Freidus v. Ing Groep N. V.
| Decision Date | 14 September 2010 |
| Docket Number | No. 09 Civ. 1049 (LAK),09 Civ. 1049 (LAK) |
| Parties | Marshall FREIDUS, et al., Plaintiffs, v. ING GROEP N.V., et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Andrew J. Brown, Lucas F. Olts, Eric Niehaus, Samuel H. Rudman, David A. Rosenfeld, Joseph F. Russello, Coughlin Stoia Geller Rudman & Robbins LLP, Deborah R. Gross, Law Offices of Bernard M. Gross, P.C., for Plaintiffs.
Mitchell A. Lowenthal, Giovanni P. Prezioso, Cleary Gottlieb Steen & Hamilton LLP, for Defendants ING Groep N.C., ING Financial Holdings Corp., and ING Financial Markets LLC.
Stuart J. Baskin, Adam S. Hakki, Herbert S. Washer, Shearman & Sterling LLP, for Defendants UBS Securities LLC, Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wachovia Capital Markets, LLC, Morgan Stanley & Co. Incorporated, Banc of America Securities LLC, RBC Capital Markets Corporation, J.P. Morgan Securities Inc., Credit Suisse Securities (USA) LLC, HSBC Securities (USA) Inc., ABN AMRO Incorporated, and A.G. Edwards & Sons, Inc.
The collapse of the residential mortgage market in the United States greatly affected the financial markets and the owners of securities issued by banks and other participants in the financial industry. This case concerns three perpetual hybrid capital securities (the "Securities") issued by ING Groep, N.V. ("ING") in offerings during June and September 2007 and June 2008 pursuant to a December 1, 2005 Shelf Registration Statement ("2005 SRS") and numerous prospectuses (collectively, the "Offering Materials"). The Securities are ordinary corporate debt instruments, rather than structured products backed by mortgage loans. Plaintiffs each purchased one of these securities and sue ING some of its affiliates, former officers and directors, and the securities' underwriters under Sections 11, 12, and 15 of the SecuritiesAct of 1933 1 on a theory that the Offering Materials related to each of the three offerings contained materially false and misleading statements or omissions. The matter is before the Court on defendants' motion to dismiss the complaint for failure to state a claim upon which relief may be granted.
There are three groups of defendants in this case-the ING Defendants, the Underwriter Defendants, and the Individual Defendants.
The ING Defendants include ING and two of its subsidiaries ING Financial Holdings Corporation ("ING Holdings") and Stichting ING Aandelen ("SING"). 2 ING is the registrant of the Offering Materials and the Securities' issuer.3 ING Holdings is a financial services company that provides banking, insurance and asset management services.4 SING is an administrative trust that holds approximately 99% of the outstanding ordinary shares of ING and issues bearer depository receipts for ING's ordinary and preference shares.5 Both ING Holdings and SING signed the 2005 SRS. 6
The Underwriter Defendants include UBS, Citigroup Global Markets Inc., Merrill Lynch, Wachovia Capital Markets, LLC, Morgan Stanley & Co. Inc., Banc of America Securities LLC, RBC Capital Markets Corporation, J.P. Morgan Securities Inc., ING Financial Markets LLC, Credit Suisse Securities (USA) LLC, HSBC, ABN Amro Inc., and A.G. Edwards & Sons, Inc.7 Each is alleged to have acted as an underwriter in connection with the offerings of the Securities.8
The Individual Defendants are officers or executive board members of ING, ING Holdings, or SING.9 Each of the Individual Defendants, except John C.R. Hele, signed the 2005 SRS.10 In addition, Mr. van Barneveld signed ING's Forms 6-K dated May 22, 2007, June 4, 2007, September 24, 2007, May 15, 2008 and May 19, 2008 11 and Mr. Maas signed also the ING's 2006 Form 20-F.12 Mr. Hele signed ING's September 24, 2007 Form 6-K and 2007 Form 20-F only.13
A mortgage backed security ("MBS") is a financial instrument based on a pool of mortgage loans. To create an MBS, mortgage loans typically are acquired, pooled together, and then sold to a trust. The trust in turn issues securities to purchasers who thus become trust beneficiaries. The MBS holders receive distributions from the trustee according to the cash flow generated by the pool of mortgages andthe rights of the respective classes of securities. The loans underlying residential mortgage backed securities ("RMBS") usually are mortgages extended to borrowers for residential properties. Alt-A RMBS are based on loans to borrowers who, because of deficiencies in their credit profiles, did not qualify for "prime" loans. Subprime RMBS are based on mortgages to subprime borrowers.14
RMBS underwriters evaluate the likelihood of default on the loans underlying a particular RMBS asset to determine the predicted risk of default, which is known as the RMBS's "expected loss." The RMBS then is broken down into pieces-called "tranches"-based on the likelihood that a particular tranche will suffer loss. The lower tranches are the first to have their payments discontinued in the event that the underlying mortgagees default on their loans. Accordingly, these tranches usually have lower credit ratings. The higher tranches are protected from defaults on the underlying loans by the lower tranches. Accordingly, they receive higher credit ratings.15
Securities issued in three offerings-the June and September 2007 Offerings, and the June 2008 Offering-are at issue in this case.
On June 8, 2007,16 ING filed a prospectus to issue $1 billion of 6.375 percent ING Perpetual Hybrid Capital Securities (the "June 2007 Securities") pursuant to the 2005 SRS.17 The prospectus related to the June 2007 Securities (the "June 2007 Prospectus") incorporated by reference ING's 2006 Annual Report ("2006 20-F") and Forms 6-K filed on May 22, 2007 and June 4, 2007 (all collectively, the "June 2007 Offering Materials") 18
The June 2007 Prospectus reported ING's shareholders' equity as Q40.117 billion, total annual income as $62.378 billion, and net annual profit at $8.949 billion.19 The 2006 20-F stated that ING's residential mortgage portfolio reached Q69 billion and described changes to ING's risk management system.20 The May 22, 2007 Form 6-K attached a May 16, 2007 press release, which stated that ING's capital position had strengthened and announced ING's plans to buy back Q5 billion in shares.21
On September 27, 2007, ING filed a prospectus to issue $1.5 billion of 7.375 percent ING Perpetual Hybrid Capital Securities (the "September 2007 Securities") pursuant to the 2005 SRS. The prospectus related to the September 2007 Securities (the "September 2007 Prospectus") incorporated by reference ING's 2006 20-F and ING's Forms 6-K filed on September 24, 2007, June 4, 2007, and May 22, 2007 (all collectively, the "September 2007 Offering Materials"). 22
It stated also that (1) ING's Alt-A portfolio had an average FICO score of 721 and a loan-to-value ("LTV") ratio of 70 percent, (2) 93 percent of ING's subprime assets and 99.9 percent of its Alt-A assets were rated AAA or AA, (3) as "of July 31, 2007, the negative revaluation[s], based on mark-to-market approach ... were EUR 58 million (for subprime) and EUR 233 million (for Alt-A), respectively, despite the significant market downturn," and (4) shareholders' equity decreased by Q0.1 billion or 0.3 percent to Q38.2 billion. 24
On June 12, 2008,25 ING filed a prospectus to issue $2.0 billion of 8.50 percent ING Perpetual Hybrid Capital Securities (the "June 2008 Securities") pursuant to the 2005 SRS. The prospectus related to the June 2008 Securities (the "June 2008 Prospectus") incorporated by reference ING's 2007 20-F and ING's Forms 6-K filed on May 27, 2008, May 19, 2008, and May 15, 2008 (all collectively, the "June 2008 Offering Materials").26
The June 2008 Offering Materials contained ING's reported 2007 and first quarter 2008 financial information.27 The 2007 20-F contained also numerous statements regarding ING's Alt-A and subprime RMBS. ING's "exposure to the U.S. housing market [wa]s predominantly via highly rated RMBS investments." 28 Eighty-nine percent of ING's asset backed securities ("ABS"), of which RMBS are a part, were rated AAA and ten percent were rated AA.29 In 2007, ING's subprime RMBS suffered Q64 million in net impairments and trading losses, and a negative pre-tax revaluation of Q307 million. Ninety-six percent of the assets, however, were rated AA or higher, and the fair value of the assets was 90.1 percent.30
According to the June 2008 Offering Materials, at the end of 2007, ING had two definitions of Alt-A assets, each of which referenced particular LTV ratios, FICO credit scores, and documentation of the loans underlying the securities. Underthe "broad" definition, ING had Q27.5 billion of exposure at December 31, 2007. Under the "narrow" definition, ING had Q9.7 billion of exposure. Ninety nine percent of the Alt-A RMBS under the "narrow" definition were rated AAA. ING took no trading losses or impairments in its Alt-A portfolio in 2007, and valued them at 96.7 percent of fair value.31 ING stated that its "pressurised asset classes [e.g., U.S....
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