Sec. & Exch. Comm'n v. Goldstone

Citation952 F.Supp.2d 1060
Decision Date08 July 2013
Docket NumberNo. CIV 12–0257 JB/LFG.,CIV 12–0257 JB/LFG.
PartiesSECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Larry A. GOLDSTONE, Clarence G. Simmons, III, and Jane E. Starrett, Defendants.
CourtUnited States District Courts. 10th Circuit. District of New Mexico

OPINION TEXT STARTS HERE

Kenneth J. Gonzalez, United States Attorney, Michael H. Hoses, Assistant United States Attorney, United States Attorney's Office, Albuquerque, NM, Stephen C. McKenna, Gregory A. Kasper, Dugan Bliss, Ian S. Karpel, Securities & Exchange Commission, Denver, CO, for Plaintiff Securities and Exchange Commission.

Bruce D. Hall, Andrew G. Schultz, Melanie B. Stambaugh, Rodey, Dickason, Sloan, Akin & Robb, P.A., Albuquerque, NM, Chris Johnstone, Alanna G. Buchanan, Wilmer, Cutler, Pickering, Hale & Dorr, LLP, Palo Alto, CA, John Valentine, Lauren R. Yates, Michael A. Lamson, April N. Williams, Wilmer, Cutler, Pickering, Hale

& Dorr, LLP, Washington, DC, Randall Lee, Jessica Kurzban, Wilmer, Cutler, Pickering, Hale & Dorr, LLP, Los Angeles, CA, for Defendants Larry A. Goldstone and Clarence G. Simmons, III.

Andrew G. Schultz, Bruce D. Hall, Melanie B. Stambaugh, Rodey, Dickason, Sloan, Akin & Robb, P.A., Albuquerque, NM, Jerry L. Marks, Paul M. Torres, Robert J. Liubicic, Alisa Schlesinger, Elena Kilberg, Milbank, Tweed, Hadley & McCloy, LLP, Los Angeles, CA, Thomas Arena, Milbank, Tweed, Hadley & McCloy, LLP, New York, NY, for Defendant Jane E. Starrett.

MEMORANDUM OPINION AND ORDER1

JAMES O. BROWNING, District Judge.

THIS MATTER comes before the Court on: (i) the Motion to Dismiss on Behalf of Defendants Larry Goldstone and Clarence G. Simmons and Memorandum of Law in Support, filed May 21, 2012 (Doc. 35)(“Goldstone & Simmons MTD”); (ii) the Defendant Jane Starrett's Motion to Dismiss and Memorandum of Points and Authorities in Support, filed May 21, 2012 (Doc. 36)(“Starrett MTD”); and (iii) the Request for Judicial Notice in Support of Defendants' Motions to Dismiss Complaint, filed May 21, 2012 (Doc. 39)(Request for Judicial Notice). 2 The Court held a hearing on July 31, 2012. The primary issues are: (i) whether the Court may or must take judicial notice of certain documents which Defendants Larry A. Goldstone, Clarence G. Simmons, III, and Jane E. Starrett have attached to their motions to dismiss; and (ii) whether the Plaintiff Securities and Exchange Commission (SEC) has stated a plausible claim that the Defendants made, aided and abetted, or are liable as control persons for material misrepresentations and omissions to the investing public and Thornburg Mortgage, Inc.'s outside auditor, Klynveld, Peat, Marwick, Goerdeler (“KPMG”), in connection with the filing of Thornburg Mortgage's 2007 Form 10–K Annual Report. The Court will grant the Request for Judicial Notice in part, and deny it in part, and will grant the motions to dismiss in part, and deny them in part.

The Court will dismiss the SEC's allegations based upon the statement in the 2007 Form 10–K and to Thornburg Mortgage's outside auditor that Thornburg Mortgage successfully met its margin calls without violating its lending agreements, and did not sell assets to meet margin calls. The Court will also dismiss the SEC's allegations that Starrett engaged in a scheme to defraud the investing public, and that the Defendants schemed to defraud Thornburg Mortgage's outside auditor in connection with the 2007 Form 10–K.

On the other hand, the Court has determined that the SEC has sufficiently alleged that the representation that Thornburg Mortgage had the intent and ability to hold its impaired assets to maturity or their value recovered in the market at the time it filed the 2007 Form 10–K was materially false or misleading. The Court determines that the Defendants' knowledge of objective financial factors—including that Thornburg Mortgage was late in meeting margin calls in February, 2008, Thornburg had diminished liquidity and cash on hand to meet margin calls on a daily basis, and Goldstone and Simmons' awareness that Thornburg would likely receive additional margin calls—undermines the statement that Thornburg would be able to continue to meet margin calls without selling assets at a loss. The Court will not dismiss the SEC's allegation that Goldstone and Simmons are primarily liable or liable as control persons for that misrepresentation in the 10–K, and the Court will not dismiss the SEC's allegations that the Defendants aided and abetted the misrepresentation, as the Court has determined that the SEC sufficiently alleged that Goldstone and Simmons made, and the Defendants provided substantial assistance to, the misrepresentation with knowledge of or recklessness to its falsity. Similarly, the Court will not dismiss the SEC's allegations that the Defendants misled Thornburg Mortgage's auditor before the 2007 Form 10–K was filed through the statement that Thornburg Mortgage had the intent and ability to hold its impaired assets to maturity or their value recovered in the market.

The Court will also allow certain claims to proceed against Goldstone and Simmons individually. The SEC has sufficiently alleged that Goldstone and Simmons failed to disclose the material information to KPMG before the 2007 Form 10–K was filed that the collapse of a European hedge fund would negatively impact Thornburg Mortgage's financial condition. The SEC has sufficiently alleged that Simmons misrepresented to KPMG the purpose of certain transactions Thornburg Mortgage used to satisfy margin calls before the 2007 Form 10–K was filed. The SEC has also sufficiently alleged that Goldstone materially misrepresented Thornburg Mortgage's financial condition after the 2007 Form 10–K was filed. The SEC has sufficiently alleged that Goldstone and Simmons materially misled KPMG by not providing correspondence confirming that Thornburg Mortgage experienced an event of default in the two weeks before the 2007 Form 10–K was filed, and that Simmons misrepresented that unforeseen events had an unexpected negative financial impact on Thornburg Mortgage after the 2007 Form 10–K was filed.

FACTUAL BACKGROUND3

The SEC alleges that the DefendantsLarry A. Goldstone, Clarence G. Simmons, III, and Jane E. Starrett—were involved in fraudulent misrepresentations and omissions made in connection with the Thornburg Mortgage, Inc. 2007 Form 10–K Annual Report, filed May 21, 2012 (Doc. 37–2)(2007 Form 10–K”). 4 Complaint ¶¶ 1–3, at 1–2, filed March 13, 2012 (Doc. 1). Thornburg Mortgage, Inc. (“Thornburg Mortgage”) was a publicly traded single-family mortgage lender and real estate investment trust, founded in 1993, headquartered in Santa Fe, New Mexico and previously was the second-largest independent mortgage company after Countrywide Financial Corporation. See Complaint ¶ 2, at 1; id. ¶ 20, at 7. During the time frame of the allegations in the Complaint, Thornburg Mortgage's shares were traded on the New York Stock Exchange. See Complaint ¶ 20, at 7.

1. The Defendants and Thornburg Mortgage.

At the time of the allegations set forth in the Complaint, Goldstone, as Thornburg Mortgage's president and chief executive officer (“CEO”), and also one of Thornburg Mortgage's directors, signed and certified Thornburg Mortgage's filings with the SEC, and exercised control over Thornburg Mortgage's management, general operations, and policies. Complaint 17, at 6. Simmons, as senior executive vice-president, chief financial officer (“CFO”), and one of Thornburg Mortgage's directors, signed and certified Thornburg Mortgage's filings with the SEC, and exercised control over Thornburg Mortgage's management, general operations, and policies. Complaint ¶ 18, at 6–7. Starrett was Thornburg Mortgage's chief accounting officer (“CAO”), and as such, was responsible for Thornburg Mortgage's financial reporting and served as Thornburg Mortgage's principal contact with its outside auditor. Complaint ¶ 19, at 7. Starrett became a certified public accountant in 1976, but her license has been inactive since 1989. See Complaint ¶ 19, at 7.

Thornburg Mortgage's lending operations focused on “jumbo” and “superjumbo” adjustable-rate mortgage (“ARM”) securities, and also purchased ARM securities third parties originated.5 Complaint ¶ 21, at 7. Thornburg Mortgage paid most of its earnings into dividends, and obtained financing for its mortgage and investment business through reverse repurchase agreements backed by ARM securities.6 Complaint ¶ 3, at 2. Thornburg Mortgage's reverse repurchase agreements “typically consisted of a simultaneous sale of pledged securities to a lender at an agreed price in return for Thornburg Mortgage's agreement to repurchase the same securities at a future date (the maturity date) at a higher price.” Complaint ¶ 22, at 7–8. The reverserepurchase agreements required Thornburg Mortgage to maintain a certain degree liquidity and subjected Thornburg Mortgage to margin calls if the value of the ARM securities serving as collateral on the agreements fell below a specified level. See Complaint ¶ 22, at 8.7 A margin call would generally require Thornburg Mortgage to pay cash to reduce its loan amount or to pledge additional collateral to the lender, either on the same day that Thornburg Mortgage received the margin call or on the following day, unless the parties otherwise agreed. See Citigroup Global Markets, Inc. as Intermediating Agent for Citigroup Global Markets Limited and [Counterparty] Thornburg Mortgage, Inc., International Securities Lenders Association ISLA Global Master Securities Lending Agreement § 5.8, at 11, filed May 21, 2012 (Doc. 37–6)(“Citigroup Global Repo Agreement”); Master Repurchase Agreement Between Greenwich Capital Markets, Inc., and Thornburg Mortgage, Inc. § 4(c) at 5, § 11(a), at 7–8, filed July 20, 2012 (Doc. 60–2)(“Greenwich Repo Agreement”); Master Repurchase Agreement Between Credit Suisse First Boston Corporation and Thornburg Mortgage Asset Corporation § 4(c), at 4, § 11(a), at 7, filed July 20, 2012 (Doc. 60–3)(“Credit...

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