Sheet Metal Workers Local No. 33 v. CBRE Realty Fin., Inc. ( 2011 )


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  •      10-1535-cv
    Sheet Metal Workers Local No. 33 et al. v. CBRE Realty Fin., Inc. et al.
    1                      UNITED STATES COURT OF APPEALS
    2
    3                           FOR THE SECOND CIRCUIT
    4
    5                              August Term, 2010
    6
    7
    8         (Argued: June 1, 2011              Decided: July 26, 2011)
    9
    10                            Docket No. 10-1535-cv
    11
    12   - - - - - - - - - - - - - - - - - - - - - - - - - -x
    13
    14   PHILIP HUTCHISON, Individually and On Behalf of
    15   All Others Similarly Situated,
    16
    17                           Plaintiff,
    18
    19   SHEET METAL WORKERS LOCAL NO. 33, Lead Plaintiff,
    20   ALFRED IVERS, Lead Plaintiff, WEST PALM BEACH
    21   FIREFIGHTERS PENSION FUND,
    22
    23                           Plaintiffs-Appellants,
    24
    25               -v.-
    26
    27   DEUTSCHE BANK SECURITIES INC., CITIGROUP GLOBAL
    28   MARKETS INC., WACHOVIA CAPITAL MARKETS, LLC,
    29   JMP SECURITIES LLC, CREDIT SUISSE SECURITIES
    30   (USA) LLC,
    31
    32                           Defendants,
    33
    34   CBRE REALTY FINANCE, INC., KEITH GOLLENBERG,
    35   MICHAEL ANGERTHAL, RAY WIRTA,
    36
    37                           Defendants-Appellees.
    38
    39   - - - - - - - - - - - - - - - - - - - - - - - - - -x
    40
    41
    42
    1       Before:       JACOBS, Chief Judge, LIVINGSTON, Circuit
    2                     Judge, and RAKOFF,* District Judge.
    3
    4       Plaintiffs-Appellants Sheet Metal Workers Local 33 et
    5   al. appeal from an August 11, 2009 judgment of the United
    6   States District Court for the District of Connecticut
    7   (Underhill, J.), dismissing their putative securities class
    8   action complaint pursuant to Federal Rule of Civil Procedure
    9   12(b)(6) for failure to state a claim.    The complaint
    10   alleged that the securities issuer made false statements and
    11   omissions of material facts in the registration documents
    12   accompanying its initial public offering, in violation of
    13   Sections 11, 12(a)(2) and 15 of the Securities Act of 1933.
    14   We conclude that the alleged misstatements were not material
    15   because the value of the transactions composed an immaterial
    16   portion of the issuer’s total assets.    Affirmed.
    17                 SUSAN K. ALEXANDER (Sanford Svetcov, San
    18                 Francisco, CA and Samuel H. Rudman, David A.
    19                 Rosenfeld, and Evan J. Kaufman, New York, NY,
    20                 on the briefs), Robbins Geller Rudman & Dowd
    21                 LLP, San Francisco, CA, for Plaintiffs-
    22                 Appellants.
    23
    24                 ROBERT S. FISCHLER (Justin J. Wolosz and David
    25                 T. Cohen, on the brief), Ropes & Gray LLP, New
    26                 York, NY, for Defendants-Appellees.
    27
    *
    The Honorable Jed S. Rakoff, of the United States
    District Court for the Southern District of New York,
    sitting by designation.
    2
    1   DENNIS JACOBS, Chief Judge:
    2
    3       Defendant-Appellee CBRE Realty Finance, Inc. (“CBRE”),
    4   a real estate financing company, floated its initial public
    5   offering (the “IPO”) in September 2006.       Among the
    6   purchasers were Plaintiffs-Appellants Sheet Metal Workers
    7   Local No. 33 and other plaintiffs (collectively,
    8   “Plaintiffs”) in this action.       They appeal from an August
    9   11, 2009 judgment of the United States District Court for
    10   the District of Connecticut (Underhill, J.), granting a Fed.
    11   R. Civ. P. 12(b)(6) motion to dismiss their putative
    12   securities class action complaint for failure to state a
    13   claim.   Plaintiffs alleged that CBRE and its Chief Executive
    14   Officer Keith Gollenberg, Chief Financial Officer Michael
    15   Angerthal, and Chairman of the Board Ray Wirta (the
    16   “Defendants”) made false statements and omissions of
    17   material facts in the registration statement and prospectus,
    18   concerning the impairment of two mezzanine loans.         The
    19   district court granted CBRE’s motion to dismiss on the
    20   ground of immateriality, because the loans were fully
    21   collateralized at the time of the IPO.       See Hutchison v.
    22   CBRE Realty Fin., Inc., 
    638 F. Supp. 2d 265
    , 276 (D. Conn.
    23   2009) (“Hutchison I”).   A motion to replead was denied.         We
    24   affirm, albeit on somewhat different grounds.
    3
    1                               BACKGROUND
    2       Since this is an appeal from a Fed. R. Civ. P. 12(b)(6)
    3   dismissal, the following facts are drawn from Plaintiffs’
    4   Second Amended Class Action Complaint for Violations of
    5   Federal Securities Laws (the “Second Amended Complaint”),
    6   and are accepted as true.    See Slayton v. Am. Express Co.,
    7   
    604 F.3d 758
    , 766 (2d Cir. 2010).        We also rely on
    8   information derived from CBRE’s filings with the Securities
    9   and Exchange Commission (“SEC”) and other documents that are
    10   invoked by the complaint.    See ATSI Commc’ns, Inc. v. Shaar
    11   Fund, Ltd., 
    493 F.3d 87
    , 98 (2d Cir. 2007) (“[W]e may
    12   consider any written instrument attached to the complaint,
    13   statements or documents incorporated into the complaint by
    14   reference, legally required public disclosure documents
    15   filed with the SEC, and documents possessed by or known to
    16   the plaintiff and upon which it relied in bringing the
    17   suit.”).
    18       CBRE is a commercial real estate speciality finance
    19   company focused on originating, acquiring, investing,
    20   financing, and managing commercial real estate-related loans
    21   and securities.   Its investment portfolio consists of: whole
    22   loans; subordinated interests in first mortgage real estate
    4
    1   loans; real estate-related mezzanine loans; commercial
    2   mortgage-backed securities; and joint venture investments.
    3       On September 26, 2006, CBRE filed an SEC Form S-11/A
    4   Registration Statement (the “Registration Statement”) for
    5   its IPO.   The Registration Statement offered 9,600,000
    6   common shares to the public at $14.50 per share.     The
    7   underwriters were granted an option to purchase up to an
    8   additional 1,440,000 common shares at $14.50 per share.     The
    9   SEC declared the prospectus effective on September 27, 2006.
    10   The IPO raised approximately $144 million.
    11       At the time of the IPO, two mezzanine loans were
    12   outstanding to developer Triton Real Estate Partners, LLC
    13   (“Triton”).   As defined in CBRE’s prospectus, investments in
    14   mezzanine loans “take the form of subordinated loans secured
    15   by second mortgages on the underlying property or loans
    16   secured by a pledge of the ownership interests in the entity
    17   that directly or indirectly owns the property.”     The first
    18   loan, with a carrying value of $19.7 million, was made on or
    19   about October 31, 2005 and was collateralized by The Rodgers
    20   Forge, a 508-unit condominium conversion project in North
    21   Bethesda, Maryland (the “Rodgers Forge Loan”).     The second
    22   loan, with a carrying value of $31.8 million, was made on or
    5
    1   about November 8, 2005 and was collateralized by The
    2   Monterey, a 434-unit condominium conversion project in
    3   Rockville, Maryland (the “Monterey Loan,” and together with
    4   the Rodgers Forge Loan, the “Triton Loans”).
    5       The Second Amended Complaint alleges that Defendants
    6   knew that these mezzanine loans were in trouble at the time
    7   of the IPO.   Triton had missed tax payments on both The
    8   Rodgers Forge and The Monterey, sales were declining at both
    9   condominiums, and The Monterey development was over budget.1
    10   CBRE had entered into an Intercreditor Agreement in or
    11   around November 2005 with Freemont Investment and Loan
    12   (“Freemont”), the senior lender on the Monterey Loan.      Under
    13   that agreement, CBRE and Freemont were required to keep each
    14   other apprised of any developments with respect to The
    15   Monterey, including whether the project was experiencing any
    16   financial difficulties.   According to a former regional
    17   manager at Freemont, Triton had exceeded the construction
    18   budget for The Monterey by approximately $3-$5 million by
    19   the summer of 2006, and as a result of this “out-of-balance”
    20   condition, Freemont stopped funding its senior loan on
    1
    For this allegation, Plaintiffs relied on information
    from a confidential witness who had been a CBRE
    underwriter/financial analyst, and worked at CBRE from June
    2005 to June 2007.
    6
    1   several occasions.   During the summer of 2006, Freemont
    2   discussed the “out-of-balance” condition with Triton;
    3   pursuant to the Intercreditor Agreement, Freemont would also
    4   have been required to inform CBRE.
    5       Other allegations concerning Triton’s troubles include:
    6   cost overruns due to unforeseen asbestos removal and
    7   unexpected mechanical and electrical issues at The Monterey;
    8   mechanics liens filed against both projects, claiming non-
    9   payment of contractors in mid-2006; Triton’s solicitation of
    10   additional funding from equity investors; and Triton’s
    11   default on payments to sub-contractors, which caused the
    12   sub-contractors to halt construction on both projects.
    13       The Second Amended Complaint alleges that CBRE’s
    14   Registration Statement was materially inaccurate because it
    15   failed to disclose that the Triton Loans were “impaired” (a
    16   defined term2).   The Registration Statement reported that
    2
    The Registration Statement defined “impairment” as
    follows:
    Loans and other investments are considered to be
    impaired, for financial reporting purposes, when it is
    deemed probable that the Company will be unable to
    collect all amounts due according to the contractual
    terms of the original agreements, or, for loans
    purchased at a discount for credit quality, when the
    Company determines that it is probable that it will be
    unable to collect as anticipated.
    7
    1   CBRE had reviewed its portfolio of loans and did not
    2   “identify any loans that exhibit[ed] characteristics
    3   indicating that impairment ha[d] occurred.”
    4       On February 26, 2007, five months after the IPO, CBRE
    5   “announc[ed] its financial results for the fourth quarter
    6   [of 2006].”   The press release indicated that as of December
    7   31, 2006 CBRE had classified the Monterey Loan as
    8   “non-performing” and that the Rodgers Forge Loan was on
    9   CBRE’s “watch list,” but that CBRE “had no impairments or
    10   loss reserves since inception.” (“Non-performing” and “watch
    11   list” are defined in the margin.3)   Following the press
    12   release, CBRE’s common stock price dropped more than 18%
    13   over the two-day period ending February 28, 2007.
    14       CBRE reported more bad news in the following months.
    3
    CBRE defined “non-performing” as:
    (1) management determines the borrower is incapable of
    curing, or has ceased efforts towards curing the cause
    of a default; (2) the loan becomes 90 days delinquent;
    (3) the loan has a maturity default; or (4) the net
    realizable value of the loan’s underlying collateral
    approximates our carrying value of such loan.
    CBRE defined “watch list” as:
    [A] review . . . designed to enable management to
    evaluate and proactively manage asset-specific credit
    issues and identify credit trends on a portfolio-wide
    basis as an “early warning system.”
    8
    1   Its year-end 2006 Form 10-K (filed on or about March 26,
    2   2007) reported that CBRE had advanced approximately $1.7
    3   million to protect its mezzanine loan position in The
    4   Rodgers Forge.   A May 7, 2007 press release disclosed that,
    5   as of April 25, 2007, CBRE was no longer pursuing equity
    6   real estate investments through joint ventures, and that on
    7   May 4, 2007, CBRE foreclosed on the Rodgers Forge Loan.       On
    8   May 9, 2007, CBRE foreclosed on the Monterey Loan.     CBRE
    9   wrote down the value of both loans, and incurred a $7.8
    10   million impairment charge with regard to the write-down of
    11   the Monterey Loan.
    12       On January 15, 2009, Defendants moved to dismiss the
    13   Second Amended Complaint pursuant to Fed. R. Civ. P.
    14   12(b)(6), arguing that the Second Amended Complaint failed
    15   to plausibly allege that the prospectus contained a material
    16   misstatement or omission.   On July 29, 2009, the district
    17   court issued an order dismissing the Second Amended
    18   Complaint for failure to state a claim.   Judgment was
    19   entered on August 11, 2009, dismissing the action and
    20   closing the file.
    21       The district court held that Plaintiffs did not
    22   plausibly allege that the omissions concerning the Triton
    9
    1   Loans were material because, as reflected in CBRE’s SEC
    2   filings, the Triton Loans were fully collateralized by the
    3   underlying real estate.    Therefore, the district court
    4   reasoned, “CBRE was not at risk” of a material loss on the
    5   loans “at the time that the registration statement and
    6   prospectus issued.”    Hutchison I, 
    638 F. Supp. 2d at 275
    .
    7   The district court did not “rely on any quantitative
    8   benchmarks to assess the materiality of the alleged
    9   omissions at issue in this case.”     
    Id. at 277
    .
    10       After the dismissal, Plaintiffs moved for
    11   reconsideration or, in the alternative, for leave to file a
    12   Proposed Third Amended Complaint.     The motion was denied.
    13   The district court found that Plaintiffs were attempting to
    14   relitigate the issue of materiality, and that the
    15   allegations they claimed had been overlooked had in fact
    16   been considered.    Hutchison v. CBRE Realty Fin., Inc., No.
    17   07-cv-1599, 
    2010 WL 1257495
    , at *2 (D. Conn. Mar. 25, 2010)
    18   (“Hutchison II”).     In denying Plaintiffs’ request for leave
    19   to file a Proposed Third Amended Complaint, the district
    20   court held that the proposed pleading added no relevant
    21   factual allegations and would have been futile.     Id. at *3.
    22   Specifically, the district court noted that “[b]ecause the
    10
    1   Triton Loans were adequately collateralized at the time of
    2   the IPO, there existed no risk of a loss to CBRE at that
    3   time.    The facts as pled in the Proposed Third Amended
    4   Complaint fail once again to rectify the deficiencies
    5   concerning the materiality of the omissions.”        Id.   As a
    6   separate ground for denying leave to amend, the court ruled
    7   that Plaintiffs had inordinately delayed seeking leave to
    8   amend (for a third time) by waiting until after the entry of
    9   judgment dismissing the Second Amended Complaint, nearly two
    10   years after the litigation began.       Id. at *4.
    11
    12                              DISCUSSION
    13       “We review de novo the dismissal of a complaint under
    14   Rule 12(b)(6), accepting all factual allegations as true and
    15   drawing all reasonable inferences in favor of the
    16   plaintiff.”    ECA & Local 134 IBEW Joint Pension Trust of
    17   Chicago v. JP Morgan Chase Co., 
    553 F.3d 187
    , 196 (2d Cir.
    18   2009).   “Where, as here, dismissed claims arise under § 11,
    19   we conduct a ‘preliminary inquiry’ into whether
    20   [P]laintiffs’ allegations are premised on fraud so as to
    21   require satisfaction of the heightened pleading standards of
    22   Fed. R. Civ. P. 9(b).”    In re Lehman Bros. Mortg.-Backed
    11
    1   Sec. Litig., --- F.3d ---, 
    2011 WL 1778726
    , at *4 (2d Cir.
    2   May 11, 2011) (quoting In re Morgan Stanley Info. Fund Sec.
    
    3 Litig., 592
     F3d 347, 358 (2d Cir. 2010)).     We will not,
    4   however, apply the heightened pleading standard of Rule 9(b)
    5   where the complaint sounds in negligence, rather than fraud.
    6   See, e.g., Litwin v. Blackstone Grp., L.P., 
    634 F.3d 706
    ,
    7   715 (2d Cir. 2011).   Here, Plaintiffs “expressly disclaim[]
    8   any allegation of fraud . . . and [D]efendants do not
    9   contend otherwise.”   In re Lehman Bros., 
    2011 WL 1778726
    , at
    10   *4.   “Accordingly, we review the complaint[’s] sufficiency
    11   under the notice-pleading standard, which requires
    12   [P]laintiffs to assert enough facts to state a claim to
    13   relief that is plausible on its face.”     
    Id.
     (internal
    14   quotation marks omitted).   “A claim has facial plausibility
    15   when the plaintiff pleads factual content that allows the
    16   court to draw the reasonable inference that the defendant is
    17   liable for the misconduct alleged.”   Ashcroft v. Iqbal, 556
    18   U.S. ––––, 
    129 S. Ct. 1937
    , 1949 (2009).
    19                                 I.
    
    20 A. 21
             Section 11 of the Securities Act provides a private
    22   right of action to a person who purchased a security, either
    23   directly from the issuer or in the aftermarket, if the
    12
    1   registration statement filed with the SEC contained either
    2   misstatements or omissions of material facts.      See 15 U.S.C.
    3   § 77k(a).   Similarly, Section 12(a)(2) imposes liability on
    4   the issuer or seller of securities if the securities were
    5   sold using a prospectus that contained a material
    6   misstatement or omission.   See id. § 77l(a)(2).     “So long as
    7   a plaintiff establishes one of the three bases for liability
    8   under these provisions--(1) a material misrepresentation;
    9   (2) a material omission in contravention of an affirmative
    10   legal disclosure obligation; or (3) a material omission of
    11   information that is necessary to prevent existing
    12   disclosures from being misleading, see In re Morgan Stanley,
    13   592 F.3d at 360--then, in a Section 11 case, ‘the general
    14   rule [is] that an issuer’s liability . . . is absolute.’”
    15   Blackstone, 
    634 F.3d at 715-16
     (quoting In re Initial Pub.
    16   Offering Sec. Litig., 
    483 F.3d 70
    , 73 n.1 (2d Cir. 2007)).
    17   Section 15 creates liability for individuals or entities
    18   that “control[] any person liable” under Sections 11 or 12.
    19   15 U.S.C. § 77o(a).
    20       “Issuers are subject to ‘virtually absolute’ liability
    21   under section 11,” In re Morgan Stanley, 592 F.3d at 359
    22   (quoting Herman & MacLean v. Huddleston, 
    459 U.S. 375
    , 382
    23   (1983)), and plaintiffs alleging violations of Sections 11
    13
    1   and 12(a)(2) not need plead “scienter, reliance, or loss
    2   causation,” 
    id.
     (citing Rombach v. Chang, 
    355 F.3d 164
    , 169
    3   n.4 (2d Cir. 2004)).
    4       Plaintiffs principally cite Item 303 of Regulation S-K,
    5   
    17 C.F.R. § 229.303
    , as the disclosure obligation that was
    6   breached.4   Item 303 requires that a registrant “[d]escribe
    7   any known trends or uncertainties that have had or that the
    8   registrant reasonably expects will have a material favorable
    9   or unfavorable impact on net sales or revenues or income
    10   from continuing operations.”   
    17 C.F.R. § 229.303
    (a)(3)(ii).
    11   “The SEC’s interpretive release regarding Item 303 clarifies
    12   that the Regulation imposes a disclosure duty ‘where a
    13   trend, demand, commitment, event or uncertainty is both [1]
    14   presently known to management and [2] reasonably likely to
    15   have material effects on the registrant’s financial
    4
    Plaintiffs assert that Defendants also breached a
    disclosure obligation created by Item 503 of Regulation S-K,
    
    17 C.F.R. § 229.503
    . Item 503 requires that a registrant
    “[w]here appropriate, provide . . . a discussion of the most
    significant factors that make the offering speculative or
    risky.” 
    Id.
     § 229.503(c). On appeal, Plaintiffs advance no
    arguments unique to Item 503, focusing instead primarily on
    Defendants’ disclosure obligations under Item 303.
    Moreover, to the extent we conclude that the impairment of
    the Triton Loans and Triton’s financial difficulties prior
    to the IPO did not constitute facts “reasonably likely” to
    be material under Item 303, see Blackstone, 
    634 F.3d at 716
    ,
    we similarly conclude that they were not among “the most
    significant factors” rendering CBRE’s IPO “speculative or
    risky,” 
    17 C.F.R. § 229.503
    (c).
    14
    1   condition or results of operations.’”     Blackstone, 
    634 F.3d 2
       at 716 (quoting Management’s Discussion and Analysis of
    3   Financial Condition and Results of Operations, Securities
    4   Act Release No. 6835, Exchange Act Release No. 26,831,
    5   Investment Company Act Release No. 16,961, 
    43 SEC Docket 6
       1330 (May 18, 1989)).
    
    7 B. 8
              The Triton Loans were $51.5 million out of a total
    9   investment portfolio of more than $1.1 billion; but, as
    10   Plaintiffs emphasize, the Triton Loans made up a much larger
    11   proportion--approximately 25%--of CBRE’s mezzanine loan
    12   portfolio.
    13          To determine whether a misstatement or omission is
    14   material is an “inherently fact-specific” inquiry.     Basic v.
    15   Levinson, 
    485 U.S. 224
    , 236 (1988).     A fact “‘is material if
    16   there is a substantial likelihood that a reasonable
    17   shareholder would consider it important in deciding how to
    18   [act].’”     
    Id. at 231
     (quoting TSC Indus., Inc. v. Northway,
    19   Inc., 
    426 U.S. 438
    , 449 (1976)).     That is to say “there must
    20   be a substantial likelihood that the disclosure of the
    21   omitted fact would have been viewed by the reasonable
    22   investor as having significantly altered the ‘total mix’ of
    23   information made available.”     TSC Indus., Inc., 
    426 U.S. at
    24   449.
    15
    1       “[W]e have consistently rejected a formulaic approach
    2   to assessing the materiality of an alleged
    3   misrepresentation.”   Ganino v. Citizens Utils. Co., 
    228 F.3d 4
       154, 162 (2d Cir. 2000).   “In both Ganino and [JP Morgan],
    5   we cited with approval SEC Staff Accounting Bulletin No. 99,
    6   
    64 Fed. Reg. 45,150
     (1999) . . . , which provides relevant
    7   guidance regarding the proper assessment of materiality.”
    8   Blackstone, 
    634 F.3d at 717
    .   According to SEC Staff
    9   Accounting Bulletin No. 99 (“SAB No. 99”), “[t]he use of a
    10   percentage as a numerical threshold such as 5%, may provide
    11   the basis for a preliminary assumption” of materiality, but
    12   a bright line percentage “cannot appropriately be used as a
    13   substitute for a full analysis of all relevant
    14   considerations.”   64 Fed. Reg. at 45,151.   Among useful
    15   qualitative factors are (1) “whether the misstatement
    16   concerns a segment or other portion of the registrant’s
    17   business that has been identified as playing a significant
    18   role in the registrant’s operations or profitability,” 64
    19   Fed. Reg. at 45,152, and (2) whether management expects
    20   “that the misstatement will result in a significant market
    21   reaction,” JP Morgan, 
    553 F.3d at 198
    .
    22
    16
    1                                II.
    2       CBRE’s Registration Statement represented that loans or
    3   other investments would be considered impaired “when it is
    4   deemed probable that [CBRE] will be unable to collect all
    5   amounts due according to the contractual terms of the
    6   original agreements.”   In the Second Amended Complaint,
    7   Plaintiffs rely on the statements of several confidential
    8   witnesses to support their allegations concerning CBRE’s
    9   knowledge that the Triton Loans were impaired.     One witness,
    10   a former regional manager of Freemont, explained that prior
    11   to the IPO, Freemont was in constant discussions with Triton
    12   about the out-of-balance condition of its loan and that the
    13   out-of-balance condition caused Triton to seek a $5 to $10
    14   million capital infusion from a group of outside investors.
    15   As previously discussed, Freemont and CBRE entered into an
    16   Intercreditor Agreement after they closed on the Monterey
    17   loans; the Agreement provided that “Freemont communicate
    18   with CBRE upon the occurrence of potential default events .
    19   . . . [and that] one such potential event of default . . .
    20   required that Freemont notify CBRE upon the occurrence of a
    21   so-called ‘out-of-balance’ condition, which is more commonly
    22   referred to as a construction cost overrun.”     Freemont’s
    17
    1   contractually-mandated discussions with CBRE, Plaintiffs
    2   allege, should have apprised CBRE that the Monterey Loan was
    3   impaired, or at least likely to be impaired.
    4       Because we are at the pleading stage, we accept
    5   Plaintiffs’ allegations as true and draw all reasonable
    6   inferences in Plaintiffs’ favor.     See Johnson v. Rowley, 569
    
    7 F.3d 40
    , 43 (2d Cir. 2009) (per curiam).       Therefore, because
    8   Freemont was aware of cost overruns at The Monterey and
    9   because the Intercreditor Agreement required Freemont to
    10   disclose potential default events to CBRE, a plausible
    11   inference may be drawn that CBRE was aware of the cost
    12   overruns and was thereby aware of an existing trend, event
    13   or uncertainty under Item 303.     17 C.F.R.
    14   § 229.303(a)(3)(ii); see Blackstone, 
    634 F.3d at
    716
    15   (observing that Item 303 “imposes a disclosure duty where a
    16   trend, demand, commitment, event or uncertainty is both [1]
    17   presently known to management and [2] reasonably likely to
    18   have material effects on the registrant’s financial
    19   condition or results of operations.”) (internal quotation
    20   mark omitted).   “[T]he sole remaining issue is whether the
    21   effect of the ‘known’ information was ‘reasonably likely’ to
    22   be material for the purpose of Item 303 and, in turn, for
    18
    1   the purpose of Sections 11 and 12(a)(2).”    Blackstone, 634
    2   F.3d at 716.
    3
    4                                III.
    5       The district court, eliding any discussion of the
    6   traditional quantitative and qualitative factors used to
    7   assess materiality, instead dismissed the Second Amended
    8   Complaint on the sole ground that the alleged misstatements
    9   and omissions were not material because the Triton Loans
    10   were adequately collateralized at the time of the IPO.     See
    11   Hutchison I, 
    638 F. Supp. 2d at 275-76
    .     While this bright
    12   line rule has considerable appeal, this is not a case in
    13   which we should consider adopting it, because the
    14   unambiguous wording of the Registration Statement defines
    15   “impairment” in a way that discounts any issue of
    16   collateralization:   “Loans and other investments are
    17   considered to be impaired, for financial reporting purposes,
    18   when it is deemed probable that the Company will be unable
    19   to collect all amounts due according to the contractual
    20   terms of the original agreements . . . .” (emphasis added).
    21   Even assuming the Triton Loans were fully collateralized, a
    22   loan default would result in (at least) a temporary loss to
    19
    1   CBRE because in the event of a default, CBRE would have to
    2   initiate foreclosure proceedings that would entail delay,
    3   fees, costs and prolonged uncertainty.    Even if CBRE could
    4   ultimately recover the full amount of its loan after a
    5   foreclosure, and even if a default ultimately “would not
    6   harm CBRE,” 
    id. at 277
    ,    CBRE would not have collected
    7   “according to the contractual terms of the original
    8   agreements.”    Without categorically rejecting the district
    9   court’s collateralization approach, we hold that it cannot
    10   decide this case.    Adequacy of collateral is one of the
    11   qualitative factors--but not the only one--that determines
    12   whether a misstatement or omission concerning the loan is
    13   material.
    14       We therefore turn to quantitative measures.      To do so,
    15   we must at the outset reconcile two recent decisions in our
    16   Circuit, each of which analyzed whether statements in a
    17   registration statement were material for purposes of a
    18   Section 11 claim: ECA & Local 134 IBEW Joint Pension Trust
    19   of Chicago v. JP Morgan Chase Co., 
    553 F.3d 187
     (2d Cir.
    20   2009), and Litwin v. Blackstone Grp., L.P., 
    634 F.3d 706
     (2d
    21   Cir. 2011).    In JP Morgan, the panel conducted a
    22   quantitative materiality analysis that compared the value of
    20
    1   the troubled investment to the value of the defendant’s
    2   entire investment portfolio, whereas the Blackstone panel,
    3   conceding that the troubled investment did not meet the 5%
    4   quantitative threshold when considered as a part of the
    5   company’s entire portfolio, determined that the investment
    6   was qualitatively material nevertheless by weighing the
    7   impact of the troubled loan on the constituent part of
    8   Blackstone’s business in which the loan was located.
    9       In JP Morgan, plaintiffs alleged that JP Morgan Chase
    10   Co. (“JP Morgan”) made material misstatements concerning $2
    11   billion in prepay transactions that JP Morgan made to a
    12   special purpose entity that, in turn, made loans to Enron
    13   Corporation.   
    553 F.3d at 193
    .    We first looked to the
    14   quantitative factors and observed:
    15       Although $2 billion in prepay transactions may sound
    16       staggering, the number must be placed in context--
    17       reclassifying $2 billion out of one category of trading
    18       assets (derivative receivables) totalling $76 billion
    19       into another category (loan assets) totalling $212
    20       billion does not alter JPMC’s total assets of $715
    21       billion. Moreover, the underlying assets in either
    22       classification carry some default risk. As the
    23       district court said about this same information,
    24       “[c]hanging the accounting treatment of approximately
    25       0.3% of JPM Chase’s total assets from trades to loans
    26       would not have been material to investors.”
    27   
    Id. at 204
     (quoting In re JP Morgan Chase Sec. Litig., 363
    
    28 F. Supp. 2d 595
    , 631 (S.D.N.Y. 2005)) (internal citation
    21
    1   omitted).     On appeal, we approved the quantitative approach
    2   as “a good starting place for assessing the materiality of
    3   the alleged misstatement,” and reasoned that “[a]n
    4   accounting classification decision that affects less than
    5   one-third of a percent of total assets does not suggest
    6   materiality.”     
    Id.
       We added that a further necessary
    7   consideration is the qualitative factors set forth in SAB
    8   No. 99.     
    Id.
    9         In Blackstone, the plaintiffs alleged that Blackstone
    10   Group, L.P. (“Blackstone”) invested: (1) approximately $331
    11   million in FGIC Corp., a monoline financial guarantor, 634
    12   F.3d at 711; (2) $3.1 billion in Freescale Semiconductor,
    13   Inc., a semiconductor designer and manufacturer, id.; and
    14   (3) an undisclosed amount in residential real estate
    15   investments, id. at 712.      Plaintiffs alleged that at the
    16   time of Blackstone’s $4.5 billion IPO, FGIC faced massive
    17   losses as a result of the housing market collapse, id. at
    18   711, and that Freescale had lost an exclusive agreement to
    19   manufacture chipsets for its largest customer, id. at 711-
    20   12.   We conceded that “Blackstone’s investments in FGIC and
    21   Freescale f[e]ll below the presumptive 5% threshold of
    22   materiality,” but held that “the District Court erred in its
    22
    1   analysis of certain qualitative factors related to
    2   materiality.”   Id. at 719.    First, we held that Blackstone
    3   could not rely on its corporate structure to argue
    4   immateriality on the ground that a loss in one division was
    5   offset by a gain in another.    Id.    Second--and critical for
    6   present purposes--we held that the district court “erred in
    7   finding that the alleged omissions did not relate to a
    8   significant aspect of Blackstone’s operations.”     Id.    The
    9   Corporate Private Equity group was represented by Blackstone
    10   to be its “flagship segment” and had a critical role in the
    11   overall enterprise.   Id. at 720.     “Even where a misstatement
    12   or omission may be quantitatively small compared to a
    13   registrant’s firm-wide financial results”--Blackstone’s
    14   investment in Freescale was a relatively minor piece of
    15   Blackstone’s total investments, accounting for 9.4% of the
    16   Corporate Private Equity segment’s assets under management--
    17   “its significance to a particularly important segment of a
    18   registrant’s business tends to show its materiality.”      Id.
    19       We need to consider these two opinions together in
    20   order to decide in this case whether to gauge the
    21   materiality of the Triton Loans in terms of CBRE’s entire
    22   portfolio or its portfolio of mezzanine loans only.       It is
    23
    1   clear that Blackstone does not purport to limit or affect
    2   the holding of JP Morgan: a panel is “bound by the decisions
    3   of prior panels until such time as they are overruled either
    4   by an en banc panel of our Court or by the Supreme Court.”
    5   United States v. Wilkerson, 
    361 F.3d 717
    , 732 (2d Cir.
    6   2004).    So we need to identify the crucial factor or fact
    7   that renders Blackstone consistent with the holding of JP
    8   Morgan.    It is this:   If a particular product or product-
    9   line, or division or segment of a company’s business, has
    10   independent significance for investors, then even a matter
    11   material to less than all of the company’s business may be
    12   material for purposes of the securities laws.
    13   Hypothetically, such a product or segment might be the
    14   company’s original niche, its iconic or eponymous business,
    15   critical to its reputation, or most promising for growth or
    16   as an engine of revenue.    Thus Blackstone emphasized as a
    17   qualitative factor that the Corporate Private Equity group
    18   was the firm’s “flagship segment”: “a reasonable investor
    19   would almost certainly want to know information related to
    20   that segment that Blackstone reasonably expects will have a
    21   material adverse effect on its future revenues.”
    22   Blackstone, 
    634 F.3d at 720
    .
    24
    1       CBRE is “a commercial real estate speciality finance
    2   company that is primarily focused on originating, acquiring,
    3   investing, financing, and managing a diversified portfolio
    4   of commercial real estate-related loans and securities.”
    5   Plaintiffs claim that the entirety of the Triton Loans--
    6   $51.5 million--constituted “25% of CBRE’s mezzanine loans
    7   which were 60% of CBRE’s total capital, 27% of all of CBRE’s
    8   loans, and 21% of CBRE’s entire investment portfolio.”     Thus
    9   Plaintiffs isolate some of CBRE’s transactions (mezzanine
    10   loans) as a notional division or segment in which the Triton
    11   Loans could loom as material in quantitative terms.
    12   However, Plaintiffs have not alleged (plausibly or
    13   otherwise) that mezzanine loans constitute a component of
    14   CBRE’s business that is of distinct interest to investors
    15   other than as another component of CBRE’s book of business.
    16   For a company that makes real estate loans, mezzanine loans
    17   (which are one tier in the hierarchy of secured interests)
    18   are not the subject of investors’ fixation.   So any alleged
    19   impairment of the Triton Loans must be analyzed in relation
    20   to CBRE’s entire investment portfolio ($1.1 billion),
    21   consistent with the quantitative approach in JP Morgan.
    22       In that light, the Triton Loans were not material.
    25
    1   Moreover, the Second Amended Complaint fails to allege how
    2   much of the Triton Loans was impaired at the time of the
    3   IPO.        It is alleged that when CBRE foreclosed on the Triton
    4   Loans, long after the IPO, it incurred a $7.8 million
    5   impairment charge on the write-down of the Monterey Loan;
    6   but it is not alleged that this figure (or some other dollar
    7   amount of impairment) was known to CBRE at the time of the
    8   IPO.5
    9           As to the qualitative analysis, Plaintiffs rely on two
    10   SAB No. 99 factors to support their contention that the
    11   misstatements and omissions were material: (A) CBRE’s stock
    12   price drop following disclosure of the Triton Loans’
    5
    Plaintiffs seek to rely on facts outside the Second
    Amended Complaint--namely, CBRE’s counterclaims in a lawsuit
    filed against the principals of Triton in the United States
    District Court for the District of Maryland--to suggest that
    CBRE suffered $22.6 million in damages due to Triton’s
    default and that CBRE knew (prior to the IPO) that Triton
    was experiencing financial difficulties and might not have
    been able to make timely interest payments. See CBRE Fin.
    TRS, LLC v. McCormick, No. 08-cv-1964, 
    2009 WL 4782124
    , at
    *10 (D. Md. Dec. 8, 2009) (granting CBRE summary judgment
    and awarding more than $22.6 million in damages). Even
    assuming that either the district court below or this Court
    could consider those extraneous facts, $30.4 million ($7.8
    million impairment plus $22.6 million in damages) out of a
    total investment portfolio of $1.1 billion falls well short
    of SAB No. 99’s 5% threshold and is therefore presumed to be
    quantitatively immaterial. See 64 Fed. Reg. at 45,151; see
    also JP Morgan, 
    553 F.3d at 204
     (analyzing misreported
    transaction as a portion of JP Morgan’s total assets).
    26
    1   impairment, and (B) the impact on a major portion of CBRE’s
    2   business.    See SAB No. 99, 64 Fed. Reg. at 45,152 (“Among
    3   the considerations that may well render material a
    4   quantitatively small misstatement . . . are-- . . . Whether
    5   the misstatement concerns a segment or other portion of the
    6   registrant’s business that has been identified as playing a
    7   significant role in the registrant’s operations or
    8   profitability . . . . [and] the demonstrated volatility of
    9   the price of a registrant’s securities in response to
    10   certain types of disclosures . . . .”).
    11       (A) Stock Drop.       The Second Amended Complaint alleges,
    12   as cause and effect, that “the price of CBRE common stock
    13   declined more than 18%, on extremely heavy [trading]
    14   volume,” in the two days following CBRE’s February 26, 2007
    15   press release reporting that the Monterey Loan was non-
    16   performing and that the Rodgers Forge Loan was placed on
    17   CBRE’s watch list.    However, that same press release
    18   reported lower-than-expected 2006 fourth quarter financial
    19   results.    CBRE Realty Finance, Inc., Fourth Quarter and Full
    20   Year 2006 Results (Form 8-K) (February 26, 2007).      (That
    21   press release also advised that the Triton Loans were fully
    22   collateralized.    Id.)
    27
    1       The Second Amended Complaint also alleges, as cause and
    2   effect, that “the price of CBRE stock declined from $6.21
    3   per share to $4.25 per share, a decline of 32%[,] and 70%
    4   lower than the IPO price of $14.50, on extremely heaving
    5   trading volume,” after CBRE’s August 6, 2007 press release
    6   disclosing that CBRE had taken a $7.8 million impairment
    7   charge due to the write-down of the Monterey Loan and that
    8   CBRE had foreclosed in May 2007 on both The Monterey and The
    9   Rodgers Forge.   However, the disclosures in the August 2007
    10   press release included that CBRE “ha[d] halted making new
    11   investments in the near-term” and that CBRE was being
    12   required to post an additional $26.7 million in collateral
    13   by one of its primary lenders--something that CBRE stated in
    14   its Prospectus could have dire consequences: “Posting
    15   additional collateral to support our credit facilities will
    16   reduce our liquidity and limit our ability to leverage our
    17   assets.   In the event we do not have sufficient liquidity to
    18   meet such requirements . . . . [it could] result in a rapid
    19   deterioration of our financial condition and possibly
    20   necessitate a filing for [bankruptcy protection].”   CBRE
    21   Realty Finance, Inc., Second Quarter 2007 Results (Form 8-K)
    22   (August 7, 2007).
    28
    1          These (insufficient) cause-and-effect allegations
    2   exemplify the warning in SAB No. 99 (which we adopted in JP
    3   Morgan): “[c]onsideration of potential market reaction to
    4   disclosure of a misstatement is by itself too blunt an
    5   instrument to be depended on in considering whether a fact
    6   is material.”    64 Fed. Reg. at 45,152 (internal quotation
    7   marks omitted); see JP Morgan, 
    553 F.3d at 205
     (“SAB No. 99
    8   limits the usefulness of [market volatility] to instances
    9   where management expects ‘that a known misstatement may
    10   result in a significant positive or negative market
    11   reaction.’” (quoting SAB No. 99, 64 Fed. Reg. at 41,152)).
    12   CBRE’s press releases were loaded with news (largely very
    13   bad), any item of which could have caused CBRE’s stock price
    14   to drop.    Moreover, CBRE had already reported the
    15   foreclosures when they happened, in May 2007; so, that item
    16   in the August 2007 press release was not information new to
    17   the market.
    18          As in JP Morgan, Plaintiffs have not pled facts “that
    19   would permit the inference that [CBRE] expected that the
    20   alleged [omissions concerning the Triton Loans would] result
    21   in a significant market reaction.”    JP Morgan, 
    553 F.3d at
    22   205.    Thus, the market’s reaction to CBRE’s press releases
    29
    1   does not “point towards qualitative materiality under SAB
    2   No. 99.”   Id.
    3       (B) Business Impact.    Plaintiffs’ contention that the
    4   impairment of the Triton Loans impacted a major segment of
    5   CBRE’s business fails for the same reasons we hold that the
    6   loans were not quantitatively material, i.e., the loans did
    7   not compose a significant portion of CBRE’s loan portfolio.
    8   Moreover, the fact that the Triton Loans were fully
    9   collateralized, as identified by CBRE in its May 7, 2007
    10   Form 8-K, militates in favor of finding that a major segment
    11   of CBRE’s business ultimately was not threatened by the
    12   impairment of the loans.
    13
    14                                 IV.
    15       Section 15 imposes joint and several liability on
    16   “[e]very person who, by or through stock ownership, agency,
    17   or otherwise . . . controls any person liable under” § 11.
    18   15 U.S.C. § 77o(a).    “To establish § 15 liability, a
    19   plaintiff must show a ‘primary violation’ of § 11 and
    20   control of the primary violator by defendants.”    In re
    21   Lehman Bros., 
    2011 WL 1778726
    , at *14 (quoting JP Morgan,
    22   
    553 F.3d at
    206–07).    Because Plaintiffs failed to plead a
    30
    1   § 11 claim, their § 15 claim necessarily fails.     See, e.g.,
    2   SEC v. First Jersey Sec., Inc., 
    101 F.3d 1450
    , 1472-73 (2d
    3   Cir. 1996).
    4
    
    5 V. 6
           We review denial of leave to amend under an “abuse of
    7   discretion” standard.   See, e.g., McCarthy v. Dun &
    8   Bradstreet Corp., 
    482 F.3d 184
    , 200 (2d Cir. 2007).     When
    9   the denial of leave to amend is based on a legal
    10   interpretation, such as a determination that amendment would
    11   be futile, a reviewing court conducts a de novo review.
    12   See, e.g., Littlejohn v. Artuz, 
    271 F.3d 360
    , 362 (2d Cir.
    13   2001) (“[I]f the denial of leave to amend is based upon a
    14   legal interpretation . . . we review the decision de
    15   novo.”); see also Gorman v. Consol. Edison Corp., 
    488 F.3d 16
       586, 592 (2d Cir. 2007) (reviewing de novo a district
    17   court’s denial of leave to amend on grounds of futility).
    18       The district court ruled that “amending the complaint
    19   would be futile because the proposed third amended complaint
    20   fails to cure the pleading deficiency concerning materiality
    21   that plagued the three previous iterations,” i.e., failure
    22   to “allege a collateral shortfall at the time the
    31
    1   Registration Statement and prospectus issued.”     Hutchison
    2   II, 
    2010 WL 1257495
    , at *3.   Because we affirm the district
    3   court’s dismissal of Plaintiffs’ Second Amended Complaint on
    4   alternative grounds, we cannot affirm the denial of
    5   Plaintiffs’ motion to amend on the futility ground cited by
    6   the district court.5
    7       We affirm nevertheless.   As discussed above, even
    8   assuming Plaintiffs supplement their allegations with facts
    9   drawn from CBRE’s lawsuit in Maryland--i.e., that CBRE
    10   suffered $22.6 million in damages--Plaintiffs’ allegations
    11   fail to satisfy any of SAB No. 99’s quantitative or
    12   qualitative materiality factors.     Amending the Second
    13   Amended Complaint would be futile.
    14
    15                            CONCLUSION
    16       The judgment of the district court is affirmed.
    5
    Plaintiffs did not raise any challenges to the
    district court’s denial of their motion for reconsideration;
    therefore, Plaintiffs have waived any such argument. See
    Norton v. Sam’s Club, 
    145 F.3d 114
    , 117 (2d Cir. 1998)
    (“Issues not sufficiently argued in the briefs are
    considered waived and normally will not be addressed on
    appeal.”).
    32