Judge Swain yesterday granted a motion for judgment on the pleadings in favor of PricewaterhouseCoopers and certain other defendants with respect to certain Securities Act claims in a class action relating to AIG’s subprime exposure. The complaint alleged that certain accounting statements in offering documents were false, but expressly disclaimed that they were fraudulently made – presumably to avoid having to plead fraud with particularity. Under the Securities Act, false statements in offering materials can be actionable even without fraudulent intent. After the complaint was filed, the Second Circuit decided Fait v. Regions Financial, which held that plaintiffs challenging statements of opinion in offering materials must plead and prove that the speaker subjectively disbelieved the claims to recover under the Securities Act. Judge Swain’s ruling was largely based on Fait. She concluded that the accounting statements were opinions within the ambit of Fait and also concluded that disputes concerning accounting standards could be decided on the pleadings:
By repeatedly disclaiming fraud and intentional or reckless misconduct in the Securities Act section of the Complaint, Plaintiffs have disavowed any allegation that the Defendants knowingly misstated any opinions they may have implicitly or explicitly communicated in the offering documents and SEC filings. Therefore, the key inquiry is whether the … allegations are opinions subject to Fait’s subjective falsity pleading requirement. The Court finds that they are. … FIN 45 requires disclosure of the “maximum potential amount of future payments” for arrangements that qualify as “guarantees.” However, the Moving Defendants contend that whether a contract qualifies as a guarantee subject to the FIN 45 requirement necessarily requires a complex series of judgments as to whether it fits the criteria set forth in FIN 45 ¶ 3. (Tr. 18-21.) In response, Plaintiffs argue that their allegation that the contracts fell within FIN 45’s ambit should be taken as true on a motion for judgment on the pleadings, thus rendering the disclosure failure one of computational fact rather than one of failure to reach or disclose an opinion. (Tr. at 47-48.) However, they have not presented the Court with any authority supporting their assertion that courts should accept as true a complaint’s interpretation of financial regulations or auditing standards as opposed to purely factual contentions, and the Court’s own research has disclosed none. It is beyond question that legal conclusions need not be accepted as true in evaluating the sufficiency of a complaint; interpretations of accounting principles – which, like laws, define and govern the conduct of aspects of human endeavor – are properly treated in the same way. The Court therefore concludes that the FIN 45 allegations are subject to the Fait requirement and will dismiss them for failure to plead subjective falsity.
Prior coverage of a similar Fait dismissal is in this post. Reuters’ Alison Frankel also discusses, in this post, the impact of Fait in cases where plaintiffs had initially decided to disclaim any allegation of fraudulent intent.