United States District Court, D. Minnesota
IRON WORKERS MID-SOUTH PENSION FUND, Derivatively on Behalf of U.S. Bancorp, Plaintiff,
RICHARD K. DAVIS, ANDREW CECERE, PATRICK T. STOKES, O'DELL M. OWENS, JERRY W. LEVIN, VICTORIA BUYNISKI GLUCKMAN, DAVID B. O'MALEY, ARTHUR D. COLLINS, JR., JOEL W. JOHNSON, CRAIG D. SCHNUCK, OLIVIA F. KIRTLEY, DOUGLAS M. BAKER, JR., Y. MARC BELTON, RICHARD D. REITEN, TERRANCE R. DOLAN, RICHARD J. HIDY, DIANE L. THORMODSGARD, BRYAN R. CALDER, and DOES 1-10, Defendants, and U.S. BANCORP, a Delaware Corporation, Nominal, Defendant
For plaintiff: Brian J. Robbins, Craig W. Smith, Gina Stassi, ROBBINS ARROYO LLP, San Diego, CA; Henry M. Helgen, III and Amanda R. Cefalu, ANDERSON, HELGEN, DAVIS & NISSEN, LLC, Minneapolis, MN.
For defendants: Peter W. Carter, Kristina L. Carlson, and Hugh D. Brown, DORSEY & WHITNEY LLP, Minneapolis, MN.
For defendants: Kristina L. Carlson, Terrance R. Dolan, Richard J. Hidy, Diane L. Thormodsgard, and Bryan R. Calder.DORSEY & WHITNEY LLP, Minneapolis, MN.
For defendants: Sarah H. Daggett and Steve W. Gaskins, GASKINS, BENNETT, BIRRELL, SCHUPP, LLP, Minneapolis, MN.
MEMORANDUM OPINION AND ORDER GRANTING MOTIONS TO DISMISS
JOHN R. TUNHEIM, United States District Judge.
Plaintiff Iron Workers Mid-South Pension Fund (" Iron" ) brought this shareholder derivative action against current and former officers and directors of U.S. Bancorp (" U.S. Bank" ), alleging that they breached their fiduciary duties by failing to properly oversee U.S. Bank's largest subsidiary, U.S. Bank National Association (" U.S. Bank NA" ), in its role as trustee of trusts that invested in mortgage-backed securities. The Court dismissed without prejudice Iron's initial failure of oversight claim, finding that Iron's allegations did not sufficiently plead that Defendants -- the individual officers and directors of U.S. Bank -- consciously disregarded their duty of loyalty. The Court granted Iron forty-five days to amend its complaint to address the shortcomings in its breach of fiduciary duty claim. Iron timely amended, and this action is now before the Court on Defendants' motions to dismiss the amended complaint. Accepting as true the
facts alleged in the amended complaint, the Court finds that Iron's amended pleading suffers from the same deficiencies as the initial complaint with respect to the director defendants and does not adequately plead at least gross negligence as to the officer defendants. Therefore, the Court will grant Defendants' motions and dismiss this action with prejudice.
I. IRON'S ALLEGATIONS
Iron is a pension fund that holds U.S. Bank stock. (Am. Compl., Attach. 1 (" Verification" ), Feb. 21, 2014, Docket No. 46.) Iron has held U.S. Bank stock continuously since January 27, 2005, including during the time of the alleged wrongdoing. ( Id.; Am. Compl. ¶ ¶ 8-12.) Defendants are U.S. Bank's CEO, CFO, and current and former members of U.S. Bank's Board of Directors. (Am. Compl. ¶ ¶ 31-48.) Many of the Defendants currently serve, or have previously served, on U.S. Bank's Audit Committee and/or Risk Management Committee. ( Id.)
During the relevant time period, U.S. Bank NA was trustee for a number of trusts holding residential mortgages as part of mortgage-backed securities transactions. ( Id. ¶ ¶ 2-3.) The mortgages, primarily originated by Washington Mutual Bank (" WaMu" ) or Bear Stearns & Co. (" Bear Stearns" ), were grouped into pools and sold to affiliated shell entities (" Depositors" ). ( Id. ¶ 3.) The Depositors transferred the mortgage pools to U.S. Bank NA to hold as trustee, and U.S. Bank NA would, in turn, transfer mortgage-backed securities (" MBS" ) to the Depositors, who ultimately sold the MBS to investors. ( Id.) Iron alleges that U.S. Bank NA owed and breached numerous duties to the trusts, including a duty to review the mortgage loan files to ensure there were no defects, and to promptly notify WaMu and Bear Stearns if any defects were identified. ( Id. ¶ ¶ 5-7, 13.) Two class actions are now pending against U.S. Bank NA for multiple alleged breaches of its duties as trustee. ( Id. ¶ 14.)
Iron's amended complaint also alleges that the individual directors and officers breached their fiduciary duties of loyalty and good faith by failing to prevent U.S. Bank NA from violating its duties as trustee. ( Id. ¶ ¶ 8-12, 15-17, 51-52, 60-63.) Iron alleges that various " red flags" alerted Defendants to the serious risks posed by the mortgages underlying Bear Stearns' and WaMu's MBS and that Defendants ignored these red flags. ( Id. ¶ ¶ 9, 11, 106-114.) These " red flags" include public and private investigations into WaMu's violations of legal requirements governing the origination and transfer of mortgage loans, and investigations into Bear Stearns's breaches of representation and warranties regarding the mortgages conveyed to the MBS covered trusts. ( Id. ¶ ¶ 107-110.) Iron further alleges that public disclosures following the investigations into both companies, media reports and congressional hearings covering the investigations, and lawsuits against WaMu and Bear Stearns following their collapse, were all red flags indicating to directors and officers at U.S. Bank that there were problems with the MBS, and Defendants ignored these red flags. ( Id. ¶ ¶ 9, 11, 106-114.)
Iron's amended complaint is substantially longer than its original complaint. One significant amendment is that Iron added several officer defendants: Andrew Cecere, Terrance Dolan, Richard J. Hidy, Bryan Calder, and Diane Thormodsgard,
along with ten unnamed " Doe Defendants." ( Id. ¶ ¶ 32-35, 47, 50.) Accordingly, the amended complaint distinguishes between officers' and directors' obligations to the corporation. ( Id. ¶ ¶ 191-210 (separating allegations against officers into one count and allegations against directors into two others).) The amended complaint delves into great detail about the way U.S. Bank NA and U.S. Bank were structured to create direct supervisory responsibility for the covered trusts by the officer defendants. ( Id. ¶ ¶ 132-39.) Further, the amended complaint describes the roles the officer defendants played at the company and their activities, such as monthly committee meetings, through which they would have been aware of the red flags and the oversight mechanisms in place to address risks affecting the company or the covered trusts. ( Id. ¶ ¶ 140-53.)
Iron also seeks to bolster the red flags it identified in the original complaint. For example, in the original complaint, Iron stated that " [b]y June and July 2008, monthly reports published by trustees for WaMu MBS securitizations started to show substantial increases in the WaMu Mortgage Loan delinquencies." (Compl. ¶ 94, Feb. 5, 2013, Docket No. 1.) In its amended complaint, Iron expands on this allegation, describing the way the trustees' reports -- publicly filed with the SEC on the Form 10-D -- flagged delinquency and foreclosure information for past due mortgages. (Am. Compl. ¶ 111.) Iron also provides more detail as to the class actions brought against U.S. Bank NA mentioned in the original complaint. (Compl. ¶ ¶ 7, 110.) Policemen's Annuity and Benefit Fund of the City of Chicago v. Bank of America, NA, 907 F.Supp.2d 536 (S.D.N.Y. 2012), and Oklahoma Police Pension and Retirement System v. U.S. Bank NA, 291 F.R.D. 47, 57-58 (S.D.N.Y. 2013), were both filed in the Southern District of New York, with U.S. Bank NA named as a defendant. (Am. Compl. ¶ ¶ 128, 130.) The amended complaint now devotes several paragraphs to describing the allegations raised by the plaintiffs in those two class actions and how other courts have handled them. (Id. ¶ ¶ 124-30.)
Iron also adds new red flags in its amended complaint. In addition to providing more detail on the Form 10-D reports, the amended complaint alleges that U.S. Bank itself acknowledged MBS risks in its Annual Report on Form 10-K filed with the SEC in February 2008. ( Id. ¶ 112.) U.S. Bank's February 25, 2008 Form 10-K confirmed that " certain securities backed by mortgages experienced both credit and liquidity issues" after turbulence in the sub-prime mortgage market in 2007, but assured that U.S. Bank would " monitor changes in market conditions, including the underlying credit quality and performance of assets collateralizing these structured investments." ( Id.) Iron alleges that the Form 10-K shows that U.S. Bank and the individual defendants " acknowledged widespread credit risk due to the unprecedented mortgage market meltdown." ( Id.) They continued to acknowledge it, Iron claims, in 2011 when U.S. Bank NA filed an action against Countrywide Home Loans (" Countrywide" ), the originator of some loans backing MBS of which U.S. Bank NA was trustee. ( Id. ¶ 121.) Specifically, U.S. Bank NA asserted misrepresentations and breach of contract by Countrywide in connection with the sale of its MBS-backing loans, similar to actions U.S. Bank NA filed against Morgan Stanley Mortgage Capital Holdings LLC in 2012 and 2013. ( Id. ¶ ¶ 121-22.) Iron's original complaint alleged that lawsuits filed against U.S. Bank NA put Defendants on notice of weaknesses at the company, but the amended complaint adds these allegations about actions initiated by U.S. Bank NA as further support, in addition to the previously described red flags, that Defendants were aware of problems associated
with U.S. Bank NA's performance ...