(PS) Grassi, et al v. Moody's Investors Services, et al

REPLY

E.D. Cal.June 7, 2010

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 DEFENDANTS’ JOINT MEMORANDUM OF POINTS AND AUTHORITIES Case No. 2:09-cv-00543-JAM-DAD DAVID T. BIDERMAN (SBN 101577) FARSCHAD FARZAN (SBN 215194) PERKINS COIE LLP Four Embarcadero Center, Suite 2400 San Francisco, California 94111 Telephone: (415) 344-7000 Facsimile: (415) 344-7050 Email: DBiderman@perkinscoie.com Email: FFarzan@perkinscoie.com Attorneys for Defendant The McGraw-Hill Companies, Inc. [Additional counsel listed on signature page] UNITED STATES DISTRICT COURT EASTERN DISTRICT OF CALIFORNIA RONALD M. GRASSI and SALLY GRASSI, Plaintiffs, v. MOODY’S INVESTOR’S SERVICE, INC., THE MCGRAW-HILL COMPANIES, INC. AND FITCH, INC., Defendants. Case No. 2:09-cv-00543-JAM-DAD DEFENDANTS’ JOINT REPLY MEMORANDUM IN FURTHER SUPPORT OF THEIR MOTION TO DISMISS THE AMENDED COMPLAINT Date: July 9, 2010 Time: 10:00 a.m. Place: Courtroom 27 Judge: Hon. Dale A. Drozd Case 2:09-cv-00543-JAM-DAD Document 95 Filed 06/07/10 Page 1 of 16 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 i DEFENDANTS’ JOINT MEMORANDUM OF POINTS AND AUTHORITIES Case No. 2:09-cv-00543-JAM-DAD TABLE OF CONTENTS Page INTRODUCTION .......................................................................................................................... 1 I. PLAINTIFFS’ NEGLIGENT MISREPRESENTATION CLAIM MUST BE DISMISSED BECAUSE, AS A MATTER OF LAW, DEFENDANTS DID NOT OWE PLAINTIFFS A DUTY OF CARE ............................................. 2 II. PLAINTIFFS HAVE FAILED TO PLEAD ADDITIONAL ELEMENTS NECESSARY TO STATE A CLAIM FOR NEGLIGENT MISREPRESENTATION OR FRAUD.................................................................. 5 III. PLAINTIFFS’ NEGLIGENT MISREPRESENTATION CLAIM IS BARRED BY THE FIRST AMENDMENT .......................................................... 7 IV. PLAINTIFFS FAIL TO STATE A CLAIM FOR AIDING AND ABETTING........................................................................................................... 10 CONCLUSION............................................................................................................................. 10 Case 2:09-cv-00543-JAM-DAD Document 95 Filed 06/07/10 Page 2 of 16 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 ii DEFENDANTS’ JOINT MEMORANDUM OF POINTS AND AUTHORITIES Case No. 2:09-cv-00543-JAM-DAD TABLE OF AUTHORITIES Page Case Law 44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484 (1996) .................................. 9 Abu Dhabi Commercial Bank v. Morgan Stanley & Co., 651 F. Supp. 2d 155 (S.D.N.Y. 2009) ......................................................................................... 8 Anderson v. Deloitte & Touche LLP, 56 Cal. App. 4th 1468 (1st Dist. 1997) ................................................................................................................. 4-5, 6 Bily v. Arthur Young & Co., 3 Cal. 4th 370 (1992) .............................................. 2, 3, 4, 5 Bolger v. Youngs Drug Products Corp., 463 U.S. 60 (1983) ............................... 9 Bose Corp. v. Consumers Union of U.S., Inc., 466 U.S. 485 (1984).................... 9 Chapman v. Chronicle, No. C 07-4775 SBA, 2009 WL 102821 (N.D. Cal. Jan. 14, 2009) ............................................................................................ 5n Commodity Trend Services, Inc. v. Commodity Futures Trading Commission, 149 F.3d 679 (7th Cir. 1998)....................................................... 9 Compuware Corp. v. Moody’s Investors Services, Inc., 499 F.3d 520 (6th Cir. 2007)................................................................................................... 6, 8 County of Orange v. McGraw Hill Cos., 245 B.R. 151 (C.D. Cal. 1999) ............ 8 In re Enron Corp. Securities, Derivative & “ERISA” Litigation, 511 F. Supp. 2d 742 (S.D. Tex. 2005) ......................................................................... 8 In re Fitch, Inc., 330 F. 3d 104 (2d Cir. 2003)...................................................... 7 Gadda v. State Bar of California, 511 F.3d 933 (9th Cir. 2007) .......................... 5n-6n In re Glenfed, Inc. Securities Litigation, 42 F.3d 1541 (9th Cir. 1994), superseded by statute on other grounds................ 6 Guenther v. Cooper Life Sciences, 759 F. Supp. 1437 (N.D. Cal. 1990) ............. 2-3 Hoffman v. Capital Cities/ABC, Inc., 255 F.3d 1180 (9th Cir. 2001) .................. 9 Jefferson County School District No. R-1 v. Moody’s Investor’s Services, Inc., 175 F.3d 848 (10th Cir. 1999) ................................................... 8 In re Lehman Bros. Securities & ERISA Litig., 684 F. Supp. 2d 485 (S.D.N.Y. 2010)................................................................................................................. 7 Lowe v. Securities & Exchange Commission, 472 U.S. 181 (1985)..................... 9 Case 2:09-cv-00543-JAM-DAD Document 95 Filed 06/07/10 Page 3 of 16 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 iii DEFENDANTS’ JOINT MEMORANDUM OF POINTS AND AUTHORITIES Case No. 2:09-cv-00543-JAM-DAD Page New Jersey Carpenters Health Fund v. DLJ Mortgage Capital Inc., No. 08-5653, 2010 WL 1473288 (S.D.N.Y. Mar. 29, 2010)................................... 6 New Jersey Carpenters Vacation Fund v. Royal Bank of Scotland Group, PLC, No. 08 CV 5093, 2010 WL 1172694 (S.D.N.Y. Mar. 26, 2010) ................................................................................................................. 6 Nutmeg Securities, Ltd. v. McGladrey & Pullen, 92 Cal. App. 4th 1435 (2d Dist. 2001) .................................................................................................. 3-4 Nycal Corp. v. KPMG Peat Marwick LLP, 688 N.E.2d 1368 (Mass. 1998) ................................................................................................................. 3 Ronconi v. Larkin, 253 F.3d 423 (9th Cir. 2001).................................................. 7 In re Scott Paper Co. Securities Litigation, 145 F.R.D. 366 (E.D. Pa. 1992) ................................................................................................................. 10 Securities & Exchange Commission v. Wall St. Publishing Institute, Inc., 851 F.2d 365 (D.C.Cir. 1988), cert. denied, 489 U.S. 1066 (1989) ................................................................................................................ 9-10 Simpson v. Specialty Retail Concepts, Inc., 908 F. Supp. 323 (M.D.N.C. 1995).................................................................................................................. 3n Tsereteli v. Residential Asset Securitization Trust 2006-A8, No. 08 CV 10637, — F. Supp. 2d. —, 2010 WL 816623 (S.D.N.Y. Mar. 11, 2010) ................................................................................................................. 6 Treatises L. Tribe, American Constitutional Law (2d ed. 1988).......................................... 9 Additional Authority Restatement (Second) of Torts, Tent. Draft No. 11 § 552 .................................... 5 Case 2:09-cv-00543-JAM-DAD Document 95 Filed 06/07/10 Page 4 of 16 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 DEFENDANTS’ JOINT MEMORANDUM OF POINTS AND AUTHORITIES Case No. 2:09-cv-00543-JAM-DAD Defendants The McGraw-Hill Companies, Inc. (“McGraw-Hill”), Moody’s Investors Service, Inc. (“Moody’s”)1, and Fitch, Inc. (“Fitch”) (collectively “Defendants”), respectfully submit this joint reply memorandum in further support of their motion seeking dismissal of the claims asserted against them in the Amended Complaint (“AC”). INTRODUCTION Plaintiffs admit that the pleading requirements of the Federal Rules of Civil Procedure present “an elusive challenge” in this case. Pl. Opp. at 5. Indeed, their opposition brief confirms this Court’s suspicion that they cannot “file an amended complaint that [meets] federal pleading standards and state a cognizable claim.” Mar. 26, 2010 Order, Dkt. No. 79, at 10. Rather than abiding by the Court’s instruction in that Order that they “comply with the requirements of Rules 8 and 9 to allege facts that establish all elements of the claims alleged and . . . provide the specificity required for the fraud claim,” Plaintiffs urge the Court to accept a stew of articles, transcripts of Congressional testimony, excerpts from recent books, Internet blogs, and other general public statements about rating agencies and/or the nation’s financial crisis. These allegations — which Plaintiffs themselves characterize merely as “circumstantial evidence” — are wholly inadequate to state a claim. Pl. Opp. at 7. Unable to make well-pleaded allegations concerning the specific bonds that they purchased and the ratings assigned to those bonds, Plaintiffs rely on extralegal appeals based on their notion of “common sense,” arguing for example that “at this point in time” there is not “really any doubt . . . that the rating agencies were over-rating bonds for fees, and the public lost million of dollars in the process.” Pl. Opp. at 6, 9. As explained below, and in Defendants’ prior submissions, such allegations are simply not sufficient under the law, as they “fall[] far short of stating a plausible, cognizable claim against any defendant.” Mar. 26, 2010 Order, Dkt. No. 79, at 9. In the alternative (and in tacit recognition of their continuing failure to state a claim) Plaintiffs’ May 21 opposition papers also seek leave to file yet another Complaint — a request ___________________________________ 1 Moody’s is erroneously identified in the caption as Moody’s Investor’s Service, Inc. Case 2:09-cv-00543-JAM-DAD Document 95 Filed 06/07/10 Page 5 of 16 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 2 DEFENDANTS’ JOINT MEMORANDUM OF POINTS AND AUTHORITIES Case No. 2:09-cv-00543-JAM-DAD that this Court denied on May 26. See May 26, 2010 Order, Dkt. No. 94. Plaintiffs’ pro se status, especially when one of the Plaintiffs is an attorney, does not excuse the application of the Federal Rules or the fundamental principles of New York and California law, discussed at length in Defendants’ opening brief. Because Plaintiffs have now clearly and unmistakably demonstrated that their claims rest on speculation and conjecture, rather than well-pleaded allegations of specific wrongdoing by Defendants, their claims must be dismissed with prejudice. I. PLAINTIFFS’ NEGLIGENT MISREPRESENTATION CLAIM MUST BE DISMISSED BECAUSE, AS A MATTER OF LAW, DEFENDANTS DID NOT OWE PLAINTIFFS A DUTY OF CARE Plaintiffs do not contest that to state a claim for negligent misrepresentation under either New York or California law, they must allege that Defendants owed them a duty of care. Yet Plaintiffs do not — and obviously cannot — allege that they stood in near-privity with Defendants (as New York law requires) or were otherwise members of a limited group for whose benefit Defendants chose to communicate their ratings, as required by the California Supreme Court’s decision in Bily v. Arthur Young & Co., 3 Cal. 4th 370 (1992). Instead, Plaintiffs urge the Court to recognize an exception to these standards, basing their argument on three cases, none of which actually advance their claims.2 First, Plaintiffs rely on Guenther v. Cooper Life Sciences, Inc., 759 F. Supp. 1437 (N.D. Cal. 1990) (which they incorrectly describe as a Ninth Circuit decision), contending that it stands for the proposition that all members of the general investing public are owed a duty of care every time Defendants broadly disseminate credit rating opinions. Notably, this is the same opinion cited at length in Plaintiffs’ August 17, 2009 Supplemental Opposition to Defendants’ original motion to dismiss. See Suppl. Opp. to Defs.’ Mot. to Dismiss, dated Aug. 17, Dkt. No. 66, at 2-4. Plaintiffs sought leave to file that supplemental brief so that they could put this decision before the Court. The Court agreed to accept the additional submission, then granted Defendants’ ___________________________________ 2 Plaintiffs incorrectly presume the application of California law to this dispute, despite having sued three parties headquartered in New York for alleged misrepresentations that were issued and disseminated from New York in connection with bond offerings by a New York-based investment bank. As explained in Defendants’ prior submissions, the point is ultimately moot since Plaintiffs’ claims fail under the laws of either State. See Defts’ Mot. to Dismiss at 4, n.1. Case 2:09-cv-00543-JAM-DAD Document 95 Filed 06/07/10 Page 6 of 16 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 3 DEFENDANTS’ JOINT MEMORANDUM OF POINTS AND AUTHORITIES Case No. 2:09-cv-00543-JAM-DAD motion. The Guenther decision provides no more support for Plaintiffs’ argument now than it did last summer. As Defendants explained in their briefs supporting the original motion, Guenther was decided pursuant to Minnesota (not California) law; it predates the California Supreme Court’s seminal decision in Bily by two years; and in any event does not begin to stand for the sweeping proposition that Plaintiffs seek to advance. See Suppl. Reply in Support of Mot. to Dismiss, dated Sept. 1, 2009, Dkt. No. 69, at 2-6. Indeed, putting aside that it was decided under Minnesota law and that it predates Bily, the decision in Guenther is inapposite here because, among other things, the auditor defendant in that case had formally and expressly consented to having its reports included in a prospectus that was prepared for a narrow purpose — to sell stock to investors. This was a critical fact in the court’s decision, which hinged on the plaintiffs’ allegations that the auditors were aware and intended that their allegedly misleading audit reports would be used for this specific purpose. See Guenther, 759 F. Supp. at 1443. Thus, Guenther does not stand for the proposition, advanced by Plaintiffs here, that entities such as Defendants, who (i) publish opinions broadly around the world for a wide range of potential uses and (ii) specifically state that their ratings are not recommendations and investors should not rely on them in making any investment decision, owe a duty of care to anyone who might happen to read and later claim to have relied on those opinions for some purpose. See Nycal Corp. v. KPMG Peat Marwick LLP, 688 N.E.2d 1368, 1373-74 (Mass. 1998) (distinguishing Guenther on the grounds that “[a]t the time the audit was being prepared, the plaintiff was an unknown, unidentified potential future investor in [the defendant’s client]”). There is no allegation here that the Defendants formally and expressly consented to have their ratings reports disseminated to Plaintiffs for use in the manner alleged here. Guenther is accordingly entirely inapplicable.3 Plaintiffs also rely heavily on Nutmeg Securities, Ltd. v. McGladrey & Pullen, 92 Cal. ___________________________________ 3 Plaintiffs’ citation to a North Carolina district court decision, Simpson v. Specialty Retail Concepts, Inc., 908 F. Supp. 323 (M.D.N.C. 1995) which cited approvingly to Guenther (but which did not mention the California Supreme Court’s decision in Bily), is similarly unpersuasive, both in its reasoning and given its ultimate reliance on North Carolina state law. See Pl. Opp. at 14-15. Case 2:09-cv-00543-JAM-DAD Document 95 Filed 06/07/10 Page 7 of 16 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 4 DEFENDANTS’ JOINT MEMORANDUM OF POINTS AND AUTHORITIES Case No. 2:09-cv-00543-JAM-DAD App. 4th 1435 (2d Dist. 2001), for the proposition that the “limited group” requirement of Bily does not apply where a complaint alleges that a defendant failed to act “independent[ly]” and “knowingly assisted . . . in preparing false or misleading financial reports[.]” Pl. Opp. at 14. What Plaintiffs fail to acknowledge is that the plaintiff in that case was not a member of the general investing public, but rather an underwriter who alleged specifically that the defendant auditor issued false and misleading reports “knowing and intending” that plaintiff would rely on them when it agreed to underwrite the relevant offering. 92 Cal. App. 4th at 1437-38 (emphasis added) Indeed, the complaint alleged that the defendant made representations intended to assuage specific concerns expressed by the plaintiff during the course of the relevant transaction: While proceeding with the steps necessary for the IPO, [Plaintiff] raised questions about [the audited company’s] accounting practices. In response to [Plaintiff’s] concerns, [the auditor] assisted [the company] in the preparation of a letter assuring [Plaintiff that] ‘the statements set forth in the registration statement . . . are true and correct . . . .’ These statements were untrue and [the auditor] was aware these untrue statements would be communicated to [Plaintiff], and intended [Plaintiff] to rely upon them. Id. at 1441 (emphasis added). In reaching its decision, the court in Nutmeg drew clear distinctions between plaintiffs such as the underwriter in that case, and other potential plaintiffs (such as those in this action) who would constitute the sort of limitless group recognized by Bily. Id. at 1445, 1447 (observing that “IPO underwriters are a sufficiently ‘narrow and circumscribed class of persons’” with “‘sufficiently specific parameters’ to allow the auditor to assess the scope of its liability when it undertakes the audit and thus engage in its own ‘private ordering’ to manage the risk.”).4 Put simply, Nutmeg says nothing that could fairly be read to extend a duty of care to members of the general investing public. Finally, Plaintiffs rely on Anderson v. Deloitte & Touche LLP, 56 Cal. App. 4th 1468 (1st Dist. 1997), which also fails to support their duty of care arguments. In Anderson, defendants ___________________________________ 4 Plaintiffs’ various contentions that Bily “may not be controlling” because, among other things, it involved a claim under the Securities Exchange Act, are unavailing. Pl. Opp. at 13. Although the California Supreme Court’s opinion in Bily did discuss federal securities law standards, the Court did not adjudicate any federal securities claim, but rather expressly addressed standards relevant to the very sort of common law negligent misrepresentation claim raised here. Case 2:09-cv-00543-JAM-DAD Document 95 Filed 06/07/10 Page 8 of 16 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 5 DEFENDANTS’ JOINT MEMORANDUM OF POINTS AND AUTHORITIES Case No. 2:09-cv-00543-JAM-DAD made alleged misstatements in connection with privately held limited partnerships formed to acquire four California wineries. The alleged misstatements were made in a “confidential offering memorandum” (id. at 1472) that was intended “for the specific purpose of attracting investors” to the four partnerships, and could not “reasonably be understood to have any other purpose.” Id. at 1478. The facts of the case are thus plainly distinguishable from Bily, in which plaintiffs (just like the Plaintiffs here) were part of a “very large class of persons whom almost any negligently given information may foreseeably reach and influence[.]” Bily, 3 Cal. 4th at 394 (quoting Restatement (Second) of Torts, Tent. Draft No. 11 § 552 at 56 (Apr. 15, 1965)). Contrary to Plaintiffs’ contention, these three cases do nothing to erode the decision in Bily (much less the even more exacting requirements of New York law) and do not begin to support Plaintiffs’ novel argument that they — along with any number of others around the world who may claim to rely on Defendants’ ratings — were owed a duty of care. Any finding to the contrary would be unprecedented and would render meaningless the well-established requirements of New York and California law. II. PLAINTIFFS HAVE FAILED TO PLEAD ADDITIONAL ELEMENTS NECESSARY TO STATE A CLAIM FOR NEGLIGENT MISREPRESENTATION OR FRAUD As demonstrated in Defendants’ prior submissions, Plaintiffs fail to allege important elements required to state claims for negligent misrepresentation and fraud, much less do they satisfy the heightened pleading requirements of Rule 9(b). While Plaintiffs’ opposition brief continues to lament the pleading requirements to which they — as well as other litigants — are bound (calling them, among other things, “rather contradictory” and a “subtle form of pre- emption,” Pl. Opp. at 7), the requirements are well-established and cannot be ignored, even in the case of a pro se plaintiff.5 ___________________________________ 5 See Chapman v. Chronicle, No. C 07-4775 SBA, 2009 WL 102821, at *2 (N.D. Cal. Jan. 14, 2009) (recognizing that pro se litigant’s status as such “does not relieve the party of the burden of alleging sufficient facts on which a recognized legal claim could be based” and that “[b]ald assertions and conclusions of law will not suffice.”) (citation and internal quotation marks omitted); Gadda v. State Bar of California, 511 F.3d 933, 939 (9th Cir. 2007) (holding that where pro se plaintiff “has not suggested any possible way that he could cure his complaint to survive Case 2:09-cv-00543-JAM-DAD Document 95 Filed 06/07/10 Page 9 of 16 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 6 DEFENDANTS’ JOINT MEMORANDUM OF POINTS AND AUTHORITIES Case No. 2:09-cv-00543-JAM-DAD Unable to make specific, well-pleaded allegations in support of their claims, Plaintiffs simply assert in the broadest possible fashion that “no professional analyst who objectively and professionally examined Lehman’s financial condition . . . could have . . . concluded the subject bonds warranted an Invest grade rating.” Pl. Opp. at 28. This vague and conclusory assertion does not even remotely approach the level of specificity required by the case law cited in Defendants’ opening brief. Among other things, a complaint must allege not only “the time, place and content” of each alleged misstatement, but also the “circumstances indicating falseness.” See In re Glenfed Inc. Sec. Litig., 42 F.3d 1541, 1547-48 (9th Cir. 1994), superseded by statute on other grounds. As set forth in Defendants’ prior submissions, the burden is highest in a case regarding alleged misstatements of opinion, where Plaintiffs must allege specific facts to show that the speaker (in this case Defendants’ credit rating analysts) held a “disbelief in the truth of the statement” — i.e., that they “did not believe the representation to be true.” See e.g. Anderson, 56 Cal. App. 4th at 1476; Compuware Corp. v. Moody’s Investors Services, Inc., 499 F.3d 520, 529 (6th Cir. 2007); New Jersey Carpenters Health Fund v. DLJ Mortgage Capital Inc., No. 08-5653, 2010 WL 1473288, at *7-*8 (S.D.N.Y. Mar. 29, 2010); New Jersey Carpenters Vacation Fund v. Royal Bank of Scotland Group, PLC, No. 08 CV 5093, 2010 WL 1172694, at *13-*14 (S.D.N.Y. Mar. 26, 2010); Tsereteli v. Residential Asset Securitization Trust 2006-A8, No. 08 CV 10637, — F. Supp. 2d. —, 2010 WL 816623, at *5, (S.D.N.Y. Mar. 11, 2010). Plaintiffs plainly have not satisfied this standard — a point they all but acknowledge on page 29 of their opposition brief where they assert that “[o]nce discovery is permitted,” they will “examine all the financial records specifically in defendants’ possession and can and will be more specific as to what was reviewed, if anything, and what should have been noted by each analyst.” Plaintiffs further tellingly assert that “if so required, [they] will also plead more details to the best of their actual belief and pursuant to information and belief (based on dozens of financial articles . . ., transcripts of ___________________________________ dismissal upon amendment, nor is one apparent . . . amendment would be futile” and “district court properly dismissed [pro se plaintiff’s] claims with prejudice and without leave to amend”). Case 2:09-cv-00543-JAM-DAD Document 95 Filed 06/07/10 Page 10 of 16 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 7 DEFENDANTS’ JOINT MEMORANDUM OF POINTS AND AUTHORITIES Case No. 2:09-cv-00543-JAM-DAD speeches from financial experts . . ., remarks set forth in books . . ., and several highly respected blogs.” Pl. Opp. at 29. (emphasis added). Of course, it is not Plaintiffs’ belief that matters, but the actual subjective belief of the analysts responsible for the ratings that must be plead with particularity. In this regard, it is not enough for Plaintiffs simply to second guess Defendants’ analysts’ ratings opinions, as they do in their opposition brief. See, e.g., Pl. Opp. at 25-26 (“So, why didn’t defendants’ analysts note [Lehman’s increasing leverage] and down-grade the ’04 bond, and either not rate or rate much lower the ’08 bond and in any event, not ever downgrade the plaintiffs[’] bonds??”). Plainly, this sort of post-hoc critique falls far short of the stringent requirements of the Federal Rules and well- established case law. See Ronconi v. Larkin, 253 F.3d 423, 430 n.12 (9th Cir. 2001) (“Fraud by hindsight is not actionable.”) (internal citation and quotation omitted). See also In re Lehman Bros. Securities & ERISA Litig., 684 F. Supp. 2d 485, 495 (S.D.N.Y. 2010) (holding that allegations critical of Defendants’ credit rating process were “insufficient to support an inference that the ratings agencies did not actually hold the opinion . . . to justify each rating at the time each rating was issued.”). III. PLAINTIFFS’ NEGLIGENT MISREPRESENTATION CLAIM IS BARRED BY THE FIRST AMENDMENT As previously established (See Defs.’ Joint Mem. in Support of Mot. to Dismiss AC, at 16-19), Plaintiffs’ negligent misrepresentation claim is also barred by fundamental principles of constitutional law because the publicly-disseminated credit ratings that Plaintiffs attack are non- actionable expressions of opinion and because Plaintiffs fail to allege that the Rating Agencies acted with actual malice. Plaintiffs respond by citing two decisions, neither of which actually advance their argument at all. First, In re Fitch, Inc., 330 F. 3d 104 (2d Cir. 2003) — also cited at length in Plaintiffs’ unsuccessful July 2, 2009 opposition to Defendants’ original motion to dismiss — is entirely inapposite. See Pl. Opp. at 31; Dkt. No. 55, at 22-25. That case did not address the First Amendment, but rather the New York Shield law for journalists, and did involve in any way the potential liability arising from ratings. Indeed, it concerned Fitch’s response to a non-party Case 2:09-cv-00543-JAM-DAD Document 95 Filed 06/07/10 Page 11 of 16 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 8 DEFENDANTS’ JOINT MEMORANDUM OF POINTS AND AUTHORITIES Case No. 2:09-cv-00543-JAM-DAD subpoena (not an alleged tort) and turned in part on allegations that Fitch had been involved in developing a structured finance transaction — an allegation that could not exist in this case, which involves ratings of corporate bonds. Nor is Plaintiffs’ argument advanced by the decision in Abu Dhabi Commercial Bank v. Morgan Stanley & Co., 651 F. Supp. 2d 155 (S.D.N.Y. 2009), which actually serves to reinforce Defendants’ First Amendment protections in this case. The court in Abu Dhabi recognized unequivocally that “[i]t is well-established that under typical circumstances, the First Amendment protects rating agencies, subject to an ‘actual malice’ exception, from liability arising out of their issuance of ratings and reports because their ratings are matters of public concern.” Id. at 175. The decision is therefore in accord with the extensive body of case law that has repeatedly and consistently recognized that, at its core, the Rating Agencies’ speech—opinions about securities that are disseminated to the investing public—implicate the First Amendment and are entitled to its protections. See, e.g., Compuware, 499 F.3d at 529; Jefferson County School District No. R-1 v. Moody’s Investor’s Services, Inc., 175 F.3d 848, 856 (10th Cir. 1999); County of Orange v. McGraw Hill Cos., 245 B.R. 151, 157 (C.D. Cal. 1999); In re Enron Corp. Securities, Derivative & “ERISA” Litigation, 511 F. Supp. 2d 742, 808-27 (S.D. Tex. 2005). While acknowledging that the First Amendment applies in “typical circumstances,” the Court in Abu Dhabi found that at the motion to dismiss stage it was bound to accept the affirmative and specific allegations made by the Plaintiff in that case that the ratings on a particular and identified issuer “were never widely disseminated, but were provided instead in connection with a private placement to a select group of investors.” 651 F. Supp. 2d at 176. As such, the court held that dismissal on First Amendment grounds was not appropriate at that procedural stage. No such circumstances are, or could be, alleged here. Indeed, Plaintiffs have repeatedly acknowledged in their pleadings and their briefs to this Court that Defendants’ Lehman ratings were disseminated to the public at large, (See AC, at 4, 8, 13, 20; Pl. Opp. at 15), a fact that is also evident from the reports themselves. See May 3, 2010 Declaration of David Biderman in Support of Defendants’ Motion to Dismiss the Amended Complaint, Ex. 1; see also Case 2:09-cv-00543-JAM-DAD Document 95 Filed 06/07/10 Page 12 of 16 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 9 DEFENDANTS’ JOINT MEMORANDUM OF POINTS AND AUTHORITIES Case No. 2:09-cv-00543-JAM-DAD June 15, 2009 Declaration of Keith E. Eggleton in Support of Moody’s Motion to Dismiss, Ex. B (Dkt. No. 46); June 15, 2009 Declaration of Tobias J. Stern in Support of Fitch’s Motion to Dismiss, Ex. A (Dkt. No. 53). There can be no serious dispute, therefore, that the ratings in this case fall within the “typical circumstances” consistently recognized by the courts. Plaintiffs’ alternative argument that Defendants’ ratings amount to commercial speech and should thus be afforded a lesser protection under the First Amendment is also unavailing. Pl. Opp. at 34-36. In Hoffman v. Capital Cities/ABC, Inc., 255 F.3d 1180 (9th Cir. 2001), cited by Plaintiffs, the Ninth Circuit explained that “the ‘core notion of commercial speech’ is that it ‘does no more than propose a commercial transaction.’” 255 F.3d at 1184 (quoting Bolger v. Youngs Drug Products Corp., 463 U.S. 60, 66 (1983)). See also 44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484, 499 (1996) (“The entire commercial speech doctrine, after all, represents an accommodation between the right to speak and hear expression about goods and services and the right of government to regulate the sales of such goods and services.” (quoting L. Tribe, American Constitutional Law § 12-15, p. 903 (2d ed. 1988)) (emphasis in original). Plaintiffs misapprehend this law, suggesting that speech about commerce is by its nature “commercial speech” entitled to lesser First Amendment protection. To the contrary, courts have routinely held that publications about commerce, economics and — most relevant to this case — the creditworthiness of issuers of debt and debt securities, are fully protected speech (not commercial speech) because they have no relation to a proposed commercial transaction. See, e.g. Lowe v. Securities & Exch. Commission, 472 U.S. 181, 210 n. 58 (1985) (“[B]ecause we have squarely held that the expression of opinion about a commercial product such as a loudspeaker is protected by the First Amendment [citing Bose Corp. v. Consumers Union of U.S., Inc., 466 U.S. 485, 513 (1984)], it is difficult to see why the expression of an opinion about a marketable security should not also be protected.”); Commodity Trend Service, Inc. v. Commodity Futures Trading Commission, 149 F.3d 679, 686 (7th Cir. 1998) (holding that the publication of “impersonal evaluations and recommendations regarding available trading options” in commodities trading was not commercial speech); Securities & Exch. Commission v. Wall St. Publishing Institute, Inc., 851 F.2d 365, 372 (D.C.Cir. 1988) (holding that there is no “clear fit Case 2:09-cv-00543-JAM-DAD Document 95 Filed 06/07/10 Page 13 of 16 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 10 DEFENDANTS’ JOINT MEMORANDUM OF POINTS AND AUTHORITIES Case No. 2:09-cv-00543-JAM-DAD between the commercial speech doctrine” and publications of general financial interest), cert. denied, 489 U.S. 1066 (1989); In re Scott Paper Co. Sec. Litig., 145 F.R.D. 366, 369 (E.D. Pa. 1992) (“We see no reason why disseminators of [credit ratings] should not have as strong a claim to First Amendment protection as do disseminators of other kinds of information”). Accordingly, there is no basis here for subjecting Defendants’ credit rating opinions to anything less than full First Amendment protection. IV. PLAINTIFFS FAIL TO STATE A CLAIM FOR AIDING AND ABETTING Plaintiffs do not propose any meaningful support for their aiding and abetting claim in their opposition brief. Confronted with the requirement that they must allege the existence of a primary tort and actual knowledge of that tort by Defendants, Plaintiffs simply repeat the applicable pleading standard, see Pl. Opp. at 41-44, and refer broadly to “the allegations comprising the Aiding and Abetting claim in (1) Count 3 at p. 20-21, and also (2) through-out the [First Amended Complaint].” Pl. Opp. at 44. For the reasons stated in Defendants’ opening brief, these allegations, without more, do not set forth with any specificity the actionable conduct Defendants are alleged to have aided or abetted and do not demonstrate in any fashion that Defendants knowingly contributed to such a wrong. See Defs.’ Joint Mem. in Support of Mot. to Dismiss AC, at 20-21. Plaintiffs’ aiding and abetting claim must therefore be dismissed. CONCLUSION For the foregoing reasons, Defendants’ motion to dismiss with prejudice the claims asserted against them in the Amended Complaint should be granted. June 7, 2010 Respectfully Submitted, /s/ Farschad Farzan Floyd Abrams (admitted pro hac vice) Adam Zurofsky (admitted pro hac vice) Brian Markley (admitted pro hac vice) CAHILL GORDON & REINDEL LLP 80 Pine Street New York, New York 10005 Telephone: (212) 701-3000 Facsimile: (212) 269-5420 Case 2:09-cv-00543-JAM-DAD Document 95 Filed 06/07/10 Page 14 of 16 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 11 DEFENDANTS’ JOINT MEMORANDUM OF POINTS AND AUTHORITIES Case No. 2:09-cv-00543-JAM-DAD David T. Biderman (SBN 101577) Farschad Farzan (SBN 215194) PERKINS COIE LLP Four Embarcadero Center, Suite 2400 San Francisco, CA 94111 Telephone: (415) 344-7000 Facsimile: (415) 344-7050 Attorneys for Defendant The McGraw-Hill Companies, Inc. /s/ Keith E. Eggleton James J. Coster (admitted pro hac vice) SATTERLEE STEPHENS BURKE & BURKE LLP 230 Park Avenue, 11th Floor New York, New York 10169 Telephone: (212) 818-9200 Facsimile: (212) 818-9606 Keith E. Eggleton (SBN 159842) David A. McCarthy (SBN 226415) WILSON SONSINI GOODRICH & ROSATI Professional Corporation 650 Page Mill Road Palo Alto, California 94304-1050 Telephone: (650) 493-9300 Facsimile: (650) 565-5100 Attorneys for Defendant Moody’s Investors Service, Inc. /s/ Jonathan A. Patchen Martin Flumenbaum (admitted pro hac vice) Roberta A. Kaplan (admitted pro hac vice) Andrew J. Erlich (admitted pro hac vice) Tobias J. Stern (admitted pro hac vice) PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP 1284 Avenue of the Americas New York, New York 10010 Telephone: (212) 373-3000 Facsimile: (212) 757-3990 Case 2:09-cv-00543-JAM-DAD Document 95 Filed 06/07/10 Page 15 of 16 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 12 DEFENDANTS’ JOINT MEMORANDUM OF POINTS AND AUTHORITIES Case No. 2:09-cv-00543-JAM-DAD Stephen E. Taylor (SBN 58452) Jonathan A. Patchen (SBN 237346) TAYLOR & COMPANY LAW OFFICES, LLP One Ferry Building, Suite 355 San Francisco, California 94111 Telephone: (415) 788-8200 Facsimile: (415) 788-8208 Attorneys for Defendant Fitch, Inc. 70164-0002/LEGAL18461172.2 Case 2:09-cv-00543-JAM-DAD Document 95 Filed 06/07/10 Page 16 of 16