Slater v. Edwards
| Decision Date | 09 July 2013 |
| Docket Number | No. 11–2170.,11–2170. |
| Citation | 719 F.3d 1190 |
| Court | U.S. Court of Appeals — Tenth Circuit |
| Parties | Kenneth Z. SLATER; W. Allen Gage; Nicholas F. Aldrich, Sr., individually and on behalf of the Aldrich Family; Donald Smith, on behalf of plaintiff and all others similarly situated; Elaine Snydman; Denis Roy Gonsalves; David Sedlmyer; Betty L. Manning; and John Learch, Plaintiffs–Appellants, v. A.G. EDWARDS & SONS, INC.; BB & T Capital Markets, a division of Scott & Stringfellow, Inc.; Citigroup Global Markets, Inc.; Oppenheimer & Company, Inc.; RBC Dain Rauscher Corp.; Stifel, Nicolaus & Company, Inc.; FBR Capital Markets & Co., formerly known as Friedman, Billings, Ramsey & Co.; Bear, Stearns & Company, now J.P. Morgan Securities Inc.; and UBS Securities LLC, Defendants–Appellees. |
OPINION TEXT STARTS HERE
Andrew L. Zivitz, Kessler Topaz Meltzer & Check, LLP, Radnor, PA (Benjamin J. Sweet, Christopher L. Nelson, Michelle M. Newcomer, and Richard A. Russo, Jr., Kessler Topaz Meltzer & Check, LLP, Radnor, PA, and Betsy C. Manifold and Patrick H. Moran, Wolf Haldenstein Adler Freeman & Herz LLP, San Diego, CA, and Turner W. Branch and Cynthia L. Zedalis, Branch Law Firm, Albuquerque, NM, with him on the briefs), Attorneys for Appellants.
Jonathan C. Dickey, Gibson, Dunn & Crutcher LLP, New York, NY (Sapna Desai, Gibson, Dunn & Crutcher LLP, New York, NY, and Blaine H. Evanson, Gibson Dunn & Crutcher LLP, Los Angeles, CA, with him on the brief), for Appellees A.G. Edwards & Sons, Inc., BB & T Capital Markets, Citigroup Global Markets Inc., Oppenheimer & Company, Inc., RBC Dain Rauscher Corp., and Stifel, Nicolaus & Co., Inc., and Steven M. Farina (Margaret A. Keeley and Allison B. Jones with him on the brief), Williams & Connolly LLP, Washington, DC, for Appellee FBR Capital Markets & Co., formerly known as Friedman, Billings, Ramsey & Co., and David C. Bohan, David Stagman, Laura A. Brake and John F. Anzelc, Katten Muchin Rosenman LLP, Chicago, IL, on the brief for Defendant UBS Securities LLC and Appellee Bear, Stearns & Company, now J.P. Morgan Securities LLC.
Before TYMKOVICH, HOLLOWAY, Senior Judge, and HOLMES, Circuit Judges.
Thornburg Mortgage, Inc. was an originator and purchaser of home loans and one of the many casualties of the 2007–2009 financial crisis. Cut off from its usual sources of financing, Thornburg attempted to raise new capital through a series of stock offerings in 2007 and early 2008. But as the mortgage market continued to sour, Thornburg's problems mounted and the value of its stock declined. Investors in those offerings then brought a class action suit against Thornburg's underwriters, alleging violations of § 11 of the Securities Act based on omissions and misrepresentations in the offering documents. In a thorough opinion, the district court dismissed the claims against the underwriters on the grounds that there were no omissions or misrepresentations in the offering documents and, even if there were, they were not material.
The Plaintiffs broadly challenge all of the district court's holdings. They contend that the offering documents contained material misrepresentations and omissions. As we explain, the Plaintiffs' contentions are not based on a contemporaneous look at Thornburg's statements and disclosure obligations during the offering periods. With that perspective in mind, we conclude there were no misrepresentations or omissions in the offering documents and, accordingly, AFFIRM.
Thornburg was a publicly traded residential mortgage lender focused on the adjustable-rate mortgage (ARM) market, and funded its mortgage purchases and originations through a variety of financing sources. These financing sources included public offerings of its securities, reverse-repurchase agreements, 1 short-term borrowing through asset-backed commercial paper,2 and collateralized debt obligations (CDOs),3 a type of mortgage-backed security (MBS). Thornburg both packaged its own MBSs (from its pool of originated and acquired loans) and purchased already-packaged MBSs. Thornburg was highly leveraged, meaning it borrowed substantial funds compared to its available assets. Similar to a bank, Thornburg profited from the differences between the interest rates at which it borrowed money and the interest rates at which it lent money.
Thornburg's business focused on the prime market—that market consisting primarily of borrowers with good credit scores who can document their income. But it also originated and acquired Alt–A loans, which are loans to otherwise creditworthy individuals who cannot or do not provide documentation of their income, have a higher percentage of debt compared to their income (debt-to-income ratio), or pay less as a down payment than do prime borrowers. These loans are generally considered riskier than prime loans, but not as risky as subprime loans. Subprime loans are loans to individuals with poor credit histories and often require even less as a down payment than do Alt–A loans.
In 2006 and 2007, the market for subprime and Alt–A mortgages declined as borrowers began to default on their loans. Rating agencies downgraded many mortgage-backed securities and collateralized debt obligations. The declining housing market also hurt the commercial paper market, and Thornburg was not able to raise the money it needed to extend new loans. As the commercial paper market faltered, Thornburg increasingly relied on repurchase agreements, using its mortgage-backed securities as collateral. The repurchase agreements required Thornburg to meet margin calls ( i.e., post additional collateral, usually cash) if the value of the original collateral declined. And, importantly, the repurchase agreements contained cross-default provisions, whereby a default on any one agreement (by failing to meet a margin call) triggered default on Thornburg's other agreements.
Unable to rely solely on these forms of financing, Thornburg sought to raise more cash by conducting public stock offerings. The offerings were made according to a shelf registration statement, filed with the SEC on May 20, 2005. The registration statement prospectively incorporated by reference Thornburg's quarterly, annual, and current reports. Each offering was also accompanied by separate prospectuses.
The first offering was on May 4, 2007, where Thornburg issued 4.5 million shares for $121.7 million. It conducted another offering on June 19, 2007, issuing another 2.75 million shares for $68.75 million. The offering documents for these sales incorporated Thornburg's 2006 10–K Annual Statement, which detailed the basis of Thornburg's business and financing: acquiring and originating loans, packaging them into securities, using the securities as collateral for its repurchase agreements, and repeating the process. Despite disclosing that it possessed a significant chunk of “stated income” (or Alt–A) loans, Thornburg did not specifically disclose that it possessed $2.9 billion of purchased MBSs backed by Alt–A loans.4
On August 14 and 20, 2007, Thornburg disclosed that the value of its AAA-rated mortgage securities—the bulk of its portfolio—was declining and, as a result, the company was experiencing margin calls. In the August 20 statement, Thornburg announced that it had sold over $20 billion of its MBSs to meet the margin calls. Analysts warned that Thornburg was “within days of failing.” App. 141 ().
Thornburg nonetheless conducted another public stock offering on September 7, 2007, in an attempt to recapitalize the company. In the September prospectus preceding the Offering, Thornburg disclosed that it had been experiencing sizable margin calls, that the value of its loan portfolio had been declining, and that its traditional sources of funding—securitization of loans and the asset-backed commercial paper market—were “not functioning.” Supp.App. 1244. Thornburg warned that the mortgage market may not improve and that the company may experience further margin calls. Thornburg conducted a final stock offering in January 2008.
The mortgage market continued to decline, and on February 28, 2008, Thornburg disclosed that it had been subject to an additional $300 million in margin calls. Thornburg also disclosed that $2.9 billion in purchased MBSs backed by Alt–A loans had collateralized its repurchase agreements. A decline in the value of the Alt–A MBSs had triggered the margin call. On the day of Thornburg's announcement, Thornburg's stock price declined 15 percent, from $11.54 per share to $9.86 per share. On March 3, 2008, Thornburg disclosed that it had been subject to an additional $270 million in margin calls as of February 29, 2008, and that it was in default with one of its repurchase agreement counterparties. Finally, on March 5, 2008, Thornburg revealed that J.P. Morgan was the counterparty with which it was in default, and that this event had triggered the cross-default provisions in the rest of Thornburg's agreements. Overall, from February 27 to March 6, the value of Thornburg's stock declined by more than 90 percent.
The Plaintiffs, investors in the stock offerings, had filed a lawsuit on August 21, 2007, just one day after Thornburg announced it had sold $20.5 billion of its MBSs to meet margin calls. On May 27, 2008, after the January offering and over two months after the precipitous drop in Thornburg's stock price, the Plaintiffs filed a consolidated complaint. The consolidated complaint targeted—in addition to Thornburg and Thornburg's officers (who are not parties to this appeal)—the banks that underwrote the stock offerings (“Underwriters”).5 The complaint alleged that the offering documents for the four public offerings contained material misstatements and omissions, actionable under § 11 of the Securities Act.
The Underwriters moved to dismiss the complaint as failing to state a claim against them. In opposing the motion to dismiss, the Plaintiffs pointed...
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...Cf. In re Thornburg Mortgage, Inc. Sec. Litig., 824 F.Supp.2d 1214, 1262 (D.N.M.2011), aff'd, Slater v. A.G. Edwards & Sons, Inc., 719 F.3d 1190 (10th Cir.2013) (observing that plaintiffs' allegations that the defendants failed to disclose known trends as required by Item 303 “fail to diffe......
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