Opinion
Case No. 11-C-0755
09-14-2012
UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. STIFEL, NICOLAUS & CO., INC. and DAVID W. NOACK, Defendant.
ORDER GRANTING IN PART AND DENYING IN PART
MOTIONS TO DISMISS (DOCS. 15, 16)
The Securities and Exchange Commission sues Stifel, Nicolaus & Co., Inc. and its former Senior Vice President, David W. Noack, for alleged violations of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933 in connection with the sale of collateralized debt obligations to five eastern Wisconsin school districts. In addition, the SEC asserts that Stifel violated Section 15(c)(1)(A) of the Exchange Act and that Noack aided and abetted that violation. The defendants move to dismiss under Fed. R. Civ. P. 9 and 12(b)(6).
The defendants filed their motions to dismiss separately, but Noack adopted Stifel's briefs and arguments, so the motions are treated together as one.
A motion to dismiss under Rule 12(b)(6) challenges the sufficiency of the complaint to state a claim upon which relief may be granted. See Fed. R. Civ. P. 12(b)(6). The complaint has to contain a short and plain statement of the claim showing that the pleader is entitled to relief. Fed. R. Civ. P. 8(a)(2). However, enough facts must be set forth to state a claim that is plausible on its face. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 1974 (2007); St. John's United Church of Christ v. City of Chicago, 502 F.3d 616, 625 (7th Cir. 2007). The "allegations must plausibly suggest that the plaintiff has a right to relief, raising that possibility above a 'speculative level'; if they do not, the plaintiff pleads itself out of court." EEOC v. Concentra Health Servs., Inc., 496 F.3d 773, 776 (7th Cir. 2007) (citing Bell Atl., 550 U.S. at 555-56, 569 n.14). When considering a Rule 12(b)(6) motion, the court is to construe the complaint in the light most favorable to the plaintiff, accepting as true all well-pleaded facts and drawing all possible inferences in the plaintiff's favor. Tamayo v. Blagojevich, 526 F.3d 1074, 1081 (7th Cir. 2008).
Federal Rule of Civil Procedure 12(e) allows a party to move for a more definite statement before filing an answer if the complaint "is so vague or ambiguous that the party cannot reasonably prepare a response." The motion must point out the defects complained of and the details desired. Fed. R. Civ. P. 12(e). A Rule 12(e) motion is disfavored and is not a substitute for discovery. Coleman v. Majestic Star Casino, LLC, No. 2:11-CV-391-PPS-PRC, 2012 WL 1424396, *1 (N.D. Ind. Apr. 24, 2012). However, it may be used to put a defendant on notice regarding which claims apply to what parties. Id.
Here, defendants attack the Complaint on procedural and substantive grounds.
PLEADING WITH PARTICULARITY UNDER RULE 9
The allegations in the Complaint concern fraud and thus must satisfy special pleading requirements. The SEC acknowledges the pleading standard of Fed. R. Civ. P. 9(b), which means that it must "state with particularity the circumstances constituting fraud."
To set forth the circumstances of fraud with particularity, the plaintiff must state "the identity of the person who made the misrepresentation, the time, place and content of the misrepresentation, and the method by which the misrepresentation was communicated to the plaintiff." Vicom, Inc. v. Harbridge Merch. Servs., Inc., 20 F.3d 771, 777 (7th Cir. 1994) (internal quotation marks omitted). Put another way, a complaint has to identify "the 'who, what, when, where, and how' of the fraud." Pirelli Armstrong Tire Corp. Retiree Med. Benefits Tr. v. Walgreen Co., 631 F.3d 436, 441-42 (7th Cir. 2011). However, courts and litigants should not take an overly rigid view of the dictates of Rule 9(b). See id. at 442. "The purposes of the pleading requirement are to protect a defending party's reputation from harm, to minimize strike suits, and to provide detailed notice of a fraud claim to a defending party," 2 James William Moore, Moore's Federal Practice § 9.03[1][a], at 9-15 (3d ed. 2012) (footnotes omitted), and "to force the plaintiff to do more than the usual investigation before filing his complaint," Ackerman v. Nw. Mut. Life Ins. Co., 172 F.3d 467, 469 (7th Cir. 1999).
Defendants contend that certain allegations of fraud must be dismissed, struck from the Complaint, or repleaded or supplemented with a more definite statement because they fail to meet Rule 9(b) requirements through lack of precise dating and failure to identify the specific individuals to whom statements were made. A. Specificity as to the Date Statements Were Made
Defendants argue that the contentions in paragraphs 73, 75, 79, 81, 87, 89, 91, 93, 95, and 103 of the Complaint suffer from a failure to identify when fraudulent statements may have been made. Defendants note that they need the dates to determine, for instance, whether such statements were made while Noack worked at Stifel and whether such statements were made before or after the first, second, or third transactions at issue. (Doc. 17 at 7-8.)
The SEC responds that the Complaint asserts, among other things, that the misrepresentations occurred before school districts invested in 2006 and that Noack was acting on behalf of Stifel at the time he made the statements. (See Doc. 20 at 8.) The SEC points to paragraphs that set forth specific dates for other statements (such as in Doc. 1 ¶¶ 77, 83) as support for the time frame of 2006. In addition, the Complaint charges that Noack worked for Stifel from 2000 to 2007. (Doc. 20 at 8 (citing Doc. 1 ¶¶ 17, 71).)
Plaintiffs are not absolutely required to plead specific dates of fraudulent acts "provided they use some alternative means of injecting precision and some measure of substantiation into their allegations of fraud." 2 Moore, supra, § 9.03[1][b], at 9-18, cited in Pirelli Armstrong Tire Co., 631 F.3d at 442. But here, as to the paragraphs challenged by defendants, the SEC has failed to provide any precision regarding a date or a sufficiently narrow time frame to satisfy Rule 9(b). "Sometime in 2006 or before" or "sometime before one of the three transactions" are too imprecise for Rule 9(b) purposes.
Thus, defendants' motions to dismiss or strike the claims in the following paragraphs are granted. However, the SEC will be allowed to amend the Complaint if it believes that it can set forth more specific dating for these statements.
+-----------------------------------------------------------------------------+ ¦Compl. ¦Allegation ¦Sufficient re Date? ¦ ¦¶¶ ¦ ¦ ¦ +-------+----------------------------------+----------------------------------¦ ¦ ¦"Noack represented that the CDO ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦investments were "Treasury-like," ¦ ¦ ¦ ¦and he ¦ ¦ ¦ ¦ ¦No. "[B]efore the first deal" is ¦ ¦ ¦claimed that they were virtually ¦not ¦ ¦ ¦risk-free. ¦ ¦ ¦ ¦ ¦sufficiently precise to satisfy ¦ ¦ ¦For example, before the first ¦Rule 9(b) ¦ ¦ ¦deal, Noack ¦ ¦ ¦ ¦ ¦regarding statements to West ¦ ¦ ¦told West Allis-West Milwaukee to ¦Allis-West ¦ ¦ ¦think of ¦ ¦ ¦ ¦ ¦Milwaukee. Further, from other ¦ ¦ ¦these investments like Treasury ¦ ¦ ¦ ¦bonds due ¦documents in the record it appears¦ ¦ ¦ ¦that ¦ ¦ ¦to the quality of the companies in¦ ¦ ¦ ¦the ¦Waukesha was not part of the ¦ ¦73 ¦ ¦"first deal" ¦ ¦ ¦portfolio. He represented that ¦ ¦ ¦ ¦only ¦with West Allis-West Milwaukee, ¦ ¦ ¦ ¦drawing ¦ ¦ ¦Treasury securities would be a ¦ ¦ ¦ ¦safer ¦into question whether the ¦ ¦ ¦ ¦statement ¦ ¦ ¦investment. Similarly, Noack ¦ ¦ ¦ ¦represented ¦occurred prior to the first of the¦ ¦ ¦ ¦three ¦ ¦ ¦to Waukesha that the CDO ¦ ¦ ¦ ¦investments ¦transactions or the first ¦ ¦ ¦ ¦transaction ¦ ¦ ¦were similar to Treasury ¦ ¦ ¦ ¦securities ¦involving West Allis-West ¦ ¦ ¦ ¦Milwaukee. ¦ ¦ ¦because the portfolio was ¦ ¦ ¦ ¦comprised of ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦AAA and AA corporate debt." ¦ ¦ +-------+----------------------------------+----------------------------------¦ ¦ ¦"Noack represented that 30 of the ¦ ¦ ¦ ¦105 ¦ ¦ ¦ ¦ ¦No. No specificity, precision, or ¦ ¦ ¦companies in the portfolio would ¦time ¦ ¦ ¦have to ¦ ¦ ¦ ¦ ¦frame; likely sometime before one ¦ ¦ ¦default before the School ¦of the ¦ ¦75 ¦Districts would ¦ ¦ ¦ ¦ ¦three transactions but that is not¦ ¦ ¦begin to lose their principal. For¦specific ¦ ¦ ¦example, ¦ ¦ ¦ ¦ ¦enough. ¦ ¦ ¦Noack made that representation to ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Waukesha, among possible others." ¦ ¦ +-------+----------------------------------+----------------------------------¦ ¦ ¦"Noack represented that it would ¦ ¦ ¦ ¦take 8.5 ¦No. The second transaction ¦ ¦ ¦ ¦occurred on ¦ ¦ ¦times historically normal default ¦ ¦ ¦ ¦levels ¦September 29, 2006. Even if the ¦ ¦ ¦ ¦SEC ¦ ¦ ¦for the School Districts to lose ¦ ¦ ¦ ¦money, ¦limited this to the year 2006, ¦ ¦ ¦ ¦"before the ¦ ¦79 ¦which only happened during the ¦ ¦ ¦ ¦Great ¦second deal" leaves many months, ¦ ¦ ¦ ¦which ¦ ¦ ¦Depression. For example, Noack ¦ ¦ ¦ ¦made ¦is too imprecise to satisfy Rule 9¦ ¦ ¦ ¦(b) in ¦ ¦ ¦that representation to the School ¦ ¦ ¦ ¦Districts ¦this case. ¦ ¦ ¦ ¦ ¦ ¦ ¦before the second deal." ¦ ¦ +-------+----------------------------------+----------------------------------¦ ¦ ¦"Noack represented that there had ¦ ¦ ¦ ¦not ¦ ¦ ¦ ¦ ¦No. No time frame is given nor any¦ ¦ ¦been a default since Enron in ¦other ¦ ¦81 ¦2000. For ¦ ¦ ¦ ¦ ¦means of determining the date with¦ ¦ ¦example, he made that ¦ ¦ ¦ ¦representation to ¦relative precision. ¦ ¦ ¦ ¦ ¦ ¦ ¦Kimberly, among possible others." ¦ ¦ +-------+----------------------------------+----------------------------------¦ ¦ ¦"Noack represented that there was ¦ ¦ ¦ ¦a ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦short-term mark-to-market risk, ¦ ¦ ¦ ¦but that it ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦was not a long-term risk because ¦No. No time frame is given nor any¦ ¦ ¦the ¦other ¦ ¦ ¦ ¦ ¦ ¦87 ¦School Districts would still get ¦means of determining the date with¦ ¦ ¦their money ¦ ¦ ¦ ¦ ¦relative precision. ¦ ¦ ¦back after seven years. For ¦ ¦ ¦ ¦example, he ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦made that representation to ¦ ¦ ¦ ¦Kenosha, ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦among possible others." ¦ ¦ +-------+----------------------------------+----------------------------------¦ ¦ ¦"Noack represented that, of the ¦ ¦ ¦ ¦top 800 ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦companies in the world, 100 of ¦ ¦ ¦ ¦them would ¦ ¦ ¦ ¦ ¦No. No time frame is given nor any¦ ¦ ¦have to go under before the School¦other ¦ ¦89 ¦ ¦ ¦ ¦ ¦Districts would suffer any ¦means of determining the date with¦ ¦ ¦principal loss. ¦ ¦ ¦ ¦ ¦relative precision. ¦ ¦ ¦For example, he made that ¦ ¦ ¦ ¦representation ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦to Kenosha, among possible ¦ ¦ ¦ ¦others." ¦ ¦ +-----------------------------------------------------------------------------+
+-----------------------------------------------------------------------------+ ¦ ¦"Noack represented that, if the ¦ ¦ ¦ ¦investments ¦ ¦ ¦ ¦ ¦No. No time frame is given nor any¦ ¦ ¦failed, they would all be in bread ¦other ¦ ¦ ¦lines ¦ ¦ ¦91 ¦ ¦means of determining the date with¦ ¦ ¦together. For example, he made that ¦ ¦ ¦ ¦ ¦relative precision. ¦ ¦ ¦representation to Waukesha, among ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦possible others." ¦ ¦ +---+--------------------------------------+----------------------------------¦ ¦ ¦"Noack represented that the country ¦ ¦ ¦ ¦would ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦have to fall further into financial ¦ ¦ ¦ ¦trouble ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦than the Great Depression before the ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦investments would be affected. But ¦ ¦ ¦ ¦even ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦in that scenario, according to Noack, ¦ ¦ ¦ ¦the ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦School Districts would get their ¦No. No time frame is given nor any¦ ¦ ¦principal ¦other ¦ ¦ ¦ ¦ ¦ ¦93 ¦back after seven years and did not ¦means of determining the date with¦ ¦ ¦have to ¦ ¦ ¦ ¦ ¦relative precision. ¦ ¦ ¦worry about losing principal. For ¦ ¦ ¦ ¦example, ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦he made that representation to West ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Allis-West Milwaukee. He similarly ¦ ¦ ¦ ¦told ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦other School Districts that it would ¦ ¦ ¦ ¦take a ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Great Depression for the investments ¦ ¦ ¦ ¦to ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦fail." ¦ ¦ +---+--------------------------------------+----------------------------------¦ ¦ ¦"Noack represented that if any of the ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦highly-rated portfolio credits ¦ ¦ ¦ ¦struggled, the ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦portfolio manager would simply replace¦ ¦ ¦ ¦ ¦No. No time frame is given nor any¦ ¦ ¦that credit with another stronger ¦other ¦ ¦95 ¦credit to ¦ ¦ ¦ ¦ ¦means of determining the date with¦ ¦ ¦maintain the AA rating. For example, ¦ ¦ ¦ ¦he ¦relative precision. ¦ ¦ ¦ ¦ ¦ ¦ ¦made that representation to Whitefish ¦ ¦ ¦ ¦Bay ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦and to Kimberly, among possible ¦ ¦ ¦ ¦others." ¦ ¦ +---+--------------------------------------+----------------------------------¦ ¦ ¦"In an affidavit executed in 2008, ¦ ¦ ¦ ¦Noack ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦admitted under oath that he had made ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦statements and representations to the ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦School Districts to persuade them to ¦ ¦ ¦ ¦enter ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦into the CDO transactions. He stated ¦ ¦ ¦ ¦under ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦oath that he had no reason to dispute ¦ ¦ ¦ ¦that ¦ ¦ ¦ ¦ ¦No. No time frame is given nor any¦ ¦ ¦he had made statements to the School ¦other ¦ ¦ ¦ ¦ ¦ ¦103¦Districts such as "[i]t takes 20 out ¦means of determining the date with¦ ¦ ¦of these ¦ ¦ ¦ ¦ ¦relative precision. ¦ ¦ ¦100 companies to default before it ¦ ¦ ¦ ¦gets ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦to your AA level," and "[t]here would ¦ ¦ ¦ ¦need ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦to be '15 Enrons' before you would be ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦impacted," and others like them. Noack¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦further admitted that certain of his ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦statements to the School Districts ¦ ¦ ¦ ¦were ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦inaccurate." ¦ ¦ +-----------------------------------------------------------------------------+ B. Specificity as to Whom the Statements Were Made
Next, defendants argue that the requirement regarding identification of the "who" of an allegedly fraudulent statement includes identification of "to whom" each statement was made, citing DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990), and Roberts v. McCarthy, 2:11-CV-00080, 2011 WL 1363811, *3 (D. Nev. Apr. 11, 2011). According to defendants, the allegations in paragraphs 73, 75, 77, 79, 81, 83, 85, 87, 89, 91, 93, 95, 97, 99, and 103 do not satisfy Rule 9(b) pleading requirements because they do not adequately specify to whom the statements were made. While some of these statements are identified as having been made to the "School Districts," those claims fall short; defendants are not provided with the names of the individuals to whom the statements were made.
DiLeo does not discuss expressly a requirement of identifying the recipient of a fraudulent statement. However, the case sets forth the oft-quoted phrase that Rule 9(b) requires "the who, what, when, where, and how: the first paragraph of any newspaper story." 901 F.2d at 627. But the court did not add that "who" means identification of both the speaker and the listener. See id. Similarly, Roberts does not address whether the plaintiff must identify the person to whom a statement is made, although in a parenthetical it cites another case for the proposition that identification of the listener is required when the alleged fraud is that of a corporation. Nevertheless, Moore's Federal Practice suggests that Rule 9(b) often requires allegations regarding "[t]he persons or entities to whom the misrepresentation was communicated." 2 Moore, supra, § 9.03[b], at 9-18. But notably, even Moore's indicates that identification of the entity to whom the statement was made (not an individual at the entity) is acceptable.
Here, in large part, the SEC's allegations of "who" are sufficient. Who made the statement is generally more important than who heard it, cf. Vicom, Inc., 20 F.3d at 777 (stating that because fair notice is the most basic consideration underlying Rule 9(b) a fraud pleading must reasonably notify the defendant of his role in the fraud), and the SEC identifies the speaker as Noack for all statements. Plus, for many challenged statements the SEC identifies at least one school district to whom a statement was aimed.
Though defendants submit that the Complaint should name the individual at the school district who heard alleged misrepresentations, the absence of these names may be a matter for discovery rather than a basis for dismissal or striking portions of the Complaint. Here, the allegations naming a particular school district are sufficient. Moreover, assertions in the Complaint identify the individuals to whom misrepresentations were made as school board members, providing even more detail to the defendants.
In addition, for allegations naming the "School Districts" together as the listeners, the Complaint defines the term "School Districts" as five particular school districts in the State of Wisconsin: School District of West Allis-West Milwaukee, Kenosha School District No. 1, School District of Waukesha, Kimberly Area School District, and School District of Whitefish Bay. (Doc. ¶¶ 1, 18.) Thus, if allegations indicate that a statement was made to the "School Districts," the Complaint is read as a whole to indicate that the statement was made to all five school districts, and that is sufficient as well.
Of course, when repleading dates the SEC will need to identify the date the statement was made to each of the five school districts.
However, in certain instances the Complaint asserts that a statement was made to "possible others." Such a reference is too vague to satisfy Rule 9(b). Additionally, some paragraphs assert a statement by Noack in general, followed by examples of the statement being made to a particular school district. Only the examples are sufficiently pled under Rule 9(b) unless the general statement is accompanied by other precise facts that describe it more particularly, such as where and when the statement occurred or that it was indeed made to all five school districts.
The SEC submits that when the Complaint is analyzed, it should be understood that statements not specifying a particular school district as recipient were made to all five school districts unless otherwise noted. But here, that is not acceptable. This case is not one in which the listener or recipient discussed in a complaint may be identified easily. Five school districts are involved. Moreover, the Complaint includes over 200 paragraphs of allegations. Hence, this case warrants particularity, not just assumptions that certain statements were made to all five school districts.
In short, the identification of a school district as the recipient of a fraudulent statement is acceptable even if an individual at the school district is not named. But in this case, with five different school districts involved, the SEC needs to identify at the least which school districts heard the statements.
Thus, the rulings as to each challenged statement are as follows:
+-----------------------------------------------------------------------------+ ¦Compl.¦Allegation ¦Sufficient re "to Whom"? ¦ ¦¶ ¦ ¦ ¦ +------+-----------------------------------+----------------------------------¦ ¦ ¦"Noack represented that the CDO ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦investments were "Treasury-like," ¦ ¦ ¦ ¦and he ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦claimed that they were virtually ¦ ¦ ¦ ¦risk-free. ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦For example, before the first deal,¦ ¦ ¦ ¦Noack ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦told West Allis-West Milwaukee to ¦Yes as to the statement made to ¦ ¦ ¦think of ¦West ¦ ¦ ¦ ¦ ¦ ¦ ¦these investments like Treasury ¦Allis-West Milwaukee and the ¦ ¦ ¦bonds due ¦separate ¦ ¦ ¦ ¦ ¦ ¦ ¦to the quality of the companies in ¦statement made to Waukesha. No as ¦ ¦73 ¦the ¦to ¦ ¦ ¦ ¦ ¦ ¦ ¦portfolio. He represented that only¦the first sentence of the ¦ ¦ ¦ ¦paragraph to the ¦ ¦ ¦Treasury securities would be a ¦ ¦ ¦ ¦safer ¦extent it may have been made to ¦ ¦ ¦ ¦others. ¦ ¦ ¦investment. Similarly, Noack ¦ ¦ ¦ ¦represented ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦to Waukesha that the CDO ¦ ¦ ¦ ¦investments ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦were similar to Treasury securities¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦because the portfolio was comprised¦ ¦ ¦ ¦of ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦AAA and AA corporate debt." ¦ ¦ +-----------------------------------------------------------------------------+
+-----------------------------------------------------------------------------+ ¦ ¦"Noack represented that 30 of the 105 ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦companies in the portfolio would have ¦ ¦ ¦ ¦to ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦default before the School Districts ¦Yes as to the statement made to ¦ ¦75¦would ¦ ¦ ¦ ¦ ¦Waukesha. No as to "possible ¦ ¦ ¦begin to lose their principal. For ¦others." ¦ ¦ ¦example, ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Noack made that representation to ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Waukesha, among possible others." ¦ ¦ +--+---------------------------------------+----------------------------------¦ ¦ ¦"Noack represented that it would take ¦ ¦ ¦ ¦'15 ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Enrons' for the School Districts to ¦ ¦ ¦ ¦lose ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦money. For example, at a meeting of the¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦school board of Whitefish Bay on ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦November 15, 2006, Noack stated: "And ¦ ¦ ¦ ¦it ¦ ¦ ¦ ¦ ¦Yes as to the statement made to ¦ ¦ ¦gives added comfort that, you know, it ¦ ¦ ¦ ¦ ¦Whitefish Bay. No as to the first ¦ ¦ ¦takes 15 defaults for us to start ¦ ¦ ¦ ¦losing ¦sentence of the paragraph to the ¦ ¦77¦ ¦extent ¦ ¦ ¦money and we have somebody watching ¦ ¦ ¦ ¦ ¦the statement may have been made ¦ ¦ ¦over every company, every day, for ¦to ¦ ¦ ¦seven ¦ ¦ ¦ ¦ ¦others. ¦ ¦ ¦years, and if it starts to look like ¦ ¦ ¦ ¦it's going ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦that way, they get out of it. The only ¦ ¦ ¦ ¦way - ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦the real - you need 15 Enrons. You need¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦something to happen that big ¦ ¦ ¦ ¦overnight.' ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦The audio was recorded." ¦ ¦ +--+---------------------------------------+----------------------------------¦ ¦ ¦"Noack represented that it would take ¦ ¦ ¦ ¦8.5 ¦Yes. The allegation is that the ¦ ¦ ¦ ¦statement ¦ ¦ ¦times historically normal default ¦ ¦ ¦ ¦levels ¦was made to all five school ¦ ¦ ¦ ¦districts. No ¦ ¦ ¦for the School Districts to lose money,¦ ¦ ¦79¦ ¦as to the first sentence of the ¦ ¦ ¦which only happened during the Great ¦paragraph ¦ ¦ ¦ ¦ ¦ ¦ ¦Depression. For example, Noack made ¦to the extent it may have been ¦ ¦ ¦ ¦made to ¦ ¦ ¦that representation to the School ¦ ¦ ¦ ¦Districts ¦others. ¦ ¦ ¦ ¦ ¦ ¦ ¦before the second deal." ¦ ¦ +--+---------------------------------------+----------------------------------¦ ¦ ¦"Noack represented that there had not ¦ ¦ ¦ ¦ ¦Yes as to the statement made to ¦ ¦ ¦been a default since Enron in 2000. For¦ ¦ ¦81¦ ¦Kimberly. No as to "possible ¦ ¦ ¦example, he made that representation to¦others." ¦ ¦ ¦ ¦ ¦ ¦ ¦Kimberly, among possible others." ¦ ¦ +--+---------------------------------------+----------------------------------¦ ¦ ¦"Noack represented to Whitefish Bay ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦during a meeting on November 15, 2006 ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦that West Allis-West Milwaukee had ¦ ¦ ¦ ¦ ¦ ¦ ¦83¦already done two deals, and 'if there ¦Yes. ¦ ¦ ¦is a ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦hiccup in one of the investments, we ¦ ¦ ¦ ¦would ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦slow down.' The audio was recorded." ¦ ¦ +-----------------------------------------------------------------------------+
+----------------------------------------------------------------------------+ ¦ ¦"Noack represented that the third ¦ ¦ ¦ ¦deal ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦would involve an investment in only ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦investment-grade companies. During a¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦meeting of the school board of ¦ ¦ ¦ ¦Waukesha ¦ ¦ ¦ ¦ ¦Yes as to the statement to Waukesha.¦ ¦ ¦on November 27, 2006, which was ¦ ¦ ¦ ¦ ¦Moreover, all Waukesha school board ¦ ¦ ¦videotaped, Noack stated to the ¦ ¦ ¦ ¦school ¦members present at the meeting can ¦ ¦ ¦ ¦be ¦ ¦ ¦board: '[A]gain, we're only ¦ ¦ ¦ ¦investing in ¦assumed to have heard the ¦ ¦ ¦ ¦statements, ¦ ¦ ¦higher grade companies. If you look ¦ ¦ ¦85¦at the ¦providing even the level of ¦ ¦ ¦ ¦specificity that ¦ ¦ ¦balance sheets of investment grade ¦ ¦ ¦ ¦ ¦defendants argue for. No as to the ¦ ¦ ¦companies in the world today, which ¦first ¦ ¦ ¦is ¦ ¦ ¦ ¦ ¦sentence to the extent it may relate¦ ¦ ¦805, they're doing better than ¦to ¦ ¦ ¦ever.' Noack ¦ ¦ ¦ ¦ ¦other school districts. ¦ ¦ ¦later said at that same meeting: ' ¦ ¦ ¦ ¦[T]he ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦odds of, again, it takes twenty out ¦ ¦ ¦ ¦of these ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦hundred companies to default before ¦ ¦ ¦ ¦it ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦gets to your AA level.'" ¦ ¦ +--+------------------------------------+------------------------------------¦ ¦ ¦"Noack represented that there was a ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦short-term mark-to-market risk, but ¦ ¦ ¦ ¦that it ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦was not a long-term risk because the¦ ¦ ¦ ¦ ¦Yes as to the statement made to ¦ ¦87¦School Districts would still get ¦ ¦ ¦ ¦their money ¦Kenosha. No as to "possible others."¦ ¦ ¦ ¦ ¦ ¦ ¦back after seven years. For example,¦ ¦ ¦ ¦he ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦made that representation to Kenosha,¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦among possible others." ¦ ¦ +--+------------------------------------+------------------------------------¦ ¦ ¦"Noack represented that, of the top ¦ ¦ ¦ ¦800 ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦companies in the world, 100 of them ¦ ¦ ¦ ¦would ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦have to go under before the School ¦Yes as to the statement made to ¦ ¦89¦ ¦ ¦ ¦ ¦Districts would suffer any principal¦Kenosha. No as to "possible others."¦ ¦ ¦loss. ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦For example, he made that ¦ ¦ ¦ ¦representation ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦to Kenosha, among possible others." ¦ ¦ +--+------------------------------------+------------------------------------¦ ¦ ¦"Noack represented that, if the ¦ ¦ ¦ ¦investments ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦failed, they would all be in bread ¦Yes as to the statement made to ¦ ¦ ¦lines ¦ ¦ ¦91¦ ¦Waukesha. No as to "possible ¦ ¦ ¦together. For example, he made that ¦others." ¦ ¦ ¦ ¦ ¦ ¦ ¦representation to Waukesha, among ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦possible others." ¦ ¦ +--+------------------------------------+------------------------------------¦ ¦ ¦"Noack represented that the country ¦ ¦ ¦ ¦would ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦have to fall further into financial ¦ ¦ ¦ ¦trouble ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦than the Great Depression before the¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦investments would be affected. But ¦Yes as to the first statement as ¦ ¦ ¦even ¦made to ¦ ¦ ¦ ¦ ¦ ¦ ¦in that scenario, according to ¦West Allis-West Milwaukee. No as to ¦ ¦ ¦Noack, the ¦the ¦ ¦ ¦ ¦ ¦ ¦ ¦School Districts would get their ¦second statement, as it does not ¦ ¦ ¦principal ¦indicate ¦ ¦ ¦ ¦ ¦ ¦93¦back after seven years and did not ¦that it was made to all four other ¦ ¦ ¦have to ¦school ¦ ¦ ¦ ¦ ¦ ¦ ¦worry about losing principal. For ¦districts-"other School Districts" ¦ ¦ ¦example, ¦is ¦ ¦ ¦ ¦ ¦ ¦ ¦he made that representation to West ¦vague as to whether it is all four ¦ ¦ ¦ ¦or just ¦ ¦ ¦Allis-West Milwaukee. He similarly ¦ ¦ ¦ ¦told ¦some of them. ¦ ¦ ¦ ¦ ¦ ¦ ¦other School Districts that it would¦ ¦ ¦ ¦take a ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Great Depression for the investments¦ ¦ ¦ ¦to ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦fail." ¦ ¦ +----------------------------------------------------------------------------+
+-----------------------------------------------------------------------------+ ¦ ¦"Noack represented that if any of the ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦highly-rated portfolio credits ¦ ¦ ¦ ¦struggled, the ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦portfolio manager would simply replace ¦Yes as to the statement made to ¦ ¦ ¦ ¦ ¦ ¦ ¦that credit with another stronger ¦Whitefish Bay and Kimberly. No as¦ ¦95 ¦credit to ¦to ¦ ¦ ¦ ¦ ¦ ¦ ¦maintain the AA rating. For example, he¦"possible others." ¦ ¦ ¦ ¦ ¦ ¦ ¦made that representation to Whitefish ¦ ¦ ¦ ¦Bay ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦and to Kimberly, among possible ¦ ¦ ¦ ¦others." ¦ ¦ +---+---------------------------------------+---------------------------------¦ ¦ ¦"Noack misrepresented the initial ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦performance of the first investment. On¦ ¦ ¦ ¦or ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦about August 14, 2006, Noack attended a¦Yes as to statement made to West ¦ ¦ ¦ ¦Allis- ¦ ¦ ¦West Allis-West Milwaukee school board ¦ ¦ ¦ ¦ ¦West Milwaukee. No as to the ¦ ¦97 ¦meeting to propose an additional ¦first ¦ ¦ ¦ ¦ ¦ ¦ ¦investment in the GOAL Program. A ¦sentence to the extent it may ¦ ¦ ¦ ¦have been ¦ ¦ ¦school board member asked Noack how ¦ ¦ ¦ ¦ ¦made to anyone else. ¦ ¦ ¦the first investment was performing. ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Noack responded that the investment was¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦'on course.'" ¦ ¦ +---+---------------------------------------+---------------------------------¦ ¦ ¦"On November 15, 2006, Stifel and Noack¦ ¦ ¦ ¦ ¦Yes. Moreover, all Whitefish Bay ¦ ¦ ¦told Whitefish Bay's school board that ¦school ¦ ¦ ¦ ¦ ¦ ¦ ¦they had completed two deals already ¦board members can be assumed to ¦ ¦ ¦with ¦have ¦ ¦ ¦ ¦ ¦ ¦99 ¦West Allis-West Milwaukee. He stated: ¦heard or seen the statement, ¦ ¦ ¦ ¦providing ¦ ¦ ¦'So, we are phasing it in and if there ¦ ¦ ¦ ¦is a ¦even the level of specificity ¦ ¦ ¦ ¦that ¦ ¦ ¦hiccup in one of the investments, we ¦ ¦ ¦ ¦would ¦defendants argue for. ¦ ¦ ¦ ¦ ¦ ¦ ¦slow down, Okay?'" ¦ ¦ +---+---------------------------------------+---------------------------------¦ ¦ ¦"In an affidavit executed in 2008, ¦ ¦ ¦ ¦Noack ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦admitted under oath that he had made ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦statements and representations to the ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦School Districts to persuade them to ¦ ¦ ¦ ¦enter ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦into the CDO transactions. He stated ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦under oath that he had no reason to ¦Yes. Use of the defined term ¦ ¦ ¦ ¦"School ¦ ¦ ¦dispute that he had made statements to ¦ ¦ ¦ ¦ ¦Districts" indicates that the ¦ ¦ ¦the School Districts such as "[i]t ¦statements ¦ ¦103¦takes 20 ¦ ¦ ¦ ¦ ¦were allegedly made to all five ¦ ¦ ¦out of these 100 companies to default ¦school ¦ ¦ ¦ ¦ ¦ ¦ ¦before it gets to your AA level," and "¦districts. ¦ ¦ ¦[t]here ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦would need to be '15 Enrons' before you¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦would be impacted," and others like ¦ ¦ ¦ ¦them. ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Noack further admitted that certain of ¦ ¦ ¦ ¦his ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦statements to the School Districts were¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦inaccurate." ¦ ¦ +-----------------------------------------------------------------------------+
SUBSTANTIVE CHALLENGES
The SEC does not disagree that its claims require that an alleged misrepresentation or omission be material. See SEC v. Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 1999) (stating that violations of § 10(b), § 17(a)(1)-(3), and Rule 10b-5 require a material misrepresentation or material omission as to which the individual had a duty to speak). A misrepresentation is material if there is a substantial likelihood that the statement or omitted fact "would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." Basic Inc. v. Levinson, 485 U.S. 224, 231 -32 (1988) (internal quotation marks omitted). Materiality "depends on the significance the reasonable investor would place on the withheld or misrepresented information" and is a fact-specific inquiry. Id. at 240.
Defendants contend that various alleged misrepresentations, even if pled properly, were immaterial as a matter of law because they were (1) puffery; (2) opinion, including predictions of future performance and generic statements about risk; or (3) as to West Allis-West Milwaukee contradicted by written offering documents. Thus, no reasonable investor would have considered the information significant.
In addition, defendants contend that certain allegations of omission must be dismissed because defendants had no duty to disclose the allegedly omitted information. A. Puffery
"Mere sales puffery is not actionable under Rule 10b-5," Eisenstadt v. Centel Corp., 113 F.3d 738, 745-46 (7th Cir. 1997), because it is not material. Typically, puffery involves optimistic rhetoric and promotional sales talk that is devoid of substantive information and contains no useful information upon which a reasonable investor would base a decision to invest. See Searls v. Glasser, 64 F.3d 1061, 1066 (7th Cir. 1995); In re Midway Games, Inc. Sec. Litig., 332 F. Supp. 2d 1152, 1164 (N.D. Ill. 2004). It includes "general, optimistic statements that are not capable of being objectively verified." In re Midway Games, Inc. Sec. Litig., 332 F. Supp. 2d at 1164. "[L]oosely optimistic statements that are so vague, so lacking in specificity, or so clearly constituting the opinions of the speaker, that no reasonable investor could find them important to the total mix of information available," may be found immaterial as a matter of law and a basis for granting a motion to dismiss. Id. (internal quotation marks omitted).
Defendants maintain that the statements in paragraphs 73, 75, 77, 79, 81, 83, 85, 89, 91, 93, 95, 97, 99, and 103 of the Complaint are immaterial and nonactionable puffery. They argue that phrases like "'treasury-like, 'higher-grade,' 'bread lines,' 'financial trouble,' 'on course,' and 'hiccup' all exemplify a lack of precision such that a reasonable investor could not find the information to be material. There is no way to define these phrases, and no way to quantify them." (Doc. 17 at 10.) Defendants further assert that such phrases were merely optimistic rhetoric. (Id. at 12.)
However, defendants pull those words out of the sentences that give them context and help determine their substantive meaning. Moreover, for the reasons set forth below the court finds that, with one exception, the challenged allegations are more than puffery. As for the one exception, the court agrees that the alleged statement regarding bread lines is hyperbole and too vague for a reasonable investor to rely upon it. Therefore, the motion to dismiss will be granted as to that one allegation (paragraph 91) and it is dismissed as a matter of law.
+-----------------------------------------------------------------------------+ ¦Compl. ¦Allegation ¦Puffery? ¦ ¦¶ ¦ ¦ ¦ +-------+----------------------------------+----------------------------------¦ ¦ ¦ ¦No. Treasury bonds are generally ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦believed by the public to be very ¦ ¦ ¦ ¦low-risk ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦investments. See, e.g., Treasury¦ ¦ ¦ ¦Bills, ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Notes and Bonds Have Risk, Too, ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦www.usatoday.com/money/perfi/ ¦ ¦ ¦ ¦columnis ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦t/krantz/ ¦ ¦ ¦ ¦2007-08-24-treasury-risk_N.htm ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦(viewed Aug. 28, 2012) ("When you ¦ ¦ ¦"Noack represented that the CDO ¦lend ¦ ¦ ¦ ¦ ¦ ¦ ¦investments were "Treasury-like," ¦money to the government by buying ¦ ¦ ¦and he ¦a ¦ ¦ ¦ ¦ ¦ ¦ ¦claimed that they were virtually ¦Treasury bill, note or bond, ¦ ¦ ¦risk-free. ¦you're getting ¦ ¦ ¦ ¦ ¦ ¦ ¦For example, before the first ¦an investment backed by the full ¦ ¦ ¦deal, Noack ¦faith and ¦ ¦ ¦ ¦ ¦ ¦ ¦told West Allis-West Milwaukee to ¦credit of the U.S. government. In ¦ ¦ ¦think of ¦other ¦ ¦ ¦ ¦ ¦ ¦ ¦these investments like Treasury ¦words, you'll get your interest ¦ ¦ ¦bonds due ¦and ¦ ¦ ¦ ¦ ¦ ¦ ¦to the quality of the companies in¦principal back unless the U.S. ¦ ¦ ¦the ¦ ¦ ¦73 ¦ ¦government fails."); What You ¦ ¦ ¦portfolio. He represented that ¦Should ¦ ¦ ¦only ¦ ¦ ¦ ¦ ¦Know/Risks of Investing in Bonds, ¦ ¦ ¦Treasury securities would be a ¦ ¦ ¦ ¦safer ¦www.investinginbonds.com/ ¦ ¦ ¦ ¦learnmore.as ¦ ¦ ¦investment. Similarly, Noack ¦ ¦ ¦ ¦represented ¦p?catid=38id=383 (viewed Aug. 28, ¦ ¦ ¦ ¦ ¦ ¦ ¦to Waukesha that the CDO ¦2012) ("It's All Relative to ¦ ¦ ¦investments ¦'Riskless' ¦ ¦ ¦ ¦ ¦ ¦ ¦were similar to Treasury ¦Treasury Yields: Bonds issued by ¦ ¦ ¦securities ¦the ¦ ¦ ¦ ¦ ¦ ¦ ¦because the portfolio was ¦U.S. Treasury are backed by the ¦ ¦ ¦comprised of ¦full faith ¦ ¦ ¦ ¦ ¦ ¦ ¦AAA and AA corporate debt." ¦and credit of the U.S. government ¦ ¦ ¦ ¦and ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦therefore considered to have no ¦ ¦ ¦ ¦credit ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦risk."). Comparison to Treasury ¦ ¦ ¦ ¦bonds ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦conveys substantive, useful ¦ ¦ ¦ ¦information ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦that a reasonable investor would ¦ ¦ ¦ ¦consider ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦in the total mix when deciding ¦ ¦ ¦ ¦whether to ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦invest. ¦ +-------+----------------------------------+----------------------------------¦ ¦ ¦ ¦No. Noack was providing a ¦ ¦ ¦ ¦meaningful ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦computation to describe the safety¦ ¦ ¦ ¦of the ¦ ¦ ¦ ¦ ¦ ¦ ¦"Noack represented that 30 of the ¦investor's principal. The ¦ ¦ ¦105 ¦statement can ¦ ¦ ¦ ¦ ¦ ¦ ¦companies in the portfolio would ¦be considered one of substantive, ¦ ¦ ¦have to ¦useful ¦ ¦ ¦ ¦ ¦ ¦ ¦default before the School ¦information that a reasonable ¦ ¦75 ¦Districts would ¦investor ¦ ¦ ¦ ¦ ¦ ¦ ¦begin to lose their principal. For¦would consider. The preciseness of¦ ¦ ¦example, ¦the ¦ ¦ ¦ ¦ ¦ ¦ ¦Noack made that representation to ¦statement adds to its usefulness ¦ ¦ ¦ ¦to the ¦ ¦ ¦Waukesha, among possible others." ¦ ¦ ¦ ¦ ¦investor, suggesting that Noack ¦ ¦ ¦ ¦looked at ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦the 105 companies in the portfolio¦ ¦ ¦ ¦to ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦make this assessment. ¦ +-----------------------------------------------------------------------------+
+-----------------------------------------------------------------------------+ ¦ ¦ ¦No. Taken in context of the entire ¦ ¦ ¦ ¦ ¦ ¦ ¦"Noack represented that it would take ¦paragraph, "15 Enrons" relates to ¦ ¦ ¦'15 ¦"15 ¦ ¦ ¦ ¦ ¦ ¦ ¦Enrons' for the School Districts to ¦defaults" before Whitefish Bay ¦ ¦ ¦lose ¦would lose ¦ ¦ ¦ ¦ ¦ ¦ ¦money. For example, at a meeting of ¦money on the investment. Moreover, ¦ ¦ ¦the ¦ ¦ ¦ ¦ ¦taken in context with the rest of ¦ ¦ ¦school board of Whitefish Bay on ¦the ¦ ¦ ¦ ¦ ¦ ¦ ¦November 15, 2006, Noack stated: "And ¦paragraph, references to Enron ¦ ¦ ¦it ¦could ¦ ¦ ¦ ¦ ¦ ¦ ¦gives added comfort that, you know, it¦relate to how Enron was managed, ¦ ¦ ¦ ¦and ¦ ¦ ¦takes 15 defaults for us to start ¦ ¦ ¦ ¦losing ¦Noack's statement that "we have ¦ ¦77¦ ¦ ¦ ¦ ¦money and we have somebody watching ¦somebody watching over every ¦ ¦ ¦ ¦company" ¦ ¦ ¦over every company, every day, for ¦ ¦ ¦ ¦seven ¦suggested that managers of the ¦ ¦ ¦ ¦ ¦ ¦ ¦years, and if it starts to look like ¦investments at issue would take ¦ ¦ ¦it's going ¦ ¦ ¦ ¦ ¦measures to prevent defaults from ¦ ¦ ¦that way, they get out of it. The only¦such ¦ ¦ ¦way - ¦ ¦ ¦ ¦ ¦companies from affecting the ¦ ¦ ¦the real - you need 15 Enrons. You ¦investment. ¦ ¦ ¦need ¦ ¦ ¦ ¦ ¦A reasonable investor could see ¦ ¦ ¦something to happen that big ¦this as ¦ ¦ ¦overnight.' ¦ ¦ ¦ ¦ ¦substantive, useful information in ¦ ¦ ¦The audio was recorded." ¦the total ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦mix for decision making. ¦ +--+--------------------------------------+-----------------------------------¦ ¦ ¦ ¦No. Again, Noack was providing a ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦meaningful computation to describe ¦ ¦ ¦ ¦the ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦safety of the investor's principal.¦ ¦ ¦ ¦The ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦statement can be considered one of ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦substantive, useful information ¦ ¦ ¦"Noack represented that it would take ¦that a ¦ ¦ ¦8.5 ¦ ¦ ¦ ¦ ¦reasonable investor would consider.¦ ¦ ¦times historically normal default ¦ ¦ ¦ ¦levels ¦Again, the preciseness of the ¦ ¦ ¦ ¦statement ¦ ¦ ¦for the School Districts to lose ¦ ¦ ¦ ¦money, ¦adds to its usefulness to the ¦ ¦79¦ ¦investor, ¦ ¦ ¦which only happened during the Great ¦ ¦ ¦ ¦ ¦suggesting that Noack had actual ¦ ¦ ¦Depression. For example, Noack made ¦data ¦ ¦ ¦ ¦ ¦ ¦ ¦that representation to the School ¦from which he made the remark. ¦ ¦ ¦Districts ¦Noack ¦ ¦ ¦ ¦ ¦ ¦ ¦before the second deal." ¦did not refer to "10 times" or "100¦ ¦ ¦ ¦times" ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦or some rounded number that ¦ ¦ ¦ ¦suggests ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦vagueness or opinion, but instead ¦ ¦ ¦ ¦used ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦"8.5 times," suggesting that his ¦ ¦ ¦ ¦comment ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦was not puffery. ¦ +--+--------------------------------------+-----------------------------------¦ ¦ ¦ ¦No. A reasonable investor could ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦consider this comment to have been ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦backed up by actual data-Noack had ¦ ¦ ¦ ¦an ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦actual year and named the ¦ ¦ ¦"Noack represented that there had not ¦defaulting ¦ ¦ ¦ ¦ ¦ ¦ ¦been a default since Enron in 2000. ¦company. A reasonable person would ¦ ¦ ¦For ¦ ¦ ¦81¦ ¦find the length of time from the ¦ ¦ ¦example, he made that representation ¦last prior ¦ ¦ ¦to ¦ ¦ ¦ ¦ ¦default to the time of investment ¦ ¦ ¦Kimberly, among possible others." ¦to be ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦substantive, useful information to ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦consider in the total mix of ¦ ¦ ¦ ¦information ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦relied upon in making an ¦ ¦ ¦ ¦investment. ¦ +-----------------------------------------------------------------------------+
+-----------------------------------------------------------------------------+ ¦ ¦ ¦No. Regardless of whether "hiccup" ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦alone could be vague, it was not ¦ ¦ ¦ ¦vague in ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦context of this sentence. Taken in a ¦ ¦ ¦ ¦light ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦favorable to plaintiff, Noack was ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦representing that another school ¦ ¦ ¦"Noack represented to Whitefish Bay ¦district ¦ ¦ ¦ ¦ ¦ ¦ ¦during a meeting on November 15, ¦had completed two deals and that if ¦ ¦ ¦2006 ¦ ¦ ¦ ¦ ¦circumstances following either had ¦ ¦ ¦that West Allis-West Milwaukee had ¦ ¦ ¦83¦ ¦caused any meaningful question about ¦ ¦ ¦already done two deals, and 'if ¦ ¦ ¦ ¦there is a ¦the investments he would suggest more¦ ¦ ¦ ¦ ¦ ¦ ¦hiccup in one of the investments, we¦time or consideration before ¦ ¦ ¦would ¦additional ¦ ¦ ¦ ¦ ¦ ¦ ¦slow down.' The audio was recorded."¦investments. A reasonable person ¦ ¦ ¦ ¦would ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦find this to be substantive, useful ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦information in determining whether to¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦invest in a similar investment to ¦ ¦ ¦ ¦those ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦made previously by the other ¦ ¦ ¦ ¦districts. ¦ +--+------------------------------------+-------------------------------------¦ ¦ ¦"Noack represented that the third ¦ ¦ ¦ ¦deal ¦No. The statement regarding twenty ¦ ¦ ¦ ¦ ¦ ¦ ¦would involve an investment in only ¦defaults is similar to the thirty or ¦ ¦ ¦ ¦fifteen ¦ ¦ ¦investment-grade companies. During a¦ ¦ ¦ ¦ ¦defaults discussed above and is ¦ ¦ ¦meeting of the school board of ¦ ¦ ¦ ¦Waukesha ¦actionable. While "higher grade ¦ ¦ ¦ ¦ ¦ ¦ ¦on November 27, 2006, which was ¦companies" could be considered vague ¦ ¦ ¦ ¦ ¦ ¦ ¦videotaped, Noack stated to the ¦in isolation, it is not vague in ¦ ¦ ¦school ¦context, as ¦ ¦ ¦ ¦ ¦ ¦ ¦board: '[A]gain, we're only ¦Noack's fuller statement related or ¦ ¦ ¦investing in ¦ ¦ ¦ ¦ ¦compared the "higher grade companies"¦ ¦ ¦higher grade companies. If you look ¦ ¦ ¦85¦at the ¦to 805 "investment grade companies," ¦ ¦ ¦ ¦ ¦ ¦ ¦balance sheets of investment grade ¦which he suggested were performing ¦ ¦ ¦ ¦ ¦ ¦ ¦companies in the world today, which ¦well. Taken in plaintiff's favor, the¦ ¦ ¦is ¦"higher ¦ ¦ ¦ ¦ ¦ ¦ ¦805, they're doing better than ¦grade companies" are or are similar ¦ ¦ ¦ever.' Noack ¦to ¦ ¦ ¦ ¦ ¦ ¦ ¦later said at that same meeting: ' ¦805 identifiable investment-grade ¦ ¦ ¦[T]he ¦ ¦ ¦ ¦ ¦companies. A reasonable investor ¦ ¦ ¦odds of, again, it takes twenty out ¦would ¦ ¦ ¦of these ¦ ¦ ¦ ¦ ¦find this useful information in ¦ ¦ ¦hundred companies to default before ¦determining ¦ ¦ ¦it ¦ ¦ ¦ ¦ ¦whether to invest. ¦ ¦ ¦gets to your AA level.'" ¦ ¦ +--+------------------------------------+-------------------------------------¦ ¦ ¦"Noack represented that, of the top ¦No. Again, Noack was providing a ¦ ¦ ¦800 ¦ ¦ ¦ ¦ ¦meaningful computation to describe ¦ ¦ ¦companies in the world, 100 of them ¦the ¦ ¦ ¦would ¦ ¦ ¦ ¦ ¦safety of the investor's principal. ¦ ¦ ¦have to go under before the School ¦The ¦ ¦89¦ ¦ ¦ ¦ ¦Districts would suffer any principal¦statement can be considered one of ¦ ¦ ¦loss. ¦ ¦ ¦ ¦ ¦substantive, useful information that ¦ ¦ ¦For example, he made that ¦a ¦ ¦ ¦representation ¦ ¦ ¦ ¦ ¦reasonable investor would consider. ¦ ¦ ¦to Kenosha, among possible others." ¦ ¦ +--+------------------------------------+-------------------------------------¦ ¦ ¦ ¦Yes. The statement is one of ¦ ¦ ¦"Noack represented that, if the ¦hyperbole ¦ ¦ ¦investments ¦ ¦ ¦ ¦ ¦and sales talk, devoid of real ¦ ¦ ¦failed, they would all be in bread ¦substance ¦ ¦ ¦lines ¦ ¦ ¦91¦ ¦and one on which a reasonable ¦ ¦ ¦together. For example, he made that ¦investor ¦ ¦ ¦ ¦ ¦ ¦ ¦representation to Waukesha, among ¦would not rely for investment ¦ ¦ ¦ ¦decision ¦ ¦ ¦possible others." ¦ ¦ ¦ ¦ ¦making. ¦ +-----------------------------------------------------------------------------+
+------------------------------------------------------------------------------+ ¦ ¦ ¦No. The statement that the school ¦ ¦ ¦ ¦ ¦ ¦ ¦"Noack represented that the country ¦districts would not lose their ¦ ¦ ¦would ¦principal and ¦ ¦ ¦ ¦ ¦ ¦ ¦have to fall further into financial ¦would get it back in seven years was ¦ ¦ ¦trouble ¦ ¦ ¦ ¦ ¦precise, useful information on which ¦ ¦ ¦than the Great Depression before the ¦a ¦ ¦ ¦ ¦ ¦ ¦ ¦investments would be affected. But ¦reasonable investor would rely. It ¦ ¦ ¦even ¦ ¦ ¦ ¦ ¦reflected the safety of the ¦ ¦ ¦in that scenario, according to Noack,¦investments as ¦ ¦ ¦the ¦ ¦ ¦ ¦ ¦well as the time frame for recovery ¦ ¦ ¦School Districts would get their ¦of ¦ ¦ ¦principal ¦ ¦ ¦ ¦ ¦principal. The comment about a ¦ ¦93¦back after seven years and did not ¦financial ¦ ¦ ¦have to ¦ ¦ ¦ ¦ ¦situation as bad as or worse than the¦ ¦ ¦worry about losing principal. For ¦ ¦ ¦ ¦example, ¦Great Depression is also substantive ¦ ¦ ¦ ¦ ¦ ¦ ¦he made that representation to West ¦enough to be actionable. The economic¦ ¦ ¦ ¦ ¦ ¦ ¦Allis-West Milwaukee. He similarly ¦conditions of the Great Depression ¦ ¦ ¦told ¦have ¦ ¦ ¦ ¦ ¦ ¦ ¦other School Districts that it would ¦been documented such that a ¦ ¦ ¦take a ¦reasonable ¦ ¦ ¦ ¦ ¦ ¦ ¦Great Depression for the investments ¦investor could use a comparison with ¦ ¦ ¦to ¦that ¦ ¦ ¦ ¦ ¦ ¦ ¦fail." ¦era in assessing risk to the proposed¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦investment. ¦ +--+-------------------------------------+-------------------------------------¦ ¦ ¦ ¦No. This was a precise, not vague, ¦ ¦ ¦ ¦ ¦ ¦ ¦"Noack represented that if any of the¦statement about the ability of the ¦ ¦ ¦ ¦portfolio ¦ ¦ ¦highly-rated portfolio credits ¦ ¦ ¦ ¦struggled, the ¦manager to replace the contents of ¦ ¦ ¦ ¦the ¦ ¦ ¦portfolio manager would simply ¦ ¦ ¦ ¦replace ¦portfolio. In addition, it indicated ¦ ¦ ¦ ¦that the ¦ ¦ ¦that credit with another stronger ¦ ¦ ¦95¦credit to ¦portfolio manager was monitoring the ¦ ¦ ¦ ¦ ¦ ¦ ¦maintain the AA rating. For example, ¦performance of the credit in the ¦ ¦ ¦he ¦portfolio. ¦ ¦ ¦ ¦ ¦ ¦ ¦made that representation to Whitefish¦This was substantive, useful ¦ ¦ ¦Bay ¦information ¦ ¦ ¦ ¦ ¦ ¦ ¦and to Kimberly, among possible ¦for a reasonable investor to consider¦ ¦ ¦others." ¦in ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦the total mix. ¦ +--+-------------------------------------+-------------------------------------¦ ¦ ¦ ¦No. While "on course" in isolation ¦ ¦ ¦ ¦could ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦be vague, it must be considered in ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦context as a response to the question¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦about how the prior investment was ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦performing for purposes of ¦ ¦ ¦"Noack misrepresented the initial ¦considering a ¦ ¦ ¦ ¦ ¦ ¦ ¦performance of the first investment. ¦second investment. "On course" could ¦ ¦ ¦On or ¦ ¦ ¦ ¦ ¦reasonably be interpreted to mean "as¦ ¦ ¦about August 14, 2006, Noack attended¦ ¦ ¦ ¦a ¦anticipated" or "as expected." Taken ¦ ¦ ¦ ¦in ¦ ¦ ¦West Allis-West Milwaukee school ¦ ¦ ¦ ¦board ¦context, a different response might ¦ ¦ ¦ ¦have ¦ ¦97¦meeting to propose an additional ¦ ¦ ¦ ¦ ¦suggested more time or consideration ¦ ¦ ¦investment in the GOAL Program. A ¦ ¦ ¦ ¦ ¦before additional investments, ¦ ¦ ¦school board member asked Noack how ¦whereas ¦ ¦ ¦ ¦ ¦ ¦ ¦the first investment was performing. ¦"on course" suggested that the ¦ ¦ ¦ ¦ ¦ ¦ ¦Noack responded that the investment ¦performance of the first investment ¦ ¦ ¦was ¦ ¦ ¦ ¦ ¦caused no concern regarding a second ¦ ¦ ¦'on course.'" ¦ ¦ ¦ ¦ ¦investment. A reasonable person would¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦find this to be substantive, useful ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦information in determining whether to¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦invest in an investment similar to ¦ ¦ ¦ ¦that ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦made previously. ¦ +--+-------------------------------------+-------------------------------------¦ ¦ ¦"On November 15, 2006, Stifel and ¦ ¦ ¦ ¦Noack ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦told Whitefish Bay's school board ¦ ¦ ¦ ¦that ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦they had completed two deals already ¦ ¦ ¦ ¦with ¦No. See the discussion regarding ¦ ¦99¦ ¦ ¦ ¦ ¦West Allis-West Milwaukee. He stated:¦paragraphs 83 and 97. ¦ ¦ ¦ ¦ ¦ ¦ ¦'So, we are phasing it in and if ¦ ¦ ¦ ¦there is a ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦hiccup in one of the investments, we ¦ ¦ ¦ ¦would ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦slow down, Okay?'" ¦ ¦ +------------------------------------------------------------------------------+
+-----------------------------------------------------------------------------+ ¦ ¦"In an affidavit executed in 2008, Noack ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦admitted under oath that he had made ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦statements and representations to the ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦School Districts to persuade them to enter¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦into the CDO transactions. He stated ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦under oath that he had no reason to ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦dispute that he had made statements to ¦ ¦ ¦ ¦ ¦No. See the discussion ¦ ¦ ¦the School Districts such as "[i]t takes ¦regarding ¦ ¦103¦20 ¦ ¦ ¦ ¦ ¦paragraphs 75 and 77. ¦ ¦ ¦out of these 100 companies to default ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦before it gets to your AA level," and "[t]¦ ¦ ¦ ¦here ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦would need to be '15 Enrons' before you ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦would be impacted," and others like them. ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Noack further admitted that certain of his¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦statements to the School Districts were ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦inaccurate." ¦ ¦ +-----------------------------------------------------------------------------+ B. Forward-Looking Opinion
Defendants contend that some of the alleged misrepresentations are mere opinions or forecasts that are not actionable in the face of written disclosures that "bespeak caution." (Doc. 17 at 17.) According to defendants, written disclosures given to the school districts included cautionary statements, and as a matter of law the school districts could not rely upon projections about the future that could not be verified.
The court disagrees. First, the written disclosures, except for those involving West Allis, are not in the record. Thus, accepting defendants' argument would require outside evidence, which is not proper on a motion to dismiss or in the record before the court. Second, the court disagrees that the following statements are mere opinion or unverifiable forecasts.
+-----------------------------------------------------------------------------+ ¦Compl.¦Allegation ¦Forward Looking Opinion? ¦ ¦¶ ¦ ¦ ¦ +------+-----------------------------------+----------------------------------¦ ¦ ¦ ¦No. This statement involves ¦ ¦ ¦ ¦historical ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦default levels, not a projection ¦ ¦ ¦ ¦of what ¦ ¦ ¦"Noack represented that it would ¦ ¦ ¦ ¦take 8.5 ¦future default levels would be. ¦ ¦ ¦ ¦The ¦ ¦ ¦times historically normal default ¦ ¦ ¦ ¦levels ¦comment that it would require 8.5 ¦ ¦ ¦ ¦times ¦ ¦ ¦for the School Districts to lose ¦ ¦ ¦ ¦money, ¦the historical default levels for ¦ ¦79 ¦ ¦a loss of ¦ ¦ ¦which only happened during the ¦ ¦ ¦ ¦Great ¦money involves a measurement of ¦ ¦ ¦ ¦the ¦ ¦ ¦Depression. For example, Noack made¦ ¦ ¦ ¦ ¦investment against past standards.¦ ¦ ¦that representation to the School ¦It ¦ ¦ ¦Districts ¦ ¦ ¦ ¦ ¦was not a projection of whether ¦ ¦ ¦before the second deal." ¦future ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦default levels would be higher or ¦ ¦ ¦ ¦lower ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦than historical levels. ¦ +------+-----------------------------------+----------------------------------¦ ¦ ¦ ¦No. Taken in the light most ¦ ¦ ¦ ¦favorable to ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦plaintiff, Noack was not ¦ ¦ ¦ ¦predicting ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦whether a "hiccup" would or could ¦ ¦ ¦ ¦occur. ¦ ¦ ¦"Noack represented to Whitefish Bay¦ ¦ ¦ ¦ ¦Instead, he was assuring Whitefish¦ ¦ ¦during a meeting on November 15, ¦Bay ¦ ¦ ¦2006 ¦ ¦ ¦ ¦ ¦that he and Stifel would not push ¦ ¦ ¦that West Allis-West Milwaukee had ¦another ¦ ¦ ¦ ¦ ¦ ¦83 ¦already done two deals, and 'if ¦investment if something was awry ¦ ¦ ¦there is a ¦in the ¦ ¦ ¦ ¦ ¦ ¦ ¦hiccup in one of the investments, ¦previous one of West Allis-West ¦ ¦ ¦we would ¦ ¦ ¦ ¦ ¦Milwaukee. Noack's assurances ¦ ¦ ¦slow down.' The audio was ¦about ¦ ¦ ¦recorded." ¦ ¦ ¦ ¦ ¦his own and Stifel's conduct is ¦ ¦ ¦ ¦different ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦from an unverifiable prediction ¦ ¦ ¦ ¦about ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦whether a hiccup would or could ¦ ¦ ¦ ¦occur. ¦ +------+-----------------------------------+----------------------------------¦ ¦ ¦ ¦No. In addition to any prediction ¦ ¦ ¦ ¦as to ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦what the portfolio manager ¦ ¦ ¦ ¦would do, this ¦ ¦ ¦"Noack represented that if any of ¦ ¦ ¦ ¦the ¦was a representation of what the ¦ ¦ ¦ ¦portfolio ¦ ¦ ¦highly-rated portfolio credits ¦ ¦ ¦ ¦struggled, the ¦manager could do. Taking the ¦ ¦ ¦ ¦facts in ¦ ¦ ¦portfolio manager would simply ¦ ¦ ¦ ¦replace ¦plaintiff's favor, the abilities ¦ ¦ ¦ ¦of the ¦ ¦ ¦that credit with another stronger ¦ ¦ ¦95 ¦credit to ¦portfolio manager (i.e., whether ¦ ¦ ¦ ¦he or she ¦ ¦ ¦maintain the AA rating. For ¦ ¦ ¦ ¦example, he ¦had the authority to replace ¦ ¦ ¦ ¦credit in the ¦ ¦ ¦made that representation to ¦ ¦ ¦ ¦Whitefish Bay ¦portfolio) should be verifiable. ¦ ¦ ¦ ¦Moreover, ¦ ¦ ¦and to Kimberly, among possible ¦ ¦ ¦ ¦others." ¦the statement suggests that ¦ ¦ ¦ ¦replacement ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦would have no negative effect, ¦ ¦ ¦ ¦which ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦should be verifiable. ¦ +------+-----------------------------------+----------------------------------¦ ¦ ¦"On November 15, 2006, Stifel and ¦ ¦ ¦ ¦Noack ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦told Whitefish Bay's school board ¦ ¦ ¦ ¦that ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦they had completed two deals ¦ ¦ ¦ ¦already with ¦ ¦ ¦ ¦ ¦No. See discussion of paragraph ¦ ¦99 ¦West Allis-West Milwaukee. He ¦83. ¦ ¦ ¦stated: ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦'So, we are phasing it in and if ¦ ¦ ¦ ¦there is a ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦hiccup in one of the investments, ¦ ¦ ¦ ¦we would ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦slow down, Okay?'" ¦ ¦ +-----------------------------------------------------------------------------+ C. West Allis-West Milwaukee Offering Documents
When an allegedly inaccurate, oral statement is contradicted by an accurate, written statement, the written statement controls, rendering the oral statement immaterial and not actionable. See Carr v. CIGNA Sec. Inc., 95 F.3d 544, 547 (7th Cir. 1996); Assocs. in Adolescent Psychiatry v. Home Life Ins. Co., 941 F.2d 561, 571 (7th Cir. 1991) ("Documents that unambiguously cover a point control over remembered (or misremembered, or invented) oral statements."). An investor who knew the truth should not be permitted to say that an inconsistent oral statement significantly altered the total mix of information considered in investing. Acme Propane, Inc. v. Tenexco, Inc., 844 F.2d 1317, 1322 (7th Cir. 1988). Moreover, "securities laws are designed to encourage the complete and careful written presentation of material information. A seller who fully discloses all material information in writing should be secure in the knowledge that it has done what the law requires." Id.
However, the issuer must disclose the truth clearly before a lie becomes immaterial. Pommer v. Medtest Corp., 961 F.2d 620, 624-25 (7th Cir. 1992) The contradiction must be on point: a conflict between "X" and "not-X," such as the difference between a written document saying "this is a risky investment" and an oral statement by the person handing out the document that "this is a safe investment." See Carr, 95 F.3d at 547. Documents trump oral statements only when they unambiguously cover the same point. See Assocs. in Adolescent Psychiatry, S.C., 941 F.2d at 571. And obscurity of the written statement in a lengthy document may be considered. See Acme Propane, Inc., 844 F.2d at 1323 ("A three-page Reserve Estimate is not so long that such a statement is too obscure to find.").
Defendants contend that the written offering documents relating to the first West Allis-West Milwaukee transaction contained express written disclosures such that any contrary oral misrepresentation cannot be actionable. Notably, defendants include with their motion the ninety-three page Tribune Limited $10,000,000,000 Secured Note Programme, and the 143-page Tribune Limited Supplemental Programme Memorandum, which they say were given to West Allis-West Milwaukee. (See Doc. 17 Ex. A.) Moreover, defendants contend that the alleged misrepresentations in paragraphs 73, 75, 77, 79, 87, 89, 91, 93, and 103 are not material because:
• The initial prospectus stated that the investment "involves substantial risks" and warned that "[e]ach prospective investor should ensure that it fully understands the nature of the transaction into which it is entering and the nature and extent of its exposure to the risk of loss of all or a substantial part of its investment." (Doc. 17 Ex. A at 6.)
• The initial prospectus provided that "[n]o person has been authorised to give any information or to make any representation other than those contained in this Programme Memorandum and/or in the relevant Supplemental Programme Memorandum." (Id. at 3 (emphasis deleted).)
• The supplemental prospectus said that "[p]urchasers of Notes should conduct such independent investigation and analysis regarding the issuer, the Notes, the Swap Counterparty, the Investment Advisor . . . as they deem appropriate to evaluate the merits and risks of an investment in the Notes" (id. at 95), warned of "clear and substantial risks inherent in investing in or holding the Notes" (id. at 95), stated that the investor would be "exposed to the credit risk" of certain corporations and obligations (id. at 95-96), and noted that every substitution to the portfolio "may result in an increased risk" of defaults (id. at 96).
Documents submitted with a motion to dismiss may be considered part of the pleadings if they are "referred to in the plaintiff's complaint and are central to his claim." 188 LLC v. Trinity Indus., Inc., 300 F.3d 730, 735 (7th Cir. 2002) (internal quotation marks omitted); see also Tierney v. Vahle, 304 F.3d 734, 738 (7th Cir. 2002). When a plaintiff has referred to a document submitted by a defendant with its motion to dismiss, a court may consider the document rather than having to convert the motion to one under Fed. R. Civ. P. 56; the exception prevents parties from surviving a motion to dismiss by artful pleading or by simply failing to attach relevant documents. 188 LLC, 300 F.3d at 735
The SEC does not object to consideration of documents on file regarding the motion to dismiss. Instead, it defends its case based on the merits.
The court agrees with the SEC's position as follows.
+-----------------------------------------------------------------------------+ ¦Compl. ¦Allegation ¦Contrary to Written Disclosure? ¦ ¦¶ ¦ ¦ ¦ +-------+-----------------------------------+---------------------------------¦ ¦ ¦"Noack represented that the CDO ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦investments were "Treasury-like," ¦ ¦ ¦ ¦and he ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦claimed that they were virtually ¦ ¦ ¦ ¦risk-free. ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦For example, before the first deal,¦ ¦ ¦ ¦Noack ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦told West Allis-West Milwaukee to ¦ ¦ ¦ ¦think of ¦ ¦ ¦ ¦ ¦No. Although the written ¦ ¦ ¦these investments like Treasury ¦disclosures ¦ ¦ ¦bonds due ¦ ¦ ¦ ¦ ¦warned of risks generally, they ¦ ¦ ¦to the quality of the companies in ¦did not ¦ ¦73 ¦the ¦ ¦ ¦ ¦ ¦compare the investment to the ¦ ¦ ¦portfolio. He represented that only¦level of ¦ ¦ ¦ ¦ ¦ ¦ ¦Treasury securities would be a ¦risk of Treasuries. ¦ ¦ ¦safer ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦investment. Similarly, Noack ¦ ¦ ¦ ¦represented ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦to Waukesha that the CDO ¦ ¦ ¦ ¦investments ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦were similar to Treasury securities¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦because the portfolio was comprised¦ ¦ ¦ ¦of ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦AAA and AA corporate debt." ¦ ¦ +-------+-----------------------------------+---------------------------------¦ ¦ ¦"Noack represented that 30 of the ¦No. Although the written ¦ ¦ ¦105 ¦disclosures ¦ ¦ ¦ ¦ ¦ ¦ ¦companies in the portfolio would ¦warned of risks generally, they ¦ ¦ ¦have to ¦did not ¦ ¦ ¦ ¦ ¦ ¦ ¦default before the School Districts¦quantify the amount of risk ¦ ¦75 ¦would ¦regarding how ¦ ¦ ¦ ¦ ¦ ¦ ¦begin to lose their principal. For ¦many companies would need to ¦ ¦ ¦example, ¦default ¦ ¦ ¦ ¦ ¦ ¦ ¦Noack made that representation to ¦before the loss of principal ¦ ¦ ¦ ¦occurred. ¦ ¦ ¦Waukesha, among possible others." ¦ ¦ +-----------------------------------------------------------------------------+
+-----------------------------------------------------------------------------+ ¦ ¦"Noack represented that it would take '15 ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Enrons' for the School Districts to lose money. ¦ ¦ ¦ ¦For example, at a meeting of the ¦No. Although the written ¦ ¦ ¦ ¦disclosures ¦ ¦ ¦school board of Whitefish Bay on ¦ ¦ ¦ ¦ ¦warned of risks ¦ ¦ ¦November 15, 2006, Noack stated: "And it ¦generally, they did not ¦ ¦ ¦ ¦ ¦ ¦ ¦gives added comfort that, you know, it ¦quantify the amount of ¦ ¦ ¦ ¦risk, such as by ¦ ¦ ¦takes 15 defaults for us to start losing ¦ ¦ ¦77¦ ¦comparing the level of ¦ ¦ ¦money and we have somebody watching ¦defaults to the ¦ ¦ ¦ ¦ ¦ ¦ ¦over every company, every day, for seven ¦failure of Enron for ¦ ¦ ¦ ¦purposes of when the ¦ ¦ ¦years, and if it starts to look like it's going ¦ ¦ ¦ ¦ ¦school districts may ¦ ¦ ¦that way, they get out of it. The only way - ¦start to lose ¦ ¦ ¦ ¦ ¦ ¦ ¦the real - you need 15 Enrons. You need ¦principal. ¦ ¦ ¦ ¦ ¦ ¦ ¦something to happen that big overnight.' ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦The audio was recorded." ¦ ¦ +--+------------------------------------------------+-------------------------¦ ¦ ¦ ¦No. Although the written ¦ ¦ ¦ ¦disclosures ¦ ¦ ¦"Noack represented that it would take 8.5 ¦ ¦ ¦ ¦ ¦warned of risks ¦ ¦ ¦times historically normal default levels ¦generally, they did not ¦ ¦ ¦ ¦ ¦ ¦ ¦for the School Districts to lose money, ¦quantify the amount of ¦ ¦ ¦ ¦risk with any ¦ ¦79¦which only happened during the Great ¦ ¦ ¦ ¦ ¦calculation using ¦ ¦ ¦Depression. For example, Noack made ¦historical default data. ¦ ¦ ¦ ¦ ¦ ¦ ¦that representation to the School Districts ¦The precise number stated¦ ¦ ¦ ¦is not ¦ ¦ ¦before the second deal." ¦ ¦ ¦ ¦ ¦contradicted by the ¦ ¦ ¦ ¦written disclosure. ¦ +--+------------------------------------------------+-------------------------¦ ¦ ¦ ¦No. Although the written ¦ ¦ ¦"Noack represented that there was a ¦disclosures ¦ ¦ ¦ ¦ ¦ ¦ ¦short-term mark-to-market risk, but that it ¦warned of risks ¦ ¦ ¦ ¦generally, they did not ¦ ¦ ¦was not a long-term risk because the ¦ ¦ ¦ ¦ ¦contradict that the ¦ ¦87¦School Districts would still get their money ¦investor would get ¦ ¦ ¦ ¦ ¦ ¦ ¦back after seven years. For example, he ¦principal back after ¦ ¦ ¦ ¦seven years or ¦ ¦ ¦made that representation to Kenosha, ¦ ¦ ¦ ¦ ¦discuss the difference ¦ ¦ ¦among possible others." ¦between a short- ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦term and long-term risk. ¦ +--+------------------------------------------------+-------------------------¦ ¦ ¦ ¦No. Although the written ¦ ¦ ¦"Noack represented that, of the top 800 ¦disclosures ¦ ¦ ¦ ¦ ¦ ¦ ¦companies in the world, 100 of them would ¦warned of risks ¦ ¦ ¦ ¦generally, they did not ¦ ¦ ¦have to go under before the School ¦ ¦ ¦89¦ ¦quantify the amount of ¦ ¦ ¦Districts would suffer any principal loss. ¦risk regarding how ¦ ¦ ¦ ¦ ¦ ¦ ¦For example, he made that representation ¦many companies would need¦ ¦ ¦ ¦to fail ¦ ¦ ¦to Kenosha, among possible others." ¦ ¦ ¦ ¦ ¦before the loss of ¦ ¦ ¦ ¦principal occurred. ¦ +--+------------------------------------------------+-------------------------¦ ¦ ¦"Noack represented that, if the investments ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦failed, they would all be in bread lines ¦ ¦ ¦ ¦ ¦Previously dismissed on ¦ ¦91¦together. For example, he made that ¦other grounds. ¦ ¦ ¦ ¦ ¦ ¦ ¦representation to Waukesha, among ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦possible others." ¦ ¦ +-----------------------------------------------------------------------------+
+-----------------------------------------------------------------------------+ ¦ ¦"Noack represented that the country ¦ ¦ ¦ ¦would ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦have to fall further into financial ¦ ¦ ¦ ¦trouble ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦than the Great Depression before the ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦investments would be affected. But ¦No. Although the written ¦ ¦ ¦even ¦disclosures ¦ ¦ ¦ ¦ ¦ ¦ ¦in that scenario, according to Noack, ¦warned of risks generally, they ¦ ¦ ¦the ¦did not ¦ ¦ ¦ ¦ ¦ ¦ ¦School Districts would get their ¦contradict that the investor would¦ ¦ ¦principal ¦get ¦ ¦ ¦ ¦ ¦ ¦93 ¦back after seven years and did not ¦principal back after seven years ¦ ¦ ¦have to ¦or ¦ ¦ ¦ ¦ ¦ ¦ ¦worry about losing principal. For ¦discuss or compare the risk of ¦ ¦ ¦example, ¦losing ¦ ¦ ¦ ¦ ¦ ¦ ¦he made that representation to West ¦principal to conditions like the ¦ ¦ ¦ ¦Great ¦ ¦ ¦Allis-West Milwaukee. He similarly ¦ ¦ ¦ ¦told ¦Depression. ¦ ¦ ¦ ¦ ¦ ¦ ¦other School Districts that it would ¦ ¦ ¦ ¦take a ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦Great Depression for the investments ¦ ¦ ¦ ¦to ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦fail." ¦ ¦ +---+--------------------------------------+----------------------------------¦ ¦ ¦"In an affidavit executed in 2008, ¦ ¦ ¦ ¦Noack ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦admitted under oath that he had made ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦statements and representations to the ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦School Districts to persuade them to ¦No. Although the written ¦ ¦ ¦enter ¦disclosures ¦ ¦ ¦ ¦ ¦ ¦ ¦into the CDO transactions. He stated ¦warned of risks generally, they ¦ ¦ ¦ ¦did not ¦ ¦ ¦under oath that he had no reason to ¦ ¦ ¦ ¦ ¦quantify the amount of risk ¦ ¦ ¦dispute that he had made statements to¦regarding how ¦ ¦ ¦ ¦ ¦ ¦ ¦the School Districts such as "[i]t ¦many companies would need to ¦ ¦ ¦takes 20 ¦default ¦ ¦103¦ ¦ ¦ ¦ ¦out of these 100 companies to default ¦before the loss of principal ¦ ¦ ¦ ¦occurred or ¦ ¦ ¦before it gets to your AA level," and ¦ ¦ ¦ ¦"[t]here ¦compare the level of defaults to ¦ ¦ ¦ ¦the ¦ ¦ ¦would need to be '15 Enrons' before ¦ ¦ ¦ ¦you ¦failure of Enron regarding when ¦ ¦ ¦ ¦the ¦ ¦ ¦would be impacted," and others like ¦ ¦ ¦ ¦them. ¦principal. ¦ ¦ ¦ ¦ ¦ ¦ ¦Noack further admitted that certain of¦ ¦ ¦ ¦his ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦statements to the School Districts ¦ ¦ ¦ ¦were ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦inaccurate." ¦ ¦ +-----------------------------------------------------------------------------+ D. Omissions
Generally, silence is not actionable absent a duty to speak. See Chiarella v. United States, 445 U.S. 222, 232 (1980). A duty to speak may arise from a relationship between parties, id. at 228, 232, or from a duty to speak the whole truth when certain statements are made, see 15 U.S.C. §§ 78j(b), 77q(a)(2); 17 C.F.R. § 240.10b-5. For instance, Rule 10b-5 states that
[i]t shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange . . . to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading . . . in connection with the purchase or sale of any security.Thus, once Noack and Stifel began speaking, they had a duty to speak truthfully and not omit material facts.
Defendants argue that the claims in paragraphs 8, 105-111, 125, 132, 134, 142, and 146 must be dismissed as a matter of law because the SEC alleges no duty to speak on the part of defendants. This argument is rejected in view of other paragraphs in the Complaint that are based on the defendants' duty to speak the whole truth. For instance, in paragraph 8 of the Complaint the SEC charges that defendants "did not disclose that the portfolio in the first transaction performed poorly from the outset, with a number of the credits suffering downgrades within weeks of closing." Paragraph 108 contains similar omissions. Those alleged omissions could be deemed necessary to complete Noack's comments in paragraphs 83 and 97 about prior investments being on course and that future investments would slow if there were hiccups. Likewise, in paragraph 106 the SEC asserts that "Stifel and Noack did not disclose to each of the School Districts that they could lose their entire investment if only a fraction of the portfolio defaulted," which could be necessary in conjunction with statements asserted in paragraphs 75 and 79 regarding how many defaults would be needed before a loss of principal occurred.
However, the matching of omissions to statements that would be misleading without the omitted information is not clear. Under Rule 9(b) the responsibility for pairing an omission with a statement that otherwise is misleading is plaintiff's, not this court's or defendants. Without a connection between an asserted omission and a statement creating a duty to speak the complete truth, the allegations of omissions fail to meet the requirements of Rule 9(b) that fraud be pled with particularity. Thus, the motions to dismiss and to strike will be granted as to these allegations, though the SEC will be given leave to replead.
Although a couple alleged omissions are paired with affirmative statements (see Doc. 1 ¶¶ 97, 98, 146, 147), for the most part they are not.
CONCLUSION
Therefore,
IT IS ORDERED that defendants' motions to dismiss or strike (Docs. 15, 16) are granted in part and denied in part as set forth above.
IT IS ORDERED that defendants' motions for more definite statement (Docs. 15, 16) are denied as moot.
IT IS FURTHER ORDERED that the SEC may replead the dismissed or struck allegations to address the problems discussed above by filing an amended complaint within twenty-one days. If no amended complaint is filed, the case will proceed on the original Complaint minus those paragraphs.
Dated at Milwaukee, Wisconsin, this 14th day of September, 2012.
BY THE COURT
____________
C. N. CLEVERT, JR.
CHIEF U. S. DISTRICT JUDGE