Pub. Employees' Ret. System Of Miss. v. Merrill Lynch & Co. Inc. .

• Decision Date: 01 June 2010
• Docket Number: No. 08 Civ. 10841(JSR).,08 Civ. 10841(JSR).
• Parties: PUBLIC EMPLOYEES' RETIREMENT SYSTEM OF MISSISSIPPI et al., Plaintiffs, v. MERRILL LYNCH & CO. INC. et al., Defendants.
• Court: U.S. District Court — Southern District of New York

714 F.Supp.2d 475

PUBLIC EMPLOYEES' RETIREMENT SYSTEM OF MISSISSIPPI et al., Plaintiffs,

v.MERRILL LYNCH & CO. INC. et al., Defendants.

No. 08 Civ. 10841(JSR).

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

June 1, 2010.

COPYRIGHT MATERIAL OMITTED.

COPYRIGHT MATERIAL OMITTED.

David R. Stickney, David A. Thorpe, Timothy Alan Delange, Bernstein Litowitz Berger & Grossmann LLP, San Diego, CA, Gerald Harlan Silk, Bernstein Litowitz Berger & Grossmann LLP, New York, NY, Samuel Howard Rudman, Carolina Cecilia Torres, David Avi Rosenfeld, Jarrett Scott Charo, Mario Alba, Jr., Robbins Geller Rudman & Dowd LLP, Melville, NY, for Plaintiffs.

Carla R. Walworth, Mor Wetzler, William Albert Novomisle, Paul, Hastings, Janofsky & Walker LLP, New York, NY, James E. Anklam, James D. Wareham, Paul, Hastings, Janofsky & Walker, LLP, Washington, DC, Jay B. Kasner, Christopher P. Malloy, Scott D. Musoff, Skadden, Arps, Slate, Meagher & Flom LLP, Mitchell A. Lowenthal, Cleary Gottlieb Steen & Hamilton, LLP, Steven Cooper, Kristina Marie Mentone, Reed Smith, Adam N. Zurofsky, Floyd Abrams, Sarah Penny Windle, Tammy Lynn Roy, Cahill Gordon & Reindel LLP, Joshua M. Rubins, Satterlee Stephens Burke & Burke LLP, New York, NY, for Defendants.

OPINION AND ORDER

JED S. RAKOFF, District Judge.

This purported class action, consolidating four cases, asserts claims for violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the “1933 Act”), 15 U.S.C. §§ 77k, 77 l (a)(2), 77 o, in connection with the sale of mortgage pass-through certificates (“certificates”) that were offered for sale by means of documents that allegedly contained untrue statements and material omissions. The first of the cases was filed by plaintiffs Connecticut Carpenters Pension Fund and Connecticut Carpenters Annuity Fund (collectively “Connecticut Carpenters”) on December 5, 2008. Plaintiffs Iron Workers Local No. 25 Pension Fund (“Iron Workers”), Public Employees' Retirement System of Mississippi (“MissPERS”), and Wyoming State Treasurer filed actions on December 12, 2008, February 17, 2009, and March 27, 2009 respectively. On April 23, 2009, the Court selected MissPERS as lead plaintiff. See 4/23/09 Order. After the cases were consolidated under the Iron Workers docket number (08 Civ. 10841), a consolidated Class Action Complaint (“Complaint”) was filed on May 20, 2009, using that number but altering the order of the parties in the caption, ¹ and naming the Los Angeles County Employees Retirement Association as an additional plaintiff.

According to the Complaint, the certificates were issued by Merrill Lynch Mortgage Investors, Inc. (“Merrill Depositor”), a subsidiary of Merrill Lynch & Co., Inc. (“Merrill”). See Compl. ¶¶ 18, 20. Matthew Whalen, Paul Park, Brian T. Sullivan, Michael M. McGovern, Donald J. Puglisi, and Donald C. Han (collectively the “individual defendants”) were officers or directors of Merrill Depositor who signed allegedly false registration statements for the certificates. Id. ¶¶ 30-35. Several other Merrill subsidiaries- Lynch Mortgage Lending, Inc. (“Merrill Sponsor”), First Franklin Financial Corporation (“First Franklin”), and Merrill Lynch, Pierce, Fenner & Smith Inc. (“Merrill PFS”)-served as sponsors or underwriters of the issue, id. at ¶¶ 19, 21-22, as did non-Merrill co-defendants Credit-Based Asset Servicing and Securitization LLC (“C-BASS”), J.P. Morgan Securities, Inc. (“J.P. Morgan”), and ABN AMRO Inc. (“ABN AMRO”), id. ¶¶ 23-25. McGraw-Hill Companies, the parent company of Standard & Poor's, and Moody's Investors Service, Inc. (collectively, the “ratings agencies”) provided ratings of the securities. Id. ¶¶ 26-27.

All defendants filed motions to dismiss on June 17, 2009. Thereafter, the Court received extensive briefing, including voluminous exhibits, and heard oral argument on August 18, 2009, followed by still further briefing. On March 31, 2010, the Court issued a “bottom line” Order resolving these motions in the manner set forth below. ² See 3/31/10 Order. This Opinion and Order gives the reasons for those rulings and schedules a conference call to plan further proceedings.

Defendants first contend that, as a global matter, all of plaintiffs' claims are time-barred. Under Section 13 of the 1933 Act, claims under Sections 11 or 12(a)(2) are subject to a one year statute of limitations, which begins to runs upon “the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence.” 15 U.S.C. § 77m. ³ Defendants do not contend that plaintiffs are barred under the first clause (so-called “actual notice”), but rather under the second clause (so-called “inquiry notice”), that is, when “circumstances would suggest to an investor of ordinary intelligence the probability that she has been defrauded.” Staehr v. The Hartford Fin. Serv. Group, Inc., 547 F.3d 406, 411 (2d Cir.2008) (quoting Dodds v. Cigna Sec., 12 F.3d 346, 350 (2d Cir.1993)). Defendants contend that such inquiry notice arose prior to December 5, 2007, that is, a year before the filing of the first of the cases here consolidated, and was even more evident before March 27, 2008, that is, a year before the filing of the last of the cases here consolidated.

Inquiry notice is assessed under an objective standard, evaluated on a “totality-of-the-circumstances analysis.” Staehr, 547 F.3d at 427; see also Shah v. Meeker, 435 F.3d 244, 249 (2d Cir.2006). However, “[i]nquiry notice may be found as a matter of law only when uncontroverted evidence clearly demonstrates when the plaintiff should have discovered the fraudulent conduct.” Staehr, 547 F.3d at 427. Thus, while defendants have proffered substantial evidence that prior to December 2007, let alone prior to March 27, 2008, questions about the bona fides of mortgage-backed securities were the subject of news reports, government investigations, public hearings, and civil complaints, plaintiffs argue that virtually none of this evidence references Merrill or the certificates at issue here and that statements made by the defendants in contemporaneous and subsequent documents would reasonably have had the effect of reassuring an investor that the doubts raised about other companies' offerings were not applicable here. See Pl. Opp. to Merrill Defs. et al. at 65-68, ECF No. 81. Tellingly, the certificates at issue were not downgraded below investment grade until April 2008, that is, after the March 27, 2008 limitation date, and, even then, the downgrade was not premised on the discovery of fraud but only on a perceived increase in risk. See Transcript 8/18/09 (“Tr.”) at 29; Pl. Opp. to Merrill Defs. et al. at 55.

Although extraneous evidence from both sides may be considered on a motion to dismiss that is premised on statute of limitations grounds, see, e.g., Staehr, 547 F.3d at 425, nonetheless, where there are plausible inferences to be drawn in either direction, the issue of “whether a plaintiff had sufficient facts to place it on inquiry notice is ‘often inappropriate for resolution on a motion to dismiss under Rule 12(b)(6),’ ” LC Capital Partners, LP v. Frontier Ins. Group, Inc., 318 F.3d 148, 156 (2d Cir.2003) (quoting Marks v. CDW Computer Centers, Inc., 122 F.3d 363, 367 (7th Cir.1997)). The competing materials referenced above show that this is such a case, and the Court therefore denies defendants' motion to dismiss on the basis of statute of limitations.

It should also be noted that the Supreme Court, in very recently construing 28 U.S.C. § 1658(b), a statute of limitations applicable to the Securities Exchange Act of 1934, was critical of the use of “inquiry notice” as a basis for determining when a reasonably diligent plaintiff should have discovered the facts constituting a violation. See Merck & Co., Inc. v. Reynolds, ---U.S. ----, 130 S.Ct. 1784, 1796-97, 176 L.Ed.2d 582 (2010). Although the Second Circuit has not yet had occasion to determine whether Merck requires a change in how the Circuit interprets Section 13 of the 1933 Act, Merck, if anything, favors the plaintiffs here. Indeed, in Merck, the Court rejected arguments of the defendants quite similar to the arguments made by defendants here and held, in effect, that even if a plaintiff had “inquiry notice” sufficient to warrant beginning to investigate, a plaintiff would not be barred by the statute of limitations unless a reasonably diligent plaintiff similarly situated would have actually discovered the facts showing the violations alleged in the plaintiff's complaint. See Merck, 130 S.Ct. at 1798-99.

Defendants next contend, with more force, that while plaintiffs assert claims based on eighty-four offerings, they lack standing to sue on all but the nineteen offerings in which the named plaintiffs purchased securities. See Compl. ¶¶ 13-17, 42-44. Plaintiffs contend that because “at least one named plaintiff ... can assert a claim directly against each defendant,” id. ¶ 179, and because they seek to bring a class action under Federal Rule of Civil Procedure 23, therefore, if the class is certified, they can bring claims on behalf of those who purchased certificates in every one of the defendants' similar eighty-four offerings. Tr. at 73; Pl. Opp. to Merrill Defs. et al. at 14-19. But it is black letter law that a rule of procedure cannot create standing. See 28 U.S.C. § 2072(b) (procedural rules “shall not abridge, enlarge or modify any substantive right”). As the Supreme Court stated in Lewis v. Casey, 518 U.S. 343, 116 S.Ct. 2174, 135 L.Ed.2d 606 (1996), “[t]hat a suit may be a class action ... adds nothing to the question of standing, for even named plaintiffs who represent a class ‘must allege and show that they personally have been injured, not that injury has been suffered by other, unidentified members of the class to which they belong and which they purport to represent.’ ” 518 U.S. at 357, 116 S.Ct. 2174 (quoting Simon v. Eastern Ky....