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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
PENNSYLVANIA PUBLIC SCHOOL
EMPLOYEES' RETIREMENT SYSTEM,
individually and on behalf of all others similarly
11 Civ. 733 (WHP)
MEMORANDUM & ORDER
BANK OF AMERICA CORPORATION, et aI.,
WILLIAM H. PAULEY III, District Judge:
Lead Plaintiff Pennsylvania Public School Employees' Retirement System
("Plaintiff') brings this putative securities class action lawsuit against Bank of America
Corporation ("BoA"), current and past officers and directors of BoA, twenty-seven underwriters,
and PricewaterhouseCoopers LLP ("PwC") (collectively, "Defendants"). Defendants move to
dismiss the Consolidated Class Action Complaint ("the Complaint"). For the following reasons,
Defendants' motions are granted in part and denied in part.
This action concerns allegations of BoA's purposeful concealment of its reliance
on Mortgage Electronic Registration Systems, Inc. ("MERS") and attendant exposure to billions
of dollars of loan repurchase claims arising from the sale of mortgage-backed securities.
(Consolidated Class Action Complaint, dated Sept. 23,2011 ("CompI.") ~ 1.) BoA allegedly
concealed this material information to facilitate the repayment of funds it borrowed from the
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federal government in connection with the Troubled Asset Relief Program ("TARP"). (Compl.,
1.) The following is gleaned from the Complaint and assumed to be true for the purposes of this
I. The Parties
BoA is the largest lender in the United States. (Compl., 34.) In July 2008, BoA
acquired Countrywide Financial Corporation ("Countrywide")-one of the biggest originators of
subprime mortgages. (Compl., 35.) Following this acquisition, BoA oversaw $2.09 trillion in
loans as of September 2010. (Compl., 94.) This action implicates Countrywide's role in
originating loans and selling them to third parties or for securitization into mortgage-backed
securities ("MBS"). It also concerns BoA's role as servicer for mortgages in MBS trusts.
Plaintiff also brings this action against the following past and current BoA
officers: (1) Kenneth D. Lewis, Chief Executive Officer ("CEO") from April 2001 to December
2009; (2) Joseph Lee Price, II, Chief Financial Officer ("CFO") from January 2007 to January
2010; (3) Brian T. Moynihan, CEO from January 2010 to the present; (4) Neil Cotty, CFO from
February 2010 to May 2010; and (5) Charles H. Noski, CFO from May 2010 through June 2011
(the "Executive Defendants," collectively with BoA, the "BoA Defendants").
The Complaint further names the following past and current BoA directors:
William P. Boardman, Frank Paul Bramble, Sr., Virgis William Colbert, Charles K. Gifford, Jr.,
Charles Otis Holliday, Jr., Monica C. Lozano, Thomas John May, Thomas Michael Ran, and
Robert W. Scully (collectively, the "Director Defendants," with Defendant Price, the "Securities
Act Defendants"). Additionally, the Complaint names over twenty underwriters to BoA's
Common Equivalent Securities offering, which is discussed below (the "Underwriter
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Defendants"). Plaintiff also names PwC, the accounting firm that audited BoA's financial
statements during the Class Period-February 27,2009 to October 19,2010.
Plaintiff is a public pension fund organized for the benefit of Pennsylvania public
school employees. (Compl., 33.) It purchased BoA's securities during the Class Period,
including the Common Equivalent Securities. (Compl., 33.) Plaintiff alleges that it suffered
substantial damage as a result of these purchases. (CompL , 33.)
In almost every jurisdiction, a mortgagee must record the mortgage in the county
where the property is located for it to take priority over other liens. (Compl., 2.) MERS is a
private, computerized system for processing and tracking loans that purports to eliminate the
need for physically recording mortgages. (Compl. ~ 6.) When a mortgage is transferred from
one MERS member to another, MERS only makes a notation of that transaction in its system.
(CompL " 6, 76.) Thus, there is no public record of the transfer. (CompL, 76.) Additionally,
instead of listing the name of the mortgagee, MERS lists itself as the mortgagee or the
"nominee" for the mortgagee. (CompL" 6, 75.) However, MERS holds no interest in the loan.
(Compl. , 75.) Thus, the mortgage holder or servicer, and not MERS, receives payments on the
loan. (Compl., 75.) BoA, Countrywide, and other financial institutions utilized MERS to avoid
burdensome recording requirements and to ensure the speedy securitization of mortgages for sale
on the secondary market. (Compl., 7.)
MERS operated seamlessly until 2008, when the country entered a recession and
default rates rose sharply. (Compl., 5.) Then a number of courts made clear that it would be
nearly impossible for mortgage holders or servicers to foreclose on loans processed or
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transferred via MERS. (Compl. ~ 22,84-85.) To foreclose on a mortgage, a party must have
title to it. (CompL ~~ 85, 87.) Courts reasoned that because MERS listed itself as the mortgagee,
mortgage holders and servicers did not have standing to foreclose. (CompL ~ 85.) Some of these
suits involved BoA and Countrywide in their capacities as a mortgage holder or servicer.
(Compl. ~ 84.) Plaintiff alleges that these publicly-filed court decisions were available to
insiders, such as the BoA Defendants, but not to the public. (Compl. ~ 87.)
Plaintiff additionally alleges that Countrywide routinely failed to transfer
promissory notes when it sold mortgages. (Compl. ~ 78.) To transfer a mortgage validly, an
assignor or seller must endorse the promissory note and physically transfer it to the new
mortgage holder. (CompL ~ 80.) Ifthe promissory note is not endorsed and transferred, the loan
is unsecured. (CompL ~ 80.) Like the standing issue, this practice hindered BoA's ability to
foreclose on loans that it serviced. (Compl. ~ 84.) Plaintiff contends that various judicial
decisions involving BoA or Countrywide informed BoA about a mortgage holder's inability to
foreclose on a mortgage when MERS was the nominee and the note was not properly assigned.
(CompL ~ 84.) To remedy this problem, BoA enlisted employees, now known as robo-signers,
to falsify affidavits representing that they had personal knowledge of facts underlying loans and
that the notes supporting various loans had been properly transferred. (Compl. ~~ 22,83.)
III. Repurchase Claims
Following its acquisition of Countrywide, BoA was responsible for underwriting
17% ofthe mortgage-backed securities market, thereby constituting the largest share ofthe
market. (CompL ~ 94.) Plaintiff alleges that during the Class Period, BoA made representations
and warranties (or assumed liability for representations Countrywide made) regarding mortgages
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it sold to third parties or bundled into mortgage-backed securities. (Compi. ~ 11.) These
representations and warranties included assurances that BoA had good title to the mortgages and
that BoA and Countrywide adhered to certain underwriting standards. (Compi. ~~ 12, 104.) If
BoA breached representations and warranties, purchasers could demand that BoA repurchase the
loan. (CompI. ~ 108.)
Plaintiff alleges that BoA breached its representation that it had good title
because, as discussed above, courts said mortgage servicers and holders lacked standing to
foreclose against borrowers in default due to the MERS system. (Compi. ~ 107.) Similarly,
Plaintiff alleges that BoA breached its representations concerning good title because
Countrywide regularly failed to transfer promissory notes with their respective mortgages as
required by law. (CompI. ~ 107.)
Plaintiff also asserts that BoA breached because the underwriting standards
utilized for those loans were far less stringent than represented. The lower standards resulted in
unqualified borrowers obtaining loans and later defaulting. (Compi. ~~ 13-14.) Specifically,
Plaintiff alleges that prior to the Class Period, Countrywide's priority was generating loans for
securitization. (Compi. ~ 100.) And because Countrywide transferred risks associated with its
loans upon securitization, it cared little about whether borrowers could fulfill their loan
obligations. (Compi. ~ 100.)
Plaintiff claims that BoA is liable to investors for billions of dollars in repurchase
claims as a result of these breaches and that the BoA Defendants misled investors about the
magnitude of repurchase claims BoA faced. (Compi. ~ 14.)
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IV. Repaying T ARP and Common Equivalent Securities
In 2008, BoA suffered significant financial setbacks due to the financial crisis,
which were exacerbated by its acquisition of Countrywide. (Compl. ~ 63.) To remain solvent,
BoA accepted $25 billion in loans from the federal government in October 2008 and another $20
billion in January 2009 (the "TARP funds"). (Compl. ~~ 15,63.) As a condition of these loans,
the government imposed onerous restrictions on executive compensation. (Compl. ~ 15.)
Accordingly, repaying the T ARP Funds was a high priority for the Executive Defendants.
(Compl. ~~ 16,65.) Indeed, Lewis publicly stated that the restrictions, which applied to top
management as well as the next twenty highly-compensated employees, went "too far." (Compl.
~ 65.) He was concerned that those highly-compensated employees would receive employment
offers from competitors if BoA were unable to offer them adequate compensation, which in tum
would hurt BoA's profits. (Compl. ~ 65.) The need to remove compensation restrictions became
more pressing when Lewis stepped down as CEO because BoA would have difficulty retaining
an executive to replace him if those restrictions remained in place. (Compl. ~ 67.)
BoA faced obstacles raising the capital required to repay T ARP funds because it
had already issued all the shares of common stock authorized under its certificate of
incorporation. (Compl. ~ 68.) Thus, in December 2009, the BoA Defendants undertook an
"unorthodox" securities offering. (Compl. ~~ 68, 143.) The BoA Defendants issued Common
Equivalent Securities, which would convert into BoA common stock upon shareholder approval
of an amendment to BoA's certificate ofincorporation (the "Offering"). (Comp1. ~~ 16,69.)
The BoA Defendants allegedly concealed BoA's reliance on MERS and BoA's exposure to
billions of dollars in repurchase claims to ensure the Offering'S success. (Comp1. ~~ 15-16,69.)
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And the Underwriter Defendants failed to ensure the truthfulness of statements the BoA
Defendants made in connection with the Offering. (Compl. ~ 42.) In February 2010,
shareholders approved the amendment, and the funds the Offering generated enabled the BoA
Defendants to repay the TARP Funds. (Compl. ~ 146.)
In September 2010, the U.S. Treasury Department announced it was investigating
improper foreclosure practices by lenders. (Compl. ~ 23.) The following month, attorneys
general of all fifty states announced they were investigating the underwriting and foreclosure
practices of major banks. (Compl. ~ 25.) That same month, BoA announced it was suspending
foreclosures and admitted that there were "technical issues" with its foreclosure practices.
(Compl. ~~ 24-25.) On October 18,2010, a group of private investors, including Pacific
Investment Management Company, LLC ("PIMCO"), demanded that BoA repurchase $47
billion worth of mortgage-backed securities (the "PIMCO demand"). 1 (Compl. ~ 159.) The
following day, BoA disclosed the PIMCO demand and announced it had received an additional
$26 billion in repurchase claims, half of which had not been resolved. (Compl. ~~ 162,314-15.)
The Complaint alleges that throughout the Class Period, the BoA Defendants
failed to disclose its reliance on MERS and the looming legal obstacles in various SEC filings,
press releases, and earnings calls, which rendered those disclosures misleading. (Compl. ~~ 184
86,188-89, 192, 199,201,203,205,209-10,212,214,216-17,221-22,231,234,237-38,239,
1 At oral argument, Plaintiffs counsel asserted that the PIMCO investors and others made
repurchase demands on BoA in June 2010 and that BoA did not disclose that demand until
October 2010. (Transcript of Oral Argument, dated Mar. 28, 2012 ("Hr'g Tr.") at 24:11-13.)
But the Complaint alleges that the PIMCO investors made repurchase demands on October 18,
2010, and that BoA disclosed those demands on October 19,2010. (Compl. ~ 159, 162,314
15.) The date alleged in the Complaint informs this Court's analysis. See Allen, 945 F.2d at 44
(noting that consideration on a motion to dismiss is limited to facts on face of the complaint).
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245, 252, 256, 259-60, 262, 268-69, 272, 274, 276.) Plaintiff alleges that the Class Period began
when the BoA Defendants issued its first misleading filing, its Form IO-K on February 27, 2009
("2008 10-K"). Similarly, Plaintiff alleges that throughout the Class Period, the BoA Defendants
failed adequately to disclose BoA's exposure to repurchase claims, making statements in the
2008 10-K and other disclosures misleading. (Compl. ~~ 184-85, 188, 190-91, 199,202,206,
266,267,270,273) Plaintiff further claims that the 2008 IO-K and BoA's Form IO-K filed
February 26, 2010, as well as interim filings, were false because the BoA Defendants represented
that BoA maintained effective disclosure controls and procedures and effective internal controls
over financial reporting, when BoA did not. (Compl. ~~ 184-85, 193-95,204,213,215,223,
226-27,249-50,251,261-64,271,289-92.) Finally, Plaintiff contends that BoA violated
generally accepted accounting principles ("GAAP") and SEC regulations and that the failure to
comply with GAAP rendered those filings presumptively misleading. (Compl. ~~ 283-85.)
I. Legal Standard
On a motion to dismiss, a court must accept the material facts alleged in the
complaint as true and construe all reasonable inferences in plaintiffs favor. See Grandon v.
Merrill Lynch & Co., 147 F.3d 184, 188 (2d Cir. 1998). Nonetheless, "factual allegations must
be enough to raise a right of relief above the speculative level, on the assumption that all of the
allegations in the complaint are true." Bell Atl. Corp. v. Twombly, 540 U.S. 544,556 (2007)
(requiring plaintiff to plead "enough fact[ s] to raise a reasonable expectation that discovery will
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reveal evidence of [his claim]"). "To survive a motion to dismiss, a complaint must contain
sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'"
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 555 U.S. at 570). "The
plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer
possibility that a defendant has acted unlawfully." 556 U.S. at 678 (citation omitted). "A court
ruling on such a motion may not properly dismiss a complaint that states a plausible version of
the events merely because the court finds a different version more plausible." Anderson News,
LLC, et at. v Am. Media Inc., et aI., 680 F.3d 162, 185 (2d Cir. 2012). "A pleading that offers
'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action will not
do.' Nor does a complaint suffice if it tenders 'naked assertion[s]' devoid of 'further factual
enhancement.'" Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 555). A court's
"consideration [on a motion to dismiss] is limited to facts stated on the face of the complaint, in
documents appended to the complaint or incorporated in the complaint by reference, and to
matters of which judicial notice may be taken." Allen v. WestPoint-Pepperell, Inc., 945 F.2d 40,
44 (2d Cir. 1991). A complaint alleging securities fraud must meet the heightened pleading
standard of Rule 9(b), which requires a plaintiff to "state with particularity the circumstances
constituting fraud." Fed. R. Civ. P. 9(b); see also ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493
F.3d 87, 99 (2d Cir. 2007).
II. Section 1O(b) of the Exchange Act and Rule IOb-5
Plaintiff asserts that the BoA Defendants violated Section 1 O(b) of the Securities
Exchange Act of 1934 ("Exchange Act") and Rule IOb-5. To state a claim for relief under
Section lO(b) and Rule IOb-5, Plaintiff must allege "(1) a material misrepresentation or omission
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by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and
the purchase or sale ofa security; (4) reliance upon the misrepresentation or omission; (5)
economic loss; and (6) loss causation." Pac. Inv. Mgmt. Co. v. Mayer Brown LLP, 603 F.3d
144, 151 (2d Cir. 2010). The parties dispute whether the Complaint adequately alleges that the
BoA Defendants made misstatements or omissions of material fact and whether the BoA
Defendants made any such misstatements or omissions with scienter.
A. Material Omissions and Misstatements
The Private Securities Litigation Reform Act of 1995 ("PSLRA") "insists that
securities fraud complaints specify each misleading statement" and ''that they set forth the facts
on which a belief that a statement is misleading was formed." Merrill Lynch, Pierce, Fenner &
Smith Inc. v. Dabit, 547 U.S. 71,81-82 (2006) (internal alterations and quotation marks
omitted). "When an allegation of fraud is based upon nondisclosure, there can be no fraud
absent a duty to speak." Chiarella v. United States, 445 U.S. 222,235 (1980); see also In re
Marsh & McLennan Cos., Inc. Sec. Litig., 501 F. Supp. 2d 452,469 (S.D.N.Y. 2006).
"Disclosure of an item of information is not required ... simply because it may be relevant or of
interest to a reasonable investor." Resnik v. Swartz, 303 F.3d 147, 154 (2d Cir. 2002). Indeed,
the Supreme Court recently reiterated that Section 1 O(b) and Rule 10b-5 "do not create an
affirmative duty to disclose any and all material information. Disclosure is required under these
provisions only when necessary to make statements made, in the light of the circumstances under
which they were made, not misleading." Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309,
1321 (2011) (internal quotation marks and alterations omitted). The undisclosed information
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need not "completely negate the public statements," but need only render them materially
misleading. In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 268 (2d Cir. 1993).
"[T]here is no duty to disclose information to one who reasonably should already
be aware ofit." Seibert v. Sperry Rand Corp., 586 F.2d 949, 952 (2d Cir. 1978), see also In re
WorldCom, Inc. Sec. Litig., 346 F. Supp. 2d 628,687 (S.D.N.V. 2004). Additionally,
defendants need not disclose matters that are merely speCUlative. See Acito v. Imcera Grp., 47
F.3d 47, 53 (2d Cir. 1995) (no duty to disclose negative consequences from a failed factory
inspection when it was not a "foregone conclusion" that consequences would materialize); see
also In re Par Pharm., Inc. Sec. Litig., 733 F. Supp. 668, 678 (S.D.N.Y. 1990) ("Defendants
cannot be held liable for failing to disclose what would have been pure speculation[.]") (internal
quotation marks omitted)). Plaintiffs allege that the BoA Defendants made misrepresentations
and omissions regarding (1) BoA's use ofMERS and the risks associated with it; (2) BoA's
exposure to repurchase claims; (3) BoA's internal controls; and (4) GAAP and SEC regulations.
1. Use of and Risks Associated with MERS
Plaintiff adequately pleads that the BoA Defendants had a duty to disclose BoA's
reliance on MERS and the risks associated with it. For example, in the 2008 10-K, the BoA
Defendants reported BoA's loan assets. (Compl., 186.) While BoA's reliance on MERS does
not render those figures false, it does make them misleading, which is sufficient to plead a
material omission. See Time Warner, 9 F.3d at 268. Specifically, the BoA Defendants'
representations that BoA held a particular amount of loan assets is rendered misleading by the
BoA Defendants' failure to disclose that MERS "clouded" ownership for a substantial number of
those loans. Cf. In re Gen. Elec. Co. Sec. Litig., No. 09 Civ. 1951 (RJH), 2012 WL 90191, at
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*17 (S.D.N.Y. Jan. 11,2012) (defendants did not have duty disclose that company made risky
loans because it did not render misleading company's statement that it was a "senior secured and
Additionally, BoA stated in the 2008 lO-K that it faced contractual liabilities ifit
breached representations and warranties concerning mortgages it sold or bundled into securities.
(CompI. ~ 190.) It noted that it "attempts to limit its risk of incurring these losses by structuring
its operations to ensure consistent production of quality mortgages and servicing those mortgages
at levels that meet secondary mortgage market standards." (CompI. ~ 190.) BoA disclosed its
efforts to limit repurchase claims, triggering its duty to disclose its reliance on MERS and the
attendant breach of its representations concerning good title to mortgage loans. See Novak v.
Kasaks, 216 F.3d 300, 315 (2d Cir. 2000) (duty to disclose contrary information when defendant
reported that a problem with inventory was "in good shape"); see also In re Gen. E1ec. Co., 2012
WL 90191, at * 17 (duty to disclose problems with loan portfolios where defendant described its
loan portfolio as "great").
The statement is not inactionable puffery because it is "not merely an expression
ofopinion, expectation or declaration of intention." Lapin v. Goldman Sachs, 506 F. Supp. 2d
221,239 (S.D.N.Y. 2006) (finding actionable Goldman Sachs' statement that integrity was "at
the heart" of its business). And more importantly, Plaintiff alleges that the BoA Defendants did
not genuinely or reasonably believe these opinions. Lapin, 506 F. Supp. 2d at 239. For example,
Plaintiff alleges that BoA employees robo-signed loan documents in an attempt to fix the various
problems created by MERS and Countrywide's failure to transfer notes with mortgages.
(Comp!. ~ 83.) Additionally, Plaintiff alleges that the BoA Defendants were aware ofjudicial
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decisions questioning the ability of a mortgage holder or servicer to foreclose on mortgages
transferred via MERS. (CompI., 84.)
The BoA Defendants next argue that they had no duty to disclose BoA's use of
MERS or its associated risks because (I) any risks associated with MERS were purely
speculative, and (2) BoA disclosed its use ofMERS in various SEC filings. Both of these
arguments are unavailing. Plaintiff sufficiently pleads that beginning in 2008, courts found that
mortgage holders and servicers could not foreclose on mortgages transferred via MERS.
(Compi. ,,84-85.) These court decisions distinguish this case from Acito v. Imcera Group, 47
F3d 47 (2d Cir. 1995). In Acito, the Second Circuit found that defendant did not have a duty to
disclose the speculative possibility that an FDA inspection of defendant's plant would have
negative effects. 47 F.3d at 53. That two prior FDA inspections of the plant had negative
consequences did not render it a "foregone conclusion" that the plant would fail a third time.
Acito, 47 F.3d at 53.
Here, however, there was no speculation about whether courts would find
problems with MERS. As Plaintiff alleges, courts in fact had found problems with MERS. Cf.
In re Yukos Oil Co. Sec. Litig., No. 04 Civ. 5243 (WHP), 2006 WL 3026024, at *16 (S.D.N.Y.
2006) (no misrepresentation where defendant had no reason to know that law would change and
render it in violation of a particular rule). And to the extent that the BoA Defendants dispute the
import of these judicial decisions, these arguments pose a question of fact that cannot properly be
decided on a motion to dismiss. See Iqbal, 556 U.S. at 678 (noting that court must accept facts
as true for purposes of a motion to dismiss); see also Anderson News, 680 F.3d at 185 ("choice
between two plausible inferences" should not be made on Rule 12(b)(6) motion to dismiss).
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The SEC filings that the BoA Defendants cite to show that BoA disclosed its
reliance on MERS are insufficient. Indeed, BoA did not even file those documents. One was
filed by a Countrywide subsidiary prior to BoA's acquisition of Countrywide, and the other was
issued by a BoA subsidiary. And both prospectuses were intended for private investors, rather
than BoA shareholders. The BoA Defendants offer no convincing explanation why BoA
shareholders should have been reasonably aware of those prospectuses. See Seibert, 586 F.2d at
952; see also In re WorldCom, 346 F. Supp. 2d at 687 (no duty to disclose information to one
who reasonably should already be aware of it); Fisher v. Plessy Co., 559 F. Supp. 442,447-48
(S.D.N.Y. 1983) (American investors were not reasonably aware of matters covered heavily in
British press). Accordingly, the BoA Defendants' failure to disclose BoA's reliance on MERS
and its associated risks constitutes a material misrepresentation.
2. Representation and Warranty Claims
Plaintiff cites various misrepresentations and omissions relating to BoA's
exposure to repurchase claims for breaches of warranties. Specifically, it contends that (1)
BoA's stated reserves were unreliable because Defendants bypassed internal controls for
establishing allowances for representation and warranty claims; (2) BoA concealed existing
repurchase claims; (3) BoA misrepresented that it had resolved issues concerning Countrywide's
assets when more repurchase claims were likely; and (4) the 2008 10-K misleadingly reported
that BoA attempted to limit its liability by ensuring "consistent production of quality mortgages."
Plaintiffs contention that stated reserves were unreliable fails because estimating
loan reserves is a matter ofjudgment. Therefore, Plaintiff must allege that the BoA Defendants'
"opinions were both false and not honestly believed when they were made." Fait v. Regions Fin.
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Corp., 655 F.3d 105, 113 (2d Cir. 2011); see also City of Omaha, Neb. Civilian Emps' Ret. Sys.
v. CBS Corp., 679 F.3d 64, 64 (2d Cir. 2012) (applying Fait to Section lOeb) claims). Plaintiff
maintains that it does not assert a claim for misstated loan loss reserves. Rather, Plaintiff alleges
that the BoA Defendants' stated reserve figures "could not be relied upon" because they
purposely bypassed internal controls to downplay the magnitude oflosses. (Compl. ~~ 136(d),
(n).) Specifically, Plaintiff alleges that contrary to industry practice and GAAP, Moynihan failed
to record an allowance for repurchase claims until BoA received a formal demand or notice of
litigation. (CompL ~ 136(d).) While Plaintiff rejects the notion that it asserts a claim for
misstated loan loss reserves, this appears to be precisely what Plaintiff is pleading. Because
Plaintiff fails to comply with the requirements set forth in Fait, unreliable loan reserves cannot
form the basis of this claim.
Plaintiffs allegation that BoA concealed repurchase claims is factually
insufficient to plead a material misstatement or omission. Indeed, Plaintiff concedes that the
Executive Defendants disclosed repurchase claims by government-sponsored entities and
mono line insurers. (Lead Plaintiffs Briefin Opposition to Defendants' Motion to Dismiss,
dated Feb. 15,2012, at 2.) Rather, Plaintiff insists that the BoA Defendants concealed
repurchase claims by private investors. On October 18, 2010, PIMCO demanded that BoA
repurchase $47 billion worth ofRMBS. But BoA disclosed this development the following
day-October 19,2010. (Compl. ~~ 159, 162,314-15.) In addition to the PIMCO demand, BoA
revealed on October 19,2010, that as of September 30, 2010, it had received $26 billion in
repurchase claims-nearly half of which were unresolved. (Compl. ~ 162.) But Plaintiff does
not allege when investors demanded repurchase. Without these facts, Plaintiff does not plead a
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claim that "is plausible on its face." Iqbal, 556 U.S. at 678. Moreover, in August 2010, BoA
disclosed that as of June 30, 2010, it had $11.1 billion worth of unresolved repurchase claims.
This disclosure undercuts any reasonable inference that up until October 20 I0, the BoA
Defendants were concealing that BoA had nearly $13 billion worth of unresolved claims.
(Declaration of Michael Bongiorno, dated Jan. 11,2012 ("Bongiorno Decl.") Ex. 0: 10-Q, dated
Aug. 6, 2010 ("August 2010 10-Q") at 40 (estimating that BoA had $11.1 billion worth of
unresolved repurchase requests).) 2 Nor does Plaintiff cite any repurchase claims that the
Executive Defendants failed to disclose but should have.
However, Plaintiffs other allegations adequately plead that the BoA Defendants
made material misstatements or omissions concerning its vulnerability to repurchase claims. For
example, Plaintiff asserts that Moynihan and Cotty's statements during an April 2010 conference
were misleading. Moynihan and Cotty represented that BoA had resolved issues with toxic
Countrywide assets by writing down the value ofloan portfolios. (Compl. ~~ 255,258.)
Specifically, Moynihan stated:
I think the results reinforce what I think will be the trends that we'll discuss over
the next few quarters. Decreasing charge-offs, potential reserve releases, and
those types of things that dominate the credit discussion .... With legacy asset
write-downs now down to an immaterial amount, and that also shows the worst of
the crisis is behind us we believe ....
("the 2010 Statement") (Compl. ~ 255.) Plaintiff correctly asserts that these statements were
misleading because BoA still remained vulnerable to a substantial number of repurchase claims.
2 The Court may consider the August 2010 10-Q because it is "incorporated in the complaint by
reference." Allen, 945 F.2d at 44.
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The BoA Defendants argue that there was no duty to disclose the speculative
possibility of litigation. But in contrast to In re Citigroup Securities Litigation, where the
plaintiff failed to allege that litigation was not "substantially certain" to occur, Plaintiff
adequately alleges the likelihood oflitigation here. Cf. 330 F. Supp. 2d 367, 377 (S.D.N.Y.
2004); cf. also Acito, 47 F.3d at 53. Here, Plaintiff alleges that BoA breached representations
and warranties for a substantial portion of their loans and that such breaches were obvious
because of the failing economy. And in contrast to In re Par Pharmaceutical, Inc. Securities
Litigation, where defendant had no duty to disclose speCUlation about the possible negative
consequences of a bribery scandal, there is nothing speculative here. Cf. 733 F. Supp. at 678; cf.
also Acito, 47 F.3d at 53. Rather, the consequences of multiple breaches of representations and
warranties were clear-BoA would be vulnerable to repurchase demands.
The BoA Defendants further claim that Moynihan's forward-looking statement
falls within the PSLRA' s safe harbor provision. "Under the PSLRA, the defendants are not
liable if the allegedly false or misleading statement is identified as a forward-looking statement,
and is accompanied by meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those in the forward-looking statement." Slayton v.
Am. Express Co., 604 F.3d 758, 768 (2d Cir. 2010) (quoting 15 U.S.c. § 78u-5(c)(l)(A)(i))
(internal quotation marks and alterations omitted). In other words, "defendants must
demonstrate that their cautionary language was not boilerplate and conveyed substantive
information." Slayton, 604 F.3d at 772. "[A] defendant need not include the particular factor
that ultimately causes its projection not to come true in order to be protected by the meaningful
cautionary language prong of the safe harbor." Slayton, 604 F.3d at 772.
Case 1:11-cv-00733-WHP Document 148 Filed 07/11/12 Page 18 of 46
Prior to Moynihan's statement, a BoA executive infonned analysts that future
predictions could change depending on a variety of factors, including, "economic conditions,
changes in interest rates, competitive pressures within the financial services industry, and
legislative or regulatory requirements that may affect our businesses." (Declaration of Scott D.
Musoff, dated Mar. 2,2012 ("MusoffDecl.") Ex. I at 1.) The BoA Defendants "carry the burden
of demonstrating that they are protected by the meaningful cautionary language prong of the safe
harbor," but but have failed to argue that any of the factors "identified were important factors
that could realistically cause results to differ materially." Slayton, 604 F.3d at 773. "Absent
such argument," this Court has "no way ofknowing if' the factors identified could have caused
results to differ materially. Slayton, 604 F.3d at 773. Accordingly, the PSLRA safe harbor does
not shield Moynihan's misstatements.
Additionally, BoA's representation that it ensures "consistent production of
quality mortgages" was rendered misleading by the BoA Defendants' failure to disclose that
BoA inherited from Countrywide loans with "origination defect[s]." (Compl. ~·155.) Indeed,
Plaintiff alleges that as early as 2007, Lewis knew that 89% of Countrywide's loans originated
from 2005 to 2006 were ineligible for origination under BoA's standards. (Compl., 114.)
BoA's assurances concerning the quality of its mortgages were not puffery because Plaintiff
alleges that some of the BoA Defendants did not genuinely or reasonably believe these opinions.
See Lapin, 506 F. Supp. 2d at 239; (Compl. " 114; 155). Indeed, the Complaint alleges that
BoA knowingly securitized loans that did not comply with its underwriting guidelines. (Compl. ,
Case 1:11-cv-00733-WHP Document 148 Filed 07/11/12 Page 19 of 46
3. Internal Controls
Plaintiff argues that Lewis and Price's certification in the 2008 lO-K that BoA
maintained adequate internal controls over financial reporting was materially misleading.
(CompL ~ 193.) Specifically, Plaintiff alleges that BoA's reliance on MERS constituted a
weakness in its financial reporting. (Compl. ~~ 286-91.) The BoA Defendants counter that
these allegations miss the mark because reliance on MERS does not implicate internal controls
over financial reporting. Rather, the BoA Defendants assert that MERS only impacted the
operation of BoA's mortgage business. But, as Plaintiff explains, BoA utilized MERS as a
control that tracked and disclosed the dollar value of mortgages on BoA's books. And because
MERS allegedly failed to transfer title to mortgage loans properly, the accuracy of BoA's
financial statements was undermined. (Compl. ~ 290.)
Plaintiff also claims that BoA's accounting practices for calculating repurchase
losses constituted a material weakness because BoA circumvented formal procedures requiring
committee approval and left decisions concerning repurchase losses to Lewis and Price. (Compl.
~ 136(a).) The BoA Defendants respond that these allegations are insufficient because Plaintiff
fails to allege why estimating loan amounts in this manner is a material weakness. But Plaintiff
pleads a plausible theory because it demonstrates the problematic nature of this practice-that it
left BoA without adequate reserves. (Compl. ~ 136(e)-(t).)
4. GAAP Violations
Finally, Plaintiff asserts that BoA failed to prepare its financial statements in
accordance with GAAP. (Compl. ~ 280-85.) SEC regulations dictate that where financial
statements are not prepared in compliance with GAAP, they are presumed to be misleading. See
Case 1:11-cv-00733-WHP Document 148 Filed 07/11/12 Page 20 of 46
17 C.F.R. § 210.4-01(a)(I». The BoA Defendants argue that GAAP violations require
fraudulent intent to be actionable. Novak, 216 F.3d at 309. But, as discussed below, Plaintiff
adequately pleads fraudulent intent on the part of BoA, and accordingly, this argument fails.
Plaintiff undergirds its claims on two GAAP precepts: (1) "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Otheres ("FIN 45") and (2) Accounting for Contingencies ("F AS 5"). The BoA
Defendants contend that Plaintiff does not allege a violation of FIN 45, which requires that a
"guarantor" disclose the nature and amount of a "guarantee." The BoA Defendants argue that
there is no basis for inferring that representation and warranty claims constitute "guarantees."
But representation and warranty claims need not amount to "guarantees" for Plaintiff to allege a
FIN 45 violation. It is clear from the Complaint that BoA made guarantees independent of
representations and warranties. For example, the 2008 10-K noted that certain securitizations of
BoA include a corporate guarantee. (Compl. ~ 190.) It further stated that BoA records its
liability for representation and warranty claims and guarantees together. (Compl. ~ 190.)
Accordingly, the BoA Defendants' argument fails.
The BoA Defendants also argue that they did not violate F AS 5 because it
"requires accrual or disclosure of a loss contingency when it is 'probable' or 'reasonably
possible' that a loss has already been incurred." Charter Twp. of Clinton Police & Fire Ret. Sys.
v. KKR Fin. Holdings LLP, No. 08 Civ. 7062 (PAC), 2010 WL 4642554, at *19 (S.D.N.Y. Nov.
17,2010). The BoA Defendants maintain that because Plaintiff cannot point to any existing,
undisclosed repurchase claim, a violation of F AS 5 cannot form the basis of this claim.
However, the BoA Defendants' argument misses the mark. While Plaintiff fails to plead
Case 1:11-cv-00733-WHP Document 148 Filed 07/11/12 Page 21 of 46
sufficient facts to support its contention that the BoA Defendants concealed repurchase claims,
Plaintiff alleges that the BoA Defendants purposely prohibited BoA's accountants from
recording accruals on the repurchase allowance until BoA received a formal demand through a
trustee or litigation. (Compl. ~ 136( d).) Plaintiff alleges that forestalling in this way is contrary
to accounting principles and industry practices. (Compl. ~ 136(d).) Thus, by failing to record
repurchase claims until the occurrence of a later event, BoA did not disclose loss contingency
when it was "probable" or "reasonably possible" that the loss already occurred.
Because Plaintiff pleads that the BoA Defendants made material misstatements
and omissions, this Court now considers the question of scienter.
The PSLRA requires that the plaintiff "plead 'with particularity facts giving rise
to a strong inference that the defendant acted'" with an "intent to deceive, manipulate, or
defraud" or acted recklessly. ECA, Local 134 IBEW Joint Pension Trust of Chi. v. JP Morgan
Chase Co., 553 F.3d 187, 198 (2d Cir. 2009). Here, "[r]ecklessness is defined as at the least, an
extreme departure from the standards of ordinary care to the extent that the danger was either
known to the defendant or so obvious that the defendant must have been aware of it." ECA,553
F.3d at 198 (internal quotation marks and alternations omitted), "The inquiry ... is whether all
of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any
individual allegation, scrutinized in isolation, meets that standard." Tellabs Inc. v. Makor Issues
& Rights, Ltd., 551 U.S. 308,323 (2007). In assessing whether a plaintiff has stated a claim, "a
court must consider plausible, nonculpable explanations for the defendant's conduct, as well as
inferences favoring the plaintiff." Tellabs, 551 U.S. at 323. "A complaint will survive ... only
Case 1:11-cv-00733-WHP Document 148 Filed 07/11/12 Page 22 of 46
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." Tellabs, 551 U.S. at 324.
"[S]cienter can be established by alleging facts to show either (1) that defendants had the motive
and opportunity to commit fraud, or (2) strong circumstantial evidence of conscious misbehavior
or recklessness." ECA, 553 F.3d at 198.
1. Motive and Opportunity
To plead scienter under the "motive and opportunity" prong, Plaintiff must allege
that the BoA Defendants "benefitted in some concrete and personal way from the purported
fraud." ECA, 553 F.3d at 198. "Motives that are common to most corporate officers, such as the
desire for the corporation to appear profitable and the desire to keep stock prices high to increase
officer compensation" are insufficient. ECA, 553 F.3d at 198. But motives common to most
corporate officers may be sufficient if defendants derived a "unique" benefit from the fraud.
ECA, 553 F.3d at 201 n.6; see also In re Worldcom, Inc. Sec. Litig., 294 F. Supp. 2d 392, 416
(S.D.N.Y. 2003) (requiring plaintiff to plead that defendant derived "unique and substantial
benefit from the fraud).
Plaintiff theorizes that the BoA Defendants concealed BoA's reliance on MERS
and its exposure to repurchase claims so that BoA could repay T ARP and lift restrictions on
executive compensation. This theory does not plead motive adequately because Plaintiff does
not allege that the BoA Defendants benefited in "some concrete and personal way from the
purported fraud." ECA, 553 F.3d at 198. Indeed, Plaintiff relies on Lewis' statement that it was
important to remove T ARP' s compensation restrictions to prevent employees outside oftop
management from leaving BoA for a competitor. (Compl. ~ 65-66.) A desire to increase
Case 1:11-cv-00733-WHP Document 148 Filed 07/11/12 Page 23 of 46
executive compensation to retain qualified executives is plainly "common to most corporate
officers." ECA, 553 F.3d at 198. And Plaintiff does not allege particularized facts suggesting
that the Executive Defendants derived a "unique and substantial benefit" from any fraud. Cf. In
re Worldcom, 294 F. Supp. 2d at 416 (unique and substantial benefit where success of company
crucial to defendant's personal finances).
Moreover, the alleged chronology of events undermines the plausibility of
Plaintiffs theory. The BoA Defendants were aware of various judicial decisions issued in early
to mid-2008 that questioned the validity ofMERS. (Compl., 85.) Prior to the Class Period,
BoA allowed loans that did not comply with its underwriting standards to be securitized.
(Compl. , 127.) Thus, it appears that the BoA Defendants were concealing information about
MERS and representation breaches prior to BoA's receipt ofTARP funds. But a theory in which
fraudulent conduct predates motive is not plausible. See U.S. Educ. Loan Trust III, LLC v. RBC
Capital Mkts. Corp., 11 Civ. 860 (NRB), 2011 WL 6778480, at *10 (S.D.N.Y Dec. 21, 2011)
(finding motive insufficient where alleged fraudulent scheme predated motive).
Additionally, the high turnover among the Executive Defendants further
underscores the implausibility of Plaintifrs theory. According to Plaintiff, in February 2009,
Lewis and Price conceived of a scheme to repay TARP Funds. Lewis stepped down as CEO in
December 2009, and Price stepped down as CFO in January 2010. (Compl." 36-37.) In early
2010, when Moynihan and Cotty became CEO and interim CFO, respectively, they allegedly
continued the scheme that Lewis and Price started. (Compl." 38, 40.) Additionally, Noski
joined the scheme in May 2010 when he replaced Cotty. (Compl., 39.) In considering
nonculpable explanations for the conduct alleged here, Plaintiff s theory is not at least as
Case 1:11-cv-00733-WHP Document 148 Filed 07/11/12 Page 24 of 46
compelling as the opposing inference drawn from the facts alleged-that the BoA Defendants
acted in good faith. Tellabs, 551 U.S. at 324.
2. Strong Circumstantial Evidence of Conscious Misbehavior or Recklessness
"[T]he strength of the circumstantial allegations [of conscious misbehavior or
recklessness] must be correspondingly greater ifthere is no motive." ECA, 553 F.3d at 198-99
(internal quotation marks omitted). A "strong inference" of scienter "may arise where the
complaint sufficiently alleges that the defendants: (1) benefited in a concrete and personal way
from the purported fraud; (2) engaged in deliberately illegal behavior; (3) knew facts or had
access to infonnation suggesting that their public statements were not accurate; or (4) failed to
check infonnation they had a duty to monitor." S. Cherry St.. LLC v. Hennessee Grp. LLC, 573
F.3d 98, 110 (2d Cir. 2009) (internal alterations omitted). To demonstrate that the BoA
Defendants knew facts or had access to infonnation contradicting their public statements,
Plaintiff must identify specific contradictory infonnation that was available to the BoA
Defendants at the time they made their misleading statements. See Shields v. Citytrust Bancorp.,
25 F.3d 1124, 1129-30 (2d Cir. 1994) (no allegations that disclosures were contradicted by other
infonnation that defendants knew at the time disclosures made); see also Novak, 216 F.3d at
309; In re PXRE Grp., Ltd., Sec. Litig., 600 F. Supp. 2d 510, 536 (S.D.N.Y. 2009) (plaintiff
must allege "(1) specific contradictory infonnation was available to the defendants (2) at the
same time they made their misleading statements"); Local No. 38 Int'l Bhd. ofElec.Workers
Pension Fund v. Am. Express Co., 724 F. Supp. 2d 447,461-62 (S.D.N.Y. 2010). Additionally,
a plaintiff "must specifically identify the reports or statements containing this infonnation."
Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 196 (2d
Case 1:11-cv-00733-WHP Document 148 Filed 07/11/12 Page 25 of 46
To support its allegations of conscious misbehavior or recklessness, Plaintiff
contends that the BoA Defendants: (1) tolerated robo-signing (Compl. ~~ 83, 17S); (2) failed to
disclose BoA's vulnerability to repurchase claims (Compl. ~~ 101, lIS, 120, 124-2S, 133;
136(c), (e), (i), (j)-(m»; (3) deliberately circumvented internal controls in establishing
allowances for repurchase claims (Compl. ~~ 136(c), (n»; (4) kept reserves for repurchase claims
low to forestall additional repurchase claims (Compl. ~ 136(e), (t), (i)-(m»; (S) fought
repurchase claims to discourage investors from asserting additional ones (Compl. ~ 136(d»; (6)
resisted investor attempts to examine loan files (Compl. ~~ 326, 148); (7) concealed BoA's use
ofMERS (Compl. ~~ 148, 155-59); and (8) failed to notify MBS purchasers of breaches (Compl.
~ 162.) Plaintiff further cites the magnitude of the alleged fraud as an additional basis for
establishing scienter. These allegations taken together fail to raise strong circumstantial
evidence of conscious misbehavior or recklessness as to the Executive Defendants, but raise a
strong inference of scienter as to BoA.
a. Executive Defendants
Plaintiff's allegation that the Executive Defendants tolerated robo-signing is
conclusory because Plaintiff does not plead that any of the Executive Defendants were even
aware of the practice. Plaintiff relies on Confidential Witness 1 ("CW -1 "), a foreclosure
specialist, who reports that he witnessed BoA employees, "including a [BoA] vice president and
assistant vice president," falsely signing affidavits representing that they personally reviewed
hundreds of loan files. (CompL ~ 83.) But Plaintiff does not allege that CW-l had "any contact
with ... [BoA Executives] or would have knowledge of what they knew or should have known
Case 1:11-cv-00733-WHP Document 148 Filed 07/11/12 Page 26 of 46
during the Class Period." In re Am. Express Co. Sec. Litig., No. 02 Civ. 5533 (WHP), 2008 WL
4501928, at *8 (S.D.N.Y. Sept. 26, 2008); see also Am. Express Co., 724 F. Supp. 2d at 461-62.
Plaintiff additionally alleges that the Executive Defendants concealed BoA's
exposure to repurchase claims. But Plaintiff does not allege that the Executive Defendants knew
of specific contradictory information at the same time they made misleading statements. See
Shields, 25 F.3d at 1129-30; see also PXRE Grp., 600 F. Supp. 2d at 536. For example, Plaintiff
points to a May 13,2010 letter that counsel for BoA sent to the Financial Crisis Inquiry
Commission ("FCIC") to demonstrate BoA and Countrywide's emphasis on generating mortgage
loans for securitization into MBS at the cost of prudent lending practices (the "FCIC letter"). In
that letter, BoA informed the FCIC that in 2006 and 2007, Countrywide sold mortgage-backed
securities with a total par value of $118 billion. (CompL ~ 101.) The letter further noted that the
par value of the interest held by BoA was only $2 billion as of February 2010. (CompL ~ 101.)
The letter also stated that 37% of Alt-A loans and 52% of Countrywide's subprime loans were
delinquent. However, there is no allegation that the Executive Defendants saw the letter or knew
of its contents. Similarly, Plaintiff relies on a confidential witness, CW-3, who claims that
"senior managers" received an audit report revealing errors in amortization schedules generated
by MERS. (Compl. ~~ 118-20.) But Plaintiff fails to allege that the Executive Defendants
reviewed this audit report. See PXRE Grp., 600 F. Supp. 2d at 536; cf. Novak, 216 F.3d at 311
Likewise, Confidential Witness 4 ("CW-4") reports that BoA's CFO and
President received reports detailing events within securitized loan portfolios for which BoA was
a securitization trustee or servicer. CW-4 maintains that in 2008, these reports made clear "that
Case 1:11-cv-00733-WHP Document 148 Filed 07/11/12 Page 27 of 46
there were going to be issues" with mortgage-backed securities. (Compl. ~~ 123-25.) This
establishes only that the CFO and the President were aware of risks, not that they knew that their
disclosures were false or misleading. See Am. Express Co., 2008 WL 4501928, at *7
(allegations that management was aware of risks associated with high yield debt not sufficient to
establish that company was not properly valuing its debt). For the same reason, Confidential
Witness 5's ("CW-5") contention that the CFO received reports reflecting "performance
characteristics" of all the MBS that BoA serviced is unavailing. (Compl. ~ 136(e).) And CW-
5's claim that Moynihan had ultimate decision-making authority relating to accruals for
repurchase demands does not suggest that Moynihan was aware of BoA's omissions. See Am.
Express Co., 2008 WL 4501928, at *7 (allegation that defendant was responsible for particular
investment strategy does not establish that he knew company's disclosures were false).
Confidential Witness 8's ("CW-8") allegations suffer from similar deficiencies.
CW-8 reports that Cotty, as part of the Allowance Committee, received reports concerning loss
forecasts and was involved in reporting values of loan portfolios and mortgage servicing rights.
(Compl. ~ 136 (j)-(m).) But again, Plaintiff does not allege that information Cotty gleaned from
these reports alerted him that any disclosures were false or misleading. Additionally, CW-8's
overly-generalized allegations that "management" could view information concerning any pool
of loans that BoA held or serviced does not raise a strong inference of scienter. See Dynex, 531
F .3d at 196 (plaintiff must "specifically identify the reports or statements" containing
contradictory information); see also Plumbers & Steamfitters Local 773 Pension Fund v. CIBC,
694 F. Supp. 2d 287, 299 (S.D.N.Y. 2010) ("broad references to raw data" insufficient to
establish that defendants should have known particular information). Moreover, knowledge of
Case 1:11-cv-00733-WHP Document 148 Filed 07/11/12 Page 28 of 46
negative economic trends "does not equate to harboring a mental state to deceive, manipulate, or
defraud." CIBC, 694 F. Supp. 2d at 300; see also In re Societe Generale Sec. Litig., No. 08 Civ.
2495 (RMB), 2010 WL 3910286, at *8 (S.D.N.Y. Sept. 29, 2010).
Plaintiff also alleges that BoA's CEO and CFO received notification of
repurchase requests. (Compl. ~ 133.) However, as discussed above, Plaintiff does not allege
facts suggesting that the Executive Defendants concealed known repurchase claims. See supra
Part II.A.2. To the contrary, in August 2010, BoA revealed that as of June 30, 2010, it had $11.1
billion worth of unresolved repurchase claims. (Bongiorno Decl. Ex. 0: August 2010 10-Q at
40.) Additionally, any inference of wrongdoing is further undermined by the fact that the
Executive Defendants disclosed losses BoA incurred in settling those claims. (Musoff Decl. Ex.
A: 2008 1O-K, dated Feb. 27, 2009 ("2008 1O-K") at 135; Ex. C: 2009 1O-K, dated Feb. 26, 2010
at 5, 144 (2009 1O_K,,)3); see also Borochoff, 2008 WL 2073421, at *8.
Accordingly, Plaintiffs failure to allege adequately any misstatements or
omissions about already-accrued claims renders many of its scienter allegations improbable. For
example, Plaintifftheorizes that the Executive Defendants circumvented internal controls to
conceal the true magnitude of repurchase claims that BoA faced. However, it does not make
sense that the Executive Defendants would circumvent internal controls to manipulate allowance
levels while being forthright in disclosing losses on repurchase claims. See Borochoff, 2008 WL
2073421, at *8. And to the extent that Plaintiff relies on the fact that the Executive Defendants