In Re Wilmington Trust Securities Litigation

Filing 85

MEMORANDUM OPINION. Signed by Judge Sue L. Robinson on 3/29/2012. (nmf)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

IN RE WILMINGTON TRUST
SECURITIES LITIGATION

)
)
)

_________________________)

Master Civ. No. 10-990
(Consolidated Securities Class Action)

Pamela S. Tikellis, Esquire and A. Zachary Naylor, Esquire of Chimicles & Tikellis LLP,
Wilmington, Delaware. Liaison Counsel for the Class. Counsel for Lead Plaintiffs and
Co-Lead Counsel for the Class: Blair Nicholas, Esquire, Hannah Ross, Esquire, Sean
K. O'Dowd, Esquire and Katherine M. Sinderson, Esquire of Bernstein Litowitz Berger &
Grossmann LLP and MayaS. Saxena, Esquire, Joseph E. White Ill, Esquire, Lester
Hooker, Esquire, and Brandon Grzandziel, Esquire of Saxena White P.A.
Virginia A. Gibson, Esquire of Hogan Lovells US LLP, Philadelphia, Pennsylvania.
Counsel for Defendant KMPG LLP. Of Counsel: George A. Salter, Esquire of Hogan
Love lis US LLP.
Laura Davis Jones, Esquire and Curtis A. Hehn, Esquire of Pachulski Stang Ziehl &
Jones LLP of Wilmington Delaware. Counsel for 1 Defendant Thomas DuPont. Of
Counsel: J. Douglass Baldridge, Esquire and George Kostolampros, Esquire of
Venable LLP.
Stephen C. Norman, Esquire of Potter Anderson & Corroon LLP, Wilmington,
Delaware. Counsel for Defendants J.P. Morgan Securities LLC and Keefe Bruyette &
Woods, Inc. Of Counsel: Thomas C. Rice, Esquire and David F. E. Tejtel, Esquire of
Simpson Thacher & Bartlett LLP.
Thomas J. Allingham II, Esquire and RobertS. Saunders, Esquire of Skadden, Arps,
Slate, Meagher & Flom LLP, Wilmington, Delaware. Counsel for Defendants
Wilmington Trust Corporation, Ted Cecala, Donald Foley, David Gibson, Robert Harra,
Jr., Kevyn Rakowski, Carolyn Burger, R. Keith Elliott, Gailen Krug, Stacey Mobley,
Michelle Rollins, David Roselle, Oliver Sockwell, Robert Tunnell, Jr., Susan Whiting,
Rex Mears and Louis Freeh.
David E. Wiks, Esquire, AndreaS. Brooks, Esquire and Andrew H. Sauder, Esquire of
Wilks, Lukoff & Bracegridle, LLC of Wilmington, Delaware. Counsel for Defendant
William North.

MEMORANDUM OPINION

Dated: March J!L, 2012
Wilmington, Delaware

I. INTRODUCTION
By an order dated March 7, 2011, the court consolidated a series of securities
fraud class action lawsuits filed against the Wilmington Trust Corporation ("WTC") and
related defendants. (D. I. 26) A consolidated class action complaint was filed on May
16, 2011. (D.I. 39) The complaint contains six counts, three under the Securities Act of
1933, 15 U.S.C. § 77a ("the Securities Act"), and three under the Securities Exchange
Act of 1934, 15 U.S.C. § 78a ("the Exchange Act"). In response to plaintiffs' complaint,
five separate motions to dismiss were filed by the various defendants. (D.I. 49, 50, 52,
58 and 61) Responses have been filed and the motions are ripe for disposition. The
court has jurisdiction pursuant to 28 U.S.C. § 1331. For the following reasons, the court
grants defendants' motions to dismiss.

II. BACKGROUND 1
A. The Exchange Act Claims
1. The Parties

Lead plaintiffs in this suit ("plaintiffs") are institutional investors that purchased
WTC common stock between January 18, 2008 and November 1, 2010 ("the class
period"). (D. I. 39

at~~

8-15) Defendant WTC was a bank headquartered in

Wilmington, Delaware during the class period. 2 (/d. at~ 16) Aside from WTC, the
1

Plaintiffs' consolidated amended complaint is one hundred eighty pages in
length and contains four hundred thirty-nine separately enumerated paragraphs. The
court has done its best to succinctly summarize the allegations.
2

WTC became a part of M&T Bank Corporation ("M&T") in 2011 and is no
longer doing business as "Wilmington Trust Company," as discussed infra.

1

complaint lists several other defendants, including: 1) officer defendants; and 2) board
of director audit committee defendants.
a. Officer defendants
Ted T. Cecala ("Cecala") served as WTC's chief executive officer ("CEO") from
July 1996 until June 3, 201 0; he was also the chairman of the board from 1996 until
July 19, 2010. (ld.

at~

20) David E. Foley ("Foley") replaced Cecala as CEO and

chairman of the board after Cecala's 2010 departure. (ld.

at~

21) David R. Gibson

("Gibson") served as WTC's chief financial officer from 1997 until November of 2010.
(/d.

at~

22) Robert V. A. Harra served as the executive vice president of WTC from

1992 until 1996 and as president from 1996 through the class period; he also served as
the chief operating officer from 1996 until 2010. (/d.

at~

23) William North ("North)

served as the chief credit officer at WTC from 2004 until July 2010. (/d.

at~

24) Kevyn

N. Rakowski ("Rakowski") was a senior vice president and the controller of WTC from
2006 through the class period. (/d.

at~

26) These defendants are collectively referred

to as "the officer defendants."
b. Audit committee defendants
Carolyn S. Burger ("Burger") served as a director on WTC's board from 1991
through the class period. (/d.

at~

27) Burger served on the audit committee from

2001-2004 and 2008 through the class period (chair from 2001-2004 and 201 0). (/d.)

R. Keith Elliott ("Elliott") was a director from 1997 until 2010 and he served on the audit
committee during 2007 and 2008 (2007 chair). (/d.

at~

28) Gailen Krug ("Krug") was a

director from 2004 through the class period and served on the audit committee from

2

2007 until 2010. (ld.

at~

29) Stacey Mobley ("Mobley") served as a director from

1991-2010 and was on the audit committee in 2009. (ld.

at~

30) Michelle Rollins

("Rollins") served as a director from 2007 until May of 201 0; she was a member of the
audit committee from 2007-2009. (ld.

at~

31) David P. Roselle ("Roselle") was a
at~

director from 1991-2009 and worked on the audit committee from 2007-2009. (ld.

32) Oliver R. Sockwell ("Sockwell") was a director from 2007-2010 and served on the
audit committee from 2008-2010. (/d.

at~

33) Robert W. Tunnell, Jr. ("Tunnell") was a

director from 1992 through the class period and was a member of the audit committee
from 2007-2008 and in 2010. (/d.

at~

34) Susan D. Whiting ("Whiting") was a director

from 2005 through the class period and a member of the audit committee in 2010. (/d.
at~

35) These defendants are collectively referred to as "the audit committee

defendants."
2. Background on WTC
WTC had four primary business segments: 1) regional banking; 2) corporate
client services; 3) wealth advisory services; and 4) affiliate money managers. (ld.

at~

17) WTC's regional banking segment, whose predominant business was the
origination of commercial loans, is the focus of plaintiffs' complaint. (Id.) WTC's
commercial loans fell into three categories: "(1) commercial real estate construction
[loans] ... ; (2) commercial, financial and agricultural loans to various clients who
use[d) the loans for working capital, equipment purchases, inventory [etc.]; and (3)
commercial mortgages." (/d.) These loans comprised approximately 70-80% of WTC's
assets and commercial mortgage lending is where a significant portion of the bank's

3

revenue was generated. (/d. at

,m 17; 38)

According to plaintiffs' complaint, "since its founding in 1903," WTC "worked
assiduously" to build its reputation as a "stable" and "conservative" regional lender. (/d.
at~

1; 37) With the emergence of the financial crisis in 2008, WTC continued to

highlight its conservatism, allegedly billing itself as "a safe harbor in otherwise turbulent
financial waters." (/d.) WTC did this by emphasizing its "conservative management"
style, "rigorous underwriting" procedures and risk adverse nature. (/d. at

,m 37-39)

While this may have been the public persona WTC created and attempted to maintain,
plaintiffs claim that WTC's lending practices were actually "egregiously deficient and
risky" during the class period. (/d.

at~

3)

3. WTC's allegedly deficient lending practices
WTC's alleged deficiencies were evidenced in a variety of ways. First, the
bank's loan portfolio supposedly "contained a dangerous concentration [of] commercial
real estate," in the sense that it "could create safety and soundness concerns in the
event of a significant economic downturn." (/d.

at~

39-44) Second, WTC allegedly

made loans to clients "based upon personal relationships and business development
rather than impartial risk-focused underwriting criteria." (/d.

at~

45) According to

plaintiffs' complaint, the underwriters, a group ordinarily designated as an independent
voice for credit risk management, reported to regional lending managers, a group of
business developers incentivized to generate more loans and lend more money. (/d. at
~~

47-48) In general, the complaint claims that WTC was more of a sales culture than

a credit culture, where loans were frequently issued without regard for established

4

underwriting practices. (/d.

at~

46) When personal connections existed or business

could be developed, those concerns trumped sound underwriting policies. (/d.

at~~

45-

60) Third, the complaint alleges that WTC's asset review group was purposefully
understaffed and unable to perform a reasonable assessment of portfolio risk. The
asset review group was tasked with determining the amount of risk present in the
bank's loan portfolios. The group assigned a loan to one of four categories: 1) pass
(no current or potential problems); 2) watchlisted (accruing loans that are potentially
problematic); 3) substandard (accruing and non-accruing loan with some probability of
loss); 4) doubtful (non-accruing loans with a high probability of loss). (/d.

at~

62) The

purpose of categorizing the loans in this fashion was to help determine the necessary
loan loss reserve. 3 However, according to the complaint, the group was only able to
review a small fraction of WTC's portfolio and this fraction was not sufficient to provide
a clear picture of actual risk. (/d. at~~ 65; 68) Moreover, the officer defendants are
accused of preventing the asset group from downgrading loans (from pass to
something less secure) to appropriately reflect risk. (/d.

at~~

70-76) Fourth, WTC

allegedly relied on knowingly outdated appraisals during its risk analyses and refused to
update these appraisals in the wake of dramatically changing economic conditions. (ld.
at~~

84-89)

4. WTC's allegedly deficient financial statements
According to plaintiffs' complaint, WTC's deficient lending practices manifested
themselves in its financial statements which violated both generally accepted

3

Loan loss reserves are addressed in more detail on page 6, infra.

5

accounting principles ("GAAP") and SEC regulations prohibiting false and misleading
statements. Specifically, plaintiffs allege that defendants under-reported loan losses
and thus inflated the value of WTC's loan portfolio. A loan loss reserve is a quarterly
balance sheet entry that reflects management's best estimate of potential loan losses. 4
(0.1. 39

at~

105-06; 0.1. 59 at 4) To account for loss contingency, GAAP requires a

loan loss reserve entry to be placed as an expense on a company's balance sheet.
(/d.) As a bank determines that loans are not recoverable, it charges them off, and then

they are removed from the loan loss reserve. (/d.) According to plaintiffs, WTC
estimated loan losses by assigning 1% of the value of pass loans to the loan loss
reserves, 2% of the value for watch list loans, 15% of the value of the substandard loans
and 50% of the value of doubtful loans. (0.1. 39

at~

119) In 2008, WTC changed its

methodology in an attempt to more accurately estimate potential risk. (/d.

at~

212)

According to plaintiffs, both methodologies were inadequate and in violation of GAAP;
this is because the officer defendants prevented credit analysts' attempts to downgrade
loans and the methodologies used focused too much on past trends without adequately
considering the current economic crisis. (/d.

at~~

119-122) The complaint states that

WTC's "rising level of nonaccrual loans and the accompanying decline in the ratio of the
Loan Loss Reserve was in reality a critical indicator that [WTC's] Loan Loss Reserve
was inadequate." (/d.

at~

129) In 2010, after M&T took over WTC and analyzed its

books, M&T issued a report concluding that $759 million dollars worth of loans would

4

Loan loss allowances involve discretion but should be sound estimates based
upon management's review of relevant factors, including past experience and trends,
national and local market conditions, industry conditions, etc. (0.1. 39 at~ 113)

6

not be recoverable (over $500 million dollars more than WTC had estimated in its loan
loss reserve). (/d.

at~

130) By extension, plaintiffs note that WTC greatly

overestimated the value of its loan portfolio. (/d.

at~~

139-42)

Plaintiffs also allege that during the fourth quarter of 2009 and the first two
quarters of 2010, WTC's officer defendants "fraudulently inflated [WTC's] assets and
earnings by nearly $200 million through improper accounting for 'deferred tax assets."'
(/d.

at~

143) A deferred tax asset is an asset recorded on a company's balance sheet

in recognition of anticipated future tax benefits. (/d. at ~144) While this tax deferred
asset was placed on WTC's balance sheet in 2009, by November of 2010 the company
acknowledged that it would not realize $194.6 million (of the originally anticipated $200
million) in tax deferred savings. (/d.

at~

148)

5. Reported class period financials
While other financial institutions were reporting massive credit-related losses
during the class period, WTC publicized strong financials. In 2007 and 2008, the
company reported annual net gains and, in 2009, it only reported an annual net loss of
$4.4 million. (/d. at W 176-249) In 2007, WTC informed investors that 96% of its loans
received pass ratings and this translated to a loan loss reserve figure of $101.1 million;
in 2008, 90.8% of WTC's loans were passing which translated to a $157.1 million loan
loss reserve. (/d. at 176-21 0)
6. The Federal Reserve's Memorandum of Understanding
In September of 2009, in response to some of WTC's shortcomings, regulators
from the Federal Reserve issued a Memorandum of Understanding ("MOU"). (/d.

7

at~

90) The MOU contained a variety of concerns that the Federal Reserve wanted WTC
to address. (/d.) These included, among other things, lending policies, loan loss
reserve determinations, credit risk management analyses and reporting structure. (/d.
at

,m 90-97)
7. WTC's demise and eventual take over
On January 29, 2010, WTC issued a 2009 year-end press release and also held

a conference call with investors. (/d. at mT 248-49) WTC reported an annual net loss of
$4.4 million (or $0.33 a share) and a loan loss reserve of $251.5 million. (/d.) In the
last quarter of 2009, 81.29% of its loans received a pass rating, 6.77% were watchlisted
and 11.31% were substandard. (/d.) On April 23, 2010, WTC issued a first quarter
2010 press release and also held a conference call with investors. (/d.

at~~

256-57)

WTC reported a quarterly net loss of $29.2 million (or $0.44 a share); it also reported
that 79.31% of its loans received a pass rating, 7.71% were watchlisted and 12.5%
were substandard and this correlated to a loan loss reserve of $299.8 million. (/d.) On
June 3, 2010, Cecala announced his retirement. (/d.

at~

261) In an effort to mitigate

concerns about Cecala's "abrupt" departure, officer defendants attempted to soothe
investors' worries by assuring them that his departure had nothing to do with a
mounting credit problem or capital concerns. (/d.

at~

263) In a July 23, 2010 press

release on its second quarter, WTC reported a net loss of $120.9 million (or $1.33 a
share), a loan loss reserve of $373.8 million, and $131.2 million in charge-offs.
~

272) WTC also acknowledged hiring consultants to review its lending and risk

management policies and procedures. (/d.)

8

(/d. at

On Monday, November 1, 2010, WTC announced that it had entered into a
merger agreement with M&T. (!d. at 1J288) That same day, WTC announced its third
quarter results: a net loss of $365 million (or $4.06 a share), a $510 million loan loss
reserve and $144.9 in net charge-offs. (/d. at 1J289) According to the complaint, credit
quality was responsible for the losses and ultimately the merger. (/d. at 288-92) M&T
concluded that WTC had over $500 million worth of loses remaining on its books. (!d.
at 294)

8. Defendants' allegedly false and misleading statements
Plaintiffs' complaint states that:
During the class period, as the credit market deteriorated and iconic financial
institutions like Lehman Brothers, Merrill Lynch, and Washington Mutual
collapsed, [WTC] carried out its scheme to conceal the Bank's true financial
position from the marketplace. In regular press releases, conference calls
and filings with the SEC, [WTC] and the officer defendants repeatedly made
materially false and misleading statements and omissions about the quality
of [WTC's] loan portfolio, its procedures for managing credit risk, its lending
and accounting practices and its income Loan Loss Reserves, and assets.

(/d. at 1J175) Specifically, under the heading "Defendants' False and Misleading
Statements," the complaint discusses allegedly false and misleading statements from:
1) a 2007 year-end press release and investor conference call (issued and held on
January 18, 2008), as well as the company's 2007 SEC 10-K filing (issued on February
28, 2008); 2) a press release and conference call regarding first quarter 2008 results
(issued and held on April 18, 2008), as well as the company's first quarter 2008 SEC
100 filing (issued on May 12, 2008); 3) a press release and conference call regarding
second quarter 2008 results (issued and held on July 18, 2008), as well as the
company's second quarter 2008 SEC 1OQ filing (issued on August 11, 2008); 4) a press

9

release and conference call regarding third quarter 2008 results (issued and held on
October 17, 2008), as well as the company's third quarter 2008 SEC 1OQ filing (issued
on November 10, 2008); 5) a 2008 year-end press release and investor conference call
(issued and held on January 30, 2009), as well as the company's 2008 SEC 1O-K filing
(issued on March 2, 2009); 6) a March 5, 2009 presentation by Cecala at the Keefe,
Bruyette & Woods, Inc. ("KBW") Regional Banking Conference; 7) a press release and
conference call regarding first quarter 2009 results (issued and held on April 24, 2009),
as well as the company's first quarter 2009 SEC 1OQ filing (issued on May 11, 2009);
8) a press release and conference call regarding second quarter 2009 results (issued
and held on July 24, 2009), as well as the company's second quarter 2009 SEC 1OQ
filing (issued on August 10, 2009); and 9) a press release and conference call regarding
third quarter 2009 results (issued and held on October 23, 2009), as well as the
company's third quarter 2009 SEC 1OQ filing (issued on November 9, 2009). (!d. at

,.m

175-244) The complaint's next section, "The Truth Begins to Emerge," discusses
allegedly false and misleading statements made in similar contexts at the end of 2009
and the beginning of 201 0; it also touches on statements made in connection with
WTC's eventual merger. (!d. at ,-r,-r 248-298)
The allegedly false or misleading statements relate to several issues, including,
but not limited to: 1) the stability and quality of the company's loan portfolio; 2) the
quality, nature and frequency of the loan portfolio's risk reviews; 3) the currentness of
appraisals and their use in assessing risk; 4) compliance with GAAP; 5) the nature and
quality of the company's internal controls; 6) the nature, quality and independence of
underwriting practices; 7) the size and accuracy of the company's loan loss provisions;
10

8) the inflated nature of the company's earnings statements; and 9) the reasons for
Cecala's resignation and the company's financial health in the wake of his departure.
(/d.) According to plaintiffs, these statements were false or misleading because:
(i) More than half of the commercial loans extended by [WTC] were not
underwritten by independent, credit-focused or trained risk management
personnel; loan officers regularly exceeded authorized amount of loans
underwritten and approved by the Loan Committee by use of the 10% Rule; 5
[WTC's] underwriting was rife with documentation errors and exceptions;
loan origination was based on personal relationships and insufficiently
reviewed personal guarantees; and [WTC's] lenders were motivated by
.volume-based compensation rather than credit quality (see ,-r,-r 45-60)
(ii) [WTC's] Asset Review Group actually reviewed only a very small
percentage of its loans portfolio, which had been the subject of criticisms by
. . . KPMG and Federal Regulators as a weakness in [WTC's] internal
controls; [WTC] relied on its lenders -who were financially disincentivized to
downgrade loans - to report negative loan quality; the Credit Risk Division,
including the Asset Review Group, was not an independent voice for credit
because it reported to Defendant Gibson ... ; Defendant Gibson interfered
and overrode loan quality decisions made by the Asset Review Group (see
,-r,-r 84-89)
(iii) [WTC] did not obtain updated appraisals ... (see ,-r,-r 84-89)
(iv) [WTC] was seeing strong negative trends in its borrowers, but was
acting under an "extend and pretend" policy to avoid recognizing impairments
(see~ 69-74)
(v) [WTC's] financial statements were not prepared in accordance with
GAAP, because its reserving methodology did not take into account
economic trends ... (see ,-r,-r 102-42)
(vi) [WTC's] internal controls suffered from significant deficiencies because
of, in~er alia, the Bank's failure to address inconsistent underwriting and
asset review, understaffing in key area, interference by senior management,
and flaws in reporting systems (see ,-r,-r 153-59)

5

Under the 10% Rule, a lending officer could unilaterally lend another 10% (or
more) of the originally approved loan; this was done after the loan went through the
underwriting process. (/d. at ,-r 50)
11

(/d. at 1f'il185; 245)

9. The claims
Based upon these factual circumstances, plaintiffs have brought three claims
under the Exchange Act. First, plaintiffs allege violations of Section 1O(b) and Rule
1Ob-5 against WTC, Cecala, Foley, Gibson, Harra and North. Second, plaintiffs allege
violations of Section 20(a) against Cecala, Foley, Gibson, Harra, North and Rakowski.
Lastly, plaintiffs allege violations of Section 20(a) against the audit committee
defendants.

B. The Securities Act Claims
On February 23, 2010, WTC conducted a securities offering to the public of
18,875,000 shares of common stock; $273.9 million was raised from the sale. (/d.

at~

355) In connection with this offering, WTC filed a registration statement and
prospectus ("offering documents") with the SEC. (/d.) These offering documents
incorporated by reference WTC's 2007 10-K, first, second and third quarter 2008 10-Qs
and the 2009 10-K. (/d.)

1. The defendants
Aside from WTC, plaintiffs also brought suit against the following defendants: 1)
the officer defendants who signed WTC's registration statement as well as documents
incorporated into the offering documents (including Cecala, Foley, Harra, Gibson and
Rakowski); 2) audit committee defendants who signed WTC's registration statement as
well as documents incorporated into the offering documents (including Burger, Elliott,

12

Krug, Mobley, Rollins, Sockwell, Tunnell and Whiting 6 ); and 3) non-audit committee
board members, including Thomas DuPont ("DuPont") who signed the registration
statement and Louis Freeh ("Freeh") who signed the 2009 10-K. (/d. at 1f1l 358-62)
KPMG LLP ("KPMG"), WTC's outside auditor since 2003, has also been named, (/d. at
1f363), as has J.P. Morgan Chase ("JP Morgan") and KBW, joint underwriters for the
offering. (/d. at 1f1l 364-65)

2. The alleged misstatements
For the reasons discussed more fully above, plaintiffs claim that the offering
documents - which incorporated WTC's earlier financial statements - contain the
following misstatements: 1) the offering documents misstated WTC's underwriting
practices; 2) the offering documents misstated WTC's asset review and appraisal
process; 3) the offering documents contained untrue financial results; and 4) the
offering documents contain untrue statements about internal controls. (/d. at

m366-99)

3. The claims
Plaintiffs have brought three claims under the Securities Act. First, plaintiffs
allege violations of Section 11 against WTC, Cecala, Foley, Gibson, Harra, Rakowski,
Burger, DuPont, Elliott, Freeh, Krug, Mobley, Rollins, Roselle, Sockwell, Tunnell,
Whiting, KPMG, J.P. Morgan and KBW. Second, plaintiffs allege violations of Section
12(a)(2) against WTC, J.P. Morgan and KBW. Lastly, plaintiffs allege violations of
Section 15 against Cecala, Foley, Gibson, Harra, Rakowski, Burger, DuPont, Elliott,
Freeh, Krug, Mobley, Rollins, Roselle, Sockwell, Tunnell and Whiting.
6

An individual named "Mears" is mentioned as a defendant in connection with
the Section 11 and 15 claims, but no description of this defendant is ever provided.
13

Ill. STANDARD OF REVIEW
Five separate motions to dismiss have been filed: J.P. Morgan and KBW have
filed a joint motion (0.1. 49); KPMG (0.1. 50), DuPont (0.1. 52) and North (0.1. 61) have
filed individual motions; and the remaining defendants have filed a collective motion.

(0.1. 58)
In reviewing a motion filed under Federal Rule of Civil Procedure 12(b )(6), the
court must accept all factual allegations in a complaint as true and take them in the light
most favorable to plaintiff. See Erickson v. Pardus, 551 U.S. 89, 94 (2007); Christopher
v. Harbury, 536 U.S. 403, 406 (2002). A court may consider the pleadings, public
record, orders, exhibits attached to the complaint, and documents incorporated into the
complaint by reference. Tellabs, Inc. v. Makar Issues & Rights, Ltd., 551 U.S. 308, 322
(2007); Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384-85 n.2 (3d
Cir. 1994 ). A complaint must contain "a short and plain statement of the claim showing
that the pleader is entitled to relief, in order to give the defendant fair notice of what the
... claim is and the grounds upon which it rests." Bell At/. Corp. v. Twombly, 550 U.S.
544, 545 (2007) (interpreting Fed.R.Civ.P. 8(a)) (internal quotations omitted). A
complaint does not need detailed factual allegations; however, "a plaintiff's obligation to
provide the 'grounds' of his entitle[ment] to relief requires more than labels and
conclusions, and a formulaic recitation of the elements of a cause of action will not do."
/d. at 545 (alteration in original) (citation omitted). The "[f]actual allegations must be
enough to raise a right to relief above the speculative level on the assumption that all of
the complaint's allegations are true." /d. Furthermore, "[w]hen there are well-ple[d]

14

factual allegations, a court should assume their veracity and then determine whether
they plausibly give rise to an entitlement to relief." Ashcroft v. Iqbal, 556 U.S. 662, 129
S.Ct. 1937, 1950 (2009). Such a determination is a context-specific task requiring the
court "to draw on its judicial experience and common sense." /d.

IV. DISCUSSION
A. Exchange Act Claims
1. Section 10(b) and Rule 10b-5
According to Section 1O(b) of the Exchange Act, it is unlawful:
To use or employ, in connection with the purchase or sale of any security
registered on a national securities exchange or any security not so
registered, or any securities-based swap agreement (as defined in section
2068 of the Gramm-Leach-Biiley Act), any manipulative or deceptive device
or contrivance in contravention of such rules and regulations as the
Commission may prescribe as necessary or appropriate in the public interest
or for the protection of investors.
15 U.S.C.A. § 78j(b ). Rule 1Ob-5, promulgated by the Securities and Exchange
Commission to implement Section 1O(b ), makes it unlawful:
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in the light of
the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any person, in connection with the
purchase or sale of any security.
17 C.F.R. § 240.10b-5.
In order to state a claim for securities fraud under Section 1O(b) and Rule 1Ob-5,
a plaintiff must allege: "(1) a material misrepresentation or omission by the defendant

15

[i.e., falsity]; (2) scienter; (3) a connection between the misrepresentation or omission
and the purchase or sale of a security; (4) reliance upon the misrepresentation or
omission; (5) economic loss; and (6) loss causation." In re DVI, Inc. Sec. Litig., 639
F.3d 623, 630-31 (3d. Cir. 2011 ). A statement or omission is material if there is "a
substantial likelihood that a reasonable shareholder would consider it important in
deciding how to [act]." In re Aetna, Inc. Sec. Litig., 617 F.3d 272, 283 (3d. Cir 201 0)
(citing TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). "A material
misrepresentation or omission is actionable if it significantly altered the total mix of
information made available." /d. (citations and quotations omitted). Material
misstatements are contrasted with subjective analyses and general or vague
statements of intention or optimism which constitute no more than mere corporate
puffery. ld; City of Roseville Employees' Ret. Sys. v. Horizon Lines, Inc., 713 F. Supp.
2d 378, 390 (D. Del. 201 0). "Scienter is a mental state embracing intent to deceive,
manipulate, or defraud, and requires a knowing or reckless state of mind." lnst.

Investors Group v. Avaya, Inc., 564 F.3d 242, 252 (3d Cir. 2009) (citations and
quotations omitted).
2. Heightened pleading standard

Shareholders filing a securities fraud lawsuit under the Exchange Act are subject
to the significantly heightened pleading standard codified by the Private Securities
Litigation Reform Act ("PSLRA"). Avaya, Inc., 564 F.3d at 253; Horizon Lines, 686 F.
Supp. 2d at 414 ("The PSLRA imposes a dramatically higher standard on a plaintiff
drafting a complaint than that of traditional notice pleading."); Brashears v. 1717 Capital

16

Mgmt., Nationwide Mut. Ins. Co., 2004 WL 1196896, at *4 (D. Del. 2004) ("[B]y enacting
the current version of the [PSLRA], Congress expressly intended to substantially
heighten the existing pleading requirements.") (internal quotations omitted). 7 "The
PSLRA provides two distinct pleading requirements, both of which must be met in order
for a complaint to survive a motion to dismiss." Avaya, Inc., 564 F.3d at 252. First, the
complaint must "specify each allegedly misleading statement, the reason or reasons
why the statement is misleading, and, if an allegation is made on information and belief,
all facts supporting that belief with particularity." /d. at 259 (citing 15 U.S.C. §
78u-4(b)(1 )). This is the falsity requirement. Second, "with respect to each act or
omission alleged to violate [§ 1O(b )]," a plaintiff is required to "state with particularity
facts giving rise to a strong inference that the defendant acted with the required state of
mind." /d. (citing 15 U.S.C. § 78u-4(b)(2)). This is the scienter requirement.
Both of these provisions require that facts be pled "with particularity." With
respect to the falsity requirement,
the particularity standard echoes Rule 9(b) of the Federal Rule[s] of Civil
Procedure, which is comparable to and effectively subsumed by the
requirements of ... the PSLRA. Like Rule 9(b ), the PSLRA requires plaintiffs
to plead the who, what, when, where and how: the first paragraph of any
newspaper story. Additionally, if an allegation regarding [a] statement or
omission is made on information and belief, a plaintiff must state with
particularity all facts on which that belief is formed.

7

"The PSLRA's heightened pleading requirements were constructed in order to
restrict abuses in securities class-action litigation, including: (1) the practice of filing
lawsuits against issuers of securities in response to any significant change in stock
price, regardless of defendants' culpability; (2) the targeting of 'deep pocket'
defendants; (3) the abuse of the discovery process to coerce settlement; and (4)
manipulation of clients by class action attorneys." Horizon Lines, 686 F. Supp. 2d at
414.
17

Horizon Lines, 686 F. Supp. 2d at 414 (citing Avaya, Inc., 564 F.3d at 253) (internal
quotations and citations omitted). The scienter requirement, on the other hand, "marks
a sharp break from Rule 9(b)." Avaya, 564 F.3d at 253. "Unlike Rule 9(b), under which
a defendant could plead scienter generally, § 78u-4(b )(2) requires any private
securities complaint alleging that the defendant made a false or misleading statement
... [to] state with particularity facts giving rise to a strong inference that the defendant
acted with the required state of mind." Horizon Lines, 686 F. Supp. 2d at 414 (citations
and quotations omitted).
Aside from these two requirements, the PSLRA imposes additional burdens with
respect to allegations involving forward-looking statements. The PSLRA's Safe Harbor
provision, 15 U.S.C. § 78u-5(c), "immunizes from liability any forward-looking
statement, provided that: the statement is identified as such and accompanied by
meaningful cautionary language; or is immaterial; or the plaintiff fails to show the
statement was made with actual knowledge of its falsehood." Avaya, 564 F.3d at 254.
3. Analysis
Plaintiffs have failed to identify the defendants' allegedly misleading statements
with the requisite degree of particularity contemplated by the PSLRA. While the
complaint contains hundreds of quotations in over forty pages dedicated to alleged
misstatements, nowhere does the complaint specifically identify those statements upon
which plaintiffs base their claims. It is not the court's responsibility to identify them. 8

8

See The Winer Family Trust v. Queen, 2004 WL 2203709, at *6 (E.D. Pa.
2004) (requiring, for clarity and economy's sake, that the plaintiff distill its 97-page
complaint into a comprehensive chart of alleged misstatements).
18

In general, the complaint contains a series of quotes that are anything but
particular. Most often the complaint contains two or three quoted words or a short
quoted phrase without providing the context of the full sentence; alternatively, longer
quotes are provided with several ellipses. If the quotation is from a document, the
document is not cited to or provided. Occasionally speakers are not identified. In short,
the alleged misstatements are provided without sufficient context, and the complaint
fails to identify the specific statements on which plaintiffs base each of their claims.
Furthermore, plaintiffs have not specifically identified the reason or reasons why
each statement is false or misleading. Instead, the complaint directs the court to a
laundry list of reasons why a statement could be untrue. This is not sufficient; the
PSLRA requires plaintiffs to address the way in which each individual statement is false
or misleading. In re The Goodyear Tire & Rubber Co. Sec. Litig., 436 F. Supp. 2d 873,
904 (N.D. Ohio 2006) ("While the Amended Complaint does specify each statement
that was allegedly misleading, it falls short of describing the reason or reasons why
each statement was misleading. To explain, the Amended Complaint repeatedly refers
to a list of alleged improprieties that may or may not have anything to do with the
statements. For example, each allegedly false series of statements refers back to [a]
section of the Amended Complaint that contains a laundry list of allegations purporting
to pertain to each separate statement. It is Plaintiffs' burden to plead fraud on a
statement-by-statement basis, and they may not evade that requirement by requiring
the Court to try to match the allegedly fraudulent statements to the allegations of
wrongdoing that are scattered throughout the seventy-plus page Amended
Complaint."); In re Ferro Corp., 2007 WL 1691358, at *19 (N.D. Ohio 2007) ("Here, the
19

SAC fails to conform to the PSLRA's mandates because Plaintiff merely repeats
(almost verbatim) the same list of reasons after each separate series of purportedly
false statements. Thus, the SAC is similar to the complaint in Goodyear because
Plaintiff leaves it up to the Court to match the allegedly false statement(s) with the
reason(s) why the statement is false.").
Up to this point, the nature of the complaint has forced the parties to speak in
generalities when the PSLRA requires specificity. Until plaintiffs specifically identify the
statements on which they would like to proceed and the reasons why these statements
are false or misleading, neither the defendants nor the court can address these
allegations with the degree of particularity required by the PSLRA. Specifically,
defendants and the court cannot adequately address issues regarding materiality,
scienter and the forward-looking nature of the statements. Accordingly, defendants'
motions to dismiss are granted.
4. Section 20(a) claims
"Section 20(a) of the Exchange Act imposes joint and several liability upon one
who controls a violator of Section 10(b)." In re Suprema Specialties, Inc. Sec. Litig.,
438 F.3d 256, 284 (3d Cir. 2006) (citing 15 U.S.C. § 78t(a)). Because plaintiffs have
failed to state a claim under 10(b), the section 20(a) claims must be dismissed as well.
B. Securities Act Claims
1. Standards
Plaintiffs allege violations of sections 11, 12(a)(2) and 15 of the Securities Act.
These claims are not subject to the heightened pleading standards set forth in the

20

PSLRA. In re Adams Golf, Inc. Sec. Utig., 176 F. Supp. 2d 216, 230 (D. Del. 2001).
"To state a claim under section 11, plaintiffs must allege that they purchased securities
pursuant to a materially false or misleading registration statement. 9 To state a claim
under section 12(a)(2), plaintiffs must allege that they purchased securities pursuant to
a materially false or misleading prospectus or oral communication. 10 In re Adams Golf,
Inc. Sec. Utig., 381 F.3d 267, 273-74 (3d Cir. 2004) (internal citations and quotations

omitted). As previously discussed, material misstatements are contrasted with general
or vague statements and corporate puffery. See supra page 16. And while materiality
is generally an issue reserved for the trier of fact, complaints alleging securities fraud
often contain alleged misstatements that are so unimportant or vague that courts can
rule them immaterial as a matter of law on a motion to dismiss. In re Aetna, Inc. Sec.
Utig., 617 F.3d 272, 283 (3d. Cir. 201 0) (citing In re Burlington Coat Factory Sec. Utig.,

114 F.3d 1410, 1426 (3d Cir.1997) ("In order for an omission or misstatement to be
actionable ... it is not enough that plaintiff identify the omission or misstatement. The
omission or misstatement must also be material, i.e., something that would alter the

9

Section 11 permits a purchaser to sue when "any part of the registration
statement, when such part became effective, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading." 15 U.S.C.A. § 77k
10

Section 12(a)(2) provides that any defendant who "offers or sells a security ...
by means of a prospectus or oral communication, which includes an untrue statement
of a material fact or omits to state a material fact necessary in order to make the
statements, in the light of the circumstances under which they were made, not
misleading (the purchaser not knowing of such untruth or omission), and who shall not
sustain the burden of proof that he did not know, and in the exercise of reasonable care
could not have known, of such untruth or omission, shall be liable ... to the person
purchasing such security from him" 15 U.S.C.A. § 771.
21

total mix of relevant information for a reasonable investor making an investment
decision. Although questions of materiality have traditionally been viewed as
particularly appropriate for the trier of fact, complaints alleging securities fraud often
contain claims of omissions or misstatements that are obviously so unimportant that
courts can rule them immaterial as a matter of law at the pleading stage.")). "Section
15 of the Securities Act provides for joint and several liability on the part of one who
controls a violator of Section 11 or Section 12." Suprema Specialties, 438 F.3d at 284
(citing 15 U.S.C. § 77o). 11 Accordingly, a "violation only applies ... when an underlying
section 11 or section 12(a)(2) violation has been found." Jasin v. Kozlowski, 2010 WL
4536973, at *1 0 (M.D. Pa. 201 0).
2. Analysis
While these claims are not subject to a heightened pleading standard, the court
nevertheless finds that plaintiffs have failed to state a claim. Like the Exchange Act
section of plaintiffs' complaint, the Securities Act section fails to specifically identify
those false and misleading statements on which plaintiffs base their claims. The court
will not do this for plaintiffs. Furthermore, the quotations (often two or three words or a
short phrase) are provided without full context and no citations have been made to the

11

15 U.S.C.A. § 77o provides: "Every person who, by or through stock
ownership, agency, or otherwise, or who, pursuant to or in connection with an
agreement or understanding with one or more other persons by or through stock
ownership, agency, or otherwise, controls any person liable under sections 77k or 771 of
this title, shall also be liable jointly and severally with and to the same extent as such
controlled person to any person to whom such controlled person is liable, unless the
controlling person had no knowledge of or reasonable ground to believe in the
existence of the facts by reason of which the liability of the controlled person is alleged
to exist."
22

registration statement or prospectus. 12 Given the current state of the complaint, the
court cannot analyze the feasability of plaintiffs' claims. 13 In other words, until plaintiffs
clearly identify those statements they believe to be materially false or misleading and
either provide sufficient context for those statements or cite to the applicable document
and provide it, 14 the court cannot determine whether a statement is materially false or
misleading (as opposed to an inactionable statement on which no reasonable investor
would rely). Even if the court accepts as true all of the factual allegations contained in
plaintiffs' complaint and interprets them in a light most favorable to the plaintiffs, it
appears as though several of the alleged misstatements would be inactionable.
Accordingly, defendants' motions to dismiss are granted.

V. CONCLUSION
Consistent with the analysis above, defendants' motions to dismiss are granted
without prejudice, to allow plaintiffs the opportunity to amend their complaint in order to:
1) in connection with the Exchange Act claims, satisfy the heightened pleading
standards of the PSLRA; and 2) in connection with the Securities Act claims, to clearly
identify the misstatements or omissions on which such claims are based and provide
sufficient context for such. An appropriate order shall issue.

12

Neither the registration statement nor prospectus were provided by plaintiffs
with the complaint.
13

While not every allegation or quote is insufficient, many are and the court
declines to address the case in a piecemeal fashion.
14

While the court believes the second option is ideal (i.e., citing to and providing
copies of the registration statement and prospectus), it is not required.

23