Potter v. Valeant Pharmaceuticals International, Inc. et al

BRIEF in Opposition

D.N.J.April 3, 2017

SEEGER WEISS LLP CHRISTOPHER A. SEEGER DAVID R. BUCHANAN 550 Broad Street, Suite 920 Newark, NJ 07102 Telephone: 973/639-9100 973/639-9393 (fax) Local Counsel ROBBINS GELLER RUDMAN & DOWD LLP JAMES E. BARZ 200 South Wacker Drive, 31st Floor Chicago, IL 60606 Telephone: 312/674-4674 312/674-4676 (fax) Lead Counsel for Plaintiffs [Additional counsel appear on signature page.] UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY In re VALEANT PHARMACEUTICALS INTERNATIONAL, INC. SECURITIES LITIGATION This Document Relates To: ALL ACTIONS. ) ) ) ) ) ) ) ) ) Master No. 3:15-cv-07658-MAS-LHG CLASS ACTION LEAD PLAINTIFF’S RESPONSE TO BRIEF OF THE SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION AS AMICUS CURIAE Case 3:15-cv-07658-MAS-LHG Document 208 Filed 04/03/17 Page 1 of 8 PageID: 4402 - 1 - I. INTRODUCTION Section 12(a)(2) allows investors to recover damages if they were solicited through false and misleading statements in a prospectus – a document soliciting the public to acquire securities. 15 U.S.C. §77l(a)(2); Gustafson v. Alloyd Co., 513 U.S. 561, 569, 574, 576, 579, 584 (1995). SIFMA, a trade group made up of many of the defendants in this case, urges an interpretation of §12(a)(2) that would grant these same defendants absolute immunity for violations of the Securities Act of 1933 (the “Securities Act”) in connection with a Rule 144A offering.1 Defendants could have avoided liability by being truthful or narrowly marketing the securities at issue. Since they did neither, the Complaint states claims under §12(a)(2) concerning $13.5 billion of Valeant debt securities sold through large-scale public offerings via prospectuses that included false statements and material omissions. See, e.g., ¶¶567-571. Defendants, with SIFMA’s biased advocacy, hope to evade accountability because the securities were not registered pursuant to Rule 144A. Given the alleged public nature of the debt offerings at issue, however, defendants’ motions to dismiss should be denied. II. ARGUMENT A. SIFMA Ignores Supreme Court Authority Ignoring Supreme Court precedent, SIFMA raises doomsday policy arguments that denying the motions to dismiss as to §12(a)(2) would result in a “sea-change” in the capital markets. Compare Gustafson, 513 U.S. at 576 with Dkt. No. 190-3 at 4-6. But applying the facts- and-circumstances test of whether an offering document is a prospectus from a “functional standpoint” would not result in the widespread liability SIFMA contends. Id. (emphasis added). 1 To the extent SIFMA repeats arguments raised by defendants, Lead Plaintiff Teachers Insurance and Annuity Association of America (“Plaintiff”) respectfully refers the Court to the omnibus opposition to the motions to dismiss. Dkt. No. 178 at 145-156. Case 3:15-cv-07658-MAS-LHG Document 208 Filed 04/03/17 Page 2 of 8 PageID: 4403 - 2 - Rather, it is simply a consequence of the Supreme Court’s twenty-year old mandate that “[t]he liability imposed by §12(2) has nothing to do with the fact of registration” (513 U.S. at 579), can attach even where “there is an exemption” from registration (id. at 571), and that a seller of a security cannot “avoid[] liability by calling a soliciting document something other than a prospectus.” Id. at 576.2 Only the largest and most widely offered securities, like the $13.5 billion of Valeant debt securities in this case, could fall outside the protection of Rule 144A. It has also long been the law that “[t]he burden of proving entitlement to an exemption rests with the party claiming the entitlement.” Berckeley Inv. Grp., Ltd. v. Colkitt, 455 F.3d 195, 212 (3d Cir. 2006) (citing SEC v. Ralston Purina Co., 346 U.S. 119, 126 (1953) (“Keeping in mind the broadly remedial purposes of federal securities legislation, imposition of the burden of proof on an issuer who would plead the [private offering] exemption seems to us fair and reasonable.”)). “Congress intended securities legislation enacted for the purpose of avoiding frauds to be construed ‘not technically and restrictively, but flexibly to effectuate its remedial purposes.’” Affiliated Ute Citizens v. United States, 406 U.S. 128, 151 (1972). Thus, whether an offering is public – regardless of registration – turns on a case-by-case, fact-specific analysis. See Dkt. No. 178 at 148. Numerous courts, including district courts in this Circuit, have applied a factual test to analyze potential §12(a)(2) liability for offerings exempt from registration. See id. at 146-150.3 Thus, SIFMA’s argument that allowing Plaintiff’s claims 2 Tellingly, SIFMA relegates Gustafson to a footnote. See Dkt. No. 190-3 at 6 n.7. 3 Despite relying heavily on district court decisions within the Second Circuit, SIFMA and defendants ignore the most recent case on point, which implicitly recognized that if sufficient facts are alleged, “such as the number of purchasers, or the character of the broad marketing efforts,” a court could “determine that notwithstanding the designation under Rule 144A, the offering was public and should not be exempted from the antifraud provisions of the Securities Act.” In re Am. Case 3:15-cv-07658-MAS-LHG Document 208 Filed 04/03/17 Page 3 of 8 PageID: 4404 - 3 - to proceed would create uncertainty by disrupting the market for private offerings (see Dkt. No. 190-3 at 4-6) is hyperbole contradicted by long-standing precedent and years’ worth of interpretations of the Rule 144A/§12(a)(2) framework. B. SEC Commentary and Recent Amendments to Rule 144A Support the Fact-Based Approach SEC commentary on Rule 144A confirms that it was not intended to categorically supplant §12(a)(2). As the SEC intended, the rule simply provides a “safe harbor from the registration requirements of the Securities Act.” 53 Fed. Reg. 44016 (Nov. 1, 1988) (emphasis added). However, Rule 144A leaves intact the “traditional facts-and-circumstances analysis to prove the availability of an exemption outside the safe harbor it provides” – most notably, the private offering exemption of §4(a)(2), 15 U.S.C. §77d. See id. This intent was captured in Rule 144A, which states the rule “will not affect the availability to such issuer of an exemption under section 4(a)(2) of the Act” or relate to “the antifraud or other provisions of the federal securities laws.” 17 C.F.R. 230.144A.4 In adopting Rule 144A, the SEC also presaged the Supreme Court’s functional test from Gustafson, commenting that “transactions technically in compliance with the Rule that nevertheless are intended to evade the registration provisions of the Securities Act are not covered by the Rule.” 55 Fed. Reg. 17933 (Apr. 30, 1990). Thus, any consideration of the SEC’s interpretation of Rule 144A only further undermines SIFMA’s position. Recent amendments to Rule 144A make SIFMA’s absolutist view even more untenable. Realty Capital Props. Inc. Litig., 1:14-cv-08668 (S.D.N.Y. Aug. 5, 2016) (attached hereto as Exhibit A). 4 The SEC lists §12(a)(2) among the federal securities laws’ “antifraud” investor protection statutes. See, e.g., https://www.sec.gov/info/smallbus/acsec/ongoinginvestorprotections.pdf. In any event, an agency interpretation cannot overcome what “the text of the regulation itself indicates.” See Christensen v. Harris Cty., 529 U.S. 576, 588 (2000). Case 3:15-cv-07658-MAS-LHG Document 208 Filed 04/03/17 Page 4 of 8 PageID: 4405 - 4 - The Jumpstart Our Business Startups Act of 2012 revised Rule 144A to allow offerings to solicit the general public. Now, “securities sold pursuant to Rule 144A may be offered to persons other than QIBs, including by means of general solicitation.” Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, 78 Fed. Reg. 44771, at 44786 (July 24, 2013) (to be codified at 17 C.F.R. pts. 230, 239 and 242). Consequently, Rule 144A offerors now have free reign to engage in all of the hallmarks of a “public offering” as that term has been defined by the Supreme Court, so long as the offeror “reasonably believes” the buyer is a QIB. See, e.g., Gustafson, 513 U.S. at 574 (“prospectus refers to a document soliciting the public to acquire securities.”); Pinter v. Dahl, 486 U.S. 622, 646-47 (1988) (“[S]olicitation is the stage at which an investor is most likely to be injured. . .); Ralston Purina, 346 U.S. at 125 (“It may well be that offerings to a substantial number of persons would rarely be exempt [as a private offering].”). Thus, after 2013 the fact-based approach to §12(a)(2) liability is even more essential to safeguarding the investing public. C. The Growth in Offerings Undermines SIFMA’s Alarmist Claims SIFMA dedicates much of its brief to a policy argument that markets would dry up if the Court were to hold, in just this case, that dismissal is precluded by applying Gustafson’s functional test. Dkt. No. 190-3. But the data shows SIFMA’s argument is complete fiction. For over twenty years courts have applied the fact-specific test mandated by the Supreme Court to Rule 144A offerings, beginning soon after Gustafson was decided. See, e.g., Sloane Overseas Fund, Ltd. v. Sapiens Int’l Corp., N.V., 941 F. Supp. 1369, 1372, 1377 (S.D.N.Y. 1996) (denying motion to dismiss §12(a)(2) claim for Rule 144A offering); AAL High Yield Bond Fund v. Ruttenberg, No. 00-C1404-5, 2001 U.S. Dist. LEXIS 25572, at *21 (N.D. Ala. Oct. 1, 2001) (same). Despite those decisions, SIFMA’s data shows offerings have ballooned. See Dkt. No. 190-1 at 3. Thus, there is no basis for SIFMA’s claim that the trend would dramatically reverse if this Court follows the path Case 3:15-cv-07658-MAS-LHG Document 208 Filed 04/03/17 Page 5 of 8 PageID: 4406 - 5 - of other courts and applies Gustafson to the unique facts here. The debt offerings here constitute some of the largest and most widely-dispersed corporate debt offerings of all time, which the Debt Offering Defendants marketed through detailed prospectuses purporting to meet the informational “requirements of Section 10 of the Securities Act.” See Dkt. No. 178 at 152-156. Given the extremely large and widespread offerings in this case, it would be the ultimate elevation of form over substance to hold as a matter of law that the debt offerings cannot be considered “public.” Finally, SIFMA’s claim that investors still have protection under §10(b) of the Exchange Act, which requires scienter, is a policy argument seeking to do away with the strict liability of §12(a)(2) and return the public offering marketplace to the state of caveat emptor that existed prior to the Securities Act’s enactment. Dkt. No. 190-3 at 6. While the industry may prefer to eviscerate the due diligence responsibilities of investment banks in all Rule 144A offerings, that is a matter for Congress, not the courts. The Securities Act’s “fundamental purpose … was to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry.” SEC v. Capital Gains, 375 U.S. 180, 186 (1963). As the Supreme Court has observed, “It requires but little appreciation . . . of what happened in this country during the 1920’s and 1930’s to realize how essential it is that the highest ethical standards prevail in every facet of the securities industry.” Id. at 186-87. That same hard lesson was recently learned following the Great Recession, and if policy arguments have any relevance to this issue, they only further support application of a fact-specific test to the large scale offerings here. See Fed. Hous. Fin. Agency v. Nomura Holding Am., Inc., 104 F. Supp. 3d 441, 552-554, 598-599 (S.D.N.Y. 2015) (plaintiff entitled to judgment under §12(a)(2) as principles of Securities Act “vindicate[d]” in “aftermath of our great recession”). Case 3:15-cv-07658-MAS-LHG Document 208 Filed 04/03/17 Page 6 of 8 PageID: 4407 - 6 - III. CONCLUSION For the reasons set forth herein, and in the omnibus opposition to the motions to dismiss, Plaintiff respectfully requests that defendants’ motions to dismiss be denied. DATED: April 3, 2017 SEEGER WEISS LLP CHRISTOPHER A. SEEGER DAVID R. BUCHANAN s/ Christopher A. Seeger CHRISTOPHER A. SEEGER 550 Broad Street, Suite 920 Newark, NJ 07102 Telephone: 973/639-9100 973/639-9393 (fax) cseeger@seegerweiss.com dbuchanan@seegerweiss.com Local Counsel ROBBINS GELLER RUDMAN & DOWD LLP DARREN J. ROBBINS BRIAN E. COCHRAN 655 West Broadway, Suite 1900 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax) darrenr@rgrdlaw.com bcochran@rgrdlaw.com Case 3:15-cv-07658-MAS-LHG Document 208 Filed 04/03/17 Page 7 of 8 PageID: 4408 - 7 - ROBBINS GELLER RUDMAN & DOWD LLP SAMUEL H. RUDMAN 58 South Service Road, Suite 200 Melville, NY 11747 Telephone: 631/367-7100 631/367-1173 (fax) srudman@rgrdlaw.com ROBBINS GELLER RUDMAN & DOWD LLP JAMES E. BARZ 200 South Wacker Drive, 31st Floor Chicago, IL 60606 Telephone: 312/674-4674 312/674-4676 (fax) jbarz@rgrdlaw.com ROBBINS GELLER RUDMAN & DOWD LLP JACK REISE ROBERT J. ROBBINS 120 East Palmetto Park Road, Suite 500 Boca Raton, FL 33432 Telephone: 561/750-3000 561/750-3364 (fax) jreise@rgrdlaw.com rrobbins@rgrdlaw.com Lead Counsel for Plaintiffs Case 3:15-cv-07658-MAS-LHG Document 208 Filed 04/03/17 Page 8 of 8 PageID: 4409 EXHIBIT “A” Case 3:15-cv-07658-MAS-LHG Document 208-1 Filed 04/03/17 Page 1 of 8 PageID: 4410 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK --------------------------------------------------------------- x IN RE AMERICAN REAL TY CAPITAL PROPERTIES, INC. LITIG. --------------------------------------------------------------- x ALVIN K. HELLERSTEIN, U.S.D.J.: SUMMARY ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTIONS TO DISMISS THE SECOND AMENDED COMPLAINT 15 MC 40 (AKH) This order summarizes my oral rulings following oral argument on June 1, 2016, and constitutes my findings and conclusions determining defendants' motion pursuant to Fed. R. Civ. P. Rule 12(b)(6) to dismiss the Second Amended Complaint ("SAC"). The case is a securities class action filed against officers and directors of American Realty Capital Properties, Inc. ("ARCP"), a Real Estate Investment Trust ("REIT") incorporated in Maryland. 1. Counts One, Two and Three-SEC Rule 430(B) Defendants Weil, Jones, Kahane and Bowman move to dismiss Counts One, Two and Three, alleging claims under section 11 of the 1933 Securities Act, 15 U.S.C. § 77k, on the ground that the misstatements in the relevant 10-Q statements became effective after they signed and filed the 2013 Shelf Registration Statement on March 13, 2014. A "prospectus supplement containing information representing a fundamental change in the information provided in the registration statement creates Section 11 liability for directors based on that new information." Fed Haus. Fin. Agency v. HSBC N. Am. Holdings Inc., 987 F. Supp. 2d 369, 375 (S.D.N.Y. 2013). The SAC alleges fundamental changes in information as between the shelf registration statement signed by the defendants, which disclosed financial statements from 2011 and 2012, and the prospectus supplement, which Case 1:14-cv-08668-AKH Document 54 Filed 08/05/16 Page 1 of 7Case 3:15-cv-07658-MAS-LHG Document 208-1 Filed 04/ 3/17 Page 2 of 8 PageID: 4411 disclosed current 2013 financial statements and related information crucial to investor decision- making at issue in this litigation. SAC iii! 76-78; 80-82. At the pleading stage, this is sufficient to show "fundamental change." The motion to dismiss the Section 11 claims based on SEC Rule 430(B) is denied. 2. Resignation Requirements of 15 U.S.C.§ 77k(b)(l) Defendants Jones and Bowman move to dismiss the Section 11 claims against them, claiming that Counts Two, Three, Six and Seven allege liability for dates after they had resigned from ARCP. However, since Jones and Bowman did not state in their resignation announcements that they would not "be responsible for such part of the registration statement" going forward, they remain liable for prior offerings for which they had responsibility. See 15 U.S.C. § 77k(b)(l). Jones and Bowman's motion to dismiss on this ground is denied. 3. Grant Thornton: Omissions Under Omnicare and Loss Causation Grant Thornton ("GT") moves to dismiss Counts I-VII of the complaint, on the ground that its opinion that ARCP's financial statements fairly reported ARCP's financial conditions and results of operations did not constitute a certification of the truthfulness of each and every component of those statements. See Omnicare Inc. v. Laborers Dist. Council Constr. Ind. Pension Fund, I 35 S. Ct. 1318, 1326-30 (2015). However, the SAC adequately alleges that GT was privy to information that plausibly challenged the reliability of ARCP's accounts and that Grant Thornton negligently failed to heighten its audit investigation. SAC fri! 59; 65. Enough is alleged to satisfy Omnicare and to require Grant Thornton to show by way of affirmative defense that it should not be liable because it exercised due diligence under Section 1 l(b)(3). 2 Case 1:14-cv-08668-AKH Document 54 Filed 08/05/16 Page 2 of 7Case 3:15-cv-07658-MAS-LHG Document 208-1 Filed 04/ 3/17 Page 3 of 8 PageID: 4412 The same reasons apply to the underwriters' motion to dismiss Counts I-VII of the SAC. The underwriters' motion also is denied. Grant'Thornton's motion to dismiss based on loss causation is also denied, and may be renewed as an affirmative defense. See Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161, 175 (2d Cir. 2005); In re: Petrobras Sec. Litig.., No. 14-CV-9662 (JSR), 2016 WL 1533553, at *3 (S.D.N.Y. Feb. 19, 2016). 4. Count Eight-Rule 144A Offering At oral argument, I withheld judgment on the question of whether the February 6, 2014 Offering, described as an "Exxon Capital Exchange," gives rise to liability under § 12(a)(2). Section 12(a)(2) creates liability for any person who, [O]ffers or sells a security (whether or not exempted by the provisions of section 77c of this title ... by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission) .... 15 U.S.C. § 771. In an Exxon Capital Exchange, a company privately offers unregistered notes pursuant to SEC Rule 144A, and later offers to exchange the limited notes for freely tradable notes. ARCP conducted the February Notes Offering pursuant to SEC Rule 144A. SAC~ 250. Rule l 44A specifically provides that securities sold in compliance with its provisions "shall be deemed not to have been offered to the public." 17 C.F.R. § 230.144A(c). Plaintiffs allege that ARCP and ARC Properties "publicly marketed" to Qualified Institutional Buyers, alleged to be "some" of the members of a class represented by two such investors, TIAA-CREF and National Pension Fund. 3 Case 1:14-cv-08668-AKH Document 54 Filed 08/05/16 Page 3 of 7Case 3:15-cv-07658-MAS-LHG Document 208-1 Filed 04/ 3/17 Page 4 of 8 PageID: 4413 In Gustafson v. Alloyd Co., the Supreme Court construed the language "by means of a prospectus" and held that "the term 'prospectus' relates to public offerings by issuers and their controlling shareholders." 513 U.S. 561, 576 (1995). In Yung v. Lee, the Second Circuit applied the Supreme Court's ruling, holding that "Gustafson's definition of a prospectus as 'a document that describes a public offering of securities' compels the conclusion that a Section 12( a)(2) action cannot be maintained by a plaintiff who acquires securities through a private transaction, whether primary or secondary." Yung v. Lee, 432 F.3d 142, 149 (2d Cir. 2005). Plaintiffs allege that class members purchased in an offering that did not involve face-to-face transactions, as did the sales of securities considered by the Supreme Court in Gustafson and the Second Circuit in Yung. However, the complaint lacks factual assertions that would allow a Court to determine whether the offering should in fact be treated as a public offering, rather than a Gustafson-type offering. The initial February 2014 transaction is described in ftft 250-254, and the September 2014 Exchange Offer in~~ 275-284. These paragraphs describe the financial reports included in the Offering Memoranda. Notably, these key paragraphs are not incorporated into the pleading specific to Section 12(a)(2). See~ 112. Even considering those paragraphs describing the transactions, plaintiffs do not allege sufficient facts, such as the number of purchasers, or the character of the broad marketing efforts, which would allow a Court to determine that notwithstanding the designation under Rule 144A, the offering was public and should not be exempted from the antifraud provisions of the Securities Act. Defendants' motion to dismiss the § 12(a)(2) claims is granted. 5. Count VIII-Statutory Sellers Defendant Nicholas Schorsch argues on the additional/alternative ground that Count VIII should be dismissed against him because he was not a "statutory seller" within the 4 Case 1:14-cv-08668-AKH Document 54 Filed 08/05/16 Page 4 of 7Case 3:15-cv-07658-MAS-LHG Document 208-1 Filed 04/ 3/17 Page 5 of 8 PageID: 4414 meaning of§ 12(a)(2), 15 U.S.C. § 771, and therefore cannot be liable under that section. An issuer is a statutory seller for the purposes of Section 12(a)(2) regardless of the form of underwriting. See 17 C.F.R. § 230.159A. An officer or director of an issuer cannot himself be a "statutory seller" except if he (1) directly passes title to the security being sold, or (2) solicits the purchase of the security out of a desire to (a) serve his own interests or (b) or the interests of the owner of the security. In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 346, 359 (2d Cir. 2010) (citing Pinter v. Dahl, 486 U.S. 622, 642, 647 (1988)). The SAC alleges in this respect that "defendants named in this Count were statutory sellers who sold and assisted in the sale of securities to plaintiff National Pension Fund and other members of the Class by means of the Offering Memorandum, and they did so for the benefit of ARCP and ARC Properties, and/or for their own personal gain, including payments directly to these individuals and/or to entities affiliated with them in the form of fees, commissions and other transaction-related payments." SAC~ 117. This is insufficient to allege a plausibly valid claim. Plaintiffs have not established that Schorsch acted out of a desire serve his own interests, and allege only by conclusion. There are no facts that suggest Schorsch participated in the solicitation beyond the preparation of the Offering Memorandum, or that he benefited in a personal way from the sale. There are insufficient facts alleged to maintain a § 12( a)(2) claim against any of the individual defendants, and the motion to dismiss is granted. See Citiline Holdings, Inc. v. iStar Fin. Inc., 701 F. Supp. 2d 506, 512 (S.D.N.Y. 2010) ("every Court of Appeals to have considered the issue ... has held that an individual's signing a registration statement does not itself suffice as solicitation under § 12(a)(2)."); accord City of Westland Police and Fire Ret. Sys. v. Metlife, Inc., 928 F. Supp. 2d 705, 720 (S.D.N.Y. 2013). 5 Case 1:14-cv-08668-AKH Document 54 Filed 08/05/16 Page 5 of 7Case 3:15-cv-07658-MAS-LHG Document 208-1 Filed 04/ 3/17 Page 6 of 8 PageID: 4415 6. § I O(b) Claim Against Defendant Lisa Beeson Defendant Lisa Beeson's motion to dismiss the§ IO(b) claim against her is denied. The SAC alleges, more clearly than the predecessor complaint, conscious misbehavior on her part, particularly with respect to the February 2014 conference call with investment analysts following ARCP. The SAC alleges that Beeson stated in a release announcing ARCP's IQ 14 financial results that the company had "improved operational and financial efficiencies," even as she was aware that the Form I 0-Q for that quarter contained false statements. SAC~~ 262; 266(c). Plaintiffs claim that the Chief Accounting Officer, McAlister, had "repeatedly" informed "members of senior management, including Beeson," that the "AFFO calculation improperly accounted for costs that should have been attributed to non-controlling interests in ARC Properties." E.g., SAC fl~ 160, 162, 260, 266. The allegations are sufficient plausibly to allege a claim against Beeson, for they allege her participation in false and misleading statements and her scienter. Beeson's 12(b)(6) motion is denied. 7. Section 15 and Section 20 "Control Person" Claims I granted leave to amend the Complaint with respect to Defendants Budko, Weil, and Block to give plaintiffs an opportunity to allege their respective culpable participations. Although the Second Circuit has not addressed the issue, the district court decisions require, where fraud is alleged, specific acts of culpable participation under. See In re Lehman Bros Mortgage Backed Secs. Litig .. , 650 F.3d 167, 186 (2d Cir. 2011); In re Marsh & Mclennan Cos., Inc. Sec. Litig., 501 F. Supp 2d 452, 493 (S.D.N.Y. 2006). In contrast to§ 15, culpable participation is a clear required element of§ 20. ATS! Commc 'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007). Culpable participation requires "a showing of both fraudulent conduct and a culpable state of mind." Pennsylvania Pub. 6 Case 1:14-cv-08668-AKH Document 54 Filed 08/05/16 Page 6 of 7Case 3:15-cv-07658-MAS-LHG Document 208-1 Filed 04/ 3/17 Page 7 of 8 PageID: 4416 Sch. Emps. 'Ret. Sys. V Bank of Am. Corp., 874 F. Supp. 2d 341, 369 (S.D.N.Y. 2012). "[M]ost courts have held that the PSLRA 's heightened pleading requirements apply to the culpable participation element, which means ... that the plaintiff must 'plead with particularity facts giving rise to a strong inference' of the requisite state of mind.'' In re ShengdaTech, Inc. Sec. Litig., 2014 WL 3928606 (S.D.N.Y. Aug. 12, 2014). Generally, the requisite state of mind for culpable participation is one "at least approximating recklessness in the Section 1 O(b) context ... . "Lapin v. Goldman Sachs Group, Inc., 506 F.Supp 2d 221, 248 (S.D.N.Y. 2006). At oral argument, I granted defendants' motions with leave to amend. Since oral argument, plaintiffs have advised the Court that they choose not to amend. Accordingly, defendants Schorsch, Kahane, Budko, Weil, and Block's motions to dismiss the Section 15 and Section 20 claims are granted. The motions by RCAP Holdings, RCAP and RCS Capital Corporation are granted for the same reason. The SAC does allege culpable participation by ARC Advisors, the external manager of ARCP, and AR Capital e.g., SAC fi 127, and these defendants' motion to dismiss are denied. Conclusion These rulings shall also apply to the opt-out cases, in which amended complaints were to be filed in accordance with my holdings on these motions. Defendants who have not already done so, shall answer by August 12, 2016. A case management shall be held Thursday, Sept. 8, at 11 :00 A.M. The clerk shall mark the motions (ECF Doc. Nos. 189, 192, 194, 198, 200, 203, 205, 207, 210, 234, 239) terminated. Dated: SO ORDERED. Aug. New ~~~ 1United States District Judge 7 Case 1:14-cv-08668-AKH Document 54 Filed 08/05/16 Page 7 of 7Case 3:15-cv-07658-MAS-LHG Document 208-1 Filed 04/ 3/17 Page 8 of 8 PageID: 4417 Case 3:15-cv-07658-MAS-LHG Document 208-2 Filed 04/03/17 Page 1 of 1 PageID: 4418