                                                             FILED
                                                United States Court of Appeals
                                                        Tenth Circuit

                                                        July 9, 2013
                                     PUBLISH        Elisabeth A. Shumaker
                                                        Clerk of Court
                  UNITED STATES COURT OF APPEALS

                              TENTH CIRCUIT



KENNETH Z. SLATER; W. ALLEN
GAGE; NICHOLAS F. ALDRICH,
SR., individually and on behalf of the
Aldrich Family; DONALD SMITH, on
behalf of plaintiff and all others
similarly situated; ELAINE
SNYDMAN; DENIS ROY
GONSALVES; DAVID SEDLMYER;
BETTY L. MANNING; and JOHN
LEARCH,

            Plaintiffs-Appellants,
      v.                                       No. 11-2170
A.G. EDWARDS & SONS, INC.;
BB&T CAPITAL MARKETS, a
division of Scott & Stringfellow, Inc.;
CITIGROUP GLOBAL MARKETS,
INC.; OPPENHEIMER & COMPANY.
INC.; RBC DAIN RAUSCHER
CORP.; STIFEL, NICOLAUS &
COMPANY, INC.; FBR CAPITAL
MARKETS & CO., formerly known as
Friedman, Billings, Ramsey & Co.;
BEAR, STEARNS & COMPANY,
now J.P. MORGAN SECURITIES
INC.; and UBS SECURITIES LLC,

            Defendants-Appellees.


       APPEAL FROM THE UNITED STATES DISTRICT COURT
              FOR THE DISTRICT OF NEW MEXICO
                (D.C. NO. 1:07-CV-00815-JB-WDS)
Andrew L. Zivitz, Kessler Topaz Meltzer & Check, LLP, Radnor, Pennsylvania
(Benjamin J. Sweet, Christopher L. Nelson, Michelle M. Newcomer, and Richard
A. Russo, Jr., Kessler Topaz Meltzer & Check, LLP, Radnor, Pennsylvania, and
Betsy C. Manifold and Patrick H. Moran, Wolf Haldenstein Adler Freeman &
Herz LLP, San Diego, California, and Turner W. Branch and Cynthia L. Zedalis,
Branch Law Firm, Albuquerque, New Mexico, with him on the briefs), Attorneys
for Appellants.

Jonathan C. Dickey, Gibson, Dunn & Crutcher LLP, New York, New York (Sapna
Desai, Gibson, Dunn & Crutcher LLP, New York, New York, and Blaine H.
Evanson, Gibson Dunn & Crutcher LLP, Los Angeles, California, with him on the
brief), for Appellees A.G. Edwards & Sons, Inc., BB&T Capital Markets,
Citigroup Global Markets Inc., Oppenheimer & Company, Inc., RBC Dain
Rauscher Corp., and Stifel, Nicolaus & Co., Inc., and Steven M. Farina (Margaret
A. Keeley and Allison B. Jones with him on the brief), Williams & Connolly LLP,
Washington, District of Columbia, for Appellee FBR Capital Markets & Co.,
formerly known as Friedman, Billings, Ramsey & Co., and David C. Bohan,
David Stagman, Laura A. Brake and John F. Anzelc, Katten Muchin Rosenman
LLP, Chicago, Illinois, on the brief for Defendant UBS Securities LLC and
Appellee Bear, Stearns & Company, now J.P. Morgan Securities LLC.


Before TYMKOVICH, HOLLOWAY, Senior Judge, and HOLMES, Circuit
Judges.


TYMKOVICH, Circuit Judge.


      Thornburg Mortgage, Inc. was an originator and purchaser of home loans

and one of the many casualties of the 2007-2009 financial crisis. Cut off from its

usual sources of financing, Thornburg attempted to raise new capital through a

series of stock offerings in 2007 and early 2008. But as the mortgage market

continued to sour, Thornburg’s problems mounted and the value of its stock

declined. Investors in those offerings then brought a class action suit against

                                        -2-
Thornburg’s underwriters, alleging violations of § 11 of the Securities Act based

on omissions and misrepresentations in the offering documents. In a thorough

opinion, the district court dismissed the claims against the underwriters on the

grounds that there were no omissions or misrepresentations in the offering

documents and, even if there were, they were not material.

      The Plaintiffs broadly challenge all of the district court’s holdings. They

contend that the offering documents contained material misrepresentations and

omissions. As we explain, the Plaintiffs’ contentions are not based on a

contemporaneous look at Thornburg’s statements and disclosure obligations

during the offering periods. With that perspective in mind, we conclude there

were no misrepresentations or omissions in the offering documents and,

accordingly, AFFIRM.

                                 I. Background

      Thornburg was a publicly traded residential mortgage lender focused on the

adjustable-rate mortgage (ARM) market, and funded its mortgage purchases and

originations through a variety of financing sources. These financing sources

included public offerings of its securities, reverse-repurchase agreements, 1 short-




      1
         A repurchase agreement is an agreement whereby the seller transfers a
security to the buyer for cash, but agrees to repurchase the security at a later date,
usually for a higher amount than the original sale price.

                                         -3-
term borrowing through asset-backed commercial paper, 2 and collateralized debt

obligations (CDOs), 3 a type of mortgage-backed security (MBS). Thornburg both

packaged its own MBSs (from its pool of originated and acquired loans) and

purchased already-packaged MBSs. Thornburg was highly leveraged, meaning it

borrowed substantial funds compared to its available assets. Similar to a bank,

Thornburg profited from the differences between the interest rates at which it

borrowed money and the interest rates at which it lent money.

      Thornburg’s business focused on the prime market—that market consisting

primarily of borrowers with good credit scores who can document their income.

But it also originated and acquired Alt-A loans, which are loans to otherwise

creditworthy individuals who cannot or do not provide documentation of their

income, have a higher percentage of debt compared to their income (debt-to-

income ratio), or pay less as a down payment than do prime borrowers. These

loans are generally considered riskier than prime loans, but not as risky as




      2
        Asset-backed commercial paper is a short-term loan, usually backed by
some physical asset. The maturity dates are usually between three and six
months.
      3
       A CDO is a pool of loans (of any quality) that is divided into, and sold in,
“tranches” according to priority of repayment in case of default. Senior tranches,
which have the highest priority in repayment, are usually rated AAA; “mezzanine
tranches” have a lower priority in repayment and are usually rated from AA to
BB; equity tranches are rated even lower and have the lowest priority in
repayment.

                                        -4-
subprime loans. Subprime loans are loans to individuals with poor credit histories

and often require even less as a down payment than do Alt-A loans.

      In 2006 and 2007, the market for subprime and Alt-A mortgages declined

as borrowers began to default on their loans. Rating agencies downgraded many

mortgage-backed securities and collateralized debt obligations. The declining

housing market also hurt the commercial paper market, and Thornburg was not

able to raise the money it needed to extend new loans. As the commercial paper

market faltered, Thornburg increasingly relied on repurchase agreements, using

its mortgage-backed securities as collateral. The repurchase agreements required

Thornburg to meet margin calls (i.e., post additional collateral, usually cash) if

the value of the original collateral declined. And, importantly, the repurchase

agreements contained cross-default provisions, whereby a default on any one

agreement (by failing to meet a margin call) triggered default on Thornburg’s

other agreements.

      Unable to rely solely on these forms of financing, Thornburg sought to

raise more cash by conducting public stock offerings. The offerings were made

according to a shelf registration statement, filed with the SEC on May 20, 2005.

The registration statement prospectively incorporated by reference Thornburg’s

quarterly, annual, and current reports. Each offering was also accompanied by

separate prospectuses.




                                         -5-
      The first offering was on May 4, 2007, where Thornburg issued 4.5 million

shares for $121.7 million. It conducted another offering on June 19, 2007, issuing

another 2.75 million shares for $68.75 million. The offering documents for these

sales incorporated Thornburg’s 2006 10-K Annual Statement, which detailed the

basis of Thornburg’s business and financing: acquiring and originating loans,

packaging them into securities, using the securities as collateral for its repurchase

agreements, and repeating the process. Despite disclosing that it possessed a

significant chunk of “stated income” (or Alt-A) loans, Thornburg did not

specifically disclose that it possessed $2.9 billion of purchased MBSs backed by

Alt-A loans. 4

      On August 14 and 20, 2007, Thornburg disclosed that the value of its AAA-

rated mortgage securities—the bulk of its portfolio—was declining and, as a

result, the company was experiencing margin calls. In the August 20 statement,

Thornburg announced that it had sold over $20 billion of its MBSs to meet the

margin calls. Analysts warned that Thornburg was “within days of failing.” App.

141 (complaint quoting August 20, 2007 news article).

      Thornburg nonetheless conducted another public stock offering on

September 7, 2007, in an attempt to recapitalize the company. In the September

      4
         In its 10-K Annual Statements and 10-Q Quarterly Statements filed with
the SEC, Thornburg designated its holdings of Alt-A loans as “stated income/no
ratio”—meaning the borrower merely stated, but did not provide proof of, his
income. Otherwise, Thornburg generally did not use the term “Alt-A” in its SEC
filings.

                                         -6-
prospectus preceding the Offering, Thornburg disclosed that it had been

experiencing sizable margin calls, that the value of its loan portfolio had been

declining, and that its traditional sources of funding—securitization of loans and

the asset-backed commercial paper market—were “not functioning.” Supp. App.

1244. Thornburg warned that the mortgage market may not improve and that the

company may experience further margin calls. Thornburg conducted a final stock

offering in January 2008.

      The mortgage market continued to decline, and on February 28, 2008,

Thornburg disclosed that it had been subject to an additional $300 million in

margin calls. Thornburg also disclosed that $2.9 billion in purchased MBSs

backed by Alt-A loans had collateralized its repurchase agreements. A decline in

the value of the Alt-A MBSs had triggered the margin call. On the day of

Thornburg’s announcement, Thornburg’s stock price declined 15 percent, from

$11.54 per share to $9.86 per share. On March 3, 2008, Thornburg disclosed that

it had been subject to an additional $270 million in margin calls as of February

29, 2008, and that it was in default with one of its repurchase agreement

counterparties. Finally, on March 5, 2008, Thornburg revealed that J.P. Morgan

was the counterparty with which it was in default, and that this event had

triggered the cross-default provisions in the rest of Thornburg’s agreements.

Overall, from February 27 to March 6, the value of Thornburg’s stock declined by

more than 90 percent.

                                         -7-
      The Plaintiffs, investors in the stock offerings, had filed a lawsuit on

August 21, 2007, just one day after Thornburg announced it had sold $20.5 billion

of its MBSs to meet margin calls. On May 27, 2008, after the January offering

and over two months after the precipitous drop in Thornburg’s stock price, the

Plaintiffs filed a consolidated complaint. The consolidated complaint targeted—

in addition to Thornburg and Thornburg’s officers (who are not parties to this

appeal)—the banks that underwrote the stock offerings (“Underwriters”). 5 The

complaint alleged that the offering documents for the four public offerings

contained material misstatements and omissions, actionable under § 11 of the

Securities Act.

      The Underwriters moved to dismiss the complaint as failing to state a claim

against them. In opposing the motion to dismiss, the Plaintiffs pointed to

omissions and misrepresentations for which the Underwriters were strictly liable:

(1) Thornburg’s holdings of $2.9 billion in purchased MBSs backed by Alt-A

loans; (2) the cross-default provisions in the repurchase agreements; and (3)

Thornburg’s 2006 financials, which its auditor KPMG had called into question.

Nevertheless, the district court granted the Underwriters’ motion. See In re


      5
        The May and June offerings were underwritten by six entities: A.G.
Edwards & Sons, BB&T Capital Markets, Citigroup Global Markets,
Oppenheimer & Co., RBC Dain Rauscher Corp., and Stifel, Nicolaus & Co. The
September offering was underwritten by FBR Capital Markets (FBR). The
January offering was underwritten by FBR, UBS Securities, and Bear, Stearns &
Co. (now owned by J.P. Morgan).

                                         -8-
Thornburg Mortg., Inc. Sec. Litig., 683 F. Supp. 2d 1236 (D.N.M. 2010)

(Thornburg I). Referencing Thornburg’s 2006 10-K Statement, filed with the

SEC and incorporated into the complaint, the district court concluded that (1)

Thornburg had disclosed its exposure to purchased Alt-A MBSs, (2) Thornburg

had no duty to disclose the existence of the cross-default provisions in its

repurchase agreements, and (3) general allegations of misstatements in

Thornburg’s 2006 financials did not make out a claim because KPMG had

actually approved the financials.

      The Plaintiffs then filed a motion for clarification to determine whether the

district court had dismissed their claims with prejudice. The court interpreted this

motion as a request by the Plaintiffs to file a separate motion for reconsideration

and for leave to amend their complaint, which the court granted. When the

Plaintiffs filed their motion for reconsideration, they presented new arguments for

why Thornburg had a duty to disclose the existence of the $2.9 billion in MBSs

and the cross-default provisions—specifically, that Regulations S-K and S-X,

promulgated by the SEC, required such disclosures. After considering these new

arguments, the court nevertheless rejected them, concluding the Plaintiffs had not

pleaded facts demonstrating that Thornburg had disclosure obligations per SEC

regulations. In re Thornburg Mortg., Inc. Sec. Litig., 824 F. Supp. 2d 1214,

1257–74 (D.N.M. 2011) (Thornburg II). Accordingly, the court declined to

change its earlier dismissal of the Securities Act claims against the Underwriters.

                                         -9-
      The Plaintiffs then appealed the district court’s dismissal. While this

appeal was pending, the Plaintiffs stipulated to dismiss the appeal as to the

Underwriters who participated in the January 2008 offering.

                                   II. Analysis

      The Plaintiffs appeal the district court’s dismissal of their complaint on the

ground they did not adequately plead a Securities Act violation by Thornburg.

The Plaintiffs contend the district erred in holding there were no material

misrepresentations or omissions relating to (1) Thornburg’s holdings of $2.9

billion in Alt-A MBSs, (2) the existence of cross-default provisions in

Thornburg’s repurchase agreements, and (3) Thornburg’s 2006 financials. As we

discuss below, none of these arguments have legal merit.

      A. Legal Background

      Standard of Review. We review de novo the district court’s granting of a

motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). Hollonbeck v.

U.S. Olympic Comm., 513 F.3d 1191, 1194 (10th Cir. 2008). To defeat a motion

to dismiss, a complaint must plead facts sufficient “to state a ‘claim to relief that

is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting

Bell Atl. Corp. v. Twombly, 550 U.S. 554, 570 (2007)).

      In a securities case, we may consider, in addition to the complaint,

documents incorporated by reference into the complaint, public documents filed

with the SEC, and documents the plaintiffs relied upon in bringing suit. See ATSI

                                         -10-
Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007). When there

are allegations that certain disclosures were not made in publicly available

documents, we may look to those documents to see whether such disclosures were

in fact made. See Roth v. Jennings, 489 F.3d 499, 509 (2d Cir. 2007). And if

those documents conflict with allegations in the complaint, we need not accept

those allegations as true. See Daniels-Hall v. Nat’l Educ. Ass’n, 629 F.3d 992,

998 (9th Cir. 2010); Roth, 489 F.3d at 511 (affirming “principle that the contents

of the document are controlling where a plaintiff has alleged that the document

contains, or does not contain, certain statements”); Kaempe v. Myers, 367 F.3d

958, 963 (D.C. Cir. 2004) (“Nor must we accept as true the complaint’s factual

allegations insofar as they contradict exhibits to the complaint or matters subject

to judicial notice.”).

       Securities Act Claim. Section 11 of the Securities Act of 1933 imposes

strict liability for material misstatements or omissions in a stock offering’s

registration statement or prospectus. Schwartz v. Celestial Seasonings, Inc., 124

F.3d 1246, 1251 (10th Cir. 1997) (citing Herman & MacLean v. Huddleston, 459

U.S. 375, 382 (1983)). Liability attaches to “every person who signed the

registration statement” as well as to “every underwriter.” 15 U.S.C. § 77k(a)(1),

(a)(5). Plaintiffs pleading a § 11 claim must identify (1) a misrepresentation or

an omission, that is (2) material. In re Morgan Stanley Info. Fund Sec. Litig., 592

F.3d 347, 360 (2d Cir. 2010).

                                         -11-
      Liability does not attach for any omission, but only for omissions of facts

that are required as part of a registration statement or those necessary to make the

statement not misleading. 15 U.S.C. § 77k(a); see also J&R Mktg., SEP v. Gen.

Motors Corp., 549 F.3d 384, 390 (6th Cir. 2008). We have held that a “duty to

disclose arises only where both the statement made is material, and the omitted

fact is material to the statement in that it alters the meaning of the statement.”

McDonald v. Kinder-Morgan, Inc., 287 F.3d 992, 998 (10th Cir. 2002) (citation

omitted).

      The meaning of materiality in a § 11 Securities Act claim is identical to

that in a § 10-b Exchange Act claim for securities fraud. In re Morgan Stanley,

592 F.3d at 360. “A statement is material only if ‘a reasonable investor would

consider it important in determining whether to buy or sell stock.’” McDonald,

287 F.3d at 998 (quoting Grossman v. Novell, 120 F.3d 1112, 1119 (10th Cir.

1997)). Materiality also depends on the information that already exists in the

market: “[U]nless the statement significantly altered the total mix of information

available, it will not be considered material.” Grossman, 120 F.3d at 1119

(citation and internal quotation marks omitted). Though materiality is a mixed

fact-law question usually reserved for the trier of fact, we do “not hesitate to

dismiss securities claims pursuant to Rule 12(b)(6) where the alleged

misstatements or omissions are plainly immaterial.” McDonald, 287 F.3d at 997

(quoting Grossman, 120 F.3d at 1118).

                                         -12-
      Failure to comply with an SEC regulation in the documents accompanying

a stock offering can also trigger liability under § 11 of the Securities Act. 15

U.S.C. § 77k; see also Litwin v. Blackstone Grp., L.P., 634 F.3d 706, 716 (2d Cir.

2011); J&R Mktg., 549 F.3d at 390. Here, the Plaintiffs raise two such

regulations: Regulation S-K and Regulation S-X.

      Regulation S-K. Item 303 of Regulation S-K requires disclosure in

offering documents of, among other things, (1) “any known trends or any known

demands, commitments, events or uncertainties that will result in or that are

reasonably likely to result in the registrant’s liquidity increasing or decreasing in

any material way,” 17 C.F.R. § 229.303(a)(1); and (2) any “known trends or

uncertainties that have had or that the registrant reasonably expects will have a

material favorable or unfavorable impact on net sales or revenues or income from

continuing operations,” id. § 229.303(a)(3)(ii).

      In interpreting the scope of Item 303, courts have relied on guidance from

the SEC, which explains that a duty to disclose arises “where a trend, demand,

commitment, event or uncertainty is both [1] presently known to management and

[2] reasonably likely to have material effects on the registrant’s financial

condition or results of operations.” Management’s Discussion and Analysis of

Financial Condition and Results of Operations, Securities Act Release No. 6835

(May 18, 1989); see also Litwin, 634 F.3d at 716 (relying on SEC release no.

6835 in interpreting Item 303); J&R Mktg., 549 F.3d at 392 (duty to disclose not

                                         -13-
properly alleged when plaintiffs fail to assert that trend was “known” by

company). In a similar vein, the Eleventh Circuit has interpreted Item 303 as

imposing a duty on companies to disclose information “that significantly or

materially decreases the predictive value of [their] reported results.” Oxford

Asset Mgmt., Ltd. v. Jaharis, 297 F.3d 1182, 1192 (11th Cir. 2002).

      Regulation S-X. Regulation S-X requires documents filed with the SEC to

be in compliance with Generally Accepted Accounting Principles (GAAP). 17

C.F.R. § 210.4-01(a)(1). “Financial statements filed with the Commission which

are not prepared in accordance with generally accepted accounting principles will

be presumed to be misleading or inaccurate.” Id.

      The relevant GAAP provision here requires disclosure of “significant

concentrations of credit risk arising from all financial instruments, whether from

an individual counterparty or groups of counterparties.” Financial Account

Standards (FAS) 107, Disclosures About Fair Value of Financial Instruments, at

¶ 15A (1991), amended by FAS 161, Disclosures About Derivative Instruments

and Hedging Activities (2008).

      We now turn to the specific allegations of the Plaintiffs.

      B. Disclosure of $2.9 Billion in Purchased Alt-A MBSs

      The Plaintiffs’ primary allegations focus on a claim that Thornburg made

actionable misstatements as part of its May, June, and September 2007 stock

offerings. In particular, they argue that Thornburg made misstatements in

                                        -14-
prospectuses and other incorporated documents that misled investors about the

firm’s exposure to the Alt-A and subprime mortgage markets. We separate our

analysis of the May/June and September offerings.

             1. Misstatement in May/June Offering

      The Plaintiffs first argue that Thornburg made a material misstatement in

its May and June offering documents when it failed to disclose its exposure to

Alt-A assets while at the same time commenting about the subprime and Alt-A

markets. The alleged misstatement was part of an 8-K statement, filed with the

SEC on April 19, 2007, and incorporated by reference in the May and June

offering documents.

      In the 8-K form, Thornburg’s CEO, Larry Goldstone, stated that Thornburg

had “benefited from wider spreads on new prime quality mortgage assets caused

by credit concerns in the subprime and Alt-A segments of the mortgage market.”

App. 115. The Plaintiffs contend this statement was misleading because

Thornburg failed to disclose that it was exposed to risk from its own Alt-A assets.

That is, Thornburg misled investors when it said it benefitted from the decline in

the subprime market without also disclosing its own exposure to the subprime

market.

      Yet the complaint and relevant documents filed with the SEC do not

support the claim that these statements were misleading. First, the focus of

Thornburg’s business was originating prime mortgages and acquiring investment-

                                        -15-
grade mortgage assets. Its asset holdings reflected this fact. In its 2006 10-K

statement, for example, Thornburg disclosed that it had around $51.5 billion in

total ARM assets (about $28.3 billion in purchased ARM assets and $23.2 billion

in ARM loans). 6 Supp. App. 257. Of its $23.2 billion in ARM loans, 21.2

percent were “stated income/no ratio,” id. at 259, a synonym for Alt-A or

subprime loans, while 78.8 percent were “full/alternative,” or prime loans. And

of its $28.3 billion in purchased ARM assets, 88 percent were rated AAA, and

98.4 percent were “High Quality.” Id. at 257.

      These disclosures give context to Thornburg’s 8-K statement. Given its

investment-grade mortgage assets primarily backed by prime loans, Thornburg’s

backward-looking comment that it had benefitted from a decline in the subprime

market was not misleading even though Thornburg also held $2.9 billion in

purchased MBSs backed by Alt-A loans. The $2.9 billion would comprise, as of

December 31, 2006, only 5.6 percent of Thornburg’s total assets. Even after

factoring in Thornburg’s portfolio of “stated income/no ratio” loans, about $4.9

billion, Thornburg’s total Alt-A holdings would be less than 15 percent of its

assets. With this relatively small exposure to the Alt-A mortgage market and


      6
        In its SEC filings, Thornburg divided its ARM assets into two general
categories: “purchased ARM assets” and “ARM loans.” The ARM loan category
consisted of loans held for securitization, loans held as collateral for debt, and
loans securitized for its own portfolio. The purchased ARM assets category
consisted of MBSs that Thornburg itself had not securitized but only purchased
afterwards.

                                        -16-
Thornburg’s focus on originating prime mortgages, the 8-K did not paint a

misleading picture of Thornburg’s financial performance. All the allegations

presented do not contradict Thornburg’s statement that in the first quarter of 2007

Thornburg had “benefitted from the spread on new prime quality mortgage

assets.” App. 115.

      Next, and importantly, the Plaintiffs have not alleged that in April 2007 the

decline in Alt-A mortgages was severe enough to harm the then-market value of

Thornburg’s purchased MBS assets backed by Alt-A loans. One of the

underpinnings of securitization, which drove the subprime market, was that

subprime loans from different parts of the country could be pooled together and

sold—on the assumption that the housing markets across the country were not

linked. See Bruce I. Jacobs, Tumbling Tower of Babel: Subprime Securitization

and the Credit Crisis, Fin. Analysts J., Mar. 2009, at 18 (“Rather than taking on

the risk of default by one or a few borrowers in a given locality, a single []MBS

diversifies risk exposures among numerous individual mortgages spread over a

large area.”). This served to reduce investors’ exposure to an otherwise risky

asset because while one part of the country could face a declining market, other

parts of the country would be fine, thus diversifying the risk in any particular

instrument. As a result, the market for new Alt-A mortgages could be shaky in

many locales while the value of already-issued MBSs and CDOs backed by Alt-A

mortgages could remain steady. Cf. Kathryn Judge, Fragmentation Nodes: A

                                        -17-
Study in Financial Innovation, Complexity, and Systemic Risk, 64 Stan. L. Rev.

657, 685 (2012) (noting that with CDOs “the nonperformance of an underlying

asset, be it a mortgage or MBS, may have no effect on the cash flows paid to

holders of a senior tranche issued in a securitization”). This assumption seemed

particularly true for Thornburg, as almost all of its purchased mortgage assets

were AAA-rated, meaning, in the case of a CDO, it owned the senior tranche.

      Without a contemporaneous collapse in the value of its MBSs, or at least

some sign that their value would collapse shortly after the statement was made,

Thornburg’s portfolio of purchased MBS holdings does not darken the marginally

optimistic picture painted by the 8-K. See id. at 698 (“[E]arly indications that

housing values may have been weakening or in decline were not immediately

reflected in the prices of subprime MBSs, CDOs, and other financial instruments

with linked values, even though the expected future cash flows from these

financial instruments could be significantly affected by the performance of the

housing market.”). Economic historians will long study the havoc wreaked by

securitized financial instruments in the 2007-2009 crisis. At the time, few

economists or investment professionals foresaw the timing and breadth of the

downturn. See generally Michael Lewis, The Big Short (2010) (detailing the

handful of investors who did foresee the collapse and profited handsomely from

their uncommon insight). But for the securities claims here, no further




                                        -18-
disclosures were necessary to make Thornburg’s statement truthful and accurate.

As a result, the statement cannot be considered misleading.

      Given our conclusion that Goldstone’s statement was not misleading, we

need not consider whether the omission of the $2.9 billion in Alt-A MBSs was

material.

            2. Misstatement in September Offering

      Turning to the September offering, the Plaintiffs also allege those offering

documents contained a materially misleading statement. The alleged

misstatement was contained in the offering prospectus:

      In early August 2007, the secondary market for financing prime
      quality mortgage assets and rated mortgage-backed securities
      (“MBSs”) came under severe pressure for a number of reasons.
      During 2007, lower credit quality loans and securities backed by
      subprime mortgage loans and, to a lesser extent, Alt-A mortgage
      loans were downgraded by ratings agencies as the credit performance
      of the underlying loans deteriorated and, as a result, the prices of
      securities backed by those loans declined.

Supp. App. 1243. The statement came in the context of Thornburg’s explanation

for its liquidity troubles. Prior to the decline in the MBS market, Thornburg had

relied primarily on its prime mortgage assets to obtain liquidity; it pledged MBSs

backed by prime mortgages as collateral for cash. The decline in the Alt-A and

subprime markets infected the prime market, and the “market prices of private-

label MBSs backed by prime mortgage loans suddenly and unexpectedly began to

decline,” thereby restricting Thornburg’s access to new cash. Id.


                                        -19-
      The statement was misleading, the Plaintiffs contend, because it mentions

the existence of a market trend relating to MBSs backed by Alt-A loans without

also mentioning the company’s own exposure to that trend. The Plaintiffs insist

that once a company chooses to address a topic, it must “disclose all material

facts about that subject.” Aplts. Br. at 31 (citing Schaffer v. Evolving Sys., Inc.,

29 F. Supp. 2d 1213, 1221 (D. Colo. 1998)); see also Schaffer, 29 F. Supp. 2d at

1221 (“[W]hen [defendants] chose to release selected, positive information from

the first quarter statements, they should have revealed the potentially negative

information as well.”); cf. Brody v. Transitional Hosps. Corp., 280 F.3d 997,

1006 (9th Cir. 2002) (statement, in order to be misleading, “must affirmatively

create an impression of a state of affairs that differs in a material way from the

one that actually exists”).

      We recognize that the statement raises the possible implication that

Thornburg had no direct exposure to the Alt-A market but only an indirect

exposure through the effect of the Alt-A market on the prime mortgage market.

Yet even assuming that a reasonable investor would have wanted to know

Thornburg’s direct exposure to the Alt-A market, we cannot conclude that

Thornburg failed to disclose the true state of affairs in its September offering

documents.

      The September prospectus expressly incorporated Thornburg’s First and

Second Quarter 10-Qs, or quarterly financial statements, which contain sufficient

                                         -20-
information to render the disclosure not misleading. Those 10-Qs inform

investors that Thornburg held several billion dollars of MBSs backed by Alt-A

loans. The Second Quarter 10-Q discloses that, as of June 30, 2007, Thornburg

held $24.5 billion of assets in its loan portfolio. Supp. App. 707. These loans

were divided into two groups, those that Thornburg’s subsidiary originated (about

$17.1 billion) and those that Thornburg purchased (about $7.4 billion). Both

groups of loans consisted of “ARM loans held for securitization, ARM loans held

as collateral for Collateralized Mortgage Debt and ARM loans securitized for our

own portfolio for which we retained credit loss exposure.” Id. Thornburg

disclosed that its pool of originated loans contained 11.1 percent in “stated

income/no ratio” loans, and that its pool of purchased loans contained 42.2

percent of such loans. A reasonable investor would have viewed this information

and could only have concluded that Thornburg had direct exposure to the Alt-A

mortgage market. As a result, the disclosure of this information made

Thornburg’s comments about the Alt-A mortgage market not misleading.

      The Plaintiffs object to this line of analysis because the $2.9 billion in

MBSs backed by Alt-A loans was actually contained not in the “ARM Loans”

category—about which Thornburg made disclosures relating to the proportion of

stated income/no ratio loans—but in the “Purchased ARM Assets” category. 7

      7
        As already noted, in its financial statements, Thornburg categorized its
over $50 billion in ARM assets into one of two groups, “ARM loans,” or
                                                                     (continued...)

                                         -21-
Thus, they argue, Thornburg did not disclose in 2007 the precise assets that were

ultimately disclosed in 2008.

      But the test for whether a statement is misleading is not whether in

retrospect an investor might have wanted to know the omitted information, but

whether additional material information was necessary at the time to make a

statement reflect the true state of affairs. See McDonald, 287 F.3d at 998 (“[A]

duty to disclose arises only where both the statement made is material, and the

omitted fact is material to the statement in that it alters the meaning of the

statement.”). Here, the only information that was needed to make Thornburg’s

comment about the Alt-A mortgage market not misleading was that Thornburg

actually had direct exposure to that market; more detailed information was not

necessary or required. Though the Plaintiffs stress the distinction between the

assets contained in Thornburg’s two accounting categories—loans that were both

underwritten and securitized by third-parties compared to loans underwritten or

securitized (or both) by Thornburg itself—the securities laws do not make that

type of fine-grain disclosure necessary to make Thornburg’s statement not

misleading. The statement did not mention third-party mortgages compared to


      7
        (...continued)
“purchased ARM assets.” As of June 30, 2007, around $31.8 billion in assets
were categorized as ARM loans and around $24.7 billion in assets were
categorized as purchased ARM assets. Supp. App. 705. The $2.9 billion in
purchased MBS backed by Alt-A loans was contained within the purchased ARM
assets category.

                                         -22-
Thornburg mortgages, and thus parsing such differences in its disclosures was

unnecessary. Accordingly, we conclude Thornburg made no misleading statement

in its September offering documents.

         Given our conclusion that the statement was not misleading, there is no

need to consider whether omission of the $2.9 billion in Alt-A MBSs from the

September offering documents was material. The Plaintiffs have failed to state a

claim.

               3. Duty to Disclose in the September Offering - Regulation S-K

         As an alternative basis for § 11 liability, the Plaintiffs argue that Item 303

of Regulation S-K required Thornburg (and its underwriter, FBR) to disclose in

the September prospectus its portfolio of purchased Alt-A MBSs. The Plaintiffs

contend Thornburg was under such a duty because the decline in the Alt-A and

subprime mortgage markets was likely to have an adverse effect on Thornburg’s

liquidity and income. See 17 C.F.R. § 229.303(a)(1), (a)(3)(ii) (requiring

disclosure of known market trends affecting liquidity and income). By contrast,

FBR, the sole underwriter of Thornburg’s September offering, relies on an

accompanying instruction to the regulation to escape liability, arguing that

omission of the $2.9 billion in MBSs did not make the reported financials any less

“indicative of future operating results or of future financial condition.” 17 C.F.R.

§ 229.303(a), Instruction 3.




                                            -23-
      The district court agreed with FBR and so do we. The Plaintiffs have not

alleged sufficient facts to demonstrate that Thornburg was under an obligation to

disclose the existence of the $2.9 billion in MBSs. The September prospectus

already warned investors that (1) Thornburg had been forced to sell $20.5 billion

of its AAA-rated MBSs at a loss, Supp. App. 1245; (2) Thornburg had been cut

off from two of its three sources of funding, id. at 1244; and (3) liquidity

conditions could worsen, id. at 1247. Given these disclosures, more specific

information concerning the $2.9 billion in purchased Alt-A MBSs (out of over

$30 billion in “Purchased ARM Assets”) would not have better illumined

Thornburg’s financial future “in any material way.” 17 C.F.R. § 229.303(a)(1).

Prospective investors knew that the prices of Thornburg’s ARM assets had

dropped due to turmoil in the housing market and that continued turmoil would

hurt both its liquidity and revenue.

      The Plaintiffs have not offered a convincing argument why the $2.9 billion

in purchased MBSs backed by Alt-A loans were materially different from

Thornburg’s other Alt-A holdings—which were explicitly disclosed under the

“ARM loans” category in Thornburg’s financial statements. The Plaintiffs

contend that, because the Alt-A loans underlying the $2.9 billion in question were

both securitized and underwritten by third parties, these loans were materially

different from ones that were underwritten or securitized (or both) by Thornburg.

As the basis for the difference between the two categories, the Plaintiffs claim

                                         -24-
Thornburg and its subsidiaries represented that they maintained strict

underwriting and securitization guidelines whereas the third parties did not.

      Yet Thornburg’s SEC filings undermine this claim. Thornburg clearly

represented in its SEC filings that it also had “case-by-case” underwriting

exceptions, just like the third-party originators supposedly had. Supp. App. 235.

Thornburg allowed such exceptions based on “low loan-to-value ratios, low debt-

to-income ratios, excellent credit history, stable employment, financial reserves,

and time in residence at the applicant’s current address.” Id. The result of these

exceptions was that, at the end of second quarter 2007, 11.1 percent of the $17.1

billion of loans that Thornburg’s subsidiary originated and that Thornburg held on

its books were Alt-A (i.e., “stated income/no ratio”). Id. at 707. As a result, the

Plaintiffs have not established that prospective investors would have viewed Alt-

A assets originated by Thornburg any differently from those Thornburg purchased

from third parties.

      Decisions from other circuits support our conclusion that Thornburg did not

violate Item 303 by failing to disclose the $2.9 billion in purchased Alt-A MBSs.

For example, in Oxford Asset Management, Ltd. v. Jaharis, 297 F.3d 1182 (11th

Cir. 2002), the Eleventh Circuit held that a pharmaceutical company did not

violate Item 303 by omitting data about declining prescription volume because the

prospectus already warned investors that the company had lost $80 million and




                                         -25-
might never be profitable. Id. at 1192. The prospectus contained all the material

information concerning the company’s financial future.

      By contrast, in Litwin v. Blackstone Group, L.P., 634 F.3d 706 (2d Cir.

2011), the Second Circuit held that the plaintiffs had alleged a violation of Item

303 based on a company’s failure to disclose how the declining trend in the real

estate market would affect its earnings, given that 22.6 percent of its assets were

in real estate. Id. at 722. While the defendant was a portfolio company, with

many different investments across various industries, it needed to disclose trends

related to its major investments, including the real estate markets.

      This case reflects the same conditions as in Oxford rather than those in

Litwin. Thornburg informed investors in its prospectus that its sources of

financing were restricted, that it had been forced to sell off billions of dollars in

assets, and that the situation could worsen. Like the defendant in Oxford,

Thornburg painted an unvarnished picture of its finances. And unlike the

defendant in Litwin, which neglected to discuss its exposure to an entire market,

Thornburg painted a materially complete picture of how it was exposed to the

decline in the MBS market. Item 303 imposed no additional disclosure

obligations.

               4. Duty to Disclose in September Offering - Regulation S-X

      As a final basis for Thornburg’s § 11 liability for omitting the $2.9 billion

in Alt-A MBSs, the Plaintiffs contend Thornburg violated Regulation S-X in its

                                          -26-
September offering. Regulation S-X requires all offering documents to be in

compliance with GAAP; and the pertinent standard here, FAS 107, obligates

companies to disclose significant concentrations of credit risk.

       The sole underwriter of the September offering, FBR, does not dispute this

requirement but contends that to “state a claim that an entity’s failure to disclose

a concentration of credit risk violated FAS 107, a plaintiff must plead facts that

would permit findings that the entity in fact had ‘significant concentrations of

credit risk’ and that the entity believed that to be so.” FBR Br. at 57 (emphasis

added) (quoting In re Lehman Bros. Sec. & ERISA Litig., 799 F. Supp. 2d 258,

291 (S.D.N.Y. 2011)). This knowledge requirement stems from the recognition

that whether a particular asset constitutes a significant concentration of risk is a

matter of judgment. See FASB Staff Position SOP 94-6-1, Terms of Loan

Products That May Give Rise to a Concentration of Credit Risk, at ¶ 7 (2005)

(“Judgment is required to determine whether loan products have terms that give

rise to a concentration of credit risk.”). A company, or its auditor, has not

exercised “judgment” in deciding whether to disclose a significant credit risk if it

never realized (or never consciously ignored signs) that it was exposed to the risk

in the first place.

       The Plaintiffs do not contest the rule advanced by FBR—that they must

allege facts sufficient to raise an inference that Thornburg believed it had a

significant concentration of risk in its $2.9 billion of purchased MBSs backed by

                                         -27-
Alt-A loans. Rather, they insist they have alleged the requisite facts. For two

reasons, we disagree.

      First, the September prospectus demonstrates that Thornburg was

concerned about the overall MBS market. The decline in its MBS assets had

triggered margin calls and forced Thornburg to sell over $20 billion of its highest-

rated assets. Thornburg was concerned this trend would continue and warned

investors about this possibility. The Plaintiffs have put forward no allegations

that Thornburg saw its MBSs backed by Alt-A loans as significantly more risky

than its other MBSs, such that it needed to make additional disclosures.

      Second, given the relatively small role the purchased MBSs backed by

Alt-A loans figured in the overall portfolio, no inference is raised from the assets’

mere existence that Thornburg saw them as (or consciously ignored the possibility

they were) a significant concentration of credit risk. Accordingly, the Plaintiffs

have not pleaded facts demonstrating Thornburg violated its disclosure

obligations under Regulation S-X.

      Given our conclusion that Thornburg had no duty to disclose the $2.9

billion in MBSs, under either Regulation S-K or S-X, we need not consider

whether the omission was material.

      C. Disclosure of Cross-Default Provisions

      The Plaintiffs’ second non-disclosure argument contends Thornburg

violated § 11 by failing to disclose in the September offering the cross-default

                                         -28-
provisions in Thornburg’s repurchase agreements. The Plaintiffs advance

multiple theories of liability.

             1. Misleading Statement in the September Offering

      As an initial matter, the Plaintiffs contend that Thornburg made a material

omission by failing to include in its September offering documents a disclosure

that its repurchase agreements contained cross-default provisions. The result of

these provisions was that a default on any one of the agreements triggered a

default on all of them. The Plaintiffs contend that this omission made misleading

the following statement:

      Because we borrow money under Reverse Repurchase Agreements
      . . . based on the fair value of our ARM Assets, our borrowing ability
      under these agreements could be limited and lenders could initiate
      margin calls in the event of interest rate changes or if the value of
      our ARM Assets declines for other reasons.

Supp. App. 703.

      Yet the Plaintiffs cannot show how the omission of the cross-default

provisions made the statement misleading. The statement merely mentions

Thornburg’s dependence on repurchase agreements to borrow money and that a

decline in the value of their ARM assets could trigger a margin call. There is no

mention about the possibility of failing to meet a margin call or its consequences.

Default, let alone cascading default, is an entirely different subject that is not

even broached in the statement. Because the statement gives no impression, one




                                          -29-
way or the other, about the effect on the company of failing to meet a margin call,

there is no basis for believing the statement was misleading.

      Given our conclusion that the statement was not misleading, we need not

consider whether the omission was material.

             2. Duty to Disclose in the September Offering - Regulation S-K

      The Plaintiffs also argue that Thornburg had an obligation to disclose the

cross-default provisions under Item 303 of Regulation S-K, which requires,

among other things, disclosure of known trends or uncertainties that are

reasonably likely or are reasonably expected to affect a company’s liquidity or

earnings. 17 C.F.R. § 229.303(a)(1), (a)(3)(ii). FBR contends that the Plaintiffs

have failed to plead sufficient knowledge for a violation of Item 303. Subsection

(a)(1) requires allegations that the cross-default provisions were “reasonably

likely” to be triggered, thereby harming Thornburg’s liquidity, and subsection

(a)(3)(ii) requires allegations that Thornburg “reasonably expect[ed]” the cross-

default provisions to have an adverse impact on its earnings.

      We agree with FBR that the Plaintiffs have failed to allege the necessary

facts. The state of the mortgage market as of the September offering does not

raise an inference that there was a reasonable likelihood the cross-default

provisions in Thornburg’s repurchase agreements would be triggered due to an

unprecedented slump. Cf. Fulton Cnty. Emps. Ret. Sys. v. MGIC Inv. Corp., 675

F.3d 1047, 1050 (7th Cir. 2012) (“The subprime market had been in decline

                                        -30-
during the first half of 2007, but that did not necessarily imply a continuing

slump, let alone a collapse. For every seller of subprime loans in 2007 who

thought them overpriced, there was a buyer who expected to make a profit when

the market went back up.” (citing academic articles on the subprime credit

crisis)).

       The Plaintiffs provide no allegations raising the inference that Thornburg

knew the cross-default provisions were reasonably likely to be triggered. The

complaint itself refers to the fact that Thornburg had been able to meet its margin

calls up to then. Only if the prime and subprime mortgage markets collapsed at

the same time would the value of Thornburg’s collateral decline to such an extent

that the size of the margin calls would raise the specter of default, thereby

triggering the cross-default provisions. Notwithstanding cautionary language in

the prospectus about the future of the mortgage market, nothing in the complaint

suggests Thornburg should have seen this catastrophic collapse as a reasonable

likelihood (rather than a mere possibility) at the time of the September offering.

Accordingly, Thornburg had no obligation under Item 303 to disclose the

existence of the cross-default provisions.

       Given our conclusion that Thornburg had no duty to disclose the cross-

default provisions under Regulation S-K, we need not consider whether the

omission was material.




                                         -31-
      D. Restatement of Financials

      As the third and final basis for liability, the Plaintiffs argue that the May,

June, and September offering documents were materially misleading because they

incorporated Thornburg’s 2006 financial statement, which allegedly contained

material misstatements. This claim stems from a letter by KPMG, Thornburg’s

outside auditor, which, on March 4, 2008, stated that Thornburg’s 2006 and 2007

annual statements “contain material misstatements associated with available for

sale securities.” App. 119. Such misstatements, if true, would be violations of

GAAP; and, as already noted, companies whose offering documents are not in

compliance with GAAP are in violation of Regulation S-X, 17 C.F.R. § 210.4-

01(a)(1), thus potentially leading to liability under § 11 of the Securities Act.

The Plaintiffs do not point to any specific misstatements, but rely only on

KPMG’s disclosure that the 2006 and 2007 statements contain material

misstatements.

      The reality, though, is that KPMG approved Thornburg’s 2006 financials.

Following the release of the March 4 letter, Thornburg restated its 2007

financials, but left untouched its 2006 financials. In response, KPMG wrote a

letter, dated March 7, stating that it had reviewed Thornburg’s restatements and

“we agree with such statements.” Supp. App. 884. The district court concluded,

and the Underwriters argue here, that this letter was an implicit approval of both

the original 2006 financials and the restated 2007 financials. The Plaintiffs

                                         -32-
contend that this inference is an impermissible evaluation of the facts, and that

there is an alternate, equally plausible interpretation of KPMG’s March 7, 2008

letter—that KPMG still thought the 2006 financials were misleading.

      Yet any ambiguity in the March 7 letter is cleared up in an auditing

statement included with Thornburg’s refiling of its 2007 10-K statement on March

11, 2008. In that statement, KPMG says it has “audited the accompanying

consolidated balance sheets . . . as of December 31, 2007 and 2006” and

determined that they “present fairly, in all material respects, the financial position

of Thornburg,” and that the statements were “in conformity with U.S. generally

accepted accounting principles.” Supp. App. 538. The statement is dated

February 27, 2008 “except as to Notes 1, 2, and 13, which are as of March 9,

2008.” Id. at 539. In Notes 1 and 2, KPMG explains that the basis of

Thornburg’s 2007 restatement was the proper valuation of certain MBS assets that

would have to be sold to meet margin calls. Id. at 545–46. There is no mention

of the 2006 financials, nor any other indication that their contents were

misleading. The 2006 financials were only included in the 2007 10-K statement,

as is customary, to provide a point of comparison. Cf. Deephaven Private

Placement Trading, Ltd. v. Grant Thornton & Co., 454 F.3d 1168, 1170 (10th Cir.

2006) (referring to similar auditing language as “standard language of the

profession”). Given this practice of automatically grouping the past two years

together, it is highly unlikely that KPMG would have remained silent after

                                         -33-
Thornburg’s correction if its accountants thought the 2006 financials were

problematic.

         KPMG’s statements, along with Thornburg’s decision not to restate its

2006 financials, conclusively defeat any claim that relies solely on the March 4

KPMG letter. Because the Plaintiffs do not make any additional allegations

concerning Thornburg’s 2006 financial statements, the Plaintiffs have not

adequately alleged an actionable misrepresentation or omission to state a § 11

claim.

                                  III. Conclusion

         The Plaintiffs have not alleged sufficient facts demonstrating Thornburg

made an actionable misrepresentation or omission at the time of its stock

offerings. As a result, they have not stated a § 11 Securities Act claim against

any of the Underwriters. Accordingly, we AFFIRM the district court’s dismissal.




                                         -34-
