In my recent subprime and credit crisis lawsuit status update (here), I commented that the defendants seemed to be getting the upper hand at the dismissal stage in many of these cases. Two recent dismissal motion rulings tend to corroborate this view. In addition, the defendants in the auction rate securities cases continue to have their dismissal motions granted.


SunTrust Bank: The first of these two recent dismissal motion rulings is the September 24, 2009 opinion (here) by Northern District of Georgia Judge Thomas Thrash, Jr. in the SunTrust Banks auction rate securities lawsuit. As reflected in greater detail here, the plaintiffs alleged that SunTrust Bank’s broker-dealer subsidiary sold them auction rate securities. The plaintiffs allege that the defendants failed to disclose certain features about the securities and about the auction rate securities marketplace. The plaintiffs also allege that the defendants engaged in manipulative auction practices.


Judge Thrash granted the defendants’ motion to dismiss the disclosure related allegations because the allegations "about the Defendants state of mind do not meet the heightened pleading requirements applicable to securities fraud cases."


As an initial matter, Judge Thrash found that the plaintiffs’ allegations were "not stated with particularity." Though the plaintiffs contend that "high level corporate officials" issued certain management directives, the plaintiffs "do not identify any of these officials, by name, by title, or even by job description." With respect to the supposed directives, the Plaintiffs "do not describe what these documents may have said, who issued them, or when they were distributed."


Judge Thrash further found that the plaintiffs’ allegations "do not give rise to a strong inference that the Defendants’ acted with an intent to defraud or with severe recklessness." Thus, while the complaint refers to supposed management directives and uniform sales materials, the allegations are "not strongly supported" in the complaint. The confidential witnesses on whom plaintiffs rely do not reference the supposed directives or sales materials, and "none of the Plaintiffs’ allegations mention a single communication from any high level corporate officials, let alone any management directives or uniform sales materials."


Judge Thrash found that "the more plausible theory is that high level corporate officials carelessly or negligently provided training on how to sell auction rate securities, and because of the improper training, many SunTrust brokers exaggerated the benefits," noting further that the allegations overall were "more consistent with a negligent state of mind than a fraudulent or reckless one."


The court did noted that "the only allegation that might suggest otherwise" is the contention that the defendant entities were among the companies the SEC investigated in 2006 for auction rate securities practices, and therefore the defendants’ senior executives "must have been aware of manipulative auction practices." But Judge Thrash found that the inference that the plaintiffs seek to draw from this allegation is "simply too weak and convoluted," because it required the court to assume that the executives continued the manipulative practices after the SEC investigation and willfully trained brokers to sell the securities without changing the practices or disclosing the practices to the brokers. The court said "Plaintiffs do not provide sufficient allegations to make anything more than a weak and convoluted inference" about this contention.


Finally, Judge Thrash found that the plaintiffs’ market manipulation allegations "do not meet the heightened pleading requirements applicable to securities fraud cases." Because plaintiffs had previously amended their complaint, he denied plaintiffs further leave to amend.


The SunTrust Banks auction rate securities lawsuit is the latest of the auction rate cases to be dismissed. (Refer to my recent post here for an overview of prior dismissals.) The SunTrust Bank case also follows the recent dismissal in the Raymond James auction rate securities case, where the case was dismissed not on the basis of a prior regulatory settlement, but rather because of pleading deficiencies, without regard to whether or not the defendant company had entered a regulatory settlement.


While there are a number of other auction rate securities cases in which the dismissal motions are yet to be heard, at this point, the plaintiffs have not yet survived a dismissal motion in any of the auction rate securities cases in which dismissal motions have been heard.


There were almost two dozen separate auction rate securities lawsuits filed (some with multiple complaints) after the auction rate securities market froze up in February 2008. But though the plaintiffs’ lawyers rushed to file these cases, so far the suits are not faring well at all for the plaintiffs.


Huntington Bancshares: The second of the two recent dismissal motion rulings involves the shareholders’ derivative suit filed in the Southern District of Ohio against Huntington Bancshares, as nominal defendant, and certain of its directors and officers. The complaint relates to Huntington’s July 2007 acquisition of Sky Financial. At the time the deal was announced, Huntington officials stated that the acquisition would be "accretive to Huntington’s earnings.


The complaint alleges that in acquiring Sky, Huntington also acquired Sky’s long-standing relationship with Franklin, which included $1.8 billion debt in the form of high-risk residential mortgages. Just five months after the acquisition, Huntington took charges of $300 million for loan loss allowances on the Franklin debt, which was followed by a "restructuring" of the relationship with Franklin. In the weeks following the restructuring, Huntington’s share price declined.


In their February 2008 complaint, the plaintiff alleged that the defendants knowingly concealed material adverse facts about mortgage-related losses resulting from the Sky acquisition and that Huntington knowingly acquired and continued to hold high-risk financial instruments that could not properly be valued. The defendants moved to dismiss the complaint on the grounds that the plaintiff had failed to make a presuit demand on Huntington’s board.


In a September 23, 2009 order (here), Judge George C. Smith granted the defendants’ motion to dismiss, holding under Maryland law that the plaintiff had failed to sufficiently allege demand futility.


Judge Smith first held under the first prong of the demand futility analysis under Maryland law that "Plaintiff has failed to plead with particularity that a demand would have caused irreparable harm to Huntington."


Judge Smith found further that "because Plaintiff fails to establish that a single member of the Board is conflicted or committed for purposes of establishing demand futility," the plaintiff had failed to satisfy the second prong of the demand futility analysis under Maryland law.


While at this point, it is difficult to generalize with respect to the subprime and credit crisis related derivative suits, as there have been relatively few dismissal motion rulings either way, the plaintiffs do not seem to be faring particularly well in dismissal motion ruling so far (see for example my recent discussion of the dismissal in the Citigroup derivative suit, here).


I have in any event added these two dismissals to my list of subprime and credit crisis-related lawsuit resolutions, which can be accessed here.


Many thanks to a loyal reader for providing a copy of the SunTrust Bank opinion.