JANE J. BOYLE, District Judge.
Before the Court are the Motions to Dismiss filed June 20, 2012 by Defendants Temple-Inland, Inc. ("Temple-Inland"), Kenneth M. Jastrow II ("Jastrow"), Kenneth R. Dubuque ("Dubuque"), Ronald D. Murff ("Murff"), and Craig E. Gifford ("Gifford") (collectively, "Defendants") at documents 37, 42, 44, and 47. The Motions seek dismissal of Plaintiff's Amended Class Action Complaint
TABLE OF CONTENTS
I. BACKGROUND ................................................................733
II. LEGAL STANDARDS ..........................................................736
III. ANALYSIS .................................................................738
A. Group and Puzzle Pleading as to all Defendants........................739
B. Did Temple-Inland or Jastrow "Make" the Statements at Issue?..........740
1. Temple-Inland.....................................................740
2. Jastrow...........................................................743
C. Were the Statements by Any of the Defendants False or Misleading?.....745
1. Alleged GAAP Violations ..........................................745
2. Allegedly False Financial Figures.................................748
3. Other Alleged Misstatements.......................................749
D. Scienter..............................................................750
1. Allegations Common to All Individual Defendants ..................750
2. Jastrow...........................................................751
3. Dubuque ..........................................................753
4. Murff.............................................................755
5. Gifford...........................................................756
6. Temple-Inland.....................................................757
E. Safe Harbor Defense...................................................757
F. Loss Causation........................................................761
G. Statute of Limitations................................................763
H. Control Person Liability..............................................765
IV. CONCLUSION ................................................................766
This action is a private securities fraud putative class action on behalf of all purchasers of Guaranty Financial Group, Inc. ("GFG") common stock between December 12, 2007 and August 24, 2009 (the "Class Period") against Temple-Inland and certain of Temple-Inland's and Guaranty's officers and directors (collectively "Defendants") for violations of the Securities and Exchange Act of 1934 (the "Exchange Act"). FAC ¶ 1. Guaranty Financial Group was a bank-holding company that owned all the stock of Guaranty Bank (the "Bank"). Id. at ¶ 8. For simplicity, the Court will refer to both GFG and the Bank as "Guaranty."
During December of 2007, Guaranty was spun off from Temple-Inland and common
The Tepper Complaint asserted numerous claims involving fraudulent and preferential transfers and breach of fiduciary duty against Temple-Inland, TIN, Inc., Forestar (USA) Real Estate Group Inc., Kenneth M. Jastrow II, Randall D. Levy, Arthur Temple III, and Larry E. Temple. These claims were eventually settled for $80 million, with $38 million paid to Mr. Tepper as Liquidation Trustee and $42 million to the FDIC, with no admission of liability by the defendants in that case.
Shortly after the Tepper Complaint was filed, Plaintiffs filed the instant case against Defendants Temple-Inland, Jastrow, Dubuque, Murff, and Gifford alleging securities fraud in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5.
While the Tepper Complaint centered on claims of improper transfers and breach of fiduciary duty, the Amended Complaint in this case is based exclusively on Plaintiffs' allegations that the Defendants violated federal securities laws. More precisely, Plaintiffs allege that during the Class Period, Guaranty issued materially false and misleading financial statements which overstated the fair value of its mortgage-backed securities ("MBS") portfolio and understated unrealized losses of that portfolio. Id. at 48. As part of this alleged fraudulent scheme, Guaranty "engaged in improper financial practices that were designed to, and did, artificially inflate the Bank's regulatory capital, thereby masking the true financial condition of the Company," by understating the Bank's losses so that its "minimum regulatory capital requirements would not be breached" and the Bank "would be afforded the time necessary to procure much needed capital."
FAC ¶¶ 47-48. Plaintiffs allege that this overstatement of fair values and understatement of losses was a result of Guaranty's use of improper pricing models to value its MBS portfolio. Id. at ¶ 52. Plaintiffs further allege that Defendants
Despite these repeated assurances regarding the safety of its MBS portfolio, Guaranty's financial situation continued to deteriorate throughout the Class Period. This deterioration eventually resulted in Guaranty falling below required capital ratios prescribed by the Office of Thrift Supervision ("OTS") and culminated in a $1.45 billion write down of the value of Guaranty's MBS portfolio on July 17, 2009. Unable to procure the necessary capital, Guaranty was eventually closed by the OTS and the FDIC was appointed as a receiver, with the company filing for bankruptcy protection under Chapter 11 shortly thereafter.
In response to the filing of the Amended Complaint, Defendants Temple-Inland, Jastrow, Dubuque, and Gifford together with Murff filed four separate motions to dismiss. In their motions, Defendants argue, inter alia, that Temple-Inland and Jastrow did not make any of the alleged misstatements, that the Amended Complaint fails to allege fraud with particularity and relies on impermissible group and puzzle pleading, that certain of the alleged statements are protected by the Private Securities Litigation Reform Act's safe harbor, that the Amended Complaint fails to properly plead loss causation or control person liability, and that Plaintiffs' claims are barred by the statute of limitations. Plaintiffs responded to the motions and Defendants filed their replies to Plaintiffs' response. The motions are now ripe for disposition.
In analyzing a complaint under Federal Rule of Civil Procedure 12(b)(6), the Court accepts all well-pleaded facts as true, viewing them in the light most favorable to the plaintiff. Martin K. Eby Constr. Co. v. Dall. Area Rapid Transit, 369 F.3d 464, 467 (5th Cir.2004). The complaint should be dismissed only if it does not include enough facts to state a claim to relief that is plausible on its face. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A claim must be "nudged ... across the line from conceivable to plausible." Id. "A pleading that offers `labels and conclusions' or `a formulaic recitation of the elements of a cause of action will not do.'" Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955). "Factual allegations must be enough to raise a right to relief above the speculative level ...." SW Bell Tel., LP v. City of Hous., 529 F.3d 257, 260 (5th Cir.2008) (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955).
Special pleading rules apply to fraud claims. Pursuant to Federal Rule of Civil Procedure 9(b) ("Rule 9(b)"), all allegations of fraud must be stated with particularity. Under Fifth Circuit precedent, pleading fraud with particularity sufficient to satisfy Rule 9(b) requires the pleader to identify the "time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what that person obtained thereby." Tuchman v. DSC Commc'ns Corp., 14 F.3d 1061, 1068 (5th Cir.1994) (internal citation omitted). Stated differently, Rule 9(b) requires "the who, what,
Securities fraud claims brought by private litigants are also subject to the pleading requirements imposed by the Private Securities Litigation Reform Act of 1995 ("PSLRA"). Section 78u-4(b) of the PSLRA requires a plaintiff pleading a false or misleading statement or omission under federal securities law to "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). At a minimum, the PSLRA pleading standard incorporates that of Rule 9(b). ABC Arbitrage Plaintiffs Grp. v. Tchuruk, 291 F.3d 336, 349-50 (5th Cir. 2002); see also Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 362-63 (5th Cir.2004).
In order to plead fraud with specificity as required by the PSLRA, the complaint must also "distinguish among those they sue and enlighten each defendant as to his or her particular part in the alleged fraud." Southland, 365 F.3d at 365 (emphasis in original). Allegations against "Defendants" as a group are not imputable to any particular individual "unless the connection between the individual defendant and the allegedly fraudulent statement is specifically pleaded." Id. Thus, allegations that each defendant controlled the contents of and participated in writing a company's SEC filings, reports, and releases, without more, are insufficient to meet the requirements of the PSLRA. Id. Similarly, complaints must not engage in "puzzle pleading" by "isolating allegations and elements while leaving it to the [c]ourt to infer a connection," as "it is the parties' burden to present succinct pleadings which clearly lay out" the required elements — a court is not required to "waste its resources attempting to construe which statements are actionable and why each is actionable." In re Alamosa Holdings, Inc., 382 F.Supp.2d 832, 857-58 (N.D.Tex.2005).
The PSLRA also requires that the plaintiff "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind," frequently referred to as the defendant's scienter. 15 U.S.C. § 78u-4(b)(2); Southland, 365 F.3d at 363. Scienter under the PSLRA means an "intent to deceive, manipulate, or defraud or that severe recklessness in which the danger of misleading buyers or sellers ... is either known to the defendant or is so obvious that the defendant must have been aware of it." Id. at 366 (citation omitted). Severe recklessness "is `limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standard of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it.'" Abrams v. Baker Hughes, Inc., 292 F.3d 424, 430 (5th Cir.2002) (citation omitted).
The facts as alleged by plaintiffs must give rise to a "strong inference" of scienter, which "must be more than merely plausible or reasonable — it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). In evaluating scienter, a court "must engage in a comparative evaluation; it must consider, not only inferences urged by the plaintiff ... but also
Defendants filed their motions to dismiss on June 20, 2012, each asserting multiple grounds for dismissal of the Amended Complaint. The Court examines those arguments next along with the Plaintiffs' corresponding responses. First, for clarity and because the four motions to dismiss contain substantially similar arguments challenging the sufficiency of the Plaintiffs' pleadings, instead of analyzing each ground for dismissal motion-by-motion, four times over, the Court has, to the extent possible, arranged its analysis by topic of dismissal (i.e., group pleading, scienter, etc.) and grouped each of the Defendant's arguments under each topic. With respect to Temple-Inland and Jastrow, because certain of their arguments apply uniquely to them, these arguments are addressed separately.
Before the Court begins its analysis, it is important to note that there has been a shift in Plaintiffs' position in this case. Specifically, in response to Defendants' motions to dismiss, Plaintiffs withdrew one of their primary grounds for recovery and, in so doing, rendered moot significant portions of Defendants' motions to dismiss. See Pls.' Resp. 73-74. More to the point, Plaintiffs, in their Amended Complaint, rely on two "cornerstone" allegations against the Defendants in this case. One is their allegation is that Defendants failed to comply with Generally Accepted Accounting Principles ("GAAP") in the valuation of Guaranty's MBS portfolio and thereafter reported fair values and unrealized losses that were materially false. Their other cornerstone allegation, which they now disavow, is that during the Class Period the Defendants falsely reported that nearly half of Guaranty's MBS portfolio were "senior tranche." See FAC ¶¶ 59, 110, 116, 126, 130, 136, 145, 149, 162, 165, 173, 175, 196. By withdrawing their senior tranche theory, Plaintiffs have eliminated significant portions of the Defendants' arguments from consideration,
Despite the withdrawal of one of their cornerstone allegations, Plaintiffs' Amended Complaint remains deficient in several respects under Rule 9(b) and the PSLRA due to an overall lack of clarity in pleading — commonly described as the use of "group" and "puzzle" pleading. For example, numerous references to non-party "Guaranty" or to the generic "Defendants" generally — as the parties responsible for the allege false and fraudulent statements — are found throughout the operative complaint,
Further, seventy pages of the Amended Complaint are devoted to what Plaintiffs describe as their "Substantive Allegations" while only two pages describe their actual causes of action under the federal securities laws. Given the length of the allegations and the exacting pleading standards for PSLRA cases, the parties were directed to submit a chart to aid the Court's determination of whether the Plaintiffs' voluminous pleadings satisfy the standards for securities fraud cases. See Chart to Aid the Court in Considering Defendants' Motions to Dismiss the Claims filed Nov. 21, 2012 (the "Chart"). Toward that end, the Chart was supposed to provide a breakdown of the Plaintiffs' pleadings organized under specific categories of PSLRA and Rule 9(b) pleading requirements. The information contained in the Chart, ideally, should correspond with the actual allegations in the Amended Complaint.
A further review of the Chart underscores the problem, discussed above, caused by Plaintiffs' sweeping references to non-party "Guaranty" or to the "Defendants" generally — as opposed to naming specific individuals — in the Amended Complaint. Specifically, certain paragraphs of the Amended Complaint name "Guaranty" as the maker of certain false statements, while Plaintiffs then appear to clarify in the Chart that those statements are, in fact, attributable to specific individuals. By way of example, in paragraph 118 of the Amended Complaint, Plaintiffs identify "Guaranty" as the maker of particular statements. Later, Plaintiffs, in the Chart, refer to paragraph 118 and specify "Dubuque and Murff" as makers of the statements. This same confusing scenario is played out in other paragraphs of the Amended Complaint including paragraph 124, where the Amended Complaint refers to "Guaranty" as the party responsible for the statement at issue, but the Chart identifies "Dubuque and Murff" as the responsible parties. In other words, the Amended Complaint reflects numerous statements attributed to "Guaranty" whereas the Chart, in several places, identifies specific individuals as responsible for making those statements. Obviously, Plaintiffs may not amend their Amended Complaint through the use of the Chart, and the Court may not consider allegations not pleaded in the operative complaint.
Finally, as mentioned above, Plaintiffs have, since the filing of the motions to dismiss, withdrawn a cornerstone allegation in their case — the senior tranche allegation, repeated through the complaint — further hindering the Court's ability to assess the viability of Plaintiffs' Amended Complaint under Rule 9(b) and the PSLRA.
For the reasons stated above, the Court
Plaintiffs seek to hold Temple-Inland liable for alleged misstatements contained within Guaranty's Form 8-K filed on December 14, 2007, which included an Information Statement describing the details of the Spin-Off and providing information
FAC ¶¶ 115-16. In response, Temple-Inland argues, inter alia, that even assuming the statements were false and misleading, it did not "make" the alleged misstatements and thus may not be held liable for them.
Under Rule 10b-5, it is unlawful for "any person, directly or indirectly... [t]o make any untrue statement of a material fact" in connection with the purchase or sale of securities. 17 C.F.R. § 240.10b-5. The maker of a statement "is the entity with authority over the content of the statement and whether and how to communicate it." Janus Cap. Grp., Inc. v. 1st Derivative Traders, ___ U.S. ___, 131 S.Ct. 2296, 2303, 180 L.Ed.2d 166 (2011). In the context of a public SEC filing, the entity that "bears the statutory obligation to file" and that the SEC has recorded as filing the document ordinarily "makes" the statements. Id. at 2304-05. Further, assisting in creating or drafting a false statement does not subject the drafter to Rule 10b-5 liability, as it is only the speaker who has "ultimate authority over the statement," and therefore makes the statement.
Even assuming that the alleged misstatements in the Information Statement are false, Temple-Inland may not be held liable for any of these statements, as it did not make them as required by Janus. In making this determination, the Court rejects Plaintiffs' "adoption" theory of liability as applied to this case, based on Janus. In Janus, the United States Supreme
Id. at 2302. Thus, the court explained that providing online access to the investment fund's prospectuses was not a basis for liability:
Id. at 2305 n. 12 (citation omitted).
Here, the Information Statement contained within the December 14, 2007 Guaranty Form 8-K, while on Guaranty letterhead and filed by Guaranty, was preceded by a letter in Temple-Inland stationery and signed by Defendant Jastrow (the "Jastrow Letter"), who was Chairman and CEO of Temple-Inland.
While this is a closer case than Janus, Plaintiffs have not sufficiently alleged that Temple-Inland "made" any of the alleged misstatements contained within the Information Statement. As in Janus, there is no allegation that Temple-Inland filed the Form 8-K or falsely attributed the Form 8-K to Guaranty. See Janus, 131 S.Ct. at 2305. Rather, the Form 8-K was filed by Guaranty and signed by Scott A. Almy, Guaranty's Executive Vice President.
Although the Court does not dismiss the claims against Temple-Inland with prejudice, the Court is dubious that any future amended complaint would cure the deficiencies listed above, in light of Janus. As such, the Court
Jastrow
With respect to the 8-K and the 10-K, Jastrow signed these documents in his capacity as an outside director, specifically Chairman of the Board of Directors of Guaranty. Jastrow cites a case outside of the Fifth Circuit for the proposition that outside directors "cannot be assumed to have assisted in preparing, reviewing, or approving offering materials ... even when an outside director's name or signature appears in a company statement." See In re Nat'l Century Fin. Enters., 504 F.Supp.2d 287, 298 (S.D.Ohio 2007). In Jastrow's view, given that he is an outside director, he may not be held liable for statements within those documents without specific allegations describing his role in creating the documents at issue. Jastrow also argues that the same rule is required under Janus, given his contention that outside directors of a company cannot be assumed to have ultimate control over that company's statements.
Although this question has not been squarely addressed by the Fifth Circuit, the weight of authorities within the Fifth Circuit indicates that an outside director's signature on a document is sufficient to make him liable for any false or misleading statements within that document.
365 F.3d at 365 (emphasis added). The court in Financial Acquisition Partners LP v. Blackwell, similarly held that "[c]orporate statements can be tied to officers if plaintiffs allege they signed the documents on which the statements were made or allege adequately their involvement in creating the documents." 440 F.3d 278, 287 (5th Cir.2006) (citing Southland, 365 F.3d at 364-65). Defendants make much of the fact that the Southland and Blackwell courts discussed the signatures of officers but not outside directors. However, some courts within the Fifth Circuit have explained that both directors and officers may be held liable for corporate statements if they signed the document containing the statements. See, e.g., In re BP p.l.c. Sec. Litig., 843 F.Supp.2d 712, 779 (S.D.Tex.2012) (citing Southland and Blackwell). Another court highlighted the significance of an outside director's signature, explaining:
In re Enron Corp. Sec., Derivative & "ERISA" Litig., 540 F.Supp.2d 800, 819 n. 19 (S.D.Tex.2007) (other citation omitted). As such, the Court
The Court also recognizes that Jastrow's signature contained within the December 14, 2007 Form 8-K is on a Guaranty cover letter preceding the Information Sheet containing the alleged misstatements, and not on the Information Statement itself. The Information Statement itself is not attributed to any author. Nevertheless, Jastrow signed the cover letter in his capacity as Chairman of the Board of Directors of Guaranty. As such, Jastrow is acting as a maker of the Information Statement under Janus, in contrast to the Temple-Inland cover letter which merely forwarded another corporation's document.
In order to plead securities fraud based on misstatements or omissions, a plaintiff must identify the statements at issue and allege that they were false or misleading when made. All Defendants argue that the Amended Complaint does not allege with specificity any false or misleading statements. The Court will examine whether the Amended Complaint pleads that Guaranty or any of the Individual Defendants made false or misleading statements below.
All Defendants argue that the Amended Complaint does not allege any GAAP violations by them or Guaranty. In response, Plaintiffs argue that the Amended Complaint alleges that Defendants violated GAAP when they knowingly overstated fair values and understated unrealized losses on the Company's MBS portfolio, failed to timely record an OTTI in the value of the Company's MBS, and failed to disclose material events about the diminution in the value of the MBS portfolio between December 31, 2007 and the filing of the 2007 Form 10-K. FAC ¶ 48. The Amended Complaint also states that Guaranty was using a flawed pricing model to value its portfolio, because:
FAC ¶ 52.
The Amended Complaint further claims that Guaranty violated GAAP by failing to record an OTTI in its MBS portfolio of at least $483 million by no later than June 30, 2008. Id. at ¶¶ 80-106. In Plaintiffs' view, Guaranty was required to record an OTTI as "[t]he massive diminution in the value of, and the significant increase in the rate of average delinquencies on, Guaranty's MBS portfolio" were "red flags" indicating to the Defendants that Guaranty "would not be able to collect all amounts due on its MBS portfolio in accordance with their contractual terms, which rendered such investments impaired on an other-than-temporary basis pursuant to GAAP," in addition to the downgrading or placement on negative watch of Guaranty's MBS as additional red flags. Defs.' Resp. 25-26 (citing FAC ¶ 92, 94). In their view, such alleged failure to record the required OTTI led to a corresponding overstatement of Guaranty's income, retained earnings, and regulatory capital no later than June 30, 2008.
Finally, Plaintiffs argue that Guaranty violated GAAP by failing to disclose material subsequent events. They point to Guaranty's 2007 10-K filed February 29, 2008, which disclosed that Guaranty had a combined unrealized loss totaling $274 million in 2007, when the actual loss was actually much greater, and which purportedly failed to disclose that the unrealized loss on the MBS portfolio, as determined by Guaranty, had increased by hundreds of millions of dollars since December 31, 2007 (citing FAC ¶ 103), given that 31 days later, Guaranty reported that the cumulative unrealized loss on its MBS portfolio totaled $1.070 billion, four times the amount reported at December 31, 2007. FAC ¶¶ 102-105.
The Court first notes that several of the allegations regarding Guaranty's purported GAAP violations are based on statements of confidential witnesses, who were directors or vice presidents of Guaranty.
In response to these allegations of GAAP violations, Defendants collectively argue that determinations of the fair value of MBS and whether to record an OTTI in the value of the MBS involve a great deal of judgment and that GAAP does not prescribe any one way of performing such valuation. See, e.g., Thor Power Tool Co. v. C.I.R., 439 U.S. 522, 544, 99 S.Ct. 773, 58 L.Ed.2d 785 (1979) (GAAP "tolerate[s] a range of `reasonable' treatments, leaving the choice among alternatives to management"); Ind. Elec., 537 F.3d at 536 ("Valuations of assets, ... as well as the application of sophisticated accounting standards like `fair value,' leave broad scope for judgment and informed estimation; this is another way of saying that determinations on such matters can differ reasonably and sizably." (citations omitted)). In their view, Plaintiffs have only alleged that certain confidential witnesses would have valued the MBS differently or would have recorded an OTTI, but neither result was required by GAAP. Defendants also argue that Plaintiffs have not alleged GAAP violations with specificity, specifically what the value of the MBS was when it was purportedly overstated, when an OTTI should have been recorded, and what the magnitude of the OTTI was.
Recognizing that GAAP rules regarding determinations of fair value and whether to recognize an OTTI require judgment calls, the Court finds that the issue of whether Guaranty violated GAAP is not appropriate for disposition on Defendants' Rule 12 motions. See Barrie v. Intervoice-Brite, Inc., 397 F.3d 249, 257 (5th Cir.2005) (in securities fraud case where parties disputed whether defendants' accounting methods were proper, dismissal of case on motion to dismiss was inappropriate given the fact-based nature of the defense); but see In re Capstead Mortg. Corp. Sec. Litig., 258 F.Supp.2d 533, 550-54 (N.D.Tex.2003) (finding that complaint did not allege facts which showed that
The Court reaches a different conclusion, however, with respect to Plaintiffs' allegations that Guaranty understated its losses, overstated the value of its MBS, and failed to properly record an OTTI in 2008. Plaintiffs themselves state that "[t]he whole thrust of the Complaint ... is that the Bank misrepresented the value of its MBS portfolio and failed to record OTTI that it was required to record." Pls.' Resp. 38 n. 29. Unfortunately, their allegations regarding what the actual valuations of the MBS portfolio were, when an OTTI should have been recorded, and what the magnitude of the OTTI should have been are simply not specific enough to show that Guaranty reported false or misleading financial figures.
The Amended Complaint states that Guaranty's MBS portfolio suffered a nearly half billion OTTI no later than June 30, 2008 and that Guaranty's failure to record this OTTI resulted in an overstated value of its MBS portfolio and an understated figure for Guaranty's losses. See, e.g., FAC 199. However such allegations do not indicate what the MBS valuation should have been when the purported misstated values were reported. As explained by one court in this District,
In re Capstead Mortg., 258 F.Supp.2d at 550. Another court explained that the plaintiff failed to allege with specificity how a Form 10-K was misleading with respect to cost overruns because, inter alia, the plaintiff did "not allege how large the overruns were at the time of the filing of the Form 10-K." Magruder v. Halliburton Co., Civ. Action No. 3:05-cv-1156-M, 2009 WL 854656, at *22 (N.D.Tex. Mar. 31, 2009) (citing Ind. Elec., 537 F.3d at 536 (holding that "plaintiffs cannot make allegations that strongly support the defendants' guilty knowledge of securities fraud... by throwing out large numbers with no factual basis for ascertaining what the `truth' was")). This case is similar to Indiana Electrical. After first noting the complaint's "voluminous citations to accounting rules," 537 F.3d at 535, the court explained that while plaintiffs alleged devices that allowed the defendant to "pad its earnings, massively, they make no attempt to estimate by how much the earnings were inflated. There is no standard of comparison to what the correct numbers would have been." Ind. Elec. at 536 (emphasis added). Here, without stating what
The Court also finds that the Amended Complaint fails to plead that Guaranty made a false statement or omission based on Guaranty's failure to record an OTTI no later than June 2008 and based on Guaranty's restatement in March 2009 which reflected a $1.45 billion OTTI. While the Court has already determined that the issue of whether Guaranty violated GAAP is not appropriate for resolution on a Rule 12 motion, stating that Guaranty should have recorded an OTTI no later than June 2008 and that Guaranty should have recorded the $1.45 billion OTTI earlier is not specific enough to show that Guaranty's financial statements were false when made. While the Court recognizes that discovery has been stayed pursuant to the PSLRA, Plaintiffs must allege what they believe the actual figures should have been in the statements alleged to be false, and the Amended Complaint does not allege those facts. As such, to the extent that Defendants seek dismissal of the Amended Complaint's claims which are based on false or misleading financial figures, the motions are
The Amended Complaint's pleadings regarding Guaranty's and the Individual Defendants' representations that its MBS was senior tranche and AAA rated are also insufficient to allege that such statements were false or misleading. Plaintiffs now recognize that Guaranty's MBS were characterized in their prospectuses as senior tranche but still seem to argue that such representations were misleading, given that "in many instances, they are far from the most senior, and have as many as 22 layers of higher priority above them" and that "it nonetheless remains true that only two of the Bank's many MBS tranches were the most senior and that Defendants used the `senior' status of the Bank's MBS portfolio, and the triple A rating of that portfolio, to disguise the known, inflated value of that portfolio in violation of Section 10(b) and Rule 10b-5." Pls.' Resp. 73-74 (citations omitted). However, the Amended Complaint does not properly allege that this characterization was material or misleading. Even though the MBS may not be the most senior tranche, there is no allegation that the most senior tranche is the only tranche that is properly considered senior. There are also insufficient allegations to indicate that the Individual Defendants knew or should have known that Guaranty's MBS, while AAA rated by independent rating agencies, should not have in fact been rated AAA
In light of the foregoing, Defendants' Motions to Dismiss, to the extent they seek dismissal of Plaintiffs' claims based on failure to plead with specificity that Defendants' statements or omissions were false or misleading when made are
Even assuming that the Amended Complaint properly alleges that Guaranty or the Individual Defendants made material false or misleading statements or omissions, Plaintiffs must allege that such statements were made with scienter, or that Defendants made them with "an intent to deceive, manipulate, or defraud or severe recklessness." Ind. Elec., 537 F.3d at 533 (citation omitted). Under this standard, simple or even gross negligence are insufficient to meet the PSLRA's scienter requirement. See, e.g., Abrams, 292 F.3d at 430. The Court will examine whether the Amended Complaint alleges a strong inference of scienter as to each of the Individual Defendants below.
Plaintiffs point to general allegations of scienter as to all Defendants, including the magnitude of GAAP violations, corroboration of multiple witnesses, and Defendants' general motive to understate losses so as to maintain minimum regulatory capital requirements and have more time to procure much needed capital.
The Court has already discussed the alleged GAAP violations above and determined that the issue of whether GAAP was violated is not appropriate for resolution at this time. The Court notes, however, that unlike many cases where the company has in effect acknowledged that it did not follow GAAP by restating its financials, here, Guaranty has never restated the MBS valuations and profits and losses at issue, with the exception of the Office of Thrift Supervision's July 2009 restatement of Guaranty's March 2009 Thrift Financial Report reflecting a $1.45 billion OTTI on the MBS portfolio. See FAC ¶¶ 47, 186. Even if Guaranty had restated its financials and violated GAAP, though, these types of errors can "easily arise from negligence, oversight or simple mismanagement, none of which rise to the standard necessary to support a securities fraud action," Abrams, 292 F.3d at 433, and the alleged violations by Guaranty appear to have been repeated by numerous other companies during the Class Period. At the same time, the failure to record an OTTI of half a million dollars would have a large effect on Guaranty's bottom line, and the OTS's July 2009 OTTI restatement resulted in Guaranty "having negative capital" and seemed to be the "last straw" in Guaranty's long and gradual decline. Given that the issue of whether Guaranty violated GAAP is disputed but the alleged magnitude and extent of the violations is large, the Court finds that this factor contributes to an inference of scienter but, standing alone, does not contribute to a strong inference.
With regard to motive and opportunity, Plaintiffs allege that Guaranty understated its losses so that its minimum regulatory capital requirements would not be breached and so that the company would be afforded time necessary to procure much needed capital via private
Plaintiffs also argue that they have sufficiently alleged the scienter of Jastrow, CEO of Temple-Inland and former Chairman of the Board of Directors of Guaranty
The actual allegation in the Amended Complaint referenced by Plaintiffs states that "Defendants knew that the Bank was significantly undercapitalized" and "Temple-Inland determined that the Bank's MBS portfolio would contribute to sustained losses by the Bank, with adverse financial consequences to Temple Inland." FAC ¶ 35. However, such group-pleaded allegations are insufficient to show that Jastrow knew that the Bank was undercapitalized
The Amended Complaint alleges that the Executive Committee of Temple-Inland's Board of Directors held a meeting at which Jastrow "opined that the real estate markets in California were deteriorating, but it does not identify when this meeting allegedly occurred. See FAC ¶ 35(a). Nevertheless, the Court does not find that this statement indicates any scienter as to the Bank's allegedly fraudulent accounting practices. Such statement regarding the California real estate market was both publicly known and also acknowledged by Guaranty in its December 14, 2007 Form 8-K. See Defs.' App. 10. Further, as discussed by Jastrow, "[t]he issue for scienter purposes is not knowledge of whether the California housing market was deteriorating, but rather knowledge of whether the AAA rated, non sub-prime mortgage-backed securities would deteriorate to such an extent that the Bank would be unable to collect the principal and interest on those securities." Jastrow Mot. Dismiss 8.
Although Plaintiffs' Response states that Jastrow made this statement, the Amended Complaint makes this allegation without attributing it to any individual, though it does appear in the Amended Complaint after the allegation regarding Jastrow's statement about the declining real estate market in California. Instead, this statement appears to be Plaintiffs' own statement regarding the California real estate market's effect on the Bank's assets. Even assuming that Jastrow made such a statement, though, such statement does not lead to the conclusion that Jastrow knew that Guaranty was improperly valuing its MBS or should have recorded a half billion OTTI by June 2008, especially considering that there is no indication that the valuations or impairments in the December 2007 Form 8-K were ever restated.
The Court first notes that Plaintiffs concede that Guaranty's MBS portfolio was indeed AAA-rated and have withdrawn their allegations that Defendants made misstatements in characterizing them as senior tranche. Pls.' Resp. 74. Such concession undermines to a significant degree much of the Amended Complaint, given the repeated allegations throughout the complaint that Guaranty falsely characterized them as senior tranche. Further, while Plaintiffs have alleged that various confidential witnesses alerted Guaranty senior management to deficiencies in Guaranty's accounting practices regarding MBS, even assuming these warnings were true and were sufficient to impute scienter on the recipient of these warnings, Plaintiffs do not allege that any of these witnesses shared these warnings with Jastrow specifically. Further, no security in Guaranty's portfolio was put on negative watch or downgraded until months after the documents attributed to Jastrow were filed with the SEC, which also weighs against an inference of scienter. See FAC ¶ 93.
At least some courts have distinguished between a corporation's inside directors
Overall, the Court finds that the Amended Complaint does not allege a strong inference of scienter as to Jastrow. Allegations showing that Jastrow was aware of the declining housing market and a declining market for MBS as well as Guaranty's need for more capital, in connection with his position as Chairman of the Board of Directors and his signature on certain Guaranty SEC filings, are simply not enough to show that Jastrow knew that Guaranty was reporting false financial figures and violating GAAP. This is especially so considering that the Amended Complaint does not allege that Jastrow specifically heard or saw any of the purported warnings shared with other Guaranty officers or directors. Instead, the more compelling inference is that he did not know of these issues or was only negligent as to them. As such, Jastrow's Motion to Dismiss, to the extent it seeks dismissal of Plaintiffs' Section 10(b) and Rule B-5 claim against Jastrow, is
Defendant Dubuque served as the President, CEO, and a director of Guaranty until his resignation from such positions on November 19, 2008. Defendant Dubuque also served as the Company's Chairman from August 26, 2008 through November 19, 2008. FAC ¶ 10. Plaintiffs seek to hold Dubuque liable for his signatures on Guaranty's 2007 10-K and three 10-Qs filed in 2008. See Pls.' Resp. 17 n. 14 (and citations therein). Plaintiffs point to various allegations which purportedly show his scienter, which the Court will examine below.
Plaintiffs point to numerous allegations showing that Dubuque knew Guaranty was undercapitalized. See, e.g., FAC ¶¶ 35, 37-39. The Court has already determined that such allegations provide support for Plaintiffs' theory regarding motive. However, such allegations, standing alone, do not support an inference of scienter, as they do not lead to the conclusion that Guaranty was improperly valuing its MBS.
Plaintiffs point to numerous allegations in support of their allegation that Dubuque knew Guaranty was improperly valuing its MBS, including the Amended Complaint's allegations that:
FAC ¶¶ 63-77. As discussed above, the Court previously found that the Amended Complaint sufficiently pleaded at least some violations of GAAP. However, even assuming that GAAP was violated, the above allegations standing alone do not lead to a strong inference of scienter. The communications described in the complaint occurred either several months prior to the Class Period or at some unspecified time. Also, the Court recognizes that GAAP requires "nuanced" judgment calls and accounting estimates, which, if proven, might be a result of negligence, oversight, or mismanagement. Magruder, 2009 WL 854656, at *8. Even viewing the Amended Complaint in a light most favorable to the Plaintiffs, these allegations do not show that Dubuque did not believe Guaranty's financial figures and statements at the time they were made. However, given the concerns that were brought to the attention of Dubuque and other executives, a point not disputed by Defendants, such allegations contribute at least partly to an inference of scienter.
Plaintiffs point to Dubuque's statements at a Guaranty investor conference call on February 6, 2008, at which he stated that it was "not a particularly good time to sell" MBS and that Guaranty could be "more transparent" with respect to its valuation of MBS portfolio, FAC ¶¶ 122, 129, as indications that Dubuque knew Guaranty was valuing its MBS improperly and violating GAAP. However, even viewing these statements in a light most favorable to Plaintiffs, these statements merely indicate a publicly known fact, that the MBS market was declining, and that Guaranty had not fully detailed the process by which it valued MBS. That "it wasn't a particularly good time to sell" would be more relevant if Plaintiffs were alleging that Guaranty was misstating the market value of its MBS, which it is not. As such, neither statement contributes to a strong inference of scienter.
Dubuque resigned from his position as Guaranty's Chairman of the Board, President, and CEO on November 19, 2008, two weeks after Guaranty's November 5, 2008 press release, which reported a 2008 third quarter net loss of $162 million, disclosed that the carrying value of the MBS portfolio had decreased by another $600 million and disclosed that Guaranty had recorded a $53 million OTTI on non-agency MBS. FAC ¶¶ 168, 170, 176. The Court recognizes that the resignation of high level officials may contribute to an inference of scienter. See generally In re Fleming Cos. Sec. & Derivative Litig., No. CIVA503MD1530TJW, MDL-1530, 2004 WL 5278716 (E.D.Tex. June 6, 2004). However, the Amended Complaint also alleges Guaranty's gradual decline, which included at least two prior significant stock drops in response to negative reports, suggesting that this overall decline, rather than securities fraud, was the impetus for Dubuque's resignation. Thus, this allegation, standing alone, does not contribute to a strong inference of scienter. See Southland, 365 F.3d at 383; Abrams, 292 F.3d at 434.
A signature on a SOX certification may raise an inference of scienter
Taking the Amended Complaint as a whole, along with its general allegations of motive, GAAP violations, and its allegations as to Dubuque specifically regarding Guaranty's capitalization levels, deficiencies in Guaranty's pricing models, his public statements, his resignation, and his SOX certifications, the Court finds that they do not raise a strong inference of scienter as to Dubuque. While the Amended Complaint may raise a plausible inference that Dubuque knew of the alleged fraud or was severely reckless, such inference is not at least as compelling as the competing inference, that he did not know of the alleged fraud or was merely negligent. As such, Dubuque's Motion to Dismiss, to the extent that it seeks dismissal of Plaintiffs' 10(b) and Rule 10b-5 claims against Dubuque based on failure to allege a strong inference of his scienter, is
Defendant Murff served as Senior Executive Vice President and Chief Financial Officer ("CFO") of Guaranty and later assumed the duties and responsibilities of Guaranty's Principal Accounting Officer. Plaintiffs seek to hold Murff liable for alleged misrepresentations in Guaranty's 2007 10-K and three 10-Qs filed in 2008 as well as several Forms NT 10-K and Forms 8-K filed in 2009, all of which he signed. See Pls.' Resp. 17 n. 14 (and citations therein).
As with the other Individual Defendants, Plaintiffs argue that Murff was aware of Guaranty's low levels of capital. The Court has already determined that such allegations provide support for Plaintiffs' theory regarding motive. However, such allegations, standing alone, do not support an inference of scienter as they do not lead to the conclusion that Guaranty was improperly valuing its MBS.
Plaintiffs point to essentially the same allegations as to Dubuque and Murff in support of their contention that Murff was aware of Guaranty's deficient pricing models. For the same reasons discussed above with respect to Dubuque, these allegations weigh somewhat in favor of scienter.
Murff resigned from his position as Guaranty's Senior Executive Vice President, CFO and Accounting Officer, less than a month before Guaranty filed for bankruptcy protection. FAC ¶ 185. The Court recognizes that the resignation of high level officials may contribute to an inference of scienter. However, the Amended Complaint also alleges Guaranty's gradual decline, which included at
Here, Murff's position as one of Guaranty's top accountants, who was allegedly put on notice regarding certain deficiencies of Guaranty's MBS pricing methodology but still certified Guaranty's SOX filings, weighs somewhat in favor of scienter. In making this evaluation, the Court notes its prior discussions of whether Murff was put on notice via communications from confidential witnesses and ALCO meetings, and also notes that Guaranty's outside auditors signed off on Guaranty's statements and that Defendants continue to argue that they and Guaranty did not violate GAAP.
Taking the Amended Complaint as a whole, along with its general allegations of motive and GAAP violations as well as its allegations as to Murff specifically regarding Guaranty's capitalization levels, deficiencies in Guaranty's pricing models, his resignation, and his SOX certifications, the Court finds that they do not raise a strong inference of scienter as to Murff. While the Amended Complaint may raise a plausible inference that Murff knew of the alleged fraud or was severely reckless, such inference is not at least as compelling as the competing inference that he did not know of the alleged fraud or was merely negligent. As such, Murff's Motion to Dismiss, to the extent that it seeks dismissal of Plaintiffs' 10(b) and Rule 10b-5 claims against Murff based on failure to allege a strong inference of his scienter is
Plaintiffs' only allegations regarding Gifford's scienter focus on his position as Guaranty's Executive Vice President and Principal Accounting Officer, in which he signed Guaranty's 2007 10-K and two 10-Qs filed in 2008, and his resignation from Guaranty "just as the truth about the company began to be disclosed." See Pls.' Resp. 17 n. 14 (and citations therein); FAC ¶ 167. They point to his role in upper level management with an accounting compliance focus and his Sarbanes-Oxley certifications, which acknowledged his responsibility to investors for establishing and maintaining effective controls to ensure that material information about Guaranty was brought to his attention. FAC ¶ 200. This is effectively a "he must have known" type of allegation that, standing alone, is insufficient to establish scienter under the PSLRA. Further, while the Amended Complaint sets forth descriptions of communications between confidential witnesses and senior management and meetings where the valuation of MBS and its proper accounting were discussed, there are no allegations that Gifford specifically received any of these communications or was present at these meetings.
The Court also finds insufficient Plaintiffs' allegation that Gifford resigned from the Bank just as the truth about the company began to be disclosed. The Amended Complaint alleges that Gifford resigned on October 6, 2008, a month before Guaranty's November 5, 2008 press release, which reported a 2008 third quarter net loss of $162 million and disclosed that the carrying value of the MBS portfolio had decreased by another $600 million. The release also disclosed that Guaranty had recorded a $53 million OTTI on non-agency
Taking the Amended Complaint as a whole, along with its general allegations of motive and its allegations of Gifford's position in Guaranty, his SOX certifications, and his resignation, the Court finds that they do not raise a strong inference of scienter as to Gifford. While the Amended Complaint may raise a plausible inference that Gifford knew of the alleged fraud or was severely reckless, such inference is not at least as compelling as the competing inference, that he did not know of the alleged fraud or was merely negligent. Overall the Amended Complaint does not sufficiently allege that Gifford knew that Guaranty was making false or misleading statements or omissions or that he was at least severely reckless as to these statements. As such, Gifford's Motion to Dismiss, to the extent that it seeks dismissal of Plaintiffs' 10(b) and Rule 10b-5 claims against him based on failure to allege Gifford's scienter is
Given that the Court finds that the Amended Complaint does not allege the scienter of any of the Individual Defendants under the PSLRA, the Court also finds that the complaint does not allege Temple-Inland's scienter. When determining whether a corporation's scienter can be drawn from an executive's false statements, it is "appropriate to look to the state of mind of the individual corporate official or officials who make or issue the statement (or order or approve it or its making or issuance, or who furnish information or language for inclusion therein, or the like)." Southland, 365 F.3d at 366 (citations omitted). Thus a corporation only has the requisite scienter if the individual executive making the statement had that level of scienter. Id. As discussed above, Plaintiffs fail to adequately allege a strong inference of scienter with regards to the Individual Defendants, and therefore there is no strong inference of scienter to impute onto Temple-Inland. Accordingly, the Court has additional grounds for dismissal of the claims against Temple-Inland and
The PSLRA provides a safe harbor for forward looking statements if "(A) the forward-looking statement is — (i) identified as a forward-looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement; or (ii) immaterial; or (B) the plaintiff fails to prove that the forward-looking statement ... was made with actual knowledge ... that the statement was
The Court notes the conflicting case law regarding whether a defendant's actual knowledge of the falsity of a forward-looking statements with meaningful cautionary language renders the safe harbor defense inapplicable. See, e.g., Hopson v. MetroPCS Commc'ns, Inc., Civ. Action No. 3:09-cv-2392-G, 2011 WL 1119727, at *18 n. 19 (N.D.Tex. Mar. 25, 2011) (and cases cited therein) (discussing conflict of Lormand and Southland). However, both the Southland and Lormand cases from the Fifth Circuit state that actual knowledge of the falsity of the statement will defeat the safe harbor defense. See Southland, 365 F.3d at 371 ("To avoid the safe harbor, plaintiffs must plead facts demonstrating that the statement was made with actual knowledge of its falsity."); Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 244 (5th Cir.2009) ("Because the plaintiff adequately alleges that the defendants actually knew that their statements were misleading at the time they were made, the safe harbor provision is inapplicable ...."). But see Hopson, 2011 WL 1119727, at *18 n. 19 (finding that "[t]he statute's plain language makes clear that even if the plaintiff could prove that the defendants made a forward-looking statement with actual knowledge of its falsity, the defendants would not be liable if the statement was immaterial or accompanied by meaningful cautionary language"). Accordingly, the Court finds that the safe harbor provision does not protect statements made with actual knowledge of their falsity.
Here, Murff, Gifford, and Dubuque argue that certain statements attributed to them are protected by the PSLRA's safe harbor provision, specifically "statements regarding the ability of the MBS pools to satisfy future debt obligations, the ability of subordinated tranches to absorb future losses in the loan pools in which the MBS participated, and many other forward-looking statements contained in the lengthy quotations that Plaintiff asserts were misleading," Murff Mot. 19 (citing FAC ¶¶ 119-175), and statements regarding Guaranty's intent to be more transparent in the future and intent and ability to hold its MBS to maturity. Dubuque Mot. 16 (citing FAC ¶¶ 122, 129, 138).
The PSLRA's safe harbor provision lists several types of statements as those that would be considered forward looking such as "(A) a statement containing a projection of revenues, income (including income loss), earnings (including earnings loss) per share, capital expenditures, dividends, capital structure or other financial items; (B) a statement of the plans and objectives of management for future operations, including plans or objectives relating to the products or services of the issuer; [and] (C) a statement of future economic performance, including any statement contained in a discussion and analysis of financial condition by the management or in the results of operations included pursuant to the rules and regulations of the Commission." 15 U.S.C. §§ 77z-2(i)(1). Here, statements regarding and related to Guaranty's ability to avoid future losses within its MBS portfolio and Guaranty's intent and ability to hold its MBS to maturity, see FAC ¶¶ 122, 138, 143-144, 158, 160, 170, are clearly the types of statements regarding income and losses, plans of management, and future economic performance contemplated by the PSLRA. Further, statements regarding Guaranty's intent to be more transparent in the future, see FAC ¶ 129, are "of the vague and optimistic type that cannot support a securities fraud action, and contain no concrete factual or material misrepresentation." Lain v. Evans, 123 F.Supp.2d 344, 348 (N.D.Tex.2000) (citation omitted) (finding non-actionable statements such as "we look forward to higher revenues and loan volume for the remainder of fiscal 1998" and that the company has "aggressive growth plans ... to become a major player"). As such, these types of statements are forward-looking statements protected by the safe harbor of the PSLRA, provided that they were accompanied by meaningful cautionary language and were not made with actual knowledge of their falsity.
Plaintiffs argue that these statements are not protected by the safe harbor provision as they concern Guaranty's present intent to be more transparent in the future as to its valuation of the MBS portfolio and the present ability of the MBS pools to satisfy future debt obligations and of subordinated tranches to absorb future losses in the loan pools. Regardless of the characterization by Plaintiffs, such statements still concern future income or losses, plans of management, and future economic performance and are therefore forward-looking. Cf. In re BP, 852 F.Supp.2d at 800 (statement listing corporate goal to complete company transition in two years was forward-looking, but statement regarding achievements towards implementation of that goal was not forward looking).
The Court next looks to see whether the forward-looking statements at issue were accompanied by sufficient cautionary language. Guaranty's 2007 10-K and its 10-Qs for each quarter in 2008, Guaranty's conference calls with investors, and Guaranty's press releases were all accompanied by cautionary language identifying forward-looking statements. See Defs.' App. 26, 55-56, 70, 92, 111, 143-44, 154, 183. However, Plaintiffs claim this language is mere boilerplate insufficient to trigger the PSLRA's safe harbor provision, citing Lormand v. U.S. Unwired, Inc., 565 F.3d 228,
In contrast to the disclaimers in Lormand and Plotkin, Guaranty's cautionary language is significantly more detailed and specifically identifies one of the main risks allegedly hidden by Defendants. The disclaimers do warn that Guaranty's actual results could differ from the projected results or goals, but they also go further in warning that Guaranty's financial results could suffer as a result of a decline in value of its MBS if the underlying loans defaulted at a higher than anticipated rate, eliminating the subordinate tranches. As one example, Guaranty's 2007 Form 10-K explains, after discussing various other risks:
Defs.' App. 52; see also Defs.' App. 51-56, 92, 99-100, 143-44, 152-53, 183-84, 189-90 (identifying various risks that could adversely affect Guaranty's performance); cf. Harris v. Ivax Corp., 182 F.3d 799, 807 (11th Cir.1999) ("[W]hen an investor has been warned of risks of a significance similar to that actually realized, she is sufficiently on notice of the danger of the investment to make an intelligent decision about it according to her own preferences for risk and reward ... and satisfies [the company's] burden to warn under the statute ...."). While such cautionary statements do not warn against the exact behavior that Plaintiffs complain of, that Defendants were overvaluing their MBS portfolio and understating losses, the statements do warn of the root cause of such alleged overvaluation and understatement, namely that Guaranty's MBS, while senior tranche and thus less risky than subordinate MBS, could nevertheless be impaired if deterioration in the housing market caused too many borrowers to default on their mortgages.
Given that the Court finds that the statements identified by Murff, Gifford, and Dubuque are forward-looking and are accompanied by meaningful cautionary language, these statements are protected by the safe harbor provision of the PSLRA unless they were made with actual knowledge of their falsity. Given that the Court has already determined that the Amended Complaint does not allege a strong inference
A plaintiff asserting securities fraud under Section 10(b) and Rule 10b-5 must allege that the defendants' alleged misrepresentations
Further, loss causation "may be pleaded on the theory that the truth gradually emerged through a series of partial disclosures and that an entire series of partial disclosures caused the stock price deflation." Id. at 261. These corrective disclosures need not directly reveal the fraud of previous statements; "it [is] enough that the market learned that the [prior] guidance was wrong and that other negative information unrelated to the reduced [and corrective] guidance did not cause the decline in [the corporation's] share price." Alaska Elec. Pension Fund v. Flowserve Corp., 572 F.3d 221, 231 (5th Cir.2009) (citation omitted). While plaintiffs need not plead a fact-for-fact disclosure to establish loss causation, "loss caused solely by a general impression in the market that `something is wrong' is insufficient to establish causation." Id. at 232 (citation omitted); see also Ryan v. Flowserve Corp., 444 F.Supp.2d 718, 729 (N.D.Tex.2006) ("[N]either Dura nor any Fifth Circuit case requires the type of `fact-for-fact' method of loss causation pleading urged by [the defendant]."). Further, "it is insufficient to simply allege that the misrepresentation `touches upon' a later economic loss" as plaintiffs must allege "that the market reacted negatively to a corrective disclosure, which revealed the falsity of [the company's] previous representations." Catogas v. Cyberonics, Inc., 292 Fed.Appx. 311, 314 (5th Cir.2008) (citations omitted).
Plaintiffs argue that during the Class Period, Defendants overstated the value of Guaranty's MBS portfolio and failed to timely record hundreds of millions of dollars of OTTI, thereby artificially inflating Guaranty's financial results. Plaintiffs identify three disclosures which they point to as corrective statements which gradually revealed the true value of the
Pls.' Resp. 59-61. In their motions to dismiss, Defendants assert that these disclosures are not sufficient "corrective" disclosures to plead loss causation, given Plaintiffs' failure to allege that any of the disclosures revealed that prior statements were false or fraudulent and given other intervening events such as the general economic decline in the United States.
Even viewing the Amended Complaint's allegations in a light most favorable to the Plaintiffs, the Court agrees that Plaintiffs fail to plead that these statements are sufficient corrective statements for the purposes of alleging loss causation. Here, the misstatements which purportedly overstate the value of Guaranty's MBS portfolio and understate Guaranty's losses "touch upon" the purported corrective statements given that they both concern the valuation of MBS and the disclosures explain that Guaranty's losses were growing and its MBS portfolio was declining in value. However, the corrective statements Plaintiffs identify do nothing to suggest that its prior statements were false. They do not state or infer that Guaranty's previously reported valuations were incorrect or that Guaranty was engaged in improper accounting practices, nor do they bring to light Defendants' alleged securities fraud. See Archdiocese of Milwaukee Supporting Fund, Inc. v. Halliburton Co., 597 F.3d 330, 337 (5th Cir.2010), rev'd on other grounds, ___ U.S. ___, 131 S.Ct. 2179, 180 L.Ed.2d 24 (2011) (plaintiffs "need to show more than that a subsequent disclosure reveals the defendant's true financial condition") (citation omitted); see also Flowserve, 572 F.3d at 230 (disclosure of company's weakening financial condition alone
Plaintiffs also identify another purported corrective statement, Guaranty's March 17, 2009, Form NT 10-K, which disclosed that Guaranty was unable to timely file its Form 10-K for 2008 due to an ongoing "analysis and discussion" with its accountants concerning the appropriateness of the valuation of its MBS portfolio and the extent to which such portfolio had incurred an OTTI, after which Guaranty's stock dropped 28% (from $.64/share to $.46/share)
The limitations period for a Section 10(b) private securities fraud action is two years after the discovery of the facts
In assessing the Defendants' limitations defense, the Court's review is limited to the allegations in the complaint and to those documents attached to a defendant's motion to dismiss to the extent that those documents are referred to in the complaint and are central to the claims. Causey v. Sewell Cadillac-Chevrolet, Inc., 394 F.3d 285, 288 (5th Cir.2004). Nevertheless, dismissal under Federal Rule of Civil Procedure 12(b)(6) is warranted where an affirmative defense, such as the statute of limitations, is apparent on the face of the plaintiff's complaint. Jones v. Alcoa, Inc., 339 F.3d 359, 366 (5th Cir. 2003) (citations omitted).
Although the alleged misstatements at issue in the Amended Complaint were made more than two years prior to the filing of the original complaint in this case, Plaintiffs argue that they could not have learned of the extent of Defendants' intentional conduct until the Tepper Complaint was filed in August 2011.
Defendants counter that Plaintiffs should have discovered the alleged scheme much earlier and should have begun investigating as early as March 17, 2009 or no later than July 2009. Specifically, Defendants point to events from March to July 2009 that they claim should have alerted Plaintiffs to the facts constituting the alleged securities fraud in this case. These events include (1) Guaranty's SEC filing on March 17, 2009, when Guaranty disclosed an "ongoing `analysis and discussion' with its accountants concerning the appropriateness of the valuation of its MBS portfolio,'" see FAC ¶ 179; (2) Guaranty's SEC filing on April 8, 2009, when Guaranty announced that it had consented to the issuance of a Cease and Desist Order by the OTS, see FAC ¶ 182; (3) Guaranty's announcement on June 29, 2009 that "the preliminary financial information it provided for the periods ended December 31, 2008 and March 31, 2009 should not
After reviewing the Amended Complaint as well as the briefing on Defendants' Motions to Dismiss, the Court determines that the issue of whether the statute of limitations has run on Plaintiffs' claims is a factual dispute not appropriate for resolution at this time on Defendants' motions to dismiss. In doing so, the Court notes that the Merck court rejected an "inquiry notice" interpretation of 28 U.S.C. § 1658(b)(1), explaining that "the point where the facts would lead a reasonably diligent plaintiff to investigate further ... is not necessarily the point at which the plaintiff would already have discovered facts showing scienter or other `facts constituting the violation.'" 130 S.Ct at 1797. Thus, even assuming that any of the events cited by Defendants put Plaintiffs on inquiry notice, which would then spur or should have spurred the Plaintiffs to investigate further, such assumption does not allow the Court to determine, based on the pleadings and the related attachments, when exactly Plaintiffs should have discovered the facts constituting the violation. Simply put, the Court cannot say that as a matter of law, the Plaintiffs did discover, or a reasonably diligent plaintiff would have discovered, the facts constituting the alleged securities fraud, especially the facts constituting scienter, more than two years prior to the filing of this complaint, or by November 11, 2009. Accordingly, Defendants' Motions to Dismiss, to the extent they seek dismissal of this case based on limitations, are
Plaintiffs seek to establish secondary liability on the Individual Defendants through Section 20 of the Exchange Act. FAC ¶¶ 215-217. Section 20(a) of the Exchange Act imposes joint and several liability on "[e]very person who, directly or indirectly, controls
Defendants also seek dismissal of the Amended Complaint's control person claims based on their argument that Plaintiffs fail to allege "actual power or influence over the controlled person," as required by Abbott
In light of the foregoing, the Court
For foregoing reasons, the Court finds that Plaintiffs' Amended Consolidated Class Action Complaint does not state a claim for violations of Section 10(b) and Rule 10b-5 or Section 20(a). As such, Defendants' Motions to Dismiss Counts I and II are hereby
If Plaintiffs are able to replead any Counts to overcome all of the grounds stated herein for dismissal as to the Individual Defendants, they should do so by no later than thirty (30) days from the date of this Order. Further, any repleading shall be accompanied by a synopsis of no more than ten (10) pages, explaining how the amendments overcome the grounds stated for dismissal in this Order. Should Plaintiffs replead, Defendants are hereby granted leave to file responses to Plaintiffs' synopsis. Any response shall not exceed ten (10) pages and must be filed within fourteen (14) calendar days of the repleading. No further briefing will be permitted. Should Plaintiffs wish to replead as to Temple-Inland specifically, they must file a motion for leave to amend in accordance with the Local Rules and the Federal Rules of Civil Procedure.
15 U.S.C. § 78j(b). Rule 10b-5 states:
17 C.F.R. § 240.10b-5. Section 20(a) states:
15 U.S.C. § 78t(a).
Whether this is meant to indicate that Plaintiffs continue to rely upon the senior tranche statements as a basis for recovery on a different theory than that originally advanced is unclear. Nonetheless, this vague statement is wholly insufficient to serve as the basis for a new theory of recovery involving the senior tranche statements.
FAC ¶¶ 23-27 (internal paragraph numbering omitted).
