Christopher Cutler

Mr. Cutler practices in the areas of accountants defense, securities enforcement, securities class action litigation, and internal investigations. He represents companies, accounting firms and individuals in investigations brought by various regulators, including the U.S. Securities and Exchange Commission and the Public Company Accounting Oversight Board (PCAOB).

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SDNY Deals Major Blow to Section 11 Plaintiffs Trying to Avoid Heightened Pleading Requirements

Posted on June 11, 2010

The Southern District of New York recently issued an opinion favorable to defendants facing liability under Section 11 of the Securities Act of 1933 for alleged misrepresentations in opinion-based financial statement line items.  In Fait v. Regions Financial Corp., the district court dismissed the Section 11 action because the plaintiff failed to allege that the defendants did not truly hold their publicly stated opinions at the time the statements were made.

Citing the Supreme Court’s decision in Virginia Bankshares, Inc. v. Sandberg, the court held that statements regarding goodwill and loan loss reserves in a company’s financial statements are matters of opinion rather than objective fact.  Fait, the plaintiff, alleged only that these statements were negligently false and misleading.  The court dismissed the case because Fait did not allege that the defendants made statements they believed to be false.

Judge Kaplan considered it significant that Fait’s complaint included a disclaimer that Fait was not alleging that defendants intentionally misstated Regions’ goodwill and loan loss reserves.  Plaintiffs often use similar disclaimers to make clear that their Section 11 claims do not allege violations of Federal anti-fraud provisions that would trigger tougher pleading requirements under the PSLRA and Federal Rule of Civil Procedure 9(b).  Plaintiffs also prefer making Section 11 claims because they impose near-absolute liability for certain defendants.

Judge Kaplan’s decision in Fait is a major setback for plaintiffs trying to thread the needle of bringing a claim under Section 11 while also avoiding heightened pleading requirements. Plaintiffs alleging misrepresentations in opinion-based financial statement line items, who fail to allege that defendants did not subjectively believe the statements at the time they were made, may face the same fate as Fait.

Not surprisingly, Judge Kaplan’s decision is being appealed.  Stay tuned as the Second Circuit weighs in on this important question, which could eventually go all the way to the Supreme Court.