Blue v. Doral Financial Corporation et al

Filing 69

OPINION and ORDER: Granting in part and denying in part 56 Motion to Dismiss for Failure to State a Claim. Signed by Judge Gustavo A. Gelpi (AS)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF PUERTO RICO

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ROBERT BLUE, Individually and on
Behalf of All Others Similarly Situated,

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Plaintiffs,
CIVIL NO. 14-1393 (GAG)

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v.
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DORAL FINANCIAL
CORPORATION, GLEN R.
WAKEMAN, ROBERT E.
WAHLMAN, PENKO IVANOV,
DAVID HOOSTON, ENRIQUE R.
UBARRI-BARAGANO and
CHRISTOPHER C. POULTON,

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Defendants.
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OPINION AND ORDER

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Lead Plaintiffs (“Plaintiffs”), Jensine Andresen, Ken M. Nimmons, and Mordechai Hakim,

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bring this putative class action lawsuit on behalf of a class of investors against the holding

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company of Doral Bank (“Doral Bank” or the “Bank”), Doral Financial Corporation (“Doral”),

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and several current and prior company executives, Glen R. Wakeman (“Wakeman”), Robert E.

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Wahlman (“Wahlman”), Penko Ivanov (“Ivanov”), David Hooston (“Hooston”), Enrique R.

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Ubarri-Baragano (“Ubarri”), and Christopher C. Poulton (“Poulton”) (all defendants collectively

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referred to as “Defendants” and the latter company executives collectively referred to as the

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“Individual Defendants”). The Consolidated Class Action Amended Complaint (“complaint”)

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alleges that Plaintiffs purchased common stock of Doral between April 2, 2012 and May 1, 2014

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(the “class period”) at prices that were artificially inflated by Defendants’ false and misleading

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statements made in violation of sections 10(b) and 20(a) of the of 1934 Securities Exchange Act,

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15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder by the Securities and

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Exchange Commission (“SEC”), 17 C.F.R. § 240.10b-5. (Docket No. 53.)

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Despite the extensiveness of the complaint, rounding out at 122 pages and comprising of

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328 paragraphs, the substantive allegations can be boiled down to the contention that, during the

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class period, Defendants violated securities laws when they engaged in a scheme to misrepresent

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Doral’s regulatory compliance, thus artificially inflating the company’s actual worth in two ways.

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First, Plaintiffs claim that Doral misrepresented the quality of its loan portfolio by failing to

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publically disclose that it had been deliberately understating its appropriate loan reserves, known

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as the Allowance for Loan and Lease Losses (the “ALLL”), and by failing to disclose the

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systematic and widespread deficiencies in its procedures for determining its ALLL. (Id. ¶¶ 4-6, 8.)

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The ALLL provides an accurate representation of a lender’s present financial status by

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approximating the portion of the lender’s loan portfolio that is impaired or is otherwise not likely

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to be collected in the future. This in turn significantly affects the lender’s value. Second,

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Plaintiffs claim that Defendants failed to disclose the known, material risk that the Puerto Rico

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Treasury Department (“Treasury Department”) and the Federal Deposit Insurance Corporation

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(“FDIC”) would disallow the inclusion of the largest single component of Doral’s capital, a

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$229,884,087 tax receivable, into its Tier 1 capital. (Id. ¶ 7.) This fraudulent scheme, Plaintiffs

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claim, led to inflated stock prices, which ultimately plummeted when Doral announced on March

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18, 2014 that it would not be able to timely file its 2013 financial results due to a material

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weakness in its internal control over its financial reporting and then subsequently announced on

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May 1, 2014 that the FDIC would not allow Doral to include the tax receivable as part of its

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capital. (Id. ¶¶ 9-13.)

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Presently before the court is Defendants’ motion to dismiss Plaintiffs’ complaint pursuant

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to the Private Securities Litigation Reform Act of 1995 (“PSLRA”) and Federal Rules of Civil

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Procedure 9(b) and 12(b)(6), in which they argue that Plaintiffs fail to state a single claim under

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the applicable federal securities laws upon which relief can be granted.

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Plaintiffs opposed said motion to dismiss. (Docket No. 58.) Defendants, in turn, replied to

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Plaintiffs’ opposition. (Docket No. 62.) Plaintiffs then surreplied to Defendants’ opposition.

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(Docket No. 64.) Thereafter, Doral filed a voluntary petition under Chapter 11 of Title 11 of the

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United States Bankruptcy Code, 11 U.S.C. §§ 101 et seq, and, as such, the case against Doral was

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automatically stayed. (See Docket No. 65.) Plaintiffs’ case against the Individual Defendants

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continues, however, and the court will consider whether the complaint sufficiently states a claim

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(Docket No. 56.)

upon which relief can be granted against those defendants.

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After reviewing the pleadings and pertinent law, and taking into consideration the

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procedural posture of this case, the Court GRANTS in part and DENIES in part Defendants’

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Motion to Dismiss at Docket No. 56 as to the Individual Defendants.

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I.

The Parties

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Plaintiffs are stock holders who purchased Doral common stock during the class period.

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(Docket No. 53 ¶ 18.) Doral is a diversified financial services company incorporated in San Juan,

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Puerto Rico that engaged in retail banking, mortgage banking, investment banking activities,

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institutional securities, and insurance agency operations. (Id. ¶¶ 19, 38.)

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Defendant Wakeman is, and was throughout the class period, Doral’s Chief Executive

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Officer (“CEO”), President, and a Director of the Bank. (Id. ¶ 20.) Defendant Wahlman also

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served as Doral’s Chief Financial Officer (“CFO”), Chief Investment Officer, Chief Accounting

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Officer, an Executive Vice President, and a Director of the Bank during the class period. (Id. ¶

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21.) Defendant Ivanov served as Doral’s Interim CFO between May 17, 2013 and October 3,

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2013. (Id. ¶ 22.) Defendant Hooston joined Doral as Executive Vice President of Finance on July

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1, 2013, pending regulatory approval of his appointment as permanent CFO, and, on October 3,

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2013, Hooston was appointed CFO and an Executive Vice President. (Id. ¶ 23.) On October 6,

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2014, after the end of the class period, Doral announced that Hooston had been placed on “paid

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administrative leave.” (Id.) Defendant Ubarri is, and was throughout the class period, Doral’s

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Chief Compliance Officer, General Legal Counsel, and an Executive Vice President. (Id. ¶ 24.)

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Defendant Poulton is, and was throughout the class period, Doral’s Chief Business Development

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Officer and an Executive Vice President. (Id. ¶ 25.)

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II.

Background

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In articulating the following facts of this case, the court recites such facts as alleged in the

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complaint, resolving any ambiguities in Plaintiffs’ favor. See Ocasio-Hernández v. Fortuño-

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Burset, 640 F.3d 1, 5 (1st Cir. 2011).

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A.

Doral Financial Corporation

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Doral is the holding company for Doral Bank, which provided retail banking services to the

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general public and institutions, primarily in Puerto Rico. (Docket No. 53 ¶¶ 19, 40.) The

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Individual Defendants were the chief officers of Doral and the Bank. (Id. ¶¶ 20-25.) As of

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December 31, 2013, Doral Bank operated a network of twenty-two branches located in Puerto

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Rico and eight branches in New York and Florida. (Id. ¶ 40.) Through these branches, the Bank

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engaged in consumer and commercial lending, including residential mortgage lending, consumer

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loans, and commercial real estate and construction loans. (Id. ¶ 41.) Doral’s stock was publically

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traded on the New York Stock Exchange (“NYSE”) and as of April 30, 2014, it had more than 6.6

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million shares of common stock outstanding.1 (Id. ¶ 19.)

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Doral Bank’s lending activities in Puerto Rico were focused on the origination of

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residential mortgage loans. (Id. ¶ 42.) The operations of the Bank in the rest of the United States

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focused on the mortgage banking business and the purchase of assigned interests in senior credit

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facilities. (Id.) The Bank also offered deposit products and other retail banking services and sold

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or securitized a portion of the residential mortgage loans it originates. (Id.)

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In the years leading up to the class period, Doral’s operations were in disarray and the Bank

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was struggling to regain profitability following a massive restatement that was announced in

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February, 2006, which stemmed from spurious mortgage sales between it and, among others,

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FirstBank, which settled a securities fraud lawsuit arising out of those transactions for $74.25

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million. (Id. ¶ 3.) As a result of its financial struggles, on April 2, 2012, the first day of the class

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period, the FDIC notified Doral that it considered the Bank to be in “troubled condition.” (Id. ¶

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67.) As a bank holding company, Doral was subject to supervision and examination by federal and

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local banking regulators, including the FDIC, the Federal Reserve Bank of New York (the

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“FRBNY”), and the Office of the Commissioner of Financial Institutions of Puerto Rico (the “PR

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Commissioner”). (Id. ¶ 43.) Approximately four months later, August 8, 2012, Doral disclosed

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this information and announced that the Bank had entered into the “Consent Order” with the FDIC

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and the PR Commissioner that imposed operational restrictions and regulatory requirements on

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Doral to get it back on track to becoming successful again. (Id.) Thereafter, on September, 13,

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2012, Doral announced that it had entered into a similar written agreement with the FRBNY (the

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“Written Agreement”) that replaced and superseded an existing cease and desist order entered into

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On February 27, 2015, the FDIC was appointed as receiver of Doral, and, as such, trading of Doral stock
was halted that same day and subsequently delisted from the New York Stock Exchange on March 2, 2015. (Docket
No. 64 at 1.)

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with the Board of Governors of the Federal Reserve System on March 16, 2006. (Id. ¶ 75.)

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To best understand the specific requirements of the Consent Order, the Written Agreement,

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and the specific allegations in this case, it is helpful to first explain the basic accounting rules and

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principles underlying those agreements.

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B.

Relevant Principles Regarding the Federal Regulation of Banks

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Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”),

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federal banking regulators must take “prompt corrective action” with respect to banks that do not

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meet minimum capital requirements.

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requirements are the “Total Risk-Based Capital Ratio,” the “Tier 1 Risk-Based Capital Ratio,” and

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the “Tier 1 Leverage Ratio.” (Id. ¶ 45.) At least half of a bank’s Total Risk-Based Capital must be

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comprised of Tier 1 Capital, which may include common equity, retained earnings, minority

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interests in unconsolidated subsidiaries, noncumulative perpetual preferred stock and a limited

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amount of cumulative perpetual preferred stock (in the case of a bank holding company), minus

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goodwill, and certain other intangible assets. (Id. ¶ 46.) The remainder may consist of Tier 2

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Capital, which may include a limited amount of subordinated debt, other preferred stock, certain

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other instruments, and a limited amount of loan and lease loss reserves. (Id.) The FDIC assesses

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the above metrics for banks by dividing certain assets by the bank’s credit risks, thereby arriving at

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ratios that it uses to determine if a bank is “well-capitalized,” “adequately capitalized,”

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“undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.” (Id. ¶ 49.)

(Id. ¶ 44.)

The relevant capital metrics for these

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The FDICIA generally prohibits a bank from making any capital distribution or paying a

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dividend or management fee to its holding company if the bank would thereafter be

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undercapitalized.

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restrictions on borrowing from the Federal Reserve System and are required to submit capital

(Id. ¶ 52.) Undercapitalized banks are also subject to growth limitations and

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restoration plans to federal banking regulators. (Id.) If a bank fails to timely submit an acceptable

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plan, it is treated as if it were significantly undercapitalized. (Id.) Significantly undercapitalized

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banks may be subject to a number of requirements and restrictions, including orders to sell

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sufficient voting stock to become adequately capitalized, orders to reduce total assets and orders to

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cease the receipt of deposits. (Id.) Critically undercapitalized banks are subject to appointment of

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a receiver or conservator. (Id.)

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Furthermore, under FDIC regulations adopted pursuant to the FDICIA, banks that are not

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well-capitalized are prohibited from accepting new, rolling over, or renewing brokered deposits in

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the absence of a waiver from the FDIC, and are prohibited from paying attractive interest rates on

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the brokered deposits they currently hold. (Id. ¶¶ 53, 55.) Brokered deposits constitute any

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deposit with an interest rate of more than seventy-five basis points above prevailing market rate,

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which includes certificates of deposit and money market deposits. (Id. ¶ 54.) Even with such a

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waiver, a bank that is merely adequately capitalized may not pay an interest rate on any brokered

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deposits in excess of seventy-five basis points above prevailing market rates. (Id. ¶ 55.)

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With respect to lending activities, pursuant to Generally Accepted Accounting Principles2

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(“GAAP”), banks are required to maintain an ALLL to reflect the difference, if any, between the

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principal balance of a loan and the present value of its projected cash flows, observable fair value,

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or collateral value. (Id. ¶ 57.) In other words, banks are required to maintain an allowance that it

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could use in the event that any of its impaired loans are not collected upon. An impaired loan is

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one for which it is probable that the lender will not collect all amounts due under the contractual

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terms of the loan. (Id.) The ALLL is established and maintained via a provision for loan and lease

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losses (“PLLL”), to account for any impaired loans and constitutes a charge against the bank’s

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“The GAAP rules embody the prevailing principles, conventions, and procedures defined by the accounting
industry from time to time.” Young v. Lepone, 305 F.3d 1, 5 n.1 (1st Cir. 2002).

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earnings. (Id.) In light of the critical importance of ALLL to a lending institution’s financial

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statements, on December 13, 2006, the FDIC and the Board of Governors of the Federal Reserve

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System, together with other banking regulators, jointly issued a policy statement that stated, in

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part, that:

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The ALLL represents one of the most significant estimates in an institution’s
financial statements and regulatory reports. Because of its significance, each
institution has a responsibility for developing, maintaining, and documenting a
comprehensive, systematic, and consistently applied process for determining the
amounts of the ALLL and the provision for loan and lease losses (PLLL). To fulfill
this responsibility, each institution should ensure controls are in place to
consistently determine the ALLL in accordance with GAAP, the institution’s stated
policies and procedures, management’s best judgment and relevant supervisory
guidance.

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As of the end of each quarter, or more frequently if warranted, each institution must
analyze the collectability of its loans and leases held for investment . . . and
maintain an ALLL at a level that is appropriate and determined in
accordance with GAAP. An appropriate ALLL covers estimated credit losses on
individually evaluated loans that are determined to be impaired as well as estimated
credit losses inherent in the remainder of the loan and lease portfolio.

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(Id. ¶ 58); Board of Governors of the Federal Reserve System, Interagency Policy Statement on the

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Allowance

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http://www.federalreserve.gov/boarddocs/srletters/2006/SR0617a1.pdf.

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12

for

Loan

and

Lease

Losses

(Dec.

13,

2006),

available

at

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C.

Doral’s Consent Order With the FDIC

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In sum, the Consent Order required the Bank to: (1) implement a comprehensive ALLL

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policy and methodology; (2) obtain a waiver from the FDIC before accepting, renewing or rolling

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over brokered deposits; (3) implement an independent loan review program; (4) implement a

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revised appraisal compliance program; and (5) maintain a higher amount of capital than was

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otherwise necessary to be considered well-capitalized under the applicable regulations. (Id. ¶ 5.)

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The requirements set forth in the Consent Order assured investors that Doral and the Bank would

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thereafter take measures to strengthen the Bank’s ALLL policy and methodology. (Id. ¶ 6.)

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Specifically, the Consent Order required, inter alia, that Doral submit a capital plan within

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sixty days detailing the manner in which the Bank would maintain a Tier 1 Leverage Ratio of at

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least eight percent, a Tier 1 Risk-Based Capital Ratio of at least ten percent, and a Total Risk-

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Based Capital Ratio of at least twelve percent—compared to the five percent Tier 1 Leverage

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Ratio, six percent Tier 1 Risk-Based Capital Ratio, and ten percent Total Risk-Based Capital Ratio

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that are generally required for a bank to be considered well-capitalized under the FDICIA. (Id. ¶

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69.) Furthermore, Doral Bank was required to immediately notify the FDIC Regional Director and

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the PR Commissioner in the event any capital ratio falls below the minimum required by the

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approved capital plan, and within sixty days thereafter either: (1) increase capital in an amount

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sufficient to comply with the capital ratios as set forth in the approved Capital Plan; or (2) submit

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to the FDIC Regional Director and the PR Commissioner a Contingency Plan for the sale, merger,

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or liquidation of the Bank in the event the primary sources of capital are not available within 120

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days. (Id. ¶ 70.)

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The agreement required the Bank to: (1) “establish a program of independent loan review

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that will provide for a periodic review of the Bank’s loan portfolio and the identification and

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categorization of problem credits”; and (2) among other things, implement “a mechanism for

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reporting . . . no . . . less than quarterly, the information developed” through the loan review

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program “to the Board.” (Id. ¶ 72.) The requirement that the Bank establish an independent loan

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review program (from which the ALLL is derived) and ensure that loan review information

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reached the Board assured investors that Defendants would implement measures to make sure that

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Doral maintained an adequate ALLL. (Id. ¶ 73.) The Consent Order also required the Bank to

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“revise its appraisal compliance program, including enhancing the Bank’s appraisal policy to

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capture risk management and internal controls that ensure that appraisals are obtained in a timely

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manner . . . and that appraisals contain appropriate valuation approaches to support assigned

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values,” which likewise assured investors that Defendants would implement measures to make

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sure that Doral maintained an adequate ALLL. (Id. ¶ 74.)

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D.

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The Written Agreement with the FRBNY imposed operational restrictions and regulatory

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requirements on Doral similar to those imposed by the Consent Order. (Id. ¶ 76.) Pertinently, the

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Written Agreement required that Doral submit to the FRBNY an acceptable written plan to

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maintain sufficient capital at Doral on a consolidated basis, including maintaining compliance with

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the capital adequacy guidelines for the Bank issued by the FDIC, which took into account, inter

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alia, the adequacy of the Bank’s ALLL. (Id.) The agreement further required Doral to establish

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programs, policies and procedures acceptable to the FRBNY relating to credit risk management

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practices, credit administration (including developing procedures to ensure that appraisals conform

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to accepted standards and developing enhanced appraisal review procedures to ensure the quality

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and timeliness of appraisals), loan grading (including developing standards and criteria for

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assessing the credit quality of loans), asset improvement, other real estate owned, allowance for

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loan and lease losses, internal audit, and accounting and internal controls (including taking

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necessary actions to ensure that accounting and financial reporting functions are staffed by

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qualified personnel and that management and the board receive timely and accurate reports

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necessary to correct weaknesses and deficiencies associated with accounting and financial

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reporting). (Id.) Doral was also to provide quarterly progress reports to the FRBNY on its

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compliance with the Written Agreement. (Id.)

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Doral’s Written Agreement With the FRBNY

Similar to the Consent Order, the Written Agreement also required Doral to “establish an

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[ALLL] methodology . . . consistent with relevant supervisory guidance, including the Interagency

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Policy Statements on the Allowance for Loan and Lease Losses, dated . . . December 13, 2006”

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and “submit to the [FRBNY] an acceptable written program for maintenance of an adequate

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ALLL.” (Id.) The agreement required Doral’s program to include policies and procedures to

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ensure adherence to the ALLL methodology, provide for periodic reviews of the ALLL by the

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board of directors on at least a quarterly calendar basis, and to provide updates to the ALLL

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methodology as appropriate. (Id. ¶ 77.) It required the board of directors to maintain written

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documentation of its review, including the factors considered and conclusions reached by Doral in

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determining the adequacy of the ALLL and to remedy an deficiency found in the ALLL during the

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quarter that it is discovered, prior to the filing of any required regulatory reports. (Id.) Lastly, the

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agreement required Doral to submit to the FRBNY, within sixty days after the end of each calendar

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quarter, a written report regarding the board of directors’ quarterly review of the ALLL and a

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description of any changes to the methodology used in determining the amount of ALLL for that

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quarter. (Id.)

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E.

Doral’s 2012 Closing Agreement with the Treasury Department

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In addition to the two aforementioned agreements, Doral had also entered into an

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agreement with the Treasury Department on March 26, 2012 (the “2012 Closing Agreement”).

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(Id. ¶ 115.) The 2012 Closing Agreement, which Doral announced at the start of the class period,

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replaced and superseded a 2006 agreement (the “2006 Closing Agreement”) that followed in the

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wake of the massive restatement of Doral’s financial results for the five year period ending

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December 31, 2004. (Id. ¶ 116.) In connection with the spurious mortgage sales mentioned above,

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Doral retained a portion of the interest to be paid on the mortgages, known as interest-only strips,

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or “IOs,” and booked a gain on the sale of the mortgages. (Id. ¶ 117.) In fact, Doral did not truly

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sell the mortgages, but instead was simply borrowing money which was collateralized by the

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mortgages. (Id.) Through side deals and oral agreements, Doral provided the purchaser with full

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recourse rights, thereby rendering the transactions loans, rather than sales. (Id.) After this scheme

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was uncovered and Doral was forced to restate its financial results and reverse the income from the

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spurious sales, Doral claimed that it had overpaid more than $152 million in taxes, and was

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entitled to a reimbursement from the Treasury Department. (Id. ¶ 118.)

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Thereafter, on September 26, 2006, Doral and the Treasury Department entered into the

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2006 Closing Agreement. (Id. ¶ 119.) In lieu of claiming a reimbursement of the allegedly

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overpaid taxes, the parties agreed that Doral would have the right to recognize a deferred tax asset

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in the amount of $889,723,361, and to gradually amortize that sum against its tax liability over a

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fifteen year period. (Id.) Six years later, on March 26, 2012, Doral and the Treasury Department

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entered into the 2012 Closing Agreement, in which Doral represented that as of that date, it had

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amortized $123,443,072 of the $889,723,361 deferred tax asset in prior tax returns, leaving a

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balance of $766,280,289. (Id. ¶ 120.) According to Doral, it entered into the 2012 Closing

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Agreement because it was apparent that Doral “would not be able to realize the full value of its tax

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asset before it expired,” and, notably, Doral “could not use the tax asset to satisfy [its regulatory]

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capital requirements.” (Id. ¶ 121.)

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The 2012 Closing Agreement voided the $766,280,289 balance of amortization, and
instead provided, in pertinent part, as follows:
[Doral and the Treasury Department] hereby agree to recognize the value of the
unamortized IO adjusted basis as a tax overpayment not recovered by [Doral] for
the period covered by the restatement, amounting to $229,884,087 as of January 1,
2011. This overpayment of taxes will be treated as a pre-payment of income tax
by [Doral] and can be apportioned among and used by any [Doral subsidiary] to
offset income taxes due to the Puerto Rican Government . . . in future years, either
through reductions of estimated income taxes or through refunds over a period of 5
years, upon proper claim by Doral.

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(Id. ¶ 122.) According to Doral, the $229,884,087 amount was arrived at by applying the lowest

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possible tax contribution payable on the amortizable balance of $766,280,289—30% rather than

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39%, as provided by the Internal Revenue Code of 1994, which was in effect for the years in

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question. (Id. ¶ 123.) This agreement addressed the “pressing public interest[]” of “keeping the

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banking system capitalized,” according to Doral. (Id. ¶ 124.) For its part, Doral agreed to aid the

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Puerto Rico economy by expanding its home preservation and commercial development program

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by up to $70 million.

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$229,884,087 as a tax receivable and included the tax receivable in its Tier 1 Capital. (Id. ¶ 125.)

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F.

(Id.)

Following the 2012 Closing Agreement, Doral recognized the

The Alleged Fraudulent Scheme

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Despite the significant problems identified by Doral’s regulators, the directives set forth in

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the aforementioned Consent Order and Written Agreement assured Doral’s investors that Doral

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and the Bank would develop and implement a sound and comprehensive ALLL policy and

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methodology, implement a mechanism for independent loan review and reporting, and enhance the

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appraisal programs—all information from which the ALLL was derived. (Id. ¶ 78.) Furthermore,

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the 2012 Closing Agreement assured investors that Doral maintained an adequate amount of

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capital throughout the class period. (Id. ¶¶ 121-124.) However, Plaintiffs allege that during the

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class period, when Doral represented to the investing public that it and the Bank were in full

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compliance with the terms set forth in those agreements, it was in fact engaging in a concerted

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effort to intentionally disobey the terms of the agreements to disguise the Bank’s actual worth and

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its increasingly dire financial prospects. (Id. ¶¶ 78, 126-130.)

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Plaintiffs allege, almost exclusively through accounts of confidential former employees of

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Doral, that unbeknownst to investors, Defendants deliberately understated Doral’s ALLL prior to

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and during the class period by, inter alia, booking assets in later periods and not fixing or updating

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material deficiencies in Doral’s internal control of its financial reporting, in order to inflate the

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Bank’s regulatory capital ratios. (Id. ¶ 82.) By understating Doral’s ALLL and ignoring the

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deficiencies in its internal control of its financial reporting, Defendants correspondingly overstated

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Doral’s net income, which in turn, overstated its capital and artificially inflated its regulatory

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capital ratios. (Id.) In addition, Plaintiffs allege that Doral falsely represented to the Treasury

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Department the balance of amortization of its deferred tax asset at the time of the 2012 Closing

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Agreement and that it did not actually overpay its taxes in the amount of $152 million. (Id.

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¶¶ 126-30.) As a result, Doral fraudulently obtained a larger tax receivable than it was entitled and

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there was a significant risk that the Treasury Department would discover Doral’s scheme and back

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out of the agreement. (Id. ¶¶ 126, 128.) This resulted in the Treasury Department later claiming

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that the Agreement is null and void, which then caused the FDIC to disallow Doral to include the

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almost $230 million tax receivable in its Tier 1 capital. (Id.)

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G.

The Securities Fraud Claims

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Plaintiffs claim that in light of Defendants’ fraudulent scheme to disguise the Bank’s actual

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worth, Defendants repeatedly issued false and misleading statements to the investing public

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regarding the accuracy of the Bank’s ALLL and PLLL and the material risk that the Treasury

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Department would seek to void the 2012 Closing Agreement. (Id. ¶ 102.) Specifically, while

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making some disclosures about the material deficiencies of Doral’s system of internal control over

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its financial reporting, particularly those controls associated with its reporting of its ALLL and

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PLLL, Plaintiffs claim that Defendants were unremittingly optimistic about Doral’s financial state,

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failed to disclose the systemic and widespread nature of those problems, that they had been

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deliberately understating Doral’s ALLL and PLLL, and falsely represented that Doral’s policy of

23

calculating and accounting for its ALLL was consistent with the requirements of GAAP. (See,

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e.g., id. ¶¶ 61, 233, 235, 238, 240, 242, 244, 246, 248.) Furthermore, Plaintiffs claim that

2

Defendants had numerous opportunities to disclose to the investing public that there was a material

3

risk that the Treasury Department would seek to void the 2012 Closing Agreement and thus not

4

recognize the almost $230 million tax receivable, leaving the institution without the adequate Tier

5

1 capital to remain well-capitalized. (See, e.g., id. ¶ 135-36, 144-45.)

6

Taken from annual and quarterly SEC filings, accompanying press releases, and conference

7

calls with investors and analysts, Plaintiffs present the allegedly false and misleading statements in

8

more than fifty-seven pages of the complaint with extensive block quotes. (See Docket No. 53 ¶¶

9

133-268.) These statements purport to describe the current financial state of Doral and the Bank,

10

including its ALLL model and the loan and appraisal data, and its compliance with the Consent

11

Order and Written Agreement. (Id.)

12

Plaintiffs allege that the Individual Defendants knew that the statements made were false

13

and misleading by citing observations and beliefs of confidential former employees of Doral

14

regarding the Individual Defendants’ involvement in the alleged fraudulent scheme, “by virtue of

15

[the Individual Defendants’] receipt of information reflecting the true facts regarding Doral, their

16

control over, and/or receipt and/or modification of Doral’s allegedly materially misleading

17

statements and/or their associations with [Doral] which made them privy to confidential

18

proprietary information concerning Doral,” and because of the internal reporting structure of Doral

19

and the high ranking positions that the Individual Defendants held. (Id. ¶¶ 83-101, 290-94.)

20

Plaintiffs also point to insider stock trades by three of the Individual Defendants and salary

21

increases for four of the Individual Defendants as evidence of Defendants’ motivation to engage in

22

the scheme and issue false and misleading statements. (Id. ¶¶ 302-04.)

23

The complaint then alleges that when Defendants’ misrepresentations and fraudulent

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conduct were disclosed to investors and the market, Doral’s common stock plummeted as a direct

2

result. (Id. ¶¶ 269-73, 306-15.) Specifically, Plaintiffs aver that when Doral announced on March

3

18, 2014 that it needed to delay the filing of its annual 10-K report for the year ending December

4

31, 2013 due to “a material weakness in its internal control over financial reporting as of

5

December 31, 2013, related to the review of the underlying data and mathematical model

6

supporting its [ALLL] and the related [PLLL],” and admitted that its “internal control over

7

financial reporting and disclosure controls and procedures were ineffective as of December 31,

8

2013,” the price of Doral common stock fell $1.13 per share, or more than 9%, from a closing

9

price of $12.30 per share on March 17, 2014, to close at $11.17 per share on March 18, 2014. (Id.

10

¶¶ 112, 269-70, 308.) Thereafter, in response to the release of Doral’s 2013 10-K that indicated it

11

had understated its ALLL and needed to make a substantial out-of-period increase to its PLLL,

12

suffered from widespread internal control deficiencies, and had not addressed the problems with its

13

ALLL policy and methodology as required by the Consent Order and the Written Agreement, the

14

price of Doral common stock tumbled 6.8%, from a closing price of $11.55 per share on Friday,

15

March 21, 2014, to close at $10.76 per share on Monday, March 24, 2014. (Id. ¶¶ 274; 309-11.)

16

The stock continued to decline over the next four trading days, as the market digested these

17

adverse announcements, closing at $8.59 per share on March 28, 2014—a total decline of 25.6%.

18

(Id.) Finally, Plaintiffs aver that when Doral disclosed on May 1, 2014 that the FDIC was no

19

longer allowing the Bank to include the almost $230 million tax receivable in its Tier 1 capital, the

20

price of Doral common stock plummeted 62%, from a closing price of $9.82 per share on May 1,

21

2014, to close at $3.73 per share on May 2, 2014, on unusually heavy trading volume of more than

22

2.37 million shares traded—erasing more than $141 million in market capitalization from the

23

stock’s class period high. (Id. ¶¶ 275-77, 315.)

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III.

Procedural History

2

On May 14, 2014, Robert Blue filed a complaint against Doral and the Individual

3

Defendants on behalf of all purchasers of Doral common stock between April 2, 2012 and May 1,

4

2014. (Docket No. 1) On August 1, 2014, the court approved the plaintiffs’ stipulation of the

5

appointment of Jensine Andresen, Ken M. Nimmons, and Mordechai Hakim as the lead plaintiffs.

6

(Docket Nos. 19 and 21.) Thereafter, on November 6, 2014, Plaintiffs filed the Consolidated Class

7

Action Amended Complaint, alleging that Doral and the Individual Defendants violated sections

8

10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by

9

the SEC. (Docket No. 53.)

10

Defendants then timely moved to dismiss the complaint for failure to state a claim upon

11

which relief can be granted, contending that Plaintiffs have failed to adequately allege actionable

12

material misrepresentations or omissions, a strong inference of scienter, loss causation, and

13

control-person liability. (Docket No. 56.) Plaintiffs opposed said motion to dismiss. (Docket No.

14

58.) Defendants, in return, replied to Plaintiffs’ opposition. (Docket No. 62.) Plaintiffs then

15

surreplied to Defendants’ opposition.

16

petition under Chapter 11 of Title 11 of the United States Bankruptcy Code, 11 U.S.C. §§ 1101 et

17

seq, and, as such, the case against Doral was automatically stayed.

18

Plaintiffs’ case against the Individual Defendants continues, however, and the court will consider

19

whether the complaint sufficiently states a claim upon which relief can be granted against those

20

defendants.

21

IV.

(Docket No. 64.)

Thereafter, Doral filed a voluntary

(See Docket No. 65.)

Standard of Review

22

First, as with any inquiry under Rule 12(b)(6) of the Federal Rules of Civil Procedure, the

23

court must “isolate and ignore statements in the complaint that simply offer legal labels and

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conclusions or merely rehash cause-of-action elements.” Schatz v. Republican State Leadership

2

Comm., 669 F.3d 50, 55 (1st Cir. 2012). Second, the court must then “take the complaint’s well-

3

pled (i.e., non-conclusory, non-speculative) facts as true, drawing all reasonable inferences in the

4

pleader’s favor.” Id. (citing Ocasio-Hernández, 640 F.3d at 12 which discusses Ashcroft v. Iqbal,

5

556 U.S. 662 (2009) and Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007)). To survive a motion

6

to dismiss, a complaint must allege facts sufficient to demonstrate “a plausible entitlement to

7

relief.” Twombly, 550 U.S. at 559; see also ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46, 58

8

(1st Cir. 2008). In asserting a securities fraud claim, the plaintiff has the burden of proving six

9

elements: “(1) a material misrepresentation or omission; (2) scienter, or a wrongful state of mind;

10

(3) in connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6)

11

loss causation.” Fire & Police Pension Ass’n of Colorado v. Abiomed, Inc., 778 F.3d 228, 240

12

(1st Cir. 2015) (quoting In re Genzyme Corp. Sec. Litig., 754 F.3d 31, 40 (1st Cir. 2014)).

13

However, “[a]s with all allegations of fraud, a plaintiff must plead the circumstances of the

14

fraud with particularity, pursuant to Rule 9(b)” of the Federal Rules of Civil Procedure. Hill v.

15

Gozani, 638 F.3d 40, 55 (1st Cir. 2011) (citing ACA Fin. Guar., 512 F.3d at 58). The federal

16

courts have long acknowledged that “litigation under Rule 10b-5 presents a danger of

17

vexatiousness different in degree and in kind from that which accompanies litigation in general.”

18

Hill, 638 F.3d at 54. As such, consistent with the requirements of Rule 9(b), the court must apply

19

the heightened pleading standard required by the PSLRA. See 15 U.S.C. § 78u-4(b)(1); In re

20

Cabletron Sys., Inc., 311 F.3d 11, 27-28 (1st Cir. 2002). Under the PSLRA, a securities fraud

21

complaint must “‘specify each statement alleged to have been misleading, the reason or reasons

22

why the statement is misleading,’ and . . . . the statements alleged to be misleading must be

23

misleading to a material degree.” Id. (quoting 15 U.S.C. § 78u–4(b)(1)). To plead scienter, the

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complaint must also “state with particularity facts giving rise to a strong inference that the

2

defendant acted with the requisite state of mind” as opposed to a mere plausible or reasonable

3

inference. 15 U.S.C. § 78u–4(b)(2); In re Cabletron Sys., Inc., 311 F.3d at 27-28. “This last

4

requirement alters the usual contours of a Rule 12(b)(6) ruling because, while a court continues to

5

give all reasonable inferences to plaintiffs, those inferences supporting scienter must be strong

6

ones.” In re Cabletron Sys., Inc., 311 F.3d at 28 (citing 15 U.S.C. § 78u–4(b)(2) and Greebel v.

7

FTP Software, Inc., 194 F.3d 185, 196-97, 201 (1st Cir. 1999)).

8

In evaluating the adequacy of a securities fraud complaint, “‘the PSLRA does not require

9

plaintiffs to plead evidence.’ Nevertheless, a significant amount of ‘meat’ is needed on the ‘bones’

10

of the complaint.” Hill, 638 F.3d at 56 (quoting ACA Fin. Guar., 512 F.3d at 63). “Courts should

11

look at the complaint as a whole and weigh competing inferences in a comparative evaluation of

12

plaintiff’s allegations and alternative inferences from those allegations. . . . If there are equally

13

strong inferences for and against scienter, then the tie goes to the plaintiff.” Simon v. Abiomed,

14

Inc., 37 F. Supp. 3d 499, 512-13 (D. Mass. 2014) aff’d sub nom. Fire & Police Pension Ass’n of

15

Colorado v. Abiomed, Inc., 778 F.3d 228 (1st Cir. 2015) (citing Tellabs, Inc. v. Makor Issues &

16

Rights, Ltd., 551 U.S. 308, 314 (2007) and New Jersey Carpenters Pension & Annuity Funds v.

17

Biogen IDEC Inc., 537 F.3d 35, 45 (1st Cir. 2008)).

18

V.

Discussion

19

Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful to “use or employ,

20

in connection with the purchase or sale of any security . . . any manipulative or deceptive device or

21

contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary

22

or appropriate in the public interest or for the protection of investors.” 15 U.S.C. § 78j(b); see also

23

Tellabs, 551 U.S. at 318. Pursuant to this law, SEC Rule 10b-5 implements Section 10(b) by

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making it unlawful:

2

(a) To employ any device, scheme, or artifice to defraud,

3

(b) To make any untrue statement of a material fact or to omit to state a material
fact necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading, or

4
5
6
7

(c) To engage in any act, practice, or course of business which operates or would
operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.

8

17 C.F.R. § 240.10b-5. As noted above, the six elements of a 10b-5 claim are: “(1) a material

9

misrepresentation or omission; (2) scienter, or a wrongful state of mind; (3) in connection with the

10

purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation.” Abiomed,

11

778 F.3d at 240.

12

Claims brought under Section 20(a) of the Act, 15 U.S.C. § 78t(a), are derivative of 10b-5

13

claims. Hill, 638 F.3d at 53. Specifically, once any “person” is found liable for violating the

14

Securities Exchange Act’s substantive provisions,

15
16
17
18
19

[e]very person who, directly or indirectly, controls any person liable under any
provision of this chapter or of any rule or regulation thereunder shall also be liable
jointly and severally with and to the same extent as such controlled person to any
person to whom such controlled person is liable, unless the controlling person acted
in good faith and did not directly or indirectly induce the act or acts constituting the
violation or cause of action.
Id. (quoting 15 U.S.C. § 78t(a)).

20

In moving to dismiss Plaintiffs’ complaint, Defendants argue that the complaint fails to

21

adequately allege actionable material misrepresentations or omissions, a strong inference of

22

scienter, loss causation, and control-person liability. (Docket No. 56.) Defendants challenge the

23

adequacy of the complaint by systematically going through each of those arguments in order,

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starting with the issue of whether Plaintiffs sufficiently allege any material misrepresentations or

2

omissions on part of the Defendants. (Id. at 17-42.)

3
4

A.

Whether the Complaint Alleges Actionable Material Misrepresentations or
Omissions

5

The first question for the court is whether the complaint sufficiently alleges misleading

6

statements or omissions by the Individual Defendants in the SEC filings, accompanying press

7

releases, and conference calls, and the reasons why they are misleading. As described above,

8

Plaintiffs’ primary allegation is that Defendants repeatedly issued false and misleading statements

9

to the investing public regarding the accuracy of the Bank’s ALLL and PLLL and Doral’s capital

10

levels, particularly concerning the tax receivable from the Treasury Department, and its internal

11

financial controls because they were engaging in a scheme to inflate Doral’s capital and disguise

12

its dire financial status. The statements can be generally summarized as stating: (1) that Doral

13

Bank was in compliance with all regulatory requirements and was considered well-capitalized

14

under the two agreements with its regulators; (2) the amounts of its ALLL and PLLL and how the

15

Bank arrived at these figures; (3) that Doral was taking a more conservative approach with respect

16

to its ALLL model; (4) that there was a material weakness in its internal controls over financial

17

reporting relating to the completeness and valuation of its ALLL and PLLL, but the Bank was

18

remedying the problem; (5) that all financial statements were in compliance with GAAP; and (6)

19

that the tax receivable of almost $230 million from the 2012 Closing Agreement was greatly

20

benefiting the bank and boosting its capital. (See, e.g., Docket No. 53 ¶¶ 137-39, 143-49, 155-59.)

21

Examples of these statements are as follows:

22

1. At the start of the class period, Defendants represented in Doral’s 2011 annual
SEC 10-K form, filed on March 30, 2012, that “[a]s of December 31, 2011,
Doral Bank was in compliance with all regulatory requirements” and “was
considered a well-capitalized bank for purposes of [the FDICIA].” (Id. ¶ 133.)

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The 2011 10-K set forth Doral’s and the Bank’s regulatory capital ratios, in
comparison to the requirements of the FDICIA, as significantly higher than the
well capitalized minimum requirements. (Id.)
2. The 2011 10-K also stated that Doral’s provisions for loan and lease losses for
the quarter and full year ended December 31, 2011 were $9.914 million and
$67.525 million respectively, and Doral’s ALLL was $102.609 million as of
December 31, 2011. (Id. ¶ 137.)
3. Defendants further disclosed in the 2011 10-K that Doral had “material
weaknesses in [its] internal control over financial reporting” concerning the
failure to “maintain effective controls over the completeness and valuation of its
[ALLL] and the related [PLLL].” (Id. ¶ 103.) Specifically, the 2011 10-K
explained that Doral had not maintained effective controls to reasonably assure:
(1) that residential second mortgages and commercial real estate loan valuations
were obtained and processed accurately so that the property value updates
received were either reflected as charge-offs, or reflected in the ALLL in a
timely manner; and (2) that the ALLL was adequately reviewed and the
underlying data was properly reconciled. (Id.) As a result of the control
deficiency, Doral had reduced the ALLL by $10.1 million in its 2011
financial statements from the amount previously reported in the
Company’s January 19, 2012 earnings release. (Id.)
4. Defendants disclosed that they had “performed additional analysis and other
post-closing procedures to ensure that the financial statements were prepared in
accordance with [GAAP]” and concluded “that the financial statements included
in [the 2011 10-K] fairly present[ed], in all material respects, the Company’s
financial condition . . . for the periods presented.” (Id. ¶ 139.) Defendants also
assured investors that Doral was “expeditiously” implementing a series of
“remediation efforts” to address both material weaknesses. (Id. ¶ 104.)
5. In its financial report on Form 10-Q for the first quarter of 2012, which was
signed and certified by Defendants Wakeman and Walhman, Doral reported that
it was in compliance with all applicable regulatory capital requirements, that it
exceeded the thresholds for well-capitalized banks, that its performance for that
quarter was primarily due to the income tax benefit from the 2012 Closing
Agreement, and then explained the implications of the tax receivable. (Id. ¶¶
148-49, 151.)
6. On May 16, 2012, the day following the filing of the first quarter 10-Q,
Defendants held a conference call with analysts and investors, during which
Defendant Wakeman stated that “Doral is solid and is well positioned in the
difficult Puerto Rico market” following “a substantial increase in capital, as
well as a substantial increase in credit reserves.” (Id. ¶ 155.) Wakeman
provided additional commentary on the 2012 Closing Agreement, in pertinent
part, as follows:
We reached an important agreement with the government of Puerto Rico
regarding our deferred tax assets. The agreement covers the portion of the
deferred tax assets that was created through a prior overpayment related to

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Doral’s legacy trading business. Now we have previously referred to this
asset as the I/O VTA and over the past several months we worked with the
government of Puerto Rico to simplify the tax agreement that was signed in
2005.
The new agreement replaces the old one and acknowledges the asset as what
it, in fact, is – an overpayment of tax. Therefore, the tax asset is now
recognized as a receivable which is no longer tied to future earnings.
Now this is an important transaction for us and it produced two clear
benefits in the first quarter. The first benefit relates to earnings. We
eliminated a reserve of $112 million, which we had carried against this
asset. This elimination of reserve flowed through our financial statements as
a gain in the first quarter.
The second benefit relates to capital. Under the previous agreement less
than $10 million of the DTA was included in Tier 1 capital. As the asset is
now a receivable and no longer tied to future earnings, the entire amount of
the asset, $223 million, is Tier 1 capital. (Id.)
7. Furthermore, in its first quarter 10-Q, Doral reported that the material
weaknesses identified in the 2011 Form 10-K still had not been remediated and
that although “the Company’s disclosure controls and procedures were not
effective as of March 31, 2013,” and “[Doral] ha[d] identified . . . material
weaknesses in its system of internal control over financial reporting,”
Defendants had “taken reasonable steps to ascertain that the financial
information contained the in [the first quarterly report] was presented “in
accordance with [GAAP].” (Id. ¶¶ 105, 153.)
8. The second quarterly Form 10-Q contained a discussion substantially similar to
one contained in its first quarterly form 10-Q, that stated that “[i]n the
agreement, the Commonwealth of Puerto Rico states that as of March 26, 2012
it has a payable to Doral of approximately $230.0 million resulting from past
Doral tax payments (prepaid tax), and that Doral has the right to use the amount
due from the Commonwealth of Puerto Rico to offset future Doral tax
obligations, or that Doral may claim a refund that the Commonwealth of Puerto
Rico may pay over a five-year period[,]” and emphasizing that the “agreement
clearly states and recognizes the source of the amount of past taxes paid by
Doral, and the Commonwealth of Puerto Rico’s obligation to return the
overpayments to Doral.” (Id. ¶ 169.)
9. The report also noted that Doral had adopted a “notably more conservative view
of the financial effects of the current and estimated future economic and
regulatory environment in which Doral’s businesses operates” and that “during
the first half of 2012, management reviewed its ALLL estimate assumptions and
calculations and adopted a more conservative outlook as to future loan
performance considering the uncertain economic and regulatory environments.
The resulting changes in estimate are reflected in the June 30, 2012 allowance
for loan and lease losses.” (Id. ¶ 171.)

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Civil No. 14-1393 (GAG)
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Plaintiffs claim that all of the alleged statements were materially false and misleading
because Defendants misrepresented and failed to disclose that:
(a) Defendants had inflated Doral’s capital by deliberately understating Doral’s
ALLL and PLLL;
(b) numerous undisclosed problems undermined the accuracy of Doral’s ALLL and
PLLL, including issues with the ALLL model and the loan and appraisal data from
which the ALLL was derived;
(c) Doral and the Bank were not in compliance with the Consent Order and the
Written Agreement, including those provisions related to the ALLL and loan review
and appraisal programs;
(d) Doral’s financial results, including its ALLL and PLLL, were not fairly
presented in conformity with GAAP;
(e) the internal control deficiency that had resulted in the out-of-period adjustments
was not an isolated issue, but instead, was indicative of systematic and widespread
internal control deficiencies and numerous undisclosed problems that undermined
the accuracy of Doral’s ALLL and PLLL; and

12
13
14
15

(f) there was a material risk that the Treasury Department would seek to void the
2012 Closing Agreement and thus the Bank would not have adequate Tier 1 Capital
to remain well-capitalized and comply with the Consent Order.
(See, e.g., id. ¶¶ 233, 235, 238, 240, 242, 244, 246, 248.)

16

Upon reviewing these allegations, due to Plaintiffs’ thorough articulation of the time, place,

17

and content of each statement, it becomes clear that this case in large part turns on the reasons why

18

the statements are misleading. “A statement cannot be intentionally misleading if the defendant

19

did not have sufficient information at the relevant time to form an evaluation that there was a need

20

to disclose certain information and to form an intent not to disclose it.” New Jersey Carpenters,

21

537 F.3d at 45. For example, failing to disclose that Defendants had inflated Doral’s capital by

22

deliberately understating its ALLL and PLLL cannot constitute a material omission if the

23

complaint does not sufficiently allege that Defendants did in fact intentionally understate the

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Civil No. 14-1393 (GAG)
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ALLL and PLLL.

2

The First Circuit has long required “a securities fraud plaintiff to explain why the

3

challenged statement or omission is misleading by requiring that the complaint . . . provide some

4

factual support for the allegations of the fraud.” Greebel, 194 F.3d at 193 (internal quotation

5

marks omitted). Indeed, in the present case, Plaintiffs argue that at the heart of their ALLL claim

6

is the “continued and pervasive ALLL-related problems that persisted [were] part of Defendants’

7

systematic fraud.” (Docket No. 58 at 27.) As such, this requires Plaintiffs to “not only allege the

8

time, place, and content of the alleged misrepresentations with specificity, but also the factual

9

allegations that would support a reasonable inference that adverse circumstances existed at the

10

time of the offering, and were known and deliberately or recklessly disregarded by defendants.”

11

Greebel, 194 F.3d at 193-94.

12

Therefore, because Plaintiffs rely upon Defendants’ fraudulent scheme for the reasons why

13

the statements are alleged to be misleading, the court will assume, arguendo, that Defendants

14

engaged in the alleged scheme and then move onto the question of whether a jury reasonably could

15

find that said statements were false or misleading given the particular context alleged. See Geffon

16

v. Micrion Corp., 249 F.3d 29, 36 n.6 (1st Cir. 2001) (“It is ultimately a question for the trier of

17

fact, here the jury, whether statements are false or misleading so as to be actionable under 10b–

18

5.”). The court will follow this structure because Plaintiffs use mostly the same alleged facts to

19

show that Defendants engaged in the fraudulent scheme as they do to support their claim of

20

scienter, i.e., that Defendants “made the challenged statements with a conscious intent to defraud

21

or with a high degree of recklessness.” Abiomed, 778 F.3d at 241. As such, to analyze the

22

purported fraudulent scheme and then later Defendants’ state of mind in making those statements

23

would require a significant amount of overlap in the court’s analysis. The court will examine in

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more detail those statements that are alleged to be misleading based upon other statements made

2

by Defendants.

3

In to moving to dismiss, Defendants do not challenge the particularity of Plaintiffs’

4

articulation of the statements, nor do they challenge the materiality of them. They do, however,

5

argue that many the many disclosures Defendants made throughout the class period negates a

6

jury’s ability to find material misrepresentations of material facts or omissions. (See Docket No.

7

56 at 8-38.) With these thoughts in mind, the court will analyze the disclosures made to the public

8

by Defendants during the class period. The court notes, however, that for the sake brevity and

9

because this case rests on scienter, it will not articulate the alleged statements in full.

10

1.

Analysis of the Statements

11

A fact is material if it there is a substantial likelihood “that the disclosure of the omitted

12

fact would have been viewed by the reasonable investor as having significantly altered the ‘total

13

mix’ of information made available.” In re Cabletron Sys., Inc., 311 F.3d at 34 (quoting Basic Inc.

14

v. Levinson, 485 U.S. 224, 231-32, 108 S. Ct. 978, 99 L. Ed. 2d 194 (1988)). “A statement can be

15

‘false or incomplete’ but not actionable ‘if the misrepresented fact is otherwise insignificant.’”

16

City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Waters Corp., 632 F.3d 751, 756-57

17

(1st Cir. 2011). In the present case, the Individual Defendants do not challenge the materiality of

18

the aforementioned statements; rather, they challenge whether the statements indeed contained any

19

misrepresentations and omissions. Further, it is well-established that Section 10(b) does not create

20

an affirmative duty to disclose any and all material information. In re Genzyme Corp. Sec. Litig.,

21

754 F.3d at 41 (citing In re Bos. Scientific Corp. Sec. Lit., 686 F.3d 21, 27 (1st Cir. 2012)).

22

Rather, a duty to disclose information earlier omitted arises only where affirmative statements

23

were made and the speaker “fail[ed] to reveal those facts that are needed so that what was revealed

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would not be so incomplete as to mislead.” In re Genzyme Corp. Sec. Litig., 754 F.3d at 41. As

2

such, “[e]ven a voluntary disclosure of information that a reasonable investor would consider

3

material must be complete and accurate.” Hill, 638 F.3d at 57 (internal quotation marks omitted).

4

This obligation, however, “does not mean that by revealing one fact . . . , one must reveal all others

5

that, too, would be interesting, market-wise; a company must reveal only those facts that are

6

needed so that what was revealed would not be so incomplete as to mislead.” Id. (internal

7

quotation marks omitted and emphasis in original).

8
9

a.

Failing to Disclose That Defendants Inflated Doral’s Capital by
Understating its ALLL.

10

Plaintiffs claim that each time Defendants commented on Doral’s capital levels,

11

specifically concerning its PLLL and ALLL, in the numerous annual and quarterly SEC filings,

12

press releases, and conference calls, the description of its basis for determining the amount of those

13

reserves and the amount themselves were materially false and misleading because Defendants

14

misrepresented and failed to disclose that the ALLL and PLLL were deliberately understated.

15

(E.g., Docket No. 53 ¶¶ 138, 147, 152, 160, 166, 172, 185, 190.) As discussed above in part V.A.

16

of this opinion, whether the Defendants’ failure to disclose that they inflated Doral’s capital by

17

deliberately understating its ALLL and PLLL constitutes a material omission requires an analysis

18

of Plaintiffs’ confidential source information and other scienter allegations.

19

purposes of this section, the court will assume, arguendo, that the Individual Defendants did

20

purposefully understate Doral’s ALLL and PLLL levels.

Therefore, for

21

Assuming that all of the Individual Defendants did indeed purposefully understate Doral’s

22

ALLL and PLLL and then submitted SEC filings followed by press releases and conference calls

23

that discussed Doral’s capital levels and leverage ratios as significantly higher than the well-

24

capitalized minimum requirements without disclosing that those amounts and the descriptions of

25
27
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Civil No. 14-1393 (GAG)
1

how they were obtained were flawed due to the Individual Defendants’ fraud, the court finds that a

2

jury reasonably could find that said disclosures were so incomplete as to mislead the public. By

3

representing to the public that Doral’s capital levels, ALLL, and PLLL were all in good shape and

4

describing how they achieved the amounts when in fact the Individual Defendants were

5

fraudulently inflating these numbers, Plaintiffs allege actionable materially misleading statements.

6

See Hill, 638 F.3d at 57 (noting “Rule 10b–5 requires that, when a company speaks, it cannot omit

7

any facts necessary in order to make the statements made, in the light of the circumstances under

8

which they were made, not misleading” and that “[e]ven a voluntary disclosure of information that

9

a reasonable investor would consider material must be complete and accurate”).

10
11
12
13

The dispositive question concerns the Individual Defendants’ state of mind at the time of
making the disclosures, which the court will address, infra.
b.

Misrepresenting and failing to Disclose Numerous Problems That
Undermined the Accuracy of Doral’s ALLL and PLLL

14

The complaint also claims that Doral failed to disclose in its SEC filings, press releases,

15

and conference calls throughout the class period the numerous problems that undermined its

16

internal controls related to the accuracy of its ALLL and PLLL, including issues with the ALLL

17

model and the loan and appraisal data from which the ALLL was derived. (E.g., Docket No. 53 ¶¶

18

138, 154, 166, 180, 190.) Also at the heart of Plaintiffs’ reasons as to why the statements were

19

misleading are their allegations relating to the alleged fraudulent scheme to manipulate Doral’s

20

capital levels. (Docket Nos. 58 at 25-26; 64 at 12-15.) In moving to dismiss, not only do

21

Defendants challenge the sufficiency of the fraud allegations, but they also posit that said claim is

22

impossible to reconcile with the history of Doral’s disclosures during the first half of the class

23

period until March 13, 2013. (Docket Nos. 56 at 12; 62 at 11-12.) Specifically, Defendants

24

highlight that Doral repeatedly disclosed at regular intervals up until it filed its 2012 Form 10-K

25
28
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Civil No. 14-1393 (GAG)
1

report on March 13, 2013 that there were deficiencies in its ALLL procedures and calculations, as

2

well as material weaknesses in its internal controls. (Id.) Plaintiffs respond by arguing that none

3

of Defendants’ disclosures revealed that the internal control deficiencies were far more systematic

4

and widespread than portrayed because these problems resulted from Defendants’ systematic

5

fraudulent scheme. (Docket Nos. 58 at 18-19; 64 at 12-13.)
i.

6

Statements Made From April 2, 2012 to March 13, 2013

7

An examination of the disclosures reveals that until under March 13, 2013, the Individual

8

Defendants did indeed disclose that there were material weaknesses in their internal controls over

9

the completeness and valuation of its ALLL and PLLL. For example, in the 2011 Form 10-K,

10
11
12
13
14
15

Defendants disclosed:
The Company did not maintain effective controls over the completeness and
valuation of its allowance for loan and lease losses and the related provision for
loan and lease losses . . . . These control deficiencies could have resulted in a
misstatement of the Company’s allowance for loan and lease losses and the related
provision for loan losses that would result in a material misstatement to the annual
or interim consolidated financial statements that would not be prevented or
detected. Accordingly, management has determined that these control deficiencies
constitute material weaknesses.

17

As a result of the existence of these material weaknesses, management has
concluded that as of December 31, 2011 the Company did not maintain effective
internal control over financial reporting based on the criteria established in Internal
Control—Integrated Framework issued by the COSO.

18

(See Docket No. 56-4 at 26.) Further, in its first, second, and third quarter financial results for the

19

2012 year, Defendants disclosed that there remained material weaknesses in its system of internal

20

control over its financial reporting. (Docket No. 53 ¶¶ 105-106, 153, 171, 173, 191.)

16

21

Plaintiffs point to their confidential source information to argue that the internal control

22

deficiencies were far more systematic and widespread than disclosed. (See Docket Nos. 58 at 27;

23

64 at 13.)

They further argue that said disclosures were rendered meaningless in light of

24
25
29
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Civil No. 14-1393 (GAG)
1

Defendants’ assurances to investors that they were “expeditiously” implementing a series of

2

“remedial efforts” to address the deficiencies (see, e.g., id. ¶¶104), that the loan loss reserves were

3

still adequate (see, e.g., id. ¶¶ 151, 155, 158-59, 267), and that the financial statements were

4

presented in accordance with GAAP (see, e.g., id. ¶¶ 105, 153, 173, 191), when Defendants were

5

in fact engaging in systematic fraud to deceive the investing public. (Docket Nos. 58 at 25-27; 64

6

at 13-15.)

7

Accordingly, like the issue in part V.A.1.a. of this opinion, to address Plaintiffs’ argument

8

that these disclosures do not defeat its claims that Doral’s statements were materially misleading,

9

the court must analyze Plaintiff’s scienter allegations. See In re The First Marblehead Corp. Sec.

10

Litig., 639 F. Supp. 2d 145, 155 (D. Mass. 2009) (“[a] plaintiff fails to plead an actionable § 10(b)

11

claim predicated on the concealment of information if information was, in fact, disclosed”).

12

Assuming, arguendo, that the Individual Defendants were engaging in the alleged fraudulent

13

scheme, specifically concealing the extent of Doral’s internal errors and capital levels, then a jury

14

reasonably could find that Defendants’ argument regarding its disclosures for this time period was

15

merely “cautionary language” that would not counter the strong misleading language or that the

16

extent of the underlying problems were not described in the those disclosures.3 If, however,

17

Plaintiffs fail to sufficiently allege the existence of the fraudulent scheme and it appears that

18

Defendants were just simply negligent in maintaining their internal financial controls, these

19

disclosures could very well have covered their errors. See Abiomed, 778 F.3d at 244 (“a company

20

may behave ‘irresponsibly’ if it issues an ominous warning about an uncertain risk that ‘had not

21
22
23
24

3

To the extent that Plaintiffs analyze the “bespeaks caution” doctrine in their reply, the court notes that said
doctrine is inapplicable to these statements because they are representations of present fact, as opposed to forwardlooking statements. See In re Stone & Webster, Inc., Sec. Litig., 414 F.3d 187, 213 (1st Cir. 2005) (citing Shaw v.
Digital Equip. Corp., 82 F.3d 1194, 1213 (1st Cir. 1996) (distinguishing applicability of said doctrine to a statement
that “has both a forward-looking aspect and an aspect that encompasses a representation of present fact” and
concluding that the doctrine was inapplicable to the extent the statement “encompasses the latter representation of
present fact”).

25
30
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Civil No. 14-1393 (GAG)
1

yet been adequately investigated’” (citing In re Boston Scientific Corp. Sec. Litig., 686 F.3d 21

2

(1st Cir. 2012) and New Jersey Carpenters, 537 F.3d at 58)).

3

ii.

Statements Made From March 13, 2013 to March 18, 2014

4

With respect to the statements made in the 2012 Form 10-K until the end of the class

5

period, Defendants readily concede that the effectiveness of ALLL-related internal controls

6

ultimately proved incorrect and thus admit that those statements during the second half of the class

7

period were in large part false and misleading. (Docket No. 62 at 12.) In the 2012 Form 10-K

8

filed on March 13, 2013, Defendants proclaimed that the problems with its internal financial

9

control and procedures had “been remediated” and “[Doral’s] internal control over financial

10

reporting [was now] effective.” (Docket No. 53 ¶¶ 107, 212.) Defendants continued to report the

11

purported effectiveness of Doral’s overall internal financial controls and procedures in SEC filings

12

until the end of the Class Period. (See, e.g., id. ¶¶ 227, 241-43, 261-63.) Then, on November 5,

13

2013, Doral announced that it had to make out-of-period adjustments impacting its ALLL going

14

back to the 2012 Form 10-K dates. (Docket No. 53 ¶ 261.) Thereafter, on March 18 and 21, 2014,

15

disclosed again there was a material weakness in its internal control relating to the underlying data

16

and mathematical model supporting its ALLL and PLLL going back to the third quarter ending on

17

September 30, 2012 Form 10-Q. (Id. ¶ 112-13, 269-274.) Therefore, there is no doubt that a jury

18

reasonably could find that these statements were indeed materially false and misleading.

19

Defendants argue, however, that Plaintiffs have not sufficiently pleaded that the Individual

20

Defendants knew that these statements were false when they were made. (Id. at 13.) This issue

21

will be addressed when the court examines Plaintiffs’ scienter allegations, infra.

22
23
24
25
31
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Civil No. 14-1393 (GAG)
1

c.

2

Misrepresenting and Failing to Disclose That Doral Was Not in
Compliance With the Consent Order and the Written Agreement
and That Doral’s Financial Results Were Not Fairly Presented in
Conformity With the GAAP

3
4

Plaintiffs also claim Defendants’ statements misrepresented that Doral was in compliance

5

with the Consent Order and Written Agreement because Defendants were manipulating and/or

6

misrepresenting the capital levels by understating the ALLL and PLLL and failing to disclose the

7

risk of non-payment of the tax receivable. (Docket Nos. 53 ¶¶ 185, 190, 196; 58 at 24.) As such,

8

the court must analyze Plaintiffs’ fraud allegations first, but assuming that the allegations are

9

sufficient, then the court holds that a jury reasonably could find that when Defendants were

10

representing that they were “line-by-line” in compliance with the agreements, this information was

11

indeed false and misleading.

12

With respect to Plaintiffs’ claims that Defendants misrepresented that Doral’s financial

13

results were presented in conformity with GAAP, Defendants argue that these claims fail due to

14

the general nature of the allegations. (Docket No. 62 at 20.) Defendants cite to the established

15

principle that “the complaint must describe the [GAAP] violations with sufficient particularity; ‘a

16

general allegation that the practices at issue resulted in a false report of company earnings is not a

17

sufficiently particular claim of misrepresentation.’” Greebel, 194 F.3d at 203. In response,

18

Plaintiffs argue that they are not alleging that Doral’s loan loss reserves were false because of

19

alleged GAAP violations, but, rather, that Doral’s statements about its compliance with GAAP

20

were false and misleading because Defendants’ reported ALLL metrics were false due to

21

Defendants’ deliberate understatement and rendered inaccurate by numerous undisclosed problems

22

with both ALLL methodology and inputs, as confirmed by their confidential witnesses. (Docket

23

Nos. 58 at 23-24; 64 at 14.)

24
25
32
26

Civil No. 14-1393 (GAG)
1

To the extent that Plaintiffs claim that Defendants’ statements regarding their GAAP

2

compliance were false and misleading, once again, the court must analyze Plaintiffs’ fraud

3

allegations to decide whether a jury reasonable could find in favor of the Plaintiffs. If the court

4

were to assume, arguendo, that Plaintiffs sufficiently allege the purported fraudulent scheme, then

5

the court has no doubt that a jury reasonably could find that said statements concerning Doral’s

6

GAAP compliance were materially false and misleading.

7
8

d.

Misrepresenting and Failing to Disclose That There Was a
Material Risk That the Treasury Department Would Seek to Void
the 2012 Closing Agreement

9

The discussion of whether Defendants failed to disclose the material risk that the Treasury

10

Department would seek to void the 2012 Closing agreement when repeatedly discussing the impact

11

of the almost $230 million tax receivable requires a greater detailed examination. Plaintiffs allege

12

that the Individual Defendants knew of the risk throughout the class period and that by including

13

the tax receivable into its Tier 1 capital and then discussing the positive impact of the 2012 Closing

14

Agreement in almost all of its SEC filings, press releases, and conference calls, the Individual

15

Defendants were materially misleading the investing public when they failed to disclose the risk.

16

(E.g., Docket No. 53 ¶¶ 130-132.) Defendants, in moving to dismiss, argue two points: (1)

17

Plaintiffs fail to allege that there was such a real material risk to disclose because the Puerto Rico

18

courts have already held that Defendants did not intentionally misrepresent information to void the

19

2012 Closing Agreement; and (2) they actually disclosed the risk that Doral’s regulators might

20

challenge the use of the tax receivable in its Tier 1 capital, thereby rendering all of their statements

21

not misleading or false. (Docket Nos. 56 at 16-21; 62 at 11-16.)

22
23
24
25
33
26

Civil No. 14-1393 (GAG)
i.

1

Whether Plaintiffs Fail to Allege That There Was a Real Material
Risk to Disclose

2
The court will first address the facts alleged by Plaintiffs and the Commonwealth of Puerto

3
4

Rico court decisions affecting this issue.

5

Department challenged the legitimacy of that Agreement by informing Doral that it believed that

6

Defendants had falsely represented the balance of amortization of the original $889,723,361

7

deferred tax asset and thereby obtained a larger tax receivable than it was entitled. (Docket No. 53

8

¶ 126.) The Department claimed that the true balance of amortization at the time of the 2012

9

Closing Agreement was $652,463,797, as opposed to the $766,280,289 that Doral had represented
(Id.)

Plaintiffs allege that in May, 2014, the Treasury

10

when executing the agreement.

It further claimed that Doral had improperly added

11

$113,816,492 in net operational losses (consisting of the amount of the deferred tax asset that

12

Doral had not been able to amortize) to the actual unamortized balance of $652,463,797. (Id. ¶

13

127.)

14

$652,463,797 had been used to calculate the tax receivable, Doral would have been entitled to

15

$195,793,139, rather than $229,884,087, amounting to a difference of $34,144,948. (Id.) Further,

16

the Treasury Department claimed that Doral was not entitled to the tax receivable because it did

17

not actually overpay its taxes in the amount of $152 million and that it had falsely represented that

18

the $229,884,087 amount of the tax receivable corresponded to an overpayment of taxes by Doral.

19

(Id. ¶ 128.)

20

null due to its determination that the Agreement was “the result of an illicit pretense or artifice.”

21

(Docket No. 62-1 at 8.)

As such, the Treasury Department asserted that if the actual unamortized amount of

As such, the Treasury department decided to declare the 2012 Closing Agreement

22

Thereafter, on June 5, 2014, Doral filed suit against the Treasury Department in Puerto

23

Rico’s Court of First Instance, requesting a declaratory judgment that the 2012 Closing Agreement

24
25
34
26

Civil No. 14-1393 (GAG)
1

and the tax receivable resulting from it were both valid.4 (Docket No. 56-1 at 3.) After a three-day

2

hearing, the trial court held, inter alia, that “[t]he evidence presented demonstrates that Doral did

3

not make false representations to the Department of the Treasury at the time of executing the 2012

4

Closing Agreement” and that it was entitled to the almost $230 million tax receivable. (Id. at 48.)

5

The Treasury Department then appealed to the Puerto Rico Court of Appeals and on

6

February 25, 2015, the Court of Appeals reversed the trial court. (Docket No. 62-1 at 44.) The

7

Court of Appeals held that the evidence presented to the trial court revealed “that there was

8

misrepresentation of the nature of the taxes paid by Doral before 2012,” namely, the claimed

9

overpayment of $152 million, and that “[t]he documentary evidence supports that there was no

10

such overpayment, [the] reason for which the falsity of such a relevant fact is ground[s] for

11

invalidating the 2012 Agreement.” (Id. at 31.) Further, the court held that “Doral knew that the

12

unamortized base [number of $766,280,289] given to the Department of Finance included [net

13

operational losses]” but that the evidence “does not permit the conclusion that Doral falsified an

14

essential fact about this item” because “the [net operational losses], as a potential benefit derived

15

from the right to amortize conferred on Doral the possibility of obtaining additional tax benefits

16

that could [have been] the subject of negotiations between the parties.” (Id. at 37.) Despite

17

holding that the evidence revealed that Doral misrepresented that it had overpaid $152 million in

18
19
20
21
22
23
24

4

When considering a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, “[t]he
court is not limited to the four corners of the complaint.” Wright & Miller, Federal Practice and Procedure: Civil 3d §
1357 (2013). A court may take judicial notice of matters of public record in resolving such a motion, which may
include a decision of a sister court, without converting the motion into one for summary judgment. Berrios-Romero v.
Estado Libre Asociado de Puerto Rico, 641 F.3d 24, 27 (1st Cir. 2011); Giragosian v. Ryan, 547 F.3d 59, 66 (1st Cir.
2008); see also Lamar v. Micou, 114 U.S. 218, 223, 5 S. Ct. 857, 29 L. Ed. 94 (1885) (“The law of any state of the
Union, whether depending upon statutes or upon judicial opinions, is a matter of which the courts of the United States
are bound to take judicial notice, without plea or proof.”). Accordingly, in light of the recent decisions by the
Commonwealth courts regarding the facts of this case, the court incorporates the holdings of these cases into
Plaintiffs’ complaint in considering Defendants’ motion to dismiss. The court may properly take judicial notice of this
decision because the same is not an unfair surprise to any of the parties, as they all discussed the decision in their
briefs to this court. See Giragosian, 547 F.3d at 66 (noting consideration of state-court judgment in resolving a Rule
12(b)(6) motion to dismiss is entirely proper when the parties were given an opportunity to address the decision).

25
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26

Civil No. 14-1393 (GAG)
1

taxes, the Court of Appeals did not overrule the trial court’s finding that Doral did not intentionally

2

misrepresent this information. (See id. at 14.) The Court of Appeals rested its holding on the

3

provision of the Puerto Rico Internal Revenue Code that entitles a contracting party to contest the

4

validity of a taxation agreement “upon a showing of . . . a misrepresentation of a material fact.”

5

(Id. at 12-14.) The finding of a misrepresentation of a material fact in this context, the court

6

emphasized, does not require a finding of intent to provide false information; it merely requires an

7

analysis of “whether the fact in question is important enough to drive a reasonable person to state

8

their consent, independently of the other party’s intention.” (Id. at 14.)

9

In light of the Puerto Rico Court of Appeals holding that “that there was misrepresentation

10

of the nature of the taxes paid by Doral before 2012,” and that “[t]he documentary evidence

11

supports that there was no such overpayment, [the] reason for which the falsity of such a relevant

12

fact is ground[s] for invalidating the 2012 Agreement,” it is apparent that a jury reasonably could

13

not only find there was such a material risk present during the class period but that by not

14

informing the investing public about this risk, the aforementioned statements were misleading.

15

(Docket No. 62-1 at 31.) Although Defendants were not required to accuse themselves of wrong

16

doing, once they chose to speak on numerous occasions about the benefits of the tax receivable,

17

including numerous assurances that Doral was in good shape financially because of this tax

18

receivable, the duty arose to disclose such information so to not render those statements

19

misleading.

20

materialization, and its anticipated magnitude, are usually material to any disclosure discussing the

21

prospective result from a future course of action.”); In re Time Warner, Inc. Sec. Litig., 9 F.3d 259,

22

268 (2d Cir. 1993) (“[a] duty to disclose arises whenever secret information renders prior public

23

statements materially misleading”). However, because the Court of Appeals did not opine on the

See Hill, 638 F.3d at 57 (“The omission of a known risk, its probability of

24
25
36
26

Civil No. 14-1393 (GAG)
1

Individual Defendants’ knowledge or reckless disregard of this misrepresentation, the court will

2

address Plaintiffs’ additional allegations in the complaint in the scienter discussion, infra.

3

ii.

Whether Defendants Actually Disclosed The Risk

4

With respect to Defendants’ disclosure argument, they posit that they did indeed disclose

5

the risk that Doral’s government regulators might reduce all or a portion of the increase to Doral’s

6

Tier 1 capital caused by the 2012 Closing Agreement. (Docket Nos. 56 at 17-18; 62 at 11-16.)

7

Specifically, Defendants point to the following disclosures made in the 2011 Form 10-K filed at

8

the beginning of the class period:

9
10
11
12
13
14
15
16
17

Governmental agencies that have supervisory authority over the Company and
Doral Bank can review the quality of our Tier 1 capital and may determine to
reduce all or a portion of the increase to our Tier 1 capital caused by our agreement
with the Commonwealth of Puerto Rico regarding our deferred tax asset. We
recently entered into an agreement with the Commonwealth of Puerto Rico in
which the Commonwealth of Puerto Rico recognized a prepayment of income taxes
of approximately $230 million from us relating to our past overpayment of taxes.
We believe that this agreement will result in an increase in our reported Tier 1
regulatory capital by approximately $200 million. The Federal Reserve and the
Federal Deposit Insurance Corporation have supervisory oversight authority over
the Company and Doral Bank, including the quality of our Tier 1 regulatory capital,
and as such there can be no assurance that the Federal Deposit Insurance
Corporation or Federal Reserve may not seek to reduce in the future our Tier 1
regulatory capital including the increase caused by the agreement with the
Commonwealth of Puerto Rico. If either regulatory agency reduces our Tier 1
regulatory capital our operations may be materially adversely effected.

18

(Docket No. 56 at 18 (citing 56-4 at 16.)) Plaintiffs respond by arguing that this generic disclosure

19

was incomplete and inadequate to address the material risk that due to Defendants’ inaccurate

20

information given to the Treasury Department when executing the 2012 Closing Agreement, there

21

was a risk that the Department would nullify that Agreement. (Docket Nos. 58 at 32-34; 64 at 16-

22

17.) Specifically, they argue that unlike in other cases in which the courts found that Defendants

23

“explicitly” disclosed the specific alleged omission at issue, see Abiomed, 778 F.3d at 243; First

24

Marblehead, 639 F. Supp. 2d at 154-60, here, while Doral initially disclosed the fact that the FDIC

25
37
26

Civil No. 14-1393 (GAG)
1

might not allow it to include the Tax Receivable in its Tier 1 Capital, Defendants did not disclose

2

the real risk that the Closing Agreement might be voided or rescinded by the Treasury Department

3

due to Doral’s misrepresentations made at the time the agreement was executed. (Docket No. 64

4

at 11, 16-17.) Plaintiffs further point to the numerous times that Defendants stated that Doral’s

5

capital was well in excess of the required levels and made assurances regarding the availability to

6

“pull down” capital the holding company to the Bank if needed. (Docket No. 58 at 31.)

7

With respect to this disclosure argument, the court agrees with Plaintiffs that although

8

Doral made a disclosure in its 2011 Form 10-K concerning the fact that its regulators might reduce

9

its Tier 1 capital based upon its use of the tax receivable, it did not explicitly disclose the material

10

risk that the Treasury Department would challenge the validity of the Closing Agreement. See

11

Geffon v. Micrion Corp., 249 F.3d 29, 33 (1st Cir. 2001) (“When a corporation does make a

12

disclosure . . . there is a duty to make it complete and accurate.”). More so, Defendants relied

13

upon the almost $230 million tax receivable to assure investors that the bank was financially sound

14

on numerous occasions, thus hammering away at the reliability of the tax receivable. These facts,

15

taken as a whole, could lead a jury to reasonably find that Doral’s disclosures were materially

16

misleading despite the cautionary language articulated above. See Hill v. State St. Corp., No. 09-

17

12146, 2011 WL 3420439, at *18 (D. Mass. Aug. 3, 2011) (noting “bespeaks caution” doctrine

18

that holds “if a statement is . . . accompanied by prominent cautionary language that clearly

19

disclaims or discounts the drawing of a particular inference, any claim that the statement was

20

materially misleading because it gave rise to that very inference may fail as a matter of law,” does

21

not, “universally immunize a party that sprinkles its statements with some cautionary language.

22

Rather, it simply instructs that a statement or omission be considered in context.”). The issue of

23
24
25
38
26

Civil No. 14-1393 (GAG)
1

whether Defendants had the requisite state of mind when making these statements will be

2

discussed next.

3

B.

Whether the Complaint Sufficiently Alleges Actionable Scienter

4

As exhaustively noted above, this case boils down to whether the complaint sufficiently

5

alleges with particularity that the Individual Defendants intended to defraud the investing public.

6

In support of this claim, Plaintiffs point to their allegations that Defendants engaged in the

7

purported fraudulent scheme to inflate Doral’s capital.

8

Rule 9(b) requires that, in alleging fraud, the plaintiff must state with particularity the

9

circumstances constituting the fraud. U.S. ex rel. Gagne v. City of Worcester, 565 F.3d 40, 45 (1st

10

Cir. 2009). This standard means that a complaint must specify ‘the time, place, and content of an

11

alleged false representation.” Id. (internal quotation marks omitted); see also Alternative Sys.

12

Concepts, Inc. v. Synopsys, Inc., 374 F.3d 23, 29 (1st Cir. 2004) (noting that Rule 9(b) requires the

13

plaintiff “to specify the who, what, where, and when of the allegedly false or fraudulent

14

representation”). As such, “[c]onclusory allegations . . . are not sufficient to satisfy Rule 9(b).”

15

Gagne, 565 F.3d 40, 45 (1st Cir. 2009). The PSLRA imposes a separate rigorous pleading

16

standard on allegations of scienter. See Greebel, 194 F.3d at 195. “Scienter is a mental state

17

embracing intent to deceive, manipulate, or defraud.” City of Dearborn Heights Act 345 Police &

18

Fire Ret. Sys. v. Waters Corp., 632 F.3d 751, 757 (1st Cir. 2011) (quoting Ernst & Ernst v.

19

Hochfelder, 425 U.S. 185, 193 n.12, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976)). “A complaint will

20

survive a motion to dismiss only if it states with particularity facts giving rise to a ‘strong

21

inference’ that defendants acted with a conscious intent ‘to deceive or defraud investors by

22

controlling or artificially affecting the price of securities’ or ‘acted with a high degree of

23

recklessness.’” Abiomed, 778 F.3d at 240 (quoting Water Corp., 632 F.3d at 757). “Recklessness,

24
25
39
26

Civil No. 14-1393 (GAG)
1

as used in this context, ‘does not include ordinary negligence, but is closer to being a lesser form

2

of intent.’” Abiomed, 778 F.3d at 240 (quoting Greebel, 194 F.3d at 188).

3

A plaintiff must allege facts that allow for a strong inference of scienter that is “more than

4

merely plausible or reasonable—it must be cogent and at least as compelling as any opposing

5

inference of nonfraudulent intent.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308,

6

314, 127 S. Ct. 2499, 168 L. Ed. 2d 179 (2007). “When there are equally strong inferences for and

7

against scienter, the draw is awarded to the plaintiff.” Abiomed, 778 F.3d at 240 (quoting Water

8

Corp., 632 F.3d at 757). Furthermore, scienter must be evaluated with reference to the complaint

9

as a whole as opposed to in piecemeal allegations. Tellabs, 551 U.S. at 322-23 (holding that courts

10

should determine whether all of the factual allegations “taken collectively” give rise to a “strong

11

inference of scienter,” not whether any individual allegation, scrutinized in isolation, meets that

12

standard). “There is no set pattern of facts that will establish scienter; it is a case-by-case inquiry.”

13

Abiomed, 778 F.3d at 241. Despite this strict pleading requirement, a complaint may pass muster

14

under the PSLRA “when some questions remain unanswered, provided the complaint as a whole is

15

sufficiently particular.” In re Cabletron Sys., Inc., 311 F.3d at 32.

16

Furthermore, the First Circuit has held that with respect to allegations deriving from

17

confidential witnesses, the courts must “look at all of the facts alleged to see if they ‘provide an

18

adequate basis for believing that the defendants’ statements were false.’” New Jersey Carpenters,

19

537 F.3d at 51 (quoting Cabletron, 311 F.3d at 29, which in turn quoted Novak v. Kasaks, 216

20

F.3d 300, 314 (2d Cir. 2000)). “[T]here is no requirement that [the confidential witnesses] be

21

named, provided they are described in the complaint with sufficient particularity to support the

22

probability that a person in the position occupied by the source would possess the information

23

alleged.” New Jersey Carpenters, 537 F.3d at 51. “This involves an evaluation, inter alia, of the

24
25
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Civil No. 14-1393 (GAG)
1

level of detail provided by the confidential sources, the corroborative nature of the other facts

2

alleged (including from other sources), the coherence and plausibility of the allegations, the

3

number of sources, the reliability of the sources, and similar indicia.” Id.

4

Finally, under the PSLRA, Plaintiffs are required to plead particularized facts that support a

5

strong inference of scienter with respect to each Individual Defendant. See 15 U.S.C. § 78u-

6

4(b)(2); Stumpf v. Garvey, No. 02-1335, 2005 WL 2127674, at *11 (D.N.H. Sept. 2, 2005); In re

7

Cross Media Mktg. Corp. Sec. Litig., 314 F. Supp. 2d 256, 263 (S.D.N.Y. 2004).

8

1.

Deliberately Understating the ALLL

9

Plaintiffs support their claim that Defendants fraudulently inflated the Bank’s capital ratios

10

by understating its ALLL primarily through the accounts of four former employees of Doral,

11

referred to as the formal employees (“FEs”). FE1 was Doral’s Principal Accounting Officer and a

12

Senior Vice President from September, 2011 through March 15, 2012. (Docket No. 53 ¶ 34.) FE1

13

reported directly to Defendant Wahlman and regularly attended meetings with other Doral

14

executives, including the Individual Defendants. (Id.) FE2 was a Vice President who worked at

15

Doral from August, 2012 through April, 2014, and was involved with Doral’s financial reporting

16

and regulatory compliance. (Id. ¶ 35.) FE2’s responsibilities included, inter alia, assisting in the

17

preparation of SEC filings, regulatory reports, and reports provided to Doral’s executive

18

management, including the Individual Defendants. (Id.) FE2 reported directly to Doral’s Principal

19

Accounting Officer, a position held by Nancy Reinhard, who is presently Doral’s acting CFO,

20

from September 20, 2012 though the end of the class period. (Id.) FE3 was employed by Doral as

21

a Senior Credit Risk Analyst from September, 2012 through July, 2013. (Id. ¶ 36.) FE3 aided in

22

the creation of presentations made on a monthly and quarterly basis to Doral’s Board of Directors,

23

as well for Doral’s Risk Policy Committee and the ALLL Committee. (Id.) FE4 worked at Doral

24

as a Vice President of Commercial Administration from approximately June, 2012 until August,

25
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Civil No. 14-1393 (GAG)
1

2013. (Id. ¶ 37.) In that position, FE4 was responsible for, among other things, updating policies

2

and procedures related to Doral’s commercial real estate business. (Id.)

3

According to FE1, Defendants’ scheme to inflate Doral’s capital ratios began even before

4

the class period. (Id. ¶ 83.) During a January 11, 2012 meeting held to discuss Doral’s fourth

5

quarter and full-year 2011 financial results that was attended by FE1, Defendants Wahlman and

6

Ubarri, among others, Wakeman stated, “I want our leverage ratio over nine percent even if that

7

means booking assets in later periods.” (Id.) Plaintiffs claim that Wakeman’s statement directing

8

Doral’s senior management to “book[] assets in later periods” to achieve a specific Tier 1 Leverage

9

Ratio gives rise to a strong inference that Doral’s Tier 1 Leverage Ratio reported in Doral’s 2011

10

Form 10-K for the year ending December 31, 2011 was knowingly manipulated. (Id.)

11

Moreover, both FE1 and FE2, believed and suggested that Doral was constantly altering its

12

ALLL model not to make sound methodological changes because it needed to be updated, or

13

because its inputs were changing, but rather to achieve the desired result of maintaining the ALLL

14

at as low a level as possible. (Id. ¶¶ 84, 86.) In FE1’s opinion, Defendants kept Doral’s ALLL

15

low in order to indirectly bolster Doral’s capital ratios. (Id. ¶ 87.) FE1 stated that Defendant

16

Wahlman, who had daily involvement with Doral’s ALLL model, was constantly pushing through

17

changes to the model. (Id.) FE1 further stated that Doral’s Chief Risk Officer expressed concern

18

regarding the calculation of the ALLL and that the employee in charge of running the ALLL

19

model also expressed to FE1 that he was very uncomfortable with the model and the constant

20

changes made to the ALLL by Defendant Wahlman, but felt that he had to do what Wahlman

21

directed. (Id. ¶ 85.)

22

Furthermore, FE1 reported that management frequently discussed making changes to

23

Doral’s ALLL model in connection with discussing Doral’s capital levels. (Id. ¶ 87.) FE2 stated

24
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Civil No. 14-1393 (GAG)
1

that the ALLL greatly impacted Doral’s capital ratios because the ALLL affected Doral’s balance

2

sheet assets and likewise acknowledged that Defendants understated Doral’s ALLL during the

3

class period in order to achieve the desired regulatory capital ratios. (Id.) FE3 similarly expressed

4

the belief that Doral found ways to justify reporting numbers in a manner that benefited the

5

company, although the numbers were not supported by any analytical tools. (Id. ¶ 88.) According

6

to FE3, Defendants moved assets around to justify Doral’s ALLL because if loan losses were

7

higher, Doral would have had to increase its ALLL, which in turn would have impacted the capital

8

ratios. (Id.) FE3 commented that if Doral had used proper methodologies, it would have become

9

illiquid. (Id.) FE2 was also directed throughout the class period to provide calculations of Doral’s

10

capital ratios to its CFO on a monthly and bi-monthly basis. (Id. ¶ 89.) FE2 believed that the

11

frequent calculations were an effort to determine whether moving receivables and calculating the

12

capital ratios at different time intervals would generate more favorable ratios. (Id.)

13

2.

Concealing Internal Control Flaws

14

According to FE1, even before the class period began, Doral’s ALLL was based on

15

outdated property appraisals and that Defendants intentionally delayed obtaining up-to-date

16

property appraisals, creating a significant issue with the accuracy of the ALLL. (Id. ¶¶ 91-92.)

17

FE1 explained that because the property values input into Doral’s ALLL model were outdated,

18

thus higher than they should be due to declining property values in Puerto Rico, the resulting

19

ALLL was understated. (Id. ¶ 92.) For example, FE1 reported that Doral had a large land

20

portfolio with a fair value significantly below the carrying value of the loans, but Defendants did

21

not adjust its value because they did not want to account for the decline by increasing the ALLL,

22

which would have resulted in lower reported earnings and capital ratios. (Id.)

23

Moreover, according to FE1, when appraisals were completed, the updated property values

24
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26

Civil No. 14-1393 (GAG)
1

were often purposely not recorded. (Id. ¶ 93.) FE1 reported that loan processors were specifically

2

instructed by the Senior Vice President of Doral’s loan processing group (who reported directly to

3

Defendant Wakeman) not to input updated property appraisals if they were below a certain level,

4

and not to input any significant declines in property values. (Id.) According to FE1, this practice

5

was brought to Defendant Wahlman’s attention in January 2012, shortly before the start of the

6

Class Period, but Wahlman instructed that the data should not be touched. (Id.) Consequently,

7

Doral’s ALLL remained understated during the Class Period. (Id.) FE1 further stated that the

8

problems with appraisals were well-known to Doral executives, including Wakeman and

9

Wahlman. (Id.)

10

FE4 stated that appraisals continued to be delayed during the class period and that during

11

the second half of 2012, few problematic commercial real estate loans were being addressed,

12

which contributed to the understatement of Doral’s ALLL. (Id. ¶ 95.)

13

problems existed with both the underlying loan data from which the ALLL was calculated, and

14

with the model itself. (Id. ¶ 96.) According to FE2, Doral’s ALLL model needed to be completely

15

overhauled. (Id.) But instead of doing so, Defendants only made minor adjustments in response

16

to problems caught by Doral’s regulators. (Id.)

FE2 explained that

17

FE2 further stated that the underlying loan data used to calculate Doral’s ALLL was

18

unreliable, in part because crucial loan data was systematically missing or was incorrect in the loan

19

files. (Id. ¶ 97.) FE2 reported, for example, that when borrowers failed to make timely balloon

20

payments on loans (and instead continued to make the regular loan payments), the loans should

21

have been recorded as delinquent, but were not. (Id.) FE2 also reported that during the class

22

period, Doral conducted a review of a sample of loans that uncovered numerous systematic and

23

widespread errors, including incorrect coding, missing information, such as the collateral type, and

24
25
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Civil No. 14-1393 (GAG)
1

properties recorded as owner-occupied that were not. (Id. ¶ 98.) Although the sample review

2

uncovered widespread errors, FE2 stated that Doral did not take the actions necessary to respond to

3

or remedy the errors discovered because Defendants did not want to spend the necessary resources.

4

(Id.) Furthermore, according to FE2, while management was preparing Doral’s 2013 Form 10-K,

5

an error was discovered in the ALLL model.

6

management was unhappy with the resulting impact on the ALLL, and subsequently adjusted the

7

ALLL to achieve a more favorable figure. (Id.) FE2 expressed concerns to Doral’s Principal

8

Accounting Officer, Nancy Reinhard, that the ALLL calculation was inaccurate and the entire

9

model needed to be overhauled, but Reinhard refused to have the ALLL model reworked. (Id.)

(Id. ¶ 99.)

Once the error was corrected,

10

Like the intentional failure to update property appraisals described by FE1, the issues with

11

Doral’s ALLL during the Class Period went well beyond mere errors and problems. (Id. ¶ 100.)

12

For example, FE2 reported that Doral altered its assumptions for non-performing loans during the

13

Class Period to add an extra four days to the ninety-day non-payment deadline at which a loan was

14

classified as non-performing. (Id.) FE2 explained that this change was made to delay the time

15

when Doral had to reverse the accrued interest on non-performing loans, and to keep the ALLL as

16

low as possible. (Id.) FE2 stated that while the change appeared minor, it had a notable impact in

17

furthering those objectives. (Id.) Even worse, in March, 2013, FE3 was tasked with developing a

18

forecast for expected mortgage loan charge-offs for 2013, which FE3 explained would in turn be

19

used to establish Doral’s ALLL. (Id. ¶ 101.) FE3 developed a forecast, but was subsequently

20

instructed by the Chief Risk and Credit Officer to modify the projection to a lower figure that FE3

21

believed was impossible to achieve based upon the actual charge-offs to date. (Id.)

22
23

3.

Scienter Allegations Concerning the Tax Receivable

Plaintiffs claim that Defendants were aware of these risks throughout the class period,

24
25
45
26

Civil No. 14-1393 (GAG)
1

given the significance of the tax receivable to Doral’s regulatory capital ratios (and thus, its overall

2

operations), and Defendants’ regular communications with the Treasury Department. (Docket No.

3

53 ¶ 131.)

4

representatives from the Treasury Department at least bi-monthly during the class period. (Id.)

5

FE2 further stated that Defendants knew there was a risk that the Treasury Department would not

6

pay Doral the tax receivable due to the financial instability of the Puerto Rican Government. (Id. ¶

7

132.) FE2 also explained that there were internal discussions at Doral each quarter about whether

8

to continue to include the tax receivable in the Company’s Tier 1 Capital. (Id.) Many of these

9

discussions were held at the executive level at audit committee meetings, which were attended by

10

FE2’s direct supervisor, Nancy Reinhard. (Id.) FE2 also was involved in quarterly discussions

11

with Reinhard and Doral’s CFO regarding whether to continue to include the tax receivable in

12

Doral’s Tier 1 Capital. (Id.) According to FE2, by early 2014, the FDIC was also closely

13

scrutinizing Doral’s inclusion of the tax receivable in its Tier 1 Capital. (Id.) None of this was

14

disclosed to investors. (Id.)

15

According to FE2, Doral’s Vice President of Tax, George Scopetta, met with

4.

Additional Scienter Allegations

16

Plaintiffs argue that “Defendants, by virtue of their receipt of information reflecting the

17

true facts regarding Doral, their control over, and/or receipt and/or modification of Doral’s

18

allegedly materially misleading statements and/or their associations with [Doral] which made them

19

privy to confidential proprietary information concerning Doral, were active and culpable

20

participants in the fraudulent scheme alleged herein.” (Id. ¶ 290.) Plaintiffs also claim that

21

because of the Individual Defendants’ positions within Doral, they controlled and were provided

22

access to the documents alleged to be false or misleading, and also had access to non-public

23

information. (Id. ¶ 292.) As such, Plaintiffs claim that each Individual Defendant is responsible

24
25
46
26

Civil No. 14-1393 (GAG)
1

for the accuracy of Doral’s statements and thus liable for the misrepresentations. (Id.) They also

2

point to the internal reporting structure of Doral and the high ranking positions that the Individual

3

Defendants held as more evidence of scienter. (Id. ¶ 297.)

4

In addition, according to FE2, monthly management reports were distributed to, among

5

others, Wakeman, Doral’s CFO (Wahlman, Ivanov, or Hoosten), Poulton and Ubarri. (Id. ¶ 299.)

6

Among other information, the monthly management reports included income statements, balance

7

sheets, deposit activity, and loan activity reports. (Id.) FE2 also stated that, beginning in January

8

2013, in addition to regular quarterly reports required by the FDIC and the FRBNY, the FDIC

9

required Doral to submit weekly and monthly reports, which were also submitted to the FRBNY.

10

(Id.) The weekly reports detailed Doral’s liquidity, loans (including loans due to be funded and

11

loans due to be paid off), receivables, deposits and any exposure to the government of Puerto Rico.

12

(Id. 300.) Then, beginning in January 2014, FE2 explained that the FDIC required daily reports

13

detailing Doral’s liquidity. (Id. ¶ 301.) These reports were reviewed by Defendant Hoosten prior

14

to being sent to the FDIC and the FRBNY. (Id.) Doral’s Principal Accounting Officer, Reinhard,

15

also reviewed these reports prior to their filing. (Id.) FE2 believed that all of this additional

16

reporting was required by the FDIC because of the tenuous financial condition of Doral, as well as

17

the Puerto Rico government, which was a concern in light of Doral’s substantial reliance on the

18

Tax Receivable to satisfy its capital requirements. (Id.)

19

5.

Trading by Insiders and Salary Increases

20

Lastly, Plaintiffs argue that the Individual Defendants were motivated to engage in this

21

fraudulent course of conduct to allow certain defendants to sell their company common stock.

22

Plaintiffs highlight that between August 30 and September 11, 2013, Defendants Ivanov, Poulton,

23

and Ubarri collectively sold unusual quantities of Doral common stock as evidence of scienter.

24
25
47
26

Civil No. 14-1393 (GAG)
1

(Id. ¶¶ 302-303.) In that time period, those defendants sold 16,305 shares of their personally-held

2

Doral common stock for proceeds of $387,168. (Id. ¶ 302.) On August 28, 2013, Poulton sold

3

10,000 shares, amounting to 20.33% of his shares, for $239,900 in proceeds. (Id.) On August 30,

4

2013, Ivanov sold 2,705 shares, which amounted to 100% of his total holdings, for $63,568 in

5

proceeds. (Id.) Then, on September 11, 2013, Ubarri sold 3,600 shares, amounting to 11.60% of

6

his total holdings, for $83,700 in proceeds. (Id.) Plaintiffs claim that these sales are suspicious

7

because they were made while Defendants were in possession of material, non-public information

8

about the understatement of Doral’s ALLL and the inflation of its capital ratios. (Id. ¶ 303.) They

9

further claim that the sales are unusual because previously, no Doral insiders had made any sales

10

of Doral common stock since November 1, 2006—nearly seven years earlier. (Id.)

11

Plaintiffs also allege that the 2012 Closing Agreement, and corresponding improvement to

12

Doral’s capital ratios, provided a justification for increasing the Individual Defendants’ salaries.

13

(Id. ¶ 304.) On April 16, 2012, shortly after Doral entered into the Closing Agreement, the Board

14

of Directors approved salary increases for four of the Individual Defendants: increasing

15

Wakeman’s annual salary by $250,000, to $1.25 million; increasing Wahlman’s annual salary by

16

$50,000, to $500,000; increasing Ubarri’s annual salary by $50,000, to $450,000; and increasing

17

Poulton’s annual salary by $100,000, to $500,000. (Id.)

18

C.

The Particularity of the Fraud Pleadings

19

Defendants challenge Plaintiffs’ pleading of this fraudulent scheme by arguing, inter alia,

20

that: (1) Plaintiffs’ allegations lump together the Defendants and do not sufficiently plead as to

21

each individual defendant; (2) the allegations regarding the Defendants as a whole are

22

insufficiently pleaded under the strict 9(b) standard; (3) some of the communications alleged

23

occurred prior to the class period and thus must be disregard; (4) FE1 was not an employee during

24
25
48
26

Civil No. 14-1393 (GAG)
1

the class period and thus his or her allegations should be disregarded; (5) remaining FEs have not

2

alleged to have had any contact with any of the Individual Defendants and, as such, their accounts

3

are not entitled to any merit; and (6) that the Court of Appeals decision does not address

4

Defendants’ intent to defraud the Treasury Department. (See Docket Nos. 56 at 24-40; 62 at 16-

5

19, 21-28.) In response, Plaintiffs argue: (1) the accounts of the FEs do indeed provide credible

6

information; (2) the pre-class period facts provided by FE1 are probative of Doral’s scheme; (3)

7

the Court of Appeals decision renders Defendants’ defense futile; and (4) that the facts pleaded

8

sufficiently allege that Defendants knew of the material risk that the 2012 Closing Agreement

9

would be voided. (See Docket Nos. 58 at 36-41; 64 at 1-2, 9-12.)

10

1.

Manipulation of the ALLL and PLLL

11

Upon applying these standards to the facts detailed above, the court finds that Plaintiffs’

12

allegations regarding Wakeman and Wahlman’s participation in the fraudulent scheme by

13

knowingly manipulating the ALLL and PLLL that was reported in the numerous SEC filings,

14

conference calls, and press releases are sufficient to meet the heightened pleading standards of

15

Rule 9(b) and the PSLRA for scienter. With respect to Wakeman, Plaintiffs provide a specific

16

description of a statement made by him during a January 11, 2012, which is alleged by FE1,

17

Doral’s Principal Accounting Officer and a Senior Vice President from September, 2011 through

18

March 15, 2012. (See Docket No. 53 ¶¶ 34, 83.) In that meeting, Wakeman allegedly stated: “I

19

want our leverage ratio over nine percent even if that means booking assets in later periods.” (Id. ¶

20

83.) Plaintiffs claim that Wakeman’s statement directing Doral’s senior management to “book[]

21

assets in later periods” to achieve a specific Tier 1 Leverage Ratio gives rise to a strong inference

22

that Doral’s Tier 1 Leverage Ratio reported in Doral’s 2011 Form 10-K was knowingly

23

manipulated. (Id.)

24
25
49
26

Civil No. 14-1393 (GAG)
1

Furthermore, Plaintiffs allege that the Senior Vice President of Doral’s loan processing

2

group, who reported directly to Wakeman, instructed loan processors to not input updated property

3

appraisals if they were below a certain level and not to input any significant declines in property

4

values. (Id.) Notably, FE1 was in a senior management position and is alleged to have had

5

ongoing contact with the Individual Defendants by directly reporting to Wahlman and regularly

6

attended meetings with other Doral executives, including the Individual Defendants. (Id. ¶ 34); see

7

Abiomed, Inc., 778 F.3d at 245 (noting factors such as a confidential witness’s position in senior

8

level management and ongoing contact with other senior management are important in evaluating

9

such sources). By describing the statement in detail, the time it was made, and the context in

10

which it was made, Plaintiffs have sufficiently pleaded a compelling inference that Wakeman

11

likely knew that the Tier 1 Leverage Ratios reported in the 2011 Form 10-K was not accurate.

12

Although Ubarri was allegedly present at that January 11 meeting, which allows for an inference

13

that Ubarri knew of the purported fraudulent scheme, the lack of other allegations tying him to the

14

scheme tends to weigh against a strong inference of his knowledge and participation in the scheme.

15

Moreover, when taking those allegations in conjunction with fact that on April 16, 2012,

16

the Board of Directors of Doral approved a $250,000 salary increase for Wakeman, to bring his

17

salary up to $1.25 million, see Aldridge v. A.T. Cross Corp., 284 F.3d 72, 82 (1st Cir. 2002)

18

(noting motive and opportunity may be added to the mix of facts to show a strong inference of

19

scienter), that as the CEO, President, and Director of the Bank, Wakeman controlled and was

20

provided access to the documents alleged to be false or misleading, and also had access to non-

21

public information, the court finds that there is a strong inference of scienter on his part. Although

22

courts have rejected “general inferences that the defendants, by virtue of their position within the

23

company, ‘must have known’ about the company’s problems when they undertook allegedly

24
25
50
26

Civil No. 14-1393 (GAG)
1

fraudulent actions,” Lirette, 27 F. Supp. 2d at 283 (citing Maldonado v. Dominguez, 137 F.3d 1, 9

2

(1st Cir. 1998)), these have been in cases wherein the plaintiff’s scienter allegations rest solely on

3

said inferences. Furthermore, Wakeman participated in almost all of the statements that Plaintiffs

4

claim to have been materially false and misleading.

5

To the extent that Defendants argue that all of FE1’s allegations must be disregarded

6

because he did not work for Doral during the class period, the court notes that courts have held that

7

a “witness need not have been at the company for [the entirety], or indeed any, of an asserted class

8

period to have probative information.” See Simon, 37 F. Supp. 3d at 515. The relevant statement

9

made by Wakeman was concerning the 2011 Form 10-K which reached the market on Monday,

10

April 2, 2012—the first day of the class period. (Docket Nos. 53 ¶ 133; 58 at 24.) As such,

11

insofar as Defendants argue that this particular statement must be disregarded because it was made

12

prior to the beginning of the class period, the court finds it probative because it affected the public

13

disclosures that reached the market during the class period.

14

Turning to Wahlman, Plaintiffs allege, through the reports of FE1, that during the class

15

period, Doral’s ALLL was based on outdated property appraisals and that loan processors were

16

specifically instructed by the Senior Vice President of Doral’s loan processing group, who reported

17

directly to Wakeman, not to input updated property appraisals if they were below a certain level

18

and not to input any significant declines in property values. (Docket No. 53 ¶ 93.) Notably, FE1

19

alleges that this practice was brought to Wahlman’s attention in January 2012, shortly before the

20

start of the class period, but Wahlman instructed that the data should not be touched. (Id.) The

21

allegation that Wahlman instructed that the data not be touched despite being told that it was based

22

upon outdated appraisals, allows for the inference that Wahlman knew that Doral’s ALLL was

23

being intentionally understated during the period of time before the release of the 2011 Form 10-K.

24
25
51
26

Civil No. 14-1393 (GAG)
1

But see In re Pharm., Inc. Sec. Litig., No. 04-12581-GAO, 2007 WL 951695, at *12 (D. Mass.

2

Mar. 28, 2007) (holding that something more is required to show scienter than the alleging that a

3

confidential witness informed management that the company’s pricing structure was significantly

4

flawed to support an allegation that management itself knew the structure to be flawed).

5

Furthermore, FE1 stated that Doral’s Chief Risk Officer expressed concern regarding the

6

calculation of the ALLL and that the employee in charge of running the ALLL model also

7

expressed to FE1 that he was very uncomfortable with the model and the constant changes made to

8

the ALLL by Defendant Wahlman. (Docket No. 53 ¶ 85.) Plaintiffs further allege that Wahlman

9

had daily involvement with Doral’s ALLL model and was constantly pushing through changes to

10

the model. (See id. ¶ 87.) Although they fail to articulate when and how Wahlman was changing

11

the ALLL model, when considering these allegations in conjunction with the rest, the inference of

12

Wahlman’s involvement in the fraudulent scheme becomes stronger. Lastly, when taking into

13

account Wahlman’s salary increase of $50,000 to $500,000 during the class period, his high

14

ranking positions of CFO, Chief Investment Officer, Chief Accounting Officer, an Executive Vice

15

President, and a Director of the Bank throughout the class period, the court finds a strong inference

16

of his involvement in the alleged fraudulent scheme.

17

To the extent that Defendants argue that more concrete information must be provided, such

18

as written proof, the court reminds the parties of the procedural posture of this case. See In re

19

Cabletron Sys., Inc., 311 F.3d at 33 (noting that “the rigorous standards for pleading securities

20

fraud do not require a plaintiff to plead evidence”). That being said, the court notes that it did not

21

consider conclusory allegations such as that FE1 stated that the problems with appraisals were

22

well-known to Doral executives, including Wakeman and Wahlman. (Id. ¶ 93). In making such

23

allegations, Plaintiffs are merely generally alleging culpability on part of the Individual

24
25
52
26

Civil No. 14-1393 (GAG)
1

Defendants—something that the PLSRA was enacted to prevent. See part IV of this opinion;

2

Lirette v. Shiva Corp., 27 F. Supp. 2d 268, 283 (D. Mass. 1998) (“To satisfy Rule 9(b) [with

3

respect to matters particularly within the opposing party's knowledge], the allegations must be

4

accompanied by a statement of facts upon which the belief is founded.”)

5

The remainder of the allegations with respect to the other Individual Defendants, however,

6

fall short of the pleading requirements of Rule 9(b) and the PSLRA. Said allegations group all of

7

the Individual Defendants together generally without specifically referring to each one of them and

8

are generally conclusory by failing to specify the what, where, and when of the alleged fraud.5 See

9

15 U.S.C. § 78u-4(b)(2); Stumpf, 2005 WL 2127674, at *11; In re Cross Media Mktg. Corp. Sec.

10

Litig., 314 F. Supp. 2d at 263. For example, almost all of the allegations state that “Doral” or

11

“Defendants” were frequently discussing changes to Doral’s ALLL model in connection with its

12

capital and they were moving assets around to keep the ALLL low. (See, e.g., Docket No. 53 ¶¶

13

87-89, 97-98.)

14

Moreover, when alleging why the collective Defendants were changing the model, FE1 and

15

FE2 stated that they “believed and suggested” that Defendants were doing this to achieve the

16

desired result of maintaining the ALLL at as low of a level as possible. (Id. ¶¶ 84, 86.) Such

17

vague information and belief allegations by a confidential source does not provide a high level of

18

detail nor does it indicate a sign of reliability on part of those witnesses. See In re Cabletron Sys.,

19
20
21
22
23
24

5

Although the First Circuit has not taken a position on attributing all statements to the defendants as
collective actions without considering the liability of each individual defendant, known as the group pleading doctrine,
there is considerable debate about the doctrine’s continued existence after enactment of the PSLRA. Mississippi Pub.
Employees’ Ret. Sys. v. Boston Scientific Corp., 523 F.3d 75, 93 (1st Cir. 2008). However, even if the court was to
apply the group pleading doctrine to this situation, “[t]o plead properly within the group pleading doctrine, a plaintiff
must plead with particularity that each individual officer knew of the fraud.” In re Allaire Corp. Sec. Litig., 224 F.
Supp. 2d 319, 341 (D. Mass. 2002); In re Stone & Webster, Inc., Sec. Litig., 253 F. Supp. 2d 102, 112 (D. Mass.
2003). As the court finds that Plaintiffs have failed to sufficiently plead that each Individual Defendant knew of the
scheme to deliberately understate Doral’s ALLL and PLLL, the allegations are insufficient regardless of the
application of the doctrine.

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Inc., 311 F.3d at 28 (citing ABC Arbitrage Plaintiffs Grp. v. Tchuruk, 291 F.3d 336, 350 (5th Cir.

2

2002) (noting that “for allegations made on information and belief, the plaintiff must . . . state with

3

particularity all facts on which that belief is formed, i.e., set forth a factual basis for such belief”)

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and Romani v. Shearson Lehman Hutton, 929 F.2d 875, 878 (1st Cir. 1991) (“Where allegations of

5

fraud are . . . based only on information and belief, the complaint must set forth the source of the

6

information and the reasons for the belief.”).

7

Further bolstering the court’s conclusion is the fact that neither FE2, FE3, nor FE4 are

8

alleged to have any contact or communications with the Individual Defendants throughout the

9

class period. (See Docket No. 53 ¶¶ 84, 86-89, 94-101.) Despite alleging that the Individual

10

Defendants knew that Doral’s underlying loan data was systematically incorrect and that they

11

failed to fix the deficiencies, Plaintiffs do not allege that any of the FEs learned of this information

12

from attending any meetings with the Individual Defendants, discussed these issues with any of

13

them, or reviewed any documents regarding these issues. See In re Gentiva Sec. Litig., 971 F.

14

Supp. 2d 305, 324 (E.D.N.Y. 2013), on reconsideration in part (Dec. 10, 2013) (holding that

15

scienter allegations were insufficient as a matter of law because plaintiffs alleged no direct contact

16

between confidential witnesses and defendants) (citing In re Wachovia Equity Sec. Litig., 753 F.

17

Supp. 2d 326, 352 (S.D.N.Y. 2011)); City of Roseville Employees’ Ret. Sys. v. Sterling Fin. Corp.,

18

963 F. Supp. 2d 1092, 1136 (E.D. Wash. 2013) (holding that “generic allegations that ‘everyone

19

knew’ are insufficient, because they do not establish that the [confidential witnesses] ‘were in a

20

position to gain personal knowledge of what Defendants saw, knew, or thought’”). To the extent

21

that Plaintiffs also allege that FE2 expressed his or her concerns regarding the widespread errors to

22

Nancy Reinhard, the court notes that said executive is not a defendants in this case. As such, this

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allegation is not probative information for whether the Individual Defendants intentionally

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understated Doral’s ALLL during the class period or whether some of them knew that others were

2

engaging in such a scheme.

3

Moreover, although the complaint includes some additional allegations of scienter, and the

4

court is aware of its duty to take into account the entirety of the allegations, see Tellabs, 551 U.S.

5

at 322-23, because the court finds that the allegations with respect to the Individual Defendants’

6

participation in the alleged fraudulent scheme are particularly weak and circumstantial, the

7

additional scienter allegations do not strengthen Plaintiffs’ case.

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extensive reports between management of Doral and its regulators does not suggest that the

9

Individual Defendants were engaging in a fraudulent scheme. If anything, it would seem to

10

suggest that the increased regulation of their actions would motivate them to not engage in fraud.

11

See Seaman v. California Bus. Bank, No. 13-02031, 2014 WL 1339649, at *6 (N.D. Cal. Apr. 2,

12

2014) (noting the fact that defendant company “was subject to a consent order, and was being

13

closely monitored by the FDIC, does not give Defendants a greater motive to lie or be reckless in

14

its statements about the adequacy of its loan loss reserves. If anything, it would tend to suggest the

15

opposite.”). Indeed, as Plaintiffs explain, both the Consent Order and Written Agreement required

16

that Doral provide its regulators with regular reports and that it develop a comprehensive ALLL

17

methodology and periodically review it.

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frequently making changes to the ALLL model is consistent with the requirements of those

19

agreements. (See Docket No. 53 ¶ 87-89.)

Specifically, frequent and

As such, generally pleading that Defendants were

20

Lastly, to the extent that Plaintiffs point to unusual insider trading by Ivanov, Poulton, and

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Ubarri, the court finds these allegations to be particularly weak as well, even when taken in

22

conjunction with the complaint as a whole. Although allegations of insider trading may be used to

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support a theory of fraud, see New Jersey Carpenters, 537 F.3d at 55; Boston Scientific Corp., 523

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F.3d at 92, it is interesting that the defendants who sold their shares during the class period had so

2

little alleged involvement in this case. Indeed, Ivanov is alleged to have signed only a single Form

3

10-Q and neither Poulton nor Ubarri are alleged to have made a single statement to the investing

4

public, other than Poulton preparing the investor presentation attached to Doral’s March 21, 2014

5

Form 8-K. (See Docket No. 53 ¶ 272.) The First Circuit has held that insider trading done by one

6

executive cannot allow for a strong inference of scienter on part of other executives. See New

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Jersey Carpenters, 537 F.3d at 56 (“‘even unusual sales by one insider do not give rise to a strong

8

inference of scienter’ when other insiders had not engaged in suspicious trading during the class

9

period”). More so, with the exception of Ivanov, who allegedly sold all of his shares, Poulton and

10

Ubarri only sold 20.33% and 11.60% of their shares in Doral respectively. (See Docket No. 53 ¶

11

302.) Selling such a small amount does not suggest that Poulton and Ubarri were selling stocks

12

due to their knowledge of the impending demise of Doral.

13

In short, Plaintiffs’ allegations through the confidential witnesses and additional scienter

14

allegations do not allow for a strong inference of scienter by the individual defendants Ivanov,

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Hooston, Ubarri, and Poulton to defraud investors with respect to the deliberate understatement of

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Doral’s ALLL and PLLL. Although “‘the PSLRA does not require plaintiffs to plead evidence,”

17

Hill, 638 F.3d at 56, when examining the complaint as a whole, the court finds that the allegations

18

appear to be almost entirely circumstantial, with the exception of Wakeman and Wahlman.

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20

2.

Concealing the Material Risk that the Department Would Seek to Void the
2012 Closing Agreement

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The court next turns to the question of whether Plaintiffs sufficiently allege that Defendants

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knew that there was a material risk that the Treasury Department would seek to void the 2012

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Closing Agreement. Although the court has taken judicial notice that there was indeed a material

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risk that the Department would seek to void the 2012 Closing Agreement, Plaintiffs fail to

2

sufficiently plead that the Individual Defendants were aware of the risk and the Puerto Rico courts’

3

decisions do not hold as such. Plaintiffs point to the significance of the tax receivable to Doral’s

4

regulatory capital ratios, Defendants’ regular communications with the Treasury Department, the

5

financial instability of the Puerto Rican Government, that there were internal discussions at Doral

6

each quarter about whether to continue to include the tax receivable in the Company’s Tier 1

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Capital, and that by early 2014, the FDIC was also closely scrutinizing Doral’s inclusion of the tax

8

receivable in its Tier 1 Capital. (Docket No. 53 ¶¶ 131-32.) These allegations do not plead with

9

particularity nor do they allow for a strong inference that any of the Individual Defendants were

10

indeed aware of the misrepresentation made to the Treasury Department. For example, insofar as

11

Plaintiffs argue that the Individual Defendants must have known about the misrepresentations to

12

the Treasury Department because the tax receivable was so critical to Doral’s core operations, the

13

courts have only found this to be significant where there are other specific factual allegations

14

providing an independent basis to infer that the defendants had notice of the wrongdoing. See

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Lenartz v. Am. Superconductor Corp., 879 F. Supp. 2d 167, 183 n.9 (D. Mass. 2012) (rejecting

16

application of “core operations” they absent independent specific allegations concerning

17

knowledge of wrongdoing). Compare Crowell v. Ionics, Inc., 343 F. Supp. 2d 1, 19 (D. Mass.

18

2004) (applying core operations doctrine to attribute knowledge of fraud to defendants where there

19

was an email pointing to the company’s vice president as the author of the scheme) with Lenartz v.

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Am. Superconductor Corp., 879 F. Supp. 2d 167, 183 n.9 (D. Mass. 2012) (same District Judge

21

who presided over Crowell finding the core operations theory inapplicable in an accounting fraud

22

case because the facts were “less clear” than the “particularized facts” of Crowell).

23

Furthermore, merely alleging that “Defendants knew there was a risk that the Treasury

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Department would not pay Doral the Tax Receivable due to the financial instability of the Puerto

2

Rican Government” (Docket No. 53 ¶ 132) is exactly the type of conclusory allegation that the

3

PSLRA sought to disallow. Ezra Charitable Trust v. Tyco Int’l Ltd., 466 F.3d 1, 12-13 (1st Cir.

4

2006) (“[s]imply pleading that the defendant knew of the falsity, without providing any factual

5

basis for that knowledge, does not suffice”); Maldonado, 137 F.3d at 12 (“the pleading of scienter

6

‘may not rest on a bare inference that a defendant ‘must have had’ knowledge of the facts’”).

7

More so, alleging that Defendants’ scienter is evident from the fact that Doral’s Vice President of

8

Tax, George Scopetta, met with representatives from the Treasury Department at least bi-monthly

9

during the class period does not provide the court with any information as to what was even

10

discussed during those meetings. It does not provide any insight as the Individual Defendants’

11

knowledge of the misrepresentation or culpability in discussing the tax receivable during the class

12

period. Lastly, to the extent that Plaintiffs allege that the fact that something turned out badly must

13

mean that the Individual Defendants knew earlier that it would turn out badly, the court rejects any

14

argument of fraud by hindsight. See Boston Scientific Corp., 523 F.3d at 91.

15

3.

Conclusion Regarding Scienter

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In sum, Plaintiffs have sufficiently pleaded scienter with respect to defendants Wakeman

17

and Wahlman’s actions concerning the ALLL claim. As such, each time Wakeman and Wahlman

18

commented on Doral’s capital levels, specifically concerning its PLLL and ALLL, failed to

19

disclose the numerous problems that undermined its internal controls related to the accuracy of its

20

ALLL and PLLL from April 2, 2012 through March 3, 2013, stated that the SEC filings were

21

adhering to GAAP, and stated that Doral was in compliance with the Consent Order and Written

22

Agreement, they were issuing statements that a jury reasonably could find to be misleading.

23

With respect to the remaining defendants, however, Plaintiffs fail to plead their

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involvement in the purported fraudulent scheme with the particularity required under Rule 9(b) and

2

the PSLRA. While the allegations might amount to mere negligence on part of the remaining

3

defendants, they are not enough to show that said defendants intentionally manipulated Doral’s

4

internal control systems and its ALLL models and that any of the Individual Defendants knew of

5

the risk that the 2012 Closing Agreement would be voided—both claims being the foundation for

6

Plaintiffs’ cause of action.

7

(“[A]llegations of corporate mismanagement are not actionable under Rule 10b-5.

8

allegations of mere negligence.”). Although prior to the enactment of the PSLRA, these sort of

9

allegations would have most certainly passed the 12(b)(6) threshold, such is no longer the case.

10

Further, unlike past securities fraud cases that have been adjudicated by this court, in the present

11

case, Plaintiffs have failed to plead with particularity that what the remaining defendants were

12

doing was indeed fraud, as opposed to mere corporate negligence. See Hoff v. Popular, 727 F.

13

Supp. 2d 77, 92-93 (D.P.R. 2010) (GAG); Fox v. First BanCorp, No. 05-2148 GAG, 2006 WL

14

4128534, at *9 (D.P.R. Nov. 6, 2006).

See Abiomed, 778 F.3d at 246 (citing Greebel, 194 F.3d at 188)
Nor are

15

Lastly, and notably, the allegations contained in the complaint are likely sufficient to

16

amount to a claim against Doral itself. However, as discussed above, the present motion to dismiss

17

is analyzed only as to the Individual Defendants at this stage due to the stay as to Doral. It is also

18

worth noting that although it is clear from the 2014 disclosures that the members of Doral made

19

many mistakes throughout the class period, the First Circuit has made clear that “[n]ot all claims of

20

wrongdoing by a company make out a viable claim that the company has committed securities

21

fraud.” Abiomed, 778 F.3d at 231.

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D.

Loss Causation

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The court must next turn to Defendants’ challenge to the loss causation element with

3

respect to Wakeman and Wahlman. A plaintiff bringing a claim under Rule 10b-5 must plead loss

4

causation, that is, that the “defendants’ misrepresentations ‘caused the loss for which the plaintiff

5

seeks to recover.’” Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 345-46, 125 S. Ct. 1627, 161 L.

6

Ed. 2d 577 (2005); see also 15 U.S.C. § 78u-4(b)(4). “[U]nlike elements of a § 10(b) claim such

7

as fraud and scienter, however, neither Federal Rule of Civil Procedure 9(b) nor the [PSLRA]

8

require that securities fraud plaintiffs plead loss causation with specificity.” Hoff, 727 F. Supp. 2d

9

at 94 (internal quotation marks omitted) (citing Dura, 544 U.S. at 347, 125 S. Ct. 1627).

10

Therefore, it “should not prove burdensome for a plaintiff who has suffered an economic loss to

11

provide a defendant with some indication of the loss and the causal connection that the plaintiff

12

has in mind.” Dura, 544 U.S. at 347, 125 S. Ct. 1627; see also Colon v. Diaz–Gonzalez, 2009 WL

13

3571974, at *6 (D.P.R.2009) (“the loss causation pleading requirements should be interpreted so as

14

not to impose a significant burden on plaintiffs”). Moreover, “[d]isputes about loss causation turn

15

primarily on questions of fact.” Hoff, 727 F. Supp. 2d at 94 (citing Wortley v. Camplin, 333 F.3d

16

284, 295 (1st Cir. 2003)).

17

The complaint alleges that when Defendants’ misrepresentations and fraudulent conduct

18

were disclosed to investors and the market, Doral’s common stock plummeted as a direct result.

19

(Docket No. 53 ¶¶ 269-73, 306-15.) Specifically, Plaintiffs aver that when Doral announced on

20

March 18, 2014 that it needed to delay the filing of its annual 10-K report for the year ending

21

December 31, 2013 due to “a material weakness in its internal control over financial reporting as

22

of December 31, 2013, related to the review of the underlying data and mathematical model

23

supporting its [ALLL] and the related [PLLL],” and admitted that its “internal control over

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Civil No. 14-1393 (GAG)
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financial reporting and disclosure controls and procedures were ineffective as of December 31,

2

2013,” the price of Doral common stock fell $1.13 per share, or more than 9%, from a closing

3

price of $12.30 per share on March 17, 2014, to close at $11.17 per share on March 18, 2014. (Id.

4

¶¶ 112, 269-70, 308.) Thereafter, in response to the release of Doral’s 2013 10-K that indicated it

5

had understated its ALLL and needed to make a substantial out-of-period increase to its PLLL,

6

suffered from widespread internal control deficiencies, and had not addressed the problems with its

7

ALLL policy and methodology as required by the Consent Order and the Written Agreement, the

8

price of Doral common stock tumbled 6.8%, from a closing price of $11.55 per share on Friday,

9

March 21, 2014, to close at $10.76 per share on Monday, March 24, 2014. (Id. ¶¶ 274; 309-11.)

10

The stock continued to decline over the next four trading days, as the market digested these

11

adverse announcements, closing at $8.59 per share on March 28, 2014—a total decline of 25.6%.

12

(Id.) Finally, Plaintiffs aver that when Doral disclosed on May 1, 2014 that the FDIC was no

13

longer allowing the Bank to include the almost $230 million tax receivable in its Tier 1 capital, the

14

price of Doral common stock plummeted 62%, from a closing price of $9.82 per share on May 1,

15

2014, to close at $3.73 per share on May 2, 2014, on unusually heavy trading volume of more than

16

2.37 million shares traded—erasing more than $141 million in market capitalization from the

17

stock’s class period high. (Id. ¶¶ 275-77, 315.)

18

The court finds that these allegations sufficiently provide Defendants with “some indication

19

of the loss and the causal connection that the plaintiff has in mind.” Dura, 544 U.S. at 347, 125 S.

20

Ct. 1627.

21

E.

22

Section 20(a) of the Securities Exchange Act imposes joint and several liability on any

23

person who “directly or indirectly, controls any person liable under any provision of this chapter.”

Control Person Liability under Section 20(a)

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Civil No. 14-1393 (GAG)
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15 U.S.C. § 78t(a). Liability under Section 20(a) is secondary, and cannot exist without first

2

establishing the primary liability of the company or its insiders. See Abiomed, 778 F.3d at 246;

3

ACA Fin., 512 F.3d at 67-68.

4

either Ivanov, Hooston, Ubarri, or Poulton directly or indirectly controlled Wakeman or Wahlman.

5

As such, Plaintiffs’ control person liability claim fails as a matter of law. Furthermore, Plaintiffs

6

have failed to establish scienter with respect to Ivanov, Hooston, Ubarri, and Poulton, and thus

7

have failed to plead primary liability under its 10b-5 claim, which leads to the inability to establish

8

secondary liability under section 20(a). See Abiomed, 778 F.3d at 246.

9

VI.

Plaintiffs make no allegations that allow the court to infer that

Conclusion

10

In sum, in light of the aforementioned reasons, the Court GRANTS in part and DENIES

11

in part Defendants’ Motion to Dismiss at Docket No. 56 as to the Individual Defendants.

12

Accordingly, the case against Wakeman and Wahlman continues, but is dismissed as to the

13

remaining defendants.

14

Although Plaintiff’s case proceeds exclusively against defendants Wakeman and Wahlman,

15

they should nonetheless consider that, at this juncture, Doral is bankrupt. Contrary to earlier

16

similar class action cases before the undersigned such as those involving Banco Popular and First

17

Bank, there is presumably no deep pocket for the putative class to recover, should a judgment

18

befall in its favor. Thus, the court highly suggests that Plaintiffs at this time strongly consider

19

proceeding individually versus requesting that the class be certified. More so, the court strongly

20

suggests that the parties seriously consider settlement alternatives at this time, once the case is

21

referred to the Magistrate Judge Bruce J. McGiverin for the initial scheduling conference.

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SO ORDERED.

2

In San Juan, Puerto Rico this 22nd day of July, 2015.
s/ Gustavo A. Gelpí
GUSTAVO A. GELPI
United States District Judge

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