Opinion ID: 2793871
Heading Depth: 3
Heading Rank: 1

Heading: Exposure Statements

Text: The August 3, 2007 statements regarding RBSʹs exposure were made prior to the start of the Class Period and cannot be the basis of liability unless ‐ 12 ‐ there was a duty to update or correct them. See Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 154 (2d Cir. 2007). Because the statements referred only to past events or conditions and did not imply anything about future circumstances, there was no duty to update. See Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1129 (2d Cir. 1994). And because the FSA Report shows that the statements were not untrue, there was no duty to correct them. See In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 267 (2d Cir. 1993). The FSA Report supports the truthfulness of Cameronʹs statements that RBS had ʺcut back a lotʺ on some of its risky exposures. It notes that, in 2007, RBS ʺhalted its new origination of structured creditʺ and ʺceased all originationʺ of leveraged finance in July and August of that year. App. at 1275. Similarly, Cameronʹs statement that RBS had taken no ʺcredit lossesʺ on its portfolio is consistent with the FSA Reportʹs statement that RBS took markdowns of at least $240 million on certain CDOs in response to ʺmarket developments.ʺ App. at 1287. The SCAC omits the context of Cameronʹs statement, which referred to market, as opposed to credit, losses. Accordingly, we affirm the district courtʹs holding with respect to the August 2007 statements. ‐ 13 ‐
Plaintiffs contend that RBSʹs December 6, 2007 press release failed to disclose $6.8 billion in subprime exposures and $14.1 billion in exposure to monoline insurers. As this Court has already recognized, the SEC has provided internal guidance with respect to determinations of materiality. ECA, 553 F.3d at 197. The SECʹs Staff Accounting Bulletin (ʺSABʺ) No. 99 provides that a misstatement related to less than 5% of a financial statement carries the preliminary assumption of immateriality. See 64 Fed. Reg. 45150, 45151 (Aug. 19, 1999). This ʺrule of thumb,ʺ however, is not conclusive. Courts must also consider qualitative factors, which can turn a quantitatively immaterial statement into a material misstatement. See id. at 45152. Such qualitative factors include, among others: whether the misstatement ʺarises from an item capable of precise measurementʺ; ʺmasks a change in earnings or other trendsʺ; ʺchanges a loss into income or vice versaʺ; ʺconcerns a segment or other portion of the . . . business that has been identified as playing a significant role in the registrantʹs operations or profitabilityʺ; ʺinvolves concealment of an unlawful transactionʺ; and whether ʺa known misstatement may result in a significant positive or negative market reaction.ʺ Id. ‐ 14 ‐ Plaintiffs allege that RBS understated its exposure in its December 2007 press release. The allegedly undisclosed $6.8 billion constitutes less than 4% of RBSʹs total asset backed securities exposure, and less than 1% of its total assets. SAB No. 99 suggests that this low percentage of assets ʺmay provide the basis for a preliminary assumption that . . . a deviation of less than [5% on] the registrantʹs financial statement[] is unlikely to be material.ʺ See 64 Fed. Reg. 45150, 45151; see, e.g., Hutchison v. Deutsche Bank Sec. Inc., 647 F.3d 479, 485 (2d Cir. 2011) (stating that materiality turns on whether there is ʺa substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made availableʺ (internal quotation marks omitted)); In re UBS AG Sec. Litig., No. 07 Civ. 11225 (RJS), 2012 WL 4471265, at  (S.D.N.Y. Sept. 28, 2012) (stating that undisclosed $100 billion portfolio constituted approximately 5% of overall portfolio and was not an ʺundue risk concentrationʺ compared to entire UBS balance sheet). This quantitative assumption is not dispositive, and we thus consider all relevant qualitative circumstances related to the alleged misstatements. ‐ 15 ‐ The qualitative factors here do not favor treating the presumptively immaterial statements as material statements. Plaintiffs do not allege that the amount of exposure could have been calculated precisely, masks a change in earnings, changes a loss into income or vice versa, or involves an unlawful transaction, or that the misstatements resulted in a significant positive market reaction. And, although RBSʹs asset‐backed securitization group was a driving factor in its profitability, this factor alone does not tip the scales in favor of finding the misstatements material. Even if the qualitative factors weighed more heavily in favor of plaintiffs, we would still dismiss the misstatements for failure to plead fraud. The SCAC alleges that the December press release disclosed $10.3 billion in ʺTotal US sub‐prime exposures.ʺ App. at 1355. Plaintiffs argue that this disclosure was fraudulent because RBS disclosed $17.1 billion in actual sub‐ prime holdings in its 2008 Annual Report. This $17.1 billion amount is comprised of Super Senior CDOs, other CDOs, and subprime U.S. RMBS. The SCAC does not explain how the Court can determine whether the ʺTotal US sub‐ prime exposures,ʺ a subset of global CDOs, is the same subset comprised of Super Senior CDOs, other CDOs, and subprime U.S. RMBS. Without any factual ‐ 16 ‐ allegations supporting the proposition that the two are the same, plaintiffs fail to adequately plead fraud. See San Leandro Emergency Med. Grp. Profit Sharing Plan v. Philip Morris Co., 75 F.3d 801, 813 (2d Cir. 1996) (stating ʺfalse comparison between the figuresʺ does not adequately plead fraud). Similarly, plaintiffs fail to explain how the $14.1 billion monoline insurers constitute subprime exposures or that RBS had an obligation to disclose them as U.S. subprime exposures ʺnet of hedges.ʺ2 The SCAC also does not allege that RBS had an obligation to disclose CLOs in its Trading Statement; the Trading Statementʹs focus was U.S. subprime exposures, including CDOs.
Plaintiffs allege that RBS failed to disclose $66 billion in assets in its 2007 Annual Results. Plaintiffs allege that RBS later corrected the 2007 numbers in Appendix II to its 2008 Annual Report, which issued one year later.3 Our review of the record reveals that the 2007 Annual Results did not omit assets and that Appendix II does not correct any misstatement of the 2007 numbers. (Compare App. at 480 (disclosing 2007 results including £2,581 high grade CDOs, 2 ʺMonoline exposures relate to credit protection purchased on credit assets, including CDOs.ʺ App. at 559. 3 The SCAC converts £ to $ without providing a conversion rate or any additional information. For consistency and ease of understanding, we use the £ values indicated in the record. ‐ 17 ‐ £1,253 mezzanine CDOs, £1,292 sub‐prime trading inventory, £8,698 leveraged finance, £2,233 Alt‐A, and £1,386 CLOs), and App. at 559 (£2,547 monoline exposures), with Supp. App. at 40‐41 (disclosing 2007 results including £2,581 high grade CDOs, £1,253 mezzanine CDOs, £1,292 sub‐prime trading inventory, £2,233 Alt‐A, £1,386 CLOs, and £2,547 monoline exposures), and Supp. App. at 54 (explaining that ʺ[l]everaged finance as disclosed above for [2007 results] has been aligned with definitions used in 2008 in terms of industry classification and is additionally £76 million higher than previously publishedʺ)). Thus, with the exception of leveraged finance, which RBS has explained was adjusted in accordance with 2008 definitions, Appendix II does not revise or correct the February 28 disclosure.