In several prior posts (most recently here), I have noted that defendants seem to be faring particularly well at the dismissal motion stage in the subprime and credit crisis-related lawsuits. However, in recent dismissal motion rulings in two subprime-related cases, one in a securities class action lawsuit and one in an ERISA class action lawsuit, the plaintiffs substantially prevailed, though in each cases portions of the plaintiffs’ complaint were also dismissed. If nothing else, these rulings demonstrate that in at least some of the cases, plaintiffs are to some extent managing to overcome the initial pleading hurdles.
General Growth Properties: In a September 17, 2009 order (here), Northern District of Illinois Judge Milton Shadur denied in part and granted in part the defendants’ motion to dismiss the complaint that General Growth Properties shareholders had filed against the company and eleven of its directors and officers. My prior post about the General Growth action can be found here and detailed background about the case can be found here.
The plaintiffs’ amended complaint contained three separate counts. The first count alleged that in a series of statements during 2008, the defendants misrepresented the company’s ability to refinance debt that was to mature in November 2008. The complaint’s first count further alleged that the company’s COO and CFO had received loans from the CEO’s family trust in violation of company’s ethics policies. Count II of the complaint alleged that the defendants allegedly "rigged the system" by obtaining a short-selling ban from the SEC prior to disposing of extensive share holdings. Count II alleged control person liability.
Judge Shadur granted the motions to dismiss Counts II and III, but denied in substantial part the dismissal motion with respect to Count I.
The defendants had moved to dismiss the allegations in Count I on the grounds that the allegedly misleading statements on which plaintiffs sought to rely all came with the "safe harbor" for forward-looking statements.
Judge Shadur agreed with the defendants that, except as to one of the alleged misrepresentations, all of the statements on which plaintiffs’’ sought to rely were accompanied by "meaningful cautionary language," as required to come within the safe harbor. As Judge Shadur noted, "General Growth’s cautionary statements were in fact entirely anticipatory of Plaintiffs’ claims."
However, even if they were accompanied by meaningful cautionary language, the statements only qualify for safe harbor protection if they were also "forward looking." In a very detailed and painstaking analysis, Judge Shadur went through each of the alleged misrepresentations on which plaintiffs sought to rely and found that while some of the statements were indeed forward-looking and therefore are within the safe harbor, many others were not forward looking and there for outside of the safe harbor.
Judge Shadur found further that the plaintiffs had adequately pled scienter. The defendants had argued that the plaintiffs impermissibly attempted to rely on "group pleading." Judge Shadur noted that, in general, it is insufficient to attempt to infer scienter from individual defendants’ corporate positions and generalized responsibility for corporate actions. However, he found further that the group pleading doctrine "does not render each individual defendant’s position within a company irrelevant."
In this case, Judge Shadur found that "the insider Defendants either had to know about General Growth’s ability or inability to refinance its looming debt, or if they did not, such lack of knowledge would amount to reckless disregard." As a result, Judge Shadur concluded that the defendants’ argument regarding group pleading "is without merit."
Judge Shadur also rejected defendants’ argument that their insider sales could not support scienter, because their sales were "the result of margin calls over which they had no control." However, he noted that the defendants’ arguments in that regard "fail to acknowledge" plaintiffs’ contentions that the defendants "attempted to inflate the stock price in an attempt to avoid margin calls."
Judge Shadur did dismiss Count II of the plaintiffs’ complaint relating to defendants’ alleged scheme to ban short selling of the company’s stock. He noted that "without an explanation as to who played what role in the alleged scheme," Count II fails to meet the pleading requirements. Judge Shadur also rejected the plaintiffs’ control person liability allegations, finding that "without alleging facts other than defendants’ status to support their conclusion, a count for control person liability is improperly pleaded and must be dismissed."
Thus, though Judge Shadur did dismiss significant parts of the plaintiffs’ complaint, a substantial portion of the plaintiffs’ claims remain and those allegations will go forward.
First Horizon: On September 30, 2009, Western District of Tennessee Judge S. Thomas Anderson denied in part and granted in part the defendants’ motion to dismiss the plaintiffs’ ERISA class action complaint that had been filed against First Horizon National Corporation (the holding company for First Tennessee Bank) and its plan fiduciaries.
As reflected in the plaintiffs’ complaint (here), the plaintiffs allege that the company required plan participants to invest in the company’s stock in order to received matching contributions. As of the end of 2005, more than half of the plan’s assets were invested in company stock.
The plaintiffs contend that after January 1, 2006, the investment in company stock was "imprudent" because the bank was lowering its underwriting standards, becoming more heavily involved with subprime and Alt-A loans, and increasing its use of off-balance sheet transactions. The plaintiffs contend that the company’s share price declined when the company announced on April 28, 2008 that it needed to raise $600 million of additional capital.
Judge Anderson granted the motion to dismiss with respect to plaintiffs’ allegations that defendants’ breached their fiduciary duty by requiring participants to invest in the company stock fund in order to receive matching contributions from the company in the form of company stock. Judge Anderson held that because these requirements are part of the Plan itself, the plaintiffs allegations failed to state a claim for breach of fiduciary duty.
However, Judge Anderson denied the defendants’ motion to dismiss plaintiffs’ claims that the defendants breached their duty by failing to take steps to remove the stock from the plan. Judge Anderson noted that the plan gave the defendants discretion to invest plan assets. Thought the plan required the fiduciaries to invest in company stock, " a plan does not impose on a fiduciary an unquestioning duty to follow the terms of the plan when doing so would be imprudent," holding further that under ERISA a plan fiduciary may only follow plan terms to the extent that those terms are consistent with ERISA.
Judge Anderson did dismiss plaintiffs’ claims that the defendants had breached ERISA by failing to provide employees with complete and accurate information about First Horizon’s financial condition, finding that the plaintiffs "have pointed to no provision in ERISA requiring a fiduciary to disclose the specific kinds of risks and factors" the plaintiffs claim the defendants omitted to disclose.
Similarly to the outcome in the General Growth Properties securities case, a material portion of the First Horizon ERISA complaint survived the motion dismiss, even though significant parts of the complaint were also dismissed. In both cases, the claims that survived the dismissal motion will go forward.
I have in any event added both decisions to my register of subprime-related dismissal motion rulings, which can be accessed here.
Court Grants Renewed Dismissal in Fremont General Case: While the plaintiffs in the above cases managed to overcome the initial pleading hurdles at least in part, the plaintiffs in the Fremont General securities lawsuit have now twice failed to survive a dismissal motion, although the court has given them yet another opportunity to amend their complaint to try to cure the pleading defects.
As noted here, Central District of California Judge Florence-Marie Cooper had previously granted the defendants’ initial motion to dismiss, with leave to amend. The plaintiffs subsequently amended their complaint, and the defendants renewed their dismissal motion.
In a September 25, 2009 order (here), Judge Cooper granted the defendants’ renewed motion to dismiss, but with further leave to amend.
As an initial matter, Judge Cooper found that "despite an effort to add allegations that would address the problems identified in the Court’s October 28, 2008 order, the [amended complaint] still suffers from inadequate organization and insufficient specificity to adequately plead falsity and the requisite level of scienter." She noted further that plaintiffs’ "puzzle pleading" makes it "extremely difficult to identify or follow Plaintiffs’ reasoning and to determine – with specificity — which allegations are intended to establish the falsity and scienter requirements."
She concluded that
Lead Plaintiff’s factual allegations are neither sufficient, nor sufficiently particularized, to satisfy the pleading standard for the falsity requirements, nor they [sic] do they articulate facts sufficient to give rise to the requisite strong inference that one or more of the Defendants made the challenged statements with the requisite level of scienter.
Finally, Judge Cooper commented that the plaintiff’s allegations that "Fremont’s underwriting was woefully inadequate and that some or all of Defendants utterly failed to implement policies and procedures sufficient to halt the company’s downward spiral," even if take as true, are "less likely to support an inference of fraud than they are to support an inference of profoundly misguided corporate mismanagement."
Judge Cooper gave the plaintiff thirty days to amend the complaint, but directed further that certain specific statements, which she said were "so broad or vague as to not be actionable" should be "omitted from the amended pleading."
I have also added Judge Cooper’s September 25 order to my register of dismissal motion rulings.
Special thanks to Adam Savett of the Securities Litigation Watch blog (here) for copies of the General Growth and Fremont General decisions.
Special thanks to Stephen Pincus of the Stember Feinstein Doyle & Payne law firm for providing a copy of the First Horizon decision. Pincus represents the plaintiffs in the First Horizon case.