Of the District of New Hampshire, sitting by designation. *

United States Court of Appeals

For the First Circuit

No. 09-2596

PLUMBERS' UNION LOCAL NO. 12 PENSION FUND, Individually and on

behalf of all others similarly situated; PLUMBERS' & PIPEFITTERS'

WELFARE EDUCATIONAL FUND; NECA-IBEW HEALTH & WELFARE FUND,

Plaintiffs, Appellants,

v.

NOMURA ASSET ACCEPTANCE CORPORATION; JOHN P. GRAHAM; NATHAN

GORIN; JOHN McCARTHY; DAVID FINDLAY; ALTERNATIVE LOAN TRUST 2006-

AF1; ALTERNATIVE LOAN TRUST 2006-AF2; ALTERNATIVE LOAN TRUST

2006-AP1; ALTERNATIVE LOAN TRUST AR2; ALTERNATIVE LOAN TRUST AR3;

ALTERNATIVE LOAN TRUST 2006-AR4; ALTERNATIVE LOAN TRUST 2006-WF1;

NOMURA SECURITIES INTERNATIONAL, INC.; GREENWICH CAPITAL MARKETS, 

INC.; UBS SECURITIES, LLC; CITIGROUP GLOBAL MARKETS, INC.;

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC.; GOLDMAN, SACHS &

CO.; ALTERNATIVE LOAN TRUST 2006-AR1,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Richard G. Stearns, U.S. District Judge]

Before

Boudin and Howard, Circuit Judges,

and Barbadoro, District Judge. *

Eric Alan Isaacson with whom Arthur C. Leahy, Joseph D. Daley,

Thomas E. Egler, Susan G. Taylor, Nathan R. Lindell, Amanda M.

Frame, Coughlin Stoia Geller Rudman & Robbins LLP, Thomas G.

Shapiro, Adam M. Stewart, Robert E. Ditzion and Shapiro Haber &

Urmy LLP were on brief for appellants.
Stephen D. Poss with whom Sarah Heaton Concannon and Goodwin

Procter LLP were on brief for the issuer defendants, appellees

Nomura Asset Acceptance Corporation, John P. Graham, Nathan Gorin,

John McCarthy, David Findlay, Alternative Loan Trust 2006-AF1,

Alternative Loan Trust 2006-AF2, Alternative Loan Trust 2006-AP1,

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.

William H. Pane with whom Mark C. Fleming, Timothy J. Perla

and Wilmer Cutler Pickering Hale and Dorr LLP were on brief for the

underwriter defendants, appellees Nomura Securities International,

Inc., Greenwich Capital Markets, Inc., UBS Securities LLC,

Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner &

Smith Inc., and Goldman, Sachs & Co.

January 20, 2011
Plumbers' Union Local No. 12 Pension Fund ("Plumbers' Fund"), 1

Plumbers' & Pipefitters' Welfare Educational Fund ("Plumbers' &

Pipefitters' Fund") and the NECA-IBEW Health & Welfare Fund ("NECAIBEW Fund").

-3-

BOUDIN, Circuit Judge. Three union pension and welfare

funds appeal from a district court order dismissing at the 1

complaint stage their putative class action against eight trusts,

the "depositor" that organized them, the trusts' underwriters and

five officers of the depositor. The lawsuit sought redress for

losses suffered when plaintiffs acquired trust certificates

representing mortgage-backed securities. The background facts are

largely undisputed.

The lead defendant, Nomura Asset Acceptance Corporation

("Nomura Asset"), played the organizing role in the creation of the

securities at issue in this case. As depositor, it acquired

mortgages from various banks and transferred them to the eight

trusts, all of which are separate legal entities. Each trust

pooled the mortgages acquired by it and, with Nomura Asset, issued

trust certificates representing interests in that trust. Then

Nomura Asset and the trusts worked with underwriters to sell the

certificates to investors.

The certificates constitute securities under the federal

securities laws, and to permit their initial sale, a registration

statement was required, disclosing information about the securities

being offered. One registration statement, filed on July 22, 2005,
-4-

covered three trusts (2006-AP1, 2006-AR1, 2006-AR2); the other,

filed on April 16, 2006, covered the remaining five (2006-AF1,

2006-AF2, 2006-AR3, 2006-AR4, 2006-WF1). These were "shelf

registrations," see 17 C.F.R. § 230.415(a) (2010), signaling an

intent to offer securities in the future and containing certain

information about Nomura Asset, the trusts and the securities.

The registration statements were not themselves offerings

and did not become effective until Nomura Asset and the trusts

updated them by filing prospectus supplements that described the

details of the offering for each trust. The registration

statements and prospectus supplements (collectively, "offering

documents") explain in detail the characteristics of the mortgages

that Nomura Asset acquired and transferred to each trust. The

federal securities laws, yet to be discussed, impose liability for

false or misleading statements causing harm to purchasers.

In this case, plaintiffs bought trust certificates

representing interests in two of the eight trusts; one trust (AP1

trust) was covered by the earlier registration statement and a

September 27, 2005, prospectus supplement; the other (AF1 trust),

by the later of the two registration statements and a May 25, 2006,

prospectus supplement. One of the three plaintiffs bought

certificates in the AF1 trust, a second in the AP1 trust and the

third in both trusts. Thereafter, on November 13, 2007, Moody's

downgraded the rating of all of the certificates for all eight
Nomura Securities International, Inc. ("Nomura Securities") 2

was the sole underwriter for the AF1, AP1, AR1 and AR2 trusts; the

AF2 trust was underwritten by Nomura Securities, Greenwich Capital

Markets, Inc. ("GCM") and Merrill Lynch, Pierce, Fenner & Smith,

Inc. ("Merrill Lynch"); the AR3 trust was underwritten by Nomura

Securities and Goldman, Sachs & Co. ("Goldman"); the AR4 trust was

underwritten by UBS Securities LLC ("UBS") and GCM; and the WF1

trust was underwritten by Nomura Securities and Citigroup Global

Markets, Inc. ("CGMI"). The officers and directors are John P.

Graham, Chief Executive Officer and President of Nomura Asset;

Nathan Gorin, Chief Financial Officer of Nomura Asset; and John

McCarthy and David Findlay, directors of Nomura Asset. (Another

defendant named in the complaint, Shunichi Ito, has apparently

-5-

trusts and the certificates are now worth much less than what

plaintiffs originally paid for them. This lawsuit followed shortly

thereafter.

On January 31, 2008, one of the three union funds filed

suit in state court, asserting violations of sections 11, 12(a)(2)

and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77k(a),

77l(a)(2), 77o (2006). Section 11 imposes liability for false or

misleading statements contained in a registration statement, id. §

77k(a); section 12(a)(2) imposes similar liability on sellers who

make such statements in a prospectus or oral communication, id. §

77l(a)(2). Section 15 imposes liability on one who "controls any

person liable" under sections 11 or 12. Id. § 77o. 

The case was removed to federal district court, the other

funds entered as plaintiffs and ultimately a joint amended

complaint was filed listing as defendants Nomura Asset, the eight

trusts, the trusts' underwriters and five officers and directors of

Nomura Asset. The gravamen of the complaint is that the offering 2
never been served with process.)

-6-

documents contained false or misleading statements, and as a result

plaintiffs purchased securities whose true value when purchased was

less than what was paid for them. The suit was cast as a class

action comprised of purchasers of the certificates of the eight

trusts covered by the two registration statements. 

Defendants filed motions to dismiss for lack of standing,

Fed. R. Civ. P. 12(b)(1), and for failure to state a claim, Fed. R.

Civ. P. 12(b)(6). On September 30, 2009, the district court

granted defendants' motions to dismiss and entered judgment.

Claims related to the trusts whose certificates had been purchased

by none of the named plaintiffs were dismissed for lack of Article

III standing; claims relating to the other two trusts were

dismissed on statutory grounds; and no class was ever certified.

The present appeal followed.

Jurisdiction. At the outset, plaintiffs say that the

original action brought in state court may have been improperly

removed and that the district court may thus have lacked subject

matter jurisdiction; although plaintiffs did not contest

jurisdiction until they lost the case in the district court, lack

of subject matter jurisdiction can be noticed at any time and

cannot be waived. United States v. Cotton, 535 U.S. 625, 630

(2002); Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 93-

94 (1998). But we conclude that any flaw in the removal was not
Whether it applied depends on how one resolves a potential 3

conflict between section 22 and language in a later statute,

namely, the Class Action Fairness Act's ("CAFA") removal provision.

Compare Luther v. Countrywide Home Loans Servicing LP, 533 F.3d

1031, 1034 (9th Cir. 2008), with Katz v. Gerardi, 552 F.3d 558, 562

(7th Cir. 2009)--a dispute we need not address.

-7-

one of subject matter jurisdiction and therefore has been waived or

forfeited for lack of a timely objection. 28 U.S.C. § 1447(c)

(2006) (requiring objection within 30 days of removal).

Removal is ordinarily permitted in civil actions where

the same case could originally have been brought in federal court

"[e]xcept as otherwise expressly provided by Act of Congress."

28 U.S.C. § 1441(a). One exception--section 22 of the Securities

Act, 15 U.S.C. § 77v(a)--is that "no case arising under [the

Securities Act] and brought in any State court of competent

jurisdiction shall be removed to any court of the United States."

However, assuming that this limitation applied, we conclude that 3

section 22's limitation would not be one of subject matter

jurisdiction but merely an advantage that a plaintiff could forfeit

by failure to make timely objection.

There are some casual references in reported circuitcourt decisions to section 22 as a limitation on subject matter

jurisdiction, e.g., Emrich v. Touche Ross & Co., 846 F.2d 1190,

1197-98 (9th Cir. 1988) (but the objection was made within 30 days,

so that conclusion was dictum); Westinghouse Credit Corp. v.

Thompson, 987 F.2d 682, 683 (10th Cir. 1993) (but the remand order
See, e.g., In re Norfolk S. Ry. Co., 592 F.3d 907, 912 (8th 4

Cir. 2010); Vasquez v. N. Cnty. Transit Dist., 292 F.3d 1049, 1062

(9th Cir. 2002); Feichko v. Denver & Rio Grande W. R.R. Co., 213

F.3d 586, 591 (10th Cir. 2000), cert. denied 531 U.S. 1074 (2001);

Belcufine v. Aloe, 112 F.3d 633, 638 (3d Cir. 1997); Williams v. AC

Spark Plugs, 985 F.2d 783, 787 (5th Cir. 1993). 

-8-

was unreviewable whatever the defect); yet a larger number of

circuits have held that similarly phrased anti-removal provisions

do not implicate subject matter jurisdiction.4

Civil suits asserting claims under the Securities Act are

within the "arising under" clause of Article III and can easily be

brought as original actions in federal court. 15 U.S.C. § 77v(a).

Although expressed as a bar on removal of such cases from state

court, section 22(a)'s aim is not to preclude hearing such cases in

federal court but instead to "favor[] plaintiffs' choice of forum."

Pinto v. Maremont Corp., 326 F. Supp. 165, 167 n.2 (S.D.N.Y. 1971);

see Cook, Recrafting the Jurisdictional Framework for Private

Rights of Action Under the Federal Securities Laws, 55 Am. U. L.

Rev. 621, 632-34 (2006).

Given that federal courts are otherwise competent to

address federal securities claims and do so all the time, it makes

far more sense to view section 22 as creating a waivable right to

insist on non-removal. That course achieves the statute's aim to

protect the plaintiff's preference for a state forum, but it

prevents the mischief of allowing a party to sit on an objection,

raising it only if and when the objector is dissatisfied with the
For section 11, see Barnes v. Osofsky, 373 F.2d 269, 273 (2d 5

Cir. 1967) (Friendly, J.) (an action under section 11 may be

maintained only by "those who purchase securities that are the

direct subject of the prospectus and registration statement")

(internal quotation marks omitted); for section 12(a)(2), see

Pinter v. Dahl, 486 U.S. 622, 644 (1988) (claims under section

12(a)(2) are available only against person who offers or sells the

security to the plaintiff).

-9-

result. Cf. 14C C. Wright et al., Federal Practice & Procedure

§ 3739, at 817-18 (4th ed. 2009) (limiting removal objections to

thirty-day period prevents use of a defect as insurance against

unfavorable developments).

Standing. The more difficult threshold question

presented by the appeal is whether plaintiffs can pursue claims, to

the extent claims may be stated, based on offerings in which they

did not participate and against trusts whose certificates they did

not purchase. This issue, styled by defendants primarily as one of

Article III standing and secondarily as a standing issue under the

Securities Act, was resolved in defendants' favor by the district

court. The issue looks straightforward and one would expect it to

be well settled; neither assumption is entirely true.

It is clear that the named plaintiffs have no claim on

their own behalf based on trust certificates that they did not

buy; and they bought no certificates issued by six of the 5

defendant trusts. To the extent claims exist based on such

purchases, they belong to the actual purchasers. Since a requisite

of an ordinary case or controversy is an injury to the plaintiff
-10-

traceable to the defendant, Lujan v. Defenders of Wildlife, 504

U.S. 555, 560-61 (1992), it might follow that there is also no case

or controversy between the named plaintiffs and the trusts from

which they made no purchases. Alas, the matter is not so simple.

In a properly certified class action, the named

plaintiffs regularly litigate not only their own claims but also

claims of other class members based on transactions in which the

named plaintiffs played no part. Yet, here certain defendants,

including six of the eight trusts named as defendants, are not

liable to the named plaintiffs on any claims. In these

circumstances older cases, including a decision of this court, have

refused to allow the case to proceed--whether as a class action or

not--against defendants not implicated in any of the wrongs done to

the named plaintiffs.

Thus, in Barry v. St. Paul Fire & Marine Insurance Co.,

555 F.2d 3 (1st Cir. 1977), aff'd, 438 U.S. 531 (1978), Rhode

Island physicians and patients sought to bring a class action fraud

claim on behalf of all physicians and patients in the state against

four insurance companies for the sale of certain insurance

policies. Id. at 5, 13. Each of the insurance companies had

almost certainly sold such policies to some members of the class,

but none of the named plaintiffs ever bought that type of policy

from two of the companies. The district court declined to allow

claims against the latter two companies for the sale of those
See also 1 J. McLaughlin, Class Actions § 4:28, at 659-60 6

(6th ed. 2010) ("In a multi-defendant case, a putative class

representative must allege that he or she has been injured by the

conduct of each defendant to establish standing."); 5 J. Moore et

al., Moore's Federal Practice § 26.63[1][b], at 23-304 (3d ed.

2010) ("If a complaint includes multiple claims, at least one named

class representative must have Article III standing to raise each

claim.").

-11-

policies and we held there was "no error in the district court's

decision to adhere strictly to the traditional [standing] rules."

Id. at 13; see also Haas v. Pittsburgh Nat'l Bank, 526 F.2d 1083,

1095-96 & n.18 (3d Cir. 1975).

How far Barry extends today may be debatable. Although

its discussion of the issue was terse and not the main focus of the

decision, its approach had support not only from sister circuit

cases but from statements from the Supreme Court. See Barry, 555

F.2d at 13. And several times since Barry the Supreme Court used

Article III concepts in refusing to permit class claims to extend

to those suffering injuries materially different than those

suffered by the named plaintiffs. Lewis v. Casey, 518 U.S. 343,

346-49, 358 & n.6 (1996); Blum v. Yaretsky, 457 U.S. 991, 999-1002

(1982). For example, Blum stated: 6

It is axiomatic that the judicial power

conferred by Art. III may not be exercised

unless the plaintiff shows "that he personally

has suffered some actual or threatened injury

as a result of some putatively illegal conduct

of the defendant." . . . It is not enough

that the conduct of which the plaintiff

complains will injure someone.
-12-

457 U.S. at 999 (quoting Gladstone, Realtors v. Vill. of Bellwood,

441 U.S. 91, 99 (1979)).

But the Supreme Court has not been consistent. In

Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999), and Amchem

Products, Inc. v. Windsor, 521 U.S. 591 (1997), the Supreme Court

ruled that no class should be certified, but in doing so, it

bypassed objections that some settling parties lacked standing,

saying that the class certification issues were "'logically

antecedent' to Article III concerns," Ortiz, 527 U.S. at 831

(quoting Amchem, 521 U.S. at 612). And in Gratz v. Bollinger, 539

U.S. 244 (2003), the Court allowed the named class plaintiff to

challenge admissions practices as to college freshman even though

his status would have been that of a transfer student subject to

different rules. Id. 263-65.

Further, several circuits have cut themselves loose from

a strict requirement that, in a plaintiff class action, no

defendant may be sued unless a named plaintiff has a counterpart

claim against that defendant. Arguing that the class action should

be a flexible instrument, these courts conclude that the class

action should embrace defendants against whom no named plaintiff

has a claim so long as the claims are essentially of the same

character as the claim against a properly named defendant, and that

the sorting out of this issue should be left to Rule 23 criteria
Payton v. Cnty. of Kane, 308 F.3d 673, 680-81 (7th Cir. 7

2002), cert. denied, 540 U.S. 812 (2003) (named plaintiffs were

only injured by two counties but may be entitled maintain class

action against seventeen other counties that implemented the same

state statute in a materially identical fashion); Fallick v.

Nationwide Mut. Ins. Co., 162 F.3d 410, 421-24 (6th Cir. 1998)

(although named plaintiff was only a participant in one ERISA plan,

he could represent a class against all of defendant's ERISA plans

where the gravamen of the challenge was a general practice that

affected all plans).

-13-

rather than by use of standing concepts focusing on named

plaintiffs.7

There is no reason to inventory stray Supreme Court

quotations that can be found on both sides; nor is there a single

recent holding by the Court that with perfect clarity resolves the

issue directly before us. Indeed, Rule 23 criteria can still be

used as a required tool for shaping the scope of a class action

without abandoning the notion that Article III creates some outer

limit based on the incentives of the named plaintiffs to adequately

litigate issues of importance to them. See Baker v. Carr, 369 U.S.

186, 204 (1962) (plaintiffs need "such a personal stake in the

outcome of the controversy as to assure . . . concrete

adverseness").

For the present, Barry--however terse its treatment--is

on our books; and we are inclined (and perhaps required) to follow

its lead--with a qualification that does not affect the outcome in

this case. The qualification, on which we reserve judgment, is one

where the claims of the named plaintiffs necessarily give them--not
-14-

just their lawyers--essentially the same incentive to litigate the

counterpart claims of the class members because the establishment

of the named plaintiffs' claims necessarily establishes those of

other class members. The matter is one of identity of issues not

in the abstract but at a ground floor level. In such a case, which

might include the kind of claims that were present in Payton, 308

F.3d at 680, and Fallick, 162 F.3d at 423, the substance of the

Article III concern may vanish even if in form it might seem to

persist.

Turning back to our own situation--claims based on

mortgage-backed securities--most district courts have continued to

hold that named plaintiffs must themselves possess claims against

each defendant. E.g., In re Salomon Smith Barney Mut. Fund Fees

Litig., 441 F. Supp. 2d 579, 604-08 (S.D.N.Y. 2006); In re Eaton

Vance Corp. Sec. Litig., 220 F.R.D. 162, 166-69 (D. Mass. 2004).

Indeed, one court recently found that 

[e]very court to address the issue in a

[mortgage-backed security] class action has

concluded that a plaintiff lacks standing

under . . . Article III . . . to represent the

interests of investors in [mortgage-backed

securities] offerings in which the [named]

plaintiffs did not themselves buy.

Me. State Ret. Sys. v. Countrywide Fin. Corp., 722 F. Supp. 2d

1157, 1163 (C.D. Cal. 2010). Interestingly, a handful of district

court cases have allowed securities claims to proceed in situations

that may fit the possible exception we have outlined above. E.g.,
-15-

In re Am. Int'l Grp., Inc. 2008 Sec. Litig., No. 08 Civ. 4772(LTS),

2010 WL 3768146, at *22 (S.D.N.Y. Sept. 27, 2010).

In our case, as in others involving mortgage-backed

securities, the necessary identity of issues and alignment of

incentives is not present so far as the claims involve sales of

certificates in the six trusts. Each trust is backed by loans from

a different mix of banks; no named plaintiff has a significant

interest in establishing wrongdoing by the particular group of

banks that financed a trust from which the named plaintiffs made no

purchases. Thus, the claims related to the six trusts from which

the named plaintiffs never purchased securities were properly

dismissed, as were the six trusts and defendants connected to only

those six trusts.

Although Nomura Asset is a common defendant with respect

to all eight of the trusts, claims against it as well fail so far

as they are based on the six trusts whose certificates were

purchased by no named plaintiff. Although Nomura Asset is a

properly named defendant, the named plaintiffs have no stake in

establishing liability as to misconduct involving the sales of

those certificates. In the Supreme Court's words: "Nor does a

plaintiff who has been subject to injurious conduct of one kind

possess by virtue of that injury the necessary stake in litigating

conduct of another kind, although similar, to which he has not been
-16-

subject." Blum, 457 U.S. at 999; see also Lewis, 518 U.S. at 358

n.6.

Adequacy of claims. The district court held that on the

face of the complaint, no claims were sufficiently stated. We

review that ruling de novo, accepting as true all well-pled facts

in the complaint and drawing all reasonable inferences in favor of

plaintiffs. SEC v. Tambone, 597 F.3d 436, 441 (1st Cir. 2010) (en

banc). But, while this much is clear, the usual difficulty of

parsing and evaluating misrepresentation claims at the complaint

stage in securities cases is further complicated by recent case law

tightening the sieve through which a well-pled complaint must pass.

To state a claim, the complaint must "contain sufficient

factual matter, accepted as true, to 'state a claim to relief that

is plausible on its face,'" Ashcroft v. Iqbal, 129 S. Ct. 1937,

1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570

(2007)); "'naked assertions devoid of further factual enhancement'"

need not be accepted, Maldonado v. Fontanes, 568 F.3d 263, 266 (1st

Cir. 2009) (quoting Iqbal, 129 S. Ct. at 1949); and "[i]f the

factual allegations in the complaint are too meager, vague, or

conclusory to remove the possibility of relief from the realm of

mere conjecture, the complaint is open to dismissal," Tambone, 597

F.3d at 442.

The district court found that of plaintiffs' main efforts

to assert adequate claims, all three failed. The statute provides
Although the issuer is not explicitly mentioned in the list 8

of enumerated defendants, because the issuer must always sign

registration statements, 15 U.S.C. § 77f(a), issuers are

permissible defendants under section 11(a)(1), which includes as

defendants "every person who signed the registration statement,"

id. § 77k(a)(1). See 2 T. Hazen, The Law of Securities Regulation

§ 7.3[3], at 218 & n.49 (6th ed. 2009).

-17-

the blueprint against which a claim must be measured and we start

by outlining the requirements of section 11, which reads in

relevant part: 

In case any part of the registration

statement, when such part became effective,

contained an untrue statement of a material

fact or omitted to state a material fact

required to be stated therein or necessary to

make the statements therein not misleading,

any person acquiring such security . . .

may . . . sue [enumerated defendants].

15 U.S.C. § 77k(a). 

Here, plaintiffs properly alleged that they acquired

securities pursuant to a registration statement, and

defendants--which include the issuer and underwriters, as well as

the directors of Nomura Asset and signers of the offering

documents--are those enumerated in section 11. Plaintiffs also 8

alleged that misstatements or misleading statements were made and

that they were "material," that is, that "'there is a substantial

likelihood that a reasonable shareholder would consider it

important' to the investment decision." Milton v. Van Dorn Co.,

961 F.2d 965, 969 (1st Cir. 1992) (emphasis omitted) (quoting

Basic, Inc. v. Levinson, 485 U.S. 224, 231 (1988)).
-18-

One qualification is important to understanding the

district court's rulings. Cautionary statements may "negate any

reasonable reliance," 2 Hazen, supra, § 7.3[1][B], at 216; but this

exception, known as the "bespeaks caution" doctrine, normally

applies only to "forward-looking" statements such as projections or

forecasts and not to "representation[s] of present fact." Shaw v.

Digital Equip. Corp., 82 F.3d 1194, 1213 (1st Cir. 1996) (emphasis

omitted), abrogated on other grounds by 15 U.S.C. § 78u-4(b)(2); 2

Hazen, supra, § 7.3[1][B], at 215 (citing cases).

This brings us to the individual charges of false or

misleading statements and to the specific allegations of the

complaint. On this appeal, plaintiffs claim that three sets of

allegations were adequately alleged: one relates to the lending

guidelines, another to appraisal standards and a third to credit

ratings. The district court disagreed in each case, and we

consider the adequacy of the allegations charge by charge.

The underwriting guidelines. 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
The prospectus supplements also stated that "FNBN employs or 9

contracts with underwriters to scrutinize the prospective

borrower's credit profile"; its guidelines "are applied in a

standard procedure that is intended to comply with applicable

federal and state laws and regulations"; "the prospective borrower

must have a credit history that demonstrates an established ability

to repay indebtedness in a timely fashion"; and "employment history

is verified through written or telephonic communication."

Similar claims were made for another "principal originator" 10

for one of the two trusts, Metrocities Mortgage, LLC, but the basis

for such claims appears to be only that such claims were made

against that company in other litigation. As we are here concerned

only with whether the claim is adequately supported as to some of

the mortgages, we need not pursue this issue further.

-19-

prospective borrower's credit standing and ability to repay the

loan, as well as the value and adequacy of the proposed mortgaged

property as collateral."9

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."10

Admittedly, warnings in the offering documents state, for

example, that the "underwriting standards . . . typically differ

from, and are . . . generally less stringent than, the underwriting

standards established by Fannie Mae or Freddie Mac"; that "certain
The same can be said about the warning that "[c]ertain 11

[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.

-20-

exceptions to the underwriting standards . . . are made in the

event that compensating factors are demonstrated by a prospective

borrower"; and that FNBN "originates or purchases loans that have

been originated under certain limited documentation programs" that

"may not require income, employment or asset verification."

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.11

That is true too of the warning that less verification may be

employed for "certain limited documentation programs designed to

streamline the loan underwriting process." Plaintiffs' allegation

of wholesale abandonment may not be proved, but--if accepted at

this stage--it is enough to defeat dismissal.

Defendants say that no detailed factual support is

provided for the allegation and that it is implausible. Despite

the familiar generalization that evidence need not be pled at the

complaint stage, see Twombly, 550 U.S. at 555, courts increasingly
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insist that more specific facts be alleged where an allegation is

conclusory, see Maldonado, 568 F.3d at 266, 274; and the same is

true for implausibility, at least where the claim is considered as

a whole, Twombly, 550 U.S. at 570; see Arista Records LLC v. Doe 3,

604 F.3d 110, 119-21 (2d Cir. 2010). 

"Conclusory" and "implausible" are matters of degree

rather than sharp-edged categories. Iqbal, 129 S. Ct. at 1949;

Twombly, 550 U.S. at 555. However, the practices alleged in this

case are fairly specific and a number of lenders in the industry

are widely understood to have engaged in such practices. 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. 

This is a familiar problem: plaintiffs want discovery to

develop such evidence, while courts are loath to license fishing

expeditions. While this case presents a judgment call, the sharp

drop in the credit ratings after the sales and the specific

allegations as to FNBN 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
The complaint cites the testimony of Alan Hummel, the Chair 12

of the Appraisal Institute, before the Senate Committee on Banking

that appraisers "experience[d] systemic problems with coercion" and

a 2007 survey showing that such pressure was widespread. How many

succumbed and altered appraisals is not specified.

-22-

summary judgment. See, e.g., Miss. Pub. Emps.' Ret. Sys. v. Bos.

Sci. Corp., 523 F.3d 75, 79 (1st Cir. 2008).

Appraisal practices. The complaint also alleges that the

offering documents contained false statements relating to the

methods used to appraise the property values of potential

borrowers--the ratio of property value to loan being a key

indicator of risk. For example, the April 19, 2006, registration

statement and the prospectus supplements stated that "[a]ll

appraisals" were conducted in accordance with the "Uniform

Standards of Professional Appraisal Practice" ("USPAP"). These in

turn require that appraisers "perform assignments with

impartiality, objectivity, and independence" and make it unethical

for appraisers, among other things, to accept an assignment

contingent on reporting a predetermined result.

The complaint alleges in a single general statement that

the appraisals underlying the loans at issue here failed to comply

with USPAP requirements; but there is no allegation that any

specific bank that supplied mortgages to the trusts did exert undue

pressure, let alone that the pressure succeeded. The complaint

fairly read is that many appraisers in the banking industry were

subject to such pressure. So, unlike the lending standard 12
See In re IndyMac Mortgage-Backed Sec. Litig., 718 F. Supp. 13

2d 495, 510 (S.D.N.Y. 2010) (based on plaintiffs' complaint, there

was no reason to infer "that the appraisers of the properties

underlying the [c]ertificates . . . succumbed to [pressure] in any

way that violated USPAP"); accord Boilermakers Nat'l Annuity Trust

Fund v. WaMu Mortg. Pass Through Certificates, Series AR1,

No. C09-00037MJP, 2010 WL 3815796, at *7 (W.D. Wash. Sept. 28,

2010); Tsereteli v. Residential Asset Securitization Trust 2006-A8,

692 F. Supp. 2d 387, 393 (S.D.N.Y. 2010). But cf. In re Wells

Fargo Mortg.-Backed Certificates Litig., 712 F. Supp. 2d 958, 972

(N.D. Cal. 2010).

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allegation, the complaint is essentially a claim that other banks

engaged in such practices, some of which probably distorted loans,

and therefore this may have happened in this case.

On this basis, virtually every investor in mortgagebacked securities could subject a multiplicity of defendants "to

the most unrestrained of fishing expeditions." Gooley v. Mobil Oil

Corp., 851 F.3d 513, 515 (1st Cir. 1988); see also DM Research,

Inc. v. Coll. of Am. Pathologists, 170 F.3d 53, 55 (1st Cir. 1999).

Accordingly, we agree with the district court that such an

allegation--amounting to the statement that others in the industry

engaged in wrongful pressure--is not enough. Several other

district courts have reached precisely this conclusion.13

Investment ratings. The prospectus supplements set forth

ratings that Standard & Poor's Rating Services, Inc. ("S&P") or

Moody's Investor Services, Inc. ("Moody's") had assigned to the

certificates or stated that the certificates would not be offered

unless they received an "investment grade" rating from S&P (AAA

through BBB) or Moody's (Aaa through Baa3). There is no claim that
See Lucia v. Prospect St. High Income Portfolio, Inc., 36 14

F.3d 170, 175-76 (1st Cir. 1994) (underwriters, directors and

advisors can be held liable for accurately reporting study by an

underwriter not party to the suit that, although literally true,

could nevertheless be misleading); cf. 2 A.A. Sommer, Federal

Securities Act of 1933 § 9.02[12][d], at 9-24 (rev. ed. 2010)

(underwriters, directors, officers and issuers can be held liable

for statements of experts included in registration statements).

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the ratings given were misreported or that the "unless" condition

was not met. Rather, plaintiffs say that these ratings were

misleading, primarily because they were based on "outdated models,

lowered ratings criteria, and inaccurate loan information."

The ratings are opinions purportedly expressing the

agencies' professional judgment about the value and prospects of

the certificates. See In re Credit Suisse First Bos. Corp., 431

F.3d 36, 46-47 (1st Cir. 2005), overruled on other grounds by

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007).

An opinion may still be misleading if it does not represent the

actual belief of the person expressing the opinion, lacks any basis

or knowingly omits undisclosed facts tending seriously to undermine

the accuracy of the statement. Id. at 47; accord In re Apple

Computer Sec. Litig., 886 F.2d 1109, 1113 (9th Cir. 1989), cert.

denied, 496 U.S. 943 (1990). Liability may on this theory also

extend to one who accurately described the opinion.14

 The complaint includes acknowledgments from S&P and

Moody's executives conceding, in hindsight, that the models and

data that the rating agencies were using were deficient. But the

ratings were not false or misleading because rating agencies should
E.g., J & R Mktg., SEP v. Gen. Motors Corp., 549 F.3d 384, 15

392-93 (6th Cir. 2008); Boilermakers, 2010 WL 3815796, at *7 ("The

mere fact that the ratings would have been different under a

different methodology is insufficient to state a claim."); IndyMac,

718 F. Supp. 2d at 511-12; Tsereteli, 692 F. Supp. 2d at 395. But

see Wells Fargo, 712 F. Supp. 2d at 973.

The strongest examples are from an S&P managing director now 16

admitting that S&P intentionally inflated ratings and that he "knew

it was wrong at the time" but did it because "[i]t was either that

or skip the business" and from a CEO of Moody's reportedly saying

to his board in 2007 that Moody's was pressured to rate higher and

that sometimes they "drink the kool-aid."

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have been using better methods and data. Defendants are not liable

under the securities laws when their opinions, or those they

reported, were honestly held when formed but simply turn out later

to be inaccurate; nor are they liable only because they could have

formed "better" opinions. See Boilermakers, 2010 WL 3815796, at

*7. A majority of district courts that have considered the issue

have dismissed similar claims, and the Sixth Circuit affirmed one

such dismissal.15

In addition to claiming that the ratings were faulty, the

complaint also alleges that the ratings agencies produced high

ratings aimed at keeping business, and it quotes individuals at the

rating companies to support that proposition and to suggest that

some inside the company thought that ratings were skewed. But, 16

tellingly, the complaint stops short of alleging expressly that the

leadership of S&P or Moody's believed that their companies' ratings

were false or were unsupported by models that generally captured

the quality of the securities being rated. 
See 2 Sommer, supra, § 9.02[12][d], at 9-24; see also In re 17

WorldCom, Inc. Sec. Litig., 346 F. Supp. 2d 628, 660-61 (S.D.N.Y.

2004) (underwriters can be liable for false and misleading public

filings made by issuer and accountants that were incorporated into

registration statement).

-26-

The line is admittedly a fine one, but the ratings--

inherently opinions and not warranties against error, J & R Mktg.,

549 F.3d at 392-93--were accurately reported by defendants and

nothing more is required so long as the ratings were honestly made,

had some basis, and did not omit critical information. That a high

rating may be mistaken, a rater negligent in the model employed or

the rating company interested in securing more business may be

true, but it does not make the report of the rating false or

misleading. If the purchaser wants absolute protection against

errors of opinion, the answer is insurance rather than lawsuits.

As sections 11 and 12 are structured, there is liability

without fault even for those who merely report the statements or

opinions of others; under section 11 this liability for the issuer

is absolute; for other defendants (including the issuer under

section 12), a defense is available for reporting statements of

others if due diligence was exercised. See 15 U.S.C §§ 77k(a)-(b),

77l(a)(2). Either way, the absence of a scienter element may 17

suggest special caution before classifying an accurate report of a

third-party opinion as "misleading" based on implied

representations about subjective intent or qualifications known

only to the third party.
-27-

Seller or solicitor allegations. Section 12(a)(2)

permits a plaintiff to sue only a defendant who either sold its own

security to the plaintiff or (for financial gain) successfully

solicited the sale of that security to the plaintiff. Pinter, 486

U.S. at 642-47, 650 & n.21. The district court dismissed

plaintiffs' section 12(a)(2) claims, concluding that they did not

adequately allege that defendants sold the certificates to the

plaintiffs or solicited the sales. This was apparently because the

complaint used a more ambiguous phrase--that plaintiffs "acquired

the [c]ertificates pursuant and/or traceable to" the offering

documents--found insufficient by a number of courts. E.g., Pub.

Emps.' Ret. Sys. of Miss. v. Merrill Lynch & Co. Inc., 714 F. Supp.

2d 475, 484 (S.D.N.Y. 2010); Wells Fargo, 712 F. Supp. 2d at 966.

But the complaint also alleged that plaintiffs

"acquired . . . [c]ertificates from defendant Nomura Securities"

and that the "[d]efendants promoted and sold the [c]ertificates to

[the p]laintiffs and other members of the [c]lass" (emphasis

added); these allegations are sufficient to state a claim under

section 12(a)(2) so long as material misstatements or misleading

omissions are alleged. The district court's dismissal of

plaintiffs' section 12(a)(2) claims for failure to allege

defendants' requisite connections with the sale was in error.

Control person liability. Finally, the district court

dismissed plaintiffs' section 15 "control person" liability claims
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because it held that plaintiffs failed to state a violation of the

securities laws to begin with. Section 15 creates liability for

any individual or entity that "controls any person liable" under

sections 11 or 12. 15 U.S.C. § 77o; see Shaw, 82 F.3d at 1201 n.2.

Because we hold that plaintiffs adequately stated some claims under

sections 11 and 12(a)(2), we also hold that the district court's

dismissal of plaintiffs' section 15 claim was in error. Given the

"highly factual nature" of the control person inquiry, resolving

that issue on a motion to dismiss is often inappropriate. 2 Hazen,

supra, § 7.12[2], at 343 n.38.

We affirm the dismissal of all claims based upon

purchases of the AR1, AR2, AF2, AR3, AR4 and WF1 trusts and all

defendants including those six trusts implicated only as to their

certificates. As to claims against the AF1 and AP1 trusts and

other remaining defendants, we affirm the dismissal of all claims

save those relating to the statements regarding the lending banks'

underwriting practices but vacate the dismissal of the latter

claims and remand for further proceedings consistent with this

decision. Each party will bear its own costs on this appeal.

It is so ordered.