Elgaoui v. Meta Financial Group Inc et al
Filing
41
MEMORANDUM OPINION AND ORDER denying in its entirety 32 Defendants' Motion to Dismiss The Amended Complaint. Signed by Judge Mark W Bennett on 7/18/11. (djs)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF IOWA
WESTERN DIVISION
In re META FINANCIAL GROUP,
INC., SECURITIES LITIGATION,
No. C 10-4108-MWB
MEMORANDUM OPINION AND
ORDER REGARDING
DEFENDANTS’ MOTION TO
DISMISS THE AMENDED
COMPLAINT
____________________
TABLE OF CONTENTS
I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
A. Factual Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
B. Procedural Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
II. LEGAL ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
A. Elements Of The Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
B. Standards Applicable To The Motion To Dismiss . . . . . . . . . . . . . . . 10
1.
Rule 12(b)(6) standards . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.
Rule 8(a) and 9(b) standards . . . . . . . . . . . . . . . . . . . . . . 14
3.
PSLRA pleading standards . . . . . . . . . . . . . . . . . . . . . . . 14
C. Application Of The Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.
Pleadings based on confidential informants . . . . . . . . . . . . 15
2.
The § 10(b)/Rule 10b-5 claim . . . . . . . . . . . . . . . . . . . . . 16
a.
Misstatements and falsity . . . . . . . . . . . . . . . . . . . . 16
b.
“Puffery” and “group pleading” . . . . . . . . . . . . . . . 16
c.
Scienter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
d.
Connection, reliance, economic loss, and causation . . 18
e.
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.
The § 20(a) “control person” claim . . . . . . . . . . . . . . . . . 19
III. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
I
n an Amended Class Action Complaint For Violations Of Federal Securities
1
Laws (Amended Complaint) (docket no. 25), filed March 14, 2011, the
plaintiffs seek, on behalf of themselves and a putative class of purchasers of common stock
of defendant Meta Financial Group, Inc., damages and injunctive relief on claims of
securities fraud against Meta Financial Group, a holding company, and against certain
officers of MetaBank and/or Meta Trust Company, which are companies held by Meta
Financial Group. The plaintiffs allege, generally, that the defendants published a series
of materially false and misleading statements about Meta Financial’s operations and
finances, knowing that or with reckless disregard to whether the statements were materially
false and misleading at the time of such publication, and knowing that or recklessly
disregarding whether the statements omitted material information necessary to make the
statements, in light of such material omissions, not materially false and misleading. They
also assert that the individual defendants should be liable for the fraudulent actions of Meta
Financial as “control persons.”
1
The plaintiffs’ original Complaint (docket no. 1) was filed November 5, 2010. In
an Order (docket no. 16) filed immediately after a hearing on January 12, 2011, I
appointed The Eden Partnership as lead plaintiff for the putative class action pursuant to
15 U.S.C. § 78u-4(a)(3)(B) and approved The Eden Partnership’s selection of lead counsel
pursuant to 15 U.S.C. § 78u-4(a)(3)(B)(v). The Amended Complaint was filed by the lead
plaintiff on March 14, 2011, pursuant to a Scheduling Order (docket no. 21). That
Scheduling Order also set deadlines for the filing and briefing of the motion to dismiss now
before me.
2
I. INTRODUCTION
A. Factual Background
“When ruling on a defendant’s motion to dismiss, a judge must accept as true all
of the factual allegations contained in the complaint.” Erickson v. Pardus, 551 U.S. 89,
94 (2007) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555-56 (2007)). Thus,
the significant factual background presented here is based on the plaintiffs’ allegations in
their Amended Complaint.
The plaintiffs allege that Meta Financial focused on two core businesses, a regional
retail banking business and a national payments business, both of which were conducted
through its Meta Payment Systems (MPS) division. They allege that Meta Financial’s
growing MPS division included a program to provide tax refund anticipation loans (RALs)
in connection with a tax preparation firm, prepaid debit cards for refunds with another
major tax preparation company, and the iAdvance micro lending product, which was
designed to provide a line of credit on prepaid cards, including the prepaid cards issued
in association with tax refund loans provided by MetaBank partners. The plaintiffs allege
that MPS was a crucial aspect of Meta Financial’s business, as the source of substantial
revenue. However, they allege that Meta Financial’s iAdvance product was targeted to
people with poor or no credit, providing short-term credit to those customers who agreed
to direct deposit their paychecks onto a MetaBank prepaid card. The iAdvance product
generated revenues by charging $9.95 per month, $2 per ATM withdrawal, and an
“advance fee” of $2.50 for each $20 increment borrowed, resulting in “fees” that
translated into an annualized interest rate for repeat borrowers of as much as 650%. The
plaintiffs allege that the iAdvance program also circumvented federal laws that protect a
minimum income from garnishment and that forbid garnishment from social security
checks, because iAdvance loan customers were required to use MetaBank prepaid cards
3
to which their paychecks were directly deposited, so that iAdvance was able to deduct loan
payments from customers’ paychecks.
The plaintiffs’ allegations rely, in substantial part, on confidential informants as the
sources of information concerning securities fraud arising from Meta Financial’s
statements about the operation of and revenue from the iAdvance product and MPS
division. One such confidential witness was described in the Amended Complaint as “a
former MPS employee from the Vendor Management Department who worked at the
Company for approximately two years until s/he was laid off in January 2010, Meta
Financial conducted a mass layoff in January 2010, terminating almost all of the personnel
in the Credit Department”; a second was described as someone “who worked for MPS for
about two years until s/he was laid off in January 2010"; and a third was described as “a
former Mortgage Loan Officer at Meta Bank who worked at the Company until June
2010.”
The plaintiffs allege that, according to the confidential informants, the Office of
Thrift Supervision (OTS) was investigating Meta Financial’s iAdvance program at least by
2009, because the OTS questioned the benefits and legality of the iAdvance program, but
the defendants failed to disclose that OTS investigation in any published securities reports
or filings. The plaintiffs allege that, while the OTS investigation was proceeding, the
defendants continued to paint a rosy picture in various filings with the Securities and
Exchange Commission (SEC) in 2008, 2009, and 2010, indicating, among other things,
that the iAdvance product was experiencing “increasing consumer acceptance and
performance”; that “MPS’ programs are managed prudently, in accordance with governing
rules and regulations, and without unnecessary exposure to the capital base”; that “[t]he
last regular examination of the Bank was conducted in early 2009"; that MPS’s net income
and earnings were increasing dramatically; that the MPS unit was continuing to grow; and
4
that Meta Financial’s internal controls were adequate. The plaintiffs allege that, because
the defendants knew that the OTS investigation was occurring and that OTS had indicated
that there were problems with the legality of the iAdvance program that would jeopardize
the continuation of that program, the defendants knew of or recklessly disregarded the
material falsity of their statements or knowingly or recklessly omitted material information
from them.
The plaintiffs allege that it was not until October 12, 2010, that the defendants
disclosed the OTS investigation in a published report with the SEC. They allege that the
October 12, 2010, report revealed for the first time that the OTS had advised Meta
Financial on October 6, 2010, that the OTS had determined that Meta Financial had
“engaged in unfair or deceptive acts or practices” in violation of Section 5 of the Federal
Trade Commission Act and the OTS Advertising Regulation in connection with the
iAdvance product and that the OTS required Meta Financial to discontinue all origination
activity for iAdvance lines of credit by October 13, 2010. The report also revealed that
the OTS had informed the defendants that it planned to require Meta Financial to
reimburse iAdvance borrowers and specifically required Meta Financial to obtain written
approval of the OTS Regional Director prior to engaging in various kinds of activity. The
report acknowledged that the discontinuance of the iAdvance program and the potential
discontinuance of the tax-related programs would eliminate a substantial portion of MPS’s
gross profit, and that the discontinuance of the iAdvance program could result in elevated
rates of nonpayment on outstanding iAdvance loans. The plaintiffs also allege that, on
October 18, 2010, Meta Financial made a further disclosure revealing that Meta Financial
had sought approval from the OTS to enter into new third-party relationship agreements,
but that request had been denied.
5
The plaintiffs allege that, in the wake of these belated disclosures, the price for
Meta Financial stock shares collapsed 60% in just five trading days, from a closing price
of $33.25 per share on October 12, 2010, to a closing price of $13.29 per share on
October 19, 2010, on unusually high trading volume.
B. Procedural Background
In the Amended Complaint, the plaintiffs assert a claim of violation of § 10(b) of
the Securities Exchange Act and Rule 10b-5 promulgated under that Act against all
defendants. Specifically, the plaintiffs allege that, during the class period (May 14, 2009,
to October 18, 2010) the defendants carried out a plan, scheme, and course of conduct
which was intended to and, throughout the class period, did: (a) deceive the investing
public regarding Meta Financial’s business, operations, management and the intrinsic value
of Meta Financial common stock; (b) enable defendants to artificially inflate the price of
Meta Financial shares; (c) enable defendants to arrange the sale of millions of dollars of
Meta Financial shares while in possession of material adverse non-public information about
the Company; and (d) cause the lead plaintiff and other members of the Class to purchase
Meta Financial common stock at artificially inflated prices. The plaintiffs allege that, in
furtherance of this unlawful scheme, plan, and course of conduct, the defendants, jointly
and individually (and each of them) took various actions to disclose materially false
information or to omit material information from disclosures.
The plaintiffs also allege a claim of violation of § 20(a) of the Securities Exchange
Act, that is, a claim of “control person” liability for the wrongdoing of Meta Financial,
against individual defendants. Specifically, the plaintiffs assert that, because of the
individual defendants’ positions with Meta Financial, the individual defendants possessed
the power and authority to control the contents of Meta Financial’s public disclosures, had
6
copies of those disclosures prior to or shortly after they were issued, and could have
prevented their issuance or caused them to be corrected. The plaintiffs also allege that the
individual defendants had access to material non-public information and knew that various
adverse facts had not been disclosed to or were being concealed from the public, while
various positive representations being made to the public were materially false and
misleading.
As relief on these claims, the plaintiffs seek certification of a class under Rule 23
of the Federal Rules of Civil Procedure; an award of compensatory damages in favor of
the plaintiffs and the other class members against all defendants, jointly and severally, for
all damages sustained as a result of the defendants’ wrongdoing; an award of reasonable
costs and expenses, including attorney fees and expert fees; an award of extraordinary,
equitable and/or injunctive relief; and such other and further relief as the court may deem
just and proper.
Neither Meta Financial nor the individual defendants filed an answer to the
Amended Complaint. Instead, as anticipated, see Scheduling Order (docket no. 21), on
April 11, 2011, the defendants jointly filed the Motion To Dismiss The Amended
Complaint (docket no. 32) that is now before me. The Lead Plaintiff, The Eden
Partnership, filed its Opposition To Defendants’ Motion To Dismiss The Amended
Complaint (docket no. 37) on May 10, 2011, and the defendants filed a Reply Brief In
Support Of Their Motion To Dismiss The Amended Complaint (docket no. 40) on April
1, 2011. I have not found it necessary to hear oral arguments on the defendants’ Motion
To Dismiss.
7
II. LEGAL ANALYSIS
A. Elements Of The Claims
Before considering the standards applicable to the defendants’ Motion To Dismiss,
I will briefly survey what it is that the plaintiffs must plead and prove to prevail on their
claims. The plaintiffs assert claims pursuant to § 10(b) of the Securities Exchange Act and
Rule 10b-5 implementing that section of the Act and pursuant to § 20(a) of the Act.
As the Eighth Circuit Court of Appeals recently explained,
To prevail, a § 10(b)/Rule 10b–5 claimant ordinarily
must show “(1) a material misrepresentation or omission by
the defendant; (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.” Stoneridge Inv.
Partners, LLC v. Sci.-Atl., Inc., 552 U.S. 148, 157, 128 S.
Ct. 761, 169 L. Ed. 2d 627 (2008).
Minneapolis Firefighters’ Relief Ass’n v. MEMC Electronic Materials, Inc., 641 F.3d
1023, 1028 (8th Cir. 2011). The Eighth Circuit Court of Appeals has explained that
scienter, one of the elements central to Meta Financial’s challenge to the pleadings, “‘can
be established in three ways: (1) from facts demonstrating a mental state embracing an
intent to deceive, manipulate, or defraud; (2) from conduct which rises to the level of
severe recklessness; or (3) from allegations of motive and opportunity.’” Detroit Gen.
Retirement Sys. v. Medtronic, Inc., 621 F.3d 800, 808 (8th Cir. 2010 (quoting Cornelia
I. Crowell GST Trust v. Possis Med., Inc., 519 F.3d 778, 782 (8th Cir. 2008)). More
specifically,
“The inquiry . . . is whether all of the facts alleged, taken
collectively, give rise to a strong inference of scienter, not
whether any individual allegation, scrutinized in isolation,
meets that standard.” Tellabs, Inc. v. Makor Issues & Rights,
8
Ltd., 551 U.S. 308, 322–23, 127 S. Ct. 2499, 168 L. Ed. 2d
179 (2007). “[I]n determining whether the pleaded facts give
rise to a ‘strong’ inference of scienter, the court must take into
account plausible opposing inferences.” Id. at 323, 127 S. Ct.
2499. The Supreme Court explained:
The strength of an inference cannot be decided in a
vacuum. The inquiry is inherently comparative: How
likely is it that one conclusion, as compared to others,
follows from the underlying facts? To determine
whether the plaintiff has alleged facts that give rise to
the requisite “strong inference” of scienter, a court
must consider plausible nonculpable explanations for
the defendant’s conduct, as well as inferences favoring
the plaintiff. The inference that the defendant acted
with scienter need not be irrefutable, i.e., of the
“smoking-gun” genre, or even the “most plausible of
competing inferences.” Recall in this regard that
§ 21D(b)’s pleading requirements are but one constraint
among many the PSLRA installed to screen out
frivolous suits, while allowing meritorious actions to
move forward. Yet the inference of scienter must be
more than merely “reasonable” or “permissible”—it
must be cogent and compelling, thus strong in light of
other explanations. A complaint will survive, we hold,
only if a reasonable person would deem the inference of
scienter cogent and at least as compelling as any
opposing inference one could draw from the facts
alleged.
Id. at 323–24, 127 S. Ct. 2499 (internal citations and footnote
omitted).
Minneapolis Firefighters’ Relief Ass’n, 641 F.3d at 1029.
Section 20(a) of the Securities Exchange Act provides for a companion claim,
establishing “liability of those who, subject to certain defenses, ‘directly or indirectly’
9
control a primary violator of the federal securities laws.” Lustgraaf v. Behrens, 619 F.3d
867, 873 (9th Cir. 2010) (quoting 15 U.S.C. § 78t(a)).
[Section 20(a)] has been interpreted as requiring only some
indirect means of discipline or influence short of actual
direction to hold a ‘controlling person’ liable.’” Farley v.
Henson, 11 F.3d 827, 836 (8th Cir. 1993) (quoting Myzel v.
Fields, 386 F.2d 718, 738 (8th Cir. 1967)). To meet this
standard, a plaintiff must prove: (1) that a “primary violator”
violated the federal securities laws; (2) that “the alleged
control person actually exercised control over the general
operations of the primary violator”; and (3) that “the alleged
control person possessed—but did not necessarily exercise—the
power to determine the specific acts or omissions upon which
the underlying violation is predicated.” Farley, 11 F.3d at 835.
Culpable participation by the alleged control person in the
primary violation is not part of a plaintiff’s prima facie case.
Metge v. Baehler, 762 F.2d 621, 631 (8th Cir. 1985). If a
plaintiff satisfies the prima facie burden, the burden shifts to
the defendant to show that it “acted in good faith and did not
directly or indirectly induce the act or acts constituting the
violation or cause of action.” 15 U.S.C. § 78t(a); see also
Metge, 762 F.2d at 630.
Lustgraaf, 619 F.3d at 873-74. The Eighth Circuit Court of Appeals has recognized that
“[t]he plain language of the control-person statute dictates that, absent a primary violation,
a claim for control-person liability must fail.” Id. at 874 (citing 15 U.S.C. § 78t(a) and
In re Hutchinson Tech., Inc. Sec. Litig., 536 F.3d 952, 961-62 (8th Cir. 2008)).
B. Standards Applicable To The Motion To Dismiss
The defendants’ Motion To Dismiss these claims is pursuant to Rules 12(b)(6) and
9(b) of the Federal Rules of Civil Procedure and provisions of the Private Securities
10
Litigation Reform Act (PSLRA), 15 U.S.C. §§ 78a, 78j, and 78u. I turn next to the
standards imposed by these rules and statutes.
1.
Rule 12(b)(6) standards
Rule 12(b)(6) provides for a motion to dismiss on the basis of “failure to state a
claim upon which relief can be granted.”
2
In Bell Atlantic Corp. v. Twombly, 550 U.S.
544 (2007), the Supreme Court revisited the standards for determining whether factual
allegations are sufficient to survive a Rule 12(b)(6) motion to dismiss:
Federal Rule of Civil Procedure 8(a)(2) requires only “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,”
Conley v. Gibson, 355 U.S. 41, 47, 78 S. Ct. 99, 2 L. Ed. 2d
80 (1957). While a complaint attacked by a Rule 12(b)(6)
motion to dismiss does not need detailed factual allegations,
ibid.; Sanjuan v. American Bd. of Psychiatry and Neurology,
Inc., 40 F.3d 247, 251 (C.A.7 1994), 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, see
Papasan v. Allain, 478 U.S. 265, 286, 106 S. Ct. 2932, 92 L.
Ed. 2d 209 (1986) (on a motion to dismiss, courts “are not
bound to accept as true a legal conclusion couched as a factual
allegation”). Factual allegations must be enough to raise a
right to relief above the speculative level, see 5 C. Wright &
2
Effective December 1, 2007, Federal Rule of Civil Procedure 12 was “amended
as part of the general restyling of the Civil Rules to make them more easily understood and
to make style and terminology consistent throughout the rules.” FED. R. CIV. P. 12,
advisory committee’s note. The advisory committee notes make it clear that the “changes
are to be stylistic only.” Id. The stylistic changes to Rule 12(b)(6) are in fact minimal,
as Rule 12(b)(6) continues to authorize a motion to dismiss “for failure to state a claim
upon which relief can be granted.” FED. R. CIV. P. 12(b)(6). Thus, the amendment did
not change the standards for a Rule 12(b)(6) motion.
11
A. Miller, Federal Practice and Procedure § 1216, pp. 235236 (3d ed.2004) (hereinafter Wright & Miller) (“[T]he
pleading must contain something more . . . than . . . a
statement of facts that merely creates a suspicion [of] a legally
cognizable right of action”), on the ASSUMPTION THAT
ALL THE allegations in the complaint are true (even if
doubtful in fact), see, e.g., Swierkiewicz v. Sorema N.A., 534
U.S. 506, 508, n. 1, 122 S. Ct. 992, 152 L. Ed. 2d 1 (2002);
Neitzke v. Williams, 490 U.S. 319, 327, 109 S. Ct. 1827, 104
L. Ed. 2d 338 (1989) (“Rule 12(b)(6) does not
countenance . . . dismissals based on a judge’s disbelief of a
complaint’s factual allegations”); Scheuer v. Rhodes, 416 U.S.
232, 236, 94 S. Ct. 1683, 40 L. Ed. 2d 90 (1974) (a wellpleaded complaint may proceed even if it appears “that a
recovery is very remote and unlikely”).
Bell Atlantic, 550 U.S. at 555-56 (footnote omitted); see Ashcroft v. Iqbal, ___ U.S. ___,
___, 129 S. Ct. 1937, 1949 (2009) (instructing that “short and plain statement”
requirement “demands more than an unadorned, the-defendant-unlawfully-harmed me
accusation.”). Thus, the Eighth Circuit Court of Appeals has recognized that, under Bell
Atlantic, “To survive a motion to dismiss, a complaint must contain factual allegations
sufficient ‘to raise a right to relief above the speculative level. . . .’” Parkhurst v. Tabor,
569 F.3d 861, 865 (8th Cir. 2009) (quoting Bell Atlantic, 550 U.S. at 555). To put it
another way, “the complaint must allege ‘only enough facts to state a claim to relief that
is plausible on its face.’” B&B Hardware, Inc. v. Hargis Indus., Inc., 569 F.3d 383, 387
(8th Cir. 2009) (quoting Bell Atlantic, 550 U.S. at 570); accord Iqbal, 129 S. Ct. at 1949
(“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.’”)
(quoting Bell Atlantic, 550 U.S. at 557).
12
The court must still “accept as true the plaintiff’s well pleaded allegations.”
Parkhurst, 569 F.3d at 865 (citing Neitzke v. Williams, 490 U.S. 319, 326-27 (1989));
B&B Hardware, Inc., 569 F.3d at 387 (“[W]e ‘assume[ ] as true all factual allegations of
the complaint’” (quoting Levy v. Ohl, 477 F.3d 988, 991 (8th Cir. 2007)). The court must
also still “construe the complaint liberally in the light most favorable to the plaintiff.”
Eckert v. Titan Tire Corp., 514 F.3d 801, 806 (8th Cir. 2008) (post-Bell Atlantic decision).
On the other hand, “[w]here the allegations show on the face of the complaint that there
is some insuperable bar to relief, dismissal under Rule 12(b)(6) is [still] appropriate.”
Benton v. Merrill Lynch & Co., Inc., 524 F.3d 866, 870 (8th Cir. 2008) (citing Parnes v.
Gateway 2000, Inc., 122 F.3d 539, 546 (8th Cir. 1997), for this standard in a discussion
of Rule 12(b)(6) standards in light of Bell Atlantic).
Thus, what is ordinarily required is pleading of allegations sufficient to raise a
plausible inference as to each element of a claim or cause of action. See Iqbal, ___ U.S.
at ___, 129 S. Ct. at 1949-50; accord Hamilton, 621 F.3d at 818-19; Parkhurst, 569 F.3d
at 865 (“To survive a motion to dismiss, a complaint must contain factual allegations
sufficient ‘to raise a right to relief above the speculative level. . . .’” (quoting Bell
Atlantic, 550 U.S. at 555)); B&B Hardware, Inc., 569 F.3d at 387 (“[T]he complaint must
allege ‘only enough facts to state a claim to relief that is plausible on its face.’” (quoting
Bell Atlantic, 550 U.S. at 570)). Moreover, allegations that raise plausible inferences of
alternative scenarios, one that satisfies a particular element and one that does not satisfy
that element, are sufficient to state a claim, because “[w]hich inference will prove to be
correct is not an issue to be determined by a motion to dismiss.” Id. at 819 (noting that
the plaintiffs’ complaint raised plausible inferences of both employee and independent
contractor status, in support of the “employee status” element of his claim that the
13
purported employer negligently breached its duty to maintain a safe workplace for its
employees).
2.
Rule 8(a) and 9(b) standards
Although Rule 8(a) of the Federal Rules of Civil Procedure ordinarily requires only
a “short and plain statement” of the grounds for jurisdiction and the pleader’s claim
showing that the pleader is entitled to relief, the defendants contend, and the plaintiffs do
not dispute, that the heightened pleading standards of Rule 9(b) and the PSLRA are
applicable here, where the claims involve alleged securities fraud. “Under Rule 9(b)’s
heightened pleading standard, ‘allegations of fraud, including fraudulent concealment for
tolling purposes, [must] be pleaded with particularity.’” Summerhill v. Terminiz, Inc., 637
F.3d 877, 880 (8th Cir. 2011) (quoting Great Plains Trust Co. v. Union Pac. R.R. Co.,
492 F.3d 986, 995 (8th Cir. 2007). “In other words, Rule 9(b) requires plaintiffs to plead
‘the who, what, when, where, and how: the first paragraph of any newspaper story.’”
Id. (again quoting Great Plains Trust Co., 492 F.3d at 995, with a quotation omitted).
3.
PSLRA pleading standards
As the Eighth Circuit Court of Appeals has explained, however, “The PSLRA goes
beyond the ordinary pleading requirements described in Rules 8(a)(2) and 9(b) of the
Federal Rules of Civil Procedure.” In re 2007 Novastar Financial, Inc., Securities Litig.,
579 F.3d 878, 882 (8th Cir. 2009). Specifically,
The PSLRA imposes a heightened pleading standard in
cases alleging securities fraud. Claims governed by the
PSLRA must “specify each statement alleged to have been
misleading, the reason or reasons why the statement is
misleading” (the “falsity requirement”), 15 U.S.C. § 78u4(b)(1), and “state with particularity facts giving rise to a
strong inference that the defendant acted with the required
state of mind” (the “scienter requirement”), id. § 78u-4(b)(2);
14
see also Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551
U.S. 308, 321, 127 S. Ct. 2499, 168 L. Ed. 2d 179 (2007).
Lustgraaf, 619 F.3d at 872. Where, as here, the “primary violation” is a § 10(b)/Rule
10b-5 securities fraud claim, the pleader’s § 20(a) “control person” claim, as well as the
§ 10(b)/Rule 10b-5 claim, must satisfy the PSLRA’s heightened pleading requirements.
Id. at 874.
C. Application Of The Standards
Although the question may be much closer than the relative brevity of this opinion
would suggest, I find that the plaintiffs have adequately pleaded both their § 10(b)/Rule
10b-5 securities fraud claim and their § 20(a) “control person” claim.
1.
Pleadings based on confidential informants
As a preliminary matter, I note that the defendants challenge the plaintiffs’ claims
based on insufficient pleading of the basis for the alleged confidential witnesses’
knowledge. At a minimum, the PLSRA requires pleading of the sources’ basis of
knowledge. See Horizon Asset Mgmt., Inc. v. H & R Block, Inc., 580 F.3d 755, 764 (8th
Cir. 2009). I believe that the Amended Complaint meets this standard. More importantly,
the actions of the OTS corroborate and support the reliability of the confidential witnesses’
allegations. See, e.g., Institutional Investors Group v. Avaya, Inc., 564 F.3d 242, 263 (3d
Cir. 2009) (“In the case of confidential witness allegations, we apply [the PSLRA’s
particularity] requirement by evaluating the ‘detail provided by the confidential sources,
the sources’ basis of knowledge, the reliability of the sources, the corroborative nature of
other facts alleged, including from other sources, the coherence and plausibility of the
allegations, and similar indicia.’” (quoting California Pub. Employees Retirement Sys. v.
15
Chubb Corp., 394 F.3d 126, 147 (3d Cir. 2004)). Thus, the Amended Complaint is not
subject to dismissal, because of its reliance on information from confidential informants.
2.
The § 10(b)/Rule 10b-5 claim
a.
Misstatements and falsity
Turning to the § 10(b)/Rule 10b-5 securities fraud claim itself, as the plaintiffs
assert, they have pleaded the alleged misstatements and why they were false when made.
See Minneapolis Firefighters’ Relief, 641 F.3d at 1028; Lustgraaf, 619 F.3d at 872. For
example, ¶¶ 30-34 identify allegedly material false statements regarding iAdvance and
MPS in specific SEC filings, and ¶ 35 alleges why each of these statements was false;
¶¶ 36-37 identify allegedly material false statements regarding disclosure of “risk factors,”
and ¶ 38 alleges why each of these statements was false; ¶ 39 identifies allegedly material
false and misleading statements and omissions regarding the OTS, and ¶ 40 alleges why
these statements were false; ¶¶ 41-53 identify allegedly material false statements about
Meta Financial’s financial results, and ¶ 54 alleges numerous specific reasons why these
statements were false; ¶¶ 55-57 identify allegedly material false statements about Meta
Financial’s controls and procedures, and ¶ 58 alleges why these statements were false; and,
finally, ¶ 59 identifies allegedly material false and misleading statements in SarbaneesOxley certifications, and ¶ 60 alleges why these statements were false. I find that the
plaintiffs have also adequately shown why there was at least arguably a duty to disclose
the omitted information and why the statements were false when made.
b.
“Puffery” and “group pleading”
Furthermore, at least in light of the pleadings, I cannot hold that, as a matter of law,
the statements on which the plaintiffs’ § 10(b)/Rule 10b-5 claim is founded involve just
“‘[s]oft, puffing statements generally lack[ing] materiality’” because they are such “vague
statements’” that are “‘not specific enough to perpetrate a fraud on the market.’” See
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Detroit Gen. Retirement Sys., 621 F.3d at 807 (quoting Parnes v. Gateway 2000, Inc., 122
F.3d 539, 547 (8th Cir. 1997)); see also In re AMDOCS, Ltd. Sec. Litig., 390 F.3d 542,
548 (8th Cir. 2004) (also citing Parnes, 122 F.3d at 546-48, for the standards for
immaterial misrepresentations, including those “so vague and of such obvious hyperbole
that no reasonable investor would rely upon them”). Moreover, the “group pleading
doctrine” does adequately tie the alleged misrepresentations and non-disclosures to the
various defendants. See City of Monroe Employees Ret. Sys. v. Bridgestone Corp., 399
F.3d 651, 689 (6th Cir. 2005) (“That exception is premised on the assumption that ‘[i]n
cases of corporate fraud where the false or misleading information is conveyed in
prospectuses, registration statements, annual reports, press releases, or other
group-published information, it is reasonable to presume that these are the collective
actions of the officers’” (quoting Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1440
(9th Cir. 1987)); and compare In re Hutchinson Tech., Inc., Sec. Litig., 536 F.3d 952,
961 n.6 (8th Cir. 2008) (declining to consider whether the “group pleading doctrine”
survived the PSLRA), with In re McLeodUSA, Inc., 2004 WL 1070570, *4 (N.D. Iowa
2004) (noting that “a majority of the federal courts addressing the issue have determined
that the group pleading doctrine has in fact survived the passage of the [PSLRA]”).
c.
Scienter
The plaintiffs have also adequately alleged scienter. See Minneapolis Firefighters’
Relief Ass’n, 641 F.3d at 1028; Lustgraaf, 619 F.3d at 872. Specifically, I find that the
combination of the allegations of the individual defendants’ positions with Meta Financial,
their alleged access to information and the disclosures in question, and the nature of the
alleged misrepresentations and omissions give rise, at the very least, to a “strong
inference,” Lustgraaf, 619 F.3d at 872, that the individual defendants were “severe[ly]
reckless[]” in allowing the disclosures to be released or to stand and that all of the
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defendants had the motive and opportunity to make the allegedly fraudulent disclosures or
not to recall them after they were made. Detroit Gen. Retirement Sys., 621 F.3d at 808.
Here, a reasonable person would deem the inference of scienter cogent and at least as
compelling as any opposing inference one could draw from the facts alleged. Minneapolis
Firefighters’ Relief Ass’n, 641 F.3d at 1029.
d.
Connection, reliance, economic loss, and causation
Finally, as to the remaining elements of the plaintiffs’ § 10(b)/Rule 10b-5 securities
fraud claim, see Minneapolis Firefighters’ Relief Ass’n, 641 F.3d at 1028, I find that the
plaintiffs have adequately pleaded a connection between the alleged misrepresentations or
omissions and the purchase or sale of a security, see, e.g., Amended Complaint ¶ 29
(alleging that the defendants’ actions deceived the investing public regarding Meta
Financial’s business, operations, management, and stock value, enabled artificial inflation
of the price of Meta Financial shares, enabled the sale by the defendants of shares of the
company, despite possession of adverse information, and caused others to purchase stock
at artificially inflated prices); reliance upon the misrepresentation or omission, see id. at
¶¶ 79-80 (pleading the applicability of a presumption of reliance under the fraud-on-themarket doctrine); see also In re NationsMart Corp. Sec. Litig., 130 F.3d 309, 321 (8th
Cir. 1997) (explaining the requirements for adequately pleading fraud-on-the-market as a
basis for a presumption of reliance); and both economic loss and loss causation, see id. at
¶¶ 70-75.
e.
Summary
Because I find that the plaintiffs’ § 10(b)/Rule 10b-5 securities fraud claim has been
pleaded with the required particularity, I will deny the defendants’ motion to dismiss that
claim.
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3.
The § 20(a) “control person” claim
The defendants challenge the plaintiffs’ § 20(a) claim on two grounds. First, the
defendants contend that the plaintiffs failed to plead a primary violation of § 10(b).
Second, the defendants contend that the plaintiffs offer nothing more than conclusory,
boilerplate allegations that the individual defendants are presumed to have had the power
to control or influence Meta Financial because of their direct and supervisory involvement
in the day-to-day operations of Meta Financial. I disagree with both contentions.
First, I found, above, that the plaintiffs have adequately pleaded their § 10(b)/Rule
10b-5 securities fraud claim as the “primary violation.” See Lustgraaf, 619 F.3d at 873-74
(noting that the first element of a § 20(a) claim is that a “primary violator” violated the
federal securities laws). Therefore, that part of the defendants’ challenge to the plaintiffs’
§ 20(a) claim based on insufficiency of the § 10(b) claim fails. Compare Minneapolis
Firefighters’ Relief Ass’n., 641 F.3d at 1030 (affirming dismissal of a § 20(a) claim,
because the plaintiff’s § 10(b)/Rule 10b-5 securities fraud claim had been properly
dismissed).
Second, I disagree with the defendants’ characterization of the allegations of the
individual defendants’ power or control over Meta Financial as merely conclusory or
boilerplate. In addition to the allegations in ¶¶ 101-102 of the Amended Complaint, which
allege, generally, that the individual defendants exercised control over Meta Financial, the
Amended Complaint includes the allegations in ¶¶ 24-28, which identify with particularity
not only the positions of each individual defendant in Meta Financial, but specific SEC
disclosures signed and certified by them. Thus, the Amended Complaint presents more
that sufficient inferences of direct or indirect control of Meta Financial by the defendants
that could serve as the basis for § 20(a) liability. Lustgraaf, 619 F.3d at 873 (noting that
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§ 20(a) has been interpreted as requiring only some indirect means of discipline or
influence short of actual direction to hold a “controlling person” liable).
Thus, the plaintiffs’ § 20(a) claim is also adequately pleaded.
III. CONCLUSION
The plaintiffs’ Amended Complaint does adequately plead both a § 10(b)/Rule 10b-5
securities fraud claim and a § 20(a) “control person” claim. Therefore, the defendants’
April 11, 2011, Motion To Dismiss The Amended Complaint (docket no. 32) is denied in
its entirety.
IT IS SO ORDERED.
DATED this 18th day of July, 2011.
__________________________________
MARK W. BENNETT
U. S. DISTRICT COURT JUDGE
NORTHERN DISTRICT OF IOWA
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