In the latest preliminary ruling in a subprime or credit crisis-related securities lawsuit, Southern District of Florida Judge Ursula Ungaro in a December 11, 2008 opinion (here) granted the defendants’ motion to dismiss the plaintiffs’ complaint, with leave to amend.



BankAtlantic Bancorp is a bank holding company that offers consumer and banking lending services, through its wholly-owned subsidiary. The plaintiffs complaint alleged securities law violations against the holding company and five present and former directors and officers of the holding company or of the subsidiary. The plaintiff purports to represent persons who purchased the holding company’s stock during the period November 9, 2005 though October 25, 2007. Background regarding the case can be found here.


As summarized in the December 11 opinion, the complaint alleges that the company "sought to capitalize on the Florida real estate boom through expansion of its commercial real estate loan portfolio." To fuel the growth, the company "cut corners" including "ignoring the Company’s internal lending guidelines." The company also allegedly "failed to adequately reserve for loan losses" in its commercial real estate loan portfolio, "resulting in material misstatements in the Company’s financials." After the Florida real estate market "entered a free fall in 2007," borrowers "began defaulting" and the company was "forced to reveal the true extent of the Company’s exposure in its real estate portfolio."


The Opinion

In her December 11 opinion, Judge Ungaro held that the complaint "adequately alleges misrepresentations and omissions in a manner sufficient to withstand a motion to dismiss," and that the complaint "is legally sufficient in so far as it pleads loss causation." However, she found that the complaint did not adequately allege scienter.


As a preliminary matter, Judge Ungaro addressed the complaint’s reliance on confidential witness statements. She found that "there is no specific information as to the confidential witnesses’ positions in the Company, their employment duties, the foundation or basis for their knowledge, or whether they were even employed with the company during the relevant time period." Accordingly, she concluded that she is "unable to give any significant weight to the allegations made by those confidential witnesses.


She then considered the scienter allegations against the individual defendants. With respect to the allegations against the Vice Chairman, the current CEO and the Chairman, she found that the "factual allegations do not give rise to a strong inference of scienter." She said that even assuming the confidential witness statements could be given weight, the allegations are insufficient; "the confidential witness’s vague and conclusory assertion that it was ‘common knowledge’ that the Company had risky loans on its books is not the type of particularized allegations required under the PSLRA."


She also noted that the defendants’ "knowledge of the company’s lending or accounting practice by virtue of their high-level positions…does not create a strong inference of scienter." She also found that the fact that these individuals received "Exception Reports" establishes "nothing about what these Defendants knew or should have known about the Company’s lending practices."


Judge Ungaro also rejected the contention that the defendants’ $7.8 million in insider stock sales established scienter, because the complaint "does not allege that the amount or percentage of shares sold …were unusual," nor does the complaint alleged "that the sales were inconsistent with their prior trading history."


With respect to the scienter allegations against the company’s former and its current CFO, Judge Ungaro concluded that the complaint "does not contain factual allegations that would support a finding that [the defendants’] statements were made with scienter." The complaint "lacks particularized allegations" that these two officials "played a role in approving loans or in setting loan loss reserves," and the complaint does not allege that they were "presented with information that would have shown the falsity of the Company’s financial statements or that they were confronted with concerns regarding the Company’s lending practices or loan loss reserves."


Finally, with respect to the company (but without reference to more generalized theories regarding "collective scienter"), Judge Ungaro held that the plaintiff "has not adequately pled scienter as to any of the Individual Defendants; therefore, Plaintiff has failed to adequately pled [sic] scienter as to BankAtlantic."


The court’s grant of the defendants’ dismissal motion is without prejudice and the plaintiffs have 20 days in which to file an amended complaint.



The BankAtlantic case joins a growing list of subprime and credit crisis related securities cases that failed to survive preliminary motions. To be sure, the dismissal motions in the Countrywide subprime securities case (refer here) and the New Century Bankcorp subprime securities case (refer here) were both recently denied in strongly worded opinions. But as reflected in my running tally of subprime and credit crisis-related securities lawsuit settlements, dismissal and motion denials (which can be accessed here), a greater number of dismissal motions have been granted than denied.


It should be noted that at this point only a handful of dismissal motions have been resolved one way or the other. And many of the dismissals that have granted have been without prejudice. The plaintiffs in these cases may yet successfully amend their complaints and survive a subsequent motion to dismiss. Nevertheless, the early returns seem to suggest that many of these cases are facing judicial resistance.


On a related note, I have observed elsewhere (refer here) that the growing wave of bank failures could lead to an increased number a new wave of "dead bank" litigation. To the extent these cases do emerge, the Bank Atlantic opinion may suggest that the cases could face significant pleading hurdles.


In any event, I have added the BankAtlantic opinion to my running tally of subprime and credit crisis-related lawsuit settlements, dismissals and dismissal denials, which can be accessed here.


Court Rejects KLA-Tencor’s Special Litigation Committee’s Motion to Dismiss Backdating Case: In a December 11, 2008 opinion (here) that is extensively redacted due to its reliance on evidence submitted under seal, Judge James Ware of the Northern District of California denied the motion of KLA-Tencor’s Special Litigation Committee (SLC) to dismiss the options backdating derivative lawsuit pending against the company, as nominal defendant, and certain of its directors and officers.


The plaintiffs had filed a complaint alleging that the defendants "permitted senior KLA insiders to unlawfully manipulate the grant dates associated with KLA stock options, resulting in hundreds of millions of dollars of losses to KLA." (Background regarding the options backdating allegations at KLA-Tencor can be found here.) In response to the filing of the complaint, the company’s board formed the SLC and appointed two directors to serve as its members. The SLC prepared a report and filed a motion to dismiss the derivative action, concluding that the derivative action "is no longer in the interests of KLA or its shareholders."


Judge Ware considered the motion under Delaware law. Because of the redactions in his opinion, his reasoning is not always entirely evident. Basically, he was concerned that one of the SLC members "was on the Board and on the Audit Committee at a time when continued backdating may have been occurring at KLA." This raises the "possibility" that the one SLC member was "tasked with investigation corporate malfeasance that he had previously, if unintentionally, approved," which in turn raised questions about his independence.


Because of the independence concerns, the Court was also "concerned by the overall size of the SLC, as it consisted of only two members." On these grounds, the court found that the SLC had not carried its burden, noting that


Although no single factor is dispositive in the Court’s determination, evaluation of the totality of the circumstances, including the size of the SLC, questions surrounding its independence, and the depth and focus of its inquiry leads to this conclusion.


Accordingly, the court denied the SLC’s dismissal motion, denied certain individual defendants’ proposed (unspecified) settlements, and scheduled the case to go forward.


Without having statistical evidence to support the observation, I note that it is relatively unusual for a court to reject an SLC’s recommendation to drop a derivative case. On the other hand it is also unusual for an SLC to have only two members, and these two unusual features wound up being related. A December 17, 2008 article discussing these aspects of Judge Ware’s opinion can be found here.


In any event, I have added the KLA-Tencor decision to my table of options backdating related lawsuit settlements, dismissal and dismissal denial, which can be accessed here. KLA-Tencor’s $65 million settlement of the options backdating securities class action lawsuit that had been filed against the company is discussed here.


Are European Investor Groups Turning to U.S. Court for Subprime Claims?: A December 16, 2008 post (here) on PomTalk, the blog of the securities plaintiffs’ firm Pomerantz Haudek Block Grossman & Gross, noting that "pension funds around the globe have lost hundreds of billions of dollars" in the credit crisis, as a result of which "increasingly, they are turning to U.S. courts to seek recovery of losses."


The article notes that "in recent years, European funds have begun to play a more prominent role" in U.S. class actions, and that according to a U.K. pension fund group, "23% of British pension funds have now actively participated in a U.S. securities class action."


The article suggests that European funds "will be particularly affected by three categories of suits": suits against financial services companies; suits involving structured financial instruments; and suits involving agency obligations and preferreds (this latter category is a reference to the securities of government sponsored entities). The article concludes by noting that "European funds are certain to remain a fixture in U.S. securities class action."


Readers of this blog may be interested to read the article’s observations in connection with litigation against financial services companies:


A major question in suits against banks is whether they have the ability to satisfy a large judgment or enter into a reasonable settlement. Many banks have already gone under or are hanging by a thread. But even failed banks generally have D&O insurance, and there may be other viable defendants like underwriters.


Ah, yes. Round up the usual suspects. Be sure to frisk them for insurance, as well as the presence of any professional advisors.