Broker-Dealer Litigation - Greenberg Traurig LLP

allegation of fraud. The complaint was premised on the argument that rating agencies can be held
liable as underwriters for alleged violation of the Securities Act, which the Court rejected as
“without merit” because “the text, case law, legislative history, and purpose of the statute” prove
that Congress intended for the Securities Act only to apply to those who participate in statutory
underwriting (including the purchase of securities with a view towards distribution), or in
offering or selling securities in connection with a distribution, not in the structuring or creation of
securities. Securities Act claims therefore cannot be brought against rating agencies, which do
not engage in the underwriting procedures and distributional activities explicitly identified in the
statute, and which more resemble “experts” under the Securities Act, given their role in assessing
creditworthiness, rather than “underwriters”.
Litwin v. Blackstone Group, L.P., 634 F.3d 706 (2d Cir. 2011).
The Court of Appeals for the Second Circuit vacated and remanded the district court’s
dismissal of plaintiffs-appellants’ putative class action complaint alleging violation of, inter alia,
Section 11 of the Securities Act of 1933 following an IPO in which the health of certain
Blackstone portfolio companies and real estate fund investments was at issue. Reviewing de
novo, the Court held that plaintiffs-appellants had plausibly alleged that downward trends in real
estate were known at the time of the IPO, were reasonably likely to have a material impact on
Blackstone’s financial condition, and were therefore material and subject to a duty to disclose
under Item 303 and Section 11. The Court rejected Blackstone’s argument that its structure as a
private equity firm required a finding of immateriality as a matter of law. Qualitative factors
found to render material a quantitatively small misstatement included the importance of the subperforming
portfolio companies to Blackstone’s overall operations, and that the omissions
masked a reasonably likely change in earnings, and “doubtless” increase in management
compensation. The disclosures regarding Blackstone’s real estate assets also were actionable
(notwithstanding plaintiffs’ inability to establish a clear “link” between the declining residential
real estate market and Blackstone’s investment in commercial real estate) because Blackstone
had at least one residential real estate investment in its portfolio, because residential real estate
allegedly constituted as much as $3 billion and 15% of real estate assets under management, and
because “complex securitizations of residential mortgages” might reasonably be expected to
have adverse effects on commercial real estate investments, as conceded in Blackstone’s
disclosures.
Hutchison v. Deutsche Bank Sec. Inc., 2011 WL 3084969 (2d Cir. July 26, 2011).
The Court of Appeals for the Second Circuit affirmed the district court’s dismissal of
plaintiff-appellant’s second amended class action complaint against a real estate financing
company alleging violation of, inter alia, Section 11 of the Securities Act of 1933 resulting from
allegedly false statements and omissions about the impairment of two mezzanine loans, which
defendants-appellees allegedly had a duty to disclose under Item 303 of Regulation S-K.
Reviewing de novo, the Court applied quantitative and qualitative analyses, holding that where
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