Opinion ID: 2366732
Heading Depth: 1
Heading Rank: 6

Heading: Procedural History and District Court Opinion

Text: The initial complaint was filed in the District Court by Landmen Partners, Inc., on April 15, 2008. On September 15, 2008, the District Court appointed Martin Litwin, Max Poulter, and Francis Brady as lead plaintiffs, and on October 27, 2008, the lead plaintiffs filed the operative Consolidated Amended Class Action Complaint. Blackstone filed a motion to dismiss the complaint on December 4, 2008, and, following oral argument, the District Court granted the motion, with prejudice, in an opinion dated September 22, 2009. See Landmen Partners Inc. v. Blackstone Group, L.P., 659 F.Supp.2d 532 (S.D.N.Y. 2009). The District Court's opinion primarily focused on the materiality of the alleged omissions and misstatements concerning FGIC, Freescale, and Blackstone's real estate investments. First, the District Court analyzed the relative scale or quantitative materiality of the alleged FGIC and Freescale omissions. After noting our (and the SEC's) acceptance of a 5% threshold as an appropriate starting place or preliminary assumption of immateriality, the District Court noted that Blackstone's $331 million investment in FGIC represented a mere 0.4% of Blackstone's [total] assets under management at the time of the IPO. [7] Id. at 541 (citing ECA & Local 134 IBEW Joint Pension Trust v. JP Morgan Chase Co., 553 F.3d 187, 204 (2d Cir.2009)). The District Court then addressed plaintiffs' argument that the materiality of the omissions is best illustrated by the effect the eventual $122.2 million drop in value of Blackstone's FGIC investment had on Blackstone's 2007 annual revenues. Id. The District Court found that while the decline in FGIC's investment value may have been significant relative to the Corporate Private Equity segment's annual revenues, it was quantitatively immaterial as compared with Blackstone's $3.12 billion in total revenues for 2007. [8] Id. The District Court next looked at the quantitative materiality of the Freescale omissions, again comparing Blackstone's investment to its total assets under management. The court stated that the $3.1 billion investment in Freescale represented 3.6% of the total $88.4 billion the Company had under management at the time of the IPO. Id. The District Court did not mention that the investment in Freescale accounted for 9.4% of the Corporate Private Equity segment's $33.1 billion of assets under management. The District Court found it significant that the complaint did not (and likely could not) allege that Freescale's loss of its exclusive supplier relationship with Motorola would cause Blackstone's investment in Freescale to lose 100% of its value. Id. at 542. The District Court then pointed to the structure of the Blackstone enterprise as further support for the immateriality of the alleged omissions. According to the District Court, because the performance of individual portfolio companies only affects Blackstone's revenues after investment gains or losses are aggregated at the fund level, the poor performance of one investment may be offset by the strong performance of another. Id. Accordingly, there is no way to make a principled distinction between the negative information that Plaintiff[s] claim[ ] was wrongfully omitted from the Registration Statement and information. . . about every other portfolio company. Id. The District Court found that requiring disclosure of information about particular portfolio companies or investments would risk obfuscat[ing] truly material information in a flood of unnecessary detail, a result that the securities laws forbid. Id. Next, recognizing that a quantitative analysis is not dispositive of materiality, the District Court found that only one of the qualitative factors that we, or the SEC, often consider was present in this case. Specifically, the court found that: (1) none of the omissions concealed unlawful transactions or conduct; (2) the alleged omissions did not relate to a significant aspect of Blackstone's operations; (3) there was no significant market reaction to the public disclosure of the alleged omissions; (4) the alleged omissions did not hide a failure to meet analysts' expectations; (5) the alleged omissions did not change a loss into income or vice versa; and (6) the alleged omissions did not affect Blackstone's compliance with loan covenants or other contractual requirements. The District Court noted that the one qualitative factor it found present in this casethat the alleged omissions had the effect of increasing Blackstone's management's compensationwas not enough, by itself, to make the omissions material. Id. at 543-44. Accordingly, the District Court held that the alleged omissions concerning FGIC and Freescale were immaterial as a matter of law. Id. at 544. The District Court then separately analyzed the alleged omissions and misstatements regarding Blackstone's real estate investments. The District Court first noted that the complaint failed to identify a single real estate investment or allege a single fact capable of linking the problems in the subprime residential mortgage market in late 2006 and early 2007 and the roughly contemporaneous decline in home prices (which are well-documented by the [complaint]) to Blackstone's real estate investments, 85% of which were in commercial and hotel properties. Id. According to the District Court, without further factual enhancement as to how the troubles in the residential mortgage markets could have a foreseeable material effect on Blackstone's real estate investments, plaintiffs' allegations fell short of the plausibility standard set forth in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). In addition, the District Court found that plaintiffs had failed to allege any facts that, if true, would render false those statements alleged to be affirmative misrepresentations. The District Court further found that insofar as plaintiffs alleged that Blackstone was required to disclose general market conditions, such omissions are not actionable because Sections 11 and 12(a)(2) do not require disclosure of publicly available information: The omission of generally known macro-economic conditions is not material because such matters are already part of the `total mix' of information available to investors. Landmen Partners, 659 F.Supp.2d at 545. Finally, the District Court noted that the complaint contained no allegations that Blackstone knew that market conditions were reasonably likely to have a material effect on its portfolio of real estate investments, id. at 545, and stated that generalized allegations that problems brewing in the market at large made it `foreseeable' that a particular set of unidentified investments would sour are insufficient to `nudge[ ] [the] claims across the line from conceivable to plausible,' id. at 546 (alterations in original) (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955). The District Court's opinion concluded with a brief analysis of the GAAP allegations. The District Court found that because those allegations were largely derivative of plaintiffs' other allegations, they were insufficient to state a claim for essentially the same reasons that the primary allegations failed. Accordingly, the District Court granted Blackstone's motion to dismiss and dismissed plaintiffs' claims with prejudice. Judgment was entered in favor of Blackstone on September 25, 2009. Plaintiffs filed a timely notice of appeal on October 23, 2009.