NECA–IBEW Health & Welfare Fund v. Goldman Sachs & Co.

693 F.3d 145

NECA–IBEW HEALTH & WELFARE FUND, individually and on behalf of all others similarly situated, Plaintiff–Appellant,

v. GOLDMAN SACHS & CO., Goldman Sachs Mortgage Company, Daniel L. Sparks, Michelle Gill, GS Mortgage Securities Corp., Kevin Gasvoda, Defendants–Appellees,GS Mortgage Securities Corp., GSAA Home Equity Trust 2007–3, GSAA Home Equity Trust 2007–4, GSAMP Trust 2007–HE2, GSAMP Trust 2007–FM2, GSAA Home Equity Trust 2007–5, GSAA Home Equity Trust 2007–6, GSAA Home Equity Trust 2007–7, GSAA Home Equity Trust 2007–8, GSR Mortgage Loan Trust 2007–4F, GSAMP Trust 2007–HSBC1, GSAMP Trust 2007–HEI, Starm Mortgage Loan Trust 2007–4, GSAA Home Equity Trust 2007–10, GSR Mortgage Loan Trust 2007–5F, GSR Mortgage Loan Trust 2007–3F, GSR Mortgage Loan Trust 2007–OA2, SunTrust Robinson Humphrey, Inc., Defendants,The Police and Fire Retirement System of the City of Detroit, Intervenor.

Docket No. 11–2762–cv.

United States Court of Appeals, Second Circuit.

Argued: Feb. 3, 2012.

Decided: Sept. 6, 2012.

Joseph D. Daley, Robbins Geller Rudman & Dowd LLP, San Diego, CA (Arthur C. Leahy, Robbins Geller Rudman & Dowd LLP, San Diego, CA, Samuel H. Rudman, David A. Rosenfeld, Carolina C. Torres, Robbins Geller Rudman & Dowd LLP, Melville, NY, Patrick J. O'Hara, Cavanagh & O'Hara, Springfield, IL, on the briefs), for Plaintiff–Appellant.

Richard H. Klapper, Sullivan & Cromwell LLP, New York, N.Y. (Theodore Edelman, Michael T. Tomaino, Jr., David M.J. Rein, Sullivan & Cromwell LLP, New York, NY, on the brief), for Defendants–Appellees.

Before: B.D. PARKER, RAGGI, and LOHIER, Circuit Judges.

BARRINGTON D. PARKER, Circuit Judge:

Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 impose essentially strict liability for material misstatements contained in registered securities offerings. See15 U.S.C. §§ 77k, l(a)(2), o. This appeal requires us to consider a plaintiff's standing to assert claims on behalf of purchasers of securities issued under the same allegedly false and misleading SEC Form S–3 and base prospectus (together, the “Shelf Registration Statement”), but sold in separate offerings by unique prospectus supplements and free writing prospectuses (together, the “Prospectus Supplements”) (collectively, the “Offering Documents”).

We hold that plaintiff has class standing to assert the claims of purchasers of certificates backed by mortgages originated by the same lenders that originated the mortgagesbacking plaintiff's certificates, because such claims implicate “the same set of concerns” as plaintiff's claims. Gratz v. Bollinger, 539 U.S. 244, 267, 123 S.Ct. 2411, 156 L.Ed.2d 257 (2003). We further hold that plaintiff need not plead an out-of-pocket loss in order to allege a cognizable diminution in the value of an illiquid security under § 11. Accordingly, we affirm in part and vacate in part the judgment of the district court and remand with instructions to reinstate plaintiff's §§ 11, 12(a)(2), and 15 claims to the extent they are based on similar or identical misrepresentations in the Offering Documents associated with certificates backed by mortgages originated by the same lenders that originated the mortgages backing plaintiff's certificates.

BACKGROUND¹

Plaintiff NECA–IBEW Health & Welfare Fund (“NECA” or the “Fund”) sued alleging violations of §§ 11, 12(a)(2), and 15 of the Securities Act on behalf of a putative class consisting of all persons who acquired certain mortgage-backed certificates (the “Certificates”) underwritten by defendant Goldman Sachs & Co. and issued by defendant GS Mortgage Securities Corp. (“GS Mortgage”). The Certificates were sold in 17 separate Offerings through 17 separate Trusts pursuant to the same Shelf Registration Statement, but using 17 separate Prospectus Supplements. NECA alleges that the Shelf Registration Statement contained false and misleading statements that were essentially repeated in the Prospectus Supplements. NECA bought Certificates issued from only two of the Offerings, but asserts class claims putatively on behalf of purchasers of Certificates from each tranche of all 17 Offerings.²

The Certificates

The Certificates are securities backed by pools of residential real estate loans acquired by GSMC through two primary channels: (1) the “Goldman Sachs Mortgage Conduit Program” (the “Conduit Program”), and (2) bulk acquisitions in the secondary market. Under the Conduit Program, GSMC acquired loans from a variety of sources, including banks, savings-and-loans associations, and mortgage brokers. Major originators of the loans in the Trusts included National City Mortgage Co. (“National City”) (six Trusts); Countrywide Home Loans (“Countrywide”) (five Trusts); GreenPoint Mortgage Funding, Inc. (“GreenPoint”) (five Trusts); Wells Fargo Bank (“Wells Fargo”) (four Trusts); SunTrust Mortgage (“SunTrust”) (three Trusts); and Washington Mutual Bank (“WaMu”) (two trusts).

Each Certificate represents a “tranche” of a particular Offering, providing its holder with an ownership interest in principal and/or interest payments from the pool of loans within the Trust through which it was issued. Each tranche has a different risk profile, paying a different rate of interest depending on the expected time to maturity and the degree of subordination, or protection against the risk of default.

In October 2007, NECA purchased $390,000 of the Class A2A Certificates of the GSAA Home Equity Trust 2007–10 (the “2007–10 Certificates”) directly from Goldman Sachs in a public offering. In May 2008, it purchased approximately $50,000 of the Class 1AV1 Certificates from Group 1 of the GSAA Home Equity Trust 2007–5 (the “2007–5 Certificates”).³ The Certificates' Offering Documents contained numerous disclaimers, including one which warned that:

Your Investment May Not Be Liquid[.] The underwriter intends to make a secondary market in the offered certificates, but it will have no obligation to do so. We cannot assure you that such a secondary market will develop or, if it develops, that it will continue. Consequently, you may not be able to sell your certificates readily or at prices that will enable you to realize your desired yield.

2007–05 Prospectus Supplement at S–50; 2007–10 Prospectus Supplement at S–35.

Shelf Registrations

The shelf registration process enables qualified issuers to offer securities on a continuous basis by first filing a shelf registration statement and then subsequently filing separate prospectus supplements for each offering. See17 C.F.R. § 230.415. The shelf registration statement includes a “base” or “core” prospectus that typically contains general information, including the types of securities to be offered and a description of the risk factors of the offering. See17 C.F.R. § 230.430B; Securities Offering Reform, Securities Act Release No. 33–8591, 70 Fed.Reg. 44,722, 44,770–44,774 (Aug. 3, 2005). It will generally not include transaction-specific details—such as pricing information, or information regarding the specific assets to be included in the vehicle from which the securities are issued—which is contained instead in the prospectus supplements. See17 C.F.R. § 229.512(a)(1).

By regulation, each new issuance requires amending the shelf registration statement, thereby creating a “new registration statement” for each issuance, id. § 229.512(a)(2), that is “deemed effective only as to the securities specified therein as proposed to be offered,” 15 U.S.C. § 77f(a). “Amendments” to the shelf registration statement include the prospectus supplements unique to each offering. See17 C.F.R. § 229.512(a)(2) ( “[E]ach ... post-effective amendment [to the shelf registration statement, such as a prospectus supplement] shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.”); Finkel v. Stratton Corp., 962 F.2d 169, 174 (2d Cir.1992) (“[Section] 229.512(a)(2), operating in the context of securities offered pursuant to the post-effective registration, deems the offering date to be the post-effective registration date, not the initial [shelf] registration date.”). The representations in the shelf registration statement are simply deemed to be made again at the effective date. Thus, each of the 17 Offerings that NECA seeks to challenge is registered pursuant to a separate registration statement consisting of the same Shelf Registration Statement and a unique Prospectus Supplement.

The Misrepresentations

In this suit, commenced in December 2008, NECA alleges that the Offering Documents contained false and misleading information about the underwriting guidelines of the mortgage loan originators, the property appraisals of the loans backing the Trusts, and the risks associated with the Certificates. ⁴ For example, NECA alleges that the following statements, contained within the Shelf Registration Statement common to the registration statements of all 17 Trusts' Certificates, were materially misleading:

• That for the mortgage loans generally, “[t]he lender ... applies the underwriting standards to evaluate the borrower's credit standing and repayment ability” and “makes a determination as to whether the prospective borrower has sufficient monthly income available (as to meet the borrower's monthly obligations on the proposed mortgage loan and other expenses related to the mortgaged property ...)” and that certain other types of loans “are underwritten on the basis of a judgment that mortgagors or obligors will have the ability to make the monthly payments required initially.”

• That for loans purchased through the Conduit Program, “the originating lender makes a determination about whether the borrower's monthly income (if required to be stated) will be sufficient to enable the borrower to meet its monthly obligations on the mortgage loan and other expenses related to the property.”

• That loan originators...