Liberty Mutual Ins. Co. v. Goldman, Sachs & Co.

• Court: Court of Appeals for the Second Circuit
• Decided: May 15, 2013
• Docket: 12-3859
• Status: Unpublished

Opinion

12-3859 Liberty Mutual Ins. Co. v. Goldman, Sachs & Co.

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

At a stated term of the United States Court of Appeals for the Second Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the 15th day of May, two thousand thirteen.

PRESENT: DENNIS JACOBS, Chief Judge, ROBERT D. SACK, Circuit Judge, JED S. RAKOFF,* District Judge.

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IN RE: FANNIE MAE 2008 SECURITIES LITIGATION 12-3859

JOHN A GENOVESE, ROBERT M. ROLLINS, NICHOLAS CRISAFI, STELLA CRISAFI, FOGEL CAPITAL

* Judge Jed S. Rakoff, of the United States District Court for the Southern District of New York, sitting by designation. MANAGEMENT, INC., DENNIS SANDMAN, KAREN ORKIN, ANTHONY ESPOSITO, FRANK MCALONAN, WILLIAM R. WHITE, STEVE LATIMER, BRIAN JARMAIN, MALKA KRAUSZ, DONALD W. MCCAULEY, DAVID L. FRANKFURT, FRANKFURT FAMILY LTD., THE DAVID FRANKFURT 2000 FAMILY TRUST, THE DAVID FRANKFURT 2002 FAMILY TRUST, CHERYL STRONG, WILLIAM BERMAN, STEPHEN H. SCHWEITZER, LINDA P. SCHWEITZER, LYNN WILLIAMS, STEVEANN WILLIAMS, SUSAN KRAUS, PHILLIP MELTON, DANIEL KRAMER, DAVID GWYER, COMPREHENSIVE INVESTMENT SERVICES, INC., MARY P. MOORE, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATION, EDWARD SMITH, Plaintiffs,

LIBERTY MUTUAL INSURANCE COMPANY, LIBERTY MUTUAL FIRE INSURANCE COMPANY, PEERLESS INSURANCE COMPANY, SAFECO CORPORATION, LIBERTY LIFE ASSURANCE COMPANY OF BOSTON, Plaintiffs-Appellants,

v.

STEPHEN B. ASHLEY, DANIEL H. MUDD, STEPHEN M. SWAD, ROBERT, J. LEVIN, LEHMAN BROTHERS, INC., J.P. MORGAN SECURITIES INC., CITIGROUP GLOBAL MARKET INC., MERRILL LYNCH, PIERCE FENNER & SMITH INCORPORATED, MORGAN STANLEY & CO., INCORPORATED, UBS SECURITIES LLC, WACHOVIA CAPITAL MARKETS LLC, WASHINGTON MUTUAL BANK, FA, FEDERAL NATIONAL HOME MORTGAGE ASSOCIATION, DENNIS BERESFORD, DENNIS BERESFORD, LOUIS FREEH, BRENDA GAINES, FREDERICK B. HARVEY, III, DAVID HISEY, KAREN HORN, BRIDGET MACASKILL, PETER NICULESCU, LESLIE RAHL, JOHN SITES, JR., GREG SMITH, H. PATRICK SWYGERT, JOHN WULFF, BANC OF AMERICA SECURITIES LLC,

2 BARCLAYS CAPITAL INC., DEUTSCHE BANK SECURITIES INC., FTN FINANCIAL SECURITIES CORP., WELLS FARGO SECURITIES LLC, BEAR STEARNS & CO., INC., FEDERAL NATIONAL MORTGAGE ASSOCIATION, AKAK FANNIE MAE, FITCH RATINGS, MOODY’S INVESTORS SERVICE, INC., HERBERT M. ALLISON, DAVID C. BENSON, BRIAN COBB, JUDITH C. DUNN, JOHN DOES, 1 - 10, LINDA K. KNIGHT, ANTHONY F. MARRA, BRIAN P. MCQUAID, ANNE F. PANKAU, DAVID H. SIDWELL, BETTY THOMPSON, CHRISTINA A. WOLF, ROBERT T. BLAKELY, ENRICO DALLAVECCHIA, JPMORGAN CHASE & CO., FANNIE MAE, Defendants,

GOLDMAN, SACHS & CO., Defendant-Appellee.

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FOR APPELLANT: JAMES R. SAFLEY, Robins, Caplin, Miller & Ciresi L.L.P, Minneapolis, Minnesota (Christopher P. Sullivan, Thomas B. Hatch, Robins, Caplin, Miller & Ciresi L.L.P, Boston, Massachusetts, on the brief).

FOR APPELLEE: JONATHAN K. YOUNGWOOD, Simpson Thacher & Bartlett LLP, New York, New York (Craig S. Waldman, Shannon Price Torres, Simpson Thacher & Bartlett LLP, New York, New York, on the brief).

1 Appeal from a judgment of the United States District 2 Court for the Southern District of New York (Crotty, J.). 3 4 UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, 5 ADJUDGED, AND DECREED that the judgment of the district 6 court is AFFIRMED. 7

3 1 Liberty Mutual Insurance Company (“Liberty”)1 appeals 2 from a judgment of the United States District Court for 3 the Southern District of New York (Crotty, J.) dismissing 4 its Second Amended Complaint for failure to state a claim 5 upon which relief may be granted. We assume the parties’ 6 familiarity with the underlying facts, procedural history 7 of the case, and issues on appeal. 8 9 We review de novo a dismissal under Federal Rule of 10 Civil Procedure 12(b)(6). See In re Citigroup ERISA 11 Litig., 662 F.3d 128, 135 (2d Cir. 2011). 12 13 Liberty sues Goldman, Sachs & Co. (“Goldman”) for its 14 conduct as lead underwriter of certain stock offerings 15 made by the Federal National Mortgage Association (“Fannie 16 Mae”) in September and December 2007, transactions which 17 resulted in Liberty’s loss of $62.5 million. According to 18 the complaint, Goldman drafted and disseminated offering 19 documents falsely representing that Fannie Mae’s capital 20 exceeded statutory and regulatory requirements, and failed 21 to disclose that Fannie Mae had inadequate write-downs and 22 loss reserves for its exposure to approximately $700 23 billion in risky subprime and Alt-A mortgages. Liberty 24 alleges violations of Rule 10b-5 of the Securities 25 Exchange Act of 1934, the Massachusetts and Washington 26 securities acts, and the Massachusetts and Washington 27 unfair and deceptive trade practices statutes, as well as 28 common law fraud and negligent misrepresentation. The 29 district court concluded that all seven of Liberty’s 30 claims failed because, inter alia, Liberty had not alleged 31 an actionable misstatement or omission.2 We agree. 32 33 Liberty’s claims rely principally on Fannie Mae’s 2008 34 Form 10-K, which increased write-downs and loan loss 35 reserves by billions of dollars over previous years. Had 36 Fannie Mae taken these write-downs and set aside these

1 “Liberty” refers to all five appellants: Liberty Mutual Insurance Company, Liberty Mutual Fire Insurance Company, Peerless Insurance Company, Safeco Corporation, and Liberty Life Assurance Company of Boston. 2 Liberty does not appeal the district court’s dismissal of its 10b-5 claim (Count I). 4 1 loss reserves earlier (i.e., prior to Liberty’s 2 investment), it is alleged that the company would not have 3 met its statutory and regulatory core capital 4 requirements, could not have paid any dividends, and 5 therefore could not have attracted investors. 6 7 This is a classic example of pleading fraud by 8 hindsight: the “plaintiff has simply seized upon 9 disclosures made in later . . . reports and alleged that 10 they should have been made in earlier ones.” Denny v. 11 Barber, 576 F.2d 465, 470 (2d Cir. 1978) (Friendly, J.). 12 While “greater clairvoyance” might have led Fannie Mae to 13 record write-downs earlier, “failure to make such 14 perceptions does not constitute fraud.” Id.; see also 15 Acito v. IMCERA Grp., Inc., 47 F.3d 47, 53 (2d Cir. 1995). 16 Courts have consistently rejected such claims. See, e.g., 17 NECA-IBEW Pension Trust Fund v. Bank of Am. Corp., No. 10 18 Civ. 440 (LAK) (HBP), 2012 WL 3191860, at *13 (S.D.N.Y. 19 Feb. 9, 2012) (Pitman, M.J.) (“[T]he mere fact that BAC’s 20 writedowns subsequently turned out to be insufficient--or 21 were substantially smaller than the write-downs taken by 22 industry peers with ‘similar’ portfolios--would not render 23 those figures false at the time that they were publicly 24 filed with the SEC.”) (footnote and citations omitted); 25 Plumbers & Steamfitters Local 773 Pension Fund v. Can. 26 Imperial Bank of Commerce, 694 F. Supp. 2d 287, 301 27 (S.D.N.Y. 2010) (dismissing claim that defendant “should 28 have recorded much larger write-downs earlier than it 29 did”). 30 31 To be sure, this does not mean that subsequent facts 32 and circumstances cannot lend support to a claim that a 33 prior allegedly fraudulent statement was false at the time 34 it was made. After all, “fraud claims by their very 35 nature involve self-concealing conduct,” S.E.C. v. 36 Gabelli, 653 F.3d 49, 59 (2d Cir. 2011), rev’d on other 37 grounds, 133 S. Ct. 1216 (2013), and thus are always 38 uncovered only after the fact. For this reason, we have, 39 in appropriate circumstances, relied on subsequent events 40 to infer a plausible claim for fraud. See, e.g., Novak v. 41 Kasaks, 216 F.3d 300, 312-13 (2d Cir. 2000) (“[T]he 42 complaint provides specific facts concerning the Company’s 43 significant write-off of inventory directly following the 44 Class Period, which tends to support the plaintiffs’

5 1 contention that inventory was seriously overvalued at the 2 time the purportedly misleading statements were made.”); 3 Rothman v. Gregor, 220 F.3d 81, 92 (2d Cir. 2000) (“[W]e 4 deem significant the amount of the write-off [the 5 defendant company] eventually did take . . . .”). 6 7 In this case, however, the representations regarding 8 Fannie Mae’s core capital necessarily incorporated 9 imperfect business judgments and predictions about the 10 future, which later proved mistaken. Given the market 11 turmoil that intervened in time between the alleged 12 misrepresentations and Fannie Mae’s subsequent write-downs 13 and loss reserve increases, any inference we might draw 14 based on those subsequent events is attenuated. Without 15 more, we cannot conclude that plaintiffs have plausibly 16 pled that the predictive judgments that informed the core 17 capital representations were so flawed when made as to 18 amount to fraud. 19 20 Finding no merit in Liberty’s remaining arguments, we 21 hereby AFFIRM the judgment of the district court. 22 23 24 FOR THE COURT: 25 CATHERINE O’HAGAN WOLFE, CLERK 26