Neca-Ibew Pension Trust Fund & Denis Montgomery v. Bank of Am. Corp.

NECA-IBEW PENSION TRUST FUND and DENIS MONTGOMERY,on behalf of themselves and all others similarly situated, Plaintiffs, v. BANK OF AMERICA CORPORATION, et al., Defendants.

10 Civ. 440 (LAK)(HBP)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

February 9, 2012

REPORT AND RECOMMENDATION

PITMAN, United States Magistrate Judge:

TO THE HONORABLE LEWIS A. KAPLAN, United States District Judge,

I. Introduction

Plaintiffs NECA-IBEW Pension Trust Fund ("NECA-IBEW") and Denis Montgomery commenced this putative securities class action against the BAC Defendants¹ and the Underwriter Defen-dants.² Plaintiffs allege violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 ("Securities Act").

By notices of motion dated March 4, 2011 (Docket Items 26 and 29), the BAC Defendants and the Underwriter Defendants move to dismiss plaintiffs' claims against them pursuant to Fed.R.Civ.P. 12(b)(6).

For the reasons set forth below, I respectfully recommend that the BAC Defendants' and the Underwriter Defendants' motions to dismiss be granted in their entirety and that plaintiffs' application to amend its complaint be denied without prejudice to renewal by way of formal motion.

II. Facts

This action arises out of alleged violations of the Securities Act by all defendants in connection with three Bank of America Corporation ("BAC") public offerings of securitiesconducted in the first half of 2008 -- specifically, Series H securities, Series K securities, and Series L securities.

A. The Parties

Lead Plaintiff NECA-IBEW acquired shares of BAC Series K securities "on and after" January 24, 2008 "purchased directly" from defendant Bank of America Securities LLC ("BAS") (First Amended Complaint, dated January 14, 2011 ("Am. Compl."), (Docket Item 25), ¶ 20). Plaintiff Montgomery acquired shares of BAC Series H securities "on or about" May 24, 2008 "through" defendant Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") (Am. Compl. ¶ 21).

There are two groups of defendants in this litigation: the BAC Defendants and the Underwriter Defendants. The BAC Defendants include BAC and BAS, as well as the individual defendants. BAC was the issuer with respect to each of the offerings, and BAS participated in each of the offerings as an underwriter (Am. Compl. ¶¶ 1, 22, 42). With the exception of individual defendant Joe L. Price, each individual defendant was a member of BAC's board of directors at all relevant times and signed the registration statement at issue in this litigation (Am. Compl. ¶¶ 23-40). Individual defendant Price was, at all relevant times, the Chief Financial Officer of BAC (Am. Compl. ¶ 24).

The remaining defendants participated in the offerings as underwriters (Am. Compl. ¶¶ 42-49). Specifically, each of the named underwriter defendants participated in the Series H offering (Am. Compl. ¶¶ 42-49). Morgan Stanley and UBS, as well as BAS, also participated in the Series K offering (Am. Compl. ¶¶ 42, 45-46). None of the underwriter defendants participated in the Series L offering (see Am. Compl. ¶¶ 42-49).

B. The Amended Complaint

As noted above, there are three BAC public offerings at issue in this litigation. First, on or about January 24, 2008, BAC issued 6 million shares of Series K securities at $1,000.00 per share, yielding gross proceeds of $6 billion (Am. Compl. ¶ 10). Second, also on or about January 24, 2008, BAC issued 6.9 million shares of Series L securities at $1,000.00 per share, yielding gross proceeds of $6.9 billion (see Am. Compl. ¶ 11; see also Ex. D attached to Declaration of Jonathan Rosenberg, Esq. in Support of BAC Defendants' Motion to Dismiss the First Amended Complaint for Failure to State a Claim, dated March 4, 2011 ("Rosenberg Decl."), (Docket Item 31)). Third, on or about May 20, 2008, BAC issued 117 million shares of Series H securities at $25.00 per share, yielding gross proceeds of $2.925 billion (Am. Compl. ¶ 12). Each of these offerings was conducted pursuant toan automatic shelf registration statement that BAC filed with the Securities and Exchange Commission ("SEC") on May 5, 2006 (Am. Compl. ¶ 1). Each offering was then "augmented by [a] separate prospectus supplement . . . which incorporate[d] by reference [BAC's] intervening public filings" (Am. Compl. ¶ 1).

In broad overview, plaintiffs allege the following. "[By] early 2007, [BAC] recognized that there existed a significant concentration of credit risk imbedded [sic] in [BAC]-originated real estate loans (i.e., residential mortgages, commercial real estate loans and [home equity loans] [and it] . . . also knew (or should have known) . . . that the amount of nonperforming real estate loans had been steadily increasing . . . since [the housing bubble peaked in] late-2006" (Am. Compl. ¶ 89; see also Am. Compl. ¶ 60). Notwithstanding this risk, "the amount of [BAC][-]originated [home equity loans] . . . [grew] to over $101 billion [by September 30, 2007] [and] the amount of nonperforming [home equity loans] mushroom[ed] to $764 million (an increase of over 160% since the end of 2006)" (Am. Compl. ¶ 92). "Similarly, fourth quarter 2007 results . . . show[ed] increasing [home equity loans] defaults (total [home equity loans] held $114.8 billion; nonperforming [home equity loans] $1.3 billion)" (Am. Compl. ¶ 92).

In the Form 10-Q report that BAC filed on November 9, 2007, BAC reported the following concerning its third quarter financial performance (as compared to the prior year): (1) BAC's overall net income had decreased -- specifically, by 32 percent in the third quarter and 7 percent in the nine months ending September 30, 2007; (2) BAC's provision for credit losses in the Global Corporate and Investment Banking section had increased -- specifically, by $192 million in the third quarter and $302 million in the nine months ending September 30, 2007 which "reflect[ed] the impact of the weak housing market;" (3) BAC's provision for overall credit losses had increased -- specifically, from $865 million to $2.0 billion in the third quarter and $1.6 billion to $5.1 billion in the nine months ending September 30, 2007 which reflected the "impact of the weak housing market;" (4) BAC's overall net charge-offs had increased -- specifically, by $296 million in the third quarter and $1.4 billion in the nine month period ending on September 30, 2007; (5) "extreme dislocations . . . in the financial markets" had impacted various markets in which BAC operated and BAC expected such dislocations to continue;³ (6) BAC had collateralized debt obligation ("CDO")exposure;⁴ (7) BAC had home equity loan exposure, of which (a)nonperforming home equity loans had increased by $473 million compared to December 31, 2006, (b) net charge-offs had increased by $39 million in the third quarter and $63 million in the nine months ending September 30, 2007, and (c) the provision for credit losses had increased by 74 percent in the third quarter and 48 percent in the nine months ending September 30, 2007; and (8) BAC's loan and lease losses had increased by $39 million since December 31, 2006⁵ (see Am. Compl. ¶¶ 67-70) (internal quotations omitted). Also in this Form 10-Q report, BAC formally reported that it had invested $2 billion in Countrywide Financial Corporation ("Countrywide") convertible preferred stock (Am. Compl. ¶ 77).

In the Form 8-K that BAC filed on January 11, 2008, BAC announced that it had completed thirty days of "extensive due diligence [concerning Countrywide] occupying over sixty . . . [BAC] personnel" and that a "definitive agreement" had been reached to purchase Countrywide for approximately $4.0 billion in BAC common stock (Am. Compl. ¶ 78) (internal quotation marks omitted). In a press release attached as an exhibit to this Form 8-K, BAC also stated:

[The Countrywide transaction] presents a rare opportunity for [BAC] to add what we believe is the best domestic mortgage platform at an attractive price and to affirm our position as the nation's premier lender to customers . . . . We are aware of the issues within the housing and mortgage industries . . . [and] [t]he transaction reflects those challenges.

* * *

[BAC] expects $670 million in after-tax savings . . . . [with] [a]bout one third of those savings [realized] in 2009, two thirds [realized] in 2010 and savings . . . fully realized in 2011.

(Am. Compl. ¶ 80) (internal quotation marks and emphasis added omitted).

BAC also filed materials relating to the Countrywide transaction with the SEC on January 11, 2008. In those materials, BAC explained that: (1) the purchase of Countrywide would provide BAC "with a unique opportunity to gain [a] leading position in consumer real estate;" (2) Countrywide was a "[t]opoverall originator" with a "[l]eading position across channels" and, further, had $209 billion in assets and $55 billion in deposits; (3) the transaction would require BAC to issue additional capital to maintain its "Tier 1 capital" status; and (4) the projection for "earning per share impact" would be "neutral" for 2008 and "3% accretive in 2009" (see Am. Compl. ¶¶ 81-82) (internal quotation marks omitted). Plaintiffs also allege that BAC representatives made substantially similar representations to securities analysts during a conference call the same day, including that "much of [Countrywide's] originations in the current market are of much higher quality and better spreads than the past couple of years" (see Am. Compl. ¶¶ 83-85) (internal quotation marks and emphasis added omitted).

In the Form 8-K that BAC filed on January 22, 2008, BAC reported "[2007] fourth quarter mark-to-market write[-]downs on its high grade, mezzanine and CDO squared tranches in [its] Super Senior CDOs of $873 million, $757 million, and $2.329 billion, respectively" (Am. Compl. ¶ 72) (internal quotation marks omitted). Additionally, BAC reported that its "year[-]end 2007 Tier1 capital and leverage ratios⁶ [were] 6.87% and 5.04%, respectively" (Am. Compl. ¶ 72).

Plaintiffs allege...