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Case 1:08-cv-10446-RGS Document 139 Filed 10/01/12 Page 1 of 25

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS

CIVIL ACTION NO. 08-10446-RGS

PLUMBERS’ UNION LOCAL NO. 12 PENSION FUND, Individually and On

Behalf of All Others Similarly Situated

v.

NOMURA ASSET ACCEPTANCE CORP., et al.

MEMORANDUM AND ORDER ON PLAINTIFFS’ MOTION

TO PROCEED WITH LITIGATION AND DEFENDANTS’ RENEWED

MOTION TO DISMISS

October 1, 2012

STEARNS, D.J.

Before the court is Plumbers’ Union Local No. 12 Pension Fund’s (Plumbers’

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Fund) motion to proceed with litigation begun more than four years ago against

defendants, who were the issuers and underwriters of mortgage-backed securities

purchased by plaintiffs. Also pending is defendants’ (renewed) motion to dismiss

pursuant to Fed. R. Civ. P. 12(b)(1) and 12(b)(6). On January 20, 2011, the First

Circuit affirmed this court’s previous dismissal of claims against a plethora of

additional defendants with one category of exceptions – “those [claims] relating to

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Plumbers’ Fund is one of three “lead plaintiffs.” The other two are Plumbers’
& Pipefitters’ Welfare Educational Fund (Pipefitters’ Fund) and NECA-IBEW Health
& Welfare Fund (NECA-IBEW).

Case 1:08-cv-10446-RGS Document 139 Filed 10/01/12 Page 2 of 25

the statements regarding the lending banks’ underwriting practices,” made by the

remaining defendants. These, the Court of Appeals remanded with instructions. See

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Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 632

F.3d 762 (1st Cir. 2011). 3

Consistent with the appellate mandate, on June 13, 2011, the court gave leave

to plaintiffs to take limited preliminary discovery on the surviving claims involving

the First National Bank of Nevada (FNBN). See Dkt # 89. Armed with new facts

unearthed during that discovery, plaintiffs attempt to remake their case for pursuing

violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 15 U.S.C.

2

Only Nomura Asset Acceptance Corp. (Nomura), Nomura Securities
International, Inc. (Nomura Securities), Alternative Loan Trust 2006-AF1,
Alternative Loan Trust 2006-AP1, and officers and directors John P. Graham, Nathan
Gorin, John McCarthy, and David Findlay remain as defendants. The court’s
previous dismissal of claims against Alternative Loan Trust 2006-AF2, Alternative
Loan Trust 2006-AR1, Alternative Loan Trust 2006-AR2, Alternative Loan Trust
2006-AR3, Alternative Loan Trust 2006-AR4, Alternative Loan Trust 2006-WF1,
Greenwich Capital Markets, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., UBS
Securities LLC, Citigroup Global Markets, Inc., and Goldman, Sachs & Co., was
affirmed by the First Circuit.

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“While this case presents a judgment call, the sharp drop in the credit ratings
after the sales and the specific allegations as to [the First National Bank of Nevada]
offer enough basis to warrant some initial discovery aimed at these precise
allegations. The district court is free to limit discovery stringently and to revisit the
adequacy of the allegations thereafter and even before possible motions for summary
judgment.” Plumbers’ Union Local No. 12 Pension Fund, 632 F.3d at 773-774
(emphasis in original).

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Case 1:08-cv-10446-RGS Document 139 Filed 10/01/12 Page 3 of 25

§§ 77k(a), 77l(a)(2), 77o (2006), based on Nomura’s alleged misstatements and

omissions with respect to FNBN’s underwriting of loans included in the purchased

trusts. Defendants, for their part, dispute the weight and relevance of plaintiffs’

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proffered evidence and independently renew the motion to dismiss on grounds that

did not figure in the prior appeal. A hearing on the parties’ competing motions was

held on September 5, 2012.

DISCUSSION

Plaintiffs’ Motion to Proceed with Litigation

The court is guided by the following language taken from the First Circuit’s

opinion.

Plaintiffs first point to a set of statements in the offering documents
implying that the banks that originated the mortgages used lending
guidelines to determine borrowers’ creditworthiness and ability to repay
the loans. For example, the prospectus supplements for the two trusts
at issue stated that First National Bank of Nevada (“FNBN”), one of the
“key” loan originators for those trusts, used “underwriting guidelines
[that] are primarily intended to evaluate the prospective borrower’s
credit standing and ability to repay the loan, as well as the value and

4

“Section 11 imposes strict liability on issuers and signatories, and negligence
liability on underwriters . . . . Section 12(a)(2) imposes liability under similar
circumstances against certain ‘statutory sellers’ . . . . And § 15 imposes liability on
individuals or entities that ‘control[ ] any person liable’ under §§ 11 or 12.”
NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 2012 WL 3854431,
at *7 (2d Cir. Sept. 6, 2012).

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Case 1:08-cv-10446-RGS Document 139 Filed 10/01/12 Page 4 of 25

adequacy of the proposed mortgaged property as collateral.” . . . In fact,
plaintiffs allege, FNBN “routinely violated” its lending guidelines and
instead approved as many loans as possible, even “scrub[bing]” loan
applications of potentially disqualifying material. Indeed, plaintiffs
allege that this was FNBN’s “business model,” aimed at milling
applications at high speed to generate profits from the sale of such risky
loans to others. Thus, plaintiffs say, contrary to the registration
statement, borrowers did not “demonstrate[ ] an established ability to
repay indebtedness in a timely fashion” and employment history was not
“verified.” . . .

The district court ruled that, read together with such warnings, the
complained-of assurances were not materially false or misleading, but
we cannot agree. Neither being “less stringent” than Fannie Mae nor
saying that exceptions occur when borrowers demonstrate other
“compensating factors” reveals what plaintiffs allege, namely, a
wholesale abandonment of underwriting standards. . . . The same can be
said about the warning that “[c]ertain [m]ortgage [l]oans were
underwritten to nonconforming underwriting standards, which may
result in losses or shortfalls to be incurred on the [o]ffered
[c]ertificates.” Using “nonconforming” standards is different than
having no standards; and this statement makes it seem as though only
some (“certain”) loans were underwritten under these standards, leaving
the impression that most other loans used “conforming” standards. . . .
The harder problem is whether enough has been said in the complaint –
beyond conclusory assertions – to link such practices with specific
lending banks that supplied the mortgages that underpinned the trusts.
Similar complaints in other cases have cited to more substantial sources,
including statements from confidential witnesses, former employees and
internal e-mails.

Plumbers’ Union Local No. 12 Pension Fund, 632 F.3d at 772-773 & n.11.

Initially, the parties disagree over the pertinent standard to be applied.

Cribbing from the First Circuit’s opinion, defendants argue that plaintiffs must

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Case 1:08-cv-10446-RGS Document 139 Filed 10/01/12 Page 5 of 25

produce evidence of a “wholesale abandonment of underwriting standards” by FNBN.

Thus, if FNBN had any underwriting standards at all, even shoddy ones, plaintiffs (as

defendants see it) have no viable cause of action. In contrast, plaintiffs contend that

all they must do is produce prima facie evidence supporting the critical contention

made in their Complaint, namely if whether contrary to Nomura’s affirmative

representations, the Bank’s loan underwriting guidelines were not primarily intended

to evaluate a prospective borrower’s ability to repay the loan.

In the court’s view, the standard (as it has previously held) is neither as

stringent nor as permissive as the polar positions staked out by the parties. To

survive a Rule 12(b)(6) dismissal of the Section 11 claims, plaintiffs must plausibly

demonstrate that Nomura (or its affiliates) misrepresented (or omitted) material

information about FNBN’s underwriting guidelines. See In re Evergreen Ultra Short

Opportunities Fund Sec. Litig., 705 F. Supp. 2d 86, 91 (D. Mass. 2010) (“Under

Section 11, as long as the plaintiff can prove a material misstatement or omission,

liability for the issuer of the security is ‘virtually absolute, even for innocent

misstatements.’”) (citation omitted); see also Blackmoss Invs. Inc. v. ACA Capital

Holdings, Inc., 2010 WL 148617, at *7 (S.D.N.Y. Jan. 14, 2010) (“Plaintiff’s claims

under the Securities Act of 1933 are measured by Rule 8’s notice pleading

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Case 1:08-cv-10446-RGS Document 139 Filed 10/01/12 Page 6 of 25

requirements, rather than Rule 9(b)’s particularity ones.”). 5

Taking heed of the First Circuit’s admonition to provide “more substantial

sources, including statements from confidential witnesses, former employees and

internal e-mails,” plaintiffs have attempted to flesh out five categories of evidence.

First, they identify three “representative” no-document loans that FNBN originated.

In each of these “No Doc” loans, the borrower’s income was either unknown or

unverified, or inadequate to make payments on the underlying mortgage, or if not, the

borrower’s debt to income ratio (DTI) belied any realistic probability that the

borrower could keep up with mortgage payments over the life of the loan. Second,

plaintiffs submit the declaration of Susan Wright, who underwrote loans at FNBN in

2006 and 2007 and generally corroborates the Complaint’s allegations about FNBN’s

5

Cf. Bauer v. Prudential Fin., Inc., 2010 WL 2710443, at *3-4 (D.N.J. June
29, 2010) (“‘[U]nlike [securities] claims brought under the anti-fraud provisions of
the 1934 Act, claims under the 1933 Act that do not sound in fraud are not held to the
heightened pleading requirements of Fed. R. Civ. P. 9(b).’ But, where ‘section 11
1933 Act claims . . . are grounded in allegations of fraud[, they] are subject to Fed.
R. Civ. P. 9(b).’ Thus, for § 11 claims, a Court must examine the complaint to
determine if they are based on allegations of fraud. . . . All § 11 claims will have
allegations that statements were false and misleading – this is a requirement of a § 11
prima facie case. The question is whether, overall, the allegations assert that such
false statements were made fraudulently or intentionally.”) (internal citations
omitted). Plaintiffs make no allegation of fraud with respect to their § 11 claims. See
Consolidated Am. Compl. ¶ 178 (“For purposes of this cause of action, Plaintiffs
expressly exclude and disclaim any allegation that could be construed as alleging
fraud or intentional or reckless misconduct, as this cause of action is based solely on
claims of strict liability and/or negligence under the 1933 Act.”).

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Case 1:08-cv-10446-RGS Document 139 Filed 10/01/12 Page 7 of 25

underwriting practices. Third, plaintiffs offer several emails generated by FNBN

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employees, including Mortgage Division President Pat Lamb; Vice President of Risk

Management Renea Aderhold; “SVP Ops/Communication Manager” Beth

Rothmuller; Senior Vice President Lisa Sleeper; and Senior Vice President and Risk

Officer Eric Meschen, which collectively paint a picture of a devil-may-care

underwriting culture. Fourth, plaintiffs submit the expert report of Ira Holt, an

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accountant who performed a forensic analysis of 408 of the Trusts’ loans using the

FNBN guidelines that were in place when they were originated. Holt found that 108

(26.5%) had material defects that violated even FNBN’s slack underwriting

standards. Finally, plaintiffs fault Nomura’s due diligence with respect to the

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6

Wright describes FNBN’s business model as trying to “make as many loans
as possible and then sell them as quickly as possible” and explains that their
underwriting practices instructed underwriters to remove income and asset
information already in the possession of FNBN from “No Doc” loans. She states that
FNBN regularly made loans to borrowers whom “FNBN knowingly qualified on the
basis of what appeared to be obviously false information [and] FNBN did not appear
to reasonably expect that the borrowers would be able to repay these loans.” Pls.’
Mot. Ex. 2.

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The FDIC, when it sued two former FNBN directors in August of 2011,

alleged that FNBN “sealed its fate through lax underwriting.” Pls.’ Mot. Ex. 28.

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According to Holt, he was unable to “re-underwrite” some of the 408 loans
because of the lack of documentation, as well as the “scrubbing” of the applicant’s
disqualifying data by FNBN. According to plaintiffs, the number of loans in the
sample with material defects may be considerably higher than Holt’s estimates.

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Case 1:08-cv-10446-RGS Document 139 Filed 10/01/12 Page 8 of 25

purchase of the FNBN loans as being “fatally flawed.”9

Nomura attacks this evidence as inconclusive at best, and, at worst, misleading.

Nomura contends that: (1) the three “exemplary” loans singled out by plaintiffs were

No Doc loans, and, by definition, did not require verification of a borrower’s means

to make payments ; and (2) the emails plaintiffs cite are taken “out of context.”

10

11

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Nomura initially selected 30% of the loans to make up its sample pool, then
divided that number in half – one half was meant to be the “adverse selection,” which
was intended to be representative of the riskiest properties but not necessarily the
riskiest borrowers. After the due diligence results returned from the two outside
vendors, Jeff Hartnagel, Nomura’s “VP Transaction Management,” sent an email
expressing concern over the “quality” of the loans, stating that the initial results
appeared to be “rejects from prior trades.” Pls.’ Mot. Ex. 36. On this basis, Nomura
conducted due diligence on an additional 125 loans from the pool with the lowest
diligence scores. The outside vendor, Clayton, assigned a failing grade to 21.58% of
the loans it reviewed; yet Nomura purchased the entire pool.

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I must admit that I find this defense baffling as it simply confirms what

plaintiffs are alleging.

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The context of the emails, however, puts FNBN’s practices in no better light.

An email from Pat Lamb (Ex. 3) reads in relevant part:

[W]e are in the business of making loans that we can sell profitably. . . .
For me, protecting the bank also means that we all do what we can to
find ways to make good loans. Finding ways to make loans, and doing
it quickly and with our customer service focus in mind is critical. In
short, we need to make certain that we are reviewing every loan with an
eye towards how do we make it work? Have we offered a counter if we
cannot make the loan under the terms as submitted? Are we looking for
documentation not required by the loan program and/or the Avenue
approval? . . . I do not want to close every application that has been
submitted to us and I am not asking you to approve loans you do not feel

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Case 1:08-cv-10446-RGS Document 139 Filed 10/01/12 Page 9 of 25

Nomura also vehemently argues that the due diligence it commissioned exceeded

industry standards.
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Finally, Nomura attacks the facts on which the Wright

declaration and the Holt report are based.

As this brief recital suggests, defendants’ efforts to impugn plaintiffs’ evidence

is largely factual in nature and better fitted to a summary judgment motion than the

comfortable in approving and I do not expect your decisions to always
be perfect. I do want to close as many loans as you believe are credit
and appraisal worthy and I do expect that there will be loans that we
have to repurchase from time to time.

A second email on which plaintiffs rely (Ex. 4), from Lisa Sleeper, states,
“[m]athematically, a lot of our borrowers would not or could not actually own a home
much less pay rent, pay for food, etc.” Sleeper continued, “[w]e have also found that
in [California] there are usually a few parties living within properties in order to be
able to afford the housing there. [California] is truly a beast within itself.” This
email is responsive to a chain of at least five emails that question whether a painter
living in the Bay Area could really be making $95,000 a year. One underwriter
explains to another that the cost of living in the Bay Area is extremely high, and this
“painter” was actually a senior painter for a small company and had owned his own
home previously. To check the painter’s income, one underwriter appears to suggest
pulling the business license information from the California contractor’s website.
Sleeper sent another email several months later (Ex. 25), in which she complains
about the lack of quality control and the mixed messages on the subject being sent by
senior management.

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No clear explanation is given of what these standards (such as they may have
been) were. Plaintiffs argue that Nomura, in any event, cannot rely on its due
diligence at this stage because its reliance is an affirmative defense. See
NECA-IBEW Health & Welfare Fund, 2012 WL 3854431, at *7 n.8. Moreover,
plaintiffs argue that regardless, under Section 11, strict liability applies to trust issuers
even for innocent misstatements. Id. at *7 (“Section 11 imposes strict liability on
issuers and signatories, and negligence liability on underwriters . . . .”).

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Case 1:08-cv-10446-RGS Document 139 Filed 10/01/12 Page 10 of 25

relaxed pleading standard that attaches to a Rule 12(b)(6) motion. Consequently, the

court will put these efforts aside as premature, and turn to defendants’ alternative

Rule 12(b) motion to dismiss.

Motion to Dismiss

“A motion to dismiss for lack of subject matter jurisdiction under Fed. R. Civ.

P. 12(b)(1) is appropriate when the plaintiff lacks standing to bring the claim.”

Edelkind v. Fairmont Funding, Ltd., 539 F. Supp. 2d 449, 453 (D. Mass. 2008).

When faced with motions to dismiss under both 12(b)(1) and 12(b)(6),
a district court, absent good reason to do otherwise, should ordinarily
decide the 12(b)(1) motion first. . . . It is not simply formalistic to decide
the jurisdictional issue when the case would be dismissed in any event
for failure to state a claim. Different consequences flow from dismissals
under 12(b)(1) and 12(b)(6): for example, dismissal under the former,
not being on the merits, is without res judicata effect.

Katz v. Pershing, LLC, 806 F. Supp. 2d 452, 456 (D. Mass. 2011), quoting Ne.

Erectors Ass’n of the BTEA v. Sec’y of Labor, Occupational Safety & Health Admin.,

62 F.3d 37, 39 (1st Cir. 1995).

To survive a motion to dismiss pursuant to Rule 12(b)(6), a complaint must

allege “a plausible entitlement to relief.” Bell Atl. Corp. v. Twombly, 550 U.S. 544,

559 (2007). “While a complaint attacked by a Rule 12(b)(6) motion does not need

detailed factual allegations, a plaintiff’s obligation to provide the grounds of his

entitlement to relief requires more than labels and conclusions, and a formulaic

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Case 1:08-cv-10446-RGS Document 139 Filed 10/01/12 Page 11 of 25

recitation of the elements of a cause of action will not do.” Id. at 555 (internal

quotation marks and citations omitted); see also Rodríguez-Ortiz v. Margo Caribe,

Inc., 490 F.3d 92, 95-96 (1st Cir. 2007). A complaint will also be dismissed where

the statute of limitations bars its claims. See Fed. R. Civ. P. 12(b)(6).

In capsule form, defendants’ argument is that plaintiff-Plumbers’ Fund (one of

the three remaining plaintiff pension funds) has no standing to bring this action

because it suffered no loss causally connected to any of the alleged false

misrepresentations. Moreover, because Plumbers’ Fund was the only one of the three

extant plaintiffs to have filed a complaint within the applicable one-year statute of

limitations, the Complaints of the remaining two plaintiffs (Pipefitters’ Fund and

NECA-IBEW), which are piggy-backed on the Plumbers’ Fund Complaint,

necessarily fail as well. See In re Elscint, Ltd. Sec. Litig., 674 F.Supp. 374, 378 (D.

Mass. 1987) (“[I]t would be improper to allow the filing of a class action by nominal

plaintiffs who are wholly inadequate to represent the asserted class to have the effect

of tolling limitation to permit the otherwise untimely intervention of proper class

representatives.”).

Defendants’ standing argument is two-fold. First, defendants contend that

Plumbers’ Fund lacks standing to sue on the 2006-AP1 offering because it did not

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Case 1:08-cv-10446-RGS Document 139 Filed 10/01/12 Page 12 of 25

purchase any Certificate in that offering. This is undisputed.

13

See Plumbers’ Union

Local No. 12 Pension Fund, 632 F.3d at 770-771 (a named plaintiff may not represent

the interests of investors in a mortgage-backed security where the named plaintiff did

not participate in the offering). Second, Nomura contends that with respect to the

2006-AF1 offering, Plumbers’ Fund sold its Certificate prior to the first “corrective

disclosure” issued by Nomura concerning the 2006-AF1 Certificate and therefore

14

can show no causal relationship between any

loss and

the purported

misrepresentation(s).

Plaintiffs, for their part, insist that defendants have mistakenly labeled their

argument as one of standing. Defendants cannot contest Plumbers’ standing, they

argue, by challenging Plumbers’ failure to allege loss causation when loss causation

is not a part of the prima facie case in either a Section 11 or Section 12 Securities Act

lawsuit. See In re Evergreen, 705 F. Supp. 2d at 94 (“Loss causation is not, however,

an element of a prima facie case under Sections 11 and 12 and, accordingly, the

plaintiffs are under no obligation to plead it.”).

13

As it bears on the later analysis, it is important to note that Pipefitters’ Fund

and NECA-IBEW did purchase shares of the 2006-AP1 offering.

14

A corrective disclosure is a statement revealing the falsity of an issuer’s prior
representations regarding a security. See Catogas v. Cyberonics, Inc., 292 Fed.
App’x. 311, 314 (5th Cir. 2008).

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Case 1:08-cv-10446-RGS Document 139 Filed 10/01/12 Page 13 of 25

Neither scienter, reliance, nor loss causation is an element of § 11 or
§ 12(a)(2) claims . . . . Nor do the heightened pleading standards of the
Private Securities Litigation Reform Act apply to such non-fraud claims.
See 15 U.S.C. § 78u-4(b)(1)-(2). Thus, the provisions “place [ ] a
relatively minimal burden on a plaintiff.” . . . [See also] In re Morgan
Stanley Info. Fund [Sec. Litig.], 592 F.3d [347,] 359, 360 [(2d Cir.
2010)] (observing that §§ 11 and 12(a)(2) “apply more narrowly but
give rise to liability more readily” than § 10(b) of the Securities
Exchange Act of 1934, 15 U.S.C. § 77j (b)).

NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 2012 WL 3854431,

at *7 (2d Cir. Sept. 6, 2012).

Instead, the absence of loss causation (sometimes termed “negative loss

causation”) is an affirmative defense. See McMahan & Co. v. Wherehouse Entm’t,

Inc., 65 F.3d 1044, 1048 (2d Cir. 1995) (“[W]here a defendant proves that the decline

in the value of the security in question was not caused by the material omissions or

misstatements in the registration statement, plaintiff is not entitled to recover any

damages.”); see also In re Merrill Lynch & Co., Inc. Research Reports Sec. Litig., 272

F. Supp. 2d 243, 253 (S.D.N.Y. 2003) (“It is an affirmative defense under Sections

11 and 12 that if the amounts recoverable represent other than the depreciation in

value of the subject security resulting from such part of the prospectus, oral

communication, or registration statement, with respect to which the liability of the

defendant is asserted then such amount shall not be recoverable.”).

Nonetheless, “occasionally courts have dismissed claims under Sections 11 and

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12 on the pleadings when it was ‘apparent on the face of the complaint’ that the

plaintiffs would be unable to establish loss causation.” In re Evergreen, 705 F. Supp.

2d at 94, citing In re Merrill Lynch, 272 F. Supp. 2d at 253-254. According to

defendants this is one of those cases where the grounds for dismissal are apparent.

Defendants argue that at the time Plumbers’ Fund sold the 2006-AF1 trust (November

1, 2007), no corrective disclosure concerning that particular Certificate had been

issued by Nomura. Only afterwards, on November 13, 2007, did the announcement

of the Moody’s downgrade take place. See Consolidated Am. Compl. ¶ 173. Because

the sale and alleged loss occurred before the corrective disclosure, it follows that the

15

alleged misrepresentations could not have caused the loss. See In re Merrill Lynch,

272 F. Supp. 2d at 254-255, citing Akerman v. Orykx Commc’ns, Inc., 810 F.2d 336,

15

Defendants also suggest that the rather small $2,000 loss might more aptly
be explained as a diminution in the principal value of the Certificate, which amortizes
over time. Indeed, argue defendants, Plumbers’ Fund may have turned a profit from
the investment. Defendants also hypothesize that the loss could be explained by
market movements caused by “a host of external market and economic factors.”
Hypotheticals, however, do not make out an affirmative defense. See NECA-IBEW
Health & Welfare Fund, 2012 WL 3854431, at *15 n.15 (“It may well be that,
ultimately, the Fund will recover nothing because defendants will prove that any
diminution in value is attributable to, e.g., (1) illiquidity, (2) the global financial
crisis, or (3) a widening of credit spreads rather than defendants’ misrepresentations.
But that is irrelevant to whether plaintiff has alleged, at the pleading stage, a
cognizable injury under the statute.”).

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342 (2d Cir. 1987) (holding that where a price decline in stock occurred prior to the

alleged public disclosure disclosing the misstatement, the decline in price “did not

constitute a loss actionable under the 1933 Act because it could not have been caused

by misstatements which had not yet been revealed”).

Plaintiffs respond that Akerman does not operate as a bar to their claims. In a

similar case, the Southern District of New York granted a motion to reconsider its

initial decision to limit any recovery of losses to the period after a corrective

disclosure was made. In re WRT Energy Sec. Litig., 2005 WL 2088406 (S.D.N.Y.

Aug. 30, 2005). Relying on Akerman, the original Order had held that “a decline in

the value of securities prior to disclosure of the material misstatement or omission is

not chargeable to the defendants.” Id. at *1. In vacating this holding, the court

explained that

[t]o establish a prima facie Section 11 claim, the plaintiff need only
plead a material misstatement or omission in a registration statement. . . .
“[A]ny decline
the
misrepresentation in the registration statement.” Defendants have the
burden of demonstrating the incorrectness of the presumption, and
Section 11(e) relegates the “risk of uncertainty to the defendants.”

to be caused by

in value

is presumed

Id. (citations omitted). The court concluded that

Akerman does not relieve Defendants of their burden of establishing the
affirmative defense of negative causation. In fact, the Circuit stated that
even if a defendant meets this burden, the plaintiff may survive a
summary judgment motion by coming forward with evidence suggesting

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Case 1:08-cv-10446-RGS Document 139 Filed 10/01/12 Page 16 of 25

that the price decline resulted from the alleged misstatement.

Id. at *2, citing Akerman, 810 F.2d at 343.

Moreover, plaintiffs argue that the Complaint does allege other corrective

disclosures that came well before the November 1, 2007 sale.

16

Although these pre-

sale disclosures do not specifically mention the 2006-AF1 Certificate, they involve

the same issuer and underwriter. Plaintiffs allege that the substance of the

misstatements and omissions are the same for all Certificates, and relate directly to

16

In the Consolidated Amended Complaint, plaintiffs make the following

statements about disclosures:


On July 17, 2007, Moody’s announced a possible downgrade of
Normura Asset Alternative Loan Trusts, Series 2006-AF2, 2006-AR1
and 2006-AR2. On October 15, 2007, Nomura Holdings disclosed that
it would be shutting down its U.S. mortgage loan business. . . . Nomura
Holdings acknowledged that the problem arising from its mortgage loan
business stemmed from weak borrowers who were issued mortgage
loans they could not afford. On October 15, 2007, Nomura Holdings
president Nobuyuki Koga told a news conference, “I think an
unpredictable change in market conditions was not the only factor
behind the losses. We had constraints on our operations because of a
weak client base. We needed to overhaul our US operations to beef up
competitiveness . . . .” . . . On October 25, 2007, Nomura Holdings
posted a ¥10.5 billion ($92 million) loss for the July-September quarter,
due to the sub-prime mortgage crisis in the United States. . . . On
November 13, 2007, Moody’s downgraded numerous classes of
Certificates of Nomura Asset Alternative Loan Trusts, including Series
2006-AP1[ and] 2006-AF1.

Id. ¶¶ 169-173.

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Case 1:08-cv-10446-RGS Document 139 Filed 10/01/12 Page 17 of 25

disclosures about Nomura’s failing mortgage loan business, “stemm[ing] from weak

borrowers who were issued mortgage loans they could not afford.” Consolidated Am.

Compl. ¶ 171. As alleged in the Complaint, Plumbers’ Fund knew that its Certificate

was a mortgage-backed security, whose value depended on the strength of the loans

issued to mortgagors. Thus, at least at the pleading stage, it is not apparent that

plaintiffs are wholly unable to plead loss causation.17

17

Defendants also suggest that even if plaintiffs could establish that a public
disclosure regarding the 2006-AF1 Certificate was made prior to the sale on
November 1, 2007, the purported loss is less than 2%, which is “immaterial as a
matter of law.” Defs.’ Reply Mem. at 8 n.6. As support for this argument, defendants
cite to In re Segue Software, Inc. Sec. Litig., 106 F. Supp. 2d 161 (D. Mass. 2000).
That case is inapposite. Segue Software involved an alleged § 10-(b) violation. This
court found plaintiffs’ claim deficient where they could not demonstrate “that any
overstatement of earnings [by 2.6%] (coupled with other wrongs) was significant to
their decision to purchase Segue stock (or to its valuation by the market).” Id. at 170
(minor adjustments to a company’s gross revenues are not generally deemed material
or indicative of scienter). Defendants would extend this general rule from a
materiality/reliance calculation to a loss calculation. In other words, defendants claim
that because the alleged loss was only $2,000, it cannot have been as a matter of law
materially “caused” by defendants’ misrepresentations or omissions. As plaintiffs
point out, Section 11 does not include a floor for defining loss. See In re Constar
Int’l. Inc. Sec. Litig., 585 F.3d 774, 785 (3d Cir. 2009) (“Section 11 does not require
a showing of individualized loss causation, because injury and loss are presumed
under § 11. It bears repeating that, in a § 11 case, plaintiffs do not bear the burden
of proving causation, damages are calculated as the difference between the purchase
price of a security and the price at the time suit was filed or the security was sold, and
any decline in value is presumed to be caused by the misrepresentation.”); see also
NECA-IBEW Health & Welfare Fund, 2012 WL 3854431, at *15-16 (“Thus, under
§ 11, the key is not, as the district court concluded and as defendants contend, market
price; the key is value. . . . [Nor] must [a fixed income investor] miss an interest
payment before his securities can be said to have declined in ‘value.’ . . . [W]hether

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Finally, there is the issue of the claims brought by Pipefitters’ Fund and NECA-

IBEW. Under Sections 11 and 12(a)(2), a plaintiff must bring a claim “within one

year after the discovery of the untrue statement” upon which the claim is premised.

15 U.S.C. § 77m. Defendants contend that Pipefitters and NECA-IBEW were on

inquiry notice of the claims they seek to assert at least as of November 13, 2007,

when the first corrective disclosure about the 2006-AF1 and 2006-AP1 offerings

occurred.
18

Pipefitters and NECA-IBEW did not bring their claims until November

Certificate-holders actually missed a scheduled coupon payment is not determinative.
. . . NECA was not required to prove the precise amount of any damages at the
pleading stage.”). Moreover, plaintiffs assert that although Plumbers’ Fund incurred
only a nominal $2,000 loss, Pipefitters’ Fund and NECA-IBEW suffered larger
losses. See Pls.’ Surreply at 5-6.

18

Determining the accuracy of defendants’ contention requires a factual
investigation into whether Pipefitters and NECA-IBEW, exercising reasonable
diligence, should have “discover[ed] [] the untrue statement” within the year and
eleven days that elapsed between the date of the corrective disclosure and the date of
the filing of the Complaint. See 15 U.S.C. § 77m; cf. Merck & Co., Inc. v. Reynolds,
130 S. Ct. 1784, 1796 (2010) (holding that “facts showing scienter are among those
that ‘constitut[e] the violation’” and must be “discovered” for a claim to accrue);
Young v. Lepone, 305 F.3d 1, 12 (1st Cir. 2002) (jury question as to whether plaintiff
exercised reasonable diligence with respect to discovering the complained-of Rule
10b-5 violation). Plaintiffs’ argument that they deserve to be accorded a mere eleven
additional “amnesty” days in which to investigate their claims is not terribly
persuasive. A tolling period is not a party favor that is bestowed on a plaintiff as a
matter of right simply because the request does not seem unreasonably excessive in
the number of days sought. Plaintiffs offer no convincing reason why what was
“discovered” in 376 days called not have been uncovered in 365. Nonetheless,
because the court finds that Pipefitters’ and NECA-IBEW’s 2006-AP1 claims were
in any event tolled by the timely filing of the original putative class complaint, the

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24, 2008, when they filed a motion jointly with Plumbers’ Fund for appointment as

lead plaintiffs. Plaintiffs’ claims are thus time-barred unless the statute of limitations

was tolled pursuant to the doctrine announced in American Pipe Construction Co. v.

Utah, 414 U.S. 538 (1974).

In American Pipe, proposed class members sought to intervene in an antitrust

class action after a district court denied class certification for lack of numerosity. The

district court concluded that the statute of limitations had expired and denied the

motions to intervene as untimely. The Supreme Court reversed, holding that “the

commencement of the original class suit tolls the running of the statute for all

purported members of the class who make timely motions to intervene after the court

has found the suit inappropriate for class action status.” Id. at 553. The Court

reasoned that a contrary rule requiring potential class members to “successful[ly]

anticipat[e] . . . the determination of the viability of the class” would “induce[] [them]

to file protective motions to intervene or to join in the event that a class was later

found unsuitable,” and thereby “deprive Rule 23 class actions of the efficiency and

economy of litigation which is a principal purpose of the procedure.” Id. at 553-554.

The Court further stated that “[t]his rule is in no way inconsistent with the functional

operation of a statute of limitations,” as it permits tolling only of claims of which the

court need not pursue this inquiry further.

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defendant was timely put on notice by virtue of the putative class complaint. Id. at

554-555.

Defendants concede that the American Pipe rule tolls the statute of limitations

on claims that Plumbers’ Fund had standing to bring, which, as the court concluded

above, includes claims pertaining to the 2006-AF1 Certificate. See supra. But

whether the rule applies to claims for which the Plumbers’ Fund lacked standing –

namely, the 2006-AP1 Certificate, which Plumbers’ Fund did not buy – is a subject

of much debate. Neither the Supreme Court

19

nor the First Circuit has addressed this

issue, and the courts that have done so are divided. As one court summarized the

divide, “[courts] that have applied the American Pipe tolling rule in these or similar

circumstances have stressed the policies animating that decision. Those declining to

do so have emphasized the tolling rule’s potential for abuse.” In re Indymac Mortg.-

Backed Sec. Litig., 793 F. Supp. 2d 637, 646 (S.D.N.Y. 2011) (footnotes omitted)

19

Seizing upon the Supreme Court’s statement in American Pipe that “the
commencement of a class action suspends the applicable statute of limitations as to
all asserted members of the class who would have been parties had the suit been
permitted to continue as a class action,” 414 U.S. at 553 (emphasis added), defendants
argue that “[i]f the named plaintiff lacked standing to represent a particular plaintiff,
then that plaintiff would not have been a party to the class action and American Pipe
does not toll that plaintiff’s claims.” Defs’ Mem. at 12. This argument overlooks the
fact that the Court expressly noted “that it was not considering a situation in which
class certification was denied ‘for lack of standing of the representative.’” Hill v.
State St. Corp., 2011 WL 3420439, at *26 (D. Mass. Aug. 3, 2011) (quoting Am.
Pipe, 414 U.S. at 553).

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(collecting cases); see also In re Direxion Shares EFT Trust, 279 F.R.D. 221, 237 n.9

(acknowledging split); In re Morgan Stanley Mortg. Pass-Through Certificates Litig.,

810 F. Supp. 2d 650, 668-669 (S.D.N.Y. 2011) (same). Where and how to strike the

balance between these polar positions is a matter of policy that the First Circuit and,

ultimately, the Supreme Court, must decide. In the absence of guidance, however,

this court has the responsibility to make a decision according to its best judgment.

In so doing, I conclude that under the circumstances of this case the reasoning of the

In re Indymac Mortgage-Backed Securities Litigation line of cases the more

persuasive.

Applying the tolling rule to Pipefitters’ and NECA-IBEW’s 2006-AF1

Certificate claims advances the policies of efficiency and economy served by Rule 23

and American Pipe. As indicated above, the American Pipe tolling rule is intended

to give a disincentive to putative class members from filing duplicative, protective

filings. Under the outcome advocated by defendants, proposed class members would

be forced to do just that in order to preserve their claims in the event that the class

representative(s) was later found to lack standing, because of an internal technical

failure (in this case the failure to purchase a particular certificate in a raft of related

securities offerings) that would not be as apparent to a putative class member as

would be the subject matter of the suit itself. The court is loath to “punish class

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members for relying on the very thing Rule 23 is intended to provide: an efficient

method for resolving claims common to a class of individuals without the need for

wasteful and duplicative litigation.” In re Initial Pub. Offering Sec. Litig., 2004 WL

3015304, at *5 (S.D.N.Y. Dec. 27, 2004).

Application of the tolling rule in this case further comports with “the polic[y]

of ensuring essential fairness to defendants.” Am. Pipe, 414 U.S. at 554 (internal

quotation marks omitted). The original complaint filed by Plumbers’ Fund included

the claims pertaining to the 2006-AP1 Certificate. “[D]efendants,” therefore, “are

not being blindsided or forced to defend against stale claims.” In re Morgan Stanley,

810 F. Supp. 2d at 669. To the contrary, “the complaint unquestionably apprised

them ‘[w]ithin the period set by the statute of limitations . . . [of] the essential

information necessary to determine both the subject matter and the size of the

prospective litigation.’” Id., quoting Am. Pipe, 414 U.S. at 555; see also Rose v.

Arkansas Valley Envtl. & Util. Auth., 562 F. Supp 1180, 1193 (W.D. Mo. 1983)

(reasoning that a putative class action that is denied for lack of standing of the

representative may be more likely to give defendants actual notice of the claims of

individual class members than one denied for lack of typicality or commonality).

The court is sensitive to the concern that any reflexive application of the

American Pipe tolling rule in cases where the class representative is found to lack

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standing could create a significant potential for abuse. See, e.g., Me. State Ret. Sys.

v. Countrywide Fin. Corp., 722 F. Supp. 2d 1157, 1167 (C.D. Cal. 2010) (“This Court

shares the concern of other district courts that extending American Pipe tolling to

class action claims the original named plaintiffs had no standing to bring will

encourage filings made merely to extend the period in which to find a class

representative.”). There may be circumstances, for example, in which the purported

class representative so clearly lacks standing that allowing intervention after

certification is denied would condone (and even invite) the filing of placeholder

lawsuits. See In re Morgan Stanley, 810 F. Supp. 2d at 670. The court is not

convinced, however, that a vigilant district court would be any less able (or inclined)

to ferret out and sanction instances of placeholder abuse than other abuses of the

litigation process. See McCarty v. Verizon New England, Inc., 674 F.3d 119 (1st Cir.

2012).

While the First Circuit ultimately affirmed this court’s conclusion that

Plumbers’ Fund lacked standing to pursue the 2006-AP1 Certificate claims, the issue,

as the Court emphasized, was neither “straightforward” nor “well settled.” Plumbers’

Union Local No. 12 Pension Fund, 632 F.3d at 768. Indeed, in its opinion the First

Circuit canvassed authority suggesting that “the class action should embrace

defendants against whom no named plaintiff has a claim so long as the claims are

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Case 1:08-cv-10446-RGS Document 139 Filed 10/01/12 Page 24 of 25

essentially of the same character as the claim against a properly named defendant.”

Id. at 769-770 (collecting cases). Given this authority and the overlap in the conduct

underlying the 2006-AP1 and 2006-AF1 claims, the putative class members were not

unreasonable in believing prior to the rulings of this court and the First Circuit that

Plumbers’ Fund standing extended to certificates beyond the 2006-AF1 Certificate

that it had purchased.
20

The reasonableness of this reliance, when coupled with the

absence of any evidence that plaintiffs were attempting to engage in placeholder

abuse, assuages any concerns and militates in favor of tolling. Compare In re

Morgan Stanley, 810 F. Supp. 2d at 670 (permitting tolling under similar

circumstances), with Direxion, 279 F.R.D. at 238 (refusing to toll where proposed

intervenor could not reasonably have believed that asserted class would protect his

interests), and Fleming v. Bank of Boston Corp., 127 F.R.D. 30, 34, 36 (D. Mass.

1989) (refusing to toll where investors could not reasonably have relied on receiver,

who had requested and been denied authority to represent investors, to litigate their

20

Inasmuch as Plumbers’ Fund clearly had standing to assert the 2006-AF1
claims, the court finds inapposite the various cases relied upon by defendants in
which courts refused to apply the American Pipe tolling rule where the original
named plaintiffs did not have standing to litigate any of the claims brought on behalf
of the purported class. See Hill v. State St. Corp., 2011 WL 3420439, at *26 n.19 (D.
Mass. Aug. 3, 2011) (applying American Pipe and distinguishing In re Elscint, 674
F. Supp. at 378-379, on grounds that the original plaintiffs in Elscint lacked standing
as to any claims and thus were “wholly inadequate” to represent the purported class).

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claims).

In sum, the court finds that pursuant to the tolling rule of American Pipe,

Pipefitters’ and NECA-IBEW’s claims were timely.

ORDER

For the foregoing reasons, plaintiffs’ motion to proceed with the litigation is

ALLOWED. Defendants’ renewed motion to dismiss is DENIED. Defendants’

motions to exclude the expert report of Ira Holt and to strike the declaration of Susan

Wright are DENIED without prejudice. The parties will jointly submit a proposed

revised discovery schedule within ten (10) days of this Order. Defendants also will

notify the court within ten (10) days if they intend to make an application for leave

to file an interlocutory appeal.

SO ORDERED.

/s/ Richard G. Stearns
________________________________
UNITED STATES DISTRICT JUDGE

25