Koesterer vs. Washington Mutual, Inc, No. 2:2008cv00387 - Document 259 (W.D. Wash. 2010)
Court Description: ORDER granting in part and denying in part Defendants' 673 676] 722 Motion to Dismiss in case 2:08-md-01919-MJP; granting in part and denying in part Defendants'(73) 76 Motion to Dismiss, by Judge Marsha J. Pechman. (Order filed in MDL 1919, C08-387MJP; C09-664MJP and C09-816MJP)(MD)
Download PDF
<![CDATA[
Koesterer vs. Washington Mutual, Inc Doc. 259 1 2 3 4 5 6 7 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE 8 9 10 11 12 13 CASE NO. 08-md-1919 MJP In re Washington Mutual, Inc. Securities, Derivative & ERISA Litigation IN RE WASHINGTON MUTUAL, INC. SECURITIES LITIGATION This Document Relates to: LEAD CASE NO.: C08-387 MJP ORDER DENYING IN PART AND GRANTING IN PART DEFENDANTS’ MOTIONS TO DISMISS 14 C09-664 MJP 15 C09-816 MJP 16 17 This matter comes before the Court on the Director Defendants’ and Deloitte & Touche 18 LLP’s motions to dismiss Plaintiffs’ second amended consolidated complaint, in which the 19 Officer Defendants and Defendant Kerry Killinger join. (Dkt. Nos. 73, 74, 75, 76.1) Having 20 reviewed the motions, the response (Dkt. No. 81), the replies (Dkt. Nos. 82, 83, 84), and all 21 relevant papers, the Court DENIES in part and GRANTS in part the motions. The Court finds 22 this matter suitable for decision without oral argument. 23 24 1 All references to the docket refer to C09-664. LEAD CASE NO.: C08-387 MJP- 1 Dockets.Justia.com 1 2 Background This action is brought by the City of San Buenaventura (the “City”) and Lou Solton on 3 behalf of the Monterey County Investment Pool (the “County”) (collectively, “Plaintiffs”). Both 4 purchased WaMu notes. The Court previously examined the sufficiency of Plaintiffs’ pleadings 5 on Defendants’ first round of motions to dismiss. (Dkt. No. 63.) The Court dismissed Plaintiffs’ 6 fraud and misrepresentation claims because Plaintiffs failed to allege reliance sufficiently to 7 survive dismissal. (Id.) The Court also dismissed Plaintiffs’ California Corporations Code 8 claim, which Plaintiffs no longer pursue. (Id.; Dkt. No. 70.) Plaintiffs have filed an amended 9 complaint, adding greater detail as to reliance, and dropping Deloitte & Touche LLP (“Deloitte”) 10 as a defendant to the misrepresentation claim. (Dkt. No. 70.) The Court’s first order on the 11 motions to dismiss sets forth the underlying allegations, which are not repeated here. 12 The County provides much greater detail as to its reliance on WaMu’s filings with the 13 Securities and Exchange Commission (“SEC”).2 The County now alleges that Solton and his 14 assistant “received and maintained detailed research analytical information about the County’s 15 investments, including the subject note with WaMu.” (Second Consolidated Amended 16 Complaint (“Compl.” or “¶”) ¶ 356.) They used a Bloomberg terminal to get access to SEC 17 filings and worked with Sam Butine of Credit Suisse Securities to get advice as to the WaMu 18 note. (Id.) Plaintiff Solton (also defined as “the County” in the complaint) alleges that: 19 20 [a]s a result of its research and analysis, as well as its communications with Butine, the County read and relied upon WaMu Forms 10-K, including the 2005 and 2006 Forms 10-K, and the Deloitte certifications and audit reports contained therein, in the days prior to its purchase of the WaMu note in July 2007. 21 22 23 24 2 The following allegations are taken from the Second Consolidated Amended Complaint and are accepted as true solely for the purpose of deciding the pending motions. Nothing should be construed as acceptance of these allegations as proven fact. ORDER DENYING IN PART AND GRANTING IN PART DEFENDANTS’ MOTIONS TO DISMISS- 2 1 (¶ 357.) The County alleges that “[i]t is probable, if not certain, that the County would not have 2 purchased the WaMu note absent the misrepresentations and concealment of information in the 3 2005 and 2006 Forms 10-K.” (Id.) Plaintiffs define the “County” as synonymous with Solton. 4 (Compl. at 1.) 5 The County also alleges that it suffered holder damages when it read and relied on the 6 2007 Form 10-K and the 2007 Form 10-K/A and continued to hold the note. The County states 7 it “received and reviewed the 2007 Form 10-K, both directly through its Bloomberg system and 8 through its advisor, and relied upon such misrepresentations and concealments in deciding to 9 hold on to its note.” (¶ 363.) The County also details that had it known the truth on February 29, 10 2008 it would have sold all of its interest in the WaMu note. (Id.) The County makes the same 11 allegations with regard to the 2007 Form 10-K/A. (Id., ¶ 364.) 12 The City alleges that its treasurer Jay Panzica monitored the City’s investments and 13 worked with Ben Finkelstein at Stanford Group in the acquisition of the WaMu note. (¶ 359.) 14 The City does not allege it read the 2005 and 2006 Forms 10-K. Instead, it alleges that 15 Finkelstein “had access to and reviewed WaMu’s public filings, including its Forms 10-K for 16 2005 and 2006” and that he “communicated with the City regarding the disclosures made 17 therein.” (¶ 359.) The City details the contents of the Forms 10-K that were material to its 18 decision to purchase the note. (¶ 360.) The City alleges that “[a]s a result of it research and 19 analysis, as well as its communications with Finkelstein, the City relied upon WaMu Forms 1020 K, including the 2005 and 2006 Forms 10-K, and the Deloitte certifications and audit reports 21 contained therein, in the days prior to its purchase of the WaMu note” in September 2007. (¶ 22 360.) The City alleges that had it known of WaMu’s true condition, it would not have purchased 23 the WaMu note. (Id.) 24 ORDER DENYING IN PART AND GRANTING IN PART DEFENDANTS’ MOTIONS TO DISMISS- 3 1 As to holder allegations, the City makes no allegations that it or Finkelstein read the 2007 2 Forms 10-K and 10-K/A. Instead, the City alleges it “was informed of the contents of the 2007 3 Form 10-K through its advisor, and relied upon such misrepresentations and concealments in 4 deciding to hold on to its note.” (¶ 363.) The same allegation is made as to the Form 10-K/A. (¶ 5 364.) Nowhere does the City explain who may have read these filings and how they were 6 communicated. Like the County, the City alleges it would have sold its entire WaMu note on 7 both February 29, 2008 and May 22, 2008. (¶¶ 363-64.) The City alleges “[i]t is probable, if not 8 certain that the City would not have continued to hold the WaMu note absent the 9 misrepresentations and concealment of information in the 2005 and 2006 Forms 10-K” and that 10 had WaMu’s true condition and Deloitte’s false certifications been revealed, “it would have 11 immediately sold its entire interest in its WaMu note.” (Id.) 12 The Directors Defendants have filed a motion to dismiss in which the Officer Defendants 13 and Kerry Killinger have joined. (Dkt. Nos. 73, 74, 75.) Deloitte has also filed a motion to 14 dismiss. (Dkt. No. 76.) The Defendants only challenge the adequacy of the allegations as to 15 reliance. 16 Analysis 17 A. Pleading Standard 18 Plaintiffs’ fraud and negligent misrepresentation claims must satisfy Rule 9(b), as the 19 Court previously held. (Dkt. No. 63 at 4-5.) To sustain their fraudulent misrepresentation 20 claims, Plaintiffs must allege in accordance with Rule 9(b) that (1) Defendants made 21 misrepresentations or omissions; (2) Defendants knew of the falsity (scienter); (3) Defendants 22 had an intent to defraud or to induce reliance; (4) Plaintiffs justifiably relied on Defendants’ 23 24 ORDER DENYING IN PART AND GRANTING IN PART DEFENDANTS’ MOTIONS TO DISMISS- 4 1 statements or omissions; and (5) Plaintiffs suffered damages. Small v. Fritz Cos., Inc., 30 Cal. 2 4th 167, 173-74 (2003). Only the issue of reliance is in play in the pending motions. 3 A cause of action for “deceit based on a misrepresentation” requires the plaintiff to allege 4 that “he or she actually relied on the misrepresentation.” Mirkin v. Wasserman, 5 Cal. 4th 1082, 5 1088 (1993). The plaintiff must allege “specific reliance on the defendants’ representations: for 6 example, that if the plaintiff had read a truthful account of the corporation’s financial status the 7 plaintiff would have sold the stock, how many shares the plaintiff would have sold, and when the 8 sale would have taken place.” Small 30 Cal. 4th at 184. “The plaintiff must allege actions, as 9 distinguished from unspoken and unrecorded thoughts and decisions, that would indicate that the 10 plaintiff actually relied on the misrepresentations.” Id. 11 Plaintiffs argue there is a presumption of reliance, but rely on inapposite case law. (See 12 Dkt. No. 81 at 13 (citing Engalla v. Permanente Medical Group, Inc., 15 Cal. 4th 951 (1997)).) 13 As Defendants point out, the plaintiffs in Engalla alleged that every class member read and relied 14 on the statements made, and thus were entitled to a class-wide presumption of reliance. As the 15 California Supreme Court clarified in Mirkin, this decision “do[es] not support an argument for 16 presuming reliance on the part of persons who never read or hear the alleged 17 misrepresentations.” 5 Cal. 4th at 1094 (citing Vasquez v. Superior Court, 4 Cal. 3d 800 (1971) 18 (a case on which the Court in Engalla relied primarily—see Engalla, 15 Cal. 4th at 977)). There 19 is no presumption of reliance here because the parties dispute whether or not Plaintiffs did in fact 20 read the SEC filings. There is also no ability to rely on the fraud-on-the-market presumption, as 21 Plaintiffs admit. (Dkt. No. 81 at 9.) 22 B. Reliance Allegations at the Time of Purchase 23 24 ORDER DENYING IN PART AND GRANTING IN PART DEFENDANTS’ MOTIONS TO DISMISS- 5 1 The County has now adequately alleged that it read and relied on the 2005 and 2006 2 Forms 10-K in deciding to purchase the WaMu note. In examining the pleadings, the Court 3 notes that Plaintiffs define the “County” interchangeably with Solton. (Compl. at 1.) The 4 County alleges that “[a]s a result of its research and analysis, as well as its communications with 5 Butine [the investment advisor], the County read and relied upon the WaMu Forms 10-K . . . in 6 the days prior to its purchase of the WaMu note in July 2007.” (¶ 357.) The phrase “[a]s a result 7 of its research and analysis,” is curious. It could be read as a qualifier to mean that the County 8 and Solton never actually read the SEC filings. However, the Court construes the pleadings 9 liberally and accepts Plaintiffs’ perhaps inartful statement that the County/Solton actually read 10 the 2005 and 2006 Forms 10-K. See Jenkins v. McKeithen, 395 U.S. 411, 421 (1969) (“the 11 complaint is to be liberally construed in favor of plaintiff”), reh’g denied, 396 U.S. 869 (1969). 12 The County now alleges that it would not have purchased the WaMu note had it known the truth 13 about WaMu’s financial condition with sufficient specificity to satisfy Rule 9(b). The Court 14 accepts the pleading and DENIES the motions on this issue. 15 The City’s allegations are also sufficient to survive dismissal. As an initial matter, the 16 Court accepts that the City can allege indirect reliance to survive dismissal so long as the 17 allegations contain adequate specificity. See Mirkin, 5 Cal. 4th at 1098. The City alleges that its 18 investment advisor, Finkelstein, acted as the City’s agent and read the Forms 10-Ks for 2005 and 19 2006. (¶ 359.) Finkelstein allegedly “communicated with the City regarding the disclosures 20 made” in the Forms 10-K, and the City alleges “in the days prior to its purchase,” it relied on 21 these disclosures in deciding to make its purchase of the WaMu note. (¶ 359; ¶ 360.) While 22 Plaintiffs could have added greater detail as to the contents of Finkelstein’s communications, the 23 Court finds that the allegation, when read in context of the surrounding paragraphs, suffices to 24 ORDER DENYING IN PART AND GRANTING IN PART DEFENDANTS’ MOTIONS TO DISMISS- 6 1 show that the City was informed of the alleged misrepresentations. The allegations show 2 sufficient detail and particularity to survive dismissal, even under Rule 9(b). The Court DENIES 3 the motions to dismiss on this issue. 4 C. Reliance as to Holder Claims 5 As to holder damages, the Plaintiffs must allege “that if the plaintiff had read a truthful 6 account of the corporation’s financial status the plaintiff would have sold the stock, how many 7 shares the plaintiff would have sold, and when the sale would have taken place.” Small, 30 Cal. 8 4th at 184. 9 The County’s allegations as to reliance are adequate. The County states that it “received 10 and reviewed the 2007 Form 10-K, both directly through its Bloomberg system and through its 11 advisor, and relied upon such misrepresentations and concealments in deciding to hold on to its 12 note.” (¶ 363.) For purposes of deciding this issue, the Court accepts that the word “reviewed” 13 adequately encompasses the word “read.” The County does not expressly state the date when it 14 read the disclosure. However, analyzing the allegation in its entirety, the Court finds that the 15 date of reading is the same day WaMu made the SEC filing because the County alleges it would 16 have sold its WaMu note the day the 2007 Form 10-K was filed. It cannot allege that it would 17 have sold the note prior to having actually read the Form 10-K. The County provides a detailed 18 statement that had it read an accurate disclosure from WaMu in the 2007 Form 10-K it would 19 have sold all of its interest in the WaMu on the date the filing was made. (Id.) The County 20 makes the same allegations as to the 2007 Form 10-K/A. These allegations are adequate under 21 Small, 30 Cal. 4th at 184. The Court DENIES the motions on this issue 22 The City fails to allege sufficient reliance to sustain a holder claim. Nowhere does the 23 City allege that it or its advisor actually read the 2007 Form 10-K or 10-K/A. In its allegations 24 ORDER DENYING IN PART AND GRANTING IN PART DEFENDANTS’ MOTIONS TO DISMISS- 7 1 as to the acquisition of the WaMu note, the City expressly stated that Finkelstein “reviewed” the 2 2005 and 2006 Forms 10-K. (¶ 359.) No similar allegation appears as to the 2007 Forms 10-K 3 and 10-K/A. Instead, the City states that it was “informed of the contents of the 2007 Form 10-K 4 through is advisor.” (¶ 363.) This allegation is insufficient because the City does not also allege 5 that Finkelstein or any other advisor actually read the SEC filings. Without this specific 6 allegation, the City has failed to allege a holder claim. The Court GRANTS the motion to 7 dismiss on this issue. The City has not alleged adequate reliance to sustain its holder claim, but 8 it may pursue a claim for purchaser damages. 9 D. 10 Justifiable Reliance The Director Defendants argue that Plaintiffs have not shown their reliance was 11 justifiable because they allege access to adverse information prior to the date they claim they 12 would have sold their stock. (Dkt. Nos. 73 at 14-15.) This inquiry is highly factual, and it is not 13 ripe for decision at this stage of the litigation. See OCM Principal Opportunities Fund v. CIBC 14 World Markets Corp., 157 Cal. App. 4th 835, 864 (2007). 15 Conclusion 16 The Court DENIES the motions to dismiss as to the County’s purchaser and holder 17 claims. The amended complaint adds sufficient detail of specific reliance to survive dismissal. 18 The Court DENIES in part and GRANTS in part the motions to dismiss the City’s claims. 19 Although the allegations as to the purchaser claim are sufficiently detailed, the City fails to make 20 sufficient allegations that it or its agent actually read the 2007 Forms 10-K and 10-K/A. The 21 City may not pursue holder-related claims. 22 \\ 23 \\ 24 ORDER DENYING IN PART AND GRANTING IN PART DEFENDANTS’ MOTIONS TO DISMISS- 8 1 The clerk is ordered to provide copies of this order to all counsel. 2 Dated this 25th day of October, 2010. 3 5 A 6 Marsha J. Pechman United States District Judge 4 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 ORDER DENYING IN PART AND GRANTING IN PART DEFENDANTS’ MOTIONS TO DISMISS- 9
]]>
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You
should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google
Privacy Policy and
Terms of Service apply.
