09-3919-cv

Iowa Pub. Employees’ Ret. Sys. v. MF Global, Ltd.

1 UNITED STATES COURT OF APPEALS

2

3 FOR THE SECOND CIRCUIT

4

5 August Term, 2009

6

7

8 (Argued: July 15, 2010 Decided: September 14, 2010)

9

10 Docket No. 09-3919-cv

11

12 - - - - - - - - - - - - - - - - - - - - -x

13

14 IOWA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM, POLICEMEN’S

15 ANNUITY & BENEFIT FUND OF CHICAGO, CENTRAL STATES, SOUTHEAST

16 AND SOUTHWEST AREAS PENSION FUND, STATE-BOSTON RETIREMENT

17 SYSTEM, MF GLOBAL INSTITUTIONAL INVESTORS GROUP,

18

19 Plaintiffs-Appellants,

20

21 MICHAEL RUBIN, individually and on behalf of all others

22 similarly situated,

23

24 Plaintiff,

25

26 NANETTE KATZ, FRANK MATASSA, SUNSHINE WIRE AND CABLE DEFINED

27 BENEFIT PLAN TRUST, individually and on behalf of all others

28 similarly situated, MICHAEL J. RUDNICK, individually and on

29 behalf of all others similarly situated,

30

31 Consolidated-Plaintiffs,

32

33 - v.-

34

35 MF GLOBAL, LTD., MAN GROUP, PLC, KEVIN R. DAVIS, AMY S.

36 BUTTE, ALISON J. CARNWATH, CHRISTOPHER J. SMITH, CHRISTOPHER

37 BATES, HENRI J. STEENKAMP, EDWARD L. GOLDBERG, DEUTSCHE BANK

38 SECURITIES, INC., ABN AMRO ROTHSCHILD LLC, BANC OF AMERICA

39 SECURITIES, LLC, BMO CAPITAL MARKETS CORP., HSBC SECURITIES

40 (USA) INC., KEEFE, BRUYETTE & WOODS, INC., SANDLER O’NEILL &

41 PARTNERS, L.P., WACHOVIA CAPITAL MARKETS LLC, CL KING &

42 ASSOCIATES, INC., DOWLING & PARTNERS SECURITIES, LLC,
2

1 E*TRADE SECURITIES LLC, FORTIS SECURITIES LLC, GUZMAN & CO.,

2 ING FINANCIAL MARKETS, LLC, JEFFRIES & CO., INC., LAZARD

3 CAPITAL MARKETS LLC, M.R. BEAL & CO., MIZUHO SECURITIES USA,

4 INC., MURIEL SIEBERT & CO., INC., OPPENHEIMER & CO., INC.,

5 PIPER, JAFFRAY & CO., RAYMOND JAMES & ASSOCIATES, INC., RBC

6 MARKETS CORP., ROBERT W. BAIRD & CO., INC., SAMUEL A.

7 RAMIREZ & CO., INC., SMH CAPITAL INC., STIFEL, NICOLAUS &

8 CO., INC., SUN TRUST CAPITAL MARKETS, INC., THE WILLIAMS

9 CAPITAL GROUP, L.P., UTENDAHL CAPITAL PARTNERS, L.P., WELLS

10 FARGO SECURITIES, LLC, WILLIAM BLAIR & CO., LLC,

11

12 Defendants-Appellees,

13

14 MERRILL LYNCH, PIERCE FENNER & SMITH, INC., CREDIT SUISSE

15 SECURITIES (USA) LLC, CITIGROUP GLOBAL MARKETS, INC., J.P.

16 MORGAN SECURITIES INC., LEHMAN BROTHERS INC., UBS SECURITIES

17 LLC, GOLDMAN SACHS & CO., MORGAN STANLEY & CO., INC.,

18

19 Consolidated-Defendants-Appellees.

20

21 - - - - - - - - - - - - - - - - - - - -x

22

23 Before: JACOBS, Chief Judge, B.D. PARKER and

24 HALL, Circuit Judges.

25

26 Plaintiffs appeal from a July 23, 2009 judgment of the

27 United States District Court for the Southern District of

28 New York (Marrero, J.), dismissing their complaint for

29 failure to state a claim. They allege material

30 misstatements and omissions in a prospectus and registration

31 statement of defendant MF Global, Ltd., and assert claims

32 under §§ 11, 12(a)(2), and 15 of the 1933 Securities Act.

33 AFFIRMED IN PART, VACATED IN PART, and REMANDED for further

34 proceedings consistent with this opinion.
3

1 MARK R. ROSEN, Barrack, Rodos &

2 Bacine, Philadelphia, PA

3 (Leonard Barrack, Barrack, Rodos

4 & Bacine, Philadelphia, PA;

5 William J. Ban, Barrack, Rodos &

6 Bacine, New York, NY; Carol V.

7 Gilden, Cohen Milstein Sellers &

8 Toll PLLC, Chicago, IL; and

9 Steven J. Toll, Daniel S.

10 Sommers, Cohen Milstein Sellers

11 & Toll PLLC, Washington, DC on

12 the brief) for Appellants.

13

14 DAVID B. ANDERS (Bernard W.

15 Nussbaum, Elaine P. Golin, and

16 Christina T. Shay on the brief),

17 Wachtell, Lipton, Rosen & Katz,

18 New York, NY for MF Global

19 Appellees.

20

21 David A. Barrett, Marilyn C.

22 Kunstler, Boies, Schiller &

23 Flexner LLP, New York, NY for

24 Appellee Man Group plc.

25

26 Stuart J. Baskin, Herbert S.

27 Washer, and Adam S. Hakki,

28 Shearman & Sterling LLP, New

29 York, NY for Underwriter

30 Appellees.

31

32 Marshall H. Fishman, Freshfields

33 Bruckhaus Deringer US LLP, New

34 York, NY for Appellee Amy S.

35 Butte.

36

37 DENNIS JACOBS, Chief Judge:

38 Plaintiffs appeal from a July 23, 2009 judgment of the

39 United States District Court for the Southern District of

40 New York (Marrero, J.), dismissing their putative securities
4

1 class action complaint for failure to state a claim. They

2 allege material misstatements and omissions in the July 2007

3 prospectus and registration statement of defendant MF

4 Global, Ltd., and assert claims under §§ 11, 12(a)(2), and

5 15 of the 1933 Securities Act. In a nutshell, the stock of

6 MF Global plummeted after the February 2008 revelation that

7 a broker had evaded trading restrictions. Of four groups of

8 allegations, dismissal of two is not appealed. As to the

9 claim that the prospectus and registration statement

10 exaggerated risk-management measures, we vacate the

11 dismissal because the district court erroneously applied the

12 bespeaks-caution doctrine. As to the remaining claim, that

13 the prospectus and registration statement failed to disclose

14 deficiencies in the firm’s controls of client accounts, we

15 affirm in part the district court’s dismissal for lack of

16 causation, and in part vacate and remand.

17

18 I

19 In the morning hours of February 27, 2008, a broker at

20 MF Global, Ltd. lost $141.5 million speculating in wheat
 These facts, drawn from the plaintiffs’ complaint, 1

are taken as true. See, e.g., Harrington v. County of

Suffolk, 607 F.3d 31, 33 (2d Cir. 2010) (When “review[ing]

. . . a district court’s dismissal for failure to state a

claim,” we “assum[e] all well-pleaded, nonconclusory factual

allegations in the complaint to be true.”).

5

1 futures. The broker, Evan Dooley, accumulated the losses

1

2 by taking positions vastly in excess of the firm’s trading

3 limits and collateral requirements. MF Global was

4 responsible for settling Dooley’s trades at the

5 clearinghouse, and absorbed the losses. When news reached

6 the markets on February 28, MF Global’s stock price fell

7 28%; it fell a further 17% the day after, resulting in a

8 two-day market capitalization loss exceeding $1.1 billion.

9 The Dooley trading incident revealed to the public that

10 MF Global’s internal risk controls had not been applied to

11 brokers trading for their own accounts (or taking client

12 orders by phone). MF Global had controls for limiting its

13 exposure to market risks in brokerage accounts by

14 restricting trading and by managing margin credit with

15 collateral and other requirements. But MF Global sometimes

16 deactivated the controls (as with Dooley) to speed

17 transactions.

18 This putative class action was filed on March 6, 2008,
 The prospectus and registration statement contained

2

substantially similar statements and wording in relevant

part. Any analysis of statements or omissions in either is

therefore equally applicable to the other.

 Section 11 imposes liability for material 3

misstatements and omissions in registration statements. See

15 U.S.C. § 77k(a). And § 12(a)(2) imposes liability for

material misstatements and omissions in prospectuses (and

certain other communications). See 15 U.S.C. § 77l(a)(2). 

Section 15 imposes joint and several vicarious

liability for violations of §§ 11 and 12 on any person who

“controls” the primary violator. See 15 U.S.C. § 77o. The

fate of the plaintiffs’ § 15 claim is therefore wholly

dependent on our disposition of their § 11 and § 12 claims,

and will not be analyzed separately here.

6

1 alleging, on behalf of certain purchasers of MF Global

2 stock, that the firm misrepresented and failed to disclose

3 relevant material information in a prospectus and

4 registration statement issued when the brokerage firm went 2

5 public in July 2007. Until its initial public offering

6 (IPO), MF Global had been the brokerage arm of Man Group,

7 Plc, a hedge fund. The defendants are MF Global, Man Group,

8 the IPO underwriters, and various MF Global officers and

9 directors. Damages are sought under §§ 11, 12(a)(2), and 15

10 of the 1933 Securities Act, 15 U.S.C. §§ 77k, 77l(a)(2) & 3

11 77o.

12 In response to a motion under Federal Rule of Civil

13 Procedure 12(b)(6), the district court dismissed the
 A directional trade is an affirmative bet on the

4

market that increases the trader’s risk--in contrast to a

hedging trade, which reduces risk.

7

1 complaint in its entirety. See Rubin v. MF Global, Ltd.,

2 634 F. Supp. 2d 459 (S.D.N.Y. 2009). The district court

3 sorted the allegations into four groups, id. at 469-72, each

4 of which it analyzed separately:

5 [1] Directional Trading: That the prospectus

6 misrepresented the types of trading--directional4

7 or only hedging--conducted by MF Global;

8 [2] Refco: That the prospectus failed to disclose

9 the lack of adjustments to MF Global’s risk10 management systems made during and after Man

11 Group’s acquisition of Refco, another brokerage

12 firm;

13 [3] Risk Management: That the prospectus

14 misrepresented and failed to disclose material

15 facts relevant to the strengths and weaknesses of

16 MF Global’s risk-management system; and

17 [4] Client Accounts: That the prospectus failed to

18 disclose “that traders did not have limits when

19 trading for clients, and that with the proper

20 password anyone could access client accounts and

21 trade in them at any time,” id. at 470;

22 The court dismissed the first group of allegations on the

23 ground that the cited statements were not false or

24 misleading, and the second on the ground that the plaintiffs

25 had insufficiently alleged the omission of any material
 The prospectus’s relevant cautionary language

5

included the following:

• “[O]ur risk-management methods may prove to be

ineffective because of their design, their

implementation or the lack of adequate,

accurate or timely information. If our riskmanagement efforts are ineffective, we could

suffer losses that could have a material

adverse effect on our financial condition or

operating results.”

• “[W]e are exposed to . . . risks relating to

employee misconduct. Among other things, our

employees could execute unauthorized

transactions for our clients or for their own

or any of our accounts.”

8

1 fact. The plaintiffs do not appeal those specific rulings. 

2 Claims premised on allegations concerning risk management

3 were dismissed on the ground that cautionary language

4 elsewhere in the prospectus rendered the cited statements 5

5 or omissions non-actionable pursuant to the bespeaks-caution

6 doctrine. (An alternative ground is discussed in note 13.)

7 The fourth category of allegations (concerning client

8 accounts) was dismissed on the ground that alleged omissions

9 concerning the accounts of clients could not have caused the

10 loss alleged, which resulted from revelations concerning the
 The district court dismissed all claims without 6

prejudice to repleading provided that the plaintiffs could

“plausibly show[] that such a repleading would not be

futile.” Rubin, 634 F. Supp. 2d at 475. The plaintiffs

subsequently proffered an amended complaint; but after

reviewing it the district court denied leave to replead,

“find[ing] that the filing of the Proposed Amended Complaint

would be futile.” Though the plaintiffs contest this denial

on appeal, for the reasons set out in note 13 we need not

reach that assignment of error.

 The doctrine (and phrase) seems to have appeared

7

first in Polin v. Conductron Corp., which held that

statements “of expectation, of anticipation, and of

possibilities” “bespeak caution in outlook and fall far

short of the assurances required for a finding of falsity

and fraud.” 552 F.2d 797, 806 n.28 (8th Cir. 1977). In

this Circuit, the doctrine first appeared when it was quoted

9

1 accounts of non-clients. 

6

2 The plaintiffs timely appealed. We review the district

3 court’s order de novo. E.g., Harrington v. County of

4 Suffolk, 607 F.3d 31, 33 (2d Cir. 2010).

5

6 II

7 To prevail on a § 11 or § 12(a)(2) claim, a plaintiff

8 must show that the relevant communication either misstated

9 or omitted a material fact. See 15 U.S.C. § 77k; 15 U.S.C.

10 § 77l(a)(2). The bespeaks-caution doctrine is a corollary

11 of “the well-established principle that a statement or

12 omission must be considered in context.” In re Donald J. 7
approvingly in dicta in Goldman v. Belden, 754 F.2d 1059,

1068 (2d Cir. 1985); it was first applied in Luce v.

Edelstein, 802 F.2d 49, 56 (2d Cir. 1986).

 Though we originally applied bespeaks caution to an 8

action under § 10(b) of the 1934 Securities Exchange Act, 15

U.S.C. § 78j(b), see Luce, 802 F.2d at 56, we have since

applied the doctrine to actions under § 11, see, e.g.,

Rombach v. Chang, 355 F.3d 164, 172-74 (2d Cir. 2004), and

§ 12(a)(2), see, e.g., P. Stolz Family P’ship L.P v. Daum,

355 F.3d 92, 96-98 (2d Cir. 2004), of the 1933 Securities

Act.

10

1 Trump Casino Sec. Litig., 7 F.3d 357, 364 (3d Cir. 1993);

2 accord, e.g., Shaw v. Digital Equip. Corp., 82 F.3d 1194,

3 1213 (1st Cir. 1996); Fecht v. Price Co., 70 F.3d 1078,

4 1081-82 (9th Cir. 1995); Rubinstein v. Collins, 20 F.3d 160,

5 167-68 (5th Cir. 1994). A forward-looking statement

6 accompanied by sufficient cautionary language is not

7 actionable because no reasonable investor could have found

8 the statement materially misleading. See, e.g., P. Stolz 8

9 Family P’ship L.P. v. Daum, 355 F.3d 92, 96-97 (2d Cir.

10 2004). In such circumstances, it cannot be supposed by a

11 reasonable investor that the future is settled, or

12 unattended by contingency. For example, Luce v. Edelstein

13 held that statements in an offering memorandum “as to the

14 potential cash and tax benefits of [a] partnership” were
 E.g. Statement by the Commission on the Disclosure of 9

Projections of Future Economic Performance, Securities Act

Release No. 5362, 1973 WL 149309, at *1 (Feb. 2, 1973);

Louis Loss et al., 2 Securities Regulation 77 & n.80 (4th

ed. 2007).

 See generally Safe Harbor for Forward-Looking 10

Statements, Securities Act Release No. 2324, 1994 WL 562021

(Oct. 13, 1994) (recounting history of SEC policy toward

forward-looking information).

11

1 non-actionable because “the Offering Memorandum made it

2 quite clear that its projections of potential cash and tax

3 benefits were ‘necessarily speculative in nature[,]’ . . .

4 that ‘[n]o assurance [could] be given that these projections

5 [would] be realized,’” and “that ‘[a]ctual results may vary

6 from the predictions and these variations may be material.’”

7 802 F.2d 49, 56 (2d Cir. 1986).

8 The doctrine is one of a set of rules coping with the

9 problem that forward-looking information poses for

10 securities disclosure laws. For decades, the disclosure of

11 forward-looking information was generally prohibited by the

12 Securities and Exchange Commission (SEC). That policy

9

13 changed in the 1970s. To encourage disclosure of forward- 10

14 looking information notwithstanding certain vulnerabilities,

15 including the tendency of predictions to be embarrassed by
 See Statement by the Commission on the Disclosure of 11

Projections of Future Economic Performance, Securities Act

Release No. 5362, 1973 WL 149309, at *3 (Feb. 2, 1973).

12

1 the passage of time, regulators developed safe harbors. 11

2 The SEC promulgated a regulatory safe harbor in 1979, see

3 Safe Harbor Rule for Projections, Securities Act Release No.

4 532, 1979 WL 181199 (June 25, 1979) (codified as amended at

5 17 C.F.R. §§ 230.175, 240.3b-6); and Congress followed suit

6 in 1995, see Private Securities Litigation Reform Act of

7 1995 § 102(a), Pub. L. No. 104-67, 109 Stat. 737, 749

8 (codified at 15 U.S.C. § 77z-2). Bespeaks caution is the

9 courts’ contribution.

10 It is settled that the bespeaks-caution doctrine

11 applies only to statements that are forward-looking. See P.

12 Stolz Family P’ship, 355 F.3d at 96-97 & n.3 (adopting

13 explicitly a forward-looking limitation to the bespeaks14 caution doctrine, but acknowledging that “elaborating such a

15 distinction may be unnecessary” “[b]ecause the ‘bespeaks

16 caution’ doctrine is often defined with respect to forward17 looking statements”). We have consistently observed that

18 limitation. 
 In Luce, we applied bespeaks caution to predictions

12

of “potential cash and tax benefits.” 802 F.2d at 56. 

In I. Meyer Pincus & Associates, P.C. v. Oppenheimer &

Co., Inc., we applied bespeaks caution to predictions of a

security’s performance (though we doubted that the

challenged statement expressed any prediction at all). 936

F.2d 759, 762-63 (2d Cir. 1991)

In Olkey v. Hyperion 1999 Term Trust, Inc., we applied

bespeaks caution to predictions of an asset manager’s

ability to hedge interest rate risk. 98 F.3d 2, 9-10 (2d

Cir. 1996).

In Hunt v. Alliance North American Government Income

Trust, Inc., we declined to apply bespeaks caution to

statements by a mutual fund that it “intended to use hedging

devices” insofar as those statements suggested that such

hedging devices were available to the fund even while “the

13

1 In P. Stolz Family Partnership, for example, the

2 doctrine insulated predictions of future capital-raising

3 transactions (“a sought-after $30 million or a future IPO”),

4 but not statements about “the existence of an agreement to

5 try to plan an IPO.” Id. at 97-98. Most recently, in

6 Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004), we applied

7 bespeaks caution to statements of optimism concerning the

8 future performance of newly acquired businesses, see id. at

9 172-76; but not to alleged omissions of information

10 concerning existing financial and operational difficulties,

11 see id. at 173. More examples are set out in the margin. 

12
Fund managers [allegedly] knew (or recklessly disregarded)

that these hedging techniques were not available (because

they were too costly).” 159 F.3d 723, 728-29 (2d Cir.

1998).

In Halperin v. eBanker USA.com, Inc., we applied

bespeaks caution to statements of “future plans,” that

“[t]he Company intends to endeavor to file registration

statements with the SEC,” which the plaintiffs alleged was

materially misleading insofar as it overstated the

likelihood of registration. 295 F.3d 352, 355, 359-60 (2d

Cir. 2002).

14

1 Here, it is alleged for example that the prospectus

2 “failed to disclose the material fact that [MF Global’s]

3 Risk Management System protocols and procedures . . . did

4 not apply to the Company’s employees . . . [when] trading

5 for their own accounts.” That allegation specifies an

6 omission of present fact, to which bespeaks caution does not

7 apply: The applicability of MF Global’s risk-management

8 system to employee accounts was ascertainable when the

9 challenged statements were made. It was therefore error for

10 the district court to rely on the bespeaks-caution doctrine

11 to dismiss that claim. 

12 The district court asked whether “Plaintiffs are

13 essentially alleging that Defendants failed to disclose the

14 risk of a future negative event.” Rubin, 634 F. Supp. 2d at

15 468. The doctrine then was applied to immunize any
 In the alternative, the district court held that the 13

plaintiffs’ risk-management allegations failed to state a

claim because they focused on systemic risk-management

problems only in February 2008, when the trading incident

occurred, not in July 2007, at the time the prospectus and

registration statement issued:

Plaintiffs’ allegations are based on information

about the MF Global risk management system that

was disclosed after the February 2008 Trading

Incident. . . . [T]here is nothing to indicate

that this was the state of affairs in July 2007,

when the Prospectus was issued. In other words,

Plaintiffs have offered no factual averments that

the alleged misrepresentations and omissions were,

in fact, false or misleading at the time the

Prospectus was issued.

Rubin, 634 F. Supp. 2d at 474. This conclusion fails to

15

1 statement that the court deemed to be “essentially alleging”

2 the non-disclosure of a risk, regardless of whether the

3 statement looked to the future or was rooted in the known

4 present:

5 The Court finds that it is appropriate to apply

6 the “bespeaks caution” doctrine here because

7 Plaintiffs’ objections to misrepresentations about

8 specific or general shortcomings in MF Global’s

9 risk management system that existed at the time

10 the Prospectus was issued are, in fact, objections

11 to Defendants’ alleged failure to disclose the

12 possibility that the risk management system might

13 be unable to prevent future negative outcomes.

14 Id. at 472. This misstates the threshold test, and applies

15 the bespeaks-caution doctrine too broadly.13
draw a reasonable inference in the plaintiffs’ favor. See,

e.g., In re DDAVP Direct Purchaser Antitrust Litig., 585

F.3d 677, 692 (2d Cir. 2009) (stating that courts must

“draw[] all inferences in favor of the plaintiff” when

ruling on a motion to dismiss). Depending on the problem,

its existence in February 2008 may support an inference that

it was present six months earlier. This is sufficient “‘to

raise [the plaintiffs’] right to relief above the

speculative level.’” Arista Records, LLC v. Doe 3, 604 F.3d

110, 120 (2d Cir. 2010) (quoting Bell Atl. Corp. v. Twombly,

550 U.S. 544, 555 (2007)).

Because we reject this alternative basis, we need not

reach the plaintiffs’ argument that the district court erred

by denying their motion to replead. The plaintiffs argue

here that their proferred repleading remedied deficiencies

in the operative complaint by sufficiently showing that MF

Global’s risk-management lacunae existed when the prospectus

and registration statement issued. The operative complaint

supports that inference without amendment.

16

1 The district court worried that “[p]laintiffs in

2 securities fraud actions can easily characterize many

3 alleged misrepresentations or omissions regarding the risk

4 of future negative events as statements that simply concern

5 discrete present or historical fact.” Id. at 468. “For

6 example, an allegation that a corporation failed to disclose

7 the risk that it would default on outstanding financial

8 obligations in the future could just as easily be

9 characterized as a failure to disclose present or historical

10 financial instability.” Id.
17

1 Investors are interested in issuer statements only

2 insofar as those statements bear on the future. But while

3 it is true that predictions about the future can represent

4 interpretations of present facts (and vice versa), there is

5 a discernible difference between a forecast and a fact, and

6 courts are competent to distinguish between the two. A

7 forward-looking statement (accompanied by cautionary

8 language) expresses the issuer’s inherently contingent

9 prediction of risk or future cash flow; a non-forward10 looking statement provides an ascertainable or verifiable

11 basis for the investor to make his own prediction. 

12 The line can be hard to draw, and we do not now

13 undertake to draw one. However, a statement specifying the

14 risk of default is distinct from a statement of present or

15 historical financial instability, even though they both bear

16 upon the same risk. And a statement of confidence in a

17 firm’s operations may be forward-looking--and thus insulated

18 by the bespeaks-caution doctrine--even while statements or

19 omissions as to the operations in place (and present

20 intentions as to future operations) are not. 
 Some of the “puffery” cases (those analyzing puffing 14

of present or historical facts) can be seen as falling into

this category: To the extent that puffery suggests a rosy

future, the principle underlying bespeaks caution applies. 

See, e.g., ECA, Local 134 IBEW Joint Pension Trust of Chi.

v. JP Morgan Chase Co., 553 F.3d 187, 205-06 (2d Cir. 2009)

(“Puffery” statements that issuer’s risk management was

effective and “highly disciplined” would not be relied upon

by a reasonable investor because they “did not, and could

not, amount to a guarantee that [the issuer’s] choices would

prevent failures in its risk management practices.”).

18

1 A statement may contain some elements that look forward

2 and others that do not. Shaw, 82 F.3d at 1213. A

3 characterization of present or historical fact may be

4 partially predictive. See, e.g., id. at 1213 (holding 14

5 that a statement that restructuring reserve was “adequate”

6 is forward-looking insofar as it “suggests that [the issuer]

7 would take no further restructuring charges in the near-term

8 future.”). A present fact like an appraisal or valuation

9 may depend on predictions: of future cash flows for example,

10 or future risks. Donald C. Langevoort, Disclosures That

11 “Bespeak Caution”, 49 Bus. Law. 481, 489 (1994). A forecast

12 may extrapolate present or historical facts into the future. 

13 Id. But in each instance the forward-looking elements and

14 the non-forward-looking are severable.
 MF Global remarks in a footnote that the heightened

15

pleading standard of Federal Rule of Civil Procedure 9(b)

may apply to at least some of the plaintiffs’ allegations. 

See generally Rombach, 355 F.3d at 171 (holding that “the

heightened pleading standard of Rule 9(b) applies to Section

11 and Section 12(a)(2) claims insofar as the claims are

premised on allegations of fraud”). The district court

declined to address this issue, see Rubin, 634 F. Supp. 2d

at 469, and so do we. See, e.g., Tolbert v. Queens Coll.,

242 F.3d 58, 75 (2d Cir. 2001) (“It is a settled appellate

rule that issues adverted to in a perfunctory manner,

unaccompanied by some effort at developed argumentation, are

deemed waived.” (internal quotation marks omitted)); Norton

v. Sam’s Club, 145 F.3d 114, 117 (2d Cir. 1998) (“Issues not

sufficiently argued in the briefs are considered waived and

normally will not be addressed on appeal.”).

19

1 Here, characterizations of MF Global’s risk-management

2 system--that the system was “robust,” for example--invite

3 the inference that the system will reduce the firm’s risk. 

4 However, bespeaks caution does not apply insofar as those

5 characterizations communicate present or historical fact as

6 to the measures taken. Rombach, 355 F.3d at 173

7 (“Cautionary words about future risk cannot insulate from

8 liability the failure to disclose that the risk has

9 transpired.”).

10 We remand to the district court to analyze the

11 plaintiffs’ remaining allegations under the standard set out

12 above.15
20

1

2 III

3 The plaintiffs also challenge the dismissal of their

4 “client accounts” allegations: that the prospectus failed to

5 disclose “that traders did not have limits when trading for

6 clients, and that with the proper password anyone could

7 access client accounts and trade in them at any time,”

8 Rubin, 634 F. Supp. 2d at 470. The district court dismissed

9 these allegations on the ground that the plaintiffs’ alleged

10 losses resulted from the failure to manage trading risks in

11 accounts of non-clients (such as Dooley), and that the

12 losses therefore were not caused by alleged misstatements or

13 omissions concerning accounts of clients. 

14 Loss causation is not an element of a plaintiff’s prima

15 facie case; rather, the absence of loss causation is an

16 affirmative defense. See 15 U.S.C. §§ 77k(e), 77l(b). A

17 causation defense prevails if the defendant “proves” that an

18 otherwise recoverable loss was not caused by the alleged

19 misstatement or omission. Id. “An affirmative defense may

20 be raised by a pre-answer motion to dismiss under Rule
21

1 12(b)(6) . . . if the defense appears on the face of the

2 complaint.” Pani v. Empire Blue Cross Blue Shield, 152 F.3d

3 67, 74 (2d Cir. 1998).

4 The district court dismissed the plaintiffs’ client

5 accounts allegations because “the Trading Incident that

6 sparked the sharp drop in MF Global’s stock price, which

7 caused the losses that Plaintiffs complain of, had nothing

8 to do with MF Global’s trading for clients or trading in or

9 access to client accounts. . . . Rather, the Trading

10 Incident involved trades in a non-client account.” Rubin,

11 634 F. Supp. 2d. at 470. 

12 This is sound as far as it goes. But the Dooley

13 trading incident (and events precipitated by it) revealed

14 that risk-management deficiencies affected client accounts

15 as well. Shortly after the Dooley incident, MF Global

16 “acknowledged that existing internal controls could have

17 stopped Mr. Dooley’s trades from being processed--but were

18 turned off in a few cases to allow for speedier transactions

19 by brokers at the firm who traded for themselves or took

20 customer orders by phone.” (emphasis added). Thus, at
22

1 least as to phone orders, the firm’s risk-management

2 controls did not reliably constrain brokers who executed

3 trades on behalf of clients. Unsurprisingly, a managing

4 director at Fitch Ratings publicly stated that the Dooley

5 incident “does open the view that [MF Global’s] customers

6 are taking more risk than we thought.” (emphasis added). 

7 This concern--likely shared by others--may have had a

8 negative impact on MF Global’s stock price because client

9 business might be lost and because clients’ market risks are

10 at least partially shared by the firm.

11 However, neither the Dooley trading incident nor

12 subsequent events revealed to the public that “anyone with

13 the password could access client accounts . . . and trade at

14 will therein,” as the plaintiffs allege. This allegation

15 concerns a security risk, of client fund misappropriation--

16 not the sort of risk made plain by and after the Dooley

17 losses. It is therefore “app[arent] on the face of the

18 complaint,” Pani, 152 F.3d at 74, that the stock price

19 decline (and the plaintiffs’ resulting losses) cannot be

20 attributed to the prospectus’s failure to disclose that
23

1 alleged fact; and the allegation was properly dismissed. 

2 Accordingly, we affirm the district court insofar as it

3 dismissed the plaintiffs’ allegation concerning access to

4 client accounts; but vacate and remand insofar as it

5 dismissed their allegation that telephone orders were not

6 subject to risk management.

7 ***

8 For the foregoing reasons, the district court’s

9 judgment is affirmed in part and vacated in part, and the

10 case is remanded for further proceedings consistent with

11 this opinion.