Full opinion text
MEMORANDUM OPINION LEWIS A. KAPLAN, District Judge. Table of Contents Background.....................................................................164 I. Parties.............................................................164 A. Plaintiffs.......................................................164 B. Defendants.....................................................164 II. The CFAC........................................... 166 III. Motions to Dismiss...................................................166 Discussion......................................................................167 I. Legal Standard......................................................167 II. Securities Act Claims.................................................170 A. Timeliness......................................................170 B. The Sufficiency of the Remaining Section 11 Claims..................172 1. Legal Standards.............................................172 2. The Present Case............................................172 a. Aleged Misstatements and Omissions Dismissed in the E/D Class Action.......................................172 b. Viability in this Case of Aleged Misstatements and Omissions Upheld as Sufficient in the E/D Class Action.....177 c. Section 11 Claims against Callan...........................180 d. Section 11 Claims against Ernst & Young...................180 C. Section 15 Claims................................................183 III. Exchange Act Claims ................................................183 A. 10b-5 Claim as to the Officer Defendants...........................183 1. Existence of Materially False and Misleading Statements or Omissions.................................................183 2. Scienter....................................................184 a. Motive and Opportunity...................................184 b. Circumstantial Evidence of Conscious Misbehavior or Recklessness ..........................................184 B. Section 20(a) Claims.............................................189 IV. Common Law Claims.................................................189 A. Governing Law..................................................189 B. Fraud..........................................................190 C. Aiding and Abetting Fraud.......................................191 D. Negligent Misrepresentation......................................192 V. The Fraudulent Conveyance Claim.....................................192 VI. California Corporations Code Claims...................................193 A. Sections 25400 and 25500 .........................................193 1. Type of Securities Bought and Sold.............................194 2. Willful Intent................................................194 B. Sections 25504 and 25504.1........................................195 D. Section 25504.2 Claims as to Ernst & Young........................197 Conclusion......................................................................197 The September 2008 collapse of Lehman Brothers Holdings Inc. (“Lehman”) spawned litigation across the country. The Lehman bankruptcy is pending in the bankruptcy court for this district. All of the securities and most of the other cases brought in or removed to federal courts have been consolidated before this Court for pretrial purposes. The cases that are the subject of this opinion are eight consolidated securities actions brought by seven California public entities and a California-based insurance company. They assert claims against Lehman’s former officers, directors and auditors under the Securities Act of 1933 (the “Securities Act”), the Securities Exchange Act of 1934 (the “Exchange Act”), and California state law, and they are before me on motions to dismiss. Three circumstances are pivotal to these motions. First, the bankruptcy court in the Lehman bankruptcy appointed an examiner to inquire into and report, broadly speaking, as to the circumstances that culminated in Lehman’s failure. In 2010, the examiner rendered comprehensive a 2,200 page, nine-volume report. Second, the plaintiffs in a consolidated class action brought on behalf of purchasers of Lehman debt and equity securities, In re Lehman Brothers Equity/Debt Securities Litigation (“E/D Class Action”), amended their complaint to take advantage of the wealth of factual material in the Examiner’s Report, which resulted in these plaintiffs filing an extraordinarily detailed third amended complaint (the “TAC”). In due course, the Court granted in part and denied in part extensive motions to dismiss. Finally, the consolidated first amended complaint in these eight actions (the “CFAC”), like the TAC in the E/D Class Action, rests very heavily on allegations drawn from the Examiner’s Report, as-serfs claims under the Securities and Exchange Acts, and therefore is quite similar in many respects to the TAC. Like the E/D Class Action plaintiffs, these plaintiffs contend principally that Lehman’s offering documents with respect to Lehman securities that plaintiffs purchased were false and misleading, as they incorporated by reference Lehman financial statements which in turn contained misleading statements and material omissions regarding Lehman’s (1) risk management policies, (2) liquidity risk, (3) use of “Repo 105” transactions and their effect on Lehman’s reported net leverage, (4) valuation of its commercial real estate holdings, and (5) concentrations of credit risk. In addition, as the CFAC was filed after the ruling on the motions to dismiss in the E/D Class Action, it attempts also to plead facts additional to those asserted in that case in an effort to support claims that were dismissed in the E/D Class Action. The Court has concluded, broadly speaking, that the CFAC, like its predecessor in the E/D Class Action, is sufficient in some respects and deficient in others. Accordingly, the motions to dismiss are granted in part and denied in part. Background I. Parties A. Plaintiffs Plaintiffs in this case collectively made twenty-one separate purchases of Lehman securities (the “Purchases”) in 15 different offerings (the “Offerings”) during the period October 25, 2004 to March 31, 2008. The identities of the securities they purchased, their purchase dates, and the dates on which they commenced their actions are set forth in the appendix to this decision. B. Defendants The defendants fall into five categories: The Officer Defendants — Erin Callan, Richard S. Fuld, Christopher M. O’Meara, Joseph M. Gregory, and Ian Lowitt. Fuld was Lehman’s chairman and chief executive officer. O’Meara was its chief financial officer, controller, and executive vice president from 2004 until December 1, 2007, when he became the global head of worldwide risk management. Gregory was Lehman’s president and chief operating officer from May 2004 until June 2008. Callan served as chief financial officer and executive vice president from December 2007 until June 12, 2008. Lowitt then succeeded Callan as chief financial officer on June 12, 2008, and remained in that position until Lehman filed for bankruptcy on September 15, 2008. The Director Defendants — five former Lehman directors — all served on Lehman’s Finance and Risk Committee, which had the “responsibility to review and advise the Board of Directors on the financial policies and practices of the company, review[ed] significant capital transactions and respective risks involved, and ensur[ed] the accuracy and completeness of applicable public filings they signed.” Each of them is alleged to have signed at least one of the Lehman 2001, 2005 and 2006 Registration Statements (the “Registration Statements”). The twenty-four Underwriter Defendants, financial institutions that underwrote portions of the Offerings that plaintiffs purchased. Ernst & Young LLP (“E & Y”), Lehman’s outside auditor for the relevant time period. Its audit opinions were incorporated by reference into the Registration Statements and the relevant offering documents for the securities at issue in this case. It reviewed interim financial statements during this time as well. Kathleen Fuld, the wife of Richard Fuld. She is named only in a fraudulent conveyance claim. II. The CFAC The CFAC alleges that plaintiffs’ purchases all were made pursuant to the Registration Statements, which were supplemented or amended by prospectuses, prospectus supplements, product supplements and pricing supplements. Plaintiffs- — largely tracking the allegations of the TAC in the E/D Class Action— assert that the Offering Documents made false statements as to material facts, omitted to state facts necessary to make the statements that were made not misleading, or breached duties to disclose material facts in a number of areas. The principal claims relate to Lehman’s (1) alleged use of Repo 105 to reduce reported net leverage, (2) alleged overstatement of the value of real estate assets, (3) allegedly misleading disclosures regarding its liquidity, risk management practices, and concentrations of risk, and (4) accounting practices. These claims are brought under Sections 11 and 15 of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act against individual defendants and E & Y and under various provisions of California common law and statutes against varying groups of defendants. The allegations of the CFAC in this case are not identical to those in the TAC in the E/D Class Action. But they are quite similar and relate to the same alleged disclosure failures and fraud by Lehman. As these are set out in considerable depth in E/D Class Action 1, it is unnecessary to recapitulate all of the alleged disclosure irregularities in detail. The Court therefore reserves discussion of specific allegation bases of liability to those points at which these plaintiffs argue that a different result is warranted here by virtue either of new authority or of differences between the pleadings at issue in the two cases. III. Motions to Dismiss This decision deals with four motions to dismiss portions of the CFAC. The first motion was brought by the Individual Defendants, who challenge, inter alia, (1) the timeliness of certain of plaintiffs’ Securities Act claims, (2) the existence of actionable misstatements or omissions alleged in plaintiffs’ Securities Act and Exchange Act claims, (3) whether plaintiffs adequately have alleged scienter as to their Exchange Act claims, (4) all of plaintiffs’ common law claims, for reasons similar to those they raise in challenging both the Securities Act and the Exchange Act claims, and (5) all of plaintiffs’ claims under the California Corporations Code, again for largely similar reasons. All but three of the Underwriter Defendants challenge the only claim in the CFAC in which they are named, that under California Corporations Code Section 25504. They assert that (1) plaintiffs’ claims are barred by the applicable statutes of limitations and of repose, (2) plaintiffs have failed adequately to plead their Section 25504 claim, (3) the only remedy available to those plaintiffs who still hold the securities on which their claims are based is rescission, which the Underwriter Defendants contend they cannot provide under California law, and (4) Zenith’s claims under this section are precluded under the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), as Zenith’s suit is a “covered class action” under the statute. Underwriter defendant HVB Capital Markets, Inc. (“HVB”) separately moves to dismiss the consolidated actions in which it is named — those brought by plaintiffs Vallejo and Contra Costa. It joins in the Underwriter Defendants’ motion to dismiss. Its primary argument is that the Section 25504 claim advanced against it — the only claim it faces — was untimely. It asserts also that the Section 25504 claim is insufficient. Finally, Ernst & Young too moves to dismiss. It relies primarily on (1) joinder in certain arguments advanced by the Individual Defendants, particularly that certain of plaintiffs’ Section 11 claims are barred by the three-year statute of repose set out by Section 13 of the Securities Act, (2) joinder in the Underwriter Defendants’ motion to dismiss insofar as it asserts that there is not a valid claim under California Corporations Code Section 25504, and (3) incorporation of an argument made by certain underwriter defendants in Washington State Investment Board v. Fuld, to the effect that the claims asserted against them based on Lehman’s Repo 105 activity are barred by the statute of repose because those claims first were asserted against them in an amended complaint filed more than three years after plaintiffs purchased their securities. Discussion I. Legal Standard In deciding a motion to dismiss, a court ordinarily accepts as true all well pleaded factual allegations and draws all reasonable inferences in the plaintiffs favor. In order to survive such a motion, “the plaintiff must provide the grounds upon which [its] claim rests through factual allegations sufficient ‘to raise a right to relief above the speculative level’ ” and “state a claim for relief that is plausible on its face.” When passing on such a motion, a court considers the complaint and “any written instrument attached to the complaint, statements or documents incorporated into the complaint by reference, legally required public disclosure documents filed with the SEC, and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit.” If matters outside the pleadings are presented and not excluded, Rule 12(d) ordinarily requires a court to convert the motion to dismiss into one for summary judgment and to provide the parties with the opportunity to present all pertinent materials. That Rule, however, is aimed at ensuring that the plaintiff has notice of what the court might consider in deciding the motion. The need to convert a Rule 12(b)(6) motion into a summary judgment motion “is largely dissipated,” however, when “plaintiff has actual notice of all the information in the movant’s papers and has relied upon these documents in framing the complaint.” This is particularly true for documents that are “integral to the complaint,” but that the plaintiff has chosen not to attach or incorporate by reference. In addition, a document that is integral to a complaint in the sense that the plaintiff had actual notice of and relied upon it in framing the complaint, is properly considered, albeit not for the truth of the matters asserted, notwithstanding that it has not been attached to or incorporated by reference into the complaint. Averments of fraud are subject to a higher standard. Such assertions must satisfy the heightened pleading standards of Rule 9(b) and, where applicable, the Private Securities Litigation Reform Act (“PSLRA”). Accordingly, the CFAC, to the extent it makes fraud claims, 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.” As to scienter, a complaint must “state with particularity facts giving rise to a strong inference that the defendant acted with the requisite state of mind.” The requisite state of mind is an intent to “deceive, manipulate, or defraud.” Sufficient allegations of recklessness — “an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it” — satisfy the scienter requirement. truth of the matters asserted, the point is academic. In any case, for reasons discussed below, the Examiner's Report would not warrant dismissal of any claims based on the due diligence defense even if its statements and conclusions properly were considered for their truth. In evaluating whether a complaint sufficiently pleads a “strong inference of scienter,” courts must consider all the facts alleged, inferences favoring plaintiffs rationally drawn from the facts, as well as “plausible, nonculpable explanations for the defendant’s conduct.” A complaint will survive a motion to dismiss “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.” A complaint may plead scienter by alleging facts showing either that the defendants had both “a motive and an opportunity” to commit fraud or that there is “strong circumstantial evidence of conscious misbehavior.” To establish a strong inference of scienter on the basis of motive and opportunity, plaintiffs must allege that defendants “benefitted in some concrete and personal way from the purported fraud.” Motives common to most corporate officers, however, are insufficient. If plaintiffs have not sufficiently alleged motive and opportunity, they may rely upon allegations of strong circumstantial evidence, “ ‘though the strength of the circumstantial allegations must be correspondingly greater’ if there is no motive.” A complaint sufficiently alleges strong circumstantial evidence of scienter when it alleges that defendants (1) “benefitted in a concrete and personal way from the purported fraud,” (2) “engaged in deliberately illegal behavior,” (3) “knew facts or had access to information suggesting that their public statements were not accurate,” or (4) “failed to check information they had a duty to monitor.” II. Securities Act Claims The CFAC asserts Section 11 claims against individual defendants Fuld, Akers, Berlind, Kaufman, Evans, O’Meara, Hernandez and Callan, as well as Ernst & Young, based upon allegedly false and misleading statements in Lehman’s financial statements that were incorporated into the Offering Documents. It asserts Section 15 claims against Officer Defendants Fuld, O’Meara, Callan and Lowitt on the theory that they allegedly controlled Lehman, which is alleged to have been a primary violator of Section ll. Defendants argue that these claims are untimely and that the CFAC does not sufficiently state a claim for relief. A. Timeliness Section 13 of the Securities Act provides that “[i]n no event shall any ... action be created under [Section 11] ... more than three years after the security was bona fide offered to the public.” As this Court has noted, the three year statute of repose set forth in Section 13 provides an “absolute” limit. Defendants challenge on Section 13 grounds the timeliness of plaintiffs’ claims with respect to eleven.of their purchases. Plaintiffs concede that the claims based on eight of them are untimely. They disagree as to whether three of the purchases made by plaintiffs Burbank, Monterey, and Contra Costa — which occurred on May 9, 2006, October 1, 2007, and February 5, 2008 — are barred by the statute of repose. The pivotal question is whether the plaintiffs have alleged facts from which it reasonably might be inferred that these three purchases occurred less than three years after each of the securities involved “was bona fide offered to the public.” The starting point for this analysis the Second Circuit’s observation that “ordinarily, a security is ‘bona fide offered to the public’ at the effective date of the registration date.” To be sure, the phrase “bona fide offered to the public, recognizes that there will be circumstances in which stock covered by an effective registration statement has not genuinely been offered to the public, in which case the commencement of the repose period may begin later than the effective date of the registration statement. But the period otherwise normally begins to run “when the security is jfirst bona fide offered.” It is undisputed that the registration statements for these three securities became effective on May 18, 2005, May 18, 2005, and May 30, 2006, respectively. The CFAC does not allege that the securities thus registered were not genuinely available on those dates. The repose period for each therefore began on the effective date of its registration statement, which in each case antedated the filing of the purchaser’s complaint by more than three years. Plaintiffs nevertheless contend that the issuer in each case filed a post-effective pricing supplement to the registration statement. They suggest that the repose periods began to run from the dates of those supplements, citing Finkel v. Stratton Corp. But Finkel discussed only resetting the repose clock by virtue of prospectus amendments pursuant to 17 C.F.R. § 229.512(a)(1)(h), which is not the situation here. Nor do plaintiffs point to any authority supporting their claim that the clock is reset by the filing of pricing supplements, which would be at odds with P. Stolz Family P’ship v. Daum. Accordingly, (1) all Securities Act claims of plaintiffs City of Auburn, Contra Costa Water District, Mary A. Zeeb, Monterey County Treasurer, and Zenith, and (2) the Securities Act claims of the City of Burbank, San Mateo County, and the Vallejo Sanitation & Flood District with respect to the securities bearing CUSIP numbers 52517PG96, 52517PXU0, 52517PC58, 52517PYN5, and 52517PXT3, are dismissed B. The Sufficiency of the Remaining Section 11 Claims This leaves Securities Act claims by four plaintiffs with respect to ten remaining purchases of six different Lehman securities. 1. Legal Standafds Section 11 claims impose a “stringent standard of liability” that “places a relatively minimal burden on a plaintiff.” A plaintiff bringing a Section 11 claim must allege that: “(1) she 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.’ ” Only five categories of persons may be held liable under Section 11— issuers, those who have signed a registration statement, an issuer’s directors, “experts” who have consented to having their reports included in the registration statement, and underwriters of the offered securities. 2. The Present Case The CFAC alleges Section 11 claims against individual defendants Fuld, Akers, Berlind, Daufman, Evans, O’Meara, Hernandez, and Callan, (the “Securities Act Defendants”) and Ernst & Young. The Securities Act Defendants challenge Plaintiffs’ claims primarily on the grounds that plaintiffs (1) allege misstatements or omissions previously dismissed in E/D Class Action I, and (2) purchased many of the offerings before the alleged occurrence of certain misstatements and omissions and thus could not have been injured by them. a. Alleged Misstatements and Omissions Dismissed in the E/D Class Action The CFAC alleges that Lehman’s financial statements and Offering Documents, as well as certain other statements, were materially misleading in that they Materially understated its net leverage by their use and accounting for Repo 105 transactions including their accounting for the transactions as sales rather than financings in alleged violation of SFAS 140. Overstated the value of Lehman real estate assets, notably that of Arch-stone, Failed adequately to disclose its liquidity, including by (a) omitting to disclose the liquidity impact of Repo 105 transactions as allegedly required by Item 303 of Regulation SK, and (b) including in Lehman’s reported liquidity pool encumbered or illiquid assets, Misled as to Lehman’s risk management practices including by (a) misleading as to compliance with concentration, balance sheet, and value-at-risk (“VaR”) limits, and (b) excluding risky principal investments from stress testing, Failed properly to disclose concentrations of risk in Alt-A loans and commercial real estate, and Misrepresented the conformity of Lehman’s financial statements with generally accepted accounting principles (“GAAP”) with respect to the accounting for Repo 105 transactions and alleged failure to comply with SFAS 157 and Item 303 of Regulation S-K. These allegations substantially mirror the TAC’s allegations of false and misleading statements and omissions in the E/D Class Action. The Court there: Dealt with the claims relating to the Repo 105 transactions by (a) dismissing as insufficient allegations that Lehman’s financial statements improperly accounted for the Repo 105 transactions as sales rather than financings under SFAS 140 but (b) upheld the sufficiency of the other Repo 105-related allegations. Dismissed as insufficient the allegations concerning Lehman’s statements that it ensured that appropriate risk mitigants were in place but sustained the sufficiency of the allegations that Lehman exceeded its risk limits, stated that it used stress testing to evaluate risks associated with its real estate portfolio and exceeded its stated VaR limits. Dismissed as insufficient the allegations of alleged misstatements and omissions related to liquidity. Dismissed as insufficient allegations concerning the concentration of risk in Lehman’s leveraged loans; that Lehman failed adequately to disclose significant concentrations of credit risk in its Alt-A holdings prior to February 20, 2008; and that Lehman failed adequately to disclose significant concentrations of credit risk in commercial real estate holdings based on statements in Offering Materials other than Lehman’s 2007 Report on Form 10-K. But it sustained the sufficiency of the allegations that Lehman, in violation of SFAS 107, failed adequately to disclose significant concentrations of credit risk in its Alt-A holdings in pertinent documents for offerings after February 20, 2008, and in its commercial real estate holdings in its 2007 Report on Form 10-K. Dismissed as insufficient the allegations regarding Lehman’s valuation of its commercial real estate assets. Thus, the ruling in E/D Class Action I appears at first blush to be substantially dispositive of the parties’ contentions with respect to the sufficiency of the CFAC’s allegations of false and misleading statements and omissions. Plaintiffs, however, contend that the allegations of the CFAC have improved upon those at issue in the E/D Class Action to an extent that they now are sufficient on several points and that the Court should resolve favorably to them an issue that it did not reach in E/D Class Action I, viz. “whether Item 303 of Regulation S-K ... required disclosure” of the Repo 105 transactions. The Court begins with the Item 303 issue and then proceeds to the alleged improvements in the allegations of this complaint as compared to the TAC. i. Regulation S-K item 303 The Court declined in E/D Class Action I to decide whether Item 303 of Regulation S-K required the disclosure of the Repo 105 transactions because that disclosure, assuming the truth of the allegations of the TAC, was required independently of Item 303, because Lehman’s statements regarding its net leverage otherwise were materially misleading. There is no need to decide the Item 303 question now for precisely the same reason. The Court therefore declines to do so. ii. SFAS HO and Repo 105 transactions Plaintiffs, with a certain degree of understatement, agree that the CFAC’s “allegations related to Repo 105 transactions, and the failure to comply with SFAS 140, are largely aligned with the Class complaint,” which the Court found insufficient in that respect. But they assert that CFAC now alleges that the Repo 105 transactions improperly were treated as sales because Lehman maintained control over the assets it received in an amount that was “equivalent to the amount of securities pledged as collateral.” This, they contend, is sufficient. As this Court already has noted “SFAS 140 contains ‘standards for accounting for securitizations and other transfers of financial assets and collateral.’ Under SFAS 140, whether a transferred asset properly is accounted for as a sale or a financing is dependent on the degree of control that the transferor has over the asset. If the transferor retains control ... over the asset, it should recognize the asset on its balance sheet. If the transferor surrenders control, ‘those assets shall be accounted for as a sale.’ ” A “transferor has surrendered control ... if and only if all of [three] conditions are met, among them that the “transferor [not] maintain effective control over the transferred assets through ... an agreement that both entitles and obligates the transferor to repurchase” them. But, as the Court wrote previously: “A transferor maintains effective control over an asset pursuant to such an agreement only if, inter alia, ‘the transferor is able to repurchase [the assets] on substantially the agreed terms, even in the event of default by the transferee.’ This occurs only if ‘at all times during the contract term [the transferor] ha[s] obtained cash or other collateral sufficient to fund substantially all of the cost of purchasing replacement assets from others.’ The Court dismissed the allegations of alleged non-compliance with SFAS 140 in the TAC in the E/D Class Action because those plaintiffs had “fail[ed] to allege that Lehman obtained funds in the Repo 105 transactions sufficient to replace the transferred assets from others.” The plaintiffs here have sought to remedy that flaw by alleging that, while Lehman received $100 in cash for every “sale” of $105 in securities in a Repo 105 transaction, it did not account for the “5% haircut on the sale” as a loss, booking the $5 as a “derivative asset” instead. Therefore, plaintiffs assert, the $100 in cash Lehman received plus its bookkeeping entry of a $5 derivative asset in each such transaction totaled “exactly the same amount of collateral that Lehman transferred in a Repo 105 transaction.” They argue that Lehman therefore received funds in each Repo 105 transaction sufficient to replace the transferred assets from others and thus retained control of the transferred assets. This contention is readily answered. As the Examiner’s Report, which is incorporated by reference in the CFAC on this point, made clear, the $5 derivative asset that Lehman booked represented “the market value of the ‘overcollateralization’ amount of the transaction.” While that overcollateralization presumably had value sufficient to justify booking it as an asset, the question remains whether it, together with the $100 of cash that Lehman received in each Repo 105 transaction, constituted, in the words of SFAS 140, “cash or other collateral sufficient to fund ... the cost of purchasing replacement assets.” But the $5 certainly was not cash. Nor is there anything in the CFAC or in plaintiffs’ papers to support a conclusion that it was collateral or that its internal book entry could have been used to buy anything. The simple fact of the matter is that Lehman received $100 for each $105 in assets it transferred, which was not sufficient to “fund” the purchase of a “replacement” asset. As Lehman therefore did not relinquish control within the meaning of SFAS 140, it was not obligated by that Standard to report the Repo 105 transactions as sales. Plaintiffs’ claims as to violations of SFAS 140 resulting from Repo 105 transactions therefore are dismissed for substantially the same reasons as were the corresponding allegations in the E/D Class Action. in. Valuation of Real Estate and SFAS 157 Both the E/D Class Action TAC and the CFAC allege that Lehman overstated the value of real estate assets because its valuation models failed to comply with SFAS 157. The Court dismissed those allegations in the E/D Class Action on the ground that valuations are matters of judgment and, because the TAC failed to allege that “Lehman had not truly believed that the models, assumptions and inputs ... produce[d] fair values in accordance with SFAS 157,” it did not adequately allege that Lehman’s judgments as to value were false and misleading. The CFAC attempts to plug this hole principally by asserting that some of the relevant assets were “valued using outdated and inaccurate pricing models that Lehman employees described as ‘worthless’.” In fact, however, this assertion is inaccurate in that the quoted language, which comes from the Examiner’s Report, (1) described one comment about a particular valuation method, and (2) was attributed not to a Lehman employee, but to an outside consultant. But putting all that aside, and taking it in context, the Examiner’s fundamental points — which were considerably more nuanced than the use that plaintiffs’ would make of their inaccurate reference to a snippet contained in his discussion — were two: Lehman realized in late 2007 that the CAP * 105 model it used as part of the PTG valuation process — which was a “prudent approach [in] an up market” — was no longer an “appropriate methodology.” Lehman thus “began to enact a plan to change ... the reporting system,” which included replacing Cap * 105. However, recognizing repeatedly that valuation of assets such as these are matters of judgment and that there is a wide range of reasonable valuations for a given asset, “ Lehman was unable quickly to replace Cap * 105 with a valuation methodology that employed market based yields.” There was not “sufficient evidence that Lehman’s failure to employ appropriate yields for PTG assets during the second and third quarter of 2008 supports a finding that any Lehman officers breached their fiduciary duties. Although there is sufficient evidence to demonstrate that the valuation methodology for PTG assets did not rely on market based assumptions, there is insufficient evidence to demonstrate that any Lehman officer acted with an intent to produce incorrect values or conducted the valuation process in a reckless manner. While Lehman’s staffing was inadequate to comprehensively value or test the significant number of positions in the PTG portfolio, and there was also questionable judgment in the selection of yields, the valuation determined by Lehman did not result from actions (or omissions) that would support a claim of a breach of fiduciary duty.” In short, the CFAC, like the TAC in the E/D Class Action, fails to allege that Lehman believed that the valuations used in its financial and other statements were unreasonable or that its financial statements did not comply with SFAS 157. Plaintiffs’ claims based on Lehman’s alleged violation of SFAS 157 are dismissed for substantially the reasons set forth in the E/D Class Action I opinion. b. Viability in this Case of Alleged Misstatements and Omissions Upheld as Sufficient in the E/D Class Action The remainder of the plaintiffs’ Section 11 allegations are similar to claims made in the Equity/Debt Class Action. But the defendants argue that there is an added complication here — this case rests in significant part on securities purchases made prior to the alleged misstatements and omissions. Accordingly, they contend, the claims based upon alleged misstatements and omissions, even those alleged sufficiently, must be dismissed because there is can be no logical connection between the purchases and the subsequent disclosure failures. We discuss these in turn. i. SFAS 107 and credit risk in Alt-A holdings First, the Court previously held sufficient the allegation that Lehman failed adequately to disclose concentrations of credit risk in its Alt-A holdings in violation of SFAS 107, but only as to SEC filings made after February 20, 2008, the first of which was an April 8, 2008 Form 10-Q. Plaintiffs do not dispute this holding or suggest that there is anything new in the CFAC that would alter it. The last of plaintiffs’ alleged purchases in this case was made on March 31, 2008, nine days before the first of the allegedly misleading statements regarding concentrations of credit risk in Lehman’s Alt-A holdings. Accordingly, the claims based on alleged failure adequately to disclose concentrations of credit risk in Alt-A holdings in violation of SFAS 107 are dismissed. ii. SFAS 107 and credit risk in commercial real estate holdings The situation is similar with respect to allegations that Lehman failed adequately to disclose concentrations of credit risk with respect to commercial real estate holdings (“CRE”). The Court in E/D Class Action held that the TAC sufficiently alleged that Lehman believed that it had significant concentrations of credit risk in CRE from and after November 2007 and, in consequence, that there was a sufficient Section 11 claim on this basis “only with respect to the alleged omissions [on this subject] in the 2007 10-K, issued in December 2007.” The Section 11 claims with respect to disclosure of concentrations of credit risk in CRE in prior periods and periods subsequent to Lehman’s disclosure of that risk in its 1Q2008 Form 10-Q on April 8, 2008 were dismissed. Plaintiffs here challenge neither that ruling nor its applicability to the CFAC. Accordingly, the Section 11 claims based on the alleged faulty disclosure with respect to concentration of credit risk in CRE, save with respect to the five purchases made during the time period between Lehman’s awareness of the concentration and April 8, 2008, are dismissed. in. Materiality of Repo 105 transactions The CFAC claims that defendants are liable for misstatements and omissions relating to the Repo 105 transactions for the period 2001 through 2008, asserting that Lehman used the Repo 105 transactions throughout that period in a “material” way without adequate disclosure. Many of the defendants counter that claims based on material misstatements or omissions with respect to Repo 105 transactions cannot succeed for purchases made before January 29, 2008, the date on which Lehman filed its 2007 Form 10-K. This argument is an attempt to spin gold out of straw. Defendants’ position rests on the fact that the Examiner's Report concluded that a trier of fact could find that Repo 105 transactions were used to create a materially misleading picture of Lehman’s financial condition beginning in late 2007. Even giving the movants the benefit of the implication that the Examiner believed that this had not been so earlier, however, this attempt to seek dismissal of this aspect of the CFAC on the basis of the Examiner’s Report would be fundamentally flawed. As previously indicated, the Court assumes that plaintiffs made sufficient use of the Examiner’s Report in the CFAC to regard it as incorporated by reference for purposes of this motion. Hence, it properly is considered, where appropriate, for the proposition that the statements it contains in fact were made by the Examiner. But that is quite a different matter from the propriety of its being considered for the truth of the statements it contains, let alone for accuracy of the opinions expressed by the examiner. The Court declines to limit the time period with respect to which plaintiffs may seek relief for the alleged failure to disclose the Repo 105 transactions on the basis of the Examiner’s opinion, assuming arguendo that he in fact held such an opinion, that the nondisclosure was not material prior to the end of 2007. This aspect of the motion is denied. iv. Risk limits Like the plaintiffs in E/D Class Action, plaintiffs here allege that Lehman regularly exceeded its purported risk limits and that its statements on the subject therefore were misleading. The Court sustained the sufficiency of that claim in E/D Class Action in light of the TAC’s allegation that Lehman had exceeded those limits every month from July 2007 to February 2008. The CFAC makes substantially the same allegation. Many of the movants argue that any claim that the statements regarding purported limits were misleading prior to July 2007 should be dismissed, as there are no allegations in the CFAC to support it. Plaintiffs do not even address the argument. Accordingly, any claim that Lehman’s statements prior to July 2007 regarding its purported risk limits, if plaintiffs indeed even make such a claim, is dismissed. v. Stress Tests Lehman’s Offering Materials stated that it used stress testing to evaluate risks associated with [its] real estate portfolios. Both the TAC in the E/D Class Action and the CFAC here allege that these statements were materially misleading because Lehman failed to disclose that it excluded many of its most risky principal investments from stress testing. In this case, however, the allegation is only that Lehman excluded those investments from its stress testing “in the first half of 2007.” Movants therefore argue that claims with respect to purchases of securities made prior to February 13, 2007, the first date in 2007 when Lehman filed a document with the SEC, should be dismissed because the CFAC alleges no disclosure irregularity on this subject in relation to earlier purchases. Again, plaintiffs do not respond to the argument, which is entirely sensible. Consequently, claims based on the alleged disclosure irregularities concerning stress testing made in relation to securities purchases prior to February 13, 2007 are dismissed. vi. VaR limits As noted elsewhere, VaR is an acronym for Value-at-Risk, which is a statistical measure of the potential loss in the fair value of a portfolio due to adverse movement in underlying risk factors. The TAC in E/D Class Action I and the CFAC here allege that Lehman’s statements regarding its VaR were false and misleading because both the firm and three of its business lines routinely exceeded the stated limits. The Court upheld the sufficiency of these allegations in E/D Class Action I, noting that the TAC breached its firm-wide VaR limit on 44 occasions during the class period and that the pleading alleged routine breaches in the three business lines, especially in view of a suggestion in Lehman’s 2007 Form 10-K that breaches of VaR were infrequent. Certain defendants now contend that claims based on the allegedly misleading disclosure concerning use of VaR limits should be dismissed with respect to securities purchases made before October 1, 2007 because the CFAC alleges that the departures from the firm-wade VaR limit occurred 44 times from mid-2007 through September 15, 2008 and those with respect to two of the business lines allegedly occurred only in the period no longer than mid-2007 through September 15, 2008. Again, plaintiffs do not respond to the point. Certainly plaintiffs who purchased their securities before the alleged misleading statements were made have no claim. Accordingly, claims based on purchases of securities made prior to mid-2007, the earliest date on which the CFAC alleges that the VaR statements were misleading, are dismissed. For present purposes, that date is fixed at July 1, 2007. c. Section 11 Claims against Callan As in the E/D Class Action, claims as to Callan may stand only “to the extent that the[y are] based on statements made in the SEC filings that she signed [as chief financial officer] and that were incorporated by reference in [the 2006 Registration] Statement.” Callan now argues that purchases made by plaintiffs here between December 1, 2007, when she became chief financial officer, and January 29, 2008, when Lehman’s 2007 10-K was filed, and which she is alleged to have signed, fail to state a claim under Section 11. She asserts that the CFAC alleges no specific misstatements during this time made either by her or in Lehman SEC filings that she signed. Plaintiffs respond that Callan signed Lehman’s December 13, 2007 Form 8-K, which they assert “detailed Lehman’s quarterly earnings for the fourth quarter of 2007” and that this document contained alleged misrepresentations that the Court has held to be legally sufficient in the preceding discussion, “including representations of net leverage rendered misleading by Repo 105 transactions.” As will appear, this Form 8-K is alleged to have been incorporated into the Offering Documents for one relevant purchase. The Court agrees that the CFAC sufficiently alleges that Callan signed the December 13, 2007 Form 8-K and that it contained material misstatéments It does not, however, allege any other such instances. Accordingly, the Section 11 claims as to Callan are dismissed except to the extent that they are based on statements made during the relevant time period. d. Section 11 Claims against Ernst & Young Ernst & Young does not attack the sufficiency of the CFAC’s alleged misstatements and omissions, but it does incorporate the other defendants’ arguments that many of plaintiffs’ Section 11 claims are barred by Section 13 of the Securities Act. Plaintiffs offer no reason why the result should be any different in Ernst & Young’s case. Accordingly, the rulings on that issue apply to Ernst & Young as well. In addition, Ernst & Young advances, again by reference, an argument made by certain underwriter defendants in a motion to dismiss Washington State Investment Board v. Fuld, another case that is a part of the MDL. It argues that “plaintiffs first predicated their Section 11 claims on Repo 105 activity by Lehman ... in amended complaints filed in August, September, and October, 2011 — more than three years [after] ... any offering on which any of plaintiffs’ Section 11 claims against EY is based.... Consequently, insofar as the Section 11 claims against EY are predicated on Lehman’s Repo 105 activity, these claims asserted in the [these] actions are barred by the applicable statute of repose.” Plaintiffs do not address this argument. Under Ernst & Young’s theory, no Section 11 “claim” first made by a party more than three years after a security is offered is timely under Section 13. Section 13, however, provides that no new “action” shall “be created under [Section 11] ... more than three years after the security was bona fide offered to the public.” Thus, the question really is whether plaintiffs’ allegations regarding Repo 105, added for the first time to their respective 2011 amended complaints, constituted new “actions” barred by the statute of repose. The original complaints filed by these plaintiffs all brought Section 11 claims against Ernst & Young based on alleged misstatements and omissions in the offering documents. These misstatements and omissions all were alleged to have been made in the annual and quarterly statements that “Lehman’s financial statements fairly presented the Company’s financial position ... in accordance with GAAP.” The original complaints therefore alleged that Ernst & Young had made material misstatements and omissions in violation of Section 11 because its audit opinions and reports were “clean” and stated that, in its view, Lehman’s financial statements had been prepared “in accordance with ... GAAP when in reality “[b]ased upon its annual audit and quarterly reviews, E & Y knew or recklessly disregarded the true financial condition and exposure of Lehman.” Additionally, plaintiffs’ original complaints contained allegations that Lehman “artificially inflate[d] the value of its bonds,” “took inadequate -write-downs,” had an “inadequate internal control structure,” and “was forced to account for many of [its] securitization deals as secured financings instead of sales.” The Examiner’s Report then was released in March 2010. Plaintiffs in this and other cases in the MDL amended their complaints, at least in part to reflect the Examiner’s findings regarding Lehman’s financial and accounting practices during the relevant time period. The amendments ultimately included, among other things, new allegations regarding the effect of Repo 105 transactions on net leverage and Lehman’s failure accurately to report the transactions and their effect in accordance with GAAP. These same allegations now appear in the CFAC. As to Ernst & Young, the CFAC still alleges that “[following each and every audit during the Relevant Period, E & Y issued an unqualified audit report on the annual financial statements of Lehman .... [and] [t]hese audit reports were false.” It further alleges that these “Audit Reports certified that Lehman’s financial results were ... prepared in accordance with GAAP.” but that “[t]hese reports were false and misleading because E & Y failed to comply with the applicable standards for audit review engagements.” The CFAC asserts that because “E & Y had no reasonable basis to believe that material modifications should not have been made to Lehman’s financial statements,” it was aware or should have been aware that Lehman’s financial statements were not in, compliance with GAAP. The fundamental allegations regarding Ernst & Young therefore have changed little between the original and the present complaints. At their core, plaintiffs’ Section 11 claims against Ernst & Young are now — and have always been — that the auditor certified that Lehman’s financial reporting was in accordance with GAAP, even though it was or should have been aware that this was not true, because it in turn was aware of various accounting devices and financial mechanisms that Lehman was using to portray its condition as better than it actually was. Supplemental allegations identifying Repo 105 as one of the means Lehman used to accomplish this alleged misreporting and the misstatements that ensued therefore did not create a new “action” as to Ernst & Young. They simply provide additional support for the Section 11 claims that plaintiffs have been asserting from the beginning. Accordingly, plaintiffs’ allegations based on Lehman’s use of Repo 105 transactions, their effect on net leverage, their compliance with GAAP, and the alleged misstatements that Ernst & Young made to that effect, are not barred by the statute of repose. C. Section 15 Claims Section 15 liability is derivative of liability under Sections 11 and 12, creating liability for any person who “controls” a primary violator of Section 11 or Section 12 of the Securities Act. Absent a primary violation of Section 11 or 12 by another person, there can be no liability for a controlling person under Section 15. Plaintiffs have asserted Section 15 claims only as to defendants Fuld, O’Meara, Callan, and Lowitt. These defendants argue that plaintiffs have not adequately pled that they controlled a primary violator of Section 11. They base this peculiar contention on the assertion that neither Lehman nor LBI — the entities they are alleged to have controlled and that are alleged to have violated Sections 11 and 12 — can be a “primary violator” here because neither “is ... a defendant.” The kindest thing to be said about this argument is that it is entirely unsupported by the language of the statute or any persuasive authority. Equally unfounded is their contention that only control persons who have signed a relevant Registration Statement may be held liable under Section 15. To the extent that plaintiffs have asserted legally sufficient claims under Section 11 based on misstatements and omissions by Lehman or LBI, their Section 15 claims against these individual defendants are sufficient as well. III. Exchange Act Claims We already have discussed earlier the pleading standards that govern and the elements of securities fraud claims. Defendants’ motions here challenge the sufficiency of the CFAC’s allegations of two of these elements — that is, whether plaintiffs have adequately pled a material misrepresentation or omission of fact, and whether they have adequately pled scienter. A. 10b-5 Claim as to the Officer Defendants Section 10(b) claims are alleged against all of the Officer Defendants. 1. Existence of Materially False and Misleading Statements or Omissions The CFAC Exchange Act claims are based principally on the same categories of alleged misstatements and omissions in the Offering Documents discussed in the Securities Act section above. The CFAC thus alleges misstatements and omissions sufficiently as to the Officer Defendants under the Exchange Act to the same extent that it does under the Securities Act. 2. Scienter a. Motive and Opportunity The CFAC does not allege that any of the Officer Defendants had a motive to commit the alleged fraud beyond saying that they had goals “ ‘possessed by virtually all corporate insiders’ such as the desire to maintain a high credit rating for the corporation or otherwise sustain the appearance of corporate profitability.” Thus, the Court’s determination in E/D Class Action I that the TAC in that case: “fails to allege that any of the defendants had a motive to commit the alleged fraud and fails also to allege that any of them benefitted from the alleged misrepresentations and omissions in a concrete way. Accordingly, it fails to allege scienter on a motive-and-opportunity basis.” applies equally to the CFAC here. b. Circumstantial Evidence of Conscious Misbehavior or Recklessness Defendants challenge the sufficiency of most of the scienter allegations of the CFAC. Their arguments focus on the allegations relating to (1) Repo 105, (2) concentrations of credit risk, (3) valuation of CRE, (4) liquidity, and (5) GAAP. i. Repo 105 Allegations In E/D Class Action I, this Court held that the TAC “allege[d] sufficient red flags to give rise to an inference of scienter with respect to the Repo 105 transactions for any [Officer] Defendant who, because of his or her corporate role, responsibilities, and actions, knew or recklessly did not know of the misleading nature of the financial reporting of [the Repo 105] transactions.” The CFAC in this case contains substantially the same allegations and thus, at least at first blush, would appear to be sufficient. Nevertheless, attempting to make a virtue out of necessity, the Officer Defendants contend that new allegations, added by plaintiffs in an attempt to bolster their case against Ernst & Young, require a different result as to the Officer Defendants. The starting point for this interesting argument is that the CFAC is said to contain “qualitatively different” allegations regarding E & Y’s knowledge and approval of Lehman’s Repo 105 policy. These new allegations are said to demonstrate “clear nonculpable explanations” for Lehman’s alleged disclosure deficiencies. The CFAC alleges that “at the time Lehman first developed its internal policy for Repo 105 transactions, its expert outside auditor E & Y knew of, vetted and approved the policy.” In consequence, the argument goes, “plaintiffs’ allegations describing E & Y’s approval of Lehman’s use of Repo 105 transactions provide a strong competing nunculpable explanation for the asserted conduction and negate any inference of scienter that may be drawn individually against any of the Officer Defendants.” Essentially the same argument was made and rejected in E/D Class Action I, albeit without the benefit of the more detailed allegations with respect to Ernst & Young. But the new allegations add nothing material. As the Court wrote previously, “Defendants argue that the ‘more compelling inference is that the[y] had an honest belief that the [Repo 105] transactions were legal, as well as accounted for and disclosed in accordance with GAAP, and were legitimate sales transactions for business units to obtain funding and stay within their balance sheet targets.’ They point to the fact that E & Y knew about Lehman’s Repo 105 transactions and approved of their use and the accounting for them, and to the fact that Linklaters provided a ‘true sale at law' legal opinion, purportedly satisfying one of SEAS 140’s requirements. They point also to the fact that the transactions were used by many of the firm’s business units and that Lehman could have reduced its net leverage to the same extent by selling the collateral assets outright, but that Repo 105 was less costly. “The suggestions that defendants believed that the Repo 105 transactions were permissible in and of themselves and that the financial reporting for them, in and of itself, complied with GAAP does not address the core of plaintiffs’ claims — that they were used to reduce temporarily and artificially Lehman’s net leverage and paint a misleading picture of the company’s financial position at the end of each quarter. The allegations that these transactions were used at the end of each reporting period, in amounts that increased as the economic crisis intensified, to affect a financial metric that allegedly was material to investors, credit rating agencies, and analysts support a strong inference that the Insider Defendants knew, or were reckless in not knowing, that use of the Repo 105 transactions and the manner in which they were accounted for painted a misleading picture of the company’s finances.” The Officer Defendants nevertheless rely on the new allegations, which simply elaborate on the prior allegation that “E & Y knew about Lehman’s Repo 105 transactions and approved of their use and the accounting for them,” and rely heavily on Tellabs, Inc. v. Makor Issues & Rights, Ltd. All to no avail. Tellabs stands at least for the propositions that a court passing on a motion to dismiss a complaint such as this on scienter grounds (1) “must take into account plausible opposing inferences,” (2) “[t]he strength of an inference cannot be decided in a vacuum,” (3) “[t]he inquiry is inherently comparative: How likely is it that one conclusion, as compared to others, follows from the underlying facts?,” and (4) the requisite strong inference of scienter is present “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.” Here, the Officer Defendants argue essentially that they all acted without culpable intent because Ernst & Young “knew of, vetted and approved” Lehman’s internal policy for Repo 105 transactions “at the time Lehman first developed” it. That, the Court assumes without deciding, would be a permissible inference. But this complaint, like that at issue in E/D Class Action I, alleges that Lehman repeatedly engaged in billions of dollars of Repo 105 transactions to manipulate the important net leverage ratio precisely for the purpose of understating the company’s leverage and vulnerability on quarterly financial reports, only to reverse the transactions immediately after the reporting dates, all without disclosure and all without any proper business purpose other than presenting the company’s finances in a better light than that in which they otherwise would have appeared. The amounts of these transactions increased quarter-by-quarter as Lehman’s situation became more and more precarious. As detailed in E/D Class Action I, three of the five Officer Defendants were chief financial officers of Lehman and the other two were its chief executive and chief operating officers, and all allegedly were well aware of what was going on. The best that can be said for the Officer Defendants in these circumstances is that Ernst & Young’s knowing approval, if that is what ultimately is established, of Lehman’s “window dressing” of its financial statements to manipulate its net leverage might give rise to an exculpatory inference that a jury would find persuasive. But a contrary inference would be cogent and at least as compelling-— namely, that the Officer Defendants knew full well of the misleading effect of their failure to disclose the Repo 105 transactions, sought to have Lehman benefit from that deception, and intended to use Ernst & Young as a fig leaf if the house of cards came tumbling down, as indeed it did. The Court rejects the Office Defendants’ argument on this point. ii. Concentrations of Credit Risk Plaintiffs’ opposition papers note that the Court previously determined that scienter had been pled sufficiently as to defendants Fuld and Gregory regarding concentrations of CRE credit risk. This conclusion extended only as to the Executive