In re Federal Nat. Mortg. Ass'n Securities
| Decision Date | 08 May 2007 |
| Docket Number | Civ. Action No. 04-1639(RJL).,MDL No. 1668. |
| Citation | 503 F.Supp.2d 1 |
| Court | U.S. District Court — District of Columbia |
| Parties | In re FEDERAL NATIONAL MORTGAGE ASSOCIATION SECURITIES, Derivative, and "ERISA" Litigation. In re Fannie Mae Securities Litigation. |
Plaintiffs in this putative class action securities fraud suit seek to recover against defendant Goldman, Sachs & Co. ("Goldman Sachs") for alleged violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Securities and Exchange Commission ("SEC") Rule 10b-5(b) as set forth in their Second Amepled Consolidated Class Action Complaint ("Amended Complaint"). Before the Court is Goldman Sachs' motion to dismiss these claims. Based upon a review of the briefs and oral argument, the Court GRANTS defendant's motion.
The Federal National Mortgage Association ("Fannie Mae") was established, in 1938 as a United States government owned entity to, inter alia, make mortgages more accessible for low and middle income Americans. In 1968, Congress amended Fannie Mae's charter to make it a shareholder-owned company. Fannie Mae is one of two (the other being Freddie Mac) federally-chartered government sponsored enterprises that serve the public policy of expanding home ownership, in part, by supplying capital and liquidity in the secondary mortgage market for residential mortgages.
Plaintiffs have brought this putative class action securities fraud suit on behalf of investors who purchased Fannie Mae securities during the period from April 17, 2001 through September 27, 2005 (the "class period"). In addition to Fannie Mae, plaintiffs have named as defendants three of its former senior executives; the national accounting firm KPMG (Fannie Mae's outside auditor during the class period); and the investment bank Goldman Sachs, who designed and implemented two Real Estate Mortgage Investment Conduit ("REMIC") transactions in December 2001 and March 2002.
In their Amended Complaint, plaintiffs allege that Fannie Mae repeatedly violated Generally Accepted Accounting Principles ("GAAP"), issued false financial statements, and made other actionable public disclosures during the putative class period, and thereby "engaged in one of the largest financial frauds in U.S. coragrate history." (Am.Compl.¶ 4.) Indeed, the Amended Complaint alleges that certain public statements by Fannie Mae between the first quarter of 2001 and the second quarter of 2004 were materially false as a result of numerous GAAP violations. (See id. ¶¶ 210-315.) Moreover, plaintiffs challenge various statements made by Fannie Mae about its compliance with GAAP, the quality of its internal controls and its corporate culture throughout the class period. (See, e.g., id. ¶¶ 225, 256, 300, 315.) In addition, plaintiffs allege liability on the part of KPMG because of a series of certified audit report statements concerning Fannie Mae's 2001, 2002 and 2003 fiscal years indicating that KPMG had conducted its audits of Fannie Mae's financial statements in accordance with GAAP, and concluding that its financial statements fairly presented Fannie Mae's financial condition in all material respects and in accordance with GAAP.
With respect to Goldman Sachs, plaintiffs' allegations are contained in their August 14, 2006 Amended Complaint that, for the first time, named Goldman Sachs as a defendant. These allegations, in essence, are limited to Goldman Sachs' involvement in two REMIC transactions with Fannie Mae. As defined by plaintiffs, a REMIC "is a vehicle for issuing multi-class mortgage-backed securities that allows the issuer [Fannie Mae] to treat the transaction as a sale of assets for tax and accounting purposes." (Id. ¶ 411) The two REMIC transactions at issue closed, respectively, in December 2001 ($20 billion principal amount) and March 2002 ($10 billion principal amount).
On November 13, 2006, Goldman Sachs moved to dismiss plaintiffs' claims pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6) and the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4 et seq. ("PSLRA"). As to Rule 12(b)(6), Goldman Sachs principally argues that plaintiffs fail to state a claim because their allegations, as presently articulated, are tantamount to aiding and abetting someone else's primary violation of Section 10(b) and Rule 10b-5 (i.e. Fannie Mae), and, thus, are barred as a private right of action by the Supreme Court's holding in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 191, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994). In that regard, they contend that plaintiffs have failed to plead sufficient conduct by Goldman Sachs to state a claim for primary liability under any subpart of Section 10(b) or Rule 10b-5. As to Rule 9(b), Goldman Sachs maintains that the Amended Complaint fails to plead with sufficient particularity facts giving rise to a strong inference of scienter to "deceive, manipulate or defraud" Fannie Mae's investors as required under both that rule and the PSLRA. While either of these deficiencies alone would be enough to dismiss plaintiffs' claims against Goldman Sachs, the Court finds, for the following reasons, that plaintiffs' Amended Complaint must be DISMISSED for failure to state a claim under Section 10(b) and Rule 10b-5.1
A motion to dismiss will not be granted unless it "appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). In considering a motion to dismiss for failure to state a claim upon which relief can be granted, this Court must view the factual allegations in the light most favorable to the plaintiff. EEOC v. St. Francis Xavier Parochial Sch, 117 F.3d 621, 625 (D.C.Cir. 1997). However, even if the Court accepts as true all of the factual allegations set forth in the complaint, Doe v. U.S. DOJ, 753 F.2d 1092, 1102 (D.C.Cir.1985), and construes the complaint liberally in favor of the plaintiff, Schuler v. United States, 617 F.2d 605, 608 (D.C.Cir.1979), it "need not accept inferences drawn by the plaintiff[] if such inferences are unsupported by the facts set out in the complaint." Kowal v. MCI Commc'ns Corp., 16 F.3d 1271, 1276 (D.C.Cir.1994).
Plaintiffs seek to recover against Goldman Sachs under Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Securities and Exchange Commission ("SEC") Rule 10b-5(b) promulgated thereunder. Section 10(b) of the Exchange Act states in relevant part:
It shall be unlawful for any person, directly or indirectly ... (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may proscribe as necessary or appropriate in the public interest or for the protection of investors.
15 U.S.C. § 78j(b). Rule 10b-5 implements this statute, stating:
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice or course of business which operated or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5. Complaints brought under Section 10(b) and Rule 10b-5 are governed by special heightened pleading standards that were included by Congress in the PSLRA. These pleading standards are unique to securities fraud litigation and were adopted in an attempt to curb abuses of these laws. In re Navarre Corp. Sec. Litig., 299 F.3d 735, 741 (8th Cir.2002). The first of these two standards requires the plaintiffs complaint to specify each misleading statement or omission and specify why the statement or omission was misleading. 15 U.S.C. § 78u-4(b)(1). If the allegation "is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." Id. Similarly, Rule 9(b) of the Federal Rules of Civil Procedure has long required that "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." The text of the PSLRA was designed "to embody, in the Act itself at least the standards of Rule 9(b)." Greebel v. FTP Software, Inc., 194 F.3d 185, 193 (1st Cir.1999).
Second, Congress stated in the PSLRA that a plaintiffs complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2) (emphasis added); Fla. State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 654 (8th Cir. 2001). Indeed, in the securities fraud context, this Court must "disregard `catch-all' or `blanket' assertions that do not live up to the particularity requirements of the [PSLRA]." Green Tree, 270 F.3d at 660. "[U]nder the Reform Act, a securities fraud case cannot survive unless its allegations collectively add up to a strong inference of the required state of mind." Green Tree, 270 F.3d at 660. ...
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