Epstein v. World Acceptance Corporation et al

Filing 146

OPINION AND ORDER denying 132 Motion to Dismiss. Signed by Honorable Mary Geiger Lewis on 8/24/2016.(abuc)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF SOUTH CAROLINA
GREENVILLE DIVISION
EDNA SELAN EPSTEIN, Individually and on §
Behalf of All Others Similarly Situated,
§
Plaintiff,
§
§ CIVIL ACTION NO. 6:14-CV-01606-MGL
vs.
§
§
WORLD ACCEPTANCE CORPORATION, §
A. ALEXANDER MCLEAN, III, JOHN L.
§
CALMES, JR., KELLY M. MALSON, and
§
MARK ROLAND,
§
Defendants.
§
MEMORANDUM OPINION AND ORDER
DENYING DEFENDANTS’ MOTION TO DISMISS

I.

INTRODUCTION
This case was filed under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934

(Exchange Act), 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5, promulgated by the Securities
Exchange Commission (SEC), 17 C.F.R. § 240.10b-5. This Court has jurisdiction over the
matter under 28 U.S.C. § 1331 and § 27 of the Exchange Act, 15 U.S.C. § 78aa. Pending before
the Court is Defendants World Acceptance Corporation (World Acceptance or the Company), A.
Alexander McLean, III, John L. Calmes, Jr., Kelly M. Malson, and Mark Roland’s (Individual
Defendants, or, collectively with World Acceptance, Defendants) Motion to Dismiss Plaintiff’s
Second Amended Complaint by way of Rule 12(b)(6) of the Federal Rules of Civil Procedure.
ECF No. 132. Having considered the motion, the memoranda, the response, the reply, the

record, and the applicable law, it is the judgment of the Court that Defendants’ Motion to
Dismiss will be denied.

II.

FACTUAL AND PROCEDURAL BACKGROUND
According to the allegations in Plaintiff’s Second Amended Complaint, “World

Acceptance is a small loan consumer finance business that specializes in sub-“subprime”
lending[,]” offering short- and medium-term installment loans. ECF No. 126 at 2. In fiscal year
2014, most of the Company’s outstanding loans “were issued to consumers with low FICO credit
scores who had been turned down by traditional sources of credit such as commercial banks,
credit unions, and credit card lenders” and who were often jobless, elderly, or disabled. ECF No.
138 at 4-5. Plaintiff claims the lending practices of World Acceptance were generally designed
to trap borrowers in debt while the Company profited.

For example, Plaintiff alleges the

Company, acting through its senior executives, tricked customers into purchasing unneeded
insurance products paid for by borrowers but solely benefitting the Company, such as credit life
insurance that provided full payment of the borrower’s credit obligation to World Acceptance if
the borrower died before repaying the loan. Id. at 5. The fees and premiums associated with
these insurance products also artificially inflated loan interest rates. Id.; ECF No. 126 at 27.
Further, Plaintiff avers the Company regularly encouraged branch managers to complete “smalldollar” renewals in which loans were refinanced even when borrowers had repaid less than 10%
of the original balance. ECF No. 138 at 5-6.
On July 3, 2013, the Company revealed to the public the filing of a Form NT 10-K/A, a
document that disclosed World Acceptance was unable to file a completed Form 10-K for the
fiscal year ending March 31, 2013, due to “unexpected delays in completing [its] financial

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statements relating to additional review and analysis needed to support the Company’s allowance
for loan losses,” and requested additional time from the SEC to file the form. Id. at 6. The
Company also announced, “it is possible that the Company’s . . . Form 10-K will report a
material weakness in its internal control over financial reporting relating to its process for
determining its allowance for loan losses, as well as reporting the measures it is undertaking to
remediate any such weakness.” Id. at 6-7.
World Acceptance avers, during this time, it realized its internal control over financial
reporting “to assess its compliance with the accounting rules” for small-dollar loan renewals—
especially where the borrower had less than 10% paid down—was inadequate. ECF No. 132-1
at 7. Looking into this material weakness, World Acceptance and KPMG LLP, the Company’s
auditor, determined the material weakness’s effect on the accuracy of the Company’s financial
statements was immaterial, and as such, a “restatement” was unnecessary. Id. at 8. After the
July 3 announcement, World Acceptance’s stock price fell over 12% on the following trading
day. ECF No. 138 at 7. On July 19, 2013, the Company filed [a] . . . Form 10-K, and that day its
stock price increased by a little less than 4%, from $82.07 to $85.18. ECF No. 126 at 65.
On July 25, 2013, Defendant disclosed to investors it had found a material weakness in
World Acceptance’s treatment of small-dollar loan renewals, which comprised up to 25% of the
Company’s entire renewal portfolio. ECF No. 138 at 7. The Company assured investors,
however, that it would correct the policies and said, “Importantly, this material weakness has no
impact on the collectability of our loan portfolio.” ECF No. 126 at 70. In a conference call later
that day, an analyst asked Defendant McLean, CEO and Chairman of the Board of Directors,
whether he thought changes in business practices would have a negative effect on the Company.
ECF No. 132-1 at 8-9; ECF No. 126 at 134. Defendant McLean responded, “I do not believe [no

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longer encouraging sub-10% renewals] will represent a material impact on our operations or
results.” ECF No. 132-1 at 8-9. After this announcement, the Company’s stock price declined
over 4% that day on unusually heavy trading volume. ECF No. 138 at 7.
On September 10, 2013, World Acceptance announced its CFO, Defendant Malson,
would retire. Id. Shortly thereafter, on November 4, 2013, World Acceptance announced its
COO, Defendant Roland, had resigned. Id. Later that day, the stock price declined over 12%,
again on heavy trading. Id.
World Acceptance revealed on March 13, 2014, that it had received a Civil Investigation
Demand (CID) from the Consumer Financial Protection Bureau (CFPB) to look into “potentially
unlawful practices in the marketing and extension of credit.” Id. That day, World Acceptance’s
stock fell almost 20%. Id.
On April 29, 2014, World Acceptance announced systemic changes in the Company’s
renewal policies as a direct result of its material accounting weakness, saying it would stop
encouraging small-dollar loan renewals and admitting these system changes created the lowest
quarterly loan growth in at least nine years. Id. at 7-8. The Company’s stock price fell about
10% on unusually heavy trading volume the following day. Id. at 8.
Meanwhile, during the investigatory period, the Company periodically updated the
market regarding the CFPB investigation. ECF No. 132-1 at 5. For example, on June 12, 2014,
World Acceptance asserted:
While the Company believes its marketing and lending practices are lawful, there
can be no assurance that the CFPB’s ongoing investigation or future exercise of
its enforcement, regulatory, discretionary or other powers will not result in
findings or alleged violations of federal consumer financial protection laws that
could lead to enforcement actions, proceedings or litigation and the imposition of
damages, fines, penalties, restitution, other monetary liabilities, sanctions,
settlements, or changes to the Company’s business practices or operations that
could have a material adverse effect on the Company’s business, financial
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condition or results of operations or eliminate altogether the Company’s ability to
operate its business profitably or on terms substantially similar to those on which
it currently operates.
Id. (emphasis omitted). The next month, on a conference call with analysts, Defendant McLean
said, “[W]e really don’t believe we are doing anything wrong and it would be very nice if they
would finish their review within the six months and go onto a different project.” ECF No. 126 at
101.
Shortly thereafter, on September 5, 2014, the Company made an announcement that
KPMG, after serving as World Acceptance’s independent auditor for twenty years, had resigned.
ECF No. 138 at 8. The Company’s stock price dropped 7.5% the next trading day. Id. Then, on
June 2, 2015, the Company announced Defendant McLean’s retirement, and its stock price
dropped over 5% by the end of that day. Id.; ECF No. 126 at 6.
Finally, on August 10, 2015, the Company announced its receipt of a Notice of
Opportunity to Respond and Advise (NORA) letter from the CFPB on August 7, 2015, which
said the CFPB’s Enforcement Office was “considering recommending that the CFPB take legal
action against the Company” and “expect[ed] to allege that the Company violated the [Consumer
Financial Protection Act].” ECF No. 138 at 8-9. World Acceptance’s stock price plummeted
more than 34% the following day. Id. at 9; ECF No. 126 at 135.
Edna Selan Epstein originally commenced this putative securities class action on April
22, 2014, on behalf of herself and all investors who purchased or acquired World Acceptance
common stock between April 25, 2013, and March 12, 2014. ECF No. 1 at 1. On June 23, 2014,
both Epstein and Operating Engineers Construction Industry and Miscellaneous Pension Fund
(Operating Engineers) moved for appointment as Lead Plaintiff. ECF Nos. 11 & 13. This Court
appointed Operating Engineers as Lead Plaintiff on July 22, 2014. ECF No. 47.

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On August 12, 2014, Plaintiff filed an Amended Complaint, alleging the Company, as
well as Individual Defendants as agents of the Company, participated in a fraudulent scheme to
inflate World Acceptance’s stock price artificially by misrepresenting and concealing
information about World Acceptance’s business practices. ECF No. 50 at 1. Defendants filed a
Motion to Dismiss the Amended Complaint on September 16, 2014, for failure to state a claim
upon which relief can be granted, ECF Nos. 58 & 59. On May 18, 2015, this Court denied that
motion, ECF No. 74.
On November 16, 2015, Plaintiff filed a Motion for Class Certification. ECF No. 121.
Plaintiff also filed its Second Amended Complaint on December 18, 2015, on behalf of “all
persons or entities who purchased or acquired shares of World Acceptance (the Class) between
January 30, 2013, and August 10, 2015, inclusive (the Class Period),” which extended the Class
Period from the Amended Complaint. ECF No. 126 at 1. Individual Defendants—McLean,
Calmes, Malson, and Roland—were all senior executive officers of World Acceptance prior to
and during a portion of the Class Period. Id. at 8. In addition to setting forth the same
allegations from the Amended Complaint and lengthening the Class Period, Plaintiff’s Second
Amended Complaint includes updates since Plaintiff filed the action, including resignations by
officials, the receipt of the NORA letter, and additional statements by Defendants.
On January 29, 2016, Defendants filed a Motion to Dismiss Plaintiff’s Second Amended
Complaint. ECF No. 132. Plaintiff filed a response in opposition on March 10, 2016, ECF No.
138, and on April 8, 2016, Defendants filed their reply. ECF No. 141. The Court, having been
fully briefed on the relevant issues, will now turn to the merits of Defendants’ motion.

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III.

STANDARD OF REVIEW
Defendants move to dismiss this putative securities fraud class action lawsuit under

Federal Rule of Civil Procedure 12(b)(6) on the grounds that the Second Amended Complaint
fails to satisfy the heightened pleading standards of the Private Securities Litigation Reform Act
(PSLRA) and Federal Rule of Civil Procedure 9(b). ECF No. 132. Therefore, according to
Defendants, Plaintiff fails to state a claim for which relief may be granted. Id.
To survive a motion to dismiss, a complaint must contain factual allegations sufficient to
provide the defendant with “notice of what the . . . claim is and the grounds upon which it rests.”
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). In considering the motion, a court accepts
all of a plaintiff’s well-pled allegations as true and liberally construes all reasonable inferences in
the plaintiff’s favor. Mylan Labs., Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir. 1993). The court
may consider only the facts alleged in the complaint, which may include any documents
referenced, and matters of which the court may take judicial notice. Tellabs, Inc. v. Makor
Issues & Rights, Ltd., 551 U.S. 308, 322 (2007).
To establish liability under § 10(b) of the Exchange Act and under Rule 10b-5, a plaintiff
must allege: “(1) a material misrepresentation (or omission); (2) scienter, i.e., a wrongful state of
mind; (3) a connection with the purchase or sale of a security; (4) reliance . . . ; (5) economic
loss; and (6) ‘loss causation,’ i.e., a causal connection between the material misrepresentation
and the loss.” Teachers’ Ret. Sys. of La. v. Hunter, 477 F.3d 162, 172 n.2 (4th Cir. 2007) (citing
Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005)). A company is liable under § 10(b)
if its officials who issued the statements possess the requisite mental state. See Tellabs, 551 U.S.
at 328. Additionally, § 20(a) of the Exchange Act assigns joint and several liability to one in
control of another who violates a security regulation under § 10(b).

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In a securities fraud case, a plaintiff must also satisfy the heightened pleading standards
of Rule 9(b) and the PSLRA. See Pub. Emps.’ Ret. Ass’n of Colo. v. Deloitte & Touche LLP,
551 F.3d 305, 311 (4th Cir. 2009). Rule 9(b), which governs all actions alleging fraud, requires
the plaintiff to “state with particularity the circumstances constituting fraud.” Fed. R. Civ. P.
9(b).

In addition, the PSLRA requires a plaintiff alleging securities fraud to “state with

particularity both the facts constituting the alleged violation, and the facts evidencing scienter,
i.e., the defendant’s intention to deceive, manipulate, or defraud.” Tellabs, 551 U.S. at 313
(internal citations and quotations omitted).

The PSLRA modifies the traditional 12(b)(6)

analysis “(1) by requiring a plaintiff to plead facts to state a claim[,] . . . (2) by authorizing the
court to assume that the plaintiff has indeed stated all of the facts upon which he bases his
allegation of a misrepresentation or omission.” Hunter, 477 F.3d at 172. The PSLRA also
requires a plaintiff to plead sufficient facts “to raise a strong inference of scienter.” Id. A
district court must dismiss a complaint on motion of any defendant if the plaintiff fails to meet
the pleading requirements of the PSLRA. 15 U.S.C. § 78u-4(b)(3)(A).

IV.

CONTENTIONS OF THE PARTIES
Defendants contend this Court should refrain from deferring to its holdings in its prior

Order on Defendants’ previous motion to dismiss when judging the sufficiency Plaintiff’s
Second Amended Complaint. ECF No. 132-1 at 32-33. Instead, Defendants urge the Court to
engage in a “statement-by-statement analysis,” and consider Plaintiff’s assertions “anew.” Id.;
ECF No. 141 at 2.
Defendants also posit four arguments attacking the sufficiency of Plaintiff’s allegations
that they violated § 10(b) of the Exchange Act. ECF No. 132-1. First, Defendants maintain that

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any statements they made indicating they believed World Acceptance’s company practices were
compliant with legal authority—allegations added in Plaintiff’s Second Amended Complaint—
were neither false nor misleading. Id. at 13. Defendants contend these were opinion statements
and Plaintiff has neglected to assert any facts “cast[ing] doubt on the sincerity of Defendants’
belief[s].” Id. at 15. Next, Defendants aver Plaintiff insufficiently pled a strong inference of
scienter with regards to Defendants’ statements concerning World Acceptance’s material
weakness, as required by the PSLRA. Id. at 17. Third, Defendants stress Plaintiff’s Second
Amended Complaint inadequately pleads the element of loss causation required in securities
fraud cases. Id. at 20. Fourth and finally, Defendants argue because Plaintiff’s § 10(b) claims
are inadequate, its derivative § 20(a) claims must also fail. Id. at 33.
Plaintiff counters that the Court’s treatment of Defendants’ Motion to Dismiss should be
governed by the law of the case doctrine, which it argues precludes Defendants from reasserting
arguments already addressed by this Court and mandates evaluating Defendants’ new arguments
consistently with the Court’s prior determinations in its previous Order. ECF No. 138 at 10-12.
Plaintiff alleges Defendants violated § 10(b) of the Exchange Act and Rule 10b-5 by
concealing illicit business and lending practices and artificially inflating the market price of
World Acceptance’s securities through misrepresentations and omissions. ECF No. 126 at 1.
Plaintiff advances in its Second Amended Complaint that it “purchased World Acceptance
common stock at artificially inflated prices during the Class Period and suffered an economic
loss” when a series of disclosures revealed the truth about the Company’s allegedly unlawful
lending practices and inflated loan growth, causing the stock price to decline. Id. at 7.

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Specifically, Plaintiff argues World Acceptance employed two particular illicit practices
to “create the perception of significant loan growth,” allegations largely based on the accounts of
confidential former employees. Id. at 2-3, 11-15.
The first of these, as already described above, is World Acceptance’s alleged practice of
regularly tricking its customers into purchasing “worthless” and unneeded credit insurance
products borrowers paid for but that solely benefitted the Company. Id. at 2. Second, Plaintiff
asseverates the Company relentlessly pushed employees to convince customers to refinance their
loans before they had paid back even 10% of their debt, thereby locking them “into an endless
cycle of debt.” Id. at 2. Plaintiff asserts that these practices allowed World Acceptance to create
the perception of loan growth, where Defendants were actually “improperly accounting for many
of [these] renewals in violation of Generally Accepted Accounting Principles (GAAP).” Id. at 3.
Plaintiff maintains Defendants acted with scienter in that they repeatedly misrepresented the
lawfulness of these practices, despite that they were aware, or reckless in being unaware, the
practices were illegal. ECF No. 138 at 17.
According to Plaintiff, Defendants’ “fraudulent scheme” came to the attention of the
Company’s investors “through a series of partial disclosures, which caused significant investor
losses.” Id. at 1-2. These disclosures, which began in July 2013 and lasted through August
2015, announced a material weakness in the Company’s renewal portfolio, changes in company
practices, several “suspicious” resignations, and the receipt of a CID and a NORA letter. Id. at
6-9. Plaintiff further asserts these “partial disclosures” revealed “a series of misstatements and
omissions” regarding the lawfulness of the Company’s practices and the financial impact of
implementing changes in these practices, resulting in losses for the class members and violating
§ 10(b). Id. at 3.; ECF No. 126 at 1. In addition to their liability as participants in the alleged

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wrongs, Plaintiff argues Individual Defendants also violated § 20(a) of the Exchange Act through
their roles as “controlling persons” of World Acceptance. ECF No. 138 at 9.

V.

DISCUSSION AND ANALYSIS
A.

Law of the Case Doctrine

As a preliminary matter, before the Court discusses the primary contentions of the
parties, it will consider the validity of the parties’ “law of the case doctrine” arguments. Plaintiff
propounds that the law of the case doctrine requires that this Court’s determinations in its prior
Order denying Defendants’ previous motion to dismiss bear on the instant motion.
Under the law of the case doctrine, “when a court decides upon a rule of law, that
decision should continue to govern the same issues in subsequent stages in the same case.”
Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 816 (1988) (quoting Arizona v.
California, 460 U.S. 605, 618 (1983)). Although the court remains free to deviate from its prior
decisions, as the doctrine is discretionary and simply “expresses the practice of courts generally
to refuse to reopen what has been decided,” as a general practice, “courts should be loath[] to
[revisit prior decisions] in the absence of extraordinary circumstances.” Id. at 817 (quoting
Messinger v. Anderson, 225 U.S. 436, 444 (1912) (internal quotations omitted)). In fact, the
Fourth Circuit has stated the law of the case doctrine should be disregarded only if: “(1) a
subsequent trial produces substantially different evidence, (2) controlling authority has since
made a contrary decision of law applicable to the issue, or (3) the prior decision was clearly
erroneous and would work manifest injustice.” United States v. Aramony, 166 F.3d 655, 661
(4th Cir. 1999) (internal citations omitted).

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Defendants argue interlocutory orders are unconstrained by the law of the case doctrine
and suggest the doctrine is limited to cases where an appellate decision bears on a district court’s
later decision. This, however, is a misinterpretation of the doctrine. Although the Fourth Circuit
stated in American Canoe Ass’n v. Murphy Farms, Inc., that “a district court retains the power to
reconsider and modify its interlocutory judgments . . . at any time prior to final judgment when
such is warranted,” it also emphasizes that a district court is not required to use this power—it is
discretionary and should typically be used only where the court is clearly at risk of otherwise
reaching the wrong result. 326 F.3d 505, 514-15 (4th Cir. 2003).
In this case, without a subsequent trial producing new evidence or any change in
controlling authority, the only remaining reason for this Court to abandon its prior
determinations and review this case anew under Plaintiff’s version of the “law of the case”
doctrine” is if applying the principles from this Court’s prior order would be “clearly erroneous
and would work manifest injustice.” See Aramony, 166 F.3d at 661. But, “[a] prior decision does
not qualify for this third exception by being just maybe or probably wrong; it must strike [the
Court] as wrong with the force of a five-week-old, unrefrigerated dead fish.” TFWS, Inc. v.
Franchot, 572 F.3d 186, 194 (4th Cir. 2009). The Court’s previous order fails to conform to this
standard.
But, there appears to be a wrinkle in this law. Defendants cite to an unpublished Fourth
Circuit opinions that states that the “law of the case” doctrine is inapplicable to motions to
dismiss. See. e.g. Plotkin v. Lehman, 178 F.3d 1285 (4th Cir. 1999) (table). But, “[c]itation of
[the Fourth Circuit’s] unpublished dispositions issued prior to January 1, 2007, in briefs . . . in
the district courts within this Circuit is disfavored.” Local App. Rule 32.1.

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Having considered the arguments of both sides, the Court holds that whether the “law of
the case” doctrine applies or not, the Court’s determination as to each of the issues presented to it
remains the same. Hence, the Court need not reach a conclusion on whether to apply the
doctrine to decide this motion. Instead, the Court is of the firm opinion that its previous order is
free from any factual or legal error. Thus, whether the “law of the case” doctrine is applicable
here is of no moment.
With this in mind, this Court will re-scrutinize its prior holdings only where Defendants
have alleged an error. Here, Defendants specifically argue this Court’s prior Order was in error
with regard to its treatment of a portion of the loss causation element, discussed in more detail
below. For all other elements, this Court’s discussion will restate its prior holding but mainly
focus on Plaintiff’s new assertions in its Second Amended Complaint and Defendants’
arguments regarding those allegations.
B.

Section 10(b) and Rule 10b-5 Claim

Section 10(b) of the Exchange Act prohibits the use of manipulative or deceptive devices
“in connection with the purchase or sale[] of any security.” 15 U.S.C. § 78j. Defendants’
motion contests only three of the elements, listed above, of a claim for a § 10(b) violation: (1) the
existence of a misrepresentation or omission, (2) a strong inference of scienter, and (3) a causal
connection between the material misrepresentation and the economic loss experienced by the
Plaintiff—otherwise known as “loss causation.” ECF No. 132-1.
1.

False Statement or Omission of Material Fact

The first element of a securities fraud action requires a plaintiff to point to a “factual
statement or omission that is false or misleading and that is material.” Longman v. Food Lion,
Inc., 197 F.3d 675, 683 (4th Cir. 1999) (emphasis omitted). In other words, “[i]f a reasonable

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investor, exercising due care, would gather a false impression from a statement, which would
influence an investment decision, then the statement satisfies the initial element of a § 10(b)
claim.” Phillips v. LCI Int’l, Inc., 190 F.3d 609, 613 (4th Cir. 1999) (internal citations omitted).
The plaintiff’s complaint must “specify each statement alleged to have been misleading,
the reason or reasons why the statement is misleading, and, if an allegation regarding the
statement or omission is made on information and belief, the complaint shall state with
particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). It is enough for
the plaintiff to simply allege “sufficient facts to support a reasonable belief in the allegation that
the defendant’s statement was misleading.” Hunter, 477 F.3d at 174. Reliance on confidential
sources in alleging these facts is permissible so long as the plaintiff “describe[s] the sources with
sufficient particularity to support the probability that a person in the position occupied by the
source would possess the information alleged.” Id. (internal quotations omitted). Furthermore,
“opinion or puffery” can be actionable as long as it is false and material, such as if senior
executives “did not believe what they said they believed.” Longman, 197 F.3d at 683; see
Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 135 S. Ct. 1318, 1327
(2015) (finding an opinion statement nonactionable where the plaintiff neglected to contest the
opinion was honestly held and explicitly disclaimed an allegation of fraud or deception); see also
Nolte v. Capital One Fin. Corp., 390 F.3d 311, 315 (4th Cir. 2004) (“[T]o plead that an opinion
is a false factual statement . . . the complaint must allege that the opinion expressed was different
from the opinion actually held by the speaker.”).
Finally, because § 10(b) claims are fraud claims, the plaintiff must satisfy the pleading
requirements imposed by Rule 9(b) of the Federal Rules of Civil Procedure, which requires all
elements of fraud be stated with particularity. A plaintiff satisfies this requirement when it

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pleads with particularity the time, place, and contents of the false representations, as well as the
identity of the person making the misrepresentation and what he obtained thereby. In re Mut.
Funds Inv. Litig., 566 F.3d 111, 120 (4th Cir. 2009), rev’d on other grounds, Janus Capital Grp.,
Inc. v. First Derivative Traders, 564 U.S. 135, 131 (2011).
This Court addressed Plaintiff’s initial assertions of Defendants’ false and misleading
statements and omissions in its previous order, holding them sufficiently pled. In the absence of
any specific argument from Defendants that this Court’s erred in making its prior determinations
on this issue, the Court turns its attention to Plaintiff’s new allegations, which fall into two
general categories: (1) misleading statements by Defendants regarding the lawfulness of the
Company’s lending practices and (2) omissions by Defendants concealing the material weakness
and its impact on the Company.
In the Second Amended Complaint, numerous confidential former employees explain
how supervisors encouraged them to enforce illicit business practices that gave loans to
customers well below the floor for legal subprime credit scores, deceive customers into
purchasing unnecessary insurance products, and renew loans before customers had paid off even
10% of the loan balance. ECF No. 126 at 16-38. One former employee recalled being told by
his manager to “look for reasons to give the loan,” and another remembered his superior saying
everyone who applied for a loan from the Company “should be approved for ‘something’
because ‘everyone qualifies’ for a starter loan.” Id. at 22-23. Further, employees described an
“implied understanding” between District Supervisors and Branch Managers that they “should
do whatever was needed to reach their monthly quotas,” which generally involved ignoring
written company policies and procedures.

Id. at 23-24.

The employees also described

aggressive practices for insurance policies, including “automatically includ[ing] insurance

15

premiums on all loans and . . . tell[ing] borrowers the insurance products were mandatory, even
though that was not the case.” Id. at 25.
Plaintiff contends Defendants repeatedly stated they believed their business and lending
practices were lawful when in actuality they were aware, or severely reckless in being unaware,
of the unlawfulness, employing “a corporate culture of looking the other way.” ECF No. 138 at
17; ECF No. 126 at 25; see, e.g., ECF No. 126 at 56, 67, 77, 84, 90 (“Defendants knew that
World Acceptance’s predatory practices widely used around the Company flew in the face of
federal and state consumer financial protection laws and regulations.”).
Between March 2014 and August 2015, the Company issued numerous statements in its
reports on forms to the SEC, such as, and as already quoted, “While the Company believes its
marketing and lending practices are lawful, there can be no assurance that CFPB’s ongoing
investigation . . . will not result in findings or alleged violations of federal consumer financial
protection laws.” See ECF No. 126 at 97; see also, e.g., ECF No. 126 at 102, 108, 112, 119, 123,
129. Conference calls with Individual Defendants produced similar statements, such as during
the aforementioned earnings call in which Defendant McLean said, “we really don’t believe we
are doing anything wrong.” ECF No. 132-1 at 14. Despite these assurances, Defendants were in
violation of state opt-in and usury laws, as well as federal and state consumer financial protection
laws and regulations—policies which Plaintiff argues ultimately led to CFPB scrutiny and the
receipt of the NORA letter. ECF No. 126 at 99.
Applying the relevant law, this Court determines knowledge of World Acceptance’s
practices would have been material to a reasonable investor, especially after CFPB announced an
investigation into the Company. Although Defendants propound Omnicare requires a showing
that a defendant’s opinion statement is inconsistent with the opinion he actually held at the time,

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this Court holds, taking all of Plaintiff’s factual allegations as true, Plaintiff has pled sufficient
facts to support a reasonable inference Defendants were aware, or severely reckless in being
unaware, that the Company’s widespread, multi-district practices violated the law. See 135 S.
Ct. at 1328-30.
Further, Omnicare is distinguishable from this case, as the plaintiff in Omnicare
explicitly disclaimed any allegations of deception, instead solely alleging the defendants’ stated
beliefs turned out to be untrue. Id. at 1324. Here, on the other hand, Plaintiff alleges Defendants
either knew, or recklessly ignored, their company practices were unlawful and pleads sufficient
facts to show this. For example, Plaintiff alleges facts illustrating the Company’s aggressive
approach to lending and its policy of forcing sales of insurance products violated state opt-in and
usury laws. See ECF No. 138 at 17; see, e.g., ECF No. 126 at 23-24. The existence of these
practices creates a compelling inference of truth that Defendants knew of the Company’s illicit
behavior, as Defendants state they kept a close eye on the day-to-day happenings of the business.
See, e.g., ECF No. 126 at 87.
Defendants also argue Omnicare provides the omission of a rebutting fact “fails to render
a statement of opinion . . . misleading.” ECF No. 141 at 4 (internal citations omitted). This is a
misinterpretation of the text of Omnicare. Although Omnicare acknowledges omissions can be
insufficient in some cases to render a statement misleading, it goes on to explain “if the issuer [of
the statement] made the statement . . . with knowledge that the [f]ederal [g]overnment was taking
the opposite view,” for example, then a reasonable investor could deem this statement
“misleading” if the statement fails to “align[] with the information in the issuer’s possession at
the time.” Omnicare, 135 S. Ct. at 1329.

17

Here, the CFPB investigation and NORA letter are indicative the federal government
may have a differing opinion on World Acceptance’s legal compliance—despite the fact that the
commencement of an investigation itself is inconclusive.

That Defendants would feel

comfortable continuously expressing their beliefs that the Company’s business practices were
legally compliant in the face of these investigatory challenges would give their statements more
weight to a reasonable investor.

Thus, a reasonable investor could rely on Defendants’

willingness to issue these statements as a sign they had information in their possession
unbeknown to the government that made them comfortable stating the Company’s practices were
legal. If the statements were later found to be out of line with what the speaker actually knew or
believed, they would be “misleading.” But even disregarding the government’s investigation,
Plaintiff has pled sufficient facts to draw a reasonable inference that Defendants either knew, or
recklessly ignored, the Company’s practices were inconsistent with the law.
Next, Plaintiff asserts Defendants concealed the material weakness and the impact of
changes in their business practices on the Company’s overall financial condition. ECF No. 138
at 13.

According to Plaintiff, Defendants both failed to disclose the Company’s illicit

practices—instead filing a Form NT 10-K/A to request additional time—and represented there
was only a “possibility” it may announce a “material weakness” when Defendants allegedly
already knew one existed. ECF No. 126 at 66, 68. Plaintiff avers Defendants regularly “tout[ed]
increased revenue and loan growth, which were driven by the Company’s later-admitted
predatory practices,” and “continued to mislead investors as to the illicit practices that led to the
‘material weakness’ in internal control over financial reporting.” E.g., id. at 68, 78, 84-85, 91,
99, 103. More specifically, Plaintiff cites many instances in which Defendants assured investors
the material weakness—and system changes related to it—would be inconsequential, such as

18

when the Company stated, “this material weakness has no impact.” Id. at 70. But Plaintiff
asseverates Defendants knew, or recklessly ignored, that this weakness would have an impact, as
any changes related to the material weakness “fundamentally altered the Company’s business
model.” E.g., id. at 82, 84-85, 98, 102, 109, 113, 119, 123.
Defendants avow many of these statements are “forward-looking” and thus are
nonactionable under the Exchange Act’s “safe harbor” provision, which covers: (1) statements
identified as a forward-looking statement and accompanied by “meaningful cautionary language”
that warns actual results may differ, (2) an immaterial forward-looking statement, or (3)
instances in which the plaintiff fails to prove the forward-looking statement was made with
“actual knowledge . . . that the statement was false or misleading.”

See 15 U.S.C.

§ 78u-5(c)(1)(A)-(B). This Court already addressed this argument in its prior Order, however,
and as such, it declines to revisit the argument today. See Epstein v. World Acceptance Corp.,
No. 6:14-CV-01606-MGL, 2015 WL 2365701, at *6 (D.S.C. May 18, 2015) (holding that the
statements cannot be “clearly classified as forward-looking or as mere immaterial puffery at this
stage of the litigation,” so the Court declines to extend absolute immunity here).
Consequently, this Court holds Plaintiff has pled sufficient facts to allege many
misrepresentations and omissions by Defendants.

Plaintiff points to numerous, material

misleading statements and omissions, stating the reasons the statements were misleading and the
facts upon which this allegation is formed. See 15 U.S.C. § 78u-4(b)(1). Further, Plaintiff pled
the details with sufficient particularity to support a “reasonable belief” the statements were
misleading because Defendants did not believe what they said they believed. See Hunter, 477
F.3d at 174; see also Longman, 197 F.3d at 683. Finally, Plaintiff also successfully alleged what

19

Defendants “obtained thereby,” by showing that investors’ reliance on these statements helped
artificially inflate the Company’s stock price. See in re Mut. Funds Inv. Litig., 566 F.3d at 120.
The Court also holds Plaintiff’s reliance on confidential sources is permissible, as it
described the sources with sufficient particularity to lend them credibility. See Hunter, 477 F.3d
at 174. Although Defendants deny Plaintiff’s allegations and assert their own arguments to
refute Plaintiff’s position, the Court need not address these arguments when reviewing the
pleadings on a motion to dismiss—all that is necessary at this stage is whether Plaintiff has
alleged sufficient facts that, if true, would form a basis for relief. See id. at 173. The Court
holds Plaintiff has done so here.
2.

Strong Inference of Scienter

Defendants’ Motion to Dismiss also challenges whether Plaintiff raised a strong inference
of scienter with respect to the statements relating to the Company’s material weakness. In a
securities fraud action, a plaintiff is required to “state with particularity facts giving rise to a
strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u4(b)(2)(A). A state of mind satisfying scienter should show an “intent to deceive, manipulate, or
defraud.” Zak v. Chelsea Therapeutics Int’l, Ltd., 780 F.3d 597, 606 (4th Cir. 2015) (internal
citation omitted). Alternatively, allegations of reckless conduct are enough to satisfy the scienter
requirement to the level necessary to survive a motion to dismiss. Hunter, 477 F.3d at 174. The
defendant must have had the necessary state of mind at the time the misstatements were made.
In re PEC Sols., Inc. Sec. Litig., 418 F.3d 379, 388 (4th Cir. 2005). Although a “strong inference
of scienter” must be “powerful or cogent,” it is unnecessary that the inference be “irrefutable . . .
or even the most plausible of competing inferences.” See Tellabs, 551 U.S. at 323-24 (internal
quotations omitted).

20

The allegations of scienter should be evaluated “holistically” and afforded “the inferential
weight warranted by context and common sense.”

Matrix Capital Mgmt. Fund, LP v.

BearingPoint, Inc., 576 F.3d 172, 183 (4th Cir. 2009). Relevant factors considered by the Fourth
Circuit include “when there are sufficient red flags to alert senior officers to the unreliability of
statements about internal controls and financial information.” Id. at 188. In addition, the Fourth
Circuit has held that certain GAAP violations may help support an inference of scienter for
pleading purposes.” In re PEC Sols., Inc. Sec. Litig., 418 F.3d at 389. Any attempt by the
moving party to assert its own version of events should be disregarded, as facts alleged in a
plaintiff’s complaint are all accepted as true at this stage in the case. See Zak, 780 F.3d at 601.
Plaintiff alleges Individual Defendants acted with scienter by issuing public statements
and documents in the name of the Company inflating loan growth and painting a false picture of
the Company’s health when, in fact, they knew, or recklessly ignored, that the Company’s
business practices violated federal securities laws and that changing the Company’s loan renewal
practices would hugely impact the Company.

ECF No. 126 at 41.

Plaintiff also asserts

Defendants were aware, or reckless in being unaware, that the Company’s practices were in
violation of GAAP. ECF No. 138 at 17. Plaintiff provides numerous examples of instances it
argues give rise to an inference of scienter. Several of these arguments were also present in the
Amended Complaint, and have thus already been deemed acceptable by this Court, including:
(1) “Defendants’ issuance of installment loans and renewals thereof were the core
business of World Acceptance during the Class Period, and were tracked
closely by Defendants on a daily basis (¶¶116, 126, 132-133, 238);
(2) “Defendants admitted to addressing the Company’s material weakness,
including implementing appropriate procedures to monitor small dollar loan
renewals ‘much more closely’ and ensuring that all of the necessary
accounting systems were in place (¶¶115-117, 122-131, 238);
(3) “the significant magnitude and duration of Defendants’ fraud (supported by
the corroborated accounts of a dozen former Company insiders nationwide)
(¶133); and
21

(4) “Defendants’ illicit practices received media and government scrutiny, which
Defendants addressed, evidencing their awareness of practices called into
question and their investigation of the same (¶¶134-142).”
ECF No. 138 at 18-19.
Further, Plaintiff pleads new facts in its Second Amended Complaint, which it argues
also give rise to a strong inference of scienter. Id. First, Plaintiff propounds the receipt of the
CID and the NORA letter is “compelling evidence of scienter.” Id. at 19. Plaintiff explains the
Company had to investigate its own practices to respond to the broad discovery requests of the
CID, so the fact that the information provided by World Acceptance resulted in a NORA letter
indicates “Defendants knew or had access to information regarding the Company’s predatory and
deceptive lending practices.” Id. Additionally, Plaintiff posits the departures of three of the four
Individual Defendants—the Company’s most senior executive officers—contributes to an
inference of scienter, as they “evince a consciousness of guilt,” particularly when considered
“against the backdrop” of a number of red flags, including identification of a material weakness,
revelations and major changes in the Company’s business practices, KPMG’s resignation. Id. at
20.
Defendants asseverate that because the Company determined none of its financial data
needed to be restated after the material weakness was found, Plaintiff’s assertions that loan
growth and volume figures were “inflated” must be false. ECF No. 132-1 at 18 n.5. Defendants
also advance that KPMG, the Company’s auditor, “consistently provided unqualified audit
opinions approving World Acceptance’s financial statements as well as unqualified opinions the
Company’s internal control over financial reporting was effective.” Id. at 18. Evaluating
whether a plaintiff has sufficiently pled a strong inference of scienter, however, is a totality of
the circumstances determination. So, World Acceptance’s financial statements being deemed

22

permissible and KPMG’s audit opinions are insufficient on their own to counter the existence of
scienter absolutely. See Deloitte, 551 F.3d at 313.
Similarly, Defendants maintain the resignation of the Company’s auditor fails to create a
showing of scienter, and might even negate it, as the Company’s Form 8-K announcing KPMG’s
resignation indicated “no disagreements” between the parties. ECF No. 132-1 at 20. This
argument is lacking for the same reason as Defendants’ previous one: under a holistic analysis,
any factor by itself is inadequate to reveal or refute the presence of scienter.
In addition, Defendants contend “a company does not commit securities fraud when . . . it
is alerted to a theretofore unknown issue with its accounting controls and promptly takes steps to
fix it.” Id. at 19. Defendants go on to further downplay the problem discovered by saying the
material weakness was “limited to compliance with a single GAAP rule concerning sub-10%
refinancings.” Id. Sub-10% refinancings, however, made up a significant percentage of World
Acceptance’s loan renewal portfolio—up to 25%—so in the context of this particular company,
compliance with this “single GAAP rule” has a significant—and later seen to be material—
impact on the Company’s financials. See ECF No. 138 at 5. Under Fourth Circuit law, some
GAAP violations may support an inference of scienter at the pleading stage. In re PEC Sols.,
Inc. Sec. Litig., 418 F.3d at 389. Hence, the Court holds that Defendants’ efforts to minimize the
impact of the violations are unpersuasive
Finally, Defendants contend Plaintiff has neglected to show “Defendants knew about or
recklessly disregarded the material weakness before it was discovered and disclosed in 2013”
and thus conclude this Court’s previous order failed to analyze scienter with respect to the
alleged material weakness. Id. at 21. Defendants are mistaken. This Court rejected this
argument explicitly when it wrote: “Plaintiff has alleged facts that give rise to a strong inference

23

of the existence of recklessness by claiming that Defendants had information about the true
nature of its business conditions and performance.” Epstein, 2015 WL 2365701, at *7. This
prior holding is especially true where the Second Amended Complaint largely sets forth the same
allegations as the Amended Complaint, in addition to asserting new statements Plaintiff
avouches reveal Defendants’ knowledge. See ECF No. 138 at 21.
Although this Court declines, under the law of the case doctrine, to reconsider its
treatment of allegations already discussed in its prior Order without a showing of clear error,
these allegations still carry weight in a holistic analysis determining the existence of scienter.
Factors Plaintiff alleges indicating the presence of scienter include: Defendants’ close
monitoring of the Company’s day-to-day business and corporate practices; accounts from
Plaintiff’s confidential sources regarding the business culture; government scrutiny and
investigation; the receipt of the NORA letter as a result of information provided by the Company
during CID discovery; the resignation of the Company’s three most senior executive officers;
and the “backdrop” of the identification of the material weakness, major changes in business
practices, and KPMG’s resignation.
Keeping all of the factors in mind and taking Plaintiff’s factual allegations as true, this
Court holds Plaintiff has alleged facts giving rise to a strong inference of the existence of
recklessness, which is at least as likely as any opposing inference. See Tellabs, 551 U.S. at 32324. Further, Plaintiff’s allegations reveal Defendants acted with scienter at the time they made
the challenged statements. See in re PEC Sols., Inc. Sec. Litig., 418 F.3d at 388. Thus, Plaintiff
satisfies the PSLRA with respect to this element.

24

3.

Loss Causation

Plaintiff avows in its Second Amended Complaint that eight partial corrective disclosures
revealed the truth about World Acceptance’s illicit lending practices and artificially inflated loan
growth. ECF No. 126 at 136-58. Defendants argue the alleged disclosures are insufficient to
establish their alleged fraud was the cause of Plaintiff’s losses. ECF No. 132-1 at 20-32.
In a private securities fraud action, “the plaintiff shall have the burden of proving that the
act or omission of the defendant . . . caused the loss for which the plaintiff seeks to recover
damages.” 15 U.S.C. § 78u-4(b)(4). A loss is actionable when a plaintiff has sufficiently pled a
corrective disclosure, or in other words, where “the [stock] price fell after the truth came to light
about a misrepresentation, and . . . the plaintiff suffered damages as a result.” Glaser v. Enzo
Biochem, Inc., 464 F.3d 474, 478 (4th Cir. 2006). In addition, “loss causation may be pleaded on
the theory that the truth gradually emerged through a series of partial disclosures and that an
entire series of partial disclosures [prompted] the stock price deflation.” Katyle v. Penn Nat’l
Gaming, Inc., 637 F.3d 462, 472 (4th Cir. 2011) (internal citations omitted).
The parties are in disagreement on what standard Plaintiff must meet to plead adequately
loss causation. According to Plaintiff, “[l]oss causation is not one of the elements with respect to
which the PSLRA imposes a more stringent pleading requirement.” Hunter, 477 F.3d at 185.
According to Defendants, however, the Court is to “review allegations of loss causation for
sufficient specificity, a standard largely consonant with Fed. R. Civ. P. 9(b)'s requirement that
averments of fraud be pled with particularity.” Katyle, 637 F.3d at 471. (citation omitted)
(internal quotation marks omitted) (footnote omitted).
Inexplicably, although each party cites to Fourth Circuit law for their competing
positions, neither party briefed the Court on how or if it is possible for the Court to reconcile the

25

holdings in the two cases. The Court is unconvinced that it is. Nevertheless, it is quite settled in
the Fourth Circuit as to conflicts between panel opinions, application of the basic rule that one
panel cannot overrule another requires this Court follow the earlier of the conflicting opinions.
See Booth v. Maryland, 327 F.3d 377, 383 (4th Cir. 2003).
A panel of the Fourth Circuit decided Hunter in 2007 and another panel decided Katyle in
2011. Therefore Hunter controls the standard that the Court has employed in determining if
Plaintiff’s causation claim can survive Defendants’ motion to dismiss.

The Court notes,

however, that even if it were to apply the Katyle standard, it would find that Plaintiff has met that
pleading requirement as well.
Plaintiff’s complaint contains three previously alleged disclosures and five new partial
disclosures, all of which are described above. The partial disclosures Plaintiff re-asserts, which
this Court deemed sufficiently alleged loss causation in its prior Order, are as follows:
(1) The July 25, 2013, revelation that a material weakness had been found in the
Company’s small dollar renewals, which comprised up to 25% of the
Company’s renewals;
(2) The March 13, 2014, receipt of a CID from the CFPB to look into “potentially
unlawful practices” at World Acceptance, followed by a stock price decrease
of 20%;
(3) The April 29, 2014, announcement of systemic changes in the Company’s
renewal policies, resulting in a 10% fall in stock price.
ECF No. 126 at 136-58; see Epstein, 2015 WL 2365701, at *8. The five newly alleged partial
disclosures are:
(1) The July 3, 2013, admission that World Acceptance could not file a Form 10K due to the possibility of the existence of a material weakness, after which
the Company’s stock price fell 12%;
(2) The November 4, 2013, announcement that Defendant Roland, World
Acceptance’s COO, had resigned, leading to a 12% decline in stock price;
(3) The September 5, 2014, resignation of KPMG as the Company’s auditor,
followed by a 7.5% stock price decrease on the next trading day;
(4) The June 2, 2015, announcement of Defendant McLean’s retirement as CEO,
after which the stock price dropped over 5%;
26

(5) The August 10, 2015, announcement of the receipt of a NORA letter from the
CFPB, leading to a fall of more than 34%.
Id.
The Court will focus its analysis on the newer disclosures, including the announcement of
the possibility of a material weakness, the three resignations, and the announcement of the
receipt of the NORA letter. In addition, Defendants specifically request this Court reconsider its
prior holding in connection to the March 13, 2014, announcement, so this Court will delve more
deeply into its discussion of that disclosure, despite the fact the Court has already addressed it.
Defendants urge “losses caused by market speculation—rather than an actual revelation
of fraud—are not recoverable under the securities laws.” ECF No. 132-1 at 21; see Katyle, 637
F.3d at 477 (“Speculation and conjecture . . . in the context of market prognostication [do] not
suffice to establish a fact.”). Defendants then move to discredit the July 2013 disclosures,
arguing because the July 3, 2013, announcement stated only that it was “possible” a material
weakness would be reported, any ensuing stock price drop stemmed from speculation rather than
the revelation of any fraudulent conduct. ECF No. 132-1 at 22.
The bright-line rule Defendants attempt to create is a misinterpretation of Katyle, in
which the Fourth Circuit noted the plaintiff’s “alleged disclosures told the market nothing
factually about the deal’s prospects that it had not already heard, repeatedly.” 637 F.3d at 477.
Thus, Katyle stands in stark contrast to the case before this Court in which the July 3
announcement presented new information to the market. Further, the announcement discussed
more than simply the possibility of a problem, instead explaining the Company was experiencing
“unexpected delays” at the time and was undergoing an “ongoing assessment” of accounting
problems and working “to remediate” these issues. ECF No. 138 at 32-33.

27

Defendants also recycle arguments from their previous motion to dismiss, stressing that
after July 19, 2013, when the Company filed its Form 10-K revealing it had suffered a material
weakness, the stock price increased. ECF No. 132-1 at 23. They propound that the July 25,
2013, quarterly earnings call when they addressed the material weakness thus cannot be a
corrective disclosure because the material weakness had already been disclosed six days earlier.
Id.; see Hunter, 477 F.3d at 187-88 (“To allege loss causation in this case, plaintiffs would have
to allege that the market reacted to new facts.”). Plaintiff, however, is correct in asserting this
Court rejected this argument in its prior Order when it held Plaintiff sufficiently pled loss
causation with this partial disclosure. See Epstein, 2015 WL 2365701, at *8. In addition,
Plaintiff aptly notes the earnings call “did not simply repeat or confirm information in the Form
10-K” but rather “revealed specifics surrounding the nature and impact of the material
weakness” and disclosed the significance of the portion of the Company’s loan renewal portfolio
this weakness would affect. ECF No. 138 at 27.
Next, Defendants reassert the April 29, 2014, announcement of systemic business
changes fails as an allegation of a corrective disclosure because, although the announcement
revealed this policy change resulted in a decrease in the previous quarter’s loan volume and
growth, it also “did not show any . . . prior figure to be false or misleading.” ECF No. 132-1 at
25. The Court, however, addressed this argument in is previous Order and, giving Plaintiff’s
factual allegations the benefit of the doubt, the Court again deems persuasive Plaintiff’s
argument this announcement “directly linked [this] disclosure[] to Defendants’ fraud because [it]
revealed that Defendants’ predatory lending practices had boosted the Company’s finances,
which then suffered when those practices were curtailed.”

28

ECF No. 138 at 31 (emphasis

omitted). Plaintiff also avows the announcement “directly contradicted Defendants’ misleading
assurances the Company’s material weakness in internal control had no material impact.” Id.
In addition, Defendants profess Plaintiff failed to show the series of resignations—
including COO Defendant Roland on November 4, 2013, KPMG on September 5, 2014, and
CEO Defendant McLean on June 2, 2015—constitute corrective disclosures. ECF No. 132-1 at
25-26, 30-32. First, Defendants argue KPMG’s resignation “revealed nothing about any alleged
fraud” where the Company had “no disagreements” with KPMG and there were “no issues with
the Company’s financial statements,” so the announcement merely reassured investors the
resignation was unproblematic. Id. at 25. Second, Defendants argue the executives’ resignations
were too far removed from the alleged fraud, if at all connected, to be considered a corrective
disclosure, and they cite several cases from other circuits indicating similar sentiments. Id. at 31;
see, e.g., In re Omnicom Grp. Sec. Litig., 597 F.3d 501, 514 (2d Cir. 2010) (explaining “[t]he
generalized investor reaction of concern . . . is far too tenuously connected . . . to the [fraudulent]
transaction to support liability” on a review on appeal of a motion for summary judgment); see
also United States v. Hatfield, No. 06-CR-0550 (JS) (AKT), 2014 WL 7271616, at *11
(E.D.N.Y. Dec. 18, 2014) (holding, on review of memoranda submitted by the parties regarding
the restitution to be assigned during sentencing, “[t]he announcement of [the] resignation should
not be considered a corrective disclosure, because at the time of the resignation, investors had no
reason to suspect that it was indicative of any fraud by Defendants.”).
To this Court, however, it appears those courts’ decisions were based on individualized
facts, in which the resignations were too isolated or attenuated from the alleged fraud to indicate
new information to investors. Further, as already noted, neither of the cases cited by Defendants

29

considers the loss causation element on a motion to dismiss, so their procedural postures
critically differ from the case before this Court.
Under different circumstances, courts have held resignation announcements can be
corrective disclosures where they are viewed collectively with other disclosures. See, e.g., Pub.
Emps. Ret. Sys. of Miss., P.R. Teachers Ret. Sys. v. Amedisys, Inc., 769 F.3d 313, 318 (5th Cir.
2014) (finding announcements of executive resignations adequately plead loss causation).
Unlike the cases cited by Defendants, Amedisys evaluates loss causation at the motion to dismiss
stage. See id. at 319. When viewing the resignation announcements in combination with the
other alleged partial corrective disclosures—which is what Plaintiff argues should be done
here—this Court holds these partial disclosures are sufficiently pled to withstand a motion to
dismiss, particularly because it is inappropriate at this stage to weigh competing factual
interpretations. See Zak, 780 F.3d at 601 (stating a plaintiff’s facts are accepted as true in a
motion to dismiss).
Finally, Defendants insist the two announcements of CFPB action on March 31, 2014,
and the August 10, 2015, NORA letter, fail to constitute corrective disclosures, as the
announcement of a government investigation conclusively reveals nothing. ECF No. 132-1 at
26-30. This Court rejected in its prior Order Defendants’ arguments regarding the March 31
receipt of the CID, which Defendants rehash in this Motion to Dismiss, holding the
announcement of the CID a sufficiently pled partial corrective disclosure. But, Defendants argue
that this holding was made in error. Consequently, the Court will readdress the same arguments
again here. ECF No. 132-1 at 30; see Epstein, 2015 WL 2365701, at *8.
Defendants advance that this partial disclosure—in addition to the August 10, 2015,
announcement of the receipt of a NORA letter—fails to correct a specific prior statement and

30

any resulting stock price drop must have been founded on mere market speculation. ECF No.
132-1 at 26. Again, Defendants attempt to create a bright-line rule from the holding of Katyle,
637 F.3d at 477, arguing first, successive disclosures revealing an “ever-mounting risk” of a
negative event fail to constitute a partial corrective measure and second, the announcement of a
government investigation can never be a corrective disclosure. ECF No. 132-1 at 28. To support
their assertions, Defendants cite a variety of cases from other circuits concluding the disclosures
regarding the government investigation alleged are impermissible. They also quote a large
passage from Meyer v. Greene, 710 F.3d 1189, 1200-02 (11th Cir. 2013) for the same
proposition. Id.
This Court is unpersuaded by Defendants’ arguments, as Defendants’ interpretation of
Meyer is fundamentally misguided. Although Defendants attempt to have this Court outright ban
the use of announcements of government investigations as corrective disclosures, the language
on which they most heavily rely, both from Meyer and from other cases, implicitly suggests
these investigations can be adequate to constitute a partial disclosure when alleged in
combination with other corrective disclosures. See Meyer, 710 F.3d at 1201 (explaining “the
commencement of an SEC investigation, without more, is insufficient to constitute a corrective
disclosure” and “the investigations, in and of themselves, [do not] reveal to the market that a
Company’s previous statements were false or fraudulent.”); see also Loos v. Immersion Corp.,
762 F.3d 880, 890 (9th Cir. 2014) (“[W]e hold that the announcement of an investigation,
without more, is insufficient to establish loss causation.”). Here, there are more partial corrective
disclosures, in addition to the two regarding the government investigation.
Plaintiff’s allegations are appropriate, emphasizing the two government investigation
disclosures reveal a showing of prior misstatements and fraudulent activity that led to loss when

31

viewed in combination with its other six alleged partial corrective disclosures. ECF No. 138 at
29. Plaintiff’s alleged disclosures are to be viewed holistically, rather than considering each as
an allegation of a full disclosure in and of itself. Id.; see Meyer, 710 F.3d at 1201.
Defendants’ citations to numerous district court cases are unpersuasive and fail to create
a bright-line rule against the use of government investigations as partial corrective disclosures.
See, e.g., Caplin v. TranS1, Inc., 973 F. Supp. 2d 596, 608-10 (E.D.N.C. 2013) (“[T]he
announcement of a subpoena by itself was insufficient”).
In addition, Defendants purport the cases they cite are “more faithful to both Supreme
Court and Fourth Circuit precedent” than other cases holding these investigations can be deemed
partial corrective disclosures. ECF No. 132-1 at 29. The Court is unpersuaded, just as the Fifth
and Ninth Circuits were. See, e.g., Amedisys, 769 F.3d at 325 (holding “[t]he district court erred
in imposing an overly rigid rule that government investigations can never constitute a corrective
disclosure in the absence of a discovery of actual fraud.”); Lloyd v. CVB Fin. Corp., 811 F.3d
1200, 1210 (9th Cir. 2016) (holding government investigations were adequate partial corrective
disclosures, as “any other rule would allow a defendant to escape liability by first announcing a
government investigation and then waiting until the market reacted before revealing that prior
representations under investigation were false.”).

In light of Defendants’ deeply flawed

argument, this Court is unconvinced government investigations are impermissible as partial
corrective disclosures and thus holds incorrect Defendants’ conclusion that the Court’s prior
conclusion on this matter was made in error.
Defendants go on to declare any stock price drop resulting from the announcements of
the government investigation “may well have arisen from a host of non-fraud factors, including
the market’s perception that the CFPB’s investigation would continue to be costly and distracting

32

for the Company.” ECF No. 132-1 at 27. But that there is another possible factual explanation
fails to render Plaintiff’s allegations meritless. At this stage of litigation, as already observed,
Plaintiff’s factual allegations are accepted as true. Zak, 780 F.3d at 601. Further, a “fact-for-fact
disclosure of the relevant truth” is an unnecessary prerequisite to establishing loss causation.”
See Katyle, 637 F.3d at 472.
Finally, Defendants discuss the resignation of Defendant Malson on September 10, 2013,
as if it were a partial disclosure. Nowhere in Plaintiff’s “Loss Causation” section of the Second
Amended Complaint, however, does Plaintiff allege Defendant Malson’s resignation was a
partial corrective disclosure, so this Court declines to treat it as such here.
This Court holds Plaintiff satisfactorily pleads how the partial disclosures revealed the
Company’s illicit practices to the market over time, as well as pleads a causal connection
between the partial corrective disclosures, Defendants’ alleged fraudulent conduct, and the
resulting loss via stock price drop. Further, this Court’s decision as to the two announcements
regarding government investigation are not dispositive of the Court’s holding that Plaintiff has
sufficiently pled loss causation.

The other partial corrective disclosures, viewed together,

sufficiently plead a causal link between Defendants’ misrepresentations and the decline in stock
price. Stated differently, even if this Court were to agree with Defendants’ argument that the
announcements of government investigations are improper considerations, it would fail to affect
the outcome of the Court’s holding on this issue. Thus, Plaintiff has alleged loss causation
sufficiently to withstand Defendants’ motion to dismiss.
Because Plaintiff has adequately pled each of the elements Defendants contested—
misrepresentations and omissions, a strong inference of scienter, and loss causation—this Court
holds Plaintiff has sufficiently pled a claim under § 10(b). And, as already noted, even if the law

33

of the case doctrine was inapplicable, the outcome would be unchanged, as Defendants have
failed to marshal any arguments in their motion to change the Court’s view of the law or facts in
the action from when it considered their arguments in the first motion to dismiss. Thus,
Plaintiff’s § 10(b) claim will survive Defendants’ motion to dismiss.
C.

Section 20 Derivative Claims

Finally, Plaintiff alleges Individual Defendants are liable under § 20(a) of the Exchange
Act, as their statuses as senior executive officers render them “controlling persons” within the
meaning of the Act. Section 20(a) imposes secondary liability, jointly and severally, on any
person who “controls” the primary violator of the Exchange Act. 15 U.S.C. § 78t. Section 20(a)
liability is derivative of a finding of liability under § 10(b). Yates v. Mun. Mortg. & Equity, LLC,
744 F.3d 874, 894 n.8 (4th Cir. 2014).
Due to the complexity of assessing control person liability, this question is “‘not
ordinarily subject to resolution on a motion to dismiss,’ and dismissal should be granted only
when ‘a plaintiff does not plead any facts from which it can reasonably be inferred the defendant
was a control person.’” Id. (quoting Maher v. Durango Metals, Inc., 144 F.3d 1302, 1306 (10th
Cir. 1998)).
In its previous Order, this Court held that because Plaintiff sufficiently stated a claim for
primary liability under § 10(b), the § 20(a) claims should also survive dismissal. Plaintiff’s
Second Amended Complaint sets forth the same arguments as its Amended Complaint, in
addition to providing further instances of statements issued by Individual Defendants in
connection with the § 10(b) claim. See, e.g., ECF No. 126 at 41, 43-44, 46-47, 99, 106, 111-12,
117, 121, 136.

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In their Motion to Dismiss, Defendants fail to contest whether Individual Defendants
were controlling persons during their time at the Company, contending only that because the
§ 10(b) claim fails, the § 20(a) claim must also fail.

Because this Court holds Plaintiff

adequately pled a primary violation under § 10(b) of the Exchange Act, however, it declines to
dismiss Plaintiff’s § 20(a) claims.

Plaintiff sufficiently pled facts in which a conclusion

Individual Defendants were controlling persons can be reasonably inferred.

VI.

CONCLUSION
Wherefore, based on the foregoing discussion and analysis, it is the judgment of this

Court Defendants’ Motion to Dismiss Plaintiff’s Second Amended Complaint is DENIED.
IT IS SO ORDERED.
Signed this 24th day of August, 2016, in Columbia, South Carolina.
s/Mary Geiger Lewis
MARY GEIGER LEWIS
UNITED STATES DISTRICT JUDGE

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