On August 10, 2012, the Southern District of New York found that the Second Circuit’s decision in Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011) (Parker, J.) “constitute[d] a change in intervening law warranting reconsideration” of the court’s earlier order denying in part the defendants’ motions to dismiss a securities fraud suit against Deutsche Bank AG. In re Deutsche Bank AG Sec. Litig., 2012 WL 3297730, at *1 (S.D.N.Y. Aug. 10, 2012) (Batts, J.).  


The plaintiffs brought claims under Sections 11 and 15 of the Securities Act alleging that Deutsche Bank’s “internal valuation systems were faulty.” Id. at *2. With respect to securities offerings in 2007 and 2008, the plaintiffs claimed that Deutsche Bank’s “internal valuations of subprime and mortgage-backed assets were inconsistent with market indices” and asserted that “a more accurate valuation may have required the [c]ompany to disclose those holdings[.]” Id. As to a May 2008 securities offering, the plaintiffs alleged that Deutsche Bank had “relied on faulty Value-at- Risk (‘VAR’) metrics, resulting in trading losses almost 700% above stated V[A]R limits.” Id.  

The defendants moved to dismiss the complaint. On August 19, 2011, the Southern District of New York granted in part and denied in part the defendants’ motion. Just four days later, the Second Circuit issued its decision in Fait holding that “valuation decisions such as goodwill and statements of loan loss reserves are ‘opinions’ rather than facts, and will not give rise to liability unless a plaintiff can ‘plausibly allege that [the] defendants did not believe the statements … at the time they made them.’” Id. at *2 (quoting Fait, 655 F.3d at 112). (Please click here to read our discussion of the Fait opinion in the September 2011 edition of the Alert.)  

In City of Omaha, NE Civilian Emps. Ret. Sys. v. CBS Corp., 679 F.3d 64 (2d Cir. 2012) (per curiam), the Second Circuit relied on Fait to hold that allegations that defendants “should have known that their valuation decisions were false or misleading will not state a plausible claim for relief under the Securities Act.” Deutsche Bank, 2012 WL 3297730, at *2. The City of Omaha court found that “[a]fter Fait, [p]laintiffs must allege that [d]efendants did not believe their valuation statements at the time they made them.” Id. (citing City of Omaha, 679 F.3d at 68). (Please click here to read our discussion of the City of Omaha decision in the May 2012 edition of the Alert.)  

The defendants moved for reconsideration of the court’s August 19, 2011 decision on the grounds that “Fait is an intervening change in the governing law.” Id. at *1.

Fait Is a Change in Controlling Law Warranting Reconsideration of the Court’s August 2011 Decision

“Reconsideration is … appropriate when there has been a change in controlling law.” Id. (citing King County, WA v. IKB Deutche Industriebank AG, 2012 WL 2160285, at *1 (S.D.N.Y. June 7, 2012) (Scheindlin, J.). The Southern District of New York found it “clear” that the Second Circuit’s rulings in Fait and City of Omaha represented “a change in intervening law” warranting reconsideration of the court’s August 2011 decision. Id. at *2 (citing In re General Elec. Co. Sec. Litig., 2012 WL 1371016, at *5 (S.D.N.Y. Apr. 18, 2012) (Cote, J.) (granting reconsideration to consider the impact of Fait on a prior decision)).

The Complaint Fails to Allege That the Defendants Did Not Believe Their Valuations When Made

Turning to the complaint, the Southern District of New York found that the “allegations suggest that the [d]efendants were wrong, and perhaps egregiously so, in their internal valuation metrics.” Id. Nevertheless, the court explained that under Fait, “such valuations are matter[s] of opinion rather than fact.” Id. “Accordingly, [p]laintiffs must allege that [the] [d]efendants did not honestly believe those valuations when made.” Id. The court noted that “[t]he [c]omplaint in this matter contains no such allegations.” Id.  

The Southern District of New York also found it significant that “the claims in the [c]omplaint ‘exclusively rely on theories of strict liability and negligence.’” Id. The plaintiffs “therefore specifically aver that none of their claims are based on knowing misconduct by the [d]efendants.” Id. The court held that “[t]his alone is fatal to [the] [p]laintiffs’ claims after Fait.” Id. (citing In re General Elec. Sec. Litig., 2012 WL 1371016, at *9) (finding statement that allegations were not based on ‘knowing misconduct’ equivalent to a concession that statements of opinion were not disbelieved when made).

The court granted the defendants’ motion for reconsideration, dismissing the complaint in its entirety with prejudice and without leave to replead. Id. at *3.