Second Circuit Addresses Materiality at the Pleadings Stage in Two Recent Decisions


In two recent decisions issued less than one week apart, Hutchison v. Deutsche Bank Securities Inc., 2011 WL 3084969 (2d Cir. July 26, 2011), and SEC v. Gabelli, 2011 WL 3250556 (2d Cir. Aug. 1, 2011), the United States Court of Appeals for the Second Circuit addressed motions to dismiss securities law claims based upon the immateriality of the defendants’ alleged misstatements or omissions. Generally, the question of whether a misstatement or omission is “material” –– i.e., significant enough that a “a reasonable shareholder would consider it important in deciding how to act” –– is a factintensive inquiry not suitable for resolution on a motion to dismiss. The Second Circuit’s decisions confirm that although this holds true in most cases, in a proper case the immateriality of an alleged misstatement or omission can be decided at the pleadings stage.

In Hutchison, plaintiffs alleged that defendant CBRE Realty Finance, Inc. (“CBRE”), a commercial real estate finance company, had made misstatements and omissions when it made its initial public offering (“IPO”). Plaintiffs alleged that, in its IPO, CBRE had failed to disclose that it had made investments in two troubled mezzanine loans totaling approximately $52 million. Not long after its IPO, CBRE announced that loans were troubled, and shortly thereafter CBRE was forced to foreclose and write down the value on each loan.

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