Court Opinion

ID: 2960589
Source: CourtListenerOpinion
Date Created: 2015-09-17 17:52:46.405174+00
Date Added: 2024-06-11T11:42:17.730356
License: Public Domain

09-0837-cv, 09-0858-cv
     In re Morgan Stanley Info. Fund Sec. Litig.

1                       UNITED STATES COURT OF APPEALS

2                               F OR THE S ECOND C IRCUIT

3

4                                August Term, 2009

5    (Argued: November 13, 2009                    Decided: January 25, 2010)

6                    Docket Nos. 09-0837-cv, 09-0858-cv

7                       (consolidated for disposition)
8

 9   IN RE MORGAN STANLEY INFORMATION FUND SECURITIES LITIGATION,
10                          No. 09-0837-cv,

11    James M. Lindsay, Michael J. McDermott, Stephen B. Dornak,
12     Dietmar H. Kubb, Lisette Vaessen, and Emil H. Vaessen, on
13      behalf of themselves and all others similarly situated,

14                           Plaintiffs-Appellants,

15                                     – v. –

16    Morgan Stanley, Morgan Stanley & Co., Inc., Morgan Stanley
17     DW Inc., Morgan Stanley Information Fund, Morgan Stanley
18        Investment Advisors Inc., Morgan Stanley Investment
19      Management Inc., and Morgan Stanley Distributors, Inc.,

20                            Defendants-Appellees.

21
1        IN RE MORGAN STANLEY TECHNOLOGY FUND SECURITIES LITIGATION,
2                               No. 09-0858-cv,

3        John C. Armstrong, Nina H. Armstrong, and James Barenboim,
4        on behalf of themselves and all others similarly situated,

5                            Plaintiffs-Appellants,

6                                      – v. –

 7       Morgan Stanley, Morgan Stanley & Co., Inc., Morgan Stanley
 8         DW Inc., Morgan Stanley Technology Fund, Morgan Stanley
 9           Investment Advisors Inc., Morgan Stanley Investment
10         Management Inc., and Morgan Stanley Distributors, Inc.,

11                           Defendants-Appellees. *

12

13   Before:

14        McL AUGHLIN and W ESLEY, Circuit Judges, and K AHN, ** District
15                                     Judge.

16        Plaintiffs appeal from a February 2, 2009 order of the
17   United States District Court for the Southern District of
18   New York (Jones, J.), which dismissed their claims relating
19   to two Morgan Stanley mutual funds brought pursuant to
20   sections 11, 12(a)(2), and 15 of the Securities Act of 1933,
21   15 U.S.C. §§ 77k, 77l(a)(2), 77o. The district court held
22   that plaintiffs had not identified any legal basis that
23   required defendants to disclose in the funds’ offering
24   documents information that related primarily to an
25   affiliated Morgan Stanley broker-dealer.

     *
        The Clerk of the Court is respectfully directed to amend the official
     captions in both actions to conform to the captions listed above.

     **
        The Honorable Lawrence E. Kahn, United States District Court for the
     Northern District of New York, sitting by designation.

                                           2
1         A FFIRMED.
2

 3              D ANIEL W. K RASNER (Jeffrey S. Nobel and Nancy A.
 4                     Kulesa, Izard Nobel LLP, Hartford,
 5                     Connecticut; Robert B. Weintraub, Wolf
 6                     Haldenstein Adler Freeman & Herz LLP, New
 7                     York, New York, on the brief), Wolf
 8                     Haldenstein Adler Freeman & Herz LLP, New
 9                     York, New York, for Plaintiffs-Appellants in
10                     both actions.

11              R ICHARD A. R OSEN (Walter Rieman, on the brief), Paul,
12                     Weiss, Rifkind, Wharton & Garrison LLP, New
13                     York, New York, for Defendants-Appellees in
14                     both actions.

15              M ARK P ENNINGTON (David M. Becker, Mark D. Cahn, Jacob
16                    H. Stillman, on the brief), for amicus curiae
17                    Securities and Exchange Commission.

18

19   W ESLEY, Circuit Judge:

20        These cases concern the boundaries of disclosure

21   obligations in registration statements and prospectuses

22   filed on Form N-1A pursuant to the Securities Act of 1933

23   (“Securities Act”), 15 U.S.C. § 77a et seq.       In separate but

24   substantially similar putative class actions, two groups of

25   plaintiffs brought claims under sections 11, 12(a)(2), and

26   15 of the Securities Act.     In re Morgan Stanley Info. Fund

27   Sec. Litig., No. 02 Civ. 8579 (S.D.N.Y.) (“Info. Fund

28   Action”); In re Morgan Stanley Tech. Fund Sec. Litig., No.

29   02 Civ. 6153 (S.D.N.Y.) (“Tech. Fund Action”).       With the

                                      3
1    exception of the Morgan Stanley mutual fund specified in the

2    caption of each case, the defendants are identical in both

3    actions.   Both groups of plaintiffs allege that defendants

4    failed to make certain disclosures relating to the mutual

5    funds that are required by the federal securities laws.

6          In a consolidated decision, the United States District

7    Court for the Southern District of New York (Jones, J.)

8    granted defendants’ motions to dismiss plaintiffs’ Second

9    Amended Consolidated Complaints.     In re Morgan Stanley Tech.

10   Fund Sec. Litig., 643 F. Supp. 2d 366, 369 (S.D.N.Y. 2009).

11   The district court held that plaintiffs’ failure to identify

12   unlawful omissions in the mutual funds’ registration

13   statements or prospectuses doomed their claims.     Id. at 381-

14   82.

15         In this appeal, plaintiffs argue that the district

16   court erred by rejecting their omissions-based legal theory.

17   However, the Securities and Exchange Commission (“SEC” or

18   “Commission”) has appeared before us as an amicus curiae and

19   opined that neither the Securities Act nor Form N-1A

20   required defendants to disclose the information that

21   plaintiffs allege was omitted.     The Commission’s position is

22   consistent with both its prior interpretations of Form N-1A

                                   4
1    and the decision below, it is entitled to judicial

2    deference, and we find it persuasive.      Moreover, a careful

3    review of plaintiffs’ allegations reveals that the true

4    object of their claims is the alleged malfeasance of the

5    mutual funds’ affiliated broker-dealer entities and not the

6    public offerings conducted by the funds themselves.      We

7    decline to expand liability under sections 11, 12(a)(2), and

8    15 to require issuers and offering participants to make

9    disclosures regarding affiliates that are not otherwise

10   called for by the securities laws.     Therefore, we affirm.

11                           I.    BACKGROUND

12       The focus of these class actions is, at least

13   nominally, two open-ended Morgan Stanley mutual funds:

14   defendant Morgan Stanley Information Fund (“Info. Fund”) and

15   defendant Morgan Stanley Technology Fund (“Tech. Fund,”

16   collectively with the Info. Fund, the “Funds”).      Plaintiffs

17   have not disputed the district court’s finding that the

18   operative pleadings in these two cases are “virtually

19   identical.”   In re Morgan Stanley Tech. Fund Sec. Litig.,

20   643 F. Supp. 2d at 369 n.2.     We agree with that

21   characterization.   The gravamen of both actions is that

22   defendants failed to disclose that the Morgan Stanley

                                     5
1    broker-dealers affiliated with the Funds suffered from

2    internal conflicts of interest, and, because the Funds’

3    managers relied on these broker-dealers’ stock research, the

4    broker-dealers’ conflicts increased the risk to investors

5    associated with purchasing shares of the Funds.

6    A.   The Parties

7         The lead plaintiffs in both actions purchased the

8    Funds’ shares during the class periods set forth in their

9    pleadings. 1   Each defendant is a commercial entity that

10   played a role in the Morgan Stanley enterprise, and each

11   action bears the title of the mutual fund to which it

12   relates.

13        Shares of the Info. Fund were publicly traded starting

14   in 1995, and shares of the Tech. Fund were available to

15   investors beginning in September 2000.    In order to sell

16   their shares to the public, both Funds registered their

17   securities with the SEC by utilizing Form N-1A to file a

18   series of registration statements and prospectuses

     1
       The class period in the Info. Fund Action spans from
     October 25, 1999 through October 25, 2002; the class period
     in the Tech. Fund Action is defined as September 25, 2000
     through July 31, 2002. The difference in these class
     periods is immaterial to our resolution of this appeal, and
     we therefore refer to them collectively as a single “Class
     Period.”

                                    6
1   (collectively, the “Offering Documents”). 2   The Info. Fund

2   made four sets of filings between July 1999 and October

3   2002; the Tech. Fund made two sets of filings between August

4   2000 and July 2002. 3

    2
      The SEC created Form N-1A to facilitate registration by
    certain types of open-ended management investment companies
    under the Securities Act and the Investment Companies Act of
    1940, 15 U.S.C. § 80a-1 et seq. See SEC, Registration Form
    Used by Open-Ended Management Investment Companies;
    Guidelines (“Form N-1A Adopting Release”), Securities Act
    Release No. 33-6479, Investment Company Act Release No.
    13,436, 48 Fed. Reg. 37,928, 37,929 (Aug. 22, 1983). The
    Form creates a three-part registration statement that is
    also sufficient to satisfy qualifying issuers’ prospectus-
    related obligations under sections 5(b)(2) and 10(a) of the
    Securities Act, 15 U.S.C. §§ 77e(b)(2), 77j(a). See Form N-
    1A Adopting Release, 48 Fed. Reg. at 37,929. First, in
    order to avoid prospectus disclosures that are “too long and
    complex,” the Form calls for a streamlined, “simplified
    prospectus” and a “Statement of Additional Information,” or
    “SAI,” that is to be made available to investors upon
    request. Id. The purpose of the SAI is to offer issuers
    “the opportunity to provide more detailed discussions of
    matters required to be in the prospectus, as well as
    discussions of certain matters that are not required to be
    in the prospectus, but which may be of interest to at least
    some investors.” Id. Finally, the third part of Form N-1A,
    referred to as “Part C,” “pertains to information that is
    not required to be in the prospectus, but is required by the
    registration statement.” Id.
    3
      The Info. Fund’s four sets of Form N-1A filings were
    submitted to the SEC on July 27, 1999, May 30, 2000, May 30,
    2001, and May 30, 2002. The Tech. Fund’s two sets of Form
    N-1A materials were filed on August 17, 2000 and October 31,
    2001. Plaintiffs have not identified material differences
    between any of these filings that are relevant to their
    claims.

                                  7
1        The Offering Documents indicate that the “Investment

2    Objective” of each Fund was to “seek[] long-term capital

3    appreciation,” which both Funds defined as “selecting

4    securities with the potential to rise in price rather than

5    pay out income.”   Each Fund disclosed a slightly different

6    strategy for pursuing this objective.   The Info. Fund

7    indicated that it would “normally invest at least 65% of its

8    total assets in common stocks and investment grade

9    convertible securities of companies engaged in the

10   communications and information industry located throughout

11   the world.”   The Tech. Fund stated that it would “normally

12   invest at least 80% of its assets in common stock of

13   companies of any asset size engaged in technology and

14   technology-related industries.”   The Funds also disclosed,

15   using nearly identical language, that their managers had

16   been granted “considerable leeway” to select both general

17   trading strategies and specific investments for the Funds’

18   portfolios.

19       The non-Fund defendants are the same in both actions.

20   Defendant Morgan Stanley is a Delaware corporation that

21   functions as a holding company and parent entity for each of

22   the non-Fund defendants.   Defendant Morgan Stanley

                                   8
1    Distributors Inc. (“MS Distributors”) served as the

2    principal underwriter for each Fund.   Defendant Morgan

3    Stanley Investment Advisors Inc. (“MS Advisors”) was the

4    Funds’ principal investment manager.   MS Advisors

5    subcontracted with defendant Morgan Stanley Investment

6    Management Inc. (“MS Investment”) to perform certain asset-

7    management functions for the Funds, such as the purchase and

8    sale of securities for their portfolios.

9         The final two defendants were Morgan Stanley’s primary

10   broker-dealer subsidiaries during the Class Period:      Morgan

11   Stanley & Co., Inc. and Morgan Stanley DW Inc.

12   (collectively, “MS&Co.”).   Each is a registered broker-

13   dealer.   Both entities offered a variety of financial

14   services relating to research, institutional and retail

15   brokerage, corporate finance, and investment banking.

16   Plaintiffs allege that, during the Class Period, both

17   entities sold shares of the Funds to the public pursuant to

18   a contract with MS Distributors.

19   B.   Plaintiffs’ Allegations

20        The thrust of plaintiffs’ cases is that the Funds’

21   Offering Documents unlawfully omitted certain information

22   relating to the manner in which MS&Co. conducted its

                                    9
1    operations, and that MS&Co.’s undisclosed conduct increased

2    the risks associated with purchasing shares of the Funds.

3    The central allegations are that defendants failed to

4    disclose:   (1) that there were conflicts of interest at

5    MS&Co. that could potentially taint the objectivity of its

6    stock research, and (2) that the Funds nevertheless relied

7    on MS&Co.’s research, as evidenced by the proportion of

8    securities in the Funds’ portfolios from companies that were

9    either covered by MS&Co.’s research analysts or being

10   pursued by MS&Co. as potential investment banking clients.

11       With respect to the conflicts of interest at the Funds’

12   affiliated broker-dealer, plaintiffs assert that MS&Co.

13   intentionally dismantled the “Information Barrier” between

14   its investment banking and research functions during the

15   Class Period, and that defendants unlawfully failed to

16   disclose that fact in the Offering Documents. 4   Following

     4
       Although plaintiffs use the term “Chinese Wall,” we use
     the term “Information Barrier” and intend it to have the
     same meaning. See, e.g., SEC, Self-Regulatory
     Organizations; International Securities Exchange, Inc.,
     Notice of Filing of Proposed Rule Change and Amendments No.
     1 and 2 Thereto To Amend the Market Maker Information
     Barrier Requirements Under ISE Rule 810, Exchange Act
     Release No. 50,197, 69 Fed. Reg. 51,735, 51,735 (Aug. 13,
     2004) (recommending that the phrase “Chinese Wall” be
     replaced with “Information Barrier” in the rules of the
     International Securities Exchange). The basic concept arose

                                   10
1    this change, MS&Co.’s research analysts received

2    compensation based partially on MS&Co.’s generation of

3    investment banking revenue.   The resulting conflicts of

4    interest allegedly led these analysts to disseminate biased

5    research reports that exaggerated the merits of investing in

6    some of the securities issued by MS&Co.’s potential

7    investment banking clients.   Such reports, plaintiffs

8    contend, artificially inflated the price of those securities

9    to the detriment of the Funds (and, presumably, all

10   investors using MS&Co.’s research).

11       In addition to the conflicts of interest arising out of

12   MS&Co.’s compensation system, plaintiffs also allege that

13   “[d]efendants” (without further specification) participated

14   in “schemes” to “have research analysts issue false reports

15   in order to obtain investment banking business” and to

16   “manipulate the price of initial public offerings.”      With

17   respect to their allegations of IPO manipulation, plaintiffs

     out of regulatory concerns about the need to “segment the
     flow of sensitive information” within broker-dealers that
     provide a diverse package of financial services. See, e.g.,
     SEC, Div. of Market Reg., Broker-Dealer Policies and
     Procedures Designed to Segment the Flow and Prevent the
     Misuse of Material Nonpublic Information, at 2 n.5 (Mar.
     1990), available at http://www.sec.gov/divisions/marketreg/
     brokerdealerpolicies.pdf.

                                   11
1    incorporated into their pleadings the “specific facts” from

2    “the approximately 303 complaints” filed as part of the

3    consolidated Multi-District Litigation Panel action

4    captioned as In re IPO Securities Litigation, No. 21 M.C.

5    92.

6          Plaintiffs also incorporated by reference the SEC’s

7    allegations in an enforcement action against MS&Co. relating

8    to its lack of an Information Barrier during the Class

9    Period.   In 2002, following the close of the Class Period,

10   nine brokerage firms agreed to a $1.4 billion global

11   settlement with the SEC and other regulators relating to

12   improper conflicts of interest that arose from the

13   commingling of research and investment banking functions.

14   See Press Release, Sec. & Exch. Comm’n, SEC, NY Attorney

15   General, NASD, NASAA, NYSE and State Regulators Announce

16   Historic Agreement to Reform Investment Practices; $1.4

17   Billion Global Settlement Includes Penalties and Funds for

18   Investors, Release No. 2002-179 (Dec. 20, 2002), available

19   http://www.sec.gov/news/press/2002-179.htm. 5   As part of the

     5
       We may take judicial notice of the full contents of the
     SEC’s filings relating to this enforcement action because
     plaintiffs rely upon portions of them in their pleadings
     and, in any event, these proceedings are a matter of public
     record. See Chambers v. Time Warner, Inc., 282 F.3d 147,

                                   12
1    global settlement agreement, the implicated firms were

2    required to “sever the links between research and investment

3    banking” in order to “ensure that stock recommendations are

4    not tainted by efforts to obtain investment banking fees.”

5    Id.

6          As part of the global settlement, the SEC commenced a

7    separate enforcement action against MS&Co., which was filed

8    in the Southern District of New York on April 28, 2003.    See

9    Press Release, Sec. & Exch. Comm’n, SEC Sues Morgan Stanley

10   for Research Analyst Conflicts of Interest:   Firm to Settle

11   with SEC, NASD, NYSE, NY Attorney General, and State

12   Regulators (“MS&Co. Settlement Release”), Release No. 18,117

13   (Apr. 28, 2003), available at http://www.sec.gov/litigation/

14   litreleases/lr18117.htm.   In that action, the SEC asserted

15   that, between approximately July 1999 and 2001:

16         Morgan Stanley engaged in acts and practices that
17         created conflicts of interest for its research
18         analysts with respect to investment banking
19         activities and considerations. . . . As a result,
20         Morgan Stanley research analysts were faced with a
21         conflict of interest between helping generate
22         investment banking business for Morgan Stanley and

     152-53 (2d Cir. 2002); Kramer v. Time Warner Inc., 937 F.2d
     767, 774 (2d Cir. 1991). We do not rely on the SEC’s
     allegations for their truth, but “rather to establish the
     fact of such litigation and related filings.” Kramer, 937
     F.2d at 774.

                                   13
1        their responsibilities to publish objective
2        research reports that, if unfavorable to actual or
3        potential banking clients, could prevent Morgan
4        Stanley from winning that banking business.

5    (Compl. ¶ 2, SEC v. Morgan Stanley & Co. Inc., No. 03 Civ.

6    2948 (S.D.N.Y. Apr. 28, 2003).)    MS&Co. consented to the

7    entry of a final judgment in that action, which directed it

8    to separate its investment banking and research functions,

9    disgorge $25 million, pay a $25 million civil penalty, and

10   spend $75 million over five years on independent research

11   consultants for use by retail brokerage customers.     (Consent

12   of Morgan Stanley & Co., SEC v. Morgan Stanley & Co. Inc.,

13   No. 03 Civ. 2948 (S.D.N.Y. Apr. 2003).)

14       Against this backdrop of allegations relating to

15   MS&Co., plaintiffs assert that the Funds’ reliance on

16   MS&Co.’s research introduced additional investment risks

17   associated with the purchase of the Funds’ shares.

18   Specifically, plaintiffs contend that the Funds were aware

19   of the conflicts at MS&Co. because of their status as

20   proprietary mutual funds under the Morgan Stanley umbrella,

21   but that the Funds’ managers nevertheless utilized MS&Co.’s

22   research when making investment decisions for the Funds’

23   portfolios.   Plaintiffs argue that the Funds should have

24   disclosed that these circumstances led to heightened

                                   14
1    investment risks, and that the Offering Documents contained

2    “numerous” material omissions relating to the Funds.

3    However, the majority of the omissions that are alleged to

4    have occurred relate to MS&Co., not to the Funds.   Quoting

5    from the pleadings, these omissions include that:

6        •    “there was no [Information Barrier] between
7             MS&Co.’s research department and its investment
8             banking department”;

 9       •    part of the compensation of MS&Co.’s research
10            analysts was “based upon their
11            securing/participation in investment banking
12            business for MS&Co.,” and the “objectivity of
13            [MS&Co.’s] research reports . . . was inherently
14            and materially tainted by” MS&Co.’s interest in
15            developing investment banking business;

16       •    MS&Co. either had, or was seeking to develop,
17            investment banking relationships with “a material
18            number of the companies whose securities were part
19            of the [Funds’] portfolio[s]”;

20       •    “MS&Co. at times issued falsely positive research
21            reports to enhance MS&Co.’s opportunity to
22            maintain and obtain investment banking business
23            from the company covered by the report”; and

24       •    “defendants had inflated the market price” of
25            securities in the Funds’ portfolios “by
26            conditioning allocations of shares in [an] IPO
27            upon the requirement that customers agree to
28            purchase additional shares of that security in the
29            aftermarket, and, in some cases, to make those
30            additional purchases at pre-arranged, ever
31            escalating prices.”

32       With respect to the Funds themselves, plaintiffs’

33   principal allegation is that these events at MS&Co. made it

                                  15
1    riskier to invest in the Funds.    This is true, plaintiffs

2    contend, because — notwithstanding their legal duties to the

3    Funds’ shareholders — the Funds’ managers had an unspecified

4    “material incentive” to cause the Funds to invest in

5    “companies for which MS&Co. issued research reports and/or

6    provided or was seeking to provide investment banking

7    services.”   Plaintiffs further allege that the Funds should

8    have specified in the Offering Documents that MS&Co. offered

9    research coverage regarding approximately 76% of the

10   securities in the Info. Fund’s portfolio and 85% of the

11   securities in the Tech. Fund’s portfolio, and that MS&Co.

12   had provided investment banking services for more than 30%

13   of the companies in which the Funds had invested.

14       Plaintiffs assert that defendants were required to

15   disclose all of this information in the Funds’ Offering

16   Documents under Form N-1A and the Securities Act.    As to

17   Form N-1A, plaintiffs rely on Item C of the Form’s “General

18   Instructions” and Items 2 and 4 of the “Information Required

19   in a Prospectus” under Part A of the Form.

20       Item C(1)(b) of the General Instructions states:

21       The prospectus disclosure requirements in Form N-
22       1A are intended to elicit information for an
23       average or typical investor who may not be
24       sophisticated in legal or financial matters. The

                                   16
1        prospectus should help investors to evaluate the
2        risks of an investment and to decide whether to
3        invest in a Fund by providing a balanced
4        disclosure of positive and negative factors.
5        Disclosure in the prospectus should be designed to
6        assist an investor in comparing and contrasting
7        the Fund with other funds.

8    Item C(2)(a) states, in pertinent part:

 9       The purpose of the [Form N-1A] prospectus is to
10       provide essential information about the Fund in a
11       way that will help investors to make informed
12       decisions about whether to purchase the Fund’s
13       shares described in the prospectus.

14       Plaintiffs also contend that Part A of Form N-1A, which

15   relates to the “simplified prospectus” called for by the

16   Form, required defendants to disclose the allegedly omitted

17   information.   Item 2, titled “Risk/Return Summary:

18   Investments, Risks, and Performance,” calls for, inter alia,

19   a “Narrative Risk Disclosure” regarding “the principal risks

20   of investing in the Fund, including the risks to which the

21   Fund’s portfolio as a whole is subject and the circumstances

22   reasonably likely to affect adversely the Fund’s net asset

23   value, yield, and total return.”   Item 4, titled “Investment

24   Objectives, Principal Investment Strategies, Related Risks,

25   and Disclosure of Portfolio Holdings,” calls for similar

26   risk-related disclosures.

27       Finally, in addition to their reliance on Form N-1A,

                                   17
1    plaintiffs argue that defendants were required by the

2    Securities Act itself to disclose the allegedly omitted

3    information in order to avoid rendering misleading the

4    statements in the Offering Documents.     See 15 U.S.C. §§

5    77k(a), 77l(a)(2); see also 17 C.F.R. § 230.408.     The

6    statements in the Offering Documents on which plaintiffs

7    rely in making this assertion relate to the Funds’

8    investment objectives, investment strategies, and risks.

9         Based on these contentions, plaintiffs argue that they

10   sustained damages from defendants’ omissions that are

11   measurable by a comparison of the Funds’ performance during

12   the Class Period relative to industry benchmarks such as the

13   S&P 500 and the Nasdaq Composite Index.     In the Info. Fund

14   Action, the named plaintiffs claim that they lost

15   approximately $280,000.   The named plaintiffs in the Tech.

16   Fund Action purport to have lost approximately $241,578.        In

17   total, plaintiffs assert that the losses sustained by their

18   combined class of proposed claimants exceed one billion

19   dollars.

20   C.   The SEC’s Amicus Brief

21        Prior to the oral argument relating to these appeals,

22   the Court requested that the SEC submit an amicus curiae

                                   18
1    brief expressing the Commission’s opinion as to whether

2        any part of Form N-1A [gave] rise to a duty owed
3        by the defendants to disclose that: (a) the
4        [Funds’] affiliated broker-dealer[] [MS&Co.] had
5        ceased to maintain an Information Barrier between
6        [its] research and investment-banking departments;
7        and (b) the resulting organizational structure [of
8        Morgan Stanley] may affect the investment strategy
9        employed by the [Funds’] managers?

10       The Commission responded on November 12, 2009, and took

11   the position that Form N-1A did not require disclosures

12   relating to the dismantling of MS&Co.’s Information Barrier.

13   First, the SEC reasoned that the “General Instructions” to

14   Form N-1A, including Item C, are

15       not an independent source of disclosure
16       obligations. Rather, [the General Instructions]
17       are intended to provide funds with general
18       guidance as to the nature of the information they
19       should provide in responding to specific
20       disclosure items, and to the sorts of language, in
21       terms of sophistication or technicality, that they
22       should use in providing that information.

23   (Brief of the Securities and Exchange Commission, Amicus

24   Curiae, In Support of Appellees on Issue Addressed (“SEC

25   Amicus Br.”) at 8.)

26       Second, the SEC turned to the risk-focused instructions

27   cited by plaintiffs in Items 2 and 4 of the Form’s Part A.

28   The Commission characterized the risk to the Funds arising

29   out of the deterioration of MS&Co.’s Information Barrier as

                                  19
1    “generic” and asserted that “the fact of affiliation

2    [between MS&Co. and the Funds] appears to be irrelevant” to

3    the existence of such a risk.          (Id. at 8-9.)   Rather,

4    “[t]his risk arises purely from the breach of the

5    [Information Barrier] and has nothing to do with whether the

6    broker-dealer is affiliated with the purchaser of the

7    securities.”    (Id. at 8.)   The SEC distinguished that

8    “generic” risk from

 9       allegations that a fund’s investment objectives
10       included enhancing an affiliated entity’s
11       investment banking business, and that the fund’s
12       investment strategy was to achieve that goal by
13       buying securities that the affiliated entity had
14       underwritten . . . .

15   (Id. at 5-6.)    With respect to this latter type of risk, the

16   agency opined that “an investment objective and strategy of

17   enhancing an affiliate’s business by buying securities that

18   the affiliate had underwritten would have to be disclosed”

19   under Form N-1A.    (Id. at 6.)        However, the SEC reasoned

20   that:

21       [T]he danger that analyst reports (whether from
22       affiliated or unaffiliated analysts) will be
23       tainted by undisclosed conflicts of interest or
24       actual corruption is but one of an indefinitely
25       large number of factors that could cause a fund
26       (or any other investor) to purchase overpriced
27       securities, and it would not be useful to
28       investors to require an attempt to set all of
29       those forth in the prospectus.

                                       20
1    (Id. at 10.)

2                           II.   DISCUSSION

3        We review de novo a district court’s dismissal of a

4    complaint pursuant to Rule 12(b)(6).        Rombach v. Chang, 355

5    F.3d 164, 169 (2d Cir. 2004).        When assessing the

6    sufficiency of claims under sections 11 and 12(a)(2) of the

7    Securities Act, the structure of the analysis is guided by a

8    preliminary inquiry into the nature of the plaintiff’s

9    allegations.   Where the claims are “premised on allegations

10   of fraud,” the allegations must satisfy the heightened

11   particularity requirements of Rule 9(b) of the Federal Rules

12   of Civil Procedure.   Id. at 171.       However, if the pleading

13   does not sound in fraud, then Rule 8(a) governs.          See id.

14       Defendants have not argued that the pleadings in these

15   cases are subject to Rule 9(b).        Therefore, notice pleading

16   supported by facially plausible factual allegations is all

17   that is required — nothing more, nothing less.        See Ashcroft

18   v. Iqbal, 129 S. Ct. 1937, 1949-50 (2009).        The district

19   court conducted its analysis in a manner consistent with

20   these principles, and dismissed plaintiffs’ claims under

                                     21
1    Rule 12(b)(6) because they failed to identify a legal basis

2    requiring disclosure of the allegedly omitted information.

3    For the reasons set forth below, we agree with the

4    conclusion reached below and therefore affirm.

5    A.   Overview of the Applicable Law

6         Sections 11, 12(a)(2), and 15 of the Securities Act

7    impose liability on certain participants in a registered

8    securities offering when the publicly filed documents used

9    during the offering contain material misstatements or

10   omissions.    Section 11 applies to registration statements,

11   and section 12(a)(2) applies to prospectuses and oral

12   communications.    15 U.S.C. §§ 77k(a), 77l(a)(2).

13        Section 15, in turn, creates liability for individuals

14   or entities that “control[] any person liable” under section

15   11 or 12.    Id. § 77o.   Thus, the success of a claim under

16   section 15 relies, in part, on a plaintiff’s ability to

17   demonstrate primary liability under sections 11 and 12.

18   See, e.g., SEC v. First Jersey Sec., Inc., 101 F.3d 1450,

19   1472-73 (2d Cir. 1996).     Because the district court’s

20   dismissal of plaintiffs’ section 15 claims was predicated on

21   their failure to state claims under sections 11 and 12, the

22   latter two provisions warrant the bulk of our analysis.

                                     22
1        Section 11 of the Securities Act prohibits materially

2    misleading statements or omissions in registration

3    statements filed with the SEC.      See 15 U.S.C. § 77k(a).   In

4    the event of such a misdeed, the statute provides for a

5    cause of action by the purchaser of the registered security

6    against the security’s issuer, its underwriter, and certain

7    other statutorily enumerated parties.      Id.   To state a claim

8    under section 11, the plaintiff must allege that:       (1) she

9    purchased a registered security, either directly from the

10   issuer or in the aftermarket following the offering; (2) the

11   defendant participated in the offering in a manner

12   sufficient to give rise to liability under section 11; and

13   (3) the registration statement “contained an untrue

14   statement of a material fact or omitted to state a material

15   fact required to be stated therein or necessary to make the

16   statements therein not misleading.”      Id.

17       Section 12(a)(2) provides similar redress where the

18   securities at issue were sold using prospectuses or oral

19   communications that contain material misstatements or

20   omissions.   See id. § 77l(a)(2).     Whereas the reach of

21   section 11 is expressly limited to specific offering

22   participants, the list of potential defendants in a section

                                   23
1    12(a)(2) case is governed by a judicial interpretation of

2    section 12 known as the “statutory seller” requirement.           See

3    Pinter v. Dahl, 486 U.S. 622, 643-47 & n.21 (1988); see also

4    Wilson v. Saintine Exploration & Drilling Corp., 872 F.2d

5    1124, 1125-26 (2d Cir. 1989).        An individual is a “statutory

6    seller” — and therefore a potential section 12(a)(2)

7    defendant — if he:    (1) “passed title, or other interest in

8    the security, to the buyer for value,” or (2) “successfully

9    solicit[ed] the purchase [of a security], motivated at least

10   in part by a desire to serve his own financial interests or

11   those of the securities[’] owner.”        Pinter, 486 U.S. at 642,

12   647; see also Capri v. Murphy, 856 F.2d 473, 478 (2d Cir.

13   1988). 6   As a result of this interpretation and the

14   remaining statutory text, the elements of a prima facie

15   claim under section 12(a)(2) are:        (1) the defendant is a

     6
       No defendant has argued on appeal that it is not a proper
     party to any of plaintiffs’ claims. The defendants in
     plaintiffs’ section 11 claims — the Funds, as issuers, and
     MS Distributor, as an underwriter of the Funds’ shares —
     appear to be permissible parties under the statute. See 15
     U.S.C. § 77k(a). The defendants in plaintiffs’ section
     12(a)(2) claims are the Funds, Morgan Stanley, MS&Co., MS
     Distributor, MS Advisors, and MS Management. It is unclear
     from plaintiffs’ allegations that each of these defendants
     satisfies the “statutory seller” requirement, but that issue
     has not been raised by the parties and we need not address
     it in light of our broader holding.

                                     24
1    “statutory seller”; (2) the sale was effectuated “by means

2    of a prospectus or oral communication”; and (3) the

3    prospectus or oral communication “include[d] an untrue

4    statement of a material fact or omit[ted] to state a

5    material fact necessary in order to make the statements, in

6    the light of the circumstances under which they were made,

7    not misleading.”   15 U.S.C. § 77l(a)(2).

8        Claims under sections 11 and 12(a)(2) are therefore

9    Securities Act siblings with roughly parallel elements,

10   notable both for the limitations on their scope as well as

11   the in terrorem nature of the liability they create.       See

12   Pinter, 486 U.S. at 646; Herman & MacLean v. Huddleston, 459

13   U.S. 375, 381-82 & n.12 (1983).       Issuers are subject to

14   “virtually absolute” liability under section 11, while the

15   remaining potential defendants under sections 11 and

16   12(a)(2) may be held liable for mere negligence.

17   Huddleston, 459 U.S. at 382. 7    Moreover, unlike securities

     7
       More specifically, section 11 provides several due
     diligence defenses available to non-issuer defendants, see
     15 U.S.C. § 77k(b), and section 12(a)(2) contains a
     “reasonable care” defense, id. § 77l(a)(2). Defendants may
     also avoid liability under both provisions for damages based
     on the depreciation in value of a security that results from
     events other than misrepresentations or omissions. See id.
     §§ 77k(e), 77l(b). Generally speaking, defendants bear the
     burden of demonstrating the applicability of each of these

                                      25
1    fraud claims pursuant to section 10(b) of the Securities

2    Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78a et

3    seq., plaintiffs bringing claims under sections 11 and

4    12(a)(2) need not allege scienter, reliance, or loss

5    causation.   See Rombach, 355 F.3d at 169 n.4.    Thus, in

6    contrast to their “‘catchall’” cousin in the Exchange Act —

7    section 10(b), 15 U.S.C. § 77j(b) — sections 11 and 12(a)(2)

8    of the Securities Act apply more narrowly but give rise to

9    liability more readily.   In re Fuwei Films Sec. Litig., 634

10   F. Supp. 2d 419, 433-34 (S.D.N.Y. 2009) (quoting Ernst &

11   Ernst v. Hochfelder, 425 U.S. 185, 206 (1976)); see also

12   Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 752-53

13   (1975).

14       In many cases — including this one — two issues are

15   central to claims under sections 11 and 12(a)(2):     (1) the

16   existence of either a misstatement or an unlawful omission;

17   and (2) materiality.   The definition of materiality is the

18   same for these provisions as it is under section 10(b) of

19   the Exchange Act:   “‘[W]hether the defendants’

20   representations, taken together and in context, would have

     defenses, which are therefore unavailing as a means of
     defeating a motion to dismiss pursuant to Rule 12(b)(6).

                                   26
1    misled a reasonable investor.’”      Rombach, 355 F.3d at 172

2    n.7 (quoting I. Meyer Pincus & Assocs. v. Oppenheimer & Co.,

3    936 F.2d 759, 761 (2d Cir. 1991)); see also DeMaria v.

4    Andersen, 318 F.3d 170, 180 (2d Cir. 2003).      However,

5    because the materiality element presents “a mixed question

6    of law and fact,” it will rarely be dispositive in a motion

7    to dismiss:

 8       “[A] complaint may not properly be dismissed . . .
 9       on the ground that the alleged misstatements or
10       omissions are not material unless they are so
11       obviously unimportant to a reasonable investor
12       that reasonable minds could not differ on the
13       question of their importance.”

14   ECA v. JP Morgan Chase, 553 F.3d 187, 197 (2d Cir. 2009)

15   (quoting Ganino v. Citizens Utils. Co., 228 F.3d 154, 162

16   (2d Cir. 2000)); see also United States v. Gaudin, 515 U.S.

17   506, 512     (1995); First Jersey Sec., 101 F.3d at 1466-67.

18       The district court did not rely on materiality in its

19   decision, and the parties’ arguments regarding this issue

20   are unpersuasive at the pleadings stage.      Nor have

21   plaintiffs argued that the Offering Documents contained

22   actual misrepresentations.     Therefore, at the heart of this

23   appeal lies the question of whether plaintiffs have

24   identified an unlawful omission in the Funds’ Offering

25   Documents.

                                     27
1    B.   The Sufficiency of Plaintiffs’ Allegations

2         Collectively, the language of sections 11 and 12(a)(2)

3    creates three potential bases for liability based on

4    registration statements and prospectuses filed with the SEC:

5    (1) a misrepresentation; (2) an omission in contravention of

6    an affirmative legal disclosure obligation; and (3) an

7    omission of information that is necessary to prevent

8    existing disclosures from being misleading.    See 15 U.S.C.

9    §§ 77k(a), 77l(a)(2). 8   This appeal relates only to

10   omissions.   The question is whether, assuming the truth of

11   plaintiffs’ allegations, the Offering Documents omitted

12   information that defendants were required to disclose.    See

13   Resnik v. Swartz, 303 F.3d 147, 154 (2d Cir. 2002) (“For an

14   omission to be actionable, the securities laws must impose a

     8
       Whereas section 11 contemplates actions based on
     “[omissions of] material fact required to be stated” in
     registration statements, 15 U.S.C. § 77k(a) (emphasis
     added), section 12(a)(2) lacks parallel language regarding
     prospectuses and oral communications, id. § 77l(a)(2)
     (prohibiting only omissions of those facts “necessary in
     order to make the statements, in the light of the
     circumstances under which they were made, not misleading”).
     See Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1204 (1st
     Cir. 1996), abrogated on other grounds by 15 U.S.C.
     § 78u(4)(b)(2) (the Private Securities Litigation Reform
     Act). However, because we conclude that plaintiffs have not
     identified a legal basis requiring disclosure, we need not
     resolve the import of this distinction.

                                    28
1    duty to disclose the omitted information.”); see also In re

2    Time Warner Inc. Sec. Litig., 9 F.3d 259, 267 (2d Cir. 1993)

3    (“[A]n omission is actionable under the securities laws only

4    when the corporation is subject to a duty to disclose the

5    omitted facts.”).   Two types of omissions can give rise to

6    liability under these provisions.

7        1.   Affirmative Disclosure Obligations

8        Plaintiffs first argue that the “General Instructions”

9    of Form N-1A required defendants to disclose the allegedly

10   omitted information.   In support of this contention,

11   plaintiffs rely on language from Item C of the General

12   Instructions, which states that “[t]he prospectus disclosure

13   requirements in Form N-1A are intended to elicit information

14   for an average or typical investor who may not be

15   sophisticated in legal or financial matters” and that “[t]he

16   purpose of the prospectus is to provide essential

17   information about the Fund.”    The district court rejected

18   this contention, and we find no fault in its conclusion.

19       The Form’s General Instructions suggest that the Funds

20   were not precluded from providing additional information

21   beyond that called for in the more specific instructions

22   accompanying Parts A, B, and C.     In addition to the language

                                    29
1    relied on by plaintiffs, Item C(3)(b) states that “[a] Fund

2    may include, except in the Risk/Return Summary [in Items 2

3    and 3 of Part A], information in the prospectus or the SAI

4    that is not otherwise required.”    Consistent with this

5    theme, Item C(1)(d) provides that “[t]he requirements for

6    prospectuses included in Form N-1A will be administered by

7    the Commission in a way that will allow variances in

8    disclosure . . . if appropriate for the circumstances

9    involved while remaining consistent with the objectives of

10   Form N-1A.”    The SEC has also indicated in guidance

11   accompanying the Form that, “in order to preserve

12   registrants’ flexibility, registrants . . . are generally

13   free to include in the prospectus information in addition to

14   that required by the specific items of the Form.”       See Form

15   N-1A Adopting Release, 48 Fed. Reg. at 37,929.    However, it

16   is one thing to suggest that, based on this language, the

17   Funds were not prohibited from providing additional

18   information.    It is entirely different to argue, as

19   plaintiffs do, that defendants were required to make

20   additional disclosures by the Form’s General Instructions.

21   The latter contention lacks support in the language of the

22   Form.

                                    30
1        To the extent there is any doubt about this issue, our

2    conclusion is confirmed by the author of the Form.     When

3    faced with ambiguity in an agency promulgation, courts can —

4    and often do — seek the interpretive opinion of the agency

5    and defer to its views.    See, e.g., Press v. Quick & Reilly,

6    Inc., 218 F.3d 121, 126-28 (2d Cir. 2000).    Such deference

7    is especially prudent here in light of the SEC’s expertise

8    in administering the securities laws, its ability to seek

9    input from the public when crafting regulatory policy, and

10   its relative political accountability.    See Bruh v. Bessemer

11   Venture Partners III L.P., 464 F.3d 202, 207-08 (2d Cir.

12   2006); cf. Resnik, 303 F.3d at 154-55 (quoting Lewis v.

13   Vogelstein, 699 A.2d 327, 332-33 (Del. Ch. 1997)).

14       We requested the SEC’s opinion with respect to whether

15   the General Instructions accompanying Form N-1A required

16   defendants to make additional disclosures in the Funds’

17   Offering Documents beyond those specified in the

18   instructions relating to Parts A, B, and C of the Form.       The

19   SEC responded “no” to our inquiry, reasoning that the

20   General Instructions “are not an independent source of

21   disclosure obligations.”    (SEC Amicus Br. at 8.)   It cannot

22   be said that this interpretation of Form N-1A is “plainly

                                    31
1    erroneous or inconsistent with the law.”    Roth ex rel.

2    Beacon Power Corp. v. Perseus L.L.C., 522 F.3d 242, 247 (2d

3    Cir. 2008) (citing Auer v. Robbins, 519 U.S. 452, 461-62

4    (1997)); Levy ex rel. Immunogen Inc. v. Southbrook Int’l

5    Invs., Ltd., 263 F.3d 10, 14 (2d Cir. 2001); Press, 218 F.3d

6    at 128.    Therefore, the SEC’s interpretation is entitled to

7    deference.    See Auer, 519 U.S. at 461; DeMaria, 318 F.3d at

8    175.    And, because we find the SEC’s view persuasive, we

9    need not pause to determine the precise quantum of deference

10   to which its opinion is entitled.    See Cmty. Health Ctr. v.

11   Wilson-Coker, 311 F.3d 132, 137-38 (2d Cir. 2002) (declining

12   to “decide the exact molecular weight of the deference” due

13   to an agency position).    Accordingly, we hold that the

14   General Instructions to Form N-1A did not require defendants

15   to disclose the allegedly omitted information identified in

16   the pleadings.

17          Plaintiffs next argue that defendants were required to

18   disclose the omitted information under Items 2 and 4 of Part

19   A of the Form, which relate to “principal risks” to be

20   disclosed in a prospectus.    Here, plaintiffs present a

21   moving target of sorts, describing the allegedly omitted

22   risks only vaguely, if at all, throughout their pleadings

                                    32
1    and briefing.   In their response to the SEC’s amicus

2    submission, however, plaintiffs clarified their position to

3    some extent:

 4         [O]nce the [Information Barrier] between Morgan
 5         Stanley’s investment banking and research
 6         operations was dismantled, the conflicts of
 7         interest that infected Morgan Stanley’s research
 8         and investment banking departments created a new
 9         material risk in these Funds’ portfolios that
10         would have not have existed had the [Information
11         Barrier] been maintained. Instead of investing in
12         securities strictly on their merits, there was an
13         increased risk that the Funds would
14         disproportionately invest in and/or retain the
15         securities of Morgan Stanley’s investment banking
16         clients/potential clients, without regard to
17         whether they were good investments.

18   (Plaintiffs-Appellants’ Brief in Opposition to Amicus Curiae

19   Securities and Exchange Commission (“Pls.’ Supp. Br.”) at 7-

20   8.)

21         At bottom, plaintiffs argue that the dismantling of

22   MS&Co.’s Information Barrier augmented the risks associated

23   with investing in the Funds because the Funds’ managers

24   utilized MS&Co.’s research when making investment decisions

25   for the Funds’ portfolios.   The district court properly

26   characterized this position as relying on the risk-related

27   instructions in Part A of the Form, and it found that there

28   were insufficient factual allegations to support an

29   inference that the Funds’ managers pursued investment

                                   33
1    strategies that were designed to facilitate MS&Co.’s

2    generation of investment banking revenue.     See In re Morgan

3    Stanley Tech. Fund Sec. Litig., 643 F. Supp. 2d at 377.

4    Plaintiffs have not challenged that conclusion, and, absent

5    a more particularized contention, we decline to revisit this

6    aspect of the district court’s decision.    See, e.g., Norton

7    v. Sam’s Club, 145 F.3d 114, 117-18 (2d Cir. 1998).     As

8    such, this is not a case involving a situation in which “a

9    fund’s investment objectives included enhancing an

10   affiliated entity’s investment banking business,” which, in

11   the SEC’s view, would have to be disclosed.     (SEC Amicus Br.

12   at 5.)   Instead, the only question to be resolved is whether

13   Form N-1A obligated defendants to disclose the allegedly

14   omitted information as a “principal risk” of investing in

15   the Funds.

16       Form N-1A’s definition of “principal risk” is ambiguous

17   in this regard.   Hence, it is prudent to look to the SEC for

18   interpretive guidance.   In its amicus brief, the Commission

19   characterizes the risk disclosures sought by plaintiffs as

20   arising from “the danger that analyst reports . . . will be

21   tainted by undisclosed conflicts of interest or actual

22   corruption” at MS&Co., and asserts that “the fact of

                                   34
1    affiliation” between MS&Co. and the other defendants

2    “appears to be irrelevant.”   (Id. at 8, 10.)     Based on these

3    characterizations, the SEC opines that plaintiffs have only

4    identified a “generic risk factor[] that [has] nothing to do

5    with a specific fund,” and — consistent with the decision

6    below — that defendants were not required by Form N-1A to

7    disclose this type of information.     (Id. at 10.)

8        Not surprisingly, plaintiffs disagree.      They first

9    argue that this aspect of the SEC’s amicus submission is

10   entitled to “little if any deference” because it constitutes

11   an “application” of Form N-1A rather than an

12   “interpretation.”   (Pls.’ Supp. Br. at 2.)     We are, of

13   course, mindful that the institutional considerations that

14   may lead us to defer to the SEC’s views on the

15   interpretation of its promulgations counsel a different

16   course when the question presented calls for an assessment

17   of the sufficiency of a complaint.     The task of construing a

18   litigant’s pleading rests firmly with the courts.

19   Nevertheless, plaintiffs’ distinction between an agency

20   “interpretation” and an “application” is untenable and

21   without support in our case law.     In Press v. Quick &

22   Reilly, Inc., for example, we afforded deference to the

                                   35
1    SEC’s reasonable determination that the defendant broker-

2    dealers in that case had satisfied their obligation to

3    disclose third party remuneration under SEC Rule 10b-10.

4    See 218 F.3d at 128-29.    We see no basis discernible from

5    Press, our other similar holdings, or this case that would

6    allow us to draw a principled line between interpretations

7    and applications of relevant agency promulgations.

8    Therefore, we continue to adhere to our prior decisions and

9    defer to the SEC’s opinion so long as it is neither plainly

10   erroneous nor contrary to law.      See, e.g., Beacon Power, 522

11   F.3d at 247-48.

12       In further support of their position that the SEC’s

13   amicus submission is not entitled to judicial deference,

14   plaintiffs argue that the agency “erroneously concluded that

15   the facts omitted here . . . were not particular to the

16   defendant Funds.”   (Pls.’ Supp. Br. at 4.)     Instead,

17   plaintiffs argue that they “claim only that those funds

18   affiliated with full-service investment banking firms, where

19   the required Information Barrier ha[s] been dismantled and

20   there are resulting research—investment banking conflicts of

21   interest, are required to disclose these facts.”      (Id. at 5

22   (emphasis in original).)    However, like the district court

                                    36
1    and the SEC, we find unconvincing plaintiffs’ attempt to

2    recast the nature of the risk they have identified by

3    limiting this case to its facts.

4        Consistent with the general guidance that accompanied

5    the 1998 amendments to the Form, the SEC asserts that Form

6    N-1A does not require disclosure of general risks that are

7    present throughout the markets.      Rather, the Form’s

8    instructions call for the disclosure of only those risks “to

9    which the Fund’s particular portfolio as a whole is expected

10   to be subject.”     The SEC has also indicated, outside of this

11   litigation, that it designed this requirement “to elicit

12   risk disclosure specific to that fund.”      SEC, Final Rule:

13   Registration Form Used by Open-End Management Investment

14   Companies, Securities Act Release No. 7512, Exchange Act

15   Release No. 39,748, Investment Company Act Release No.

16   23,064, 63 Fed. Reg. 13,916, 13,928 n.111 (Mar. 23, 1998)

17   (emphasis added).     In its amicus submission, the SEC takes

18   the view that the risks identified by plaintiffs are not

19   limited to the context presented by their factual

20   allegations, and that systemic risks relating to the

21   potential that a company’s stock price is inflated by biased

22   research coverage are present throughout the market.      Put

                                     37
1    differently, all investors, including the Funds’ managers,

2    face the risk that the research they use to make their

3    decisions may be biased or flawed, and that the prices they

4    pay for securities may not accurately reflect the

5    securities’ intrinsic value.    In order to justify

6    disregarding the Commission’s conclusion, plaintiffs must

7    persuade us that the omitted risks relating to investing in

8    the Funds — not just the factual circumstances at Morgan

9    Stanley or MS&Co. — are unique.     Simply put, they have not

10   done so.

11       Plaintiffs’ allegations focus on the conduct of MS&Co.

12   However, the pleadings do not suggest that there was

13   anything untoward about the relationship between MS&Co. and

14   the Funds, and there are no allegations that the internal

15   problems at MS&Co. directly affected the manner in which the

16   Funds’ managers approached investment decisions. 9    The

     9
       The SEC has already sanctioned MS&Co., and we do not
     understand its position in this litigation to condone the
     dismantling of MS&Co.’s Information Barrier. Nor do we
     perceive any inconsistency between the agency’s position
     here and plaintiffs’ perceptions of the SEC’s “long-standing
     view of Information Barriers.” (Pls.’ Supp. Br. at 17
     n.14.) Therefore, American Federation of State, County &
     Municipal Employees v. American International Group, Inc.,
     462 F.3d 121 (2d Cir. 2006) is inapposite. Plaintiffs’
     suggestion to the contrary only serves to further illustrate
     the extent to which their claims place undue focus on events

                                    38
1    affiliation between MS&Co. and the Funds was disclosed in

2    the Offering Documents and is insufficient to bridge this

3    gap.     Without more, we see no basis in Form N-1A for

4    requiring the Funds to complicate their public filings by

5    making additional disclosures about the internal workings of

6    a broker-dealer with only a limited role in the issuance of

7    the securities that are the focus of this case, i.e., the

8    Funds’ shares.     “To demand more would open the door to

9    unceasing and unreasonable clamorings for all manner of

10   tutoring . . . , which would afford a bonanza to lawyers . .

11   . with no corresponding benefit to the actual investor.”

12   Greenapple v. Detroit Edison Co., 618 F.2d 198, 211 (2d Cir.

13   1980).

14          The flaw in plaintiffs’ MS&Co.-focused tunnel vision is

15   not remedied by their allegations relating to the

16   proportions of securities in the Funds’ portfolios issued by

17   companies that were either covered by MS&Co.’s research

18   analysts or utilizing MS&Co.’s investment banking services.

19   Nothing about these facts changes the nature of the risks

20   associated with utilizing MS&Co.’s research.     See Kramer v.

21   Time Warner Inc., 937 F.2d 767, 776 (2d Cir. 1991) (“It is

     at MS&Co. rather than at the Funds.

                                     39
1    in the very nature of securities markets that even the most

2    exhaustively researched predictions are fallible.” (emphasis

3    added)).   Additionally, plaintiffs have not alleged that

4    MS&Co.’s recommendations relating to these companies

5    diverged from the assessments of analysts outside of Morgan

6    Stanley, or that the Funds’ managers breached their legal

7    duties to the Funds’ shareholders by blindly and

8    uncritically following MS&Co.’s potentially tainted

9    recommendations.   See In re Morgan Stanley Tech. Fund Sec.

10   Litig., 643 F. Supp. 2d at 378 n.6.   Consequently, while one

11   might infer from the pleadings that conflicts of interest

12   affected MS&Co.’s research analysis of the companies in the

13   Funds’ portfolios, plaintiffs’ allegations do not support an

14   inference that the Funds’ managers made investment decisions

15   under circumstances that gave rise to unique, undisclosed

16   risks relating to the Funds.

17       In seeking to implicate the Funds merely by virtue of

18   their affiliation with MS&Co., plaintiffs also overstate the

19   import of the inference that the Funds’ managers knew that

20   MS&Co. had dismantled its Information Barrier.     Assuming,

21   arguendo, that the pleadings support such an inference,

22   plaintiffs have not alleged that the Funds’ managers knew

                                    40
1    that MS&Co.’s analysts had breached their professional

2    obligations by disseminating biased or false research or

3    manipulating IPOs.     Affiliated or not, the Funds were not

4    MS&Co.’s keeper, and defendants were not obligated to

5    suggest — in the Funds’ Offering Documents — that MS&Co.’s

6    employees may have engaged in activities that might later be

7    determined to run afoul of the securities laws.

8    “[D]isclosure is not a ‘rite of confession or exercise of

9    common law pleading.’”     I. Meyer Pincus & Assocs., 936 F.2d

10   at 762 (quoting Data Probe Acquisition Corp. v. Datatab,

11   Inc., 722 F.2d 1, 5-6 (2d Cir. 1983)).     Defendants’

12   knowledge of the lack of an Information Barrier at MS&Co.

13   does not demonstrate that the allegedly omitted risks

14   relating primarily to MS&Co.’s operations — however

15   disconcerting they may be in a broader sense — were anything

16   but run-of-the-mill insofar as Form N-1A is concerned.

17       To be clear, plaintiffs are not required under sections

18   11 and 12(a)(2) of the Securities Act to allege that

19   defendants acted with scienter or intentionally omitted

20   information from the Offering Documents.     See Rombach, 355

21   F.3d at 169 n.4.     The allegations regarding the extent of

22   defendants’ knowledge of MS&Co.’s activities are relevant,

                                     41
1    however, to assessing the nature of the risks that

2    plaintiffs have identified in their claims.    The pleadings

3    indicate that these risks arose because the Funds’ managers

4    purchased securities “in a market artificially inflated by

5    [MS&Co.’s] falsely rosy analyst reports . . . [and] market

6    manipulations.”   Plaintiffs have not persuaded us that such

7    risks were unique to investing in the Funds, and they have

8    not presented any other meritorious basis for attributing

9    error to the SEC’s opinion that defendants were not required

10   to disclose this information as an investment risk under

11   Part A of Form N-1A.    Therefore, we defer to the persuasive

12   view of the SEC, and hold that Items 2 and 4 of Form N-1A’s

13   Part A did not create a disclosure obligation that supports

14   plaintiffs’ claims.

15       2.   Duty to Avoid Misleading Statements

16       Our conclusion that Form N-1A did not directly require

17   defendants to disclose the allegedly omitted information

18   does not mark the end of our inquiry.    Sections 11 and

19   12(a)(2) both call for the disclosure of information that is

20   necessary to avoid rendering misleading the representations

21   in registration statements and prospectuses.    See 15 U.S.C.

22   §§ 77k(a), 77l(a)(2).    SEC Rule 408, which applies to

                                    42
1    filings on Form N-1A, establishes a similar requirement

2    relating only to registration statements.    See 17 C.F.R. §

3    230.408.

4         Citing these provisions, plaintiffs argue that the

5    statements in the Offering Documents “concerning the Fund[s]

6    and [their] investment strategy and principal risks

7    triggered a clear duty to disclose all material information

8    on the same or related subjects.”    They further contend that

9    “the boilerplate disclosures” in the Offering Documents

10   regarding the Funds’ “principal investment strategies” and

11   “principal risks” were rendered misleading by the absence of

12   the allegedly omitted information.

13        These contentions misconstrue the nature of defendants’

14   disclosure obligations and must be rejected. 10   When

15   analyzing offering materials for compliance with the

16   securities laws, we review the documents holistically and in

     10
       The question that we presented to the SEC as part of our
     invitation to participate in this appeal as an amicus curiae
     focused on Form N-1A and did not relate to the issue of
     whether the alleged omissions rendered the Offering
     Documents misleading under Rule 408. This is because we see
     no ambiguity in the relevant language of the Securities Act
     or Rule 408 with respect to this issue. Thus, although our
     conclusion is consistent with the views expressed by the
     Commission, we have not deferred to this aspect of its
     amicus submission.

                                   43
1    their entirety.   See, e.g., Olkey v. Hyperion 1999 Term

2    Trust, Inc., 98 F.3d 2, 5 (2d Cir. 1996).      The literal truth

3    of an isolated statement is insufficient; the proper inquiry

4    requires an examination of “defendants’ representations,

5    taken together and in context.”      DeMaria, 318 F.3d at 180

6    (internal quotation marks omitted).      Thus, when an offering

7    participant makes a disclosure about a particular topic,

8    whether voluntary or required, the representation must be

9    “complete and accurate.”     Glazer v. Formica Corp., 964 F.2d

10   149, 157 (2d Cir. 1992) (internal quotation marks omitted).

11       Plaintiffs’ argument, however, stretches these

12   principles past their logical breaking point.      The Offering

13   Documents’ disclosures did not trigger a generalized duty

14   requiring defendants to disclose the entire corpus of their

15   knowledge regarding MS&Co.     See In re Time Warner Inc. Sec.

16   Litig., 9 F.3d at 267 (“[A] corporation is not required to

17   disclose a fact merely because a reasonable investor would

18   very much like to know that fact.”).      The SEC designed Form

19   N-1A in an attempt to balance the costs and benefits of

20   additional disclosures in the context of a specific class of

21   issuers.   Form N-1A Adopting Release, 48 Fed. Reg. at 37,928

22   (noting that the Form was intended to “provide guidance to

                                     44
1    registrants and their counsel who may be concerned about

2    potential liability for material omissions from the

3    prospectus”).   While defendants were required to make

4    complete and accurate disclosures regarding the principal

5    risks of investing in the Funds, these mandatory disclosures

6    did not obligate defendants to make disclosures relating to

7    the commonly understood risks associated with securities

8    research.   See id.   Consequently, we decline to hold that

9    defendants’ disclosure of the information called for by Form

10   N-1A gave rise to a duty to make disclosures about “related

11   subjects” not called for by the Form.

12       In light of that conclusion, plaintiffs’ remaining

13   arguments give us little pause.      As stated above, plaintiffs

14   have not alleged that the Funds’ managers pursued an

15   undisclosed objective or investment strategy when making

16   investment decisions for the Funds.      Therefore, the Funds’

17   disclosures about these topics were not misleading.

18   Similarly, in light of our holding that plaintiffs have not

19   identified any undisclosed “principal risks” relating to the

20   Funds, it cannot be said that the Offering Documents’ risk

21   disclosures were misleading because they omitted the generic

22   risks relied on by plaintiffs.      Accordingly, we hold that

                                    45
1    the Offering Documents were not rendered misleading as a

2    consequence of the omissions that are alleged to have

3    occurred.

4                           III.   CONCLUSION

5        For the reasons set forth above, we conclude that

6    plaintiffs have not identified any unlawful omissions in the

7    Funds’ Offering Documents.    Therefore, their claims under

8    sections 11 and 12(a)(2) of the Securities Act were properly

9    dismissed.   As such, we find no error in the district

10   court’s dismissal of plaintiffs’ claims for control-person

11   liability under section 15.    We have considered plaintiffs’

12   remaining arguments and find them to be without merit.

13   Accordingly, the district court’s February 2, 2009 order is

14   hereby AFFIRMED.

                                    46