Yates v. Municipal Mortgage & Equity, No. 12-2496 (4th Cir. 2014)
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Plaintiffs filed suit against MuniMae defendants, alleging that they committed securities fraud by falsely representing that the Company was in full compliance with a new accounting standard enacted in 2003; and concealing the substantial cost of correcting the accounting error. The court affirmed the district court's dismissal of plaintiffs' claims under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and SEC Rule 10b-5, 17 C.F.R. 240.10b-5, for failing to adequately plead scienter; affirmed the district court's dismissal of plaintiffs' claim under sections 11 of the Securities Act of 1933, 15 U.S.C. 77k(a), as time-barred under section 13's statute of repose; affirmed the district court's dismissal of plaintiffs' claim under section 12(a)(2) of the Securities Act, 15 U.S.C. 77(a)(2), for lack of standing; and affirmed the district court's dismissal of the section 15 claim because plaintiffs failed to adequately plead a primary violation of the Securities Act.
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PUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 12-2496 ROBERT YATES, MJG 08 269; ALAN S. BARRY, MJG 08 269; DAVID YOUNG, MJG 08 269; CARLO HORNSBY; ED FRIEDLANDER, MJG 08 269; PAUL ENGEL, individually and on behalf of all others similarly situated MJG 08 292; WILLIAM D. FELIX; DAVID KREMSER, on behalf of himself and on behalf of Elk Meadow Investments, LLC; CHARLES W. DAMMEYER, on behalf of himself and others similarly situated, Plaintiffs Appellants, and F. RICHARD MANSON, individually and on behalf of, all others similarly situated MJG 08 269; GEETA SHAILAM, individually and on behalf of all others similarly situated MJG 08 386; MICHAEL J. CIRRITO, individually and on behalf of all others similarly situated MJG 08 476; JOHN J. HUFNAGLE, individually and on behalf of all others similarly situated MJG 08 579; WILLIAM JOHNSTON, derivatively on behalf of Municipal Mortgage & Equity, LLC MJG 08 670; ROBERT STAUB, derivatively on behalf of Municipal Mortgage & Equity, LLC MJG 08 802; THE MARY L. KIESER TRUST, by Mary L. Kieser and Ralph F. Kieser, Trustees, derivatively and on behalf of Nominal Defendant, Municipal Mortgage & Equity LLC MJG 08 805; JUDITH GREENBERG; JOSEPH S. GELMIS, individually and on behalf of all others similarly situated MJG 08 2133; ARNOLD J. ROSS, MJG 08 2133; TROY BROY; JULES ROTHAS, individually and on behalf of all others similarly situated MJG 08 2134; NAOMI RAPHAEL; FAFN/SLATER GROUP; KREMSER GROUP, MJG 08 269, Plaintiffs, v. MUNICIPAL MORTGAGE & EQUITY, LLC; MELANIE M. LUNDQUIST; MICHAEL L. FALCONE; MERRILL LYNCH PIERCE FENNER AND SMITH INCORPORATED; RBC CAPITAL MARKETS, LLC.; MARK K. JOSEPH; CHARLES C. BAUM; EDDIE C. BROWN; ROBERT S. HILLMAN; DOUGLAS A. MCGREGOR; ARTHUR S. MEHLMAN; FRED N. PRATT, JR.; RICHARD O. BERNDT; WILLIAM S. HARRISON; DAVID KAY; CHARLES M. PINCKNEY, Defendants Appellees, and GARY A. MENTESANA; BARBARA B. LUCAS; EARL W. COLE, III; ANGELA B. BARONE, Defendants. Appeal from the United States District Court for the District of Maryland, at Baltimore. Marvin J. Garbis, Senior District Judge. (1:08-md-01961-MJG) Argued: October 30, 2013 Decided: March 7, 2014 Before DIAZ and FLOYD, Circuit Judges, and Joseph F. ANDERSON, Jr., United States District Judge for the District of South Carolina, sitting by designation. Affirmed by published opinion. Judge Diaz wrote the opinion, in which Judge Floyd and Judge Anderson joined. ARGUED: David A.P. Brower, BROWER PIVEN, New York, New York, for Appellants. Mark Holland, New York, New York, William M. Jay, GOODWIN PROCTER LLP, Washington, D.C.; Jason J. Mendro, GIBSON, DUNN & CRUTCHER LLP, Washington, D.C., for Appellees. ON BRIEF: Charles J. Piven, Yelena Trepetin, BROWER PRIVEN, Stevenson, Maryland; Sherrie R. Savett, Barbara A. Podell, Eric Lechtzin, BERGER & MONTAGUE, P.C., Philadelphia, Pennsylvania; Kim E. Miller, KAHN SWICK & FOTI, LLC, New York, New York; Susan K. Alexander, Andrew S. Love, ROBBINS GELLER RUDMAN & DOWD LLP, San Francisco, California, for Appellants. Jonathan C. Dickey, GIBSON, DUNN & CRUTCHER LLP, New York, New York, for Appellees Merrill Lynch Pierce Fenner and Smith Incorporated, and RBC Capital Markets, LLC. Mary K. Dulka, GOODWIN PROCTER LLP, New York, New York; Anthony Candido, CLIFFORD CHANCE LLP, New York, 2 New York; Stephen A. Goldberg, Ward B. Coe III, GALLAGHER EVELIUS & JONES LLP, Baltimore, Maryland, for Appellees Municipal Mortgage & Equity, LLC, Mark K. Joseph, William S. Harrison, Charles M. Pinckney, and David Kay. William M. Krulak, Jr., MILES & STOCKBRIDGE P.C., Baltimore, Maryland, for Appellees Charles C. Baum, Richard O. Berndt, Eddie C. Brown, Robert S. Hillman, Douglas A. McGregor, Arthur S. Mehlman, and Fred N. Pratt, Jr. Charles O. Monk, II, Geoffrey M. Gamble, SAUL EWING LLP, Baltimore, Maryland, for Appellee Michael L. Falcone. David W.T. Daniels, RICHARDS KIBBE & ORBE LLP, Washington, D.C., for Appellee Melanie Lundquist. 3 DIAZ, Circuit Judge: This case involves claims that Municipal Mortgage & Equity ( MuniMae or the Company ), and certain of its officers and directors (collectively, the federal securities laws. 1 class representatives, MuniMae defendants ), violated Plaintiffs, both individually and as contend that the MuniMae defendants committed securities fraud by (1) falsely representing that the Company was in full compliance with a new accounting standard enacted in 2003; and (2) concealing correcting the accounting error. the substantial cost of Plaintiffs allege that they relied on the integrity of the market price of the Company s stock, and fraudulent that, conduct, as a result investors of paid the an MuniMae defendants artificially inflated price for MuniMae shares during the class period. The §§ 10(b) district and 20(a) court of dismissed the plaintiffs Securities Exchange claims under Act 1934, of finding that the amended complaint failed to adequately plead scienter, or wrongful intent. The court also dismissed claims under §§ 11, 12(a)(2), and 15 of the Securities Act of 1933 relating to a secondary public 1 offering ( SPO ). The court Plaintiffs also sued Merrill Lynch, Pierce, Fenner & Smith, Inc. and RBC Capital Markets Corp., who served as lead underwriters in a secondary public offering conducted by MuniMae in 2005. 4 found the § 11 claim time-barred by the applicable statute of repose, and § 12(a)(2) that claim. plaintiffs It lacked dismissed standing the § 15 to bring claim the because plaintiffs failed to adequately plead a primary violation of the Securities Act. 2 For the reasons that follow, we affirm. I. In reviewing the district court's dismissal under Federal Rule of Civil Procedure 12(b)(6), we allegations in the complaint as true. accept all factual Matrix Capital Mgmt. Fund, LP v. BearingPoint, Inc., 576 F.3d 172, 176 (4th Cir. 2009) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, (2007)). And as did the district court, we take judicial notice of the content of relevant SEC filings and other publicly available documents included in the record. See In re PEC Solutions, Inc. Sec. Litig., 418 F.3d 379, 390 & n.10 (4th Cir. 2005). 2 The district court refused to dismiss three other claims alleging violations of the Securities Act. After some procedural skirmishing not relevant to this appeal, the parties filed a joint motion requesting that the district court certify the dismissed claims as final pursuant to Federal Rule of Civil Procedure 54(b). Finding no just reason for delay, the court granted the motion. We are satisfied that the district court acted appropriately in certifying its order under Rule 54(b). See Culosi v. Bullock, 596 F.3d 195, 203 (4th Cir. 2010). 5 A. The putative class period for this case spans from May 3, 2004, to January 29, 2008. During that period, MuniMae was one of the nation s largest syndicators of low-income housing tax credits ( LIHTCs ). developers developers of low-income cannot services Federal take companies, tax rental advantage like law provides housing. of MuniMae, LIHTCs Because to most these credits, financial organize LIHTC investment partnerships ( LIHTC Funds ) to pool and sell the credits to investors. MuniMae usually acted as the general partner of its LIHTC Funds during the class period, and it received syndication and asset management fees for organizing and maintaining them. Although its ownership share was generally low, ranging from 0.1% to 1.0%, it was typically larger than that of any single investor. Prior to 2003, MuniMae primarily treated these LIHTC Funds as off balance sheet entities. In 2003, the Financial Accounting Standards Board adopted Financial ( FIN Accounting 46R ), which Standards Board addressed the Interpretation financial No. 46R reporting requirements of businesses with respect to off balance sheet 6 activity. 3 FIN 46R defined a new category of entities called Variable Interest Entities ( VIEs ). Under FIN 46R, a company must consolidate onto its financial statements the assets and liabilities of a VIE if the company is its primary beneficiary, that is, if the company absorbs the majority of the risks and rewards associated with the VIE. Before the adoption of this revised standard, a company was generally only required to consolidate financial statements if it had a majority voting interest in the entity. The first quarter of 2004 was the first period for which MuniMae reported compliance with FIN 46R. The Company then concluded that FIN 46R required it to consolidate some but not all of its LIHTC Funds, which added a net $1.3 billion in assets and liabilities remaining to the unconsolidated approximately $970.3 Company s LIHTC million and financial Funds statements. had net liabilities of assets The of approximately $90.8 million. Through mid-2006, MuniMae continued to represent its compliance with FIN 46R in financial reports filed with the SEC. PricewaterhouseCoopers LLP ( PwC ), MuniMae s independent public accountant, certified that those reports had been prepared in 3 The Board initially adopted FIN 46 in January 2003. In December 2003, it approved various amendments to FIN 46 and released FIN 46R. 7 accordance with generally accepted ( GAAP ) for fiscal years 2004 and 2005. accounting principles Between 2004 and 2006, the Company also made a number of acquisitions and conducted several offerings, including an SPO in February 2005. At the end of 2005, Melanie Lundquist replaced William Harrison as the Company s CFO. On March 10, 2006, MuniMae announced that it was restating its financial statements for the nine-month period ending on September 30, 2005, as well as fiscal years 2002 through 2004. The restatement corrected certain financial that were unrelated to FIN 46R. reporting errors MuniMae issued the restated financial statements in June 2006. In August, the Company disclosed that it had identified material weaknesses in internal controls over financial reporting, and that, as a result, it would be unable to file timely its second quarter 2006 Form 10-Q. J.A. 65. A few months later, on September 13, 2006, MuniMae announced that it was again restating its financial statements for fiscal years 2003 through 2005, and for the first quarter of 2006. The Company initially informed investors that the second restatement would address commitments three related to areas: (1) affordable accounting housing for projects; equity (2) the classification of cash flow from tax credit equity funds; and (3) accounting for syndication 8 fees. About a month later, however, MuniMae disclosed that it had not yet reached a conclusion regarding the extent of the [second] restatement. J.A. 1120. On October 26, 2006, MuniMae announced that it was replacing PwC as the Company s independent public accountant. The Company stated--and PwC agreed--that for fiscal years 2004 and 2005, and through October 2006, there were no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure or audit scope or procedure which disagreements if not resolved to the satisfaction of PwC would have caused them to make reference thereto in their reports on [MuniMae s] financial statements. Three months later, the J.A. 1120. Company reported consecutive increase in its quarterly dividend. its 40th In the same announcement, the Company revealed that the second restatement would address accounting errors with respect to FIN 46R, and that the Company would be required to consolidate substantially all of the low income housing tax credit equity funds it has interests in. J.A. 1373. On May 4, 2007, MuniMae disclosed that it would not be able to timely dedication file of its 10-K significant restatement efforts. for 2006 [a]s management J.A. 1129. a result resources to of the . . . The Company noted that since September 2006, it had identified additional material weaknesses 9 in its internal controls over financial reporting, including with respect to its accounting of LIHTC Funds. On July Navigant 10, 2007, Consulting restatement. to MuniMae assist announced its that internal it had auditors hired in the A month later, it disclosed more details about the scope of the effort, noting that there are approximately 92 people currently working on the restatement, company employees and 72 consultants. including J.A. 1145. 20 Around the same time, Lundquist resigned and Charles Pinckney replaced her as CFO. MuniMae held a teleconference further update investors. on November 8, 2007 to The Company stated that management planned to ask the Board to continue the Company s longstanding policy of increasing the dividend distribution every quarter, although it warned that it is possible that the dividend payout ratio for the full fiscal year 2007 may exceed 100% of the Company s net cash from operations due to incurred by the Company from the restatement. the costs J.A. 1155. being The Company s officers declined at that point to estimate the cost of the second restatement, though they acknowledged the costs were substantial. On January 28, 2008, MuniMae announced that it was cutting its quarterly dividend by 37%, from $0.525 to $0.33 per share. The Company attributed the cut to the cost of the Company s 10 ongoing restatement of its financial statements, the decision . . . to conserve capital . . . given the current volatility in the credit and capital markets, and the desire to dedicate additional capital to the high-growth Renewable Energy Finance business. J.A. 1171. At the same time, the Company stated that it did not believe the results of the restatement w[ould] materially change the previously recorded cash balances of the Company and its subsidiaries. Id. Because the restatement efforts were still ongoing, the Company also announced that it anticipated being delisted from the New York Stock Exchange because it could not meet a NYSE deadline for filing its 2006 Form 10-K. The price of MuniMae shares dropped 46.57%, from $17.20 per share on January 28, to $9.19 per share on January 29, on unusually heavy trading volume. MuniMae provided further details to investors regarding the second restatement during a January 29 conference call. respect to FIN 46R, the Company disclosed that it With had to consolidate 230 LIHTC Funds, which required it to review 6,000 separate financial statements. Because the Company had no automated process in place to review the accounting, this work had to be done manually. Acknowledging that these developments were Company s a result instance[,] CEO of the Michael Falcone mistakes expressed his in the first disappointment and embarrassment over the the amount of time and energy and 11 effort[] it s taking us to fix them. MuniMae shares dropped an J.A. 1196. additional 22.416%, The price of to $7.13 per share, on January 30, again on unusually heavy trading volume. On April 9, 2008, MuniMae disclosed that it spent $54.1 million to complete the second restatement. B. Shareholders filed multiple lawsuits against MuniMae, certain of its officers and directors, and the lead underwriters in the 2005 SPO, alleging violations of federal securities laws. The actions were consolidated in the District of Maryland for pretrial proceedings. See In re Mun. Mortg. & Equity, LLC, Sec. & 571 Derivative Litig., F. Supp. 2d 1373 (J.P.M.L. 2008). Plaintiffs filed the operative Consolidated Amended Class Action Complaint on December 5, 2008. Applying the heightened pleading standards of the Private Securities Litigation Reform Act ( PSLRA ), 15 U.S.C. § 78u-4, the district court held that plaintiffs Exchange Act claims failed because the amended complaint did not adequately plead scienter. See In re Mun. Mortg. & Equity, LLC, Sec. Derivative Litig., 876 F. Supp. 2d 616, 647 (D. Md. 2012). court also dismissed respect to the SPO. plaintiffs Securities Act The with It found the § 11 claim time-barred by the statute of repose in § 13 of the Securities Act. 657. claims & See id. at It also concluded that Charles Dammeyer, the only named 12 plaintiff asserting Securities Act claims with respect to the SPO, lacked standing to bring a § 12(a)(2) claim, see id. at 661, and that the amended complaint failed to adequately plead that the underwriter defendants were immediate sellers, see id. at 662. This appeal followed. II. A. We first consider the district court s dismissal of plaintiffs claims under § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 for failing to adequately plead scienter. The purpose of the Exchange Act and its accompanying regulations is to ensure that companies disclose the information necessary for investors to make informed investment decisions. See Taylor v. First Union Corp. of S.C., 857 F.2d 240, 246 (4th Cir. 1988). Section 10(b) of the Act prohibits the use of any manipulative or deceptive device or contrivance in connection with the sale of a security in violation of SEC rules. U.S.C. § 78j(b). See 15 Rule 10b-5 implements § 10(b) by making it unlawful, in connection with the sale of a security: (a) To employ defraud, any device, 13 scheme, or artifice to (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person. 17 C.F.R. § 240.10b-5. The Supreme Court has recognized that § 10(b) provides an implied right of action for purchasers or sellers of securities who have been injured by violations of the statute. See Stoneridge Inv. Partners v. Scientific-Atlanta, Inc., 552 U.S. 148, 157 (2008). In a typical § 10(b) action, a private plaintiff must prove six elements: the (1) a material misrepresentation or omission by defendant; (2) misrepresentation scienter; or (3) omission and a the connection purchase between or sale the of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation. To establish defendant acted scienter, with deceive, manipulate, (internal quotation alleging either sufficient. § 10(b) See context, a or mental state or reckless act At severely Capital, must 576 is 551 the at that that the intent to U.S. pleading reckless F.3d one prove embracing Tellabs, omitted). intentional a plaintiff defraud. marks Matrix a Id. so 319 stage, conduct 181. is at In is the highly unreasonable and such an extreme departure from the standard of 14 ordinary care as to present a danger of misleading the plaintiff to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it. Id. (internal quotation marks omitted). The PSLRA imposes a heightened pleading standard on fraud allegations in private securities complaints. See Teachers Ret. Sys. of La. v. Hunter, 477 F.3d 162, 171-72 (4th Cir. 2007). The complaint must state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind with allegedly violated the statute. respect to each act that 15 U.S.C. § 78u-4(b)(2). [T]o the extent a plaintiff alleges corporate fraud, the plaintiff must allege facts that support a strong inference of scienter with respect corporation. to at least Matrix one Capital, quotation marks omitted). authorized 576 F.3d at agent 182 of the (internal To allege fraud against an individual defendant, the plaintiff must allege facts supporting a strong inference of scienter as to that person. See id. Evaluating the strength of an inference is necessarily a comparative inquiry. inference of See Tellabs, 551 U.S. at 326-27. scienter can only be strong . . . when [A]n it is weighed against the opposing inferences that may be drawn from the facts in their entirety. Cozzarelli Inc., 549 F.3d 618, 624 (4th Cir. 2008). 15 v. Inspire Pharm. A court must compare the malicious and innocent inferences cognizable from the facts pled in the complaint, and only allow the complaint to survive a motion to dismiss if the malicious inference is at least as compelling as any opposing innocent inference. Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 991 (9th Cir. 2009). As applied here, the question is whether the allegations in the complaint, viewed in their totality and in light of all the evidence in the record, allow us to draw a strong inference, at least MuniMae as compelling defendants as either any opposing knowingly or inference, that the recklessly defrauded investors by (1) issuing false financial statements as to the Company s compliance with FIN 46R, and (2) concealing the cost of correctly consolidating LIHTC Funds in accordance with that standard. See Pub. Emps. Ret. Ass n of Co. v. Deloitte & Touche LLP, 551 F.3d 305, 313 (4th Cir. 2009). If we find the inference that defendants acted innocently, or even negligently, more compelling than the inference requisite scienter, we must affirm. that they acted with the Id. B. 1. We begin by considering whether the facts alleged in the amended complaint give rise to an inference of scienter and, if so, the strength of that inference. evaluate plaintiffs allegations 16 of Although we ultimately scienter holistically, we only afford their allegations the inferential weight warranted by context and common sense. Plaintiffs rely on four Matrix Capital, 576 F.3d at 183. categories of allegations as to scienter, to which we now turn. a. Confidential Witness Statements The amended complaint incorporates information from three confidential witness ( CW ) statements. complaint chooses sources, it to must rely on describe facts the provided sources by obtained When the confidential with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged or in the alternative provide some other evidence to support their allegations. (internal quotation Teachers Ret., 477 F.3d at 174 marks omitted). [O]missions and ambiguities count against an inference of scienter because a complaint s factual particularity. allegations must be stated with Tellabs, 551 U.S. at 326; see also Institutional Investors Grp. v. Avaya, Inc., 564 F.3d 242, 263 (3d Cir. 2009) (noting that confidential courts should sources reliability). We confidential witnesses steeply that present lack the before discount sufficient allegations assessing scienter inferences they support. 17 allegations the of indicia from of each of the strength of the i. CW3 served manager in attended as a MuniMae s accounting defendants. Confidential Witness 3 staff accountant Internal meetings According to Accounting with CW3, and several MuniMae later a project Department. of CW3 the individual executives considered restating the Company s financial statements for months prior to the announcement of the first restatement, in March 2006. CW3 also asserts that, at some point prior to the first restatement, a PwC partner advised MuniMae to consolidate the remaining LIHTC Funds, but certain recommendation. MuniMae executives disagreed with that Specifically, CW3 s bosses . . . argued with PwC about how to classify the tax credit equity funds and how to determine the percentage of ownership MuniMae held on each one. J.A. 84. 4 CW3 also states that the Company was always in a state of some confusion and chaos as a result of MuniMae s rapid expansion. J.A. 68. and staff legal was As CW3 describes, the Company s accounting bombarded with documentation as the Company expanded but lacked sufficient personnel to handle the paper flow. J.A. 68-69. According to CW3, the staff was 4 According to CW3, the PwC partner assigned to the MuniMae account considered the Company s audits to be exceedingly challenging because MuniMae was a high level, complex company that required a sophisticated external auditing process in order to comply with FIN 46. J.A. 84. 18 unprepared professionally for the complex nature of accounting needed, particularly compliance with FIN 46R. the J.A. 69. ii. Confidential Witness 2 CW2 served as an in-house certified public accountant from late 2005 to April 2007. Lundquist and MuniMae s CW2 reported directly to then-CFO Chief Accounting Officer, Greg Thor. CW2 asserts that by early 2006, Lundquist and Thor had concluded that there were widespread problems with the accounting done under former CFO Harrison. among other According things, to restatement), CW2, the by The problems led Thor to review, Company s mid-2006 Lundquist knew (at that LIHTC the Fund time the accounting. of the primary first beneficiary determinations for most LIHTC Funds were incorrect and that the Funds should have been consolidated under FIN 46R. CW2 also asserts that Lundquist and Falcone were heavily involved in the restatement effort, with Falcone receiving updates regarding the restatement at least on a weekly basis and sometimes on a daily basis. J.A. 82. iii. Confidential Witness 1 Finally, CW1 was the administrative assistant to MuniMae s head of Internal Audit, Angela Barone, from June 2004 to June 2007. In that capacity, CW1 attended discuss progress on ongoing audit work. 19 regular meetings to According to CW1, at some point, frustration with the progress of FIN 46R accounting became a regular subject of discussion at the meetings, and Barone communicated that frustration to Lundquist and Falcone. 5 CW1 recounts that Falcone sent a memo to all MuniMae employees in Fall 2006 emphasizing that the auditing staff would be focusing all of its energies on the second restatement. The memo made clear that the related audit work should be made a priority and excuses regarding delays providing Department with information would not be tolerated. iv. the Audit J.A. 81. Inferences from the CW Evidence We conclude that the confidential witness statements permit an inference that the MuniMae defendants knew, perhaps as early as mid-2006, that the Company was not in compliance with FIN 46R, despite their representations to the contrary. The allegations are also consistent with the inference that these defendants knew--or at least suspected--by Fall 2006 that consolidating the LIHTC Funds in accordance with FIN 46R would be a difficult and costly undertaking. Nonetheless, we agree with the district court that these allegations intent. To do not begin support with, a the strong inference confidential 5 of witnesses wrongful do not However, CW1 does not describe the nature of the accountants frustration, nor is it clear precisely when these discussions took place. 20 expressly assert that the MuniMae defendants intentionally or recklessly failed to comply with GAAP or their accounting policies during the class period. also generally vague and conclusory own internal The statements are as to the MuniMae defendants state of mind. As even the amended complaint concedes, MuniMae struggled throughout the class period with what its own former accountant described as difficult and complex accounting. This complexity was not helped by an accounting system that was in a constant state of confusion and chaos, J.A. 85, in no small part due to the Company s rapid expansion and inadequate staffing. The MuniMae defendants may well have been negligent in failing to properly apply FIN 46R to their business in the first instance, and then by allowing the Company resulting accounting tsunami. not support a powerful and to be overwhelmed by the But plaintiffs allegations do compelling inference that these defendants acted with wrongful intent or severe recklessness. Cf. Zucco Partners, 552 F.3d at 1007 ( Although the allegations in this case are legion . . . the facts alleged . . . point towards the overwhelmed conclusion with that integrating a [the defendant] large new was division simply into its existing business. ). That MuniMae s officers and outside auditor debated how to account for the LIHTC Funds in light of FIN 46R does not compel 21 an inference of wrongful intent. is that there was an honest The more plausible inference disagreement over the application of a challenging new accounting standard. MuniMae defendants were ultimately support an inference of scienter. wrong is not proper That the enough to Cf. DSAM Global Value Fund v. Altris Software, Inc., 288 F.3d 385, 390 (9th Cir. 2002) ( [T]he mere publication of inaccurate accounting figures, or a failure to follow GAAP, without more, does not establish scienter. (quoting In re Software Toolworks, Inc., 50 F.3d 615, 627 (9th Cir. 1994))). As for CW2 s allegations regarding Lundquist s knowledge of the FIN 46R issues, they too fail to support a strong inference that she--or anyone else--acted with fraudulent purpose. Even if, as plaintiffs allege, Lundquist began to suspect a problem with the FIN 46R accounting at the time the first restatement began in March 2006, we are not persuaded that she then hatched a plot to defraud the investing public. To the contrary, we are skeptical that Lundquist would sign off on the first restatement in June 2006 without addressing FIN 46R issues, thus subjecting herself to SEC sanctions, if she firmly believed then that the accounting was wrong. A more logical and compelling inference is that Lundquist and the other MuniMae defendants were continuing to assess the scope of the problem before deciding on an appropriate course of action. 22 We also find it significant that it was MuniMae s management--and not some outside entity--that ultimately disclosed that the Company would have to consolidate the remaining LIHTC Funds in January 2007 (thus conceding the Company s earlier error). our view, defendants this disclosure were not supports acting with a strong scienter inference but rather In that were endeavoring in good faith to inform [the investing public]. Matrix Capital, 576 F.3d at 189. Finally, we recognize that the Fall 2006 Falcone memorandum, which noted that that the auditing staff intended to focus all of its energies on the second restatement, supports an inference that the MuniMae defendants could have more promptly anticipated the substantial costs of addressing the Company s myriad accounting issues. But that is a far cry from concluding that Falcone and his fellow defendants resolved then to defraud plaintiffs by hiding the true costs. In our view, management s subsequent disclosures tend to negate an inference of fraudulent purpose. In July and August 2007, the Company (1) announced the hiring of an independent consultant to assist with the work of the second restatement, (2) identified the large number of personnel working on the accounting issues, and (3) expressed uncertainty as to the costs of the effort going forward. Although these disclosures were perhaps not as timely or as fulsome as plaintiffs would have 23 liked, they give rise to a more compelling inference that the MuniMae defendants were attempting--even if imperfectly--to keep the investing public informed, while working strenuously to correct the accounting errors they had discovered. b. Red Flags Plaintiffs contend that there were numerous red flags that should have alerted the MuniMae defendants to the FIN 46R accounting problems, and that their failure to timely identify the problems demonstrates a reckless disregard for the accuracy of the Company s financial statements. to: Specifically, they point (1) the need for and magnitude of multiple restatements, which involved revising several years financial statements and multiple accounting problems; (2) the frequency of accounting meetings involving FIN 46R issues; (3) the high turnover of CFOs during the class period; and (4) the firing of PwC. Additionally, plaintiffs emphasize that the individual defendants were the Company s most senior executives, and that the LIHTC Funds represented a core operation of the Company. Because these defendants were directly responsible for the Company s financial statements--and many were heavily involved in the second restatement--they must have known, or recklessly failed to realize, that the Company was not in compliance with FIN 46R. 24 The presence of red flags, coupled with the breadth and gravity of a company s problems, may provide substantial weight to an inference that high level corporate agents must have been aware of the problems. at 183-85. See Matrix Capital, 576 F.3d The more significant the error the stronger the inference it supports. See id. at 184-85; see also In re Atlas Worldwide Holdings, Inc. Sec. Litig., 324 F. Supp. 2d 474, 48889 (S.D.N.Y. 2004) ( When a company is forced to restate its previously issued financial statements, the mere fact that the company had to make a large correction is some evidence of scienter. ). While the red flags alleged in the complaint are not insubstantial, they do not give rise to a strong inference of scienter. was not Fundamentally, the FIN 46R accounting error itself especially obvious, at Company s financial bottom-line. least with respect to the In that regard, we note, as did the district court, that MuniMae s ownership interest in the unconsolidated cumulative LIHTC economic adjustments--including consolidation--was a Funds was impact but loss of not of one percent all limited of to approximately 25 or less. The the restatement the LIHTC $44.9 Fund million in shareholders equity for fiscal year 2005. 6 For the same year, MuniMae s adjusted shareholders equity was approximately $723 million. Thus, while the effort to complete the restatement proved costly, the practical effect of proper consolidation on the Company s financial statements was relatively small. The other potential warning signs also lend themselves to benign interpretations. meetings as a sign nefarious purpose. of We view the frequency of accounting diligence rather than evidence of a Cf. Zucco Partners, 552 F.3d at 1000 (noting that an allegation that top executives attended several meetings to discuss the company s financial affairs was not the kind of particular evidence required to support a strong inference of scienter). A high turnover in CFOs can certainly raise suspicion, but the facts alleged here mitigate any concern. Harrison left the Company in late 2005, well before any officer is alleged to have known about the FIN 46R issues. Lundquist resigned in July 2007, after the Company was required to perform two restatements under her watch, the second of which entailed numerous delays and snowballing costs. While 6 Lundquist s resignation is The loss in shareholders equity specifically attributable to consolidating the LIHTC Funds was $78.3 million, but gains in other areas as a result of the restatement reduced the overall impact of consolidation on the Company s financial bottom-line. 26 evidence of the substantial accounting challenges the Company then faced, it does not compel an inference that she and the other individual defendants were bent on committing fraud. id. at after 1002 the ( Where a defendant resignation slightly issues corporation occurs a See before or restatement, a plaintiff must plead facts refuting the reasonable assumption that the resignation occurred as a result of [the] restatement s issuance itself in order for a resignation to be strongly indicative of scienter. ). Nor is PwC s October 2006 departure particularly telling. The dismissal of an accounting restatement is not surprising. firm around the time of a Cf. id. (concluding that the resignation of the defendant s independent public accountant did not support a strong inference of scienter because the firm had just been partially responsible for the corporation s failure to adequately control its especially true these on accounting facts, as procedures ). MuniMae was This is required to execute two restatements while PwC was serving as its auditor. The fact that PwC alerted the Company to one of the many issues the restatements ultimately addressed does not mean that the MuniMae defendants were not justifiably dissatisfied with PwC s services generally. Any inference of wrongful intent is further weakened by the fact that PwC made clear in a letter to the SEC that it had no disagreements with the Company on any matter of 27 accounting principle or practice that it felt obligated to report. 7 Finally, and in accordance with several of our sister circuits, we reject plaintiffs contention that the individual defendants must have acted intentionally or recklessly with respect to the FIN 46R accounting merely because (1) they were senior executives, and (2) the LIHTC Funds represented a core business of the Company. See, e.g., In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 282 (3d Cir. 2006) ( A pleading of scienter . . . may not rest on a bare inference that a defendant must have had knowledge of the facts or must have known of the fraud given his or her position in the company. (internal quotation marks omitted)), abrogated on other grounds by Tellabs, 551 U.S. at 322-23; Zucco Partners, 552 F.3d at 1000 (finding that bare allegations that officers must have have had knowledge of key facts relating to the business s core operations are rarely enough to support a strong inference of scienter). To be sure, such allegations are relevant to the court s holistic analysis of scienter. 7 But without additional SEC regulations required MuniMae to file a statement disclosing information about its dismissal of PwC as its independent public accountant. See 17 C.F.R. § 229.304(a)(1)(2). The regulations also required PwC to file a letter stating whether MuniMae s disclosures regarding the circumstances of its dismissal were true. See id. § 229.304(a)(3). 28 detailed allegations establishing the defendants actual exposure to the accounting problem, the complaint falls short of of the PSLRA s particularity requirements. c. Insider Trading Plaintiffs also say that Company insiders were motivated to conceal MuniMae s accounting problems to improperly benefit from insider trading. Allegations of personal financial gain may weigh heavily in favor of a scienter inference. Tellabs, 551 U.S. that at 325. However, the inferential weight may be attributed to any claim of motive must be evaluated in context. See id. at 324. Insider trading allegations will only support an scienter inference defendant s of trading were if the unusual timing or and amount suspicious. of a Teachers Ret., 477 F.3d at 184 (internal quotation marks omitted). To determine whether an insider s sales were unusual in scope we consider factors such as the amount of profit made, the amount of stock traded, the portion of number of insiders involved. stockholdings sold, or the In re Suprema Specialties, 438 F.3d at 277 (internal quotation marks omitted). In this case, the overall value of MuniMae shares sold during the class period was higher than in previous years. Six Company insiders sold 470,210 shares for a total of $12,004,901 in gross proceeds during the class period, as compared to the sale of 298,002 shares and $7,139,835 in gross proceeds between 29 June 1998 and the beginning of the class period. These numbers are certainly consistent with an inference that the insiders who traded during the class period had a motive to commit fraud. Nonetheless, the inference that the trades were innocent is stronger. The number of insiders who traded during the class period is relatively small, and plaintiffs do not allege that the insiders timed the sales to take advantage of any particular disclosure. deficient Cf. a Teachers complaint Ret., that, among 477 F.3d other at 184 things, (finding failed to allege that defendants timed their sales to profit from any particular disclosures ). Nor is the extent of any insiders divestiture particularly alarming. Former CFO Harrison sold 78% of his shares in early December 2004, but that was well before plaintiffs say that any officer of the Company knew that the FIN 46R accounting was flawed. Board Chairman Mark Joseph sold approximately 37% of his shares between late April 2005 and early June 2006. these sales announcement coincided of the with first the lead-up restatement. to the However, Some of Company s the sales occurred at fairly regular intervals and amounts compared to earlier periods. CEO Falcone sold just over 28% of his holdings during the class period, with the bulk of the sales occurring in 2004 and mid-2005. Falcone sold shares twice in early 2006, but the volume of the trades was not unusual. 30 In short, none of the defendants trading strikes us as suspicious. Cf. id. at 185 (finding of insider sales of 92%, 100%, and 82% defendants holdings unremarkable in context). The fact that Falcone and Joseph traded MuniMae shares under non-discretionary Rule 10b5-1 plans further weakens any inference of fraudulent purpose. Under Rule 10b5-1, corporate insiders can set up trading plans to sell company shares at predetermined times and amounts to avoid accusations of illegal insider trading. is an See 17 C.F.R. § 240.10b5-1(c) (stating that it affirmative defense in insider trading cases that the defendant s purchases or sales were made pursuant to a written plan for trading securities ); see also Cent. Laborers Pension Fund v. Integrated Elec. Servs. Inc., 497 F.3d 546, 554 n.4 (5th Cir. 2007) (explaining that a 10b5-1 trading plan can give rise to an inference that the sales were not suspicious); In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1427-28 (9th Cir. 1994) (same). Joseph s Rule 10b5-1 plan does less to shield him from suspicion because he instituted the plan in March 2005, after the start of the class period. plan in 2003. Nonetheless, By contrast, Falcone created his Joseph entered the plan a year before the complaint alleges that any officer at MuniMae knew the FIN 46R accounting was wrong, and the amended complaint does not allege that Joseph traded 31 outside of the plan. Thus, although Joseph the from Rule 10b5-1 suspicion, plan it does does not mitigate completely any immunize inference of improper motive surrounding his sales. An additional problem with the allegations of insider trading relates to the length of the putative class period. The plaintiffs have chosen an inordinately long period of 44 months. See Teachers Ret., 477 F.3d at 185 (describing a 46-month class period as exceedingly long ); see also In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1092 (9th Cir. 2002) (characterizing a class period of 15 months as unusually long ), abrogation on other grounds recognized by South Ferry LP, No. 2 v. Killinger, 542 F.3d 776, 784 (9th Cir. 2008). In our view, alleging such a lengthy class period makes it difficult to infer intent from the mere fact of a stock sale, as it is not unusual for insiders to trade at some point during their tenure with a company. See Teachers Ret., 477 F.3d at 185. d. Other Allegations of Motive Plaintiffs proffer a number of general business motivations from which they would have us infer fraud. They contend that MuniMae wanted to artificially inflate the price of its shares to attract investors, fund corporate acquisitions, avoid default on loan covenants, and obtain favorable loan terms. decline, however, to infer common to every company. fraud from financial a We motivations See Ottmann v. Hanger Orthopedic Grp., 32 Inc., 353 repeatedly F.3d 338, rejected 352 these (4th Cir. types of 2003) ( [C]ourts generalized have motives--which are shared by all companies--as insufficient to plead scienter under the PSLRA. ). Although acquisitions MuniMae during the conducted class numerous period, offerings very little of and this activity occurred after any officer is alleged to have known that the FIN 46R accounting was flawed. It is true that the Company was aware that consolidating LIHTC Funds could affect its debt covenants, as the initial consolidation in 2004 would have caused it to default on at least two debt covenants. But MuniMae disclosed that fact, and it was also able to negotiate waivers on each covenant to avoid default. In short, nothing about MuniMae s the specific facts alleged render general business motivations particularly suspicious. e. Class Period Disclosures For their part, the MuniMae defendants assert that their class period disclosures rebut any inference of scienter. is appropriate to consider such disclosures, which in It some contexts will indicate that the defendants were acting in good faith, but in other contexts will indicate that the defendants had knowledge of operational risks (suggesting a lack of good faith). Matrix Capital, 576 F.3d at 185. 33 We believe MuniMae made several relevant disclosures during the class period. In announcing its first restatement on March 10, 2006, MuniMae also alerted investors to the fact that the Company suffered from material weaknesses financial reporting process. J.A. 821. material identified, weaknesses were then related to the Although only a few the Company warned that management might identify additional material weaknesses as part of the restatement. Id. Over the next two years, the Company repeatedly disclosed newly discovered material weaknesses, and might identify additional problems that remedial efforts ineffective. reiterated would that render it its The fact that MuniMae continued to update investors about newly discovered weaknesses tends to negate an inference that the defendants acted with an intent to defraud. Cf. Matrix Capital, 187 F.3d at 187 ( A disclosure that meaningfully alerts investors to the risk that financial information is not accurate may suggest that the individuals responsible for the disclosure did not knowingly (or perhaps not even recklessly) misstate the underlying financial information. ). MuniMae also attempted to update investors regarding the escalating cost of the second restatement. Although the initial announcement in September 2006 identified only a few areas for restatement, the Company announced in October that it had not 34 yet determined its full scope. In May 2007, the Company disclosed that it was unable to timely file its annual Form 10-K for fiscal year 2006 because of the dedication of significant management resources to these restatement efforts. J.A. 1129. On July 10, 2007, the Company announced that it had retained Navigant Consulting to assist in the restatement efforts. telephone conference with investors the following In a month, the Company noted that, given the scope of the restatement, it had to bring new and unbudgeted resources online quickly. 1145. Finally, informed at investors a November that both 8 teleconference, the magnitude restatement would be very significant. and the cost J.A. Company of the J.A. 1157. To be sure, the import of some of MuniMae s disclosures was moderated by information the in press fact that releases it occasionally headlined with buried favorable the news. Nonetheless, MuniMae repeatedly noted the need to restate its financials, the deficiency in its internal controls, and the fact that the restatement would require the Company to commit resources far greater than initially anticipated. Not only do these disclosures bolster the inference that the MuniMae defendants acted in good faith, but they also strengthen the inference that these defendants only realized the FIN 46R accounting problems--and the cost of fixing them--over time. 35 2. After evaluating the inferential weight owed to plaintiffs allegations of corporate fraud in light of context and common sense, we regard the must consider inference that whether a reasonable defendants knowingly person or would recklessly misstated or omitted material information at least as strong as the inference that [the MuniMae defendants] negligent with respect to those statements. 576 F.3d at 187. holistically, were merely Matrix Capital, To that end, we must evaluate the complaint recognizing that allegations of scienter that would not independently create a strong inference of scienter might compliment [sic] each other to create sufficient strength to satisfy the PSLRA. an inference of Id. at 187-88. Considered holistically, we conclude that plaintiffs have not satisfied their burden under the PSLRA. We accept as fact that management regularly discussed FIN 46R compliance issues, even before the first restatement, and that by mid-2006, at least Lundquist had determined that the Company s LIHTC Fund accounting was flawed. We know that PwC recommended that the Company reconsider its LIHTC Fund accounting prior to the first restatement, but that at least some MuniMae officers disagreed. We acknowledge that in the fall of 2006, the Company recognized that correcting various accounting errors would be a management focus for some time. We accept that the MuniMae defendants had 36 financial motivations--albeit universal ones--to disclosing the need to consolidate the LIHTC Funds. avoid And we know that MuniMae suffered from material weaknesses in its internal controls that, among other things, could have alerted management to problems with the FIN 46R accounting. While this mosaic supports an inference of scienter, we find more compelling the inference that the MuniMae defendants were, at most, negligent. In 2004, MuniMae was faced with applying a challenging new accounting standard to its rapidly expanding business, requiring the Company to determine whether and how to consolidate a number of LIHTC Funds that previously were not on the Company s financial statements. MuniMae's management mistakenly--and perhaps negligently--failed to have sufficient accounting controls and processes in place to meet this challenge, which, together with other accounting errors over the course of 2004 and 2005, required the Company to twice restate cost. its financial accounting statements at a substantial In our view, the facts alleged point more convincingly to an inference that MuniMae was simply in over its head. Although some officers may have believed that MuniMae s accounting was flawed by mid-2006, the evidence suggests that others, at least initially, disagreed. This makes it difficult to intentionally, infer that the MuniMae defendants or even recklessly, misrepresented the state of the Company s financial 37 affairs. F.3d See Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 1049, 1069 (9th Cir. 2008) (finding insufficient allegations that point only to disagreement and questioning within the Company about a particular accounting practice). And even if some senior officers had concluded by mid-2006 that the FIN 46R accounting was wrong, that does not establish that they acted with fraudulent purpose to conceal the problems until January 2007. The strength of the inference with respect to MuniMae s knowledge of the costs of the second restatement is even weaker on the facts alleged. We think it more plausible that the Company simply had not reached a conclusion with respect to FIN 46R until after it began the second restatement, and that the MuniMae defendants only gradually became aware of the expense as it was incurred. The Company s officers successive attempted to internal weaknesses. keep disclosures investors suggest updated that about its MuniMae s The pattern of disclosures also suggests that management only gradually awakened to the magnitude of the Company s accounting problems and the cost of fixing them. That the Company s accounting department during the early part of the class period initially, challenge was chronically professionally before it, understaffed unprepared strengthens 38 the for and, the inference at least accounting that final decisions regarding the FIN 46R accounting remained unresolved until late 2006. On the facts alleged, the inference that the MuniMae defendants were negligent in discharging their duties may well be compelling. But that is not enough to survive a motion to dismiss in this context. See Pub. Emps. Ret., 551 F.3d at 313. We hold that the district court correctly dismissed plaintiffs claims under the PSLRA for failing to adequately plead scienter. 8 III. We turn next to plaintiffs Securities Act claims. The basic purpose of the Securities Act of 1933 is to provide greater Herman protection & MacLean to v. purchasers of registered securities. Huddleston, 459 U.S. 383 375, (1983). Sections 11 and 12(a)(2) prohibit the use of materially false or misleading and statements prospectuses, 77l(a)(2). or omissions respectively. in See registration 15 U.S.C. statements § 77k(a); In contrast to Exchange Act requirements, scienter 8 The district court also dismissed the plaintiffs claims against the MuniMae officers under § 20(a) of the Exchange Act. That provision imposes liability on each person who controls any person liable under any provision of this chapter or of any rule or regulation thereunder. 15 U.S.C. § 78t(a). Section 20(a) liability is derivative of § 10(b). Because the complaint is legally insufficient with respect to the § 10(b) claim, the § 20(a) claim must also fail. See, e.g., Matrix Capital, 576 F.3d at 192. 39 is not an element of a violation of either section. Newcome v. Esrey, 862 F.2d 1099, 1106 (4th Cir. 1988) (en banc). The amended complaint alleges that defendants 9 certain violated §§ 11 and 12(a)(2) because the registration statement and prospectus for the 2005 SPO incorporated by materially misleading statements and omissions. the registration statement incorporated by reference For example, reference the Company s quarterly reports from the second and third quarters of 2004, which represented that MuniMae was in compliance with FIN 46R. See J.A. 1461. The February 2, 2005, prospectus supplement expressly represented that MuniMae was in compliance with FIN 46R. However, it also noted that [d]ue to the complexity of FIN 46R . . . we cannot assure you that further changes in our financial statements will not be required with respect to the application of FIN 46R. J.A. 1578. The district court found the § 11 claim time-barred by the Securities Act s statute of repose and dismissed the § 12(a)(2) claim for lack of standing. We address each issue in turn. 9 The § 11 SPO claim is defendants and the underwriter claims is alleged against the defendants. 40 brought against the MuniMae defendants. The § 12(a)(2) Company and the underwriter A. 1. Section 13 of statute of repose. the Securities Act contains See 15 U.S.C. § 77m. a three-year It provides: In no event shall any such action be brought to enforce a liability created under [§ 11 or § 12(a)(1)] of this title more than three years after the security was bona fide offered to the public . . . . 15 U.S.C. § 77m. The statute does not define the term bona fide offered to the public, and neither the Supreme Court nor this circuit has determined the meaning of the phrase. The district court applied the rule accepted by the majority of courts and found that the statute of repose began to run on the date the SEC declared MuniMae s January 14, 2005. registration statement effective, i.e., Because the original complaint in this action was not filed until February 1, 2008, the court concluded that the § 11 claim was two-weeks late. See In re Mun. Mortg. & Equity, 576 F.2d at 655-57. On appeal, plaintiffs arguments are threefold. First, applying a combination of dictionary and statutory definitions, they say that a bona fide offering occurs only when securities are offered for value in a manner capable of acceptance, and in a way that is open and visible. Under this interpretation, the repose period began to run, at the earliest, on February 2, 41 2005, that pricing is, the commenced. when MuniMae securities, issued or Alternatively, on a prospectus February plaintiffs 3, suggest supplement when the the SPO securities were not bona fide offered until February 8, the last date of the SPO. rule is effective Finally, plaintiffs argue that, even if the general that date the of statute the of repose registration begins to statement, we run on the should not apply that rule in this case because there was a significant delay between the effective date and the commencement of the offering. Both the MuniMae and underwriter defendants respond that the effective date of the SPO registration statement constituted the bona fide offering date because it is the date on which all barriers to sale were removed. case law defines the They also emphasize that most effective date of the registration statement as the bona fide offering. 2. The meaning of bona fide offered to the public in § 13 s statute of repose is a question of statutory interpretation that we review de novo. See P. Stolz Family P ship L.P. v. Daum, 355 F.3d 92, 98 (2d Cir. 2004). We begin by considering whether the language at issue has a plain and unambiguous meaning. 718 F.3d 377, 382 (4th See United States v. Ashford, Cir. 2013). 42 At first blush, the plaintiffs principal position is appealing. In ordinary usage, bona fide often means (as plaintiffs urge) genuine. See Random House Webster s Unabridged Dictionary 237 (2d ed. 2001); see also Black s Law Dictionary 199 (9th ed. 2009) ( Sincere; genuine ). But it can also mean made . . . in good faith and without deception or fraud. Random House Webster s Unabridged Dictionary 237; see also Black s Law Dictionary 199 ( Made in good faith; without fraud or deceit ). courts fide and in intended offering. Joel authorities context, to have they considered have distinguish a concluded true To the extent other the meaning that offering of Congress from a bona simply simulated See P. Stolz, 355 F.3d at 99; see also 1 Louis Loss, Seligman & Troy Paredes, Securities Regulation § 2-B- 6(g)(i), at 773 & n.355 (4th ed. 2006) (discussing the dealer exemption under § 4(3)(A) of the Securities Act, which also uses the term bona fide offered to the public ). The meaning of the word offer is no more certain. As commonly used, offer can mean both to present for acceptance or rejection consideration. Dictionary 1344. and also See to propose Random House or put Webster s forward for Unabridged Section 2(a)(3) of the Securities Act defines offer to include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value. 15 U.S.C. § 77b(a)(3). 43 But we think it unlikely that offered in Congress § 13 to intended be offer in § 2(a)(3). the meaning coterminous with of the bona fide definition of See Morse v. Peat, Marwick, Mitchell & Co., 445 F. Supp. 619, 622 (S.D.N.Y 1977) ( The term bona fide offered to the public is a term of art and one not necessarily synonymous with the full breadth of the statutory term offer. ). Because we believe the statutory language is susceptible to more than one meaning, we look beyond the statute for guidance. The Second Circuit s opinion in P. Stolz is the leading authority on the term bona fide offered to the public in § 13. The question in that case was the meaning of that phrase in the context of unregistered securities. But the court examined a number of cases involving registered securities and determined that the date of registration has been treated as the date that starts the running of the repose period. P. Stolz, 355 F.3d at 99. A majority of courts have followed the P. Stolz guidance, see, e.g., Armstrong v. Am. Pallet Leasing Inc., 678 F. Supp. 2d 827, 868 (N.D. Iowa 2009); In re Metro. Sec. Litig., 2010 WL 537740, at *1 (E.D. Wash. Feb. 8, 2010); In re Countrywide Fin. Corp. Sec. Litig., 2009 WL 943271, at *6 (C.D. Cal. Apr. 6, 2009), and congressional we agree purpose. that this Section 11 44 approach is best violated reflects when a registration statement containing misleading information becomes effective. See 15 U.S.C. § 77k(a); 17 J. William Hicks, Civil Liabilities: Enforcement & Litigation Under the 1933 Act § 4:57 (2013). as the Using the effective date of the registration statement bona defendant s fide offering liability to date the logically statutory links a violation. putative See Fed. Hous. Fin. Agency v. UBS Ams., Inc., 2012 WL 2400263, at *2 (S.D.N.Y. June 26, 2012) (recognizing that courts have accepted the effective date as the repose trigger on the ground that the registration statement includes the information upon which the Section 11 claim is predicated--the alleged falsehood ). Using the effective date is also purpose of statutes of repose generally. consistent with the Such statutes provide a fixed date readily determinable by the defendant . . . rather than a date plaintiff. determined by the personal circumstances of the Caviness v. Derand Res. Corp., 983 F.2d 1295, 1300 n.7 (4th Cir. 1993); see also City of Pontiac Gen. Emps. Ret. Sys. v. MBIA, Inc., 637 F.3d 169, 176 (2d Cir. 2011) (contrasting a statute of repose, which begins to run from the defendant s violation, with a statute of limitations, which cannot begin to run until the plaintiff s claim has accrued ). 10 10 Although we do not rely on the legislative history, we note that it is not inconsistent with our conclusion. In 1954, Congress amended numerous provisions of the federal securities (Continued) 45 Plaintiffs object to this view of the statute, pointing to § 4(3) of the Securities Act, which also uses the term bona fide offered to That provision the public. exempts See certain 15 dealer U.S.C. § 77d(a)(3)(B). transactions from the prospectus delivery requirement, and it applies prior to the expiration of forty days after the effective date of such registration statement or prior to the expiration of forty days after the first date upon offered to the public. which the security was See id. (emphasis added). bona fide Plaintiffs say that this language demonstrates that the date on which a security is bona fide offered to the public can be entirely distinct from the declared effective. date on which a registration statement is Appellants Br. at 24. laws, including the Investment Company Act of 1940. See Act of August 10, 1954, ch. 667, tit. IV, § 402, 68 Stat. 683, 689 (codified as amended at 15 U.S.C. § 80a-24). Congress amended the Investment Company Act, 15 U.S.C. § 80a-1 et seq., among other things, to permit investment companies engaged in continuous offerings to file amendments to existing registration statements instead of filing a new one. See S. Rep. No. 831037, at 21 (1954). Both the House and Senate Reports accompanying the amendments equate the effective date of the registration statement with the bona fide offering. See H.R. Rep. No. 831542, at 30 (1954) ( [A] dealer . . . need not use a prospectus in connection with a transaction in a security after the expiration of 1 year from the first date on which the security was bona fide offered to the public, which, in most cases, means approximately 1 year after the effective date of the registration statement. ); S. Rep. No. 83-1037, at 20 (same). 46 But provides the fact that a different that the bona fide offer section and of the registration statute can be distinct events does not inexorably mean that they always will be. Cf. In re Lehman Bros. Sec. & ERISA Litig., 903 F. Supp. 2d 152, 171 (S.D.N.Y. 2012) ( To be sure, the phrase bona fide offered to circumstances the public, in which recognizes stock that covered there by an will be effective registration statement has not genuinely been offered to the public, in which case the commencement of the repose period may begin later than the effective date of the registration statement. (internal quotation marks omitted)). In the vast majority of offerings the bona fide offering to the public will be the effective date of the registration statement. 17 Hicks, Civil Liabilities § 4:77. The only exceptions would arise in the context of delayed or continuous offerings in which information that is fundamental to assessing the value of a particular offering is not disclosed until after the registration statement becomes effective. See id.; see also UBS Ams., Inc., 2012 WL 2400263, at *2. 11 11 At the time of the 2005 SPO, the SEC did not consider the pricing information MuniMae filed in its prospectus supplement the kind of fundamental information that would merit exceptional treatment. See 17 C.F.R. § 229.512(a)(1)(2004); In re Lehman Bros. Sec. & ERISA Litig., 903 F. Supp. 2d at 171. 47 Plaintiffs argue nonetheless that we should not accept registration as the triggering event here, even if, as a general rule, the two coincide. They say that using the effective date of the registration statement is only appropriate in cases where there is virtually no delay between commencement of the public offering. registration and the By contrast, the 2005 SPO was a shelf offering, and there was a two-week delay between the effective date and the commencement of the offering. did not file a prospectus supplement announcing MuniMae that the registration statement was effective until February 1, and it only priced the securities on February 2. On these facts, plaintiffs argue, the securities were not genuinely offered to the public on January 14. We disagree. The general rule that the statute of repose begins to run on the effective date has been repeatedly applied in the context of delayed offerings. See, e.g., In re Adelphia Commc'ns Corp. Sec. & Derivative Litig., 2005 WL 1679540, at *6 (S.D.N.Y. July 18, 2005) ( Even where registered securities are offered pursuant to a less typical delayed offering, the limitations period runs from the date of either the registration statement or the [post-effective] amendment . . . . ), adhered to on reconsideration, 2005 WL 1882281 (S.D.N.Y. Aug. 9, 2005); see also UBS Ams., Inc., 2012 WL 2400263, at *2-3 (recognizing that that the general rule will apply in shelf offerings when 48 the registration statement contains the misleading information on which the § 11 claim is predicated). This is not the disclosure--rather the allegedly complaint unusual than false directly or the case which registration misleading avers in that a post-effective statement--contained information. the The registration amended statement declared effective on January 14 contained or incorporated by reference the misleading statements to which plaintiffs object. 12 Under these circumstances, we are comfortable concluding that MuniMae s exposure began on the effective date. The two-week gap between the effective date commencement of the SPO does not alter our analysis. and the The fact that plaintiffs did not know that the registration statement was effective as of January 14 is of no consequence for statute of repose purposes. allows for no circumstances. ); See Caviness, 983 F.2d at 1300 ( [Section] 13 qualification see also emanating P. Stolz, from 355 the F.3d claimant s at 102-03 (explaining that a statute of repose begins to run even if the plaintiff has not yet, or could not yet have, discovered that she has a cause of action ). Moreover, the SEC has sanctioned a 12 By contrast, the prospectus supplement filed on February 2, which priced the securities, contained a rather unambiguous warning that MuniMae s FIN 46R accounting might be incorrect. See J.A. 1578. 49 delay of up to fifteen business days between registration and the commencement offerings. of sale in the context of non-delayed See 17 C.F.R. §§ 230.430A(a)(3), 229.512(a). Thus, the thirteen-day gap here hardly strikes us as abusive. In sum, we hold that securities will generally be bona fide offered to registration the public statement on the date effective. the SEC Applying declares this the holding, we conclude that MuniMae bona fide offered securities to the public on January relates 14, back to 2005. the Plaintiffs original amended complaint filed complaint, on which February 1, 2008, is thus time-barred under § 13 s statute of repose. B. 1. We turn finally to the amended complaint s § 12(a)(2) claim against MuniMae and the underwriter defendants with respect to the 2005 SPO. Section 12(a)(2) provides that any person who offers or sells a security . . . by means of a prospectus or oral communication containing a materially false statement or material omission shall be liable purchasing such security from him. . . . to the person 15 U.S.C. § 77l(a)(2). The amended complaint alleges that named plaintiff Dammeyer purchased MuniMae s common stock pursuant and/or traceable to the SPO Registration Statement and Prospectus dated February 2, 2005. J.A. 89. It incorporates 50 by reference Dammeyer s confirmation slip for the shares. The slip shows that Dammeyer purchased 600 shares of MuniMae stock at $26.32 per share on February 3, 2005, and that he received those shares on February 8, 2005. The slip also bears the logo of RBC Dain Rauscher and includes the phrase PROS UNDER SEP COVER. The district confirmation standing. court slip found the insufficient J.A. 1606. amended to complaint establish and Dammeyer s It found Dammeyer s claim that he purchased stock pursuant and/or traceable to the SPO documents conclusory, and the confirmation slip lacking in supporting details to make a plausible claim that Dammeyer purchased directly in the SPO. In re Mun. Mortg. & Equity, LLC, 876 F. Supp. 2d at 660. On appeal, plaintiffs contend that the district court improperly failed to consider the confirmation slip referenced in the complaint, and that the slip, when properly considered, supplies the necessary details to support a plausible allegation of standing. Defendants respond that Dammeyer would have said that he purchased his shares directly in the SPO if he actually did. Moreover, they claim that the details of the confirmation slip show that Dammeyer purchased his securities the amended on the secondary market and not in the SPO. 2. We review the plausibility of complaint s standing allegations de novo under the pleading requirements of 51 Rule 8(a). See In re Century Aluminum Co. Sec. Litig., 729 F.3d 1104, 1107-09 (9th Cir. 2013) (reviewing the plausibility of a complaint s standing allegations with respect to a § 11 claim). It is not enough for the amended complaint to allege facts, which, accepted as true, possibility that Dammeyer allegations must also are merely purchased render such consistent shares a in with the SPO; the the conclusion plausible. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). To establish standing under § 12(a)(2), a plaintiff must allege that he purchased shares from [a]ny person who offer[ed] or s[old] a security . . . by means of a prospectus. 15 U.S.C. § 77l(a)(2). In Gustafson v. Alloyd Co., 513 U.S. 561 (1995), the Supreme Court interpreted the prospectus requirement of § 12(a)(2), and concluded that, because prospectus is a term of art referring to a specific document in a public offering, sales made pursuant to private contracts are not made by means of a prospectus. See id. at 580-84. Thus, § 12(a)(2) liability is limited to public offerings, and purchasers in the secondary market may not sue. Id. at 578; see also In re CitiGroup Inc. Bond Litig., 723 F. Supp. 2d 568, 585 (S.D.N.Y. 2010) ( [A] plaintiff seeking redress pursuant to Section 12(a)(2) must establish that it purchased the security directly from defendants through the public offering at issue. ). 52 A number of district courts have concluded that the pursuant and/or traceable to language employed in the amended complaint is insufficient to establish standing for § 12(a)(2) purposes. See, e.g., Pub. Emps. Ret. Sys. of Miss. v. Merrill Lynch & Co., 714 F. Supp. 2d 475, 484 (S.D.N.Y. 2010); In re Wells Fargo Mortg.-Backed Certificate Litig., 712 F. Supp. 2d 958, 966 (N.D. Cal. 2010); In re Sterling Foster & Co., Inc., Sec. Litig., 222 F. Supp. 2d 216, 245-46 (E.D.N.Y. 2002). The general tenor of these opinions is that plaintiffs should plead that they offering, directly and that purchased a securities to failure in implies do so the relevant that the securities were in fact purchased on the secondary market. See, e.g., In re Sterling Foster, 222 F. Supp. 2d at 245. The First Circuit has held that alleging that a plaintiff purchased securities pursuant and/or traceable to a public offering can be sufficient if coupled with additional supportive facts. Asset See Plumbers Union Local No. 12 Pension Fund v. Nomura Acceptance (finding the Corp., 632 terminology F.3d 762, sufficient 776 (1st 2011) coupled when Cir. with allegations that plaintiffs acquired securities from the defendants and that the defendants promoted and sold the securities to the plaintiffs). We agree that language--coupled using with the pursuant sufficient 53 and/or supporting traceable facts--can to give rise to a plausible circumstances. inference of standing in certain Here, however, we find the amended complaint and confirmation slip insufficient to make plaintiffs allegations of standing plausible. Though not dispositive, the plaintiffs coy choice of words gives us some pause. And we do not find the additional supporting facts sufficient to push the claim into the realm of plausibility. To be sure, the amended complaint alleges a number of facts consistent with the possibility shares directly in the SPO. that Dammeyer purchased his For example, the complaint alleges that Dammeyer purchased 600 common shares of MuniMae stock on February 3, 2005, and, according to the amended complaint, the SPO occurred [o]n or about February 2, 2005, J.A. 233. Although these dates of purchase are close, they do not directly coincide. More helpful to plaintiffs, the confirmation slip shows that the settlement date for Dammeyer s securities was February 8, see J.A. 1606, which coincides with the date the prospectus supplement delivery, states see that J.A. SPO 1557. shares These would be supporting irrelevant, but they are also not sufficient. available facts are for not Cf. In re Century Aluminum, 729 F.3d at 1107-08 (finding similar evidence about pricing and sale dates insufficient in the where standing requirements are more relaxed). 54 context of § 11, Plaintiffs emphasize the fact that the confirmation slip bears the notation prospectus under Gustafson, 513 [§ 12(a)(2)] distribute PROS separate U.S. cannot the UNDER at cover. 571 attach prospectus SEP COVER, See J.A. ( [T]he unless 1606; liability there . . . . ). which is an However, means see also imposed by obligation to as defendants note, RBC is both a registered broker-dealer and an underwriter, and under prospectus SEC to §§ 77d(a)(3), regulations, Dammeyer 77e(b) in it may either (prospectus have had capacity. delivery to See deliver 15 a U.S.C. requirement); 17 C.F.R. § 230.174 (obligations of broker-dealers to comply with prospectus delivery requirements). Without more, that notation is merely consistent with the claim that Dammeyer purchased his shares directly in the SPO. 13 The plausibility of defendants is even weaker. the claim against the underwriter The confirmation slip provides no support for the contention that Dammeyer purchased his shares from Merrill Lynch. not much better. With respect to RBC, the allegations are The attached confirmation slip bears the logo 13 We also note that the complaint alleges that the SPO offered shares priced at $26.51. J.A. 111. But Dammeyer s purchase price was $26.32 per share. J.A. 1606. And, in contrast to Plumbers Union, there are no allegations that defendants specifically promoted the securities or solicited Dammeyer s purchase. 55 of RBC Dain Rauscher. the designated However, RBC Capital Markets Corp. was underwriter for the SPO. See J.A. 1590. Dammeyer does not allege that these were the same entity as of 2005, or that they should be treated as such for liability purposes. At best, the allegations are merely consistent with the possibility that Dammeyer purchased his securities in the SPO. The pursuant and/or traceable to language of the complaint is conclusory, sufficient and the factual confirmation enhancement slip to does support not a provide reasonable inference that the defendant[s are] liable for the misconduct alleged. See Iqbal, 556 U.S. at 678 (internal quotation marks omitted). In this circumstance, the complaint stops short of the line between possibility and plausibility. Corp. v. Twombly, 550 U.S. 544, 556 (2007). See Bell Atl. Accordingly, we agree with the district court that Dammeyer did not adequately allege standing to bring a § 12(a)(2) claim. 14 14 Dammeyer also brings an SPO-based claim under § 15 of the Securities Act, which imposes derivative liability on certain control persons for primary violations of the Act. See 15 U.S.C. § 77o. We dismiss the § 15 claim because the complaint fails to state a claim under the predicate Securities Act provisions. See Greenhouse v. MCG Capital Corp., 392 F.3d 650, 656 n.7 (4th Cir. 2004). 56 IV. For the foregoing reasons, we affirm the judgment of the district court. AFFIRMED 57
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