George Pappas v. Countrywide Financial Corp et al

MEMORANDUM in Support of MOTION to Dismiss Counts I and III of the Second Amended Consolidated Amended Class Action Complaint ; and Notice of Joinder to Motions to Dismiss

C.D. Cal.February 6, 2009

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEGAL_US_W # 60962692.4 MEMO. OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS 07-CV-05295-MRP (MANx) WILLIAM F. SULLIVAN (SB# 078353) williamsullivan@paulhastings.com THOMAS A. ZACCARO (SB# 183241) thomaszaccaro@paulhastings.com JOSHUA G. HAMILTON (SB# 199610) joshuahamilton@paulhastings.com PAUL, HASTINGS, JANOFSKY & WALKER LLP 515 South Flower Street, Twenty-Fifth Floor Los Angeles, CA 90071-2228 Telephone: (213) 683-6000 Facsimile: (213) 627-0705 Attorneys for Defendant Thomas K. McLaughlin UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA IN RE COUNTRYWIDE FINANCIAL CORPORATION SECURITIES LITIGATION This Document Applies to: All Actions LEAD CASE NO.: 07-CV-05295-MRP (MANx) DEFENDANT THOMAS K. MCLAUGHLIN’S MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF MOTION TO DISMISS SECOND CONSOLIDATED AMENDED CLASS ACTION COMPLAINT [Notice of Motion and Motion to Dismiss and Request for Judicial Notice Filed and Served Concurrently Herewith] Date: April 13, 2009 Time: 10:00 a.m. Courtroom: 12 Judge: Hon. Mariana R. Pfaelzer Case 2:07-cv-05295-MRP-MAN Document 360 Filed 02/06/09 Page 1 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 TABLE OF CONTENTS Page -i- MEMO. OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS 07-CV-05295-MRP (MANx) I. PRELIMINARY STATEMENT...................................................................4 II. FACTUAL AND PROCEDURAL BACKGROUND...................................5 A. Relevant Procedural Background........................................................5 B. Allegations Relating to Mr. McLaughlin ............................................7 1. Count I for Alleged Violation of Section 11 of the Securities Act ...........................................................................7 2. Count III for Alleged Violation of Section 15 of the Securities Act ...........................................................................8 3. Plaintiffs’ allegations concerning 2003 are not actionable. .......9 III. THE COURT SHOULD DISMISS PLAINTIFFS’ SECTION 11 CLAIM BECAUSE IT IS BARRED BY THE STATUTE OF REPOSE..................................................................................................... 10 A. Section 11 Claims Are Subject to Section 13 and the Statute of Repose.............................................................................................. 11 B. Mr. McLaughlin Was Not a Defendant in this Case Until April 11, 2008 And Thus Must Be Dismissed................................... 12 C. Count I Should Be Dismissed Because the Three-Year Period of Repose for Mr. McLaughlin Begins on the Effective Date of the Initial Shelf Registration Statement .................................................. 12 1. For the purposes of Section 11 liability, unlike for issuers and underwriters, a supplemental prospectus does not extend the effective date of a shelf registration for officers and directors ........................................................................... 13 2. The face of the SAC demonstrates that Plaintiffs’ Section 11 claim against Mr. McLaughlin is barred by the statute of repose................................................................................. 15 IV. PLAINTIFFS FAIL TO STATE A CLAIM FOR CONTROL PERSON LIABILITY AGAINST MR. MCLAUGHLIN ........................... 16 V. THE COURT SHOULD DISMISS ALL CLAIMS AGAINST MR. MCLAUGHLIN WITH PREJUDICE ........................................................ 19 VI. CONCLUSION .......................................................................................... 20 Case 2:07-cv-05295-MRP-MAN Document 360 Filed 02/06/09 Page 2 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 TABLE OF AUTHORITIES Page LEGAL_US_W # 60962692.4 i MEMO. OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS 07-CV-05295-MRP (MANx) CASES Allen v. City of Beverly Hills, 911 F.2d 367 (9th Cir. 1990) ........................................................................... 16 Bell Atlantic Corporation v. Twombly, 550 U.S. 544, 127 S. Ct. 1955 (2007) ................................................................7 Brown v. Enstar Group, Inc., 84 F.3d 393 (11th Cir. 1996) ........................................................................... 14 Burgess v. Premier Corp., 727 F.2d 826 (9th Cir. 1984) ........................................................................... 14 Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005) ........................................................................................ 16 Christoffel v. E.F. Hutton & Co., Inc., 588 F.2d 665 (9th Cir. 1978) ........................................................................... 13 Durham v. Kelly, 810 F.2d 1500 (9th Cir. 1987) ......................................................................... 13 Finkel v. Stratton Corp., 962 F.2d 169 (2d Cir. 1992) ..............................................................................9 Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076 (9th Cir. 1999) ...........................................................................8 In re Broderbund/Learning Co. Sec. Litig., 294 F.3d 1201 (9th Cir. 2002) ......................................................................... 15 In re Digi Intern., Inc. Sec. Litig., 6 F. Supp. 2d 1089 (D. Minn. 1998) ................................................................ 14 In re GlenFed, Inc. Sec. Litigation, 60 F.3d 591 (9th Cir. 1995) ............................................................................. 13 In re Immune Response Sec. Litig., 375 F. Supp. 2d 983 (S.D. Cal. 2005) ................................................................8 In re Infonet Services Corp. Sec. Litig, 310 F. Supp. 2d 1106 (C.D. Cal. 2003)..............................................................8 In re Metropo. Sec. Litig., 532 F. Supp. 2d 1260 (E.D. Wash. 2007) .......................................... 8, 9, 10, 17 In re Mutual Funds Inv. Litig., 384 F. Supp. 2d 845 (D. Md. 2005) ................................................................. 15 Case 2:07-cv-05295-MRP-MAN Document 360 Filed 02/06/09 Page 3 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 TABLE OF AUTHORITIES (cont.) Page LEGAL_US_W # 60962692.4 ii MEMO. OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS 07-CV-05295-MRP (MANx) Iqbal v. Hasty, 490 F.3d 143 (2d Cir. 2007) ..............................................................................7 Jablon v. Dean Witter & Co., 614 F.2d 677 (9th Cir. 1980) .............................................................................7 Jackson Nat. Life Ins. Co. v. Merrill Lynch & Co., Inc., 32 F.3d 697 (2d Cir. 1994) ................................................................................8 Louisiana-Pacific Corp. v. ASARCO, Inc., 5 F.3d 431 (9th Cir. 1993) .................................................................................9 P. Stolz Family P’ship L.P. v. Daum, 355 F.3d 92 (2d Cir. 2004) ............................................................................ 8, 9 Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d 1151 (9th Cir. 1996) ..................................................................... 17, 19 S.E.C. v. Seaboard Corp., 677 F.2d 1301 (9th Cir. 1982) ...........................................................................8 Mitan v. Feeney, 497 F. Supp. 2d 1113 (C.D. Cal. 2007)..............................................................7 Toombs v. Leone, 777 F.2d 465 (9th Cir. 1985) .............................................................................8 STATUTES 15 U.S.C. § 77m................................................................................................. 1, 8 OTHER AUTHORITIES Securities Offering Reform, Securities Act Release No. 8591, Exchange Act Release No. 52,056, 70 Fed. Reg. 44,722 (Aug. 3, 2005) ......................................... 1, 12 RULES Fed. R. Civ. P. 12(b)(6) .................................................................................... 7, 14 Fed. R. Civ. P. 8(a)(2) ...................................................................................... 7, 15 REGULATIONS 17 C.F.R. § 230.430B (2005)............................................................................ 5, 11 17 C.F.R. § 230.430B(f)(2) (2005) ................................................................. 10, 12 17 C.F.R. § 230.430B(f)(4).....................................................................................2 17 C.F.R. § 230.430B(f)(4)(ii) (2005) .............................................................. 2, 11 Case 2:07-cv-05295-MRP-MAN Document 360 Filed 02/06/09 Page 4 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 TABLE OF AUTHORITIES (cont.) Page LEGAL_US_W # 60962692.4 iii MEMO. OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS 07-CV-05295-MRP (MANx) 17 C.F.R. § 230.430B(f)(5)(i) (2005).................................................................... 12 17 C.F.R. § 230.430B(f)(5)(ii) (2005) .................................................................. 12 Case 2:07-cv-05295-MRP-MAN Document 360 Filed 02/06/09 Page 5 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEGAL_US_W # 60962692.4 4 MEMO. OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS 07-CV-05295-MRP (MANx) I. PRELIMINARY STATEMENT Defendant Thomas K. McLaughlin brings this motion to dismiss on the grounds that, under Section 13 of the Securities Act of 1933 (the “Securities Act”), the claims against him in the Second Consolidated Amended Class Action Complaint (“SAC”) are barred by the absolute three-year statute of repose for claims brought under Section 11 of the Securities Act. See 15 U.S.C. § 77m (“In no event shall any action be brought to enforce a liability created under [Section 11] more than three years after the security was bona fide offered to the public . . . .”) (emphasis added). The face of the SAC reveals that Plaintiffs’ Section 11 claim is barred by the three-year statute of repose and must be dismissed, with prejudice. Mr. McLaughlin, the former Chief Financial Officer (“CFO”) of Countrywide Financial Corporation (“Countrywide”), resigned from Countrywide effective April 1, 2005 (SAC ¶ 44), and was not named as a defendant in this action until April 11, 2008 when the Consolidated Amended Class Action Complaint (“CAC”) was filed. He is named in only two counts in the SAC - Count 1 for violation of Section 11 based on Countrywide’s offering of Series A Medium-Term Notes “offered and sold pursuant to a shelf registration” on April 7, 2004 (SAC ¶¶ 930, 1101-03) and Count III for control person liability under Section 15 of the Securities Act based on the same offering. (SAC ¶ 1131.) Under the Securities Offering Reform of 2005, the three-year statute of repose begins at the effective date of the initial registration statement, and the filing of a supplemental prospectus “will not create a new effective date for directors or signing officers.” Securities Offering Reform, Securities Act Release No. 8591, Exchange Act Release No. 52,056, 70 Fed. Reg. 44,722, 44,774 (Aug. 3, 2005) (“Securities Offering Reform Release”)1 (RJN, Ex. 28 at 107) (emphasis added); see also Securities Offering Reform, 17 C.F.R.§ 230.430B(f)(4)(ii) (2005). 1 A true and correct copy of relevant portions of the Securities Offering Reform Release are attached to Thomas K. McLaughlin’s Request for Judicial Notice (“RJN”) filed and served concurrently herewith. Case 2:07-cv-05295-MRP-MAN Document 360 Filed 02/06/09 Page 6 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEGAL_US_W # 60962692.4 5 MEMO. OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS 07-CV-05295-MRP (MANx) Plaintiffs allege that the Series A Medium-Term Notes were “offered and sold pursuant to a shelf-registration statement on Form S-3 and prospectus, dated April 7 and April 21, 2004” (SAC ¶ 930) and that on February 7, 2005, Countrywide “commenced” a public offering of the Series A Medium Term Notes. (SAC ¶ 929.) Under either date, the statute of repose bars Plaintiffs’ Section 11 claim against Mr. McLaughlin, requiring dismissal.2 Plaintiffs also assert a claim against Mr. McLaughlin as a “control person” under Section 15 of the Securities Act based on the same Series A Medium-Term Notes. As Plaintiffs acknowledge in the SAC, Mr. McLaughlin resigned from Countrywide effective April 1, 2005, and thus could not control any activities at Countrywide after that point. (SAC ¶ 44.) In addition, Plaintiffs cannot allege that they suffered any injury under Section 11 or 12(a)(2) based on any Series A Medium-Term notes offered for sale by Countrywide while Mr. McLaughlin was the CFO. Consequently, Plaintiffs’ Section 15 claim against Mr. McLaughlin should be dismissed. In addition to moving on the statute of repose, Mr. McLaughlin also joins in the Motions to Dismiss the SAC filed by Countrywide and the Outside Director Defendants relating to arguments that apply to the deficiency in Plaintiffs’ allegations in Counts I and III of the SAC relating to the Series A Medium-Term Notes. II. FACTUAL AND PROCEDURAL BACKGROUND A. Relevant Procedural Background Mr. McLaughlin, one of forty-four defendants targeted by Plaintiffs in their sweeping SAC, was Countrywide’s Executive Managing Director and Chief Financial Officer beginning in 2004, and resigned effective April 1, 2005. (SAC 2 Mr. McLauglin’s statute of repose defense is unique to officers and directors because regulations governing shelf registrations, as are at issue here, provide different standards of liability for officers and directors than they do for issuers and underwriters. 17 C.F.R. § 230.430B(f)(4). Case 2:07-cv-05295-MRP-MAN Document 360 Filed 02/06/09 Page 7 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEGAL_US_W # 60962692.4 6 MEMO. OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS 07-CV-05295-MRP (MANx) ¶ 44.) He was not an officer of Countrywide during most of the alleged class period in this case, March 12, 2004 through March 7, 2008 (“Class Period”). (See id., ¶ 1.) On August 14, 2007, George Pappas, on behalf of himself and other individuals, filed suit against Countrywide and several other individuals. On November 28, 2007, this Court consolidated the Pappas action with four other cases. On March 28, 2008, this Court further consolidated two more cases with the original five cases previously consolidated. Despite the number of cases filed, Mr. McLaughlin was not named in this case until April 11, 2008, when Plaintiffs filed their CAC, nearly eight months after the Pappas action was filed.3 On December 1, 2008, addressing six separate motions to dismiss, the Court issued its Omnibus Order on Defendants’ Motions to Dismiss the CAC (“Omnibus Order”), granting in part and denying in part defendants’ motions to dismiss and granting Plaintiffs’ leave to amend their CAC (Omnibus Order at 111-12.) On January 6, 2009, Plaintiffs filed their SAC, dropping Mr. McLauglin from two out of the original four counts alleged against him in the CAC. (SAC ¶¶ 1100-15, 1127-36.) Out of thirteen counts asserted in the new and equally expansive SAC, only Counts I and III are asserted against Mr. McLaughlin. (Id.) Count I, alleging a violation of Section 11 of the Securities Act, and Count III, alleging a violation of Section 15 of the Securities Act are both premised on the allegation that Mr. McLaughlin signed a registration statement and prospectus filed with the Securities and Exchange Commission (“SEC”) on April 7, 2004 in connection with the offering of Series A Medium-Term Notes. (SAC ¶¶ 44, 1104.) The Series A Medium-Term Notes registration statement incorporated by reference Countrywide’s 2003 Form 10-K, which plaintiffs contend contained false 3 In fact, Plaintiffs did not identify Mr. McLaughlin as a possible defendant in the case in the Stipulation Regarding Consolidation of Actions and Scheduling filed March 28, 2008, just two weeks before Plaintiffs’ filed the CAC first naming Mr. McLaughlin. (See Docket No. 167.) Case 2:07-cv-05295-MRP-MAN Document 360 Filed 02/06/09 Page 8 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEGAL_US_W # 60962692.4 7 MEMO. OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS 07-CV-05295-MRP (MANx) representations. (SAC ¶¶ 931-33.) B. Allegations Relating to Mr. McLaughlin In its Omnibus Order, the Court pointed out that “the vast majority” of Individual Defendants are not “alleged to have participated in the fraud” in the CAC. (Omnibus Order at 38.) This is certainly true of Mr. McLaughlin, who resigned from Countrywide effective April 1, 2005. (SAC ¶ 44.) Despite the lack of any real temporal connection with the bulk of Plaintiffs’ allegations, Plaintiffs unnecessarily included him in the SAC. 1. Count I for Alleged Violation of Section 11 of the Securities Act Count I of the SAC against Mr. McLaughlin is based on an offering of Series A Medium-Term Notes. (SAC ¶ 1102.) The SAC groups a series of documents following the April 7, 2004 shelf registration statement together and defines them as “Series A Medium-Term Notes Prospectus” (SAC ¶ 930.), which are described below: • Shelf Registration Statement (dated April 7, 2004): Plaintiffs allege that Mr. McLaughlin signed this initial shelf registration statement. (SAC ¶ 930, Ex. 1.) • Prospectus (dated April 21, 2004): Plaintiffs allege that this prospectus was included initially as one of the base prospectuses with the initial shelf registration statement. Mr. McLaughlin did not sign this prospectus, contrary to Plaintiffs’ allegation. (Id.; RJN, Ex. 2.) • Prospectus Supplement (dated February 7, 2005): Plaintiffs plead that this is the date Countrywide “commenced” the public offering of Series A Medium- Term Notes. (SAC ¶ 929; RJN, Ex. 3.) • Prospectus Supplement (dated December 14, 2005): Plaintiffs allege that this prospectus supplement increased the size of the original offering of Series A Medium-Term Notes from $8 billion to $8.627 billion. (Id.; RJN, Ex. 4.) Case 2:07-cv-05295-MRP-MAN Document 360 Filed 02/06/09 Page 9 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEGAL_US_W # 60962692.4 8 MEMO. OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS 07-CV-05295-MRP (MANx) • Free Writing Prospectus (dated December 14, 2005): This prospectus supplement offered two separate types of notes: (1) the 2yr Floating Rate Notes due 2007 and (2) the 3yr Floating Rate Notes due 2008. Both notes have already matured. (Id.; RJN, Ex. 5.) • Pricing Supplements Nos. 1-18 & 20-24 (dated from March 16, 2005 to February 1, 2006): The pricing supplements are also issued pursuant to the initial shelf registration for the Series A Medium-Term Notes. (Id.; RJN, Exs. 6- 27.) 4 Plaintiffs indiscriminately lump all of these filings together and define them as “Series A Medium-Term Notes Registration Statement.” (SAC ¶ 930.)5 The shelf registration statement and prospectus filed on April 7 and 21, 2004 - and not the subsequent prospectus supplements - establish the effective date as to Mr. McLaughlin for the purpose of the statute of repose. 17 C.F.R. § 230.430B(f)(4). Under any circumstances, Plaintiffs allege that the offering commenced on February 7, 2005, more than three years before Mr. McLaughlin was named as a defendant in this case. (SAC ¶ 929.) 2. Count III for Alleged Violation of Section 15 of the Securities Act Count III of the SAC alleges a violation of Section 15 of the Securities Act against Mr. McLaughlin.6 (SAC ¶ 1128.) The SAC alleges in conclusory fashion that, because of his senior executive position, Mr. McLaughlin was a “controlling” person responsible for the veracity of the information contained and incorporated 4 Pricing Supplement No. 11 offered Series M Medium-Term Notes rather than Series A Medium-Term Notes, which are not as issue here and is therefore irrelevant. (RJN, Ex. 15.) Moreover, a number of the pricing supplements for Series A Medium Term Notes, representing a significant percentage of the total offering amount, have already matured. 5 Plaintiffs allege that “[t]he series A Medium-Term Notes Registration Statement expressly incorporated by reference Countrywide’s Form 10-K Annual Report for the year ended December 31, 2003.” (SAC ¶ 931.) 6 In addition to Mr. McLaughlin, Count III is alleged against Mr. Mozilo and Mr. Kurland. (SAC ¶ 1128.) Case 2:07-cv-05295-MRP-MAN Document 360 Filed 02/06/09 Page 10 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEGAL_US_W # 60962692.4 9 MEMO. OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS 07-CV-05295-MRP (MANx) by reference in the Series A Medium-Term Notes registration statement and prospectus. (SAC ¶¶ 1129-36.) Plaintiffs allege that Mr. McLaughlin was directly involved in Countrywide’s day-to-day operations and possessed the power to influence and control, indirectly and directly, the content of the registration statement and prospectus, therefore making him liable for their allegedly false and misleading nature. (SAC ¶¶ 1131, 1132.) Plaintiffs, therefore, attempt to include Mr. McLaughlin as a “control person” for events that occurred after he resigned from Countrywide. 3. Plaintiffs’ allegations concerning 2003 are not actionable. As described in detail in the Motion to Dismiss brought by the Outside Director Defendants, which Mr. McLaughlin joins in part, Plaintiffs rely on allegations and events occurring after 2003 to support their allegations relating to statements made in the 2003 Form 10-K. Plaintiffs’ allegations regarding 2003 are contained in paragraphs 606 through 616 in the SAC and are mainly twofold: (1) Countrywide made several misrepresentations because it misclassified subprime loans as prime; and (2) Countrywide’s statements relating to its underwriting and loan origination practices were misleading. (SAC ¶¶ 606-16.) The allegations asserted against Mr. McLaughlin are lacking. Plaintiffs refer to an earlier section of the SAC, Section IV.D, to support the allegation that Countrywide misclassified subprime loans as prime loans in 2003. (SAC ¶ 614.) But Section IV.D fails to contain even a single statement alleging any fact that supports this allegation. (SAC ¶¶ 220-44.) In fact, within the entire section, there is only one reference to “2003,” found in paragraph 228, which is a quote from Freddie Mac’s “February 2003 public guidelines.” Otherwise, every allegation in that section relates to 2004 and beyond, with a focus on 2007, in particular, leaving Plaintiffs’ allegation relating to 2003 completely unsupported. Case 2:07-cv-05295-MRP-MAN Document 360 Filed 02/06/09 Page 11 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEGAL_US_W # 60962692.4 10 MEMO. OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS 07-CV-05295-MRP (MANx) III. THE COURT SHOULD DISMISS PLAINTIFFS’ SECTION 11 CLAIM BECAUSE IT IS BARRED BY THE STATUTE OF REPOSE. A complaint is properly dismissed under Rule 12(b)(6) of the Federal Rules of Civil Procedure where it is apparent on the face of the pleading that plaintiffs’ claims are barred by the statute of limitations. See Jablon v. Dean Witter & Co., 614 F.2d 677, 682 (9th Cir. 1980). Because the SAC clearly demonstrates that the three-year statute of repose articulated under Section 13 of the Securities Act has run as to Mr. McLaughlin, Plaintiffs’ Section 11 claim against him should be dismissed with prejudice. Plaintiffs also cannot state a claim under Rule 8(a)(2) of the Federal Rules of Civil Procedure. In Bell Atlantic Corporation v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 1964-65 (2007), the Supreme Court concluded that Rule 8(a)(2) requires that a complaint allege facts establishing that a claim is not merely conceivable, but actually plausible. Id. at 1965. Rule 8(a)(2) requires a plaintiff to plead “enough facts to raise a reasonable expectation that discovery will reveal evidence” of the claim’s elements. Id. at 1964-65 (allegations of ambiguous behavior are not enough to properly state a claim). Courts in the Ninth Circuit have also applied the “tougher plausibility” standard for Rule 8 pleading. See, e.g., Mitan v. Feeney, 497 F. Supp. 2d 1113, 1124 (C.D. Cal. 2007); see also Iqbal v. Hasty, 490 F.3d 143, 155-57 (2d Cir. 2007) (noting that Twombly would apply where “massive discovery is likely to create unacceptable settlement pressures”). As set forth below, Plaintiffs’ claims under Section 11 are time-barred against Mr. McLaughlin and Plaintiffs cannot establish a control person violation under Section 15. Case 2:07-cv-05295-MRP-MAN Document 360 Filed 02/06/09 Page 12 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEGAL_US_W # 60962692.4 11 MEMO. OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS 07-CV-05295-MRP (MANx) A. Section 11 Claims Are Subject to Section 13 and the Statute of Repose. Plaintiffs’ Section 11 claim, arising from the offering of a Series A Medium-Term Notes, is governed by Section 13 of the Securities Act 7 Under Section 13 of the Securities Act, (“In no event shall any action be brought to enforce a liability created under [Section 11] more than three years after the security was bona fide offered to the public . . . .”) 15 U.S.C. § 77m (emphasis added). Section 13 of the Securities Act requires a plaintiff to “affirmatively plead sufficient facts in his complaint to demonstrate conformity with the statute of limitations.” Toombs v. Leone, 777 F. 2d 465, 468 (9th Cir. 1985); In re Infonet Servs. Corp. Sec. Litig., 310 F. Supp. 2d 1106, 1115 (C.D. Cal. 2003). The three-year time period under Section 13 operates as an absolute bar to ill-timed lawsuits and is not subject to equitable principles. This statute of repose - unlike a statute of limitations - “is not a limitation of a plaintiff’s remedy, but rather defines the right involved in terms of the time allowed to bring suit.” P. Stolz Family P’ship L.P. v. Daum, 355 F.3d 92, 102 (2d Cir. 2004); see also In re Metro. Sec. Litig., 532 F. Supp. 2d 1260, 1281 (E.D. Wash. 2007). “Therefore, a statute of repose begins to run without interruption once the necessary triggering event has occurred, even if equitable considerations would warrant tolling or even if the plaintiff has not yet, or could not yet have, discovered that she has a cause of action.” Id. at 102-03 (citing Jackson Nat’l. Life Ins. Co. v. Merrill Lynch & Co., Inc., 32 F. 3d 697, 704 (2d Cir. 1994) (“The three-year period is an absolute limitation which applies whether or not the investor could have discovered the violation.”)); see S.E.C. v. Seaboard Corp., 677 F. 2d 1301, 1308 (9th Cir. 1982) (“[W]e believe the statutory language requires the conclusion that Congress meant 7 Section 11 confers standing to sue on any person who purchases a security pursuant to a registration statement that misrepresents or omits a material fact. Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076, 1077 (9th Cir. 1999); In re Immune Response Sec. Litig., 375 F. Supp. 2d 983, 1039 (S.D. Cal. 2005). Case 2:07-cv-05295-MRP-MAN Document 360 Filed 02/06/09 Page 13 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEGAL_US_W # 60962692.4 12 MEMO. OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS 07-CV-05295-MRP (MANx) the bar to be absolute.”). Congress, spurred by the “fear that lingering liabilities would disrupt normal business and facilitate false claims,” passed the statute “to provide an easily ascertainable and certain date for the quieting of litigation.” P. Stolz, 355 F.3d at 104-05. B. Mr. McLaughlin Was Not a Defendant in this Case Until April 11, 2008 And Thus Must Be Dismissed. When an amended pleading adds a new defendant to the action, the amended pleading does not relate back to the filing of the original complaint unless the defendant “should have known that, but for a mistake concerning identity, the action would have been brought against it.” Louisiana-Pacific Corp. v. ASARCO, Inc., 5 F. 3d 431, 434 (9th Cir. 1993). It is undisputed that Mr. McLaughlin did not appear in the case prior to April 11, 2008 when he was named in the CAC. Plaintiffs allege no facts, nor can they, that Mr. McLaughlin should have known that he would be named in this case prior to the filing of the CAC. Consequently, the relevant date for calculating the statute of repose for liability under Section 11 is the date of the filing of the CAC - April 11, 2008. C. Count I Should Be Dismissed Because the Three-Year Period of Repose for Mr. McLaughlin Begins on the Effective Date of the Initial Shelf Registration Statement. The three-year period of repose starts to run when a security is “bona fide offered to the public,” which is generally on the effective date of the registration statement for the security. See In re Metro. Sec. Litig., 532 F. Supp. at 1281; Finkel v. Stratton Corp., 962 F.2d 169, 173 (2d Cir. 1992) (“[O]rdinarily, a security is ‘bona fide offered to the public’ at the effective date of the registration statement.”) (citation omitted). The SEC has set forth specific rules for the effective date of shelf registrations, which are at issue for the Series A Medium- Term Notes. (See SAC ¶ 930.) For the purpose of imposing liability, the SEC has Case 2:07-cv-05295-MRP-MAN Document 360 Filed 02/06/09 Page 14 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEGAL_US_W # 60962692.4 13 MEMO. OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS 07-CV-05295-MRP (MANx) distinguished between issuers and underwriters, on one hand, and officers and directors, on the other. 1. For the purposes of Section 11 liability, unlike for issuers and underwriters, a supplemental prospectus does not extend the effective date of a shelf registration for officers and directors. In a typical shelf registration, a company/issuer is permitted to file a registration statement and sell the securities described therein at a later time. See In re Metro. Sec. Litig., 532 F. Supp. at 1284. The registration statement is generally placed “on the shelf” for up to three years. Id. Each time a company decides to sell the securities to the public, it can pull the registration off the shelf (a “takedown”) and sell a portion of the securities by filing a prospectus supplement with the relevant price and terms. The company may repeat this process and “offer the securities on a continued and delayed basis.” Id. While the Court briefly mentioned shelf registrations in its Omnibus Order, it did not address an important distinction between (1) issuers and underwriters and (2) officers and directors. The Court stated in the Omnibus Order: [w]here there are continuous or serial offerings under a shelf registration … each new issuance requires amending the “registration statement” for the shelf registration, thereby creating a new “registration statement” for purposes of giving rise to § 11 liability while comporting with § 6(a). (Omnibus Order at 41.) The Court’s Omnibus Order, therefore, only addressed the rule as it applies to issuers and underwriters. For issuers and underwriters only, each new prospectus establishes a new “bona fide offering” for the securities issued therein and, as a consequence, a new effective date “for purposes of liability under section 11 of the Act ….” 17 C.F.R. § 230.430B(f)(2) (2005). The new effective Case 2:07-cv-05295-MRP-MAN Document 360 Filed 02/06/09 Page 15 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEGAL_US_W # 60962692.4 14 MEMO. OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS 07-CV-05295-MRP (MANx) date for issuers and underwriters is the date a prospectus is deemed part of and included in the registration statement. See 17 C.F.R. § 230.430B (2005). In contrast, for directors and officers who have signed a shelf registration statement such as Mr. McLaughlin, the filing of a new prospectus does not establish a new effective date for Section 11 liability purposes. As stated clearly in the Securities Offering Reform, for directors and officers who have signed a shelf registration, the date of a new prospectus filing “shall not be an effective date ….”; instead, the effective date of the initial registration statement continues to control for Section 11 liability purposes. 17 C.F.R. § 230.430B(f)(4)(ii) (2005) (emphasis added). The SEC has clearly articulated this difference in discussing Rule 430B: Rule 430B also establishes a new effective date for a shelf registration statement for Section 11 liability purposes only for the issuer and for … an underwriter. That new effective date will be the date a prospectus supplement filed in connection with the takedown or takedowns is deemed part of the relevant registration statement. …. Therefore, under rule 430B … the prospectus filing will not create a new effective date for directors or signing officers of the issuer. …. Including information contained in prospectus supplements in registration statements and triggering new effective dates for the issuer and underwriter will provide and preserve important investor protections under the Securities Act. Case 2:07-cv-05295-MRP-MAN Document 360 Filed 02/06/09 Page 16 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEGAL_US_W # 60962692.4 15 MEMO. OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS 07-CV-05295-MRP (MANx) See Securities Offering Reform Release at 44,773-44,774 (emphasis added); (RJN, Ex. 28 at 107-08). Thus, unlike for issuers and underwriters, for whom a prospectus supplement restarts the period of repose for shelf registration, subsequent prospectus supplements do no impact the effective date for officers and directors, and the statute of repose begins at the original effective date. 17 C.F.R. § 230.430B(f)(2) (2005).8 The allegations in this case underscore the policy behind this distinction. Mr. McLaughlin resigned from Countrywide in April 2005. (SAC ¶ 44.) Consequently, he was not aware of or able to have any input on any decisions relating to Countrywide after that time. The statute of repose was designed to provide an absolute temporal limit on liability against such a defendant. As that absolute time limit clearly passed by the time Mr. McLaughlin was named in the CAC, this Court should dismiss all of the claims against him, with prejudice. 2. The face of the SAC demonstrates that Plaintiffs’ Section 11 claim against Mr. McLaughlin is barred by the statute of repose. Plaintiffs allege a cause of action against Mr. McLaughlin for violation of Section 11 based on a registration statement and prospectus dated April 7, 2004 that incorporated a 2003 Form 10-K signed by Mr. McLaughlin. (SAC ¶¶ 930-31.) Mr. McLaughlin was not named in the case until April 11, 2008, more than four years later and well after the expiration of the statute of repose in Section 13. Under any circumstances, the face of Plaintiffs’ SAC conclusively establishes that the Section 11 claim against Mr. McLaughlin is time-barred. Plaintiffs allege that: On or about February 7, 2005, Countrywide commenced a public offering of approximately $8.627 billion of Series 8 SEC regulations contain distinct provisions for other participants such as auditors and experts. See 17 C.F.R. § 230.430B(f)(5)(i) (2005) and 17 C.F.R. § 230.430B(f)(5)(ii) (2005). Case 2:07-cv-05295-MRP-MAN Document 360 Filed 02/06/09 Page 17 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEGAL_US_W # 60962692.4 16 MEMO. OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS 07-CV-05295-MRP (MANx) A Medium-Term Notes to be offered on a continuous basis. (SAC ¶ 929.) Even if the alleged February 7, 2005 “commencement,” rather than the April 7, 2004 registration statement, was the “bona-fide” offering date, Plaintiffs’ claims against Mr. McLaughlin are barred by the three-year statute of repose under Section 13 because Mr. McLaughlin was not named as a defendant until April 11, 2008. (See CAC.) Any subsequent prospectus supplements and pricing supplements alleged in the SAC are irrelevant to the application of the statute of repose to Mr. McLaughlin because they do not create new offerings for the purpose of applying the statute of repose to officers and directors. Count I is time-barred against Mr. McLaughlin, and should be dismissed with prejudice. IV. PLAINTIFFS FAIL TO STATE A CLAIM FOR CONTROL PERSON LIABILITY AGAINST MR. MCLAUGHLIN. Plaintiffs also fail to properly allege a claim for “control person” liability under Section 15 of the Securities Act against Mr. McLaughlin. (SAC ¶¶ 1127-36.) In the Ninth Circuit, to state a claim for control person liability, a plaintiff must allege that: (1) the defendant had the power to influence or control the primary violator and (2) the defendant actively used this influence or control so as to be a “culpable participant” in the primary violation. Durham v. Kelly, 810 F.2d 1500, 1503-04 (9th Cir. 1987). A plaintiff must allege more than the defendant’s position and committee membership. In re GlenFed, Inc. Sec. Litig, 60 F.3d 591, 593 (9th Cir. 1995). The Ninth Circuit has indicated that there can be no liability if the controlling person “was not a participant in ... activities which are claimed to violate the securities laws.” Christoffel v. E.F. Hutton & Co., Inc., 588 F.2d 665, 669 (9th Cir. 1978). “There must be some showing of actual participation in the corporation’s operation or some influence before the consequences of control may be imposed.” Burgess v. Premier Corp., 727 F.2d 826, 832 (9th Cir. 1984).9 9 Mr. McLaughlin has joined the motion to dismiss of Countrywide Defendants Case 2:07-cv-05295-MRP-MAN Document 360 Filed 02/06/09 Page 18 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEGAL_US_W # 60962692.4 17 MEMO. OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS 07-CV-05295-MRP (MANx) Plaintiffs acknowledge that Mr. McLaughlin resigned effective April 1, 2005. Nevertheless, Plaintiffs allege that Mr. McLaughlin was a controlling person “when each of the Series A Medium-Term Notes Registration Statement and Series A Medium-Term Notes Prospectus was filed and became effective ….” (SAC ¶ 1131.) However, Plaintiffs indiscriminately lump together pricing supplements and prospectuses dated after April 1, 2005 into their definition of Series A Medium- Term Notes Registration Statement. (Id.) In its Omnibus Order, the Court noted the rule, which applies to issuers but not officers, that each new offering pursuant to a shelf registration creates a new registration statement for the purposes of giving rise to Section 11 liability. (Omnibus Order at 41.) Mr. McLaughlin cannot be liable as a control person under Section 15 for any Series A Medium-Term notes issued pursuant to prospectuses or pricing supplements after he left the company. See In re Digi Intern., Inc. Sec. Litig., 6 F. Supp. 2d 1089, 1101 (D. Minn. 1998) (CFO not liable as control person for alleged false and misleading disclosures made after he left the company); Brown v. Enstar Group, Inc., 84 F.3d 393 (11th Cir. 1996) (Former founder of company held not to be a control person because he did not have the power to control the corporation at the time the prospectus was issued.). In addition, Plaintiffs have failed to plead any loss relating to the Series A Medium-Term Notes that Countrywide issued during the Class Period while Mr. McLaughlin was the CFO. As the Court stated in its Omnibus Order, “[t]here are cases, of course, where the face of the complaint or judicially noticeable facts demonstrate that the plaintiff cannot establish loss causation. In such cases, 12(b)(6) dismissal may be appropriate.” (Omnibus Order at 51.) This is such a case justifying dismissal. relating to Count I. To the extent the Court dismisses Count I against Countrywide, there can be no liability against Mr. McLaughlin under Section 15. Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d 1151, 1161 (9th Cir. 1996). Case 2:07-cv-05295-MRP-MAN Document 360 Filed 02/06/09 Page 19 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEGAL_US_W # 60962692.4 18 MEMO. OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS 07-CV-05295-MRP (MANx) Under the law of the Ninth Circuit, a person only may sue under Section 11 for “losses caused by the misstatement or omission.” In re Broderbund/Learning Co. Sec. Litig., 294 F.3d 1201, 1203 (9th Cir. 2002). In addition, under Section 12(a)(2), “there can be no recovery unless the purchaser has suffered a loss.” Id. at 1205. If a complaint demonstrates that a plaintiff cannot have suffered the type of injury contemplated by the statute, then it fails Rule 8(a)(2) for failure to “show[] that the pleader is entitled to relief.” Fed. R. Civ. Proc. 8(a)(2). Countrywide issued only one pricing supplement during the Class Period while Mr. McLaughlin was the CFO. (SAC ¶¶ 44, 930; RJN, Ex. 6.) That pricing supplement, dated March 16, 2005, was for notes that matured on March 21, 2006. (RJN, Ex. 6 at 34.) A “maturity date” is defined as “the date on which the principal amount of a note, draft, acceptance bond or other debt instrument becomes due and is repaid to the investor and interest payments stop. It is also the termination or due date on which an installment loan must be paid in full.” Investopedia, http://www.investopedia.com/terms/m/maturitydate.asp (last visited Feb. 6, 2009); (RJN, Ex. 29.) (Emphasis added.) By definition, therefore, the notes issued by Countrywide on March 16, 2005 were fully paid on March 21, 2006, and Plaintiffs have not and cannot allege that they suffered any loss from the purchase of those notes. Plaintiffs’ SAC does not allege any corrective disclosure causing a loss before that maturity date. Consequently, Plaintiffs cannot allege the “type of injury” necessary to state a claim under Sections 11 or 12 against Countrywide as a primary violator for the notes issued pursuant to the March 16, 2005 pricing supplement. (Omnibus Order at 46 (“The ‘type of injury’ the statute contemplates is a decline in investment value due to materially false or misleading information in the registration statement.”).); In re Mutual Funds Inv. Litig., 384 F. Supp. 2d 845 (D. Md. 2005) (A complaint is deficient under Section 11 when it fails to “plead facts demonstrating that [plaintiff] suffered the particular type of injury contemplated by the statute.”); cf. Dura Case 2:07-cv-05295-MRP-MAN Document 360 Filed 02/06/09 Page 20 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEGAL_US_W # 60962692.4 19 MEMO. OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS 07-CV-05295-MRP (MANx) Pharms., Inc. v. Broudo, 544 U.S. 336, 342 (2005) (“Loss causation is a causal connection between the material misrepresentation and the loss.”). Countrywide is not primarily liable under Section 11 for those notes issued pursuant to the March 16, 2005 pricing supplement because Plaintiffs cannot show any injury under Section 11 or Section 12(a)(2). There is, therefore, no basis to hold Mr. McLaughlin liable under Section 15 under any circumstances. See Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d at 1161 (9th Cir. 1996) (Absent the pleading of an underlying securities violation, there can be no control person liability under Section 15.). V. THE COURT SHOULD DISMISS ALL CLAIMS AGAINST MR. MCLAUGHLIN WITH PREJUDICE. Plaintiffs have had ample opportunity to thoroughly investigate Mr. McLaughlin’s involvement and make sufficient allegations to state a claim, but have failed to do so. Under such circumstances, the Court should dismiss the claims against him, without leave to amend. Allen v. City of Beverly Hills, 911 F.2d 367, 373 (9th Cir. 1990) (“The district court’s discretion to deny leave to amend is particularly broad where [the] plaintiff has previously amended the complaint.”). Nearly seventeen months have passed since the first suit filed by George Pappas and the recent SAC, yet Plaintiffs still have failed to allege a claim against Mr. McLaughlin. The Court, in dismissing with prejudice all claims against Grant Thornton (“GT”) in this case, reasoned that Plaintiffs had “sufficient opportunity to investigate GT’s involvement and make allegations sufficient to state a claim” in the eight months between the suit filed by George Pappas and the CAC. (Omnibus Order at 36.) Likewise, Plaintiffs have had ample time and opportunity to investigate any claims concerning Mr. McLaughlin and should not be given any more time in a patently futile effort to state a claim against Mr. McLaughlin when none exists. Case 2:07-cv-05295-MRP-MAN Document 360 Filed 02/06/09 Page 21 of 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LEGAL_US_W # 60962692.4 20 MEMO. OF POINTS & AUTHORITIES IN SUPPORT OF MOTION TO DISMISS 07-CV-05295-MRP (MANx) Moreover, there is no question of fact at issue here as all relevant dates for the Section 13 inquiry have been pleaded and established by Plaintiffs and are, thus, beyond dispute. The effective date of the registration statement occurred in April 2004, and Plaintiffs allege that the offering “commenced” on February 7, 2005. Mr. Mclaughlin was not named in the case until the CAC was filed on April 11, 2008. Thus, Plaintiffs cannot correct the Section 13 violation by amendment - the flaw is fatal to their claims. In re Metro. Sec. Litig., 532 F. Supp. at 1276 (An amendment cannot “cure … the bar imposed by a statute of repose.”). In addition, no amendment can cure the defects in the SAC alleging that Mr. McLaughlin is a “control person” based on the Series A Medium-Term notes. VI. CONCLUSION For the foregoing reasons, the Court should dismiss with prejudice Counts I and III against Mr. McLaughlin for alleged violations of Sections 11 and 15 of the Securities Act. As these are the only claims against Mr. McLaughlin asserted in the SAC, he should be dismissed from the entire action, with prejudice. DATED: February 6, 2009 PAUL, HASTINGS, JANOFSKY & WALKER LLP WILLIAM F. SULLIVAN THOMAS A. ZACCARO JOSHUA G. HAMILTON By: /s/ WILLIAM F. SULLIVAN Attorneys for Defendant Thomas K. McLaughlin Case 2:07-cv-05295-MRP-MAN Document 360 Filed 02/06/09 Page 22 of 22