Opinion ID: 2793871
Heading Depth: 4
Heading Rank: 2

Heading: December 6, 2007 Statements

Text: 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.