MEMORANDUM OF DECISION ON MOTIONS FOR SUMMARY JUDGMENT
WAGNER, J., JTR.
This is an action by the Administrator of the Estate of Ruth Goryn to recover certain real property and other assets obtained by defendant David Mann by virtue of a quitclaim deed dated March 26, 2009 and a power of attorney dated March 26, 2009 from the decedent. It is not disputed that Mann befriended the decedent as her landscaper. The quitclaim deed dated March 26, 2009 was filed in the Glastonbury Town Clerk's office on May 19, 2009, three days prior to decedent's death and was acknowledged that one of the two witnesses was Mann. The power of attorney was also acknowledged and had two witnesses one of which was Mann.
Plaintiff Administrator moved for Summary Judgment on March 4, 2010, claiming that the deed and power of attorney were void because the relevant statute requires two witnesses and Mann was not a proper witness because he was not only an interested party but a donee or named beneficiary.
On April 21, 2010 Mann filed an opposing Motion for Summary Judgment claiming the deed and power of attorney were valid as a matter of law.
In this action both parties agree there is no dispute as to the facts. The argument centers around the presence of the defendant (David Mann) as one of the witnesses to each document.
I
Plaintiff cites the standards of title as authority for the required two witnesses be disinterested persons, but it is not seriously disputed that the standard serve as advisory and are reflective of local custom and do not have the authority of law. CT Page 17996
II
Plaintiff primarily relies on the early Supreme Court case of Winsted Savings Bank Bldg Ass'n. v. Spencer, 26 Conn. 195 (1857), which held that "by our statutes no title can be conveyed except by a deed attested by two witnesses and duly acknowledged. This must mean by two disinterested witnesses, and acknowledged before a disinterested magistrate."
The current state of law, however, is much more forgiving. Specifically, no modern case in Connecticut has made a ruling that the witness to a deed must be disinterested, and to the contrary, the Appellate Court has held that witnesses with an interest are not disqualified or invalid. Additionally, there are no cases on record that have distinguished between an "interested" or "disinterested" witness and one who is a "beneficiary" of the deed.
The Appellate Court, in Giannopoulos v. Corbin, 7 Conn.App. 601, 509 A.2d 1075 (1986), discussed the applicability of Winsted, holding that:
[I]n support of her claim that the warranty deed was not witnessed by two disinterested, competent witnesses, the defendant relies on
Winsted Savings Bank v. Spencer . . . as the prevailing law. There, the court held that the land statute which provides that the signing by the grantor shall be attested by two witnesses has always been considered `as requiring that deeds should be attested by disinterested or competent witnesses;
witnesses who could testify in court in respect to the execution, upon any controversy that might arise in respect to it.' . . . In
Winsted, for example, a stockholder in a private corporation was not deemed to be disinterested. General Statutes § 47-6, which the defendant maintains is applicable to corporate transactions only, provides: `Conveyances of real estate made to or by any corporation . . . may be attested by witnesses interested therein, and may be acknowledged before properly authorized persons who are so interested.' Even if we assume CT Page 17997 that the defendant is correct, the enactment of General Statutes § 52-145(a), which provides in relevant part that "[a] person shall not be disqualified as a witness in any action because of, (1) his interest in the outcome of the action as a party or otherwise . . ." overcomes the objection since interest no longer disqualifies one from being a witness in a case or from being able to testify to the execution of a deed.
Essentially, the Appellate Court reasoned that as Winsted equated a "disinterested" witness with one who could testify in court should controversy arise, and that as § 52-145(a) provides that interest in the outcome of an action does not disqualify a person as a witness to that action, that therefore no requirement remains for the witnesses to a deed to be "disinterested." Additionally, the Appellate Court also noted the existence of General Statutes § 47-6, which allows for witnesses to corporate conveyances of land to have an interest in the transaction and remain qualified as witnesses. This would tend to lend strength to the notion that any beneficiary of a land conveyance can also be a witness to the deed in that transaction.
Connecticut General Statutes § 47-5 states that "(a) [all] conveyances of land shall be: (1) In writing; (2) if the grantor is a natural person, subscribed, with or without a seal, by the grantor with his own hand or with his mark with his name annexed to it or by his attorney authorized for that purpose by a power executed, acknowledged and witnesses in the manner provided for conveyances or, if the grantor is a corporation, limited liability company or partnership, subscribed by a duly authorized person; (3) acknowledged by the grantor, his attorney or such duly authorized person to be his free act and deed; and (4) attested to by two witnesses with their own hands." (Emphasis added.) The statute makes no distinction as to the witnesses having an interest or not in the conveyance of land, merely requiring two witnesses without any other clarifying terms.
III
Further, it is concluded that the appointed individual on a power of attorney can serve as a witness on the document granting that power of attorney. General Statutes § 1-43(a) holds that "[t]he execution of this statutory short form power of attorney shall be duly acknowledged by the principal in the manner prescribed for the CT Page 17998 acknowledgment of a conveyance of real property." Section 47-5, referenced above, describes the requirements for an acknowledgment of a conveyance of real property. If a grantee of a conveyance of real property, or any interested party, may also be a witness to that conveyance, then it follows in the wake of § 1-43(a) that the person receiving the benefit of the power of attorney may also be a witness to the document granting him the power.
It is concluded that the presence of Mann as a witness does not invalidate the quitclaim deed or the power of attorney.
Plaintiff's Motion for Summary Judgment is denied. Defendant's Motion for Summary Judgment is granted.
CT Page 17999
reference point,
or that they were not 0.24 percent (subprime) and 2.0 percent (Alt-A) of ING's total assets.
Id. ¶ 124.
In determining whether statements are materially misleading, the Court must consider the alleged misrepresentations in context. In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d at 364 ("When analyzing offering materials for compliance with the securities laws, we review the documents holistically and in their entirety. The literal truth of an isolated statement is insufficient; the proper inquiry requires an examination of defendants' representations, taken together and in context.") (citing Olkey v. Hyperion 1999 Term Trust, Inc., 98 F.3d 2, 5 (2d Cir. 1996); DeMaria v. Andersen, 318 F.3d 170, 180 (2d Cir. 2003)) (internal citations and quotation marks omitted).
Here, no reasonable investor could have been misled by ING's statement that the sizes of its Alt-A and subprime RMBS holdings were "limited" and that they were "limited" with reference to ING's total assets. The September 24, 2007 6-K, from which the CAC takes the "limited size" quotation states:
"To date this market disruption has had a limited impact on ING. Overall, ING considers its subprime, Alt-A and CDO/CLO exposure to be of limited size and of relatively high quality. ING's total exposure to CDOs and CLOs was EUR 0.9 billion, or 0.07% of assets, as of July 31, 2007. As of that date, subprime exposure amounted to EUR 3.2 billion, representing 0.24% of total assets, and Alt-A exposure amounted to EUR 28.7 billion, representing 2% of total assets. The Group's exposure to subprime and Alt-A mortgages is almost entirely through asset-backed securities." CAC ¶ 124.
CAC ¶ 124.
Third, there are no allegations that ING's RMBS, as of September 2007, had had anything other than a "limited impact" on the company in amounts specifically disclosed in the September 2007 Offering Materials.
Id. (negative revaluation of €58 million for subprime and €233 for Alt-A RMBS).
What is left then is the allegation that ING's statement that it considered its assets to be of "relatively high quality" was inaccurate or incomplete in September 2007 because it did not disclose the types of loans in the pools underlying ING's Alt-A and subprime RMBS or the places and years in which they were originated. The CAC's insufficiently alleges that this statement is inaccurate or incomplete.
Allegations of industry-wide or market-wide troubles alone ordinarily are insufficient to state a claim based on the securities or assets held by a defendant. Here, none of the CAC's allegations concern ING's assets. The CAC describes the creation of the "housing bubble," the
Yu v. State St. Corp., 686 F. Supp. 2d 369, 380 (S.D.N.Y. 2010) ("To survive a motion to dismiss, plaintiffs must allege some facts to close the loop between the market turmoil and the accuracy of the Fund's valuations."); Landamen Partners Inc. v. Blackstone Group, L.P., 659 F. Supp. 2d 532, 545 (S.D.N.Y. 2009) (holding that complaint failed to state a claim under the Securities Act when it failed to allege any facts "linking the problems in the subprime residential mortgage market" to the defendant's "real estate investments, 85% of which were in commercial and hotel properties."); Plumbers' Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp. (" Nomura"), 658 F. Supp. 2d 299, 308 (D. Mass. 2009) (holding allegation that "questionable appraisal practices were a common problem in the industry as a whole" was insufficient to allege that a registration statements' description of the appraisal practices used with respect to particular securities were false or misleading.).
Plaintiffs only response on this point — an attempt to distinguish Landamen — is unavailing. They argue, in essence, that the difference there between the "market" — residential assets — and the defendant's investments — commercial assets — was far larger than the difference here between ING's Alt-A and subprime RMBS and the troubles in the residential housing and credit markets. Pl. Br. at 20. This argument, however, does not dispute the principle that a complaint must sufficiently link market-wide troubles to the particular assets at issue in order to state a claim. Plaintiffs' real argument with respect to Landamen, then, is that they have sufficiently alleged a link where the complaint in that case did not. For the reasons stated above, the Court disagrees.
CAC ¶¶ 60-61.
types of mortgage loans issued during 2006 and 2007, and their delinquency and default rates "at the end of 2007" or later. It describes also the proportions of the pools underlying ING's RMBS that each of the allegedly "risky" types of loans constituted. It finally describes, in general terms, the market-wide increase in default rates on the mortgages underlying RMBS, the resulting "substantial distress" in the market for Alt-A and subprime RMBS, the downgrading of credit ratings attached to some tranches of RMBS, and the fact that other banks at different times beginning in October 2007 revealed losses on their mortgage-related assets.
Id. ¶¶ 67-73.
Id.
Id. ¶¶ 74-101.
In many cases, these allegations post-date the statements in the offering materials alleged to be misleadingly incomplete. In most cases, they describe conditions related to the individual mortgage loans, not the securities structured around them. None describe ING's assets — the allegations concern the market generally, other securities, or the actions of other institutions. Perhaps most importantly, the only allegations that concern Alt-A and subprime RMBS — the categories of assets ING owned — before September 2007 discuss the performance of tranches that were lower-rated, and therefore riskier and more prone to loss, than those that ING held.
See, e.g., id. ¶¶ 87, 92, 93-96, 98-101.
See, e.g., id. ¶¶ 74, 76, 78-81, 83-86.
See, e.g., id. ¶¶ 74, 766, 77, 82, 89.
See, e.g., id. ¶¶ 90-91, 93.
See, e.g., id. ¶¶ 93-96.
See, e.g., id. ¶ 89 ("Beginning in October 2006, the ABX BBB and BBB-indices began suffering substantial declines[.]"), ¶ 90 ("By February and March 2007, the ABX index for BBB and BBB-RMBS tranches had suffered serious declines — some BBB dropped as much as 60% of par. During that time, market participants anticipated that the values of junior tranches RMBSs such as these were going to zero.") (emphasis omitted), ¶ 91 ("By September 30, 2007, the ABX triple-B indices had fallen to 30% of par, while the TABX indices for all junior mezzanine tranches showed such tranches to be effectively worthless. The TABX index for mezzanine super seniors had fallen to 33% of par. In addition, ABX indexes for higher RMBS tranches also showed substantial declines: single-A ABX indices were at 50% of par, while double-A ABX indices were at 80%.").
Such allegations are, at best, consistent with a theory that ING's assets were "extremely risk" or not of "relatively high quality" in September 2007 and therefore not of "relatively high quality." But absent some factual allegations suggesting that ING's assets had been impacted by the general market conditions at the time the allegedly misleading statements were made, the CAC "stops short of the line between possibility and plausibility" that the September 2007 Offering Materials were misleading in a way that required additional disclosure. It therefore fails to state a claim on this basis.
See Twombly, 550 U.S. at 557.
Id.
The cases on which plaintiffs rely to support the argument that ING was subject to a duty to disclose do not change this conclusion. Indeed, they only underscore the difference between this case and those where disclosure was necessary in order to render another statement not misleading. In In re Globalstar Sec. Litig., No. 01 Civ. 1748 (SHS), 2003 WL 2295316 (S.D.N.Y. Dec. 15, 2003), the company and its CEO predicted that, by the end of a particular fiscal year, it would have approximately 500,000 customers and $250 to $300 million in revenues, and repeated these predictions throughout that year. Id. at *3-4. The court found that these statements were materially misleading because plaintiffs had alleged that prior to and during the fiscal year, the company and its CEO knew it was having problems with its infrastructure that would significantly diminish its revenues. Id. The court in Caiola v. Citibank, N.A., 295 F.3d 312 (2d Cir. 2002) held that Citibank had a duty to disclose to its customer that it would be discontinuing a particular hedging strategy after a merger that the customer used because Citibank had represented to the customer that their relationship would remain the same. Id. at 329. Finally, the plaintiffs in Lapin v. Goldman Sachs Group, Inc. 506 F. Supp. 2d 221 (S.D.N.Y. 2006), stated a claim when the defendants represented that their analyst reports were objective an unbiased even though they knew about allegedly pervasive conflicts of interests and their effects on the analyst reports. Id. at 240.
Plaintiffs next allege that ING was obligated to disclose the allegedly omitted information by Item 503(c) of Regulation S-K ("Item 503"). Item 503 requires issuers to discuss "the most significant factors that make the offering speculative or risky." But, as noted, the CAC fails to allege, in anything other than conclusory terms, that any of ING's Alt-A or subprime RMBS were "speculative or risky" at the time of the September 2007 Offering. Accordingly, it has failed to allege that Item 503 obligated ING to disclose more than it did.
17 C.F.R. § 229.503(c).
Id. The discussion "must be concise and organized logically." Id.
Plaintiffs next argue that International Accounting Standard ("IAS") Nos. 30 and 32 required ING to disclose the allegedly omitted information. IAS 30 requires disclosure of significant concentrations of "assets, liabilities, and off balance sheet items." IAS 32 requires disclosure of "significant concentrations of credit risk." This claim fails for at least three reasons.
Id. ¶ 130.
Id. ¶ 129.
First, ING disclosed its Alt-A and subprime RMBS. Plaintiffs have pointed to no authority requiring more detailed disclosures about the specific types of loans in the pools underlying the RMBS and the years and places in which they were issued.
Id. ¶ 124 (subprime exposure of €3.2 billion, Alt-A expoure of €28.1 billion).
Second, the CAC fails to allege that ING's holdings of Alt-A and subprime RMBS were a "significant concentration of its assets, liabilities and off balance sheet items." At the time of the September 2007 Offering, ING's Alt-A and subprime RMBS respectively constituted two percent and 0.24 percent of its total assets. Plaintiffs have pointed to no authority indicating that IAS 30 requires disclosure of such comparatively minor holdings.
Id. ¶ 124.
Third, for the reasons noted above, the CAC fails to allege any facts indicating that ING's Alt-A and subprime RMBS were a significant concentration of credit risk at the time of the September 2007 Offering. In consequence, the CAC fails to allege that IAS 30 or 32 obligated ING to disclose the allegedly omitted information.
Plaintiffs allege in a conclusory manner that the September 2007 Offering Materials's failure to disclose the above information violated ING's "stated risk management policies and public representations." CAC ¶ 120(f). The CAC nowhere alleges what ING's risk management policies were in September 2007.
Plaintiffs rely on three cases to support their position that these accounting principles required disclosure of the allegedly omitted information. None helps their cause. None involved IAS 30 or IAS 32. More importantly, in each case, unlike here, the complaint alleged facts tending to demonstrate that the defendant had violated the relevant accounting principles.
They cite a fourth case in a footnote for the proposition that alleged accounting improprieties may not be resolved on a motion to dismiss. See Pl. Br. at 32 (citing Florida State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 666 (8th Cir. 2001)). As in the other cases cited above, the plaintiffs there alleged that the defendants published statements with knowledge of facts indicating that crucial information in them had been discredited. Id. at 665.
The court in In re RAIT Fin. Trust Sec. Litig., found that plaintiffs had stated a claim by alleging that the defendant, RAIT, had violated Statement of Financial Accounting Standards ("SFAS") No. 115, which required RAIT to take "other-than-temporary, asset impairment charges" to certain securities. The court found that the plaintiffs had alleged facts supporting the conclusion that RAIT knew about "other-than-temporary impairments" that it would have had to take on those securities had it complied with the proper accounting policies, including RAIT insiders' knowledge that the securities' issuers were likely to default.
No. 07 Civ. 3148 (LDD), 2008 WL 5378164 (E.D. Pa. Dec. 22, 2008).
Id. at *7.
Id.
Plaintiffs in In re New Century alleged that New Century, a mortgage loan originator, was reducing the value of its Allowance for Loan Losses, a reserve to cover losses on mortgage loans it held for investment in violation of GAAP, even as the number of delinquent loans that New Century held on its books was increasing. In holding that plaintiffs had stated a claim, the court found that the complaint contained factual allegations about the "declining loan performance, an increase in defaults, and a concomitant rise in repurchase claims that were baldly disregarded" by New Century.
588 F. Supp. 2d 1206 (C.D. Cal. 2008).
Id. at 1215.
Id. 1227.
Finally, the Court in In re Washington Mutual, Inc. Sec., Derivative ERISA Litig., found that Washington Mutual ("WaMu") failed to take adequate reserves in violation of GAAP because its reserve calculation failed to account for other improper practices regarding its mortgage loan origination practice like inflated appraisals, deficient underwriting, and ineffective internal controls established by factual allegations in the complaint.
259 F.R.D. 490 (W.D. Wash. 2009).
Id. at 507.
Here, the CAC fails to make any factual allegations that tend to show that ING violated the applicable accounting policies. It therefore fails to state a claim on this basis.
B. FICO and LTV statements
The September 2007 Offering Materials stated that "ING's Alt-A portfolio has an average FICO score of 721 and an LTV of 70%." The CAC alleges that these statements were false and misleading because the FICO scores and LTV ratios associated with the loans underlying ING's RMBS were determined at the time the loans were underwritten, but had deteriorated with the collapse of the housing market. They allege also that the statements were misleading because they presented the FICO and LTV scores as existing at the time of the offering when, in fact, they were determined at the time the loan first was underwritten. These claims are insufficient.
CAC ¶ 124.
Pl. Br. at 34-35.
CAC ¶ 127.
Plaintiffs have alleged no facts indicating that the FICO scores and LTV ratios stated in the September 2007 Offering Materials were false. They have alleged only that "a FICO score for a loan taken in 2005 was not necessarily the same homeowner's FICO score in 2007 or 2008," that "many Alt-A borrowers were counting on ever-increasing real estate values when they purchased their homes," that "in many situations Alt-A borrowers took additional lines of credit out or second mortgages on their homes, creating a total effective LTV ratio of 100%," and that "as housing prices throughout the United States plummeted during 2006, 2007 and 2008, LTV ratios quickly became out-dated and . . . significantly understated the risk of default." But as these allegations say nothing about the LTV ratios and FICO scores of any of the loans underlying ING's RMBS, they fail to state a sufficient claim for relief.
Id. ¶ 155-56.
ING's statement that its "Alt-A portfolio has an average FICO score of 721 and an LTV of 70%" presents a closer question. Defendants appear to concede that the FICO scores and LTV ratios were not determined on the date that the statements were made, but instead, spoke as of the dates the loans were made. The distinction between historic and present ratios and scores in this case is immaterial, however, as plaintiffs have failed to allege any facts indicating that the FICO scores and LTV ratios for the loans underlying ING's RMBS had changed from the date they first were underwritten. Consequently, the CAC fails to state a claim for relief on this basis.
Id. ¶ 124 (emphasis added).
Def. Br. at 33.
C. Credit rating statements
With respect to ratings, the September 2007 Offering Materials stated that
"[a]s of July 31, 2007, 93% of the subprime assets and 99.9% of the Alt-A assets were rated AAA or AA. ING is not responsible for these securities ratings, which are not a measure of liquidity and which may be changed or withdrawn without notice by the rating agencies."
The CAC alleges that these statements "did not accurately reflect the risk of default" and therefore were false and misleading because (1) the ratings were determined by out-of-date models based on out-of-date assumptions that used inaccurate data, and (2) the ratings agencies relaxed their ratings criteria to get more business and were subject to conflicts of interest. They allege also that defendants' reliance on these ratings was "highly unreasonable" because they had "access to the necessary information to verify these ratings" and "made no effort to ensure that the ratings accurately reflected the risk" of default.
Id. ¶¶ 97, 124, 127.
Id. ¶¶ 146-48.
Id. ¶¶ 150-51.
Id. ¶¶ 152-53.
Id. ¶ 127.
As this Court previously has stated, ratings are opinions. Any given rating reflects the judgment of the particular rating agency that certain facts, when fed into a particular model based on a particular set of assumptions, support issuing a particular rating for a particular security. That opinion can be false or misleading only if the opinion-giver — here the rating agency — did not truly believe it to be the case at the time it was issued. There are no such allegations in the CAC.
See, e.g., Tsereteli v. Residential Asset Securitization Trust 2006-A, 692 F. Supp. 2d 387, 394-95 (holding that a rating is a "statement of opinion by each agency that it believed, based on the models it used and the factors it considered, that the credit quality of the mortgage pool underlying each Certificate was sufficient to support the assigned rating"); In re Lehman Brothers Sec. ERISA Litig., 684 F. Supp. 2d 485, 494 (S.D.N.Y. 2010) (holding that a rating is "a statement of opinion by each ratings agency that it believed, based on the methods and models it used, that the amount and form of credit enhancement built into each Certificate, along with the Certificate's other characteristics, was sufficient to support the rating assigned to it.").
In re Lehman Brothers Sec. ERISA Litig., 684 F. Supp. 2d at 495.
Id. at 494 (citing Shields v. Citytrust Bancorp., 25 F.3d 1124, 1131 (2d Cir. 1994) ("A statement of reasons, opinion or belief by such a person when recommending a course of action to stockholders can be actionable under the securities laws if the speaker knows the statement to be false.") (in turn citing Va. Bankshares v. Sandberg, 501 U.S. 1083, 1094-96, (1991))); In re Global Crossing, Ltd. Sec. Litig., 313 F. Supp. 2d 189, 210 (S.D.N.Y. 2003).
As the CAC has failed to allege that the ratings assigned to ING's RMBS were false or misleading, it has failed also to allege that ING's statements regarding them were false or misleading.
The CAC alleges also that the September 2007 Offering Materials were false and misleading because ING "failed to include . . . an explanation for the Company's capital position even though it had provided such detail in its report for the prior quarter." CAC ¶ 126(d). Plaintiffs do not press this point in their briefing. The allegation is not actionable in any event. First, the CAC fails to allege why ING was obliged to disclose this information. The fact that previous quarterly reports did so is irrelevant as the September 24, 2007 6-K is not a quarterly report. Second, it fails to allege how the allegedly omitted information would have been material, particularly in light of the quarterly reports that did disclose the information plaintiffs apparently sought. See Lowenthal Decl. Exs. Q, BB.
V. June 2008 Offering
Plaintiffs allege that ING's June 2008 Offering Materials were false and misleading because they (1) understated impairments on its Alt-A and subprime RMBS and understated also its required loan loss reserves, (2) omitted details about the "risky nature" of its Alt-A and subprime RMBS, including the particular types of mortgages in the pools underlying them, the places and years in which those loans were originated, and their effect on the company's financial condition, (3) omitted to disclose ING's holdings of financial institution debt securities, (4) referred to LTV ratios, FICO scores, and credit ratings, and (5) violated a series of accounting principles.
A. Impairments and loan loss reserves
In the fall of 2008, ING announced a €409 million impairment charge related to its Alt-A and subprime RMBS, a €416 million impairment charge on its debt securities, including securities related to certain unnamed Icelandic banks and WaMu, and approximately €400 million in loan loss reserve increases. The CAC alleges that ING, based on market conditions, should have taken these impairment charges and increased its loan loss reserves no later than March 31, 2008 and that the June 2008 Offering Materials were materially misleading because it failed to do so. The sole basis for their allegation that ING should have taken larger impairment charges earlier than it did is that they were required to do so by IAS No. 39. The sole basis for the allegation
The CAC alleges that ING should have taken impairments on the Collateralized Debt Obligations ("CDOs") and Collateralized Loan Obligations ("CLOs") that it held no later than March 31, 2008. ¶ 173. It does not allege the amount of the alleged impairment, and therefore provides no basis for the Court to determine materiality.
CAC ¶ 163.
See, e.g., ¶¶ 175, 180, 186, 210.
Id. ¶ 162. The CAC alleges also that, as a result, ING's representations concerning net income, retained earnings, and capital were inaccurate. Id. ¶¶ 214-15.
that ING should have increased its loan loss reserves is the allegation that it was necessary in light of the allegedly unreported impairments.
Id. ¶¶ 212, 215.
Assuming without deciding that the CAC sufficiently alleges that IAS 39 required ING to take the impairments and loan loss reserves before the June 2008 Offering Materials were published, the CAC fails to allege how failing to do so was material. A statement or omission is material if there is a "substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available." Both quantitative and qualitative factors must be considered. As materiality is a mixed question of law and fact, a complaint may be dismissed on materiality grounds only if the alleged misstatements and omissions "are so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance."
ECA, 553 F.3d at 197; Ganino, 228 F.3d at 162.
ECA, 553 F.3d at 204.
Id. at 197.
Defendants claim that the allegedly omitted impairments with respect to the Alt-A and subprime RMBS, the financial institution debt securities, and the omitted loan loss reserves, were quantitatively and qualitatively immaterial.
The quantitative aspect clearly favors defendants. The allegedly omitted impairments with respect to the Alt-A and subprime RMBS and the financial institution debt securities were, respectively, €409 million and €416 million. At the time plaintiffs allege that these impairments should have been recognized, March 31, 2008, the value of ING's total assets exceeded €1,303 billion. Accordingly, each alleged impairment constituted just over 0.03 percent of ING's total assets. The loan loss reserves allegedly were understated by €400 million, an amount representing also just over 0.03 percent of ING's total assets. Even aggregating all three numbers, as plaintiffs do in the CAC, the allegedly omitted impairments and understatements represented 0.09 percent of ING's net assets. These amounts were not quantitatively material.
CAC ¶ 163.
See Lowenthal Decl. Ex. S ("5/15/08 6-K") at 16 (reporting ING's total assets as of March 31, 2008).
CAC ¶ 163.
See ECA, 553 F.3d at 204 (noting that SEC uses five percent numerical threshold for materiality and that an accounting decision that "affects less than one-third of a percent of total assets does not suggest materiality.").
Plaintiffs assert that the materiality of the impairments and loan loss reserve should be considered in the context of ING's total equity, not its total assets. But even on that view, the impairments and understatements each constituted approximately one percent of ING's total equity,
Pl. Br. at 22-23 ("[D]efendants completely ignore the CAC's allegation that ING's RMBS portfolio was material because it equaled 75% of the Company's total equity, thereby posing a significant threat to the Company's Tier-1 capital ratio and its ability to function as a bank."), 49 ("[T]he material nature of the Company's impairment losses does not arise from their effect as a percentage of total assets, but their effect up the Company's capital ratio."); see also CAC ¶ 4 (comparing size of ING's Alt-A and subprime RMBS portfolio to its "total equity"), ¶ 7 (comparing size of ING's Alt-A and subprime RMBS portfolio to "reported shareholder equity of €40 billion and `Capital and Reserves' of €40 billion), ¶¶ 13-15 (stating importance to ING of being "well capitalized" and stating that Offerings allowed it to raise over $4.4 billion of "Tier 1" capital).
or, in the aggregate, 2.9 percent, also quantitatively immaterial.
The CAC alleges that ING had approximately €31 billion of Alt-A and subprime RMBS, and that this represented approximately seventy-five percent of the Company's total equity. CAC ¶ 4. Assuming that to be true, ING's total equity would be approximately €41.3 billion.
The quantitative immateriality of the alleged impairments and understatements alone would not be grounds for dismissal if relevant qualitative factors would permit a finding of materiality. The qualitative factors "are intended to allow for a finding of materiality if the quantitative size of the misstatement is small, but the effect of the misstatement is large." Plaintiffs' sole argument in this regard is that the impairments and understatements were qualitatively material because, in October and November 2008, they "forced ING to seek and receive a bail out by the Dutch Government to remain adequately capitalized and functioning." There are at least two problems with this argument.
ECA, 553 F.3d at 205; Ganino, 228 F.3d at 163.
Pl. Br. at 48; CAC ¶¶ 16-17, 105-07, 141(d).
First, the CAC connects only the Alt-A and subprime RMBS impairments to ING's need to obtain a bailout from the Dutch government. There are no allegations that the unrecorded impairments with respect to the financial institution debt securities and the understated loan loss reserves "forced" ING to need a Dutch government bailout. Accordingly, even assuming the CAC's allegations could sufficiently make out qualitative materiality, they could do so only with respect to the Alt-A and subprime RMBS impairment.
CAC ¶ 16 ("ING's RMBS portfolio was so toxic to the Company's balance sheet that on October 20, 2008 . . . it was forced to seek a €10 billion . . . bailout from the Dutch government. This bailout was due to the declines in the value of ING's RMBS assets during 2007 and 2008), ¶ 17 ("ING admitted that is RMBS portfolio threatened the bank's liquidity. To avert a total collapse, the Dutch government intervened and on January 26, 2009 took ownership of over 80% of the €27.7 billion . . . Alt-A portfolio on ING's books. . . ."), ¶¶ 105-07 (stating that ING needed Dutch bailout in context of declines in RMBS portfolio).
The Court notes that the CAC once alleges that the allegedly omitted financial institution debt impairment, along with the allegedly omitted RMBS impairments and understated loan loss reserves "forced ING to procure capital from the Dutch government." Id. ¶ 141(d). The theory, based on a completely conclusory allegation, that ING's financial institution debt impairment "forced" the company to accept a government bailout, is not plausible in light of the CAC's contradictory allegations that the impairments to the €31 billion Alt-A and subprime RMBS asset portfolio were the driving factor.
Plaintiffs' memorandum of law states that ING was "forced" to take the bailout because of "increasing exposures in their `pressurized asset classes' [i.e., its non-prime RMBS and debt securities]." Pl. Br. at 49. The bracketed attempt to define "pressurized asset classes" — a term used by ING in its public filings — as including the financial institution debt securities is exceedingly misleading and is contradicted by the CAC. According to the CAC, each time ING uses the phrase "pressurised [or pressuri zed] asset securities" it is in the context of Alt-A and subprime RMBS and not financial institution debt securities. See, e.g., id. ¶ 111 (ING announced €3 billion impairment and loss on pressurized assets, with €1.8 billion in the Alt-A RMBS portfolio), ¶ 137 ("ING's exposure to pressurised asset classes [e.g., U.S. subprime and Alt-A RMBS, CDOs and CLOs] is of high quality and has not led to major impairments.") (emphasis omitted) (alterations in CAC), ¶ 139 ("Losses on ING's investments in pressurised asset classes were limited to EUR 55 million after tax, reflecting the high structural credit protection of the securities in ING's subprime and Alt-A RMBS portfolios."). Moreover, the CAC alleges that ING never disclosed its exposure to Icelandic Bank and WaMu debt securities, id. ¶ 211, further contradicting the argument that "pressurised asset classes" as used in the company's financial statements could have included those assets.
Second, the fact, assumed here to be true, that ING was "forced" to accept a government bailout in October and November 2008 because of allegedly unreported impairments and understatements does not say anything about whether the same thing would have been the case in March or June 2008, particularly in light of the "distinctively unique financial crisis" that was particularly turbulent in the later period. There are no factual allegations that ING would have been "forced" to accept a bailout from the Dutch government had the impairments and understatements been recorded at the end of March 2008 or at the time of the June 2008 Offering.
CAC ¶ 189.
Id. ¶ 106 (noting "deepening market turmoil" in third quarter of 2008).
Consequently, the CAC fails to allege facts sufficient to support an inference that the allegedly undisclosed impairments or loan loss reserves were material.
B. Alleged Omissions 1. Omissions relating to allegedly "risky nature" of Alt-A and subprime RMBS
Plaintiffs next argue that ING was obliged to disclose the details about its Alt-A and subprime RMBS, including the particular types of loans in the pools underlying the securities, as well as the places and years in which they were issued, because the June 2008 Offering Materials (1) described the assets as "near prime and of high-quality," (2) noted that ING was "well-insulated from the worst effects of the market turmoil," and (3) had "risk management fully integrated at all levels." As with the September 2007 Offering Materials, they argue that these statements "obligated [defendants] to speak fully and truthfully about [ING's] RMBS exposure.
Pl. Br. at 42.
Id.
Defendants first contend that, like the September 2007 Offering Materials, the CAC fails to allege ING's assets were "extremely risky" so that disclosures about, for example, the types of loans underlying them and the states in which the loans were originated were required. The CAC's allegations with respect to the June 2008 Offering Materials, however, sufficiently allege a connection between the general market conditions and ING's assets to plausibly suggest that they were risky.
Def. Br. at 17-20, 38.
In addition to the market-wide allegations described above, the CAC specifically alleges specific problems in ING's RMBS portfolio prior to the June 2008 Offering including:
See, e.g., CAC ¶¶ 74-101.
• the AAA rated tranches of Alt-A RMBS had declined in value,
• more than twenty percent of ING's RMBS had been downgraded from AAA credit rating to AA,
• increases in the "60+ day delinquent, bankrupt, foreclosed and REOs mortgage loans" underlying the RMBS in some of ING's subsidiaries,
and
• declines in the notional values of ING's Alt-A RMBS.
These allegations sufficiently link the troubles in the market-at large to ING's portfolio to support a plausible inference, that ING's assets in June 2008 were "extremely risky," and could impact the company's finances. The fact that ING held these allegedly risky assets may have rendered misleading its statements that its assets were "near prime and of high quality" and that it was "well insulated" from the worst of the market if those risks were material.
Defendants next argue that the allegedly omitted information was immaterial in light of the extensive information the June 2008 Offering Materials disclosed about ING's Alt-A and subprime RMBS. As noted, an omission is material only if it "would have been viewed by the reasonable investor as having significantly altered the total mix of information made available." This "necessarily depends on all relevant circumstances of a particular case." In consequence, a complaint may not be dismissed for immateriality unless the alleged omissions "are so obviously unimportant that reasonable minds could not differ on the question of their importance."
Def. Br. at 38.
Basic, Inc., 485 U.S. at 231-32.
Ganino, 228 F.3d at 162.
Id.
The June 2008 Offering Materials contained numerous disclosures about ING's Alt-A and subprime RMBS assets. ING's 2007 20-F disclosed the size of ING's holdings, and the negative revaluations taken on them, the fact that the credit ratings on more than €10 million of them had been downgraded by the credit rating agencies. It warned also that "there can be no assurances that we will not experience further negative impacts to our shareholders equity or profit and loss accounts from such assets in future periods." ING's May 15, 2008 6-K disclosed additional details about the company's exposure to Alt-A and subprime RMBS, reporting €33 million in impairments on ING's subprime RMBS and €17 million on its Alt-A RMBS, as well as declines in the fair value of its RMBS portfolio. It disclosed also, in a separate appendix called "Direct Impact of Credit and Liquidity Crisis," that ING had taken negative revaluations of €528 million and €4.2 billion on its subprime and Alt-A assets, respectively.
CAC ¶ 114.
Id. ¶¶ 134-35.
Id.
2007 20-F, at 10.
Id. ¶ 139
5/15/08 6-K, at 22.
The question whether these disclosures rendered the alleged omissions immaterial is a close call. They were extensive and described in some detail the risks that ING's subprime and Alt-A RMBS posed to the company's financial health. But they were undercut to some extent by ING's statements that it had suffered "limited direct impact" from the credit and liquidity crisis and that the further negative impacts to shareholder equity might occur as a result of "uncertainties concerning valuations," as opposed to from the inherently risky nature of the securities it held. In all the circumstances, the Court cannot conclude as a matter of law that no reasonable investor would have found additional disclosures about the nature of ING's Alt-A and subprime RMBS immaterial as a matter of law. Accordingly, the CAC states a claim on this basis for which relief might be granted. 2. Omissions related to financial institution debt securities
Id. at 1; 2007 20-F, at 10.
The CAC's allegations that the June 2008 Offering Materials (1) contained false and misleading risk management statements, (2) violated Item 503, and (3) omitted disclosures required by Form F-3 state a claim on this basis as well. ¶¶ 141(e)-(f), 160.
Plaintiffs allege that the June 2008 Offering Materials were false and misleading because they failed to disclose "the actual risks associated with ING's investments in Icelandic Banks and WaMu debt securities." The CAC, however, fails to allege facts that would permit a conclusion that these disclosures were material. It is devoid of any allegations about the extent of ING's exposure to Icelandic bank or WaMu debt securities or how they affected ING's financial position. The closest it comes are allegations that ING failed to take €413 million in impairments on these assets that allegedly should have taken. But, as noted above, this allegation is immaterial. Accordingly, the CAC fails to state a claim on this basis.
CAC ¶ 159.
3. LTV, FICO, and rating statements
The June 2008 Offering Materials stated that "on average, the ING Direct Alt-A RMBS portfolio is near prime and of high-quality with a loan-to-value ratio of 71%, an average FICO [s]core of 723 and more than 99% of the portfolio is rated AAA." Plaintiffs allege that using the LTV ratios and FICO scores of the loans to support the assertion that ING's RMBS were "high quality" was false and misleading because those metrics were based on historic information provided by the borrowers at the time the mortgages were issued but were presented as statements of current fact. These statements are insufficient to state a claim for the reasons noted above. Plaintiffs have failed to allege that any LTV ratios or FICO scores in the loans underlying ING's RMBS had changed from the time the loans were originated. The statements with respect to the RMBS credit ratings fail also to state a claim for the reasons discussed above.
CAC ¶ 154.
Id. ¶ 155-56.
4. Other alleged IFRS violations
The CAC alleges also that ING violated several other accounting principles, including IAS numbers 1, 7, 10, and 34. These allegations are insufficient to state a claim because, among other reasons, they fail to allege in anything other than a conclusory manner how the alleged violations of these standards would have been material.
Id. ¶¶ 219-226.
Id. ¶ 227 ("The violations of each of the foregoing standing alone, was a material breach of IFRS and/or SEC regulations. . . ."); see Twombly, 553 U.S. at 555 ("Formulaic recitation of the elements of a cause of action will not do.").
VI. Section 15 claims
The CAC alleges that the Individual Defendants and SING are liable under Section 15 as ING's controlling persons. As the CAC alleges a primary violation of the Securities Act only with respect to the omissions regarding the risky nature of ING's Alt-A and subprime RMBS in the June 2008 Offering Materials, it alleges a Section 15 claim only to that extent as well.
Conclusion
For the foregoing reasons, defendants' motion to dismiss [DI 76] is granted except that it is denied with respect to the claims based on the allegedly omitted information regarding the "risky nature" of ING's Alt-A and subprime RMBS in the June 2008 Offering Materials and the Section 15 claims based thereon.
SO ORDERED.
Dated: September 14, 2010.