Sec. Action, 08 Ci v. 2793. SRM Global Master Fund Ltd. (In re Bear Stearns Cos.)

• Decision Date: 05 February 2014
• Docket Number: No. 13 Civ. 2692.,No. 08 MDL 1963.,08 MDL 1963.,13 Civ. 2692.
• Citation: 995 F.Supp.2d 291
• Parties: In re BEAR STEARNS COMPANIES, INC. SECURITIES, DERIVATIVE, AND ERISA LITIGATION. This Document Relates To: Securities Action, 08 Civ. 2793. SRM Global Master Fund Limited Partnership, Plaintiff, v. The Bear Stearns Companies LLC (f/k/a Bear Stearns Companies Inc.), Alan D. Schwartz, Samuel L. Molinaro, Jr., James Cayne, Warren Spector and Deloitte & Touche LLP, Defendants.
• Court: U.S. District Court — Southern District of New York

995 F.Supp.2d 291

In re BEAR STEARNS COMPANIES, INC. SECURITIES, DERIVATIVE, AND ERISA LITIGATION.

This Document Relates To: Securities Action, 08 Civ. 2793.

SRM Global Master Fund Limited Partnership, Plaintiff,

v.The Bear Stearns Companies LLC (f/k/a Bear Stearns Companies Inc.), Alan D. Schwartz, Samuel L. Molinaro, Jr., James Cayne, Warren Spector and Deloitte & Touche LLP, Defendants.

No. 08 MDL 1963.

No. 13 Civ. 2692.

United States District Court,

S.D. New York.

Feb. 5, 2014.

Boies, Schiller & Flexner, LLP, by: Philip C. Korologos, Esq., Richard B. Drubel, Esq., Matthew J. Henken, Esq., New York, NY, Korein Tillery, LLC by: George A. Zelcs, Esq., Stephen M. Tillery, Esq., Douglas R. Sprong, Esq., Chicago, IL, for Plaintiffs.

Paul, Weiss, Rifkind, Wharton & Garrison LLP, by: Eric S. Goldstein, Esq., Brad S. Karp., Esq., Jessica S. Carey, Esq., Jonathan Hurwitz, Esq., New York, NY, for Defendant The Bear Stearns Companies LLC.

Skadden, Arps, Slate, Meagher & Flom LLP, by: Susan Saltzstein, Esq., New York, NY, for Defendant Alan D. Schwartz.

Allen & Overy LLP, by: Pamela R. Chepiga, Esq., New York, N.Y. 10020 for Defendant Samuel L. Molinaro, Jr.

Kramer Levin Naftalis & Frankel LLP, by: David S. Frankel, Esq., New York, NY, for Defendant James E. Cayne.

Wachtell, Lipton, Rosen & Katz, by: David B. Anders, Esq., New York, NY, for Defendant Warren J. Spector.

Cravath, Swaine & Moore LLP, Worldwide Plaza by: Thomas G. Rafferty, Esq., Antony L. Ryan, Esq., Rachel G. Skaistis, Esq., New York, NY, for Defendant Deloitte & Touche LLP.

OPINION

SWEET, District Judge.

The defendants The Bear Stearns Companies LLC (F/K/A The Bear Stearns Companies Inc.) (“Bear Stearns”), Alan D. Schwartz, Samuel L. Molinaro, James Cayne, and Warren Spector (the “Individual Defendants”) (collectively, the “Bear Stearns Defendants”) and Deloitte & Touche LLP (“Deloitte”) (collectively, with the Bear Stearns Defendants, the “Defendants”) have moved pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6) to dismiss the Complaint filed by plaintiff SRM Global Master Fund Limited Partnership (“SRM” or the “Plaintiff”). Based on the conclusions set forth below, Defendants' motions are granted.

I. Prior Proceedings

In the immediate wake of Bear Stearns' near-collapse in mid-March 2008, a series of securities fraud putative class actions were filed against Defendants in the Southern District of New York and other jurisdictions by purchasers of Bear Stearns common stock and stock options, and transferred to this Court by the Judicial Panel on Multidistrict Litigation for coordinated or consolidated pretrial proceedings. See Transfer Order, In re Bear Stearns Cos., Inc. Sec., Deriv. & ERISA Litig., No. 08 MDL 1963 (J.P.M.L. Aug. 19, 2008). Those actions were consolidated on January 5, 2009 (the “Class Action”). In re Bear Stearns Cos. Inc. Sec., Deriv. & ERISA Litig., 08 M.D.L. No.1963(RWS), 2009 WL 50132 (S.D.N.Y. Jan. 5, 2009). On February 27, 2009, Lead Plaintiff State of Michigan Retirement Systems (“Class Action Lead Plaintiff”) filed the Consolidated Class Action Complaint (“Class Action Complaint”) asserting claims on behalf of “all persons and entities that, between December 14, 2006 and March 14, 2008 ... purchased or otherwise acquired the publicly traded common stock or other equity securities, or call options of or guaranteed by Bear Stearns, or sold Bear Stearns put options and were damaged thereby.”

The Court denied Defendants' motions to dismiss the consolidated class action complaint on January 19, 2011. In re Bear Stearns Cos. Inc. Sec., Deriv. & ERISA Litig., 763 F.Supp.2d 423 (S.D.N.Y.2011) [hereinafter Bear Stearns I ]. The parties then spent over fourteen months conducting discovery, resulting in the production of over nine million pages of documents by Defendants. In May 2012, the parties reached a settlement that was approved by the Court in orders and final judgments dated November 28, 2012 (“Class Action Settlement”). (No. 08 MDL 1963, ECF Nos. 337–38, Exs. 10–11.) The Settlement Class was limited to persons who transacted in Bear Stearns common stock, other equity securities, or call or put options (the “Class Action Settlement Class”). ( See id. ¶ 3.) SRM did not participate in any of the Class Action proceedings.

SRM is a highly sophisticated “multi-billion dollar hedge fund that takes ‘a contrarian and long-term investment’ approach in ‘companies or sectors that have been through periods of stress and are out of favor with the market.’ ” SRM Global Fund Ltd. P'ship v. Countrywide Fin. Corp., No. 09 Civ. 5064(RMB), 2010 WL 2473595, at *14 (S.D.N.Y. June 17, 2010) (quoting Tom Cahill & Katherine Burton, Wood's SRM Global Fell 30% in January, Adding to 2007 Losses, Bloomberg (Feb. 6, 2008), http:// www. bloomberg. com/ apps/ news? pid= 21070001& sid= a CPm ITS 7 l Z 8 k), aff'd448 Fed.Appx. 116 (2d Cir.2011). SRM is domiciled and registered as a private investment fund in the Cayman Islands, and is based in Monaco. ( See Complaint ¶ 12, SRM, No. 09 Civ. 5064(RMB) (S.D.N.Y. May 29, 2009), ECF No. 1; Carey Aff., Ex. 3.)

SRM has been represented by its present counsel since at least May 2009, when SRM sued Countrywide Financial seeking recovery foe losses that SRM allegedly suffered in the financial crisis because of an investment in Countrywide. (Complaint, SRM, No. 09 Civ. 5064(RMB) (S.D.N.Y. May 29, 2009), ECF No. 1.) SRM submitted a request for exclusion from the Class Action Settlement Class in August 2012. SRM filed its complaint for the instant action on April 24, 2013 (“Complaint” or “Compl.”).

The instant motions were heard and marked fully submitted on October 23, 2013.

II. Allegations of the Complaint

The Complaint contains many of the same factual allegations as the Class Action Complaint. The facts regarding Bear Stearns' collapse is set forth in detail in this Court's opinion in Bear Stearns I, 763 F.Supp.2d 423. SRM alleges that, from December 14, 2006 through approximately March 12, 2008, the Bear Stearns and Deloitte Defendants “fraudulently overstated”: (i) “the value of [Bear Stearns'] mortgages, mortgage-and asset-backed securities and other derivative financial instruments;” (ii) “the adequacy of its liquidity and capital reserves;” and (iii) “the quality of [Bear Stearns'] risk management,” (Compl. ¶ 2; see also id. ¶¶ 39–237.)

SRM alleges losses of two types. First, SRM alleges that it “owned shares of Bear [Stearns] stock at least as early as March 2007,” and “continued to invest in Bear [Stearns]” until its near collapse. (Compl. ¶ 12.) Following Bear Stearns' near-collapse, it sold its “investment in Bear [Stearns]” between April 1, 2008 and June 2, 2008, and thereby “incur [red] losses of more than $200 million.” (Compl. ¶ 6.) According to Defendants, SRM's request for exclusion from the Class Action Settlement Class states that SRM had made its last purchase of Bear Stearns common stock on September 24, 2007 and sold all of its Bear Stearns common stock on the same day, before Bear Stearns' stock price decreased significantly. (Def. Bear Stearns Br., at 6; Carey Aff., Ex. 9.)

Second, SRM alleges losses from its “purchase [of] security-based swaps representing approximately 3.5 million shares of Bear Stearns common stock” (“Bear Stearns Swaps”) between September 24, 2007 and March 12, 2008 (the “Swap Transactions”). ( Id. ¶ 13.) SRM purchased its Bear Stearns Swaps by placing orders with UBS Securities LLC (“UBS”) and Merrill Lynch, Pierce, Fenner & Smith Inc. (“Merrill Lynch”). ( Id. ¶ 14.) SRM's Bear Stearns Swaps were “total return swaps,” which are synthetic instruments designed to mimic all aspects (i.e., the “total return”) of a stock as though the stock had been purchased itself. SRM's Bear Stearns Swaps were the functional equivalent of shares of Bear Stearns common stock. (Opp., at 4–5.) ¹ SRM alleges that the Bear Stearns Swaps were inflated to precisely the same extent and by precisely the same misrepresentations and omissions as Bear Stearns stock itself, and when Bear Stearns' stock price collapsed, so did the value of SRM's Bear Stearns Swaps.

Deloitte was the independent outside auditor for Bear Stearns, and it provided audit, audit-related, tax and other services to Bear Stearns during fiscal years 2006 and 2007. SRM alleges that Deloitte “consented to and caused the incorporation by reference of its unqualified opinions on Bear[ Stearns'] financial statements for fiscal years 2006 and 2007” which contained misrepresentations and omissions that caused SRM loss. (Compl. ¶ 23.)

SRM alleges that its losses occurred, in part, due to SRM's reliance on Bear Stearns Defendants' false and misleading representations and omissions regarding Bear Stearns' Value at Risk (“VaR”) amounts. (Compl. ¶¶ 59, 66.) SRM alleges that Bear Stearns knew the Securities and Exchange Commission (“SEC”) had stated that Bear Stearns' VaR models were seriously flawed and the VaR models were never updated to reflect the housing and subprime mortgage downturn. From the VaR published in Bear Stearns' SEC filings, SRM concluded that Bear Stearns was subject to substantially less risk than was in fact the case, and SRM purchased and retained Bear Stearns stock and the Bear Stearns Swaps. ( Id. ¶¶ 73, 177.) According to the Complaint and in conflict with SRM's request for exclusion from the Class Action Settlement Class, between April 1 and June 2, 2008, after Bear Stearns had collapsed, it is alleged that SRM sold its holdings of Bear Stearns stock and the Bear Stearns Swaps, at a significant loss. Plaintiff alleges losses of more than $200 million on its investment. (Compl. ¶ 243.)

Based on its allegations, SRM asserts claims against the Bear Stearns and Deloitte Defendants for alleged violations of: (i) Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b–5 promulgated thereunder ( id. ¶¶ 519–23); (ii) Section 18 of the Exchange Act, based on misrepresentations...