Securities and Exchange Commission v. Gibson et al

Filing 44

MEMORANDUM ORDER: Defendants' motion to dismiss (D.I. 36 ) is DENIED. Signed by Judge Richard G. Andrews on 7/29/2020. (nms)

Case 1:15-cv-00363-RGA Document 44 Filed 07/29/20 Page 1 of 4 PageID #: 759

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
Civil Action No. 15-363-RGA
v.
DAVID R. GIBSON, et al.,
Defendants.

MEMORANDUM ORDER
Defendant William B. North filed a motion to dismiss pursuant to Federal Rules of Civil
Procedure 9(b) and 12(b)(6). (D.I. 36). Defendant Robert V.A. Harra later joined the motion.
(D.I. 43). Defendants argue that Plaintiff’s complaint should be dismissed because (1) it does
not claim that Defendants violated “GAAP or any other authority” in reporting past due loans,
and (2) the complaint therefore does not establish a strong inference of scienter. (D.I. 37 at 910).
When reviewing a motion to dismiss pursuant to Federal Rule of Civil Procedure
12(b)(6), the Court must accept the complaint’s factual allegations as true. See Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 555–56 (2007). Rule 8(a) requires “a short and plain statement of the
claim showing that the pleader is entitled to relief.” Id. at 555. The factual allegations do not
have to be detailed, but they must provide more than labels, conclusions, or a “formulaic
recitation” of the claim elements. Id. (“Factual allegations must be enough to raise a right to
relief above the speculative level . . . on the assumption that all the allegations in the complaint
are true (even if doubtful in fact).”). Moreover, there must be sufficient factual matter to state a
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facially plausible claim to relief. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The facial
plausibility standard is satisfied when the complaint’s factual content “allows the court to draw
the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (“Where a
complaint pleads facts that are merely consistent with a defendant’s liability, it stops short of the
line between possibility and plausibility of entitlement to relief.” (internal quotation marks
omitted)).
Federal Rule of Civil Procedure 9(b) imposes a heightened pleading standard on claims
of fraud. The Rule requires that, “In alleging fraud or mistake, a party must state with
particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and
other conditions of a person’s mind may be alleged generally.” Fed. R. Civ. P. 9(b). “Rule 9(b)
requires plaintiffs to plead with particularity the ‘circumstances’ of the alleged fraud in order to
place the defendants on notice of the precise misconduct with which they are charged, and to
safeguard defendants against spurious charges of immoral and fraudulent behavior.” Seville
Industrial Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786, 791 (3d Cir. 1984).
To state the circumstances of the fraud with particularity in the Third Circuit, a plaintiff must
plead: “(1) a specific false representation of material fact; (2) knowledge by the person who
made it of its falsity; (3) ignorance of its falsity by the person to whom it was made; (4) the
intention that it should be acted upon; and (5) that the plaintiff acted upon it to his damage.”
Christidis v. First Pennsylvania Mortgage Trust, 717 F.2d 96, 99 (3d Cir. 1983).
Defendants assert that Rule 9(b) requires that Plaintiff’s complaint cite a “statute,
regulation, guidance, generally accepted accounting principle or other authority supporting its”
definition of “past due.” (D.I. 37 at 7-8). Defendants argue that Plaintiff’s complaint does not
do so and thus must be dismissed. (Id. at 9). In support of this argument, Defendants cite to
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cases where courts have deemed dismissal appropriate when the complaint alleged a general
breach of accounting principles, but did not identify a specific accounting principle that was
breached. (Id. at 7-8) (citing Christidis, 717 F.2d 96; Shapiro v. UJB Financial Corp., 964 F.2d
272 (3d Cir. 1992); U.S. ex rel. Atkinson v. Pennsylvania Shipbuilding Co., 2000 WL 1207162
(E.D. Pa. August 24, 2000)).
Unlike Defendants, I do not read these cases to require that Plaintiff’s complaint cite to
some regulation or authority in identifying a reasonable accounting practice to adequately plead
that Defendants departed from that practice. The cases cited by Defendants merely instruct that,
when a complaint alleges an action was fraudulent for departing from an accounting principle,
the complaint must identify what that principle is and how it was departed from, ensuring that a
defendant is put “on notice of the precise misconduct with which they are charged.” Seville, 742
F.2d at 791; see Christidis, 717 F.2d at 100; Shapiro, 964 F.2d at 284-85; U.S. ex rel. Atkinson,
2000 WL 1207162, at *13-14. These cases do not require that any complaint alleging
accounting fraud must cite to “GAAP or any other authority.” (D.I. 37 at 9).
In the instant suit, Plaintiff’s complaint adequately pleads the circumstances of the fraud
alleged and puts Defendants on notice of the charges of fraud against them. The complaint
alleges that Defendants engaged in fraud by knowingly making, or aiding and abetting in
making, material false statements in certain 2009 and 2010 SEC filings of the Wilmington Trust
Corporation (the “Bank”). (D.I. 1 at ¶ 1). Plaintiff’s complaint alleges that these statements
were false because they omitted material disclosures concerning the Bank’s accruing loans 90
days or more past due.” (Id.; see ¶¶ 24, 33, 40, 62, 78, 80). The complaint defines “past due”:
“A ‘matured’ loan is a loan that has reached the end of its term without its principal being paid
off or its term renewed or extended. Matured loans are past due as long as principal remains
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owing.” (Id. at ¶ 23). The complaint alleges that Defendants knew or recklessly disregarded that
they were making false and misleading statements in the Bank’s SEC filings. (See id. at ¶¶ 26,
63, 81). Accepting the allegations in Plaintiff’s complaint as true, the complaint adequately
pleads that Defendants knowingly made, or aided and abetted others in making, material false
disclosures in certain SEC filings by omitting the Bank’s accruing loans 90 days or more past
due.
Defendants’ motion also argues that, because the complaint did not set out “a statute,
regulation, guidance, generally accepted accounting principle or other authority” supporting
Plaintiff’s definition of “past due,” the complaint does not sufficiently plead that Defendants
knowingly or recklessly departed from any such statute, regulation, etc. (D.I. 37 at 10). As
stated above, I do not think it is required that Plaintiff’s complaint cite to authority in alleging
that the loans omitted from certain reports were past due. Thus, I disagree with Defendants that
a strong inference of Defendants’ scienter cannot be drawn from the complaint because it does
not cite to authority in defining “past due.” Further, Plaintiff’s complaint adequately pleads that
Defendants knew of, or recklessly disregarded, the false or misleading statements in the Bank’s
SEC filings. (D.I. 1 at ¶¶ 24, 26-31, 47-63, 71-82).
Therefore, Defendants’ motion to dismiss (D.I. 36) is DENIED. 1
Entered this 29th day of July, 2020.
_/s/ Richard G. Andrews_____
United States District Judge
1

Plaintiff’s answering brief argues that Defendants’ motion should also be denied because
Defendants’ convictions in the related criminal case, USA v. Wilmington Trust Corporation et al.,
No. 15-cr-23, collaterally estop Defendants from challenging the fraud claims in the instant
complaint. (D.I. 40 at 12-14). Because I deny Defendants’ motion on other grounds, I need not
and do not consider Plaintiff’s collateral estoppel arguments.
4