Citations
- 731 F. Supp. 2d 689
Full opinion text
ORDER
SANDRA S. BECKWITH, Senior District Judge.
This matter comes before the Court on the following motions: Defendants’ motion to dismiss (Doc. No. 78), Defendants’ supplemental motion to dismiss (Doc. No. 79); Plaintiffs’ motion to file an amended consolidated class action complaint (Doc. No. 83), Plaintiffs’ motion to strike extraneous documents and references filed in support of Defendants’ motion to dismiss (Doc. No. 90), and Plaintiffs’ motion to file a surreply brief in opposition to Defendants’ motion (Doc. No. 99). For the reasons that follow Defendants’ motion to dismiss and supplemental motion to dismiss are GRANTED IN PART AND DENIED IN PART; Plaintiffs’ motion to file an amended consolidated class action complaint is MOOT; Plaintiffs’ motion to strike is MOOT; Plaintiffs’ motion to file a surreply brief is well-taken and is GRANTED.
I. General Background
Generally speaking, this is a securities fraud class action against Fifth Third Ban-corp. and other individual and institutional defendants arising out of alleged material misrepresentations and omissions by the Defendants during the period from October 19, 2007 to June 17, 2008. The consolidated complaint is comprised of or has under its umbrella essentially four different lawsuits involving four different subclasses of owners or purchasers of securities — First Charter Bank Stock, Fifth Third common stock, Fifth Third Preferred B stock, and Fifth Third Preferred C stock. The Court will address the specifics of the alleged misrepresentations and omissions in the course of its analysis of Defendants’ motion to dismiss. The basic theme of the complaint, however, is that during the class period, Fifth Third represented that it followed conservative lending policies and had adequate capital reserves. The complaint alleges that in reality, however, during the class period Fifth Third abandoned its conservative lending policies and embarked on an aggressive campaign to originate what amounted to sub-prime loans. Moreover, the complaint alleges that despite being a de facto sub-prime lender, Fifth Third failed to set aside adequate loan loss reserves and misleadingly blamed the deteriorating credit quality of its loan portfolio on the downturn in the macro credit market instead of its own poor lending practices. Thus, the complaint alleges, the price of Fifth Third securities was artificially inflated during the class period and abruptly collapsed on June 17, 2008 when Fifth Third announced that it would to have raise capital through new securities offerings, cutting its dividends, and selling off non-core business assets.
II. First Charter Subclass
On August 15, 2007, Fifth Third’s Board of Directors approved the acquisition of First Charter Bank of Charlotte, North Carolina at a price of $31 per share. The total price of the acquisition was $1.1 billion, 70% of which was to be paid by-tendering Fifth Third common stock and 30% of which was to be paid with cash. Consolidated Class Action Complaint ¶¶ 90-91 (hereinafter “Complaint” or “complaint”). On November 7, 2007, Fifth Third filed with the SEC a registration/proxy statement and prospectus for the issuance of 35,000,000 shares of common stock to be issued upon completion of the First Charter acquisition. Fifth Third’s registration statement incorporated by reference its Form 10-Q for the quarter ended September 30, 2007, its Forms 8-K filed on October 29, 2007, October 31, 2007, and November 9, 2007 and “any documents filed with the SEC in the future under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended ... until we exchange all of the securities offered in this Prospectus.” Id. ¶ 93.
The complaint alleges that the registration/proxy statement filed with the SEC contained the following material misrepresentations and omissions:
1. the consideration payable for the First Charter shares was not actually worth $31 per share;
2. Fifth Third used “a system of rigid sales quotas and lavish bonuses” to encourage its employees to originate risky and illiquid commercial and consumer loans;
3. the above risky loans included Alt-A loans that had risks comparable to subprime loans;
4. Fifth Third was originating Alt-A loans with “layered risk factors” such as high loan-to-value ratios, borrowers with credit scores below 660, unverified employment, unverified income, unverified assets, and borrowers with high debt-to-income ratios;
5. Defendants aggressively marketed high loan-to-value commercial and land loans;
6. Defendants aggressively marketed Fifth Third real estate loans in Florida to European borrowers whose creditworthiness they were unable to verify;
7. as a result of its deficient underwriting and risk management practices, Fifth Third was increasingly unable to sell its loans in the secondary market and thus was forced to retain these loans in its held-for-investment portfolio;
8. the credit quality of Fifth Third’s loan portfolio rapidly deteriorated from mid-2006 through 2008.
9. Fifth Third failed to timely identify and report non-performing loans;
10. Fifth Third’s income was overstated throughout the class period as a result of its failure to make timely reserves for loan losses;
11. the credit quality of Fifth Third’s Tier 1 capital had severely deteriorated, leaving it undercapitalized and vulnerable to future losses;
12. that as a result of the above policies or business practices, Fifth Third would be required to raise “massive amounts of capital” by cutting its annual dividend, selling billions of dollars of preferred stock, selling assets, and seeking federal bailout money.
Complaint ¶ 106. Fifth Third failed to correct any of these alleged misstatements and omissions prior to the final closing of the First Charter acquisition on June 6, 2008. Id. ¶ 108-110.
On June 18, 2008, Fifth Third issued a press release stating that it needed to strengthen its capital position in light of deteriorating credit trends. Therefore, Fifth Third stated that it was going to raise $1 billion in Tier 1 capital by issuing convertible preferred shares. Fifth Third also announced that it was going to reduce its quarterly dividend from $.44 per share to $.15 per share and that it was going to raise another $1 billion in capital by selling non-core businesses. After Fifth Third made this announcement, the price of its shares dropped from $12.73 to $9.26 on heavy volume. Id. ¶¶ 111-12.
III. The Preferred B Sub-class
The claims of the Preferred B sub-class plow much of the same ground as the First Charter sub-class. The claims of this subclass, however, specifically relate to filings Fifth Third submitted to the SEC in October 2007 in conjunction with its public offering of 34,500,000 shares of 7.25% Fifth Third Preferred B stock. The Preferred B prospectus incorporated by reference its Form S-3 automatic shelf registration statement of March 26, 2007, which in turn was signed by the Director Defendants. The offering itself was underwritten by the Underwriter Defendants. Id. ¶ 158.
The Preferred B prospectus included certain financial data for the six months ended June 30, 2007 and June 30, 2006, including Fifth Third’s provision for loan and lease losses of $205 million and $149 million respectively. The prospectus also reported non-performing assets of $706 million as of September 30, 2007 and a loan loss provision of $139 million for the third quarter of 2007. Id. ¶¶ 159-60. The complaint alleges, however, that despite reporting these numbers, the prospectus was materially misleading because it failed to disclose that Fifth Third’s non-performing assets were rapidly increasing as a result of its deficient lending practices. The complaint also alleges that the prospectus was materially misleading because Fifth Third failed to increase its loan loss provision to cover the losses. Therefore, the complaint alleges, Fifth Third overstated its income. Id. ¶ 161. Additionally, the Preferred B sub-class alleges that the prospectus was misleading because it contained substantially the same materially misleading misrepresentations and omissions listed, supra at 696, for the First Charter sub-class. Id. ¶ 162. The Preferred B sub-class alleges that when Fifth Third made its June 18, 2008 announcement concerning the need to raise additional capital, the price of Preferred B shares dropped from $18.00 per share to $ 16.64 per share. Id. ¶ 163.
IV. The Preferred C Sub-class
On April 28, 2008, Fifth Third filed with the SEC a prospectus for its offering of Preferred C shares, each share of which represented an undivided interest in an underlying trust consisting of $400,000,000 in junior subordinated notes. Complaint ¶¶ 188-89. The Preferred C prospectus incorporated by reference Fifth Third’s Form 10-K for December 31, 2007 and Forms 8-K filed on January 14, 2008, February 25, 2008, February 28, 2008, and April 23, 2008. Id. ¶ 190. The Preferred C prospectus also incorporated by reference Fifth Third’s shelf registration statement of March 26, 2007, which had been signed by the Director Defendants. Id. ¶ 191. The Underwriter Defendants were the underwriters for the Preferred C offering.
Similar to the Preferred B prospectus, the Preferred C prospectus reported provisions for loan loss reserves. The prospectus reported loan loss reserves for December 31, 2007 and December 31, 2006 of $628 million and $343 million respectively. Id. ¶ 192. Additionally, the prospectus reported non-performing loans of $1.6 billion as of March 31, 2008 and a loan loss provision of $544 million for the first quarter of 2008. Like the Preferred B sub-class, the Preferred C sub-class alleges that the prospectus was misleading, despite reporting these figures, because it failed to disclose that Fifth Third’s non-performing assets were rapidly increasing as a result of its deficient lending practices. Moreover, the complaint alleges, the prospectus was misleading because Fifth Third failed to increase its loan loss provisions. Id. ¶ 194. Finally, the Preferred C sub-class alleges that the prospectus contained the same series of materially misleading statements and omissions recited supra at 695-96 by the First Charter and Preferred B subclasses. Id. ¶ 195. The Preferred C subclass alleges that when Fifth Third made its June 18, 2008 announcement concerning the need to raise additional capital, the price of Preferred C stock dropped from $22.68 per share to $21.20 per share. Id. ¶ 196.
V. Fifth Third Common Stock Sub-class
The Fifth Third common stock subclass presents the most comprehensive set of allegations, taking approximately 150 pages of the complaint to set forth. The gist, however, is that Fifth Third falsely blamed its deteriorating loan portfolio on external factors, presumably beyond its control, such as declining real estate markets in Florida and Michigan and the subprime credit crisis, when in fact the problem was created when it abandoned conservative lending practices in order to generate revenue from new loan originations. Complaint ¶ 223. The specific material misstatements and omissions alleged by this sub-class can be adequately summarized as follows:
1. Defendants falsely represented that its loan loss reserves were sufficient to cover losses;
2. Defendants falsely represented that its methodology for setting aside loan loss reserves, which relied on historical loss rates, was adequate;
3. Defendants falsely represented that Fifth Third was well-capitalized and that its Tier 1 capital was not at risk;
4. Fifth Third’s Third Quarter 2007 Earnings Release was false and misleading because, although it reported increased reserves for loan losses and non-performing assets, it failed to disclose that Defendants had delayed increasing reserves to an amount sufficient to cover its risky loan portfolio.
5. During an October 19, 2007 conference call with industry analysts, Defendant Marshall falsely stated that the increase in non-performing assets was due to market conditions instead of Fifth Third’s deficient lending practices. Complaint ¶ 369.
6. Defendants Rabat and Marshall made the following materially false statements or omissions in Fifth Third’s Form 10-Q for the third quarter of 2007:
a. Fifth Third’s earnings were overstated because Fifth Third had failed to set aside sufficient reserves to cover its risky loan portfolio; id. ¶ 373;
b. the increase in non-performing loans was due to market conditions in Florida, Ohio, and Michigan and not because of Fifth Third’s deficient lending practices; id. ¶374;
c. the reports of increases in loan loss reserves were false and misleading because Fifth Third delayed increasing allowances in an amount sufficient to cover its risky loan portfolio; id. ¶ 377;
d. contractual provisions in certain of its mortgage products increased Fifth Third’s credit exposure in the event of a decline in housing prices when at the time Fifth Third was aggressively marketing Alt-A loans comparable in quality to subprime loans; id. ¶ 379;
e. the report on high an-to-value residential mortgages was false because it failed to disclose that many of these loans were made to borrowers with many other risk factors, such as poor credit scores and unverifiable income and assets; id. ¶ 380;
f. stated that the borrower qualifications for Alt — A. borrowers were comparable to conforming mortgages, and that these loans were issued for resale, when in fact the Alt-A borrower qualifications were not similar and the loans could not be resold on the secondary market, or were sold with recourse; id. ¶ 381.
g. stated that Fifth Third’s credit risk management strategy was based on conservatism, diversification, and monitoring when in fact it had abandoned those principles; id. ¶ 383;
h. stated that Fifth Third was well-capitalized when it was not because of the deterioration in the quality of its loan portfolio; id. ¶ 385.
7.Fifth Third’s Form 8-K filed on November 14, 2007, which reported a presentation to Merrill Lynch’s Banking & Financial Services Conference, was materially false and misleading because its report on its borrowers’ loan-to-value ratios and FICO scores gave the impression that it was using prudent lending standards when it was not. Additionally, Fifth Third failed to disclose whether it required private mortgage insurance, whether it verified key information, such as
employment income and assets, whether it relied on a subjective standard of reasonableness for assessing no-documentation loans, that it had lowered its underwriting standards, that it routinely made exceptions to its underwriting standards, and that its definitions of “prime” and “subprime” were different from industry standards; id. ¶ 387.
8. Fifth Third’s Form 8-K, filed on November 29, 2007, which reported a presentation to the Fox-Pitt, Kelton Cochran Caronia Waller Financial Services Conference, was materially false and misleading for substantially the same reasons as the November 14, 2008 Form 8-K; id. ¶ 389.
9. Fifth Third’s Form 8-K, filed on December 18, 2007, was materially false and misleading because it continued to blame increases in loan loss reserves on general market conditions instead of its deficient underwriting standards. Additionally, Fifth Third’s statements concerning its non-performing assets were materially false and misleading because they did not reflect that the number of loans delinquent for 30 to 89 days was increasing; id. ¶ 392;
10. Fifth Third’s Earnings Release and Form 8-K of January 22, 2008 were materially false and misleading for substantially the same reasons as the December 18, 2007 Form 8-K; id. ¶ 395.
11. During a January 22, 2008 conference call with industry analysts, Defendants Kabat and Marshall made the following material misrepresentations and omissions:
a. stated that Fifth Third did not hold the kind of assets that would subject it to huge losses when in fact its loan quality was poor;
b. attributed the quality of its loan portfolio to the markets in the Midwest and Florida when in fact the problem was its deficient lending practices;
c. stated that Fifth Third was well-positioned for a downturn in the real estate and credit markets when it was not because of its risky lending practices;
d. stated that its Florida loan portfolio was acquired through acquisitions of other banks when instead it was created by its own origination of poor quality loans;
e. stated that Fifth Third was well-capitalized when in fact its Tier 1 capital was deteriorating; id. ¶¶ 396-401.
12. Fifth Third’s Form 8-K, filed on January 30, 2008, which disclosed its presentation at the Citi 2008 Financial Services Conference, did not fully disclose the extent of the deterioration of its loan portfolio because it failed to recognize as impaired loans delinquent for 30 to 89 days; id. ¶ 404;
13. Fifth Third’s Annual Form 10-K, filed on February 22, 2008, was materially false and misleading because:
a. net income was materially overstated due to Fifth Third’s failure to take adequate and timely reserves for loan losses;
b. stated that Fifth Third did not originate subprime loans when it did;
c. stated that Fifth Third was well-capitalized when its Tier 1 capital was deteriorating;
d. stated that Fifth Third’s methodology for setting reserves for loan losses was adequate when Generally Accepted Accounting Principles (“GAAP”) required it to increase its loan loss allowance because of its deficient lending practices;
e. stated that Fifth Third’s qualifications for Alt-A borrowers were comparable to the qualifications for conforming loans when they were not;
f. continued to blame market conditions for the deteriorating quality of its loan portfolio;
g. stated that a majority of its Alt-A portfolio had been sold without recourse when in fact a substantial proportion had been sold with recourse because of its poor quality; id. ¶¶ 405-14.
14. Fifth Third falsely stated during the April 15, 2008 annual shareholders meeting that it used conservative underwriting standards when it did not; id. ¶¶ 415-16;
15. Fifth Third’s first quarter earnings release and Form 8-K, issued on April 22, 2008 was materially false and misleading because:
a. Fifth Third was not well-positioned relative to its competitors because of the poor quality of its loan portfolio;
b. statements concerning increases in loan loss reserves failed to account for loans 30 to 89 days delinquent and failed to reflect that Fifth Third was delaying increases in reserves;
c. statements concerning non-performing assets were materially false and misleading because they did not take into account the rapidly increasing number of loans in the 30 to 89 days delinquent category; id. ¶¶ 417-22.
16. During an April 22, 2008 conference call, Defendants Kabat and Marshall made the following materially false and misleading statements:
a. stated that Fifth Third had substantially increased its loan loss reserves when its reserves had actually decreased as a percentage of non-performing loans;
b. stated that Fifth Third was a “prime” underwriter in when it was originating de facto subprime loans;
c. failed to disclose that the credit quality of Fifth Third’s loan portfolio was rapidly deteriorating; id. ¶¶ 423-30.
17. A May 2, 2008 press release and Form 8-K announced that Defendant Marshall “resigned” as Executive Vice President and Chief Financial Officer of Fifth Third and that Daniel Poston would serve as CFO until a permanent successor was named; id. ¶ 432.
18. Fifth Third’s First Quarter 2008 Form 10-Q was materially false and misleading for substantially the same reasons outlined supra — holding itself out an originator of prime mortgages, failure to take reserves for loans delinquent for 30 to 89 days, falsely stating that it employed conservative lending practices, misrepresenting the qualifications for Ali>-A borrowers, and stating that the bank was well-capitalized; id. ¶ 433-45.
19. Fifth Third’s Form 8-K, filed on May 12, 2008, which reported a presentation to the UBS Global Financial Services Conference, was materially false and misleading for substantially all of the same reasons set forth supra, at 695-96; id. ¶ 448.
On June 18, 2008, when Fifth Third announced the steps it intended to take to raise additional capital, the price of Fifth Third common stock dropped from $12.73 per share to $9.26 per share on unusually heavy volume. Id. ¶ 453.
VI. Procedural History
As stated above, this case is the consolidation of four separate securities class actions into one lawsuit. Here is the array of parties and claims before the Court. 1. First Charter sub-class, represented by lead plaintiff Edwin Shelton:
Count • Defendants
I — violations of Section 11 of the Securities Act of 1933,15 U.S.C. § 77k Fifth Third
Kevin Kabat
Christopher Marshall
Daniel Poston
[collectively “the Individual
Defendants”]
Darryl F. Allen
John F. Barrett
James P. Hackett
Gary R. Heminger
Joan R. Hersehede
Allen M. Hill
Robert L. Koch III
Mitchel D. Livingston III, Ph.d
Hendrik G. Meijer
George A. Schaefer, Jr.
John J. Schiff, Jr.
Dudley S. Taft
Thomas W. Traylor
[collectively “the Director Defendants”]
Ulysses L. Bridgeman, Jr.
James E. Rogers
Count Defendants
II. violations of Section 12(a)(2) of the Securities Act, 15 U.S.C. § 77Í Fifth Third
III. violations of Section 15 of the Securities Act of 1933,15 U.S.C. § 77o The Individual Defendants
IV. violations of Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a) and SEC Rule 14a-9,17 C.F.R. § 240.14a-9 Fifth Third The Individual Defendants
V. violations of Section 20(a) of the Securities The Individual Defendants
Exchange Act of 1934,15 U.S.C. § 78t(a)
2. Preferred B sub-class, represented by Plaintiffs Jacqueline Dinwoodie and Jeffery J. Wacksman:
Count Defendants
VI. violations of Section 11 Fifth Third
of the Securities Act of 1933.15 U.S.C. § 77k
Fifth Third Capital Trust VI
The Individual Defendants
The Director Defendants
UBS Securities LLC
Citigroup Global Markets, Inc.
Merrill Lynch, Pierce, Fenner & Smith, Inc.
Morgan Stanley & Co., Inc.
Wachovia Capital Markets LLC
Banc of America Securities LLC
Credit Suisse Securities (USA) LLC
[the latter seven defendants collectively “The Preferred B Underwriters
VII. violations of Section Fifth Third 12(a)(2) of the Securities Act of 1933,15 U.S.C. § 111
Fifth Third Capital Trust VI
The Preferred B Underwriters
VIII. violations of Section Fifth Third 15 of the Securities Act of 1933, 15 U.S.C. § 77o
The Individual Defendants
The Preferred C sub-class, represented by
Plaintiff Leon C. Loewenstine:
Count Defendants
IX. violations of Section 11 Fifth Third of the Securities Act of 1933.15 U.S.C. § 77k
Fifth Third Capital Trust VII Marshall
The Director Defendants The Underwriter Defendants
UBS Securities LLC Citigroup Global Markets, Inc.
Merrill Lynch, Pierce, Fenner & Smith, Inc.
Morgan Stanley & Co., Inc.
Wachovia Capital Markets LLC
Banc of America Securities LLC
Credit Suisse Securities (USA) LLC
Barclays Capital, Inc. Fifth Third Securities [the latter nine defendants collectively “the
Preferred C Underwriters”]
X. violations of Section Fifth Third 12(a)(2) of the Securities Act of 1933,15 U.S.C. § 111
Fifth Third Capital Trust VII
The Preferred C Underwriters
XI. violations of Section 15 The Individual Defendants of the Securities Act of 1933,15U.S.C. § llo
The Fifth Third Common Stock sub-class, represented by co-Lead Plaintiffs Local 295/Local 851 IBT Employer Group Pension Trust and Welfare Funds and District No, 9,1.A. of M & A Pension Trust [collectively “the Pension Trust Funds”]:
Count Defendants
XII. violations of Section Fifth Third 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and SEC Rule 10b-5,17 C.F.R. § 240.10b-5
The Individual Defendants
XIII. violations of Section The Individual Defendants 20 of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a).
On July 15, 2009, Defendants filed an omnibus motion and memorandum to dismiss the consolidated class action complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. (Doc. No. 78). The Underwriter Defendants filed a supplemental memorandum in support of the motion to dismiss which asserted additional grounds for dismissal of the claims peculiar to them. In response, Plaintiffs moved to file an amended consolidated complaint to clarify their Section 11 claims against the Underwriter Defendants. Doc. No. 83. Plaintiffs filed a memorandum in opposition to the motion to dismiss on September 25, 2009. Doc. No. 88. Additionally, Plaintiffs simultaneously filed a motion to strike extraneous documents and exhibits attached to Defendants’ motion to dismiss. Doc. No. 90. Generally speaking, the alleged extraneous documents and exhibits are newspaper artides reporting the recent credit crisis and additional Fifth Third SEC filings not specifically referenced in the complaint.
Principal briefing on Defendants’ motion to dismiss and Plaintiffs’ motion to strike was completed on November 13, 2009. On November 16, 2009, however, Plaintiffs filed a motion to file a sur-reply brief (Doc. No. 99) on the grounds that Defendants’ reply brief relied heavily on a Sixth Circuit decision, Indiana State Dist. Council of Laborers & Hod Carriers Pension & Welfare Fund v. Omnicare, Inc., 583 F.3d 935 (6th Cir.2009), that was issued after they filed their memorandum in opposition to the motion to dismiss. Briefing on Plaintiffs’ motion to file a sur-reply brief was completed on December 23, 2009. The parties subsequently have filed several notices of supplemental authority which they contend support their respective positions. Doc. Nos. 105-07.
Each of the pending motions has been fully briefed and is ready for disposition.
VII. Plaintiffs’ Motion to Strike
The Court first addresses Plaintiffs’ motion to strike since it potentially affects the resolution of Defendants’ motion to dismiss.
Defendants’ motion to dismiss relies on three categories of exhibits (47 exhibits in total) that are extraneous to the complaint: SEC filings, press releases, news reports, and stock quotations. The relevance of SEC filings and stock quotations in a securities fraud case is fairly self-evident. Defendants rely on the press releases and news reports to set forth the global credit crisis that overlapped the class period to establish fully the context in which Plaintiffs’ claims arise. Defendants contend that the Court can consider all of this information in ruling on their motion to dismiss. Plaintiffs do not object to the Court’s consideration of Defendants’ submission of documents referenced in the complaint and historical price data. Doc. No. 90, at 2. These unobjectionable documents are Defendants’ exhibits 20, 25, and 27-47. Id. Plaintiffs, however, object to the Court’s consideration of news articles and SEC filings and a conference call transcript which predates the class period. The objectionable documents are Defendants’ exhibits 1 -24 and 26. Id. at 3-4.
With respect to the news articles, Plaintiffs acknowledge that the Court may properly take judicial notice that there has been an economic downturn. Doc. No. 90, at 8 n. 7. Plaintiffs, however, argue that Defendants are improperly attempting to use these, articles to shift the blame for the decline of Fifth Third’s stock price on the global financial climate rather than their own fraud. Plaintiffs contend that what Defendants are really asking is for the Court to resolve disputed factual questions in their favor on a motion to dismiss. Plaintiffs then argue that the SEC filings and the conference call transcript are not integral to the complaint and must be disregarded. Plaintiffs contend that if the Court does consider these exhibits, Defendants’ motion to dismiss will have been converted to a motion for summary judgment. If that occurs, Plaintiffs argue that they will be entitled to conduct discovery on the matters raised by or related to the exhibits.
In deciding a Rule 12(b)(6) motion, the trial court may consider, in addition to the allegations in the complaint, “other materials that are integral to the complaint, are public records, or are otherwise appropriate for the taking of judicial notice.” Wyser-Pratte Mgmt. Co., Inc. v. Telxon Corp., 413 F.3d 553, 560 (6th Cir.2005). Plaintiffs are correct, however, that although SEC filings are public documents, the Sixth Circuit requires that they be integral to the complaint to be considered on a Rule 12(b)(6) motion. Bovee v. Coopers & Lybrand, C.P.A., 272 F.3d 356, 360-61 (6th Cir.2001) (“This Court may consider the full text of the SEC filings, prospectus, analysts’ reports, and statements ‘integral to the complaint,’ even if not attached, without converting the motion into one for summary judgment.”).
Defendants argue that the pre-class period SEC filings and the conference call transcript are integral to the complaint because the complaint faults Fifth Third for not recognizing danger signs about subprime lending before the class period. Defendants note that the complaint also cites other SEC filings and conference call transcripts that pre-date the class period. Plaintiffs reply, however, that they are entitled to rely on factual information that pre-dates the class period because the complaint has to establish each element of their claims on the first day of the class period.
As explained further below, infra at 716-27, the Court need not resolve this motion because the complaint fails to establish a strong inference of scienter even in the absence of Defendants’ additional materials describing the extent of the global credit crisis. See Konkol v. Diebold, Inc., 590 F.3d 390, 403 (6th Cir.2009) (defendant does not have burden under PSLRA to provide non-fraudulent explanation for his statements). Accordingly, Plaintiffs’ motion to strike is MOOT.
VIII. Rule 12(b)(6) and the Private Securities Litigation Reform,
Act
The Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u-4, enacted by Congress to curb abuses in securities class action litigation, imposes pleading requirements more stringent than the Federal Rules of Civil Procedure. “[A] short and plain statement of the claim showing that the pleader is entitled to relief,” Fed.R.Civ.P. 8(a)(2), is not sufficient in a private suit to recover damages for violations of the securities laws. Where the claim is based on material misstatements and omissions, as in this case, the complaint must “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1)(B). Additionally, if the claim requires proof of scienter, i.e., a showing of intent to defraud, the complaint must “with respect to each act or omission alleged ... state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). Claims sounding in fraud must also comply with Fed.R.Civ.P. 9(b) — that is, the complaint must “(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.” Frank v. Dana Corp., 547 F.3d 564, 570 (6th Cir.2008).
In Tellabs, Inc. v. Makar Issues & Rights, Ltd., 551 U.S. 308, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007), the Supreme Court established the procedure for resolving a Rule 12(b)(6) motion where the PSLRA applies. First, the trial court must accept all factual allegations in the complaint as being true. Id. at 322, 127 S.Ct. 2499. Second, “courts must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice. Id. Where the claim requires proof of scienter, the court must consider the complaint as a whole, and not each individual allegation in isolation, to determine whether the complaint gives rise to a strong inference of scienter. Id. at 323, 127 S.Ct. 2499. Third, in deciding whether the complaint does give rise to a strong inference of scienter, “the court must take into account plausible opposing inferences.” Id. This means that the court “must consider plausible nonculpable explanations for the defendant’s conduct, as well as inferences favoring the plaintiff.” Id. at 324, 127 S.Ct. 2499. Under this standard, “[a] complaint will survive ... only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” Id.
IX. Analysis
A. Alleged violations of the Securities Act of 19SS
Counts I, VI, and IX of the complaint assert claims for violations of Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k. Counts II, VII, and X of the complaint assert claims for violations of Section 12(a)(2) of the Securities Act of 1933, 15 U.S.C. § III. Counts III, VIII, and XI of the complaint assert claims for violations of Section 15 of the Securities Act of 1933, 15 U.S.C. § 77o. These claims only concern the First Charter, Preferred B and Preferred C subclasses.
Section 11 of the Securities Act imposes liability on persons who sign securities registration statements containing untrue statements of material fact or omissions of material fact. J & R Marketing, SEP v. General Motors Corp., 549 F.3d 384, 390 (6th Cir.2008). “Section! ] 11 ... impose[s] a duty to disclose additional facts when a statement of material fact made by the issuer is misleading, and ... impose[s] liability for failing to fulfill that duty of disclosure as well as for misstating a material fact.” Id. In order to state a claim for relief under Section 11, the plaintiff must allege facts showing that: (1) he purchased a registered security, either directly from the issuer or in the aftermarket following the offering; (2) the defendant participated in the offering in a manner sufficient to give rise to liability under Section 11; and (3) the registration statement contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading. In re Morgan Stanley Information Fund Sec. Lit., 592 F.3d 347, 358-59 (2nd Cir.2010).
In Herman & MacLean v. Huddleston, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983), the Supreme Court explained that:
Th[is] section was designed to assure compliance with the disclosure provisions of the Act by imposing a stringent standard of liability on the parties who play a direct role in a registered offering. If a plaintiff purchased a security issued pursuant to a registration statement, he need only show a material misstatement or omission to establish his prima facie case. Liability against the issuer of a security is virtually absolute, even for innocent misstatements.
Although limited in scope, Section 11 places a relatively minimal burden on a plaintiff.
Id. at 382-83, 103 S.Ct. 683. A Section 11 plaintiff is not required to plead or prove that the defendant acted with scienter. Id. at 383, 103 S.Ct. 683.
Section 12(a)(2) of the Securities Act of 1933 is similar to Section 11 in that it imposes liability against a seller of securities by means of a prospectus or oral communications containing materially misleading statements or omissions. Morgan Stanley, 592 F.3d at 360. Section 12(a)(2) only imposes liability on “statutory sellers” of securities, i.e., those who have (1) passed title, or other interest in the security, to the buyer for value, or (2) successfully solicited the purchase of a security, motivated at least in part by a desire to serve his own financial interests or those of the securities’ owner. Id. Thus, in order to state a claim for relief under § 12(a)(2), the plaintiff must allege that: (1) the defendant is a “statutory seller”; (2) the sale was effectuated by means of a prospectus or oral communication; and (3) the prospectus or oral communication included an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading. Id. Like Section 11, Section 12(a)(2) does not have a scienter requirement. Id. at 359.
Defendants proffer four reasons why the complaint fails to state claims for violations of the Securities Act. First, Defendants argue that the complaint fails to set forth any materially misleading statements or omissions. Second, Defendants contend that to the extent that these claims sound in fraud, they fail to meet Rule 9(b)’s requirement to plead fraud with particularity. Third, Defendants claim that the complaint fails to adequately plead loss causation. Fourth, Defendants argue that Plaintiffs in the Preferred B and Preferred C subclasses lack standing to assert Section 12 claims.
1. Materiality
Section 11 and Section 12 both require that the misstatement or omission at issue be material. An omission or misrepresentation is material if there is a substantial likelihood that a reasonable investor would have viewed the omitted or misrepresented fact as having significantly altered the total mix of information available. Basic, Inc. v. Levinson, 485 U.S. 224, 232, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). The Supreme Court has cautioned, however, that “[s]ome information is of such dubious significance that insistence on its disclosure may accomplish more harm than good.” TSC Ind., Inc. v. Northway, Inc., 426 U.S. 438, 448, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976). Imposing liability for some omissions or misstatements would cause management “simply to bury the shareholders in an avalanche of trivial information that is hardly conducive to informed decisionmaking.” Id. at 448-49, 96 S.Ct. 2126. Materiality presents a mixed question of law and fact requiring “delicate assessments” of the inferences a reasonable shareholder would draw from a given set of facts. Id. at 450, 96 S.Ct. 2126. It is only if the omissions or misstatements are “so obviously important to an investor, that reasonable minds cannot differ on the question of materiality is the ultimate issue appropriately resolved as a matter of law [by the court].” Id. (internal quotation marks omitted). In Thiemann v. OHSL Fin. Corp., No. C-1-00-CV-793, 2001 WL 34128240 (S.D.Ohio July 25, 2001) (Beck-with, J.), this Court stated that “[t]he inverse proposition of this holding is that only when a misstatement or omission is so obviously unimportant that reasonable minds cannot differ on the question of materiality that the ultimate issue is appropriately resolved as a matter of law by the court.”). Id. at *6; see also In re Westinghouse Sec. Lit., 90 F.3d 696, 707 n. 8 (3rd Cir.1996) (same).
The parties agree that the alleged misstatements and omissions at issue for these subclasses concern Fifth Third’s loan loss provisions, charge-offs, non-performing assets, capital ratios, and underwriting standards. And, for the First Charter sub-class, the misstatements and/or omissions also concern the consideration paid for First Charter shares in the acquisition.
a. Loan Loss Provisions, Charge-offs and Nonr-P erf arming Assets
Loan loss provisions, charge-offs and non-performing assets are related concepts in this case in that the complaint alleges that throughout the class period Fifth Third either purposefully delayed recognizing delinquent loans as non-performing assets or that Fifth Third should have recognized delinquent loans as non-performing assets sooner than it actually did, as in the case of loans delinquent for 30 to 89 days. As a result of allegedly not recognizing loans as non-performing assets properly, Fifth Third’s reserves for losses were inadequate with the consequent effect that net income was overstated on its financial statements.
In Mayer v. Mylod, 988 F.2d 635 (6th Cir.1993), the Court held that the following allegations were sufficient to state claims for material misrepresentations and omissions:
Defendants misrepresented and concealed the deteriorated quality of Michigan National’s loan portfolio, intentionally concealed and misrepresented the likelihood of huge increases in non-performing assets, charge-offs and loss reserves, and failed to set appropriate loan loss reserve levels on commercial real estate loans. Michigan National’s net income, assets and net worth were materially overstated as a result, and the market prices of Michigan National’s publicly-traded securities were artificially inflated.
Id. at 637, 639. These allegations are substantially similar to the allegations that the First Charter, Preferred B, and Preferred C sub-classes assert against Fifth Third with respect to its loan portfolio and loan loss reserves. Since these kinds of statements were material in Mayer, the Court must conclude that the similar allegations in this case are material as well.
b. Underwriting Standards
Several courts have held that where a bank touts but then abandons its conservative loan underwriting standards without disclosing the change, statements concerning its lending policies are materially misleading. See, e.g., In re Countrywide Fin. Corp. Deriv. Lit., 554 F.Supp.2d 1044, 1072, 1076-77 (C.D.Cal.2008) (finding that the underwriting practices of a mortgage originator would be among the most important information on which investors rely); In re Washington Mut., Inc. Sec., Deriv. & ERISA Lit., 259 F.R.D. 490, 505-06 (W.D.Wash.2009); but see In re Security Capital Assur., Ltd. Sec. Lit., No. 7 Civ. 11086(DAB), 729 F.Supp.2d 569, 597-98, 2010 WL 1372688, at *28 (S.D.N.Y. Mar. 31, 2010) (statement that a corporation employs conservative underwriting policies amounts to puffery that is not actionable). Countrywide and Washington Mutual are identical to this case in that not only did plaintiffs allege that those financial institutions failed to disclose a change to more risky lending practices, the banks in those cases also provided financial incentives to its employees which emphasized loan quantity over loan quality, thereby increasing the banks’ exposure to defaults. Countrywide, 554 F.Supp.2d at 1058-59. Similarly, in Mayer, the Court held that the defendant made a material misstatement when, inter alia, in light of the bank’s deteriorating loan portfolio and the likelihood of increases in non-performing assets and charge-offs, he commented that its loan portfolio was “soundly underwritten.” 988 F.2d at 636-37, 639. Accordingly, the Court concludes that statements concerning the soundness or reliability of Fifth Third’s underwriting standards or practices are material. Additionally, the Court holds that it would be a material omission, if, as the complaint alleges, Fifth Third concealed that it was relaxing its underwriting standards.
On the other hand, the Court finds that Defendants’ alleged omissions concerning sales quotas, incentives, and bonuses to increase new loan originations are not material because this is the type of minutia that would inundate the investor with “an avalanche of trivial information.” TSC Indus., 426 U.S. at 448, 96 S.Ct. 2126. Plaintiffs essentially allege that Fifth Third should have disclosed that it implemented sales policies and a compensation structure which incentivized its employees to approve loans to substandard borrowers. To a large degree, however, these types of omissions are subsumed within Plaintiffs’ claims concerning Fifth Third’s alleged relaxation of lending standards because the quotas and incentives allegedly led Fifth Third to relax its lending standards. More importantly, however, the sales policies and incentives are essentially the day-to-day operational details of implementing the strategy of increasing new loan originations. Most investors would fail to connect the existence of sales quotas and incentives with an increased risk that the credit quality of Fifth Third’s loan portfolio would decrease. The Court’s own research has not discovered any case in which the compensation structure of non-executive employees was held to be a material fact requiring disclosure to investors. Accordingly, these alleged omissions are not material as a matter of law.
c. Consideration for First Charter Shares
The final category of misstatement at issue here is the consideration Fifth Third was to pay for First Charter shares. As stated, the registration statement indicated that Fifth Third would pay $31 for each First Charter share, to be paid by a combination of cash and Fifth Third shares. The First Charter subclass claims that the consideration paid for their shares was not $31 because the price of Fifth Third stock was inflated due to the alleged misstatements and omissions. It would seem to go without saying that any misrepresentation concerning the consideration a shareholder would receive for his shares in a merger or acquisition would be material information which would affect his voting decision. Defendants argue that the registration statement was not misleading as to consideration because it never guaranteed a value of $31 per share. Moreover, Defendants argue, the registration statement explained the conversion ratio to First Charter shareholders and warned them that the price of Fifth Third stock could increase or decrease before the closing date because of a number of factors. In response, Plaintiffs point out that the First Charter board approved the merger specifically on the basis that the consideration paid by Fifth Third would equal $31 per First Charter share. Additionally, to the extent the complaint was unclear or ambiguous, Plaintiffs’ brief clarifies that they are not claiming that the registration statement was misleading as to the conversion ratio or whether there would be a fluctuation in Fifth Third stock prior to the merger. Rather, Plaintiffs claim that because Fifth Third shares allegedly were artificially inflated during the class period, due to the alleged misstatements and omissions, their consideration did not actually equal $31 per share. Another way of stating it would be that Plaintiffs are claiming that had the price of Fifth Third stock not been artificially inflated during the class period, they would have received more Fifth Third shares in exchange for their First Charter shares.
With that understanding of the complaint, the Court concludes that Plaintiffs state a claim that the First Charter registration statement was materially misleading as to consideration. As just stated, it is self-evident that a shareholder would And statements concerning the consideration to be paid for his shares in a merger to be material to his decision-making process.
2.Forward-looking Statements
Defendants argue that even if the alleged misstatements and omissions set forth in the complaint are material, many of them are protected by the PSLRA safe harbor, which excepts forward-looking statements from liability. In particular, Defendants argue that statements concerning Fifth Third’s loss reserves are necessarily forward-looking since the adequacy of reserves is contingent upon future events.
The PSLRA safe harbor:
excuses liability for defendants’ projections, statements of plans and objectives, and estimates of future economic performance. A plaintiff may overcome this protection only if the statement was material; if defendants had actual knowledge that it was false or misleading; and if the statement was not identified as “forward-looking” or lacked meaningful cautionary statements.
Zaluski v. United American Healthcare Corp., 527 F.3d 564, 572 (6th Cir.2008) (quoting Helwig v. Vencor, Inc., 251 F.3d 540, 547-48 (6th Cir.2001)). In order to be meaningful, the cautionary statements cannot be boilerplate. Helwig, 251 F.3d at 558. Rather, “the cautionary statements must convey substantive information about factors that realistically could cause results to differ materially from those projected in the forward-looking statements, such as, for example, information about the issuer’s business.” Id. at 558-59 (quoting H.R. Conf. Rep. No. 04-369, at 43 (1995), U.S.Code Cong. & Admin.News 1995, pp. 730, 742).
With that standard in mind, several of the alleged misstatements and omissions set forth in the complaint concerning Fifth Third’s reserves and capitalization are forward-looking and, although not accompanied by meaningful cautionary language, there are no facts pled which demonstrate that the statements were made with actual knowledge of their falsity. In re Compuware Securities Lit., 301 F.Supp.2d 672, 683 (E.D.Mich.2004). Specifically, the following statements fall within the safe harbor:
1. Defendant Marshall’s statement during the April 22, 2008 conference call that “I wouldn’t expect us to do anything out of the ordinary and certainly nothing resembling the extreme capital raises you’ve seen from some of our more stressed peers ... We don’t think that’s — -we think of ourselves as being in an entirely different category and don’t need to do any of those things,” Complaint ¶ 284, is by definition a forward-looking statement because it is a projection concerning Fifth Third’s capital structure. See 15 U.S.C. § 78u-5(i)(1)(A); see also Harris v. Ivax Corp., 182 F.3d 799, 803 (11th Cir.1999) (statement that company is “well-positioned” was forward-looking).
2. Defendant Marshall’s statements during an October 19, 2007 conference call concerning whether Fifth Third would have a sale of non-performing assets in the fourth quarter and whether restructuring troubled debt would reduce the growth in nonperforming assets are projections or predictions and thus are forward-looking statements. Complaint ¶ 368.
3. Defendant Marshall’s statements in the January 22, 2008 conference call concerning Fifth Third’s targeted and expected level of Tier 1 capital is a projection and is thus forward-looking. Complaint ¶ 400.
4. Defendant Marshall’s statement in the April 22, 2008 conference call that “we expect our capital to be comfortably within our targets” is a projection and is thus forward-looking. Complaint ¶ 427.
These statements are all forward-looking, and, though lacking meaningful cautionary language, there are no facts pled indicating that they were made with actual knowledge of their falsity. Therefore, they fall within the PSLRA safe harbor and are not actionable. Accordingly, Defendants’ motion to dismiss is well-taken and is GRANTED as to these alleged misstatements.
3. Applicability of Rule 9(b)
Defendants next argue that Plaintiffs’ Section 11 Securities Act claims sound in fraud and that, therefore, they must comply with Rule 9(b) of the Federal Rules of Civil Procedure and plead these claims with particularity. Fraud is not an element of Securities Act claims. In re Charles Schwab Corp. Sec. Lit., 257 F.R.D. 534, 548 (N.D.Cal.2009). Defendants are correct, however, that Securities Act claims sounding in fraud must comply with Rule 9(b). Indiana State Dist. Council of Laborers & Hod Carriers Pension & Welfare Fund v. Omnicare, Inc., 583 F.3d 935, 948 (6th Cir.2009). The complaint denies that the Securities Act claims allege fraud, Complaint ¶ 89, and Plaintiffs rely on that disclaimer in arguing that they do not have to comply with Rule 9(b). A blanket disavowal in the complaint that the claims do not allege fraud, however, is insufficient to rescue them from the requirements of Rule 9(b). California Pub. Emp. Ret. Sys. v. Chubb Corp., 394 F.3d 126, 160 (3rd Cir.2004) (“The one-sentence disavowment of fraud contained within Plaintiffs’ section 11 Count — Count II of the Second Amended Complaint — does not require us to infer that the claims are strict liability or negligence claims, and in this case is insufficient to divorce the claims from their fraudulent underpinnings.”); In re Alstom 5.A. Secs. Lit., 406 F.Supp.2d 402, 410 (S.D.N.Y.2005) (“Plaintiffs cannot so facilely put the fraud genie back in the bottle.”). Moreover, Plaintiffs’ allegation that their Securities Act claims do not sound in fraud is a legal conclusion that the Court does not have to accept as being true. Lewis v. ACB Business Services, Inc., 135 F.3d 389, 405 (6th Cir.1998).
Nevertheless, upon review of the motion to dismiss, it appears to the Court that in arguing that the complaint fails to comply with Rule 9(b), Defendants rely on their contention that the allegations concerning the Section 11 claims fail to establish scienter. See Doc. No. 89, at 100 (stating that “for all of the reasons explained ... supra, Plaintiffs failed to plead scienter against any defendant.”). As just stated, however, the requirement to plead fraud with particularity does not require the complaint to plead intent to defraud with particularity. Accordingly, to the extent that the motion to dismiss the Section 11 claims is based on the failure to plead scienter with particularity, it is not well-taken and is DENIED.
Defendants’ Rule 9(b) argument also adverts to the section of its brief which contends that the complaint fails to plead any actionable misstatements or omissions. See id. That section of the brief, however, is not framed in the context of Rule 9(b) and, other than Defendants’ general assertion that the Section 11 claims do not comply with Rule 9(b), they fail to specify how and why the complaint lacks the requisite specificity. Accordingly, the Court concludes that Defendants are not entitled to dismissal of these claims for failure to comply with Rule 9(b).
4. Loss Causation
Defendants also argue that Plaintiffs’ Securities Act claims are subject to dismissal on the grounds that the complaint shows on its face that their losses were not caused by the Defendants’ alleged misstatements and omissions. Defendants contend that the complaint fails to allege facts connecting the revelation of a secret fraud to the decline in the price of Fifth Third stock. Thus, Defendants argue that the complaint only shows that the price of Fifth Third stock declined after the revelation of bad news, which is insufficient to show loss causation.
“Loss causation” refers to the plaintiffs burden to “show that an economic loss occurred after the truth behind the misrepresentation or omission became known to the market.” Omnicare, 583 F.3d at 944. Defendants, however, correctly recognize that loss causation is not an element of a Securities Act claim but rather an affirmative defense to it. Id. at 947. Where a Rule 12(b)(6) motion is based on an affirmative defense, the complaint must show on its face that the claim is barred by the defense. Riveruiew Health Inst. LLC v. Medical Mut. of Ohio, 601 F.3d 505, 513 (6th Cir.2010). “In a situation involving an affirmative defense, the claim is stated adequately, but in addition to the claim the contents of the complaint includes matters of avoidance that effectively vitiate the pleader’s ability to recover on the claim. In such a situation the complaint is said to have a built-in defense and is essentially self-defeating.” Id. (quoting 5B Wright & Miller, Federal Practice & Proceduee § 1357 (3d ed.2004))(internal quotation marks, ellipses and brackets omitted).
The complaint attributes the decline in Fifth Third stock solely to the June 18, 2008 press release in which Fifth Third announced that in order to strengthen its capital position in light of deteriorating credit trends, it was going to issue $1 billion in new convertible preferred shares, cut its dividend, and sell certain non-core businesses. Complaint ¶ 111. The Court agrees with Defendants that on its face the complaint fails to establish loss causation with respect to many of the misrepresentations and omissions alleged because the press release did not contain any disclosures or corrections addressed to them. See, e.g., Omnicare, 583 F.3d at 944 (“[A] plaintiff must show that an economic loss occurred after the truth behind the misrepresentation or omission became known to the market.”); D.E. & J.L.P. v. Conaway, 133 Fed.Appx. 994, 1000-01 (6th Cir. 2005) (loss causation not established when company announced filing of bankruptcy petition because bankruptcy announcement did not disclose any prior misrepresentations to the market); In re Britannia Bulk Holdings Inc. Sec. Lit., 665 F.Supp.2d 404, 419-20 (S.D.N.Y.2009) (granting defendants’ Rule 12(b)(6) motion on affirmative defense of loss causation because sole disclosure upon which plaintiffs relied did not “reveal to the market the falsity” of its offering documents); In re Initial Pub. Of. Sec. Lit., 399 F.Supp.2d 261, 265, 266-67 (S.D.N.Y.2005) (in order to establish loss causation, there needs to be a disclosure or event that corrects the alleged misrepresentations and omissions). Specifically, the Court finds as follows with respect to these alleged misrepresentations and omissions:
1. Failure to disclose sales quotas and bonuses to encourage origination of risky loans. There is no loss causation because the press release did not disclose that such programs were in place or that Fifth Third was revising or eliminating such programs in order to strengthen the quality of its loan portfolio.
2. Failure to disclose that Alt-A loan portfolio was the same or similar to sub-prime loans. There is no loss causation because Fifth Third did not announce that it had misstated or mis-evaluated the characteristics of its At-A loan portfolio.
3. Failure to disclose that Alh-A loan portfolio had “layered risk factors. ” Again, there is no loss causation because there was no disclosure amending or modifying Fifth Third’s description of its At-A portfolio.
4. Failure to disclose aggressive marketing of high loan-to-value loans. There is no loss causation because there was no disclosure that Fifth Third was discontinuing marketing high loan-to-value loans or that it was modifying its marketing strategy with respect to such loans.
5. Aggressively marketing real estate loans to European borroioers with unverifiable credit histories. There is no loss causation because Fifth Third did not announce that it was discontinuing marketing such loans or that it was modifying its marketing strategy with respect to such loans.
6. Failure to disclose inability to sell loans on secondary market. There is no loss causation because Fifth Third did not announce that it was unable to sell its loans on the secondary market in the press release.
7. Failure to disclose deteriorating credit quality of loan portfolio. There is loss causation with respect to this alleged misrepresentation or omission because Fifth Third’s need to restructure its capital position was, according to the press release, due to “continued deterioration in credit trends.”
8. Failure to identify non-performing loans. There is no loss causation because Fifth Third did not disclose any accounting changes with respect to non-performing loans.
9. Overstatement of income. There is no loss causation because Fifth Third did not announce that it was restating its earnings.
10. Deterioration in Tier 1 capital/need to raise capital. There is loss causation with respect to these misrepresentations or omissions because the press release specifically states that Fifth Third was issuing preferred securities to bolster its Tier 1 capital.
11. Failure to disclose the need to raise additional capital. There clearly is loss causation for this alleged omission because the topic of the press release was Fifth Third’s need to bolster its capital position.
Accordingly, Defendants’ motion to dismiss Plaintiffs’ Securities Act claims is well-taken and is GRANTED with respect to alleged misstatements or omissions 1-6, and 8-9, as identified above.
5. Interim Summary
In summary, the Section 11 and Section 12(a) claims of