In an August 19, 2010 order (here), Northern District of Georgia Judge Thomas Thrash granted the defendants’ motion to dismiss the subprime-related securities class action lawsuit that had been filed against SunTrust Inc and certain of its directors and officers. The opinion is noteworthy for the harshness of its tone, the comprehensiveness of the dismissal, and for the court’s willingness to consider the larger context of the overall global financial crisis.
As reflected in greater detail here, the plaintiffs first filed their action against SunTrust in March 2009. SunTrust is the parent holding company of it wholly-owned banking subsidiary, SunTrust Bank. As reflected in the lead plaintiffs’ amended complaint, the plaintiff alleges that in the second and third quarter of 2008, SunTrust tried to hide the extent of its increase in nonperforming loans by classifying some of these loans as "in-process" loans, which permitted the company to report better financial results.
These loans were later reclassified in the fourth quarter of 2008, which cause the company’s nonperforming loans to increase, which in turn, the plaintiff asserts, caused the company’s share price to drop eleven percent in a single day.
In reviewing plaintiff’s allegations in his August 19 opinion, Judge Thrash noted that plaintiff "never explicitly alleges facts" that would support its claim of a half billion dollars of misclassified loans, a "figure," Judge Thrash notes, that "seems to be plucked out of thin air."
Judge Thrash said that the plaintiff’s "theory" about the misclassification "collapses" in the face of the defendants’ showing that the average daily nonperforming loan balance was greater at the end of each quarter during this period than at the beginning, which, Judge Thrash said, is "entirely consistent with the continuing deterioration of SunTrusts’s loan portfolio over the course of the financial crisis" and is "entirely inconsistent with the Plaintiffs’ theory of large scale misclassification of nonperforming loans at the end of each quarter."
Judge Thrash notes that in its opposition to the motions to dismiss, the plaintiff shifted its liability theory from the misclassification allegation to alleged understatement of reserved for nonperforming loans. Judge Thrash found plaintiff’s inadequate loan loss reserve allegations insufficient, noting that "the fact that SunTrust substantially increased its reserves for nonperforming loans in the fourth quarter of 2008 is not evidence of fraudulent accounting practices in earlier periods."
"Life," Judge Thrash noted, "is too short to say more about this."
Judge Thrash also found that the plaintiff’s scienter allegations were also insufficient. Specifically, Judge Thrash found that the plaintiff’s allegations of intentional wrongdoing, access to information, motive were insufficient to support an inference of scienter. He also found that "competing inferences totally overwhelm any inference of scienter." especially in light of the fact that there were no suspicious stock sales and the totally speculative nature of the supposed benefit the defendants theoretically might have gained from a putative merger.
Finally Judge Thrash concluded that the plaintiff had not established loss causation, noting among things that the eleven percent stock price drop on which the plaintiff sought to rely to plead loss causation "occurred during a financial crisis that hit the financial services industry hard." The company’s share prices had already lost two-thirds of its value prior to the supposedly corrective disclosure, and though it fell an additional 11% on the disclosure date, other banks also had significant share price declines that day, some of which were even greater as a matter of percentage than SunTrust’s.
Judge Thrash concluded that the complaint’s allegations "cannot support an inference that SunTrust’s misstatements – rather than general market conditions – proximately caused the Plaintiffs’ loss."
Although the Opinion does not explicitly state whether or not it is with prejudice, Judge Thrash did not expressly grant plaintiffs leave to amend and in fact entered judgment for the defendants.
Special thanks to a loyal reader for providing me with a copy of Judge Thrash’s opinion.
I have in any event added the SunTrust decision to my running tally of subprime and credit crisis-related dismissal motion rulings, which can be accessed here.