Opinion ID: 2366732
Heading Depth: 1
Heading Rank: 12

Heading: Materiality of Omissions and Misstatements Related to Real Estate Investments

Text: We also find that the District Court erred in its analysis of the alleged omissions and misstatements related to Blackstone's real estate investments. First, the District Court's opinion implies that to state a plausible claim, plaintiffs' complaint had to identify specific real estate investments made or assets held by Blackstone funds that might have been at risk as a result of the then-known trends in the real estate industry. See Landmen Partners Inc. v. Blackstone Group, L.P., 659 F.Supp.2d 532, 545-46 (S.D.N.Y.2009). This expectation, however, misses the very core of plaintiffs' allegations, namely, that Blackstone omitted material information that it had a duty to report. In other words, plaintiffs' precise, actionable allegation is that Blackstone failed to disclose material details of its real estate investments, and specifically that it failed to disclose the manner in which those unidentified, particular investments might be materially affected by the then-existing downward trend in housing prices, the increasing default rates for sub-prime mortgage loans, and the pending problems for complex mortgage securities. That is all Item 303 requires in order to trigger a disclosure obligation: a known trend that Blackstone reasonably expected would materially affect its investments and revenues. Plaintiffs allege that they were unaware of, but legally entitled to disclosure of, the very information that the District Court held had to be specified in plaintiffs' complaint. Moreover, there are two problems with the District Court's finding that plaintiffs' claims fail because they cannot establish any link[ ] between the declining residential real estate market and Blackstone's heavy investments in commercial real estate. See id. at 544. First, the offering documents indicate, and Blackstone admits, that Blackstone has at least one modest-sized residential real estate investment, and, drawing all reasonable inferences in plaintiffs' favor, its residential real estate holdings might constitute as much as $3 billion and 15% of the Real Estate segment's assets under management. See supra n. 6. This alone is enough on a Rule 12(b)(6) motion to establish a plausible link between the alleged trend in the residential real estate market and Blackstone's real estate investments. Second, even if the overwhelming majority of Blackstone's real estate investments are commercial in nature, it is certainly plausible for plaintiffs to allege that a collapse in the residential real estate market, and, more importantly, in the market for complex securitizations of residential mortgages, might reasonably be expected to adversely affect commercial real estate investments. Blackstone's own disclosures in its Registration Statement make this link clear, given that it admits that the ability of lenders to repackage their [residential] loans into securitizations is one factor contributing to the significant[ ] increase [in] the capital committed to [predominantly commercial] real estate funds. Finally, the District Court erred when it stated that Plaintiff[s] fail[ ] to allege any facts . . . that if true, would render false the few statements alleged to be affirmative misrepresentations. Landmen Partners, 659 F.Supp.2d at 544. To the contrary, plaintiffs provide significant factual detail about the general deterioration of the real estate market and specific facts that, drawing all reasonable inferences in plaintiffs' favor, directly contradict statements made by Blackstone in its Registration Statement. First, the chart in plaintiffs' complaint illustrating the seasonally adjusted price change in the U.S. housing market contradicts Blackstone's representation that the real estate industry [was]. . . experiencing historically high levels of growth, because the chart shows that the rate of price appreciation began to decline significantly beginning in late 2005. In addition, Blackstone's representation that strong investor demand for real estate assets is due [in part] to . . . persistent, reasonable levels of interest rates is refuted by plaintiffs' allegations that [a]s key short-term and the prime rates rose [beginning in June 2004], other interest rates rose as well, including those for most residential mortgage loans and that [t]his rise in interest rates made it more difficult for borrowers to meet their payment obligations. Also, Blackstone's statement that lenders [were able] to repackage their loans into securitizations, thereby diversifying and limiting their risk, is at least impliedly refuted by plaintiffs' detailed allegations as to how the increasing sub-prime mortgage loan defaults were going to impact negatively the existing and future uses of, and value associated with, CDOs, RMBSs, and CDSs. Absent these errors, the materiality of the alleged omitted and misstated information related to Blackstone's real estate investments becomes clear. First, Blackstone's real estate segment played a significant role, SAB No. 99, 64 Fed.Reg. at 45,152, in Blackstone's business. While Blackstone's real estate segment may not be as prominent to the company's traditional identity as its Corporate Private Equity segment, Blackstone's real estate segment nevertheless constituted 22.6% of Blackstone's total assets under management. A reasonable Blackstone investor may well have wanted to know of any potentially adverse trends concerning a segment that constituted nearly a quarter of Blackstone's total assets under management. Second, the alleged misstatements and omissions regarding real estate were qualitatively material because they masked a potential change in earnings or other trends. Finally, the alleged misstatements and omissions, if proven, had the effect of increasing management's compensation, id. For all these reasons, we conclude that the District Court erred in dismissing plaintiffs' allegations relating to Blackstone's real estate investments. Plaintiffs plausibly allege that Blackstone omitted material information that it was required to disclose and that it made material misstatements in its IPO offering documents. With regard to all of the alleged omissions and misrepresentations, the District Court and Blackstone raise the legitimate concern that plaintiffs' view of materiality would require companies like Blackstone to issue compilations of prospectuses for the scores of portfolio companies and real estate assets in which its private equity and real estate funds have any interest. Although, as the District Court correctly noted, [i]ncluding all such information would . . . obfuscate[ ] truly material information in a flood of unnecessary detail, a result that the securities laws forbid, id. at 542 (citing I. Meyer Pincus & Assocs. v. Oppenheimer & Co., 936 F.2d 759, 762 (2d Cir.1991)), we are not persuaded that such a concern is warranted in this case because of two protections from that result. First, as in all bases for liability under Sections 11 and 12(a)(2), the omitted information must be material. Although materiality is undoubtedly a flexible concept due to its fact-specific nature, it is still capable of some defined boundaries. And needless to say, not every portfolio company or real estate asset in which Blackstone invests will be deemed material. Moreover, in the area of pure omissions, disclosure of the information must be required. Here, plaintiffs adequately plead that Item 303 of Regulation S-K requires Blackstone to disclose the omitted information, but without that regulatory requirement Blackstone would be under no obligation to disclose even material information. Thus, it is only when there is both materiality and a duty to disclose that a company may be held liable for omitting information from a registration statement or prospectus. These requirements provide sufficient protection against the opening-of-the-floodgates argument advanced by Blackstone and accepted by the District Court.