” registration statement, which “includes a ‘base’ or ‘core’ prospectus that ... contains general information, including the types of securities to be offered and a description of the risk factors of the offering.” NECA–IBEW, 693 F.3d at 150. The core prospectus may omit otherwise required information if, because the issuer will offer the securities in the future, such information is “unknown or not reasonably available.” 17 C.F.R. § 230.430B(a). In the amended prospectus filed on June 16, 2006, NMFC indicated that it would offer interests in trusts that principally contained residential mortgages.

After an issuer files its shelf registration statement, it may issue securities under that statement by filing a supplemental prospectus that discloses “information previously omitted from the prospectus filed as part of [the] effective registration statement.” Id. § 230.424(b)(2); see also id. § 229.512(a)(1)(ii) (requiring a supplemental prospectus to disclose “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”). Information disclosed in a supplemental prospectus “shall be deemed to be part of and included in the registration statement.” Id. § 230.430B(f)(1); see also id. § 229.512(a)(2) (deeming each supplemental prospectus to be “a new registration statement” for the “purpose of determining any liability” under the '33 Act.). ²

According to the FAC, NMFC issued six securities under the June 16, 2006 shelf registration statement: (1) the NovaStar Mortgage Funding Trust, Series 2006–3, which had assets worth approximately $1,089,000,000, and which NMFC offered on June 22, 2006; (2) the NovaStar Mortgage Funding Trust, Series 2006–4, which had approximately $1,004,851,000 in assets, and which NMFC offered on August 18, 2006; (3) the NovaStar Mortgage Funding Trust, Series 2006–5, which had approximately $1,279,850,000 in assets, and which NMFC offered on September 22, 2006; (4) the NovaStar Mortgage Funding Trust, Series 2006–6, which had approximately $1,233,750,000 in assets, and which NMFC offered on November 20, 2006; (5) the NovaStar Mortgage Funding Trust, Series 2007–1, which had approximately $1,813,274,000 in assets, and which NMFC offered on February 23, 2007; and (6) the NovaStar Mortgage Funding Trust, Series 2007–2 (the “Series 2007–2 Trust”), which had approximately $1,324,400,000 in assets, and which NMFC offered on May 25, 2007. Defendant–Appellee NovaStar Mortgage Inc. (“NMI”), NMFC's parent company, originated or purchased all of the mortgages contained in each of the six trusts.³ After NMI originated or purchased the relevant loans, it sold them to NMFC, which assigned them, in turn, to the trusts described above. Defendants–Appellees Greenwich Capital Markets, Inc., Deutsche Bank Securities, Inc., and Wachovia Capital Markets, LLC (collectively, the “Underwriter Defendants”) underwrote and sold each of the six trusts that NMFC offered.

The amended prospectus filed on June 16, 2006 indicated that the supplemental prospectuses accompanying each offering would describe “the underwriting standards used to underwrite the mortgage loans.” J. App'x at 202. The supplemental prospectus filed in conjunction with the Series 2007–2 Trust (the “2007–2 Prospectus”) described NMI's underwriting guidelines at length. According to the 2007–2 Prospectus, NMI adopted its underwriting guidelines in order to “evaluate the credit history of the potential borrower, the capacity and willingness of the borrower to repay the loan[,] and the adequacy of the collateral securing the loan.” Id. at 370. To this end, NMI required each potential borrower to file an...