WILEY Y. DANIEL, Chief Judge.
THIS MATTER is before the Court on: (1) Crowe Horwarth LLP's Motion To Dismiss Pursuant to Rule 12(b)(6) [ECF No. 50]; (2) Defendants United Western Bancorp, Inc., Scot T. Wetzel, William D. Snider, Guy A. Gibson, Michael J. McCloskey, Robert T. Slezak, Lester Ravitz, Dr. James H. Bullock, Jeffery R. Leeds, Bernard C. Darre, And Dennis R. Santistevan's Motion To Dismiss Plaintiffs' Amended Class Action Complaint Pursuant To Rule 12(b)(1) And 12(b)(6) [ECF No. 52]; and, (3) Defendants Sandler O'Neill & Partners, L.P. And FBR Capital Markets & Co.'s Motion To Dismiss Plaintiffs' Amended Class Action Complaint [ECF No. 56].
On August 11, 2011, MHC Mutual Conversion Fund, L.P. and Clover Partners, L.P. (collectively "the Plaintiffs"), filed an Amended Securities Class Action Complaint against the following defendants: (1) United Western Bancorp, Inc. ("Bancorp"); (2) Scot T. Wetzel, William D. Snider, Guy A. Gibson, Michael J. McCloskey, Robert T. Slezak, Lester Ravitz, Dr. James H. Bullock, Jeffery R. Leeds, Bernard C. Darre, and Dennis R. Santistevan (collectively "the Individual Defendants"); (3) Sandler O'Neill & Partners, L.P. and FBR Capital Markets & Co. (collectively "the Underwriter Defendants"); and, (4) Crowe Horwath LLP. The Plaintiffs allege violations under the Securities Act of 1933, 15 U.S.C. § 77a, et seq., Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq., and the Securities and Exchange Commission's ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5.
Bancorp, a now defunct corporation, was a unitary thrift holding company headquartered in Denver, Colorado until January 2011. During all relevant times to this lawsuit, Bancorp operated United Western Bank as a wholly owned subsidiary. Bancorp filed a registration statement
After Bancorp's public offering, the United States Department of Treasury, Office of Thrift Supervision, conducted two examinations of Bancorp: one on March 30, 2009, and a second on September 27, 2010. Reports issued in connection with the examinations criticized Bancorp's model for determining OTTI and stated that it was not in compliance with Generally Accepted Accounting Principles.
On January 21, 2011, the Federal Deposit Insurance Corporation seized United Western Bank, Bancorp's wholly owned subsidiary. On January 26, 2011, NASDAQ Stock Market, LLC, informed Bancorp that it would no longer list Bancorp's
MHC Mutual filed its original Securities Class Action Complaint on March 11, 2011 [ECF No. 1]. MHC Mutual and Clover Partners filed an Amended Securities Class Action Complaint on August 11, 2011 [ECF No. 46]. In their Amended Complaint, the Plaintiffs allege three claims under the Securities Act, two claims under the Securities Exchange Act, and one claim under SEC Rule 10b-5. With respect to the Securities Act claims, the Plaintiffs allege that Bancorp's September 16, 2009, registration statement contained untrue statements of material fact. With respect to the Securities Exchange Act and SEC Rule 10b-5 claims, the Plaintiffs allege that Bancorp's upper level employees made untrue statements of material fact with respect to Bancorp's financial status.
On September 26, 2011, Crowe Horwath and the Individual Defendants filed Motions to Dismiss [ECF Nos. 50 and 52]. On September 27, 2011, the Underwriter Defendants filed their Motion to Dismiss [ECF No. 56]. The defendants' primary argument is that the Plaintiffs' claims fail because the Plaintiffs did not plead that Bancorp's statements regarding OTTI were objectively and subjectively false.
On March 8, 2012, the Plaintiffs voluntarily dismissed all claims against Bancorp [ECF No. 75]. On November 19, 2012, I held a hearing and heard arguments from all parties regarding the defendants' motions to dismiss. Based on an analysis of the parties' filings and the arguments presented at the hearing, there are two issues before me: (1) whether the determination of a security being other-than-temporarily-impaired is an opinion; and, (2) whether plaintiffs alleging a claim under the Securities Act, Securities Exchange Act, and/or SEC Rule 10b-5 which is based on an opinion, must allege that the opinion is objectively and subjectively false.
The defendants filed motions to dismiss pursuant to Rule 12(b)(6) of the FEDERAL RULES of CIVIL PROCEDURE.
In ruling on a motion to dismiss pursuant to FED.R.CIV.P. 12(b)(6), I "must accept all the well-pleaded allegations of the complaint as true and must construe them in the light most favorable to the plaintiff."
The Plaintiffs' assert three different claims under the Securities Act.
Liability under the Securities Act is contingent on a defective registration statement. Pursuant to 15 U.S.C. § 77k(a):
The Plaintiffs allege that Bancorp's registration statement was "materially untrue and/or misleading and omitted to state other facts necessary to make the statements made not misleading." Amended Compl. [ECF No. 46] p. 103, ¶ 237. Specifically, the Plaintiffs' allege that Bancorp's registration statement misrepresented and failed to disclose that:
Amended Compl. [ECF No. 46] pp. 27-28, ¶ 62. The Plaintiffs argue that: (1) the Underwriter Defendants are liable under § 77k(a)(5) because "[t]he Underwriter Defendants each served as an underwriter with respect to the Offering of Bancorp's securities and each permitted its name to be included on the cover of the Registration Statement as the underwriters" Amended Compl. [ECF No. 46], p. 104, ¶ 246; (2) Crowe Horwarth is liable under § 77k(a)(4) because "Crowe Horwarth acted as Bancorp's accountant/independent auditor and was named by consent as having certified the Registration Statement, including Bancorp's financial results for the year ended 2008" Amended Compl. [ECF No. 46] p. 105, ¶ 247; and, (3) the Individual Defendants, except Santistevan, are liable under § 77k(a)(1) for Bancorp's false and misleading registration statement because they signed or authorized the signing of their name on the registration statement.
Pursuant to 15 U.S.C. § 77l (a):
The Plaintiffs allege that the Underwriter Defendants are liable under § 77l(a)(2) because they "were sellers, offerors and solicitors of purchases of the shares offered pursuant to the prospectus (i.e., the `Registration Statement,' which, as alleged herein, included a prospectus which is false and misleading for same reasons)." Amended Compl. [ECF No. 46] p. 106, ¶ 253.
Pursuant to 15 U.S.C. § 77o (a):
The Plaintiffs allege that the Individual Defendants, except Dennis R. Santistevan, are liable under § 77o (a) because they were "control person[s] of Bancorp by virtue of [their] position as a senior officer, director and/or major shareholder ... and had the power, and exercised the same, to control the representations and actions of Bancorp and cause it to engage in the violations of law complained of herein." Amended Compl. [ECF No. 46] pp. 107-08, ¶ 261. The Plaintiffs further allege that "[e]ach Individual Defendant (except Santistevan) was provided with or had access to copies of the Registration Statement and had the ability to either prevent its issuance or cause it to be corrected." Id.
The Plaintiffs allege two claims under the Securities Exchange Act.
Pursuant to 15 U.S.C. § 78j:
Pursuant to SEC Rule 10b-5:
17 C.F.R. § 240.10b-5. Rule 10b-5 "is coextensive with the coverage of § 10(b)." SEC v. Smart, 678 F.3d 850, 857 n. 7 (10th Cir.2012) (quoting SEC v. Wolfson, 539 F.3d 1249, 1256 n. 11 (10th Cir.2008)); United States v. O'Hagan, 521 U.S. 642, 651, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997) ("Liability under Rule 10b-5, our precedent indicates, does not extend beyond conduct encompassed by § 10(b)'s prohibition"). Thus, the plaintiffs' SEC Rule 10b-5 claim is analyzed under the framework of § 78j
In order for the plaintiffs to establish a violation under § 78j(b), they must prove that: "(1) the defendant[s] made an untrue or misleading statement of material fact, or failed to state a material fact necessary to make the statement not misleading; (2) the statement complained of was made in connection with the purchase or sale of securities; (3) the defendant[s] acted with scienter, that is, with intent to defraud or recklessness; (4) [they] relied on the misleading statements; and (5) [they] suffered damages as a result of [their] reliance." In re Level 3 Communs. Sec. Litig., 667 F.3d 1331, 1333 (10th Cir. 2012).
Pursuant to the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b), a heightened pleading standard applies to the first and third elements of a claim under § 78j(b). Id. Thus, in order to defeat a motion to dismiss, a 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)(B).
The Plaintiffs allege that Wetzel, Snider, and Santistevan "disseminated and approved the false statements specified above, which they knew or recklessly disregarded were misleading in that they contained misrepresentations and failed to disclose material facts necessary in order to make the statements made, in light of the circumstances under which they made, not misleading." Amended Compl. [ECF No. 46] p. 108, ¶ 265. The Plaintiffs further allege that Wetzel, Snider, and Santistevan employed schemes to defraud the defendants and "[e]ngaged in acts, practices, and a course of business that operated as a fraud or deceit upon Plaintiffs and the Exchange Act Class in connection with their purchases of Bancorp securities during the Class Period." Id. at p. 109, ¶ 266.
Pursuant 15 U.S.C. § 78t(a):
In order to establish control person liability, a plaintiff must establish: (1) a primary violation of the Securities Exchange Act; and, (2) "control over the primary violator by the alleged controlling person." City of Philadelphia v. Fleming Cos., 264 F.3d 1245, 1270 (10th Cir.2001) (citation omitted). The Plaintiffs allege that the Individual Defendants "acted as controlling persons of Bancorp within the meaning of § 20 of the Exchange Act. By virtue of their positions and their power to control public statements about Bancorp, these defendants had the power and ability to control the actions of Bancorp and its employees." Amended Compl. [ECF No. 46], p. 110, ¶ 272.
Each of the Plaintiffs' claims, except the "control person" claims, Counts IV and VI
In their motions to dismiss, the defendants argue that because the determination of OTTI is an opinion, the Plaintiffs must plead that the defendants' statements regarding OTTI were objectively and subjectively false. Thus, the defendants' argument dictates that my initial inquiry is whether the determination of a security being other-than-temporarily impaired is an opinion. The parties have not cited to a case squarely addressing this issue and I am not aware of any controlling case from the Supreme Court of the United States or the United States Court of Appeals for the Tenth Circuit. Thus, this is an issue of first impression.
In order to ascertain whether the determination of OTTI is an opinion, it is necessary to lay out the sequential process one goes through in making the decision that a security's impairment is other-than-temporary. The first step is to determine whether a security is impaired. To determine whether a security is impaired, one
The defendants argue that the above-mentioned decision making process results in an opinion. I agree. The determination of OTTI reflects the entity's judgment regarding multiple factors. A security's fair value takes into account market forces, market trends, and buyers' whims. The United States Court of Appeals for the Tenth Circuit has recognized this and stated "[t]here is no universally infallible index of fair market value. There may be a
The defendants argue that because the Plaintiffs' claims are based on opinions i.e., statements regarding OTTI, they are required to plead that such opinions are objectively and subjectively false.
The defendants rely on Virginia Bankshares v. Sandberg, 501 U.S. 1083, 111 S.Ct. 2749, 115 L.Ed.2d 929 (1991), and its progeny. In Virginia Bankshares, minority shareholders sued a bank and its directors for allegedly violating § 78n(a)
Virginia Bankshares, 501 U.S. at 1095-1096, 111 S.Ct. 2749. The Supreme Court held that "disbelief or undisclosed motivation, standing alone, is insufficient to satisfy the element of fact that must be established under § 14(a)." Id. at 1096, 111 S.Ct. 2749. Thus, the Supreme Court in Virginia Bankshares did not squarely address the issue that is presently before this Court. A literal reading of Virginia Bankshares results in a clear understanding that subjective falsity alone is insufficient to establish a claim under the Securities Exchange Act when such claim is based on an opinion. The Supreme Court neither stated that objective falsity alone is sufficient, nor did it state that objective and subjective falsity must be pled.
However, Courts have held that under Virginia Bankshares, plaintiffs asserting claims under the Securities Act, Securities Exchange Act, and/or SEC Rule 10b-5 that are based on opinions, must allege that the opinions are objectively and subjectively false. Rubke v. Capitol Bancorp, Ltd., 551 F.3d 1156, 1162 (9th Cir.2009) (citations omitted) ("Because these fairness determinations are alleged to be misleading opinions, not statements of fact, they can give rise to a claim under section 11 [sic] only if the complaint alleges with particularity that the statements were both objectively and subjectively false or misleading"); Fait, 655 F.3d at 110 ("However, when a plaintiff asserts a claim under section 11 or 12 based upon a belief or opinion alleged to have been communicated by a defendant, liability lies only to the extent that the statement was both objectively false and disbelieved at the time it was expressed"); Freedman v. Value Health, Inc., 958 F.Supp. 745, 753 (D.Conn.1997) ("Therefore, the Court concludes that plaintiffs do not state a cause of action with respect to an opinion statement unless they offer allegations that the statement was incorrect or misleading as to both its objective and subjective aspects"); In re McKesson HBOC, Inc. Secs. Litig., 126 F.Supp.2d 1248, 1265 (N.D.Ca. 2000) ("In the case of a fairness opinion, then, the plaintiff must plead with particularity why the statement of opinion was objectively and subjectively false"); Wolfe v. Aspenbio Pharma, Inc., 2012 WL 4040344, *8 (D.Colo.2012) (quoting In re Sanofi-Aventis Secs. Litig., 774 F.Supp.2d 549, 567 (S.D.N.Y.2011)) ("Thus, `to properly plead that such statements were materially misleading, Plaintiffs must allege with particularity provable facts to demonstrate that the statement of opinion is both objectively and subjectively false'").
Most recently, Judge Blackburn of the United States District Court for the District of Colorado, held that plaintiffs asserting claims under § 78j(b) of the Securities Exchange Act and SEC Rule 10b-5 which are based on an opinion, must allege that the opinion is both objectively and subjectively false. Wolfe, 2012 WL 4040344, *8. With respect to their § 78j(b) and Rule 10b-5 claims, the plaintiffs in Wolfe alleged that the defendants' statements regarding the results of a clinical trial were untrue and false. The plaintiffs based this allegation on retrospective testing
I agree with Judge Blackburn and other Courts holding that plaintiffs asserting claims under the Securities Act, Securities Exchange Act, and/or SEC Rule 10b-5 that are based on opinions, must allege that the opinions are objectively and subjectively false. With that said, the Plaintiffs' 112 page Amended Complaint is void of any allegations that Bancorp's statements regarding OTTI were subjectively false i.e., that Bancorp did not believe its statements regarding OTTI were true when they were made. Further, Plaintiffs' counsel admitted in open court that the Amended Securities Class Action Complaint does not allege subjective falsity as to Bancorp's statements regarding OTTI. Because the Plaintiffs' are required to allege objective and subjective falsity, and because the Plaintiffs have failed to plead subjective falsity, their claims should be dismissed. Therefore, construing the Amended Securities Class Action Complaint in the light most favorable to the Plaintiffs, I find that the Plaintiffs fail to state a claim upon which relief can be granted.
After careful consideration of the matters before this Court, I find that: (1) the determination of a security being other-than-temporarily impaired is an opinion; and, (2) under governing law, a plaintiff asserting a claim under the Securities Act, Securities Exchange Act, and/or SEC Rule 10b-5 that is based on an opinion, must allege that the opinion is objectively and subjectively false. Based on the parties' briefs and arguments in open court, and in light that the Plaintiffs' 112 page Amended Securities Class Action Complaint is devoid of allegations that the challenged statements regarding OTTI were subjectively false, I find that the Plaintiffs fail to state a claim upon which relief can be granted. Accordingly, it is
ORDERED that Crowe Horwarth LLP's Motion to Dismiss [ECF No. 50], the Individual Defendants' Motion to Dismiss [ECF No. 52], and the Underwriter Defendants' Motion To Dismiss [ECF No. 56] are
The United States Code of Federal Regulations ("CFR") further details the conduct that 15 U.S.C. § 78n(a)(1) proscribes. Under 17 CFR § 240.14a-9(a):