The U.S. District Court in Manhattan recently dismissed a securities class action brought by a proposed class of investors, alleging that the company and two of its senior officers violated Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and SEC Rule 10b-5 by making false or materially misleading disclosures about the company’s risk management and exposure to mortgage-related securities. Plumbers’ Union Local No. 12 Pension Fund v. Swiss Reinsurance Company, et al., No. 08-cv-01958 (S.D.N.Y). Click here for a copy of the decision. The court’s decision was based on its findings that: (1) §10(b) and Rule 10b-5 did not apply to the company, whose stock was not traded on a domestic stock exchange; and (2) plaintiff failed to allege fraud with the required particularity.

As to the first finding, the court explained that the company’s stock was traded on the Swiss stock exchange and that the plaintiff purchased shares of the company’s stock on a foreign exchange. Under the Supreme Court’s rule announced in Morrison v. National Australia Bank, Ltd., 130 S. Ct. 2869 (2010), the prior conduct and effects tests could not be used to determine liability under §10(b), because that provision of the Exchange Act does not apply to securities traded or listed on exchanges outside the United States.

Plaintiffs argued that they could assert their claims under state common law and that the court would have diversity of citizenship jurisdiction over such a claim. Accordingly, the court next evaluated whether the complaint failed to allege fraud with particularity as required by Fed. R. Civ. P. 9(b). Specifically, the court considered the defendants’ argument that the second amended complaint failed to allege with particularity either materially false or misleading statements or scienter.

Plaintiffs asserted the following three categories of allegedly false or misleading statements made by the defendants: (1) defendants falsely or misleading misrepresented that they possessed minimal exposure to sub-prime and other risky mortgage securities; (2) defendants falsely represented that they employed sound risk management practices; and (3) defendants failed to mark to market the true value of the credit default swaps they sold. The court found all three arguments unavailing.

Finally, the court agreed that the plaintiffs failed to plead scienter with particularity. The court explained that plaintiffs did not allege that the defendants had motive to commit fraud, but rather, had attempted to show conscious misbehavior or recklessness, which would require very strong circumstantial allegations. However, here the plaintiffs had failed to sufficiently allege false or misleading statements and had failed to raise a strong inference of conscious misbehavior. The court noted that even if the alleged misstatements had been actionable, the plaintiffs “failed to allege with particularity any contrary information that rendered defendants’ statements reckless.”