Opinion
Case No. 04-22517-CIV-SEITZ/MCALILEY.
January 10, 2006
ORDER GRANTING DEFENDANTS' MOTION TO DISMISS AND CLOSING CASE
THIS CAUSE is before the Court on Defendants' Motion to Dismiss the Amended Class Action Complaint (the "Complaint"). Plaintiffs brought this class action under sections 11, 12, and 15 of Securities Act of 1933, 15 U.S.C. §§ 77k, 77l, 77o (the "Securities Act"). They allege that Defendants sold Corporate Backed Trust Certificates, GE Global Insurance Note-Backed Series 2003-19, Class A-1 (the "Certificates" or "Class A-1 Certificates") pursuant to a prospectus that contained material omissions. Specifically, Plaintiffs allege that the prospectus failed to inform them of the "nature and extent" of the risk of an SEC Reporting Failure and of the significant loss the Class A-I Certificate holders could experience upon the occurrence of an SEC Reporting Failure. In their motion, Defendants contend that the Court should dismiss the Amended Class Action Complaint because, inter alia, they did not have a duty to disclose the omitted information. Upon review of all relevant portions of the record, and after hearing the excellent oral argument of the parties, the Court grants Defendants' Motion to Dismiss the Amended Class Action Complaint with prejudice.
I. Background
A. Corporate Backed Trust Certificates
At issue in the instant action is a common investment product, known as Corporate Backed Trust Certificates ("CBTCs"). CBTCs are a type of security issued by a trust whose sole assets are corporate bonds of public companies. Because CBTCs are designed to permit investors who wish to invest in corporate bonds the opportunity to do so, they are typically sold in $25 units.
The Securities and Exchange Commission ("SEC") has recognized CBTCs and other asset-backed investment products, and has provided a regulatory framework governing the same. See Asset Backed Securities, 70 Fed. Reg. 1506, 1509-11 (January 7, 2005) (to be codified at 17 C.F.R. pt. 210 et seq. and available at 2005 WL 25262) ("Final Rules"). The Final Rules recognize the "practical difficulties" that a CBTC issuer faces with respect to obtaining, using, and evaluating the financial information of an unrelated third party. Thus, because underlying issuers are required by law to make periodic filings, the Final Rules allow Defendants to "refer to the filings of the underlying securities issuer . . . in lieu of providing the required financial information [regarding the underlying securities issuer] in the filing." Id. at 1552. "Of course, if the registrant is in possession of material nonpublic information about the third party being referenced, such information must be disclosed." Id. at 1553 n. 367.
To be permitted to reference the underlying issuers' filings, there must be "sufficient market interest" in that security, as indicated by (i) registration under section 12 of the Securities Act; and (ii) either (a) eligible to use Form S-3 or F-3 for primary offerings or (b) meets certain listing criteria. See Morgan Stanley Co., Inc. No Action Letter, 1996 WL 347869 (June 24, 1996) (the "No Action Letter"). Here, while it is undisputed that Defendants have met these requirements, Plaintiffs cite to the No Action Letter for the proposition that such guidance only applies to equity securities as opposed to the debt securities that are at issue here. Such argument is unavailing. Although the No Action Letter refers to equity securities, nothing in the letter indicates that such guidance is not applicable to debt securities and the Final Rules specifically refer to debt securities. Accordingly, Plaintiffs position is without merit.
While the Final Rules permit CBTCs to exclude a third party's financial information from a prospectus, such allowance is conditioned on the fact that the third party is making such disclosures in its SEC filings. Accordingly, given that any issuer may cease to make such filings, the Final Rules permit "[CBTC] issuers scrutinizing such debt to include a provision that, if . . . financial information [for the underlying security] is not available, the transaction, or a portion of the transaction, would terminate. . . . . . Id. at 1553. The Final Rules require CBTCs to make "such provisions . . . clear to investors." Id. at 1554, n. 374. However, the Final Rules do not require CBTC issuers to disclose the factors that could impact upon the underlying issuer's decision to cease its SEC Filings or to assess the magnitude of the risk that the underlying issuer will cease its SEC Filings.
B. GE Global Insurance Holding Corp.'s CBTCs
The relevant facts in Plaintiffs Complaint, accepted as true for purposes of this motion, are as follows: In February 1996, GE Global Insurance Holding Corp. ("GEGI"), a subsidiary of General Electric Capital Services Inc., issued the underlying debt securities, 7% notes, which were to mature in February 2026. (Compl. ¶¶ 23, 25.) Thereafter, in late 2003, Defendant Lehman ABS Corp. ("Lehman ABS") purchased $38 million of the underlying securities in the secondary market, and established a trust (the "Trust") to hold the same. ( Id. ¶¶ 22-23.) Through the Trust, Lehman ABS repackaged the underlying debt securities as CBTCs, denominated Class A-I Certificates. ( Id. ¶ 24.) In December 2003, the Trust offered 1,520,000 Class A-1 Certificates to the general public at an interest rate of 6% and a price of $25 per share. ( Id. ¶¶ 24, 26.) Defendants Lehman Brothers, Inc (Lehman Brothers), Banc of America Securities LLC ("Banc of America"), and J.J.B. Hilliard W.L. Lyons, Inc. ("Hilliard Lyons") acted as underwriters, and offered and sold the Certificates to the public pursuant to a Prospectus dated November 8, 2002, and a Prospectus Supplement dated December 3, 2003 (collectively the "Prospectus"). ( Id. ¶¶ 28-29.) The parties do not dispute that GEGI is a third party, unrelated to any of the Defendants.
In order to capitalize on the remaining 1% (i.e., the difference between the 7% interest on the underlying securities and the 6% interest on the Class A-1 Certificates), the Trust also issued Class A-2 Certificates in a private offering. These were interest — only certificates that did not entitle holders to distributions of principal from the Trust. ( See Defs.' Mot. Dismiss, Ex. 3 at S-15.) Rather, the Trust entitled Class A-2 Certificate holders to receive distributions of interest at 1% per annum on the principal balance of the Class A-1 Certificates of $38 million. (Compl. ¶ 27; Defs.' Mot. Dismiss, Ex. 3 at S-15.) However, in the event of an SEC Reporting Failure, Class A-2 Certificate holders were entitled to share in the distribution of proceeds. (Defs.' Mot. Dismiss, Ex. 3 at S-17).
Although not attached to the Complaint, the Court will consider the Prospectus in analyzing the sufficiency of Plaintiffs' allegations. See Solis-Ramirez v. U.S. Dep't of Justice, 758 F.2d 1426, 1430 (11th Cir. 1985) (noting that a Court may consider documents directly referred to in a complaint without converting a motion to dismiss into one for summary judgment). See also Oxford Asset Mgt., Ltd. v. Jaharis, 297 F.3d 1182, 1189 (11th Cir. 2002).
In accordance with the Final Rules, Defendants' Prospectus excluded GEGI's financial information and instead recommended that investors examine all publicly available information about GEGI. Specifically, the Prospectus stated as follows:
In connection with the present offering, none of the Depositor, the Underwriters or the Trustee (a) has made, or will make, any due diligence investigation of the business, operations or condition, financial or otherwise, or credit worthiness of the Underlying Securities Issuer [GEGI] or (b) has verified, or will verify, any reports or information filed by the Underlying Securities Issuer with the Securities and Exchange Commission. . . . It is strongly recommended that prospective investors in the Certificates consider and evaluate publicly available financial and other information regarding the Underlying Securities Issuer. The issuance of the Certificates should not be construed as an endorsement by the Depositor, the Underwriters or the Trustee of the financial condition or business prospects of the Underlying Securities Issuer.
( Id., Ex. 3 at S-10.) (emphasis added). Accordingly, in the event that GEGI were to state in writing its intention to permanently cease filing period reports required under the Securities Exchange Act of 1934 (the "Exchange Act"), the Trust required that its assets be liquidated. Thus, the Prospectus provided as follows:
SEC Reporting Failure
If the Underlying Securities Issuer [GEGI] either (x) states in writing that it intends permanently to cease filing periodic reports under the Exchange Act or (y) fails to file all periodic reports for one full year (each an "SEC Reporting Failure") . . . the Depositor shall within a reasonable period of time instruct the Trustee to sell the Underlying Securities and allocate the proceeds of such sale in the following order of priority: (1) to the Trustee, reimbursement for all extraordinary expenses incurred by the Trustee in accordance with the Trust Agreement . . . and (2) any remainder shall be allocated to the holders of the Class A-I Certificates and the Class A-2 Certificates in accordance with the ratio of the Class A-I Allocation to the Class A-2 Allocation.
( Id. ¶ 31; Defs.' Mot. Dismiss, Ex. 3 at S-17.) The Prospectus also defined Class A-I Allocation and Class
A-2 Allocation as follows:
"Class A-1 Allocation" means the sum of the present values (discounted at the rate of 6.00% per annum) of (i) any unpaid interest due or to become due on the Class A-1 Certificates and (ii) the outstanding principal amount of the Certificates (in each case assuming that the Class A-1 Certificates were paid when due and were not redeemed prior to their stated maturity).
"Class A-2 Allocation" means the present value (discounted at the rate of 6.00% per annum) of any unpaid amounts due or to become due on the Class A-2 Certificates (assuming that the Class A-2 Certificates were paid when due and were not redeemed prior to their stated maturity).
(Defs.' Mot. Dismiss, Ex. 3 at S-16.)
Finally, the Prospectus stated the consequences of an SEC Reporting Failure. Specifically, the Prospectus provided:
If the Underlying Securities are redeemed, prepaid, or liquidated in whole or in part due to . . . an SEC Reporting Failure, funds received by the Trust will be allocated to the holders of the Class A-1 Certificates and the Class A-2 Certificates in accordance with a formula which is based on the present value of the amounts due, or to become due, on such Certificates. Any such allocation of funds may cause the holders of the Class A-1 Certificates to receive less than they would have received if payments on the Underlying Certificates were made as scheduled.
(Defs.' Mot. Dismiss, Ex. 3 at S-11.)
Plaintiffs purchased the Class A-1 Certificates on December 4, 2003, and on December 16, 2003. ( Id., Ex. 4 at 2.) Three months later, on March 16, 2004, GEGI issued a press release announcing that it was de-listing and de-registering its securities (which is known as an opt-out transaction) and would thus cease SEC reporting as a separate entity. ( See Compl. ¶¶ 34, 42.) Accordingly, the Trust advised Certificate holders that the Trust would be liquidated and that they could either receive a pro rata share of the liquidation proceeds or their pro rata portion of the underlying securities held by the Trust. ( See id. ¶ 35.) Upon liquidation, Plaintiffs elected to take their pro rata share of the underlying securities in lieu of cash liquidation proceeds. ( See id. ¶¶ 40-41.) However, Plaintiffs contend that because the Trust used the distribution proceeds to pay expenses and because Class A-2 Certificate holders shared in the distribution with Class A-1 Certificate holders, Class A-I Certificate holders suffered a loss of approximately 10-20% of their investments ( Id. ¶ 39).
The parties dispute the actual cause of Plaintiffs' losses. Defendants contend that any loss suffered by Plaintiffs is attributable to market conditions, whereas Plaintiffs argue that Defendants' flawed investment scheme caused their losses. At oral argument, however, Plaintiffs acknowledged that interest rates could impact upon the value of their investment. As stated by Plaintiffs:
Depending on the value of the bonds at liquidation, lets say interest rates went way down, theoretically, for a long period of time and there is a liquidation. Then the value of the bonds would be higher and at the end of the day the investors would receive more than they would have gotten had they stayed with the certificates, depending on market fluctuations.
( See Dec. 13, 2005, Oral Argument Tr. at 33:18-24.).
Plaintiffs aver that "[u]pon information and belief," GEGI's opt-out transaction "was motivated, at least in part, by the significantly increased costs and regulatory burdens arising from compliance with the Sarbanes-Oxley Act of 2002." ( Id. ¶ 42.) At the time Defendants issued the Prospectus, opt-out transactions were an "increasingly attractive option" for corporate securities issuers, and particularly for the securities of a wholly-owned subsidiary of a company filing SEC reports, such as GEGI. ( Id.) Thus, Plaintiffs contend that because Defendants are experienced and knowledgeable in the securities field, they knew or should have known that GEGI was a prime candidate for an opt-out transaction, the risks associated with such a transaction, and the information from which investors could evaluate such a risk. Accordingly, Plaintiffs contend that Defendants should have disclosed the following: (I) that GEGI is a wholly owned-subsidiary; (2) that GEGI had or could have less than 300 holders of record and thus could engage in an opt-out transaction; (3) that the negative incentives arising from compliance with the Sarbanes Oxley Act increased the risk of an "SEC Reporting Failure," especially for a wholly-owned subsidiary of a public company such as GEGI; and (4) that GEGI's decision to cease its SEC Reporting could have nothing to do with its particular business, operations, or financial condition. ( See id. ¶¶ 42-45, 47-48.) Based on these omissions, Plaintiffs contend that the Prospectus failed to convey the magnitude the risk of an SEC Reporting Failure.
In their Notice of Filing Supplemental Authority, filed December 20, 2006, Plaintiffs filed the Press Release of Grant Thornton, LLP dated December 15, 2003, titled "Post Sarbanes-Oxley: Number of Public Companies Going Private Increases 30 Percent." According to the article, "Privatization transaction announcements increased 30 percent following the legislation's enactment from August 2002 to November 2003, in comparison to the 16-month period preceding the Act's initiation from April 2001 to July 2002."
With respect to the risk of an SEC Reporting Failure, Plaintiffs focused exclusively on the fourth alleged omission at oral argument, as indicated by the following exchange:
Court: So it would have been sufficient if they had simply said there is a risk that this company could elect to opt-out of the SEC filing requirement having nothing to do with their financial condition —
Plaintiff: Right. . . .
( See Dec. 13, 2005, Oral Argument Tr. at 45:12-15).
Plaintiffs also contend that Defendants should have disclosed the nature and extent of the dilution of Class A-I Certificates in the event of an SEC Reporting Failure due to the rights of Class A-2 Certificate holders to share in the distribution of proceeds. ( See id. ¶ 46). Specifically, at oral argument Plaintiffs stated that the following information should have been included in the Prospectus: "when there is a liquidation the [Class] A-I [Certificate holders] are going to be diluted to the extent the [Class] A-2 [Certificate holders] are being paid." ( See Dec. 13, 2005, Oral Argument Tr. at 34:2-4.) Based on this omission, Plaintiffs contend that the Prospectus was misleading.
II. Standard of Review
Federal Rule of Civil Procedure 12(b)(6) provides that dismissal of a claim is appropriate when "it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Blackstone v. Alabama, 30 F.3d 117, 120 (11th Cir. 1994); Fed.R.Civ.P. 12(b)(6). A motion to dismiss under Rule 12(b)(6) tests not whether the plaintiff will ultimately prevail on the merits but instead, whether it has properly stated a claim. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). To survive a Rule I2(b)(6) motion to dismiss, a complaint generally need only provide a short and plain statement of the claim and the grounds on which it rests. Conley v. Gibson, 355 U.S. 41, 47 (1957). Moreover, a court must accept the plaintiff's allegations in the complaint as true and view those allegations in a favorable light to determine whether the complaint states a claim for relief. S Davis Int'l, Inc. v. Republic of Yemen, 218 F.3d 1292, 1298 (11th Cir. 2000).
III. Analysis
A. Standing
As an initial matter, this Court must determine whether it has subject matter jurisdiction over Plaintiffs' claims. Defendants have raised a factual attack to this Court's subject matter jurisdiction, challenging Plaintiffs' constitutional standing. Specifically, Defendants contend that Plaintiffs cannot show either an injury or that their injury is fairly traceable to the Defendants, as they continue to hold the same interest in the same underlying securities as before the Class A-1 Certificates were terminated, and any decline in value of the underlying securities is attributable to market forces, not Defendants.
In a factual challenge to the court's jurisdiction, courts may consider matters outside the pleadings, such as testimony and affidavits. Morrison v. Amway Corp., 323 F.3d 920, 925 n. 5 (11th Cir. 2003). Thus, the plaintiff bears the burden of proof that jurisdiction does in fact exist, and the trial court is free to weigh the evidence and satisfy itself as to the existence of its power to hear the case. See Eaton v. Dochester Dev., Inc., 692 F.2d 727 (11th Cir. 1982). However, where a defendant's factual attack also implicates an element of the cause of action, "the proper course of action is to find that jurisdiction exists and deal with the objection as a direct attack on the merits of the plaintiff's case." Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981).
In the instant case, Defendants' challenge to this Court's subject matter jurisdiction is intertwined with the underlying merits of the case. Indeed, although causation is not an element of Plaintiffs' claims, loss causation is an affirmative defense that precludes liability "if the depreciation value of the security did not result from any nondisclosure or false statement made in the registration statement or prospectus." Azzolini v. Corts Trust II for Provident Fin. Trust I, No. 103CV1003, 103CV1005, MDL 103MD1552, 2005 WL 3448053, *5 (E.D. Tenn. Dec. 14, 2005) (citing In re Adams Golf Inc. Sec. Litig., 381 F.3d 267, 277 (3d Cir. 2004)). Accordingly, the Court will assume that it has subject matter jurisdiction and reserve ruling on the Defendants' constitutional standing challenge.
B. Failure To State A Claim
Plaintiffs assert claims under section II of the Securities Act against all Defendants (Count I) and under section 12(a)(2) of the Securities Act against all Defendants except Lehman ABS (Count III). Specifically, Plaintiffs allege that Defendants' Prospectus omitted two types of material information: (1) information relating to the likelihood of an SEC Reporting Failure; and (2) information relating to the extent Plaintiffs would suffer a loss upon an SEC Reporting Failure. In order to avoid dismissal of a section 11 or section 12(a)(2) claim based on an omission, Plaintiffs must allege facts establishing the following: (1) that the registration statement or prospectus contained an omission; (2) that the omission was material; (3) that defendants were under a duty to disclose the omitted material information; and (4) that such information existed at the time the registration statement or prospectus became effective. Oxford Asset Mgt., Ltd., 297 F.3d at 1189. Here, given that Defendants did not have a duty to disclose the alleged omissions, the Court must grant Defendants' Motion to Dismiss with prejudice.
Section 11(a) of the Securities Act provides a cause of action to purchasers of securities where: "any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading. . . ." 15 U.S.C. § 77k.
Section 12(a)(2) of the Securities Act imposes liability upon one who sells a security "by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading. . . ." 15 U.S.C. § 771.
1. The Likelihood Of An SEC Reporting Failure
Plaintiffs first allege that Defendants' omitted material information concerning the likelihood of an Specifically, Plaintiffs contend that Defendants should have disclosed the following: (1) that GEGI is a wholly owned subsidiary; (2) that GEGI had or could have less than 300 holders of record and thus could engage in an opt-out transaction; (3) that the negative incentives arising from compliance with the Sarbanes Oxley Act increased the risk of an "SEC Reporting Failure," especially for a wholly-owned subsidiary of a public company such as GEGI; and (4) that GEGI's decision to cease its SEC Reporting could have nothing to do with its particular business, operations, or financial condition. In response, Defendants content, inter alia, that they did not have a duty to disclose the above mentioned information.
"[A] corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact." Tawn Assoc., Inc. v. Housecall Med. Res., Inc., 1:96-CV-2214A, 1998 WL 1745361, at *6 (N.D. Ga. Mar. 30, 1998) (citation omitted). Rather, an omission of material information is actionable only if there was a duty to disclose it. See Ziemba v. Cascade Int'l, Inc., 256 F.3d 1194, 1206 (11th Cir. 2001). The Eleventh Circuit has squarely held that there is no "duty to disclose, in a prospectus, all information material to the offering [of securities]," and that this "duty question is properly stated as `whether defendants had a specific obligation to disclose information of the type that plaintiffs claim was omitted from the registration statement and prospectus."' Oxford Asset Mgt., Ltd., 297 F.3d at 1190 (citation omitted). Indeed, "If the prospectus contains all of the material information specifically required by the securities laws, does not contain an untrue statement of a material fact and if the statements therein are not materially misleading in any respect, there has been no material misrepresentation or material omission." Id. at 1190.
As to the first alleged omission, Defendants did not have a duty to disclose that GEGI was a wholly owned subsidiary because such information was publicly available. See In re Merrill Lynch Co., Inc. Research Reports Sec. Litig., 272 F. Supp. 2d 234, 249-50 (S.D.N.Y. 2003) (stating, "Sections 1 I and 12(a)(2) do not require the disclosure of publicly available information."). As to the second alleged omission, the Complaint fails to allege even one fact indicating that Defendants knew or could have known that GEGI, an unrelated third party, had less than 300 holders of record. See Oxford Asset Mgt., Ltd., 297 F.3d at 1192 (dismissing claim where complaint failed to "plead any factual basis for the charges"). Moreover, although Plaintiffs contend that Defendants should have disclosed that GEGI could have less than 300 holders of record and thus could have an SEC Reporting Failure, Defendants made clear in the Prospectus that an SEC Reporting Failure could occur. ( See Defs.' Mot. Dismiss, Ex. 3 at S-11, 17). Thus, the Prospectus was not rendered misleading based on this omission.
See also Hillson Partners Ltd. P'ship v. Adage Inc., 42 F.3d 204, 212 (4th Cir. 1994) (holding that the defendant's failure to fully disclose a company's financial problems in a quarterly report did not constitute an omission of a material fact where such information was available in both the company's annual report and 10k).
Turning to the question of whether Defendants had a duty to disclose that compliance with the Sarbanes Oxley Act increased the risk of an SEC Reporting Failure and that an SEC Reporting Failure could occur for reasons unrelated to GEGI's financial condition or business, the Court finds that Defendants did not. Although the Final Rules do not create an affirmative duty to disclose the risks associated with an SEC Reporting Failure, Defendants nevertheless have a duty to ensure that the statements in the Prospectus are not materially misleading. Plaintiffs contend that the Prospectus is misleading because it lacks any information from which an investor could evaluate the magnitude of the risk that GEGI would cease its SEC filings. Plaintiffs further provide that such disclosures would not require any particular knowledge of GEGI's business, but would rather require general information from which an investor could discern the factors that could impact upon GEGI's decision. In response, Defendants contend that a reasonable investor would not look to the Prospectus for information regarding the factors that could impact upon GEGI's decision to cease its SEC filings, as the Prospectus disavows making any representations as to GEGI. The Court agrees. The Prospectus provides that Defendants have not made any investigation of GEGI, an unaffiliated third party. Moreover, the Prospectus warns investors that they should "consider and evaluate publicly available financial and other information" regarding GEGI before making an investment. Thus, because Defendants did not purport to assess the risks associated with an SEC Reporting Failure, but rather advised Plaintiffs generally that they should evaluate GEGI on their own behalf, the omissions here do not render the Prospectus misleading. See generally In re WorldCom, Inc. Sec. Litig., 303 F. Supp. 2d 385 (S.D.N.Y. 2004); Azzolini v. Corts Trust II for Provident Fin. Trust I, No. 103CV1003, 103CV1005, MDL103MD1552, 2005 WL 2253971 (E.D. Tenn. Sept. 16, 2005).
Defendants suggest implicitly that because the Final Rules do not affirmatively create a duty to disclose the alleged omissions, the inverse is also true, in that the Final Rules preclude a finding of any duty on the part of Defendants. See Defs. Reply at 5 (stating, "[a] contrary holding by this Court would reject established principles of law and overturn the formal SEC regulatory framework applicable to CBTCs."). However, while it is certainly relevant that the Final Rules do not create an affirmative duty, a court must continue its inquiry to determine whether a prospectus is materially misleading.
In addition, although Plaintiffs suggest that the alleged omissions are generic, Plaintiff's theory would require Defendants to hypothecate as to what might impact upon an unrelated third party's decision to cease its SEC filings. While the Final Rules require Defendants to disclose known mate rial facts about the underlying securities issuer, there is no duty to speculate. Although Plaintiffs may regret in hindsight not having more information as to the magnitude of the risk of an SEC Reporting Failure, Defendants did not abrogate any duty, and accordingly, the Court must grant Defendants' Motion to Dismiss as to the omissions regarding the likelihood of an SEC Reporting Failure.
B. Defendants Adequately Disclosed That Class A-2 Certificate Holders Would Share In The Distribution Of Proceeds In The Event Of An SEC Reporting Failure
Plaintiffs next contend that Defendants should have disclosed that in the event of an SEC Reporting Failure, the Class A-1 Certificate Holders' interest in the Trust would be diluted to the extent that Class A-2 Certificate Holders were paid. In response, Defendants point out that the Prospectus specifically warned investors that in the event of an SEC Reporting Failure, the Depositor would sell the underlying securities and allocate the proceeds of such sale first to the Trustee for expenses, and then to the holders of the Class A-I Certificates and the Class A-2 Certificates. Furthermore, the Prospectus explained that such allocation would be in accordance with a formula based on the present value of the amounts due, or to become due, on such Certificates, and defined the allocation terms. ( See Defs.' Mot. Dismiss, Ex. 3 at S-10, 11, 16, 17.) Finally, the Prospectus disclosed that any such allocation of funds may cause the Class A-I Certificate holders to receive less than they would have received if payments on the Underlying Certificates were made as schedule. Thus, based upon the disclosures in the Prospectus, the Prospectus adequately informed Class A-I Certificate holders of the consequences of an SEC Reporting Failure and was not materially misleading. Thus, the Court must grant Defendant's Motion to Dismiss as to this omission as well.
Although Plaintiffs' pleadings suggest that Defendants should have predicted a loss of approximately 10%-20%, Plaintiffs did not pursue this position at oral argument, tacitly conceding that Defendants could not have predicted in December 2003 the extent of their loss in March 2004, as Defendants did not know when an SEC Reporting Failure would occur, if ever, and the interest rates at such time.
The Court also dismisses Plaintiffs' Section 15 claim against Lehman ABS (Count 11).To state a claim for "control person" liability under Section 15, a plaintiff must establish that the defendant is liable for a primary violation of Section 11. See 15 U.S.C. § 77o; Elhert v. Singer, 245 F.3d 1313 (11th Cir. 2001).
IV. Conclusion
For the reasons articulated above, it is hereby
ORDERED that Defendant's Motion to Dismiss [DE 18] is GRANTED WITH PREJUDICE. All pending motions not otherwise ruled upon are DENIED AS MOOT. This case is CLOSED.
ORDERED.