Court Opinion

ID: 2675035
Source: CourtListenerOpinion
Date Created: 2014-05-20 15:00:52.981225+00
Date Added: 2024-06-11T13:07:03.411933
License: Public Domain

United States Court of Appeals
         FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 19, 2014                Decided May 20, 2014

                       No. 12-7088

                     D.J. WU, ET AL.,
                      APPELLANTS

                            v.

            JOHN CRUMPTON STOMBER, ET AL.,
                     APPELLEES

                Consolidated with 12-7097

       Appeals from the United States District Court
               for the District of Columbia
                   (No. 1:11-cv-02287)
                   (No. 1:11-cv-01142)

    Matthew E. Miller argued the cause for appellants. With
him on the briefs were Jonathan W. Cuneo and Joel Davidow.

    Robert A. Van Kirk argued the cause for appellees. With
him on the brief were Sarah F. Teich, Brian C. Rabbitt, and
Gary A. Orseck.

    Before: HENDERSON and KAVANAUGH, Circuit Judges,
and RANDOLPH, Senior Circuit Judge.
                               2
   Opinion for       the   Court   filed   by   Circuit   Judge
KAVANAUGH.

     KAVANAUGH, Circuit Judge:               Carlyle Capital
Corporation invested in residential mortgage-backed
securities. In June 2007, in order to raise capital, Carlyle
Capital sold shares in the company to private investors.
During the real estate and financial crisis of 2008, Carlyle
Capital’s investments lost their value, and the company went
out of business. In this suit, former Carlyle Capital investors
alleged that Carlyle Capital made material misstatements and
omissions in its June 2007 sale of securities and thereby
violated the federal securities laws. Plaintiffs also alleged
violations of Dutch law. In thorough opinions, the District
Court dismissed the claims. We affirm.

                               I

     Carlyle Capital was an investment fund. Between 2006
and 2008, it invested the majority of its capital in AAA-rated,
Fannie Mae-guaranteed and Freddie Mac-guaranteed
residential mortgage-backed securities. In June 2007, Carlyle
Capital conducted a private offering of its shares to accredited
investors. Such accredited investors must meet certain high
personal wealth requirements at the time they purchase
securities. See 17 C.F.R. § 230.501(a). The basic idea of
Carlyle Capital’s offering was to raise more capital so that it
could purchase even more residential mortgage-backed
securities.

     In the spring of 2008, amidst the ongoing real estate
meltdown, Carlyle Capital collapsed. Three years later, two
sets of investors brought class action suits in federal district
court in Washington, D.C. The two cases were later
consolidated. Plaintiffs alleged, as relevant here, that Carlyle
                              3
Capital made certain misstatements and omissions during the
June 2007 Offering, in violation of Section 10(b) of the
Securities Exchange Act of 1934 and Securities and Exchange
Commission Rule 10b-5. See 15 U.S.C. § 78j(b); 17 C.F.R.
§ 240.10b-5. They also eventually alleged common-law fraud
and misrepresentation claims. In the midst of the D.C.
litigation, these same plaintiffs, joined later by some other
new plaintiffs, brought a separate suit in New York state court
based on the same nucleus of facts and raising the same basic
claims. The New York action was removed to New York
federal district court and then transferred to the D.C. federal
district court to be considered along with the consolidated
D.C. suit.

     Carlyle Capital moved to dismiss the consolidated D.C.
case for, among other things, failure to state a claim under
Rule 12(b)(6). The District Court granted Carlyle Capital’s
motion to dismiss the consolidated D.C. suit. See Wu v.
Stomber, 883 F. Supp. 2d 233 (D.D.C. 2012). Carlyle Capital
also moved to dismiss the New York action, and the District
Court then dismissed the New York suit as duplicative. Id.

    Plaintiffs now appeal the dismissal of their consolidated
D.C. suit and the transferred New York case. Our review is
de novo.

                              II

    Plaintiffs’ complaints in both the D.C. and New York
cases primarily allege that Carlyle Capital’s June 19, 2007,
Offering Memorandum contained material misstatements and
omissions and thereby violated federal securities laws.

    Under Section 10 of the Securities Exchange Act and
SEC Rule 10b-5, a company issuing securities may not make
“any untrue statement of a material fact” or omit a “material
                                4
fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not
misleading.” 17 C.F.R. § 240.10b-5; see 15 U.S.C. § 78j(b).

     In its June 19 Offering Memorandum, Carlyle Capital
disclosed a first-quarter gain of $11.6 million in the value of
its portfolio, which was primarily residential mortgage-
backed securities. In the Offering Memorandum, Carlyle
Capital also disclosed an updated figure as of June 13 to
reflect changes since the end of the first quarter. Between the
end of the first quarter and June 13, the value of the portfolio
fell by $28.9 million. As a result, as of June 13, Carlyle
Capital’s portfolio had a year-to-date loss of $17.3 million.

     That volatility, and the latest figures, were all disclosed in
the June 19 Offering Memorandum. And plaintiffs do not
dispute the accuracy of those figures. Instead, plaintiffs
allege that an internal email from one Carlyle Capital director
indicated that as of June 11 the year-to-date decline in value
of Carlyle Capital’s portfolio was $76.2 million. According
to plaintiffs, Carlyle Capital’s omission of that June 11 figure
constituted fraud.

     One difficulty with plaintiffs’ theory is that Carlyle
Capital did in fact disclose the latest, updated figure, the June
13 figure and did not suggest that the snapshot of June 13 was
anything other than just that – a snapshot of June 13.
Moreover, the Offering Memorandum warned against relying
on the stability of its residential mortgage-backed securities.
It informed potential investors that the market value of
Carlyle Capital’s securities was “highly volatile” and
“difficult to predict.” Offering Memorandum at 13. And as
plaintiffs’ complaint itself acknowledges, it was widely
known that the value of residential mortgage-backed
securities nationwide was in extreme flux at the time. See
                               5
Consolidated Complaint at ¶ 125, Wu v. Stomber, No. 11-cv-
01142 (D.D.C. Dec. 5, 2011) (the price volatility of
residential mortgage-backed securities rose 140% between
November 2006 and September 2007).

     Plaintiffs’ theory has another major flaw as well. On
June 28, which was during the offering period and just nine
days after issuance of the Offering Memorandum, Carlyle
Capital announced that it was changing the terms of the
Offering. Carlyle Capital notified potential investors that it
was postponing the pricing of the shares and issuing a
Supplemental       Memorandum.         That    Supplemental
Memorandum, issued June 29, contained updated financial
information for the period between June 13 and June 26,
2007. That updated data informed investors that the loss in
value of Carlyle Capital’s portfolio had continued. In
particular, the Supplemental Memorandum disclosed that as
of June 26, the year-to-date loss in its portfolio was
approximately $72.6 million.

     Plaintiffs seem to acknowledge that the June 29
Supplemental Memorandum would have rectified the
omission that they say existed in the June 19 Offering
Memorandum.          Plaintiffs contend, however, that the
Supplemental Memorandum was not distributed to them and
that there is no evidence that anyone read it. But the investors
here were very wealthy and sophisticated. And a reasonable
investor – not to mention a wealthy and sophisticated investor
– surely would have paid close attention to the Supplemental
Memorandum. After all, the cover of the June 19 Offering
Memorandum and two later press releases had expressly
informed investors that additional information would be
available from the New York broker-dealer who received
their subscription agreements or from Carlyle Capital’s office
in the Netherlands.        And the cover of the June 29
                               6
Supplemental Memorandum informed investors that it formed
“part of,” “must be read in conjunction with,” and
“supercede[d]” the Offering Memorandum. Supplemental
Memorandum at 1.

     Put simply, given the accurate disclosure in the initial
June 19 Offering Memorandum and the additional accurate
disclosure in the June 29 Supplemental Memorandum,
plaintiffs have not sufficiently alleged any material
misstatement or omission.

     Plaintiffs’ remaining argument proceeds from the
assumption that Carlyle Capital, as of June 2007, was already
aware of problems in the larger market that made the collapse
of the company certain, but did not disclose those problems.
But the Offering Memorandum contained extensive
cautionary language about what had already occurred in the
market and what might follow. Carlyle Capital informed
potential investors that rising interest rates had caused
defaults on mortgages, resulting in a decline in the value of its
residential mortgage-backed securities.          The Offering
Memorandum also cautioned investors that Carlyle Capital’s
investment strategy might lead to a further fall in the value of
its securities and result in margin calls on the mortgage-
backed securities that it could meet only up to a point.

    In sum, Carlyle Capital had no duty under federal
securities laws to make further disclosures in the Offering
Memorandum or, as plaintiffs suggested at oral argument, to
put “a skull and crossbones” on the press releases
accompanying the Supplemental Memorandum. Oral Arg. at
                                7
11:56. The District Court properly dismissed plaintiffs’
federal claims.1

                                III

    We next consider plaintiffs’ common-law fraud and
misrepresentation claims.

                                A

      Plaintiffs in the consolidated D.C. suit assert common-
law fraud and misrepresentation claims and label those claims
as Dutch-law claims. But applying D.C. choice-of-law rules,
it is D.C. tort law not Dutch law that applies. And plaintiffs
have not sufficiently alleged a fraud or misrepresentation
claim under D.C. law.

     As a general matter, we must apply the choice-of-law
rules of the jurisdiction in which we sit – namely, the District
of Columbia. See GEICO v. Fetisoff, 958 F.2d 1137, 1141
(D.C. Cir. 1992). D.C. choice-of-law rules require that we
apply the tort law of the jurisdiction that has the “most
significant relationship” to the dispute. Washkoviak v.
Student Loan Marketing Association, 900 A.2d 168, 180
(D.C. 2006) (internal quotation marks omitted). That inquiry
requires that we consider “where the injury occurred,” “where
the conduct causing the injury occurred,” “the domicile,
residence, nationality, place of incorporation and place of
business of the parties,” and “the place where the relationship
is centered.” Id. (quotation omitted).

    1
       Plaintiffs argue that the District Court should have allowed
them to file a proposed amended complaint. But as the District
Court concluded, plaintiffs’ proposed amended complaint likewise
failed to allege a material misstatement or omission. See Wu v.
Stomber, 292 F.R.D. 69 (D.D.C. 2013).
                                8
     Plaintiffs say that Dutch law applies here because the
relevant shares of Carlyle Capital were traded on a Dutch
exchange and the Offering Memorandum was filed with a
Dutch regulator. But the “conduct causing the injury” was a
series of statements made by Carlyle Capital, whose principal
place of business was in Washington, D.C. The other
companies named as defendants in this action also primarily
conducted their business in Washington, D.C. And plaintiffs’
losses occurred at their places of domicile in D.C., Virginia,
and Maryland. In fact, plaintiffs themselves stated that
Carlyle Capital “has no rational connection to the Netherlands
other than Carlyle’s decision to list [the company’s] shares
there.” Consolidated Complaint at ¶ 109, Wu v. Stomber, No.
11-cv-01142 (D.D.C. Dec. 5, 2011).

     Taken together, those factors point to D.C. law. Even if
the balance of factors were uncertain, moreover, D.C. choice-
of-law rules require, in a case where the factors do not point
to a clear answer, that we apply D.C. tort law, the law of the
forum state. See Washkoviak, 900 A.2d at 182.

     Like federal securities law, D.C. law requires a material
misrepresentation or omission for a fraud or misrepresentation
claim. See Sherman v. Adoption Center of Washington, Inc.,
741 A.2d 1031, 1036-37 (D.C. 1999). For the reasons we
outlined above in connection with the federal claims,
plaintiffs here have failed to meet that standard.2

    2
      On appeal, plaintiffs say that they also advanced a common-
law claim based on Carlyle Capital’s post-Offering statements. See
Wu Br. 41-44. But plaintiffs’ sole appellate argument on that point
is that Dutch law should apply to that claim. As we have
concluded, however, Dutch law does not apply.
                               9
                               B

    Plaintiffs in the New York action also argue that the
District Court erred in dismissing their common-law fraud
and misrepresentation claims.

     The New York action was transferred from New York to
D.C. A diversity case transferred from one federal forum to
another generally retains the state choice-of-law rules of the
original forum. See Atlantic Marine Construction Co. v. U.S.
District Court for the Western District of Texas, 134 S. Ct.
568, 582 (2013). Under New York choice-of-law rules for
conduct-related torts, courts look to the “locus of the tort.” In
re Thelen LLP, 736 F.3d 213, 220 (2d Cir. 2013) (internal
quotation mark omitted). For fraud cases, that “is generally
deemed to be the place where the injury was inflicted, rather
than where the fraudulent act originated.” Id. In this case,
that points to the location where the plaintiffs sustained
losses. See Odyssey Re (London) Ltd. v. Stirling Cooke
Brown Holdings Ltd., 85 F. Supp. 2d 282, 292 (S.D.N.Y.
2000). The domiciles of the plaintiffs in the New York action
were either New York or D.C. That means that either New
York law or D.C. law applies, but not Dutch law. As we have
explained, plaintiffs’ claims would not suffice under D.C.
law. Nor would they suffice under New York law. The
elements of fraud and misrepresentation claims in both New
York and D.C. are essentially the same. Both jurisdictions
require a material misrepresentation or omission. See
Premium Mortgage Corp. v. Equifax, Inc., 583 F.3d 103, 108
(2d Cir. 2009); Hydro Investors, Inc. v. Trafalgar Power Inc.,
227 F.3d 8, 20-21 (2d Cir. 2000). As noted above, plaintiffs
here have failed to satisfy that standard.
                            10
                          ***

     We have considered all of plaintiffs’ arguments.   We
affirm the judgment of the District Court.

                                               So ordered.