Parmelee v. Santander Consumer USA Holdings Inc et al

Filing 52

MEMORANDUM OPINION & ORDER granting in part, denying in part 44 Motion to Dismiss for Failure to State a Claim. The Court GRANTS the Defendants' motion to dismiss only as to Dawood and DISMISSES all claims against Dawood. Because Parmelee has adequately pleaded her claims against Santander, Dundon, Kulas, and Davis, the Court DENIES Santander's motion to dismiss as to those defendants. (Ordered by Judge Ed Kinkeade on 1/3/2018) (aaa)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
CYNTHIA A. PARMELEE, Individually
And on Behalf of All Others Similarly
Situated,

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Plaintiffs,
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v.
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SANTANDER CONSUMER USA
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HOLDINGS, INC., THOMAS G.
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DUNDON, ISMAIL DAWOOD,
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JASON KULAS, and JENNIFER DAVIS, §
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Defendants.
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Civil Action No. 3:16-CV-783-K

MEMORANDUM OPINION & ORDER
Before the Court is Defendants’ Motion to Dismiss the Amended Complaint
and Supporting Brief (Doc. No. 44). The Court carefully considered Defendants’
Motion to Dismiss the Amended Complaint and Supporting Brief (Doc. No. 44),
Lead Plaintiffs’ Opposition to Defendants’ Motion to Dismiss (Doc. No. 49),
Defendants’ Reply Brief in Further Support of Their Motion to Dismiss the Amended
Complaint, and the applicable law. Because Plaintiffs have met the heightened
pleading standard for scienter against Defendants Santander, Thomas Dundon, Jason
Kulas, and Jennifer Davis and have adequately pleaded loss causation, the Court
DENIES the Defendants’ motion as to those defendants. But because Plaintiffs did

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not meet the heightened pleading standard for scienter as to Defendant Ismail
Dawood, the Court GRANTS Defendants’ motion only as to Dawood and
DISMISSES all claims against Dawood.
I.

Background
Defendant Santander Consumer USA Holdings, Inc., (“Santander”) is a

consumer finance company that provides vehicle finance and unsecured consumer
lending. Lead Plaintiffs Cynthia Parmelee and Kelly Baxley (collectively “Parmelee”
or “Plaintiffs”) purchased Santander securities. Parmelee brought this class action suit
on behalf of all individuals or entities that purchased Santander securities between
February 3, 2015 and March 15, 2016, inclusive (“Class Period”).
The Court “accept[s] all factual allegations in this complaint as true,” as is
proper in a Rule 12(b)(6) motion to dismiss a Section 10(b) action. Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 324 (2007). Parmelee alleged the following:
On February 3, 2015, Santander released its financial information for the
fourth quarter of 2014 and for the 2014 fiscal year, showing strong profitability. That
day, Santander released this information through its Form 8-K filing with the
Securities and Exchange Commission (“SEC”), its press release issued that morning,
and through a conference call with investors discussing the company’s earnings.
Based on this information, stock prices continued to rise for the following two weeks,

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ultimately increasing 20% above the $18.63 stock price that immediately preceded
the Class Period.
On April 28, 2015, Santander released the financial results for the first quarter
of 2015, again showing positive financial results. The stock price continued to climb,
reaching a peak price of $26.83 on June 22, 2015. Two weeks later, Defendant
Thomas G. Dundon (“Dundon”), Santander’s CEO at the time of these events,
resigned after the peak stock price and cashed out his entire 10% ownership of
Santander at a high trading price of $24.01. The new CEO, Defendant Jason Kulas
(“Kulas”), reassured investors Dundon’s resignation was not related to any problems
with Santander’s finances. Nonetheless, the stock price dropped following Dundon’s
departure. Kulas and Defendant Jennifer Davis (“Davis”), interim CFO of Santander
from July 2015 to December 2015, also sold Santander stock during the Class Period.
However, Defendant Ismail Dawood (“Dawood”), CFO of Santander after Davis, had
no stock in Santander to sell.
In October 2015, Santander released its financial results for the third quarter
of 2015. These financial results showed an increase in Troubled Debt Restructurings
(“TDRs”) and a corresponding decrease in the financial returns. After the release of
this information, Santander’s stock price fell by 15.6%.
On February 29, 2016, Santander announced it would not file its 2015 annual
report on time. Santander also announced it received an open comment letter from

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the SEC regarding credit loss allowance, TDR impairment, and disclosures during the
third quarter of 2015 and the 2014 fiscal year. Two weeks later, Santander stated it
was changing its methodology for estimating credit loss allowance and would be
correcting prior fiscal periods based on this new methodology. In response to this
announcement, Santander’s stock price dropped 16%.
On March 31, 2016, Santander filed its Form 10-K with the SEC for the 2015
fiscal year and included restated financial results for the 2011–2015 fiscal years.
These restated financial results showed Santander had incorrectly estimated its credit
loss allowance for certain investments, incorrectly applied loss emergence period to a
portfolio instead of applying it only to loans not considered TDRs, and failed to
classify certain loans as TDRs. Six months later, Santander announced for the second
time that it would be restating financial statements and disclosures for the 2013,
2014, and 2015 financial years and for certain quarters in 2014, 2015, and 2016.
This second set of financial restatements allegedly corrected accounting methodology
and other accounting errors.
Plaintiffs filed this class action under 15 U.S.C. § 74u–4 of the Private
Securities Litigation Reform Act (“PSLRA”) alleging Santander violated federal
securities laws during the Class Period by fraudulently overstating its net income
resulting in an artificial inflation of Santander’s stock price. Plaintiffs further allege
that then-CEO Defendant Dundon took advantage of this inflated stock price by

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negotiating the buyout of his 10% ownership in Santander during the time period
when stock prices were allegedly artificially inflated.
II.

Legal Standard
In considering a Rule 12(b)(6) motion, a court must determine whether the

plaintiff has sufficiently stated claims upon which relief may be granted. FED. R. CIV.
P. 12(b)(6). The court must view all facts in the light most favorable to the plaintiff.
Oliver v. Scott, 276 F.3d 736, 744 (5th Cir. 2002). A well-pleaded complaint must
allege facts upon which the claims are based and not a conclusory recitation of the
elements of a cause of action. Bell Atlantic Corp. v. Twombly, 550 U.S. 554, 555
(2007). A complaint must state sufficient facts such that the “claim has facial
plausibility” and is not merely “possible.” Aschcroft v. Iqbal, 556 U.S. 662, 678 (2009).
Certain claims or elements, however, require a plaintiff to meet a heightened pleading
standard, such as pleading scienter in a securities fraud claim. Lormand v. US Unwired,
Inc., 565 F.3d 228, 252 (5th Cir. 2009).
To successfully plead scienter in a securities fraud claim, a plaintiff must allege
sufficient facts to support a “‘strong inference’ of scienter.” Tellabs, Inc., 551 U.S. at
324. The court looks to “whether all of the facts alleged, taken collectively, give rise
to a strong inference of scienter, not whether any individual allegation, scrutinized in
isolation, meets that standard.” Id. at 323. In making this determination, the court
“must consider the complaint in its entirety, as well as other sources courts ordinarily

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examine when ruling on Rule 12(b)(6) motions to dismiss, in particular documents
incorporated into the complaint by reference, and matters of which a court may take
judicial notice.” Id. at 322. The plaintiff has met the heightened pleading standard
when “a reasonable person would deem the plausible inference of scienter cogent and
at least as strong as any opposing inference one could draw.” Lormand, 565 F.3d at
252. A plaintiff need not have “irrefutable” evidence of scienter; “circumstantial
evidence” considered collectively can be sufficient to establish an inference of
scienter. Tellabs, 551 U.S. at 324; Lormand, 565 F.3d at 251.
The “group pleading” doctrine, which allows a plaintiff to generally allege
claims against a group of defendants, does not apply to the scienter element under
the PSLRA. Southland Secs. Corp. v. INSpire Ins. Sols., Inc., 365 F.3d 353, 365 (5th Cir.
2004). A plaintiff must plead facts showing the corporate officer was severely reckless
or had actual knowledge of the wrongdoing instead of merely alleging the individual’s
position supports a reasonable inference of his awareness or negligence. Id; Local 731
I.B. of T. Excavators & Pavers Pension Trust Fund v. Diodes, Inc., 810 F.3d 951, 958 (5th
Cir. 2016).
III.

Analysis
In this class action, Parmelee brought security fraud claims under Sections

10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b–5 of the
Security Exchange Commission against Defendants Santander and four company

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executives (collectively “Defendants”). In their motion, Defendants argue Parmelee’s
fraud claims must be dismissed under Rule 12(b)(6) because she failed to meet the
heightened pleading standard for scienter and failed to adequately plead loss
causation. Defendants contend Parmelee’s Section 20(a) claim for liability of a
control person also fails because she did not sufficiently plead scienter and loss
causation. Parmelee argues in her response that she has properly pleaded all of her
claims by sufficiently pleading scienter and loss causation. Parmelee contends she has
sufficiently pleaded scienter by alleging Santander violated Generally Accepted
Accounting Principles (“GAAP”), Santander issued two restatements in a six month
period showing significantly overstated net income during the Class Period, and
Dundon sold his entire 10% ownership in Santander at an allegedly artificially
inflated price.
A. Parmelee Met the Heightened Pleading Standard for Scienter as to
Santander, Dundon, Kulas, and Davis.
To state a securities fraud claim under Section 10(b) and Rule 10b–5, a
plaintiff must plead “(1) a misstatement or omission; (2) of a material fact; (3) made
with scienter; (4) on which the plaintiff relied; and (5) that proximately caused the
plaintiff’s injuries.” Southland Secs. Corp., 365 F.3d at 362. Under the PSLRA, to
allege the defendant made a false or misleading statement, the plaintiff’s complaint
“must: (1) ‘specify each statement alleged to have been misleading [and] the reason

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or reasons why the statement is misleading,’ 15 U.S.C. § 78u–4(b)(1); and (2) ‘state
with particularity facts giving rise to a strong inference that the defendant acted with
the required state of mind,’ § 78u–4(b)(2).” Tellabs, 551 U.S. at 321. There are
numerous factual scenarios a plaintiff can allege in a complaint that, taken together,
can sufficiently plead scienter. Here, Parmelee supports the scienter element by
alleging Santander violated basic GAAP principles resulting in an overstated net
income for the company, Santander issued two restatements correcting four years of
filings with the SEC that overstated net income during the Class Period, and
Dundon, Kulas, and Davis sold shares in the company when the stock price was
allegedly artificially inflated. The Court considers Parmelee’s allegations together and
finds these alleged facts are sufficient to meet the heightened pleading standard for
scienter as to Santander, Dundon, Kulas, and Davis. See In re Seitel, Inc. Sec. Litig.,
447 F. Supp. 2d 693, 705–09 (S.D. Tex. 2006); Stone v. Life Partners Holdings, Inc., 26
F. Supp. 3d 575, 604–06 (W.D. Tex. 2014). Parmelee alleged no facts about Dawood
individually or his involvement in the alleged fraud.
1. Santander’s GAAP Violations
Parmelee’s amended complaint alleges Santander violated basic GAAP
principles and internal accounting methodologies that caused overstated net income
during the Class Period. In her response to the motion for summary judgment,

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Parmelee contends these allegations combined with other facts sufficiently pleads
scienter.
Violations of GAAP, by themselves, do not establish scienter. Abrams v. Baker
Hughes Inc., 292 F.3d 424, 432 (5th Cir. 2002). However, when the “context of the
misapplication [of accounting principles] or restatement are taken into account,” such
errors in accounting contribute to a strong inference of scienter. In re ArthroCare Corp.
Secs. Litig., 726 F. Supp. 2d 696, 721 (W.D. Tex. 2010). Furthermore, when a
company releases financial restatements showing overstated net income due to GAAP
violations, courts have found this supports an inference of scienter when combined
with other allegations. Id. at 721–22; In re Triton Energy Ltd. Secs. Litig., No. 5:98-CIV256, 2001 WL 872019, at *11 (E.D. Tex. Mar. 30, 2001); In re MicroStrategy, Inc. Sec.
Litig., 115 F. Supp. 2d 620, 623 (E.D. Va. 2000).
In In re Seitel, Inc. Sec. Litig., the defendant argued plaintiff’s complaint did not
meet the heightened pleading standard for scienter. 447 F. Supp. 2d 693, 701 (S.D.
Tex. 2006). The plaintiff alleged defendants filed restatements with the SEC after
overstating its revenue by 15% in 2000 and 30% in the first nine months of 2001,
violated GAAP by failing to follow industry standards in accounting methodologies
and failing to disclose its methodologies, and the defendant suspiciously hired a new
accounting firm after the prior firm audited the defendant company. Id. at 705–09.
The court found that while GAAP violations alone cannot show scienter, the alleged

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GAAP violations, combined with the other allegations in the complaint met the
heightened pleading standard for scienter. Id. at 707.
Parmelee’s Amended Complaint alleges Santander released two financial
restatements covering four years showing the company overstated Santander’s net
income by significant amounts, which Plaintiffs allege resulted in an artificially
inflated stock price. Taking these well-pleaded facts as true, the errors in basic GAAP
principles and in accounting methodologies caused the significant overstatement of
net income during the Class Period. These errors in GAAP principles and accounting
methodologies contribute to a strong inference of scienter. See Id. at 709.
2. Santander’s Significant and Repeated Restatements
Parmelee contends the allegations in her Amended Complaint regarding
Santander’s restatements contribute to a strong inference of scienter. Allegedly,
Santander’s

repeated

restatements

spanned multiple years

and

significantly

overstated net income during the Class Period. “When the number, size, timing,
nature, frequency, and context of the… restatement are taken into account, the
balance of the inferences to be drawn from such allegations may shift significantly in
favor of scienter.” In re Triton, 2001 WL 872019, at *11. Courts have also found that
“a restatement adds significant weight to the scienter calculus due to the magnitude
of a restatement.” In re Fleming Cos. Inc. Secs. & Derivative Litig., No. 5-03-MD-1530TJW, MDL-1530, 2004 WL 5278716, at *37 (E.D. Tex. June 16, 2004).

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In In re Seitel, Inc. Sec. Litig., the complaint alleged the defendant company filed
a restatement with the SEC that reduced its revenue by 15% in 2000 and 30% in the
first nine months of 2001. 447 F. Supp. 2d at 705. The Court found the magnitude
of these restatements that covered two years “significantly contribute[d] to a finding
of scienter.” Id. The Court ultimately held the plaintiff sufficiently alleged scienter
based on the violations to GAAP, the restatement showing overstated revenue of 15%
and 30%, memoranda and meeting minutes indicating defendants discussed the
improper account methods, and the suspicious dismissal of an auditor. Id. at 705–09.
Here, Santander filed its first restatement on March 31, 2016 correcting four
years of filings with the SEC. On October 26, 2016, Santander filed its second
restatement again correcting fiscal years 2013–2015 and fiscal quarters in 2014,
2015, and 2016. During the Class Period, the restatements showed Santander
overstated its net income by 61.8% in the fourth quarter of 2014 and by 19.3% in
the first quarter of 2015. The Court concludes the repeated restatements and the
significant overstatement in net income during the Class Period contribute to a strong
inference of scienter. See Id. at 705.
3. Dundon and Other Officers Sell Santander Stock
Another allegation contributing to scienter is insider trading. The Fifth Circuit
found “[i]nsider trading in suspicious amounts or at suspicious times is, of course,
presumptively probative of bad faith and scienter.” Rubinstein v. Collins, 20 F.3d 160,

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169 (5th Cir. 1994). When company executives sell large portions of their shares
during suspicious time periods and either knowingly take advantage of inflated stock
prices or are recklessly indifferent to the signs, courts consider such action as
contributing to scienter. Id; Stone v. Life Parts. Holdings, Inc., 26 F. Supp. 3d 575, 606
(W.D. Tex. 2014). While insider trading without more is insufficient to plead
scienter, the Fifth Circuit has found “[insider trading] may meaningfully enhance the
strength of the inference of scienter.” Local 731 I.B. of T. Excavators & Pavers Pension
Tr. Fund v. Diodes, Inc., 810 F.3d 951, 960 (5th Cir. 2016).
In Stone v. Life Partners Holdings, Inc., the plaintiffs alleged defendant Pardo,
president and CEO of the defendant company, sold almost 500,000 shares of stock in
the defendant company over a two-year period when Pardo knew the company’s
assets’ value was overinflated. 26 F.Supp.3d at 604. Pardo sold these shares at peak
stock prices and retained just enough shares to maintain control over the company.
Id. at 605. The Court found Pardo’s actions were highly suspicious and gave rise to a
strong inference of scienter for Pardo. Id.
Here, the Court has found the size of the alleged overstatements and the
alleged accounting errors in basic GAAP principles contribute to finding a strong
inference that Defendants either knew or were recklessly indifferent to the errors that
resulted in an inflated stock price. Dundon then chose this time of peak stock price
to resign and cash out all of his stock in Santander, giving him significantly more

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money than had he sold the stock before the Class Period. Kulas and Davis, the other
CEOs during the Class Period, allegedly acquired more stock in Santander and then
quickly sold the stock during the Class Period. Kulas allegedly sold 23.6% of his
holdings and Davis allegedly sold all or nearly all of her shares. During the Class
Period Dundon, Davis, and Kulas also made statements reassuring shareholders that
Santander was doing well. The suspicious timing of Dundon’s cash out of his entire
10% ownership of Santander and the other CEOs stock sales contribute to a finding
of scienter. See Id.
While Parmelee alleged Dundon, Kulas, and Davis took advantage of the
overinflated stock price by selling their shares, Parmelee’s Complaint failed to allege
any specific facts about Dawood, the CFO since December 2015, and his
involvement in the alleged securities fraud. As discussed above, a plaintiff cannot rely
on “group pleading” to show an individual had the requisite scienter. Southland Secs.
Corp., 365 F.3d at 365. The plaintiff must allege sufficient facts showing the
individual corporate officer had the requisite scienter, such as the officer was aware of
or should have suspected the financial statements contained material misstatements
or omissions based on glaring accounting irregularities. Ind. Elec. Workers’ Pension Trust
Fund IBEW v. Shaw Grp., Inc., 537 F.3d 527, 545 (5th Cir. 2008). The Complaint
alleges Dundon, Kulas, and Davis were aware of the material misstatements based on
their well-timed cash out of shares during the Class Period. See Southland Secs. Corp.,

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365 F.3d at 380. The Complaint does not allege any facts against Dawood
individually, and Parmelee’s response only states Dawood owned no tradeable shares
during the Class Period. Parmelee failed to adequately plead scienter as to Dawood.
See Id.
The Court concludes the combination of the company repeatedly issuing
restated financials showing overstated net income, the types of errors in accounting
methodologies that caused the false financial reports, and the suspicious timing of
Dundon, Kulas, and Davis’ cash out of stock creates a strong inference of scienter.
These facts, taken together and in the light most favorable to the plaintiff, create a
strong inference of scienter and meet the heightened pleading standard as to those
Defendants. See In re Seitel, Inc., 447 F. Supp. 2d at 705–09; Stone, 26 F. Supp. 3d at
604–06 (W.D. Tex. 2014). Because Parmelee did not allege specific facts against
Dawood, Parmelee did not meet the heightened pleading standard for Dawood. See
Southland Secs. Corp., 365 F.3d at 380.
B. Parmelee Adequately Pleaded Loss Causation.
Santander argues the Court should dismiss the securities fraud claims because
Parmelee failed to adequately plead loss causation. In her response, Parmelee argues
her Amended Complaint adequately pleaded loss causation by alleging Santander
released multiple partial disclosures which culminated in a corrective disclosure.

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The plaintiff must show a causal connection between the company revealing
the truth regarding an earlier misrepresentation and a subsequent decline in the
company’s stock price. Alaska Elec. Pension Fund v. Flowserve Corp., 572 F.3d 221, 229
(5th Cir. 2009). This corrective disclosure must be “related to” or “relevant to” the
alleged fraud, meaning the disclosed information must make the existence of the
alleged fraud “more probable than it would be without that alleged fact.” Pub. Emps.
Ret. Sys. of Miss., P.R. Teachers Ret. Sys. v. Amedisys, Inc., 769 F.3d 313, 321 (5th Cir.
2014). The corrective disclosure “can be gradually perceived in the marketplace
through a series of partial disclosures.” Id. at 322. The court views these partial
disclosures collectively and considers them as a whole to determine when cumulative
facts support a corrective disclosure that meets the loss causation pleading standard,
even though one of those facts on its own might be insufficient to plead loss
causation. Id. at 325.
Parmelee’s Amended Complaint alleged Santander released multiple partial
disclosures which culminated in a corrective disclosure. First, after Santander
announced Dundon’s resignation, the company’s stock price dropped. Second, on
February 29, 2016, Santander announced it would delay filing its Annual Report on
Form 10-K and that the SEC had an open comment letter on the previous year’s
fiscal report. Third, on March 15, 2016, Santander announced the company was
changing some accounting practices and would correct prior fiscal reports according

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to those new accounting methods. The next day, Santander’s stock price dropped
again.
Considering these facts together, the Court concludes these partial disclosures
gradually informed the market of the relevant truth and, thus, collectively constitute
a corrective disclosure that adequately pleads loss causation. See. Id. at 325–26.
C. Parmelee Can Maintain the Section 20(a) Claims against Dundon,
Kulas, and Davis but not Dawood.
Santander argues Parmelee’s Section 20(a) claims should be dismissed because
they are dependent on a viable claim for securities fraud, which Santander argues
Parmelee has not sufficiently pleaded. Section 20(a) of the Securities Exchange Act
imposes liability on a control person when a plaintiff brings primary violations under
securities law. 15 U.S.C. § 78t; see Southland Secs. Corp., 365 F.3d at 383.
The Court has already concluded Parmelee failed to adequately plead Dawood
had the requisite scienter. Thus, Parmelee’s Section 20(a) claim against Dawood fails
because Parmelee failed to bring a primary violation of securities law against Dawood.
See Id. at 383–84. Regarding Santander, Dundon, Kulas, and Davis, the Court has
determined Parmelee adequately pleaded scienter and loss causation as to her primary
claims of violations to the Securities and Exchange Act, specifically Section 10(b) and
Rule 10b–5. Because she sufficiently pleaded primary violations of the Securities
Exchange Act against all Defendants except for Dawood, Santander’s sole argument

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fails and Parmelee’s Section 20(a) claims against Santander, Dundon, Kulas, and
Davis are not subject to dismissal. See Id.
IV.

Conclusion
Because Paremelee failed to meet the heightened pleading standard for scienter

as to Dawood, the Court GRANTS the Defendants’ motion to dismiss only as to
Dawood and DISMISSES all claims against Dawood.
As to the other Defendants, Pamelee has met the heightened pleading standard
for scienter and adequately pleaded loss causation. Thus, Parmelee has sufficiently
pleaded the Section 10(b) and Rule 10b–5 claims and can bring the dependent
Section 20(a) claim against the remaining Defendants. Because Parmelee has
adequately pleaded her claims against Santander, Dundon, Kulas, and Davis, the
Court DENIES Santander’s motion to dismiss as to those defendants.
SO ORDERED.
Signed January 3rd, 2018.
______________________________________
ED KINKEADE
UNITED STATES DISTRICT JUDGE

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