As the early returns have slowly accumulated for the subprime and credit crisis-related securities lawsuits, the question has arisen (refer here for example) whether or not these cases are faring poorly, in light of the numerous dismissal motions that have been granted thus far. Many of these dismissals have been granted, however, with leave to amend. And now at least one case in which a dismissal was granted with leave amend has survived a renewed motion to dismiss, suggesting that at least in the cases where dismissals were granted with leave to amend, it may be premature to write off the plaintiffs’ prospects.
As noted in a prior post (here), on December 11, 2008, Southern District of Florida Judge Ursula Ungaro granted defendants’ motion to dismiss, with leave to amend, in the BankAtlantic Bancorp subprime-related securities class action lawsuit. Judge Ungaro granted the motion on the ground that the plaintiff’s complaint failed to plead facts giving rise to a strong inference that the defendants acted with scienter in making the alleged misrepresentations and omissions.
On January 12, 2009, the plaintiff filed a first amended consolidated complaint (here), and the defendants’ renewed their motion to dismiss.
In a May 11, 2009 ruling (here), Judge Ungaro found that the amended complaint "cures the most pertinent deficiencies" that she had found in the earlier complaint. Thus, whereas the earlier complaint relied on confidential witnesses "about whom the Court knew nothing," and on allegations that were "vague and [that] failed to show what each of the individual defendants’ knew," Judge Ungaro found that the amended complaint "contains sufficient information regarding these confidential witnesses, including their employment duties, whether they were employed during the Class Period, and how they obtained direct knowledge of the facts they were reporting."
Judge Ungaro further found that the amended complaint "clearly states" how the individual defendants were reckless in not knowing the alleged misrepresentations regarding the bank’s lending practices.
Judge Ungar considered the defendants’ arguments for the court to consider competing inferences that might be drawn from the plaintiff’s allegations. Noting that the inferences of scienter "need not be irrefutable," she found that the facts alleged gave rise to a strong inference of scienter because the amended complaint "includes specific facts demonstrating that [the defendants] knew or were severely reckless in not knowing of the Company’s risk exposure, which was greater than they disclosed to investors."
With respect to defendants’ argument that the bank’s woes were due to the "deterioration in the real estate market," Judge Ungar said "whether or not Defendants’ alternative causation theory bars Plaintiff’s claim for damages is a question for another day."
Noting that the "pleading requirements under the PSLRA are stringent but are not insurmountable," Judge Ungaro concluded that plaintiffs had sufficiently alleged that the Defendants were "extremely reckless" in the company’s disclosure about the bank’s commercial loans, and so defendants’ renewed motion to dismiss was denied.
The amended complaint’s survival is most significant because it comes after the initial motion to dismiss had been granted, raising the possibility that even if the plaintiffs whose original complaints fails to survive dismissal motions may yet be able to file an amended complaint that can overcome the court’s concerns. It may be premature to count out the plaintiffs in the various other cases where initial motions to dismiss have been granted with leave to amend.
Judge Ungaro’s denial of the renewed motion to dismiss is also interesting because this case, perhaps by contrast to some other cases (such as the Countrywide and New Century cases) where dismissal motions have been denied, does not involve some of the more dramatic allegations involved in those other cases. For example, by contrast to the Countrywide case, allegations of insider trading were not a significant consideration in Judge Ungaro’s denial of the motion to dismiss in this case.
Plaintiffs’ lawyers may well find Judge Ungaro’s opinion as a positive development. Perhaps if the allegations in this case are sufficient, other cases may yet survive motions to dismiss as well. This impression is underscored by the fact that Judge Ungaro was not deterred by the general downturn in the real estate market or the economy.
In any event, I have added Judge Ungaro’s latest opinion to my running tally of settlements, dismissal and dismissal motion denials in the subprime and credit crisis-related lawsuits, which can be accessed here.
Should He Stay or Should He Go?: In the recent Household Financial securities lawsuit jury trial (about which refer here), among the individual defendants who were found to have acted recklessly in making public disclosures was Household director William Aldinger. As a result, Aldinger not only faces the prospect of having to pay monetary damages; he also faces further questions about his continued service on other corporate boards.
As reflected in a May 12, 2009 Chicago Tribune article (here), Aldinger serves on the board of four other publicly traded companies: Illinois Tool Works; AT&T; Charles Schwab Corp.; and KKR Financial Holdings LLC. As the article notes, "the verdict raises the question of whether Aldinger should have to resign from the boards."
This is uncharted territory in many ways, because so few securities lawsuits actually go to trial. While the verdict does not "automatically disqualify" Aldinger from continued service on the other boards, according to one expert cited in the Tribune article, it certainly puts the boards of those other organizations in a difficult position. The article quotes governance commentator Nell Minow as suggesting that Aldinger should resign and save those other companies from embarrassment and shareholder scrutiny.
Aldinger had been CEO of Household prior to its 2003 acquisition by HSBC.
Special thanks to a loyal reader for the link to the Tribune article.
Speaker’s Corner: On Thursday May 14, 2009, I will be in Los Angeles for the Professional Liabiltiy Underwriting Society Southern California Chapter eductional event. I will be participating as a panelist on a sesion discussion the State of the Insurance Market. Further information about the session can be found here. If you are attending the event, I hope you will make a point of greeting me and introducing yourself.