Fulton County Employees Retirement System, on behalf of a class v. Mgic Investment Corporation

In the
United States Court of Appeals
For the Seventh Circuit
No. 11-1080
FULTON COUNTY EMPLOYEES RETIREMENT SYSTEM,
on behalf of a class,
Plaintiff-Appellant,
v.
MGIC INVESTMENT CORPORATION, et al.,
Defendants-Appellees.
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 08-C-458—Lynn Adelman, Judge.
ARGUED JANUARY 12, 2012—DECIDED APRIL 12, 2012
Before EASTERBROOK, Chief Judge, and ROVNER and
TINDER, Circuit Judges.
EASTERBROOK, Chief Judge. 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;

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2 No. 11-1080
borrowers may fail to make payments or allow the collat-
eral 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 pack-
ages 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 com-
plaint did not meet the standard set by the Private Secu-
rities 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).

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No. 11-1080 3
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 aban-
doned.
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 sub-
stantial 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

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4 No. 11-1080
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 pack-
ages 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 re-
maining on July 19 might not last long. The purpose of

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No. 11-1080 5
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 “sub-
stantial reserves” statement misleading. Second, be-
tween July 19 and August 2 C-BASS received an addi-
tional $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 invest-
ment 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 con-
ference call made the press release materially misleading.
The district court wrote (and we concur) that the “sub-
stantial 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
6½ months of margin calls, managers could say that the
remaining $150 million was “substantial” liquidity with-
out demonstrating bad intent. Tellabs holds that a com-

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6 No. 11-1080
plaint must contain facts rendering an inference of
scienter at least as likely as any plausible opposing infer-
ence. 551 U.S. at 324.
That’s not all. The “substantial liquidity” statement was
immediately followed by a warning that C-BASS’s re-
serves 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 ad-
versely affected by credit losses, insufficient liquidity or
competition affecting those businesses.” The press
release went on to detail problems MGIC was encoun-
tering, including the liquidity risk at C-BASS. The goal
of this paragraph was to let investors know about
the trouble without painting too gloomy a picture. A bal-
ancing act of that nature cannot sensibly be described
as fraud.
Although Fulton insists that MGIC must have seen the
next $470 million in margin calls coming, it did not. If
it had seen the cliff, it would have stopped contributing
capital to C-BASS before July 23, when it turned off the
spigot. Until then MGIC thought that C-BASS was going
to pull through and backed that belief with cash, as did
Radian Group. The most the complaint’s allegation
could support is the proposition that MGIC’s managers

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No. 11-1080 7
should have seen the looming problem, but that’s negli-
gence rather than the state of mind required for fraud.
Even “should have seen” may be too strong. The
subprime market had been in decline during the first
half of 2007, but that did not necessarily imply a con-
tinuing slump, let alone a collapse. For every seller of
subprime loans in 2007 who thought them overpriced,
there was a buyer who expected to make a profit when
the market went back up. The crisis took many experts
by surprise. See, e.g., Frederic S. Mishkin, Over the Cliff:
From the Subprime to the Global Financial Crisis, 25 J. Econ.
Perspectives 49 (Winter 2011); Francis A. Longstaff,
The subprime credit crisis and contagion in financial markets,
97 J. Fin. Econ. 436 (2010). One of the core findings of
modern financial economics is that “trends” in market
prices do not predict future prices; that a security’s price
has fallen four months in a row does not imply a fall
the next month. See, e.g., Burton G. Malkiel, A Random
Walk Down Wall Street (10th ed. 2012). It takes new infor-
mation to move prices either up or down.
What new information might that be? It would be
information about the economy as a whole, or the
mortgage-loan business as a whole; Fulton does not
contend that any of the information that led to
the price decline and thus the margin calls was specific
to C-BASS. This means that MGIC’s managers did not
have any private information that they could have re-
vealed. The problem was market-wide. If MGIC’s man-
agers saw the collapse coming, so could anyone else
who studied the markets.

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8 No. 11-1080
Securities law requires issuers to disclose firm-specific
information, not news that concerns the industry or
economy as a whole. Thus we held in Wielgos v. Common-
wealth Edison Co., 892 F.2d 509 (7th Cir. 1989), that a firm
building a nuclear power plant could not be liable for
failing to tell investors that the Nuclear Regulatory Com-
mission was making it more difficult, and more expen-
sive, for operators to finish and operate plants. Reporters
and investors well knew that fact, which hurt the value
of all electric utilities that had nuclear plants in
operation, under construction, or in planning. Just so
here. In July 2007 the whole world knew that firms
that had issued, packaged, or insured subprime loans
were in distress. Nothing MGIC said, or didn’t say,
could conceal that fact.
Judge Friendly famously said that there is no securities
fraud by hindsight. Denny v. Barber, 576 F.2d 465, 470 (2d
Cir. 1978). Issuers need not be prescient. The July 19
press release did not misrepresent the past or C-BASS’s
current condition, and MGIC had no duty to foresee
the future.
Fulton contends that some statements made during
the conference call were fraudulent independent of the
press release. The statements in question were made by
Bruce Williams, the chief executive of C-BASS, and
John Draghi, its chief operating officer. Fulton wants to
hold MGIC vicariously liable for their statements under
§20(a) of the 1934 Act, 15 U.S.C. §78t(a): “Every person
who, directly or indirectly, controls any person liable
under any provision of this chapter . . . shall also be liable

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No. 11-1080 9
jointly and severally with and to the same extent as
such controlled person to any person to whom such
controlled person is liable . . . , unless the controlling
person acted in good faith and did not directly or
indirectly induce the act or acts constituting the viola-
tion or cause of action.” Fulton contends that MGIC’s
46% interest in C-BASS made it a controlled entity for
which MGIC is responsible.
Fulton relies on two decisions saying that a significant
bloc of shares short of a majority can create control. See
Harrison v. Dean Witter Reynolds, Inc., 974 F.2d 873, 880
(7th Cir. 1992); Kirsch Co. v. Bliss and Laughlin Industries,
Inc., 495 F. Supp. 488, 495 (W.D. Mich. 1980). That’s easy
to see when other investments are widely distributed. A
bloc of 20% or less may be enough for working control
when no one else holds a substantial position. But
that’s not how C-BASS’s units were aligned. MGIC had
46% and Radian another 46%. The point of such equal
positions is to prevent both MGIC or Radian from exer-
cising unilateral control. Unless MGIC and Radian
agreed, C–BASS could operate as it pleased, since its
own managers held the balance of power (the last 8%).
This is a common investment structure in joint ventures.
Fulton does not contend that MGIC directed Williams
or Draghi to say what they did. Nor does Fulton contend
that, as a condition of participating in MGIC’s earnings
call, Williams or Draghi promised to support the MGIC
party line (if there was one). They appear to have been
independent agents, speaking for themselves (and of
course for C-BASS, over which as CEO and COO they had

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10 No. 11-1080
day-to-day control). We asked at oral argument whether
any case under §20(a) holds that either of two equally
matched bloc holders is treated as a control party. None
of the lawyers was aware of such a decision. We
searched independently and did not find one. For the
reasons we have given, it would be inappropriate to
hold MGIC liable under §20(a) for statements made by
managers of a different firm that MGIC could not
control without the assent of a third party holding an
equally large bloc.
If MGIC is not liable under §20(a), Fulton contends,
then MGIC and the three MGIC managers named as
defendants are directly liable under §10(b), 15 U.S.C.
§78j(b), and Rule 10b–5, because by inviting Williams
and Draghi to speak MGIC effectively “made” their
statements itself. That line of argument cannot be
squared with Janus Capital Group, Inc. v. First Derivative
Traders, 131 S. Ct. 2296 (2011), which holds that
the “maker” of a statement is the person with ultimate
authority over the language. We have explained why
Williams and Draghi, not MGIC or its officers, had
ultimate authority over their own statements. Janus
Capital prevents treating MGIC as the statements’ maker.
Fulton proposes to get around Janus Capital by asserting
that MGIC had a duty to correct any errors Williams or
Draghi made. But no statute or rule creates such a duty—
if there were one, Janus Capital itself would have come
out the other way. The statements at issue in Janus
Capital appeared in a prospectus of Janus Investment
Fund—which, as the author of the prospectus, controlled

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No. 11-1080 11
its contents. Some propositions in the prospectus were
attributed to Janus Capital Management, which plain-
tiffs sought to hold liable. The Court held that this
would be improper, because the mutual fund and not
the investment adviser determined the prospectus’s
contents. Janus Capital Management could have issued
a press release denouncing or correcting the prospectus
but didn’t. Just so with MGIC. It could have added its
own footnotes or corrections to what Williams and
Draghi said, but it is no more liable than was Janus
Capital Management for keeping silent when someone
else spoke.
That leaves only the direct claims against Williams
and Draghi personally. We agree with the district court,
for the reasons it gave, that Fulton’s complaint does not
meet the statutory standard for demonstrating fraud.
Williams and Draghi accurately outlined C-BASS’s fi-
nancial position as of July 19. Neither they nor MGIC
is liable under the federal securities laws for failing to
foresee what was to happen during the next two weeks.
AFFIRMED
4-12-12

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