Sheet Metal Workers Local No. 33 et al. v. CBRE Realty Fin., Inc. et al.

10-1535-cv
Sheet Metal Workers Local No. 33 et al. v. CBRE Realty Fin., Inc. et al.
UNITED STATES COURT OF APPEALS 1
2
FOR THE SECOND CIRCUIT 3
4
August Term, 2010 5
6
7
(Argued: June 1, 2011 Decided: July 26, 2011) 8
9
Docket No. 10-1535-cv 10
11
- - - - - - - - - - - - - - - - - - - - - - - - - -x 12
13
PHILIP HUTCHISON, Individually and On Behalf of 14
All Others Similarly Situated, 15
16
Plaintiff, 17
18
SHEET METAL WORKERS LOCAL NO. 33, Lead Plaintiff, 19
ALFRED IVERS, Lead Plaintiff, WEST PALM BEACH 20
FIREFIGHTERS PENSION FUND, 21
22
Plaintiffs-Appellants, 23
24
-v.- 25
26
DEUTSCHE BANK SECURITIES INC., CITIGROUP GLOBAL 27
MARKETS INC., WACHOVIA CAPITAL MARKETS, LLC, 28
JMP SECURITIES LLC, CREDIT SUISSE SECURITIES 29
(USA) LLC, 30
31
Defendants, 32
33
CBRE REALTY FINANCE, INC., KEITH GOLLENBERG, 34
MICHAEL ANGERTHAL, RAY WIRTA, 35
36
Defendants-Appellees. 37
38
- - - - - - - - - - - - - - - - - - - - - - - - - -x 39
40
41
42

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* The Honorable Jed S. Rakoff, of the United States
District Court for the Southern District of New York,
sitting by designation.
2
Before: JACOBS, Chief Judge, LIVINGSTON, Circuit 1
Judge, and RAKOFF, * District Judge. 2
3
Plaintiffs-Appellants Sheet Metal Workers Local 33 et 4
al. appeal from an August 11, 2009 judgment of the United 5
States District Court for the District of Connecticut 6
(Underhill, J.), dismissing their putative securities class 7
action complaint pursuant to Federal Rule of Civil Procedure 8
12(b)(6) for failure to state a claim. The complaint 9
alleged that the securities issuer made false statements and 10
omissions of material facts in the registration documents 11
accompanying its initial public offering, in violation of 12
Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. 13
We conclude that the alleged misstatements were not material 14
because the value of the transactions composed an immaterial 15
portion of the issuer’s total assets. Affirmed. 16
SUSAN K. ALEXANDER (Sanford Svetcov, San 17
Francisco, CA and Samuel H. Rudman, David A. 18
Rosenfeld, and Evan J. Kaufman, New York, NY, 19
on the briefs), Robbins Geller Rudman & Dowd 20
LLP, San Francisco, CA, for Plaintiffs- 21
Appellants. 22
23
ROBERT S. FISCHLER (Justin J. Wolosz and David 24
T. Cohen, on the brief), Ropes & Gray LLP, New 25
York, NY, for Defendants-Appellees. 26
27

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3
DENNIS JACOBS, Chief Judge: 1
2
Defendant-Appellee CBRE Realty Finance, Inc. (“CBRE”), 3
a real estate financing company, floated its initial public 4
offering (the “IPO”) in September 2006. Among the 5
purchasers were Plaintiffs-Appellants Sheet Metal Workers 6
Local No. 33 and other plaintiffs (collectively, 7
“Plaintiffs”) in this action. They appeal from an August 8
11, 2009 judgment of the United States District Court for 9
the District of Connecticut (Underhill, J.), granting a Fed. 10
R. Civ. P. 12(b)(6) motion to dismiss their putative 11
securities class action complaint for failure to state a 12
claim. Plaintiffs alleged that CBRE and its Chief Executive 13
Officer Keith Gollenberg, Chief Financial Officer Michael 14
Angerthal, and Chairman of the Board Ray Wirta (the 15
“Defendants”) made false statements and omissions of 16
material facts in the registration statement and prospectus, 17
concerning the impairment of two mezzanine loans. The 18
district court granted CBRE’s motion to dismiss on the 19
ground of immateriality, because the loans were fully 20
collateralized at the time of the IPO. See Hutchison v. 21
CBRE Realty Fin., Inc., 638 F. Supp. 2d 265, 276 (D. Conn. 22
2009) (“Hutchison I”). A motion to replead was denied. We 23
affirm, albeit on somewhat different grounds. 24

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4
BACKGROUND 1
Since this is an appeal from a Fed. R. Civ. P. 12(b)(6) 2
dismissal, the following facts are drawn from Plaintiffs’ 3
Second Amended Class Action Complaint for Violations of 4
Federal Securities Laws (the “Second Amended Complaint”), 5
and are accepted as true. See Slayton v. Am. Express Co., 6
604 F.3d 758, 766 (2d Cir. 2010). We also rely on 7
information derived from CBRE’s filings with the Securities 8
and Exchange Commission (“SEC”) and other documents that are 9
invoked by the complaint. See ATSI Commc’ns, Inc. v. Shaar 10
Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007) (“[W]e may 11
consider any written instrument attached to the complaint, 12
statements or documents incorporated into the complaint by 13
reference, legally required public disclosure documents 14
filed with the SEC, and documents possessed by or known to 15
the plaintiff and upon which it relied in bringing the 16
suit.”). 17
CBRE is a commercial real estate speciality finance 18
company focused on originating, acquiring, investing, 19
financing, and managing commercial real estate-related loans 20
and securities. Its investment portfolio consists of: whole 21
loans; subordinated interests in first mortgage real estate 22

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5
loans; real estate-related mezzanine loans; commercial 1
mortgage-backed securities; and joint venture investments. 2
On September 26, 2006, CBRE filed an SEC Form S-11/A 3
Registration Statement (the “Registration Statement”) for 4
its IPO. The Registration Statement offered 9,600,000 5
common shares to the public at $14.50 per share. The 6
underwriters were granted an option to purchase up to an 7
additional 1,440,000 common shares at $14.50 per share. The 8
SEC declared the prospectus effective on September 27, 2006. 9
The IPO raised approximately $144 million. 10
At the time of the IPO, two mezzanine loans were 11
outstanding to developer Triton Real Estate Partners, LLC 12
(“Triton”). As defined in CBRE’s prospectus, investments in 13
mezzanine loans “take the form of subordinated loans secured 14
by second mortgages on the underlying property or loans 15
secured by a pledge of the ownership interests in the entity 16
that directly or indirectly owns the property.” The first 17
loan, with a carrying value of $19.7 million, was made on or 18
about October 31, 2005 and was collateralized by The Rodgers 19
Forge, a 508-unit condominium conversion project in North 20
Bethesda, Maryland (the “Rodgers Forge Loan”). The second 21
loan, with a carrying value of $31.8 million, was made on or 22

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1 For this allegation, Plaintiffs relied on information
from a confidential witness who had been a CBRE
underwriter/financial analyst, and worked at CBRE from June
2005 to June 2007.
6
about November 8, 2005 and was collateralized by The 1
Monterey, a 434-unit condominium conversion project in 2
Rockville, Maryland (the “Monterey Loan,” and together with 3
the Rodgers Forge Loan, the “Triton Loans”). 4
The Second Amended Complaint alleges that Defendants 5
knew that these mezzanine loans were in trouble at the time 6
of the IPO. Triton had missed tax payments on both The 7
Rodgers Forge and The Monterey, sales were declining at both 8
condominiums, and The Monterey development was over budget. 1
9
CBRE had entered into an Intercreditor Agreement in or 10
around November 2005 with Freemont Investment and Loan 11
(“Freemont”), the senior lender on the Monterey Loan. Under 12
that agreement, CBRE and Freemont were required to keep each 13
other apprised of any developments with respect to The 14
Monterey, including whether the project was experiencing any 15
financial difficulties. According to a former regional 16
manager at Freemont, Triton had exceeded the construction 17
budget for The Monterey by approximately $3-$5 million by 18
the summer of 2006, and as a result of this “out-of-balance” 19
condition, Freemont stopped funding its senior loan on 20

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2 The Registration Statement defined “impairment” as
follows:
Loans and other investments are considered to be
impaired, for financial reporting purposes, when it is
deemed probable that the Company will be unable to
collect all amounts due according to the contractual
terms of the original agreements, or, for loans
purchased at a discount for credit quality, when the
Company determines that it is probable that it will be
unable to collect as anticipated.
7
several occasions. During the summer of 2006, Freemont 1
discussed the “out-of-balance” condition with Triton; 2
pursuant to the Intercreditor Agreement, Freemont would also 3
have been required to inform CBRE. 4
Other allegations concerning Triton’s troubles include: 5
cost overruns due to unforeseen asbestos removal and 6
unexpected mechanical and electrical issues at The Monterey; 7
mechanics liens filed against both projects, claiming non- 8
payment of contractors in mid-2006; Triton’s solicitation of 9
additional funding from equity investors; and Triton’s 10
default on payments to sub-contractors, which caused the 11
sub-contractors to halt construction on both projects. 12
The Second Amended Complaint alleges that CBRE’s 13
Registration Statement was materially inaccurate because it 14
failed to disclose that the Triton Loans were “impaired” (a 15
defined term 2). The Registration Statement reported that 16

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3 CBRE defined “non-performing” as:
(1) management determines the borrower is incapable of
curing, or has ceased efforts towards curing the cause
of a default; (2) the loan becomes 90 days delinquent;
(3) the loan has a maturity default; or (4) the net
realizable value of the loan’s underlying collateral
approximates our carrying value of such loan.
CBRE defined “watch list” as:
[A] review . . . designed to enable management to
evaluate and proactively manage asset-specific credit
issues and identify credit trends on a portfolio-wide
basis as an “early warning system.”
8
CBRE had reviewed its portfolio of loans and did not 1
“identify any loans that exhibit[ed] characteristics 2
indicating that impairment ha[d] occurred.” 3
On February 26, 2007, five months after the IPO, CBRE 4
“announc[ed] its financial results for the fourth quarter 5
[of 2006].” The press release indicated that as of December 6
31, 2006 CBRE had classified the Monterey Loan as 7
“non-performing” and that the Rodgers Forge Loan was on 8
CBRE’s “watch list,” but that CBRE “had no impairments or 9
loss reserves since inception.” (“Non-performing” and “watch 10
list” are defined in the margin. 3
) Following the press 11
release, CBRE’s common stock price dropped more than 18% 12
over the two-day period ending February 28, 2007. 13
CBRE reported more bad news in the following months. 14

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9
Its year-end 2006 Form 10-K (filed on or about March 26, 1
2007) reported that CBRE had advanced approximately $1.7 2
million to protect its mezzanine loan position in The 3
Rodgers Forge. A May 7, 2007 press release disclosed that, 4
as of April 25, 2007, CBRE was no longer pursuing equity 5
real estate investments through joint ventures, and that on 6
May 4, 2007, CBRE foreclosed on the Rodgers Forge Loan. On 7
May 9, 2007, CBRE foreclosed on the Monterey Loan. CBRE 8
wrote down the value of both loans, and incurred a $7.8 9
million impairment charge with regard to the write-down of 10
the Monterey Loan. 11
On January 15, 2009, Defendants moved to dismiss the 12
Second Amended Complaint pursuant to Fed. R. Civ. P. 13
12(b)(6), arguing that the Second Amended Complaint failed 14
to plausibly allege that the prospectus contained a material 15
misstatement or omission. On July 29, 2009, the district 16
court issued an order dismissing the Second Amended 17
Complaint for failure to state a claim. Judgment was 18
entered on August 11, 2009, dismissing the action and 19
closing the file. 20
The district court held that Plaintiffs did not 21
plausibly allege that the omissions concerning the Triton 22

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10
Loans were material because, as reflected in CBRE’s SEC 1
filings, the Triton Loans were fully collateralized by the 2
underlying real estate. Therefore, the district court 3
reasoned, “CBRE was not at risk” of a material loss on the 4
loans “at the time that the registration statement and 5
prospectus issued.” Hutchison I, 638 F. Supp. 2d at 275. 6
The district court did not “rely on any quantitative 7
benchmarks to assess the materiality of the alleged 8
omissions at issue in this case.” Id. at 277. 9
After the dismissal, Plaintiffs moved for 10
reconsideration or, in the alternative, for leave to file a 11
Proposed Third Amended Complaint. The motion was denied. 12
The district court found that Plaintiffs were attempting to 13
relitigate the issue of materiality, and that the 14
allegations they claimed had been overlooked had in fact 15
been considered. Hutchison v. CBRE Realty Fin., Inc., No. 16
07-cv-1599, 2010 WL 1257495, at *2 (D. Conn. Mar. 25, 2010) 17
(“Hutchison II”). In denying Plaintiffs’ request for leave 18
to file a Proposed Third Amended Complaint, the district 19
court held that the proposed pleading added no relevant 20
factual allegations and would have been futile. Id. at *3. 21
Specifically, the district court noted that “[b]ecause the 22

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11
Triton Loans were adequately collateralized at the time of 1
the IPO, there existed no risk of a loss to CBRE at that 2
time. The facts as pled in the Proposed Third Amended 3
Complaint fail once again to rectify the deficiencies 4
concerning the materiality of the omissions.” Id. As a 5
separate ground for denying leave to amend, the court ruled 6
that Plaintiffs had inordinately delayed seeking leave to 7
amend (for a third time) by waiting until after the entry of 8
judgment dismissing the Second Amended Complaint, nearly two 9
years after the litigation began. Id. at *4. 10
11
DISCUSSION 12
“We review de novo the dismissal of a complaint under 13
Rule 12(b)(6), accepting all factual allegations as true and 14
drawing all reasonable inferences in favor of the 15
plaintiff.” ECA & Local 134 IBEW Joint Pension Trust of 16
Chicago v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir. 17
2009). “Where, as here, dismissed claims arise under § 11, 18
we conduct a ‘preliminary inquiry’ into whether 19
[P]laintiffs’ allegations are premised on fraud so as to 20
require satisfaction of the heightened pleading standards of 21
Fed. R. Civ. P. 9(b).” In re Lehman Bros. Mortg.-Backed 22

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12
Sec. Litig., --- F.3d ---, 2011 WL 1778726, at *4 (2d Cir. 1
May 11, 2011) (quoting In re Morgan Stanley Info. Fund Sec. 2
Litig., 592 F3d 347, 358 (2d Cir. 2010)). We will not, 3
however, apply the heightened pleading standard of Rule 9(b) 4
where the complaint sounds in negligence, rather than fraud. 5
See, e.g., Litwin v. Blackstone Grp., L.P., 634 F.3d 706, 6
715 (2d Cir. 2011). Here, Plaintiffs “expressly disclaim[] 7
any allegation of fraud . . . and [D]efendants do not 8
contend otherwise.” In re Lehman Bros., 2011 WL 1778726, at 9
*4. “Accordingly, we review the complaint[’s] sufficiency 10
under the notice-pleading standard, which requires 11
[P]laintiffs to assert enough facts to state a claim to 12
relief that is plausible on its face.” Id. (internal 13
quotation marks omitted). “A claim has facial plausibility 14
when the plaintiff pleads factual content that allows the 15
court to draw the reasonable inference that the defendant is 16
liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 17
U.S. ––––, 129 S. Ct. 1937, 1949 (2009). 18
I. 19
A. 20
Section 11 of the Securities Act provides a private 21
right of action to a person who purchased a security, either 22
directly from the issuer or in the aftermarket, if the 23

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13
registration statement filed with the SEC contained either 1
misstatements or omissions of material facts. See 15 U.S.C. 2
§ 77k(a). Similarly, Section 12(a)(2) imposes liability on 3
the issuer or seller of securities if the securities were 4
sold using a prospectus that contained a material 5
misstatement or omission. See id. § 77l(a)(2). “So long as 6
a plaintiff establishes one of the three bases for liability 7
under these provisions--(1) a material misrepresentation; 8
(2) a material omission in contravention of an affirmative 9
legal disclosure obligation; or (3) a material omission of 10
information that is necessary to prevent existing 11
disclosures from being misleading, see In re Morgan Stanley, 12
592 F.3d at 360--then, in a Section 11 case, ‘the general 13
rule [is] that an issuer’s liability . . . is absolute.’” 14
Blackstone, 634 F.3d at 715-16 (quoting In re Initial Pub. 15
Offering Sec. Litig., 483 F.3d 70, 73 n.1 (2d Cir. 2007)). 16
Section 15 creates liability for individuals or entities 17
that “control[] any person liable” under Sections 11 or 12. 18
15 U.S.C. § 77o(a). 19
“Issuers are subject to ‘virtually absolute’ liability 20
under section 11,” In re Morgan Stanley, 592 F.3d at 359 21
(quoting Herman & MacLean v. Huddleston, 459 U.S. 375, 382 22
(1983)), and plaintiffs alleging violations of Sections 11 23

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4 Plaintiffs assert that Defendants also breached a
disclosure obligation created by Item 503 of Regulation S-K,
17 C.F.R. § 229.503. Item 503 requires that a registrant
“[w]here appropriate, provide . . . a discussion of the most
significant factors that make the offering speculative or
risky.” Id. § 229.503(c). On appeal, Plaintiffs advance no
arguments unique to Item 503, focusing instead primarily on
Defendants’ disclosure obligations under Item 303.
Moreover, to the extent we conclude that the impairment of
the Triton Loans and Triton’s financial difficulties prior
to the IPO did not constitute facts “reasonably likely” to
be material under Item 303, see Blackstone, 634 F.3d at 716,
we similarly conclude that they were not among “the most
significant factors” rendering CBRE’s IPO “speculative or
risky,” 17 C.F.R. § 229.503(c).
14
and 12(a)(2) not need plead “scienter, reliance, or loss 1
causation,” id. (citing Rombach v. Chang, 355 F.3d 164, 169 2
n.4 (2d Cir. 2004)). 3
Plaintiffs principally cite Item 303 of Regulation S-K, 4
17 C.F.R. § 229.303, as the disclosure obligation that was 5
breached. 4 Item 303 requires that a registrant “[d]escribe 6
any known trends or uncertainties that have had or that the 7
registrant reasonably expects will have a material favorable 8
or unfavorable impact on net sales or revenues or income 9
from continuing operations.” 17 C.F.R. § 229.303(a)(3)(ii). 10
“The SEC’s interpretive release regarding Item 303 clarifies 11
that the Regulation imposes a disclosure duty ‘where a 12
trend, demand, commitment, event or uncertainty is both [1] 13
presently known to management and [2] reasonably likely to 14
have material effects on the registrant’s financial 15

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15
condition or results of operations.’” Blackstone, 634 F.3d 1
at 716 (quoting Management’s Discussion and Analysis of 2
Financial Condition and Results of Operations, Securities 3
Act Release No. 6835, Exchange Act Release No. 26,831, 4
Investment Company Act Release No. 16,961, 43 SEC Docket 5
1330 (May 18, 1989)). 6
B. 7
The Triton Loans were $51.5 million out of a total 8
investment portfolio of more than $1.1 billion; but, as 9
Plaintiffs emphasize, the Triton Loans made up a much larger 10
proportion--approximately 25%--of CBRE’s mezzanine loan 11
portfolio. 12
To determine whether a misstatement or omission is 13
material is an “inherently fact-specific” inquiry. Basic v. 14
Levinson, 485 U.S. 224, 236 (1988). A fact “‘is material if 15
there is a substantial likelihood that a reasonable 16
shareholder would consider it important in deciding how to 17
[act].’” Id. at 231 (quoting TSC Indus., Inc. v. Northway, 18
Inc., 426 U.S. 438, 449 (1976)). That is to say “there must 19
be a substantial likelihood that the disclosure of the 20
omitted fact would have been viewed by the reasonable 21
investor as having significantly altered the ‘total mix’ of 22
information made available.” TSC Indus., Inc., 426 U.S. at 23
449. 24

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16
“[W]e have consistently rejected a formulaic approach 1
to assessing the materiality of an alleged 2
misrepresentation.” Ganino v. Citizens Utils. Co., 228 F.3d 3
154, 162 (2d Cir. 2000). “In both Ganino and [JP Morgan], 4
we cited with approval SEC Staff Accounting Bulletin No. 99, 5
64 Fed. Reg. 45,150 (1999) . . . , which provides relevant 6
guidance regarding the proper assessment of materiality.” 7
Blackstone, 634 F.3d at 717. According to SEC Staff 8
Accounting Bulletin No. 99 (“SAB No. 99”), “[t]he use of a 9
percentage as a numerical threshold such as 5%, may provide 10
the basis for a preliminary assumption” of materiality, but 11
a bright line percentage “cannot appropriately be used as a 12
substitute for a full analysis of all relevant 13
considerations.” 64 Fed. Reg. at 45,151. Among useful 14
qualitative factors are (1) “whether the misstatement 15
concerns a segment or other portion of the registrant’s 16
business that has been identified as playing a significant 17
role in the registrant’s operations or profitability,” 64 18
Fed. Reg. at 45,152, and (2) whether management expects 19
“that the misstatement will result in a significant market 20
reaction,” JP Morgan, 553 F.3d at 198. 21
22

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17
II. 1
CBRE’s Registration Statement represented that loans or 2
other investments would be considered impaired “when it is 3
deemed probable that [CBRE] will be unable to collect all 4
amounts due according to the contractual terms of the 5
original agreements.” In the Second Amended Complaint, 6
Plaintiffs rely on the statements of several confidential 7
witnesses to support their allegations concerning CBRE’s 8
knowledge that the Triton Loans were impaired. One witness, 9
a former regional manager of Freemont, explained that prior 10
to the IPO, Freemont was in constant discussions with Triton 11
about the out-of-balance condition of its loan and that the 12
out-of-balance condition caused Triton to seek a $5 to $10 13
million capital infusion from a group of outside investors. 14
As previously discussed, Freemont and CBRE entered into an 15
Intercreditor Agreement after they closed on the Monterey 16
loans; the Agreement provided that “Freemont communicate 17
with CBRE upon the occurrence of potential default events . 18
. . . [and that] one such potential event of default . . . 19
required that Freemont notify CBRE upon the occurrence of a 20
so-called ‘out-of-balance’ condition, which is more commonly 21
referred to as a construction cost overrun.” Freemont’s 22

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18
contractually-mandated discussions with CBRE, Plaintiffs 1
allege, should have apprised CBRE that the Monterey Loan was 2
impaired, or at least likely to be impaired. 3
Because we are at the pleading stage, we accept 4
Plaintiffs’ allegations as true and draw all reasonable 5
inferences in Plaintiffs’ favor. See Johnson v. Rowley, 569 6
F.3d 40, 43 (2d Cir. 2009) (per curiam). Therefore, because 7
Freemont was aware of cost overruns at The Monterey and 8
because the Intercreditor Agreement required Freemont to 9
disclose potential default events to CBRE, a plausible 10
inference may be drawn that CBRE was aware of the cost 11
overruns and was thereby aware of an existing trend, event 12
or uncertainty under Item 303. 17 C.F.R. 13
§ 229.303(a)(3)(ii); see Blackstone, 634 F.3d at 716 14
(observing that Item 303 “imposes a disclosure duty where a 15
trend, demand, commitment, event or uncertainty is both [1] 16
presently known to management and [2] reasonably likely to 17
have material effects on the registrant’s financial 18
condition or results of operations.”) (internal quotation 19
mark omitted). “[T]he sole remaining issue is whether the 20
effect of the ‘known’ information was ‘reasonably likely’ to 21
be material for the purpose of Item 303 and, in turn, for 22

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19
the purpose of Sections 11 and 12(a)(2).” Blackstone, 634 1
F.3d at 716. 2
3
III. 4
The district court, eliding any discussion of the 5
traditional quantitative and qualitative factors used to 6
assess materiality, instead dismissed the Second Amended 7
Complaint on the sole ground that the alleged misstatements 8
and omissions were not material because the Triton Loans 9
were adequately collateralized at the time of the IPO. See 10
Hutchison I, 638 F. Supp. 2d at 275-76. While this bright 11
line rule has considerable appeal, this is not a case in 12
which we should consider adopting it, because the 13
unambiguous wording of the Registration Statement defines 14
“impairment” in a way that discounts any issue of 15
collateralization: “Loans and other investments are 16
considered to be impaired, for financial reporting purposes, 17
when it is deemed probable that the Company will be unable 18
to collect all amounts due according to the contractual 19
terms of the original agreements . . . .” (emphasis added). 20
Even assuming the Triton Loans were fully collateralized, a 21
loan default would result in (at least) a temporary loss to 22

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20
CBRE because in the event of a default, CBRE would have to 1
initiate foreclosure proceedings that would entail delay, 2
fees, costs and prolonged uncertainty. Even if CBRE could 3
ultimately recover the full amount of its loan after a 4
foreclosure, and even if a default ultimately “would not 5
harm CBRE,” id. at 277, CBRE would not have collected 6
“according to the contractual terms of the original 7
agreements.” Without categorically rejecting the district 8
court’s collateralization approach, we hold that it cannot 9
decide this case. Adequacy of collateral is one of the 10
qualitative factors--but not the only one--that determines 11
whether a misstatement or omission concerning the loan is 12
material. 13
We therefore turn to quantitative measures. To do so, 14
we must at the outset reconcile two recent decisions in our 15
Circuit, each of which analyzed whether statements in a 16
registration statement were material for purposes of a 17
Section 11 claim: ECA & Local 134 IBEW Joint Pension Trust 18
of Chicago v. JP Morgan Chase Co., 553 F.3d 187 (2d Cir. 19
2009), and Litwin v. Blackstone Grp., L.P., 634 F.3d 706 (2d 20
Cir. 2011). In JP Morgan, the panel conducted a 21
quantitative materiality analysis that compared the value of 22

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21
the troubled investment to the value of the defendant’s 1
entire investment portfolio, whereas the Blackstone panel, 2
conceding that the troubled investment did not meet the 5% 3
quantitative threshold when considered as a part of the 4
company’s entire portfolio, determined that the investment 5
was qualitatively material nevertheless by weighing the 6
impact of the troubled loan on the constituent part of 7
Blackstone’s business in which the loan was located. 8
In JP Morgan, plaintiffs alleged that JP Morgan Chase 9
Co. (“JP Morgan”) made material misstatements concerning $2 10
billion in prepay transactions that JP Morgan made to a 11
special purpose entity that, in turn, made loans to Enron 12
Corporation. 553 F.3d at 193. We first looked to the 13
quantitative factors and observed: 14
Although $2 billion in prepay transactions may sound 15
staggering, the number must be placed in context-- 16
reclassifying $2 billion out of one category of trading 17
assets (derivative receivables) totalling $76 billion 18
into another category (loan assets) totalling $212 19
billion does not alter JPMC’s total assets of $715 20
billion. Moreover, the underlying assets in either 21
classification carry some default risk. As the 22
district court said about this same information, 23
“[c]hanging the accounting treatment of approximately 24
0.3% of JPM Chase’s total assets from trades to loans 25
would not have been material to investors.” 26
Id. at 204 (quoting In re JP Morgan Chase Sec. Litig., 363 27
F. Supp. 2d 595, 631 (S.D.N.Y. 2005)) (internal citation 28

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22
omitted). On appeal, we approved the quantitative approach 1
as “a good starting place for assessing the materiality of 2
the alleged misstatement,” and reasoned that “[a]n 3
accounting classification decision that affects less than 4
one-third of a percent of total assets does not suggest 5
materiality.” Id. We added that a further necessary 6
consideration is the qualitative factors set forth in SAB 7
No. 99. Id. 8
In Blackstone, the plaintiffs alleged that Blackstone 9
Group, L.P. (“Blackstone”) invested: (1) approximately $331 10
million in FGIC Corp., a monoline financial guarantor, 634 11
F.3d at 711; (2) $3.1 billion in Freescale Semiconductor, 12
Inc., a semiconductor designer and manufacturer, id.; and 13
(3) an undisclosed amount in residential real estate 14
investments, id. at 712. Plaintiffs alleged that at the 15
time of Blackstone’s $4.5 billion IPO, FGIC faced massive 16
losses as a result of the housing market collapse, id. at 17
711, and that Freescale had lost an exclusive agreement to 18
manufacture chipsets for its largest customer, id. at 711- 19
12. We conceded that “Blackstone’s investments in FGIC and 20
Freescale f[e]ll below the presumptive 5% threshold of 21
materiality,” but held that “the District Court erred in its 22

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23
analysis of certain qualitative factors related to 1
materiality.” Id. at 719. First, we held that Blackstone 2
could not rely on its corporate structure to argue 3
immateriality on the ground that a loss in one division was 4
offset by a gain in another. Id. Second--and critical for 5
present purposes--we held that the district court “erred in 6
finding that the alleged omissions did not relate to a 7
significant aspect of Blackstone’s operations.” Id. The 8
Corporate Private Equity group was represented by Blackstone 9
to be its “flagship segment” and had a critical role in the 10
overall enterprise. Id. at 720. “Even where a misstatement 11
or omission may be quantitatively small compared to a 12
registrant’s firm-wide financial results”--Blackstone’s 13
investment in Freescale was a relatively minor piece of 14
Blackstone’s total investments, accounting for 9.4% of the 15
Corporate Private Equity segment’s assets under management-- 16
“its significance to a particularly important segment of a 17
registrant’s business tends to show its materiality.” Id. 18
We need to consider these two opinions together in 19
order to decide in this case whether to gauge the 20
materiality of the Triton Loans in terms of CBRE’s entire 21
portfolio or its portfolio of mezzanine loans only. It is 22

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24
clear that Blackstone does not purport to limit or affect 1
the holding of JP Morgan: a panel is “bound by the decisions 2
of prior panels until such time as they are overruled either 3
by an en banc panel of our Court or by the Supreme Court.” 4
United States v. Wilkerson, 361 F.3d 717, 732 (2d Cir. 5
2004). So we need to identify the crucial factor or fact 6
that renders Blackstone consistent with the holding of JP 7
Morgan. It is this: If a particular product or product- 8
line, or division or segment of a company’s business, has 9
independent significance for investors, then even a matter 10
material to less than all of the company’s business may be 11
material for purposes of the securities laws. 12
Hypothetically, such a product or segment might be the 13
company’s original niche, its iconic or eponymous business, 14
critical to its reputation, or most promising for growth or 15
as an engine of revenue. Thus Blackstone emphasized as a 16
qualitative factor that the Corporate Private Equity group 17
was the firm’s “flagship segment”: “a reasonable investor 18
would almost certainly want to know information related to 19
that segment that Blackstone reasonably expects will have a 20
material adverse effect on its future revenues.” 21
Blackstone, 634 F.3d at 720. 22

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25
CBRE is “a commercial real estate speciality finance 1
company that is primarily focused on originating, acquiring, 2
investing, financing, and managing a diversified portfolio 3
of commercial real estate-related loans and securities.” 4
Plaintiffs claim that the entirety of the Triton Loans-- 5
$51.5 million--constituted “25% of CBRE’s mezzanine loans 6
which were 60% of CBRE’s total capital, 27% of all of CBRE’s 7
loans, and 21% of CBRE’s entire investment portfolio.” Thus 8
Plaintiffs isolate some of CBRE’s transactions (mezzanine 9
loans) as a notional division or segment in which the Triton 10
Loans could loom as material in quantitative terms. 11
However, Plaintiffs have not alleged (plausibly or 12
otherwise) that mezzanine loans constitute a component of 13
CBRE’s business that is of distinct interest to investors 14
other than as another component of CBRE’s book of business. 15
For a company that makes real estate loans, mezzanine loans 16
(which are one tier in the hierarchy of secured interests) 17
are not the subject of investors’ fixation. So any alleged 18
impairment of the Triton Loans must be analyzed in relation 19
to CBRE’s entire investment portfolio ($1.1 billion), 20
consistent with the quantitative approach in JP Morgan. 21
In that light, the Triton Loans were not material. 22

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5 Plaintiffs seek to rely on facts outside the Second
Amended Complaint--namely, CBRE’s counterclaims in a lawsuit
filed against the principals of Triton in the United States
District Court for the District of Maryland--to suggest that
CBRE suffered $22.6 million in damages due to Triton’s
default and that CBRE knew (prior to the IPO) that Triton
was experiencing financial difficulties and might not have
been able to make timely interest payments. See CBRE Fin.
TRS, LLC v. McCormick, No. 08-cv-1964, 2009 WL 4782124, at
*10 (D. Md. Dec. 8, 2009) (granting CBRE summary judgment
and awarding more than $22.6 million in damages). Even
assuming that either the district court below or this Court
could consider those extraneous facts, $30.4 million ($7.8
million impairment plus $22.6 million in damages) out of a
total investment portfolio of $1.1 billion falls well short
of SAB No. 99’s 5% threshold and is therefore presumed to be
quantitatively immaterial. See 64 Fed. Reg. at 45,151; see
also JP Morgan, 553 F.3d at 204 (analyzing misreported
transaction as a portion of JP Morgan’s total assets).
26
Moreover, the Second Amended Complaint fails to allege how 1
much of the Triton Loans was impaired at the time of the 2
IPO. It is alleged that when CBRE foreclosed on the Triton 3
Loans, long after the IPO, it incurred a $7.8 million 4
impairment charge on the write-down of the Monterey Loan; 5
but it is not alleged that this figure (or some other dollar 6
amount of impairment) was known to CBRE at the time of the 7
IPO. 5
8
As to the qualitative analysis, Plaintiffs rely on two 9
SAB No. 99 factors to support their contention that the 10
misstatements and omissions were material: (A) CBRE’s stock 11
price drop following disclosure of the Triton Loans’ 12

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27
impairment, and (B) the impact on a major portion of CBRE’s 1
business. See SAB No. 99, 64 Fed. Reg. at 45,152 (“Among 2
the considerations that may well render material a 3
quantitatively small misstatement . . . are-- . . . Whether 4
the misstatement concerns a segment or other portion of the 5
registrant’s business that has been identified as playing a 6
significant role in the registrant’s operations or 7
profitability . . . . [and] the demonstrated volatility of 8
the price of a registrant’s securities in response to 9
certain types of disclosures . . . .”). 10
(A) Stock Drop. The Second Amended Complaint alleges, 11
as cause and effect, that “the price of CBRE common stock 12
declined more than 18%, on extremely heavy [trading] 13
volume,” in the two days following CBRE’s February 26, 2007 14
press release reporting that the Monterey Loan was non- 15
performing and that the Rodgers Forge Loan was placed on 16
CBRE’s watch list. However, that same press release 17
reported lower-than-expected 2006 fourth quarter financial 18
results. CBRE Realty Finance, Inc., Fourth Quarter and Full 19
Year 2006 Results (Form 8-K) (February 26, 2007). (That 20
press release also advised that the Triton Loans were fully 21
collateralized. Id.) 22

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28
The Second Amended Complaint also alleges, as cause and 1
effect, that “the price of CBRE stock declined from $6.21 2
per share to $4.25 per share, a decline of 32%[,] and 70% 3
lower than the IPO price of $14.50, on extremely heaving 4
trading volume,” after CBRE’s August 6, 2007 press release 5
disclosing that CBRE had taken a $7.8 million impairment 6
charge due to the write-down of the Monterey Loan and that 7
CBRE had foreclosed in May 2007 on both The Monterey and The 8
Rodgers Forge. However, the disclosures in the August 2007 9
press release included that CBRE “ha[d] halted making new 10
investments in the near-term” and that CBRE was being 11
required to post an additional $26.7 million in collateral 12
by one of its primary lenders--something that CBRE stated in 13
its Prospectus could have dire consequences: “Posting 14
additional collateral to support our credit facilities will 15
reduce our liquidity and limit our ability to leverage our 16
assets. In the event we do not have sufficient liquidity to 17
meet such requirements . . . . [it could] result in a rapid 18
deterioration of our financial condition and possibly 19
necessitate a filing for [bankruptcy protection].” CBRE 20
Realty Finance, Inc., Second Quarter 2007 Results (Form 8-K) 21
(August 7, 2007). 22

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29
These (insufficient) cause-and-effect allegations 1
exemplify the warning in SAB No. 99 (which we adopted in JP 2
Morgan): “[c]onsideration of potential market reaction to 3
disclosure of a misstatement is by itself too blunt an 4
instrument to be depended on in considering whether a fact 5
is material.” 64 Fed. Reg. at 45,152 (internal quotation 6
marks omitted); see JP Morgan, 553 F.3d at 205 (“SAB No. 99 7
limits the usefulness of [market volatility] to instances 8
where management expects ‘that a known misstatement may 9
result in a significant positive or negative market 10
reaction.’” (quoting SAB No. 99, 64 Fed. Reg. at 41,152)). 11
CBRE’s press releases were loaded with news (largely very 12
bad), any item of which could have caused CBRE’s stock price 13
to drop. Moreover, CBRE had already reported the 14
foreclosures when they happened, in May 2007; so, that item 15
in the August 2007 press release was not information new to 16
the market. 17
As in JP Morgan, Plaintiffs have not pled facts “that 18
would permit the inference that [CBRE] expected that the 19
alleged [omissions concerning the Triton Loans would] result 20
in a significant market reaction.” JP Morgan, 553 F.3d at 21
205. Thus, the market’s reaction to CBRE’s press releases 22

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30
does not “point towards qualitative materiality under SAB 1
No. 99.” Id. 2
(B) Business Impact. Plaintiffs’ contention that the 3
impairment of the Triton Loans impacted a major segment of 4
CBRE’s business fails for the same reasons we hold that the 5
loans were not quantitatively material, i.e., the loans did 6
not compose a significant portion of CBRE’s loan portfolio. 7
Moreover, the fact that the Triton Loans were fully 8
collateralized, as identified by CBRE in its May 7, 2007 9
Form 8-K, militates in favor of finding that a major segment 10
of CBRE’s business ultimately was not threatened by the 11
impairment of the loans. 12
13
IV. 14
Section 15 imposes joint and several liability on 15
“[e]very person who, by or through stock ownership, agency, 16
or otherwise . . . controls any person liable under” § 11. 17
15 U.S.C. § 77o(a). “To establish § 15 liability, a 18
plaintiff must show a ‘primary violation’ of § 11 and 19
control of the primary violator by defendants.” In re 20
Lehman Bros., 2011 WL 1778726, at *14 (quoting JP Morgan, 21
553 F.3d at 206–07). Because Plaintiffs failed to plead a 22

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31
§ 11 claim, their § 15 claim necessarily fails. See, e.g., 1
SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1472-73 (2d 2
Cir. 1996). 3
4
V. 5
We review denial of leave to amend under an “abuse of 6
discretion” standard. See, e.g., McCarthy v. Dun & 7
Bradstreet Corp., 482 F.3d 184, 200 (2d Cir. 2007). When 8
the denial of leave to amend is based on a legal 9
interpretation, such as a determination that amendment would 10
be futile, a reviewing court conducts a de novo review. 11
See, e.g., Littlejohn v. Artuz, 271 F.3d 360, 362 (2d Cir. 12
2001) (“[I]f the denial of leave to amend is based upon a 13
legal interpretation . . . we review the decision de 14
novo.”); see also Gorman v. Consol. Edison Corp., 488 F.3d 15
586, 592 (2d Cir. 2007) (reviewing de novo a district 16
court’s denial of leave to amend on grounds of futility). 17
The district court ruled that “amending the complaint 18
would be futile because the proposed third amended complaint 19
fails to cure the pleading deficiency concerning materiality 20
that plagued the three previous iterations,” i.e., failure 21
to “allege a collateral shortfall at the time the 22

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5 Plaintiffs did not raise any challenges to the
district court’s denial of their motion for reconsideration;
therefore, Plaintiffs have waived any such argument. See
Norton v. Sam’s Club, 145 F.3d 114, 117 (2d Cir. 1998)
(“Issues not sufficiently argued in the briefs are
considered waived and normally will not be addressed on
appeal.”).
32
Registration Statement and prospectus issued.” Hutchison 1
II, 2010 WL 1257495, at *3. Because we affirm the district 2
court’s dismissal of Plaintiffs’ Second Amended Complaint on 3
alternative grounds, we cannot affirm the denial of 4
Plaintiffs’ motion to amend on the futility ground cited by 5
the district court. 5
6
We affirm nevertheless. As discussed above, even 7
assuming Plaintiffs supplement their allegations with facts 8
drawn from CBRE’s lawsuit in Maryland--i.e., that CBRE 9
suffered $22.6 million in damages--Plaintiffs’ allegations 10
fail to satisfy any of SAB No. 99’s quantitative or 11
qualitative materiality factors. Amending the Second 12
Amended Complaint would be futile. 13
14
CONCLUSION 15
The judgment of the district court is affirmed. 16

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