Comprehensive Inv. Servs., Inc. v. Mudd (In re Fannie Mae 2008 Sec. Litig.)

891 F.Supp.2d 458

In re FANNIE MAE 2008 SECURITIES LITIGATION.

Comprehensive Investment Services, Inc., Plaintiff,

v.Daniel H. Mudd, et al., Defendants.

Edward Smith, Plaintiff,

v.Federal National Mortgage Association, et al., Defendants.

Liberty Mutual Insurance Company, et al., Plaintiffs,

v.Goldman, Sachs & Co., Defendant.

Nos. 08 Civ. 7831(PAC), 09 MDL 2013(PAC), 09 Civ. 6102(PAC), 10 Civ. 2781(PAC), 10 Civ. 9184(PAC).

United States District Court, S.D. New York.

Aug. 30, 2012.

Andrew James Frisch, Andrew J. Frisch, New York, NY, Andrew J. Mytelka, Eric J. Kirkpatrick, Michael David Le Blanc, Steven Carl Windsor, Greer, Herz & Adams, LLP, Galveston, TX, Joseph A.C. Fulcher, Greer, Herz & Adams, LLP, League City, TX, for Plaintiff Comprehensive Investment Services, Inc.

Matthew P. Siben, Dietrich Siben Thorpe, Carlsbad, CA, for Plaintiff Edward Smith.

Samuel Howard Rudman, Robbins Geller Rudman & Dowd LLP, Melville, NY, Joseph W. Cotchett, Cotchett, Pitre & Simon, Burlingame, CA, Patrick Vincent Dahlstrom, Gustavo Fabian Bruckner, H. Adam Prussin, Fei–Lu Qian, Marc Ian Gross, Pomerantz Haudek Block Grossman & Gross LLP, Gregory Mark Nespole, Martin E. Restituyo, Wolf Haldenstein Adler Freeman & Herz LLP, Ronen Sarraf, Sarraf Gentile, LLP, Jonathan H. Beemer, Robert N. Cappucci, Stephen David Oestreich, Vincent Roger Cappucci, Entwistle & Cappucci LLP, Kent Andrew Bronson, Roland Winfield Riggs, IV, Milberg LLP, Joe R. Whatley, Jr., Whatley, Drake & Kallas, LLC, Matthew Gluck, Fried, Frank, Harris, Shriver & Jacobson, Samuel Kenneth Rosen, Harwood Feffer LLP, New York, NY, Jonathan Paul Whitcomb, Diserio Martin O'Connor & Castiglioni LLP, Stamford, CT, William Bernard Federman, Federman & Sherwood, Oklahoma City, OK, Charles Robert Cohen, Peter S. Pearlman, Cohn, Lifland, Pearlman, Herrmann & Knopf, L.L.P., Saddle Brook, NJ, Edward W. Ciolko, Joseph H. Meltzer, Julie Siebert–Johnson, Mark K. Gyandoh, Kessler Topaz Meltzer & Check, LLP, Radnor, PA, John Bucher Isbister, Toyja Eran Libia Kelley, Tydings & Rosenberg, LLP, Baltimore, MD, Christopher P. Sullivan, Lisa A. Furnald, Robins, Kaplan, Miller & Ciresi L.L.P., Boston, MA, James Robert Safley, Robins, Kaplan, Miller & Ciresi L.L.P., Minneapolis, MN, for Plaintiffs.

John J. Clarke, Jr., DLA Piper US LLP, David Fleischer, James Evan Berger, Paul Hastings LLP, Bronson Jeffrey Bigelow, Jones Day, George S. Wang, Michael Joseph Chepiga, Paul C. Curnin, Simpson Thacher & Bartlett LLP, Craig Scott Waldman, Eric Samuel Olney, Shapiro, Arato & Isserles LLP, James Ellis Brandt, Jeff G. Hammel, Latham & Watkins LLP, Andrew James Ehrlich, Martin Flumenbaum, Roberta Ann Kaplan, Tobias James Stern, Paul, Weiss, Rifkind, Wharton & Garrison LLP, James J. Coster, Joshua M. Rubins, Justin Evan Klein, Satterlee Stephens Burke & Burke LLP, Andrew J. Levander, Hector Gonzalez, Dechert, LLP, New York, NY, Shannon Barrett, O'Melveny & Myers LLP, James E. Anklam, James D. Wareham, DLA Piper US LLP, Scott M. Flicker, Paul, Hastings, Janofsky & Walker LLP, Scott N. Auby, Jonathan Rosser Tuttle, Debevoise & Plimpton LLP, Erik L. Kitchen, Steptoe & Johnson, LLP, Jeffrey W. Kilduff, Michael John Walsh, Robert Norris Eccles, O'Melveny & Myers LLP, Washington, DC, for Defendants.

OPINION & ORDER

PAUL A. CROTTY, District Judge.

The above captioned private securities actions allege, generally, that Federal National Mortgage Association (“FNMA”), its executives, and certain underwriters made material misstatements in FNMA's filings with the Securities and Exchange Commission (“SEC”) and in various securities offerings, concerning FNMA's (1) subprime and Alt–A exposure; (2) risk management controls; and (3) core capital financials. While many of the private action plaintiffs have joined the securities class action (“Class Action”), Comprehensive Investment Services, Inc. (“CIS”), Edward Smith (“Smith”), and Liberty Mutual Insurance Co., Liberty Mutual Fire Insurance Co., Peerless Insurance Co., SafeCo Corp., and Liberty Life Assurance Co. of Boston (collectively, “Liberty”) are pursuing their own individual actions.¹

The eight defendants bring fourteen motions to dismiss the second amended complaints.² Defendants' motions are GRANTED IN PART and DENIED IN PART.

THE SECOND AMENDED COMPLAINTS

I. Class Action's Second Amended Complaint in 08 Civ. 7831

The Court previously held that the Class Action's allegations regarding FNMA's alleged deficient risk control measures were sufficient to state Section 10(b) and Rule 10b–5 claims against FNMA, Daniel H. Mudd (“Mudd”), and Enrico Dallavecchia (“Dallavecchia”), and Section 20(a) claims against Mudd and Dallavecchia. See In re Fannie Mae 2008 Sec. Litig., 742 F.Supp.2d 382, 399 (S.D.N.Y.2010). Familiarity with the Court's prior opinion is assumed.

The Class Action's Second Amended Complaint adds new factual allegations that defendants failed to disclose adequately FNMA's level of exposure to subprime and Alt–A loans.

II. CIS's Second Amended Complaint in 09 Civ. 6102

In May 2008, CIS purchased 600,000 shares of FNMA's Series T Preferred Stock from Wachovia Securities for $15 million. (CIS SAC ¶¶ 2, 14–15.) On May 13, 2009, CIS filed a single-plaintiff lawsuit in the United States District Court for the Southern District of Texas, against FNMA; Mudd, Dallavecchia, Robert J. Levin (“Levin”) and Stephen M. Swad (“Swad”) (collectively, the “Individual CIS defendants”); and the CIS Underwriters. ³ CIS alleges that FNMA, the Individual CIS defendants, and the CIS Underwriters violated the Texas Fraud in Real Estate and Stock Transaction statute, Section 27.01 of the Texas Business & Commerce Code (“TBCC”), as both primary violators and as aiders and abettors; Wachovia Securities and FNMA committed primary violations of the Texas Securities Act (“TSA”), Texas Revised Civil Statute article 581–33A(2); the Individual CIS defendants violated 581–33F(1) of the TSA; Dallavecchia, Mudd, and the CIS Underwriters violated article 581–33F(2) of the TSA; FNMA, Dallavecchia, and Mudd committed common law fraud; FNMA, the Individual CIS defendants, and the CIS Underwriters made negligent misrepresentations; FNMA, Mudd and Dallavecchia violated Section 10(b) of the Exchange Act and Rule 10b–5; and Mudd and Dallavecchia violated Section 20(a) of the Exchange Act. On July 9, 2009, this action was transferred to this Court.

III. Smith's Second Amended Complaint in 10 Civ. 2781

Smith purchased FNMA's Series S Preferred Stock on or about December 6, 2007, and thereafter suffered substantial losses. (Smith SAC ¶ 13.) On February 26, 2010, Smith filed this action in the United States District Court for the Southern District of California, against FNMA; Mudd and Dallavecchia (collectively, the “Individual Smith defendants”); and the Smith Underwriters. ⁴ Smith claims that: FNMA and the Individual Smith defendants violated Section 10(b) and Rule 10b–5, committed common law fraud, and violated Sections 1572, 1709 and 1710 of California's Civil Code; FNMA violated Sections 25400 and 25500 of California's Corporate Code; the Individual Smith defendants violated Section 20(a) of the Exchange Act; and all defendants made negligent misrepresentations. On March 12, 2010, this action was transferred to this Court.

IV. Liberty's Second Amended Complaint in 10 Civ. 9184

Liberty raises claims only against Goldman, Sachs & Co. (“Goldman”), which served as lead underwriter for FNMA's Series S and P offerings, and had solicited Liberty's purchase of FNMA's Series S and Series P preferred stock offerings. (Liberty SAC ¶¶ 130, 142.) Liberty claims that Goldman: violated Section 10(b) and Rule 10b–5; violated Massachusetts' securities fraud statute, M.G.L. c. 110A Section 410, and Washington's securities fraud statute, Wash.Rev.Code Sections 21.20.010 and 21.20.430; committed deceptive trade practices in violation of M.G.L. c. 93A, Section 11, and Wash. Rev.Code. Sections 19.86.020 and 19.86.090; committed common law fraud; and made negligent misrepresentations. On December 9, 2010, the case was transferred to this Court.

GENERAL LEGAL STANDARDS

I. General Motion to Dismiss Standard

When considering a Fed.R.Civ.P. 12(b)(6) motion, the court “must accept as true all of the factual allegations contained in the complaint,” and construe the complaint in the light most favorable to the plaintiff. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 572, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007); see Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1950, 173 L.Ed.2d 868 (2009). The court only “assess[es] the legal feasibility of the complaint”; it does not “assay the weight of the evidence which might be offered in support thereof.” Levitt v. Bear Stearns & Co., 340 F.3d 94, 101 (2d Cir.2003).

To state a facially plausible claim, a plaintiff must plead “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. “A pleading that offers ‘labels and conclusions' or ‘a formulaic recitation of the elements of a cause of action will not do.’ Nor does a complaint suffice if it tenders ‘naked assertion[s]’ devoid of ‘further factual enhancement.’ ” Id. (citation omitted).

II. Heightened Pleading Standards of Rule 9(b) and the PSLRA

Fed.R.Civ.P. 9(b) requires a heightened pleading standard for complaints alleging fraud: “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.” See In re Pfizer Inc. Sec. Litig., 584 F.Supp.2d 621, 632–33 (S.D.N.Y.2008). This standard requires the plaintiff to “(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.” Stevelman v. Alias Research Inc., 174 F.3d 79, 84 (2d Cir.1999).

III. Elements of Claims under ...