## Facts

- Investors bought shares in closed-end “term trusts” that invested primarily in mortgage-backed securities and were scheduled to terminate on specified future dates.
- The offerings were made through prospectuses describing the funds’ income objectives and investment strategies.
- The prospectuses also included risk disclosures addressing interest-rate sensitivity, prepayment/extension risk, leverage effects, market-price volatility, and the possibility of trading at a discount to net asset value.
- After the offerings, interest-rate changes and market conditions allegedly caused declines in share prices and net asset value, producing investor losses.
- Investors filed a putative class action alleging the offering materials overstated safety/yield and failed to disclose the “true” risk profile of the investments.

## Issues

1. Whether the prospectuses were materially misleading under Securities Act §§ 11 and 12(2) and Exchange Act § 10(b)/Rule 10b-5, given the scope and specificity of their risk disclosures.
2. Whether allegations resting largely on subsequent losses and generalized claims of understated risk sufficiently pleaded falsity, materiality, and (for Rule 10b-5) scienter with particularity.
3. Whether control-person liability under Securities Act § 15 and Exchange Act § 20(a) can stand absent a well-pleaded primary securities-law violation.

## Decision

- The Second Circuit affirmed the dismissal of the complaint.
- Reading the prospectuses as a whole, the court held the disclosures adequately warned of the same risks that later materialized and thus were not materially misleading as a matter of law.
- The court rejected the theory that poor performance after the offering itself supports an inference that earlier disclosures were fraudulent (“fraud by hindsight”).
- The Rule 10b-5 claims were also dismissed for failure to plead fraud with Rule 9(b) particularity, including insufficient allegations supporting a strong inference of scienter.
- Because no primary violation was stated, the derivative control-person claims under §§ 15 and 20(a) were properly dismissed.

## Legal Principles

- Offering documents are assessed “as a whole”; isolated optimistic statements are not actionable when the same documents contain specific, meaningful cautionary disclosures about the relevant risks.
- No actionable omission exists where the complained-of risk is plainly and specifically disclosed; securities laws do not provide relief for market losses arising from disclosed contingencies.
- Allegations based primarily on later price declines or adverse outcomes, without facts showing statements were false when made, amount to impermissible “fraud by hindsight.”
- Rule 10b-5 fraud claims must plead the allegedly false statements, why they were false when made, and facts supporting scienter with the specificity required by Rule 9(b).
- Control-person liability under §§ 15 and 20(a) is derivative and fails when the complaint does not state a primary securities-law violation.

## Conclusion

The court held that detailed, specific prospectus warnings about interest-rate, prepayment, leverage, and discount-to-NAV risks defeated claims that the offerings were misleading, and that generalized post-loss allegations and inadequate fraud pleading could not sustain Securities Act, Rule 10b-5, or control-person claims.


Olkey v. Hyperion 1999 Term Tr., Inc., 98 F.3d 2 (2d Cir. 1996)