Second Circuit Holds that Falsity of Estimates of Goodwill and Loan Loss Reserves For Purposes of Sections 11 and 12(a)(2) of the Securities Act Hinges on the Speakers' Subjective Belief


In Fait v. Regions Financial Corp., No. 10-2311-cv, 2011 WL 3667784 (2d Cir. Aug. 23, 2011), the United States Court of Appeals for the Second Circuit affirmed the dismissal of claims under Section 11 and Section 12(a)(2) of the Securities Act of 1933 (“1933 Act”), 15 U.S.C. §§ 77k, 77l(a)(2), alleging that statements concerning goodwill and loan loss reserves contained in a prospectus and registration statement were false and misleading. The Court held that such statements were “opinions” which can be false or misleading only if defendants did not genuinely believe the opinions at the times they were made. This decision is notable because it recognizes squarely that estimates of goodwill and loan loss reserves are inherently subjective and thus constitute “opinions” rather than statements of fact.

Plaintiff Alfred Fait (“Fait”) brought a purported class action on behalf of purchasers of stock issued by Regions Financial Corporation (“Regions”) in an April 2008 securities offering. Plaintiffs alleged that the registration statement and prospectus issued in connection with the offering contained false statements regarding goodwill and loan loss reserves. Specifically, plaintiffs alleged that Regions failed to write down the $6.2 billion of reported goodwill attributed to its 2006 acquisition of AmSouth Bancorporation (“AmSouth”), despite evidence that serious problems existed in AmSouth’s loan portfolio. Plaintiffs also alleged that Regions’ loan loss reserves from the first quarter of 2007 through the first three quarters of 2008 were materially inadequate and did not reflect the high risk of loss inherent in its mortgage loan portfolio. Plaintiffs alleged that defendants violated Section 11 of the 1933 Act, which imposes liability on issuers and other signatories of a registration statement that “contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading,” and Section 12(a)(2) of the 1933 Act, which imposes liability under similar circumstances with respect to prospectuses.

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