## Facts

- From 2005 to 2007, investors purchased about $155 billion in mortgage pass-through certificates issued through Lehman-affiliated securitization trusts and offered pursuant to SEC registration statements.
- Standard & Poor’s, Moody’s, and Fitch assigned ratings (often AAA) to many certificates.
- Plaintiffs alleged issuers “shopped” for favorable ratings and that the rating agencies were involved in deal structuring to reach target ratings.
- Alleged conduct by the rating agencies included advising on mortgage pool composition, tranche structure, and credit enhancements, and providing ratings models that issuers could use to design securities to attain desired ratings.
- Plaintiffs alleged the models were not adequately updated for increased subprime exposure and weaker underwriting, resulting in inflated ratings that understated risk.
- Plaintiffs sued the rating agencies under Securities Act § 11, claiming the agencies were statutory “underwriters,” and under Securities Act § 15, claiming the agencies were “control persons” of the primary violators.

## Issues

1. Whether alleged structuring and ratings-related conduct made the rating agencies “underwriters” under Securities Act § 2(a)(11), permitting strict liability under § 11 for registration statement misstatements or omissions.
2. Whether the agencies’ alleged advisory role constituted “control” under Securities Act § 15 over issuers, sponsors, or depositors allegedly liable for a primary Securities Act violation.
3. Whether the district court abused its discretion by denying leave to amend where the complaints were dismissed for failure to state claims.

## Decision

- The Second Circuit affirmed dismissal of the § 11 claims, holding the complaints did not plausibly allege that the rating agencies were “underwriters” within the meaning of § 2(a)(11).
- The court affirmed dismissal of the § 15 claims, holding the complaints did not plead facts showing the agencies actually exercised control over the primary violators.
- The court affirmed the denial of leave to amend, concluding plaintiffs did not identify non-futile amendments capable of curing the defects.

## Legal Principles

- Securities Act § 2(a)(11) “underwriter” status turns on participation in the purchase, offer, or sale of securities for distribution; providing analytical opinions, models, or structuring advice, without involvement in distribution, is insufficient.
- Allegations that a service provider’s work was important to a transaction do not substitute for facts showing participation in the distribution chain required for § 11 underwriter liability.
- Securities Act § 15 control-person liability requires allegations supporting actual control over the primary violator, including power to direct management and policies; influence arising from advice, expertise, or leverage in negotiations is not enough.
- Leave to amend may be denied where plaintiffs do not propose specific, plausible amendments and the defects stem from legal limits on the asserted theories rather than missing factual detail.

## Conclusion

The Second Circuit held that alleged structuring assistance and ratings issuance did not make rating agencies “underwriters” for § 11 purposes and did not establish “control” for § 15 purposes absent facts showing participation in distribution or power to direct the primary violators; dismissal and denial of leave to amend were affirmed.


In re Lehman Bros. Mortgage-Backed Sec. Litig., 650 F.3d 167 (2d Cir. 2011)