In re Bank of Am. Aig Disclosure Sec. Litig.

• Decision Date: 01 November 2013
• Docket Number: No. 11 Civ. 6678(JGK).,11 Civ. 6678(JGK).
• Citation: 980 F.Supp.2d 564
• Parties: In re BANK OF AMERICA AIG DISCLOSURE SECURITIES LITIGATION.
• Court: U.S. District Court — Southern District of New York

980 F.Supp.2d 564

In re BANK OF AMERICA AIG DISCLOSURE SECURITIES LITIGATION.

No. 11 Civ. 6678(JGK).

United States District Court, S.D. New York.

Nov. 1, 2013.

Andrew D. Abramowitz, Robert Mark Roseman, Spector, Roseman & Kodroff Willis, P.C., Philadelphia, PA, David Avi Rosenfeld, Samuel Howard Rudman, William John Geddish, Robbins Geller Rudman & Dowd LLP, Melville, NY, Jason Allen Zweig, Hagens Berman Sobol Shapiro LLP, New York, NY, Karl P. Barth, Steve W. Berman, Hagens Berman Sobol Shapiro LLP, Seattle, WA, Reed R. Kathrein, Hagens Berman Sobol Shapiro LLP, Berkeley, CA, Jason A. Forge, Tor Gronborg, Robbins Geller Rudman & Dowd LLP, San Diego, CA, for Plaintiff and Movants.

Jeffrey Rourke Burke, Luke A. Connelly, Winston & Strawn LLP, New York, NY, Marc T.G. Dworsky, Christopher Marisak Lynch, George M. Garvey, Newman Antoin Nahas, Munger, Tolles & Olson LLP, Los Angeles, CA, Victoria Louise Boesch, Munger, Tolles & Olson LLP, San Francisco, CA, for Defendants.

OPINION AND ORDER

JOHN G. KOELTL, District Judge:

This action is another in the series of cases arising out of the collapse of the market for mortgage backed securities (“MBS”). In this case, the plaintiffs are purchasers of Bank of America (“BoA”) stock. BoA and its subsidiaries sold a substantial amount of MBS to American International Group, Inc. (“AIG”). BoA made extensive public disclosures about the amount of MBS that it and its subsidiaries had sold, as well as the increasing risks of material litigation against it, together with disclosures of actual litigation that had been filed against it. In this lawsuit, the plaintiffs allege that BoA and four of its officers (collectively, “defendants”) defrauded investors by failing to disclose the imminence and amount of a potential MBS lawsuit by AIG against BoA (“the AIG suit”).

The plaintiffs assert violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b–5 promulgated thereunder, 17 C.F.R. § 240.10b–5. The plaintiffs also assert control person liability under Section 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t(a), against the four BoA officers: Chief Executive Officer Brian Moynihan, Chief Financial Officer and Vice Chairman Charles Noski, Chief and Principal Accounting Officer Neil Cotty, and Chief Risk Officer Bruce Thompson (collectively the “individual defendants”).¹

The defendants move to dismiss the Second Amended Complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). This court has subject matter jurisdiction pursuant to 15 U.S.C. § 78aa, and 28 U.S.C. § 1331. For the reasons explained below, the motion to dismiss is granted.

I.

In deciding a motion to dismiss pursuant to Rule 12(b)(6), the allegations in the complaint are accepted as true, and all reasonable inferences must be drawn in the plaintiffs' favor. McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir.2007). The Court's function on a motion to dismiss is “not to weigh the evidence that might be presented at a trial but merely to determine whether the complaint itself is legally sufficient.” Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir.1985). A complaint should not be dismissed if the plaintiffs have stated “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). “A claim has facial plausibility when the plaintiff[s] plead[ ] factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). While factual allegations should be construed in the light most favorable to the plaintiffs, “the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.” Id.

A claim under Section 10(b) of the Securities Exchange Act sounds in fraud and must meet the pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u–4(b). Rule 9(b) requires that the complaint “(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.” ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir.2007). The PSLRA similarly requires that the complaint “specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading,” and it adds the requirement that “if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u–4(b)(1); ATSI, 493 F.3d at 99;see also City of Roseville Emps' Ret. Sys. v. EnergySolutions, Inc., 814 F.Supp.2d 395, 401 (S.D.N.Y.2011).

When presented with a motion to dismiss pursuant to Rule 12(b)(6), the Court may consider documents that are referenced in the complaint, documents that the plaintiffs relied on in bringing suit and that are either in the plaintiffs' possession or that the plaintiffs knew of when bringing suit, or matters of which judicial notice may be taken. See Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir.2002). Matters of which judicial notice can be taken include press coverage establishing what information existed in the public domain during periods relevant to the plaintiffs' claims. Staehr v. Hartford Fin. Serv. Grp., Inc., 547 F.3d 406, 425 (2d Cir.2008). The Court can also take judicial notice of public disclosure documents that must be filed with the Securities and Exchange Commission (“SEC”) and documents that both “bear on the adequacy” of SEC disclosures and are “public disclosure documents required by law.” Kramer v. Time Warner, Inc., 937 F.2d 767, 773–74 (2d Cir.1991).

II.

The following facts are undisputed or accepted as true for purposes of this motion.

A.

BoA is a Delaware company with its principal place of business in North Carolina. (SAC ¶ 23.) BoA underwrote “increasingly risky loans” to securitize and sell a significant number of MBS. (SAC ¶ 33.) BoA publicly disclosed that during 2004–2008, it and its subsidiaries originated, securitized, and sold nearly $2.1 trillion in MBS. ( See Declaration of Newman A. Nahas in Supp. of Def.'s Mot. to Dismiss (“Nahas Decl.”) Ex. 1 (“Annual Report”) at 53–54.) BoA reported in February, 2011 that it had sold $963 billion in MBS to private parties from 2004 through 2008; however, the mortgages underlying $216 billion of that total were in default or severely delinquent. (Annual Report at 54.) When mortgage defaults rose from 1% prior to 2006 to 10% in 2009, BoA was “more exposed than any major bank” to the economic downturn. (SAC ¶ 28; 34 n. 11, 35.) As a result, BoA has, in recent years, faced escalating exposure to various types of litigation over its involvement in the MBS market. (SAC ¶ 4.)

B.

This action concerns statements about litigation risk made by the defendants between February 25, 2011, the date of BoA's Annual Report or Form 10–K, and August 8, 2011, the date BoA announced it had been sued by AIG (“Class Period”). (SAC ¶¶ 10, 15.) The gist of the plaintiffs' complaint is that despite BoA's disclosure about the risks arising from its enormous sales of MBS, and the rising litigation risks specifically, it failed to disclose the imminence and size of the potential AIG suit.

At the beginning of the Class Period, BoA filed with the Securities and Exchange Commission (“SEC”) its fiscal year 2010 Annual Report (the “Annual Report”). (SAC ¶ 10.) The Annual Report explicitly discussed BoA's escalating exposure to MBS litigation at different levels of particularity. (SAC Section V.A.) In a section prominently titled “Mortgage and Housing Market Related Risks,” the Annual Report stated in bold that “[w]e face substantial potential legal liability and significant regulatory action, which could have a material adverse effect on our cash flows, financial condition, and results of operations, or cause significant reputational harm to us.” (Annual Report at 16.) The Annual Report noted that “the volume of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against [BoA] and other financial institutions remain high and are increasing.” (SAC ¶ 74.) The Annual Report cautioned that BoA “continue[s] to face increased litigation risk and regulatory scrutiny as a result of [its] Countrywide and Merrill Lynch acquisitions” and warned that BoA “and its subsidiaries are routinely defendants in or parties to many pending or threatened legal actions and proceedings.” (SAC ¶ 74.) The Annual Report disclosed that BoA's exposure to “these litigation and regulatory matters and any related settlements could have a material adverse effect on our cash flows, financial condition, and results of operation.” (SAC ¶ 74.)

The Annual Report also referred readers to detailed discussion of BoA's litigation exposure in Note 14 of the Annual Report. (Annual Report at 16.) There, BoA warned that it frequently could not predict how, when, and at what cost pending matters would be resolved, especially when opposing litigants raised novel legal arguments or sought “very large or indeterminatedamages.” (Annual Report at 196.) Still, BoA explained that, in accordance with applicable accounting guidance, it accrued reserves for those litigation losses that were “probable and estimable.” (Annual Report at 196.) When a loss contingency was not both probable and estimable, BoA did not establish an accrued liability. (Annual Report at 196.)

BoA next explained that where accrual was not required, but a loss was probable or reasonably possible, BoA could sometimes estimate a loss or range of loss. To determine whether it could...