     10-1535-cv
     Sheet Metal Workers Local No. 33 et al. v. CBRE Realty Fin., Inc. et al.

 1                      UNITED STATES COURT OF APPEALS
 2
 3                           FOR THE SECOND CIRCUIT
 4
 5                              August Term, 2010
 6
 7
 8         (Argued: June 1, 2011              Decided: July 26, 2011)
 9
10                            Docket No. 10-1535-cv
11
12   - - - - - - - - - - - - - - - - - - - - - - - - - -x
13
14   PHILIP HUTCHISON, Individually and On Behalf of
15   All Others Similarly Situated,
16
17                           Plaintiff,
18
19   SHEET METAL WORKERS LOCAL NO. 33, Lead Plaintiff,
20   ALFRED IVERS, Lead Plaintiff, WEST PALM BEACH
21   FIREFIGHTERS PENSION FUND,
22
23                           Plaintiffs-Appellants,
24
25               -v.-
26
27   DEUTSCHE BANK SECURITIES INC., CITIGROUP GLOBAL
28   MARKETS INC., WACHOVIA CAPITAL MARKETS, LLC,
29   JMP SECURITIES LLC, CREDIT SUISSE SECURITIES
30   (USA) LLC,
31
32                           Defendants,
33
34   CBRE REALTY FINANCE, INC., KEITH GOLLENBERG,
35   MICHAEL ANGERTHAL, RAY WIRTA,
36
37                           Defendants-Appellees.
38
39   - - - - - - - - - - - - - - - - - - - - - - - - - -x
40

41
42
 1       Before:       JACOBS, Chief Judge, LIVINGSTON, Circuit
 2                     Judge, and RAKOFF,* District Judge.
 3
 4       Plaintiffs-Appellants Sheet Metal Workers Local 33 et

 5   al. appeal from an August 11, 2009 judgment of the United

 6   States District Court for the District of Connecticut

 7   (Underhill, J.), dismissing their putative securities class

 8   action complaint pursuant to Federal Rule of Civil Procedure

 9   12(b)(6) for failure to state a claim.    The complaint

10   alleged that the securities issuer made false statements and

11   omissions of material facts in the registration documents

12   accompanying its initial public offering, in violation of

13   Sections 11, 12(a)(2) and 15 of the Securities Act of 1933.

14   We conclude that the alleged misstatements were not material

15   because the value of the transactions composed an immaterial

16   portion of the issuer’s total assets.    Affirmed.

17                 SUSAN K. ALEXANDER (Sanford Svetcov, San
18                 Francisco, CA and Samuel H. Rudman, David A.
19                 Rosenfeld, and Evan J. Kaufman, New York, NY,
20                 on the briefs), Robbins Geller Rudman & Dowd
21                 LLP, San Francisco, CA, for Plaintiffs-
22                 Appellants.
23
24                 ROBERT S. FISCHLER (Justin J. Wolosz and David
25                 T. Cohen, on the brief), Ropes & Gray LLP, New
26                 York, NY, for Defendants-Appellees.
27

         *
           The Honorable Jed S. Rakoff, of the United States
     District Court for the Southern District of New York,
     sitting by designation.
                                  2
 1   DENNIS JACOBS, Chief Judge:
 2
 3       Defendant-Appellee CBRE Realty Finance, Inc. (“CBRE”),

 4   a real estate financing company, floated its initial public

 5   offering (the “IPO”) in September 2006.       Among the

 6   purchasers were Plaintiffs-Appellants Sheet Metal Workers

 7   Local No. 33 and other plaintiffs (collectively,

 8   “Plaintiffs”) in this action.       They appeal from an August

 9   11, 2009 judgment of the United States District Court for

10   the District of Connecticut (Underhill, J.), granting a Fed.

11   R. Civ. P. 12(b)(6) motion to dismiss their putative

12   securities class action complaint for failure to state a

13   claim.   Plaintiffs alleged that CBRE and its Chief Executive

14   Officer Keith Gollenberg, Chief Financial Officer Michael

15   Angerthal, and Chairman of the Board Ray Wirta (the

16   “Defendants”) made false statements and omissions of

17   material facts in the registration statement and prospectus,

18   concerning the impairment of two mezzanine loans.         The

19   district court granted CBRE’s motion to dismiss on the

20   ground of immateriality, because the loans were fully

21   collateralized at the time of the IPO.       See Hutchison v.

22   CBRE Realty Fin., Inc., 638 F. Supp. 2d 265, 276 (D. Conn.

23   2009) (“Hutchison I”).   A motion to replead was denied.         We

24   affirm, albeit on somewhat different grounds.


                                     3
 1                               BACKGROUND

 2       Since this is an appeal from a Fed. R. Civ. P. 12(b)(6)

 3   dismissal, the following facts are drawn from Plaintiffs’

 4   Second Amended Class Action Complaint for Violations of

 5   Federal Securities Laws (the “Second Amended Complaint”),

 6   and are accepted as true.    See Slayton v. Am. Express Co.,

 7   604 F.3d 758, 766 (2d Cir. 2010).        We also rely on

 8   information derived from CBRE’s filings with the Securities

 9   and Exchange Commission (“SEC”) and other documents that are

10   invoked by the complaint.    See ATSI Commc’ns, Inc. v. Shaar

11   Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (“[W]e may

12   consider any written instrument attached to the complaint,

13   statements or documents incorporated into the complaint by

14   reference, legally required public disclosure documents

15   filed with the SEC, and documents possessed by or known to

16   the plaintiff and upon which it relied in bringing the

17   suit.”).

18       CBRE is a commercial real estate speciality finance

19   company focused on originating, acquiring, investing,

20   financing, and managing commercial real estate-related loans

21   and securities.   Its investment portfolio consists of: whole

22   loans; subordinated interests in first mortgage real estate


                                     4
 1   loans; real estate-related mezzanine loans; commercial

 2   mortgage-backed securities; and joint venture investments.

 3       On September 26, 2006, CBRE filed an SEC Form S-11/A

 4   Registration Statement (the “Registration Statement”) for

 5   its IPO.   The Registration Statement offered 9,600,000

 6   common shares to the public at $14.50 per share.     The

 7   underwriters were granted an option to purchase up to an

 8   additional 1,440,000 common shares at $14.50 per share.     The

 9   SEC declared the prospectus effective on September 27, 2006.

10   The IPO raised approximately $144 million.

11       At the time of the IPO, two mezzanine loans were

12   outstanding to developer Triton Real Estate Partners, LLC

13   (“Triton”).   As defined in CBRE’s prospectus, investments in

14   mezzanine loans “take the form of subordinated loans secured

15   by second mortgages on the underlying property or loans

16   secured by a pledge of the ownership interests in the entity

17   that directly or indirectly owns the property.”     The first

18   loan, with a carrying value of $19.7 million, was made on or

19   about October 31, 2005 and was collateralized by The Rodgers

20   Forge, a 508-unit condominium conversion project in North

21   Bethesda, Maryland (the “Rodgers Forge Loan”).     The second

22   loan, with a carrying value of $31.8 million, was made on or



                                   5
 1   about November 8, 2005 and was collateralized by The

 2   Monterey, a 434-unit condominium conversion project in

 3   Rockville, Maryland (the “Monterey Loan,” and together with

 4   the Rodgers Forge Loan, the “Triton Loans”).

 5       The Second Amended Complaint alleges that Defendants

 6   knew that these mezzanine loans were in trouble at the time

 7   of the IPO.   Triton had missed tax payments on both The

 8   Rodgers Forge and The Monterey, sales were declining at both

 9   condominiums, and The Monterey development was over budget.1

10   CBRE had entered into an Intercreditor Agreement in or

11   around November 2005 with Freemont Investment and Loan

12   (“Freemont”), the senior lender on the Monterey Loan.      Under

13   that agreement, CBRE and Freemont were required to keep each

14   other apprised of any developments with respect to The

15   Monterey, including whether the project was experiencing any

16   financial difficulties.   According to a former regional

17   manager at Freemont, Triton had exceeded the construction

18   budget for The Monterey by approximately $3-$5 million by

19   the summer of 2006, and as a result of this “out-of-balance”

20   condition, Freemont stopped funding its senior loan on

         1
           For this allegation, Plaintiffs relied on information
     from a confidential witness who had been a CBRE
     underwriter/financial analyst, and worked at CBRE from June
     2005 to June 2007.
                                   6
 1   several occasions.   During the summer of 2006, Freemont

 2   discussed the “out-of-balance” condition with Triton;

 3   pursuant to the Intercreditor Agreement, Freemont would also

 4   have been required to inform CBRE.

 5       Other allegations concerning Triton’s troubles include:

 6   cost overruns due to unforeseen asbestos removal and

 7   unexpected mechanical and electrical issues at The Monterey;

 8   mechanics liens filed against both projects, claiming non-

 9   payment of contractors in mid-2006; Triton’s solicitation of

10   additional funding from equity investors; and Triton’s

11   default on payments to sub-contractors, which caused the

12   sub-contractors to halt construction on both projects.

13       The Second Amended Complaint alleges that CBRE’s

14   Registration Statement was materially inaccurate because it

15   failed to disclose that the Triton Loans were “impaired” (a

16   defined term2).   The Registration Statement reported that


         2
           The Registration Statement defined “impairment” as
     follows:

         Loans and other investments are considered to be
         impaired, for financial reporting purposes, when it is
         deemed probable that the Company will be unable to
         collect all amounts due according to the contractual
         terms of the original agreements, or, for loans
         purchased at a discount for credit quality, when the
         Company determines that it is probable that it will be
         unable to collect as anticipated.
                                   7
 1   CBRE had reviewed its portfolio of loans and did not

 2   “identify any loans that exhibit[ed] characteristics

 3   indicating that impairment ha[d] occurred.”

 4       On February 26, 2007, five months after the IPO, CBRE

 5   “announc[ed] its financial results for the fourth quarter

 6   [of 2006].”   The press release indicated that as of December

 7   31, 2006 CBRE had classified the Monterey Loan as

 8   “non-performing” and that the Rodgers Forge Loan was on

 9   CBRE’s “watch list,” but that CBRE “had no impairments or

10   loss reserves since inception.” (“Non-performing” and “watch

11   list” are defined in the margin.3)   Following the press

12   release, CBRE’s common stock price dropped more than 18%

13   over the two-day period ending February 28, 2007.

14       CBRE reported more bad news in the following months.


         3
             CBRE defined “non-performing” as:

         (1) management determines the borrower is incapable of
         curing, or has ceased efforts towards curing the cause
         of a default; (2) the loan becomes 90 days delinquent;
         (3) the loan has a maturity default; or (4) the net
         realizable value of the loan’s underlying collateral
         approximates our carrying value of such loan.

     CBRE defined “watch list” as:

         [A] review . . . designed to enable management to
         evaluate and proactively manage asset-specific credit
         issues and identify credit trends on a portfolio-wide
         basis as an “early warning system.”
                                     8
 1   Its year-end 2006 Form 10-K (filed on or about March 26,

 2   2007) reported that CBRE had advanced approximately $1.7

 3   million to protect its mezzanine loan position in The

 4   Rodgers Forge.   A May 7, 2007 press release disclosed that,

 5   as of April 25, 2007, CBRE was no longer pursuing equity

 6   real estate investments through joint ventures, and that on

 7   May 4, 2007, CBRE foreclosed on the Rodgers Forge Loan.       On

 8   May 9, 2007, CBRE foreclosed on the Monterey Loan.     CBRE

 9   wrote down the value of both loans, and incurred a $7.8

10   million impairment charge with regard to the write-down of

11   the Monterey Loan.

12       On January 15, 2009, Defendants moved to dismiss the

13   Second Amended Complaint pursuant to Fed. R. Civ. P.

14   12(b)(6), arguing that the Second Amended Complaint failed

15   to plausibly allege that the prospectus contained a material

16   misstatement or omission.   On July 29, 2009, the district

17   court issued an order dismissing the Second Amended

18   Complaint for failure to state a claim.   Judgment was

19   entered on August 11, 2009, dismissing the action and

20   closing the file.

21       The district court held that Plaintiffs did not

22   plausibly allege that the omissions concerning the Triton



                                   9
 1   Loans were material because, as reflected in CBRE’s SEC

 2   filings, the Triton Loans were fully collateralized by the

 3   underlying real estate.    Therefore, the district court

 4   reasoned, “CBRE was not at risk” of a material loss on the

 5   loans “at the time that the registration statement and

 6   prospectus issued.”    Hutchison I, 638 F. Supp. 2d at 275.

 7   The district court did not “rely on any quantitative

 8   benchmarks to assess the materiality of the alleged

 9   omissions at issue in this case.”     Id. at 277.

10       After the dismissal, Plaintiffs moved for

11   reconsideration or, in the alternative, for leave to file a

12   Proposed Third Amended Complaint.     The motion was denied.

13   The district court found that Plaintiffs were attempting to

14   relitigate the issue of materiality, and that the

15   allegations they claimed had been overlooked had in fact

16   been considered.    Hutchison v. CBRE Realty Fin., Inc., No.

17   07-cv-1599, 2010 WL 1257495, at *2 (D. Conn. Mar. 25, 2010)

18   (“Hutchison II”).     In denying Plaintiffs’ request for leave

19   to file a Proposed Third Amended Complaint, the district

20   court held that the proposed pleading added no relevant

21   factual allegations and would have been futile.     Id. at *3.

22   Specifically, the district court noted that “[b]ecause the


                                     10
 1   Triton Loans were adequately collateralized at the time of

 2   the IPO, there existed no risk of a loss to CBRE at that

 3   time.    The facts as pled in the Proposed Third Amended

 4   Complaint fail once again to rectify the deficiencies

 5   concerning the materiality of the omissions.”        Id.   As a

 6   separate ground for denying leave to amend, the court ruled

 7   that Plaintiffs had inordinately delayed seeking leave to

 8   amend (for a third time) by waiting until after the entry of

 9   judgment dismissing the Second Amended Complaint, nearly two

10   years after the litigation began.       Id. at *4.

11

12                              DISCUSSION

13       “We review de novo the dismissal of a complaint under

14   Rule 12(b)(6), accepting all factual allegations as true and

15   drawing all reasonable inferences in favor of the

16   plaintiff.”    ECA & Local 134 IBEW Joint Pension Trust of

17   Chicago v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir.

18   2009).   “Where, as here, dismissed claims arise under § 11,

19   we conduct a ‘preliminary inquiry’ into whether

20   [P]laintiffs’ allegations are premised on fraud so as to

21   require satisfaction of the heightened pleading standards of

22   Fed. R. Civ. P. 9(b).”    In re Lehman Bros. Mortg.-Backed


                                    11
 1   Sec. Litig., --- F.3d ---, 2011 WL 1778726, at *4 (2d Cir.

 2   May 11, 2011) (quoting In re Morgan Stanley Info. Fund Sec.

 3   Litig., 592 F3d 347, 358 (2d Cir. 2010)).     We will not,

 4   however, apply the heightened pleading standard of Rule 9(b)

 5   where the complaint sounds in negligence, rather than fraud.

 6   See, e.g., Litwin v. Blackstone Grp., L.P., 634 F.3d 706,

 7   715 (2d Cir. 2011).   Here, Plaintiffs “expressly disclaim[]

 8   any allegation of fraud . . . and [D]efendants do not

 9   contend otherwise.”   In re Lehman Bros., 2011 WL 1778726, at

10   *4.   “Accordingly, we review the complaint[’s] sufficiency

11   under the notice-pleading standard, which requires

12   [P]laintiffs to assert enough facts to state a claim to

13   relief that is plausible on its face.”     Id. (internal

14   quotation marks omitted).   “A claim has facial plausibility

15   when the plaintiff pleads factual content that allows the

16   court to draw the reasonable inference that the defendant is

17   liable for the misconduct alleged.”   Ashcroft v. Iqbal, 556

18   U.S. ––––, 129 S. Ct. 1937, 1949 (2009).

19                                 I.

20                                 A.

21         Section 11 of the Securities Act provides a private

22   right of action to a person who purchased a security, either

23   directly from the issuer or in the aftermarket, if the

                                   12
 1   registration statement filed with the SEC contained either

 2   misstatements or omissions of material facts.      See 15 U.S.C.

 3   § 77k(a).   Similarly, Section 12(a)(2) imposes liability on

 4   the issuer or seller of securities if the securities were

 5   sold using a prospectus that contained a material

 6   misstatement or omission.   See id. § 77l(a)(2).     “So long as

 7   a plaintiff establishes one of the three bases for liability

 8   under these provisions--(1) a material misrepresentation;

 9   (2) a material omission in contravention of an affirmative

10   legal disclosure obligation; or (3) a material omission of

11   information that is necessary to prevent existing

12   disclosures from being misleading, see In re Morgan Stanley,

13   592 F.3d at 360--then, in a Section 11 case, ‘the general

14   rule [is] that an issuer’s liability . . . is absolute.’”

15   Blackstone, 634 F.3d at 715-16 (quoting In re Initial Pub.

16   Offering Sec. Litig., 483 F.3d 70, 73 n.1 (2d Cir. 2007)).

17   Section 15 creates liability for individuals or entities

18   that “control[] any person liable” under Sections 11 or 12.

19   15 U.S.C. § 77o(a).

20       “Issuers are subject to ‘virtually absolute’ liability

21   under section 11,” In re Morgan Stanley, 592 F.3d at 359

22   (quoting Herman & MacLean v. Huddleston, 459 U.S. 375, 382

23   (1983)), and plaintiffs alleging violations of Sections 11

                                   13
 1   and 12(a)(2) not need plead “scienter, reliance, or loss

 2   causation,” id. (citing Rombach v. Chang, 355 F.3d 164, 169

 3   n.4 (2d Cir. 2004)).

 4       Plaintiffs principally cite Item 303 of Regulation S-K,

 5   17 C.F.R. § 229.303, as the disclosure obligation that was

 6   breached.4   Item 303 requires that a registrant “[d]escribe

 7   any known trends or uncertainties that have had or that the

 8   registrant reasonably expects will have a material favorable

 9   or unfavorable impact on net sales or revenues or income

10   from continuing operations.”   17 C.F.R. § 229.303(a)(3)(ii).

11   “The SEC’s interpretive release regarding Item 303 clarifies

12   that the Regulation imposes a disclosure duty ‘where a

13   trend, demand, commitment, event or uncertainty is both [1]

14   presently known to management and [2] reasonably likely to

15   have material effects on the registrant’s financial

         4
           Plaintiffs assert that Defendants also breached a
     disclosure obligation created by Item 503 of Regulation S-K,
     17 C.F.R. § 229.503. Item 503 requires that a registrant
     “[w]here appropriate, provide . . . a discussion of the most
     significant factors that make the offering speculative or
     risky.” Id. § 229.503(c). On appeal, Plaintiffs advance no
     arguments unique to Item 503, focusing instead primarily on
     Defendants’ disclosure obligations under Item 303.
     Moreover, to the extent we conclude that the impairment of
     the Triton Loans and Triton’s financial difficulties prior
     to the IPO did not constitute facts “reasonably likely” to
     be material under Item 303, see Blackstone, 634 F.3d at 716,
     we similarly conclude that they were not among “the most
     significant factors” rendering CBRE’s IPO “speculative or
     risky,” 17 C.F.R. § 229.503(c).
                                    14
 1   condition or results of operations.’”     Blackstone, 634 F.3d

 2   at 716 (quoting Management’s Discussion and Analysis of

 3   Financial Condition and Results of Operations, Securities

 4   Act Release No. 6835, Exchange Act Release No. 26,831,

 5   Investment Company Act Release No. 16,961, 43 SEC Docket

 6   1330 (May 18, 1989)).

 7                                   B.

 8          The Triton Loans were $51.5 million out of a total

 9   investment portfolio of more than $1.1 billion; but, as

10   Plaintiffs emphasize, the Triton Loans made up a much larger

11   proportion--approximately 25%--of CBRE’s mezzanine loan

12   portfolio.

13          To determine whether a misstatement or omission is

14   material is an “inherently fact-specific” inquiry.     Basic v.

15   Levinson, 485 U.S. 224, 236 (1988).     A fact “‘is material if

16   there is a substantial likelihood that a reasonable

17   shareholder would consider it important in deciding how to

18   [act].’”     Id. at 231 (quoting TSC Indus., Inc. v. Northway,

19   Inc., 426 U.S. 438, 449 (1976)).     That is to say “there must

20   be a substantial likelihood that the disclosure of the

21   omitted fact would have been viewed by the reasonable

22   investor as having significantly altered the ‘total mix’ of

23   information made available.”     TSC Indus., Inc., 426 U.S. at

24   449.

                                     15
 1       “[W]e have consistently rejected a formulaic approach

 2   to assessing the materiality of an alleged

 3   misrepresentation.”   Ganino v. Citizens Utils. Co., 228 F.3d

 4   154, 162 (2d Cir. 2000).   “In both Ganino and [JP Morgan],

 5   we cited with approval SEC Staff Accounting Bulletin No. 99,

 6   64 Fed. Reg. 45,150 (1999) . . . , which provides relevant

 7   guidance regarding the proper assessment of materiality.”

 8   Blackstone, 634 F.3d at 717.   According to SEC Staff

 9   Accounting Bulletin No. 99 (“SAB No. 99”), “[t]he use of a

10   percentage as a numerical threshold such as 5%, may provide

11   the basis for a preliminary assumption” of materiality, but

12   a bright line percentage “cannot appropriately be used as a

13   substitute for a full analysis of all relevant

14   considerations.”   64 Fed. Reg. at 45,151.   Among useful

15   qualitative factors are (1) “whether the misstatement

16   concerns a segment or other portion of the registrant’s

17   business that has been identified as playing a significant

18   role in the registrant’s operations or profitability,” 64

19   Fed. Reg. at 45,152, and (2) whether management expects

20   “that the misstatement will result in a significant market

21   reaction,” JP Morgan, 553 F.3d at 198.

22



                                    16
 1                                II.

 2       CBRE’s Registration Statement represented that loans or

 3   other investments would be considered impaired “when it is

 4   deemed probable that [CBRE] will be unable to collect all

 5   amounts due according to the contractual terms of the

 6   original agreements.”   In the Second Amended Complaint,

 7   Plaintiffs rely on the statements of several confidential

 8   witnesses to support their allegations concerning CBRE’s

 9   knowledge that the Triton Loans were impaired.     One witness,

10   a former regional manager of Freemont, explained that prior

11   to the IPO, Freemont was in constant discussions with Triton

12   about the out-of-balance condition of its loan and that the

13   out-of-balance condition caused Triton to seek a $5 to $10

14   million capital infusion from a group of outside investors.

15   As previously discussed, Freemont and CBRE entered into an

16   Intercreditor Agreement after they closed on the Monterey

17   loans; the Agreement provided that “Freemont communicate

18   with CBRE upon the occurrence of potential default events .

19   . . . [and that] one such potential event of default . . .

20   required that Freemont notify CBRE upon the occurrence of a

21   so-called ‘out-of-balance’ condition, which is more commonly

22   referred to as a construction cost overrun.”     Freemont’s


                                   17
 1   contractually-mandated discussions with CBRE, Plaintiffs

 2   allege, should have apprised CBRE that the Monterey Loan was

 3   impaired, or at least likely to be impaired.

 4       Because we are at the pleading stage, we accept

 5   Plaintiffs’ allegations as true and draw all reasonable

 6   inferences in Plaintiffs’ favor.     See Johnson v. Rowley, 569

 7   F.3d 40, 43 (2d Cir. 2009) (per curiam).       Therefore, because

 8   Freemont was aware of cost overruns at The Monterey and

 9   because the Intercreditor Agreement required Freemont to

10   disclose potential default events to CBRE, a plausible

11   inference may be drawn that CBRE was aware of the cost

12   overruns and was thereby aware of an existing trend, event

13   or uncertainty under Item 303.     17 C.F.R.

14   § 229.303(a)(3)(ii); see Blackstone, 634 F.3d at 716

15   (observing that Item 303 “imposes a disclosure duty where a

16   trend, demand, commitment, event or uncertainty is both [1]

17   presently known to management and [2] reasonably likely to

18   have material effects on the registrant’s financial

19   condition or results of operations.”) (internal quotation

20   mark omitted).   “[T]he sole remaining issue is whether the

21   effect of the ‘known’ information was ‘reasonably likely’ to

22   be material for the purpose of Item 303 and, in turn, for



                                   18
 1   the purpose of Sections 11 and 12(a)(2).”    Blackstone, 634

 2   F.3d at 716.

 3

 4                                III.

 5       The district court, eliding any discussion of the

 6   traditional quantitative and qualitative factors used to

 7   assess materiality, instead dismissed the Second Amended

 8   Complaint on the sole ground that the alleged misstatements

 9   and omissions were not material because the Triton Loans

10   were adequately collateralized at the time of the IPO.     See

11   Hutchison I, 638 F. Supp. 2d at 275-76.     While this bright

12   line rule has considerable appeal, this is not a case in

13   which we should consider adopting it, because the

14   unambiguous wording of the Registration Statement defines

15   “impairment” in a way that discounts any issue of

16   collateralization:   “Loans and other investments are

17   considered to be impaired, for financial reporting purposes,

18   when it is deemed probable that the Company will be unable

19   to collect all amounts due according to the contractual

20   terms of the original agreements . . . .” (emphasis added).

21   Even assuming the Triton Loans were fully collateralized, a

22   loan default would result in (at least) a temporary loss to


                                   19
 1   CBRE because in the event of a default, CBRE would have to

 2   initiate foreclosure proceedings that would entail delay,

 3   fees, costs and prolonged uncertainty.    Even if CBRE could

 4   ultimately recover the full amount of its loan after a

 5   foreclosure, and even if a default ultimately “would not

 6   harm CBRE,” id. at 277,    CBRE would not have collected

 7   “according to the contractual terms of the original

 8   agreements.”    Without categorically rejecting the district

 9   court’s collateralization approach, we hold that it cannot

10   decide this case.    Adequacy of collateral is one of the

11   qualitative factors--but not the only one--that determines

12   whether a misstatement or omission concerning the loan is

13   material.

14       We therefore turn to quantitative measures.      To do so,

15   we must at the outset reconcile two recent decisions in our

16   Circuit, each of which analyzed whether statements in a

17   registration statement were material for purposes of a

18   Section 11 claim: ECA & Local 134 IBEW Joint Pension Trust

19   of Chicago v. JP Morgan Chase Co., 553 F.3d 187 (2d Cir.

20   2009), and Litwin v. Blackstone Grp., L.P., 634 F.3d 706 (2d

21   Cir. 2011).    In JP Morgan, the panel conducted a

22   quantitative materiality analysis that compared the value of



                                    20
 1   the troubled investment to the value of the defendant’s

 2   entire investment portfolio, whereas the Blackstone panel,

 3   conceding that the troubled investment did not meet the 5%

 4   quantitative threshold when considered as a part of the

 5   company’s entire portfolio, determined that the investment

 6   was qualitatively material nevertheless by weighing the

 7   impact of the troubled loan on the constituent part of

 8   Blackstone’s business in which the loan was located.

 9       In JP Morgan, plaintiffs alleged that JP Morgan Chase

10   Co. (“JP Morgan”) made material misstatements concerning $2

11   billion in prepay transactions that JP Morgan made to a

12   special purpose entity that, in turn, made loans to Enron

13   Corporation.   553 F.3d at 193.    We first looked to the

14   quantitative factors and observed:

15       Although $2 billion in prepay transactions may sound
16       staggering, the number must be placed in context--
17       reclassifying $2 billion out of one category of trading
18       assets (derivative receivables) totalling $76 billion
19       into another category (loan assets) totalling $212
20       billion does not alter JPMC’s total assets of $715
21       billion. Moreover, the underlying assets in either
22       classification carry some default risk. As the
23       district court said about this same information,
24       “[c]hanging the accounting treatment of approximately
25       0.3% of JPM Chase’s total assets from trades to loans
26       would not have been material to investors.”

27   Id. at 204 (quoting In re JP Morgan Chase Sec. Litig., 363

28   F. Supp. 2d 595, 631 (S.D.N.Y. 2005)) (internal citation

                                   21
 1   omitted).     On appeal, we approved the quantitative approach

 2   as “a good starting place for assessing the materiality of

 3   the alleged misstatement,” and reasoned that “[a]n

 4   accounting classification decision that affects less than

 5   one-third of a percent of total assets does not suggest

 6   materiality.”     Id.   We added that a further necessary

 7   consideration is the qualitative factors set forth in SAB

 8   No. 99.     Id.

 9         In Blackstone, the plaintiffs alleged that Blackstone

10   Group, L.P. (“Blackstone”) invested: (1) approximately $331

11   million in FGIC Corp., a monoline financial guarantor, 634

12   F.3d at 711; (2) $3.1 billion in Freescale Semiconductor,

13   Inc., a semiconductor designer and manufacturer, id.; and

14   (3) an undisclosed amount in residential real estate

15   investments, id. at 712.      Plaintiffs alleged that at the

16   time of Blackstone’s $4.5 billion IPO, FGIC faced massive

17   losses as a result of the housing market collapse, id. at

18   711, and that Freescale had lost an exclusive agreement to

19   manufacture chipsets for its largest customer, id. at 711-

20   12.   We conceded that “Blackstone’s investments in FGIC and

21   Freescale f[e]ll below the presumptive 5% threshold of

22   materiality,” but held that “the District Court erred in its



                                      22
 1   analysis of certain qualitative factors related to

 2   materiality.”   Id. at 719.    First, we held that Blackstone

 3   could not rely on its corporate structure to argue

 4   immateriality on the ground that a loss in one division was

 5   offset by a gain in another.    Id.    Second--and critical for

 6   present purposes--we held that the district court “erred in

 7   finding that the alleged omissions did not relate to a

 8   significant aspect of Blackstone’s operations.”     Id.    The

 9   Corporate Private Equity group was represented by Blackstone

10   to be its “flagship segment” and had a critical role in the

11   overall enterprise.   Id. at 720.     “Even where a misstatement

12   or omission may be quantitatively small compared to a

13   registrant’s firm-wide financial results”--Blackstone’s

14   investment in Freescale was a relatively minor piece of

15   Blackstone’s total investments, accounting for 9.4% of the

16   Corporate Private Equity segment’s assets under management--

17   “its significance to a particularly important segment of a

18   registrant’s business tends to show its materiality.”      Id.

19       We need to consider these two opinions together in

20   order to decide in this case whether to gauge the

21   materiality of the Triton Loans in terms of CBRE’s entire

22   portfolio or its portfolio of mezzanine loans only.       It is



                                     23
 1   clear that Blackstone does not purport to limit or affect

 2   the holding of JP Morgan: a panel is “bound by the decisions

 3   of prior panels until such time as they are overruled either

 4   by an en banc panel of our Court or by the Supreme Court.”

 5   United States v. Wilkerson, 361 F.3d 717, 732 (2d Cir.

 6   2004).    So we need to identify the crucial factor or fact

 7   that renders Blackstone consistent with the holding of JP

 8   Morgan.    It is this:   If a particular product or product-

 9   line, or division or segment of a company’s business, has

10   independent significance for investors, then even a matter

11   material to less than all of the company’s business may be

12   material for purposes of the securities laws.

13   Hypothetically, such a product or segment might be the

14   company’s original niche, its iconic or eponymous business,

15   critical to its reputation, or most promising for growth or

16   as an engine of revenue.    Thus Blackstone emphasized as a

17   qualitative factor that the Corporate Private Equity group

18   was the firm’s “flagship segment”: “a reasonable investor

19   would almost certainly want to know information related to

20   that segment that Blackstone reasonably expects will have a

21   material adverse effect on its future revenues.”

22   Blackstone, 634 F.3d at 720.



                                     24
 1       CBRE is “a commercial real estate speciality finance

 2   company that is primarily focused on originating, acquiring,

 3   investing, financing, and managing a diversified portfolio

 4   of commercial real estate-related loans and securities.”

 5   Plaintiffs claim that the entirety of the Triton Loans--

 6   $51.5 million--constituted “25% of CBRE’s mezzanine loans

 7   which were 60% of CBRE’s total capital, 27% of all of CBRE’s

 8   loans, and 21% of CBRE’s entire investment portfolio.”     Thus

 9   Plaintiffs isolate some of CBRE’s transactions (mezzanine

10   loans) as a notional division or segment in which the Triton

11   Loans could loom as material in quantitative terms.

12   However, Plaintiffs have not alleged (plausibly or

13   otherwise) that mezzanine loans constitute a component of

14   CBRE’s business that is of distinct interest to investors

15   other than as another component of CBRE’s book of business.

16   For a company that makes real estate loans, mezzanine loans

17   (which are one tier in the hierarchy of secured interests)

18   are not the subject of investors’ fixation.   So any alleged

19   impairment of the Triton Loans must be analyzed in relation

20   to CBRE’s entire investment portfolio ($1.1 billion),

21   consistent with the quantitative approach in JP Morgan.

22       In that light, the Triton Loans were not material.



                                  25
 1   Moreover, the Second Amended Complaint fails to allege how

 2   much of the Triton Loans was impaired at the time of the

 3   IPO.        It is alleged that when CBRE foreclosed on the Triton

 4   Loans, long after the IPO, it incurred a $7.8 million

 5   impairment charge on the write-down of the Monterey Loan;

 6   but it is not alleged that this figure (or some other dollar

 7   amount of impairment) was known to CBRE at the time of the

 8   IPO.5

 9           As to the qualitative analysis, Plaintiffs rely on two

10   SAB No. 99 factors to support their contention that the

11   misstatements and omissions were material: (A) CBRE’s stock

12   price drop following disclosure of the Triton Loans’


             5
           Plaintiffs seek to rely on facts outside the Second
     Amended Complaint--namely, CBRE’s counterclaims in a lawsuit
     filed against the principals of Triton in the United States
     District Court for the District of Maryland--to suggest that
     CBRE suffered $22.6 million in damages due to Triton’s
     default and that CBRE knew (prior to the IPO) that Triton
     was experiencing financial difficulties and might not have
     been able to make timely interest payments. See CBRE Fin.
     TRS, LLC v. McCormick, No. 08-cv-1964, 2009 WL 4782124, at
     *10 (D. Md. Dec. 8, 2009) (granting CBRE summary judgment
     and awarding more than $22.6 million in damages). Even
     assuming that either the district court below or this Court
     could consider those extraneous facts, $30.4 million ($7.8
     million impairment plus $22.6 million in damages) out of a
     total investment portfolio of $1.1 billion falls well short
     of SAB No. 99’s 5% threshold and is therefore presumed to be
     quantitatively immaterial. See 64 Fed. Reg. at 45,151; see
     also JP Morgan, 553 F.3d at 204 (analyzing misreported
     transaction as a portion of JP Morgan’s total assets).
                                        26
 1   impairment, and (B) the impact on a major portion of CBRE’s

 2   business.    See SAB No. 99, 64 Fed. Reg. at 45,152 (“Among

 3   the considerations that may well render material a

 4   quantitatively small misstatement . . . are-- . . . Whether

 5   the misstatement concerns a segment or other portion of the

 6   registrant’s business that has been identified as playing a

 7   significant role in the registrant’s operations or

 8   profitability . . . . [and] the demonstrated volatility of

 9   the price of a registrant’s securities in response to

10   certain types of disclosures . . . .”).

11       (A) Stock Drop.       The Second Amended Complaint alleges,

12   as cause and effect, that “the price of CBRE common stock

13   declined more than 18%, on extremely heavy [trading]

14   volume,” in the two days following CBRE’s February 26, 2007

15   press release reporting that the Monterey Loan was non-

16   performing and that the Rodgers Forge Loan was placed on

17   CBRE’s watch list.    However, that same press release

18   reported lower-than-expected 2006 fourth quarter financial

19   results.    CBRE Realty Finance, Inc., Fourth Quarter and Full

20   Year 2006 Results (Form 8-K) (February 26, 2007).      (That

21   press release also advised that the Triton Loans were fully

22   collateralized.    Id.)



                                      27
 1       The Second Amended Complaint also alleges, as cause and

 2   effect, that “the price of CBRE stock declined from $6.21

 3   per share to $4.25 per share, a decline of 32%[,] and 70%

 4   lower than the IPO price of $14.50, on extremely heaving

 5   trading volume,” after CBRE’s August 6, 2007 press release

 6   disclosing that CBRE had taken a $7.8 million impairment

 7   charge due to the write-down of the Monterey Loan and that

 8   CBRE had foreclosed in May 2007 on both The Monterey and The

 9   Rodgers Forge.   However, the disclosures in the August 2007

10   press release included that CBRE “ha[d] halted making new

11   investments in the near-term” and that CBRE was being

12   required to post an additional $26.7 million in collateral

13   by one of its primary lenders--something that CBRE stated in

14   its Prospectus could have dire consequences: “Posting

15   additional collateral to support our credit facilities will

16   reduce our liquidity and limit our ability to leverage our

17   assets.   In the event we do not have sufficient liquidity to

18   meet such requirements . . . . [it could] result in a rapid

19   deterioration of our financial condition and possibly

20   necessitate a filing for [bankruptcy protection].”   CBRE

21   Realty Finance, Inc., Second Quarter 2007 Results (Form 8-K)

22   (August 7, 2007).



                                   28
 1          These (insufficient) cause-and-effect allegations

 2   exemplify the warning in SAB No. 99 (which we adopted in JP

 3   Morgan): “[c]onsideration of potential market reaction to

 4   disclosure of a misstatement is by itself too blunt an

 5   instrument to be depended on in considering whether a fact

 6   is material.”    64 Fed. Reg. at 45,152 (internal quotation

 7   marks omitted); see JP Morgan, 553 F.3d at 205 (“SAB No. 99

 8   limits the usefulness of [market volatility] to instances

 9   where management expects ‘that a known misstatement may

10   result in a significant positive or negative market

11   reaction.’” (quoting SAB No. 99, 64 Fed. Reg. at 41,152)).

12   CBRE’s press releases were loaded with news (largely very

13   bad), any item of which could have caused CBRE’s stock price

14   to drop.    Moreover, CBRE had already reported the

15   foreclosures when they happened, in May 2007; so, that item

16   in the August 2007 press release was not information new to

17   the market.

18          As in JP Morgan, Plaintiffs have not pled facts “that

19   would permit the inference that [CBRE] expected that the

20   alleged [omissions concerning the Triton Loans would] result

21   in a significant market reaction.”    JP Morgan, 553 F.3d at

22   205.    Thus, the market’s reaction to CBRE’s press releases



                                    29
 1   does not “point towards qualitative materiality under SAB

 2   No. 99.”   Id.

 3       (B) Business Impact.    Plaintiffs’ contention that the

 4   impairment of the Triton Loans impacted a major segment of

 5   CBRE’s business fails for the same reasons we hold that the

 6   loans were not quantitatively material, i.e., the loans did

 7   not compose a significant portion of CBRE’s loan portfolio.

 8   Moreover, the fact that the Triton Loans were fully

 9   collateralized, as identified by CBRE in its May 7, 2007

10   Form 8-K, militates in favor of finding that a major segment

11   of CBRE’s business ultimately was not threatened by the

12   impairment of the loans.

13

14                                 IV.

15       Section 15 imposes joint and several liability on

16   “[e]very person who, by or through stock ownership, agency,

17   or otherwise . . . controls any person liable under” § 11.

18   15 U.S.C. § 77o(a).    “To establish § 15 liability, a

19   plaintiff must show a ‘primary violation’ of § 11 and

20   control of the primary violator by defendants.”    In re

21   Lehman Bros., 2011 WL 1778726, at *14 (quoting JP Morgan,

22   553 F.3d at 206–07).    Because Plaintiffs failed to plead a


                                    30
 1   § 11 claim, their § 15 claim necessarily fails.     See, e.g.,

 2   SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1472-73 (2d

 3   Cir. 1996).

 4

 5                                 V.

 6       We review denial of leave to amend under an “abuse of

 7   discretion” standard.   See, e.g., McCarthy v. Dun &

 8   Bradstreet Corp., 482 F.3d 184, 200 (2d Cir. 2007).     When

 9   the denial of leave to amend is based on a legal

10   interpretation, such as a determination that amendment would

11   be futile, a reviewing court conducts a de novo review.

12   See, e.g., Littlejohn v. Artuz, 271 F.3d 360, 362 (2d Cir.

13   2001) (“[I]f the denial of leave to amend is based upon a

14   legal interpretation . . . we review the decision de

15   novo.”); see also Gorman v. Consol. Edison Corp., 488 F.3d

16   586, 592 (2d Cir. 2007) (reviewing de novo a district

17   court’s denial of leave to amend on grounds of futility).

18       The district court ruled that “amending the complaint

19   would be futile because the proposed third amended complaint

20   fails to cure the pleading deficiency concerning materiality

21   that plagued the three previous iterations,” i.e., failure

22   to “allege a collateral shortfall at the time the


                                   31
 1   Registration Statement and prospectus issued.”     Hutchison

 2   II, 2010 WL 1257495, at *3.   Because we affirm the district

 3   court’s dismissal of Plaintiffs’ Second Amended Complaint on

 4   alternative grounds, we cannot affirm the denial of

 5   Plaintiffs’ motion to amend on the futility ground cited by

 6   the district court.5

 7       We affirm nevertheless.   As discussed above, even

 8   assuming Plaintiffs supplement their allegations with facts

 9   drawn from CBRE’s lawsuit in Maryland--i.e., that CBRE

10   suffered $22.6 million in damages--Plaintiffs’ allegations

11   fail to satisfy any of SAB No. 99’s quantitative or

12   qualitative materiality factors.     Amending the Second

13   Amended Complaint would be futile.

14

15                            CONCLUSION

16       The judgment of the district court is affirmed.




         5
           Plaintiffs did not raise any challenges to the
     district court’s denial of their motion for reconsideration;
     therefore, Plaintiffs have waived any such argument. See
     Norton v. Sam’s Club, 145 F.3d 114, 117 (2d Cir. 1998)
     (“Issues not sufficiently argued in the briefs are
     considered waived and normally will not be addressed on
     appeal.”).
                                   32
