ALVIN W. THOMPSON, District Judge.
Lead plaintiff Brian Perez and additional plaintiff Robert E. Lee bring this class action on behalf of all persons, other than the defendants and their affiliates, who purchased Higher One Holdings, Inc. ("Higher One") securities during the period from August 7, 2012 to August 6, 2014 (the "Class Period"). The plaintiffs allege two claims for violations of the Securities Exchange Action of 1934 (the "Exchange Act"), under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5, 17 C.F.R. § 240.10b. The defendants, Higher One and current or former executives at and/or directors of Higher One, have moved to dismiss the plaintiffs' Second Amended Complaint. For the reasons set forth below, the defendants' motion to dismiss is being granted in part, i.e. with respect to the false statements alleged in paragraphs 89, 91 and 93 of the Second Amended Complaint.
Defendant Higher One was co-founded in 2000 and is headquartered in New Haven, Connecticut. The company provides products and services to higher education institutions and to students. Those services include financial aid refund disbursements, educational institution performance analytics, banking services, tuition payment plans, and financial management. Its products include a line of electronic refund management and disbursement products and retail banking products, including federally insured online deposit and checking accounts ("OneAccounts") and a debit card. Higher One provides its services and products to more than 1,900 campuses and 13 million students across the country.
Defendant Mark Volchek ("Volcheck") was a co-founder of Higher One, and from June 2012 to April 2014 he served as Chief Executive Officer ("CEO"); he was a Director throughout the Class Period. Defendant Miles Lasater ("Lasater") was a co-founder of Higher One and, during the Class Period, he served as its President, Chief Operating Officer ("COO"), and a Director. He left the COO position in May 2013 and resigned as President in January 2014. Defendant Christopher Wolf ("Wolf") has served as Higher One's Chief Financial Officer ("CFO") since March 2013. Defendant Jeffrey Wallace ("Wallace") has served as Higher One's President of Finance at all relevant times. Defendant Dean Hatton ("Hatton") was President and CEO prior to the Class Period and was a Director during most of the Class Period. Defendant Patrick McFadden ("McFadden") served as a Director and Chairman of the Board's Audit Committee throughout the Class Period.
When deciding a motion to dismiss under Rule 12(b)(6), the court must accept as true all factual allegations in the complaint and must draw inferences in a light most favorable to the plaintiff.
In its review of a motion to dismiss for failure to state a claim, the court may consider "only the facts alleged in the pleadings, documents attached as exhibits or incorporated by reference in the pleadings and matters of which judicial notice may be taken."
Federal Rule of Civil Procedure 8(a) requires that a pleading contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). However, allegations of securities fraud pled under § 10(b) of the Exchange Act and Rule 10b-5 are subject to the pleading requirements of Federal Rule of Civil Procedure Rule 9(b).
Similarly, the Private Securities Litigation Reform Act of 1995 ("PSLRA") requires that when a plaintiff claims that the defendant has made an untrue statement of a material fact or omitted a material fact necessary to make a statement not misleading, the plaintiff must "specify each statement alleged to have been misleading [and] 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)(2010). Furthermore, to state a claim for securities fraud, the plaintiff must "with respect to each act or omission . . . state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2)(2010). "The requisite state of mind in a Rule 10b-5 action is `an intent to deceive, manipulate or defraud.'"
The Second Amended Complaint alleges false or misleading statements that the plaintiffs have recategorized as: (1) Higher One's legal compliance ("Legal Compliance Fraud"), (2) termination of the banking partner relationship between Higher One and Cole Taylor Bank ("Cole Taylor Fraud"), (3) Higher One's product transparency ("Products Transparency Fraud"), (4) changes in Higher One's practices as a result of the class action settlement ("Class Action Resolution Fraud") and (5) false statements and omissions by Higher One in its public statements and filings announcing its financial and operating results ("Operating Results Fraud").
The defendants argue that the Second Amended Complaint should be dismissed because the plaintiffs have failed to plead facts that show that the defendants made any actionable statement or omission and because the plaintiffs have failed to plead with particularity facts that establish a strong inference of scienter.
To state a claim for violation of Section 10(b) and Rule 10b-5, a plaintiff must allege "(1) a material misrepresentation or omission by the defendant; (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."
A plaintiff must allege "that the defendant[s] made a statement that was `misleading as to a material fact.'"
"[Section] 10(b) and Rule 10b-5(b) do not create an affirmative duty to disclose any and all material information. Disclosure is required under these provisions only when necessary `to make . . . statements made, in the light of the circumstances under which they were made, not misleading.'"
Courts distinguish between false or misleading statements of fact and false or misleading statements of opinion. Statements of opinion are considered false or misleading if at the time a statement was made, "the speaker did not hold the belief she professed" or "the supporting fact[s] she supplied were untrue."
"Adequacy of disclosure is not assessed by looking at a single sentence in a vacuum, but rather the question is `whether the defendants' representations, taken together and in context, would have misled a reasonable investor.'"
"Courts that have determined that corporations had a duty to disclose uncharged illegal conduct in order to prevent other statements from misleading the public have required a connection between the illegal conduct and the statements."
The defendants contend that the plaintiffs have not pled facts showing that the statements regarding legal compliance were false or misleading when made. They argue that the plaintiffs' allegations regarding Higher One's legal compliance are conclusory and speculative. It is insufficient under Rule 9(b) "to couple a factual statement with a conclusory allegation of fraudulent intent."
The plaintiffs allege that the statements made by the defendants that "[u]nder the terms of the [2012 FDIC] Consent Order, we are required to, among other things, review and revise our compliance management system and, to date, we have already substantially revised our compliance management system[,]" and that "[a]s a result of the Consent Order and completion of the related examination, we believe that all material exposure related to this matter has been recorded and we do not expect any further losses as a result of this matter[,]" were materially false and misleading. Second Am. Compl. ¶¶ 75-79. The defendants contend that the court has already held that these statements "are not actionable under the securities laws because they are,
With the inclusion of three additional CWs, and in particular CW5, the plaintiffs have sufficiently pled falsity with respect to the statement that Higher One had "substantially revised [its] compliance management system," as directed by the 2012 FDIC Consent Order. "CW5 was a Compliance Assurance Procedures Analyst at Higher One from August 2011 to October 2013[,]" who "was hired to help Higher One rework its banking and compliance system," and "wrote Higher One's new banking operations policies and procedures in the wake of the 2012 FDIC Consent Order." Second Am. Compl. ¶ 33. CW5 said that by October 2013, "ten policies and procedures mandated by the 2012 FDIC Consent Order still needed to be written," and `called Higher One's compliance program a `joke.'" Second Am. Compl. ¶ 79(a). CW5 also said that the "banking department head refused to alter existing policies when CW5 pointed out problems and told subordinates that Higher One did not have to comply with banking rules and regulations because it was a technology company, not a bank."
With respect to the statement, "we believe that all material exposure related to this matter has been recorded and we do not expect any further losses as a result of this matter," the court held that "this matter" "referred to the FDIC investigation and the specific violations regarding account fees, misleading advertising, and other FTC Act violations identified in the [2012] FDIC Consent Order." Ruling at 32. Because the plaintiffs did not plead facts creating a nexus between the cited conduct and future violations, the court found that the First Amended Complaint did not adequately plead facts showing this statement was false or misleading.
In the Second Amended Complaint, however, the plaintiffs added factual allegations that were not in their prior complaint, including the statements from CW4, CW5 and CW6 regarding the defendants' attitude toward compliance; statements from CWs and the revelations from the later Federal Reserve Cease and Desist Orders and 2015 FDIC Consent Order showing the defendants continued the very conduct cited in the 2012 FDIC Consent Order as constituting violations to the FTC Act; and statements from CWs showing that the defendants received warnings about their ongoing violative conduct from their own employees and from their banking partner, Cole Taylor, before it severed its relationship with Higher One. Second Am. Compl. ¶ 79(b). With the additions, the Second Amended Complaint sufficiently alleges facts that, if proven, would show a nexus between the conduct cited in the FDIC Consent Order and ongoing violations later revealed, and that because the defendants did not, in any material way, alter the cited conduct, the defendants could not have reasonably believed their own statements of corporate optimism — that all exposure had been recorded and that they did not expect any further losses related to the violative conduct — at the time the statements were made.
Accordingly, the plaintiffs have pled actionable misstatements and omissions with respect to Higher One's legal compliance.
The plaintiffs allege that the statements by the defendants that they had "agreed to a mutual termination" of their banking relationship with Cole Taylor were materially false and misleading. The statement, in substantively identical but slightly varied forms, appeared in Higher One's Form 8-K, filed with the SEC on February 12, 2013 ("2/12/2013 Cole Taylor 8-K"); was made by Volchek and Lasater on 2/12/2013 Earnings Call; and appeared in Higher One's 2012 10-K, filed with the SEC on March 4, 2013.
The court previously found that the plaintiffs had not sufficiently pled facts to support an allegation that these statements were materially false or misleading because,
The court reaches a different conclusion, however, with respect to the false statements alleged in paragraphs 89, 91 and 93 and discussed in paragraphs 89 through 94.
The plaintiffs allege that the defendants made other statements related to the termination of the Cole Taylor relationship or Higher One's transition to other banking relationships that were materially false or misleading by way of omission.
The plaintiffs allege that the statements made by Volchek and Lasater during Higher One's earnings call with analysts and investors held on November 7, 2013 ("11/7/2013 Earnings Call") are actionable.
Finally, the plaintiffs allege that the statements Higher One made in its press release on February 13, 2014 ("2/13/2014 Press Release"), which was filed with the SEC as an exhibit to a Form 8-K signed by Volchek ("2/13/2014 8-K"), in which Volchek was quoted as saying, "We continue to operate in a difficult and complex operating environment due in part to our relationships with multiple bank partners that are overseen by different regulators." Second Am. Compl. at ¶ 93.
The plaintiffs contend that each of these statements is "materially false or misleading because it omitted the details" about the true reason Cole Taylor terminated its relationship with Higher One, and that "[h]aving chosen to discuss Higher One's banking partner relationships, Defendants Higher One and Volchek were under a duty to speak the whole truth, which they violated." Second Am. Compl. at ¶¶ 90, 94.
The court concludes that the plaintiffs fail to plead facts sufficient to substantiate their claims with regard to these statements for substantially the reasons given in the court's prior ruling.
Accordingly, the motion to dismiss is being granted with respect to the false statements alleged in paragraphs 89, 91 and 93.
The court agrees with the plaintiffs that the Second Amended Complaint adequately pleads the false statements with respect to the Products Transparency Fraud. False statements are identified in paragraph 96 (statements on August 7, 2012 earnings call), paragraphs 98 and 99 (response to question from analyst on November 6, 2012 earnings call), and paragraph 101 (statements made with respect to positive changes purportedly made to Higher Ones' products and processes on earnings calls on February 12, 2013, May 7, 2013, August 8, 2013, November 7, 2013, and February 13, 2013 and in the press release on August 8, 2013). The reasons these statements are false are alleged in paragraphs 95, 97, 100, 102.
The court agrees with the plaintiffs that the Second Amended Complaint adequately pleads false statements with respect to the Class Action Resolution Fraud. False statements are identified in paragraphs 104 (statements with respect to changes in practices Higher One had agreed to make as part of the class action settlement made in the Form 10Q for the quarter ending September 30, 2013, the press release on November 5, 2013, and the 2013 Form 10-K) and paragraph 106 (statements made during the November 7, 2013 earnings call). The reasons the statements are false are alleged in paragraphs 103, 105, and 107.
The court agrees with the plaintiffs that the Second Amended Complaint adequately pleads false statements, with respect to the Operating Results Fraud, which are identified in paragraphs 109 through 116 (press releases and filings with the SEC is announcing its financial and operating results for Q2 2012 through Q1 2014). The reasons the statements are false are alleged in paragraphs 108 and 117.
Accordingly the motion to dismiss is being denied with respect to the Products Transparency Fraud, the Class Action Resolution Fraud and the Operating Results Fraud.
"To establish liability under § 10(b) and Rule 10b-5, a private plaintiff must prove that the defendant acted with scienter, "`a mental state embracing intent to deceive, manipulate, or defraud.'"
When determining whether the plaintiff has adequately plead scienter, the court "must . . . evaluate `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.'"
The court agrees with the plaintiffs that the defendants have offered no inference more compelling than the strong inference of scienter pled in the Second Amended Complaint for the reasons discussed by the plaintiffs in their opposition at pages 26 to 37. The plaintiffs have adequately alleged both motive and opportunity and knowledge or recklessness.
The court agrees with the plaintiffs that the loss causation allegations in the Second Amended Complaint are virtually identical to those in the earlier complaint and that there have been no material developments in the case law since the defendants moved to dismiss the First Amended Complaint. The court also agrees that under the circumstances present here this argument was waived.
Because the plaintiffs have established a primary violation of the securities laws, the motion to dismiss the Section 20(a) claim, control person liability, is being denied.
For the reasons set forth above, the motion to dismiss (Doc. No. 90) is hereby GRANTED in part and DENIED in part. The motion to dismiss is being granted with respect to the false statements alleged in paragraphs 89, 91 and 93.
It is so ordered.