Yates v. Mun. Mortg. & Equity, LLC

• Decision Date: 07 March 2014
• Docket Number: No. 12–2496.,12–2496.
• Citation: 744 F.3d 874
• Court: U.S. Court of Appeals — Fourth Circuit
• Parties: Robert YATES, MJG–08–269; Alan S. Barry, MJG–08–269; David Young, MJG–08–269; Carlo Hornsby; Ed Friedlander, MJG–08–269; Paul Engel, individually and on behalf of all others similarly situated MJG–08–292; William D. Felix; David Kremser, on behalf of himself and on behalf of Elk Meadow Investments, LLC; Charles W. Dammeyer, on behalf of himself and others similarly situated, Plaintiffs–Appellants, and F. Richard Manson, individually and on behalf of, all others similarly situated MJG–08–269; Geeta Shailam, individually and on behalf of all others similarly situated MJG–08–386; Michael J. Cirrito, individually and on behalf of all others similarly situated MJG–08–476; John J. Hufnagle, individually and on behalf of all others similarly situated MJG–08–579; William Johnston, derivatively on behalf of Municipal Mortgage & Equity, LLC MJG–08–670; Robert Staub, derivatively on behalf of Municipal Mortgage & Equity, LLC MJG–08–802; The Mary L. Kieser Trust, by Mary L. Kieser and Ralph F. Kieser, Trustees, derivatively and on behalf of Nominal Defendant, Municipal Mortgage & Equity LLC MJG–08–805; Judith Greenberg; Joseph S. Gelmis, individually and on behalf of all others similarly situated MJG–08–2133; Arnold J. Ross, MJG–08–2133; Troy Broy; Jules Rothas, individually and on behalf of all others similarly situated MJG–08–2134; Naomi Raphael; Fafn/Slater Group; Kremser Group, MJG–08–269, Plaintiffs, v. MUNICIPAL MORTGAGE & EQUITY, LLC; Melanie M. Lundquist; Michael L. Falcone; Merrill Lynch Pierce Fenner and Smith Incorporated; RBC Capital Markets, LLC.; Mark K. Joseph; Charles C. Baum; Eddie C. Brown; Robert S. Hillman; Douglas A. Mcgregor; Arthur S. Mehlman; Fred N. Pratt, Jr.; Richard O. Berndt; William S. Harrison; David Kay; Charles M. Pinckney, Defendants–Appellees, and Gary A. Mentesana; Barbara B. Lucas; Earl W. Cole, III; Angela B. Barone, Defendants.

744 F.3d 874

Robert YATES, MJG–08–269; Alan S. Barry, MJG–08–269; David Young, MJG–08–269; Carlo Hornsby; Ed Friedlander, MJG–08–269; Paul Engel, individually and on behalf of all others similarly situated MJG–08–292; William D. Felix; David Kremser, on behalf of himself and on behalf of Elk Meadow Investments, LLC; Charles W. Dammeyer, on behalf of himself and others similarly situated, Plaintiffs–Appellants,andF. Richard Manson, individually and on behalf of, all others similarly situated MJG–08–269; Geeta Shailam, individually and on behalf of all others similarly situated MJG–08–386; Michael J. Cirrito, individually and on behalf of all others similarly situated MJG–08–476; John J. Hufnagle, individually and on behalf of all others similarly situated MJG–08–579; William Johnston, derivatively on behalf of Municipal Mortgage & Equity, LLC MJG–08–670; Robert Staub, derivatively on behalf of Municipal Mortgage & Equity, LLC MJG–08–802; The Mary L. Kieser Trust, by Mary L. Kieser and Ralph F. Kieser, Trustees, derivatively and on behalf of Nominal Defendant, Municipal Mortgage & Equity LLC MJG–08–805; Judith Greenberg; Joseph S. Gelmis, individually and on behalf of all others similarly situated MJG–08–2133; Arnold J. Ross, MJG–08–2133; Troy Broy; Jules Rothas, individually and on behalf of all others similarly situated MJG–08–2134; Naomi Raphael; Fafn/Slater Group; Kremser Group, MJG–08–269, Plaintiffs,

v. MUNICIPAL MORTGAGE & EQUITY, LLC; Melanie M. Lundquist; Michael L. Falcone; Merrill Lynch Pierce Fenner and Smith Incorporated; RBC Capital Markets, LLC.; Mark K. Joseph; Charles C. Baum; Eddie C. Brown; Robert S. Hillman; Douglas A. Mcgregor; Arthur S. Mehlman; Fred N. Pratt, Jr.; Richard O. Berndt; William S. Harrison; David Kay; Charles M. Pinckney, Defendants–Appellees,andGary A. Mentesana; Barbara B. Lucas; Earl W. Cole, III; Angela B. Barone, Defendants.

No. 12–2496.

United States Court of Appeals, Fourth Circuit.

Argued: Oct. 30, 2013.

Decided: March 7, 2014.

ARGUED:David A.P. Brower, Brower Piven, New York, New York, for Appellants. Mark Holland, New York, New York, William M. Jay, Goodwin Procter LLP, Washington, D.C.; Jason J. Mendro, Gibson, Dunn & Crutcher LLP, Washington, D.C., for Appellees. ON BRIEF:Charles J. Piven, Yelena Trepetin, Brower Priven, Stevenson, Maryland; Sherrie R. Savett, Barbara A. Podell, Eric Lechtzin, Berger & Montague, P.C., Philadelphia, Pennsylvania; Kim E. Miller, Kahn Swick & Foti, LLC, New York, New York; Susan K. Alexander, Andrew S. Love, Robbins Geller Rudman & Dowd LLP, San Francisco, California, for Appellants. Jonathan C. Dickey, Gibson, Dunn & Crutcher LLP, New York, New York, for Appellees Merrill Lynch Pierce Fenner and Smith Incorporated, and RBC Capital Markets, LLC. Mary K. Dulka, Goodwin Procter LLP, New York, New York; Anthony Candido, Clifford Chance LLP, New York, New York; Stephen A. Goldberg, Ward B. Coe III, Gallagher Evelius & Jones LLP, Baltimore, Maryland, for Appellees Municipal Mortgage & Equity, LLC, Mark K. Joseph, William S. Harrison, Charles M. Pinckney, and David Kay. William M. Krulak, Jr., Miles & Stockbridge P.C., Baltimore, Maryland, for Appellees Charles C. Baum, Richard O. Berndt, Eddie C. Brown, Robert S. Hillman, Douglas A. McGregor, Arthur S. Mehlman, and Fred N. Pratt, Jr. Charles O. Monk, II, Geoffrey M. Gamble, Saul Ewing LLP, Baltimore, Maryland, for Appellee Michael L. Falcone. David W.T. Daniels, Richards Kibbe & Orbe LLP, Washington, D.C., for Appellee Melanie Lundquist.

Before DIAZ and FLOYD, Circuit Judges, and JOSEPH F. ANDERSON, Jr., United States District Judge for the District of South Carolina, sitting by designation.

Affirmed by published opinion.

Judge DIAZ wrote the opinion, in which Judge FLOYD and Judge ANDERSON joined.

DIAZ, Circuit Judge:

This case involves claims that Municipal Mortgage & Equity (“MuniMae” or the “Company”), and certain of its officers and directors (collectively, the “MuniMae defendants”), violated federal securities laws.¹ Plaintiffs, both individually and as class representatives, contend that the MuniMae defendants committed securities fraud by (1) falsely representing that the Company was in full compliance with a new accounting standard enacted in 2003; and (2) concealing the substantial cost of correcting the accounting error. Plaintiffs allege that they relied on the integrity of the market price of the Company's stock, and that, as a result of the MuniMae defendants' fraudulent conduct, investors paid an artificially inflated price for MuniMae shares during the class period.

The district court dismissed plaintiffs' claims under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, finding that the amended complaint failed to adequatelyplead scienter, or wrongful intent. The court also dismissed claims under §§ 11, 12(a)(2), and 15 of the Securities Act of 1933 relating to a secondary public offering (“SPO”). The court found the § 11 claim time-barred by the applicable statute of repose, and that plaintiffs lacked standing to bring the § 12(a)(2) claim. It dismissed the § 15 claim because plaintiffs failed to adequately plead a primary violation of the Securities Act.²

For the reasons that follow, we affirm.

I.

In reviewing the district court's dismissal under Federal Rule of Civil Procedure 12(b)(6), “we ‘accept all factual allegations in the complaint as true.’ ” Matrix Capital Mgmt. Fund, LP v. BearingPoint, Inc., 576 F.3d 172, 176 (4th Cir.2009) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179, (2007)). And as did the district court, we take judicial notice of the content of relevant SEC filings and other publicly available documents included in the record. See In re PEC Solutions, Inc. Sec. Litig., 418 F.3d 379, 390 & n. 10 (4th Cir.2005).

A.

The putative class period for this case spans from May 3, 2004, to January 29, 2008. During that period, MuniMae was one of the nation's largest syndicators of low-income housing tax credits (“LIHTCs”). Federal tax law provides LIHTCs to developers of low-income rental housing. Because most developers cannot take advantage of these credits, financial services companies, like MuniMae, organize LIHTC investment partnerships (“LIHTC Funds”) to pool and sell the credits to investors.

MuniMae usually acted as the general partner of its LIHTC Funds during the class period, and it received syndication and asset management fees for organizing and maintaining them. Although its ownership share was generally low, ranging from 0.1% to 1.0%, it was typically larger than that of any single investor. Prior to 2003, MuniMae primarily treated these LIHTC Funds as off balance sheet entities.

In 2003, the Financial Accounting Standards Board adopted Financial Accounting Standards Board Interpretation No. 46R (“FIN 46R”), which addressed the financial reporting requirements of businesses with respect to off balance sheet activity.³ FIN 46R defined a new category of entities called Variable Interest Entities (“VIEs”). Under FIN 46R, a company must consolidate onto its financial statements the assets and liabilities of a VIE if the company is its “primary beneficiary,” that is, if the company absorbs the majority of the risks and rewards associated with the VIE. Before the adoption of this revised standard, a company was generally only required to consolidate financial statements if it had a majority voting interest in the entity.

The first quarter of 2004 was the first period for which MuniMae reported compliance with FIN 46R. The Company then concluded that FIN 46R required it to consolidate some but not all of its LIHTC Funds, which added a net $1.3 billion in assets and liabilities to the Company's financial statements. The remaining unconsolidated LIHTC Funds had net assets of approximately $970.3 million and liabilities of approximately $90.8 million.

Through mid–2006, MuniMae continued to represent its compliance with FIN 46R in financial reports filed with the SEC. PricewaterhouseCoopers LLP (“PwC”), MuniMae's independent public accountant, certified that those reports had been prepared in accordance with generally accepted accounting principles (“GAAP”) for fiscal years 2004 and 2005. Between 2004 and 2006, the Company also made a number of acquisitions and conducted several offerings, including an SPO in February 2005. At the end of 2005, Melanie Lundquist replaced William Harrison as the Company's CFO.

On March 10, 2006, MuniMae announced that it was restating its financial statements for the nine-month period ending on September 30, 2005, as well as fiscal years 2002 through 2004. The restatement corrected certain financial reporting errors that were unrelated to FIN 46R. MuniMae issued the restated financial statements in June 2006.

In August, the Company disclosed that it had identified “material weaknesses in internal controls over financial reporting,” and that, as a result, it would be unable to “file timely its second quarter 2006 Form 10–Q.” J.A. 65. A few months later, on September 13, 2006, MuniMae announced that it was again restating its financial statements for fiscal years 2003 through 2005, and for the first quarter of 2006. The Company initially informed investors that the second restatement would address three areas: (1) accounting for equity commitments related to affordable housing projects; (2) the classification of cash flow from tax credit equity funds; and (3) accounting for syndication fees. About a month later, however, MuniMae disclosed that it had “not yet reached a conclusion regarding the extent of the [second] restatement.” J.A. 1120.

On October 26, 2006, MuniMae announced that it was replacing PwC as the Company's independent public accountant. The Company stated—and PwC agreed—that for fiscal years 2004 and 2005, and through October 2006, “there were no disagreements with PwC on any matter of accounting principles or practices, financial...