Ohio Police & Fire Pension Fund v. Standard & Poor's Financial Services LLC

RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit I.O.P. 32.1(b)

File Name: 12a0398p.06

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

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OHIO POLICE & FIRE PENSION FUND; OHIO

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PUBLIC EMPLOYEES RETIREMENT SYSTEM;

STATE TEACHERS RETIREMENT SYSTEM OF -

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No. 11-4203

OHIO; SCHOOL EMPLOYEES RETIREMENT

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SYSTEMS OF OHIO; OHIO PUBLIC EMPLOYEES

Plaintiffs-Appellants, -

DEFERRED COMPENSATION PROGRAM,

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v.

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STANDARD & POOR’S FINANCIAL SERVICES

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LLC; THE MCGRAW-HILL COMPANIES, INC.;

MOODY’S CORP.; MOODY’S INVESTORS -

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SERVICE, INC.; FITCH, INC.,

Defendants-Appellees.

Appeal from the United States District Court

for the Southern District of Ohio at Columbus.

No. 2:09-cv-1054—James L. Graham, District Judge.

Argued: October 10, 2012

Decided and Filed: December 3, 2012

Before: GILMAN, GIBBONS, and ROGERS, Circuit Judges.

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COUNSEL

ARGUED: Elizabeth J. Cabraser, LIEFF, CABRASER, HEIMANN & BERNSTEIN,

LLP, San Francisco, California, for Appellants. Floyd Abrams, CAHILL, GORDON &

REINDEL LLP, New York, New York, for Appellees. ON BRIEF: Elizabeth J.

Cabraser, LIEFF, CABRASER, HEIMANN & BERNSTEIN, LLP, San Francisco,

California, Steven E. Fineman, Daniel P. Chiplock, Michael J. Miarmi, LIEFF,

CABRASER, HEIMANN & BERNSTEIN, LLP, New York, New York, John P.

Gilligan, Matthew L. Fornshell, Columbus, Ohio, for Appellants. Floyd Abrams,

Tammy L. Roy, CAHILL, GORDON & REINDEL LLP, New York, New York, Drew

H. Campbell, BRICKER & ECKLER LLP, Columbus, Ohio, Joshua M. Rubins,

SATTERLEE STEPHENS BURKE & BURKE LLP, New York, New York, Martin

Flumenbaum, Roberta A. Kaplan, James J. Beha II, PAUL, WEISS, RIFKIND,

WHARTON & GARRISON LLP, New York, New York, Thomas D. Warren, BAKER

1

No. 11-4203 Ohio Police & Fire, et al. v. Standard & Poor’s Fin., et al. Page 2

& HOSTETLER LLP, Cleveland, Ohio, for Appellees. Marion H. Little, Jr., ZEIGER,

TIGGES & LITTLE LLP, Columbus, Ohio, for Amicus Curiae.

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OPINION

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JULIA SMITH GIBBONS, Circuit Judge. The plaintiffs to this action are five

pension funds operated by the State of Ohio for public employees (the “Funds”). The

Funds invested hundreds of millions of dollars in 308 mortgage-backed securities

(“MBS”) between 2005 and 2008, all of which received a “AAA” or equivalent credit

rating from one of the three major credit-rating agencies (the “Agencies”).1 The value

of MBS collapsed during this period, leaving the Funds with estimated losses of $457

million. In an effort to recoup some of these losses, the Funds brought suit against the

Agencies under Ohio’s “blue sky” laws and a common-law theory of negligent

misrepresentation, alleging that the Agencies’ ratings were false and misleading and that

the Funds’ reasonable reliance on those ratings caused their losses. The district court

granted the Agencies’ motion to dismiss the entire complaint with prejudice. The Funds

now appeal that ruling. For the reasons set forth below, we affirm the judgment of the

district court.

I.

A.

MBS are “financial products whose value is derived from and collateralized by

(i.e., ‘backed’ by) the revenue stream flowing from” a pool of residential or commercial

mortgage loans. Compl. at ¶ 31. An MBS offering is initiated by an “arranger,”

“typically an investment bank,” that buys mortgage loans from lenders and transfers

those loans to an affiliated “bankruptcy remote trust” that is “immune from any

bankruptcy the arranger might suffer and vice versa.” Id. ¶ 32. The trust then offers

1

Standard & Poor’s Financial Services LLC (a wholly-owned subsidiary of The McGraw-Hill

Companies, Inc.), Moody’s Investors Service, Inc. (a wholly-owned subsidiary of Moody’s Corp.), and

Fitch, Inc.

No. 11-4203 Ohio Police & Fire, et al. v. Standard & Poor’s Fin., et al. Page 3

securities collateralized by this pool of mortgages to investors and uses the funds earned

from the sale to cover the costs of acquiring mortgage loans and organizing the offer.

Id. ¶ 33. As the owner of the mortgage loans, the trust is entitled to principal and interest

payments made by mortgagees. Those payments are passed on to the purchasers of the

securities in the form of principal and interest payments. Id.

Arrangers can increase or decrease the risk investors assume when purchasing

MBS by altering one of two features of the capital structure of these investments. Id. ¶

34. First, arrangers can adjust the “overcollateralization” of the securities, which is the

amount by which the principal balance of the mortgage pool exceeds the principal

balance of the issued securities. Id. ¶ 35. This creates a “buffer” zone before mortgage

defaults result in losses for investors. Id. Second, arrangers can change the “excess

spread” of the securities, which is the difference between the interest received on the

mortgages and the interest paid out to investors. Id. The excess spread can be applied

toward delinquent interest payments or used to build up loss reserves. Id. The degree

to which securities incorporate these risk-prevention features is known as “credit

enhancement.” Arrangers can further apportion risk by issuing multiple classes, or

“tranches,” of securities collateralized by the same underlying asset pool. Id. Tranches

are prioritized by their level of credit enhancement. Id. Accordingly, investors in the

lowest tranche have the lowest up-front costs, but they also bear the lowest level of

credit enhancement and would have all losses of payments and interest allocated to them

before investors in the next highest tranche could be affected. Id. By contrast, the Funds

paid premium prices for “AAA”-rated funds in the highest tranche, which provided the

greatest amount of credit enhancement. Id. ¶¶ 3, 38, 100.

B.

It was the role of the Agencies to assess how much risk investors assumed when

they purchased MBS. Arrangers typically initiated this process by sending the Agencies

data on the sort of mortgages they planned to acquire and securitize, along with their

proposed capital structure. Id. ¶ 37. The Agencies used statistical modeling to predict

how many of the pooled mortgage loans would enter default, as well as how much of the

No. 11-4203 Ohio Police & Fire, et al. v. Standard & Poor’s Fin., et al. Page 4

principal balance of the loan the arranger could expect to recover after a default. Id.

Based on these predictions, the Agencies would run “stress tests” in order to determine

“how much credit enhancement a given tranche security needed to receive a particular

credit rating.” Id. ¶ 38. They would then look at the proposed capital structure to see

if it provided an appropriate level of credit enhancement and report their findings to the

arranger. Id. ¶ 39. Once the arranger settled on a capital structure and estimated rating

for each tranche, the Agency would perform a final review of the estimated cash flow

and legal documentation of the proposed MBS offering before providing a final rating.

Id. ¶ 40. The Agency would earn its fee if the desired rating issued. Id. ¶¶ 39–40. At

any point in this process, the arranger could reject the Agency’s proposed rating. Id.

The Funds allege that between 2005 and 2008, this “issuer pays” system

compromised the integrity of the credit rating process. Id. ¶ 52. In an effort to attract

the significant rating fees paid by MBS arrangers, the Agencies “became intimately

involved in the issuance of [MBS]” by assisting arrangers in structuring their securities

to achieve certain credit ratings, turning the process into a form of negotiation and

placing the Agencies in the position of “rating their own work.” Id. ¶¶ 56, 65, 80.

Nonetheless, the Agencies continued to publicize the objectivity, independence, and

analytical rigor of their rankings, despite privately acknowledging the “latent conflict

of interest” in their business model. Id. ¶¶ 43–51, 66. In addition, the desire to attract

business led the Agencies to lower their rating standards. Id. ¶¶ 82–93. They preferred

older, more forgiving debt models over more up-to-date ones that might result in the

rejection of an arranger’s proposed capital structure. Id. ¶ 85. Analysts would also

perform “out of model” corrections to achieve a certain rating for a security that

computer models did not justify. Id. ¶¶ 92–93. The Funds allege that the Agencies did

not properly disclose the weaknesses of the Agencies’ ratings, that the Agencies knew

investors like the Funds would rely on the accuracy of their ratings in making investment

decisions, and that the Agencies’ failure to make proper disclosures caused the

significant losses the Funds experienced when the MBS market collapsed. Id. ¶¶

97–101.

No. 11-4203 Ohio Police & Fire, et al. v. Standard & Poor’s Fin., et al. Page 5

The complaint describes these practices at a high level of generality. It draws its

allegations from publicly available reports, newspapers, and magazines explaining

problems with the Agencies’ business model from 2005 to 2008. Although the

complaint includes an exhaustive appendix of the 308 MBS the Funds purchased, no fact

alleged in the complaint is connected to any particular rating given by an Agency for a

security the Funds purchased during the period in question.

C.

The complaint contains three counts: (1) common-law negligent

misrepresentation; (2) violation of Ohio Rev. Code § 1707.41; and (3) violation of Ohio

Rev. Code § 1707.43. The district court granted a motion to dismiss the entire complaint

for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) and entered

judgment with prejudice in favor of the Agencies. At no point in the district court

proceedings did the Funds seek to amend their complaint. This timely appeal followed.

II.

A district court’s order granting a Rule 12(b)(6) motion receives de novo review

on appeal. Courie v. Alcoa Wheel & Forged Prods., 577 F.3d 625, 629 (6th Cir. 2009).

We must “construe the complaint in the light most favorable to the plaintiff, accept its

allegations as true, and draw all reasonable inferences in favor of the plaintiff.” Directv,

Inc. v. Treesh, 487 F.3d 471, 476 (6th Cir. 2007). Despite this liberal pleading standard,

we “may no longer accept conclusory legal allegations that do not include specific facts

necessary to establish the cause of action.” New Albany Tractor, Inc. v. Louisville

Tractor, Inc., 650 F.3d 1046, 1050 (6th Cir. 2011). Rather, the complaint has to “plead[]

factual content that allows the court to draw the reasonable inference that the

defendant[s are] liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678

(2009). If the Funds do “not nudge[] their claims across the line from conceivable to

plausible, their complaint must be dismissed.” Bell Atl. Corp. v. Twombly, 550 U.S. 544,

570 (2007).

No. 11-4203 Ohio Police & Fire, et al. v. Standard & Poor’s Fin., et al. Page 6

Because the district court exercised diversity jurisdiction, this court must “apply

[New York and Ohio] substantive law to the state-law claims presented,” as interpreted

by their respective state supreme courts. Beverage Distribs., Inc. v. Miller Brewing Co.,

690 F.3d 788, 792 (6th Cir. 2012). If those courts have not ruled on a particular issue,

“‘this [c]ourt must predict how [they] would rule, by looking to all relevant data,

including state appellate decisions.’” Id. (quoting Kessler v. Visteon Corp., 448 F.3d

326, 330 (6th Cir. 2006) (internal quotation marks omitted)).

III.

Section 1707.41(A) of the Ohio Revised Code, enacted in 1913, creates “an

express private civil cause of action for the use of false sales materials.” Thomas E.

Geyer et al., Civil Liability and Remedies in Ohio Securities Transactions, 70 U. Cin.

L. Rev. 939, 1009 (2002). It provides:

[A]ny person that, by a written or printed circular, prospectus, or

advertisement, offers any security for sale, or receives the profits

accruing from such sale, is liable, to any person that purchased the

security relying on the circular, prospectus, or advertisement, for the loss

or damage sustained by the relying person by reason of the falsity of any

material statement contained therein or for the omission of material facts

....

Ohio Rev. Code § 1707.41(A) (emphasis added). The Funds do not allege that the

Agencies “sold” or “offer[ed] . . . for sale” the securities they rated; that was the

arrangers’ role. Therefore, this claim turns on whether or not the Agencies “receive[d]

the profits accruing from” the issuance and sales of MBS. The district court held that

they did not because the Agencies were paid for “work performed in preparation for a

securities offering” and their fees were “not contingent upon an actual sale.” Ohio

Police & Fire Pension Fund v. Standard & Poor’s Fin. Servs., LLC, 813 F. Supp. 2d

871, 878 (S.D. Ohio 2011) [hereinafter OPFPF].

“When interpreting legislation, courts must give the words used in statutes their

plain and ordinary meaning, unless legislative intent indicates otherwise.” Coventry

Towers, Inc. v. City of Strongsville, 480 N.E.2d 412, 414 (Ohio 1985). Particularly in

No. 11-4203 Ohio Police & Fire, et al. v. Standard & Poor’s Fin., et al. Page 7

the context of business and finance, the “plain and ordinary meaning” of the word

“profit” is “[t]he excess of revenues over expenditures in a business transaction.” Black’s

Law Dictionary 1329 (9th ed. 2009). Sources from the time of section 1707.41(A)’s

passage also reflect this understanding. See Eyster v. Centennial Bd. of Fin., 94 U.S.

500, 503 (1876) (“[T]he receipts of the exhibition, over and above its current expenses,

are the profits of the business. . . . They are, in fact, the net receipts, which, according

to the common understanding, ordinarily represent the profits of a business.”); Webster’s

Revised Unabridged Dictionary 1144 (1913) (“Acquisition beyond expenditure; excess

of value received for producing, keeping, or selling, over cost; hence, pecuniary gain in

any transaction or occupation; emolument; as, a profit on the sale of goods.”). Since

“profit” is contingent upon expenses incurred and revenue generated, a seller’s promise

to share “the profits accruing from [the] sale” does not guarantee that the promisee will

receive any payment at all. See United States v. Santos, 553 U.S. 507, 517 (2008)

(plurality opinion) (“[B]y definition profits consist of what remains after expenses are

paid.”).

The Agencies’ rating fees were fixed costs of an MBS issue. As the complaint

notes, the Agencies’ entitlement to a fee vested when their ratings issued. The fees did

not vary based on the amount by which revenues exceeded expenditures, or the amount

of shares sold. One MBS offering document that the Funds rely upon heavily in their

briefing is illustrative of this relationship:

[T]he net proceeds from the sale of the Offered Certificates will be

applied by the Depositor to pay for the acquisition of the Mortgage Loans

from the Seller, as well as to pay the costs of structuring and issuing the

securities, which generally consists of legal, accounting and rating

agency fees . . . .

Id. ¶ 119(e). Even though the arrangers contemplated using monies generated by the

sale of the securities to satisfy the costs of retaining the Agencies, payments to the

Agencies were part of “the costs of structuring and issuing the securities,” similar to

“legal” and “accounting” fees. Accordingly, these fees lacked the contingent quality that

is characteristic of profits.

No. 11-4203 Ohio Police & Fire, et al. v. Standard & Poor’s Fin., et al. Page 8

The Funds argue that the Agencies “receive[d] the profits” from the sale of MBS

merely because they were paid out of the “proceeds” or “net proceeds” of MBS sales.

But this argument confuses the source of payment with the manner in which the amount

of payment is determined. Because the Agencies were not entitled to what remained of

the “proceeds” of MBS sales “after expenses [were] paid,” Santos, 503 U.S. at 517, it

is not relevant that they were paid out of “proceeds” or “net proceeds,” and the district

court was correct to reject this argument.

The amicus curiae argues “profit” can mean “benefit, advantage, or pecuniary

gain,” and that under this definition, the Agencies are liable. “Profit” can bear this

meaning in certain usages. Webster’s Revised Unabridged Dictionary 1144 (1913)

(“Accession of good; valuable results; useful consequences; benefit; avail; gain; as, an

office of profit.”). But this is not an appropriate definition in the context of this statute,

for two reasons. First, the use of a definite article in front of “profits,” and the

requirement that “the profits accru[e] from such sale,” suggest that the word “profits”

is referring to the definite quantity of “revenue minus expenses,” and not to any “gain”

or “benefit” arising from a securities sale. Second, in the context of a securities-fraud

statute, it would be unusual to give the word “profit” a meaning other than the “plain and

ordinary” one widely accepted in business and finance. See Mut. Bldg. & Inv. Co. v.

Efros, 89 N.E.2d 648, 650–51 (Ohio 1949) (“The language employed in a statute must

be accorded its common, ordinary and usually accepted meaning in the connection in

which it is used . . . .” (emphasis added)).

This distinction between sharing profits and paying business expenses has been

recognized in dicta by a leading Ohio case interpreting this section of the “blue sky”

laws. In Federated Management Co. v. Coopers & Lybrand, 738 N.E.2d 842, 858 (Ohio

Ct. App. 2000), the defendant bank received a “referral fee” consisting of a percentage

of “the proceeds the underwriter received from” the sale of debt notes issued by a solid

waste management company. The bank argued that these payments, which “were based

directly on the [n]ote [o]ffering,” were “akin to fees earned by attorneys and printers

No. 11-4203 Ohio Police & Fire, et al. v. Standard & Poor’s Fin., et al. Page 9

who worked for an underwriter.” Id. In concluding that the bank had “profited from the

sale of the securities,” the Ohio Court of Appeals rejected this argument:

Attorneys who perform services for underwriters in connection with a

securities offering . . . receive their fee regardless of whether the

securities actually went up for sale. Here, [the bank] received its fees

because the underwriter received its fees, and the underwriter received

its fee (a fee that was directly based upon the price of the [n]otes)

because the [n]ote [o]ffering actually occurred. [The bank] received

profits accruing from the sale of securities . . . .

Id.

The Funds attempt to analogize the case before us to Federated Management

because, in both cases, there was a “causal connection” between the securities

offerings and their fees. This is an oversimplification. Because the bank in Federated

Management agreed to take a percentage of sales proceeds as its referral fee, the fee was

contingent on the “profitability” of the securities offering. By contrast, even though the

Agencies were paid out of the proceeds of MBS sales, their fees were fixed business

costs that would have to be satisfied regardless of whether the securities “actually went

up for sale.” In this respect, the Agencies are more akin to the attorneys and accountants

described in Federated Management, a similarity the prospectus quoted above implies

by grouping “rating agency” fees with “legal” and “accounting” fees. Accordingly,

Federated Management supports the conclusion that ratings fees cannot be considered

“profits” for purposes of section 1707.41(A).

The Funds also rely upon Baker v. Conlan, 585 N.E.2d 543 (Ohio Ct. App.

1990). In that case, a corporation served as a general partner of a limited partnership that

intended to purchase a horse for breeding and sell its offspring. 585 N.E.2d at 544.

After selling shares in the limited partnership to investors, the venture collapsed. Id. at

545. The corporation, along with its director, was found liable under section

1707.41(A). Id. at 549–50. In affirming the finding of liability against the corporation,

the Ohio Court of Appeals observed that the corporation “had received some of the

proceeds from the investors, and was therefore liable as a recipient of the ‘profits

accruing from’ the sales.” Id. at 548. The Funds focus on the Baker court’s use of the

No. 11-4203 Ohio Police & Fire, et al. v. Standard & Poor’s Fin., et al. Page 10

word “proceeds” and argue that this shows that the receipt of “proceeds” is sufficient to

create liability under section 1707.41(A). This reading of the case elevates form over

substance. The corporation was not offering a service prior to the sale of securities for

which it was promised payment, independent of whether or not sale of the securities was

successful. Because it does not speak to the facts of this case, we find Baker to be

unpersuasive.

Two remaining arguments in support of the Funds’ interpretation of the statute

need be addressed only briefly. First, the Funds cannot circumvent the statute by

arguing that profits from previous MBS sales were used to pay the Agencies’ rating fees.

This claim contradicts the Funds’ consistent allegations that arrangers paid the Agencies

for their work on a particular security out of the funds generated by offering that security

for sale. But even if the complaint supported this about-face, the statute creates liability

only when the plaintiff purchased “the security” sold under false pretenses, and the

defendant received profits from “such sale,” not from sales of unrelated securities

offered on a previous occasion. Ohio Rev. Code § 1707.41(A) (“[A]ny person that . . .

offers any security for sale, or receives the profits accruing from such sale . . . is liable,

to any person that purchased the security . . . .” (emphasis added)). Second, the mandate

of the Ohio courts to construe section 1707.41(A) “liberally,” In re Columbus Skyline

Secs., Inc., 660 N.E.2d 427, 429 (Ohio 1996), does not authorize this court to ignore the

plain meaning of statutory text or disregard Ohio case law interpreting the statute, Lake

Hosp. Sys., Inc. v. Ohio Ins. Guar. Ass’n, 634 N.E.2d 611, 614 (Ohio 1994) (“There is

no need to liberally construe a statute whose meaning is unequivocal and definite.”). We

conclude that the district court correctly dismissed the Funds’ section 1707.41(A) claim.

IV.

The second statute under which the Funds seek relief, entitled “Remedies of

purchaser in unlawful sale,” provides:

[E]very sale or contract for sale made in violation of Chapter 1707. of the

Revised Code, is voidable at the election of the purchaser. The person

making such sale or contract for sale, and every person that has

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participated in or aided the seller in any way in making such sale or

contract for sale, are jointly and severally liable to the purchaser . . . .

Ohio Rev. Code § 1707.43(A) (emphasis added). This provision has an unusual dual

nature. Its primary purpose is to confer a rescission remedy on victims of securities

fraud. See Martin v. Steubner, 485 F. Supp. 88, 101 (S.D. Ohio 1979) (“[Section

1707.43(A)] is not punitive but simply permits the purchaser to rescind the transaction

and puts the parties in the position they were in before the contract was entered into.”).

But the statute also imposes secondary liability on those who “participate[ ] in or aid[ ]

the seller in any way in making such sale or contract for sale,” presuming the existence

of a “sale or contract for sale made in violation” of the “blue sky” laws. Ohio Rev.

Code § 1707.43(A). The district court dismissed this claim because the Funds failed to

plead either a violation of the securities laws by the Agencies themselves or another

party’s violation of the laws that the Agencies “participated in or aided.” OPFPF, 813

F. Supp. 2d at 878–79.

The Funds primarily rely upon the Agencies’ alleged violation of section

1707.41(A) to support their section 1707.43(A) entitlement to rescission. As discussed

above, that argument lacks merit. In order to salvage their rescission remedy, the Funds

claim that two different predicate violations can be reasonably inferred from the

complaint: violations of section 1707.41(A) by the arrangers in issuing the securities the

Funds purchased, and violations of section 1707.44(B) by the Agencies themselves. As

explained below, neither argument preserves the Funds’ section 1707.43(A) claim. The

amicus curiae suggests an additional possibility, section 1707.44(J), which the Funds did

not argue themselves, and we will not consider. See Cellnet Commc’ns, Inc. v. F.C.C.,

149 F.3d 429, 443 (6th Cir. 1998).

A.

We look first to the Funds’ assertion that the Agencies can be held liable for the

arrangers’ violations of Ohio law. The complaint does not allege that any entity other

than the Agencies committed securities fraud, even in conclusory terms. The best the

Funds can do is to argue that the complaint alleges arrangers “took advantage of the

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‘issuer-pays’ model to pressure the Rating Agencies into assigning false or misleading

ratings to the subject MBS,” but that is not the equivalent of claiming that the arrangers

actually made material misrepresentations or omissions in written form, in violation of

section 1707.41(A). Even if that were sufficient, the portion of the complaint the Funds

rely upon to establish this claim is devoid of allegations of pressure to make false

statements by the arrangers. See Compl. ¶¶ 42–75. The Funds claim that this reading

of the complaint represents a misapplication of Federal Rule of Civil Procedure 9(b)’s

“particularity” requirement for fraud claims to section 1707.41(A). But the Funds have

not even satisfied Rule 8(a)’s “plausibility” standard, having offered no facts from which

a reasonable inference of wrongdoing by unnamed arrangers could be drawn. See Iqbal,

556 U.S. at 678. The complaint accordingly falls short of alleging a section 1707.41(A)

violation by the arrangers.

B.

We also reject the Funds’ attempt to save their rescission remedy by claiming the

Agencies violated section 1707.44(B)(4) of the Ohio Revised Code. The statute

provides:

No person shall knowingly make or cause to be made any false

representation concerning a material and relevant fact, in any oral

statement or in any prospectus, circular, description, application, or

written statement, for [the] purpose[ of] . . . [s]elling any securities in this

state . . . .

Ohio Rev. Code § 1707.44(B)(4). Unlike section 1707.41(A), this statute “prohibit[s]

only affirmative misrepresentation; [it does] not apply to fraudulent nondisclosure.”

State v. Warner, 564 N.E.2d 18, 38 (Ohio 1990). The Funds could have proceeded

against the Agencies under section 1707.44(B)(4) when they filed their complaint, but

chose not to, and for good reason. As explained in greater detail in section V.B, infra,

the complaint does not adequately plead affirmative misrepresentations by the Agencies.

Accordingly, the Funds have not alleged a predicate violation of 1707.44(B) and we

dismiss the Funds’ claim for rescission under section 1707.43(A).

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V.

The final theory of liability under which the Funds seek relief against the

Agencies is common-law negligent misrepresentation. The parties disagreed below

about whether Ohio or New York common law governed the claims, but the district

court found that under the law of either state, the claims failed. OPFPF, 813 F. Supp.

2d at 879. In Ohio, negligent misrepresentation is defined as follows:

One who, in the course of his business, profession or employment, or in

any other transaction in which he has a pecuniary interest, supplies false

information for the guidance of others in their business transactions, is

subject to liability for pecuniary loss caused to them by their justifiable

reliance upon the information, if he fails to exercise reasonable care or

competence in obtaining or communicating the information.

Delman v. City of Cleveland Heights, 534 N.E.2d 835, 838 (Ohio 1989) (emphasis

omitted) (quoting Restatement (Second) of Torts § 552(1) (1965)). A similar definition

maintains under New York law.2 The district court correctly held that the Funds lacked

a viable claim under either Ohio or New York law because they (1) did not properly

allege a duty owed by the Agencies to the Funds, and (2) the ratings were not actionable

misrepresentations.

A.

The district court found that the Funds failed to plead a duty of care under New

York law, although it did not discuss New York cases in any detail. The point needs

little discussion. New York law “‘strictly limits negligent misrepresentation claims to

situations involving actual privity of contract between the parties or a relationship so

close as to approach that of privity.’” Anschutz Corp. v. Merrill Lynch & Co., 690 F.3d

2

(1) [T]he defendant had a duty, as a result of a special relationship,

to give correct information; (2) the defendant made a false

representation that he or she should have known was incorrect; (3)

the information supplied in the representation was known by the

defendant to be desired by the plaintiff for a serious purpose; (4) the

plaintiff intended to rely and act upon it; and (5) the plaintiff

reasonably relied on it to his or her detriment.

Hydro Invs., Inc. v. Trafalgar Power Inc., 227 F.3d 8, 20 (2d Cir. 2000).

No. 11-4203 Ohio Police & Fire, et al. v. Standard & Poor’s Fin., et al. Page 14

98, 114 (2d Cir. 2012) (internal quotation marks omitted) (quoting In re Time Warner

Inc. Secs. Litig., 9 F.3d 259, 271 (2d Cir. 1993)); see also Ossining Union Free Sch.

Dist. v. Anderson LaRocca Anderson, 539 N.E.2d 91, 94 (N.Y. 1989). In Anschutz, the

Second Circuit dismissed negligent misrepresentation claims under New York law

against the Agencies similar to those made by the Funds in this case. Id. at 114–15

(“[Plaintiff] has alleged no relationship or contact with the Rating Agencies that could

remotely satisfy the New York standard.”). In this case, as in Anschutz, there are no

allegations of contacts between the Funds and the Agencies establishing a relationship

“so close as to approach that of privity.” We adopt the Second Circuit’s reasoning and

affirm the district court’s holding that the Agencies did not owe the Funds a duty of care

under New York law.

Determining whether a duty of care exists under Ohio law is not as

straightforward. Ohio cases generally agree that speakers do not owe a duty of care to

the “extensive, faceless, and indeterminable investing public-at-large.” Federated

Mgmt., 738 N.E.2d at 856. “[L]iability may be imposed for negligent misrepresentation

only if the disseminator of the information intends to supply it to a specific person or to

a limited group of people.” Amann v. Clear Channel Commc’ns, Inc., 846 N.E.2d 95,

100 (Ohio Ct. App. 2006); see also Picker Int’l, Inc. v. Mayo Found., 6 F. Supp. 2d 685,

689 (N.D. Ohio 1998) (“A core requirement [of negligent misrepresentation claims] is

a special relationship under which the defendant supplied information to the plaintiff for

the latter’s guidance in its business transactions.”). For instance, accountants owe a duty

of care not merely to their clients, but to any “third party [that] is a member of a limited

class whose reliance on the accountant’s representation is specifically foreseen.” Haddon

View Inv. Co. v. Coopers & Lybrand, 436 N.E.2d 212, 215 (Ohio 1982) (finding limited

partners were owed a duty of care by an accounting firm their general partner hired to

perform accounting work); see also Picker, 6 F. Supp. 2d at 689 (“Usually the defendant

is a professional . . . who is in the business of rendering opinions to others for their use

in guiding their business, and the plaintiff is a member of a limited class.”). By contrast,

“a newspaper reader” is not part of a “special limited class . . . of foreseeable persons,”

and therefore, newspaper reporting is beyond the reach of a negligent misrepresentation

No. 11-4203 Ohio Police & Fire, et al. v. Standard & Poor’s Fin., et al. Page 15

claim. Gutter v. Dow Jones, Inc., 490 N.E.2d 898, 900 (Ohio 1986); see also Amann,

846 N.E.2d at 100–01 (holding that radio show listeners are not a “limited class” under

Haddon View).

Ohio courts have applied Haddon View in contexts where third parties closely

linked to a person in privity with the defendant could reasonably be expected to rely on

information the defendant provided to that person. See Merrill v. William E. Ward Ins.,

622 N.E.2d 743, 748–49 (Ohio Ct. App. 1993) (insurer owed duty of care to

beneficiaries of a life insurance contract); Perpetual Fed. Sav. & Loan v. Porter & Peck,

Inc., 609 N.E.2d 1324, 1327 (Ohio Ct. App. 1992) (finding issue of material facts at to

whether appraisal agency owed duty of care to bank that loaned money in reliance on

a property appraisal report prepared for the bank’s mortgage broker); but see Floor Craft

Floor Covering, Inc. v. Parma Comm. Gen. Hosp. Ass’n, 560 N.E.2d 206, 208–10 (Ohio

1990) (refusing to acknowledge a duty of care in a contractor’s suit against an architect

when there was no privity of contract between them, distinguishing Haddon View). In

practice, the rule appears to work in much the same way that New York’s rule of privity

or “near-privity” works. That is not surprising, since Haddon View borrowed its analytic

framework from New York cases. See Haddon View, 436 N.E.2d at 155–56 (discussing

Ultramares Corp v. Touche, Niven & Co., 174 N.E. 441 (N.Y. 1931) (Cardozo, J.), and

White v. Guarente, 372 N.E.2d 315 (N.Y. 1977)).

Although the Funds claim that they are part of a “limited class,” Compl. ¶ 158,

the complaint proves otherwise. Of the 308 MBS the Funds purchased, 254 of them

were publicly available securities any investor could have acquired. This is precisely

the sort of claim for representations made to the “faceless” investing public that Ohio

courts reject. The claim is not salvaged by the Agencies’ alleged role in structuring

funds, the creation of “pre-sale” reports containing ratings that were used by arrangers

to market MBS, or the contingent relationship between providing a desired rating and

receiving rating fees. None of these considerations changes the fundamental reason for

the failure of this claim: there is no “special relationship” between the Funds and the

Agencies.

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Conceding the weakness of their claim as a whole, the Funds focus on the fifty-

four remaining securities mentioned in the complaint. These MBS were “private

placements,” securities offered only to “qualified institutional buyers” that “own[ ] and

invest[ ] on a discretionary basis at least $100 million in securities.” Anegada Master

Fund, Ltd. v. PXRE Grp. Ltd., 680 F. Supp. 2d 616, 621 (S.D.N.Y. 2010). The

complaint does not plead such a distinction, but the district court ruled that even if it did,

the distinction would not be sufficient to cure the complaint’s defects. We agree. The

Haddon View rule is a narrow exception to the general principle that privity limits the

scope of liability for professional negligence, and Ohio courts have not been eager to

expand it. Haddon View, 436 N.E.2d at 214–15. Even if the Funds were to limit their

challenge to those MBS offered to “qualified investors,” such a class includes thousands

of investors who lack privity or a similarly close relationship to the Agencies, and is not

“limited” in the sense understood by Haddon View. See Richard Baumann, A Big

Surprise, Int’l Fin. L. Rev., Nov. 2007, at 30 (noting that the United States has

“thousands” of qualified investors, and that underwriting banks marketed restricted

securities to them “as if [they] constituted their own mini-public”).

As the district court held, there is no sound basis under either Ohio or New York

law for concluding that the Agencies owed a duty of care to the Funds in this case.

B.

The district court was also correct to dismiss the negligent misrepresentation

claims because the complaint does not plausibly allege actionable misrepresentations.

Under Ohio law, “‘[an actionable] misrepresentation generally must relate to an existing

or pre-existing fact which is susceptible of knowledge.’” Kondrat v. Morris, 692 N.E.2d

246, 251 (Ohio Ct. App. 1997) (quoting Platsis v. E.F. Hutton & Co., 642 F. Supp. 1277,

1293 (W.D. Mich. 1986)). A statement “is actionable only when an affirmative false

statement has been made.” Leal v. Holtvogt, 702 N.E.2d 1246, 1261 (Ohio Ct. App.

1998). New York law imposes a similar requirement. Schwalb v. Kulaski, 814 N.Y.S.2d

696, 698 (N.Y. App. Div. 2006). So defined, credit ratings are not actionable

misrepresentations. As we noted in an analogous context, “[a] . . . credit rating is a

No. 11-4203 Ohio Police & Fire, et al. v. Standard & Poor’s Fin., et al. Page 17

predictive opinion, dependent on a subjective and discretionary weighing of complex

factors,” and there is “no basis upon which we could conclude that the credit rating itself

communicates any provably false factual connotation.” Compuware Corp. v. Moody’s

Investors Servs., Inc., 499 F.3d 520, 529 (6th Cir. 2007) (concluding that a credit rating

was insufficient to establish a defamation claim under Michigan law because the rating

did not “connote[ ] actual, objectively verifiable facts”); see also Plumbers’ Union Local

No. 12 Pension Fund v. Nomura Asset Acceptance Corp., 632 F.3d 762, 776 (1st Cir.

2011) (“That a high rating may be mistaken, a rater negligent in the model employed or

the rating company interested in securing more business may be true, but it does not

make the report of the rating false or misleading.”).

The Funds argue that although this general rule is correct, a “fraudulently made”

opinion could nonetheless be considered actionable. Ohio cases support the proposition

that some opinions are “actionable,” but do not provide specifics. See Link v. Leadworks

Corp., 607 N.E.2d 1140, 1145 (Ohio Ct. App. 1992); Davish v. Arn, 32 Ohio Law Abs.

646, 655 (Ohio Ct. App. 1940). By contrast, some cases applying New York law

specifically recognize that “statements of opinion may support” a negligent

misrepresentation claim “when a plaintiff alleges that the defendant did not genuinely

or reasonably believe the opinions at the time the defendant made them.” Eaves v.

Designs for Fin., Inc., 785 F. Supp. 2d 229, 256 (S.D.N.Y. 2011). In such a case, the

misrepresentation is not the opinion, but is the speaker’s assertion that he or she believes

the opinion, which is a question of existing or pre-existing fact. Fait v. Regions Fin.

Corp., 655 F.3d 105, 112 (2d Cir. 2011) (“Requiring plaintiffs to allege a speaker’s

disbelief in, and the falsity of, the opinions or beliefs expressed ensures that their

allegations concern the factual components of those statements.”). Our cases

interpreting § 10(b) of the Securities Exchange Act acknowledge a similar distinction.

Mayer v. Mylod, 988 F.2d 635, 639 (6th Cir. 1993) (holding that opinions are actionable

under § 10(b) when “the speaker does not believe the opinion and the opinion is not

factually well-grounded”).

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The district court assumed that this exception to the general rule on liability for

opinions applied to negligent misrepresentation claims under both Ohio and New York

law, but nonetheless found that the Funds had not sufficiently alleged an actionable

misrepresentation because “the complaint fail[ed] to allege that the . . . Agencies did not

believe their ratings.” OPFPF, 813 F. Supp. 2d at 883. We agree. Based on publicly

available information describing the Agencies’ business practices, the Funds draw the

inference that the Agencies did not believe in the correctness of their ratings with respect

to any MBS the Funds purchased over a three-year period. That inference is an

unreasonable one. General criticism of business practices does not provide a basis for

concluding that the Agencies made actionable misrepresentations on any particular

occasion. This is precisely the sort of complaint the Supreme Court’s recent Rule 8

jurisprudence is designed to preclude. Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009)

(“[W]here the well-pleaded facts do not permit the court to infer more than the mere

possibility of misconduct,” a complaint is subject to dismissal for failure to state a

claim).

District courts addressing similarly amorphous claims of misrepresentation

against the Agencies concur in this view. In re Lehman Bros. Secs. & ERISA Litig.,

684 F. Supp. 2d 485, 495 (S.D.N.Y. 2010) (dismissing complaint containing allegations

similar to those made in this case because they did not “support an inference that the

[Agencies] did not actually hold the opinion about the sufficiency of the credit

enhancements to justify each rating at the time each rating was issued”), aff’d, 650 F.3d

167 (2d Cir. 2011); Tsereteli v. Residential Asset Securitization Trust 2006-A8, 692 F.

Supp. 2d 387, 395 (S.D.N.Y. 2010) (finding allegations that the Agencies “used out-of-

date models” and “did not verify the loan information provided to them” were

“insufficient to support an inference that the . . . Agencies did not actually believe that

the ratings they had assigned were supported by the factors they said they had

considered.”). Moreover, the many non-binding authorities upon which the Funds rely

on appeal all involve complaints that pled specific facts suggesting the Agencies

believed a particular opinion they provided was improper. See Anschutz Corp. v. Merrill

Lynch & Co., 785 F. Supp. 2d 799, 825 (N.D. Cal. 2011) (“Plaintiff’s allegations here

No. 11-4203 Ohio Police & Fire, et al. v. Standard & Poor’s Fin., et al. Page 19

are much more detailed and specific than the ones at issue in . . . the cases relied on by

the [Agencies],” including In re Lehman Bros.); Abu Dhabi Comm. Bank v. Morgan

Stanley & Co., 651 F. Supp. 2d 155, 178–79 (S.D.N.Y. 2009) (summarizing complaint’s

allegations regarding Agencies’ knowledge of credit issues with a single “structured

investment vehicle” the plaintiffs purchased); In re Nat’l Century Fin. Enterp., Inc., Inv.

Litig., 580 F. Supp. 2d 630, 643, 648 (S.D. Ohio 2008) (detailing multiple “red flags”

associated with two offerings of investment notes by a particular company that were

sufficient to give rise to a negligent misrepresentation claim); LaSalle Nat’l Bank v. Duff

& Phelps Credit Rating Co., 951 F. Supp. 1071, 1075–80 (S.D.N.Y. 1996) (finding

plaintiffs properly pled negligent misrepresentation when complaint included extensive

allegations of misconduct by the ratings agency connected with a single bond offering,

including the failure to discover obvious corporate fraud despite purported “due

diligence” efforts and oral misrepresentations to several purchasers of the bonds).

Even if we presume that a credit rating can serve as an actionable

misrepresentation, the Funds’ complaint does not contain allegations that would permit

a reasonable inference of wrongdoing. Accordingly, the Funds’ negligent

misrepresentation claims may be dismissed for failure to satisfy this element, as well.

VI.

Finally, the district court’s dismissal of the complaint with prejudice was proper.

The Funds argue that even if their complaint cannot survive a Rule 12(b)(6) motion, the

district court erred by not giving the Funds leave to amend the complaint. We review

“a district court’s decision to dismiss a complaint with prejudice for an abuse of

discretion.” United States ex rel. Bledsoe v. Comm. Health Sys., Inc., 342 F.3d 634, 644

(6th Cir. 2003). The Funds never sought leave to amend before the district court, despite

ample opportunity to do so. See Fed. R. Civ. P. 15(a)(1) (“A party may amend its

pleading once as a matter of course” within twenty-one days of receiving a motion to

dismiss for failure to state a claim); id. 15(a)(2) (“The [district] court should freely give

leave when justice so requires” if the plaintiff does not take advantage of opportunities

to amend the complaint as of right); Morse v. McWhorter, 290 F.3d 795, 799 (6th Cir.

No. 11-4203 Ohio Police & Fire, et al. v. Standard & Poor’s Fin., et al. Page 20

2002) (acknowledging that a party may amend its complaint after entry of final judgment

by “first moving to alter, set aside or vacate judgment”). And our default rule is that “if

a party does not file a motion to amend or a proposed amended complaint” in the district

court, “it is not an abuse of discretion for the district court to dismiss the claims with

prejudice.” CNH Am. LLC v. UAW, 645 F.3d 785, 795 (6th Cir. 2011).

There is no reason to deviate from that rule here. The Funds rely upon Bledsoe,

where we concluded that the district court’s entry of judgment with prejudice without

permitting an amended complaint was improper, despite the plaintiff’s failure to file a

motion to amend. Bledsoe, 342 F.3d at 644–45. But Bledsoe was an unusual case

because the district court’s final order gave plaintiff notice, for the first time, that a

heightened pleading standard applied to his claims. Id. There was no evidence in the

record of “undue delay, bad faith or dilatory motive” on the plaintiff’s part, and the

plaintiff’s disclosures to the government prior to filing his qui tam suit showed that he

could meet the heightened pleading standard. Id. By contrast, in this case, there are no

extenuating circumstances justifying a departure from the principle that “it is not the

district court’s role to initiate amendments.” Total Benefits Planning Agency, Inc. v.

Anthem Blue Cross & Blue Shield, 552 F.3d 430, 438 (6th Cir. 2008). The Funds’

claims fail as a matter of law under established pleading standards. Accordingly, the

district court did not abuse its discretion in dismissing the complaint with prejudice.

VII.

For the foregoing reasons, we affirm the judgment of the district court.