Deangelis v. Corzine (In re MF Global Holdings Ltd.)

Decision Date12 November 2013
Docket NumberNo. 11 Civ. 7866(VM).,11 Civ. 7866(VM).
Citation982 F.Supp.2d 277
PartiesIn re MF GLOBAL HOLDINGS LIMITED SECURITIES LITIGATION. This document relates to all securities actions. DeAngelis v. Corzine.
CourtU.S. District Court — Southern District of New York

OPINION TEXT STARTS HERE

Bennett Leon Spiegel, Bruce S. Bennett, Jones Day, Los Angeles, CA, Scott Jason Greenberg, Jones Day, New York, NY, for MF Global Holdings Limited.

Brian C. Kerr, David A.P. Brower, Brower Piven, A Professional Corporation, Jeffrey Craig Block, Whitney Erin Street, Block & Leviton LLP, New York, NY, Jason Mathew Leviton, Scott A. Mays, Berman Devalerio, Boston, MA, for DeAngelis.

DECISION AND ORDER

VICTOR MARRERO, District Judge.

TABLE OF CONTENTS

I.

INTRODUCTION

288
II.

BACKGROUND

291

A.

THE PARTIES

292
1.

Plaintiffs and the Class

292

2.

Officer Defendants

292 3.

Independent Director Defendants

292 4.

Underwriter Defendants and Senior Notes Underwriter Defendants

293

B.

FACTUAL ALLEGATIONS

293
1.

DTA and Net Income

293

2.

RTM Strategy

296 3.

MF Global's Collapse

300

C.

PROCEDURAL HISTORY

301
III.

LEGAL STANDARD

301
A.

PLEADING STANDARDS: RULE 12(b)(6), RULE 8(a), RULE 9(b), AND THE PSLRA

301

B.

THE EXCHANGE ACT

302

1.

Misstatements or Omissions of Material Fact

303

b.

Scienter

305

2.

Section 20(a)

306
C.

THE SECURITIES ACT

308
1.

Section 11 and Section 12(a)(2)

308

2.

Section 15(a)

308

IV.

DISCUSSION

309
A.

PLEADING STANDARDS

309
1.

Exchange Act Claims

309

2.

Securities Act Claims

310

B.

MATERIAL MISSTATEMENTS OR OMISSIONS

311
1.

DTA and Net Income

311
a.

Whether the Statements about DTA Are Opinion

312

b.

Whether the CAC Pleads Subjective and Objective Falsity

313 c.

Bespeaks Caution

315

2.

RTM Strategy

316
a.

False or Misleading Statements

316

b.

Bespeaks Caution / PSLRA Safe Harbor

318

C.

EXCHANGE ACT DEFENSES

319
1.

Strong Inference of Scienter

319

2.

Control Persons Claims

321

D.

SECURITIES ACT DEFENSES

321
1.

Liability for Forms 10–Q

321

2.

Reliance on Audited Statements

322 3.

Evidence of Purchase

323 4.

Control Persons Claims

324

V.
ORDER 324 * * *

Lead Plaintiffs The Virginia Retirement System and Her Majesty The Queen In Right Of Alberta, along with several other named plaintiffs (collectively, Plaintiffs), individually and on behalf of all others similarly situated (the “Class”), filed this Consolidated Amended Securities Class Action Complaint (the “CAC”) against defendants Jon S. Corzine (“Corzine”), J. Randy MacDonald (“MacDonald”), and Henri J. Steenkamp (“Steenkamp”; collectively, the “Officers” or the “Officer Defendants); defendants David P. Bolger, Eileen S. Fusco, David Gelber, Martin J. Glynn, Edward L. Goldberg, David I. Schamis, and Robert S. Sloan (collectively, the “Independent Directors” or the “Independent Director Defendants); 1 defendants Citigroup Global Markets Inc., Deutsche Bank Securities Inc., Goldman Sachs & Co., J.P. Morgan Securities LLC, Merrill, Lynch, Pierce, Fenner & Smith Incorporated, and RBS Securities Inc. (collectively, the “Underwriters” or the “Underwriter Defendants); and defendants BMO Capital Markets Corp., Commerz Markets LLC, Jefferies & Company, Inc., Lebenthal & Co., LLC, Natixis Securities North America Inc., Sandler O'Neill & Partners, L.P., and U.S. Bancorp Investments, Inc. (collectively, the “Senior Notes Underwriters” or the “Senior Notes Underwriter Defendants).2

Plaintiffs' fourteen-count CAC (Dkt. No. 330) asserts violations of Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act), 15 U.S.C. § 78j(b) (Section 10(b)); Rule 10b–5 promulgated thereunder, 17 C.F.R. § 240.10b–5 (Rule 10b–5); Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a) (Section 20(a)); Section 11 of the Securities Act of 1933 (the Securities Act), 15 U.S.C. § 77k (Section 11); Section 12(a)(2) of the Securities Act, 15 U.S.C. § 77 l(a)(2) (Section 12(a)(2)); and Section 15(a) of the Securities Act, 15 U.S.C. § 77 o(a) ( Section 15(a)). Defendants moved to dismiss all counts of the CAC ( see Dkt. Nos. 357, 360, 364, 366, 368, 373), and the parties have fully briefed the motions.3

I. INTRODUCTION

If ever there was a federal securities fraud case that offered the parties a unique opportunity to depart from scripted litigation strategy and give Rule 1 of the Federal Rules of Civil Procedure a fair chance, this was it: an action that could have served as a prime candidate for litigants to test that exceedingly rare prospect.

At the initial conference on this matter, the Court likened the events surrounding the catastrophic collapse of MF Global Holdings Limited (“MF Global” or the “Company”) in the closing days of October of 2011 to a massive train wreck in which thousands of people—passengers, crew, bystanders, and others—were seriously injured upon sudden impact with a force the victims could not see coming. As Plaintiffs relate the events, at the culmination of what occurred at MF Global in the course of a few days, $1.6 billion had disappeared from the company. Cash from customer accounts could not be found. Initially, no one could explain what happened to the money. Much later on, its trail was traced through circuitous international channels to MF Global corporate accounts, where the funds had been improperly commingled and used to cover questionable company transactions.

The Court's train wreck analogy was meant as a hint giving a form of guidance. As the doctrine of res ipsa loquitur suggests, when an unusual accident strikes during the particular defendant's watch and control over the circumstances, especially in a case of immense magnitude such as the disaster at issue here, some facts about the calamity's proximate cause may be presumed: at minimum that someone somewhere did something wrong—and presumably not anyone directly hurt by the misfortune. Bearing this premise in mind as a starting point, the Court's observation suggested a practical framework within which the parties could examine the legal issues the case raises and consider pursuing the exceptional route to the most speedy, economical, and just resolution possible. With the assumption up front that something here went terribly awry, the parties could more easily turn to the search for relevant evidence, thus enabling them much sooner to sort out legal issues and to apportion responsibility in a manner consistent with the fuller record. Unfortunately, the suggestion of such an economical shortcut held no sway. Apparently, efficiency was not in the cards.

And so, before further investigation into Plaintiffs' claims as to what set in motion such an extraordinary chain of events, Defendants seem convinced that no one named in this lawsuit could possibly have done anything wrong. So confident are they of the validity of this perception that, at what must have amounted to an enormous expenditure of money, time and energy,4 they seek a court ruling dismissing the complaint in its entirety, thus barring any discovery that might shed light on remaining unknowns that bear momentous consequences for the victims who have suffered the losses.

MF Global's demise, however, is not a complete mystery. In their CAC, Plaintiffs compiled an extensive factual recitation, which the Court must accept as true for the purposes of ruling on Defendants' motions, comprising 695 paragraphs, filling 218 pages, and pleading 14 claims of unlawful conduct arising from the events leading to the eventual disintegration and bankruptcy of MF Global on October 31, 2011. As detailed below, Plaintiffs' allegations suggest a long, knowing, and consistent course of action on the part of the various Defendants, wrongful conduct that cumulatively produced the harmful outcome that came to pass. Moreover, this account is not based on pure speculation or the traditional pleading foundation grounded primarily upon information and belief. Rather, Plaintiffs' portrayal of the facts possesses an added measure of reliability and plausibility. It draws heavily from the public record of information generated by various investigations performed by government regulators and congressional committees.5

As highlights of the most salient of Defendants' wrongful acts, Plaintiffs assert that MF Global: inflated its profits by recording deferred tax assets on its balance sheet even in light of evidence, known to the Officers, that the Company would never realize those assets; engaged in a high-risk strategy of investing in European sovereign debt while simultaneously concealing the size of and risk posed by those investments; repeatedly increased its European sovereign debt investments, in spite of concerns expressed on numerous occasions by its chief risk assessment officer and in violation of the company's own trading limits—trading limits that started at $500 million and within 15 months exceeded $6 billion in exposure; undertook this risky investment strategy despite numerous internal reports that indicated a lack of sufficient internal controls to manage MF Global's liquidity and capital requirements; fired a chief risk officer who questioned whether MF Global's new investment strategy was prudent and replaced him with another officer who initially supported the new strategy, but who later also voiced similar warnings about the company's financial condition; and used intra-day transfers from various MF Global accounts, including those involving customer funds, to cover increasing liquidity demands.

Despite these dire signs of mounting crisis, MF Global continued to issue securities in public exchanges, repeatedly assuring investors that everything at the Company was running smoothly, that it possessed sufficient liquidity to cover its financial exposure, and that it had put in place strong internal controls sufficient to check against any management failures.

Plaintiffs purchased MF Global securities issued while, unknown to them, these circumstances were internally-unfolding and the company was unraveling. They brought suit against the numerous Defendants they claim were aware of the events and contributed to bringing them...

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