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In re Under Armour Securities Litigation

United States District Court, D. Maryland

September 19, 2018



          Richard D. Bennett United States District Judge.

         Plaintiffs Aberdeen City Council as Administrating Authority for the North East Scotland Pension Fund (“Exchange Act Plaintiff” or “Lead Plaintiff”) and Bucks County Employees Retirement Fund (“Securities Act Plaintiff”) (collectively, “Plaintiffs”) bring this putative class action against Under Armour, Inc. (“Under Armour” or “the Company”), Kevin A. Plank (“Plank”), Lawrence P. (Chip) Molloy (“Molloy”), Brad Dickerson (“Dickerson”), named directors[1] (“Director Defendants”), and named underwriters[2](“Underwriter Defendants”) (collectively, “Defendants”) alleging violations of federal securities laws. (Consol. Am. Compl., ECF No. 30.) Plaintiffs bring this federal class action under the Securities Exchange Act of 1934 (“Exchange Act”) §§ 10(b), 20(a), 15 U.S.C. §§ 78j(b), 78(t)(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, against Under Armour, Plank, Molloy, and Dickerson (collectively, “Exchange Act Defendants”). Separately, the Securities Act Plaintiff brings this federal class action under the Securities Act of 1933 (“Securities Act”) §§ 11, 15, 15 U.S.C. §§ 77k, 77o, and the rules promulgated thereunder, against Under Armour, Plank, Molloy, the Director Defendants, and the Underwriter Defendants (collectively, “Securities Act Defendants”).

         Currently pending before this Court are two dismissal motions: (1) the Under Armour Defendants' Motion to Dismiss Plaintiffs' Consolidated Amended Complaint (ECF No. 51); and (2) Underwriter Defendants' Notice of Motion to Dismiss the Consolidated Amended Complaint (ECF No. 52). The parties' submissions have been reviewed, and no hearing is necessary. See Local Rule 105.6 (D. Md. 2016). For the reasons that follow, Defendants' motions shall be GRANTED. Specifically, the Underwriter Defendants' Motion to Dismiss (ECF No. 52) is GRANTED, and Counts I and II of [Corrected] Consolidated Amended Complaint (ECF No. 30) as to all Defendants shall be DISMISSED WITH PREJUDICE. The Under Armour Defendants' Motion to Dismiss (ECF No. 51) is GRANTED, and Counts III and IV of the [Corrected] Consolidated Amended Complaint (ECF No. 30) shall be DISMISSED WITHOUT PREJUDICE.


         In ruling on a motion to dismiss, this Court “accept[s] as true all well-pleaded facts in a complaint and construe[s] them in the light most favorable to the plaintiff.” Wikimedia Found. v. Nat'l Sec. Agency, 857 F.3d 193, 208 (4th Cir. 2017) (citing SD3, LLC v. Black & Decker (U.S.) Inc., 801 F.3d 412, 422 (4th Cir. 2015)). The Court may consider only such sources outside the complaint that are, in effect, deemed to be part of the complaint, for example, documents incorporated into the complaint by reference and matters of which a court may take judicial notice. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007).[3]

         Under Armour, based in Maryland, is a large sports apparel company that sells branded athletic apparel, footwear, and accessories primarily in North America, [4] although their products are available worldwide. (ECF No. 30 at ¶¶ 5, 24, 95.) Since its formation in 1996, Under Armour's market share has grown to compete with the leaders in the sector, Nike and Adidas. (Id. at ¶¶ 6, 93.) By 2014, Under Armour surpassed Adidas and became the number two sportswear brand by revenue in the United States. (Id.) By capitalizing on its premium brand image and reputation for state-of-the-art fabrics, Under Armour reported 26 consecutive quarters of 20% or more compounded annual growth between 2010 and 2016. (Id. at ¶¶ 6, 97.)

         Led by its founder, Plank, who also serves as Chief Executive Officer (“CEO”) and Chairman of the Board, Under Armour had an aggressive growth strategy, declaring its intent to become the “No. 1” brand. (Id. at ¶¶ 25, 94-96.) During the Company's Investor Day on September 16, 2015, Plank boasted that “demand for our brand has never been stronger, ” and Under Armour's net revenue was projected to grow 25% in 2016. (Id. at ¶ 8.)

         However, Plaintiffs allege that by the fall of 2015, customer demand for Under Armour's apparel products was declining, partly due to the Company's failure to compete early in the athletic leisure apparel trend. (Id. at ¶ 98.) Excess inventory in Under Armour's basic sports apparel, which had historically provided the majority of sales, led the Company to begin competing on price rather than brand strength as it had done in the past. (Id. at ¶¶ 99-103, 106.) At the same time, the trend away from consumer sports-apparel purchases at traditional sporting goods stores towards online shopping and large discount chains led to bankruptcies for some of Under Armour's traditional sporting goods customers, which put further pressure on sales and margins. (Id. at ¶¶ 104-112.) Under Armour expanded its footwear and international sales, but with lower margins and high promotional expenses, overall margins declined. (Id. at ¶¶ 113-115.)

         On January 10, 2016, Morgan Stanley issued a detailed report with point-of-sale data from Under Armour's retail customers illustrating declines in the Company's growth, average sales price (“ASP”), and market share. (Id. at ¶ 117.) The next month, February 2016, Under Armour's Chief Financial Officer (“CFO”) Dickerson left the Company. (Id. at ¶ 118.) However, the Company's first quarter 2016 financial results, announced in an April 21, 2016 press release, were positive: “For the past 24 consecutive quarters or six years, we have driven net revenue growth above 20% and we are incredibly proud of our start to 2016 with first quarter net revenue growth of 30%. The strong results posted this quarter truly demonstrate the balanced growth of our brand across product categories, channels and geographies.” (Id. at ¶ 188 (quoting the April 21, 2016 press release announcing the Company's first quarter results for 2016).)

         In May 2016, the Company's Chief Merchandising Officer, Henry Stafford (“Stafford), and the Chief Digital Officer, Robin Thurston (“Thurston”), abruptly departed. (Id.) As Under Armour's sales problems became publicly known, stock prices declined. (Id. at ¶¶ 116-117.) On June 1, 2016, the Company announced a reduced expectation of 2016 revenues related to the bankruptcy of one of its major sporting goods customers, the Sports Authority, [5] which triggered further stock price declines. (Id. at ¶ 119.)

         On June 6, 2016, Under Armour filed the Registration Statement with the Securities Exchange Commission (“SEC”) in connection with its Bond offering (“Bond Offering” or “the Offering”). (Id. at ¶¶ 52, 210.) Under Armour offered the Bonds pursuant to the Offering materials, which incorporated Under Armour's 2015 Annual Report on Form 10-K and first quarter 2016 Quarterly Report on Form 10-Q. (Id. ¶¶ 52-54.) The Offering was completed on June 8, 2016 with the Company receiving $593.6 million in total net proceeds. (Id. at ¶¶ 52, 141.) Each of the Underwriter Defendants allegedly acted as an underwriter of the Offering. (Id. ¶¶ 39-49.)

         On July 26, 2016, Under Armour reported growth below 20% for the first time in more than seven years and forecast the slowest quarterly growth in over six years. (Id. at ¶ 120.) On October 25, 2016, Under Armour revealed a further slowdown in growth in the third quarter. (Id.) On January 31, 2017, Under Armour revealed that the 2016 slowdown was more severe than previously reported and also announced the sudden departure of Molloy, who served as CFO after Dickerson. (Id. at ¶¶ 57, 89, 120.)

         The next day, on February 1, 2017, S&P Global Ratings (“S&P”) downgraded the Company's Bonds to junk status, and Moody's Investors Service (“Moody's”) changed Under Armour's rating outlook from stable to negative. (Id. at ¶ 57.) The Bond price fell in response and slid further in August 2017 when the Company revealed slow North American growth, reduced its 2017 guidance, and announced a massive restructuring.[6] (Id. at ¶¶ 58-59.)

         The initial Complaints alleging violations of federal securities law were filed in February and March 2017 and were consolidated on March 23, 2017.[7] A Consolidated Amended Complaint was filed on August 9, 2017. (ECF No. 30.) Plaintiffs claim four causes of action:

Count I - For Violation of Section 11 of the Securities Act Against All of the Securities Act Defendants
Count II - For Violation of Section 15 of the Securities Act Against Plank, Molloy, and the Director Defendants
Count III - Violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder Against All of the Exchange Act Defendants
Count IV - For Violations of Section 20(a) of the Exchange Act Against the Individual Defendants.[8]

         Consol. Am. Compl., ECF No. 30. The Exchange Act Plaintiffs purport to represent a class of all persons or entities that purchased or acquired publicly traded securities of Under Armour between September 16, 2015 to January 30, 2017, inclusive (“Class Period”), and who were damaged thereby. (Id. at ¶ 2). The Securities Act Plaintiff purports to represent all persons or entities that purchased or acquired 3.250% senior unsecured notes of Under Armour due June 15, 2026 pursuant or traceable to the Registration Statement filed with the SEC on June 6, 2016. (Id. at ¶ 3.)

         Plaintiffs allege that Defendants concealed their sales and revenue problems during the Class Period, making false claims of explosive growth and strong customer demand while downplaying the ballooning inventory, liquidations, and gross margin compression. (Id. at ¶ 11.) They also allege that Plank personally cashed in on the artificial inflation by selling shares of his Company stock for total proceeds of $138.2 million during the Class Period. (Id. at ¶ 13.) Further, Plaintiffs allege that the Defendants raised nearly $600 million from the sale of then-investment grade Bonds by making various untrue and misleading statements in the materials provided to the SEC on June 6-9, 2016. (Id. at ¶ 13, 27, 52.)

         By the instant motion, ECF No. 51, the Under Armour Defendants seek dismissal with prejudice of all claims pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Procedure, and the Private Securities Litigation Reform Act (“PSLRA”). The Underwriter Defendants join in the motion, and separately move this Court to dismiss the claims against them under Section 11 of the Securities Act for the additional reason that the claims are barred by the Securities Act one-year statute of limitations. See ECF No. 52-2.


         Rule 8(a)(2) of the Federal Rules of Civil Procedure requires that a complaint contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). Rule 12(b)(6) authorizes the dismissal of a complaint if it fails to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). The United States Supreme Court's opinions in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), require that complaints in civil actions be alleged with greater specificity than previously was required. While a court must accept as true all factual allegations contained in the complaint, legal conclusions drawn from those facts are not afforded such deference. Iqbal, 556 U.S. at 678. A complaint must set forth “enough factual matter (taken as true) to suggest” a cognizable cause of action, “even if . . . [the] actual proof of those facts is improbable and . . . recovery is very remote and unlikely.” Twombly, 550 U.S. at 556 (internal quotations omitted).

         This Court has noted that a claim for securities fraud must meet the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) and the PSLRA, 15 U.S.C. § 78u-4(b). In re Constellation Energy Grp., Inc. Sec. Litig., 738 F.Supp.2d 614, 634 (D. Md. 2010). Rule 9(b) of the Federal Rules of Civil Procedure requires that “the circumstances constituting fraud be stated with particularity.” Fed.R.Civ.P. 9(b). The rule “does not require the elucidation of every detail of the alleged fraud, but does require more than a bare assertion that such a cause of action exists.” Mylan Labs., Inc. v. Akzo, N.V., 770 F.Supp. 1053, 1074 (D. Md. 1991). To satisfy the rule, a plaintiff must “identify with some precision the date, place and time of active misrepresentations or the circumstances of active concealments.” Johnson v. Wheeler, 492 F.Supp.2d 492, 509 (D. Md. 2007). As the United States Court of Appeals for the Fourth Circuit stated in United States ex rel. Nathan v. Takeda Pharmaceuticals North America, Inc., 707 F.3d 451 (4th Cir. 2013), the aims of Rule 9(b) are to provide notice to defendants of their alleged misconduct, prevent frivolous suits, eliminate fraud actions where all the facts are learned after discovery, and protect defendants from harm to their goodwill and reputation. 707 F.3d at 456 (citation omitted).

         The PSLRA further requires a securities fraud claim to (1) “specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading, ” and (2) “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Tellabs, 551 U.S. at 321 (quoting 15 U.S.C. § 78u-4(b)(1), (b)(2)).


         I. Securities Act Claims

         Section 11 of the Securities Act addresses liability for registration statements filed with the Securities Exchange Commission. See 15 U.S.C. § 77k(a). Section 11 of the Securities Act imposes liability if “any part of the registration statement, when such part became effective, 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 . . . .” Id. If someone purchases a security for which the registration statement contained a material misstatement or omission, this section allows him to sue “every person who signed the registration statement, ” every director in the issuer at the time of the statement's filing, and “every underwriter with respect to such a security.” Id. There is no state of mind element to a § 11 claim, and liability is “virtually absolute, even for innocent misstatements.” Herman & MacLean v. Huddleston, 459 U.S. 375, 382 (1983).

         Pursuant to § 15 of the Securities Act, persons in control of any person found liable under § 11 or § 12(a)(2) may be jointly and severally liable. 15 U.S.C. § 77o. Section 15, therefore, is dependent on an underlying violation of the relevant securities laws, meaning that if this Court finds no violation of Section 11, there is no violation of Section 15. See In re Constellation Energy, 738 F.Supp.2d at 639.

         Underwriter Defendants argue that the Section 11 claims against them are time-barred by the statute of limitations and all Securities Act Defendants argue that the complaint fails to allege any actionable misrepresentation or omission in the offering materials issued in connection with the Bond Offering. (ECF No. 52-2 at 1.)

         A. Statute of Limitations

         The merits of an affirmative defense, such as limitations, are not considered on a motion to dismiss unless all the facts necessary to establish the defense “clearly appear[] on the face of the complaint.” Goodman v. Praxair, Inc., 494 F.3d 458, 464 (4th Cir. 2007)(citations omitted). The application of a limitations period often entails a fact intensive inquiry. See Id. at 465-66 (reversing dismissal of claim on limitations grounds, on motion to dismiss, because plaintiff's complaint “d[id] not provide facts sufficient to apply the discovery rule”). Further, a defendant bears “the burden of establishing the affirmative defense” predicated on limitations. Id. at 464.

         The Securities Act's one-year statute of limitations prohibits actions “unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence”-that is, after a plaintiff was on “actual notice” or “inquiry notice.” 15 U.S.C. § 77m.

         The Underwriter Defendants assert that inquiry notice “is triggered by evidence ‘of the possibility' of a claim of misrepresentation and not by complete exposure of the alleged scam.” (ECF No. 52-2 at 12 (quoting In re USEC Sec. Litig., 190 F.Supp.2d 808, 819 (D. Md. 2002).) Securities Act Plaintiff argues that in 2010, the Supreme Court altered the legal standard for inquiry notice, holding that “the ‘discovery' of facts that put a plaintiff on ‘inquiry notice' does not automatically begin the running of the limitations period.” (ECF No. 56 at 12 (quoting Merck & Co. v. Reynolds, 559 U.S. 633, 653 (2010).) Rather, the limitation period “begins to run once the plaintiff did discover or a reasonably diligent plaintiff would have ‘discover[ed] the facts constituting the violation'-whichever comes first.” (Id. (quoting 28 U.S.C. § 1658(b).) Although Merck involved an Exchange Act claim, Plaintiffs argue that it applies equally to Securities Act claims. (Id.)

         The Fourth Circuit has not yet had occasion to determine whether Merck requires a change in the interpretation of Section 13 of the 1933 Act. However in 2012, this Court applied the Merck standard to a Section 11 claim, noting:

While courts in the Fourth Circuit have not yet confronted the inquiry notice standard in a Securities Act case since Merck, before Merck, courts in the Fourth Circuit applied the inquiry notice standard from Brumbaugh v. Princeton Partners, 985 F.2d 157, 162 (4th Cir. 1993), an Exchange Act case, to Securities Act claims.

In re Mun. Mortg. & Equity, LLC, Sec. & Derivative Litig., 876 F.Supp.2d 616, 662 n.47 (D. Md. 2012), aff'd sub nom. Yates v. Mun. Mortg. & Equity, LLC, 744 F.3d 874 (4th Cir. 2014)(citing Cohen v. USEC, Inc., 70 Fed.Appx. 679, 686-89 (4th Cir. 2003)). Other courts have agreed that Merck applies to Securities Act claims. See, e.g., Pension Tr. Fund for Operating Engineers v. Mortg. Asset Securitization Transactions, Inc., 730 F.3d 263, 274 (3d Cir. 2013)(holding that the discovery standard governs whether Securities Act claims are timely); see also Fed. Housing Fin. Agency v. UBS Americas, Inc., 858 F.Supp.2d 306, 319 (S.D.N.Y. 2012) aff'd 712 F.3d 136 (2d Cir. 2013) (treating § 77m and § 1658(b) as equivalent)); In re Bear Stearns Mortg. Pass-Through Certificates Litigation, 851 F.Supp.2d 746, 763 (S.D.N.Y. 2012) (“Given this identity of operation, the Court finds no principled basis for cabining Merck's holding to Section 1658(b).”); but see Pa. Pub. Sch. Emps.' Ret. Sys. v. Bank of Am. Corp., 874 F.Supp.2d 341, 364-65 (S.D.N.Y. 2012) (surveying the conflicting law, the court stated that the “majority of courts in this district declined to apply Merck to Section 11 claims, ” but then noted that it made no difference because of Section 11's more relaxed pleading requirements); In re Magnum Hunter Res. Corp. Sec. Litig., 616 Fed.Appx. 442, 447 (2d Cir. 2015)(“We have never considered whether Merck abrogates this circuit's existing “inquiry notice” rule in favor of the discovery rule in Securities Act claims, an issue that divides the district courts in this circuit.”)

         The Merck Court itself described with approval the longstanding practice of adopting the Securities Act's explicit “reasonable diligence” standard for the Exchange Act accrual date, despite “the omission of an explicit provision to that effect.” Merck, 559 U.S. at 647. At the same time, the Supreme Court also clearly preserved a limited role for the inquiry standard, acknowledging that “terms such as ‘inquiry notice' and ‘storm warnings' may be useful to the extent that they identify a time when the facts would have prompted a reasonably diligent plaintiff to begin investigating.” Id. at 653.

         In this case, it is apparent that a reasonably diligent plaintiff would not only have begun investigating but would have discovered the alleged facts underlying the claim that was pleaded more than one year before this claim was ultimately filed. Securities Act Plaintiff filed its first complaint in this matter on August 4, 2017.[9] Therefore, assuming the discovery standard for purposes of this timeliness analysis, the Securities Act Plaintiff must not have had sufficient information about the facts of the claim to adequately plead them in a complaint on August 4, 2016. See Mun. Mortg., 876 F.Supp.2d at 654 (citing Pontiac Gen. Emps.' Ret. Sys. v. MBIA, Inc., 637 F.3d 169, 175 (2d Cir. 2011)).

         The Underwriter Defendants contend that the Securities Act Plaintiff knew all of the information they now cite in support of the omissions alleged-and could have pleaded them in a complaint-no later than July 26, 2016. (ECF No. 52-2 at 15.) Securities Act Plaintiff, however, contends that the disclosure events occurring on January 31, 2017, resulting in the February 1, 2017 Bonds' rating downgrade, triggered the earliest possible running of limitations. (ECF No. 56 at 18.) Securities Act Plaintiff notes that the Bond price was trading above the Offering price on July 26, 2016, and October 26, 2016 was the first date that the Bonds ever closed below their Offering price, so Securities Act Plaintiff could not have alleged damages until that time. (Id. at 20-21.)

         Securities Act Plaintiff's focus is misplaced. To state a claim under Section 11, plaintiffs must allege only that they purchased securities for which the registration statement contained a material misstatement or omission. 15 U.S.C. § 77k(a). Securities Act Plaintiff alleges that it purchased the Bonds on July 19, 2016, which is before August 4, 2016. (ECF No. 30-1 at 4.) Therefore, if Securities Act Plaintiff should have discovered facts sufficient to allege that the registration statement contained untrue statements or omissions before August 4, 2016, the claim is untimely. Securities Act Plaintiff's allegations point directly to information that was publicly available prior to August 4, 2016. For example, Securities Act Plaintiff alleges that “Under Armour's apparel products, which account for most of the Company's sales, suffered from reduced customer appeal and demand (see ¶¶98-100).” (ECF No. 30 at ¶ 55(a).) Paragraphs 98-100 specifically reference the Morgan Stanley Report, attached as Exhibit C and incorporated by reference. (Id. at 24 n.4.) The date on the Morgan Stanley Report is January 10, 2016. (ECF No. 30-3.)

         Securities Act Plaintiff asserts that Under Armour's “countervailing narrative” downplayed the Morgan Stanley Report and related articles, which undercut any questions raised. (ECF No. 56 at 19 (citing cases for support that a ratings downgrade may be an appropriate triggering event for statute of limitations).) Of course, a ratings downgrade may well be a sufficient triggering event, and Under Armour's ratings downgrade is cited in Securities Act Plaintiff's Complaint as additional support for their claim, but that does not mean it is a necessary or sole triggering event.

         Importantly, Under Armour's July 26, 2016 announcement of “second quarter decreases in operating and net income and a drop in apparel sales growth below 20% for the first time in more than seven years, and forecast [of] the slowest quarterly growth in over six years” (ECF No. 30 at ¶ 120.) undercuts any earlier Under Armour comments downplaying the negative reports. As part of its factual allegations, Securities Act Plaintiff also cited the negative effect on Under Armour securities prices as a result of the “surprising” news from Morgan Stanley on January 10, 2016, (Id. at ¶ 117.), the “suspicious” departures of executives in February and May 2016 causing prices to decline on May 4, 2016 (Id. at ¶ 118.), and the June 1, 2016 revelations of “a reduced expectation of 2016 revenues and operating income and an impairment charge related to the Sports Authority bankruptcy, triggering additional securities price declines” (Id. at ¶ 119.). These earlier disclosures, especially taken in their entirety, were sufficient triggers to allow Securities Act Plaintiff to have investigated, and to reasonably have discovered, prior to August 4, 2016, facts adequate for pleading a Section 11 cause of action against the Underwriter Defendants.

         Further, the relation-back doctrine does not save the claim with regard to the Underwriter Defendants because they had no notice of the action prior to the filing of the Consolidated Amended Complaint against them on August 4, 2017. See Fed. R. Civ. P. 15(c)(1). Therefore, this Court holds that the Section 11 claims against the Underwriter Defendants, as set forth in Count I, are time-barred and shall be dismissed WITH PREJUDICE.

         Securities Act Plaintiff also argues that Under Armour, Plank, and Molloy were on notice of the fact that the initial complaints alleged the falsity of statements made in Under Armour's Form 10-Q for the first quarter 2016, filed with the SEC on April 29, 2016. (ECF No. 56 at 28.) However, the initial complaints made only Exchange Act claims related to the decline in stock prices, the factual allegations regarded statements made in press releases and conference calls with analysts, and there is no mention of Form 10-Q filings or the Bond Offering. Further, the Securities Act Plaintiff was not a plaintiff in the original complaints. Although these Defendants did not formally[10] join the motion to dismiss on statute of limitations grounds, this Court holds that the relation-back doctrine would not apply to save the claim against them from also being time-barred.

         Accordingly, this Court holds that the Section 11 claims against all the Securities Defendants are time-barred and shall be dismissed WITH PREJUDICE. Section 15 claims “are derivative of the other claims and thus subject to the same time limitation.” Pub. Employees' Ret. Sys. of Mississippi v. Merrill Lynch & Co. Inc., 714 F.Supp.2d 475, 479 n.3 (S.D.N.Y. 2010). Therefore, Section 15 claims, as set forth in Count II, shall also be dismissed WITH PREJUDICE.

         B. Failure to State a Claim

         Although this Court dismisses the Section 11 claims as being time-barred, resulting in the dismissal of the Securities Defendants with prejudice, this Court also finds that Securities Act Plaintiff has failed to state a claim under Section 11, which would result in the Securities Act claims being dismissed without prejudice.

         To state a claim under Section 11, a plaintiff must allege that: (1) the plaintiff purchased the registered security; and (2) the registration statement “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.” 15 U.S.C. § 77k(a). For a misrepresentation to violate securities law it must be material. In re USEC, 190 F.Supp.2d at 815. “It is not enough that a statement is false or incomplete, if the misrepresented fact is otherwise insignificant.” Greenhouse v. MCG Capital Corp., 392 F.3d 650, 656 (4th Cir. 2004) (quoting Basic, Inc. v. Levinson, 485 U.S. 224, 238 (1988)).

         1. Pleading Standard

         Generally, the heightened pleading requirements of Federal Rule of Civil Procedure 9(b) do not apply to a Section 11 claim because it is based in negligence and does not require a showing of scienter. In re Constellation Energy, 738 F.Supp.2d at 640 n.8 (citing In re Royal Ahold N.V. Sec. & ERISA Litig., 351 F.Supp.2d 334, 402 (D. Md. 2004). However, if the claim sounds in fraud, it must be pleaded with particularity. Id. (citing Cozzarelli v. Inspire Pharm. Inc., 549 F.3d 618, 629 (4th Cir. 2008)).

         Defendants contend that Securities Act Plaintiff was required to satisfy heightened pleading requirements for the securities claims because they allege “a single, coordinated scheme to defraud investors” and used the same allegations as the basis of all their claims. (ECF No. 51-2 at 52 (quoting Plymouth Cty. Ret. Ass'n v. Primo Water Corp., 966 F.Supp.2d 525, 554 (M.D. N.C. 2013)). Plaintiffs note that they practically filed two different complaints by placing the Exchange Act claims and the Securities Act claims in separate sections, the Exchange Act claims do not incorporate by reference the allegations supporting the Securities Act claims, the Securities Act claims apply to mostly different defendants, and Securities Act Plaintiff exclusively pleaded “ordinary negligence and strict liability” while “expressly disclaim[ing] that the Securities Act Defendants acted with fraudulent intent or scienter.” (ECF No. 55 at 56-57, nn. 37, 39.)

         Even though Section 11 claims do not have fraud as an element, allegations may “sound in fraud.” Cozzarelli, 549 F.3d at 629.[11] In Cozzarelli, “sound in fraud” is described: the plaintiffs' allegations are “part of a single, coordinated scheme to defraud investors” and are “exactly the same as plaintiffs' allegations of fraud under the Exchange Act, ” i.e., the same alleged false statements support the Exchange Act counts, and are specifically alleged elsewhere in the complaint to be fraudulent. Id. Whether Securities Act claims sound in fraud requires analyzing the wording and structure of the specific pleading. See In re Wachovia Equity Sec. Litig., 753 F.Supp.2d 326, 374 (S.D.N.Y. 2011).

         In this case, Bucks County Employees Retirement Fund is a separate Securities Act Plaintiff bringing the Securities Act claims, who alleges:

These claims are, in effect, a separate complaint. In the allegations and claims set forth herein, Bucks County asserts strict liability claims pursuant to the Securities Act on behalf of itself and the Securities Act Class (defined in ¶63 below). Bucks County's claims are not based on any allegations of intentional, knowing, or reckless misconduct on behalf of any of the Defendants. Bucks County's claims do not, and are not intended to, allege fraud or sound in fraud, and Bucks County specifically disclaims any allegations of fraud, scienter, or recklessness in connection with these non-fraud claims.

(ECF No. 30 at ¶ 22.) Yet, within the Securities Act claims allegations, they later allege that an opinion statement “was materially false and misleading because the Securities Act Defendants had knowledge of, or recklessly disregarded, omitted facts . . . .” (Id. at ¶ 56.)[12]Also, there is no allegation that the Securities Act Defendants were negligent. The alleged misleading statements or omissions under the Securities Act claims are later alleged under the Exchange Act to be fraudulent. (See, e.g., ECF No. 30 at 164, 284, 294, 319, 322.) Despite the care that Plaintiffs may have taken to keep the claims separate, as in Cozzarelli, the alleged misleading statements that form the basis for Plaintiffs' Exchange Act claims are the same as Securities Act Plaintiffs Section 11 claims. Thus, this Court shall apply the heightened pleading standard of Federal Rule of Civil Procedure 9(b).

         2. Adequacy of Allegations

         Securities Act Plaintiff alleges that it purchased the Bonds on July 19, 2016. (ECF No. 30-1 at 4.) There is no dispute that Securities Act Plaintiff has adequately pleaded the purchase of the registered security. Securities Act Defendants contend, however, that ...

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