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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT of NEW YORK ------X : : in RE WACHOVIA EQUITY : No UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ----------------------------------------------------------------x : : IN RE WACHOVIA EQUITY : No. 08 Civ. 6171 (RJS) SECURITIES LITIGATION : ECF CASE : : -----------------------------------------------------------------: : : IN RE WACHOVIA PREFERRED SECURITIES : Master File No. 09 Civ. 6351 (RJS) AND BOND/NOTES LITIGATION : ECF CASE : : ----------------------------------------------------------------x CONSOLIDATED MEMORANDUM OF LAW IN SUPPORT OF THE WACHOVIA DEFENDANTS’ MOTIONS TO DISMISS THE AMENDED CONSOLIDATED CLASS ACTION COMPLAINTS Douglas H. Flaum Israel David Eric A. Hirsch Courtney A. Jean FRIED, FRANK, HARRIS SHRIVER & JACOBSON LLP One New York Plaza New York, New York 10004 (212) 859-8000 [email protected] Attorneys for the Wachovia Defendants TABLE OF CONTENTS Page(s) TABLE OF AUTHORITIES ......................................................................................................... iii TABLE OF SOURCES................................................................................................................. xii TABLE CROSS-REFERENCING CONFIDENTIAL WITNESSES IN THE BOND NOTES COMPLAINTS ................................................................................................ xviii PRELIMINARY STATEMENT .....................................................................................................1 FACTUAL BACKGROUND ..........................................................................................................5 ARGUMENT .................................................................................................................................13 I. COUNTS I AND II OF THE EQUITY ACTION SHOULD BE DISMISSED FOR FAILURE TO ADEQUATELY ALLEGE SCIENTER ....................................................13 A. The Motive and Opportunity Allegations Fail .......................................................15 1. The Stock “Sales” Do Not Support an Inference of Scienter ....................16 2. Allegations Concerning Corporate Acquisitions & Offerings Do Not Support an Inference of Scienter .........................................................24 3. The Economic Irrationality of the Supposed Scheme Undercuts an Inference of Scienter .............................................................................25 B. There Is No Circumstantial Evidence of Scienter ..................................................25 1. No Contact with the Individual Defendants ...............................................26 2. Fraudulent Underwriting Allegations Fail .................................................27 3. The Bond Notes Confidential Witnesses Undermine Any Scienter Claim ..........................................................................................................30 4. Another Institution’s Cumulative Loss Estimate Does Not Support an Inference of Scienter ..................................................................................31 5. Wachovia’s Risk Management Structure Does Not Support an Inference of Scienter ..................................................................................32 6. Wachovia’s April 2008 Adjustments to Its Underwriting Standards Add Nothing to Plaintiffs’ Scienter Claims ...............................................34 7. Unspecified Internal Reports Do Not Support an Inference of Scienter ......................................................................................................35 i II. THE CLASS ACTION COMPLAINTS FAIL TO PLEAD FALSITY ............................36 A. Plaintiffs’ Securities Act Claims Sound in Fraud and Are Subject to the Heightened Pleading Requirements of Rule 9(b) ..................................................36 B. Plaintiffs’ Conclusory Allegations Fail .................................................................38 C. The Unchallenged Characteristics of the Pick-a-Pay Portfolio .............................38 D. The Confidential Witness Allegations Do Not Plead Falsity ................................41 1. Plaintiffs’ Unsupported or Empty Allegations Should Be Disregarded ................................................................................................42 2. Plaintiffs’ Inadequately Described Witnesses Should Be Ignored ............47 3. Paul Bishop’s Observations Do Not Support Plaintiffs’ Claims ...............48 4. Plaintiffs’ Confidential Witness-Based Underwriting Claims Fail ...........49 E. Plaintiffs’ Allegations of Materially Misstated LTV Ratios Fail ..........................60 F. Plaintiffs’ Loan Loss Reserves Claim Fails ...........................................................65 G. 7.5% Annual Cap and Loan Recast Features Were Accurately Described ...........67 H. Loan Charge-Off Policies Were Accurately Described .........................................68 I. Plaintiffs Fail to Plead Facts Supporting the Assertion that Wachovia Misrepresented Its Underwriting and Risk Profile ................................................69 J. Referenced Documents Do Not Show Falsity .......................................................70 K. Plaintiffs’ CDO Allegations Fail to State a Claim .................................................71 L. Plaintiffs’ GAAP Allegations Fail to State a Claim ..............................................77 III. THE EXCHANGE ACT CLAIMS MUST BE DISMISSED FOR FAILURE TO PLEAD LOSS CAUSATION ..........................................................................................................80 IV. BOND NOTES PLAINTIFFS’ CLAIMS SUFFER FROM STANDING AND STATUTE OF LIMITATIONS DEFECTS.......................................................................82 V. PLAINTIFFS’ SECONDARY LIABILITY CLAIMS SHOULD BE DISMISSED ......................................................................................................................83 CONCLUSION ..............................................................................................................................84 ii TABLE OF AUTHORITIES CASES Page(s) Acito v. IMCERA Group, Inc., 47 F.3d 47 (2d Cir. 1995) ..................................................................................................19, 72 Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009) .............................................................................................................38 ATSI Commc’ns Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007)...................................................................................................5 n.3 Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) .................................................................................................................38 Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975) ...................................................................................................................4 Caiafa v. Sea Containers Ltd., 525 F. Supp. 2d 398 (S.D.N.Y. 2007) ..............................................................................26 n.33 Cal. Pub. Employees Ret. Sys. v. Chubb Corp., 394 F.3d 126 (3d Cir. 2004)...............................................................................................42, 56 Campo v. Sears Holdings Corp., 635 F. Supp. 2d 323 (S.D.N.Y. 2009), aff’d, 2010 WL 1292329 (2d Cir. Apr. 6, 2010) ...............................................................................26 Chill v. General Elec. Co., 101 F.3d 263 (2d Cir. 1996).....................................................................................................15 City of Austin Police Ret. Sys. v. ITT Educ. Servs., Inc., 388 F. Supp. 2d 932 (S.D. Ind. 2005) ......................................................................................52 Coronel v. Quanta Capital Holdings, Ltd., 2009 WL 174656 (S.D.N.Y. Jan. 23, 2009) ................................................................ 63-64, 78 Davidoff v. Farina, 2005 WL 2030501 (S.D.N.Y. Aug. 22, 2005) .........................................................................25 DiLeo v. Ernst & Young, 901 F.2d 624 (7th Cir. 1990) ...................................................................................................72 Dura Pharms., Inc. v. Broudo, 544 U.S. 336 (2005) .......................................................................................14, 69 n.71, 80, 82 Durham v. Whitney Info. Network, Inc., 2009 WL 3783375 (M.D. Fla. Nov. 10, 2009) ........................................................................60 iii ECA v. JP Morgan Chase Co., 553 F.3d 187 (2d Cir. 2009)............................................................................................. passim Epirus Capital Management LLC v. Citigroup Inc., 2010 WL 1779348 (S.D.N.Y. Apr. 29, 2010)..........................................................................31 Fadem v. Ford Motor Co., 2003 WL 22227961 (S.D.N.Y. Sept. 25, 2003) .................................................................50, 76 Fait v. Regions Fin. Corp., 2010 WL 1883487 (S.D.N.Y. May 10, 2010) ...................................................................66, 79 First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763 (2d Cir. 1994).......................................................................................................81 Garber v. Legg Mason, Inc., 537 F. Supp. 2d 597 (S.D.N.Y. 2008), aff’d, 347 Fed. App’x 665 (2d Cir. 2009) ..................................................................................72 n.73 Garr v. U.S. Healthcare, Inc., 22 F.3d 1274 (3d Cir. 1994).............................................................................................26
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