Full opinion text
OMNIBUS ORDER ON DEFENDANTS’ MOTIONS TO DISMISS THE CONSOLIDATED AMENDED COMPLAINT AND ALL PENDING REQUESTS FOR JUDICIAL NOTICE MARIANA R. PFAELZER, District Judge. INTRODUCTION This Court has consolidated numerous securities actions related to Countrywide Financial Corporation (“Countrywide”) into three cases pending before it. The present case involves publicly traded equity securities and publicly traded, unsecured debt instruments that Countrywide used to raise capital from investors. On August 14, 2007, George Pappas, on behalf of himself and all others similarly situated, filed suit against Countrywide and several individuals alleging securities law violations. On November 28, 2007, this Court consolidated the Pappas action with several other cases involving publicly traded Countrywide securities. The Court designated New York Funds (“NY Funds”) as lead plaintiffs. In this Order, “Plaintiffs” refers to all the named plaintiffs in this consolidated case; “NY Funds” is used when referring to the lead plaintiffs in particular. Plaintiffs filed a 416-page Consolidated Amended Class Action Complaint (“CAC”) on April 14, 2008. The CAC’s proposed class period spans the nearly 4 years between March 12, 2004 and March 7, 2008. The CAC contains 21 claims and names 50 defendants. Defendants now move to dismiss. The Court feels obliged to issue this comprehensive — and regrettably long— Order to establish much of the law of the case, narrow the issues, and discourage some of the parties’ more tenuous arguments. This document shall guide the parties and save the Court detailed expositions in future orders. For reasons explained below, the motions are granted in part and denied in part. The Conclusion section of this Order summarizes which claims are dismissed. TABLE OF CONTENTS OVERVIEW OF ALLEGATIONS AND CLAIMS..................................1144 A. Overview of allegations about Countrywide’s core business..................1145 i. Countrywide changes strategy......................................1145 ii. How Countrywide’s core mortgage-related operations affect investment value................................................1151 iii. Examples of allegedly false statements...............................1153 B. Overview of claims and defendants.......................................1154 LEGAL ANALYSIS............................................................1156 A. Rule 8(a).............................................................1156 B. Issues common to the '33 and '34 Act claims..............................1157 i. Standing.........................................................1157 ii. Statute of limitations...............................................1159 iii. Truth on the market...............................................1159 iv. Grant Thornton’s involvement.......................................1160 C. '33 Act Claims ........................................................1162 i. Section 11........................................................1162 1. “Sounds in fraud”..............................................1162 2. Section 11 standing ............................................1164 3. Loss .........................................................1167 4. Loss causation.................................................1170 5. Market forces and causation.....................................1173 6. Falsity.......................................................1174 ii. Section 12(a)(2)....................................................1182 iii. Section 15........................................................1183 D. '34 Act Claims ........................................................1184 i. Section 10(b)......................................................1184 1. Standing......................................................1184 2. Materiality....................................................1185 3. Falsity & scienter..............................................1185 a. Countrywide..............................................1192 b. Angelo Mozilo.............................................1192 c. David Sambol.............................................1194 d. Stanford Kurland..........................................1195 e. Eric Sieracki..............................................1196 f. KPMG ...................................................1197 4. Reliance......................................................1198 5. Loss .........................................................1199 6. Loss causation.................................................1200 ii. Section 20(a)......................................................1201 iii. Section 20A.......................................................1202 CONCLUSION 1205 I. OVERVIEW OF ALLEGATIONS AND CLAIMS The Court first summarizes Plaintiffs’ basic allegations and states the general nature of their legal claims. Specific additional allegations are discussed as relevant in the legal analysis section (Section II). While the facts of this case are inextricably intertwined with the mortgage-backed securities (“MBS”) that Countrywide sold to investment banks and other sophisticated investors, none of the actions before this Court are based on MBS purchases. Rather, the present case is brought on behalf of those who invested in Countrywide’s business. The investments’ values depend in great part on the soundness of Countrywide’s core mortgage-related operations. These operations include originating mortgages, purchasing mortgages from other originators, servicing mortgages, investing in mortgages, and packaging mortgages into MBS for resale. Core mortgage-related operations accounted for the vast majority of Countrywide’s earnings during the class period — 93% of fiscal year (“FY”) 2006 pretax earnings. See ¶¶ 82-83. As explained in the legal analysis, the federal securities laws deal with false or misleading statements in connection with investments. The federal securities laws do not create liability for poor business judgment or failed operations. See Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 479, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977). Nor do the laws require public companies to disclose every change in operations. But the CAC’s allegations present the extraordinary case where a company’s essential operations were so at odds with the company’s public statements that many statements that would not be actionable in the vast majority of cases are rendered cognizable to the securities laws. For example, descriptions such as “high quality” are generally not actionable; they are vague and subjective puffery not capable of being material as a matter of law. On an individual level, this is because a reasonable person would not rely on such descriptions; on a macro scale, the statements will have little price effect because the market will discount them. See Cook, Perkiss and Liehe, Inc. v. N. Cal. Collection Svc. Inc., 911 F.2d 242, 245-46 (9th Cir.1990) (collecting and discussing puffery cases, including securities cases). However, the CAC adequately alleges that Countrywide’s practices so departed from its public statements that even “high quality” became materially false or misleading; and that to apply the puffery rule to such allegations would deny that “high quality” has any meaning. Thus, to understand Plaintiffs’ claims, one must first understand the facts Plaintiffs allege about Countrywide’s core operations. A. Overview of allegations about Countrywide’s core business Legal standard. A motion to dismiss tests whether the allegations in a complaint, if true, amount to an actionable claim. Navarro v. Block, 250 F.3d 729, 732 (9th Cir.2001). In evaluating a motion to dismiss under Fed.R.Civ.P. 12(b)(6), a court must accept as true all allegations of material fact in the complaint and read the complaint in the light most favorable to the nonmoving party. Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir.2001); Parks Sch. of Bus., Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir.1995). However, a court need not accept as true unreasonable inferences; nor need it accept legal conclusions cast in the form of factual allegations. Sprewell, 266 F.3d at 988. A court reads the complaint as a whole, together with matters appropriate for judicial notice, rather than isolating allegations and taking them out of context. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 127 S.Ct. 2499, 2509, 168 L.Ed.2d 179 (2007). Dismissal is appropriate only where a complaint fails to allege “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1974, 167 L.Ed.2d 929 (2007). Accordingly, the discussion below provides an overview of some key facts that Plaintiffs allege, stated in the light most favorable to the Plaintiffs. i. Countrywide changes strategy “In or about mid-2003,” the CAC alleges, Countrywide began a systematic shift from its traditional mortgage business. ¶ 3. Underwriting practices. From mid-2003 onward, Countrywide continually loosened its underwriting guidelines to the point of nearly abandoning them by 2006. Countrywide’s highest-level managers authored official documents — underwriting matrices and guidelines — such as those for Countrywide’s Corresponding Lending Division (“CLD”) that memorialized Countrywide’s systematically lowered lending standards. ¶¶ 127, 149-52, 154. Numerous Confidential Witnesses (“CWs”) from different levels and involved in different aspects of the company corroborate the nature of Countrywide’s strategy shift. See, e.g., ¶¶ 155-57. The CAC and CWs identify specific documents and their dates. ¶¶ 130-47 (alleging underwriting matrix updates from January 2004 to March 2006), 155-57 (CWs alleging dramatic changes in practices during 2005 and 2006). Chairman and CEO Angelo Mozilo’s stated goal was to gain 30% market share. ¶ 405. To do so, he and other high-ranking executives at Countrywide ordered many of the lowered standards. See, e.g., ¶¶ 405, 419. Nothing alleged thus far amounts to a securities violation. The claims arise because, throughout the class period, Countrywide officers publicly denied that underwriting standards had deteriorated. Countrywide officers expressly said they would not lower underwriting standards in service of the market share goal. See, e.g., ¶¶ 122, 237, 253, 403, 690, 731, 803-05. Underwriting standards changed so much during the class period that, in December 2007, Countrywide told reporters that billions of dollars of loans in 2005 and 2006 could not have been made under “new” guidelines. Those “new” guidelines actually represented Countrywide’s pre-class period guidelines. ¶ 32. Countrywide revealed that 89% ($64 bn.) of its 2006 pay-option ARMs would not have been approved under the new-old guidelines; nor would 83% ($74 bn.) of its 2005 pay-option ARMs. Id. Pay-option ARMs, explained below, are one of the riskiest classes of loans. “Subprime. ” Countrywide also employed a misleading definition of “subprime.” ¶¶ 5-6. The definition was known internally but not disclosed to the public until 2007. ¶ 10. Thus, the CAC alleges, Countrywide’s public statements about its “sub-prime” operations were inherently misleading to investors. Countrywide, and most lenders, use a credit score system called “FICO.” Named for the system’s creator, Fair Isaac Credit Organization, FICO refers to a method for calculating a borrower’s credit worthiness. FICO’s workings are largely proprietary, but based on the information in a credit bureau’s files — e.g., credit card usage and payment history, other revolving loan history, installment loan history, previous bankruptcy, judgments, and liens — FICO returns a score between 300 and 800. CAC at 45 n. 6. The higher the score, the more creditworthy the borrower; the more creditworthy the borrower, the less likely the borrower is to default. Though “subprime” has no universal definition, the CAC adequately alleges that industry custom regarded 660 as the prime-subprime dividing line. ¶¶ 217-20, 232. Further, the U.S. median score is 720. ¶215. The dispersion is such that only 27% of the population has a score below 650 and 15% of the population scores below 600. Id. Countrywide internally used 620 to mark the subprime line. See, e.g., ¶¶ 177, 192, 223, 226. According to two CWs— one a manager in Full Spectrum Lending (“FSL”), Countrywide’s loan origination and purchasing division, and the other a loan originator who worked in a branch that only underwrote “prime” loans — some loans to borrowers with scores as low as 500 were classified as “prime.” ¶ 164, 170, 221, 223, 226. Countrywide revealed its internal deviation from the industry norm to the public in a July 24, 2007 conference call. ¶ 231 (Countrywide’s Chief Risk Officer disclosing and defending Countrywide’s classification system and suggesting that Countrywide classified borrowers “with FICOs in the low 500s” as “prime”). Some analysts expressed shock. ¶¶ 232-34. Countrywide’s stock price fell that day. ¶ 944. As Countrywide lowered standards, borrowers with lower FICO scores could take out larger loans (in absolute-dollar terms) with higher loan-to-value ratios. ¶¶ 141-46. The loan-to-value ratio measures the amount owed on the loan against the appraised value of the home. A higher ratio indicates higher risk because the more owed relative to the home’s value, the less likely a borrower can (or has strong enough incentives to) pay off the loan. More to the point from a lienholder’s perspective: in the event of foreclosure, it becomes less likely the lienholder can recover the loan net of foreclosure expenses. Exception loans. Countrywide often waived even its weakened standards, routinely approving loans that fell well outside its guidelines. ¶ 5. Its goal was to “[a]p-prove virtually every borrower and loan profile with pricing add on [sic] when necessary.” ¶¶ 5, 176. These exceptions made Countrywide’s public disclosures even more misleading insofar as they stated information regarding loan types and its customers’ credit quality. One common practice for loans that Countrywide originated in-house involved a computer system called the Exception Processing System (“EPS”). ¶ 175. EPS was created and overseen by one of Countrywide’s longest-serving officers and directors, David Sambol. ¶ 178. High-risk loans that did not meet the stated underwriting matrices could be originated using the EPS. A loan officer would “enter a customer’s FICO score, loan amount, property value used as collateral, and a description of the client’s situation” into the EPS. Id. CW9, a retail underwriter in the branch that was “the ‘top grossing’ branch in the nation, closing more than $2 billion in loans during its highest-producing year,” alleges that exception loans “including loans in the 500 FICO range, would be approved as ‘prime loans.’” ¶¶ 170, 223. CW9 further alleges that “approximately 80%” of loans at his branch went into the EPS. ¶ 179. In the office of CW10, a loan originator, 15-20% of each day’s origina-tions were processed by the EPS. Id.; ¶ 173. During parts of the class period, CW12 reports that Countrywide processed between 15,000 and 20,000 loans per month through EPS. Id. Whatever the absolute numbers, exception loans made up significant portions of Countrywide’s loan origi-nations even early in the class period. See, e.g., ¶ 193 (internal document reporting that exception loans made up 15-40% of loans coming into FSL from various Countrywide divisions). Loans put into EPS were sent to Countrywide’s central corporate underwriting offices, known as the (“Structured Loan Desks”) (“SLDs”). Countrywide set up an incentive system that encouraged the SLDs to approve as many loans as possible. ¶¶ 183-85. One SLD allegedly had a stated policy of keeping its decline rate at 1%. ¶ 185. Low decline rates were allegedly imposed on the SLD managers by the highest level officers and directors. See, e.g., ¶ 410, 423. Rather than a risk management system, EPS was a tool for generating higher fees for Countrywide and enabling the company to gain market share. ¶ 182. Loans processed through EPS were priced with risk-based “add-ons” (additional fees and mark-ups meant to compensate for risk) using a system called “Price Any Loan.” ¶¶ 182-83. Countrywide’s internal philosophy, the CAC alleges, was that no loan was too risky to be out of the question. See, e.g., ¶¶ 183 and 192. David Sambol’s “mantra ... was that ‘Countrywide will make every loan possible.’ ” ¶ 419. The highest-placed people in the company, including Mozilo and Sambol, monitored the EPS exceptions closely and acted on EPS reports. These and other top executives knew the exception rates and revised underwriting guidelines downward in response to EPS reports. ¶¶ 405, 412-29. Reports to the executives, including EPS reports, were detailed and broke down exceptions by, for example, branch and region. ¶¶ 420-27. Countrywide did not originate all the loans it serviced or packaged into MBS. It also bought loans from other subprime lenders. ¶ 190. Approximately 1-10% of these purchased loans were audited. ¶¶ 190, 335. If the audit showed that the loans failed Countrywide’s “underwriting guidelines, the guidelines would be ‘tweaked’ midstream in order to get the package to conform by processing the loans as exceptions through” a computer system similar to EPS, called the “GEMS exception module.” ¶ 190. Appraisals. One Countrywide insider, Mark Zachary, states that in September 2006 he “informed Countrywide executives that there was a problem with appraisals” on one of Countrywide’s joint ventures. ¶ 194. He alleges specific dates when he reported to Countrywide’s board and states that the board “knew that appraisers were strongly encouraged to inflate appraisal values by as much as 6% to allow homeowners to ‘roll up’ [into their mortgage] all closing costs.” Id. Rolling-up makes it easier to sell a home, but can result in the borrower owing more than the home is worth — even before a housing market shift or negative amortization. ¶ 195. If not limited to the joint venture — the CAC does not say how substantial the venture was — more widespread, and accounting for a higher percentage of stated values than perhaps known to the market, then faulty appraisal practices make assessing the value and quality of Countrywide’s loans and MBS more difficult. Further, CW8 (an FSL manager) alleges that, “until at least mid-2005 ... all of Countrywide’s origination divisions” allowed loan officers to “hire appraisers of their own choosing” and then “discard appraisals that did not support loan transactions, and substitute more favorable appraisals ... to obtain a more favorable loan to value ratio so that the loan would ‘qualify* for approval.” ¶ 205. Documentation practices. In “stated-income,” “stated-asset,” or “no-doc” loans, the borrower simply asserts his income (or assets) on a form. ¶ 101. Countrywide told borrowers there would be no income verification. Id. See also ¶ 131 (stating that Countrywide removed from its guidelines a statement that “income verification could be requested”); ¶ 134 (Countrywide internal document states that “income on [a no doc] application is generally not verified” so long as “the stated income is ‘reasonable for the borrower’s professional [sic] and level of experience’ ”); ¶ 161 (discussing low verification rates). CW2, a supervising underwriter, describes a process by which loans were approved based on the borrowers’ stated income and then rationalized post hoc. CW2 states that CLD underwriters had to “paper the file” and “build the case” that stated-income, stated-asset loans had been appropriately approved, “because [underwriters] knew the borrower file had to have some type of documentation to support or substantiate the borrower’s income in order for the loan to be sold on the secondary market.” Id. ¶¶ 129, 160-162 (describing how CW2 and other underwriters would use printouts from a website, salary.com, which provided generic salary ranges based on a borrower’s particular job title and zip code). This was done even when “CLD underwriters knew that the borrower’s income could not reasonably be what was represented on the loan application.” Id. ¶ 161. Thus, many loans that did not meet the matrices may have been approved without having to process an exception. The incentive system at the CLD was set up so that denying loans required more work by an underwriter than approving loans within his threshold authority: denying loans of any value required additional review and a second signature. ¶ 158. For example, a junior officer with the discretionary authority to approve a loan up to $350,000 could not decline that same loan without additional review and work. Id. Combined with the other allegations, the incentive system contributes an inference that Countrywide policies were designed from top to bottom to encourage increased risk. But see supra n. 12 (emphasizing the limits of incentive-based inferences). During the class period, official underwriting matrices progressively lowered the metrics required for no-doc loans. ¶¶ 135-37. By the end of the period, a borrower with a FICO score of 500 and whose bankruptcy had been discharged a single day before origination could get a loan up to $700,000 — without providing income documentation. ¶ 137. New products. The above practices were combined with a shift to new, inherently more risky loan products. One example is the adjustable-rate mortgage (“ARM”)- ARMs give homeowners a low “teaser” interest rate for an introductory period, typically between 2-10 years. ¶ 96. After the teaser period expires, ARMs “reset” to higher interest rates for the remainder of the mortgage period. Id. After the reset, buyers have higher minimum payments. Id. Pay-option ARMs are a type of ARM designed to give buyers flexibility in paying back their mortgage. The buyer may, in a given month, choose (1) to pay down the principal; (2) make an interest-only payment; or (3) make a minimum payment lower than the interest for the period. ¶ 97. If a buyer chooses option 3, the remaining interest will be capitalized. Id. This is known as “negative amortization.” Id. Countrywide’s pay-option ARMs have amortization caps (usually 110-125% of the original loan amount). ¶ 99. When a buyer hits the cap, the interest rates typically reset and buyers must begin paying down the principal. Id. Thus, the risk of default increases as the principal reaches the amortization cap. Further, the “vast majority” of pay-option ARMs were made on a low-doc or no-doc basis. ¶ 6. Interest-only mortgages allow the borrower to make only interest payments for an introductory period. ¶ 102. After the introductory period, minimum payment requirements increase, making these loans inherently riskier as well. Id. Interest-only loans could be fixed rate or ARM loans. Id. A Home Equity Line of Credit (“HE-LOC”) is a second mortgage secured by the difference between the value of the home and amount due on the first mortgage. ¶ 103. The smaller that delta, the more likely that even a slight decrease in property value will render the HELOC’s collateral worthless. Traditionally, a buyer financing more than 80% of a home’s value had to purchase Private Mortgage Insurance (“PMI”) to protect the lender from default on the mortgage. ¶ 106. Countrywide internal documents state that Countrywide’s loan origination and purchasing division “does NOT require Private Mortgage Insurance (PMI) on any loan — ever!” Id. Instead, a buyer could finance 100% of the purchase price by simultaneously taking out (1) a mortgage for 80% of the home’s value and (2) a “piggyback” loan for remaining 20%. Id. The piggyback loan is a second lien. Therefore, it is subject to the same risks as a HELOC. Id. n. 5. Loan-to-value ratios. Both HELOCs with slim margins between the home’s value and the amount due on the first mortgage and piggyback loans that allow 100% financing increase risk. See ¶ 942 (Countrywide representative on conference call explaining that “leverage [here, the loan-to-value ratio] at origination matters. More leverage means more serious delinquencies.”). Relatively high loan-to-value ratios at origination were exacerbated by negative amortization on pay-option ARMs and the riskiness of Countrywide’s other new products. Pay-option ARMs and 100% financing plans increased dramatically during the class period. In 2004, 15% of the pay-option ARMs packaged into MBS had loan-to-value ratios of greater than 90%. ¶ 113. By 2006, the percentage of securi-tized pay-option ARMs had almost doubled to 29% of securitized loans. Id. ii. How Countrywide’s core mortgage-related operations affect investment value Again, Countrywide’s core mortgage-related operations accounted for the vast majority of Countrywide’s earnings during the class period — 93% of pretax earnings for 2006. See ¶¶ 82-83. Therefore, virtually all the value of an investment in Countrywide derived from its ability to carry on mortgage-related businesses. Cf. Atlas v. Accredited Home Lenders Holding Co., 556 F.Supp.2d 1142, 1155 (S.D.Cal.2008) (“[A]s a mortgage lender ... underwriting practices would be among the most important information looked to by investors.”). Origination fees. A substantial portion of Countrywide’s income came from loan origination fees. Writing more mortgages generates more fees, as explained above. Countrywide’s continued ability to originate loans apace would therefore increase the value of investments in the company. However, Countrywide could only keep originating loans at a high rate if (1) the housing market remained healthy; (2) people continued to invest capital in Countrywide as a going concern; (3) Countrywide’s own investments in loans rose in value; and (4) Countrywide could continue to sell the mortgages it originated to third parties so that it could use the proceeds to originate more mortgages. Steps 2-4 could only continue if Countrywide’s underwriting practices were basically sound and the mortgages performed adequately. If Countrywide’s loans began systematically to perform below expectations, Countrywide’s value as a going concern would rapidly diminish. Servicing fees. Countrywide also earns fees from servicing mortgages. “Servicing” refers to processing payments and dealing with customers. Therefore, the longer the loan exists, the more servicing fees the servicer can collect. Countrywide valued these assets on its balance sheet as mortgage-servicing rights (“MSRs”). MSRs’ value is a function of the likelihood Countrywide will continue to service the mortgage, discounted by interest rate risk and other market risks extrinsic to the mortgages. ¶ 327. Controlling for extrinsic risks, the value of MSRs increases with mortgages’ expected life spans. The life of a mortgage ends (1) upon payment in full (either payment over the mortgage’s stated period or pre-payment before the mortgage’s stated period runs); or (2) default and foreclosure. Risky loans increase the risk of default, thereby decreasing the value of MSRs. Loans packaged into MBS for resale. Countrywide’s Capital Markets division created collections of mortgages for sale to relatively sophisticated investors such as investment banks. MBS separate the operational risk of the mortgage originator from mortgage risk. As such, investors in Countrywide could expect decreased exposure to low-performing mortgages. Likewise, those who invested in MBS could expect decreased exposure to Countrywide’s ongoing operations. MBS also pool loan risk. By gathering mortgages into MBS, the risk of individual mortgage defaults is mitigated by other mortgages: some high-risk, high-yield mortgages are made more attractive by being offset by lower-risk, lower-yield mortgages. MBS investors buy the right to receive an income stream from a pool of underlying mortgages. Countrywide would put the mortgages into an entity created to issue the MBS (commonly known as a Special Investment Vehicle [“SIV”]). The SIV are trusts with no assets except the right to receive mortgage payments. Countrywide would then collect mortgage payments (that is, service the mortgages) and pass the payments (net of its servicing fees) on to the SIV.. The SIVs would issues debt instruments to investors. Those instruments are the MBS. They are sold in income tiers known as “tranches.” The tranches are paid in descending order — with each subsequent tranche yielding higher interest to compensate for the increased risk that the last dollar will be taken by a higher tranche.Thus, the lowest tranche (the “residual interest”) takes the first loss, the next level takes the next loss, and so on until the highest tranche (the “supersenior tranche”) takes the last loss. To attract investors, Countrywide would often hold the residual interest (as well as some higher tranches). Countrywide thereby bore additional risk to further reduce MBS investors’ risk. Countrywide booked these assets as “retained interests” (“RIs”). ¶ 115. Further, Countrywide made representations and warranties (“R & Ws”) to MBS purchasers. The R & Ws obligated Countrywide to replace some securitized loans if they failed to perform at a certain level. ¶ 87. Both RIs and R & Ws increased Countrywide’s own financial exposure in the event that the loans it originated began systematically failing. Investors in an MBS receive a prospectus with statistics regarding the loans underlying the MBS. The prospectuses contain tables of statistics about the loans behind the MBS. The tables break down the loans into ranges by such criteria as FICO, loan-to-value ratio, documentation level, and sometimes a credit quality classification such as “prime” or “nonprime.” See, e.g., Countrywide Defs.’ Supp. Req. for Jud. Notice, Exs. 77-79; infra Section II.B.iii (discussing the truth on the market defense). To the extent that the loans underlying MBS fail to perform, the ability of Countrywide to continue to sell MBS to investors (known as selling into the “secondary market”) would be impaired. The secondary market’s appetite for Countrywide’s MBS was a primary source of liquidity (i.e., cash to continue the business of loaning money for mortgages). See, e.g., ¶ 376. To the extent the data about the mortgages entered into Countrywide’s computer system was misleading, the MBS may not perform as well as the MBS prospectus’ disclosures would suggest. Such poor performance could lead to an increase in Countrywide’s R & Ws liability as well as an inability to continue selling mortgages to investors in MBS. ¶¶ 85-87. Loans held by Countrywide. The value of the loans held for investment (“LHIs”) by Countrywide’s banking division depended on the quality of the underlying mortgages as well as interest rate and other market risks extrinsic to the mortgages. LHIs are kept on the balance sheet at amortized cost — the loan’s unpaid principal balance less an allowance for projected loan losses. ¶¶ 267, 278-79; Fair Accounting Statement No. 115 (“FAS 115”). If the LHIs had losses greater than the assumptions used to establish the allowance amount, the inadequate allowance would inflate Countrywide’s book value. Countrywide also held loans for sale. If the loans could not be sold, they would eventually have to be discounted and moved to the LHI balance sheet item. ¶¶ 354-55. Thus, if the credit quality of the loans Countrywide intended to sell deteriorated while held for sale, it would be more difficult to sell the loans and they could eventually be reclassified and discounted, lowering Countrywide’s net book value. iii. Examples of allegedly false statements The CAC contains myriad statements that occur throughout the 4-year class period. The following are illustrative examples of the statements the CAC alleges were materially false or misleading. Directors and officers. Specific misrepresentations by the Officer Defendants are discussed below in connection with the CAC’s fraud allegations. Section II.D.3. Countrywide. Countrywide’s SEC Forms 10-K during the class period “touted the Company’s ‘proprietary underwriting systems ... that improve the consistency of underwriting standards, assess collateral adequacy and help to prevent fraud.’ ” ¶ 118. Countrywide’s SEC disclosures “also described an ‘extensive post-funding quality control process.’ ” Id. See also, e.g., ¶¶ 350-51. The CAC’s allegations raise the inference that Countrywide’s computer systems, such as EPS, could not reasonably be said to “improve consistency,” “assess collateral adequacy,” or “prevent fraud.” References to “underwriting standards” or a “quality control process” may also be actionable in these circumstances. See also ¶ 673. As explained above, the CAC sufficiently alleges that Countrywide systematically departed so far from any reasonable interpretation of “quality” and “standards” that such statements could be materially false or misleading. It cannot be emphasized enough that in the vast majority of cases such statements would be nonactionable puffery. Given the gravity of the CAC’s allegations about Countrywide’s operations — as well as the market’s subsequent realizations regarding Countrywide’s business and mortgages— the Court cannot dismiss such claims at the pleading stage. The CAC also alleges that Countrywide did not disclose to its own investors how many of Countrywide’s riskiest loans were originated on a reduced documentation basis. See Pis.’ Opp. at 29-30 (noting 80% of Countrywide’s pay-option ARMs originated in 2004 were low-doc mortgages; and roughly 80% of its HELOCs and pay option ARMs held in the Countrywide Bank portfolio as of July 2007 were low doc). Moreover, the CAC sufficiently alleges that statements attributable to Countrywide that speak in terms of “prime” versus “subprime” (or “nonprime”) were also misleading before Countrywide’s June 2007 disclosure of its internal definition of prime. ¶ 232, 625; supra Section I.A.I. These misrepresentations continued throughout the class period and until at least April 2007. ¶ 867-70 (Countrywide representative stating to finance industry conference that “over 90% of Countrywide loan origination volume is prime quality” and that Countrywide’s loan were “[k]ind of the opposite of subprime”). Some Defendants argue that the CAC itself bars any allegation of falsity after Countrywide released its financials for 3Q07, as it states that the company was “forced to admit the poor quality of its mortgage loans” at that time. See CAC ¶ 353. This argument, which strips the CAC’s allegation from its context, borders on the frivolous. Plaintiffs allege that the 3Q07 disclosures failed to correct all misrepresentations; rather, the truth only gradually leaked out and was often coupled with further misrepresentations to blunt the disclosures’ impact on the value of Countrywide securities, ¶¶ 997-1058. It is possible that a complaint could allow only the inference that corrective disclosure was complete by a certain point and thus all statements thereafter could not be false (or material or causally related to a loss, see infra Sections II.C.i.4, II.D.i.6). The CAC is no such complaint. The CAC alleges actionable statements by Countrywide from at least 2004 and continuing throughout the class period. Auditors and accounting-related statements. Plaintiffs allege that Countrywide’s practices made virtually every accounting-related statement actionable. The basic theory is that various balance sheet items — including the LHIs, RIs, R & Ws, and MSRs explained above — should have changed much more dramatically than they did during the class period, given the changes underway in Countrywide’s operations. The inferences one can draw from the accounting-related statements are analyzed in infra Section II.C.i.6. B. Overview of claims and defendants The Complaint names fifty Defendants: Countrywide, Countrywide Capital V, Countrywide Securities Corp., four “Officer Defendants,” sixteen additional “Individual Defendants,” twenty-five “Underwriter Defendants,” and two “Auditor Defendants.” At the time of briefing, Individual Defendants Michael E. Dough-erty and Kathleen Brown had their own counsel. Dougherty and Brown’s (“D & B’s”) arguments are therefore identified separately where appropriate. KPMG submitted separate briefing. GT also submitted separate briefing. All other Defendants (Countrywide, its affiliated entities, and Individual Defendants besides D & B) submitted consolidated briefing; collectively, they are “Countrywide Defendants” for the purposes of referring to their arguments and papers. The first group of claims — Counts 1-15 — are brought under the Securities Act of 1933 (“'33 Act”). These claims are based on five Countrywide-related securities. Six classes of securities are unsecured debt instruments: Series A Medium-Term Notes (“Series A Notes”), Floating Rate Subordinated Notes Due April 1, 2011 (“2011 Notes”), Series B Medium-Term Notes (“Series B Notes”), Series A Floating Rate Senior Convertible Debentures Due 2037 (“Series A Debentures”), Series B Floating Rate Senior Convertible Debentures Due 2037 (“Series B Debentures”), and 6.25% Subordinated Notes Due May 15, 2016 (“6.25% Notes”). The last security is an equity security “7% Capital Securities” in Countrywide Capital V, a Delaware Statutory Trust, the sole assets of which are Countrywide subordinated debt. For each of these five securities, Plaintiffs allege three Counts. Each Count alleges violations of §§ 11, 12(a)(2), and 15, respectively. Plaintiffs bring § 11 claims against: (1) those Individual Defendants who signed the relevant registration statements; (2) the Auditor Defendants that certified the audited financial statements contained or incorporated in the registration statements; (3) the Underwriter Defendants that acted as underwriters in the securities’ offerings; and (4) other Defendants who “owed a duty to make a reasonable and diligent investigation of the statements” in connection with public offerings. The § 12(a)(2) claims are brought against the Underwriter Defendants that allegedly served as “sellers” within the meaning of the '33 Act for the relevant security. Finally, § 15 claims are brought against the Individual Defendants who allegedly served as “control persons” of Countrywide when the registration statements were filed and became effective. The remaining claims (Counts 16-21) allege violations of the Securities Exchange Act of 1934 ('34 Act). Count 16 alleges violations of § 10(b) and SEC Rule 10b-5 against Countrywide and the Officer Defendants with respect to common stock and “other publicly traded securities, including but not limited to, public debt and preferred securities specifically alleged.” Count 18 alleges the same against Auditor Defendants. Count 17 alleges § 20(a) violations against the Officer Defendants with respect to common stock and “other publicly traded securities, including but not limited to, public debt and preferred securities specifically alleged.” Count 21 alleges § -20A violations against Mozilo, Sambol, and Kurland for the same securities. Count 19 alleges § 10(b) and SEC Rule 10b-5 against Countrywide and the Officer Defendants with respect to publicly traded Series A and B Debentures. Count 20 alleges § 20(a) violations against Mozilo, Sambol, and Sieracki as to the same Debentures. II. LEGAL ANALYSIS Six separate motions to dismiss are before the Court: (1) Underwriter Defendants’ Motion to Dismiss; (2) KPMG’s Motion to Dismiss; (3) Countrywide and Certain Individual Defendants’ Motion to Dismiss; (4) Grant Thornton’s Motion to Dismiss; (5) Dougherty and Brown’s Motion to Dismiss; and (6) KPMG’s Motion under Fed. R. Civ. Proc. 8, 12(e), and 41(b). The motions and opposition raise dozens of arguments. Most Defendants’ motions expressly adopt portions of other Defendants’ motions. The Court addresses the arguments deemed important in turn, without necessarily identifying which Defendants made which arguments. A. Rule 8(a) KPMG filed a motion asking the Court to dismiss Plaintiffs’ CAC under Rule 41(b) for failure to comply with Rule 8, which requires that pleadings include “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. Proc. 8(a)(2). Today’s securities plaintiffs must meet three separate pleading standards — • Rule 8(a)’s short and plain statement rule, Rule 9(b)’s particularity requirement (“In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity”), and the Private Securities Litigation Act (“PSLRA”)’s requirement that the facts underlying falsity and scienter be pled with particularity sufficient to create a cogent and compelling inference of falsity and scienter. Tellabs, 127 S.Ct. 2499. In a case such as this, navigating and reconciling these standards can be an onerous task. Plaintiffs’ 416-page CAC is neither “short” nor “plain.” However, the Court declines to dismiss it on these grounds. Stephenson v. Deutsche Bank AG is instructive. 282 F.Supp.2d 1032, 1075 (D.Minn.2003). Stephenson recognized that, where a complaint includes a '34 Act claim, “Rule 8(a) must be read in harmony with Rule 9(b).” Id. Given that case’s complicated facts, in Stephenson it was “appropriate that Plaintiffs present their allegations in detail to comply with Rule 9(b)[’s requirement that fraud be plead with particularity] and the heightened pleading standards of the [PSLRA].” Id. That is, Stephenson heeded the second part of Rule 8(a): the short and plain statement must still be sufficient to “show[] that the pleader is entitled to relief’ according to whatever other rules and laws govern the action. Fed. R. Civ. Proc. 8(a)(2). The Court (and Defendants) would have appreciated a complaint that is more concise, less redundant, and better organized. This Court has little patience for excess— and 416 pages is excessive. But, given the extraordinary complexity of this case’s factual allegations, the lengthy class period, and the wide swath of defendants, focusing on the CAC’s rhetorical and structural flaws would be a pointless enterprise. Plaintiffs have, as a general matter, successfully navigated the pleading standards. In so doing, Plaintiffs provided KPMG a complaint that fairly puts KPMG on notice of the claims against it. KPMG’s motion is DENIED. B. Issues common to the '33 and '34 Act claims i. Standing Various Defendants attack Plaintiffs’ standing as to several claims. The Court does not find these arguments persuasive and rejects them all. However, D & B correctly point out a formal pleading requirement that Plaintiffs failed to meet with respect to the 2011 Notes. Plaintiffs state that they are prepared to remedy the error. Plaintiffs have leave to amend for this purpose. 7% Securities. Underwriter Defendants argue that no one in this case has standing to sue on the 7% Securities because N.Y. Funds did not purchase those particular securities. NY Funds do not have standing for the 7% Securities, but other named plaintiffs do. Underwriter Defendants would have this Court interpret the PSLRA’s lead plaintiff provision as working a sea change in the law of standing and, paradoxically, inhibiting this Court’s discretion to appoint lead plaintiffs. As lead plaintiffs, N.Y. Funds may bring claims on behalf of other named parties, and “nothing in the PSLRA requires that the lead plaintiffs have standing to assert all of the claims” so long as lead plaintiffs “identify and include named plaintiffs who have standing.” In re Global Crossing, Ltd. Sec. Litig., 313 F.Supp.2d 189, 205 (S.D.N.Y.2003). Underwriter Defendants’ interpretation of the lead plaintiff provision, utterly unsupported by its text, 15 U.S.C. § 78u-4(a)(3)(B), would require this Court to appoint even more lead plaintiffs. By so doing, Underwriter Defendants’ proposed rule would require courts either (1) to increase lawyer-driven litigation and conflicts of interest by elevating more lawyers to lead counsel status; or (2) to waste judicial resources by litigating securities cases in separate actions rather than by allowing the Court to exercise its discretion in consolidating several named plaintiffs’ actions into a single case, led by a single plaintiff. It is therefore no surprise that “Judges presiding over complex securities class actions under the PSLRA have repeatedly rejected arguments ... that seek to confuse the role of lead plaintiffs under the PSLRA with that of named plaintiffs.... ” Global Crossing, 313 F.Supp.2d at 205. In this case, it is undisputed that named Plaintiff Brahn holds the relevant security. Underwriter Defendants make the merit-less assertion, buried in a footnote, that N.Y. Funds “quietly inserted [Brahn] into this litigation without notice to the court or the Defendants” to cure an “obvious” lack of standing. Underwriters’ Mot. at 24 n. 22. Brahn filed his own case on November 5, 2007 and the Court consolidated it on November 28, 2007 with a written order describing the case — after a hearing with all the parties where Brahn’s case was discussed. See Nov. 28 Order Consolidating Cases and Appointing Lead Plaintiff and Lead Counsel, at 5-6; Nov. 19, 2007 Hearing Tr. at 46:31-47. The 7% Securities remain in this litigation. 2011 Notes. D & B correctly point out that the CAC fails to include the 2011 Notes in the same counts as a security for which any named Plaintiff has standing. D & B’s Reply at 9-10. Thus, Plaintiffs cannot state a claim in Counts 4-6 because those counts rely solely on the 2011 Notes. Plaintiffs agreed on this point at the hearing. Oct. 20, 2008 Hearing Tr. at 135:5— 16. See also infra Section II.C.i.2 (discussing § 11 standing for the 2011 Notes). Accordingly, Counts 4-6 are DISMISSED WITHOUT PREJUDICE. Plaintiffs have LEAVE TO AMEND. Matured debt. At the hearing, the parties inexplicably continued to debate debt instruments that have already matured. Plaintiffs cannot recover — and do not seek recovery — on debt instruments held to maturity because Countrywide paid on the agreed terms. See CAC Ex. B; Pis.’ Opp. Appx. A; Hearing Tr. at 132:2-10. More debt will come due during the litigation. This will, of course, defeat standing for and recovery on the matured instruments if Countrywide pays in full. But no company’s future is certain. It also is possible that, as the law contemplates, Plaintiffs will sell the instruments at a loss caused by the alleged securities law violations between now and maturity. See, e.g., 15 U.S.C. § 77k(e) (defining § 11 damages). Plaintiffs allege the type of economic injury the securities laws require. See infra Section II.C.i.3. Matured debt will raise damages issues. If all securities in one category of debt matures, then standing as to that category will be defeated. The Court defers further consideration of matured debt until the summary judgment or damages stage; or until Plaintiffs lose standing because all debt of one category has matured. Counsel for Underwriter Defendants at the hearing indicated that some Underwriter Defendants should be dismissed because all the particular instruments they underwrote have matured. Hearing Tr. 52:11-17 (“I have ... underwriter clients whose only involvement in this case is to have underwritten those short-term notes which are now fully paid .... and my clients are wondering why they’re still involved, because these things are gone.”). Counsel did not bring this to the Court’s attention in the papers. If the Court correctly understands Underwriter Defendants’ assertion at the hearing, then counsel for Underwriter Defendants should have pointed this out earlier. Counsel for both sides are INSTRUCTED to meet and confer as to any necessary amendment on this matter. ii. Statute of limitations Underwriter Defendants also argue that the statute of limitations bars Plaintiffs’ '33 Act claims. The '33 Act provides that “[n]o action shall be maintained to enforce any liability created under section 11 or section 12(a)(2) ... unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence.” 15 U.S.C. § 77m. In this case, the statute of limitations would bar Plaintiffs’ claims if they discovered or should have discovered the actionable statements by mid-2006. The Ninth Circuit presently applies a two-prong “inquiry-plus-reasonable-diligence” standard to determine the applicability of this provision. Betz v. Trainer Wortham & Co., Inc., 519 F.3d 863, 871 (9th Cir.2008), subseq. hist, at — U.S. -, 129 S.Ct. 339, 172 L.Ed.2d 15 (2008) (inviting Solicitor General’s comment on cert, petition). First, a court identifies when, if at all, an investor had inquiry notice (“when there exists sufficient suspicion of fraud to cause a reasonable investor to investigate the matter further.”) Id. Second, a court determines when a reasonably diligent investor making such an investigation would have discovered the facts underlying the alleged fraud. Id. The Court finds it unnecessary to address Betz’s reasonable diligence prong. Countrywide’s alleged systematic shift from sound underwriting could not have been maintained through the class period if reasonable investors had inquiry notice. Countrywide was a huge, closely watched company. Even so, analysts were still said to have been shocked by Countrywide’s 2007 revelations. ¶¶ 233-34. Countrywide allegedly continued its misrepresentations even while it began issuing corrective disclosures. ¶¶ 997-1058. The ratings agencies have testified to Congress that they failed to get sound analysis on the market. Countrywide’s mortgage-related operations and mortgage securitizations were complex financial transactions that were relatively difficult to value. Where a market appears to have all the ordinary hallmarks of efficiency but a complaint still plausibly alleges the market was fooled, it is preposterous to argue at the pleadings stage that a “reasonable investor” should have been on inquiry notice. See Betz, 519 F.3d at 865 (Kozinski, C.J., dissenting from denial of rehearing en banc) (observing that statute of limitations arguments are difficult for defendants in “those byzantine securities cases involving risk-indexed convertible debentures or rupee-denominated strip bonds [and] Gibbon-length, fine-print prospectuses] artfully concealing liabilities”). iii. Truth on the market Shortly before the hearing, Countrywide Defendants began propounding a new argument in a request for judicial notice. Countrywide Defendants point out that the majority of Countrywide’s mortgages were securitized into MBS and sold into the private secondary market. The prospectuses from these MBS contain some statistics of varying specificity about the underlying mortgages. See, e.g., Countrywide Defs.’ Supp. Req. for Judicial Notice, Exs. 77-79. The prospectuses are on file with the SEC and available to the public. Countrywide Defendants assert that these documents put the truth on the market, thereby foreclosing the possibility that Plaintiffs “relied” on the misrepresentations in paying a market price for the securities. See Hanon v. Dataproducts Corp., 976 F.2d 497, 503 (9th Cir.1992). The Court takes notice of these prospectuses, but not for the truth of the matters asserted therein. The Court also notes SEC Regulation AB, which governs many of the disclosures in MBS prospectuses. 17 C.F.R. § 229.1100 et seq. Regulation AB relies heavily on disclosing historical loan performance data. Countrywide’s historical loan performance data should have become increasingly false or misleading as Countrywide’s loan underwriting standards declined. Failing to disclose the evaporation of the most fundamental assumption that makes historical performance data useful — that the current loans materially resemble the previous loans — could be independently false or misleading. Cf. 17 C.F.R. § 229.1110(b); id. 229.1111(c) (always requiring historical data on the current asset pool); SEC Div. of Corp. Finance, Manual of Publicly Available Telephone Interpretations, Regulation AB and Related Rules (SEC interpretation emphasizing that general principles of materiality guide any additional disclosures necessary to prevent the historical data provided under Regulation AB from being materially false or misleading), available at http://www.sec.gov/interps/ telephone/cftelinterps_regab.pdf (last accessed Nov. 13,2008). Countrywide Defendants argue that these approximately 250,000 pages of prospectuses, issued by SIVs and not Countrywide itself, put the truth on the market and thereby negate the reliance element. For substantially the same reasons elaborated above in discussing the statute of limitations, the Court rejects a truth-on-the-market defense at the pleading stage. Hanon, 976 F.2d at 503 (to use a truth on the market defense, defendant must show that the information was “transmitted to the public with a degree of intensity and credibility sufficient to effectively counterbalance any misleading impression created by the insiders’ one-sided representations” (quotations and citation omitted)). Countrywide’s MBS were complex instruments and the prospectuses are very large documents; it is perfectly reasonable to infer that this complexity, coupled with Countrywide’s alleged public misrepresentations, would blunt the effect of any disclosures in MBS’ prospectuses. iv. Grant Thornton’s involvement Auditor Defendant Grant Thornton (“GT”) conducted Countrywide’s 2003 audit. The audit was completed in February 2004. GT performed no other Countrywide audits during the class period. GT’s 2003 audit conclusions were incorporated, with GT’s consent, into subsequent SEC filings during the class period. The CAC’s allegations about Countrywide’s core operations depict dramatic underwriting changes that began in mid-2003 and continued throughout the class period. See supra Section I.A.L However, Plaintiffs do not allege sufficient facts to allow the inference that Countrywide’s new practices had gone on long enough, or had yet dramatically enough departed from previous practices, to have resulted in any accounting-related material misstatement or omission for the 2003 fiscal year. Instead, the most egregious departures from sound underwriting are not alleged to have occurred until after GT completed its work in February 2004. Countrywide’s departure from previous underwriting practices did not allegedly peak until about 2005. ¶¶ 13(M7 (alleging underwriting matrix updates from January 2004 to March 2006), 155-57 (CWs alleging dramatic changes in practices during 2005 and 2006). Further, it is reasonable to infer that buyers who intended to refinance their ARMs or interest-only loans near the reset date would not cause much trouble until approximately two years after origination (and even then likely if underwriting practices had changed or the housing market cooled). See, e.g., 1196 (ARMs generally set within 2 years [“2/28” loans]); ¶ 99 (pay-option ARMs have negative amortization caps, at which point they reset). See also ¶ 317 (CW1 alleging that loose underwriting standards made default likely within 18 months of origination); Countrywide, Form 10-K at 42 (2006) (“[W]hen the required monthly payments for pay-option loans eventually increase ... borrowers may be less able to pay the increased amounts and, therefore, more likely to default on the loan, than a borrower with an amortizing loan. Our exposure to this higher credit risk is increased by any negative amortization that has been added to the principal balance.”). Even if the 2003 changes were serious enough to make balance sheet items based on 2003 mortgages materially false or misleading further down the road, significant mortgage default rates would take longer to manifest than the short time between the mid-2003 shifts and the end of 2003. It is reasonable to infer that delinquency probability rises at some point after origination before declining over the loan’s life. See ¶ 317 (CW1 alleging that loose underwriting standards made default likely within 18 months of origination); Countrywide, Form 10-K at 42 (2006) (“[W]hen the required monthly payments for pay-option loans eventually increase ... borrowers may be less able to pay the increased amounts and, therefore, more likely to default on the loan, than a borrower with an amortizing loan. Our exposure to this higher credit risk is increased by any negative amortization that has been added to the principal balance.”). The Court cannot infer that this default probability curve on the mid-2003 mortgages — based on underwriting practices that had only recently begun to deteriorate — would deviate enough by the end of 2003 for GT’s audit to be materially false or misleading. By the time of GT’s audit, Countrywide’s loan performance would not have borne out — and, based on all reasonable inferences from the CAC, did not yet bear out — the alleged changes in Countrywide’s mortgage-related operations. Plaintiffs in the eight months between the first Pappas complaint and the CAC had sufficient opportunity to investigate GT’s involvement and make allegations sufficient to state a claim. They have not. Given the timeline of the CAC’s allegations, Plaintiffs cannot state a claim against GT. Lopez v. Smith, 203 F.3d 1122, 1129 (9th Cir.2000) (dismissing with prejudice is appropriate where plaintiff cannot cure by amendment). Accordingly, all claims against GT are DISMISSED WITH PREJUDICE. C. '33 Act Claims i. Section 11 Section 11 provides a remedy for plaintiffs that purchased a security they can trace to a defective registration statement. To state a claim under § 11, a plaintiff “must demonstrate (1) that the registration statement contained an omission or misrepresentation, and (2) that the omission or misrepresentation was material, that is, it would have misled a reasonable investor about the nature of his or her investment.” In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1403-04 (9th Cir.1996) (quotations and citation omitted), cert. denied sub. nom. Anderson v. Clow, 520 U.S. 1103, 117 S.Ct. 1105, 137 L.Ed.2d 308 (1997). Defendants are liable for innocent or negligent material misstatements or omissions, subject to a few affirmative defenses. The most notable affirmative defense is due diligence. 15 U.S.C. § 77k(b)(3); In re Stac, 89 F.3d at 1404. Reliance is not an element. 1. “Sounds in fraud” '33 Act claims are subject to Rule 8(a)’s ordinary notice pleading requirements unless the allegations “sound in fraud.” In re Daou Sys., Inc., 411 F.3d 1006, 1027 (9th Cir.2005), cert. denied sub. nom. Daou Sys., Inc. v. Sparling, 546 U.S. 1172, 126 S.Ct. 1335, 164 L.Ed.2d 51 (2006). Id. In evaluating a '33 Act claim, a court must strip away the allegations that sound in fraud and see if the remaining allegations state a claim. Id. at 1028. The CAC’s '33 Act allegations do not sound in fraud. The CAC does the work of “stripping” the allegations that sound in fraud. It levies fraud allegations against a select few defendants. Those allegations are addressed in the '34 Act discussion. Infra Section II.D. Several defendants take a contrary view. KPMG argues, for example, that the law provides that “[w]hen a misrepresentation forming the basis of a Section 11 claims is also alleged to support a claim for fraud under Section 10(b), the Section 11 claim is ‘grounded in fraud’ and the plaintiff must plead that claim with particularity.” KPMG’s 12(b)(6) Mot. to Dismiss at 7. The Court rejects this statement of the law. In re Daou endorses a bright line only where plaintiffs allege “a unified course of fraudulent conduct and rely entirely on that course of conduct as the basis of a claim.” In re Daou, 411 F.3d at 1027 (emphasis added) (quoting Vess v. Ciba-Geigy Corp. US