Olkey v. Hyperion 1999 Term Trust, Inc.
| Decision Date | 12 May 1992 |
| Citation | 98 F.3d 2 |
| Parties | , Fed. Sec. L. Rep. P 99,335 Marilyn OLKEY; Lawrence Berger, Cetinna Camenzuli; Lois F. Dehaven; Gary Pshena; Janis Pshena; Herbert N. Feldstein; Charles Kornberger; Marcella Levy; Michael W. Moran; Milton V. Firestone; Alan Wolf; Leonard Newberger; Robert Perocchia; Madeline Middlemark; Direct Reproduction Corp., Superimposed Pension Trust # 3 Pension Plan Dated |
| Court | U.S. Court of Appeals — Second Circuit |
Roger W. Kirby, New York City (Irving Malchman, Jeffrey H. Squire, Ira M. Press, Kaufman Malchman Kirby & Squire, LLP, New York City, Henry Paul Monaghan, New York City, of counsel), for Plaintiffs-Appellants.
Michael J. Malone, New York City (Steven B. Carlin, Paul A. Straus, Elizabeth Swire Falker, Battle Fowler LLP, New York City, of counsel), for Defendants-Appellees Hyperion Capital Management, Inc., Lewis S. Ranieri, Kenneth C. Weiss, David R. Odenath, Jr., Patricia Sloan and Alan M. Mandel.
Alan J. Hruska, New York City (Gerald A. Ford, David A. Kotler, Gregory E. Birkenstock, Cravath, Swaine & Moore, New York City, of counsel), for Defendants-Appellees Hyperion 1997 Term Trust, Inc., Hyperion 1999 Term Trust, Inc., Hyperion 2002 Term Trust, Inc., Rodman L. Drake, Garth Marston, Harry E. Petersen, Jr. and Leo M. Walsh, Jr.
Charles A. Gilman, New York City (David G. Januszewski, Jonathan R. Donnellan, Cahill, Gordon & Reindel, a partnership including a professional corporation, New York City, of counsel), for Defendant-Appellee Underwriter Class.
Before: NEWMAN, Chief Judge, OAKES, and PARKER, Circuit Judges.
Plaintiffs Marilyn Olkey et al., a group of investors, brought a class action against Hyperion 1999 Term Trust, Inc. et al. seeking damages for fraud in issuing and using prospectuses to market mortgage-backed securities, in violation of Sections 11, 12(2), and 15 of the Securities Act of 1933 ("the 1933 Act"), 15 U.S.C. §§ 77k(a), 77l(2), and 77o; and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("the 1934 Act"), 15 U.S.C. § 78j(b), SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, and 15 U.S.C. § 78t(a). They also allege common law fraud. The defendants moved for dismissal under Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure. In a judgment dated July 14, 1995, the district court of the Southern District of New York (Michael B. Mukasey, Judge ) dismissed the suit under Rule 12(b)(6) for failure to state a claim upon which relief can be granted. In re Hyperion Sec. Litig., No. 93 Civ. 7179(MBM), 1995
WL 422480. The court held that a reasonable investor would not have been misled by the prospectuses because, on their face, they contained no material misstatements or omissions of fact. The court found the prospectuses accurately represented the investment strategy and provided sufficient explanation of risk. The plaintiffs appeal. We affirm the 12(b)(6) dismissal because the plaintiffs' claims are contradicted by the prospectuses on their face and therefore no set of additional facts could prove the plaintiffs' claims.
The plaintiffs are a group of more than twenty investors who purchased common stock in three investment companies--Hyperion 1997 Term Trust, Inc., Hyperion 1999 Term Trust, Inc., and Hyperion 2002 Term Trust, Inc. (collectively, "the Trusts"). The investors sue on behalf of themselves and a class of similarly situated investors. The class period extends from June 1992 when the registration statement for Hyperion 1999 became effective and the initial public offering commenced, until October 1993, the date on which the defendants announced that each Hyperion Trust was reducing its dividend. The defendants include the Trusts, Hyperion Capital Management, which served as the investment advisor and administrator of the Trusts, individuals who served as officers or directors of the Trusts or Hyperion Capital, and nine underwriters who participated in the Hyperion offerings.
The Trusts are closed-end investment companies, so they are not obligated to redeem shares bought by investors; investors must resell their shares on the secondary market. The Trusts were formed to invest primarily in mortgage-backed securities. The securities comprising the Trusts included interest-only strips (IOs) of mortgages, which tend to go up with interest rates, and mortgage-backed securities, which tend to go down when interest rates go up. IOs and mortgage-backed securities were intended to balance each other, to serve as a hedge against interest rate changes. Interest rates subsequently declined to historic lows, and the value of the trusts declined.
The plaintiffs alleged that the prospectuses misled investors by indicating that securities would be selected to achieve a balance such that, as interest rates rose and fell, the value and earnings of the Trusts would remain stable. The plaintiffs contended that this was a misrepresentation because the defendants actually invested in a combination of securities which required rising interest rates to succeed. The plaintiffs further alleged that the defendants failed to disclose the limitations of their hedging strategy, namely, its vulnerability to decreasing interest rates, and that therefore the prospectuses and registration statements misrepresented both the investment strategy of the trust and the risks involved. Finally, the plaintiffs claimed that the defendants misrepresented the riskiness of the Trusts in the presentations, known as roadshows, which they gave to potential brokers.
The plaintiffs claimed that these alleged misrepresentations violate the following securities laws: (1) Section 11(a) of the 1933 Act, 15 U.S.C. § 77k(a), which makes any signer, officer of the issuer or underwriter liable for a registration statement that "contain[s] an untrue statement of a material fact or omit[s] to state a material fact"; (2) section 12(2) of the 1933 Act, 15 U.S.C. § 77l(2), providing for liability for making a securities offering "by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements ... not misleading"; (3) section 15 of the 1933 Act and section 20(a) of the 1934 Act, 15 U.S.C. § 77o and § 78t(a), providing for liability of controlling persons; (4) section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, prohibiting fraudulent, material misstatements or omissions in connection with the sale or purchase of a security, see Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir.1986).
The defendants moved to dismiss the claim pursuant to the Federal Rules of Civil Procedure, on two grounds--failure to state a claim upon which relief can be granted under Rule 12(b)(6), and failure to state a fraud claim with sufficient particularity under Rule 9(b).
The district court granted the motion to dismiss the suit pursuant to Rule 12(b)(6), on the ground that the investment strategy and risks were fully revealed on the face of the prospectuses. 1995 WL 422480, at * 8. While acknowledging that the roadshows were "more optimistic about risks and returns" than the prospectuses, Judge Mukasey reasoned that reasonable investors would not have relied on oral assurances when they were "contradicted by specific disclosures in the prospectuses." Id. at * 7-8. The court dismissed the claim without leave to replead because the plaintiffs had already amended their complaint twice. Id. at * 8. The court did not reach the motion to dismiss under Rule 9(b). It denied a motion for reargument. In re Hyperion Sec. Litig., No. 93 Civ. 7179(MBM), 1995 WL 539634 (S.D.N.Y. Sept. 11, 1995). The plaintiffs appeal.
The plaintiffs offer the following argument: The Trusts were based upon a failed bet that interest rates would rise. The riskiness of this bet was disproportionate to the level of return promised to investors; promised profits were small in comparison to the risk and potential size of losses. This bet was not disclosed to investors. If it had been disclosed, the investors would not have bought shares in the trust because no reasonable investor would accept low return for high risk. The cautionary language in the prospectuses is too general and generic to have alerted investors of the actual risks they faced and should therefore be ignored as boilerplate. These warnings do not mention risk to capital, to the total value of the portfolio rather than merely components of it. Read as a whole, each prospectus gave the false impression of an attempt to pursue a balanced strategy to minimize risk. In fact, the Trusts speculated on high interest rates. The roadshows compounded the false impression of balance and safety.
We review de novo the district court's dismissal of the complaint under Rule 12(b)(6) and draw all reasonable inferences in the plaintiff's favor. Jackson Nat'l Life Ins. Co. v. Merrill Lynch & Co., ...
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