In re Metropolitan Securities Litigation (532 F. Supp. 2d 1260, 2007)

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS’ MOTIONS TO DISMISS

FRED VAN SICKLE, District Judge.

THIS MATTER is before the Court on four motions to dismiss brought by the various Defendants. In view of this procedural posture, the Court must accept all factual allegations set forth in the complaint as true for the purposes of the present order. Epstein v. Wash. Energy Co., 83 F.3d 1136, 1140 (9th Cir.1996). The following statement of facts is accordingly drawn from the pleadings.

BACKGROUND

This is a class action brought by investors against the former accountants, the Qualified Independent Underwriter, and certain officers and directors of Metropolitan Mortgage & Securities Company (“Metropolitan”), Summit Securities (“Summit”), and their subsidiaries. The Plaintiffs allege that Metropolitan and Summit were affiliated securities companies. Both owned a number of subsidiaries, collectively referred to as the “Met Group.” After the collapse of Metropolitan and Summit in 2004, their securities became virtually worthless. SCAC ¶ 12. This suit followed.

Procedural History

The present action is a consolidation of two previously filed actions, Hall et al. v. Metropolitan Mortgage & Securities Co. Inc., et al, CV-04-28-FVS and Cauvel et al. v. Metropolitan Investment Securities Company, Inc. et al, CV-04-25-FVS. When the Court consolidated the cases on August 11, 2004, it appointed Keith Cauvel, Arthur Becker, Venus Hafford Weber, Eva Drauhn, George Saylor, Becklyn Wilkey, and Floyd Bodner (collectively, “the Saylor Group”) as Lead Plaintiffs for the proposed class pursuant to 15 U.S.C. § 78u4 (a)(3)(B). (Ct.Rec.121.) By the same order, the Court appointed Hagens Berman LLP and Gordon Thomas Honeywell Malanca Peterson & Daheim LP as Co-Lead Counsel. Id.

The First Amended Complaint (“FAC”) in Cauvel, Ct. Rec. 11, named as Defendants Metropolitan, Summit, Metropolitan Investment Securities, Inc. (“MIS”), Ernst & Young, LLP, and a number of former Metropolitan and Summit officers and directors. It alleged claims under Section 10(b) of the Securities and Exchange Act of 1934 (“the Exchange Act” or “the 1934 Act”) and Sections 11, 12, 15, and 20 of the Securities Act of 1933 (“the Securities Act” or “the 1933 Act”). (Ct. Ree.ll.) Following the consolidation of Cauvel with Hall, on December 17, 2004, the Plaintiffs moved to file an amended complaint. (Ct.Ree.150.) The Plaintiffs attached their proposed Consolidated and Amended Class Action Complaint (“CAC”) to the motion to amend. The Court granted the motion on January 20, 2005, Ct. Rec. 178, and the Plaintiffs filed the CAC on March 11, 2005. (Ct.Rec.209.) The CAC named Pricewaterhousecoopers, LLP and Roth Capital Partners, LLC as Defendants for the first time. The CAC dropped the claim previously asserted under the 1934 Act, and instead alleged a claim under Washington State’s Securities Act (“WSSA”).

On October 6, 2006, the Court approved a partial settlement that dismissed a number of Defendants. (Ct.Rec.406.) The Court also granted the Plaintiffs permission to file a second consolidated and amended complaint. (Ct.Rec.404). The Plaintiffs filed their Second Consolidated and Amended Class Action Complaint (“SCAC”) on October 10, 2006.

The SCAC asserts a total of thirteen claims. Pursuant to Section 11 of the 1933 Act, the Plaintiffs allege that, as a result of the Defendants’ negligence, certain registration statements issued by Metropolitan and Summit contained material misrepresentations and omissions. The Plaintiffs bring an additional Section 11 claim against Metropolitan and Summit’s former auditors and underwriter, alleging that the misrepresentations in the registration statements amounted to fraud. SCAC ¶¶ 758-782. Pursuant to Section 12 of the 1933 Act, the Plaintiffs allege that the Met Group’s former officers and directors sold securities using prospectuses that contained misrepresentations. Pursuant to Section 15 of the 1933 Act, the Plaintiffs allege that the Met Group’s former officers and directors exercised control over the parties responsible for the Section 11 and Section 12 violations. Finally, pursuant to Washington State’s Securities Act, the Plaintiffs allege that all of the Defendants made false statements in connection with the sale of securities.

The Plaintiffs propose to certify two different classes. The Federal Claims Class would bring only federal claims and consist of all persons who purchased investment debentures and preferred stock from Metropolitan and investment certificates and preferred stock from Summit pursuant to nine registration statements (the “Registration Statements”) that became or were effective from February 13, 2001 to December 15, 2003 (“the Class Period”). SCAC ¶ 40. The State Claims Class would bring only state law claims and consist of all persons who purchased investment debentures and preferred stock from Metropolitan and investment certificates and preferred stock from Summit pursuant to the Registration Statements that became or were effective during the Class Period “but which were not listed or authorized for listing on the National Market System of the NASDAQ market system.'” SCAC ¶ 40 (emphasis added). Class certification is not before the Court at this time.

The Met Group’s Business Practices

The Plaintiffs allege that Metropolitan focused on buying high risk home mortgages after its founding in 1953. SCAC ¶ 43. In 1973, Metropolitan Investment Securities, Inc. (“MIS”), a broker-dealer, was formed as a wholly owned subsidiary of Metropolitan. SCAC ¶ 46. Metropolitan later expanded into other areas of business, including insurance. SCAC ¶ 48. Summit was created as another wholly owned subsidiary in 1990. SCAC ¶ 49. Summit became a “near mirror image” of Metropolitan after it was acquired by National Summit Corporation in 1994. SCAC ¶ 50.

Metropolitan and Summit originally focused on different business activities. Metropolitan was primarily involved in residential mortgage loans and selling various kinds of receivables, while Summit’s primary areas of business were commercial lending and property development. SCAC ¶ 55. Metropolitan’s earnings in the mid-1990s could not keep pace with its rapid growth, however, and Metropolitan became “very thinly capitalized.” SCAC ¶ 85. As a result, Metropolitan changed its practices to reflect those of Summit in 2000. SCAC ¶ 56.

Functioning as “a single enterprise focused on commercial lending,” Metropolitan and Summit aggressively pursued commercial lending, writing $20-$30 million dollars in commercial loans every month during much of 2001 and 2002. SCAC ¶¶ 86-87. In an effort to increase this amount to $100 million a month, the companies engaged in increasingly risky ventures. SCAC ¶¶ 88-90. The SCAC describes sixteen “representative transactions” to illustrate the Met Group’s practices. ¶¶ SCAC 455-619.

With its commercial real estate investments generating little return, the Met Group was unable to pay the significant annual rates of return on its securities, leading it to issue yet more securities as a source of cash. SCAC ¶ 148. The Met Group thus became wholly dependant on cash acquired from the sale of securities. SCAC ¶ 130. Its practices required both unqualified financial statements from the Met Group’s auditors and continual regulatory approval. SCAC ¶ 130. During the time period identified by the proposed class, the Met Group made nine securities offerings. MIS acted as the sales brokerage for all of these sales.

Efforts to Evade State Regulation

In 1995, the Securities Division of the Washington State Department of Financial Institutions (“DFI”) conducted an audit and examination of the Met Group that disclosed numerous regulatory violations, unsound business practices, and conflicts of interest. SCAC ¶ 62. DFI and the Met Group subsequently entered into a Memorandum of Understanding (“MOU”) that imposed special requirements on the Met Group. By 1998, the Met Group was disregarding the terms of the MOU. SCAC ¶ 63.

In late 1999, Metropolitan “sought to escape the supervision of the Washington State regulators” by “listing its debentures on a national securities exchange for the express purpose of achieving preemption as a ‘covered security’ under federal law.” SCAC ¶¶ 64-65. Metropolitan accordingly listed its debentures on Tier I of the Pacific Stock Exchange. SCAC ¶ 66. In January 2002, Metropolitan listed its preferred stock, Series E-7, on the American Stock Exchange. SCAC ¶ 72. “Thus Metropolitan was able to achieve complete preemption of regulation by the DFI.” SCAC ¶ 73.

The Collapse

On December 31, 2002, Metropolitan filed its Annual Report (Form 10-K) with the SEC. The report explained that the IRS intended to disallow certain tax benefits Metropolitan had claimed based on its involvement in the Foreign Leverage Investment Program (“FLIP”). The report further indicated that Metropolitan could lose up to $28 million if, following an audit, the IRS ultimately disallowed the FLIP transaction’s tax benefits. The report also stated that a complete review had not taken place at the time of the report and Metropolitan could not “reasonably estimate a loss, if any, associated with this transaction.” Metro. Mortgage & Sec. Co., Annual Report (Form 10-K), at 28 (December 31, 2002).

In October 2002 and March 2003, the Met Group sought SEC approval for two new securities offerings, one for Metropolitan and the other for Summit. SCAC ¶¶ 131-132. In investigating the registration statements underlying the securities, the SEC observed a number of concerning practices, SCAC ¶ 134, and denied approval for both proposed offerings. SCAC ¶ 133. Following the SEC’s lead, the Met Group’s qualified independent underwriter, as well as its auditor, also took a closer look at the Met Group’s practices. SCAC ¶ 135. The underwriter withdrew its approval of pricing and yield determinations for all currently offered Met Group Securities on July 17, 2003. SCAC ¶ 136.

Around the same time, the National Association of Securities Dealers (“NASD”) began investigating MIS, eventually resulting in a $500,000 fine and a prohibition on further marketing of securities. SCAC ¶¶ 137, 139. On July 7, 2003, Metropolitan filed a Current Report, Form 8-K, with the SEC, revealing that MIS, “the sole broker dealer responsible for the offer and sale of [Metropolitan’s] preferred stock and debt securities,” had received a “Wells letter” from NASD. The Wells letter notified MIS that NASD had made a preliminary determination to recommend sanctions against it. The July 7 report explained that MIS would be given an opportunity to respond to NASD’s allegations and that MIS was cooperating with NASD in an attempt to resolve the matter. The report further explained that sanctions, if ultimately imposed, could have an adverse effect on MIS’s ability to sell Metropolitan’s securities, which could, in turn, have an adverse effect on Metropolitan. Metro. Mortgage & Sec. Co., Current Report (Form 8-K), Item 5 (July 7, 2003).

On November 3, 2003, Metropolitan and Summit’s boards of directors suspended monthly payments on all preferred stock and announced the penalties NASD had imposed upon MIS. SCAC ¶ 143. The following day, Metropolitan filed a Current Report that revealed two facts relevant to the motions presently before the Court. First, the report revealed that MIS had settled the issues raised in NASD’s Wells letter by entering into a Letter of Acceptance, Waiver, and Consent (“AWC”) with NASD. Under the AWC, MIS agreed to pay a fíne of $500,000, make restitution to certain investors, and “agreed not to sell securities to its affiliates until it has revised its systems, supervision, training, and written procedures with respect to those sales.” Metro. Mortgage & Sec. Co., Current Report (Form 8-K), Item 5 (November 4, 2003).

Second, the November 4 report disclosed that Metropolitan had suspended dividend payments in order to “conserve liquidity.” While Metropolitan’s projected cash needs for the next three months totaled $10 million, the company’s available cash only amounted to $7 million. Most significantly, the report explained,

Because the company is currently unable to sell securities publicly, which sales historically have been significant sources of liquidity, the company is exploring other options to improve its liquidity position. No assurance can be given that these efforts will be successful.

Id.

Summit issued a similar Current Report on November 4, 2003. This report revealed that Summit, like Metropolitan, was suspending dividend payments on its preferred stock in order to “conserve liquidity.” It also contained identical language warning investors of the historical importance of securities sales and the uncertainty of Summit’s cash flow position. Summit Sec. Inc., Current Report (Form 8-K), Item 5 (November 4, 2003).

On December 15, 2003, Metropolitan filed another Current Report, Form 8-K, revealing that MIS had ceased operations. The report stated, “MIS will no longer have the ability to sell [Metropolitan’s] securities which in the past have been a significant source of revenue.” Metro. Mortgage & Sec. Co., Current Report (Form 8-K), Item 5 (July 7, 2003).

Unable to sell additional securities, the Met Group’s “liquidity problems intensified” and it began considering the possibility of bankruptcy. SCAC ¶¶ 139-140. On January 20, 2004, the Met Group’s independent auditor withdrew its 2001 and 2002 opinions on the Met Group’s financial statements. SCAC ¶ 144. Metropolitan and Summit filed for bankruptcy on February 4, 2004. SCAC ¶ 147.

The Accountant Defendants

Pricewaterhousecoopers, LLP (“PwC”) served as the Met Group’s independent auditor and accountant from 1994 until June 12, 2001. In this capacity, PwC prepared and certified Metropolitan and Summit’s financial statements for fiscal year 2000. PwC consented to being named as the party that prepared and certified the financial statements attached to the Registration Statements. SCAC ¶ 36.

Ernst & Young, LLP (“EY”) served as Metropolitan and Summit’s independent auditor and accountant from June 12, 2001, until January 22, 2004. In this capacity, EY prepared and certified financial statements for fiscal years 2001 and 2002, and quarterly statements for fiscal year 2003. EY consented to being named as the party that prepared and/or certified the financial statements attached to the Registration Statements. SCAC ¶ 37.

The SCAC alleges that PwC and EY negligently violated their duties under Generally Accepted Auditing Standards (“GAAS”) and Generally Accepted Accounting Principles(“GAAP”) by issuing unqualified audit opinions that enabled Metropolitan and Summit to sell securities. SCAC ¶ 150. The SCAC further alleges that the Accountant Defendants certified Metropolitan and Summit’s year-end financial statements. These certifications were materially false. SCAC ¶¶ 708, 716.

Roth Capital Partners

Roth Capital Partners (“Roth”) is an investment banking firm. Roth served as Metropolitan and Summit’s Qualified Independent Underwriter (“QIU”) from 1998-2003. SCAC ¶ 630. As the QIU, Roth was required to undertake the responsibilities and liabilities of an underwriter prescribed by Section 11 of the Securities Act of 1933. One such responsibility is to exercise due diligence by verifying the accuracy of the Met Group’s registration statements and prospectuses. SCAC ¶ 632.

The SCAC alleges that Roth performed its due diligence negligently. As a result, Roth failed to detect a number of misrepresentations and omissions in the Met Group’s registration statements. Roth also negligently approved prices and dividend schedules for the Met Group’s securities that understated the risks of the securities. SCAC ¶ 643.

Koa Timber Transaction

One of the representative transactions alleged in the SCAC of particular import to the present motions is the “Koa Timber Transaction.” Pursuant to the “Timber Harvest Agreement,” Metropolitan, Summit, and Old Standard Life Insurance, a Summit subsidiary, loaned a total of $11.85 million to one Kyle Dong to enable him to acquire and begin logging 13,000 acres of forested land in Hawaii known as the Hilo property. The Hilo property was worth only $9.1 million and most of it was located in a Conservation District. Dong did not have the permit necessary to begin logging. SCAC ¶¶ 456-493.

Pursuant to the Timber Harvest Agreement, Metropolitan purchased the right to harvest the timber on the Hilo property from Dong for $2.5 million. The same day, Dong reacquired the right from Metropolitan for $18 million to be paid over five years. Metropolitan then sold the Timber Harvest Agreement to Summit for $13.2 million. Dong defaulted on his second payment, to be made on November 1, 2000. In August of 2001, Summit brought suit to recover the amounts due. SCAC ¶ 627. Dong counterclaimed, alleging that the Timber Harvest Agreement was void and unenforceable “as part and parcel of securities fraud.” Declaration of Brian D. Buckley, December 6, 2006, Ex. A ¶ 201.

The SCAC alleges that, although PwC was aware of Dong’s default and his failure to obtain a permit, PwC’s consolidated financial statements for Metropolitan for 2000 did not disclose either of these facts. The consolidated financial statements for Summit for 2000 indicated that the Timber Agreement was acquired for fair market value. For these and other reasons, “Financial reporting for the Koa Transaction violated numerous GAAP, GAAS and SEC provisions.” SCAC ¶ 493.

The SCAC further alleges that EY was familiar with the Met Group’s accounting in the Koa transaction, that EY negligently failed to conduct an investigation of the transaction in connection with its 2001 audit, and that EY did not revise PwC’s 2000 financial statements. SCAC ¶ 491.

FLIP Transaction

In support of their argument that PwC was negligent in performing its accounting and auditing duties, the Plaintiffs cite PwC’s promotion and approval of Metropolitan’s participation in an offshore investment scheme called the Foreign Leverage Investment Program (“FLIP”). The primary purpose of the FLIP transaction was to serve as a tax shelter. SCAC ¶ 275. Although PwC should have known that the FLIP transaction was illegal, PwC “induced” Metropolitan to invest in the FLIP transaction in 1998. SCAC ¶ 274. Metropolitan garnered significant tax benefits from the FLIP transaction for the tax year that ended on December 31, 2000. Following an audit in 2003, Metropolitan entered into a settlement agreement with the IRS that disallowed 80% of the tax savings from the FLIP transaction. SCAC ¶ 295.

DISCUSSION

I.OVERVIEW

Although the SCAC is deficient in a number of respects, it would be inappropriate to dismiss an action of this complexity prior to granting the Plaintiffs an opportunity to correct the deficiencies identified by the Defendants. The Plaintiffs will accordingly be permitted to file a Third Consolidated and Amended Complaint.

However, amendment can cure neither the bar imposed by a statute of repose, nor the force of federal preemption. Consequently, the Plaintiffs’ Section 11 claims against Roth and PwC must be dismissed to the extent that they rely upon the Registration Statements that became effective prior to November 14, 2001. Likewise, the Plaintiffs’ WSSA claim must be dismissed to the extent that it relies upon the seven securities that are preempted by the Securities Litigation Uniform Standards Act of 1998.

II. SUBJECT MATTER JURISDICTION

The Plaintiffs allege both federal and state causes of action. The Plaintiffs’ federal claims arise under the Securities Act of 1933,15 U.S.C. § 77a et seq. The Court has jurisdiction to hear these claims pursuant to 28 U.S.C. § 1331.

The Court has discretion to exercise supplemental jurisdiction over the Plaintiffs’ state law claims pursuant to 28 U.S.C. § 1367. Section 1367 provides that, when a federal district court has subject matter jurisdiction over a claim, the court also has “supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III.” In this case, the Plaintiffs’ state law claims form part of the same case or controversy as the Plaintiffs’ Securities Act claims because all of the claims arise from the purchase of the Met Group’s securities between February 13, 2001 and December 15, 2003.

III. LEGAL STANDARD

Under Federal Rule of Civil Procedure 12(b)(6), a trial court may dismiss a complaint that fails to state a claim upon which relief can be granted. Such dismissal is proper “only when there is no cognizable legal theory or an absence of sufficient facts alleged to support a cognizable legal theory.” Siaperas v. Mont. State Comp. Ins. Fund, 480 F.3d 1001, 1003 (9th Cir. 2007). For the purposes of a 12(b)(6) motion, all factual allegations set forth in the complaint are taken as true and construed in the light most favorable to the plaintiff. Epstein, 83 F.3d at 1140. The Court must give the plaintiff the benefit of every inference that reasonably may be drawn from well-pleaded facts. Tyler v. Cisneros, 136 F.3d 603, 607 (9th Cir.1998).

“Once a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint.” Bell Atlantic Corp. v. Twombly, — U.S. -, -, 127 S.Ct. 1955, 1969, 167 L.Ed.2d 929 (2007)(internal citations omitted). However, the Court is not required to accept as true conclusory allegations, legal characterizations, unreasonable inferences, or unwarranted deductions of fact. In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1403 (9th Cir.1996). “In practice, a complaint must ... contain either direct or inferential allegations respecting all the material elements necessary to sustain recovery under some viable legal theory.” Twombly, 127 S.Ct. at 1969, 167 L.Ed.2d at 944 (quoting Car Carriers, Inc. v. Ford Motor Co., 745 F.2d 1101, 1106 (7th Cir.1984))(ellipsis and emphasis in original).

As a general rule, the Court “may not consider any material beyond the pleadings in ruling on a Rule 12(b)(6) motion.” Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir.2001). There are, however, two exceptions to the rule that consideration of extrinsic evidence converts a Rule 12(b)(6) motion into a motion for summary judgment. First, the Court may consider “material which is properly submitted as part of the complaint” or material upon which the complaint necessarily relies. Lee, 250 F.3d at 688. Second, under Federal Rule of Evidence 201, the Court may take judicial notice of “matters of public record.” MGIC Indem. Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir.1986).

IV. SUFFICIENCY OF THE PLEADINGS

A. Failure to Comply with the “Short and Plain Statement” Requirement of Rule 8

EY argues that the SCAC fails to conform to the “short and plain statement” requirement of Federal Rule of Civil Procedure 8. Under the notice pleading requirements of the Federal Rules of Civil Procedure, a complaint in a civil suit must contain “a short and plain statement of the claim.” Fed.R.Civ.P. 8(a)(2). “The ‘short and plain statement’ must provide the defendant with ‘fair notice of what the plaintiffs claim is and the grounds upon which it rests.’ ” Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 346, 125 S.Ct. 1627, 1634, 161 L.Ed.2d 577, 588 (2005)(citing Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 103, 2 L.Ed.2d 80, 85 (1957)). A complaint whose length and disorganization require opposing counsel and the court to “root around for actionable claims” does not satisfy Rule 8’s pleading requirements. In re Splash Tech. Holdings Secs. Litig., 160 F.Supp.2d 1059, 1073 (N.D.Cal.2001). See also Wenger v. Lumisys, Inc., 2 F.Supp.2d 1231, 1243 (N.D.Cal.l998)(dismissing a complaint alleging securities fraud that “requir[ed] a laborious deconstruction and reconstruction of a great web of scattered, vague, redundant, and often irrelevant allegations” for failure to comply with Rule 8).

While the Court recognizes the hard work Plaintiffs’ counsel no doubt expended in drafting the SCAC, the SCAC nevertheless fails to satisfy the “short and plain statement” requirement of Rule 8. Like the complaint dismissed in Wenger, the SCAC,

repeats many allegations three or four times ... does not indicate which among the [many] pages of statements are alleged to be false, does not follow each allegedly false statement with factors showing it was false [... and] merely throws the statements and the alleged “true facts” together in an undifferentiated clump and apparently expects the reader to sort out and pair each statement with a supposedly relevant “true fact.”

2 F.Supp.2d at 1243. These problems are described more fully in the Court’s discussion of Rule 9(b) below.

Moreover, the SCAC’s length and organization make it even more cumbersome and time-consuming than the complaints dismissed in Splash and Wenger. While the complaint in Splash was 124 pages, and that in Wenger 86 pages, the SCAC “tips the scales” at 317 pages in length. It appears that the Plaintiffs, blessed with the wealth of facts disclosed in the Bankruptcy Examiner’s report, felt the need to incorporate as many facts as possible into the complaint. The purpose of a complaint is not, however, to inform the opposing party of every fact underlying the plaintiffs claims. The proper time for such detailed revelation is discovery. A complaint need only set forth sufficient facts to notify the opposing party of the claims against it and the factual basis of those claims. Factual allegations will, of course, be lengthier and more detailed when a plaintiffs claims must be alleged with particularity. As explained below, however, even complaints alleging fraud must be more “user-friendly” than the SCAC.

The Plaintiffs will be permitted to amend their complaint in order to conform with the requirements of Rule 8. The Court recognizes that this task will be both challenging and burdensome. However, the American legal system places this burden on the party seeking relief, rather than the party responding to a claim. Nor is it appropriate for a trial court to effectively involve itself in the drafting process by puzzling out the details of a plaintiffs claims.

B. Applicability of Rule 9(b) to Strict Liability Claims

EY argues that the Plaintiffs’ negligence claims brought under Section 11 should be dismissed for failure to comply with the pleading standards of Rule 9(b). Rule 9(b) requires a complaint alleging fraud to “state with particularity the circumstances constituting fraud or mistake.” A Section 11 claim that sounds in fraud must satisfy the particularity requirements of Rule 9(b). In re Daou Sys., 411 F.3d 1006, 1027 (9th Cir.2005); In re Stac, 89 F.3d at 1405. A Section 11 plaintiff can not escape the requirements of Rule 9(b) by virtue of a general disclaimer that a claim is based on negligence rather than fraud. Wagner v. First Horizon Pharm. Corp., 464 F.3d 1273, 1278 (11th Cir.2006); In re Stratosphere Secs. Litig., 1 F.Supp.2d 1096, 1104 (D.Nev.1998); In re Stac, 89 F.3d at 1405 n. 2.

A Section 11 claim sounds in fraud when it alleges “a unified course of fraudulent conduct and reifies] entirely on that course of conduct as the basis of a claim.” Vess v. Cibar-Geigy Corp. USA, 317 F.3d 1097, 1103-04 (9th Cir.2003). When the facts underlying a negligence claim are also “said to be part of a fraud claim,” the negligence claim sounds in fraud. Wagner, 464 F.3d at 1278. Similarly, the Ninth Circuit has held that a Section 11 claim sounds in fraud if it “makes a wholesale adoption” of the facts underlying a fraud claim. Daou, 411 F.3d at 1028.

The Court finds that the Plaintiffs’ Section 11 strict liability claims sound in fraud. Apart from their references to the Defendants’ states of mind, the SCAC’s fraud and strict liability counts are virtually identical. Compare SCAC ¶¶ 706-713 (Count VII) with SCAC ¶¶ 766-773 (Count XII). As the case law cited above indicates, the Plaintiffs’ express denial that the strict liability claims rest on allegations of fraud are irrelevant; only the content of the claims matters. While the Plaintiffs argue that the SCAC alleges facts in support of the fraud claims that do not go to the negligence claims, the Plaintiffs’ “underlying allegations of negligence” allege facts very similar to those alleged in their “Additional Factual Allegations Sounding in Fraud.” Compare SCAC ¶¶ 58, 64 with SCAC ¶¶ 737-740 and SCAC ¶¶ 149-152, 265-267 with SCAC ¶¶ 741-747. Consequently, the Plaintiffs’ strict liability claims must be pleaded with particularity pursuant to Rule 9(b).

C. Failure to Allege Fraud With Particularity

Roth and EY argue that the SCAC does not allege the claims sounding in fraud with sufficient particularity to satisfy the pleading requirements of Rule 9(b). In order to allege fraud with particularity, the complaint must both identify the allegedly fraudulent statement and explain why it was false when made. In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541, 1547-48 (9th Cir.1994). Identifying a statement involves setting forth such facts as the statement’s contents, the time and place at which it was made, and the party who made it. Id.; In re Autodesk, Inc. Sec. Litig., 132 F.Supp.2d 833, 839 (N.D.Cal.2000).

A complaint is deficient for the purposes of Rule 9(b) when it relies on “shotgun” or “puzzle” pleading. Id. at 1554. “Shotgun pleadings are those that incorporate every antecedent allegation by reference into each subsequent claim for relief or affirmative defense.” Wagner, 464 F.3d at 1279. Similarly, puzzle pleadings are those that require the defendant and the court to “match the statements up with the reasons they are false or misleading.” Autodesk, 132 F.Supp.2d at 842. See also Wagner, 464 F.3d at 1280 (holding that a complaint failed to satisfy Rule 9(b) because “the factual particularity of the first 175 paragraphs is not connected to the otherwise generally pled claim in any meaningful way”); Autodesk, 132 F.Supp.2d 833 (dismissing complaint, in part, because of puzzle pleading); In re PetSmart, Inc. Sec. Litig., 61 F.Supp.2d 982, 996 (same).

In this case, the SCAC fails to satisfy the particularity requirements of Rule 9(b) because it relies upon both shotgun and puzzle pleading. As Roth and EY argue, it is difficult and laborious to determine which portions of the Registration Statements are allegedly false and which false statements are attributed to any particular defendant. Like the complaint in GlenFed, the SCAC “often rambles through long stretches of material quoted from defendants’ public statements ... unpunctuated by any specific reasons for falsity.” 42 F.3d at 1553. See SCAC ¶¶ 75-77, 78, 81.

The SCAC is also comparable to the GlenFed complaint in that “the organization of the complaint often makes the nature of the fraud difficult to define and certainly makes the complaint difficult to respond to.” 42 F.3d at 1554. The Plaintiffs’ response to EY’s motion to dismiss is illustrative, as the Plaintiffs explain that EY’s misrepresentations are identified at Paragraphs 766-768, the Plaintiffs’ exposition of the GAAS and GAAP standards can be found at Paragraphs 148-185, and the explanation of how EY allegedly violated those standards appears some 400 paragraphs later, at Paragraphs 515-51.

Finally, as in Wagner, the SCAC fails to connect its factual allegations to the elements comprising the Plaintiffs’ various claims. The Plaintiffs’ 317 page complaint sets forth 624 paragraphs of factual allegations prior to reaching the claims for relief. SCAC at 271. Each of the Plaintiffs’ claims for relief then incorporates the factual allegations without specifying which ones support any particular elements of the claim. SCAC ¶¶668, 675, 684, 687, 694, 703, 706, 714, 722, 730. “No further reference is made to the previous allegations in the complaint, leaving the reader to wonder which prior paragraphs support the elements of the fraud claim.” Wagner, 464 F.3d at 1279.

Where a complaint contains puzzle pleading, the Ninth Circuit has recommended that the plaintiff should be required to “streamline and reorganize the complaint before allowing it to serve as the document controlling discovery.” Glen-Fed, 42 F.3d at 1554. See also Wagner, 464 F.3d at 1280 (holding that the proper remedy for shotgun pleadings is to, sua sponte, order repleading pursuant to Rule 12(e)). Accordingly, the Plaintiffs will be permitted to amend their complaint to comply with Rule 9(b).

V. SECTION 11 OF THE SECURITIES ACT OF 1933

Section 11 of the Securities Act of 1933 provides a private cause of action for investors who purchase securities pursuant to a registration statement containing a material misstatement or omission. 15 U.S.C. § 77k(a). A Section 11 claim has two elements. First, the plaintiff must prove that the registration statement contained a misstatement or an omission. Second, the plaintiff must prove that the misstatement or omission was material. Daou, 411 F.3d at 1027; Kaplan v. Rose, 49 F.3d 1363, 1371 (9th Cir.1994). It is unnecessary to allege scienter in order to state a cause of action under Section 11. As a result, parties subject to suit under Section 11 may be held liable, not only for fraudulent statements or omissions, but also under a theory of strict liability. Daou, 411 F.3d at 1027.

A. Standing

1. Necessity of Tracing Securities

The Individual Defendants argue that the Plaintiffs lack standing because the SCAC does not allege that any of the Lead Plaintiffs purchased securities pursuant to the Registration Statements at issue. Section 11 confers standing to sue on any person who purchases a security pursuant to a registration statement that misrepresents or omits a material fact. In re Immune Response Sec. Litig., 375 F.Supp.2d 983, 1039 (S.D.Cal.2005); Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076, 1077 (9th Cir.1999). An investor who purchases securities on the secondary market after the expiration of the registration statement must directly trace the securities to the registration statement at issue. Lee v. Ernst & Young, 294 F.3d 969, 977 (8th Cir.2002); Hertzberg, 191 F.3d at 1080 n. 4.

While it is not necessary to prove that the securities are traceable at the pleading stage, traceability must be alleged in the complaint. Shapiro v. UJB Fin. Corp., 964 F.2d 272, 286 (3d Cir.1992). It is sufficient, however, if a plaintiff generally alleges that he or she purchased securities pursuant to the registration statement or statements at issue. Id.; In re SeeBeyond Techs. Corp. Sec. Litig., 266 F.Supp.2d 1150, 1171 (C.D.Cal.2003); In re Global Crossing, Ltd. Sec. Litig., 313 F.Supp.2d 189, 208 (S.D.N.Y.2003). Traceability is also sufficiently alleged where the complaint seeks relief on behalf of a proposed class comprised of investors who purchased securities pursuant to the allegedly false registration statement. In re Immune Response, 375 F.Supp.2d at 1039.

As the Plaintiffs point out, the SCAC explicitly limits recovery for each of its Section 11 claims to those Plaintiffs who acquired securities pursuant to the Registration Statements. SCAC ¶¶ 688, 707, 715, 723, 759, 767, 755. At this stage of the litigation, the Plaintiffs need do no more in order to allege standing.

In view of the fact that standing is a jurisdictional issue, the Defendants have asked the Court to set a deadline by which the Plaintiffs must trace the securities purchased by the Lead Plaintiffs. This request is reasonable and will be granted. As the Defendants have argued, each proposed class representative in a class action must have standing in his or her own right. Lilley v. Charren, 936 F.Supp. 708, 716 (N.D.Cal.1996). Accordingly, before they may a file a motion for class certification, the Plaintiffs must file an amended certification for each proposed class representative tracing the representative’s securities to one or more of the Registration Statements at issue.

2. Standing to Sue Ness

Ness argues that the Plaintiffs do not have standing to bring a Section 11 claim against him because he does not fall into any of the categories specified in Section 11(a). Section 11 provides a cause of action against certain types of individuals, including those who signed the registration statement, the directors of the issuing company, and the underwriters of the securities. 15 U.S.C. § 77k(a).

The SCAC alleges that Ness signed Summit’s Registration Statements filed in 2001 and Metropolitan’s Registration Statements filed in 2002. SCAC ¶ 23. The SCAC does not plead that Ness signed the other Registration Statements. Nor does it allege any other relationship that would subject him to liability for misrepresentations or omissions he did not actually sign. Accordingly, only Section 11 claims based on the following Registration Statements may be brought against Ness: 1) Summit Investment Certificates, Series B, effective February 13, 2001; 2) Summit Preferred Stock, Seris R & T, effective February 13, 2001; 3) Metropolitan Investment Debentures, Series III and III— A, effective April 29, 2002; and 4) Metropolitan Preferred Stock, Series E-7, effective August 13, 2002.

B. Statute of Repose

PwC and Roth argue that the Plaintiffs’ Section 11 claims against them are time barred by the statute of repose to the extent that these claims are based on the first seven Registration Statements. Pursuant to Section 13 of the Securities Act, no action may be brought under Section 11 more than three years after the security at issue was “bona fide offered to the public.” 15 U.S.C. § 77m. As a statute of repose, rather than a statute of limitations, this time limit is not subject to equitable tolling. 4 Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure: Civil § 1056 (3d ed.2002); Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 363, 111 S.Ct. 2773, 2782, 115 L.Ed.2d 321, 336 (1991). The date on which a security was bona fide offered to the public is a question of fact. In the case of registered securities, courts generally treat the date of the security’s registration as the date on which the period of repose begins to run. P. Stolz Family P’ship L.P. v. Daum, 355 F.3d 92, 99 (2d Cir.2004).

The Registration Statements challenged by PwC and Roth became effective between February 13, 2001, and February 13, 2002. According to PwC and Roth, these Registration Statements all predate the filing of the CAC, the first pleading to name PwC and Roth as Defendants, by more than three years, as the CAC was filed on March 11, 2005. The Plaintiffs respond that the statute of repose does not bar their claims for three reasons. First, the Plaintiffs argue that the CAC was effectively filed on December 17, 2004, when they sought leave to file it. Second, the Plaintiffs argue that the Sarbanes-Oxley Act extended the statute of repose for securities claims alleging fraudulent conduct. Finally, the Plaintiffs argue that Metropolitan’s Preferred Stock, Series E-7 was not bona fide offered to the public until December 17, 2004.

1. Effective filing date of the CAC

As a general rule, a civil action does not commence until the complaint is filed with the court. Fed.R.Civ.P. 3. Where an amended pleading adds a new defendant to the action, the amended pleading does not relate back to the filing of the original complaint unless the defendant “should have known that, but for a mistake concerning identity, the action would have been brought against it.” Louisiana-Pacific Corp. v. ASARCO, Inc., 5 F.3d 431, 434 (9th Cir.1993). The Plaintiffs do not suggest that their failure to name PwC and Roth at an earlier date was due to mistaken identity. Consequently, the Plaintiffs’ complaint against PwC and Roth was not filed for the purposes of the statute of limitations until the Plaintiffs filed the CAC.

However, it is well established, for the purpose of calculating the statute of limitations, that an amended pleading is effectively filed when the motion to amend is filed. Mayes v. AT & T Info. Sys., Inc., 867 F.2d 1172, 1173 (8th Cir.1989). See also Butter Trucking Co. v. Owner Operator Indep. Driver Risk Retention Group, Inc., 461 F.Supp.2d 768, 777 (D.C.Ill.2006)(citing cases). The rationale underlying this rule is twofold. First, as PwC and Roth have argued, parties have “no control over when a court renders its decision regarding the proposed amended complaint.” Moore v. Indiana, 999 F.2d 1125, 1131 (7th Cir.1993). In addition, when a motion to amend is accompanied by the proposed amended pleading, the motion to amend notifies the defendant of the impending claim. Id. Consequently, a plaintiffs delay in filing the amended pleading after the court has granted permission does not necessitate dismissal of the claims if the delay did not prejudice the defendant. Bradley v. Armstrong Rubber Co., 46 F.Supp.2d 583, 586-87 (S.D.Miss.1999).

When the Plaintiffs filed their motion to amend, they also filed their proposed CAC. Both Roth and PwC received copies of the CAC at that time, with the result that they were put on notice of the claims against them. While PwC and Roth are correct in stating that the Plaintiffs’ delay in filing the CAC defeats one purpose underlying the Mayes exception, the purpose of a statute of repose is to protect potential defendants by providing them with timely notice. PwC and Roth received this notice prior to the expiration of the statute of repose. They have neither argued nor demonstrated that they were otherwise prejudiced by the Plaintiffs’ delay in filing the SCAC. The reasoning of the Bradley court applies equally to this case. Thus, the Court finds that the FAC was effectively filed on December 17, 2004.

2. Length of statute of repose

On July 30, 2002, Congress passed the Sarbanes-Oxley Act (“Sarbanes-Oxley”) amending the residual statute of limitations for federal claims. Section 804 of Sarbanes-Oxley provides a two year statute of limitations and a five year statute of repose for “a private right of action that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws.” 28 U.S.C. § 1658(b). “The Securities laws” refers to, among other laws, the 1933 Act and the Securities and Exchange Act of 1934. 15 U.S.C. 78c(a)(47).

Neither the Supreme Court nor the Ninth Circuit has determined whether the statute of repose and the statute of limitations set forth in Section 804 apply to claims brought under Section 11 of the 1933 Act. All of the district courts who have addressed the question have held that Section 13 continues to provide the statute of repose and the statute of limitations for Section 11 claims. In re Alstom