Appeal from the United States District Court for the Eastern District of Wisconsin. No. 08-C-458-Lynn Adelman, Judge.
The opinion of the court was delivered by: Easterbrook, Chief Judge.
Before EASTERBROOK, Chief Judge, and ROVNER and TINDER, Circuit Judges.
MGIC Investment Corpora- tion insures mortgage loans. Lenders prefer security beyond the borrower's promise to pay plus the value of the real property. The market price of land or a house may decline; its worth may have been overestimated; borrowers may fail to make payments or allow the collateral to fall into disrepair. Several governmental agencies offer mortgage insurance. When no governmental body will insure a loan-or when public insurance is limited (often it covers only 80% of the collateral's appraised value)-firms such as MGIC stand ready to sell private mortgage insurance. With insurance in hand, lenders securitize the loans (that is, sell securities in packages containing many loans), raising money that they can lend to other people who seek housing.
Both public and private mortgage-insurance markets incurred large losses in the financial crunch that began with the decline of the prices of securities based on packages of mortgage loans. The price of MGIC's securities fell substantially-though MGIC, unlike many other firms, survived and sells mortgage insurance to this day. Precisely because it survived a steep fall in the price of its securities, MGIC is an attractive target for litigation. Four class-action suits were filed under the Securities Exchange Act of 1934. These suits were consolidated in the Eastern District of Wisconsin and dismissed when the judge concluded that the complaint did not meet the standard set by the Private Securities Litigation Reform Act (PSLRA). 2010 U.S. Dist. LEXIS 14037 (E.D. Wis. Feb. 18, 2010), relying on 15 U.S.C. §78u--4(b), as interpreted by Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007). Plaintiffs asked leave to amend their complaint to meet the district judge's requirements, but the judge found the proposed amendment no better than the original and denied the motion as futile. 2010 U.S. Dist. LEXIS 134615 (E.D. Wis. Dec. 8, 2010).
Of all the original plaintiffs, only one filed a notice of appeal. And of all the contentions in the complaints, only one survived to the appellate briefs. The other claims presented to the district court have been abandoned.
The one remaining plaintiff's sole remaining claim is that fraud occurred during and in connection with MGIC's quarterly earnings call on July 19, 2007. The claim starts with this paragraph in a press release:
With respect to liquidity, the substantial majority of C-BASS's on-balance sheet financing for its mortgage and securities portfolio is dependent on the value of the collateral that secures this debt. C-BASS maintains substantial liquidity to cover margin calls in the event of substantial declines in the value of its mortgages and securities. While C-BASS's policies governing the management of capital risk are intended to provide sufficient liquidity to cover an instantaneous and substantial decline in value, such policies cannot guarantee that all liquidity required will in fact be available.
Appellant Fulton County Employees Retirement System (Fulton for short) also contends that some statements made during the earnings call were fraudulent. Before evaluating these contentions, we need to explain C-BASS.
C-BASS stands for Credit-Based Asset Servicing and Securitization LLC. MGIC owned 46% of its equity units. Radian Group Inc., another mortgage insurer, also owned 46% of the units; managers at C-BASS owned the remaining 8%. C-BASS was in the securitization business: it bought single-family residential-mortgage loans (most of them subprime), packaged them, and sold securities in the packages. It borrowed money to do this. The packages served as security for the loans. If the value of a package fell, the businesses that had provided C-BASS's capital saw their collateral eroding. Contracts entitled these lenders to demand that C-BASS either repay the loans or put up additional collateral, so that the ratio of the collateral's value to the outstanding balance did not fall below contractually specified levels. Such a demand is known as a margin call.
As the subprime market faltered, lenders began making margin calls. C-BASS began 2007 with $300 million in cash reserves. During the first three months of that year, it received and met $200 million in margin calls. It ended the quarter with $200 million in cash reserves, having made some money on operations. During the second three months of 2007, margin calls came to $90 million. On July 19, the day of the conference call, C-BASS's cash reserves were $150 million. Its ability to meet margin calls affected its viability, and thus the value of the securities that MGIC owned. This was a subject of the press release in which MGIC said that C-BASS had "substantial liquidity."
Fulton contends that this statement was false, and it offers two facts to support that proposition. First, from July 1 through 18 C-BASS had met $145 million in margin calls, implying that the $150 million remaining on July 19 might not last long. The purpose of the conference call was to discuss financial results during the months April, May, and June; MGIC did not discuss C-BASS's operations during July 2007. Fulton says that it should have and that silence made the "substantial reserves" statement misleading. Second, between July 19 and August 2 C-BASS received an additional $470 million in margin calls. It met some of these calls with a combination of internally generated cash and additional investments from MGIC and Radian. But on July 30 MGIC decided that it had had enough. It declined to put up additional cash and issued a press release declaring that its investment in C-BASS, which at one time MGIC had carried on its books as worth $516 million, was "materially impaired." In accounting-speak, this is equivalent to announcing that an investment may be written off as a loss. Fulton contends that MGIC should have seen these developments coming and that its failure to announce them at the July 19 conference call made the press release materially misleading.
The district court wrote (and we concur) that the "substantial liquidity" statement was true, both absolutely ($150 million is a lot of money) and relative to the needs of C-BASS's business. C-BASS began 2007 with $300 million in reserves, met $435 million in margin calls before July 18, and still had $150 million in reserves on July 19. This also means that the complaint flunked the PSLRA's requirement for pleading scienter: Since C-BASS had depleted reserves by only $150 million in meeting 61/2 months of margin calls, managers could say that the remaining $150 million was "substantial" liquidity without demonstrating bad intent. Tellabs holds that a com- plaint must contain facts rendering an inference of scienter at least as likely as any plausible opposing inference. 551 U.S. at 324.
That's not all. The "substantial liquidity" statement was immediately followed by a warning that C-BASS's reserves might turn out to be insufficient. This was not the sort of generic warning deemed inadequate in Asher v. Baxter International Inc., 377 F.3d 727 (7th Cir. 2004). It spoke to the problems C-BASS and other participants in the subprime mortgage market had encountered in 2007. More than that: The whole paragraph that Fulton highlights was itself a warning. It appears in the press release, together with other warnings, under this caption: "Our income from joint ventures could be adversely affected by credit losses, insufficient liquidity or competition affecting those businesses." The press release went on to detail problems MGIC was encountering, including the ...