Second Circuit Addresses Materiality at the Pleadings
Stage in Two Recent Decisions
August 18. 2011
In two recent decisions issued less than one week apart, Hutchison v. Deutsche Bank
Securities Inc., 2011 WL 3084969 (2d Cir. July 26, 2011), and SEC v. Gabelli, 2011 WL
3250556 (2d Cir. Aug. 1, 2011), the United States Court of Appeals for the Second
Circuit addressed motions to dismiss securities law claims based upon the immateriality
of the defendants’ alleged misstatements or omissions. Generally, the question of
whether a misstatement or omission is “material” –– i.e., significant enough that a “a
reasonable shareholder would consider it important in deciding how to act” –– is a fact-
intensive inquiry not suitable for resolution on a motion to dismiss. The Second Circuit’s
decisions confirm that although this holds true in most cases, in a proper case the
immateriality of an alleged misstatement or omission can be decided at the pleadings
stage.
In Hutchison, plaintiffs alleged that defendant CBRE Realty Finance, Inc. (“CBRE”), a
commercial real estate finance company, had made misstatements and omissions when
it made its initial public offering (“IPO”). Plaintiffs alleged that, in its IPO, CBRE had failed
to disclose that it had made investments in two troubled mezzanine loans totaling
approximately $52 million. Not long after its IPO, CBRE announced that loans were
troubled, and shortly thereafter CBRE was forced to foreclose and write down the value
on each loan.
Plaintiffs filed suit shortly thereafter under Sections 11, 12 and 15 of the Securities Act of
1933., 15 U.S.C. §§ 77k, 77l, 77o. CBRE moved to dismiss the complaint pursuant to
Federal Rule of Civil Procedure 12(b)(6), arguing that plaintiffs’ complaint failed to
“plausibly allege that the prospectus contained a material misstatement or
omission.” The United States District Court for the District of Connecticut agreed, and
