If there were lingering doubts that the U.S. Court of Appeals for the Second Circuit threw up a big obstacle for securities plaintiffs lawyers one year ago in Fait v. Regions Financial Corp., 655 F.3d 105, Southern District Judge Deborah Batts (See Profile) helped put them to rest on Aug. 10.
In a terse six-page order, Batts threw out a proposed class action claiming that Deutsche Bank AG, its individual officers and its underwriters misstated the bank’s losses from mortgage-backed securities even after the credit bubble popped in 2008. Batts had previously allowed the case to go forward, but Deutsche Bank’s lawyers at Cahill Gordon & Reindel convinced the judge to reconsider in light of the Second Circuit’s holding in Fait that only knowingly false loss valuations are actionable under the Securities Act of 1933 (NYLJ, Aug. 26, 2011).
In February 2009, Deutsche Bank posted a record loss of $4.8 billion for the fourth quarter of 2008, prompting six different class action suits. Batts consolidated the cases in 2009 and named Robbins Geller Rudman & Dowd and Murray Frank co-lead counsel. The two firms filed an amended complaint in early 2010, alleging that Deutsche Bank’s offering statements for six securities marketed between 2006 and 2008 were materially false and misleading because they didn’t explain the extent of the company’s MBS exposure. For some of the securities, the plaintiffs also alleged that the offering statements were deficient because they didn’t fully disclose inadequacies in Deutsche Bank’s risk management systems, the extent of the bank’s potential liability to monoline insurers, or the volume of its high-risk proprietary trading. The allegations were based on theories of negligence and strict liability, rather than knowing misconduct.
Cahill Gordon, which represents both Deutsche Bank and the individual defendants, moved to dismiss in March 2010, arguing that the bank’s disclosures were sufficient and that the complaints amounted to “nothing more than impermissible hindsight pleading.” Skadden Arps Slate Meagher & Flom’s Jay Kasner and Scott Musoff also moved to dismiss the case on standing and statute of limitations grounds on behalf of a group of underwriter defendants, including UBS Securities LLC and Citigroup Financial Markets Inc.
Batts largely rejected the dismissal motions in an August 2011 order. She found that the plaintiffs had alleged sufficient facts to proceed with their claims regarding five of the six offerings, and she gave them leave to amend their claims regarding the sixth. Four days later, however, the Second Circuit handed down Fait, and Cahill Gordon and Skadden jointly filed a motion urging Batts to reconsider.
The judge agreed with the defense on Aug. 10 that Fait left her no alternative but to dismiss the case with prejudice.
“These allegations suggest that Defendants were wrong, and perhaps egregiously so, in their internal valuation metrics,” she wrote in In re Deutsche Bank AG Securities Litigation, 09 Civ. 1714. “It is clear after Fait, however, that such valuations are matters of opinion rather than fact. Accordingly, plaintiffs must allege that Defendants did not honestly believe those valuations when made. The complaint in this matter contains no such allegations.”
Cahill’s David Januszewski and Robbins Geller partner Andrew Brown did not respond to calls for comment. Robbins Geller also represented the plaintiffs in Fait.
@|Jan Wolfe is a reporter for The Litigation Daily, an affiliate of the New York Law Journal. He can be contacted at email@example.com.