Countrywide Class Action Defense Cases–In re Countrywide: California Federal Court Grants In Part Motion To Dismiss Securities Fraud Class Action Claims And Holds SEC Rule 430B Not Retroactive

Apr 21, 2009 | By: Michael J. Hassen

Amended Securities Fraud Class Action Complaint Against Countrywide and Various other Defendants Largely Survives Motion to Dismiss because Allegations in Class Action Complaint Generally Satisfied Heightened Pleading Requirements of Private Securities Litigation Reform Act (PSLRA) and, as Matter of First Impression, SEC Rule 430B is not Retroactive California Federal Court Holds

Plaintiff filed a putative class action against Countrywide and certain individual defendants alleging violations of federal securities laws; the class action was one of “several related securities actions” in the district court involving Countrywide, underwriter defendants and outside directors. In re Countrywide Fin. Corp. Sec. Litig., ___ F.Supp.2d ___ (C.D.Cal. April 6, 2009) [Slip Opn., at 1-2]. Plaintiff’s class action was consolidated with several other class action lawsuits “involving publicly traded Countrywide securities.” _Id._, at 2. The district court appointed lead plaintiffs, and a consolidated amended class action complaint was filed, _id._ By prior court order, dated December 1, 2008, the amended class action complaint was dismissed in part, but the district court granted leave to amend and a second consolidated amended class action complaint was filed. _Id._ Defense attorneys for various defendants again moved to dismiss, _id._ The district court granted the motions in part, but largely denied the motions.

We do not discuss in detail the intensively detailed and fact-driven opinion. In broad terms, after summarizing recent Ninth Circuit authority, see In re Countrywide, at 3-5, and addressing certain evidentiary matters, see id., at 5-6, the district court turned to the merits, following the Ninth Circuit opinion in Glazer Capital Mgmt., LP v. Magistri, 549 F.3d 736 (9th Cir. 2008), which held that a securities fraud complaint must plead facts that constitute strong circumstantial evidence of scienter. The federal court summarily found that the accounting-related allegations against Countrywide, KPMG, and the Individual Defendants, as well as those against the Underwriters, in the second amended class action complaint were sufficient to satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA). Id., at 6. However, the same could not be said for the insider trading-related allegations: the district dismissed these claims in the original class action complaint, with leave, because of the “weak support” of scienter; the second amended class action complaint “does nothing to alter the insider trading-based scienter analysis” in the prior order, so the federal court dismissed the Section 20A claims with prejudice (except for the claims against Mozilo that post-date October 26, 2006). Id., at 6-7.

But the most notable aspect of the district court’s opinion is its discussion of the statute of repose for Section 11 claims. The court explained, “SEC Rule 430B, part of the Securities Offering Reform (‘SOR’) effective December 1, 2005, now governs Section 11 liability periods under some circumstances. 17 C.F.R. § 230.430B(f)(2), (f)(4). It does so by determining when the registration statement becomes effective, and by deeming that effective date the first bona fide offering—but only as some actors.” In re Countrywide, at 9-10. The court held that Rule 430B is not retroactive, id., at 10, based on an extensive analysis of retroactivity and the statute of repose, see id., at 8-12. However, the district court admitted that it analysis was “not undertaken without some doubt” based on the SEC’s “position on repose timing due to statutory and regulatory ambiguities” and its subsequent adoption of the SOR. See id., at 8 n.6. And based on the court’s analysis of the pre-Rule 430B law, it dismissed with prejudice the Section 11 claims against defendant McLaughlin, see id., at 14-15.

Download PDF file of In re Countrywide Financial

Comments are closed.