In re OSG Securities Litigation
In re OSG Securities Litigation
Opinion of the Court
OPINION AND ORDER
I. INTRODUCTION
Lead Plaintiffs Stichting Pensioenfonds DSM Nederland (“DSM”), Indiana Treasurer of State, and Lloyd Crawford (together, “Plaintiffs”), bring this action on behalf of themselves and others similarly situated on the basis of a March 2010 Senior Notes Offering (“the Offering”) by Overseas Shipholding Group, Inc. (“OSG” or “the Company”). OSG filed for bankruptcy on November 14, 2012, and is not a party to this action.
Plaintiffs name the following parties as defendants: Morten Arntzen
The Class consists of all persons and entities who purchased OSG Senior Notes pursuant to and/or traceable to the Offering, as well as purchasers of OSG securities between March 1, 2010 and October 19, 2012, inclusive (the “Class Period”).
Plaintiffs assert claims under the following statutes: 1) Section 11 of the Securities Act of 1933 (“Securities Act”) against all Defendants,
In April and May of 2013, four different motions to dismiss were filed pursuant to Federal Rule of Civil Procedure 12(b)(6). Ernst & Young (“E & Y”) and Pricewater-houseCoopers LLP (“PwC”), the two Auditor Defendants, each filed a motion to dismiss, as did the Underwriter Defendants and the Individual Defendants. For the reasons that follow, the motions by E & Y, PwC, and the Underwriter Defendants are denied in full, while the motion by the Individual Defendants is granted in part and denied in part.
II. BACKGROUND
A. OSG’s Business Operations and Tax Liability
OSG is a tanker company with a fleet of over one hundred vessels operating both domestically and internationally.
Another tax provision relevant to OSG is Section 956 of Section F of the Internal Revenue Code. Section 956 provides that, when a foreign subsidiary guarantees the loans of a United States parent company, the “accumulated ‘earnings and profits’ of that subsidiary are deemed to have been distributed to the U.S. parent company” and are thereby subject to United States
B. The Offering
On March 24, 2010, OSG conducted a public offering of three hundred million dollars of unsecured notes.
C. The Role of the Auditors
The Registration Statement and Prospectus incorporated the Company’s 2009 Form 10-K by reference, and thereby the Company’s financial statements from 2007, 2008, and 2009.
PwC served as OSG’s independent registered public accounting firm from June 17, 2009 to the present, and audited OSG’s financial statements for 2009.
D.The Road to Bankruptcy
On October 3, 2012, Defendant Andreas resigned from his position on OSG’s Board of Directors and Audit Committee.
On October 22, 2012, OSG filed a Form 8-K with the SEC indicating that its previously issued financial statements for “at least three years ended December 31, 2011 ... should no longer be relied upon.”
III. STANDARD OF REVIEW AND PLEADING STANDARD
A. Rule 12(b)(6) Motion to Dismiss
In deciding a motion to dismiss pursuant to Rule 12(b)(6), the court must “accept[ ] all factual allegations in the complaint as true, and draw[ ] all reasonable inferences in the plaintiffs favor.”
The court evaluates the sufficiency of the complaint under the “two-pronged approach” suggested by the Supreme Court in Ashcroft v. Iqbal.
B. Heightened Pleading Standard under Rule 9(b) and the PSLRA
Private securities fraud claims are subject to a heightened pleading standard. First, Federal Rule of Civil Procedure 9(b), which applies to allegations of fraud or mistake, requires plaintiffs to allege the circumstances constituting fraud with par
Second, the Private Securities Litigation Reform Act (“PSLRA”) provides that, in actions alleging securities fraud, “the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.”
C. Leave to Amend
Whether to permit a plaintiff to amend its complaint is a matter committed to a court’s “sound discretion.”
IV. APPLICABLE LAW
A. The Securities Act Claims 1. Section 11 Standard
Section 11 provides purchasers of registered securities with strict liability protection where “any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.”
(1) signatories of the registration statement; (2) directors or partners of the issuer at the time of filing; (3) persons consenting to be named as about to become a director or partner; (4) accountants or other experts consenting to be named as preparing or certifying part of the registration statement; and (5) underwriters of the security at issue.53
2.Section 12(a)(2) Standard
Section 12(a)(2) holds any person liable who “offers or sells a security” by means of a materially false or misleading “prospectus or oral communication.”
A “statutory seller” is defined as a person who either passes title to the plaintiff for value or successfully solicits the purchase, “motivated at least in part by a desire to serve his own financial interests or those of the securities!’] owner.”
(1) the defendant is a ‘statutory seller’;
(2) the sale was effectuated ‘by means of a prospectus or oral communication’; and (3) the prospectus or oral communication ‘include[d] an untrue statement of a material fact or omit[ted] to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading.’57
3.Loss Causation
Sections 11 and 12 shield Defendants from liability for any portion of the Plaintiffs’ damages not caused by the Defendants’ misrepresentations or omissions.
4.When Rule 9(b) Applies to Section 11 and 12 Claims
While fraud is not an element of a claim under Section 11 or 12, the Second Circuit has held that “the heightened pleading standard of Rule 9(b) applies to Section 11 and Section 12(a)(2) claims “insofar as the claims are premised on allegations of fraud,” especially where “the wording and imputations of the complaint are classically associated with fraud.”
B. Section 10(b) and Rule 10b-5 of the Exchange Act
Section 10(b) of the Securities Exchange Act of 1934 prohibits using or employing, “in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance ....”
C. Section 20(a) of the Exchange Act
Section 20(a) of the Exchange Act creates a cause of action against “control persons” of the primary violator.
V. DISCUSSION
A. Sections 11 and 12 of the Securities Act
1. Auditor Defendants
a. Liability Based on the Audit Opinions
Section 11 creates liability for experts such as accountants who certified any part of the Registration Statement containing actionably false information, or who “prepared any report or valuation used in connection with the registration statement.”
The Auditor Defendants contend that their Audit Opinions are statements of opinion subject to Fait’s subjective disbelief standard.
In this case, the alleged misstatements and omissions contained in the Registration Statement center upon the failure to disclose OSG’s significant tax liabilities under Section 956. Although the Internal Revenue Code is complex and often gives rise to debate, it cannot be said that statements of income tax liability are “subjective valuations.”
Defendants argue that the entire Audit Opinion is a statement of belief or opinion under Fait because it contains the word “opinion” in its title, and prefaces its conclusions with the phrase “in our opinion.”
The Auditor Defendants’ broad reading of Fait would undercut the statutory lan
The Auditor Defendants will have the opportunity to establish a “due diligence” defense by showing that their interpretation of Section 956 was reasonable and that they conducted a reasonably diligent audit.
b. Lack of Material Misstatement Against E & Y
Defendant E & Y separately moves to dismiss the Section 11 claims because Plaintiffs do not allege any misstatement in OSG’s tax liability from 2007 or 2008, the only two years during the Class Period for which E & Y performed an audit.
Plaintiffs respond that OSG’s financial statements from 2007 and 2008 “were required to include all liabilities as of those dates,” including the significant tax liabilities that had accrued in 2004 and 2005.
a. Reliance Defense
Section 11 provides an affirmative defense for underwriters who “shall sustain the burden of proof’
The Underwriter Defendants assert that their reliance on the audited financial statements was per se reasonable, given that Plaintiffs have not alleged any “red flags” that might have put the Underwriter Defendants on notice.
Despite the Underwriter Defendants’ contention that reliance is per se reasonable in the absence of red flags, no such rule of law exists. Most of the Underwriter Defendants’ cases address the reliance defense in the context of a motion for summary judgment, not a motion to dismiss.
b. Loss Causation
The Underwriter Defendants further allege that they are entitled to dismissal because they cannot have caused the Plaintiffs’ losses. The Underwriter Defendants assert that their loss causation defense is “apparent on the face of the complaint” because the magnitude of tax liability asserted to have arisen during the Offering Period is “de minimis” in relation to OSG’s overall liability prior to filing for bankruptcy.
The Underwriter Defendants misconstrue the loss causation defense in several ways. First, the defense is proportional, and only applies to that portion of the damages for which the defendant establishes negative causation.
Second, “it is the defendant who bears the burden of demonstrating that something other than the misstatement at issue caused plaintiffs loss.”
3. Individual Defendants
The Individual Defendants argue that the Section 12 claims against them must be dismissed because Plaintiffs have not established that the Individual Defendants are “statutory sellers.”
Plaintiffs cite various cases for the proposition that signing a registration statement or prospectus constitutes solicitation.
In this case, however, Plaintiffs allege that the Individual Defendants did more than sign the Registration Statement. The Complaint states that the Individual Defendants “prepar[ed] the defective and inaccurate Prospectus and participated] in efforts to market the Offering to investors.”
In addition to pleading active solicitation, Plaintiffs must further plead that the Individual Defendants were motivated “at least in part by a desire to serve [their] own financial interests or those of the securities owner.”
Moreover, a defendant need not act out of personal financial motivation if he acts to serve the interests of the securities owner.
4. Arntzen and Itkin
Defendants Arntzen and Itkin claim that Plaintiffs’ Section 11 and 12 claims against them are subject to the heightened pleading standard of Rule 9(b) because the claims “sound in fraud.”
Defendants point to Rombach v. Chang, in which the Second Circuit held that phrases like “inaccurate and misleading,” “untrue statements of material facts” and “materially false and misleading written statements” were allegations of fraud subject to Rule 9(b).
In this case, the Section 11 claims are not in fact “premised on allegations of fraud.”
Defendants further argue that Plaintiffs’ Securities Act claims are subject to Rule 9(b) because they are based on the same facts as the Section 10(b) claims.
Ultimately, “unless a plaintiff specifically pleads a claim of fraud,”
B. Section 10(b) and Rule 10b-5 of the Exchange Act
1. Motive and Opportunity
To demonstrate motive under the first prong, Plaintiffs must show that defendants “benefitted in some concrete and personal way from the purported
The Complaint alleges that Arntzen and Itkin perpetrated the fraud in order to “allow certain Company insiders to collectively sell shares of their personally-held OSG common stock for gross proceeds of approximately $2.7 million during the Class Period.”
Plaintiffs also allege that Arntzen and Itkin were motivated by a desire to “facilitate OSG’s access to much needed capital at a time when the Company was recording hundreds of millions of dollars in annual losses.”
Plaintiffs concede that “the need to raise capital does not ordinarily constitute an adequate motive under the motive and opportunity prong of the scienter test,” but argue that in this case the Offering was “critical to OSG’s very sur
2. Strong Circumstantial Evidence
Plaintiffs point to various facts supporting the theory that Amtzen and Itkin might have known or recklessly disregarded the Company’s tax liabilities under Section 956. Specifically, they contend that Arntzen and Itkin understood other related tax provisions applicable to the Company
The allegations that Arntzen and Itkin must have known about OSG’s Section 956 liability because they were well-informed about other tax provisions affecting the Company is unpersuasive. The tax provisions that Arntzen and Itkin allegedly discussed in detail at various meetings and conference calls are largely unrelated to Section 956.
Plaintiffs also attempt to impute knowledge of Section 956 to Arntzen and Itkin under the “core operations doctrine.”
Plaintiffs further argue that Defendant Andreas’s resignation from the Board of Directors provides evidence of Arntzen and Itkin’s scienter. However, Andreas resigned from the Board on October 3, 2012, only a month before the Company filed for bankruptcy.
Finally, Plaintiffs contend that the sheer size of the tax liability, and the
Plaintiffs also argue that the existence of GAAP violations is indicative of scien-ter.
Overall, Plaintiffs cannot demonstrate that the inference of scienter in this case is “at least as compelling as any opposing inference of nonfraudulent intent.”
C. Section 20(a) of the SEA
“Any claim for ‘control person’ liability under § 20(a) of the Exchange Act must be predicated on a primary violation of securities law.”
D. Leave to Amend
For the foregoing reasons, Plaintiffs’ Exchange Act claims against Arntzen and Itkin are dismissed for failing to adequately allege scienter under the PSLRA. Because leave to amend should be freely given “when justice so requires,”
VI. CONCLUSION
For the foregoing reasons, the motions to dismiss by E & Y, PwC, and the Underwriter Defendants are denied in full. The Individual Defendants’ motion to dismiss is granted with respect to the Exchange Act claims and denied with respect to the Securities Act Claims. It is further Ordered that Plaintiffs are granted leave to replead within thirty days of the date of this Order. The Clerk of Court is directed to close these motions (Docket Nos. 85, 86, 95,102).
SO ORDERED.
. See Consolidated Amended Complaint for Violations of the Federal Securities Laws ("CAC”) ¶ 9.
. Arntzen served as OSG’s President, Chief Executive Officer, and a member of the Board of Directors. See id. ¶ 10(a).
. Itkin served as OSG’s Vice President, Chief Financial Officer, and Treasurer. See id. ¶ 10(b). Plaintiffs also allege that Itkin served on the Board of Directors, although that fact is contested. See id.; Reply Memorandum of Law in Support of the Individual Defendants’ Motion to Dismiss the Consolidated Amended Complaint (“Indiv. Reply Mem.”) at 5 n. 1.
.The other individual defendants served as OSG Board members during all or part of the Class Period. See CAC ¶ 3.
. See id. ¶¶ 10-13.
. See id. ¶ 14.
. See id. ¶¶ 91-103.
. See id. ¶¶ 104-111.
. See id. ¶ 112-115.
. See id. ¶¶ 203-209.
. See id. ¶¶ 210-212.
. See id. ¶¶ 21-22.
. See id. ¶¶ 22, 25.
. See id. ¶¶ 29, 31.
. See id.
. See id. ¶ 34.
. See id. ¶ 37.
. See id. ¶ 49.
. See id. ¶ 48.
. See id. ¶ 10(e).
. See id. ¶¶ 60, 62, 67.
. See id. ¶ 52.
. See id. ¶ 12.
. Id. ¶ 75.
. See id. ¶ 12.
. Id. ¶ 75.
. Id.
. Id. ¶97.
. See id. ¶ 40.
. Id.
. Id. ¶ 41.
. Id. ¶ 42.
. See id. ¶ 44.
. See id. ¶ 46.
. Wilson v. Merrill Lynch & Co., 671 F.3d 120, 128 (2d Cir. 2011) (quoting Holmes v. Grubman, 568 F.3d 329, 335 (2d Cir. 2009)).
. DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010).
. See 556 U.S. 662, 678-79, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).
. Id. at 679, 129 S.Ct. 1937.
. Id. at 678, 129 S.Ct. 1937.
. Id. at 679, 129 S.Ct. 1937.
. Id. at 678, 129 S.Ct. 1937.
. Id. (quotation marks omitted).
. Fed.R.Civ.P. 9(b).
. 15 U.S.C. § 78u-4(b)(2).
. ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007) (citing Ganino v. Citizens Utilities Co., 228 F.3d 154, 168-69 (2d Cir. 2000)).
. McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 200 (2d Cir. 2007).
. Fed.R.Civ.P. 15(a).
. Hayden v. Cnty. of Nassau, 180 F.3d 42, 53 (2d Cir. 1999).
. See ATSI, 493 F.3d at 108.
. See Dougherty v. Town of N. Hempstead Bd. of Zoning Appeals, 282 F.3d 83, 87-88 (2d Cir. 2002).
. 15 U.S.C. § 77k(a) (1998).
. City of Roseville Emps. Ret. Sys. v. Energy-Solutions, Inc., 814 F.Supp.2d 395, 424 (S.D.N.Y. 2011) (quoting In re Flag Telecom Holdings, Ltd. Secs. Litig., 411 F.Supp.2d 377, 382 (S.D.N.Y. 2006), abrogated on other grounds, 574 F.3d 29 (2d Cir. 2009)).
. In re Lehman Bros. Mortg.-Backed Secs. Litig., 650 F.3d 167, 175 (2d Cir. 2011) (citing 15 U.S.C. § 77k(a)).
. See 15 U.S.C. § 77k(b)(3)(B).
. See id. § 77k(b)(3)(C).
. See id. § 77Z(a)(2).
. In re Morgan Stanley Info. Fund Secs. Litig., 592 F.3d 347, 359 (2d Cir. 2010) (quoting 15 U.S.C. § 77Z(a)(2)).
. Capri v. Murphy, 856 F.2d 473, 478 (2d Cir. 1988) (citing Pinter v. Dahl, 486 U.S. 622, 647, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988)) (applying Pinter standard to 12(a)(2) claims).
. See 15 U.S.C. § 77k(e) (providing that, "[I]f the defendant proves that any portion or all of such damages represents other than the depreciation in value of such security resulting from such part of the registration statement] with respect to which his liability is asserted ... such portion of or all such damages shall not be recoverable”); Id § 771(b) ("[I]f the person who offered or sold such security proves that any portion or all of the amount recoverable under subsection (a)(2) of this section represents other than the depreciation in value of the subject security resulting from such part of the prospectus or oral communication! ] with respect to which the liability of that person is asserted ... then such portion or amount, as the case may be, shall not be recoverable.”).
. See id. §§ 77k(e), 77l(b).
. Rombach v. Chang, 355 F.3d 164, 171-72 (2d Cir. 2004).
. See In re Refco, Inc. Secs. Litig., 503 F.Supp.2d 611, 633 (S.D.N.Y. 2007); In re Axis Capital Holdings Ltd. Secs. Litig., 456
. Wallace v. IntraLinks, No. 11 Civ. 8861, 2013 WL 1907685, at *11 (S.D.N.Y. May 8, 2013) (citing Refco, 503 F.Supp.2d at 632). Accord In re NovaGold Res. Inc. Secs. Litig., 629 F.Supp.2d 272, 290 (S.D.N.Y. 2009) ("Defendants identify no controlling authority finding that Securities Act allegations, when plead entirely separately from Exchange Act allegations, and accompanied by a disclaimer explaining that they sound in negligence, in fact sound in fraud.”).
. Employees' Ret. Sys. of the Virgin Islands v. JP Morgan Chase & Co., 804 F.Supp.2d 141, 151 (S.D.N.Y. 2011) (quotations and citations omitted). Accord Panther Partners Inc. v. Ikanos Commc'ns, Inc., 681 F.3d 114, 120 (2d Cir. 2012) (quoting Litwin v. Blackstone Grp. LP, 634 F.3d 706, 716 (2d Cir. 2011)).
. 15 U.S.C. § 78j(b) (1934).
. 17 C.F.R. § 240.10b-5 (1951).
. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008).
. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976).
. South Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98, 109 (2d Cir. 2009) ("By reckless disregard for the truth, we mean ‘conscious recklessness — i.e., a state of mind approximating actual intent, and not merely a heightened form of negligence.’ " (quoting Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir. 2000))).
. See supra, Part III.B.
. See 15 U.S.C. § 78t(a).
. ATSI, 493 F.3d at 108.
. See id.; see also In re eSpeed, Inc. Secs. Litig., 457 F.Supp.2d 266, 297-98 (S.D.N.Y. 2006).
. 15 U.S.C. 77k(a)(4) (holding liable "every accountant ... who has with his consent been named as having prepared or certified any part of the registration statement, or as having prepared or certified any report or valuation which is used in connection with the registration statement”).
. Fait v. Regions Financial Coip., 655 F.3d 105, 110 (2d Cir. 2011) (requiring subjective disbelief to find Section 11 and 12 liability for valuations of goodwill and the adequacy of loan loss reserves). Accord Freidus v. Barclays Bank PLC, 734 F.3d 132, 140-41 (2d Cir. 2013) (applying Fait's subjective disbelief requirement to subjective financial valuations).
. Fait, 655 F.3d at 110 ("[Pjlaintiff's allegations regarding goodwill do not involve misstatements or omissions of material fact, but rather a misstatement regarding Regions’ opinion. Estimates of goodwill depend on management’s determination of the 'fair value’ of the assets acquired and liabilities assumed, which are not matters of objective fact.... In other words, the statements regarding goodwill at issue here are subjective ones rather than ‘objective factual matters.' ”); Id. at 113 (applying subjective disbelief standard to statements concerning the adequacy of loan loss reserves, since "Plaintiff does not point to an objective standard for setting loan loss reserves” and "[sjuch a determination is inherently subjective, and like goodwill, estimates will vary depending on a variety of predictable and unpredictable circumstances”).
. See Memorandum of Ernst & Young LLP in Support of Its Motion to Dismiss ("E & Y Mem.”) at 6; Memorandum of Law in Support of Motion to Dismiss by Defendant Price-waterhouseCoopers LLP ("PwC Mem.”) at 7.
. See Reply Memorandum of Law of Ernst & Young LLP in Support of its Motion to Dismiss ("E & Y Reply Mem.”) at 7; Reply Memorandum of Law in Support of Motion to Dismiss by Defendant PricewaterhouseCoop-ers ("PwC Reply Mem.”) at 2.
. See, e.g., CAC ¶ 92 (plaintiffs "affirmatively state that they do not claim that Defendants committed intentional or reckless misconduct or that Defendants acted with scienter or fraudulent intent”).
. See PL Opp. at 30-32.
. See id. at 31 n. 14. Plaintiffs also argue that they need not show subjective disbelief if the Auditor Defendants lacked a reasonable belief in the truth of their statements. See Lead Plaintiff’s Omnibus Memorandum of Law in Opposition to Defendants’ Motions to Dismiss the Amended Complaint ("PL Opp.”) at 32 ("Plaintiffs do not need to plead that [defendants] acted with the scienter of intent or recklessness. Rather ... to allege that an auditor opinion is a misrepresentation, a complaint must show that the statement in question is grounded on a specific factual premise that is false, and that the speaker did not ‘genuinely or reasonably believe' it.” (citing In re Longtop Fin. Techs. Ltd. Secs. Litig., 910 F.Supp.2d 561, 580 (S.D.N.Y. 2012))). However, despite any dicta to the contrary, subjective disbelief is required to allege a Section 11 violation based on inherently subjective statements, not "unreasonable belief.” See Fait, 655 F.3datll0.
. Freidus, 734 F.3d at 140 (applying subjective disbelief standard to "financial valuation models which are inherently subjective,” including writedowns of mortgage-related assets). Even prior to Fait, courts in this district have required allegations of disbelief where the statements involved inherently subjective matters — such as real estate appraisals, securities ratings, and valuations of complex securitized holdings. Lighthouse Fin. Grp. v. The Royal Bank of Scotland Grp., PLC, 902 F.Supp.2d 329, 345-46 (S.D.N.Y. 2012) (valuations of complex securitized holdings); Tsereteli v. Residential Asset Securitization, 692 F.Supp.2d 387 (S.D.N.Y. 2010) (securities ratings by rating agencies); In re IndyMac Mortg.-Backed Secs. Litig., 718 F.Supp.2d 495 (S.D.N.Y. 2010) (real estate appraisals); In re Global Crossing, Ltd. Secs. Litig., 313 F.Supp.2d 189 (S.D.N.Y. 2003) (individual's personal opinion that a transaction is "fair”). The applicability of a tax provision, however, does not fall into the same "inherently subjective” category.
. CAC ¶ 41.
. See E & Y Reply Mem. at 7; PwC Reply Mem. at 6.
. PwC argues that when Section 11 was enacted, the common practice of auditors was to "certify” financial statements, whereas the modern practice is to merely issue "opinions” on the accuracy of those financial statements. PwC Reply. Mem. at 7 n. 3.
. Fait, 655 F.3d at 110, 113.
.Courts in this district have consistently found that accountants bear Section 11 liability for the portions of a Registration Statement that they audited. See In re Wachovia Equity Secs. Litig., 753 F.Supp.2d 326, 378-79 (S.D.N.Y. 2011) (finding possible Section 11 liability against auditors based on financial statements they audited as well as statements in their audit reports); Amorosa v. Ernst & Young LLP, 672 F.Supp.2d 493, 513 (S.D.N.Y. 2009), aff'd, 409 Fed.Appx. 412 (2d Cir. 2011) (auditors subject to Section 11 liability for any actionable misstatements in financial statements they audited); In re WorldCom, Inc. Secs. Litig., 352 F.Supp.2d 472, 492 (S.D.N.Y. 2005) (auditor's opinion that company’s “financial statements present fairly, in all material respects, the financial position of the company” constituted certification of “each material statement within the financial statements and to the financial statements taken as a whole,” and thus subjected auditor to strict liability under Section 11); In re Global Crossing, Ltd. Secs. Litig., 322 F.Supp.2d 319, 348-49 (S.D.N.Y. 2004) (upholding Section 11 claims against outside auditor for having audited allegedly false and misleading financial statements); Escott v. BarChris Constr. Corp., 283 F.Supp. 643, 683-84 (S.D.N.Y. 1968) (finding accountants subject to Section 11 liability for balance sheets and earnings statements that they audited and approved in their auditors' report). Although these cases were decided prior to Fait, their interpretation of what constitutes "certification” under Section 11 is instructive.
. Fait, 655 F.3d at 110.
. See 15 U.S.C. 77k(b)(3)(B).
. See E & Y Mem. at 4-6.
. See CAC ¶¶ 46-47.
. PI. Opp. at 34.
. 15 U.S.C. § 77k(b).
. Id. § 77k(b)(3)(C). See also id. § 777(a)(2) (providing affirmative defense where defendant "did not know, and in the exercise of reasonable care could not have known, of such untruth or omission” contained in the prospectus or oral communication).
. McKenna v. Wright, 386 F.3d 432, 436 (2d Cir. 2004) (citing Citibank, N.A. v. K-H Corp., 968 F.2d 1489, 1494 (2d Cir. 1992)).
. Pani v. Empire Blue Cross Blue Shield, 152 F.3d 67, 75 (2d Cir. 1998).
. See The Underwriter Defendants’ Memorandum of Law in Support of Their Motion to Dismiss the Consolidated Amended Complaint (“Underwriter Mem.”) at 8-11.
. See id.
. See In re Software Toolworks, Inc. Secs. Litig., 50 F.3d 615, 623 (9th Cir. 1994); In re Worlds of Wonder Secs. Litig., 35 F.3d 1407, 1421 (9th Cir. 1994); Phillips v. Kidder, 933 F.Supp. 303, 323-24 (S.D.N.Y. 1996).
. In re Countrywide Fin. Corp. Secs. Litig., 588 F.Supp.2d 1132, 1175 (C.D.Cal. 2008).
. The Underwriter Defendants' Reply Memorandum of Law in Support of Their Motion to Dismiss the Consolidated Amended Complaint ("Underwriter Reply Mem.”) at 12-13.
. See id. at 13.
. See 15 U.S.C. § 77k(e) ("[Ilf the defendant proves that any portion or all of such damages represents other than the depreciation in value of such security resulting from such part of the registration statement[ ] with respect to which his liability is asserted ... such portion of or all such damages shall not be recoverable.”) (emphasis added); Id. § 771(b) ("[I]f the person who offered or sold such security proves that any portion or all of the amount recoverable under subsection (a)(2) of this section represents other than the depreciation in value of the subject security resulting from such part of the prospectus or oral communication[ ] with respect to which the liability of that person is asserted ... then such portion or amount, as the case may he, shall not be recoverable.”) (emphasis added).
. Flag Telecom, 574 F.3d at 36. See also 15 U.S.C. § 77k(e) ("if the defendant proves ...”); id. § 771(b) ("if the person who offered or sold such security proves ... ”).
. See PL Opp. at 29.
. See Morgan Stanley, 592 F.3d at 359 (only "statutory sellers” are subject to liability under Section 12).
. Capri, 856 F.2d at 478 (citing Pinter, 486 U.S. at 647, 108 S.Ct. 2063) (applying Pinter standard to Section 12(a)(2) claims).
. See Memorandum of Law in Support of the Individual Defendants' Motion to Dismiss the Consolidated Amended Complaint ("In-div. Mem.”) at 24-25.
. See Briarwood Inv. Inc. v. Care Inv. Trust Inc., No. 07 Civ. 8159, 2009 WL 536517, at *4 (S.D.N.Y. Mar. 4, 2009); In re Flag Telecom,
.See City of Westland Police & Fire Ret. Sys. v. MetLife, Inc., 928 F.Supp.2d 705, 720 (S.D.N.Y. 2013) (dismissing Section 12 claim where plaintiffs claimed "solicitation by the director defendants based on the fact that they signed the registration statements”); McKenna v. Smart Technologies Inc., 2012 WL 1131935, at *18 (S.D.N.Y. April 3, 2012) (same); Citiline Holdings, Inc. v. iStar Fin., Inc., 701 F.Supp.2d 506, 512 (S.D.N.Y. 2010) ("While Section 11 expressly imposes liability upon every signer of the registration statement, Section 12 does not do so. Plaintiffs’ position would render this distinction a nullity and is, in any event, inconsistent with Pinter’s statement that Congress did not intend to impose liability under Section 12 'for mere participation in unlawful sales transactions.’ ” (citing Pinter, 486 U.S. at 650, 108 S.Ct. 2063)). Compare In re Vivendi Universal, S.A. Secs. Litig., 381 F.Supp.2d 158, 187 (S.D.N.Y. 2003) (complaint adequately alleged that corporate CEO was statutory seller where he "actively participated in the preparation of the allegedly misleading or false registration statement” and "regularly appeared before investors and financial news agencies to tout the financial vitality of Vivendi and thereby encourage investors to purchase Vivendi’s securities”).
. See Rosenzweig v. Azurix Corp., 332 F.3d 854, 871 (5th Cir. 2003) (“the seller must, at a minimum, directly communicate with the buyer”); Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1216 (1st Cir. 1996), superceded by statute on other grounds, 15 U.S.C. § 78u-4(b)(l, 2) ("[NJeither involvement in preparation of a registration statement or prospectus nor participation in ‘activities’ relating to the sale of securities, standing alone, demonstrates the kind of relationship between defendant and plaintiff that could establish statutory seller status.”); Craftmatic Secs. Litig. v. Kraftsow, 890 F.2d 628, 636 (3d Cir. 1989) (requiring “direct and active participation in the solicitation of the immediate sale to hold the issuer liable” under 12(a)(2)).
. Pinter, 486 U.S. at 650, 108 S.Ct. 2063.
. CAC ¶ 108.
. See In re IndyMac Mortg.-Backed Secs. Litig., 718 F.Supp.2d 495, 502 (S.D.N.Y. 2010) (pleadings sufficient where plaintiffs alleged that defendants "solicited, sold and distributed” the securities, and also "promoted and sold” the securities for personal gain).
. Pinter, 486 U.S. at 647, 108 S.Ct. 2063.
. Pl. Opp. at 22 (citing CAC ¶¶ 42, 104).
. See In re Scottish Re Grp. Secs. Litig., 524 F.Supp.2d 370, 400 (S.D.N.Y. 2007) (proceeds from sale of securities constituted financial gain to the issuer rendering issuer a statutory seller).
. See, e.g., Independent Energy Holdings PLC Secs. Litig., 154 F.Supp.2d 741, 751, 760-61 (S.D.N.Y. 2001), abrogated on other grounds by In re Initial Pub. Offering Secs. Litig., 544 F.Supp.2d 277 (S.D.N.Y. 2008) ("The allegation of financial gain in the SAC- — that these Individual Defendants stood to gain more than $30 million in capital from the Secondary Offering — is sufficient to meet the second prong.”).
. See Meadows v. SEC, 119 F.3d 1219, 1226 (5th Cir. 1997) (finding financial gain where, although receiving no salary or commission from the sale, defendant was shareholder of issuing companies and "thereby stood to benefit personally from the additional investments he solicited”); Capri, 856 F.2d at 478 (finding defendants to be statutory sellers of the company’s securities based on their stake in the company as general partners); Vivendi, 381 F.Supp.2d at 187 (finding CEO to be statutory seller where salary and bonuses were tied to Company’s revenues); In re Keegan Mgmt. Co. Secs. Litig., No. 91-20084, 1991 WL 253003, at *8 (N.D.Cal. Sept. 10, 1991) (finding that officers benefitted financially from securities sales by protecting their positions and compensation, as well as enhancing the value of their own holdings in company's securities, and noting that plaintiffs need only allege "that the stock sales improved defendants’ financial position,” rather than alleging "that the sale translated into an immediate increase in defendants' wealth”); Flournoy v. Peyson, 701 F.Supp.1370, 1379 n. 12 (N.D.Ill. 1988) (noting that defendant need not receive proceeds from the sales, given that "the sales promoted the viability of [the Company], in which [defendant] had a direct stake”).
. See Pinter, 486 U.S. at 655, 108 S.Ct. 2063.
. See Pl. Opp. at 42 ("the very existence of the Company was at stake, and by extension Arntzen and Itkin’s lucrative positions with the company”). Although the above allegation was made in the context of Plaintiffs’ Section 10(b) claims against Arntzen and It-kin, it equally supports the inference that all the Individual Defendants stood to lose their positions and/or salaries with the Company if the Offering failed.
. See Pinter, 486 U.S. at 655, 108 S.Ct. 2063 ("[A] person who solicits the buyer’s purchase in order to serve the financial interests of the owner may properly be liable under Section 12(1) without showing that he expects to participate in the benefits the owner enjoys.”); SEC v. Tuchinsky, No. 89-6488-CIV, 1992 WL 226302, at *4 (S.D.Fl. June 29, 1992) ("Cannon admits that he acted on behalf of SW Computer in his capacity as president. ... It is therefore unnecessary to show that he also had his own financial interests at heart in orchestrating the sale of ICOM stock.”).
. Indiv. Mem. at 22.
. Id. at 21-22 (citing CAC at ¶¶ 17, 19(c), 57, 59, 61).
. Id. at 22 (citing CAC at ¶¶ 95, 56, 93, 108).
. Id. at 21.
. Rombach, 355 F.3d at 171.
. Refco, 503 F.Supp.2d at 631.
. See 15 U.S.C. § 77k(a) (providing liability where “any part of the registration statement ... contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading”); Wallace, 2013 WL 1907685, at *11 (“allegations that statements were 'materially false or misleading' and contained ‘untrue statements of material fact’ do not necessarily sound in fraud because such allegations simply track the language of Section 11 and 12(a)(2)”); Wachovia, 753 F.Supp.2d at 375 (same).
. Refco, 503 F.Supp.2d at 631.
. Id. at 632.
. Rombach, 355 F.3d at 171-72. Accord Refco, 503 F.Supp.2d at 632 (Rule 9(b) applies where the "gravamen of the complaint is plainly fraud”); Xpedior Creditor Trust v. Credit Suisse First Boston (USA) Inc., 341 F.Supp.2d 258, 269 (S.D.N.Y. 2004) ("[A] claim sounds in fraud when, although not an essential element of the claim, the plaintiff alleges fraud as an integral part of the conduct giving rise to the claim.”).
. Rombach, 355 F.3d at 171-72.
. See Pl. Opp. at 19; Wallace, 2013 WL 1907685, at *11; Wachovia, 753 F.Supp.2d at 375 (same).
. Indiv. Mem. at 22 (citing CAC ¶ 95).
. CAC ¶¶ 92, 105, 113. Note that bare disclaimers alone are insufficient to shield claims that otherwise sound in fraud. See Refco, 503 F.Supp.2d at 633; Axis Capital Holdings, 456 F.Supp.2d at 598; JP Morgan, 363 F.Supp.2d at 635.
. Wallace, 2013 WL 1907685, at *11 (citing Refco, 503 F.Supp.2d at 632). Accord City of Roseville, 814 F.Supp.2d at 424 n. 12 ("[complete isolation of Securities Act claims is not necessary” as long as the complaint’s structure generally separates the allegations of fraud from the Section 11 and 12 claims); NovaGold, 629 F.Supp.2d at 290 ("Defendants identify no controlling authority finding that Securities Act allegations, when plead entirely separately from Exchange Act allegations, and accompanied by a disclaimer explaining that they sound in negligence, in fact sound in fraud.”).
. See Indiv. Mem. at 21 (citing Caiafa v. Sea Containers Ltd., 331 Fed.Appx. 14, 16 (2d Cir. 2009) (applying Rule 9(b) because “plaintiffs’ Section 11 claim relies on the same factual allegations that served as a basis for their Section 10(b) claim”)). However, Caiafa is an unpublished summary order and includes only one sentence of analysis on the topic.
. Wallace, 2013 WL 1907685, at *11 (citing In re IAC/InterActiveCorp. Secs. Litig., 695 F.Supp.2d 109 (S.D.N.Y. 2010)).
. Employees’ Ret. Sys., 804 F.Supp.2d at 152.
. Panther Partners, 681 F.3d at 120.
. Id. (quoting Litwin, 634 F.3d at 716).
. To hold otherwise would discourage plaintiffs from bringing Section 10(b) and Section 11 claims in the same lawsuit, which would result in the potential inefficiency of multiple lawsuits.
. ECA and Local 134 IBEW Joint Pension Trust of Chi. v. JP Morgan Chase Co., 553 F.3d 187, 198 (2d Cir. 2009) (citing Novak, 216 F.3d at 307-08).
. See Cherry St., 573 F.3d at 108-09 (test generally met " 'when corporate insiders [are] alleged to have misrepresented to the public material facts about the corporation’s performance or prospects in order to keep the stock price artificially high while they sold their own shares at a profit’ ”) (quoting Novak, 216 F.3d at 308).
. Kalnit v. Eichler, 264 F.3d 131, 139 (2d Cir. 2001).
. CAC ¶ 191.
. See Russo v. Bruce, 777 F.Supp.2d 505, 518 (S.D.N.Y. 2011) (scienter not established where "the Complaint gives no indication as to why the Individual Defendants would have been motivated to defraud investors in order to enrich others, not themselves”); eSpeed, 457 F.Supp.2d at 289-90 (scienter not established against corporate officer defendants where other insiders sold stock, but they— despite being "well-positioned to reap profits from insider knowledge” — did not). Cf. ECA, 553 F.3d at 198 (motive generally established "when corporate insiders allegedly make a misrepresentation in order to sell their own shares at a profit”).
. See Indiv. Reply Mem. at 2. Because this information is publicly available on Arntzen’s Form 4, it is properly considered on a motion to dismiss. ATSI, 493 F.3d at 98 (courts may consider "public disclosure document[] filed with the SEC”).
. CAC ¶ 187.
. Cherry St., 573 F.3d at 109. Accord ECA, 553 F.3d at 198; Kalnit, 264 F.3d at 139; Acito v. IMCERA Grp., Inc., 47 F.3d 47, 54 (2d Cir. 1995) (if the desire to inflate stock price were sufficient to constitute scienter, "virtually every company in the United States that experiences a downturn in stock price could be forced to defend securities fraud actions”); Gissin v. Endres, 739 F.Supp.2d 488, 512 (S.D.N.Y. 2010) (finding company’s desire to "complete the offering” too generalized to establish scienter).
. Pl. Opp. at 40-41.
. Id. at 42.
. See In re Cabletron Sys. Inc., 311 F.3d 11, 39 (1st Cir. 2002) (finding that allegations of insider trading and fraudulent warehousing activities, along with company's dire need for capital, stated a claim for relief); In re Initial Pub. Offering Secs. Litig., 544 F.Supp.2d 277, 294 (S.D.N.Y. 2008) (finding that various allegations, including motive to raise capital, supported inference of scienter against issuer Defendants). Note that neither complaint was sustained solely or even primarily based on the desire to raise capital, and IPO concerned an issuer defendant instead of officer/director defendants.
. Kalnit, 264 F.3d at 139.
. In re PXRE Grp., Ltd., Secs. Litig., 600 F.Supp.2d 510, 532 (S.D.N.Y. 2009). Accord Gissin, 739 F.Supp.2d at 499, 512-13 (despite company’s "crippling liquidity problem,” desire to complete an offering did not support inference of scienter); In re Elan Corp. Secs. Litig., 543 F.Supp.2d 187, 216 (S.D.N.Y. 2008) ("Any corporation would be motivated to make a profit, to avoid bankruptcy, or to finance the successful launch of a promising product. Similarly, corporate executives are generally motivated to maximize bonus compensation. These allegations do not support an inference of scienter.”).
. See CAC ¶ 183 (Defendants were "aware of the principal U.S. tax laws applicable to the Company, the subjectivity of foreign source income to U.S. federal income taxes and the ‘critical’ nature of OSG’s policy of accounting for income taxes.”). See also id. ¶ 184 (senior OSG officials "spent significant resources trying to persuade federal officials to enact changes in the tax law that were favorable to the Company”).
. See Pl. Opp. at 40.
. See id.
. See id. (Arntzen "discussed how new tax laws would allow OSG to carry back 2009 tax losses” on a conference call in 2009, while
. Id. at 44 ("Given the centrality of its foreign operations to the health of its business, and the importance of U.S. tax policy to those foreign operations, it is entirely fair to impute knowledge of the fraud to Arntzen ... and Itkin.”).
. See Glaser v. The9, Ltd., 772 F.Supp.2d 573, 596 (S.D.N.Y. 2011) (questioning whether the "core operations” doctrine "remains good law” after the PSLRA); eSpeed, 457 F.Supp.2d at 294 n. 209, n. 210 (citing cases that have rejected the "core operations” doctrine since the enactment of the PSLRA).
. See JP Morgan, 363 F.Supp.2d at 628 ("[Pjlaintiffs allege no facts suggesting that the accounting treatment of the Mahonia transactions as trades rather than as loans was at the core of JPM Chase’s business.”).
. See Board of Trs. of Ft. Lauderdale Gen. Emps.’ Ret. Sys. v. Mechel OAO, 811 F.Supp.2d 853, 873 (S.D.N.Y. 2011) (courts in this district "have long held that accusations founded on nothing more than a defendant's corporate position are entitled to no weight”) (quoting Plumbers & Steamfitters Local 173 Pension Fund v. Canadian Imperial Bank of Commerce, 694 F.Supp.2d 287, 300 (S.D.N.Y. 2010)).
. See CAC ¶ 40.
. See, e.g., In re Scholastic Corp. Secs. Litig., 252 F.3d 63, 73 (2d Cir. 2001) (holding that $13 million pre-tax special charge "lends yet more support to the notion that defendants had knowledge”); Rothman v. Gregor, 220 F.3d 81, 92 (2d Cir. 2000) (the magnitude of a $73.8 million write-off supported inference of scienter); In re Alstom SA Secs. Litig., 406 F.Supp.2d 433, 460 (S.D.N.Y. 2005) ("significant length of time (several years) during which the arrangements were not disclosed” supported strong inference of scienter); In re Am. Bank Note Holographics, Inc. Secs. Litig., 93 F.Supp.2d 424, 446-47 (S.D.N.Y. 2000) (noting "the admitted falsity of the statements, the extraordinary degree to which they were false, the length of time (covering several years) that the statements were false”).
. See Glaser, 772 F.Supp.2d at 596-97 ("[A]bsent facts indicating that defendants knew of the falsity of their statements, that an eventual write-off was large does not support the required strong inference of misbehavior.”); PXRE Grp., 600 F.Supp.2d at 545 ("[I]t is well established that the size of the fraud alone does not create an inference of scienter.”).
. See Indiv. Mem. at 19.
. See Varghese v. China Shenghuo Pharm. Holdings, Inc., 672 F.Supp.2d 596, 608 (S.D.N.Y. 2009) (GAAP violations contribute to inference of scienter).
. See ECA, 553 F.3d at 200 (“Allegations of GAAP violations or accounting irregularities, standing alone, are insufficient to state a securities fraud claim.”); Chill v. General Elec. Co., 101 F.3d 263, 270 (2d Cir. 1996) (“Allegations of a violation of GAAP provisions or SEC regulations, without corresponding fraudulent intent, are not sufficient to state a securities fraud claim.”); Worlds of Wonder, 35 F.3d at 1426 (holding that the "failure to follow GAAP, without more, does not establish scienter”) (citations omitted).
. See, e.g., CAC at ¶ 53.
. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007).
. See Davidoff v. Farina, No. 04 Civ. 7617, 2005 WL 2030501, at *17 (S.D.N.Y. Aug. 22, 2005) ("[T]o the extent plaintiffs claim that defendants had knowledge of specific facts that rendered their public statements mislead
.Cherry St., 573 F.3d at 109 (quotation marks and emphasis omitted). Accord Kalnit, 264 F.3d at 142.
. See Kushner v. Beverly Enters., Inc., 317 F.3d 820, 829 (8th Cir. 2003) (declining to find an inference of scienter because it was "telling” that the company’s "outside auditors did not question its accounting practices”).
. See Indiv. Reply Mem. at 2.
. Pacific Inv. Mgmt. Co. LLC v. Mayer Brown LLP, 603 F.3d 144, 160 (2d Cir. 2010).
.Fed.R.Civ.P. 15(a)(2).
Reference
- Full Case Name
- In re OSG SECURITIES LITIGATION
- Cited By
- 30 cases
- Status
- Published