UNITED STATES DISTRICT COURT SOUTHERN … [Dkt. 0572] Memo of Law...united states district court...

UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK

In re:

LEHMAN BROTHERS SECURITIES ANDERISA LITIGATION

*Civil Action 09 MD 2017*(LAK)

This Document Applies to:

State Compensation Insurance Fund v. Richard S. Fuld, et al.,11I Civ. 3892 (LAK)

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BANK DEFENDANTS' MEMORANDUM OF LAW IN SUPPORT OF THEIR.MOTION TO DISMISS PLAINTIFF'S AMENDED COMPLAINT

CLEARY GOTTLIEB STEEN & HAMILTON LLPOne Liberty PlazaNew York, NY 10006(212) 225-2000

Case 1:09-md-02017-LAK Document 572 Filed 01/06/12 of 22

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES..........................................................................11

PRELIMINARY STATEMENT......................................................................1

FACTUAL BACKGROUND........................................................................ 2

ARGUMENT ...................................................................................... 3

1. ALL OF SCIF'S CLAIMS ARE TIME-BARRED ....................................... 3

A. SCIF's Securities Act Claims Are Barred ByThe Statute Of Repose .............................................................. 3

B. SCIF's State Law Claims Are Time-BarredUnder California Law............................................................... 4

II. SCIF'S STATE LAW CLAIMS ARE ALSO PRECLUDED BY SLUSA ............ 6

A. The Consolidation Of SCIF's Action With TheLehman Holdings Class Action Makes It Part OfA "Covered Class Action". ......................................................... 7

B. SCIF Cannot Avail Itself Of The Narrow State-ActorException To SLUSA ............................................................... 8

111. INDEPENDENTLY, THE AMENDED COMPLAINT FAILS TOSTATE A CLAIM ........................................................................... 9

A. SCIF Has Not Established Section 12 Standing.................................. 10

B. SCIF Relies On Allegations Of MisstatementsAnd Omissions That The Court Has AlreadyDismissed As Inadequate........................................................... 12

CONCLUSION ....................................................................................... 13


TABLE OF AUTHORITIESPage(s)

RULES AND STATUTES

15 U.S.C. § 77m ....................................................................................... 3

15 U.S.C. § 77p(d)(2)(A) .......................................................................... 8

15 U.S.C. § 77p(f)(2)(A)(ii).......................................................................... 7

15 U.S.C. § 77r(b)(1)(C).............................................................................. 6

Cal. Code Gov't § 11770.5 ........................................................................... 8

Cal. Code Gov't § 11793 .......................................................................... 8

Cal. Code Gov't § 11873 .......................................................................... 8

Cal. Corp. Code § 25506(b) .......................................................................... 5

Cal. Rev. & Tax. Code § 202(a)(4).................................................................. 8

Cal. Rev. & Tax. Code § 12203 ..................................................................... 8

CASES

Akerman v. Oryxi Commc'ns. Inc.,609 F. Supp. 363 (S.D.N.Y. 1984), aff d, 810 F.2d 336 (2d Cir. 1987).........................11I

Albano v. Shea Homes Ltd. P'ship,254 P.3d 360 (Ariz. 2011)............................................................................ 4

Amorosa v. Ernst & Young LLP,672 F. Supp. 2d 493 (S.D.N.Y. 2009)............................................................... 7

Ashcroft v. Igbal,556 U.S. 662, 129 S. Ct. 1937 (2009)............................................................. -1 0, 11

Bell Ati. Corp. v. TwoMbly,550 U.S. 544, 127 S. Ct. 1955 (2007)............................................................... 9

Cajuste v. Lechworth Developmental Disabilities Serv.,No. 03 Civ. 0 161 (RCC), 2005 WL 22863 (S.D.N.Y. Jan. 5, 2005)............................. 4

Capri v. Mup~hy,856 F.2d 473 (2d Cir. 1988) ......................................................................... 10

ii


Pag~e(s)

Casey v. Merck & Co.,653 F.3d 95 (2d Cir. 2011)............................................................................ 5

Clemens v. DaimlerChrysler Corp.,534 F.3d 1017 (9th Cir. 2008) ...................................................................... 5-6

Cohain v. KliMley,Nos. 08 Civ. 5047(PGG), 09 Civ. 4527(PGG), 09 Civ. 10584(PGG),2010 WL 3701362 (S.D.N.Y. Sept. 20, 2010)...................................................... 5

Cortec Indus., Inc. v. Sum Holding L.P.,949 F.2d 42(2d Cir. 199 1)............................................................................ 10

Courtesy Ambulance Serv. of San Bernardino v. Superior Court,8 Cal. App. 4th 1504 (Cal. Ct. App. 1992) ......................................................... 9

Dernings v. Nationwide Life Ins. Co.,593 F.3d 486 (6th Cir. 2010) ........................................................................ 8

Deveny v. Entropin, Inc.,42 Cal. Rptr. 3d 807 (Cal. Ct. App. 2006).......................................................... 5

Factors Etc., Inc. v. Pro Arts. Inc.,652 F.2d 278(2d Cir. 198 1)......................................................................... 6

Felix v. State Comp. Ins. Fund,No. SACV 67-006 1 AG (MLGx), 2007 WL 3034444 (C.D. Cal. Oct. 3, 2007)............... 8, 9

Footbridge Ltd. Trust v. Countrywide Fin. Corp.,770 F. Supp. 2d 618 (S.D.N.Y. 2011)............................................................... 4

Freidus v. ING Groep N.V.,736 F. Supp. 2d 816 (S.D.N.Y. 2010)............................................................... 13

Gordon Partners v. Blumenthal,No. 02 Civ. 07377 (LAK), 2007 WL 143 8753 (S.D.N.Y. May 16, 2007)...................... 7

Griffin v. PaineWebber. Inc.,No. 99 Civ. 2292(VM), 2001 WL 740764 (S.D.N.Y. June 29, 2001) ......................... 10

Huelbiv, v. Aurora Loan Servs.. LLC,No. 10OCiv. 6215 (RJH)(THK), 2011 WL 4348281 (S.D.N.Y. May 18, 2011) ............... 10

In re Activision Sec. Litig.,621 F. Supp. 415 (N.D. Cal. 1985)..................................................................11I


Page s)

In re Adeiphia Commc'ns Corp. Sec. & Derivative Litijz.,No. 03 MD 0 1529(LMM), 2005 WL 1278544 (S.D.N.Y. May 31, 2005)...................... 4

In re ATG. Inc.,311 B.R. 810 (Bankr. N.D. Cal. 2004).............................................................. 9

In re Barclays Bank PLC Sec. Litig.,No. 09 Civ. 1989 (PAC), 2011 WL 31548 (S.D.N.Y. Jan. 5, 2011)............................ 10

In re Chaus Sec. Litig.,801 F. Supp. 1257 (S.D.N.Y. 1992)................................................................. 4

In re Fed. Nat'l Mortg. Sec.. Derivative & ERISA Litig.,503 F. Supp. 2d 25 (D.D.C. 2007)................................................................. 6, 7-8

In re IndyMac Mortg.-Backed Sec. Litig.718 F. Supp. 2d 495 (S.D.N.Y. 2010)............................................................... 10

In re IndyMac Mortg.-Backed Sec. Litig.,793 F. Supp. 2d 637 (S.D.N.Y. 2011)............................................................... 4

In re Infonet Servs. Corp. Sec. Litig.,3 10 F. Supp. 2d 1106 (C.D. Cal. 2003)............................................................. 5

In re Lehman Bros. Sec. & ERISA Litig.,799 F. Supp. 2d 258 (S.D.N.Y. 2011)............................................................. passim

In re Lehman Bros. Sec. & ERISA Litig,800 F. Supp. 2d 477 (S.D.N.Y. 2011)............................................................... 4

In re Morgan Stanley Mortg. Pass-Through Certificates Litig.,Master File No. 09 Civ. 2137(LTS) (MHD), 2010 WL 3239430(S.D.N.Y. Aug. 17, 2010)............................................................................ 4

In re WorldCom. Inc. Sec. Litig.,308 F. Supp. 2d 236 (S.D.N.Y. 2004)............................................................... 6

Instituto de Prevision Militar v. Merrill Lynch,546 F.3d 1340 (11Ith Cir. 2008)...................................................................... 7

Jackson v. First Fed. Say, of Arkansas, F.A.,709 F. Supp. 863 (E.D. Ark. 1988)..................................................................11I

Klein v. Computer Devices, Inc.,602 F. Supp. 837 (S.D.N.Y. 1985).................................................................1


Pape~s

Kiamas v. Sec. Gas & Oil Inc.,672 F.2d 766 (9th Cir. 1982)...................................................................... 5

Maxon Indus.. Inc. v. State Comp. Ins. Fund,16 Cal. App. 4th 1387 (Cal. Ct. App. 1993)........................................................ 9

McCann v. Hy-Vee, Inc.,__ F.3d _, No. 11-1459, 2011 WL 5924414 (7th Cir. Nov. 22, 2011) ........................ 4

Menowitz v. Brown,991 F.2d 36 (2d Cir. 1993) ........................................................................... 9

Morin v. Trpin,747 F. Supp. 1051 (S.D.N.Y. 1990)................................................................. 10

N.J. Carpenters Health Fund v. Residential Capital, LLC,Nos. 08 Civ. 8781 (HB11), 08 Civ. 5093 (HB11), 2011 WL 2020260(S.D.N.Y. May 19, 2011) ............................................................................ 11

Notrica v. State Comp. Ins. Fund,70 Cal. App. 4th 911 (Cal. Ct. App. 1999) ......................................................... 9

P. Stolz Family P'ship L.P. v. Daum,355 F.3d 92 (2d Cir. 2004) ........................................................................... 4

Pinter v. Dahl,486 U.S. 622, 108 S. Ct. 2063 (1988)................................................................11

Rothman v. Gregor,220 F.3d 81 (2d Cir. 2000)........................................................................... 10

Salameh v. Tarsadia Hotels,No. 09 Civ. 02739 DMS (CAB), 2011 WL 1044129 (S.D. Cal. Mar. 22, 2011) .............. 5

Sec. Officers Serv., Inc. v. State Comp. Ins. Fund,17 Cal. App. 4th 887 (Cal. Ct. App. 1993) ......................................................... 9

State Comp. Ins. Fund v. Superior Court of Orange Cnty.,24 Cal. 4th 930 (Cal. 2001) .......................................................................... 9

Tsereteli v. Residential Asset Securitization Trust 2006-A8,692 F. Supp. 2d 387 (S.D.N.Y. 2010) .............................................................. 10

Vierria v. Cal. Highway Patrol,644 F. Supp. 2d 1219 (E.D. Cal. 2009) ............................................................. 9


Page(s)

OTHER AUTHORITIES

State Compensation Insurance Fund, Frequently Asked Questions,http://www.statefundca.com/ ........................................................................ 8


The Bank Defendants' respectfully submit this memorandum in support of their

motion, under Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure, to dismiss the

claims alleged against them in the Amended Complaint (the "AC" or "Amended Complaint")

with prejudice. 2

PRELIMINARY STATEMENT

Plaintiff State Compensation Insurance Fund ("SCIF") asserts claims against the

Bank Defendants under Sections 11I and 12(a)(2) of the Securities Act of 1933 (the "Securities

Act") and Sections 25401 and 25501 of the California Corporations Code. All of SCIF's claims

fail as a matter of law.

All of the claims are untimely. SCIF filed this action on May 16, 2011 -more

than three years after the relevant securities were offered and sold, and more than two years after

Lehman Brothers Holdings Inc. ("Lehman Holdings") filed for bankruptcy protection.

Accordingly, all of SCIF's claims are facially time-barred under the applicable statutes of repose

and limitations. Tellingly, SCIF does not plead any basis for tolling these limitations periods,

and none exists under controlling law. Thus, SCIF's Securities Act claims must be dismissed as

time-barred. Moreover, as the Ninth Circuit recently held, California law does not recognize

"cross-jurisdictional" class action tolling. There is therefore also no basis for tolling SCIF's state

law claims.

The Bank Defendants are ANZ Securities, Inc., BBVA Securities Inc., BMO Capital Markets Corp. (f/k/aHarris Nesbitt Corp.), BNP Paribas S.A., Citigroup Global Markets Inc., Commerzbank Capital MarketsCorp., Daiwa Capital Markets Europe Ltd. (f/k/a Daiwa Securities SMBC Europe Ltd.), DZ FinancialMarkets LLC, Fortis Securities LLC, ING Financial Markets LLC, Mellon Financial Markets LLC (n/k/aBNY Mellon Capital Markets LLC), Mizuho Securities USA Inc., Natixis Bleichroeder Inc. (n/k/a NatixisSecurities Americas LLC), Scotia Capital (USA) Inc., SG Americas Securities LLC, Sovereign SecuritiesCorporation LLC, SunTrust Robinson Humphrey Inc., Utendahl Capital Partners L.P., and Wells FargoSecurities, LLC.

2 Unless otherwise noted, all exhibits are attached to the Declaration of Brendan H. Gibbon, dated January 6,2012 (the "Gibbon DecI."), submitted herewith.


The state law claims are precluded by SLUSA. SCIF's state law claims against

the Bank Defendants are also independently barred by the Securities Litigation Uniform

Standards Act of 1998 ("SLUSA"), which precludes private plaintiffs from asserting state law

claims in precisely this situation: where an individual action is consolidated with and asserts the

same factual allegations as other lawsuits collectively seeking damages on behalf of more than

50 plaintiffs.

SCIF has not established standing under Section 12(a)(2). SCIF's claims

under Section 12(a)(2) must also be dismissed because SCIF has not established standing to

assert those claims against any Bank Defendant. In particular, SCIF has failed to plausibly

allege that My Bank Defendant solicited or sold an of the relevant securities to SCIF.

SCIF repeats previously dismissed allegations. Finally, SCIF's claims should

also be dismissed to the extent that they allege misstatements and omissions that have already

been considered and rejected by this Court.

FACTUAL BACKGROUND

In May 2011, SCIF filed a lawsuit in the United States District Court for the

Northern District of California, alleging violations of the federal securities law and California

state law relating to certain offerings of Lehman Holdings securities. Dkt. No. 1 in I11 Civ. 3892

(LAK). SCIF's original complaint named former officers and directors of Lehman Holdings, as

well as 21 purported underwriters of the relevant Lehman Holdings securities. In June 2011, the

United States Judicial Panel on Multidistrict Litigation transferred the action to this Court. Dkt.

No. 6 in I11 Civ. 3892 (LAK). Pursuant to the Court's prior Pre-Trial Order No. I (Dkt. No. 1 in

09 MD 2017 (LAK)), the action was consolidated for pre-trial purposes with other actions

involving claims related to Lehman Holdings securities. In November 2011, SCIF amended its


complaint, adding claims against Lehman Holdings' former auditor, Ernst & Young, and making

changes to the underlying factual allegations asserted against all defendants. Dkt. No. 19 in 11I

Civ. 3892 (LAK).

SCIF asserts three causes of action against the Bank Defendants: (1) violations of

Section 11I of the Securities Act, (AC TT 504-14); (2) violations of Section 12(a)(2) of the

Securities Act, (AC TT 5 15-20); and (3) violations of Sections 25401 and 25501 of the California

Corporations Code, (AC 535-42). SCIF's claims arise from its alleged purchases of two

securities issued by Lehman Holdings on September 19, 2007 and January 15, 2008. See AC TT

2, 9, 52. For purposes of clarity, the Bank Defendants refer to the offerings by the numbers

listed on the chart (annexed as Appendix A hereto), which also identifies the CUSIPs and

participating Bank Defendants.

ARGUMENT

1. ALL OF SCIF'S CLAIMS ARE TIME-BARRED

SCIF filed this lawsuit on May 16, 201 1-more than three years after the relevant

securities were offered and sold, and more than two years after Lehman Holdings filed for

bankruptcy protection. Accordingly, all of SCIF's claims must be dismissed as time-barred

under the applicable statutes of limitations and repose.

A. SCIF's Securities Act Claims Are Barred By The Statute Of Repose

Securities Act claims are subject to a three-year statute of repose, which runs from

either the date of the offering (for Section 11) or the date of the sale (for Section 12(a)(2)). Se

15 U.S.C. § 77m. Here, SCIF first asserted its Securities Act claims in May 2011, which was

well after the expiration of the three-year period for the relevant offerings. See AC TT 2, 9

(listing latest date of offer or sale as January 25, 2008). Tellingly, SCIF makes no attempt to


plead compliance with the three-year statute of repose. This alone requires dismissal of its

Securities Act claims. See, ejg., In re Chaus Sec. Litig., 801 F. Supp. 1257, 1265 (S.D.N.Y.

1992) ("plaintiffs must plead and prove facts demonstrating compliance with both limitations

periods" contained in Section 13 3)3

But, in any event, SCIF cannot plead compliance with the three-year time period

because a statute of repose is "absolute," subject only to "legislatively created exceptions . . . set

forth in the statute of repose." P. Stolz Family P'ship L.P. v. Daum, 355 F.3d 92, 102 (2d Cir.

2004) (quoting Calvin W. Corman, Limitation of Actions § 1.1., at 4-5 (1991)).4 Because there

are no such legislatively created exceptions set forth in Section 13, or elsewhere, the Securities

Act's statute of repose is not subject to tolling and SCIF's Securities Act claims must be

dismissed as time-barred. See In re Lehman Bros. Sec. & ERISA Litig., 799 F. Supp. 2d 258,

3 10 (S.D.N.Y. 2011) (" [N]either American Pipe nor any other form of tolling may be invoked to

avoid the three year statute of repose set forth in Section 13 of the Securities Act of 1933.")5

B. SCIF's State Law Claims Are Time-Barred Under California Law

Claims brought under Sections 24501 and 25501 of the California Corporations

Code are subject to a two-year statute of limitations, which runs from the date a plaintiff receives

3See also In re Morgan Stanley Mortg. Pass-Through Certificates Litig., Master File No. 09 Civ. 213 7(LTS)(MHD), 20 10 WL 3239430, at *6 (S.D.N.Y. Aug. 17, 2010); In re Adelphia Commc'ns Corp. Sec. &Derivative Litig., No. 03 MD 0 1529(LMM), 2005 WL 1278544, at * 18 (S. D.NY. May 31, 2005 ); Cjutev. Lechworth Developmental Disabilities Serv., No. 03 Civ. 016 1(RCC), 2005 WL 22863, at *2 (S.D.N.Y.Jan. 5, 2005).

4 See also McCann v. Hy-Vee. Inc., _F.3d _,No. 11-1459, 2011 WL 5924414, at *3 (7th Cir. Nov. 22,2011) (Posner, J.) (a "statute of repose is strong medicine" and "serves as an unyielding and absolutebarrier to a cause of action" precluding "even meritorious suits because of a delay for which the plaintiff isnot responsible").

5 See also In re IndvMac Morta.-Backed Sec. Litig., 793 F. Supp. 2d 637, 642 (S.D.N.Y. 2011) (SecuritiesAct's statute of repose is not subject to class action tolling); In re Lehman Bros. Sec. & ERISA~ Litig_-, 800F. Supp. 2d 477, 482-483 (S.D.N.Y. 2011) (same); Footbridge Ltd. Trrust v. Countrywide Fin. Corp, 770 F.Supp. 2d 618, 624-27 (S.D.N.Y. 2011) (same); Albano v. Shea Homes Ltd. P'ship, 254 P.3d 360, 364-67(Ariz. 2011) (refusing to apply class action tolling to a statute of repose because "[wie cannot ... employ acourt-adopted rule of procedure to alter the substantive effect of a statute of repose").


inquiry notice of its claim. See Cal. Corp. Code § 25506(b). 6 Here, the Amended Complaint

itself makes clear that SCIF was placed on inquiry notice by September 15, 2008 at the latest-

when Lehman Holdings filed for bankruptcy protection. See. e.g., AC 484 (alleging that

Lehman Holdings' bankruptcy "revealed the truth" about its financial condition and decreased

the value of SCIF's notes to "pennies on the dollar").7 Yet SCIF did not file its initial complaint

until May 16, 201 1-well over two years after Lehman Holdings' bankruptcy filing. Thus,

SCIF's state law claims are time-barred unless it identifies a valid basis for tolling.

As already noted, SCIF does not plead any basis for tolling, which also requires

dismissal of its claims. See supra at 4. Nor is there any valid basis to toll the statute of

limitations for these claims. Although the securities purchased by SCIF are at issue in the

Lehman Holdings class action, the Court "must look to the law of the relevant state to determine

whether, and to what extent, the statute of limitations should be tolled by the filing of a putative

class action in another jurisdiction." Casey v. Merck & Co., 653 F.3d 95, 100 (2d Cir. 2011).

Here, California law does not permit the tolling of state claims based upon the pendency ofa

class action in another court system. See Clemens v. DaimlerChrysler Corp., 534 F.3d 1017,

1025 (9th Cir. 2008) ("[T]he weight of authority and California's interest in managing its own

6 See also Kramas v. Sec. Gas & Oil Inc., 672 F.2d 766, 770-71 (9th Cir. 1982) (inquiry notice is sufficientto trigger the two-year discovery period); Salameh v. Tarsadia Hotels, No. 09 Civ. 02739 DMS (CAB),2011 WL 1044129, at *8 (S.D. Cal. Mar. 22, 201]) (same); Deveny v. Entropin. Inc., 42 Cal. Rptr. 3d 807,817 (Cal. Ct. App. 2006) (same).

7 Inquiry notice arises "when circumstances suggest to an investor of ordinary intelligence the possibility thathe has been defrauded." Deveny, 42 Cal. Rptr. at 817. In the context of the Securities Act, various courtshave held that the filing of a bankruptcy petition, together with widespread media coverage and/or a sharpdecline in stock value, is sufficient to trigger inquiry notice. See, e.g., In re Infonet Servs. Corp. Sec. Litig.,3 10 F. Supp. 2d 1106, 1114 (C.D. Cal. 2003) ("Inquiry notice may ... be triggered by the suspension oftrading in the issuer's stock, public reports of federal or state investigations of the registrant, notice that theissuer has filed for reorganization or bankruptcy, a sharp decline in stock value, or public disclosure of theadverse financial condition of the issuer."); Cohain v. Klimley, Nos. 08 Civ. 5047(PGG), 09 Civ.4527(PGG), 09 Civ. 10584(PGG), 2010 WL 3701362, at *5 (S.D.N.Y. Sept. 20, 2010) (listing cases inwhich "courts in this district have similarly found that a bankruptcy petition puts plaintiffs on inquirynotice of claims arising from investments in companies whose financial woes previously went undisclosedor were misrepresented").


judicial system counsel us not to import the doctrine of cross-jurisdictional tolling into California

law."). Clemens is binding, 8and requires dismissal of SCIF's state law claims against the Bank

Defendants.

II. SCIFS STATE LAW CLAIMS ARE ALSO PRECLUDED BY SLUSA

SLUSA is an independent basis for dismissal of SCIF's state law claims. Under

SLUSA, no action may be maintained that: (1) is based on state law, (2) alleges a

misrepresentation or omission of material fact in connection with the purchase or sale of a

security, (3) involves "covered securities," and (4) arises in the context of a "covered class

action." In re WorldCom. Inc. Sec. Litig., 308 F. Supp. 2d 236, 243 (S.D.N.Y. 2004).

On its face, the Amended Complaint establishes the first two elements. SCIF

asserts a state law claim against the Bank Defendants based upon allegedly false or misleading

statements made in connection with the sale of Lehman Holdings securities. Se AC TT 536,

538; see also In re Fed. Nat'l Mortg. Sec.. Derivative & ERISA Litig., 503 F. Supp. 2d 25, 32

(D.D.C. 2007) (SLUSA precludes similar claims brought under the California Corporations

Code). The securities at issue here also qualify as "covered securities" under SLUSA because

they were senior to Lehman Holdings' common stock, which was listed on the New York Stock

Exchange. Se 15 U.S.C. § 77r(b)(1)(C). Thus, the only remaining issue is whether SCIF's

claims arise in the context of a "covered class action."

8 See.Factors Etc.. Inc. v. Pro Arts. Inc., 652 F.2d 278, 281-83 (2d Cir. 198 1) ("Where . .. the pertinent court

of appeals has essayed its own prediction of the course of state law on a question of first impression withinthat state, the federal courts of other circuits should defer to that holding, perhaps always, and at least in allsituations except the rare instance when it can be said with conviction that the pertinent court of appeals hasdisregarded clear signals emanating from the state's highest court pointing toward a different rule.'"i.


A. The Consolidation Of SCIF's Action With The Lehman Holdings Class ActionMakes It Part Of A "Covered Class Action"

SLUSA defines the term "covered class action" to include "any group of lawsuits

filed in or pending in the same court and involving common questions of law or fact, in. which (i)

damages are sought on behalf of more than 50 persons; and (ii) the lawsuits are joined,

consolidated, or otherwise proceed as a single action for any purpose." 15 U.S.C.

§ 77p(f)(2)(A)(ii). As this Court has recognized, the "plain language" of the statute encompasses

consolidated actions that collectively seek damages on behalf of more than fifty plaintiffs. See

Gordon Partners v. Blumenthal, No. 02 Civ. 07377 (LAK), 2007 WL 1438753, at *3 (S.D.N.Y.

May 16, 2007).9

Here, SCIF's action is consolidated for pretrial purposes with the Lehman

Holdings class action (and many other individual actions), and is based upon the same

underlying facts alleged by the class plaintiffs (and the other individual plaintiffs). See

Conditional Transfer Order (CTO-16), Dkt. No. 435 in 09 MID 2017 (LAK) (conditionally

transferring SCIF's action to this Court under 28 U.S.C. § 1407); Pretrial Order No. 1, Dkt. No. I

in 09 MID 2017 (LAK) (providing that the provision on pretrial consolidation automatically

applies to any action so transferred). These consolidated actions unquestionably seek damnages

on behalf of more than fifty plaintiffs. See. e.g., Third Amended Complaint T 18, Dkt. No. 278

in 09 MD 2017 (LAK) ("[T]here are thousands of members of the Class located throughout the

United States."). Thus, SCIF's action is part of a "covered class action," and SLUSA preclusion

applies. See, e.g.. Gordon Partners. 2007 WL 1438753. at *3 (SLUSA requires preclusion of

state law claims in individual actions consolidated with class action for pretrial purposes), Fed.

9 See also Instituto de Prevision Militar v. Merrill Lynch, 546 F.3d 1340, 1347 (11Ith Cir. 2008); Amorosa v.Ernst & Young LLP, 672 F. Supp. 2d 493, 517 (S.D.N.Y. 2009); Fed. Nat'l Mortg., 503 F. Supp. 2d at 32-33 (D.D.C. 2007).


Nat'l Mortg., 503 F. Supp. 2d at 32 (SLUSA precludes individual plaintiffs' state law claims

when their actions are consolidated with an MDL proceeding).

B. SCIF Cannot Avail Itself Of The Narrow State-Actor Exception To SLUSA

Under SLUSA, actions filed by certain governmental entities may be exempted

from preemption. See 15 U.S.C. § 77p(d)(2)(A) (SLUSA preemption does not apply to actions

filed by a state, political subdivision thereof, or state pension plan on its own behalf). This state-

actor exception, however, represents "a narrow (and contentious) savings provision." Demnings

v. Nationwide Life Ins. Co., 593 F.3d 486, 495 (6th Cir. 2010) (O'Connor, J.). SCIF-which

operates as a private insurance company-does not qualify for this "narrow" exception.

SCIF is not a state, political subdivision, or state pension plan; rather, it is a

private company-as SCIF itself has argued in the context of other litigation. See, e.g., Felix v.

State Comp. Ins. Fund, No. SACV 67-0061 AG (MLGx), 2007 WL 3034444, at *4-.5 (C.D. Cal.

Oct. 3, 2007) (granting SCIF's motion to dismiss Section 1983 claims on the ground that SCIF is

a private, self-supporting insurer that cannot act under color of state law).' 0 Although SCIF was

established by the state legislature, see AC T 9, "the [flegislature meant SCIF to be an entity

separate from the State." Felix, 2007 WL 3034444, at *4,11 Thus, "California has made a

concerted effort to make SCIF an independent, private company." Id. In other words, SCIF's

10 In addition, Plaintiff repeatedly acknowledges that it is "not a branch of the State of California" on itswebsite. See. e.g., State Compensation Insurance Fund, Frequently Asked Questions,http://www.statefiundca.coml (follow "FAQs" hyperlink)..

11 After establishing SCIF, the State took various measures to make it a private and independent company.For example, property belonging to SCIF is not treated as "state property" for the purposes of exemptionfrom state taxes, Cal. Rev, & Tax. Code § 202(a)(4); SCIF is subject to the payment of taxes on the samebasis as any other private insurer, id. at § 12203; SCIF is exempt from the public meeting, publicinspection, and claims provisions of the California Government Code, Cal. Code Gov't § § 11770.5, 11793;and SCIF is exempt from the provisions of the Government Code applicable to state agencies, id. at§ 11873.


"purpose and everyday function is indistinguishable" from those of "a private corporation."

Notrica v. State Comp. Ins. Fund, 70 Cal. App. 4th 911, 935 (Cal. Ct. App. 1999).

Federal and state courts have therefore consistently treated SCIF "like any other

private carrier, rather than a government entity." Vierria v. Cal. Highway Patrol, 644 F. Supp.

2d 1219, 1240 (E.D. Cal. 2009) ("SCIF does not qualify as a state actor"); elix, 2007 WL

3034444, at *4-5 (SCIF does not act under color of state law); State Comnp. Ins. Fund v. Sup:erior

Court of Orange Cnty., 16 P.3d 85, 88-94 (Cal. 2001) (SCIF is subject to civil suits in the same

manner as any other private carrier).'12 Accordingly, SCIF is not a "state" actor under SLUSA.

111. INDEPENDENTLY, THE AMENDED COMPLAINT FAILS TOSTATE A CLAIM

To survive a motion to dismiss, a plaintiff must plead enough facts "to state a

claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 570,

127 S. Ct. 1955, 1965, 1974 (2007). 13 The complaint must contain "factual content that allows

the court to draw the reasonable inference that the defendant is liable for the misconduct

alleged." Ashcroft v. kIbal, 556 U.S. 662, _, 129 S. Ct. 1937, 1949 (2009). This standard "asks

for more than a sheer possibility that a defendant has acted unlawfully." Id. The complaint's

"[flactual allegations must be enough to raise a right to relief above the speculative level,"

Twomy~~, 550 U.S. at 545, 127 S. Ct. at 1959, and must permit the Court "to infer more than the

12 See also Sec. Officers Serv.. Inc. v. State Comp. Ins. Fund, 17 Cal. App. 4th 887, 89 1-96 (Cal. Ct. App.1993) (SCIF is subject to suit in tort and contract); Maxon Indus.. Inc. v. State Comp. Ins. Fund, 16 Cal.App. 4th 1387, 1389-94 (Cal. Ct. App. 1993) (SCIF is subject to suit in tort); Courtesy Ambulance Serv. ofSan Bernardino v. Superior Court, 8 Cal, App. 4th 1504, 15 13 -16 (Cal. Ct. App. 1992) (same); In re ATG,Inc. 311 B.R. 810, 813 (Bankr. N.D. Cal. 2004) (SCIF is not entitled to immunity under the EleventhAmendment).

13 Where, as here, an action is transferred under 28 U.S.C. § 1407, the transferee court applies its owninterpretation of federal law. See Menowitz v. Brown, 991 F.2d 36, 40-41 (2d Cir. 1993).


mere possibility of misconduct," Igbal, 556 U.S. at -, 129 S. Ct. at 1950; Lehman Bros. Sec. &

ERISA Litig., 799 F. Supp. 2d at 272-73. 14

A. SCIF Has Not Established Section 12 Standing

"A plaintiff has standing to bring a Section 12 claim only against a 'statutory

seller' from which it 'purchased' a security." Lehman Bros. Sec. & ERISA Litig., 799 F. Supp.

2d at 3 10 (citing Akerman v. Oryx Commc'ns. Inc., 810 F.2d 336, 344 (2d Cir. 1987), af' cd, 8 10

F.2d 336 (2d Cir. 1987)). 15 A "statutory seller" is "one who, in a public offering, either

transferred title to the purchaser or successfully solicited the transfer for financial gain."

Lehman Bros. Sec. & ERISA Litig., 799 F. Supp. 2d at 311 (citing Pinter v. Dahl, 486 U.S. 622,

642, 108 S. Ct. 2063, 2076 (1988)).

Thus, to establish standing under Section 1 2(a)(2), a plaintiff must assert factual

allegations showing that the specific defendant solicited or sold securities directly to the plaintiff.

See Griffin v. PaineWebber, Inc., No. 99 Civ. 2292(VM), 2001 WL 740764, at *2 (S.D.N.Y.

June 29, 2001l). 16 Broad allegations that a defendant was an "underwriter" in an offering do not

14 In addition to the complaint, in ruling on a 12(b)(6) motion the Court may also consider documents ofwhich the plaintiffs had notice and which are integral to their claim, including the complaint and attachedexhibits, statements and documents incorporated by reference, legally required public disclosure documentsfiled with the SEC, documents possessed by or known to the plaintiffs and upon which they relied inbringing suit, and matters subject to judicial notice. See Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir.2000); Cortec Indus.. Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d Cir. 1991). Thus, the Court mayconsider the documents attached to the Gibbon Declaration because they were filed with the SEC, andplaintiff relied on them in its complaint.

Is See also In re IndvMac Mortg.-Backed Sec. Litig., 718 F. Supp. 2d 495, 501 (S.D.N.Y. 2010); Tsereteli v.Residential Asset Securitization Trust 2006-A8, 692 F. Supp. 2d 387, 391 (S.D.N.Y. 2010).

16 See also Capri v. Murphy, 856 F.2d 473, 478-79 (2d Cir. 1988) (holding that plaintiffs must show that a

particular defendant actually solicited their investment); Huelbip, v. Aurora Loan Servs.. LLC, No. 10 Civ.6215 (RJH)(THK), 2011 WL 4348281, at *7 (S.D.N.Y. May 18, 2011) (dismissing plaintiff s Section12(a)(2) claim against purported underwriters when "the Amended Complaint d[id] not plausibly allege asecurities transaction between Plaintiff and any one of the Defendants"); In re Barclays Bank PLC Sec.Litig., No. 09 Civ. 1989 (PAC), 2011 WL 31548, at *5 (S.D.N.Y. Jan. 5, 2011) ("To bring a Section 12claim, a plaintiff must adequately allege that he or she purchased the relevant shares directly from thedefendant."); Morin v. Trupin, 747 F. Supp. 1051, 1064 (S.D.N.Y. 1990) (requiring plaintiffs to replead"stating, with respect to each individual Securities Defendant whom they deem appropriate to rename undersuch [Section 12(a)(2)] claim, the specific conduct which warrants that defendant's classification as a seller


satisfy this requirement. See Klein v. Computer Devices. Inc., 602 F. Supp. 837, 840 (S.D.N.Y.

1985). 17 Instead, the plaintiff must allege that the defendant solicited or sold securities directly

to the plaintiff. Id.

There are no such allegations here. SCIF only alleges that the Bank Defendants

were "underwriter [s] " of each offering, (see AC TT 30-50), and that they "solicited sales" of the

securities and "were paid fees in connection therewith." IdL at 52. Tellingly, SCIF never

alleges that any Bank Defendant-let alone each of them-solicited or sold securities directly to

SCIF. This is not enough to establish standing under Section 12(a)(2).18

Moreover, while SCIF's sparse allegations would be insufficient under any set of

facts, they are particularly deficient here, where the Bank Defendants only agreed to underwrite a

small fraction of the relevant offerings, and a Lehman Holdings affiliate underwrote more than

85 percent of the offerings. See Appendix A. Therefore, without specifically alleging which

particular entity sold SCIF the relevant securities, the Amended Complaint fails to establish that

it is either probable or plausible that any Bank Defendant solicited or sold to SCIF. See Igbal,

under [S]ection 12"); Jackson v. First Fed. Say, of Arkansas. F.A., 709 F. Supp. 863, 884 (E.D. Ark. 1988)(dismissing Section 12(a)(2) claim where plaintiff "does not allege that any of the defendants either soldhim his shares or solicited him to buy his shares. Even if defendants solicited purchases or sold shares toevery other buyer of First Federal's shares, if they did not solicit [plaintiff] or sell to [plaintiff], then[plaintiff] may not recover from them under [S]ection [12(a)(2)].") (emphasis in original).

17 See also New Jersey Carpenters Health Fund v. Residential Capital. LLC, Nos. 08 Civ. 8781 (1-11), 08 Civ.5093 (HB11), 2011 WL 2020260, at *2 (S.D.N.Y. May 19, 2011) ("The fact that the allegations of purchasesby Intervenors, sales by Defendants and sales in offerings all co-exist in the same paragraph fails, withoutmore, to raise an inference that the Intervenors purchased from a defendant in a public offering,");Akerman v. Oryx Commc'ns. Inc., 609 F. Supp. 336, 374 (S.D.N.Y. 1984) (refusing to hold participatingunderwriters liable for sales effected by other participating underwriters), affd, 8 10 F.2d 336 (2d Cir.1987); In re Activision Sec. Litig., 621 F. Supp. 415, 425-26 (N.D. Cal. 1985) (dismissing claims thatsought to impose Section 12 liability on underwriters for only their "institutional involvement" in the publicoffering of securities); see also Pinter v. Dahl, 486 US. 622, 650 n.26, 108 S.Ct. 2063, 2080 n.26 (1988)("Section 11I(a) explicitly enumerates the various categories of persons involved in the registration processwho are subject to suit under that section, including many who are participants in the activities leading upto the sale. There are no similar provisions in § 12, and therefore we may conclude that Congress did notintend such persons to be defendants in § 12 actions.").

18 See. e.g., New Jersey Carpenters Health Fund, 2011 WL 2020260, at *3 ("If plaintiffs did in fact purchasethe Certificates directly from the defendants, they should have said so. An evasive circumlocution does notserve as a substitute.").


556 U.S. at __, 129 S. Ct. at 1949 (the plausibility standard "asks for more than a sheer

possibility that a defendant has acted unlawfully"). Accordingly, the Amended Complaint's

Section 1 2(a)(2) claims must be dismissed under Federal Rule of Civil Procedure 1 2(b)(1I).

B. SCIF Relies On Allegations Of Misstatements And Omissions That The CourtHas Already Dismissed As Inadequate 19

The allegations that the Court previously found inadequate in the Lehman

Holdings class action are likewise inadequate here. Specifically, the Court found inadequate

allegations of misstatements or omissions related to Lehman Holdings' application of SFAS 140

to Repo 105 transactions, use of appropriate risk mitigants, liquidity, and valuation of

commercial real estate. See Lehman Bros. Sec. & ERISA Litig., 799 F. Supp. 2d at 276-80

(Repo 105), 285 (risk mitigants), 287-88 (liquidity), 311-13 (valuation). Undeterred, the

Amended Complaint repeats these same allegations. See AC TT 64-68 (Repo 105); TT 163, 255-

57, 283-89, 299-303 (risk mitigants); TT 3 13-22, 331, 333, 335, 338-40 (liquidity); TT 198-204,

225-36 (valuation). SCIF fails to state a claim here for the reasons this Court has already held.

Moreover, certain allegations that were only sustained for later time periods in the

class action should be dismissed in their entirety here because SCIF only challenges offerings

during an earlier time period. In particular, the Court sustained claims regarding Lehman

19 Certain of SCIF's allegations are similar to allegations regarding Repo 105 transactions and riskmanagement practices that survived the motion to dismiss the consolidated Lehman Holdings securitiesclass action. See. e.g., AC TT 69-75, 115, 122, 128 (use of Repo 105 violated GAAP); 109, 115, 123(treatment of Repo 105 transactions as sales); T 80-86, 110-20, 124, 135 (duty to disclose Repo 105transactions based on statements regarding net leverage); TT 255-78, 297, 299-305, 307 (risk limits), TT255-57, 279-82, 299-303 (stress tests); TT 255-57, 290-91, 304-05, 307 (Value-at-Risk); see also LehmanBros. Sec. & ERISA Litig., 799 F. Supp. 2d at 278-89, 291-92. The Bank Defendants reassert andincorporate by reference the arguments from Defendants' Joint Motion to Dismiss the Third AmendedClass Complaint (the "Class Motion"). Dkt. No. 293 in No. 09 MD 2017 (LAK). See Class Motion at 4-25(arguing that the Offering Materials were not actionable because Lehman Holdings accurately disclosed itsuse of leverage and correctly accounted for its Repo 105 transactions, which were known to and approvedby Ernst &Young (on whose audit opinions the bank defendants were entitled to rely) and which were notmaterial; Lehman Holdings' risk management disclosures were truthful statements concerning businessjudgment that were accompanied by specific warnings about the limitations of those policies; and thecomplaint fails to allege that Lehman Holdings had a duty to disclose additional information concerning itsreal estate assets at any point during the Class Period).


Holdings' alleged concentrations of credit risk in Alt-A holdings only with respect to offerings

made after February 20, 2008, and regarding Lehman Holdings' alleged concentrations of credit

risk in commercial real estate holdings only with respect to offerings that incorporated Lehman

Holdings' 2007 Form 10O-K, which was issued on January 29, 2008. See Lehman Bros. Sec. &

ERISA Litig., 799 F. Supp. 2d at 292. Here, all of SCIF's investments were made before these

dates. Therefore, in order to survive a motion to dismiss, SCIF must provide additional

allegations concerning the time period that is relevant here rather than merely repeating factual

allegations contained in the class complaint. See Freidus v. ING Groep N.V., 736 F. Supp. 2d

816, 826 (S.D.N.Y. 2010) ("A statement is actionable only if materially false or misleading at the

time it is made."). Because it has not done so, all of its claims regarding concentrations of credit

risk must be dismissed.

CONCLUSION

For the foregoing reasons, the Bank Defendants respectfully request that the Court

dismiss SCIF's claim against them with prejudice. 0

Dated: New York, New York

January 6, 2012

Respectfully submitted,

CLEARY GOTTLIEB STEEN & HAMILTON LLP

By: /s/ Mitchell A. LowenthalMitchell A. Lowenthal (mlowenthal(cgsh.com)Victor L. Hou (vhou(gcgsh.com)Roger A. Cooper (racooper(gcgsh.com)One Liberty PlazaNew York, New York 10006

20 The Bank Defendants also incorporate to the extent applicable the arguments set forth in the Memorandumof Law in Support of the Individual Defendants' Motion to Dismiss the Amended Complaint filedcontemporaneously herewith.


Tel: (212) 225-2000Fax: (212) 225-3999

Attorneys for Bank Defendants ANZ Securities, Inc.,BBVA Securities Inc., BMO Capital Markets Corp.(f/k/a Harris Nesbitt Corp.), BNP Paribas S.A.,Citigroup Global Markets Inc.,I Comm erzbank CapitalMarkets Corp., Daiwa Capital Markets Europe Ltd(f/k/a Daiwa Securities SMBC Europe Ltd), DZFinancial Markets LLC, Fortis Securities LLC, INGFinancial Markets LLC, Mellon Financial Markets LLC(n/k/a BNY Mellon Capital Markets LLC), MizuhoSecurities USA Inc., Natixis Bleichroeder Inc. (n/kaNatixis Securities Americas LLC) Scotia Capital (USA)Inc., SG Americas Securities LLC, Sovereign SecuritiesCorporation LLC, Sun Trust Robinson Humphrey Inc.,Utendahl Capital Partners L.P., and Wells FargoSecurities, LLC


APPENDIX A

I See Gibbon Deci., Exs. 21, 27.

1 9/19/2007 52517P5X5 ANZ (1%) 9/24/2007BBVA (1%)Cabrera (1%)CGMI (1%)Daiwa (1%)DZ Financial (1%)Harris Nesbitt (1%)Mellon (1%)Mizuho (1%)Scotia (1%)Sovereign (1%)SunTrust (1%)Utendahi (1%)Wells Fargo (1%)

2 1/15/2008 5252M0BZ9 CGMI (1%) 1/25/2008Mellon (1%)SunTrust (1%)Wells Fargo (1%)BBVA (1%)BNP Paribas (1%)Commerzbank (1%)Daiwa (1%)Fortis (1%)ING (1%)MR Beal (1%)Natixis (1%)

______________________SG Americas (1%)


UNITED STATES DISTRICT COURT SOUTHERN … [Dkt. 0572] Memo of Law...united states district court...

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