A&O Shearman | Securities Litigation Blog | Southern District Of New York Partially Grants Motion To Dismiss Securities Claims In Virtus Investment Partners Securities Litigation<br >  
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  • Southern District Of New York Partially Grants Motion To Dismiss Securities Claims In Virtus Investment Partners Securities Litigation

    On July 1, 2016, Judge William Pauley III of the United States District Court for the Southern District of New York granted in part and denied in part a motion to dismiss a putative class action concerning Virtus Investment Partners, the parent of an investment advisory company that managed and provided advice to mutual funds. See Youngers v. Virtus Inv. Partners Inc., No. 15-cv-8262 (S.D.N.Y. July 1, 2016).  Plaintiffs purported to assert claims under Section 10(b) of the Securities Exchange Act of 1934 and Sections 11 and 12(a)(2) of the Securities Act of 1933, on behalf of investors who purchased shares in certain Virtus mutual funds between May 8, 2010 and December 22, 2014. Plaintiffs’ allegations concerned statements in the funds’ registration statement that the above-market performance of the funds using a particular investment strategy (the “AlphaSector” strategy) was calculated based on live trading since 2001. Plaintiffs alleged that the pre-2008 returns were actually generated using only back-testing, as the algorithm was not developed until 2008. 

    Addressing standing, the Court found that plaintiffs had standing to pursue claims on behalf of the shareholders of two of the five mutual funds at issue even though the named plaintiffs never purchased shares in those particular funds. Applying NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145, 162 (2d Cir. 2012), the Court found that plaintiffs satisfied the requirements for both Article III and class standing: Article III standing was present because there was a named plaintiff who could assert a claim against the defendant, and class standing was present because all of the alleged misstatements at issue implicated the same set of concerns as the conduct allegedly causing the named plaintiffs’ loss, because the alleged misstatements were contained in registration statements common to all the funds. 

    With respect to plaintiffs’ Exchange Act claims, the Court found that plaintiffs adequately alleged that defendants’ misstatements caused the alleged losses. Defendants had argued that because a mutual fund’s share price is, as a matter of law, calculated according to the value of the fund’s underlying assets, and because the misstatements alleged concerned the fund’s strategy rather than the value of its underlying assets, those statements in turn could not affect the price of the Virtus fund shares. The Court, however, found that in this instance a “change in value [was] not necessarily represented by a corresponding change in price.” Slip. op at 9. The Court concluded that plaintiffs’ allegations that the value of the funds was affected by their (allegedly misstated) performance history were sufficient to plead that the “registration statements concealed something from the market that, when disclosed, negatively affected the value of the security.”  Id. at 11.

    The Court dismissed plaintiffs’ claims under Section 11 of the Securities Act of 1933 as untimely under the applicable one-year statute of limitations. The Court found that articles published by The Wall Street Journal, Barron’s, and The Financial Times more than a year prior to the filing of the complaint straightforwardly reported that the SEC was investigating the exact allegations subsequently contained in the complaint. The Court noted that, while the Second Circuit had not decided whether an “inquiry notice” or “discovery rule” standard applied to trigger the Securities Act’s one-year limitations period, because multiple news reports detailed the exact wrongs alleged in the complaint, plaintiffs’ Section 11 claims were time-barred under either standard.  Id. at 23-24.

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