Consol. v. Global

620 F.3d 137

IOWA PUBLIC EMPLOYEES' RETIREMENT SYSTEM, Policemen's Annuity & Benefit Fund of Chicago, Central States, Southeast and Southwest Areas Pension Fund, State-Boston Retirement System, MF Global Institutional Investors Group, Plaintiffs-Appellants,Michael Rubin, individually and on behalf of all others similarly situated, Plaintiff,Nanette Katz, Frank Matassa, Sunshine Wire and Cable Defined Benefit Plan Trust, individually and on behalf of all others similarly situated, Michael J. Rudnick, individually and on behalf of all others similarly situated, Consolidated-Plaintiffs,

v. MF GLOBAL, LTD., Man Group, PLC, Kevin R. Davis, Amy S. Butte, Alison J. Carnwath, Christopher J. Smith, Christopher Bates, Henri J. Steenkamp, Edward L. Goldberg, Deutsche Bank Securities, Inc., ABN Amro Rothschild LLC, Banc of America Securities, LLC, BMO Capital Markets Corp., HSBC Securities (USA) Inc., Keefe, Bruyette & Woods, Inc., Sandler O'Neill & Partners, L.P., Wachovia Capital Markets LLC, CL King & Associates, Inc., Dowling & Partners Securities, LLC, E*Trade Securities LLC, Fortis Securities LLC, Guzman & Co., ING Financial Markets, LLC, Jeffries & Co., Inc., Lazard Capital Markets LLC, M.R. Beal & Co., Mizuho Securities USA, Inc., Muriel Siebert & Co., Inc., Oppenheimer & Co., Inc., Piper, Jaffray & Co., Raymond James & Associates, Inc., RBC Markets Corp., Robert W. Baird & Co., Inc., Samuel A. Ramirez & Co., Inc., SMH Capital Inc., Stifel, Nicolaus & Co., Inc., Sun Trust Capital Markets, Inc., The Williams Capital Group, L.P., Utendahl Capital Partners, L.P., Wells Fargo Securities, LLC, William Blair & Co., LLC, Defendants-Appellees,Merrill Lynch, Pierce Fenner & Smith, Inc., Credit Suisse Securities (USA) LLC, Citigroup Global Markets, Inc., J.P. Morgan Securities Inc., Lehman Brothers Inc., UBS Securities LLC, Goldman Sachs & Co., Morgan Stanley & Co., Inc., Consolidated-Defendants-Appellees.

Docket No. 09-3919-cv.

United States Court of Appeals,Second Circuit.

Argued: July 15, 2010.

Decided: Sept. 14, 2010.

Mark R. Rosen, Barrack, Rodos & Bacine, Philadelphia, PA (Leonard Barrack, Barrack, Rodos & Bacine, Philadelphia, PA; William J. Ban, Barrack, Rodos & Bacine, New York, NY; Carol V. Gilden, Cohen Milstein Sellers & Toll PLLC, Chicago, IL; and Steven J. Toll, Daniel S. Sommers, Cohen Milstein Sellers & Toll PLLC, Washington, DC on the brief) for Appellants.

David B. Anders (Bernard W. Nussbaum, Elaine P. Golin, and Christina T. Shay on the brief), Wachtell, Lipton, Rosen & Katz, New York, NY, for MF Global Appellees.

David A. Barrett, Marilyn C. Kunstler, Boies, Schiller & Flexner LLP, New York, NY, for Appellee Man Group plc.

Stuart J. Baskin, Herbert S. Washer, and Adam S. Hakki, Shearman & Sterling LLP, New York, NY, for Underwriter Appellees.

Marshall H. Fishman, Freshfields Bruckhaus Deringer U.S. LLP, New York, NY, for Appellee Amy S. Butte.

Before JACOBS, Chief Judge, B.D. PARKER and HALL, Circuit Judges.

DENNIS JACOBS, Chief Judge:

Plaintiffs appeal from a July 23, 2009 judgment of the United States District Court for the Southern District of New York (Marrero, J.), dismissing their putative securities class action complaint for failure to state a claim. They allege material misstatements and omissions in the July 2007 prospectus and registration statement of defendant MF Global, Ltd., and assert claims under §§ 11, 12(a)(2), and 15 of the 1933 Securities Act. In a nutshell, the stock of MF Global plummeted after the February 2008 revelation that a broker had evaded trading restrictions. Of four groups of allegations, dismissal of two is not appealed. As to the claim that the prospectus and registration statement exaggerated risk-management measures, we vacate the dismissal because the district court erroneously applied the bespeaks-caution doctrine. As to the remaining claim, that the prospectus and registration statement failed to disclose deficiencies in the firm's controls of client accounts, we affirm in part the district court's dismissal for lack of causation, and in part vacate and remand.

I

In the morning hours of February 27, 2008, a broker at MF Global, Ltd. lost $141.5 million speculating in wheat futures. ¹ The broker, Evan Dooley, accumulated the losses by taking positions vastly in excess of the firm's trading limits and collateral requirements. MF Global was responsible for settling Dooley's trades at the clearinghouse, and absorbed the losses. When news reached the markets on February 28, MF Global's stock price fell 28%; it fell a further 17% the day after, resulting in a two-day market capitalization loss exceeding $1.1 billion.

The Dooley trading incident revealed to the public that MF Global's internal risk controls had not been applied to brokers trading for their own accounts (or taking client orders by phone). MF Global had controls for limiting its exposure to market risks in brokerage accounts by restricting trading and by managing margin credit with collateral and other requirements. But MF Global sometimes deactivated the controls (as with Dooley) to speed transactions.

This putative class action was filed on March 6, 2008, alleging, on behalf of certain purchasers of MF Global stock, that the firm misrepresented and failed to disclose relevant material information in a prospectus and registration statement ² issued when the brokerage firm went public in July 2007. Until its initial public offering (IPO), MF Global had been the brokerage arm of Man Group, Plc, a hedge fund. The defendants are MF Global, Man Group, the IPO underwriters, and various MF Global officers and directors. Damages are sought under §§ 11, 12(a)(2), and 15 of the 1933 Securities Act, ³ 15 U.S.C. §§ 77k, 77 l(a)(2) & 77 o .

In response to a motion under Federal Rule of Civil Procedure 12(b)(6), the district court dismissed the complaint in its entirety. See Rubin v. MF Global, Ltd., 634 F.Supp.2d 459 (S.D.N.Y.2009). The district court sorted the allegations into four groups, id. at 469-72, each of which it analyzed separately:

[1] Directional Trading: That the prospectus misrepresented the types of trading-directional ⁴ or only hedging-conducted by MF Global;

[2] Refco: That the prospectus failed to disclose the lack of adjustments to MF Global's risk-management systems made during and after Man Group's acquisition of Refco, another brokerage firm;

Risk Management: That the prospectus misrepresented and failed to disclose material facts relevant to the strengths and weaknesses of MF Global's risk-management system; and

[4] Client Accounts: That the prospectus failed to disclose “that traders did not have limits when trading for clients, and that with the proper password anyone could access client accounts and trade in them at any time,” id. at 470;

The court dismissed the first group of allegations on the ground that the cited statements were not false or misleading, and the second on the ground that the plaintiffs had insufficiently alleged the omission of any material fact. The plaintiffs do not appeal those specific rulings. Claims premised on allegations concerning risk management were dismissed on the ground that cautionary language elsewhere in the prospectus ⁵ rendered the cited statements or omissions non-actionable pursuant to the bespeaks-caution doctrine. (An alternative ground is discussed in note 13.) The fourth category of allegations (concerning client accounts) was dismissed on the ground that alleged omissions concerning the accounts of clients could not have caused the loss alleged, which resulted from revelations concerning the accounts of non-clients. ⁶

The plaintiffs timely appealed. We review the district court's order de novo. E.g., Harrington v. County of Suffolk, 607 F.3d 31, 33 (2d Cir.2010).

II

To prevail on a § 11 or § 12(a)(2) claim, a plaintiff must show that the relevant communication either misstated or omitted a material fact. See 15 U.S.C. § 77k; 15 U.S.C. § 77 l(a)(2). The bespeaks-caution doctrine is a corollary of “the well-established principle that a statement or omission must be considered in context.” ⁷ In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357, 364 (3d Cir.1993); accord, e.g., Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1213 (1st Cir.1996); Fecht v. Price Co., 70 F.3d 1078, 1081-82 (9th Cir.1995); Rubinstein v. Collins, 20 F.3d 160, 167-68 (5th Cir.1994). A forward-looking statement accompanied by sufficient cautionary language is not actionable because no reasonable investor could have found the statement materially misleading. ⁸ See, e.g., P. Stolz Family P'ship L.P. v. Daum, 355 F.3d 92, 96-97 (2d Cir.2004). In such circumstances, it cannot be supposed by a reasonable investor that the future is settled, or unattended by contingency. For example, Luce v. Edelstein held that statements in an offering memorandum “as to the potential cash and tax benefits of [a] partnership” were non-actionable because “the Offering Memorandum made it quite clear that its projections of potential cash and tax benefits were ‘necessarily speculative in nature[,]’. that ‘[n]o assurance [could] be given that these projections [would] be realized,’ ” and “that ‘[a]ctual results may vary from the predictions and these variations may be material.’ ” 802 F.2d 49, 56 (2d Cir.1986).

The doctrine is one of a set of rules coping with the problem that forward-looking information poses for securities disclosure laws. For decades, the disclosure of forward-looking information was generally prohibited by the Securities and Exchange Commission (SEC). ⁹ That policy changed in the 1970s. ¹⁰ To encourage disclosure of forward-looking information notwithstanding certain vulnerabilities, including the tendency of predictions to be embarrassed by the passage of time, ¹¹ regulators developed safe harbors. The SEC promulgated a regulatory safe harbor in 1979, see SAFE HARBOR RULE FOR PROJECTIONS, Securities Act Release No. 532, 1979 WL 181199 (June 25, 1979) (...