In recent decisions in separate subprime-related securities
class action lawsuits reflecting a common unwillingness to engage in
"backward looking assessments," two different Southern District of
New York judges granted defendants' motions to dismiss. In each of the cases,
the judge's recognition of the extent of the financial crisis played into their
rulings, and in the absence of specific allegations showing how internal
information or knowledge differed from the defendant companies' public
statements, both judges were unwilling to allow the cases to go forward.
The State Street Case
In a February
22, 2010 opinion, Southern District of New York Judge Richard Holwell
granted with prejudice the motion of defendants to dismiss the subprime-related
securities class action lawsuit that had been filed against State Street
Corporation, its management arm, and two executives and eight trustees of the
management arm and one of the funds it managed, the Yield Plus Fund.
According to the complaint, the Fund's value declined 34%
during the class period of July 1, 2005 and June 30, 2008. This decline was
alleged to have reflected the write-downs of the value of the Fund's
mortgage-related holdings. The Fund was liquidated on May 30, 2008.
The plaintiffs claimed that the Fund's offering documents
reflected three categories of misrepresentations: (1) a misleading description
of the Fund's investment strategy; (2) misrepresentations of the extent of
Fund's exposure to mortgage-related securities; and (3) inflated valuations of
the Fun's mortgage-related holdings. Based on these alleged misrepresentations,
the plaintiffs sought to recover damages under the liability provisions of the
Securities Act of 1933.
With respect to the plaintiffs' allegations that the
defendants' misrepresented the Fund's investment strategy, by misrepresenting
its goal to invest in "high-quality debt securities," Judge Holwell
found the plaintiffs had insufficiently pled falsity. He noted that though the
phrase "high quality" is "somewhat vague when read in
isolation," it "surely cannot be understood as a guarantee that
investors would not suffer losses."
Courts Reject Hindsight Assessments, Dismiss Subprime Securities Suits in
its entirety on The D&O