    12-3859
    Liberty Mutual Ins. Co. v. Goldman, Sachs & Co.



                    UNITED STATES COURT OF APPEALS
                        FOR THE SECOND CIRCUIT

                                SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER
FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF
APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY
ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX
OR AN ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”).         A PARTY CITING A
SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.



         At a stated term of the United States Court of Appeals
    for the Second Circuit, held at the Thurgood Marshall
    United States Courthouse, 40 Foley Square, in the City of
    New York, on the 15th day of May, two thousand thirteen.

    PRESENT:
                 DENNIS JACOBS,
                      Chief Judge,
                 ROBERT D. SACK,
                      Circuit Judge,
                 JED S. RAKOFF,*
                      District Judge.

    - - - - - - - - - - - - - - - - - - - - - -X

    IN RE: FANNIE MAE 2008 SECURITIES LITIGATION                      12-3859

    - - - - - - - - - - - - - - - - - - - - - -X

    JOHN A GENOVESE, ROBERT M. ROLLINS, NICHOLAS
    CRISAFI, STELLA CRISAFI, FOGEL CAPITAL


             *
            Judge Jed S. Rakoff, of the United States District
       Court for the Southern District of New York, sitting by
       designation.
MANAGEMENT, INC., DENNIS SANDMAN, KAREN
ORKIN, ANTHONY ESPOSITO, FRANK MCALONAN,
WILLIAM R. WHITE, STEVE LATIMER, BRIAN
JARMAIN, MALKA KRAUSZ, DONALD W. MCCAULEY,
DAVID L. FRANKFURT, FRANKFURT FAMILY LTD.,
THE DAVID FRANKFURT 2000 FAMILY TRUST, THE
DAVID FRANKFURT 2002 FAMILY TRUST, CHERYL
STRONG, WILLIAM BERMAN, STEPHEN H.
SCHWEITZER, LINDA P. SCHWEITZER, LYNN
WILLIAMS, STEVEANN WILLIAMS, SUSAN KRAUS,
PHILLIP MELTON, DANIEL KRAMER, DAVID GWYER,
COMPREHENSIVE INVESTMENT SERVICES, INC.,
MARY P. MOORE, INDIVIDUALLY AND ON BEHALF
OF ALL OTHERS SIMILARLY SITUATION, EDWARD
SMITH,
         Plaintiffs,

LIBERTY MUTUAL INSURANCE COMPANY, LIBERTY
MUTUAL FIRE INSURANCE COMPANY, PEERLESS
INSURANCE COMPANY, SAFECO CORPORATION,
LIBERTY LIFE ASSURANCE COMPANY OF BOSTON,
         Plaintiffs-Appellants,

         v.

STEPHEN B. ASHLEY, DANIEL H. MUDD,
STEPHEN M. SWAD, ROBERT, J. LEVIN, LEHMAN
BROTHERS, INC., J.P. MORGAN SECURITIES
INC., CITIGROUP GLOBAL MARKET INC.,
MERRILL LYNCH, PIERCE FENNER & SMITH
INCORPORATED, MORGAN STANLEY & CO.,
INCORPORATED, UBS SECURITIES LLC,
WACHOVIA CAPITAL MARKETS LLC, WASHINGTON
MUTUAL BANK, FA, FEDERAL NATIONAL HOME
MORTGAGE ASSOCIATION, DENNIS BERESFORD,
DENNIS BERESFORD, LOUIS FREEH, BRENDA
GAINES, FREDERICK B. HARVEY, III, DAVID
HISEY, KAREN HORN, BRIDGET MACASKILL,
PETER NICULESCU, LESLIE RAHL, JOHN SITES,
JR., GREG SMITH, H. PATRICK SWYGERT, JOHN
WULFF, BANC OF AMERICA SECURITIES LLC,


                            2
    BARCLAYS CAPITAL INC., DEUTSCHE BANK
    SECURITIES INC., FTN FINANCIAL SECURITIES
    CORP., WELLS FARGO SECURITIES LLC, BEAR
    STEARNS & CO., INC., FEDERAL NATIONAL
    MORTGAGE ASSOCIATION, AKAK FANNIE MAE,
    FITCH RATINGS, MOODY’S INVESTORS SERVICE,
    INC., HERBERT M. ALLISON, DAVID C. BENSON,
    BRIAN COBB, JUDITH C. DUNN, JOHN DOES, 1 -
    10, LINDA K. KNIGHT, ANTHONY F. MARRA,
    BRIAN P. MCQUAID, ANNE F. PANKAU, DAVID
    H. SIDWELL, BETTY THOMPSON, CHRISTINA A.
    WOLF, ROBERT T. BLAKELY, ENRICO
    DALLAVECCHIA, JPMORGAN CHASE & CO., FANNIE
    MAE,
             Defendants,

    GOLDMAN, SACHS & CO.,
             Defendant-Appellee.

    - - - - - - - - - - - - - - - - - - - - -X

    FOR APPELLANT:         JAMES R. SAFLEY, Robins, Caplin,
                           Miller & Ciresi L.L.P, Minneapolis,
                           Minnesota (Christopher P. Sullivan,
                           Thomas B. Hatch, Robins, Caplin,
                           Miller & Ciresi L.L.P, Boston,
                           Massachusetts, on the brief).

    FOR APPELLEE:          JONATHAN K. YOUNGWOOD, Simpson
                           Thacher & Bartlett LLP, New York,
                           New York (Craig S. Waldman, Shannon
                           Price Torres, Simpson Thacher &
                           Bartlett LLP, New York, New York,
                           on the brief).

1        Appeal from a judgment of the United States District
2   Court for the Southern District of New York (Crotty, J.).
3
4        UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,
5   ADJUDGED, AND DECREED that the judgment of the district
6   court is AFFIRMED.
7


                                   3
 1        Liberty Mutual Insurance Company (“Liberty”)1 appeals
 2   from a judgment of the United States District Court for
 3   the Southern District of New York (Crotty, J.) dismissing
 4   its Second Amended Complaint for failure to state a claim
 5   upon which relief may be granted. We assume the parties’
 6   familiarity with the underlying facts, procedural history
 7   of the case, and issues on appeal.
 8
 9        We review de novo a dismissal under Federal Rule of
10   Civil Procedure 12(b)(6). See In re Citigroup ERISA
11   Litig., 662 F.3d 128, 135 (2d Cir. 2011).
12
13        Liberty sues Goldman, Sachs & Co. (“Goldman”) for its
14   conduct as lead underwriter of certain stock offerings
15   made by the Federal National Mortgage Association (“Fannie
16   Mae”) in September and December 2007, transactions which
17   resulted in Liberty’s loss of $62.5 million. According to
18   the complaint, Goldman drafted and disseminated offering
19   documents falsely representing that Fannie Mae’s capital
20   exceeded statutory and regulatory requirements, and failed
21   to disclose that Fannie Mae had inadequate write-downs and
22   loss reserves for its exposure to approximately $700
23   billion in risky subprime and Alt-A mortgages. Liberty
24   alleges violations of Rule 10b-5 of the Securities
25   Exchange Act of 1934, the Massachusetts and Washington
26   securities acts, and the Massachusetts and Washington
27   unfair and deceptive trade practices statutes, as well as
28   common law fraud and negligent misrepresentation. The
29   district court concluded that all seven of Liberty’s
30   claims failed because, inter alia, Liberty had not alleged
31   an actionable misstatement or omission.2 We agree.
32
33        Liberty’s claims rely principally on Fannie Mae’s 2008
34   Form 10-K, which increased write-downs and loan loss
35   reserves by billions of dollars over previous years. Had
36   Fannie Mae taken these write-downs and set aside these

          1
            “Liberty” refers to all five appellants: Liberty
     Mutual Insurance Company, Liberty Mutual Fire Insurance
     Company, Peerless Insurance Company, Safeco Corporation, and
     Liberty Life Assurance Company of Boston.
          2
            Liberty does not appeal the district court’s
     dismissal of its 10b-5 claim (Count I).
                                  4
 1   loss reserves earlier (i.e., prior to Liberty’s
 2   investment), it is alleged that the company would not have
 3   met its statutory and regulatory core capital
 4   requirements, could not have paid any dividends, and
 5   therefore could not have attracted investors.
 6
 7        This is a classic example of pleading fraud by
 8   hindsight: the “plaintiff has simply seized upon
 9   disclosures made in later . . . reports and alleged that
10   they should have been made in earlier ones.” Denny v.
11   Barber, 576 F.2d 465, 470 (2d Cir. 1978) (Friendly, J.).
12   While “greater clairvoyance” might have led Fannie Mae to
13   record write-downs earlier, “failure to make such
14   perceptions does not constitute fraud.” Id.; see also
15   Acito v. IMCERA Grp., Inc., 47 F.3d 47, 53 (2d Cir. 1995).
16   Courts have consistently rejected such claims. See, e.g.,
17   NECA-IBEW Pension Trust Fund v. Bank of Am. Corp., No. 10
18   Civ. 440 (LAK) (HBP), 2012 WL 3191860, at *13 (S.D.N.Y.
19   Feb. 9, 2012) (Pitman, M.J.) (“[T]he mere fact that BAC’s
20   writedowns subsequently turned out to be insufficient--or
21   were substantially smaller than the write-downs taken by
22   industry peers with ‘similar’ portfolios--would not render
23   those figures false at the time that they were publicly
24   filed with the SEC.”) (footnote and citations omitted);
25   Plumbers & Steamfitters Local 773 Pension Fund v. Can.
26   Imperial Bank of Commerce, 694 F. Supp. 2d 287, 301
27   (S.D.N.Y. 2010) (dismissing claim that defendant “should
28   have recorded much larger write-downs earlier than it
29   did”).
30
31        To be sure, this does not mean that subsequent facts
32   and circumstances cannot lend support to a claim that a
33   prior allegedly fraudulent statement was false at the time
34   it was made. After all, “fraud claims by their very
35   nature involve self-concealing conduct,” S.E.C. v.
36   Gabelli, 653 F.3d 49, 59 (2d Cir. 2011), rev’d on other
37   grounds, 133 S. Ct. 1216 (2013), and thus are always
38   uncovered only after the fact. For this reason, we have,
39   in appropriate circumstances, relied on subsequent events
40   to infer a plausible claim for fraud. See, e.g., Novak v.
41   Kasaks, 216 F.3d 300, 312-13 (2d Cir. 2000) (“[T]he
42   complaint provides specific facts concerning the Company’s
43   significant write-off of inventory directly following the
44   Class Period, which tends to support the plaintiffs’

                                 5
 1   contention that inventory was seriously overvalued at the
 2   time the purportedly misleading statements were made.”);
 3   Rothman v. Gregor, 220 F.3d 81, 92 (2d Cir. 2000) (“[W]e
 4   deem significant the amount of the write-off [the
 5   defendant company] eventually did take . . . .”).
 6
 7        In this case, however, the representations regarding
 8   Fannie Mae’s core capital necessarily incorporated
 9   imperfect business judgments and predictions about the
10   future, which later proved mistaken. Given the market
11   turmoil that intervened in time between the alleged
12   misrepresentations and Fannie Mae’s subsequent write-downs
13   and loss reserve increases, any inference we might draw
14   based on those subsequent events is attenuated. Without
15   more, we cannot conclude that plaintiffs have plausibly
16   pled that the predictive judgments that informed the core
17   capital representations were so flawed when made as to
18   amount to fraud.
19
20        Finding no merit in Liberty’s remaining arguments, we
21   hereby AFFIRM the judgment of the district court.
22
23
24                              FOR THE COURT:
25                              CATHERINE O’HAGAN WOLFE, CLERK
26




                                  6
