Sec. & Exch. Comm'n v. Goldstone

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. LARRY A. GOLDSTONE, CLARENCE G. SIMMONS, III,and JANE E. STARRETT, Defendants.

No. CIV 12-0257 JB/GBW

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW MEXICO

August 22, 2015

UNSEALED MEMORANDUM OPINION AND ORDER¹

TABLE OF CONTENTS

Introduction ..................................................................................................................................... 1

Factual Background ........................................................................................................................ 3

Procedural Background ............................................................................................................... 335

Law Regarding Summary Judgment ........................................................................................... 502

Relevant Federal Securities Law ................................................................................................ 508

Analysis ....................................................................................................................................... 558

I. The Court Will Deny the Defendants' Request for Summary Judgment on the Objective Falsity Issue ................................................................................................... 559

A. The Restatement Demonstrates that a Genuine Issue of Material Fact Exists For Objective Falsity ........................................................................................... 562

B. Thornburg Mortgage's Inability to Timely Meet Margin Calls Shows that a Genuine Issue of Material Fact Exists for Objective Falsity .............................. 566

C. Thornburg Mortgage's Depleted Liquidity Shows that a Genuine Issue of Material Fact Exists on the Objective Falsity Issue ............................................ 568

D. The I/O Strip Transactions Demonstrate that a Genuine Issue of Material Fact Exists for Objective Falsity ......................................................................... 570

E. The European Hedge-Fund Rumor Also Shows a Genuine Issue of Material Fact on the Objective Falsity Issue ..................................................................... 572

II. The Court Will Deny the SEC's Request for Summary Judgment on the Objective Falsity and Materiality Issues ......................................................................................... 580

III. There is a Genuine Issue of Material Fact on the Subjective Falsity Issue .................... 584

A. The February 25, 2008, Email that Starrett Wrote to Goldstone Supports Finding that a Genuine Issue of Material Fact Exists Concerning Subjective Falsity .................................................................................................................. 590

B. Thornburg Mortgage's Decision to Postpone the Securitization Supports Finding that there is a Genuine Issue of Material Fact About Subjective Falsity .................................................................................................................. 598

C. The February 28, 2008, Email that Simmons Wrote to Goldstone Supports a Conclusion that a Genuine Issue of Material Fact Exists Whether there is Subjective Falsity ................................................................................................ 601

D. The Hedge-Fund Rumor Shows that there is a Genuine Issue of Material Fact About Subjective Falsity ............................................................................. 602

IV. There is a Genuine Issue of Material Fact Concerning Scienter ........................ 605

V. There is a Genuine Issue of Material Fact Whether the Defendants Deceived KPMG ............................................................................................................................. 607

A. Rule 13b2-2 is Violated when a Person Omits a Material Fact that Makes a Statement Misleading ....................................................................................... 608

B. KPMG's No-Fraud Conclusion does not Foreclose a Possible Rule 13b2-2 Violation ............................................................................................................. 612

C. The SEC has Presented Evidence of Material Misstatements that the Defendants Made to KPMG ................................................................................ 613

D. The SEC has Presented Evidence of Omissions that Made Statements Misleading ........................................................................................................... 617

INTRODUCTION

THIS MATTER comes before the Court on: (i) the Motion for Summary Judgment on Behalf of Larry Goldstone and Clarence G. Simmons and Memorandum of Law in Support, filed August 9, 2013 (Doc. 201)("Goldstone MSJ"); (ii) the Memorandum of Point and Authorities in Support of Defendant Jane Starrett's Motion for Summary Judgment, filed August 31, 2013 (Doc. 206)("Starrett MSJ")²; (iii) the Plaintiff Securities and Exchange Commission's Opposition to Motion for Summary Judgment on Behalf of Larry Goldstone and Clarence G. Simmons and Cross-Motion for Summary Judgment Regarding Objective Falsity and Materiality, filed November 6, 2013 (Doc. 231)("SEC Goldstone Response"); and (iv) the Plaintiff Securities and Exchange Commission's Opposition to Motion for Summary Judgment and Memorandum of Law in Support of Jane Starrett's Motion for Summary Judgment and Cross-Motion for Summary Judgment on the Issues of Objective Falsity and Materiality, filed November 14, 2013 (Doc. 240)("SEC Starrett Response"). The Court held hearings on June 26, 2014, June 27, 2014, August 12, 2014, and August 13, 2014. The primary issues are (i) whether the Court should use a recklessness or an actual-disbelief standard for determining whether a statement of opinion is subjectively false; (ii) whether the Court should grant summary judgmentin the Defendants' favor on the issue whether they made an objectively false statement; (iii) whether the Court should grant summary judgment in favor of Plaintiff Securities and Exchange Commission ("SEC") on the issue whether the Defendants made an objectively false statement; (iv) whether the Court should grant the SEC summary judgment on the issue of materiality; (v) whether the Court should grant summary judgment in the Defendants' favor on the issue of subjective falsity; (vi) whether the Court should grant summary judgment on the issue of scienter; and (vii) whether the Court should grant the Defendants summary judgment on the SEC's claim under SEC rule 13b2-2, 17 C.F.R. § 240.13b2-2.

Because of recent opinions from the Supreme Court of the United States of America and from the United States Court of Appeals for the Tenth Circuit, the Court will apply an actual-disbelief standard for determining whether a person subjectively disbelieved the truth of an opinion statement. There are genuine issues of material fact from which a reasonable juror could find that the Defendants made an objectively false statement. The Court will, thus, not grant summary judgment in the Defendants' favor on the objective-falsity issue. Similarly, there is a genuine issue of material fact from which a juror could find that the Defendants' statements were not objectively false; summary judgment is, consequently, also not appropriate for the SEC on the objective-falsity issue. Because the SEC's arguments for materiality are closely tied to its objective-falsity arguments, the same issues of material fact preclude the Court from granting summary judgment in the SEC's favor on the issue of materiality. Even under the stricter actual-disbelief standard, there are genuine issues of material fact whether the Defendants believed that their statements were false when made. These same issues of material fact affect scienter, because the Defendants acted with scienter if they knew that their statements were false when they made them. Accordingly, the Court will not grant the Defendants summary judgmenton the issues of subjective falsity or scienter. Finally, the Defendants made statements that were false or misleading because of omitted information, which show that genuine issues of material fact exist that make summary judgment on the SEC's rule 13b2-2 claim inappropriate. Consequently, the Court will not grant either party summary judgment on any issue.

FACTUAL BACKGROUND

Thornburg Mortgage, Inc. was a publicly traded, single-family residential mortgage lender that commenced operations in 1993 and was based in Santa Fe, New Mexico. See Statement of Material Facts of Larry Goldstone and Clarence G. Simmons in Support of Their Motion for Summary Judgment ¶ 1, at 4, filed August 9, 2013 (Doc. 203)("Goldstone Facts")(setting forth this fact); Plaintiff Securities and Exchange Commission's Statement of Disputed Material Facts in Opposition to Motion for Summary Judgment on Behalf of Larry Goldstone and Clarence G. Simmons and Cross-Motion for Summary Judgment Regarding Objective Falsity and Materiality at 1-51, filed November 6, 2013 (Doc. 233)("SEC Disputed Facts")(not disputing this fact);³ Joint Status Report and Provisional Discovery Plan ¶ 3, at 2,filed June 1, 2012 (Doc. 43)("Stipulated Facts")(setting forth facts to which the parties stipulated); Thornburg Mortgage, Inc. 2007 Form 10-K at 16 (filed with Securities and Exchange Commission on February 28, 2008), filed August 9, 2013 (Doc. 204-244)("2007 Form 10-K").⁴ "Thornburg originated, acquired, and retained investments in adjustable rate mortgage ('ARM')[⁵] assets, particularly High Quality ARM securities, and focused principally on prime and super-prime borrowers seeking jumbo and super-jumbo ARMs." Goldstone Facts ¶ 2, at 4. See SEC Disputed Facts, at 1-51 (not disputing this fact); Memorandum from Shawn Buniel to Clay Simmons, Jane Starrett, and File, regarding Evaluation of Thornburg Mortgage, Inc., and Its Ability to Continue Operations (dated August 24, 2007)...