NECA-IBEW Pension Tr. Fund v. Bank of Am. Corp.

Full title: NECA-IBEW PENSION TRUST FUND and DENIS MONTGOMERY, on behalf of themselves…

Court: UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

Date published: Feb 9, 2012

10 Civ. 440 (LAK)(HBP) (S.D.N.Y. Feb. 9, 2012)

Opinion

10 Civ. 440 (LAK)(HBP)

02-09-2012

NECA-IBEW PENSION TRUST FUND and DENIS MONTGOMERY, on behalf of themselves and all others similarly situated, Plaintiffs, v. BANK OF AMERICA CORPORATION, et al., Defendants.

PITMAN, United States Magistrate Judge

REPORT AND RECOMMENDATION

:

TO THE HONORABLE LEWIS A. KAPLAN, United States District Judge,

I. Introduction

Plaintiffs NECA-IBEW Pension Trust Fund ("NECA-IBEW") and Denis Montgomery commenced this putative securities class action against the BAC Defendants¹ and the Underwriter Defen- dants.² Plaintiffs allege violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 ("Securities Act").

1 The BAC Defendants include: Bank of America Corporation; Banc of America Securities LLC; Kenneth D. Lewis; Joe L. Price; Neil A. Cotty; William Barnet, III; Frank P. Bramble, Sr.; John T. Collins; Gary L. Countryman; Tommy R. Franks; Charles K. Gifford; W. Steven Jones; Walter E. Massey; Thomas J. May; Patricia E. Mitchell; Thomas M. Ryan; O. Temple Sloan, Jr.; Meredith R. Spangler; Robert L. Tillman; and Jackie M. Ward. I note, however, that plaintiffs treat Banc of America Securities LLC as an underwriter defendant in the amended complaint (see First Amended Complaint, dated January 14, 2011 ("Am. Compl."), (Docket Item 25), ¶¶ 42-50).

2 The Underwriter Defendants include: Citigroup Global Markets Inc.; Deutsche Bank Securities; J.P. Morgan Securities Inc.; Merrill Lynch, Pierce, Fenner & Smith Incorporated; Morgan Stanley & Co. Incorporated; UBS Securities LLC; and Wachovia Capital Markets, LLC.

By notices of motion dated March 4, 2011 (Docket Items 26 and 29), the BAC Defendants and the Underwriter Defendants move to dismiss plaintiffs' claims against them pursuant to Fed.R.Civ.P. 12(b)(6).

For the reasons set forth below, I respectfully recommend that the BAC Defendants' and the Underwriter Defendants' motions to dismiss be granted in their entirety and that plaintiffs' application to amend its complaint be denied without prejudice to renewal by way of formal motion.

II. Facts

This action arises out of alleged violations of the Securities Act by all defendants in connection with three Bank of America Corporation ("BAC") public offerings of securities conducted in the first half of 2008 -- specifically, Series H securities, Series K securities, and Series L securities.

A. The Parties

Lead Plaintiff NECA-IBEW acquired shares of BAC Series K securities "on and after" January 24, 2008 "purchased directly" from defendant Bank of America Securities LLC ("BAS") (First Amended Complaint, dated January 14, 2011 ("Am. Compl."), (Docket Item 25), ¶ 20). Plaintiff Montgomery acquired shares of BAC Series H securities "on or about" May 24, 2008 "through" defendant Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") (Am. Compl. ¶ 21).

There are two groups of defendants in this litigation: the BAC Defendants and the Underwriter Defendants. The BAC Defendants include BAC and BAS, as well as the individual defendants. BAC was the issuer with respect to each of the offerings, and BAS participated in each of the offerings as an underwriter (Am. Compl. ¶¶ 1, 22, 42). With the exception of individual defendant Joe L. Price, each individual defendant was a member of BAC's board of directors at all relevant times and signed the registration statement at issue in this litigation (Am. Compl. ¶¶ 23-40). Individual defendant Price was, at all relevant times, the Chief Financial Officer of BAC (Am. Compl. ¶ 24).

The remaining defendants participated in the offerings as underwriters (Am. Compl. ¶¶ 42-49). Specifically, each of the named underwriter defendants participated in the Series H offering (Am. Compl. ¶¶ 42-49). Morgan Stanley and UBS, as well as BAS, also participated in the Series K offering (Am. Compl. ¶¶ 42, 45-46). None of the underwriter defendants participated in the Series L offering (see Am. Compl. ¶¶ 42-49).

B. The Amended Complaint

As noted above, there are three BAC public offerings at issue in this litigation. First, on or about January 24, 2008, BAC issued 6 million shares of Series K securities at $1,000.00 per share, yielding gross proceeds of $6 billion (Am. Compl. ¶ 10). Second, also on or about January 24, 2008, BAC issued 6.9 million shares of Series L securities at $1,000.00 per share, yielding gross proceeds of $6.9 billion (see Am. Compl. ¶ 11; see also Ex. D attached to Declaration of Jonathan Rosenberg, Esq. in Support of BAC Defendants' Motion to Dismiss the First Amended Complaint for Failure to State a Claim, dated March 4, 2011 ("Rosenberg Decl."), (Docket Item 31)). Third, on or about May 20, 2008, BAC issued 117 million shares of Series H securities at $25.00 per share, yielding gross proceeds of $2.925 billion (Am. Compl. ¶ 12). Each of these offerings was conducted pursuant to an automatic shelf registration statement that BAC filed with the Securities and Exchange Commission ("SEC") on May 5, 2006 (Am. Compl. ¶ 1). Each offering was then "augmented by [a] separate prospectus supplement . . . which incorporate[d] by reference [BAC's] intervening public filings" (Am. Compl. ¶ 1).

In broad overview, plaintiffs allege the following. "[By] early 2007, [BAC] recognized that there existed a significant concentration of credit risk imbedded [sic] in [BAC]-originated real estate loans (i.e., residential mortgages, commercial real estate loans and [home equity loans] [and it] . . . also knew (or should have known) . . . that the amount of nonperforming real estate loans had been steadily increasing . . . since [the housing bubble peaked in] late-2006" (Am. Compl. ¶ 89; see also Am. Compl. ¶ 60). Notwithstanding this risk, "the amount of [BAC][-]originated [home equity loans] . . . [grew] to over $101 billion [by September 30, 2007] [and] the amount of nonperforming [home equity loans] mushroom[ed] to $764 million (an increase of over 160% since the end of 2006)" (Am. Compl. ¶ 92). "Similarly, fourth quarter 2007 results . . . show[ed] increasing [home equity loans] defaults (total [home equity loans] held $114.8 billion; nonperforming [home equity loans] $1.3 billion)" (Am. Compl. ¶ 92).

In the Form 10-Q report that BAC filed on November 9, 2007, BAC reported the following concerning its third quarter financial performance (as compared to the prior year): (1) BAC's overall net income had decreased -- specifically, by 32 percent in the third quarter and 7 percent in the nine months ending September 30, 2007; (2) BAC's provision for credit losses in the Global Corporate and Investment Banking section had increased -- specifically, by $192 million in the third quarter and $302 million in the nine months ending September 30, 2007 which "reflect[ed] the impact of the weak housing market;" (3) BAC's provision for overall credit losses had increased -- specifically, from $865 million to $2.0 billion in the third quarter and $1.6 billion to $5.1 billion in the nine months ending September 30, 2007 which reflected the "impact of the weak housing market;" (4) BAC's overall net charge-offs had increased -- specifically, by $296 million in the third quarter and $1.4 billion in the nine month period ending on September 30, 2007; (5) "extreme dislocations . . . in the financial markets" had impacted various markets in which BAC operated and BAC expected such dislocations to continue;³ (6) BAC had collateralized debt obligation ("CDO") exposure;⁴ (7) BAC had home equity loan exposure, of which (a) nonperforming home equity loans had increased by $473 million compared to December 31, 2006, (b) net charge-offs had increased by $39 million in the third quarter and $63 million in the nine months ending September 30, 2007, and (c) the provision for credit losses had increased by 74 percent in the third quarter and 48 percent in the nine months ending September 30, 2007; and (8) BAC's loan and lease losses had increased by $39 million since December 31, 2006⁵ (see Am. Compl. ¶¶ 67-70) (internal quotations omitted). Also in this Form 10-Q report, BAC formally reported that it had invested $2 billion in Countrywide Financial Corporation ("Countrywide") convertible preferred stock (Am. Compl. ¶ 77).

3 Specifically, BAC stated:

During the third quarter, extreme dislocations emerged in the financial markets, including leveraged finance, subprime mortgage, and the commercial paper markets . . . . [which] created less liquidity, a flight to quality, greater volatility, widening of credit spreads and a lack of price transparency. [BAC's Capital Markets and Advisory Services] business within the [Global Corporate and Investment Banking] segment operates in these markets, either directly or indirectly through exposures in securities, loans, derivatives and other commitments and has been and will continue to be adversely impacted by this market disruption.


* * *

Subsequent to September 30, 2007 the credit ratings of . . . [CDOs] were downgraded . . . . We have been an active participant in the CDO market and maintain ongoing exposure . . . . and it is unclear what impacts these dislocations will have on other markets in which we operate or maintain positions . . . . We anticipate . . . adverse [ ] impact[s] . . . during the fourth quarter.

(Am. Compl. ¶ 68).

4 Specifically, BAC stated:

We provided $15.5 billion, or $12.8 billion net of amounts hedged . . . in liquidity support for commercial paper . . . . The net amount that is principally backed by subprime residential mortgage exposure totaled $9.8 billion.


* * *

We also have exposure to CDOs through our structuring, warehousing and trading activities. At September 30, 2007, we had $2.4 billion in super senior securities . . . as part of our CDO structuring business, net of $2.8 billion that is hedged . . . . The portion that is backed principally by subprime residential mortgage exposure was $1.9 billion, net of $2.1 billion of hedges.


* * *

We also had CDO exposure of approximately $1.0 billion in CDO warehouses. The portion backed principally by subprime residential mortgage exposure was approximately $400 million. We had other subprime exposure related to loans pending securitization of approximately $1.8 billion and outstandings under financing transactions of approximately $1.0 billion.

(Am. Compl. ¶ 69).

5 BAC also described its methodology for calculating and monitoring its allowance for loan and lease losses (see Am. Compl. ¶ 70).

In the Form 8-K that BAC filed on January 11, 2008, BAC announced that it had completed thirty days of "extensive due diligence [concerning Countrywide] occupying over sixty . . . [BAC] personnel" and that a "definitive agreement" had been reached to purchase Countrywide for approximately $4.0 billion in BAC common stock (Am. Compl. ¶ 78) (internal quotation marks omitted). In a press release attached as an exhibit to this Form 8-K, BAC also stated:

[The Countrywide transaction] presents a rare opportunity for [BAC] to add what we believe is the best domestic mortgage platform at an attractive price and to affirm our position as the nation's premier lender to customers . . . . We are aware of the issues within the housing and mortgage industries . . . [and] [t]he transaction reflects those challenges.


* * *

[BAC] expects $670 million in after-tax savings . . . . [with] [a]bout one third of those savings [realized] in 2009, two thirds [realized] in 2010 and savings . . . fully realized in 2011.

(Am. Compl. ¶ 80) (internal quotation marks and emphasis added omitted).

BAC also filed materials relating to the Countrywide transaction with the SEC on January 11, 2008. In those materials, BAC explained that: (1) the purchase of Countrywide would provide BAC "with a unique opportunity to gain [a] leading position in consumer real estate;" (2) Countrywide was a "[t]op overall originator" with a "[l]eading position across channels" and, further, had $209 billion in assets and $55 billion in deposits; (3) the transaction would require BAC to issue additional capital to maintain its "Tier 1 capital" status; and (4) the projection for "earning per share impact" would be "neutral" for 2008 and "3% accretive in 2009" (see Am. Compl. ¶¶ 81-82) (internal quotation marks omitted). Plaintiffs also allege that BAC representatives made substantially similar representations to securities analysts during a conference call the same day, including that "much of [Countrywide's] originations in the current market are of much higher quality and better spreads than the past couple of years" (see Am. Compl. ¶¶ 83-85) (internal quotation marks and emphasis added omitted).

In the Form 8-K that BAC filed on January 22, 2008, BAC reported "[2007] fourth quarter mark-to-market write[-]downs on its high grade, mezzanine and CDO squared tranches in [its] Super Senior CDOs of $873 million, $757 million, and $2.329 billion, respectively" (Am. Compl. ¶ 72) (internal quotation marks omitted). Additionally, BAC reported that its "year[-]end 2007 Tier 1 capital and leverage ratios⁶ [were] 6.87% and 5.04%, respectively" (Am. Compl. ¶ 72).

6 Plaintiffs allege that BAC is subject to "substantially similar risk-based and leveraged capital guidelines" issued by the Federal Reserve Board ("FRB"), the Office of the Comptroller of the Currency ("OCC"), and the Federal Deposit Insurance Corporation ("FDIC"). Plaintiffs also allege that "[t]hese guidelines define a multi-tiered capital framework [that is] used by regulators and investors to evaluate capital adequacy based primarily on the perceived credit risk associated with balance sheet assets, as well as certain off-balance sheet exposures such as unfunded loan commitments, letters of credit, derivatives, and foreign exchange contracts, if they are known." These guidelines "are supplemented by a leverage ratio requirement, calculated by dividing the bank's Tier 1 risk-based capital (the numerator of the ratio) by its average total consolidated assets (the denominator of the ratio)" (Am. Compl. ¶ 3). Finally, plaintiffs allege that the Federal Deposit Insurance Corporation adopted a "rating system employing four capital categories for insured depository institutions" and that "to earn the designation of 'well capitalized,' a bank's total risk-based capital ratio [must be] equal to or greater than 10 percent, its Tier 1 risk-based capital ratio must be equal to or greater than 6 percent, and its Tier 1 leverage capital ratio must be equal to or greater than 5 percent" (Am. Compl. ¶ 4, citing 12 C.F.R. § 327.9(a)(2)).

Plaintiffs allege that in the Form S-4 that BAC filed on February 13, 2008, BAC "reaffirmed many of [the] material representations made . . . to the securities analysis present at the January 11, 2008 presentation and conference call . . . including . . . that a pro forma analysis of the [Countrywide transaction] would be neutral to slightly dilutive to [BAC] in 2008 and accretive in 2009." (Am. Compl. ¶ 87) (internal quotation marks omitted).

In the Form 10-K report that BAC filed on February 28, 2008, BAC reported the following concerning its financial performance for the full year 2007 (as compared to the prior year): (1) BAC's overall net income had decreased -- specifically, by 29 percent; (2) BAC's provision for credit losses in the Global Consumer and Small Business Banking section had increased by 51 percent which reflected the "impact of the housing market weakness on the home equity portfolio;" and (3) BAC's provision for credit losses in the Global Corporate and Investment Banking section had increased by $643 million which reflected higher net charge-offs and the "impact of the housing market weakness on the homebuilder sector" (Am. Compl. ¶¶ 73-74). Additionally, BAC once again reported a "year[-]end risk-based capital rations [sic] of: Tier 1 - 6.87%; Total - 11.02%; and Tier 1 Leverage - 5.04%" (Am. Compl. ¶ 74).

In the Form 10-Q report that BAC filed on May 8, 2008, BAC made the following statements concerning its financial performance for the first quarter of 2008 (as compared to the first quarter of 2007): (1) BAC's overall net income had decreased -- specifically, by 77 percent; (2) BAC's provision for overall credit losses had increased from $4.8 billion to $6.0 billion which reflected "deterioration in the housing markets" and a "housing market slowdown;" (3) BAC's total assets were $1.7 trillion, an increase of one percent from December 31, 2007 due mostly to "increases in derivative assets, debt securities and other assets . . . . "; and (4) BAC's allowance for consumer loan and lease losses had increased by $2.5 billion since December 31, 2007 and BAC's allowance for commercial loan and lease losses had increased by $817 million since December 31, 2007, both due to reserve increases in BAC's loan portfolio (Am. Compl. ¶¶ 75-76).

Plaintiffs contend that these offering documents were materially false and misleading in light of the following post-offering documents and announcements: (1) BAC issued a press release on January 16, 2009, in which it reported "huge multi-billion write-downs and provisions associated with both its [home equity loan]-originated portfolio and residential loan portfolio [that] it had acquired from Countrywide" and also that BAC "had separately suffered significant deteriorated asset values associated with [BAC]-originated CDOs along with [its] commercial mortgage securities-backed investment instruments . . . . " (Am. Compl. ¶ 15); (2) BAC's release of its fourth quarter results for the year 2009, in which it reported that the company had exhausted the $11.9 billion reserve originally set aside for liabilities associated with the purchase of Countrywide and its residential mortgage-backed securities transactions, and further, an additional $3.875 billion charge-off for these assets had been made (Am. Compl. ¶ 111); (3) BAC's Form CORRESP filing dated April 14, 2010, in which it reported certain accounting errors with respect to the reporting of its residential mortgage-backed securities transactions during 2007 and 2008 (Am. Compl. ¶¶ 96-97); and (4) BAC's announcement on January 3, 2011 that it was paying Fannie Mae and Freddie Mac $2.8 billion to settle BAC's liability for Countrywide-originated nonconforming mortgages (Am. Compl. ¶ 111). Plaintiffs also contend that BAC's home equity loan "write-offs"/net charge-offs during 2007 were "significantly less than [its] banking industry peers Citibank and J.P. Morgan," as were its 2007 fourth quarter CDO write-downs when compared to Citibank and UBS AG (Am. Compl. ¶¶ 93, 95).

On the basis of the foregoing, plaintiffs allege (1) Section 11 claims against all defendants except for individual defendant Price, (2) Section 12(a)(2) claims against BAC and the Underwriter Defendants (including BAS), and (3) Section 15 claims against all of the individual defendants, including individual defendant Price.

Specifically, plaintiffs allege that the offering documents failed to disclose that: (1) BAC's "loans and leases, CDOs, and commercial mortgage backed securities were impaired to a greater extent than . . . disclosed;" (2) BAC "misrepresented the extent of [BAC's] impaired assets by failing to establish adequate reserves or properly record losses for its impaired assets;" (3) BAC's "internal controls were not capable as represented and were inadequate to prevent [BAC] from improperly reporting the quantum of impaired assets;" (4) BAC "misrepresented in its January 11, 2008 Form 8-K filings with the SEC, and concurrently made false public statements regarding the thoroughness and adequacy of [BAC's] due diligence investigation conducted in connection with its decision to acquire Countrywide, along with the financial impact of that acquisition on [BAC's] operational results;" (5) BAC's "capital base was not represented given the true impairment of its assets;" and (6) BAC's "Tier 1 leverage ratio for its risk-based capital was materially overstated and [BAC's] representation that it was 'well-capitalized' . . . as set forth in its January 22, 2008 Form 8-K . . . was false because [BAC] was at best only 'adequately capitalized' . . . at the end of 2007"⁷ (Am. Comp. ¶¶ 101, 103). Plaintiffs also allege that the offering materials failed to comply with Item 503 of Regulation S-K, 17 C.F.R. § 229.53 and SEC Article 10-01 of Regulation S-X, 17 C.F.R. § 210.10-01 (Am. Compl. ¶¶ 104-08). Plaintiffs "expressly exclude and disclaim any allegation that could be construed as alleging fraud or intentional or reckless misconduct [on the part of the defendants] . . . . " (Am. Compl. ¶¶ 1, 112, 123, 128).

7 This particular allegation is raised specifically with respect to the Series K offering, but not with respect to the Series H offering (compare Am. Compl. ¶ 101 with Am. Compl. ¶ 103).

The BAC Defendants and the Underwriter Defendants have moved to dismiss all of the claims against them. Specifically, the BAC Defendants contend that (1) plaintiffs' claims are time-barred pursuant to Section 13 of the Securities Act, and further, that plaintiffs lack standing to assert claims concerning the Series H securities; (2) none of the asserted statements are actionable under the Securities Act because they are either subjective opinions, expressions of puffery, vague statements, forward-looking statements protected by the safe harbor provision of the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-5(c)(1)(A)(i), or statements protected by the judicial "bespeaks caution" doctrine; and (3) plaintiffs' derivative Section 15 claims should be dismissed because there is no primary violation of the Securities Act. The Underwriter Defendants adopt the BAC Defendants' arguments to the extent that they apply to them, and they additionally contend that (1) plaintiffs lack standing to assert claims concerning the Series L securities; and (2) plaintiffs lack standing to bring claims under Section 12(a)(2) of the Securities Act. The BAC Defendants adopt the Underwriter Defendants' argument with respect to the Series L securities.

Because plaintiffs concede that their claims concerning the Series L securities cannot proceed in this action (see Plaintiffs' Memorandum of Law in Opposition to BAC Defendants' Motion to Dismiss First Amended Complaint, dated May 6, 2011 ("Pl.'s Mem. in Opp. to BAC's Mot. to Dismiss"), (Docket Item 34), 3 n.4), those claims should be dismissed. Thus, I need not further address the Series L securities in resolving this motion.

III. Analysis

A. Standards Applicable to a Motion to Dismiss

The standards applicable to a motion to dismiss pursuant to Rule 12(b)(6) are well-settled and require only brief review.

When deciding a motion to dismiss under Rule 12(b)(6), [the court] must accept as true all well-pleaded factual allegations of the complaint and draw all inferences in favor of the pleader. See City of Los Angeles v. Preferred Communications, Inc., 476 U.S. 488, 493, 106 S.Ct. 2034, 90 L.Ed.2d 480 (1986); Miree v. DeKalb County, 433 U.S. 25, 27 n.2, 97 S.Ct. 2490, 53 L.Ed.2d 557 (1977) (referring to "well-pleaded allegations"); Mills v. Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir. 1993). "'[T]he complaint is deemed to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference.'" Int'l Audiotext Network, Inc. v.

Am. Tel. & Tel. Co., 62 F.3d 69, 72 (2d Cir. 1995) (quoting Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991)). The Court also may consider "matters of which judicial notice may be taken." Leonard T. v. Israel Discount Bank of New York, 199 F.3d 99, 107 (2d Cir. 1999) (citing Allen v. WestPoint--Pepperill, Inc., 945 F.2d 40, 44 (2d Cir. 1991)). In order to avoid dismissal, a plaintiff must do more than plead mere "[c]onclusory allegations or legal conclusions masquerading as factual conclusions." Gebhardt v. Allspect, Inc., 96 F. Supp. 2d 331, 333 (S.D.N.Y. 2000) (quoting 2 James Wm. Moore, Moore's Federal Practice ¶ 12.34[a][b] (3d ed. 1997)).

Hoffenberg v. Bodell, 01 Civ. 9729 (LAP), 2002 WL 31163871 at *3 (S.D.N.Y. Sept. 30, 2002) (Preska, D.J.); see also In re Elevator Antitrust Litig., 502 F.3d 47, 50 (2d Cir. 2007); Johnson & Johnson v. Guidant Corp., 525 F. Supp. 2d 336, 345-46 (S.D.N.Y. 2007) (Lynch, then D.J., now Cir. J.). In addition to the documents attached to or incorporated by reference in the complaint, the court may also consider "' . . . legally required public disclosure documents and documents possessed by or known to the plaintiff upon which it relied in bringing the suit.'"⁸ In re Lehman Bros. Sec. & ERISA Litig., 799 F. Supp. 2d 258, 272 (S.D.N.Y. 2011) (Kaplan, D.J.), quoting ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007).

8 Plaintiffs contend that the BAC defendants have submitted "extraneous materials" that should be disregarded by the court in resolving these motions. To the extent that the materials submitted include publicly filed SEC documents that were incorporated into the Series H and Series K offering documents, however, I do consider those documents in resolving these motions to dismiss.

The Supreme Court has clarified the proper mode of inquiry for evaluating a motion to dismiss pursuant to Rule 12(b)(6), which uses as its starting point the principle that "[a] pleading that states a claim for relief must contain . . . a short and plain statement of the claim showing that the pleader is entitled to relief."⁹ Fed.R.Civ.P. 8(a)(2).

9 Fed.R.Civ.P. 9(b)'s heightened pleading requirement does not apply to this case. "Claims under the Securities Act ordinarily need satisfy only the requirements of Rule 8 [--] in other words, the complaint ordinarily need contain [only] sufficient factual matter, accepted as true, to state a claim for relief that is plausible on its face." Freidus v. ING Groep N.V., 736 F. Supp. 2d 816, 826 (S.D.N.Y. 2010) (Kaplan, D.J.) (internal quotation marks and citation omitted). Rule 9(b) only applies "when the wording and imputations of the complaint are classically associated with fraud." Freidus v. ING Groep N.V., supra, 736 F. Supp. 2d at 826 (internal quotation marks and citations omitted). Defendants do not contend, nor does a review of the complaint suggest, that Rule 9(b) should be applied in this case.

[I]n Bell Atl[antic] Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), the Court disavowed the well-known statement in Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957) that "a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." 550 U.S. at 562. Instead, to survive a motion to dismiss under Twombly, a plaintiff must allege "only enough facts to state a claim to relief that is plausible on its face." Id. at 570.

Talley v. Brentwood Union Free Sch. Dist., No. 08-790 (DRH), 2009 WL 1797627 at *4 (E.D.N.Y. June 24, 2009).

While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact).

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citations, internal quotations and alterations omitted).

In evaluating a motion under Rule (12)(b)(6), the court must determine whether the plaintiff has alleged any facially plausible claims. See Smith v. NYCHA, 410 F. App'x 404, 405-06 (2d Cir. 2011). A claim is plausible when its factual content "allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949 (2009) (citations omitted). "Where a complaint pleads facts that are merely consistent with a defendant's liability, it stops short of the line between possibility and plausibility of entitlement to relief." Ashcroft v. Iqbal, supra, 129 S.Ct. at 1949 (internal quotations omitted). Accordingly, "where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged -- but it has not 'show[n]' -- 'that the pleader is entitled to relief.'" Ashcroft v. Iqbal, supra, 129 S.Ct. at 1950, quoting Fed.R.Civ.P. 8(a)(2).

"[T]he tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions," however. Ashcroft v. Iqbal, supra, 129 S.Ct. at 1949; see also Reed Const. Data Inc. v. McGraw-Hill Cos., Inc., 745 F. Supp. 2d 343, 349 (S.D.N.Y. 2010) (Sweet, D.J.). As a result, "a court considering a motion to dismiss can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth. While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations." Ashcroft v. Iqbal, supra, 129 S.Ct. at 1950.

B. Standards Applicable to Sections 11, 12(a)(2), and 15 of the Securities Act

The standards applicable to claims arising under the Securities Act pursuant to Sections 11, 12(a)(2), and 15 were succinctly set forth by the Court of Appeals for the Second Circuit in In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 358-60 (2d Cir. 2010). Specifically, the Second Circuit stated:

Sections 11, 12(a)(2), and 15 of the Securities Act impose liability on certain participants in a registered securities offering when the publicly filed documents used during the offering contain material misstatements or omissions. Section 11 applies to registration statements, and [S]ection 12(a)(2) applies to prospectuses and oral communications. 15 U.S.C. §§ 77k(a), 77l(a)(2). Section 15, in turn, creates liability for individuals or entities that "control [ ] any person liable" under [S]ection 11 or 12. Id. § 77o. Thus, the success of a claim under section 15 relies, in part, on a plaintiff's ability to demonstrate primary liability under [S]ections 11 and 12. See, e.g., SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1472-73 (2d Cir. 1996).

In re Morgan Stanley Info. Fund Sec. Litig., supra, 592 F.3d at 358; see also Fait v. Regions Fin. Corp., 655 F.3d 105, 109 & n.2 (2d Cir. 2011); In re Barclays Bank PLC Sec. Litig., 09 Civ. 1989 (PAC), 2011 WL 31548 at *5 & n.15 (S.D.N.Y. Jan. 5, 2011) (Crotty, D.J.). "Issuers are subject to 'virtually absolute' liability under [S]ection 11, while the remaining potential defendants under [S]ections 11 and 12(a)(2) may be held liable for mere negligence." In re Morgan Stanley Info. Fund Sec. Litig., supra, 592 F.3d at 359, citing Herman & MacLean v. Huddleston, 459 U.S. 375, 382 (1983); see also Fait v. Regions Fin. Corp., supra, 655 F.3d at 109.

Section 11 "provides for a cause of action by the purchaser of the registered security against the security's issuer, its underwriter, and certain other statutorily enumerated parties." In re Morgan Stanley Info. Fund Sec. Litig., supra, 592 F.3d at 358; see also Freidus v. ING Groep N.V., 736 F. Supp. 2d 816, 825 (S.D.N.Y. 2010) (Kaplan, D.J.); In re Fuwei Films Sec. Litig., 634 F. Supp. 2d 419, 433-34 (S.D.N.Y. 2009) (Sullivan, D.J.). In order to state a claim under Section 11, a plaintiff must allege: (1) the purchase of a registered security, "either directly from the issuer or in the aftermarket following the offering;" (2) that the defendant was an offering participant "sufficient to give rise to liability under [S]ection 11;"¹⁰ and (3) that the registration statement "'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.'" In re Morgan Stanley Info. Fund Sec. Litig., supra, 592 F.3d at 358-59, citing 15 U.S.C. § 77k(a); see also In re Fuwei Films Sec. Litig., supra, 634 F. Supp. 2d at 435.

10 The parties statutorily enumerated in Section 11 include: (1) "every person who signed the registration statement;" (2) "every person who was a director of (or person performing similar functions) . . . the issuer at the time of the filing of the part of the registration statement with respect to which his liability is asserted;" (3) "every person who, with his consent, is named in the registration statement as being or about to become a director, person performing similar functions . . . . ;" (4) "every accountant, engineer, or appraiser, or any person whose profession gives authority to a statement made by him, who has with his consent been named as having prepared or certified any part of the registration statement . . . . ;" and (5) "every underwriter with respect to such security." 15 U.S.C. § 77k(a).

"Whereas the reach of [S]ection 11 is expressly limited to specific offering participants, the list of potential defendants in a [S]ection 12(a)(2) case is governed by a judicial interpretation . . . known as the 'statutory seller' requirement." In re Morgan Stanley Info. Fund Sec. Litig., supra, 592 F.3d at 359, citing in part Pinter v. Dahl, 486 U.S. 622, 643-47 & n.21 (1988); see also Freidus v. ING Groep N.V., supra, 736 F. Supp. 2d at 825-26. Thus, in order to state a claim under Section 12(a)(2), a plaintiff must allege that: (1) the defendant is a "'statutory seller';"¹¹ (2) the sale occurred "'by means of a prospectus or oral communication'"; and (3) the prospectus or oral communication "'include[d] an untrue statement of material fact or omit[ted] to state a material fact necessary in order to make the statements, in the light of the circum- stances under which they were made, not misleading.'" In re Morgan Stanley Info. Fund Sec. Litig., supra, 592 F.3d at 359, citing 15 U.S.C. § 77l(a)(2); see also In re Fuwei Films Sec. Litig., supra, 634 F. Supp. 2d at 435.

11 A "statutory seller" includes one who has "'passed title, or other interest in the security, to the buyer for value,'" or "'successfully solicit[ed] the purchase [of a security], motivated at least in part by a desire to serve his own financial interests or those of the securities['] owner.'" In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 359 (2d Cir. 2010), citing in part Pinter v. Dahl, 486 U.S. 622, 642 (1988).

Claims under Sections 11 and 12(a)(2) have "roughly parallel elements." In re Morgan Stanley Info. Fund Sec. Litig., supra, 592 F.3d at 359; see also Fait v. Regions Fin. Corp., supra, 655 F.3d at 109; In re Barclays Bank PLC Sec. Litig., supra, 2011 WL 31548 at *5. Accordingly, these claims "are usually evaluated in tandem because if a plaintiff fails to plead a cognizable Section 11 claim, he or she will be unable to plead one under Section 12(a)." Lin v. Interactive Brokers Grp., Inc., 574 F. Supp. 2d 408, 416 (S.D.N.Y. 2008) (McMahon, D.J.); accord In re Wachovia Equity Sec. Litig., 753 F. Supp. 2d 326, 368 (S.D.N.Y. 2011) (Sullivan, D.J.). Thus, I shall evaluate plaintiffs' Section 11 and 12(a)(2) claims together.

C. Application of the Foregoing Principles

1. Whether the Alleged Misstatements are Actionable

"In order to state a claim under the Securities Act, [a plaintiff] must allege a misstatement or omission of fact." Fait v. Regions Fin. Corp., 712 F. Supp. 2d 117, 121 (S.D.N.Y. 2010) (Kaplan, D.J.), aff'd, 655 F.3d 105 (2d Cir. 2011). "A plaintiff may not plead Section 11 or [Section] 12(a)(2) claims with the benefit of 20/20 hindsight." In re Barclays Bank PLC Sec. Litig., supra, 2011 WL 31548 at *5, citing Yu v. State St. Corp., 686 F. Supp. 2d 369, 377 (S.D.N.Y.), vacated on other grounds, 08 Civ. 8235 (RJH), 2010 WL 2816259 (S.D.N.Y. July 14, 2010) (Holwell, D.J.). Rather, "'the accuracy of offering documents must be assessed in light of the information available at the time they were published." In re Barclays Bank PLC Sec. Litig., supra, 2011 WL 31548 at *5, citing Yu v. State St. Corp., supra, 686 F. Supp. 2d at 377.

"[M]atters of belief and opinion are not beyond the purview of [Sections 11 and 12(a)(2)]. However . . . liability lies only to the extent that the statement was both objectively false and disbelieved by the defendant at the time it was expressed." Fait v. Regions Fin. Corp., supra, 655 F.3d at 110, citing Virginia Bankshares v. Sandberg, 501 U.S. 1083, 1095-96 (1991); see also In re Lehman Bros. Sec. & ERISA Litig., 684 F. Supp. 2d 485, 494-95 (S.D.N.Y. 2010) (Kaplan, D.J.); In re AOL Time Warner, Inc. Sec. & "ERISA" Litig., 381 F. Supp. 2d 192, 243 (S.D.N.Y. 2004) (Kram, D.J.).

a. Alleged Misstatements Concerning BAC's Various Financial Disclosures During 2007 and Early to Mid-2008

Plaintiffs' fifty-three page complaint contains scattered references to BAC's financial disclosures concerning (1) its loss reserves, write-downs, and net charge-offs to its CDO and loan portfolios, (2) its reporting of its residential mortgage-backed securities transactions, and (3) its capital base during 2007 and 2008 as well as its resulting risk-based capital ratio and "well-capitalized" designation at year-end 2007¹² (see Am. Compl. ¶¶ 8, 13-15, 67-76, 89-99, 101, 103, 106-11). It is not entirely clear, however, whether plaintiffs are alleging that BAC's public filings with the SEC inaccurately reported the financial figures contained in the company's internal books and records (i.e., the public filings with the SEC were not consistent with BAC's internal books and records) or whether plaintiffs are alleging that BAC misrepresented the adequacy of these financial figures to investors but that the figures themselves accurately reflected the company's internal books and records (the misrepresentation being BAC's statement to investors that its financial figures were adequate for their respective purposes, when in fact, they were not). After a review of the amended complaint, I conclude that plaintiffs are proceeding on the latter theory because there are no factual allegations to support an inference that BAC had internally calculated one set of figures, but then either filed a different set of figures with the SEC or publicly disclosed a different set of figures to investors.

12 With respect to BAC's failure to disclose the impaired nature of its capital base, plaintiffs allege that the offering documents for both the Series H and Series K offerings either contained an untrue statement of material fact or were misleading (see Am. Compl. ¶¶ 101(e), 103(e)). As already noted in footnote 6, however, with respect to BAC's 2007 year-end risk-based capital ratio and corresponding "well-capitalized" designation, plaintiffs allege that the offering documents either contained an untrue statement of material fact or were misleading only for the Series K offering (see Am. Compl. ¶ 101(f); see also Am. Compl. ¶ 103).

1. BAC's Loss Reserves

With respect to BAC's representations concerning the adequacy of its loss reserves in connection with its CDO and loan portfolios, plaintiffs allege that: (1) BAC "failed to undertake a proper mark-to-market assessment during 2007 under Statement of Financial Accounting Standards ("SFAS") 159¹³ . . . to evaluate its CDO portfolio and timely reserve for future losses . . . . " (Am. Compl. ¶ 8); (2) notwithstanding "a surfeit of internal controls and procedures" informing BAC that its CDOs had been "declining in value" and the number of its nonperforming loans were "increasing exponentially," BAC "failed to take sufficient reserves and charge-offs to its CDO and loan portfolios in the second, third and fourth quarter of 2007 in the cumulative amount of at least $1.01 billion (for [BAC]-originated loans/[home equity loans]) and at least $2.2 billion (for CDOs), causing the [c]ompany to materially misstate its Tier 1 leverage ratio . . . and, thus, its [Federal Deposit Insurance Corporation] rating as a 'well-capitalized' financial institution at year[-]end 2007" (Am. Compl. ¶ 13); (3) "the quantum of . . . actual quarterly nonperforming [loans] and loan charge[-]offs in comparison to quarter reserves set aside by [BAC] for these assets (as reported in its SEC filings), reveals a substantial short fall [sic] for the second ($181 million), third ($148 million), and fourth quarters ($611 million) for 2007 that is indicative of [BAC's] failure to accurately report its actual results of operations . . . . " (Am. Compl. ¶ 90); (4) "[a]s a result of the errors committed . . . in writing off and/or reserving against bad loans and assets[,] [BAC] misstated its risk-based capital ratios in its fourth quarter and year[-]end results of operations"¹⁴ (Am. Compl. ¶ 98); (5) on January 22, 2008, BAC "repeatedly assured [securities] analysts of the soundness of [BAC's] CDO reserves and write-downs" during a conference call and webcast presentation¹⁵ (Am. Compl. ¶ 99); and (6) BAC failed "to establish adequate reserves or properly record losses for its impaired assets" (Am. Compl. ¶¶ 101(b), 103(b)). In essence, plaintiffs allege only that (1) BAC should have been aware that its loss reserves were inadequate in light of the size and quality of its CDO and loan portfolios, as well as the decreasing value of its CDOs and the increasing number of its nonperforming loans; and (2) BAC later engaged in massive write-downs and net charge-offs to these very same portfolios (see Am. Compl. ¶¶ 13, 15, 89, 91-92, 109, 111).

13 SFAS 159 does not appear to be a mandatory accounting rule, but rather, a valuation option that companies may elect for eligible assets and liabilities. See Statement of Financial Accounting Standards No. 159, Financial Accounting Series, No. 289-A, pg. 4 (Feb. 2007), available at http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175820919488&blobheader=application%2Fpdf. Plaintiffs do not allege that BAC represented to investors that it elected to follow SFAS 159 with respect to the valuation of its CDO and loan portfolios. Additionally, with respect to its allowance for loan and lease losses, BAC publicly disclosed that such an allowance "excludes loans measured at fair value in accordance with SFAS 159 as mark-to-market adjustments related to loans measured at fair value include a credit risk component" (see Am. Compl. ¶ 70) (emphasis added).
However, in BAC's Form 10-Q filed on November 9, 2007 (provided by the BAC Defendants as an exhibit in connection with their motion to dismiss), the company did disclose the following:

Effective January 1, 2007, the Corporation adopted SFAS 159 and elected to account for loans and loan commitments to certain large corporate clients at fair value . . . . Effective April 1, 2007, the results of loans and loan commitments to certain large corporate clients for which the Corporation elected the fair value opinion . . . were transferred from Business Lending to Capital Markets and Advisory Services to reflect management's view of the underlying economics and the manner in which they are managed.

(Ex. J attached to Rosenberg Decl. at 75) (emphasis added). While this statement does show that BAC made an SFAS election during 2007, it does not cure the deficiencies with respect to plaintiffs' allegations in the amended complaint. Plaintiffs generally allege that BAC "failed to undertake a proper mark-to-market assessment [of its CDO portfolio] during 2007" in accordance with SFAS 159 (see Am. Compl. ¶ 8). This is the only allegation pertaining to SFAS 159 in the amended complaint. BAC's disclosure (which was not even referred to by plaintiffs in the amended complaint) makes clear that it elected the SFAS 159 fair value option only with respect to loans and loan commitments to certain large corporate clients. Thus, plaintiffs fail to (1) allege that BAC's election with respect to SFAS 159 covered its CDO portfolio at issue in this litigation, and (2) in any event, indicate how BAC departed from SFAS 159 in valuing its CDO portfolio. Plaintiffs' allegations that "BAC assumed an extremely cavalier and unprincipled approach to satisfying its financial reporting obligations under [GAAP] and applicable SEC rules and regulations [instead of following SFAS 159]" is not sufficient (see Am. Compl. ¶ 8).

14 Specifically, plaintiffs allege that BAC's "failure to mark-to-market its CDO portfolio and take appropriate charge offs and reserves on its impaired real estate loans at year end 2007 . . . artificially inflated the Tier 1 capital and Tier 1 leverage ratios reported in [BAC's] January 22, 2008 Form 8-K (and subsequently in its 2007 Form 10-K annual report), i.e., [instead of 6.87% and 5.04%, respectively,] the correct figures [were] 6.63% and 4.85%, respectively [which] . . . would have required that [BAC] downgrade its capitalization status from 'well[-]capitalized' to an 'adequately[-]capitalized' designation [just] a short time before the [Series H and K offerings]" (Am. Compl. ¶ 98).

15 The specific statements from this conference call cited in the amended complaint are discussed in this subsection. The conference call is also discussed in the following subsection entitled "BAC's Write-Downs."

With the exception of the reference to BAC's representations to securities analysts on January 22, 2008, however, plaintiffs' allegations do not refer to any representations made by BAC to investors concerning the adequacy of its loss reserves.¹⁶ This is insufficient, even at the pleading stage. Without such a statement, the mere fact that BAC's predicted loss reserves turned out to be insufficient some time after they were made does not render those figures false at the time that they were publicly filed with the SEC. See Zirkin v. Quanta Capital Holdings Ltd., 07 Civ. 851 (RPP), 2009 WL 185940 at *10 (S.D.N.Y. Jan. 23, 2009) (Patterson, D.J.) ("The relevant inquiry under the Securities Act is not whether the estimate disclosed in the offering documents later turned out to be correct, but rather whether the Company knew or had reason to know, at the time the offering documents were filed, that the statement was untrue."). Even had BAC stated that it believed its loss reserves were adequate, "[t]hat defendants later decided to revise the amount of loan loss reserves that it deemed adequate provides absolutely no reasonable basis for concluding that defendants did not think [the] reserves were adequate at the time the registration statement and prospectus became effective." In re CIT Grp. Inc. Sec. Litig., 349 F. Supp. 2d 685, 690-91 (S.D.N.Y. 2004) (Sprizzo, D.J.);¹⁷ see also In re Wachovia Equity Sec. Litig., supra, 753 F. Supp. 2d at 361 (stating that the fact of an increase to loan loss reserves was not, in itself, an indicator that previous reserve levels were inadequate), citing In re Fannie Mae 2008 Sec. Litig., 742 F. Supp. 2d 382, 412 (S.D.N.Y. 2010) (Crotty, D.J.) (same).

16 BAC's Form 10-K annual report for the year 2006 filed in early 2007 (provided by the BAC Defendants as an exhibit in connection with their motion to dismiss and not referred to by plaintiffs in the amended complaint) does contain the following statement:

These sensitivity analyses [which explain possible deviations from BAC's calculations concerning its allowance for credit losses] do not represent management's expectations of the deterioration in risk ratings or the increases in loss rates but are provided as hypothetical scenarios to assess the sensitivity of the Allowance for Loan and Lease Losses to change in key inputs. We believe the risk ratings and loss severities currently in use are appropriate and that the possibility of a downgrade of one level of the internal risk ratings for commercial loans and leases within a short period of time is remote. The process of determining the level of allowance . . . requires a high degree of judgment. It is possible that others, given the same information, may at any point in time reach different conclusions.

(Ex. H attached to Rosenberg's Decl. at 82). Plaintiffs, however, do not allege that BAC made a similar statement with respect to its allowance for credit losses during 2007 -- which are the loss reserves at issue in this litigation.

17 The late Honorable John E. Sprizzo, United States District Judge for the Southern District of New York, in In re CIT Grp. Inc. Sec. Litig., supra, 349 F. Supp. 2d at 689, also noted that even where the defendant had stated that its loan loss reserves were reviewed for their adequacy, that statement would not be "actionable under the securities laws if [it] simply represented a failure on the part of defendants to correctly gauge the adequacy of the loan loss reserves." Thus, in that case, Judge Sprizzo found that plaintiffs had "fail[ed] to plead any facts from which it could be inferred that defendants' belief in the adequacy of the reserves was beyond the pale of reason." In re CIT Grp. Inc. Sec. Litig., supra, 349 F. Supp. 2d at 691.

With respect to BAC's alleged "assur[ances] of the soundness of [its] CDO reserves and write-downs" to investors on January 22, 2008 (see Am. Compl. ¶ 99), plaintiffs refer to a number of statements made during a conference call conducted on that date among BAC representatives and securities analysts. For example, a securities analyst from Merrill Lynch asked BAC the following question:

It looks like [BAC's] subprime CDO write downs are less significant than some of [BAC's] competitors and [the company] alluded to the fact that . . . most of the driver of [the company's] decision process for how much to take in subprime CDO write downs was a mark to model process . . . . assuming that [BAC] will hold those CDO positions through to maturity, is that the correct way to look at [it]?"

(Am. Compl. ¶ 99). BAC responded to this question as follows:

No, it's probably the other way . . . we . . . come to the view from a management standpoint that a lot of

these structures terminate and therefore we look through to the net asset values of the underlying securities . . . . [so] it's probably more of a termination view than a hold to term view . . . .

(Am. Compl. ¶ 99). Further, another securities analyst asked BAC the following question: "[W]ould it be safe to assume that the subprime part [of BAC's CDO portfolio] [has been] written down very, very heavily and the non-subprime part [has been] written down lightly?" (Am. Compl. ¶ 99). To this question, BAC responded: "It's a way to think about it, [but] it varies by particular structure because in some it may be earlier vintages subprime that would not make that necessarily correct[,] but . . . in general [that] that's a fair way . . . to be thinking about it" (Am. Compl. ¶ 99). However, a review of the language quoted by plaintiffs in the amended complaint demonstrates that BAC did not make any representations concerning the adequacy of its loss reserves to investors on that date. Rather, the quoted language deals only with the method by which BAC conducted writedowns to its CDO portfolio (see Am. Compl. ¶ 99). Plaintiffs do not allege that this method was not described accurately.

In addition, notwithstanding plaintiffs' allegations, a review of BAC's relevant public filings demonstrates that BAC informed its investors that its loss reserves were based on estimated default rates which could not be predicted with cer- tainty. For example, in BAC's Form 10-Q report for the third quarter ending September 30, 2007 and its Form 10-Q report for the first quarter ending March 31, 2008 (see Am. Compl. ¶¶ 70, 76), BAC stated:

[A portion of BAC's allowance for loan and lease losses includes] reserves which are maintained to cover uncertainties that affect [BAC's] estimate of probable losses including the imprecision inherent in the forecasting methodologies, as well as domestic and global economic uncertainty, large single name defaults and event risk.

(Am. Compl. ¶¶ 70, 76) (emphasis added). Further, BAC stated in its Form 10-K annual report for the year 2006¹⁸ filed in early 2007 that:

A number of our products expose us to credit risk, including loans, leases and lending commitments, derivatives, trading account assets and assets held-for-sale. As one of the nation's largest lenders, the credit quality of our portfolio can have a significant impact on our earnings. We allow for and reserve against credit risks based on our assessment of credit losses inherent in our credit exposure (including unfunded credit commitments). This process, which is critical to our financial results and condition, requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of

our borrowers to repay their loans. As is the case with any such assessments, there is always the risk that [BAC] will fail to accurately estimate the impact of factors that [it] identif[ies].

(Ex. H attached to Rosenberg Decl. at 5-6) (emphasis added). Finally, BAC also stated in its 2006 Form 10-K annual report that its "allowance for credit losses is [its] estimate of probable losses in the loans and leases portfolio and within [the company's] unfunded lending commitments," and further, that "[t]he process of determining . . . [such] losses requires a high degree of judgment [and] [i]t is possible that others, given the same information, may at any point in time reach different reasonable conclusions" (Ex. H attached to Rosenberg Decl. at 81-82).

18 Although plaintiffs do not reference this Form 10-K annual report in their amended complaint, this report was filed on February 27, 2007, and thus, was incorporated into the offering documents for both the Series H and Series K offerings (see Am. Compl. ¶¶ 58-59). It is, therefore, properly considered in connection with defendants' motions because it is integral to plaintiffs' claims. See Roth v. Jennings, 489 F.3d 499, 509 (2d Cir. 2007).

Finally, I note that BAC's public filings also demonstrate that BAC did provide for increasing loss reserves throughout the relevant time period -- specifically, beginning in the third quarter of 2007 and throughout the period leading up to the Series H and K offerings, implying that the risk of non-payment was increasing throughout the period (see Am. Compl. ¶¶ 67-70, 73-76). See In re Fannie Mae 2008 Sec. Litig., supra, 742 F. Supp. 2d at 412 (noting as relevant that defendants had continually increased their loan loss reserves throughout the relevant time period).

Thus, plaintiffs' allegations concerning misrepresentations that BAC made with respect to the adequacy of its loss reserves fail to state a facially plausible claim under Sections 11 or 12(a)(2).¹⁹

19 Even if plaintiffs' allegations could be construed as alleging that BAC's publicly disclosed loss reserves were inaccurately stated as compared to the company's internal estimates or some other method of comparison, the allegations are similarly insufficient. In the absence of an allegation by plaintiffs that BAC calculated its loss reserves through the use of an objective standard, loss reserves are generally considered subjective opinions. See Fait v. Regions Fin. Corp., supra, 655 F.3d at 113 (citations omitted) ("[D]etermining the adequacy of loan loss reserves is not a matter of objective fact [because] . . . [such] reserves reflect management's opinion or judgment about what, if any, portion of amounts due on the loans ultimately might not be collectible."). In order for such representations to be actionable, plaintiffs would need to allege not only that BAC's statements were false, but also that BAC did not honestly believe the statements when they were made. See Fait v. Regions Fin. Corp., supra, 655 F.3d at 110; see also In re Lehman Bros. Sec. & ERISA Litig., supra, 684 F. Supp. at 494-95; In re AOL Time Warner, Inc. Sec. & "ERISA" Litig., supra, 381 F. Supp. 2d at 243. As already noted in the text, BAC's public filings disclosed that its loss reserves were estimated figures subject to market conditions, and further, the figures were not worded as guarantees. See Fait v. Regions Fin. Corp., supra, 655 F.3d at 110-11 n.3, 112, 113 & n.6 (noting that there may be liability if an opinion is framed as a guarantee). Thus, in addition to falsity, plaintiffs would need to allege that BAC did not honestly believe its statements concerning its loss reserves when those statements were publicly disclosed. Plaintiffs, however, allege no facts supporting such an inference. At most, plaintiffs' theory is mismanagement. Finally, I note that plaintiffs expressly disclaim any allegations in the amended complaint that defendants acted with intentionally fraudulent or reckless misconduct in making any of the alleged misstatements or omissions (see Am. Compl. ¶¶ 1, 112, 123, 128).

2. BAC's Write-Downs

With respect to BAC's representations concerning the adequacy of its write-downs to its CDO and loan portfolios, plaintiffs allege that: (1) BAC "failed to undertake a proper mark-to-market assessment during 2007 under [SFAS] 159²⁰ . . . to evaluate its CDO portfolio and . . . write-down [the portfolio] to its then-present value" (Am. Compl. ¶ 8); (2) "[i]nexplicably, [BAC's] [home equity loan] write-offs during 2007 remained a small fraction of the [c]ompany's actual credit loss exposure, and was significantly less than banking industry peers Citibank and J.P. Morgan [particularly in light of] . . . [BAC's] net charge[-]offs for [home equity loans throughout 2007 as compared to Citibank and J.P. Morgan]" (Am. Compl. ¶ 93); (3) BAC's "fourth quarter mark-to-market write downs on its high grade, mezzanine and CDO squared tranches in the [c]ompany's 'Super Senior' CDOs" were understated by $2.2 to $3.6 billion as compared to BAC's industry peers Citibank and UBS AG -- "finan- cial institutions whose CDO portfolios contain[ed] substantially the same mix and vintages of underlying securitized assets" (Am. Compl. ¶ 95); (4) "[a]s a result of the errors committed . . . in writing off and/or reserving against bad loans and assets[,] [BAC] misstated its risk-based capital ratios in its fourth quarter and year[-]end results of operations" (Am. Compl. ¶ 98); (5) on January 22, 2008, BAC "repeatedly assured [securities analysts] of the soundness of [BAC's] CDO reserves and writedowns" (Am. Compl. ¶ 99); (6) BAC "failed to mark-to-market its CDOs, and reasonably and timely write down the impairment to these assets and/or their material effect on the [c]ompany's results of operations and capital base" (Am. Compl. ¶ 106); and (7) in January 2009, BAC issued a press release announcing "writedowns of commercial mortgage-backed securities and related transactions of $853 million" with respect to the company's fourth quarter and full year performance for 2008 (Am. Compl. ¶ 109).

20 As already discussed in footnote 12, SFAS 159 is not a mandatory accounting rule, but rather, a valuation option that companies may elect for eligible assets and liabilities. Also, as already discussed in that footnote, plaintiffs do not sufficiently allege that BAC represented to investors that it had made such an election with respect to the valuation of its CDO portfolio at issue in this litigation, nor do plaintiffs explain how BAC departed from the accounting rule with respect to elected financial assets.

Like their loss-reserves allegations, plaintiffs only allege that (1) BAC overvalued its CDO and loan portfolios despite its increasing risk with respect to both portfolios, and (2) as a result, the company failed to write down the portfolios sufficiently during the relevant time period, especially as compared to industry peers and later write-downs taken to the same portfolios. With the exception of the reference to BAC's representations to securities analysts on January 22, 2008, plaintiffs' allegations again do not refer to any representations made by BAC to investors concerning the adequacy of its valuations and resulting write-downs to its CDO and loan portfolios. Without such a representation, the mere fact that BAC's writedowns subsequently turned out to be insufficient -- or were substantially smaller than the write-downs taken by industry peers with "similar" portfolios²¹ (see Am. Compl. ¶¶ 93, 95) -- would not render those figures false at the time that they were publicly filed with the SEC. See Zirkin v. Quanta Capital Holdings Ltd., supra, 2009 WL 185940 at *10. Specifically, "the simple fact of a write-down does not stand for the proposition that values stated before the write-down were inaccurate, and the write-downs certainly do not substitute for facts about the supposedly false valuations themselves." Yu v. State St. Corp., supra, 686 F. Supp. 2d at 380; see also In re Fannie Mae 2008 Sec. Litig., supra, 742 F. Supp. 2d at 409 ("The fact that a financial item is accounted for differently, or in a later period, does not support an inference that a previously filed financial statement was fraudulent [because] . . . allegation[s] of fraud by hindsight [are] insufficient to withstand a motion to dismiss.").

21 I also note that plaintiffs simply state that Citibank and UBS AG are "financial institutions whose CDO respective portfolios contain substantially the same mix and vintages of underlying securitized assets" (see Am. Compl. ¶ 95). However, plaintiffs have not "alleged any facts that would suggest that [the defendant] had the same loan loss experience as [these] other financial institutions." See In re Gen. Elec. Co. Sec. Litig., 09 Civ. 1951 (RJH), 2012 WL 90191 at *22, *35 (S.D.N.Y. Jan. 11, 2012) (Holwell, D.J.).

With respect to the January 22, 2008 assurances that BAC allegedly made concerning the adequacy of its write-downs, as already discussed above, the language quoted in the amended complaint demonstrates that (1) securities analysts raised questions about BAC's write-downs to its CDO portfolio being "less significant" than some of its competitors, and (2) BAC answered those questions by explaining how it conducted the write-downs, without making any representations as to the adequacy of their methods or resulting figures. For example, a securities analyst asked, "[W]ould it be safe to assume that the subprime part [of BAC's CDO portfolio] [has been] written down very, very heavily and the non-subprime part [has been] written down lightly," to which BAC replied, "It's a way to think about it, [but] it varies by particular structure because in some it may be earlier vintages subprime that would not make that necessarily correct[,] but . . . in general [that] that's a fair way . . . to be thinking about it" (Am. Compl. ¶ 99). This statement does not, as plaintiffs contend, demonstrate that BAC "assured" investors of the adequacy of its write-downs during the relevant time period.

Further, like its public statements concerning its loss reserves, BAC's public filings also demonstrate that BAC informed its investors that the valuation of its assets and liabilities were only "estimates" subject to "[c]omplex [a]ccounting [p]rinciples" (Ex. H attached to Rosenberg Decl. at 81). For example, in its Form 10-K annual report for the year 2006, BAC stated:

Many of [BAC's] significant accounting principles require complex judgments to estimate values of assets and liabilities. We have procedures and processes to facilitate these judgments . . . . In many cases, there are numerous alternative judgments that could be used . . . . Where alternatives exist, we have used the factors that we believe represent the most reasonable value in developing the inputs . . . . Separate from the possible future impact to [n]et [i]ncome from input and model variables, the value of our lending portfolio and market sensitive assets and liabilities may change subsequent to the balance sheet measurement, often significantly, due to the nature and magnitude of future credit and market conditions . . . . [F]luctuations would not be indicative of deficiencies in our models or inputs.

(Ex. H attached to Rosenberg Decl. at 81) (emphasis added).

Finally, I note that plaintiffs' allegation concerning BAC's January 2008 write-downs to its CDO portfolio is that BAC failed to write down the portfolio sufficiently at that time -- specifically, that BAC "understated" the write-downs by $2.2 to $3.6 billion -- not, for example, that BAC failed to take a specific write-down altogether despite some information to the contrary that the write-down should have been taken at the allegedly proper time. See In re Fannie Mae 2008 Sec. Litig., supra, 742 F. Supp. 2d at 409 (noting that "the Court will not intervene in a business and accounting judgment simply because [p]laintiffs allege that [a] write-down . . . should have occurred earlier.").

Thus, plaintiffs' allegations concerning misrepresentations that BAC made with respect to the adequacy of its writedowns also fail to state a facially plausible claim under Sections 11 or 12(a)(2).²²

22 Even if plaintiffs' allegations could be construed as alleging that BAC's publicly disclosed write-downs were inaccurately stated as compared to the company's internal estimates or some other method of comparison, the allegations are similarly insufficient. While not every valuation of assets will be a matter of subjective opinion, the valuation of assets "not traded on the New York Stock Exchange or some other efficient market where the fair market value typically is the price at which a share or other asset is trading at any given moment" is generally a matter of such subjective opinion. Fait v. Regions Fin. Corp., supra, 712 F. Supp. 2d at 122 & n.38, aff'd, 655 F.3d at 110-11; see also Tsereteli v. Residential Asset Securitization Trust 2006-A8, 692 F. Supp. 2d 387, 393 (S.D.N.Y. 2010) (Kaplan, D.J.); Yu v. State St. Corp., supra, 686 F. Supp. 2d at 379; Fraternity Fund Ltd. v. Beacon Hill Asset Mgmt., LLC, 479 F. Supp. 2d 349, 361-63 (S.D.N.Y. 2007) (Kaplan, D.J.). In order for such representations to be actionable, like with their loss-reserves allegations, plaintiffs would need to allege that BAC's statements were false, and further, that BAC did not honestly believe the statements when they were made. See Fait v. Regions Fin. Corp., supra, 655 F.3d at 110. As already noted in the text, BAC's public filings disclosed that its valuation of assets and liabilities were estimates subject to complex accounting principles, and further, the figures were not worded as guarantees. See Fait v. Regions Fin. Corp., supra, 655 F.3d at 110-11 n.3, 112, 113 & n.6. While plaintiffs refer to SFAS 159 in the amended complaint, they do not allege that BAC made a representation to investors that their CDO and loan portfolios at issue in this litigation would be valued in accordance with that accounting rule. Thus, in addition to falsity, plaintiffs would need to allege that BAC did not honestly believe its statements concerning its write downs when those statements were publicly disclosed. Plaintiffs, however, allege no facts supporting such an inference. Again, plaintiffs' theory is, at most, mismanagement. Finally, as noted above, plaintiffs expressly disclaim any allegations that defendants acted with intentionally fraudulent or reckless misconduct in making any of the alleged misstatements or omissions (see Am. Compl. ¶¶ 1, 112, 123, 128).

3. BAC's Net Charge-Offs

Plaintiffs' allegations with respect to BAC's representations concerning the adequacy of its net charge-offs in connection with its CDO and loan portfolios are similarly insufficient. Plaintiffs allege that BAC failed to: (1) "take sufficient reserves and charge-offs . . . in the second, third and fourth quarter of 2007 in the cumulative amount of at least $1.01 billion [for BAC-originated loans/home equity loans] and at least $2.2 billion [for CDOs]" (Am. Compl. ¶ 13); and (2) "charge off (cumulatively) a total of approximately $209 million, $262 million and $626 million for impaired residential mortgages, commercial real estate loans and home equity loans for the second, third and fourth quarter 2007, respectively" as compared to industry peers during the same time period²³ (Am. Compl. ¶ 94, see also Am. Compl. ¶¶ 90, 92-93).

23 Though the amended complaint is not entirely clear as to whether these alleged amounts were calculated as a result of comparing the home equity loan net charge-offs of Citibank, J.P. Morgan, and BAC discussed in paragraph 92 of the amended complaint (see Am. Compl. ¶ 93), I shall assume this to be the case as I draw all reasonable inferences in plaintiffs' favor.

However, the only factual support provided for these allegations is that (1) BAC was aware of its increasing exposure as a result of its growing CDO and loan portfolios (see Am. Compl. ¶¶ 13, 92), and (2) BAC's industry peers -- Citibank and J.P. Morgan -- charged off more home equity loans during 2007²⁴ (see Am. Compl. ¶ 93). Like their allegations concerning BAC's loss reserves and write-downs, plaintiffs fail to allege that BAC made any representations to investors about the adequacy of its net charge-offs, or that the figures publicly filed with the SEC were different from BAC's internal books and records. Plaintiffs also do not, for example, allege that BAC departed from some stated policy in calculating its net charge-off figures. Cf. In re Wachovia Equity Sec. Litig., supra, 753 F. Supp. 2d at 362 (noting that "[t]here is no dispute about the falsity of the charge-off statement, since the stated policy clearly diverged from actual Wachovia practice prior to the announced reconciliation"). Thus, plaintiffs have also failed to state a claim under the Securities Act with respect to BAC's net charge-offs.

24 Specifically, plaintiffs allege that BAC's net charge-offs for home equity loans during the four quarters of 2007 were .08%, .12%, .20%, and .63%, respectively -- as compared to: (1) Citibank's net charge-offs for home equity loans during the same time period of .47%, .61%, .94%, and 1.67%, respectively; and (2) J.P. Morgan's net charge-offs for home equity loans during the same time period of .32%, .44%, .65%, and 1.05%, respectively (see Am. Compl. ¶ 93).

4. BAC's Capital Base, Resulting Capital Ratios, and Well-Capitalized Status

As noted above, plaintiffs allege that based upon BAC's putative misrepresentations concerning the adequacy of its loss reserves, write-downs, and net charge-offs during the relevant time period, BAC misrepresented its capital base, and thus, "its [resulting] Tier 1 leverage ratio (publicly touted at 5.04% vs. an actual ratio of approximately 4.85%) and . . . its FDIC rating as a 'well-capitalized' financial institution at year[-]end 2007" (Am. Compl. ¶ 13; see also Am. Compl. ¶¶ 98, 101(e)-(f), 103(e)). Specifically, plaintiffs allege that "a Tier 1 leverage ratio of only 4.85% would have required that [BAC] downgrade its capitalization status from 'well capitalized' to an 'adequately capitalized' designation [just] a short time before the [offerings]" (see Am. Comp. ¶ 98). Plaintiffs allege that the resulting capital ratios and BAC's well-capitalized status at year-end 2007 were publicly disclosed in BAC's (1) Form 8-K filed on January 22, 2008 (see Am. Compl. ¶¶ 72, 98, 101(f)), and (2) Form 10-K filed on February 28, 2008 (see Am. Comp. ¶¶ 74, 98).

To be considered "well capitalized," plaintiffs allege that "a bank's total risk-based capital ratio [must be] equal [to] or greater than 10 percent, its Tier 1 risk-based capital ratio must be equal to or greater than 6 percent, and its Tier 1 leverage capital ratio must be equal to or greater than 5 percent" (see Am. Compl. ¶ 4, citing 12 C.F.R. § 327.9(a)(2)). Thus, BAC's representation that it was "well capitalized" during 2007 was not a qualitative representation of the adequacy of its capital base, but instead was the result of a specific mathematical calculation that incorporated various financial figures. While such a representation may be actionable under the Securities Act when based on inaccurate calculations, plaintiffs' allegations are insufficient because they focus on BAC's mismanagement of its assets and liabilities instead of focusing on the accuracy with which those assets and liabilities were disclosed to investors. Cf. In re Citigroup Inc. Bond Litig., 723 F. Supp. 2d 568, 593-94 (S.D.N.Y. 2010) (Stein, D.J.) (upholding Section 11 claim based on misrepresentation of "well-capitalized" status where "the core of plaintiffs['] allegations [turned not on the issuer's] management of its assets and liabilit[ies] but instead turn[ed] on the manner in which [it] disclosed those assets and liabilities").²⁵

25 In In re Citigroup Inc. Bond Litig., supra, 723 F. Supp. 2d at 593, "[p]laintiffs' allegation that defendants' statement [in its pertinent SEC filings] that Citigroup was 'well capitalized' was untrue [was] backed by specific factual allegations describing why it was untrue and why that untrue statement was material." The Honorable Sidney H. Stein, United States District Judge for the Southern District of New York, went on to note that plaintiffs had alleged that Citigroup's Tier 1 capital ratio "was calculated without inclusions of billions of dollars of liabilities, including $66 billion in direct exposure to subprime-backed CDO securities, and thus the disclosed capital ratio was an untrue and misleading reflection of Citigroup's financial health." In re Citigroup Inc. Bond Litig., supra, 723 F. Supp. 2d at 593-94. In that case, Judge Stein also found that plaintiffs had stated a proper Securities Act claim based on defendants' misstatement of its reserves in its pertinent SEC filings. Specifically, plaintiffs (1) alleged that defendants were required to comply with a particular GAAP requirement, and (2) provided "specific factual allegations in support of a finding that [defendants in fact] failed to [comply with that requirement]." In re Citigroup Inc. Bond Litig., supra, 723 F. Supp. 2d at 592. For example, plaintiffs alleged that "Citigroup's reserve levels . . . merely took into account its actual losses for much of the relevant period [and not future losses]." In re Citigroup Inc. Bond Litig., supra, 723 F. Supp. 2d at 592. In the present case, as already discussed in the text, plaintiffs' allegations in the amended complaint concerning BAC's loss reserves are not sufficient.

For example, plaintiffs' allegations with respect to BAC's loss reserves merely show that the company may have made bad predictions as to its reserves. There are no factual allegations to support an inference that BAC failed to comply with an applicable accounting rule, departed from a prescribed procedure for calculating its loss reserves, or that it did not honestly believe its estimates when they were publicly disclosed. With respect to BAC's write downs, plaintiffs' allegations merely show that BAC wrote down assets of the company (having no fair market value) based upon its subjective valuation methods. There are no factual allegations to support an inference that BAC either departed from its valuation methods or did not honestly believe its valuations when they were publicly disclosed. Finally, with respect to BAC's net charge-offs, plaintiffs' allegations merely show that BAC took smaller net charge-offs to its CDO and loan portfolios as compared to industry peers. Again, there are no factual allegations to support an inference that BAC departed from a prescribed procedure for calculating its net charge-offs or otherwise inaccurately reported its net charge-offs when they were publicly disclosed.

In short, plaintiffs' allegations fail to show that either (1) the financial figures used to calculate the required ratios which ultimately led to BAC's "well-capitalized" designation at year-end 2007 were themselves false, or (2) BAC's "well-capitalized" designation at year-end 2007 was false because of some other BAC error in its calculations. In other words, if BAC's statements concerning its financial disclosures were not inaccurate when publicly disclosed, and no other information existed to change BAC's assumptions at the time that it calculated the required ratios to determine its capital adequacy, then its "well-capitalized" designation was not a false statement merely because BAC made predictions concerning the underlying financial figures which subsequently proved to be inaccurate. Thus, on the basis of the foregoing, the amended complaint fails to state a claim with respect to BAC's capital base, its resulting capital ratios, and its "well-capitalized" status at year-end 2007.

b. Alleged Misstatements Concerning BAC's Inadequate Internal Controls and Procedures

Plaintiffs also allege that BAC's "internal controls were not capable as represented and were inadequate to prevent the [c]ompany from improperly reporting the quantum of [its] impaired assets" (Am. Compl. ¶¶ 101(c), 103(c)). In essence, plaintiffs contend that BAC's error with respect to the reporting of its residential mortgage-backed securities transactions during the relevant time period "evidences and highlights [BAC's] admitted[ly] lax internal controls and procedures concerning the very same types of investment vehicles at issue in this case" (see Am. Compl. ¶ 97).

Specifically, plaintiffs allege that BAC admitted in a FORM CORRESP filing with the SEC on April 14, 2010 that between March 2007 and March 2009, it "repeatedly failed to employ adequate internal controls and procedures to protect against . . . erroneous reporting of [residential mortgage-backed securities transactions] and their impact on [BAC's] financial results" (Am. Compl. ¶ 96). Further, plaintiffs state that BAC: (1) "improperly, albeit mistakenly, accounted for as much as $28 billion in [residential mortgage-backed securities transactions] (including transactions on March 31, 2007, for $4.5 billion; December 31, 2007, for $2.0 billion[;] and September 30, 2008, for $10.7 billion) on its balance sheet through repurchasing agreements known as 'Dollar Rolls' or 'Repo to Maturity' transactions" (Am. Compl. ¶ 96); (2) "admitted that it incorrectly classified and accounted [for these] transactions as 'sales' when they were really a 'secured borrowing' because [BAC had] repurchased 'substantially the same securities'"²⁶ (Am. Compl. ¶ 97); and (3) "claimed that the[se] errors were caused by an internal 'control deficiency' in that [BAC] did not review completed dollar roll transactions to ensure that repurchased securities were not 'substantially the same' as the transferred securities . . . . " (Am. Compl. ¶ 97).

26 Plaintiffs allege that pursuant to "ASC 860-10-40-24" (a GAAP principle), to properly record residential mortgage-backed securities transactions as sales, "the securitized asset ultimately repurchased cannot be the same or substantially the same as those [assets] transferred" (Am. Compl. ¶ 97).

Plaintiffs' allegations concerning BAC's internal controls and procedures, however, fail to state a facially plausible claim under Sections 11 and 12(a)(2).²⁷ Because plaintiffs are alleging claims under Section 11 and 12(a)(2), the principal issue here is whether BAC made false statements concerning its internal controls and procedures; the actual adequacy of those internal controls and procedures is relevant only to the extent that it, if at all, corroborates or contradicts BAC's statements. In the amended complaint, plaintiffs do not point to any representations that BAC made to investors concerning the adequacy of its internal controls and procedures during the relevant time period, nor do they point to any specific departures from internal controls or procedures as they had been represented to investors.²⁸ Plaintiffs merely contend that BAC's internal controls and procedures were inadequate because they resulted in financial disclosures that later also turned out to be inadequate (see Am. Compl. ¶¶ 13, 96-97, 101(c), 103(c), 108).

27 Plaintiffs discuss BAC's reporting of its residential mortgage-backed securities transactions only in connection with its allegations that BAC had inadequate internal controls and procedures during the relevant time period. Additionally, in paragraphs 101 and 103 of the amended complaint, where plaintiffs specifically list the putative material misstatements and omissions in the Series H and Series K offering documents, there is no mention of the residential mortgage-backed securities transactions (see Am. Compl. ¶¶ 101, 103). Thus, I shall discuss the allegations concerning those transactions separate and apart from the allegations concerning BAC's inadequate internal controls and procedures.

28 Though plaintiffs argue that BAC's internal controls and procedures were inadequate and resulted in various financial disclosure errors, in paragraph 13 of the amended complaint, plaintiffs also allege: "Notwithstanding a surfeit of internal controls and procedures fully apprising management of the situation [concerning the declining value of its CDO portfolio and the increasing number of nonperforming loans in its loan portfolio], [BAC] failed to take sufficient reserves and charge-offs to its . . . portfolios . . . causing the [c]ompany to materially misstate its Tier 1 leverage ratio . . . and, thus, its FDIC rating as a 'well capitalized' financial institution [in] 2007" (emphasis added). Despite the conflicting characterization of BAC's internal controls and procedures, this allegation still fails to demonstrate how BAC departed from any representations made to investors concerning its internal controls or procedures.

While plaintiffs do reference BAC's admitted error in the reporting of its residential mortgage-backed securities transactions due to an "internal control deficiency," such a reference does not cure the deficiency in the amended complaint. Again, plaintiffs do not identify any representations made by BAC to investors in SEC filings or any statements made by BAC within the meaning of Section 12(a)(2) during the relevant time period that either concerns its internal controls and procedures or that incorporates the erroneously reported residential mortgage-backed securities transactions. "In the absence of . . . an affirmative misrepresentation, allegations of 'garden-variety mismanagement, such as managers failing to . . . adequately inform themselves' do not state a claim under federal securities laws."²⁹ In re Duke Energy Corp. Sec. Litig., 282 F. Supp. 2d 158, 160 (S.D.N.Y. 2003) (Rakoff, D.J.); see also In re Deutsche Bank AG Sec. Litig., 09 Civ. 1714 (DAB), 2011 WL 3664407 at *9 (S.D.N.Y. Aug. 19, 2011) (Batts, D.J.).

29 Plaintiffs' argument that their allegations concerning BAC's inadequate controls and procedures are not based on "garden-variety mismanagement" is not persuasive (Pl.'s Mem. in Opp. to BAC's Mot. to Dismiss at 20-21). Plaintiffs first contend that their claim based on BAC's putative "failure to adequately write-down CDO and [home equity loans] and [the] improper [ ] reporting [of] its Tier 1 capital was not a failure to predict the future or garden-variety 'mismanagement,' as [d]efendants argue" (Pl.'s Mem. in Opp. to BAC's Mot. to Dismiss at 20). Plaintiffs next contend that their "claims relating to the [Countrywide] [a]cquisition [are] that BAC . . . provided misleading statements and omitted facts about borrower quality, deterioration of underwriting standards, untested loan applications . . . , widespread use of 'exceptions' to allow imprudent loans to risky consumers and similar loan origination practices, as well as, Countrywide's mortgage securitization practices" (Pl.'s Mem. in Opp. to BAC's Mot. to Dismiss at 20-21). It appears that plaintiffs are conflating their arguments concerning BAC's internal controls and procedures with their arguments concerning BAC's putative misrepresentations and omissions of financial information. BAC's argument that plaintiffs have actually asserted a mismanagement claim is directed only at plaintiffs' claim concerning BAC's internal controls. To the extent plaintiffs are alleging violations of Sections 11 and 12(a)(2) based on the timing and/or amount of BAC's write-downs, the representations concerning BAC's capital base, or BAC's representations concerning the Countrywide transaction, plaintiffs' arguments are addressed in Sections II and III of the BAC Defendants' Memorandum of Law in Support of their Motion to Dismiss and in Sections III.C.1.a and III.C.1.d of this Report and Recommendation (see also The BAC Defendants' Reply Memorandum of Law in Further Support of Their Motion to Dismiss the First Amended Complaint for Failure to State a Claim, dated June 10, 2011 ("BAC's Reply Mem."), (Docket Item 38), 14-15).

c. Failure to Comply SEC Regulations

Plaintiffs also allege that as a result of each of the aforementioned misrepresentations, the offering documents used in connection with the Series H and Series K offerings failed to comply with SEC regulations -- specifically, Item 503 of Regulation S-K,³⁰ 17 C.F.R. § 229.503, and Article 10-01 of Regulation S-X,³¹ 17 C.F.R. § [210].10-01 (see Am. Compl. ¶¶ 104- 08). In essence, plaintiffs allege that BAC "failed to comply [with these regulations] . . . because it did not begin to make adequate disclosures of its capital market exposures until January 16, 2009 . . . . " (see Am. Compl. ¶ 108). Thus, at the time of the Series H and K offerings, investors were not "adequately alert[ed] . . . to the actual risks associated with [BAC's] investments" in the CDO and home equity loan markets (see Am. Compl. ¶¶ 106-07). Plaintiffs' theory appears to be that BAC's failure to comply with certain SEC regulations constitutes an omission of information that it was affirmatively required to disclose.

30 17 C.F.R. § 229.503(c) provides that, "[w]here appropriate, [the issuer is to] provide [in the prospectus summary] under the caption 'Risk Factors' a discussion of the most significant factors that make the offering speculative or risky." The regulation further provides that "risk factors" may include, among other things, the following: lack of operating history, lack of profitable operations in recent periods, the company's financial positions, the company's business or proposed business, or the lack of a market for the company's securities. 17 C.F.R. § 229.503(c)(1)-(5). Plaintiffs allege that this regulation required BAC to provide a discussion of the most significant factors that made its public offerings speculative or risky, and further, to explain how those risks would affect BAC or the securities it was offering (see Am. Compl. ¶ 104).

31 Plaintiffs rely on the portion of Regulation S-X that deals with interim financial statements; however, they cite to the incorrect regulation. The correct regulation is 17 C.F.R. § 210.10-01, which provides, in pertinent part, that "[d]isclosures [in the interim financial statements] should encompass[,] for example, significant changes since the end of the most recently completed fiscal year in such items as: accounting principles and practices; estimates inherent in the preparation of financial statements; status of long-term contracts; capitalization including significant new borrowings or modification of existing financing arrangements; and the reporting entity resulting from business combinations or dispositions . . . [n]otwithstanding the above, where material contingencies exist, disclosure of such matters shall be provided even though a significant change since year end may not have occurred." Plaintiffs allege that "disclosures [by BAC] of . . . loss contingencies in, inter alia, the annual Form 10-K [for 2007] were particularly important to an informed investment decision in view of [Article 10-01 of Regulation S-X]" (see Am. Compl. ¶ 105).

While "[f]inancial statements filed with the [SEC] which are not prepared in accordance with [GAAP] will be presumed to be misleading or inaccurate" and SEC-specific regulations require the disclosure of various types of information "in any event," see 17 C.F.R. § 210.4-01, plaintiffs' allegations are deficient because they "fail to allege 'in any cognizable respect . . . how [BAC's] . . . accounting practices were improper.'" See In re Barclays Bank PLC Sec. Litig., supra, 2011 WL 31548 at *9, citing In re Duke Energy Corp. Sec. Litig., supra, 282 F. Supp. 2d at 160. Plaintiffs' allegations are premised on BAC's failure to timely disclose its "capital market exposures" (see Am. Compl. ¶ 108). However, as already discussed, BAC did disclose the content and exposure of its CDO and loan portfolios to investors (see Am. Compl. ¶¶ 68-70, 72, 75-76), as well as provided for increasing loss reserves and net charge-offs associated with those portfolios (see Am. Compl. ¶¶ 67-68, 70, 72, 75-76). BAC also announced write-downs to its CDO portfolio in January 2008 (see Am. Compl. ¶ 72). Thus, plaintiffs' allegations concerning the SEC regulations "are inextricably intertwined with their previously rejected arguments regarding [BAC's] valuations of its assets," see In re Barclays Bank PLC Sec. Litig., supra, 2011 WL 31548 at *9, and fail to state a claim for the same reasons that their other allegations fail.

d. Alleged Misstatements Concerning the Countrywide Transaction

The final set of alleged misstatements identified by plaintiffs concerns the adequacy of BAC's due diligence with respect to the Countrywide transaction and the resulting impact that the transaction would have on BAC's financial performance.

Specifically, BAC made statements in January 2008 -- approximately two weeks before the Series K offering and approximately four and a half months before the Series H offering -- that (1) it had conducted "extensive due diligence" with respect to the transaction (see Am. Compl. ¶¶ 78-79, 83-86), and (2) the purchase of Countrywide was a "unique opportunity" for BAC, which would cause the company to gain a "leading position in consumer real estate" because Countrywide was a top originator with many assets and deposits (see Am. Compl. ¶ 81). BAC also projected that (1) the Countrywide transaction would be "'neutral' for 2008 and '3% accretive in 2009'" (see Am. Compl. ¶ 82), and (2) "[t]o stay capital neutral on this transaction . . . it would take you incrementally another couple of billion dollars . . . . " (see Am. Compl. ¶ 85) (emphasis in amended complaint). Plaintiffs allege that BAC reaffirmed these material misrepresentations in February 2008, just shortly after the Series K offering had been completed and approximately three and a half months before the Series H offering (see Am. Compl. ¶ 87).³²

32 Each of the quoted statements occurred after BAC had reached a definitive and binding agreement to purchase Countrywide, but prior to the actual completion of the transaction.

Plaintiffs also allege that if BAC had conducted a proper due diligence investigation, it would have discovered, and thus, it would have disclosed, that Countrywide had followed "improper mortgage origination practices, lax underwriting standards, and toxic debt securitization practices" (see Am. Compl. ¶ 88).

Plaintiffs' allegations can be separated into three separate categories of misrepresentations: (1) BAC's representations to investors about the adequacy of its due diligence investigation with respect to the purchase of Countrywide; (2) BAC's representations to investors about the Countrywide transaction's impact on BAC; and (3) BAC's purported non-disclosure of Countrywide's improper mortgage origination practices, lax underwriting standards, and toxic debt securitization practices.

Plaintiffs' allegations concerning BAC's representations about the adequacy of its due diligence investigation with respect to Countrywide fail to state a facially plausible claim under Sections 11 and 12(a)(2). First, plaintiffs do not identify any representations made by BAC about the adequacy of its due diligence efforts, i.e., that its efforts were completely comprehensive or that the purchase of Countrywide was guaranteed to be a financial success based upon the information disclosed by its efforts. To the contrary, while BAC allegedly stated that purchasing Countrywide was a "unique opportunity [for BAC to] acquire the mortgage capabilities and scale that [was] critical to [BAC's] customer relationships at a time when valuations [were] in fact very compelling" and that BAC's "extensive due diligence support[ed] [its] overall valuation and pricing [of] the transaction," BAC is also alleged to have stated that:

As [everyone is] aware, this year has been tough for [Countrywide] as their model was severely impacted by market liquidity concerns and the ability to fund asset growth. The good news is much of the originations in the current market are of much higher quality and better spreads than the past couple years. [T]he secondary markets remain fragile and worth keeping an eye [on] [,] but many spreads have been improving.

(Am. Compl. ¶ 83) (emphasis added and emphasis from amended complaint omitted). Thus, it is not the case that BAC painted only a rosy picture of Countrywide's financial performance for investors. Further, information about Countrywide's then-existing financial state, presumably, was also publicly available to some extent from Countrywide's own financial disclosures to the investing public (as it was also a corporation with publicly traded stock) as well as from the financial press during the relevant time period.

Second, plaintiffs do not allege that BAC did not perform its due diligence investigation as it had been represented to investors. Specifically, plaintiffs allege that BAC stated the focus of the due diligence investigation was on "the mortgage servicing rights, credit, and legal, as well as accounting and operational areas" of Countrywide (Am. Compl. ¶ 84). Plaintiffs do not, however, allege that BAC did not actually perform due diligence in any of these areas, or that some specific departure was made from its stated due diligence protocol. Instead, plaintiffs' allegations are generally that BAC's due diligence turned out to be inadequate some time after the transaction had been completed, and, thus, that BAC's "extensive" due diligence "failed" to identify severe problems with Countrywide's business model.³³ As discussed already with respect to the adequacy of BAC's loss reserves, write-downs, and net charge-offs, the fact that a due diligence investigation turned out to reach results that ultimately proved to be incorrect does not mean that a statement by a company that it had performed extensive due diligence was false at the time it was made.

33 Specifically, plaintiffs allege:

From at least 2006 through the January 11, 2008 [Countrywide] [a]cquisition announcement, Countrywide had suffered a series of severe business disruptions resulting from its improper mortgage origination practices, lax underwriting standards, and toxic debt securitization practices which [BAC's] due diligence apparently failed to identify, or if identified, were not fully appreciated.

(Am. Compl. ¶ 88) (emphasis added).

Plaintiffs' allegations concerning BAC's representations about the Countrywide transaction's impact on BAC's financial performance also fail to state a facially plausible claim under Sections 11 and 12(a)(2). With the exception of one quoted statement, which is discussed below, BAC made only generalized statements about how the Countrywide transaction would benefit BAC in the long-term future, and further, BAC provided only estimated projections of the transaction's impact on its financial performance in the short-term future.

BAC's statements concerning the general benefits of the transaction (i.e., describing how purchasing Countrywide played to BAC's strengths and predicting that the purchase would strength BAC's position in the marketplace) can fairly be characterized as "[e]xpressions of puffery and corporate optimism [which] do not give rise to securities violations." See Rombach v. Chang, 355 F.3d 164, 174 (2d Cir. 2004); see also Freedman v. Value Health, 34 F. App'x 408, 411 (2d Cir. 2002); Novak v. Kasaks, 216 F.3d 300, 315 (2d Cir. 2000). Specifically, the Second Circuit has stated:

Up to a point, companies must be permitted to operate with a hopeful outlook: "People in charge of an enterprise are not required to take a gloomy, fearful or defeatist view of the future; subject to what current data indicates, they can be expected to be confident about their stewardship and the prospects of the business that they manage." Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1129-30 (2d Cir. 1994). To succeed on this claim, plaintiffs must do more than say that the statements in the press releases were false and misleading; they must demonstrate with specificity why and how that is so.

Rombach v. Chang, supra, 355 F.3d at 174. Further, while plaintiffs generally allege that Countrywide suffered from "a series of severe business disruptions" from at least 2006 through early January 2008 as a result of problematic origination practices and underwriting standards (see Am. Compl. ¶ 88), they allege only that BAC failed to discover these disruptions through its due diligence efforts. BAC's generalized statements about the benefits of the Countrywide transaction also did not concern the quality of Countrywide's origination practices or underwriting standards. Thus, without more, plaintiffs do not sufficiently demonstrate with specificity why and how the aforementioned BAC statements were false when made to investors.³⁴ To the contrary, it appears that BAC was merely expressing its best guess as to -- and highest hopes for -- the Countrywide transaction's impact on BAC.

34 Plaintiffs do allege the following:

Undisclosed during the teleconference [between BAC and the securities analysts on January 11, 2008] was the fact that during [BAC's] due diligence investigation, Countrywide had hired Sandler O'Neill [sic], a boutique investment banking firm, to explore its options. Before [BAC] tendered its purchase offer to Countrywide's Board, Sandler O'Neill's [sic] CEO, Jimmy Duane, met with Countrywide's CFO, Eric Sieracki, to review a presentation by Countrywide's management of a "base-case scenario," a "stress scenario," and a "severe scenario" concerning the company's then-teetering mortgage operations. After reviewing the presentation, Mr. Duane dismissed the base-case scenario out of hand and informed Mr. Sieracki that coming events would likely be even worse than Countrywide's projected "severe scenario."

(Am. Compl. ¶ 86). From plaintiffs' allegations, however, it appears that this information was only exchanged between Sandler O'Neil and Countrywide. Thus, without more, this does not demonstrate why and how BAC's statements concerning the Countrywide transaction's impact on BAC were false when they were made to investors.

BAC did make one statement that is potentially actionable. Specifically, BAC stated during a conference call with securities analysts on January 11, 2008³⁵ that:

35 It is not clear from the amended complaint whether a script of this conference call was ever publicly filed with the SEC. However, plaintiffs do allege that BAC reaffirmed "many of the material misrepresentations" made during this conference call in a Form S-4 filing on February 13, 2008 (see Am. Compl. ¶ 87), which would have been incorporated by reference into the Series H offering which occurred in late-May 2008. In addition, Section 12(a)(2) subjects statutory sellers to liability for material misstatements or omissions in oral communications. See 15 U.S.C. § 77l(a)(2).

[T]his year has been tough for [Countrywide] as their model was severely impacted by market liquidity concerns and the ability to fund asset growth . . . [however,] [t]he good news is much of the originations in the current market are of much higher quality and better spreads than the past couple years . . . . [T]he secondary markets remain fragile and worth keeping an eye [on] but many spreads have been improving.

(Am. Compl. ¶ 83) (emphasis in amended complaint). This statement, as opposed to BAC's other generalized statements concerning the Countrywide transaction, is an affirmative representation of a then-existing fact -- specifically, the quality of Countrywide's originations and their resulting spreads in the market as of January 2008.

While plaintiffs do not specifically allege that Countrywide's originations in January 2008 were either of the same or lower quality as compared to prior years, they generally allege that "[f]rom at least 2006 through the January 11, 2008 [Countrywide] [a]cquisition announcement, Countrywide had suffered a series of severe business disruptions resulting from its improper mortgage origination practices, lax underwriting standards, and toxic debt securitization practices" which resulted in Countrywide making many low-quality loans. Specifically, plaintiffs allege that Countrywide: (1) implemented a loan origination practice, a loan matching strategy, and a loan underwriting process that forced loan underwriting employees to concentrate on increasing the number of originations at the expense of borrower creditworthiness; (2) systematically approved "exception" loans "that did not satisfy even Countrywide's weakened 'thereotical' underwriting criteria . . . . " such that by 2006, nearly 23% of all Countrywide's subprime first-lien loans were generated as "exceptions;" (3) routinely classified its mortgages for sale in the secondary loan market as "prime," even if they were issued to non-prime borrowers, including those who recently filed for bankruptcy; (4) reviewed its loan portfolio in December 2006, which revealed that (a) over 62% of all subprime loans originated in the second quarter of 2006 had a loan to value ratio of 100% and (b) the percentage of 60- and 90-day delinquencies in subprime loans originated in 2006 were at 8.11% and 4.03%, respectively, with a prediction that such rates would continue to rise; and (5) reviewed its [home equity loan] holdings in the first and fourth quarters of 2007, which revealed that "'borrower repayment capacity was not adequately assessed by the bank during the underwriting process for home equity loans'" (see Am. Compl. ¶ 88).

Plaintiffs appear to be alleging that Countrywide's loan portfolio was getting worse between 2006 and 2008 -- as opposed to better -- due to its abandonment of proper origination and underwriting standards. However, again, plaintiffs allege only that BAC failed to identify these problems through its due diligence efforts (see Am. Compl. ¶¶ 79, 88). Additionally, plaintiffs' allegations either primarily concern Countrywide's putative problematic business practices during 2006 or are generalized comments about those practices with no indication of date. The only references bearing on Countrywide's business practices during 2007 include: (1) that Countrywide's Chief Credit Risk Officer reviewed the Countrywide's 2006 loan portfolio in early December 2006 and predicted that "delinquency rates for 2006 [v]intage loans would likely continue to rise, driven by the company's lax underwriting guidelines and the worsening economic environment;" and (2) an analysis of home equity loans in the first and fourth quarters of 2007 "revealed 'that borrower repayment capacity was not adequately assessed by the bank during the underwriting process for home equity loans'" (see Am. Compl. ¶ 88) (emphasis in amended complaint omitted). While plaintiffs allege that these various business disruptions affected Countrywide from 2006 until at least BAC's January 11, 2008 announcement of the purchase of Countrywide, the aforementioned factual allegations are not inconsistent with BAC stating in early January 2008 that Countrywide's originations as of that date (which would necessarily encompass a reasonable period of time prior to that date as well) were an improvement over Countrywide's originations of the prior years (originations of which plaintiffs expressly allege were of poor quality).

BAC's estimated projections concerning the transaction's impact on BAC's financial performance, and further, how much additional capital BAC would need to issue in order to remain capital neutral on the transaction, are similarly not actionable. Again, in the absence of allegations that BAC made the representations -- which were projections and not framed as guarantees -- to investors in the face of some contrary information available to it when the statements were made, the mere fact that the projections turned out to be insufficient or inadequate does not mean that they were falsely represented when made.

Finally, plaintiffs' allegations concerning BAC's purported non-disclosure of Countrywide's improper mortgage origination practices, lax underwriting standards, and toxic debt securitization practices fail to state a facially plausible claim under Sections 11 and 12(a)(2). In order for an omission of information to be actionable, it must have been "in contravention of an affirmative legal disclosure obligation" or "an omission of information that is necessary to prevent existing disclosures from being misleading." In re Morgan Stanley Info. Fund Sec. Litig., supra, 592 F.3d at 360-61. Further, "[w]hen analyzing offering materials for compliance with the securities laws . . . the documents [are reviewed] holistically and in their entirety." In re Morgan Stanley Info. Fund Sec. Litig., supra, 592 F.3d at 365-66, citing Olkey v. Hyperion 1999 Term Trust, Inc., 98 F.3d 2, 5 (2d Cir. 1996).

Plaintiffs do not allege that BAC violated an affirmative legal disclosure obligation by not disclosing Countrywide's allegedly improper mortgage origination practices and lax underwriting standards³⁶ (see Am. Compl. ¶¶ 79, 87, 88). Instead, plaintiffs allege that BAC's due diligence failure rendered its statements about the benefits of the Countrywide transaction and its resulting impact on BAC's financial performance misleading. However, as already discussed, (1) BAC's statements concerning the Countrywide transaction and its resulting impact on BAC's financial performance were primarily generalized expressions of puffery and estimated projections, and (2) BAC made no specific representations or guarantees concerning the quality of Countrywide's origination and underwriting practices that would have been rendered misleading by the absence of this information.

36 The closest plaintiffs come to alleging that BAC violated an affirmative legal disclosure obligation is that BAC failed to comply with Item 503 of Regulation S-K, 17 C.F.R. § 229.504, and Article 10-01 of Regulation S-X, 17 C.F.R. § 210.10-01, which required BAC to discuss what made its public offerings risky or speculative and to discuss material contingencies (see Am. Compl. ¶¶ 104-05). However, plaintiffs' allegations with respect to these regulations concern BAC's alleged misstatements as to the adequacy of BAC's loss reserves, write-downs, net charge-offs, capital base, and risk-based capital ratio -- they do not refer to BAC's alleged misstatements concerning the Countrywide transaction (see Am. Compl. ¶¶ 106-08).

Thus, the only statement potentially rendered misleading by the aforementioned non-disclosure is, again, BAC's statement that Countrywide's originations in January 2008 were of a higher quality and producing better spreads as compared to prior years. However, this single statement was made in the context of BAC's November 2007 financial disclosures that: (1) its provisions for credit losses had increased; (2) its net charge-offs had increased; (3) the relevant financial markets were experiencing extreme dislocations, and further, BAC predicted continuing adverse impacts on its future financial performance as a result of those dislocations; (4) it had CDO and loan exposure, including subprime exposure; and (5) its allowance for loan and lease losses had increased (see Am. Compl. ¶¶ 67-70). BAC also announced large fourth-quarter write-downs to its CDO portfolio just shortly before the Series K offering in late-January 2008 (see Am. Compl. ¶ 72). BAC then made similar financial disclosures prior to the Series H offering with respect to its full- year 2007 performance and its first-quarter of 2008 performance (see Am. Compl. ¶¶ 73-76). Finally, plaintiffs' own allegations acknowledge that "[a]s the housing collapse gained momentum throughout 2007, foreclosures skyrocketed, loan originators began going bankrupt and the financial media publicly described the fallout from the lax mortgage requirements and salacious lending practices" (see Am. Compl. ¶ 65). On the basis of the aforementioned financial disclosures made by BAC concerning its increasing market exposure and plaintiffs' own allegations concerning the deteriorating market conditions during the relevant time period, it is not plausible that one generalized statement concerning Countrywide's originations as of January 2008 would cause the offering documents to be misleading within the meaning of the Securities Act.

Thus, in light of the information provided in the offering documents as a whole and in the absence of additional representations concerning the quality of Countrywide's loan portfolio or Countrywide's origination and underwriting practices, the amended complaint fails to state a facially plausible claim under Sections 11 and 12(a)(2) with respect to BAC's alleged misstatements concerning the Countrywide transaction.³⁷

37 Because I find ample reason to conclude that plaintiffs' allegations concerning (1) BAC's representations regarding the adequacy of its loss reserves, write-downs, and net charge-offs to its CDO and loan portfolios during the relevant time period, and (2) BAC's representations concerning the Countrywide transaction are not actionable under the Securities Act, I do not reach defendants' alternative arguments that (1) plaintiffs claims are time-barred, and further, that plaintiffs lack standing to bring claims concerning the Series H securities, and (2) the statements are not actionable under the PSLRA safe-harbor provision and the judicial "bespeaks caution" doctrine.

2. Whether Plaintiffs Lack Section 12(a)(2) Standing

The Underwriter Defendants contend that plaintiffs lack Section 12(a)(2) standing because: (1) plaintiffs fail to allege that plaintiff NECA-IBEW purchased Series K securities "'in'" the Series K offering, as opposed to the secondary market; and (2) plaintiffs fail to allege that plaintiff Montgomery purchased Series H securities "directly from" defendant Merrill Lynch (Underwriter Def.'s Mem. in Supp. of Mot. to Dismiss at 9-10).

The applicable legal standards for statutory standing pursuant to Section 12(a)(2) are as follows:

A plaintiff has standing to bring a Section 12 claim only against a "statutory seller" from which it "purchased" a security. A "statutory seller" is one who, in a public offering, either transferred title to the purchaser or successfully solicited the transfer for financial gain. A complaint that alleges that the plaintiff purchased its securities "pursuant and/or traceable to" the Offering Documents is not sufficient. Allegations that a plaintiff purchased securities "pursuant to" the pertinent offering documents, how-

ever, have been construed to permit proof that the plaintiff purchased his or her security "in the offering."

In re Lehman Bros. Sec. & ERISA Litig., supra, 799 F. Supp. 2d at 310-11 (internal citations omitted); see also Akerman v. Oryx Commc'ns, Inc., 810 F. 2d 336, 344 (2d Cir. 1987); In re Deutsche Bank AG Sec. Litig., supra, 2011 WL 3664407 at *10; Tsereteli v. Residential Asset Securitization Trust 2006-A8, 692 F. Supp. 2d 387, 391 (S.D.N.Y. 2010) (Kaplan, D.J.); In re Ultrafem Inc. Sec. Litig., 91 F. Supp. 2d 678, 694 (S.D.N.Y. 2000) (Preska, D.J.).

Plaintiffs allege that they brought the putative class action "on behalf of . . . all persons or entities who on or before September 12, 2008 acquired [BAC Series H and Series K securities] directly pursuant (or traceable to) [BAC's] false and misleading [r]egistration [s]tatement for [those] [o]fferings . . . . " (Am Compl. ¶ 52). Plaintiffs also allege that: (1) "on and after January 24, 2008[,] [plaintiff NECA-IBEW] acquired shares of [BAC] Series K securities that were purchased directly from [d]efendant [u]nderwriter [BAS] . . . . " (Am Compl. ¶ 20); and (2) "[on or about May 24, 2008,] [p]laintiff Denis Montgomery . . . acquired shares of [BAC] securities issues in connection with the Series H offering through [d]efendant Merrill Lynch . . . . " (Am. Compl. ¶ 21). Finally, plaintiffs contend that (1) the certification attached to NECA-IBEW's motion for appoint- ment as lead plaintiff states that it had purchased 100,000 shares of Series K securities at the offering price on January 24, 2008, and (2) the certification attached to the original complaint states that plaintiff Montgomery had purchased 2,000 shares of Series H securities at the offering price on May 20, 2008 (see Plaintiffs' Memorandum of Law in Opposition to Underwriter Defendants' Motion to Dismiss Counts I and II of the First Amended Complaint ("Pl.'s Mem. in Opp. to Underwriters' Mot. to Dismiss"), (Docket Item 35), 11 & n.9).

Plaintiffs' allegations are sufficient to establish Section 12(a)(2) standing at this stage of the litigation. Plaintiffs have (1) alleged that the class action is brought on behalf of all those who purchased Series H and Series K securities pursuant or traceable to the misleading offering documents associated with the Series H and K offerings, (2) alleged the dates on which plaintiff NECA-IBEW and plaintiff Montgomery purchased BAC securities from named defendant underwriters, and (3) referred to the certifications (both of which certainly would have been relied upon in drafting the original and amended complaints) indicating the amount of securities purchased by plaintiff NECA-IBEW and plaintiff Montgomery. See In re Lehman Bros. Sec. & ERISA Litig., supra, 799 F. Supp. 2d at 311; Public Emp. Ret. Sys. of Mississippi v. Goldman Sachs Grp., Inc., 09 Civ. 1110 (HB), 2011 WL 135821 at *8 (S.D.N.Y. Jan. 12, 2011) (Baer, D.J.); In re IndyMac Mortg.-Backed Sec. Litig., 718 F. Supp. 2d 495, 502 (S.D.N.Y. 2010) (Kaplan, D.J.). Plaintiffs also alleged that plaintiff NECA-IBEW purchased its securities "directly" from BAS, and plaintiff Montgomery purchased his securities "through" Merrill Lynch.

Thus, defendants' arguments -- specifically, that (1) the phrase "in connection with" is not sufficient to mean "in the offering," and (2) the word "through" is not sufficient to mean "directly from" -- must be rejected. Plaintiffs' additional allegations are sufficient to establish their standing.

3. Section 15 Claims

Plaintiffs assert claims under Section 15 of the Securities Act against all individual defendants. Section 15 "creates liability for individuals or entities that 'control [ ] any person liable' under Sections 11 or 12 [and its] . . . success . . . relies, in part, on a plaintiff's ability to demonstrate primary liability under [S]ections 11 and 12." In re Morgan Stanley Info. Fund Sec. Litig., supra, 592 F.3d at 358.

Because plaintiffs have not adequately alleged Section 11 and Section 12(a)(2) claims with respect to the Series H and Series K offerings, the amended complaint fails to state a claim under Section 15 against each of the individual defendants.

4. Motion to Amend

Plaintiffs request that it be granted leave to amend if the defendants' respective motions to dismiss are granted (Pl.'s Mem. in Opp. to BAC's Mot. to Dismiss at 24; see also Pl.'s Mem. in Opp. to Underwriter's Mot. to Dismiss at 15). Plaintiffs have not, however, submitted a proposed amended pleading.

Generally, "a complete copy of the proposed amended complaint must accompany the motion [to amend] so that both the Court and opposing parties can understand the exact changes sought." Segatt v. GSI Holding Corp., 07 Civ. 11413 (WHP), 2008 WL 4865033 at *4 (S.D.N.Y. Nov 3, 2008) (Pauley, D.J.); accord In re Refco Capital Mkts., Ltd. Brokerage Customer Sec. Litig., 06 Civ. 643 (GEL), 07 Civ. 8686 (GEL), 07 Civ. 8688 (GEL), 2008 WL 4962985 at *3 (S.D.N.Y. Nov. 20, 2008) (Lynch, then D.J., now Cir. J.); 6 Charles A. Wright, Arthur R. Miller & Mary K. Kane, Federal Practice & Procedure § 1485 at 688 (2d ed. 1990). As discussed above, plaintiffs' amended complaint lacks certain essential allegations necessary to state a claim against the BAC Defendants and the Underwriter Defendants. Without the benefit of a proposed amended pleading, it is not possible to know whether plaintiffs could make these allegations consistent with Fed.R.Civ.P. 11. Because I cannot determine whether an amended complaint could cure the deficiencies identified above, I conclude that the more efficient course is to defer any assessment of an amended pleading until plaintiffs submit a definite proposed amended pleading.

IV. Conclusion

For all the foregoing reasons, I respectfully recommend that the BAC Defendants' and the Underwriter Defendants' motions to dismiss be granted in their entirety and that plaintiffs' application to amend its complaint be denied without prejudice to renewal by way of formal motion.

V. OBJECTIONS

Pursuant to 28 U.S.C. § 636(b)(1)(c)) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties shall have fourteen (14) days from receipt of this Report to file written objections. See also Fed.R.Civ.P. 6(a). Such objections (and responses thereto) shall be filed with the Clerk of the Court, with courtesy copies delivered to the Chambers of the Honorable Lewis A. Kaplan, United States District Judge, 500 Pearl Street, Room 2240, and to the Chambers of the undersigned, 500 Pearl Street, Room 750, New York, New York 10007. Any requests for an extension of time for filing objections must be directed to Judge Kaplan. FAILURE TO OBJECT WITHIN FOURTEEN (14) DAYS WILL RESULT IN A WAIVER OF OBJECTIONS AND WILL PRECLUDE APPELLATE REVIEW. Thomas v. Arn, 474 U.S. 140, 155 (1985); United States v. Male Juvenile, 121 F.3d 34, 38 (2d Cir. 1997); IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1054 (2d Cir. 1993); Frank v. Johnson, 968 F.2d 298, 300 (2d Cir. 1992); Wesolek v. Canadair Ltd., 838 F.2d 55, 57-59 (2d Cir. 1988); McCarthy v. Manson, 714 F. 2d 234, 237-238 (2d Cir. 1983). Dated: New York, New York

February 9, 2012

Respectfully submitted,

/s/_________

HENRY PITMAN

United States Magistrate Judge Copies transmitted to: Mark L. Knutson, Esq.
Jeffrey R. Krinsk, Esq.
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Finkelstein & Krinsk LLP
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