09-0837-cv, 09-0858-cv

In re Morgan Stanley Info. Fund Sec. Litig.

1 UNITED STATES COURT OF APPEALS

2 FOR THE SECOND CIRCUIT

3 

4 August Term, 2009

5 (Argued: November 13, 2009 Decided: January 25, 2010)

6 Docket Nos. 09-0837-cv, 09-0858-cv

7 (consolidated for disposition)

8 

9 IN RE MORGAN STANLEY INFORMATION FUND SECURITIES LITIGATION,

10 No. 09-0837-cv,

11 James M. Lindsay, Michael J. McDermott, Stephen B. Dornak,

12 Dietmar H. Kubb, Lisette Vaessen, and Emil H. Vaessen, on

13 behalf of themselves and all others similarly situated,

14 Plaintiffs-Appellants,

15 – v. – 

16 Morgan Stanley, Morgan Stanley & Co., Inc., Morgan Stanley

17 DW Inc., Morgan Stanley Information Fund, Morgan Stanley

18 Investment Advisors Inc., Morgan Stanley Investment

19 Management Inc., and Morgan Stanley Distributors, Inc.,

20 Defendants-Appellees.

21 
The Clerk of the Court is respectfully directed to amend the official *

captions in both actions to conform to the captions listed above.

The Honorable Lawrence E. Kahn, United States District Court for the **

Northern District of New York, sitting by designation. 

2

1 IN RE MORGAN STANLEY TECHNOLOGY FUND SECURITIES LITIGATION,

2 No. 09-0858-cv,

3 John C. Armstrong, Nina H. Armstrong, and James Barenboim,

4 on behalf of themselves and all others similarly situated,

5 Plaintiffs-Appellants,

6 – v. – 

7 Morgan Stanley, Morgan Stanley & Co., Inc., Morgan Stanley

8 DW Inc., Morgan Stanley Technology Fund, Morgan Stanley

9 Investment Advisors Inc., Morgan Stanley Investment

10 Management Inc., and Morgan Stanley Distributors, Inc.,

11 Defendants-Appellees.

*

12 

13 Before:

14 McLAUGHLIN and WESLEY, Circuit Judges, and KAHN, District **

15 Judge.

16 Plaintiffs appeal from a February 2, 2009 order of the

17 United States District Court for the Southern District of

18 New York (Jones, J.), which dismissed their claims relating

19 to two Morgan Stanley mutual funds brought pursuant to

20 sections 11, 12(a)(2), and 15 of the Securities Act of 1933,

21 15 U.S.C. §§ 77k, 77l(a)(2), 77o. The district court held

22 that plaintiffs had not identified any legal basis that

23 required defendants to disclose in the funds’ offering

24 documents information that related primarily to an

25 affiliated Morgan Stanley broker-dealer. 
3

1 AFFIRMED.

2 

3 DANIEL W. KRASNER (Jeffrey S. Nobel and Nancy A.

4 Kulesa, Izard Nobel LLP, Hartford,

5 Connecticut; Robert B. Weintraub, Wolf

6 Haldenstein Adler Freeman & Herz LLP, New

7 York, New York, on the brief), Wolf

8 Haldenstein Adler Freeman & Herz LLP, New

9 York, New York, for Plaintiffs-Appellants in

10 both actions.

11 RICHARD A. ROSEN (Walter Rieman, on the brief), Paul,

12 Weiss, Rifkind, Wharton & Garrison LLP, New

13 York, New York, for Defendants-Appellees in

14 both actions.

15 MARK PENNINGTON (David M. Becker, Mark D. Cahn, Jacob

16 H. Stillman, on the brief), for amicus curiae

17 Securities and Exchange Commission.

18 

19 WESLEY, Circuit Judge:

20 These cases concern the boundaries of disclosure

21 obligations in registration statements and prospectuses

22 filed on Form N-1A pursuant to the Securities Act of 1933

23 (“Securities Act”), 15 U.S.C. § 77a et seq. In separate but

24 substantially similar putative class actions, two groups of

25 plaintiffs brought claims under sections 11, 12(a)(2), and

26 15 of the Securities Act. In re Morgan Stanley Info. Fund

27 Sec. Litig., No. 02 Civ. 8579 (S.D.N.Y.) (“Info. Fund

28 Action”); In re Morgan Stanley Tech. Fund Sec. Litig., No.

29 02 Civ. 6153 (S.D.N.Y.) (“Tech. Fund Action”). With the
4

1 exception of the Morgan Stanley mutual fund specified in the

2 caption of each case, the defendants are identical in both

3 actions. Both groups of plaintiffs allege that defendants

4 failed to make certain disclosures relating to the mutual

5 funds that are required by the federal securities laws. 

6 In a consolidated decision, the United States District

7 Court for the Southern District of New York (Jones, J.)

8 granted defendants’ motions to dismiss plaintiffs’ Second

9 Amended Consolidated Complaints. In re Morgan Stanley Tech.

10 Fund Sec. Litig., 643 F. Supp. 2d 366, 369 (S.D.N.Y. 2009). 

11 The district court held that plaintiffs’ failure to identify

12 unlawful omissions in the mutual funds’ registration

13 statements or prospectuses doomed their claims. Id. at 381-

14 82. 

15 In this appeal, plaintiffs argue that the district

16 court erred by rejecting their omissions-based legal theory. 

17 However, the Securities and Exchange Commission (“SEC” or

18 “Commission”) has appeared before us as an amicus curiae and

19 opined that neither the Securities Act nor Form N-1A

20 required defendants to disclose the information that

21 plaintiffs allege was omitted. The Commission’s position is

22 consistent with both its prior interpretations of Form N-1A
5

1 and the decision below, it is entitled to judicial

2 deference, and we find it persuasive. Moreover, a careful

3 review of plaintiffs’ allegations reveals that the true

4 object of their claims is the alleged malfeasance of the

5 mutual funds’ affiliated broker-dealer entities and not the

6 public offerings conducted by the funds themselves. We

7 decline to expand liability under sections 11, 12(a)(2), and

8 15 to require issuers and offering participants to make

9 disclosures regarding affiliates that are not otherwise

10 called for by the securities laws. Therefore, we affirm.

11 I. BACKGROUND

12 The focus of these class actions is, at least

13 nominally, two open-ended Morgan Stanley mutual funds: 

14 defendant Morgan Stanley Information Fund (“Info. Fund”) and

15 defendant Morgan Stanley Technology Fund (“Tech. Fund,”

16 collectively with the Info. Fund, the “Funds”). Plaintiffs

17 have not disputed the district court’s finding that the

18 operative pleadings in these two cases are “virtually

19 identical.” In re Morgan Stanley Tech. Fund Sec. Litig.,

20 643 F. Supp. 2d at 369 n.2. We agree with that

21 characterization. The gravamen of both actions is that

22 defendants failed to disclose that the Morgan Stanley
The class period in the Info. Fund Action spans from 1

October 25, 1999 through October 25, 2002; the class period

in the Tech. Fund Action is defined as September 25, 2000

through July 31, 2002. The difference in these class

periods is immaterial to our resolution of this appeal, and

we therefore refer to them collectively as a single “Class

Period.” 

6

1 broker-dealers affiliated with the Funds suffered from

2 internal conflicts of interest, and, because the Funds’

3 managers relied on these broker-dealers’ stock research, the

4 broker-dealers’ conflicts increased the risk to investors

5 associated with purchasing shares of the Funds.

6 A. The Parties

7 The lead plaintiffs in both actions purchased the

8 Funds’ shares during the class periods set forth in their

9 pleadings. Each defendant is a commercial entity that 1

10 played a role in the Morgan Stanley enterprise, and each

11 action bears the title of the mutual fund to which it

12 relates. 

13 Shares of the Info. Fund were publicly traded starting

14 in 1995, and shares of the Tech. Fund were available to

15 investors beginning in September 2000. In order to sell

16 their shares to the public, both Funds registered their

17 securities with the SEC by utilizing Form N-1A to file a

18 series of registration statements and prospectuses
The SEC created Form N-1A to facilitate registration by 2

certain types of open-ended management investment companies

under the Securities Act and the Investment Companies Act of

1940, 15 U.S.C. § 80a-1 et seq. See SEC, Registration Form

Used by Open-Ended Management Investment Companies;

Guidelines (“Form N-1A Adopting Release”), Securities Act

Release No. 33-6479, Investment Company Act Release No.

13,436, 48 Fed. Reg. 37,928, 37,929 (Aug. 22, 1983). The

Form creates a three-part registration statement that is

also sufficient to satisfy qualifying issuers’ prospectusrelated obligations under sections 5(b)(2) and 10(a) of the

Securities Act, 15 U.S.C. §§ 77e(b)(2), 77j(a). See Form N1A Adopting Release, 48 Fed. Reg. at 37,929. First, in

order to avoid prospectus disclosures that are “too long and

complex,” the Form calls for a streamlined, “simplified

prospectus” and a “Statement of Additional Information,” or

“SAI,” that is to be made available to investors upon

request. Id. The purpose of the SAI is to offer issuers

“the opportunity to provide more detailed discussions of

matters required to be in the prospectus, as well as

discussions of certain matters that are not required to be

in the prospectus, but which may be of interest to at least

some investors.” Id. Finally, the third part of Form N-1A,

referred to as “Part C,” “pertains to information that is

not required to be in the prospectus, but is required by the

registration statement.” Id.

The Info. Fund’s four sets of Form N-1A filings were 3

submitted to the SEC on July 27, 1999, May 30, 2000, May 30,

2001, and May 30, 2002. The Tech. Fund’s two sets of Form

N-1A materials were filed on August 17, 2000 and October 31,

2001. Plaintiffs have not identified material differences

between any of these filings that are relevant to their

claims. 

7

1 (collectively, the “Offering Documents”). The Info. Fund 2

2 made four sets of filings between July 1999 and October

3 2002; the Tech. Fund made two sets of filings between August

4 2000 and July 2002.3
8

1 The Offering Documents indicate that the “Investment

2 Objective” of each Fund was to “seek[] long-term capital

3 appreciation,” which both Funds defined as “selecting

4 securities with the potential to rise in price rather than

5 pay out income.” Each Fund disclosed a slightly different

6 strategy for pursuing this objective. The Info. Fund

7 indicated that it would “normally invest at least 65% of its

8 total assets in common stocks and investment grade

9 convertible securities of companies engaged in the

10 communications and information industry located throughout

11 the world.” The Tech. Fund stated that it would “normally

12 invest at least 80% of its assets in common stock of

13 companies of any asset size engaged in technology and

14 technology-related industries.” The Funds also disclosed,

15 using nearly identical language, that their managers had

16 been granted “considerable leeway” to select both general

17 trading strategies and specific investments for the Funds’

18 portfolios.

19 The non-Fund defendants are the same in both actions. 

20 Defendant Morgan Stanley is a Delaware corporation that

21 functions as a holding company and parent entity for each of

22 the non-Fund defendants. Defendant Morgan Stanley
9

1 Distributors Inc. (“MS Distributors”) served as the

2 principal underwriter for each Fund. Defendant Morgan

3 Stanley Investment Advisors Inc. (“MS Advisors”) was the

4 Funds’ principal investment manager. MS Advisors

5 subcontracted with defendant Morgan Stanley Investment

6 Management Inc. (“MS Investment”) to perform certain asset7 management functions for the Funds, such as the purchase and

8 sale of securities for their portfolios.

9 The final two defendants were Morgan Stanley’s primary

10 broker-dealer subsidiaries during the Class Period: Morgan

11 Stanley & Co., Inc. and Morgan Stanley DW Inc.

12 (collectively, “MS&Co.”). Each is a registered broker13 dealer. Both entities offered a variety of financial

14 services relating to research, institutional and retail

15 brokerage, corporate finance, and investment banking.

16 Plaintiffs allege that, during the Class Period, both

17 entities sold shares of the Funds to the public pursuant to

18 a contract with MS Distributors. 

19 B. Plaintiffs’ Allegations

20 The thrust of plaintiffs’ cases is that the Funds’

21 Offering Documents unlawfully omitted certain information

22 relating to the manner in which MS&Co. conducted its
Although plaintiffs use the term “Chinese Wall,” we use 4

the term “Information Barrier” and intend it to have the

same meaning. See, e.g., SEC, Self-Regulatory

Organizations; International Securities Exchange, Inc.,

Notice of Filing of Proposed Rule Change and Amendments No.

1 and 2 Thereto To Amend the Market Maker Information

Barrier Requirements Under ISE Rule 810, Exchange Act

Release No. 50,197, 69 Fed. Reg. 51,735, 51,735 (Aug. 13,

2004) (recommending that the phrase “Chinese Wall” be

replaced with “Information Barrier” in the rules of the

International Securities Exchange). The basic concept arose

10

1 operations, and that MS&Co.’s undisclosed conduct increased

2 the risks associated with purchasing shares of the Funds. 

3 The central allegations are that defendants failed to

4 disclose: (1) that there were conflicts of interest at

5 MS&Co. that could potentially taint the objectivity of its

6 stock research, and (2) that the Funds nevertheless relied

7 on MS&Co.’s research, as evidenced by the proportion of

8 securities in the Funds’ portfolios from companies that were

9 either covered by MS&Co.’s research analysts or being

10 pursued by MS&Co. as potential investment banking clients. 

11 With respect to the conflicts of interest at the Funds’

12 affiliated broker-dealer, plaintiffs assert that MS&Co.

13 intentionally dismantled the “Information Barrier” between

14 its investment banking and research functions during the

15 Class Period, and that defendants unlawfully failed to

16 disclose that fact in the Offering Documents. Following 4
out of regulatory concerns about the need to “segment the

flow of sensitive information” within broker-dealers that

provide a diverse package of financial services. See, e.g.,

SEC, Div. of Market Reg., Broker-Dealer Policies and

Procedures Designed to Segment the Flow and Prevent the

Misuse of Material Nonpublic Information, at 2 n.5 (Mar.

1990), available at http://www.sec.gov/divisions/marketreg/

brokerdealerpolicies.pdf. 

11

1 this change, MS&Co.’s research analysts received

2 compensation based partially on MS&Co.’s generation of

3 investment banking revenue. The resulting conflicts of

4 interest allegedly led these analysts to disseminate biased

5 research reports that exaggerated the merits of investing in

6 some of the securities issued by MS&Co.’s potential

7 investment banking clients. Such reports, plaintiffs

8 contend, artificially inflated the price of those securities

9 to the detriment of the Funds (and, presumably, all

10 investors using MS&Co.’s research).

11 In addition to the conflicts of interest arising out of

12 MS&Co.’s compensation system, plaintiffs also allege that

13 “[d]efendants” (without further specification) participated

14 in “schemes” to “have research analysts issue false reports

15 in order to obtain investment banking business” and to

16 “manipulate the price of initial public offerings.” With

17 respect to their allegations of IPO manipulation, plaintiffs
We may take judicial notice of the full contents of the 5

SEC’s filings relating to this enforcement action because

plaintiffs rely upon portions of them in their pleadings

and, in any event, these proceedings are a matter of public

record. See Chambers v. Time Warner, Inc., 282 F.3d 147,

12

1 incorporated into their pleadings the “specific facts” from

2 “the approximately 303 complaints” filed as part of the

3 consolidated Multi-District Litigation Panel action

4 captioned as In re IPO Securities Litigation, No. 21 M.C.

5 92.

6 Plaintiffs also incorporated by reference the SEC’s

7 allegations in an enforcement action against MS&Co. relating

8 to its lack of an Information Barrier during the Class

9 Period. In 2002, following the close of the Class Period,

10 nine brokerage firms agreed to a $1.4 billion global

11 settlement with the SEC and other regulators relating to

12 improper conflicts of interest that arose from the

13 commingling of research and investment banking functions. 

14 See Press Release, Sec. & Exch. Comm’n, SEC, NY Attorney

15 General, NASD, NASAA, NYSE and State Regulators Announce

16 Historic Agreement to Reform Investment Practices; $1.4

17 Billion Global Settlement Includes Penalties and Funds for

18 Investors, Release No. 2002-179 (Dec. 20, 2002), available

19 http://www.sec.gov/news/press/2002-179.htm. As part of the 5
152-53 (2d Cir. 2002); Kramer v. Time Warner Inc., 937 F.2d

767, 774 (2d Cir. 1991). We do not rely on the SEC’s

allegations for their truth, but “rather to establish the

fact of such litigation and related filings.” Kramer, 937

F.2d at 774.

13

1 global settlement agreement, the implicated firms were

2 required to “sever the links between research and investment

3 banking” in order to “ensure that stock recommendations are

4 not tainted by efforts to obtain investment banking fees.”

5 Id. 

6 As part of the global settlement, the SEC commenced a

7 separate enforcement action against MS&Co., which was filed

8 in the Southern District of New York on April 28, 2003. See

9 Press Release, Sec. & Exch. Comm’n, SEC Sues Morgan Stanley

10 for Research Analyst Conflicts of Interest: Firm to Settle

11 with SEC, NASD, NYSE, NY Attorney General, and State

12 Regulators (“MS&Co. Settlement Release”), Release No. 18,117

13 (Apr. 28, 2003), available at http://www.sec.gov/litigation/

14 litreleases/lr18117.htm. In that action, the SEC asserted

15 that, between approximately July 1999 and 2001: 

16 Morgan Stanley engaged in acts and practices that

17 created conflicts of interest for its research

18 analysts with respect to investment banking

19 activities and considerations. . . . As a result,

20 Morgan Stanley research analysts were faced with a

21 conflict of interest between helping generate

22 investment banking business for Morgan Stanley and
14

1 their responsibilities to publish objective

2 research reports that, if unfavorable to actual or

3 potential banking clients, could prevent Morgan

4 Stanley from winning that banking business.

5 (Compl. ¶ 2, SEC v. Morgan Stanley & Co. Inc., No. 03 Civ.

6 2948 (S.D.N.Y. Apr. 28, 2003).) MS&Co. consented to the

7 entry of a final judgment in that action, which directed it

8 to separate its investment banking and research functions,

9 disgorge $25 million, pay a $25 million civil penalty, and

10 spend $75 million over five years on independent research

11 consultants for use by retail brokerage customers. (Consent

12 of Morgan Stanley & Co., SEC v. Morgan Stanley & Co. Inc.,

13 No. 03 Civ. 2948 (S.D.N.Y. Apr. 2003).)

14 Against this backdrop of allegations relating to

15 MS&Co., plaintiffs assert that the Funds’ reliance on

16 MS&Co.’s research introduced additional investment risks

17 associated with the purchase of the Funds’ shares. 

18 Specifically, plaintiffs contend that the Funds were aware

19 of the conflicts at MS&Co. because of their status as

20 proprietary mutual funds under the Morgan Stanley umbrella,

21 but that the Funds’ managers nevertheless utilized MS&Co.’s

22 research when making investment decisions for the Funds’

23 portfolios. Plaintiffs argue that the Funds should have

24 disclosed that these circumstances led to heightened
15

1 investment risks, and that the Offering Documents contained

2 “numerous” material omissions relating to the Funds.

3 However, the majority of the omissions that are alleged to

4 have occurred relate to MS&Co., not to the Funds. Quoting

5 from the pleadings, these omissions include that:

6 • “there was no [Information Barrier] between

7 MS&Co.’s research department and its investment

8 banking department”;

9 • part of the compensation of MS&Co.’s research

10 analysts was “based upon their

11 securing/participation in investment banking

12 business for MS&Co.,” and the “objectivity of

13 [MS&Co.’s] research reports . . . was inherently

14 and materially tainted by” MS&Co.’s interest in

15 developing investment banking business;

16 • MS&Co. either had, or was seeking to develop,

17 investment banking relationships with “a material

18 number of the companies whose securities were part

19 of the [Funds’] portfolio[s]”;

20 • “MS&Co. at times issued falsely positive research

21 reports to enhance MS&Co.’s opportunity to

22 maintain and obtain investment banking business

23 from the company covered by the report”; and

24 • “defendants had inflated the market price” of

25 securities in the Funds’ portfolios “by

26 conditioning allocations of shares in [an] IPO

27 upon the requirement that customers agree to

28 purchase additional shares of that security in the

29 aftermarket, and, in some cases, to make those

30 additional purchases at pre-arranged, ever

31 escalating prices.”

32 With respect to the Funds themselves, plaintiffs’

33 principal allegation is that these events at MS&Co. made it
16

1 riskier to invest in the Funds. This is true, plaintiffs

2 contend, because — notwithstanding their legal duties to the

3 Funds’ shareholders — the Funds’ managers had an unspecified

4 “material incentive” to cause the Funds to invest in

5 “companies for which MS&Co. issued research reports and/or

6 provided or was seeking to provide investment banking

7 services.” Plaintiffs further allege that the Funds should

8 have specified in the Offering Documents that MS&Co. offered

9 research coverage regarding approximately 76% of the

10 securities in the Info. Fund’s portfolio and 85% of the

11 securities in the Tech. Fund’s portfolio, and that MS&Co.

12 had provided investment banking services for more than 30%

13 of the companies in which the Funds had invested.

14 Plaintiffs assert that defendants were required to

15 disclose all of this information in the Funds’ Offering

16 Documents under Form N-1A and the Securities Act. As to

17 Form N-1A, plaintiffs rely on Item C of the Form’s “General

18 Instructions” and Items 2 and 4 of the “Information Required

19 in a Prospectus” under Part A of the Form.

20 Item C(1)(b) of the General Instructions states:

21 The prospectus disclosure requirements in Form N22 1A are intended to elicit information for an

23 average or typical investor who may not be

24 sophisticated in legal or financial matters. The
17

1 prospectus should help investors to evaluate the

2 risks of an investment and to decide whether to

3 invest in a Fund by providing a balanced

4 disclosure of positive and negative factors. 

5 Disclosure in the prospectus should be designed to

6 assist an investor in comparing and contrasting

7 the Fund with other funds.

8 Item C(2)(a) states, in pertinent part:

9 The purpose of the [Form N-1A] prospectus is to

10 provide essential information about the Fund in a

11 way that will help investors to make informed

12 decisions about whether to purchase the Fund’s

13 shares described in the prospectus.

14 Plaintiffs also contend that Part A of Form N-1A, which

15 relates to the “simplified prospectus” called for by the

16 Form, required defendants to disclose the allegedly omitted

17 information. Item 2, titled “Risk/Return Summary: 

18 Investments, Risks, and Performance,” calls for, inter alia,

19 a “Narrative Risk Disclosure” regarding “the principal risks

20 of investing in the Fund, including the risks to which the

21 Fund’s portfolio as a whole is subject and the circumstances

22 reasonably likely to affect adversely the Fund’s net asset

23 value, yield, and total return.” Item 4, titled “Investment

24 Objectives, Principal Investment Strategies, Related Risks,

25 and Disclosure of Portfolio Holdings,” calls for similar

26 risk-related disclosures.

27 Finally, in addition to their reliance on Form N-1A,
18

1 plaintiffs argue that defendants were required by the

2 Securities Act itself to disclose the allegedly omitted

3 information in order to avoid rendering misleading the

4 statements in the Offering Documents. See 15 U.S.C. §§

5 77k(a), 77l(a)(2); see also 17 C.F.R. § 230.408. The

6 statements in the Offering Documents on which plaintiffs

7 rely in making this assertion relate to the Funds’

8 investment objectives, investment strategies, and risks. 

9 Based on these contentions, plaintiffs argue that they

10 sustained damages from defendants’ omissions that are

11 measurable by a comparison of the Funds’ performance during

12 the Class Period relative to industry benchmarks such as the

13 S&P 500 and the Nasdaq Composite Index. In the Info. Fund

14 Action, the named plaintiffs claim that they lost

15 approximately $280,000. The named plaintiffs in the Tech.

16 Fund Action purport to have lost approximately $241,578. In

17 total, plaintiffs assert that the losses sustained by their

18 combined class of proposed claimants exceed one billion

19 dollars.

20 C. The SEC’s Amicus Brief

21 Prior to the oral argument relating to these appeals,

22 the Court requested that the SEC submit an amicus curiae
19

1 brief expressing the Commission’s opinion as to whether

2 any part of Form N-1A [gave] rise to a duty owed

3 by the defendants to disclose that: (a) the

4 [Funds’] affiliated broker-dealer[] [MS&Co.] had

5 ceased to maintain an Information Barrier between

6 [its] research and investment-banking departments;

7 and (b) the resulting organizational structure [of

8 Morgan Stanley] may affect the investment strategy

9 employed by the [Funds’] managers?

10 The Commission responded on November 12, 2009, and took

11 the position that Form N-1A did not require disclosures

12 relating to the dismantling of MS&Co.’s Information Barrier. 

13 First, the SEC reasoned that the “General Instructions” to

14 Form N-1A, including Item C, are

15 not an independent source of disclosure

16 obligations. Rather, [the General Instructions]

17 are intended to provide funds with general

18 guidance as to the nature of the information they

19 should provide in responding to specific

20 disclosure items, and to the sorts of language, in

21 terms of sophistication or technicality, that they

22 should use in providing that information.

23 (Brief of the Securities and Exchange Commission, Amicus

24 Curiae, In Support of Appellees on Issue Addressed (“SEC

25 Amicus Br.”) at 8.)

26 Second, the SEC turned to the risk-focused instructions

27 cited by plaintiffs in Items 2 and 4 of the Form’s Part A. 

28 The Commission characterized the risk to the Funds arising

29 out of the deterioration of MS&Co.’s Information Barrier as
20

1 “generic” and asserted that “the fact of affiliation

2 [between MS&Co. and the Funds] appears to be irrelevant” to

3 the existence of such a risk. (Id. at 8-9.) Rather,

4 “[t]his risk arises purely from the breach of the

5 [Information Barrier] and has nothing to do with whether the

6 broker-dealer is affiliated with the purchaser of the

7 securities.” (Id. at 8.) The SEC distinguished that

8 “generic” risk from

9 allegations that a fund’s investment objectives

10 included enhancing an affiliated entity’s

11 investment banking business, and that the fund’s

12 investment strategy was to achieve that goal by

13 buying securities that the affiliated entity had

14 underwritten . . . .

15 (Id. at 5-6.) With respect to this latter type of risk, the

16 agency opined that “an investment objective and strategy of

17 enhancing an affiliate’s business by buying securities that

18 the affiliate had underwritten would have to be disclosed”

19 under Form N-1A. (Id. at 6.) However, the SEC reasoned

20 that: 

21 [T]he danger that analyst reports (whether from

22 affiliated or unaffiliated analysts) will be

23 tainted by undisclosed conflicts of interest or

24 actual corruption is but one of an indefinitely

25 large number of factors that could cause a fund

26 (or any other investor) to purchase overpriced

27 securities, and it would not be useful to

28 investors to require an attempt to set all of

29 those forth in the prospectus. 
21

1 (Id. at 10.)

2 II. DISCUSSION

3 We review de novo a district court’s dismissal of a

4 complaint pursuant to Rule 12(b)(6). Rombach v. Chang, 355

5 F.3d 164, 169 (2d Cir. 2004). When assessing the

6 sufficiency of claims under sections 11 and 12(a)(2) of the

7 Securities Act, the structure of the analysis is guided by a

8 preliminary inquiry into the nature of the plaintiff’s

9 allegations. Where the claims are “premised on allegations

10 of fraud,” the allegations must satisfy the heightened

11 particularity requirements of Rule 9(b) of the Federal Rules

12 of Civil Procedure. Id. at 171. However, if the pleading

13 does not sound in fraud, then Rule 8(a) governs. See id. 

14 Defendants have not argued that the pleadings in these

15 cases are subject to Rule 9(b). Therefore, notice pleading

16 supported by facially plausible factual allegations is all

17 that is required — nothing more, nothing less. See Ashcroft

18 v. Iqbal, 129 S. Ct. 1937, 1949-50 (2009). The district

19 court conducted its analysis in a manner consistent with

20 these principles, and dismissed plaintiffs’ claims under
22

1 Rule 12(b)(6) because they failed to identify a legal basis

2 requiring disclosure of the allegedly omitted information. 

3 For the reasons set forth below, we agree with the

4 conclusion reached below and therefore affirm. 

5 A. Overview of the Applicable Law

6 Sections 11, 12(a)(2), and 15 of the Securities Act

7 impose liability on certain participants in a registered

8 securities offering when the publicly filed documents used

9 during the offering contain material misstatements or

10 omissions. Section 11 applies to registration statements,

11 and section 12(a)(2) applies to prospectuses and oral

12 communications. 15 U.S.C. §§ 77k(a), 77l(a)(2). 

13 Section 15, in turn, creates liability for individuals

14 or entities that “control[] any person liable” under section

15 11 or 12. Id. § 77o. Thus, the success of a claim under

16 section 15 relies, in part, on a plaintiff’s ability to

17 demonstrate primary liability under sections 11 and 12. 

18 See, e.g., SEC v. First Jersey Sec., Inc., 101 F.3d 1450,

19 1472-73 (2d Cir. 1996). Because the district court’s

20 dismissal of plaintiffs’ section 15 claims was predicated on

21 their failure to state claims under sections 11 and 12, the

22 latter two provisions warrant the bulk of our analysis. 
23

1 Section 11 of the Securities Act prohibits materially

2 misleading statements or omissions in registration

3 statements filed with the SEC. See 15 U.S.C. § 77k(a). In

4 the event of such a misdeed, the statute provides for a

5 cause of action by the purchaser of the registered security

6 against the security’s issuer, its underwriter, and certain

7 other statutorily enumerated parties. Id. To state a claim

8 under section 11, the plaintiff must allege that: (1) she

9 purchased a registered security, either directly from the

10 issuer or in the aftermarket following the offering; (2) the

11 defendant participated in the offering in a manner

12 sufficient to give rise to liability under section 11; and

13 (3) the registration statement “contained an untrue

14 statement of a material fact or omitted to state a material

15 fact required to be stated therein or necessary to make the

16 statements therein not misleading.” Id. 

17 Section 12(a)(2) provides similar redress where the

18 securities at issue were sold using prospectuses or oral

19 communications that contain material misstatements or 

20 omissions. See id. § 77l(a)(2). Whereas the reach of

21 section 11 is expressly limited to specific offering

22 participants, the list of potential defendants in a section
No defendant has argued on appeal that it is not a proper 6

party to any of plaintiffs’ claims. The defendants in

plaintiffs’ section 11 claims — the Funds, as issuers, and

MS Distributor, as an underwriter of the Funds’ shares —

appear to be permissible parties under the statute. See 15

U.S.C. § 77k(a). The defendants in plaintiffs’ section

12(a)(2) claims are the Funds, Morgan Stanley, MS&Co., MS

Distributor, MS Advisors, and MS Management. It is unclear

from plaintiffs’ allegations that each of these defendants

satisfies the “statutory seller” requirement, but that issue

has not been raised by the parties and we need not address

it in light of our broader holding. 

24

1 12(a)(2) case is governed by a judicial interpretation of

2 section 12 known as the “statutory seller” requirement. See

3 Pinter v. Dahl, 486 U.S. 622, 643-47 & n.21 (1988); see also 

4 Wilson v. Saintine Exploration & Drilling Corp., 872 F.2d

5 1124, 1125-26 (2d Cir. 1989). An individual is a “statutory

6 seller” — and therefore a potential section 12(a)(2)

7 defendant — if he: (1) “passed title, or other interest in

8 the security, to the buyer for value,” or (2) “successfully

9 solicit[ed] the purchase [of a security], motivated at least

10 in part by a desire to serve his own financial interests or

11 those of the securities[’] owner.” Pinter, 486 U.S. at 642,

12 647; see also Capri v. Murphy, 856 F.2d 473, 478 (2d Cir.

13 1988). As a result of this interpretation and the 6

14 remaining statutory text, the elements of a prima facie

15 claim under section 12(a)(2) are: (1) the defendant is a
More specifically, section 11 provides several due 7

diligence defenses available to non-issuer defendants, see

15 U.S.C. § 77k(b), and section 12(a)(2) contains a

“reasonable care” defense, id. § 77l(a)(2). Defendants may

also avoid liability under both provisions for damages based

on the depreciation in value of a security that results from

events other than misrepresentations or omissions. See id.

§§ 77k(e), 77l(b). Generally speaking, defendants bear the

burden of demonstrating the applicability of each of these

25

1 “statutory seller”; (2) the sale was effectuated “by means

2 of a prospectus or oral communication”; and (3) the

3 prospectus or oral communication “include[d] an untrue

4 statement of a material fact or omit[ted] to state a

5 material fact necessary in order to make the statements, in

6 the light of the circumstances under which they were made,

7 not misleading.” 15 U.S.C. § 77l(a)(2).

8 Claims under sections 11 and 12(a)(2) are therefore

9 Securities Act siblings with roughly parallel elements,

10 notable both for the limitations on their scope as well as

11 the in terrorem nature of the liability they create. See

12 Pinter, 486 U.S. at 646; Herman & MacLean v. Huddleston, 459

13 U.S. 375, 381-82 & n.12 (1983). Issuers are subject to

14 “virtually absolute” liability under section 11, while the

15 remaining potential defendants under sections 11 and

16 12(a)(2) may be held liable for mere negligence. 

17 Huddleston, 459 U.S. at 382. Moreover, unlike securities 7
defenses, which are therefore unavailing as a means of

defeating a motion to dismiss pursuant to Rule 12(b)(6). 

26

1 fraud claims pursuant to section 10(b) of the Securities

2 Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78a et

3 seq., plaintiffs bringing claims under sections 11 and

4 12(a)(2) need not allege scienter, reliance, or loss

5 causation. See Rombach, 355 F.3d at 169 n.4. Thus, in

6 contrast to their “‘catchall’” cousin in the Exchange Act —

7 section 10(b), 15 U.S.C. § 77j(b) — sections 11 and 12(a)(2)

8 of the Securities Act apply more narrowly but give rise to

9 liability more readily. In re Fuwei Films Sec. Litig., 634

10 F. Supp. 2d 419, 433-34 (S.D.N.Y. 2009) (quoting Ernst &

11 Ernst v. Hochfelder, 425 U.S. 185, 206 (1976)); see also

12 Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 752-53

13 (1975). 

14 In many cases — including this one — two issues are

15 central to claims under sections 11 and 12(a)(2): (1) the

16 existence of either a misstatement or an unlawful omission;

17 and (2) materiality. The definition of materiality is the

18 same for these provisions as it is under section 10(b) of

19 the Exchange Act: “‘[W]hether the defendants’

20 representations, taken together and in context, would have
27

1 misled a reasonable investor.’” Rombach, 355 F.3d at 172

2 n.7 (quoting I. Meyer Pincus & Assocs. v. Oppenheimer & Co.,

3 936 F.2d 759, 761 (2d Cir. 1991)); see also DeMaria v.

4 Andersen, 318 F.3d 170, 180 (2d Cir. 2003). However,

5 because the materiality element presents “a mixed question

6 of law and fact,” it will rarely be dispositive in a motion

7 to dismiss: 

8 “[A] complaint may not properly be dismissed . . .

9 on the ground that the alleged misstatements or

10 omissions are not material unless they are so

11 obviously unimportant to a reasonable investor

12 that reasonable minds could not differ on the

13 question of their importance.”

14 ECA v. JP Morgan Chase, 553 F.3d 187, 197 (2d Cir. 2009)

15 (quoting Ganino v. Citizens Utils. Co., 228 F.3d 154, 162

16 (2d Cir. 2000)); see also United States v. Gaudin, 515 U.S.

17 506, 512 (1995); First Jersey Sec., 101 F.3d at 1466-67. 

18 The district court did not rely on materiality in its

19 decision, and the parties’ arguments regarding this issue

20 are unpersuasive at the pleadings stage. Nor have

21 plaintiffs argued that the Offering Documents contained

22 actual misrepresentations. Therefore, at the heart of this

23 appeal lies the question of whether plaintiffs have

24 identified an unlawful omission in the Funds’ Offering

25 Documents. 
Whereas section 11 contemplates actions based on 8

“[omissions of] material fact required to be stated” in

registration statements, 15 U.S.C. § 77k(a) (emphasis

added), section 12(a)(2) lacks parallel language regarding

prospectuses and oral communications, id. § 77l(a)(2)

(prohibiting only omissions of those facts “necessary in

order to make the statements, in the light of the

circumstances under which they were made, not misleading”). 

See Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1204 (1st

Cir. 1996), abrogated on other grounds by 15 U.S.C.

§ 78u(4)(b)(2) (the Private Securities Litigation Reform

Act). However, because we conclude that plaintiffs have not

identified a legal basis requiring disclosure, we need not

resolve the import of this distinction. 

28

1 B. The Sufficiency of Plaintiffs’ Allegations

2 Collectively, the language of sections 11 and 12(a)(2)

3 creates three potential bases for liability based on

4 registration statements and prospectuses filed with the SEC: 

5 (1) a misrepresentation; (2) an omission in contravention of

6 an affirmative legal disclosure obligation; and (3) an

7 omission of information that is necessary to prevent

8 existing disclosures from being misleading. See 15 U.S.C.

9 §§ 77k(a), 77l(a)(2). This appeal relates only to 8

10 omissions. The question is whether, assuming the truth of

11 plaintiffs’ allegations, the Offering Documents omitted

12 information that defendants were required to disclose. See

13 Resnik v. Swartz, 303 F.3d 147, 154 (2d Cir. 2002) (“For an

14 omission to be actionable, the securities laws must impose a
29

1 duty to disclose the omitted information.”); see also In re

2 Time Warner Inc. Sec. Litig., 9 F.3d 259, 267 (2d Cir. 1993)

3 (“[A]n omission is actionable under the securities laws only

4 when the corporation is subject to a duty to disclose the

5 omitted facts.”). Two types of omissions can give rise to

6 liability under these provisions.

7 1. Affirmative Disclosure Obligations

8 Plaintiffs first argue that the “General Instructions”

9 of Form N-1A required defendants to disclose the allegedly

10 omitted information. In support of this contention,

11 plaintiffs rely on language from Item C of the General

12 Instructions, which states that “[t]he prospectus disclosure

13 requirements in Form N-1A are intended to elicit information

14 for an average or typical investor who may not be

15 sophisticated in legal or financial matters” and that “[t]he

16 purpose of the prospectus is to provide essential

17 information about the Fund.” The district court rejected

18 this contention, and we find no fault in its conclusion. 

19 The Form’s General Instructions suggest that the Funds

20 were not precluded from providing additional information

21 beyond that called for in the more specific instructions

22 accompanying Parts A, B, and C. In addition to the language
30

1 relied on by plaintiffs, Item C(3)(b) states that “[a] Fund

2 may include, except in the Risk/Return Summary [in Items 2

3 and 3 of Part A], information in the prospectus or the SAI

4 that is not otherwise required.” Consistent with this

5 theme, Item C(1)(d) provides that “[t]he requirements for

6 prospectuses included in Form N-1A will be administered by

7 the Commission in a way that will allow variances in

8 disclosure . . . if appropriate for the circumstances

9 involved while remaining consistent with the objectives of

10 Form N-1A.” The SEC has also indicated in guidance

11 accompanying the Form that, “in order to preserve

12 registrants’ flexibility, registrants . . . are generally

13 free to include in the prospectus information in addition to

14 that required by the specific items of the Form.” See Form

15 N-1A Adopting Release, 48 Fed. Reg. at 37,929. However, it

16 is one thing to suggest that, based on this language, the

17 Funds were not prohibited from providing additional

18 information. It is entirely different to argue, as

19 plaintiffs do, that defendants were required to make

20 additional disclosures by the Form’s General Instructions. 

21 The latter contention lacks support in the language of the

22 Form. 
31

1 To the extent there is any doubt about this issue, our

2 conclusion is confirmed by the author of the Form. When

3 faced with ambiguity in an agency promulgation, courts can —

4 and often do — seek the interpretive opinion of the agency

5 and defer to its views. See, e.g., Press v. Quick & Reilly,

6 Inc., 218 F.3d 121, 126-28 (2d Cir. 2000). Such deference

7 is especially prudent here in light of the SEC’s expertise

8 in administering the securities laws, its ability to seek

9 input from the public when crafting regulatory policy, and

10 its relative political accountability. See Bruh v. Bessemer

11 Venture Partners III L.P., 464 F.3d 202, 207-08 (2d Cir.

12 2006); cf. Resnik, 303 F.3d at 154-55 (quoting Lewis v.

13 Vogelstein, 699 A.2d 327, 332-33 (Del. Ch. 1997)). 

14 We requested the SEC’s opinion with respect to whether

15 the General Instructions accompanying Form N-1A required

16 defendants to make additional disclosures in the Funds’

17 Offering Documents beyond those specified in the

18 instructions relating to Parts A, B, and C of the Form. The

19 SEC responded “no” to our inquiry, reasoning that the

20 General Instructions “are not an independent source of

21 disclosure obligations.” (SEC Amicus Br. at 8.) It cannot

22 be said that this interpretation of Form N-1A is “plainly
32

1 erroneous or inconsistent with the law.” Roth ex rel.

2 Beacon Power Corp. v. Perseus L.L.C., 522 F.3d 242, 247 (2d

3 Cir. 2008) (citing Auer v. Robbins, 519 U.S. 452, 461-62

4 (1997)); Levy ex rel. Immunogen Inc. v. Southbrook Int’l

5 Invs., Ltd., 263 F.3d 10, 14 (2d Cir. 2001); Press, 218 F.3d

6 at 128. Therefore, the SEC’s interpretation is entitled to

7 deference. See Auer, 519 U.S. at 461; DeMaria, 318 F.3d at

8 175. And, because we find the SEC’s view persuasive, we

9 need not pause to determine the precise quantum of deference

10 to which its opinion is entitled. See Cmty. Health Ctr. v.

11 Wilson-Coker, 311 F.3d 132, 137-38 (2d Cir. 2002) (declining

12 to “decide the exact molecular weight of the deference” due

13 to an agency position). Accordingly, we hold that the

14 General Instructions to Form N-1A did not require defendants

15 to disclose the allegedly omitted information identified in

16 the pleadings.

17 Plaintiffs next argue that defendants were required to

18 disclose the omitted information under Items 2 and 4 of Part

19 A of the Form, which relate to “principal risks” to be

20 disclosed in a prospectus. Here, plaintiffs present a

21 moving target of sorts, describing the allegedly omitted

22 risks only vaguely, if at all, throughout their pleadings
33

1 and briefing. In their response to the SEC’s amicus

2 submission, however, plaintiffs clarified their position to

3 some extent:

4 [O]nce the [Information Barrier] between Morgan

5 Stanley’s investment banking and research

6 operations was dismantled, the conflicts of

7 interest that infected Morgan Stanley’s research

8 and investment banking departments created a new

9 material risk in these Funds’ portfolios that

10 would have not have existed had the [Information

11 Barrier] been maintained. Instead of investing in

12 securities strictly on their merits, there was an

13 increased risk that the Funds would

14 disproportionately invest in and/or retain the

15 securities of Morgan Stanley’s investment banking

16 clients/potential clients, without regard to

17 whether they were good investments.

18 (Plaintiffs-Appellants’ Brief in Opposition to Amicus Curiae

19 Securities and Exchange Commission (“Pls.’ Supp. Br.”) at 7-

20 8.) 

21 At bottom, plaintiffs argue that the dismantling of

22 MS&Co.’s Information Barrier augmented the risks associated

23 with investing in the Funds because the Funds’ managers

24 utilized MS&Co.’s research when making investment decisions

25 for the Funds’ portfolios. The district court properly

26 characterized this position as relying on the risk-related

27 instructions in Part A of the Form, and it found that there

28 were insufficient factual allegations to support an

29 inference that the Funds’ managers pursued investment
34

1 strategies that were designed to facilitate MS&Co.’s

2 generation of investment banking revenue. See In re Morgan

3 Stanley Tech. Fund Sec. Litig., 643 F. Supp. 2d at 377. 

4 Plaintiffs have not challenged that conclusion, and, absent

5 a more particularized contention, we decline to revisit this

6 aspect of the district court’s decision. See, e.g., Norton

7 v. Sam’s Club, 145 F.3d 114, 117-18 (2d Cir. 1998). As

8 such, this is not a case involving a situation in which “a

9 fund’s investment objectives included enhancing an

10 affiliated entity’s investment banking business,” which, in

11 the SEC’s view, would have to be disclosed. (SEC Amicus Br.

12 at 5.) Instead, the only question to be resolved is whether

13 Form N-1A obligated defendants to disclose the allegedly

14 omitted information as a “principal risk” of investing in

15 the Funds. 

16 Form N-1A’s definition of “principal risk” is ambiguous

17 in this regard. Hence, it is prudent to look to the SEC for

18 interpretive guidance. In its amicus brief, the Commission

19 characterizes the risk disclosures sought by plaintiffs as

20 arising from “the danger that analyst reports . . . will be

21 tainted by undisclosed conflicts of interest or actual

22 corruption” at MS&Co., and asserts that “the fact of
35

1 affiliation” between MS&Co. and the other defendants

2 “appears to be irrelevant.” (Id. at 8, 10.) Based on these

3 characterizations, the SEC opines that plaintiffs have only

4 identified a “generic risk factor[] that [has] nothing to do

5 with a specific fund,” and — consistent with the decision

6 below — that defendants were not required by Form N-1A to

7 disclose this type of information. (Id. at 10.)

8 Not surprisingly, plaintiffs disagree. They first

9 argue that this aspect of the SEC’s amicus submission is

10 entitled to “little if any deference” because it constitutes

11 an “application” of Form N-1A rather than an

12 “interpretation.” (Pls.’ Supp. Br. at 2.) We are, of

13 course, mindful that the institutional considerations that

14 may lead us to defer to the SEC’s views on the

15 interpretation of its promulgations counsel a different

16 course when the question presented calls for an assessment

17 of the sufficiency of a complaint. The task of construing a

18 litigant’s pleading rests firmly with the courts. 

19 Nevertheless, plaintiffs’ distinction between an agency

20 “interpretation” and an “application” is untenable and

21 without support in our case law. In Press v. Quick &

22 Reilly, Inc., for example, we afforded deference to the
36

1 SEC’s reasonable determination that the defendant broker2 dealers in that case had satisfied their obligation to

3 disclose third party remuneration under SEC Rule 10b-10. 

4 See 218 F.3d at 128-29. We see no basis discernible from

5 Press, our other similar holdings, or this case that would

6 allow us to draw a principled line between interpretations

7 and applications of relevant agency promulgations. 

8 Therefore, we continue to adhere to our prior decisions and

9 defer to the SEC’s opinion so long as it is neither plainly

10 erroneous nor contrary to law. See, e.g., Beacon Power, 522

11 F.3d at 247-48.

12 In further support of their position that the SEC’s

13 amicus submission is not entitled to judicial deference,

14 plaintiffs argue that the agency “erroneously concluded that

15 the facts omitted here . . . were not particular to the

16 defendant Funds.” (Pls.’ Supp. Br. at 4.) Instead,

17 plaintiffs argue that they “claim only that those funds

18 affiliated with full-service investment banking firms, where

19 the required Information Barrier ha[s] been dismantled and

20 there are resulting research—investment banking conflicts of

21 interest, are required to disclose these facts.” (Id. at 5

22 (emphasis in original).) However, like the district court
37

1 and the SEC, we find unconvincing plaintiffs’ attempt to

2 recast the nature of the risk they have identified by

3 limiting this case to its facts. 

4 Consistent with the general guidance that accompanied

5 the 1998 amendments to the Form, the SEC asserts that Form

6 N-1A does not require disclosure of general risks that are

7 present throughout the markets. Rather, the Form’s

8 instructions call for the disclosure of only those risks “to

9 which the Fund’s particular portfolio as a whole is expected

10 to be subject.” The SEC has also indicated, outside of this

11 litigation, that it designed this requirement “to elicit

12 risk disclosure specific to that fund.” SEC, Final Rule: 

13 Registration Form Used by Open-End Management Investment

14 Companies, Securities Act Release No. 7512, Exchange Act

15 Release No. 39,748, Investment Company Act Release No.

16 23,064, 63 Fed. Reg. 13,916, 13,928 n.111 (Mar. 23, 1998)

17 (emphasis added). In its amicus submission, the SEC takes

18 the view that the risks identified by plaintiffs are not

19 limited to the context presented by their factual

20 allegations, and that systemic risks relating to the

21 potential that a company’s stock price is inflated by biased

22 research coverage are present throughout the market. Put
The SEC has already sanctioned MS&Co., and we do not 9

understand its position in this litigation to condone the

dismantling of MS&Co.’s Information Barrier. Nor do we

perceive any inconsistency between the agency’s position

here and plaintiffs’ perceptions of the SEC’s “long-standing

view of Information Barriers.” (Pls.’ Supp. Br. at 17

n.14.) Therefore, American Federation of State, County &

Municipal Employees v. American International Group, Inc.,

462 F.3d 121 (2d Cir. 2006) is inapposite. Plaintiffs’

suggestion to the contrary only serves to further illustrate

the extent to which their claims place undue focus on events

38

1 differently, all investors, including the Funds’ managers,

2 face the risk that the research they use to make their

3 decisions may be biased or flawed, and that the prices they

4 pay for securities may not accurately reflect the

5 securities’ intrinsic value. In order to justify

6 disregarding the Commission’s conclusion, plaintiffs must

7 persuade us that the omitted risks relating to investing in

8 the Funds — not just the factual circumstances at Morgan

9 Stanley or MS&Co. — are unique. Simply put, they have not

10 done so. 

11 Plaintiffs’ allegations focus on the conduct of MS&Co. 

12 However, the pleadings do not suggest that there was

13 anything untoward about the relationship between MS&Co. and

14 the Funds, and there are no allegations that the internal

15 problems at MS&Co. directly affected the manner in which the

16 Funds’ managers approached investment decisions. The 9
at MS&Co. rather than at the Funds. 

39

1 affiliation between MS&Co. and the Funds was disclosed in

2 the Offering Documents and is insufficient to bridge this

3 gap. Without more, we see no basis in Form N-1A for

4 requiring the Funds to complicate their public filings by

5 making additional disclosures about the internal workings of

6 a broker-dealer with only a limited role in the issuance of

7 the securities that are the focus of this case, i.e., the

8 Funds’ shares. “To demand more would open the door to

9 unceasing and unreasonable clamorings for all manner of

10 tutoring . . . , which would afford a bonanza to lawyers . .

11 . with no corresponding benefit to the actual investor.” 

12 Greenapple v. Detroit Edison Co., 618 F.2d 198, 211 (2d Cir.

13 1980).

14 The flaw in plaintiffs’ MS&Co.-focused tunnel vision is

15 not remedied by their allegations relating to the

16 proportions of securities in the Funds’ portfolios issued by

17 companies that were either covered by MS&Co.’s research

18 analysts or utilizing MS&Co.’s investment banking services.

19 Nothing about these facts changes the nature of the risks

20 associated with utilizing MS&Co.’s research. See Kramer v.

21 Time Warner Inc., 937 F.2d 767, 776 (2d Cir. 1991) (“It is
40

1 in the very nature of securities markets that even the most

2 exhaustively researched predictions are fallible.” (emphasis

3 added)). Additionally, plaintiffs have not alleged that

4 MS&Co.’s recommendations relating to these companies

5 diverged from the assessments of analysts outside of Morgan

6 Stanley, or that the Funds’ managers breached their legal

7 duties to the Funds’ shareholders by blindly and

8 uncritically following MS&Co.’s potentially tainted

9 recommendations. See In re Morgan Stanley Tech. Fund Sec.

10 Litig., 643 F. Supp. 2d at 378 n.6. Consequently, while one

11 might infer from the pleadings that conflicts of interest

12 affected MS&Co.’s research analysis of the companies in the

13 Funds’ portfolios, plaintiffs’ allegations do not support an

14 inference that the Funds’ managers made investment decisions

15 under circumstances that gave rise to unique, undisclosed

16 risks relating to the Funds.

17 In seeking to implicate the Funds merely by virtue of

18 their affiliation with MS&Co., plaintiffs also overstate the

19 import of the inference that the Funds’ managers knew that

20 MS&Co. had dismantled its Information Barrier. Assuming,

21 arguendo, that the pleadings support such an inference,

22 plaintiffs have not alleged that the Funds’ managers knew
41

1 that MS&Co.’s analysts had breached their professional

2 obligations by disseminating biased or false research or

3 manipulating IPOs. Affiliated or not, the Funds were not

4 MS&Co.’s keeper, and defendants were not obligated to

5 suggest — in the Funds’ Offering Documents — that MS&Co.’s

6 employees may have engaged in activities that might later be

7 determined to run afoul of the securities laws. 

8 “[D]isclosure is not a ‘rite of confession or exercise of

9 common law pleading.’” I. Meyer Pincus & Assocs., 936 F.2d

10 at 762 (quoting Data Probe Acquisition Corp. v. Datatab,

11 Inc., 722 F.2d 1, 5-6 (2d Cir. 1983)). Defendants’

12 knowledge of the lack of an Information Barrier at MS&Co.

13 does not demonstrate that the allegedly omitted risks

14 relating primarily to MS&Co.’s operations — however

15 disconcerting they may be in a broader sense — were anything

16 but run-of-the-mill insofar as Form N-1A is concerned. 

17 To be clear, plaintiffs are not required under sections

18 11 and 12(a)(2) of the Securities Act to allege that

19 defendants acted with scienter or intentionally omitted

20 information from the Offering Documents. See Rombach, 355

21 F.3d at 169 n.4. The allegations regarding the extent of

22 defendants’ knowledge of MS&Co.’s activities are relevant,
42

1 however, to assessing the nature of the risks that

2 plaintiffs have identified in their claims. The pleadings

3 indicate that these risks arose because the Funds’ managers

4 purchased securities “in a market artificially inflated by

5 [MS&Co.’s] falsely rosy analyst reports . . . [and] market

6 manipulations.” Plaintiffs have not persuaded us that such

7 risks were unique to investing in the Funds, and they have

8 not presented any other meritorious basis for attributing

9 error to the SEC’s opinion that defendants were not required

10 to disclose this information as an investment risk under

11 Part A of Form N-1A. Therefore, we defer to the persuasive

12 view of the SEC, and hold that Items 2 and 4 of Form N-1A’s

13 Part A did not create a disclosure obligation that supports

14 plaintiffs’ claims. 

15 2. Duty to Avoid Misleading Statements

16 Our conclusion that Form N-1A did not directly require

17 defendants to disclose the allegedly omitted information

18 does not mark the end of our inquiry. Sections 11 and

19 12(a)(2) both call for the disclosure of information that is

20 necessary to avoid rendering misleading the representations

21 in registration statements and prospectuses. See 15 U.S.C.

22 §§ 77k(a), 77l(a)(2). SEC Rule 408, which applies to
The question that we presented to the SEC as part of our 10

invitation to participate in this appeal as an amicus curiae

focused on Form N-1A and did not relate to the issue of

whether the alleged omissions rendered the Offering

Documents misleading under Rule 408. This is because we see

no ambiguity in the relevant language of the Securities Act

or Rule 408 with respect to this issue. Thus, although our

conclusion is consistent with the views expressed by the

Commission, we have not deferred to this aspect of its

amicus submission.

43

1 filings on Form N-1A, establishes a similar requirement

2 relating only to registration statements. See 17 C.F.R. §

3 230.408. 

4 Citing these provisions, plaintiffs argue that the

5 statements in the Offering Documents “concerning the Fund[s]

6 and [their] investment strategy and principal risks

7 triggered a clear duty to disclose all material information

8 on the same or related subjects.” They further contend that

9 “the boilerplate disclosures” in the Offering Documents

10 regarding the Funds’ “principal investment strategies” and

11 “principal risks” were rendered misleading by the absence of

12 the allegedly omitted information.

13 These contentions misconstrue the nature of defendants’

14 disclosure obligations and must be rejected. When 10

15 analyzing offering materials for compliance with the

16 securities laws, we review the documents holistically and in
44

1 their entirety. See, e.g., Olkey v. Hyperion 1999 Term

2 Trust, Inc., 98 F.3d 2, 5 (2d Cir. 1996). The literal truth

3 of an isolated statement is insufficient; the proper inquiry

4 requires an examination of “defendants’ representations,

5 taken together and in context.” DeMaria, 318 F.3d at 180

6 (internal quotation marks omitted). Thus, when an offering

7 participant makes a disclosure about a particular topic,

8 whether voluntary or required, the representation must be

9 “complete and accurate.” Glazer v. Formica Corp., 964 F.2d

10 149, 157 (2d Cir. 1992) (internal quotation marks omitted). 

11 Plaintiffs’ argument, however, stretches these

12 principles past their logical breaking point. The Offering

13 Documents’ disclosures did not trigger a generalized duty

14 requiring defendants to disclose the entire corpus of their

15 knowledge regarding MS&Co. See In re Time Warner Inc. Sec.

16 Litig., 9 F.3d at 267 (“[A] corporation is not required to

17 disclose a fact merely because a reasonable investor would

18 very much like to know that fact.”). The SEC designed Form

19 N-1A in an attempt to balance the costs and benefits of

20 additional disclosures in the context of a specific class of

21 issuers. Form N-1A Adopting Release, 48 Fed. Reg. at 37,928

22 (noting that the Form was intended to “provide guidance to
45

1 registrants and their counsel who may be concerned about

2 potential liability for material omissions from the

3 prospectus”). While defendants were required to make

4 complete and accurate disclosures regarding the principal

5 risks of investing in the Funds, these mandatory disclosures

6 did not obligate defendants to make disclosures relating to

7 the commonly understood risks associated with securities

8 research. See id. Consequently, we decline to hold that

9 defendants’ disclosure of the information called for by Form

10 N-1A gave rise to a duty to make disclosures about “related

11 subjects” not called for by the Form. 

12 In light of that conclusion, plaintiffs’ remaining

13 arguments give us little pause. As stated above, plaintiffs

14 have not alleged that the Funds’ managers pursued an

15 undisclosed objective or investment strategy when making

16 investment decisions for the Funds. Therefore, the Funds’

17 disclosures about these topics were not misleading. 

18 Similarly, in light of our holding that plaintiffs have not

19 identified any undisclosed “principal risks” relating to the

20 Funds, it cannot be said that the Offering Documents’ risk

21 disclosures were misleading because they omitted the generic

22 risks relied on by plaintiffs. Accordingly, we hold that
46

1 the Offering Documents were not rendered misleading as a

2 consequence of the omissions that are alleged to have

3 occurred.

4 III. CONCLUSION

5 For the reasons set forth above, we conclude that

6 plaintiffs have not identified any unlawful omissions in the

7 Funds’ Offering Documents. Therefore, their claims under

8 sections 11 and 12(a)(2) of the Securities Act were properly

9 dismissed. As such, we find no error in the district

10 court’s dismissal of plaintiffs’ claims for control-person

11 liability under section 15. We have considered plaintiffs’

12 remaining arguments and find them to be without merit. 

13 Accordingly, the district court’s February 2, 2009 order is

14 hereby AFFIRMED.