NOEL L. HILLMAN, District Judge.
This case is a putative securities class action concerning alleged material misrepresentations or omissions made by Defendants. Presently before the Court are two motions. First is Defendants' Motion to Dismiss Plaintiffs' First Amended Complaint. Second, is Plaintiffs' Motion to File a Sur-Reply. For the reasons expressed herein, Defendants' motion will be granted, in part, and denied, in part. Plaintiffs' motion will be granted.
We take our brief recitation of the facts from Plaintiffs' First Amended Class Action Complaint ("FAC"). This is a putative securities class action asserted against Defendant Toronto-Dominion Bank ("TD Bank") and several TD Bank executives (collectively, "Individual Defendants"). The executives include Bharat Masrani, CEO, Riaz Ahmed, CFO, Teri Currie, Group Head, Canadian Personal Banking, Leo Salom, Group Head, Wealth Management and TD Insurance, TD Bank Group (formerly, Executive Vice President, Wealth Management), Mike Pedersen, President and CEO until October 27, 2016 (formerly, Group Head, U.S. Banking), and Mark Chauvin, Group Head and Chief Risk Officer. The putative class consists of those who held United States-traded, TD Bank stock between December 3, 2015 and March 9, 2017, inclusive.
The securities claims are centered around TD's public statements about (1) strong risk management, (2) solid organic growth, and (3) growth in the Canadian Retail segment. Those statements, Plaintiffs allege, were false. Instead, Plaintiffs allege that a "highly pressurized work environment" and "forced sales targets" — among other things — led to violations of TD Bank's Code of Conduct, behavior that "exceeded TD's articulated risk appetite," and possibly illegal activity. Plaintiffs suggest that these allegations are supported by hundreds of confidential witnesses ("CWs").
The FAC presents statements from nineteen CWs, who are nonparties. Those individuals and their statements are discussed as relevant,
Plaintiffs complain of statements made in press releases, SEC filings, TD Bank's Code of Conduct, and investor teleconferences by TD Bank and Individual Defendants, which they say contradict the alleged experience of the CWs. These statements will be discussed as relevant,
Plaintiffs filed their first complaint on March 12, 2017. This Court consolidated this case with a similar action filed by Janet Tucci (No. 1:17-cv-1735 (NLH/JS)) and appointed Plaintiff Ethan Silverman as the lead plaintiff on December 13, 2017. Plaintiffs filed the operative FAC on March 5, 2018, alleging two counts. First, Plaintiffs allege violations of Section 10(b) of Securities Exchange Act of 1934 (the "Exchange Act") and Securities and Exchange Commission ("SEC") Rule 10b-5 (codified at 17 C.F.R. 240.10b-5) against all Defendants. Second, Plaintiffs allege violations of Section 20(a) of the Exchange Act against Individual Defendants.
Defendants filed their Motion to Dismiss on April 16, 2018. The Motion to Dismiss has been fully briefed. Additionally, Plaintiffs filed their Motion for Leave to File a Sur-Reply or, in the Alternative, to Strike Exhibit 1 on July 24, 2018. This motion has also been fully briefed. Therefore, these motions are ripe for adjudication.
This Court has subject matter jurisdiction over this case because it presents a federal question under the Exchange Act.
On July 24, 2018, Plaintiffs filed a Motion to File a Sur-Reply and attached, as an exhibit, a proposed sur-reply brief. In the alternative, Plaintiffs request this Court to strike Exhibit 1 of Susan Leming's Supplemental Declaration, which was attached to Defendants' reply brief. Plaintiffs' only complaint concerns one footnote in Defendants' reply brief, which mentions a Financial Consumer Agency of Canada ("FCAC") report (the "FCAC Report"). Plaintiffs believe the FCAC Report was improperly first set forth in a reply brief instead of being presented in Defendants' moving brief. Defendants disagree, arguing the FCAC Report was properly presented in the reply brief in reply to one of Plaintiffs' arguments.
Local Rule of Civil Procedure 7.1(d) controls the filing of a sur-reply brief in this specific situation. It states: "No sur-replies are permitted without permission of the Judge or Magistrate Judge to whom the case is assigned." Loc. R. Civ. P. 7.1(d)(6). Since the proposed sur-reply was accompanied by a brief in support, Plaintiffs have complied with the Local Rules.
In the interests of justice, this Court will grant Plaintiffs' Motion to File a Sur-Reply and consider both Plaintiffs' and Defendants' arguments concerning the FCAC Report on the merits, to the extent relevant,
When considering a motion to dismiss a complaint for failure to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6), a court must accept all well-pleaded allegations in the complaint as true and view them in the light most favorable to the plaintiff.
"While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the `grounds' of his `entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. . . ."
A district court, in weighing a motion to dismiss, asks "not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claim."
Since this is a claim covered by the Private Securities Litigation Reform Act ("PSLRA"), heightened pleading standards apply beyond those encapsulated by Rule 12(b)(6). Federal Rule of Civil Procedure 9(b) requires that "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." Moreover, to allege a material misrepresentation, a plaintiff must "specify[] each allegedly misleading statement, why the statement was misleading, and, if an allegation is made on information or belief, all facts supporting that belief with particularity."
To allege a Section 10(b) claim, a plaintiff must plead "(1) a material misrepresentation or omission, (2) scienter, (3) a connection between the misrepresentation or omission and the purchase or sale of a security, (4) reliance upon the misrepresentation or omission, (5) economic loss, and (6) loss causation."
Defendants present four main arguments concerning dismissal of Plaintiffs' claims, focusing on the materiality and falsity of the statements and whether scienter has been appropriately pleaded. First, Defendants argue that the statements complained of were neither material nor false or misleading. Second, Defendants argue that Plaintiffs have not presented the strong showing of scienter required for either the Individual Defendants or Defendant TD Bank. Third, Defendants argue as a result of dismissal under either of the above two grounds, the Section 20(a) claims must also be dismissed. Fourth and finally, Defendants argue that — at the very least — claims against two Individual Defendants, Pedersen and Chauvin, should be dismissed because of a lack of the necessary factual predicates for a claim. This Court will address each argument in turn.
Defendants present three basic arguments in favor of dismissal of the Section 10(b) claim. Essentially, Defendants argue the statements complained of were either not material or not false or misleading. First, Defendants argue Plaintiffs have failed to plead the falsity of the statements with particularity, as required by the Federal Rules of Civil Procedure and applicable statutory law. Second, Defendants argue Plaintiffs cannot base their claim on TD Bank's earnings statements or certifications. Third, Defendants argue Plaintiffs only cite general statements about risk management, internal controls, and business operations. This is — in Defendants' understanding — not enough to support a Section 10(b) claim as the statements are so general as to be immaterial.
Defendants assert Plaintiffs fail to plead facts with particularity concerning the underlying illegal scheme that resulted in improper, illegal, or unauthorized sales of TD Bank products, services, and accounts. Defendants' argument here contains two main facets: (1) Plaintiffs' CW allegations do not meet the standards required under controlling Third Circuit law and (2) even if they meet that standard, the allegations do not state an illegal scheme with the requisite particularity. Plaintiffs counter by stating the CW allegations are proper and an illegal scheme was pleaded with the requisite particularity. The details of those arguments will be addressed
In assessing the particularity of CWs' allegations, a court should examine "the sources' base of knowledge, the reliability of the sources, the corroborative nature of other facts alleged, including from other sources, the coherence and plausibility of the allegations, and similar indicia."
Under this test, Defendants assert some CWs lack personal knowledge as they were not employed during the class period, some CWs' statements are conclusory, and some CWs' statements are based merely on rumor or conjecture. Defendants appear to be correct in that CW2, CW3, CW7, CW8, and CW9 were not employed at TD Bank during the class period. Although this seems to foreclose the possibility of personal knowledge of facts during the class period, that does not mean those CWs' statements must be — or can be — ignored. As Plaintiffs point out, the misstatements at issue made during the class period were based on TD Bank's conduct before the class period. The CWs statements are certainly relevant to those allegedly false statements — at least. Additionally, they may also serve as corroboration of CWs' statements regarding conduct within the class period.
Defendants are correct that CWs' statements which appear to be based on rumor or conjecture do not meet the particularity requirement.
But, CWs' statements are not conclusory merely because they state something happened "regularly," "often," or "usually." Even though these statements are not exceedingly precise, Defendants place too much emphasis on the particularity requirement. These CW statements provide where the misconduct occurred — to a specific branch location or department, the time period when it occurred, how and why it occurred, and what products may have been involved.
Defendants also challenge CW7's statements on grounds of particularity. The crux of Defendants argument is that CW7 does not provide a basis for how he determined a certain percentage of his subordinates' sales of certain services were without customer authorization. Defendants point to CW7's statements, which states he lacked "direct evidence" and never "saw" unauthorized sales occur. Plaintiffs counter that CW7's estimates are sufficiently supported by the detailed allegations in the FAC.
Defendants citations to
Finally, Defendants challenge the CW statements that appear to be drawn from CBC reports released in March 2017. Defendants assert these allegations do not contain the necessary specificity or indicia of reliability. Defendants specifically complain that Plaintiffs fail to allege when these CBC CWs worked at TD Bank, the dates when they acquired the information that serves as the basis of their allegations, and the facts showing how they obtained the information. Plaintiffs counter with the assertion that many courts allow CW statements to be taken from other complaints. Moreover, some courts find news reports — because of their independence — a more reliable source than CW statements provided in other actions.
This Court will consider the allegations stemming from the CBC CWs. Defendants' own case,
Additionally, Plaintiffs are correct that some courts have considered "the probative value of an independent news article or government report is much greater than that of confidential witness statements recounted in another complaint."
These appear to be the only objections to the CWs statements under the Third Circuit test. Thus, with the above caveats in mind, this Court finds it may rely on the CWs' statements in determining whether an underlying wrong has been sufficiently pled.
Since this Court has found it may rely on certain CWs statements, it must next determine whether those statements have adequately pleaded an underlying illegal scheme. Defendants provide several reasons why these statements do not show, with particularity, an underlying illegal scheme. First, the allegations mainly focus on "standard sales practices" that are not unlawful. (Defs.' Br. 10.) Second, the allegations pertain to only "isolated," "localized," or "episodic" unlawful activities at most, not widespread illegal conduct across the Canadian retail market. (Defs.' Br. 12-13.)
Defendants first argument on this point is a red herring. Plaintiffs do not complain that TD Bank's sales practices were per se illegal.
Defendants second argument, whether Plaintiffs have alleged an underlying, nationwide illegal scheme, is substantive. The Court is certainly cognizant that Plaintiffs have not provided a CW — or even a statement — from someone occupying a high position at TD Bank to show conclusively that untoward conduct may have been occurring across the entire Canadian retail sector. The Court is also aware that the CWs' statements in the FAC provide snapshots of different locations at different times. But this does not make the FAC deficient.
This case is not
In contrast, the Plaintiffs have properly alleged where and when the CWs worked for TD Bank, how the CWs had access to the information they allege, and that they possess firsthand knowledge. Moreover, the CWs were employed in the very branches and departments that are alleged to have engaged in improprieties. These allegations are much different than those presented to the Third Circuit in
As noted
In fact, it appears Plaintiffs' case is most analogous to the case cited by Plaintiffs out of the Central District of California.
Defendants attempt to distinguish this case is unavailing. Possibly, Defendants arguments about whether the claims were elevated to higher levels of the company could have a bearing on scienter, but it does not bear on whether an underlying scheme has been pleaded with particularity. Moreover, Plaintiffs have presented CW statements from multiple levels — tellers, advisors, customer service representatives, a branch manager, a district vice president, a human resources employee, and a senior credit analyst — not just the lowest levels as Defendants attempt to argue. Accordingly, this Court will not dismiss Plaintiffs Section 10(b) claim on these grounds.
Defendants argue, even if this Court finds an underlying illegal scheme was sufficiently pleaded, Plaintiffs have not explained why each statement is misleading. Defendants assert Plaintiffs' allegations concerning the falsity of these statements are merely conclusory and boilerplate. Plaintiffs counter that their allegations may be repetitive, but they are far from conclusory or boilerplate.
This Court first notes that it appears Plaintiffs have not merely used identical language to explain why each statement was allegedly misleading. Defendants seem to admit as much, saying the paragraphs are only "nearly identical." Plaintiffs actually offer a number of different versions of this paragraph that are specifically tailored to the alleged misstatement at issue. As Plaintiffs point out, this does not make their allegations conclusory, nor is it a ground for dismissal.
Defendants are incorrect in that Plaintiffs do not refer to a public statement and then allege "in a general and conclusory manner, that those disclosures were false or misleading."
While this Court will not walk through each and every allegation — especially considering Defendants do not present argument specific to each and every allegation — it is instructive to provide an example. Plaintiffs complain of a statement made by Masrani on a December 1, 2016 earnings call. On it, Masrani stated, "
Defendants also argue that many of the complained of statements were statements of opinion. Defendants assert a statement of opinion is only actionable if the speaker did not "actually hold[] the stated belief" or if the statement "omits material facts about the [speaker's] inquiry into, or knowledge concerning [the] statement . . . and if those facts conflict with what a reasonable investor . . . would take from the statement itself."
Defendants are correct. First, as Plaintiffs seem to admit, there are no allegations in the FAC that the Individual Defendants did not truly hold the stated belief. Without that, Plaintiffs do not properly plead a Section 10(b) claim premised on pure opinion. Moreover, this Court finds that none of the statements referenced in Defendants' moving brief actually expresses an "embedded statement[] of fact."
Next, Defendants argue that any claims based on figures in TD Bank's earnings statements must be dismissed. Defendants assert those allegations occur at paragraphs 177(a), 177(c), 178(a), 179(a), 180(a), 181(c), and 182(a) of the FAC. First, Defendants argue that as long as the numbers disclosed in the earning statements are accurate, they cannot give rise to Section 10(b) liability. Plaintiffs do not respond to this particular argument, instead pointing to assertions which attribute the growth of various factors that they believe violated Section 10(b).
Considering the strength of the case law in this area, this Court will dismiss any claims — to the extent they are made — which are premised on numbers reported in the earnings statements.
Second, Defendants argue the statements attributing financial results to specific sources cannot be the basis for a Section 10(b) claim. In doing so, Defendants rely heavily on
The Court rejected this entire theory of Section 10(b) liability. It held, as this Court has already described
Defendants may have correctly described the law, but they fail to grapple with the facts of this case. While this Court agrees — as discussed
Third, Defendants argue the certifications accompanying the earnings statements are inactionable because the financial figures have been determined to be inactionable. Defendants assert those allegations occur at paragraphs 177(b), 177(c), 178(b), 179(b), 180(b), 181(c), and 182(b) of the FAC. Plaintiffs counter that Sarbanes-Oxley ("SOX") certifications are actionable here — regardless of whether the figures in the earnings statements are actionable — because Plaintiffs have pleaded deficient internal controls.
Plaintiffs are correct. SOX certifications are typically actionable when either the financial figures are inaccurate or when there is an allegation that the internal controls within a company were deficient.
Defendants also argue over whether Plaintiffs have sufficiently alleged that the Individual Defendants who certified the reports had the necessary state of mind. This argument is more properly addressed in the scienter section below, so the Court will address it
Defendants also challenge whether Plaintiffs may base a Section 10(b) claim on statements made in TD Bank's Code of Conduct (the "Code"). Defendants assert Plaintiffs' claim regarding the Code is merely that TD Bank did not disclose violations, which were evidenced by the CWs' statements. Plaintiffs argue that statements in the Code are actionable because it contains "specific, concrete, objectively provable or disprovable statements." (Pltfs.' Opp. Br. 23.)
This Court finds the Code is inactionable. To the extent that Plaintiffs' claim is based on the Code acting as a representation by TD Bank that the Code is not being violated by its employees, it is inactionable.
Furthermore, to the extent Plaintiffs complain about the actual statements made in the Code, those are also inactionable, general statements. Plaintiffs cited case is unavailing, as it found inactionable most of the statements in the defendant's ethics code, and only allowed a statement in a corporate responsibility report to move forward.
Instead, the statements are most analogous to those considered inactionable. For example, statements that "[o]ne of Avon's fundamental principles is that its associates will observe the very highest standards of ethics in the conduct of Avon's business" and "[b]ribes, kickbacks and payoffs to government officials, suppliers and other[s] are strictly prohibited" were found inactionable.
Finally, Defendants argue the only statements left in the FAC beyond the earnings statements, SOX certifications, Code, and statements of opinion are "generalized positive comments that are immaterial as a matter of law." (Defs.' Br. 20.) Statements of optimism and hope, according to Defendants, are inactionable because they are not relied upon by any reasonable investor. Plaintiffs counter these statements are actionable because they are statements which are provable or disprovable.
As both sides acknowledge, "[m]ateriality is ordinarily an issue left to the factfinder and is therefore not typically a matter for Rule 12(b)(6) dismissal."
With that standard controlling this determination, this Court declines to dismiss the statements cited by Defendants. As Plaintiffs correctly point out, these statements are devoid of context. For example, that TD Bank's "philosophy around compensation [is] very conservative" is not a positive or general statement when taken in context. (Defs.' Br. 20.) The context of the statement is whether Pederson believes internal controls at TD Bank are sufficient to ensure that the improprieties that occurred at Wells Fargo could not occur at TD Bank. The full statement Plaintiffs complain of states:
(FAC ¶ 154.) This Court cannot say at this point — as a matter of law — that this statement would not be material to a reasonable investor.
This Court is unable to discount the other statements complained of for the same or similar reasons. Accordingly, this Court will not dismiss the Section 10(b) claim on these grounds. But, the Court notes that Defendants are not foreclosed from pursuing this argument again on a fuller factual record.
Defendants also challenge whether Plaintiffs have pleaded the strong inference of scienter needed to propel Plaintiffs' FAC past the pleading stage. In determining whether a strong inference of scienter has been shown, courts must determine "whether
Thus, this Court will discuss each basis for scienter and Defendants plausible opposing inference. Then this Court will consider the complaint as a whole in determining whether Plaintiffs have shown a strong inference of scienter.
Defendants present argument on two separate bases for why this Court cannot use the CWs' statements in conducting its scienter analysis. First, Defendants assert Plaintiffs do not assert any facts alleging the Individual Defendants had actual knowledge of the substance of the CWs' statements. Defendants argue to do so would require allegations by CWs that they disclosed this information to Individual Defendants. Plaintiffs do not contest this characterization. Accordingly, this Court will not allow this theory to support scienter.
Second, Defendants challenge whether Plaintiffs allegation that Individual Defendants "should have known" of the alleged improprieties should be allowed to support an inference of scienter. To the extent Plaintiffs pleaded this way, Defendants would be correct.
But it appears Plaintiffs allegations go beyond that. Plaintiffs do not argue Defendants should have known merely from their supervisory role, but because it was widely known within TD Bank that these alleged improprieties were occurring. As discussed
Notably, there are some indications that individuals at the corporate office were aware of the underlying issues disclosed by the CWs. (
This Court will permit the CWs' statements to support a strong inference of scienter. The Court finds it may infer from these allegations that Individual Defendants either knew or the improprieties were so obvious that they must have been aware.
The Court has decided to let these allegations serve as a basis for scienter because it finds the law unsettled. Plaintiffs cite cases tending to show that CW statements which show widespread misconduct may support an inference of scienter.
Although most of Defendants case law is not relevant,
It would be improper for the Court to grant dismissal at this stage in the proceedings because of the apparently unsettled nature of the case law. Therefore, Defendants are unable to prove these allegations are improper as a matter of law. This does not disclose Defendants from challenging these allegations again on a fuller record.
Defendants also assert this Court may not consider Plaintiffs scienter allegations because they improperly rely upon group pleading. Defendants cite cases which explain that group pleading is prohibited by the PSLRA. Plaintiffs counter that they do not rely on group pleading and have identified particularly which statements are attributable to which Defendants and which scienter arguments are applicable to which Defendants.
Defendants have accurately stated the law in this Circuit. As pronounced in
Regardless, Plaintiffs have not relied upon group pleading in alleging Defendants' statements. The statements which have survived the Motion to Dismiss are attributed to specific Defendants, whether they are SOX certifications or statements made at conferences or on earnings calls. Defendants' argument here is adequately countered by the FAC.
It appears
Plaintiffs have offered particularized allegations as to motive and opportunity where appropriate in the FAC. Plaintiffs have made particular allegations as to scienter stemming from insider sales and SOX certifications. Nor are the other bases for scienter deficient. For example, the core operations doctrine is sufficiently pleaded. Plaintiffs have alleged the importance of the Canadian retail segment and Individual Defendants position within TD Bank, which is enough to allow the core operations doctrine pleading to survive a motion to dismiss. The Court will not ignore any allegations on the basis of this argument.
Defendants challenge whether an inference of scienter may be derived from Individual Defendants' allegedly suspicious trades. Generally, Defendants challenge this basis for scienter on grounds that Plaintiffs fail to allege the trades were unusual in scope or timing. Plaintiffs essentially allege that Individual Defendants' trades support scienter because they occurred during the class period, were unusual, and amounted to C$28,950,441. Defendants offer multiple opposing inferences that may be derived from Individual Defendants allegedly suspicious trades during the class period that will be discussed in turn. Defendants do not dispute the FAC's allegations concerning the types, dates, or amounts of trading by the Individual Defendants.
In determining whether a stock sale supports scienter, a court should consider whether it is "unusual in scope or timing."
Defendants first argue that the "performance share units" ("PSUs") supposedly "exercised" by Individual Defendants were not suspicious because they were (1) not exercised by Defendants and (2) not unusual in amount. As Defendants explain, PSUs are "phantom share units that track the price of common shares of [TD B]ank, receive dividend equivalents in the form of additional units, and are subject to an adjustment to a portion of the award at maturity to further reflect bank performance over the performance period." (Defs.' Reply Br. 9.) These PSUs cannot be exercised or sold, but are paid out at the end of three years.
While Defendants appear to be correct in that the PSUs were not technically exercised or sold, that does not necessarily defeat Plaintiffs' argument on scienter. The motive, personal financial gain, and opportunity, because the PSUs vested shortly after planned public statements were made by various Individual Defendants, still exists whether the PSUs could be sold at particular times or vested at a predetermined time. While this inhibits the flexibility of Individual Defendants in making a statement to raise the stock price and then immediately sell at a higher price, the timing of the vesting of the PSUs is close in time to various statements by Individual Defendants, which are alleged to contain false or misleading information. This will contribute to Plaintiffs' scienter argument as the vesting may have been unusual in time.
This Court must also consider "scope." Defendants appear to be correct, that the amounts sold were not unusual. Examining the records, it appears a similar amount of PSUs were paid out each December during the class period. Plaintiffs, incorrectly, combine two Decembers of PSU sales and compare them to only one December of PSU sales for all Individual Defendants. This will neither aid nor detract from Plaintiffs pleading of scienter. If the PSUs take three years to vest, as Defendants assert, then the amounts were set before the class period. Given that fact, this cannot be said to support either side's scienter argument.
Regardless, there are still stock sales and options that various Individual Defendants made during the course of the class period. Plaintiffs have presented evidence showing the sales of shares and options were unusual in timing, as many were sold in close proximity to allegedly false or misleading statements. Unlike the PSUs, Defendants do not allege these sales were not within the control of Individual Defendants. This supports scienter. Moreover, it appears all Individual Defendants either sold shares or exercised stock options during the class period. This also supports scienter. It also appears to be undisputed that these sales were unusual in amount, as opposed to the previous year where none of the Individual Defendants sold shares or exercised options (besides the aforementioned PSUs). This supports scienter as well.
Defendants do not present this Court with a compelling counter-narrative of the stock sales. Instead, Defendants rely on general principles about the percentage of holdings sold and whether the stock sold was in the form of options. (Defs.' Reply Br. 11.) If Defendants wished to challenge Plaintiffs' scienter argument, they could have provided this Court with percentages of holdings which each Individual Defendant sold off during the class period.
Moreover,
Defendants argue the allegations made concerning the effect of the legal troubles faced by Wells Fargo in 2016 add nothing to this Court's determination of scienter for two reasons. First, Defendants assert that the FAC does not plead that misconduct at Wells Fargo put Defendants on notice of misconduct at TD Bank. Second, Defendants argue that "guilt by association" theories of scienter have been rejected by other federal courts. Although Plaintiffs do not appear to dispute this argument, this Court will consider it on the merits.
This Court is persuaded by Defendants' argument on this point. There appears to be no cogent inference that could be made here from the events that occurred at Wells Fargo. While Plaintiffs allege the same types of misconduct occurred at both Wells Fargo and TD Bank, these are two separate banks with different executives, employees, and policies. Defendants are right: the FAC does not allege that the occurrences at Wells Fargo put Defendants on notice of improper conduct at TD Bank. For this reason alone, this Court could find these allegations do not contribute in any way to its determination of scienter.
Moreover, the decision in
Defendants argue Plaintiffs' allegations concerning the general structure and organization of TD Bank cannot be used as a basis to support scienter. Plaintiffs do not appear to oppose this argument.
Defendants assert "a plaintiff cannot establish scienter on the part of defendant executives by `loosely describing the managerial hierarchy' by which fraudulent conduct could have come to their attention."
Defendants argue the core operations doctrine cannot support a strong inference of scienter when Plaintiffs fail to plead any facts in the FAC showing alleged misconduct so pervasive as to implicate the core operations of TD Bank. Defendants generally complain the allegations concerning the core operations doctrine are conclusory. Plaintiffs contend the core operations doctrine applies and strengthens the inference of Defendants' scienter given the Canadian retail segment's central importance to TD Bank's profitability.
"[U]nder the core operations doctrine, misstatements and omissions made on `core matters of central importance' to the company and its high-level executives gives rise to an inference of scienter when taken together with additional allegations connecting the executives' positions to their knowledge."
The core operations doctrine was allowed to support scienter in
Here, the Plaintiffs allege the Canadian Retail segment is "TD's flagship business," "contribut[ed] over 60%" of earnings, and that 95% of TD Bank's customer base used branch locations for banking — the very locations where alleged improprieties occurred. (FAC ¶¶ 48-59.) Defendants fail to argue the Canadian retail segment is not one of TD Bank's core operations. Defendants also fail to provide an alternative inference that should apply here. Therefore, like
Defendants also challenge whether Plaintiffs assertion that the resignation or reassignment of three of the Individual Defendants may properly support scienter. Plaintiffs argue in their opposition brief and the FAC that the resignations and reassignments were suspicious because of their timing.
Generally, "[t]he departure of corporate executive defendants is a factor that can strengthen the inference of scienter."
The FAC does not support an inference of scienter from these allegations. There are three reasons supporting this conclusion. First, the timing of the two reassignments — that of Johnson from CFO to Group Head and Pederson from President and CEO to Advisor — was not suspicious. Those occurred before the CBC reports were published in March 2017. Stepping down at the height of an alleged fraud does not cogently lead to a conclusion of knowledge or reckless involvement in a fraud.
Second, the fact that all three — Johnson, Pederson, and Chauvin — retained a role at TD Bank further undercuts Plaintiffs scienter theory. A resignation may support a finding of scienter because it may be implied that the individual knew of the fraud being perpetrated. Once those outside the fraud find out, supposedly, they terminate (or force to resign) all those who may have been responsible. If these Individual Defendants knew or were reckless in not knowing the alleged fraud, why would TD Bank retain them in an advisory role?
Third, and most importantly, Plaintiffs plead nothing more than that the resignation or reassignment happened within or shortly after the class period. The FAC does not allege, as is required, that the resignations and reassignments had anything to do with the specific Individual Defendants knowledge or reckless involvement in the fraud. Without more, this Court finds these allegations do not support a finding of scienter.
Defendants also challenge whether TD Bank's $2.75 billion in note offerings during the class period may support scienter.
Defendants cite
Plaintiffs counter with case law of their own.
This Court finds — based on the timing of the alleged misstatements and the offerings — that these allegations are probative of scienter. But, they are not particularly helpful. While the Court finds Plaintiffs have advanced a cogent theory, this Court finds these allegations only support scienter because it is at least as compelling as Defendants' inference. Therefore, this Court finds these allegations may lend some support to scienter.
Finally, Defendants argue that the SOX certifications made by Masrani, Johnston, and Ahmed do not support an inference of scienter. Defendants essentially argue that "[a]n allegation that a defendant signed a SOX certification attesting to the accuracy of an SEC filing that turned out to be materially false does not add to the scienter puzzle in the absence of any allegation that the defendant knew he was signing a false SEC filing or recklessly disregarded inaccuracies contained in an SEC filing."
Considering this Court's previous findings,
On balance, this Court finds Plaintiffs' allegations support a strong inference of scienter. In favor of a finding of scienter are Individual Defendants' stock sales, the core operations doctrine, the CWs' statements, and — to the extent helpful — the SOX certifications. The Court does not find that the resignations, management structure, or activities which occurred at Wells Fargo adds to the scienter puzzle. On balance, the FAC and Plaintiffs' arguments have persuaded this Court that — at this stage — Plaintiffs' proposed inference is at least as plausible or more plausible than Defendants' proposed inference. Thus, this Court finds a strong inference of scienter and it will not dismiss Plaintiffs' Section 10(b) claim on this ground.
Lastly, Defendants argue that the doctrine of corporate scienter has not been adopted in the Third Circuit and cannot be relied upon here. Defendants also argue, even if this Court allows the case to move forward on the doctrine of corporate scienter, Plaintiffs have not met the exacting standard required under that doctrine.
First, this Court will address Defendants argument concerning the adoption of the doctrine of corporate scienter in the Third Circuit. Defendants are correct: the Third Circuit has "neither accepted nor rejected the doctrine of corporate scienter in securities fraud actions."
This does not provide an adequate basis for this Court to dismiss the scienter argument made against TD Bank. Federal Rule of Civil Procedure 12(b)(6) only allows this Court to grant a motion for "failure to state a claim upon which relief can be granted." The Third Circuit has yet to determine whether it will allow the doctrine of corporate scienter a place in its jurisprudence. While the outcome remains unknown, this Court cannot hold that Plaintiffs have failed to state a claim merely because the law is unsettled. Therefore, this Court will not dismiss the Section 10(b) claim against TD Bank on this basis.
Second, this Court must address whether — assuming the viability of the doctrine of corporate scienter — Plaintiffs have pleaded enough in the FAC. Defendants argue Plaintiffs have not pleaded facts (1) creating a strong inference that at least one of the Individual Defendants possessed intent that could be attributed to TD Bank or (2) evidencing "extraordinary" circumstances. Plaintiffs dispute Defendants allegedly narrow view of the doctrine.
Regardless, since this Court finds that a strong inference of scienter has been alleged as to Individual Defendants and Defendants admit that this may properly support a finding of corporate scienter, it will not dismiss the claim against TD Bank premised on corporate scienter. This argument, however, is not permanently foreclosed. Defendants are free to raise this argument again on a fuller record.
Defendants argue the Section 20(a) claim must also be dismissed based on two pleading deficiencies. First, Defendants argue that the FAC is deficient because Plaintiffs fail to plead that each of the Individual Defendants were Section 20(a) "controlling persons." Defendants assert, instead, Plaintiffs make only group allegations in their FAC. Second, Defendants assert the FAC fails to allege facts showing the Individual Defendants' culpable participation in the fraud. Acknowledging a split in this district, Defendants request this Court to follow one line of cases and require allegations of culpable participation.
First, this Court will address Defendants' argument concerning group pleading of control. While Defendants have accurately quoted the case law they cite, they have failed to provide the necessary context. For example,
The
Second, this Court will address Defendants' argument concerning pleading culpable participation. Defendants admit "[t]he Third Circuit has left [open the question of] whether plaintiffs must plead `culpable participation' to survive a motion to dismiss." (Defs.' Reply Br. 34.) Therefore, there is no controlling law on-point for Defendants to assert that the Section 20(a) claims must be dismissed on these grounds. This, alone, could preclude dismissal.
Moreover, this Court finds the line of cases that do not require pleading of "culpable participation" at the motion to dismiss stage persuasive.
Lastly, Defendants request Defendants Pedersen and Chauvin be dismissed from this case. Essentially, Defendants argue that only one statement from each individual has been asserted by Plaintiffs to be false or misleading. But, Defendants argue, the FAC neither asserts facts showing these statements were false or misleading nor does it contain particularized allegations that these defendants' control over any other Defendant violated Section 10(b). The Court addressed this second argument,
Plaintiffs assert that Defendants unfairly quote the actual statement made, that the statement was alleged to be false and misleading, and that these statements are not the only basis for Plaintiffs' claim against them. This Court will address each statement in turn.
As discussed
Finally, this Court examines Chauvin's sole statement. Chauvin was asked by an analyst "what keeps you up at night" and he responded with what keeps him up at night — the loss and monetization of customer data or a disruption of TD Bank's systems by an outside force. (FAC ¶ 162.) Plaintiffs allege the statement was "materially false and misleading" but offer no facts showing that the stated concern was not what keeps Chauvin up at night. (FAC ¶ 163.) Generally, Plaintiffs' allegations do not have any relation to Chauvin's statement about cyber-attacks.
But, a statement may also be materially misleading by omission. And, Plaintiffs allege that Chauvin, TD Bank's Chief Risk Officer, was "asked, point-blank, to list" significant risks facing TD Bank. If Chauvin knew of the underlying improprieties and failed to list this as a significant risk, his statements could be misleading by their omission of that alleged fact. In light of the Court's determination that the other elements have been plausibly pled,
This does not mean, however, that Defendants are foreclosed from reiterating this argument at some later point. Defendants may present this argument again on a fuller record.
Plaintiffs request in one sentence and two footnotes at the end of their opposition brief that this Court grant leave to amend. (Pls.' Opp. Br. 35 n.27-28.) Given the nature of this Court's Opinion, granting, in part, and denying, in part, Defendants' Motion to Dismiss, this Court will not decide whether to grant or deny Plaintiffs' request for leave to amend. First, Plaintiffs' request to amend the Section 20(a) claim is moot — this Court did not dismiss it. Second, Plaintiffs appear to only request leave to amend if the Court granted Defendants entire motion; the Court has not done so here.
Upon consideration of this Opinion and the accompanying Order, Plaintiffs' are permitted to file a motion complying with the Federal Rules of Civil Procedure and this District's Local Rules of Civil Procedure requesting leave to amend.
For the reasons stated in this Opinion, the Court will grant, in part, and deny, in part, Defendants' Motion to Dismiss and grant Plaintiffs' Motion to File a Sur-Reply.
An appropriate Order will be entered.
