Waterford Township Police & Fire Retirement System v. Regional Management Corp. et al

Filing 84

OPINION AND ORDER re: 64 MOTION to Dismiss the Second Amended Complaint, filed by FBR Capital Markets & Co., BMO Capital Markets Corp., Keefe, Bruyette & Woods, Inc., Stephens Inc., JMP Securities LLC., 61 MOTION to Dism iss the Second Amended Complaint. filed by Roel C. Campos, Donald E. Thomas, Thomas F. Fortin, C. Glynn Quattlebaum, Richard T. Dell'Aquila, Jared L. Johnson, Palladium Equity Partners III, L.P., Palladium Equity Partners III, L.L.C., Regional Management Corp., Parallel 2005 Equity Partners, LP, Richard A. Godley, David Perez, Parallel 2005 Equity Fund, LP, Alvaro G. De Molina, Erik A. Scott, Carlos Palomares. Defendants' motions to dismiss the Second Amended Complai nt are granted in their entirety. This opinion and order resolves docket entry nos. 61 and 64. In their memorandum in opposition to the instant motions, Plaintiffs requested leave to amend their complaint for a third time in the event Defendants 9; motions were granted. Plaintiffs are hereby granted leave to move for permission to file a Third Amended Complaint. Any such motion must be filed by April 21, 2016, comply with the relevant local rules, and be accompanied by (1) a proposed Third Amended Complaint, and (2) a blackline of the proposed Third Amended Complaint showing the changes made from the Second Amended Complaint. If no timely motion is filed, or if the motion is denied, the dismissal of the Second Amended Complaint will be with prejudice and judgment will be entered in Defendants' favor without further advance notice. (As further set forth in this Order.) (Signed by Judge Laura Taylor Swain on 3/30/2016) (spo)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
WATERFORD TOWNSHIP POLICE &
FIRE RETIREMENT SYSTEM, individually
and on behalf of all others similarly situated,
Plaintiffs,
-v-

No. 14 CV 3876-LTS

REGIONAL MANAGEMENT CORP.,
PALLADIUM EQUITY PARTNERS III, L.P.,
PALLADIUM EQUITY PARTNERS III, L.L.C.,
PARALLEL 2005 EQUITY FUND, LP,
PARALLEL 2005 EQUITY PARTNERS, LP,
THOMAS F. FORTIN, C. GLYNN
QUATTLEBAUM, DONALD E. THOMAS,
DAVID PEREZ, ROEL C. CAMPOS,
RICHARD T. DELL’AQUILA, RICHARD A.
GODLEY, JARED L. JOHNSON, ALVARO
G. DE MOLINA, CARLOS PALOMARES,
ERIK A. SCOTT, STEPHENS INC., KEEFE,
BRUYETTE & WOODS, INC., BMO
CAPITAL MARKETS CORP., JMP
SECURITIES LLC, and FBR CAPITAL
MARKETS & CO.,
Defendants.

OPINION AND ORDER

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APPEARANCES:
ROBBINS GELLER RUDMAN & DOWD
LLP
By:
Samuel H. Rudman, Esq.
Joseph Russello, Esq.
58 South Service Road
Suite 200
Melville, NY 11747

SIMPSON THACHER & BARTLETT LLP
By:
George S. Wang, Esq.
Anar Rathod Patel, Esq.
Shannon K. McGovern, Esq.
425 Lexington Avenue
New York, NY 10017

Lead Counsel and Attorneys for Plaintiffs

Attorneys for Regional Management,
Palladium Equity Partners III, L.P.,
Palladium Equity Partners III, L.L.C.,
Parallel 2005 Equity Fund, LP, Parallel 2005
Equity Partners, LP, Thomas F. Fortin, C.
Glynn Quattlebaum, Donald E. Thomas,
David Perez, Roel C. Campos, Richard T.
Dell’Aquila, Richard A. Godley, Jared L.
Johnson, Alvaro G. de Molina, Carlos
Palomares, and Erik A. Scott
ALSTON & BIRD LLP
By:
Jessica P. Corley, Esq.
Joseph G. Tully, Esq.
90 Park Avenue
New York, NY 10016
Attorneys for Stephens Inc., Keefe, Bruyette
& Woods, Inc., BMO Capital Markets Corp.,
JMP Securities LLC, and FBR Capital
Markets & Co.

LAURA TAYLOR SWAIN, United States District Judge

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Lead Plaintiff Waterford Township Police & Fire Retirement System (“Lead
Plaintiff”) brings this action on behalf of a putative class of investors (“Plaintiffs”) who
purchased publicly traded securities issued by Regional Management Corp. (“RM” or the
“Company”), between May 2, 2013, and October 30, 2014 (the “Class Period”). RM is a
consumer finance company that provides loan products primarily to subprime borrowers who
have limited access to traditional lenders and banks. Plaintiffs principally allege that Defendants
violated the federal securities laws by failing to disclose, in public statements and filings and in
connection with two secondary public stock offerings, certain underwriting and staffing issues
relating to RM’s portfolio of so-called “live check” loans, which were checks mailed directly to
consumers that, when deposited, would create a loan between RM and the depositing consumer
in the amount of the check. Defendants now move to dismiss Plaintiffs’ Second Amended
Complaint (“SAC”). The Court has jurisdiction of this action pursuant to 28 U.S.C. § 1331.
Plaintiffs group the Defendants as follows in the SAC, and the Court uses the
same nomenclature for the purposes of this opinion:
•

Palladium Equity Partners III, L.P. and Palladium Equity Partners III, LLC are
referred to jointly as “Palladium” (SAC ¶ 22);

•

Parallel 2005 Equity Fund, LP and Parallel 2005 Equity Partners, LP are referred
to jointly as “Parallel” (SAC ¶ 23);

•

Chief Executive Officer (“CEO”) Thomas F. Fortin, Chief Operating Officer
(“COO”) C. Glynn Quattlebaum, Chief Financial Officer (“CFO”) Donald E.
Thomas, Chairman of the Board of Directors David Perez, Director Roel C.
Campos, Director Richard T. Dell’Aquila, Director Richard A. Godley, Director
Jared L. Johnson, Director and later Chairman of the Board Alvaro G. de Molina,

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Director Carlos Palomares, and Director Erik A. Scott are referred to as the
“Individual Defendants” (SAC ¶ 35);
•

Fortin, Quattlebaum, and Thomas are referred to as the “Officer Defendants”
(SAC ¶ 35);

•

Keefe, Bruyette & Woods, Inc. (“Keefe”), BMO Capital Markets Corp. (“BMO”),
JMP Securities LLC (“JMP”), and FBR Capital Markets & Co. (“FBR”), five
firms that were involved in underwriting secondary public offerings of RM’s
stock, are referred to as the “Underwriter Defendants” (SAC ¶ 41).
Plaintiffs assert claims under the federal securities laws against RM and various

current or former RM executives, directors, and underwriters, as well as against the private
equity funds that controlled a majority of RM’s stock at the outset of the Class Period and sold
their stock in the two secondary public offerings. Specifically, in the operative Second
Amended Complaint (“SAC” or “Complaint”), Plaintiffs assert the following claims:
1. Against all defendants except C. Glynn Quattlebaum, for violations of Section
11 of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77k (“Section 11");
2. Against all defendants, for violations of Section 12(a)(2) of the Securities Act,
15 U.S.C. § 77l(a)(2) (“Section 12(a)(2)”);
3. Against the Individual Defendants, Palladium, and Parallel, for violations of
Section 15 of the Securities Act, 15 U.S.C. § 77o (“Section 15");
4. Against RM and the Officer Defendants, for violation of Section 10(b) of the
Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b) (“Section 10(b)”), as
well as Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (“Rule 10b-5”); and
5. Against the Individual Defendants, Palladium, and Parallel, for violation of
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Section 20(a) of the Exchange Act, 15 U.S.C. § 78t-1 (“Section 20(a)”). The Court has
jurisdiction of this action pursuant to 28 U.S.C. § 1331.
Before the Court are two motions to dismiss the SAC: one filed by RM, Parallel,
Palladium, and the Individual Defendants; the other filed by the Underwriter Defendants (who
are only named in two of the Securities Act claims). The Court has reviewed thoroughly all of
the parties’ submissions, including notices of supplemental authority. For the following reasons,
Defendants’ motions are granted in their entirety.

A.
BACKGROUND
For the purposes of these motions, the Court takes as true the following facts
drawn from the SAC (docket entry no. 60), the documents incorporated by reference therein, and
public filings of which the Court may take judicial notice.1 Plaintiffs’ 173-page SAC details
Plaintiffs’ allegations as to the history and operation of RM’s live check program, as well as
allegations regarding related material misstatements and omissions. The Court assumes the
parties’ familiarity with the record and limits the following summary of Plaintiffs’ factual
allegations to matters material to the Court’s legal conclusions.

RM’s Business Model and Statements Regarding the Live Check Program
RM was founded in 1987 by Godley and Quattlebaum as a consumer finance
company specializing in subprime lending. (SAC ¶ 136.) RM operates primarily in the southern

1

See Citadel Equity Fund Ltd. v. Aqulia, Inc., 168 F. App’x 474, 476 (2d Cir. 2006)
(holding that SEC filings are amenable to judicial notice).

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United States and maintains branches that service its customers. (Id.) RM sources its loans,
which range from $300 to $27,500, from a number of channels, including direct mail campaigns
like the live check program. (SAC ¶ 137.) In its live check program, which is the focus of
Plaintiffs’ allegations, RM would send customers valid checks through the mail that, when
cashed, would become loans that RM would service through its branches. (SAC ¶ 3.) RM’s live
check loans ranged from $300 to $2,500, and were payable in fixed-rate monthly installments
with terms up to 36 months. (SAC ¶ 138.) The issuance of live checks was conducted by RM’s
central headquarters, with servicing and collection of the resulting loans managed at the branch
level. (SAC ¶ 152.)
RM began the live check program in 1999. (SAC ¶ 152.) Historically, live check
campaigns were timed to coincide with seasonal demand, such as for holiday spending. (SAC
¶ 154.) Breaking from this pattern in 2013, the Company conducted a live check mailing during
the first quarter of that year. (SAC ¶ 278.) A speech given in May 2013 by CEO Fortin
described the live check program as a “very productive source of growth” for RM. (SAC ¶ 293.)
In that speech and in other public statements, Fortin represented that RM was “very sound in
terms of our underwriting methodology and I think that is certainly expressed in terms of the
downstream collection metrics . . . .” (SAC ¶ 295.) Similar statements about RM’s underwriting
appear in RM’s SEC filings, including the May 13, 2013 Form 10-Q, which stated that the
“quality of [RM’s] asset portfolio is the result of our ability to enforce sound underwriting
standards, maintain diligent portfolio oversight, and respond to changing economic conditions as
we grow our loan portfolio.” (SAC ¶ 298; see also, e.g., id. ¶ 317 (August 9, 2013 Form 10-Q);
¶ 341 (November 8, 2013 Form 10-Q); ¶ 371 (March 17, 2014 Form 10-K).)
RM’s first off-season live check program lead to a significant expansion of RM’s
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exposure to live check loans as a percentage of its overall portfolio. As of June 30, 2013, small
loans (regardless of origination method) made up 45% of RM’s total portfolio, and live check
loans were a “sizeable balance” of those loans. (SAC ¶ 304.) On a yearly basis, small
installment loans increased by 71.2% from June 2012 through June 2013, representing an
additional $86 million of outstanding loans on RM’s balance sheet. (SAC ¶ 317.)
On September 16, 2013, RM announced that it would conduct a secondary public
offering (“SPO”) of common stock on September 20, 2013 (the “First SPO”). (SAC ¶ 319.)
RM’s announcement indicated that only Parallel and Palladium, and not RM itself, would be
offering shares for sale. (SAC ¶ 319.) In announcing the First SPO, CEO Fortin declared that
RM had mailed “more than one million convenience [live] checks to pre-screened individuals”
between the last week of June and the first week of August, 2013. (SAC ¶ 321.) The First SPO
closed on September 25, 2013. (SAC ¶ 324.)
On December 2, 2013, RM announced that it would conduct another SPO of
common stock on December 5, 2013 (the “Second SPO”). (SAC ¶¶ 1, 343.) As in the First
SPO, RM itself did not sell any shares. (SAC ¶ 343.) The Second SPO closed on December 10,
2013. (SAC ¶ 349.) After the completion of the Second SPO, Parallel and Palladium had
completely divested their holdings of RM stock. (SAC ¶ 201.) The putative Plaintiff class
includes investors who purchased stock pursuant and/or traceable to the offering documents
issued in connection with the First and Second SPOs.
During the same time period as the First and Second SPOs – the second half of
2013 – RM began experiencing an increase in accounts per employee (“APE”), a measure
representing the number of outstanding loan accounts for which branch loan supervision and
collection personnel were responsible. The Company later admitted that the APE increase was a
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source of delinquency problems. (SAC ¶¶ 356-58.) This staffing issue was first disclosed to
investors on March 11, 2014, when the Company announced its 2013 fourth-quarter and fullyear earnings, which included an increase in charge-offs, or delinquencies, from 7.1% in the
prior year period to 7.8% in the fourth quarter of 2013. (SAC ¶¶ 350-56.) CFO Thomas told
investors that, although the Company traditionally “followed a formulaic approach” in staffing
its branches, the overall APE had begun to increase due to “growth [that] outpaced [RM’s] hiring
. . . which was the primary reason for the increase in delinquencies.” (SAC ¶¶ 356-58.) Fortin
stated that RM had been “pushing our branches in our various geographies higher on accounts
per employee . . . [and] what we have seen is there is a natural flattening to gains in labor
productivity. . . . [W]e have gone through each and every branch, done a very granular analysis
as to the adequacy of staffing . . . [and] we have shown a very concrete correlation between
collection performance and what we call APE . . . .” (SAC ¶ 358.) Fortin went on to say that
RM was making adjustments to its staffing in order to remediate the issue. (SAC ¶ 359.)
In a conference call one month later, in April 2014, the Company disclosed that
the staffing issue had arisen during “the last five months of 2013” and continued into the first
quarter of 2014. (SAC ¶¶ 373-375.) Fortin stated that RM had “determined an APE around 300
allows us to run the business efficiently and effectively.” (SAC ¶ 379.) Fortin then noted that
APE was “well above” 300 from August 2013 through February 2014, but had decreased below
300 as of April 2014 due to additional hiring. (SAC ¶ 379.) Thomas went on to describe RM’s
efforts to remediate the staffing issue, stating that RM “implemented a new labor guideline that
provides more headcount to the branches, and we enhanced our labor forecasting model to hire
employees sooner than before.” (SAC ¶ 380.) After the March 11, 2014, conference call, RM’s
stock dropped by 5.83% and then by 9.9% in the following two days of trading. (SAC ¶ 366.)
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The day after the April 2014 conference call, RM’s stock dropped by 30.6%. (SAC ¶ 389.)
Principally citing statements from ten confidential witnesses who were formerly
employed in RM’s branch offices and one former internal auditor, Plaintiffs allege that RM did
not properly underwrite its live check loan program. Specifically, Plaintiffs proffer confidential
witness statements from former branch employees that they had serviced live check-originated
loans to individuals who would not have been granted credit under the criteria employed for
consumers who applied directly to branches for loans, that they noticed high delinquency rates
for live check customers, that loans for live check customers were frequently renewed or
extended even when the borrowers were not current with payments on the loans, and that some
live check borrowers were not even traceable to the addresses to which the checks had been
mailed. (See SAC ¶ 56.)
The former auditor, who had traveled among RM’s branches and regions to
perform his work, is alleged to have stated that RM issued live checks based on lists purchased
from credit bureaus that had incomplete information resulting in unaffordable multiple checks
going to some borrowers, and that the information was not updated during the course of the year
even though it was used throughout the year for live check issuances. (SAC ¶¶ 95-100.)
According to the former auditor, there were regular patterns of delinquencies following the
issuance of live checks, and RM carried delinquencies for an unusually long time to make its
ledger look better and pushed renewals and rollovers of loans, with some branches failing to
follow company underwriting standards in connection with renewals. (SAC ¶¶ 101-107.)
Plaintiffs also note in connection with their allegations of unsound underwriting practices that, in
October 2014, RM increased dramatically its loan loss reserves, citing an elevated level of live
check loan delinquencies as a principal reason for the increase. (SAC ¶ 420-21.)
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In April 2014, the Company changed the way in which it selected customers who
would receive live checks. Rather than directly selecting customers from credit bureau files, RM
entered into a contract with a “data aggregator” who would select the customers for RM. (SAC
¶ 427.) This change was not mentioned during the April 2014 conference call. (See SAC ¶ 427;
¶¶ 373-388.) In RM’s July 30, 2014, conference call with investors, Thomas still did not
mention this changeover, but stated that the Company “continued to test throughout the quarter
the adequacy of all of our underwriting programs.” (SAC ¶ 406.) The Company disclosed the
change in its October 30, 2014, investor conference call (which included notice to investors that
CEO Fortin would be leaving the Company), stating that “the selection parameters with the new
vendor did not get set properly” and that discrepancy had led to a higher-than-usual number of
delinquencies in RM’s loan portfolio. (SAC ¶ 427.) The day after this disclosure, on October
31, 2014, RM’s stock fell 35.2%. (SAC ¶ 431.)
In November 2014, after the appointment of an Interim CEO to replace Fortin,
RM disclosed in its Form 10-Q for the third quarter of 2014 that material weaknesses in its
internal and disclosure controls had existed during the second and third quarters of 2014. (SAC
¶ 440.) RM stated in the third-quarter Form 10-Q that its prior management had “concluded that
our disclosure controls and procedures were effective as of June 30, 2014. However, our Interim
CEO and our CFO have now concluded that our disclosure controls and protocols were not
effective as of June 30, 2014, because of . . . material weaknesses in our internal control over
financial reporting . . . .” (SAC ¶ 441.) The third-quarter Form 10-Q further stated that the
Form 10-Q for the second quarter of 2014 would be “amend[ed]” to reflect this disclosure.
(SAC ¶ 441.) However, the third-quarter Form 10-Q noted that the “material weakness did not
result in any adjustments to our prior-period interim or annual consolidated financial
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statements.” (SAC ¶ 441.)
On November 20, 2014, RM filed an amendment to its second-quarter Form
10-Q, which described the material weakness as follows: “Management has identified a control
deficiency that constituted a material weakness in our internal control over financial reporting as
of June 30, 2014. Specifically, we did not design and maintain effective controls over the credit
risk associated with the origination of direct mail loans, resulting in a reasonable possibility that
a material misstatement of our allowance for credit losses would not be prevented or detected on
a timely basis.” (SAC ¶ 442.) Plaintiffs characterize this disclosure as an admission that RM did
not “adequately monitor, properly apply, or accurately describe its underwriting practices.”
(SAC ¶ 443.)

Alleged Material Misstatements and Omissions
Plaintiffs contend that Defendants began to mislead the market materially with
regard to RM’s live check campaign in RM’s May 2, 2013, press release and investor conference
call that disclosed the Company’s financial results for the first quarter of 2013; that Defendants
continued to mislead the market through various public filings and investor conferences
throughout the Class Period; and that the material misstatements and omissions were not fully
cured until the October 30, 2014, press release and conference call discussing Fortin’s departure
and RM’s financial results for the third quarter of 2014. Plaintiffs point to many allegedly
actionable misstatements and omissions.
Plaintiffs assert, based on the 2014 disclosures and the fact that increases in the
live check program without contemporaneous staffing increases would necessarily have altered
the company’s historic staff-to-accounts ratios, that Defendants were aware of the understaffing
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issue and the link to delinquencies from at least August 2013. Plaintiffs further allege that
Defendants’ 2013 disclosures, which lauded the live check program expansion and attributed
delinquency rate increases to auto loans, constituted material misstatements and omissions.
(See, e.g., SAC ¶ 279-80.) The thrust of all of Plaintiffs’ allegations is that RM’s positive
statements regarding the live check program expansion, its loan loss reserve provisions, and its
underwriting practices were materially misleading, or omitted information necessary to make the
statements not misleading, because RM and the Individual Defendants knew, at the time of each
such statement, that: (1) staffing problems had created, or were likely to lead to, increased
delinquencies; (2) that RM’s underwriting practices were unsound and would lead to increased
delinquencies as the live check program grew; and (3) that there were material undisclosed
financial reporting and control problems.
The following representative sampling of Plaintiff’s allegations suffices to
support the legal analysis that follows.
RM’s May 2, 2013 Investor Conference Call
In discussing RM’s financial results for the first quarter of 2013, Fortin disclosed
the Company’s first-ever off-season live check campaign. Fortin characterized the live check
program as “focused” (SAC ¶ 284) and stated that RM chose its live check customers based on
“very precise” “marketing analytics” that targeted customers appropriately (SAC ¶ 288). Fortin
also stated that RM was “confident with the 41 [new branch] stores that we have announced that
we have the right people in place to absorb [the] growth” resulting from the live check program.
(SAC ¶ 289.) Plaintiffs allege that the disclosure was materially misleading in the absence of
disclosures that: (1) the live check campaign would increase the Company’s APE, preventing the
Company from adequately servicing loans and increasing delinquencies; and (2) the live check
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campaign was conducted without adequate underwriting and would therefore result in increasing
delinquencies. (SAC ¶ 280.)
RM’s 2013 Disclosures and the SPOs
Plaintiffs contend that RM repeated many of the false and misleading statements
regarding the live check program throughout its disclosures in 2013 and in statements leading up
to, and during, the First and Second SPOs.
The First SPO was announced on September 16, 2013. (SAC ¶ 319.) In
announcing the First SPO, Fortin stated that RM had mailed “more than one million convenience
checks to pre-screened individuals” over the summer of 2013. (SAC ¶ 320.) Fortin further
stated that RM’s “credit quality remains consistent with recent history” and described a decrease
in net delinquencies. (SAC ¶ 321.) Plaintiffs allege that Fortin’s statements about the live check
program were materially misleading absent disclosure that: (1) RM did not employ sound
underwriting practices for those live checks, and (2) demand for the live checks was from
borrowers who were not creditworthy. (SAC ¶ 322.)
Between the two SPOs, during the October 30, 2013, call following RM’s
announcement of its earnings for the third quarter of 2013, Fortin described RM’s “consistently
sound portfolio quality” (SAC ¶ 333), and Thomas stated that RM’s “[c]redit quality remains
good” (SAC ¶ 334). Although RM reported an increase in delinquencies, Thomas stated that the
increase was due to “auto delinquencies that increased more than the other categories in Q3” and
that “an increase in our delinquency rate at this time of year is fairly normal.” (SAC ¶ 335.) In
its Form 10-Q for the third quarter of 2013, RM stated that the “quality of our asset portfolio is
the result of our ability to enforce sound underwriting standards, maintain diligent portfolio
oversight, and respond to changing economic conditions as we grow our loan portfolio.” (SAC
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¶ 341.)
The Second SPO was announced on December 2, 2013. (SAC ¶ 343.) In
announcing the Second SPO, the Company disclosed accounting errors relating to non-income
based franchise taxes. (SAC ¶ 344.) RM also stated that it “continue[d] to experience strong
growth in its receivables” due in part to the “convenience check campaigns.” (SAC ¶ 346.)
Plaintiffs allege that these disclosures were materially misleading in that RM did not explain
underwriting and staffing issues relating to the live check program, and because RM did not
explain the full scope of its accounting irregularities, which Plaintiffs contend were material
notwithstanding RM’s assertions in its 2014 disclosures that the accounting issues were not
material ones requiring restatements of RM’s financials. (SAC ¶¶ 347, 441.)
RM’s Disclosure of Staffing Issues
In March 2014, the Company announced its fourth-quarter and full-year 2013
financial results. (SAC ¶ 350.) These results included an increase in charge-offs as a percentage
of average finance receivables to 7.8%, from 7.1% in FY 2012. (Id.) In a conference call after
the earnings announcement, Fortin explained the increase in delinquencies as follows: RM’s
“growth outpaced our hiring during Q4 2013 and [RM] saw [its] accounts per employee move
up.” (SAC ¶ 356.) Fortin also stated that RM had “historically followed a formulaic approach
for staffing branches based on the number of accounts,” and that management had been “pushing
our branches in our various geographies higher on accounts per employee” as the Company
“attempt[ed] to gain more labor productivity.” (SAC ¶ 358.) Fortin went on to state that
It doesn’t go to infinity and beyond and I think what we have seen
there is a natural flattening to gains in labor productivity. It actually
varies quite a bit by state just depending on product mix. So the
concrete actions that we are taking is we have gone through each and
every branch, done a very granular analysis as to the adequacy of
staffing, particular market conditions that are going on and as Don
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[Thomas] had indicated in the prepared remarks, we have been and
we continue to add to our labor force. And we expect to incur higher
personnel costs associated with that additional hiring, but we have
shown a very concrete correlation between collection performance
and what we call APE, accounts per employee. So it stands to reason
that with additional staffing, we will begin to get our arms around
those collection issues.
(SAC ¶ 358.) In response to an analyst’s question regarding whether the credit performance of
live checks was among the factors driving the fourth-quarter loss rates, Thomas stated that
“convenience checks actually run slightly better than the rest of our small loans. We are
screening those opportunities to a higher level because we don’t see the customer and their data
in front of us. And the end result is that they just perform better.” (SAC ¶ 360.) Thomas also
asserted that auto loan delinquencies were the cause of an overall increase in delinquencies
during the quarter. (SAC ¶ 360.) Plaintiffs contend that this disclosure concerning the staffing
problem was incomplete, given that RM would later disclose that the staffing issues arose prior
to the fourth quarter of 2013, and further argue that RM was concealing underwriting problems
relating to the live check program, given that RM would later disclose that a change in its
underwriting vendor led to a decrease in underwriting quality.
In April 2014, the Company announced its first-quarter 2014 financial results.
(SAC ¶ 373.) These results included an increase in charge-offs as a percentage of average
finance receivables to 9.7%, from 6.4% in the first quarter of 2013. (SAC ¶ 374.) This
represented the highest level of charge-offs in RM’s history. (SAC ¶ 391.) In its press release,
RM disclosed that the increase in charge-offs was “primarily the result of elevated accounts per
employee through the last five months of 2013 and most of the first quarter [of 2014], which
caused challenges in properly servicing the growth in accounts.” (SAC ¶ 375.) The Company’s
stock declined 30.6% after the release of this information. (SAC ¶ 389.)
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In July 2014, the Company held a conference call with analysts to discuss its
second-quarter 2014 financial results. On the call, Fortin stated that RM’s management believed
“we now have a firm handle on our APE levels,” but went on to say that “we recognize fully that
we must continue to properly train our new employees and remain ever vigilant of our
delinquency levels.” (SAC ¶ 406.) Plaintiffs assert that this was only a “partial disclosure of
truthful information concerning the staffing issues and their impact on the Company.” (SAC
¶ 412.)
RM’s Disclosure of Underwriting Issues
In April 2014, RM changed the vendor it used to identify customers who would
receive live check loans. (SAC ¶ 427.)
In July 2014, when announcing its financial results for the second quarter of
2014, RM announced that charge-offs as a percentage of average finance receivables had
increased to 10.5%, from 6.6% in the second quarter of 2013, a problem the Company continued
to attribute to elevated accounts per employee. (SAC ¶ 403.) In response to questions about
underwriting, Thomas stated that RM had “continued to test throughout the quarter the adequacy
of all of our underwriting programs and we remain very confident that [the elevated percentage]
was not a degradation in our credit granting activities that are rather directly linked to staffing.”
(SAC ¶ 406.) Plaintiffs allege that this disclosure was false or misleading given RM’s later
disclosure of underwriting problems that were traceable to a new vendor that was hired during
the second quarter of 2014.
On October 30, 2014, in announcing its financial results for the third quarter of
2014, RM made several significant new disclosures. (SAC ¶ 419.) RM disclosed the change in
its vendor used to originate live check loans, and attributed an increase in charge-offs to loans
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originated through that vendor, stating that “the selection parameters with the new vendor did
not get set properly.” (SAC ¶ 427.) The Company also announced the immediate resignation of
Fortin as CEO and a director. (SAC ¶ 419.) The Company’s stock dropped 35.2% the next day.
(SAC ¶ 431.) The stock closed at $11.66 per share. (Id.) The stock offering price had been
$27.50 for the First SPO (SAC ¶ 324), and $31 per share for the Second SPO (SAC ¶ 349). The
Class Period for Plaintiffs’ Exchange Act claims ends on October 30, 2014. (SAC ¶ 1.)

B.
DISCUSSION
When deciding a motion to dismiss a complaint for failure to state a claim
pursuant to Federal Rule of Civil Procedure 8(a) and 12(b)(6), the Court accepts as true the nonconclusory factual allegations in the complaint, drawing all reasonable inferences in favor of the
plaintiff. Ashcroft v. Iqbal, 556 U.S. 662 (2009); Roth v. Jennings, 489 F.3d 499, 501 (2d Cir.
2007). To survive a motion to dismiss, a complaint must plead “enough facts to state a claim to
relief that is plausible on its face.” Bell Atl. v. Twombly, 550 U.S. 544, 570 (2007). However, a
“pleading that offers labels and conclusions or a formulaic recitation of elements of a cause of
action will not do.” Iqbal, 556 U.S. at 678 (internal quotation marks and citations omitted).
Plaintiffs assert that Defendants’ written and oral disclosures violated Section
10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, which make it unlawful to,
inter alia, “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 . . . in connection with the purchase or sale of any security.” 17
C.F.R. § 240.10b-5. Claims alleging fraud-based violations of the federal securities laws are
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subject to additional pleading requirements. Plaintiffs’ Section 10(b) claims are subject to the
heightened pleading standards of both Federal Rule of Civil Procedure 9(b) and the Private
Securities Litigation Reform Act of 1995 (the “PSLRA”). In re Scholastic Corp., 252 F.3d 63,
69-70 (2d Cir. 2001). Rule 9(b) requires that fraud allegations be stated with particularity. Fed
R. Civ. P. 9(b). To satisfy the particularity requirement of Rule 9(b), the complaint must: “(1)
specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3)
state where and when the statements were made, and (4) explain why the statements were
fraudulent.” Stevelman v. Alias Research, Inc., 174 F.3d 79, 84 (2d Cir. 1999) (internal
quotation marks and citation omitted). Similarly, under the PSLRA, when a plaintiff seeks
money damages that require proof of scienter, “the complaint [must] . . . state with particularity
facts giving rise to a strong inference that the defendant acted with the requisite state of mind.”
15 U.S.C.S. § 78u-4(b)(2) (LexisNexis 2008). The Second Circuit has identified several nonexclusive factors for consideration in determining whether plaintiffs have adequately pleaded the
required “strong inference” of scienter: “the inference may arise where the complaint sufficiently
alleges that the defendants: (1) benefitted in a concrete and personal way from the purported
fraud; (2) engaged in deliberately illegal behavior; (3) knew facts or had access to information
suggesting that their public statements were not accurate; or (4) failed to check information they
had a duty to monitor.” Novak v. Kasaks, 216 F.3d 300, 311 (2d Cir. 2000) (internal citations
omitted).
Section 11 of the Securities Act provides a private right of action for investors
who purchase securities pursuant to a registration statement that, at the time it 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 statement therein not misleading.” 15 U.S.C.S. § 77k
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(LexisNexis 2008). Section 11 liability extends to issuing companies, executives and directors,
underwriters, and accountants who consent to being named as having prepared or certified any
part of the registration statement or any report used in connection with the registration statement.
Id. Under Section 12(a)(2) of the Securities Act, a person who offers or sells a security based on
any prospectus or oral communication that contained a material misstatement or omission is
liable to the purchaser unless he can prove that he did not know, and in the exercise of
reasonable care could not have known, of the untruth or omission. 15 U.S.C. § 77l(a)(2).
Finally, under Section 15 of the Securities Act, liability is extended to include defendants who
controlled a primary violator of Section 11. 15 U.S.C. § 77o. The standard for a materially
misleading statement under Section 11 and Section 12(a)(2) is identical to the standard under
Section 10(b): “whether representations, viewed as a whole, would have misled a reasonable
investor.” Rombach v. Chang, 355 F.3d 164, 178 n.11 (2d Cir. 2004).
Plaintiffs assert claims against all defendants (except Quattlebaum) for alleged
violations of Section 11; (2) against all defendants for alleged violations of Section 12(a)(2); and
(3) against the Individual Defendants, Palladium, and Parallel under Section 15. Plaintiffs’
Securities Act claims are based on purchases during the two SPOs, the offering documents for
each of which incorporated by reference RM’s Forms 10-Q, 10-K, and 8-K.
RM, Parallel, Palladium, and the Individual Defendants argue that the SAC
should be dismissed because it fails to allege any actionable misstatement or omission of
material fact. They assert that none of the statements Plaintiffs identify was false when made,
and argue that Plaintiffs have failed to allege facts demonstrating plausibly that any of the
underwriting or staffing practices were known to be unsound or likely to lead to material losses
prior to the times RM claimed, in its disclosures, to have discovered them. The Underwriter
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Defendants, who are only alleged to have violated the Securities Act, argue that, even if the
offering documents for the SPOs contained material omissions or misstatements, the Section
12(a)(2) claims should be dismissed as to them because they were not statutory sellers within the
meaning of that section of the Securities Act.

The Exchange Act Claims
Rule 10b-5 Claims Against RM and the Officer Defendants
To state a claim under Section 10(b) and Rule 10b-5, a plaintiff must allege facts
indicating that “the defendant, in connection with the purchase or sale of securities, made a
materially false statement or omitted a material fact, with scienter, and that plaintiff’s reliance on
defendant’s action caused injury to the plaintiff.” Lawrence v. Cohn, 325 F.3d 141, 147 (2d Cir.
2003).
The securities laws do not require a corporation to disclose every fact a
reasonable investor would like to know; once a corporation speaks on a given topic, however,
that communication creates “a duty to disclose all facts necessary to ensure the completeness and
accuracy of [the corporation’s] public statements.” In re Marsh & McLennan Cos. Sec. Litig.,
501 F. Supp. 2d 452, 469 (S.D.N.Y. 2006). A corporation’s omission is material, and therefore
actionable under Rule 10b-5, “only if there is a substantial likelihood that the disclosure of the
omitted fact would have been viewed by the reasonable investor as having significantly altered
the total mix of information made available.” In re Int’l Business Machines Corporate Sec.
Litig., 163 F.3d 102, 106-07 (2d Cir. 1998) (citing Basic v. Levinson, 485 U.S. 224, 231-32
(1988)).
The Second Circuit has recognized “several important limitations on the scope of
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liability for securities fraud.” Novak, 216 F.3d at 309. Plaintiffs may not sustain causes of
action based on “fraud by hindsight,” relying on “allegations that defendants should have
anticipated future events and made certain disclosures earlier than they actually did.” Id.
Additionally, in order to state claims based on the falsity of statements of opinion, Plaintiffs
“must allege that defendant's opinions were both false and not honestly believed when they were
made.” Fait v. Regions Fin. Corp., 655 F.3d 105, 113 (2d Cir. 2011); see also Omnicare, Inc. v.
Laborers Dist. Council Const. Indus. Pension Fund, 135 S. Ct. 1318, 1329 (2015) (“[I]f a
registration statement omits material facts about the issuer's inquiry into or knowledge
concerning a statement of opinion, and if those facts conflict with what a reasonable investor
would take from the statement itself, then § 11’s omissions clause creates liability. . . . The
reasonable investor understands a statement of opinion in its full context, and § 11 creates
liability only for the omission of material facts that cannot be squared with such a fair reading.”)
Notwithstanding Plaintiffs’ repeated allegations in the SAC that delinquency rates
on live check loans were high at relevant times, Plaintiffs plead no facts demonstrating that
RM’s computed delinquency rates, as disclosed in the relevant documents and announcements,
were inaccurate as of the dates of the relevant disclosures. Nor do Plaintiffs identify any figures
that were restated, other than the tax-related revisions identified in RM’s December 2013 and
March 2014 disclosures. (SAC ¶ 270.) Plaintiffs allege in a conclusory fashion that the changes
reflected in the tax-related revisions were material, but proffer no facts inconsistent with RM’s
assertions in the December 2013 disclosure documents that “the Company, in consultation with
its advisors” did not believe “the amounts related to any quarter or any year are material” (SAC
¶¶ 202, 204), or in the March 2014 disclosure that “the errors were immaterial to the previously
issued financial statements” (SAC ¶ 211). Accordingly, the SAC identifies no material
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misstatements of RM’s financial performance.
Plaintiffs’ remaining allegations fall into two general categories: (1) that RM’s
characterizations of its underwriting practices as “sound” or “targeted,” its positive statements
regarding the sufficiency of its staffing, and its attributions of delinquency trends to causes other
than staffing deficiencies were false; and (2) that RM failed to disclose material trends and
information relating to the likely effects of its expansion of the live check program on the ability
of its branch staff to manage the loans, and the alleged insufficiency of its underwriting
practices.
The alleged misstatements as to RM’s underwriting were statements in the nature
of belief or opinion, and Plaintiffs do not allege facts demonstrating that RM or the Officer
Defendants did not believe the statements were true at the time they were made. See Fait, 655
F.3d at 112 (“Requiring plaintiffs to allege a speaker’s disbelief in, and the falsity of, the
opinions or beliefs expressed ensures that their allegations concern the factual components of
those statements.”); see also Omnicare, 135 S. Ct. at 1327 (“[A] sincere statement of pure
opinion is not an ‘untrue statement of material fact,’ regardless whether an investor can
ultimately prove the belief wrong.”) Although Plaintiffs have alleged that lower-level branch
staff were skeptical of RM’s live check underwriting and were experiencing difficulties in
servicing live check loans, Plaintiffs have alleged no facts demonstrating that RM’s management
believed that the Company’s underwriting practices were unsound or inappropriate for a
program of that type, which involved offering loans to large numbers of subprime borrowers at
high interest rates (the Company referred to rates “as low as 29% APR” (SAC ¶ 307)), with the
expectation that a small percentage of the offerees would actually take the loans (Fortin stated in
October 2013 that the response rate for live checks was historically “between 1.5% and 5%”
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(SAC ¶ 325)). Nor have Plaintiffs pleaded facts demonstrating that RM knowingly failed to
follow the underwriting practices that it actually disclosed, or that those practices were
objectively unsound in the context of the live check program. See Omnicare, 135 S. Ct. at 1328
(“[A] statement of opinion is not misleading just because external facts show the opinion to be
incorrect.”)
Plaintiffs’ allegation of a material omission based on RM’s failure to disclose that
unusual delinquencies were likely at the time it changed vendors is also lacking a plausible
factual basis, as the Company maintained that the delinquencies resulted from failure to program
the underwriting properly and that the failure was only discovered on later investigation.
Plaintiffs have pleaded no facts to the contrary, resting solely on the impermissible theory that
RM “should have anticipated future events and made certain disclosures earlier than they
actually did.” Novak, 216 F.3d at 309. Plaintiffs have also failed to plead facts demonstrating
that the Company’s representation that it was monitoring the underwriting was false.
Accordingly, Plaintiffs have failed to identify actionable misstatements or omissions insofar as
their claim is premised on RM’s disclosures regarding its underwriting practices.
Plaintiffs’ claims regarding RM’s staffing levels are, similarly, allegations of
fraud by hindsight. Plaintiffs assert that RM’s statements about the adequacy of its staffing were
false because APE was later understood to have been too high at the time the positive statements
were made. This conclusion is premised solely on the Company’s own post hoc disclosure of
information that RM attributed to a “deep dive” study by RM, after delinquencies began to
increase, that identified 300 APE as an optimal ratio that had been exceeded in the latter half of
2013. (SAC ¶ 359.) Plaintiffs plead no facts demonstrating that the Company did not actually
believe that it could achieve increased labor productivity with the increased loan volume at the
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time it made the positive statements, nor do they identify any contemporaneous facts that would
have rendered such a belief unfounded.
Finally, Plaintiffs’ allegation regarding misstatements relating to the sufficiency
of internal controls fails because there are no facts pleaded to support an inference that the
Company knew, at time of the earlier disclosures and under its old management team, that its
internal controls were insufficient. RM did not restate its financial results; rather, it revised the
Company’s stated opinion as to the sufficiency of internal controls, and Plaintiffs have not
pleaded facts demonstrating falsity of the prior disclosure in relation to information then known
to the Company. Plaintiffs have similarly failed to plead facts demonstrating that RM’s earlier
loss reserve provisions were not the product of sincere opinions regarding appropriate loss
reserves, notwithstanding the subsequent substantial increase in those provisions following the
change of management.
Plaintiffs’ allegations therefore do not identify misstatements or omissions of
material facts, but rest solely on non-actionable opinion statements by the Officer Defendants
and RM, and failures to forecast future events without factual allegations demonstrating that
proper bases for such forecasts existed at the relevant times. Given that Plaintiffs have failed to
establish a material misstatement or omission, it is unnecessary to consider the remaining
elements of their Section 10(b) and Rule 10b-5 claim. That claim is, accordingly, dismissed.
Section 20(a) Claims for Control Person Liability
A plaintiff must show “(1) a primary violation by a controlled person; (2) control
of the primary violator by the defendant; and (3) that the controlling person was in some
meaningful sense a culpable participant in the primary violation” in order to establish a claim for
control person liability under Section 20(a) of the Exchange Act. Boguslavsky v. Kaplan, 159
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F.3d 715, 720 (2d Cir. 1998) (internal quotation marks omitted). As explained above, Plaintiffs
have not stated a claim under Section 10(b) and Rule 10b-5 with respect to RM or the Officer
Defendants. Therefore, Plaintiffs cannot state a claim under Section 20(a). This claim is,
accordingly, dismissed.

The Securities Act Claims
Section 11 Claims Against All Defendants
Plaintiffs’ Section 11 claims do not state a claim of material misstatement or
omission, for the reasons discussed above. This claim is therefore dismissed.
Section 12(a)(2) Claims Against All Defendants
Plaintiffs’ Section 12 claims do not state a claim of material misstatement or
omission, for the reasons discussed above. This claim is therefore dismissed.
Section 15 Claims Against Parallel, Palladium, and the Individual Defendants
Claims for control person liability under Section 15 of the Securities Act are
evaluated according to the same standard as those under Section 20(a) of the Exchange Act. In
re Global Crossing, Ltd. Sec. Litig., 2005 WL 1907005, at *11 (S.D.N.Y. Aug. 8, 2005).
Because Plaintiffs did not state a claim for control person liability under Section 20(a) as to any
Defendants, they have not stated a claim for control person liability under Section 15 either, and
this claim is also dismissed.

CONCLUSION
For the reasons stated above, Defendants’ motions to dismiss the Second
Amended Complaint are granted in their entirety. This opinion and order resolves docket entry
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nos. 61 and 64.
In their memorandum in opposition to the instant motions, Plaintiffs requested
leave to amend their complaint for a third time in the event Defendants’ motions were granted.
Plaintiffs are hereby granted leave to move for permission to file a Third Amended Complaint.
Any such motion must be filed by April 21, 2016, comply with the relevant local rules, and be
accompanied by (1) a proposed Third Amended Complaint, and (2) a blackline of the proposed
Third Amended Complaint showing the changes made from the Second Amended Complaint. If
no timely motion is filed, or if the motion is denied, the dismissal of the Second Amended
Complaint will be with prejudice and judgment will be entered in Defendants’ favor without
further advance notice.
SO ORDERED.
Dated: New York, New York
March 30, 2016
/s/ Laura Taylor Swain
LAURA TAYLOR SWAIN
United States District Judge

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