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July 5, 2001


The opinion of the court was delivered by: William H. Yohn, Jr., United States District Court Judge.

    Memorandum and Order

The plaintiffs in this consolidated class action allege that Providian Financial Corporation ("Providian"); its Chairman of the Board, President, and Chief Executive Officer Shalish Mehta ("Mehta"); and its Executive Vice President and Chief Financial Officer David Petrini ("Petrini") all engaged in securities fraud in violation of § 10(b) of the Securities Reform Act of 1934 and Rule 10b-5 promulgated thereunder. The suit began as a series of separate class actions by customers of the defendants and their shareholders which were launched after news that various government agencies had begun investigating Providian's credit card business practices. The investigations ended after Providian agreed to alter some of its business practices, pay restitution to certain account holders, and to pay various fines. The federal suits are still pending but have been consolidated and assigned to this court. The plaintiffs in this portion of the consolidated action dealing with the securities litigation purport to represent the class of persons who purchased Providian common stock on the open market between January 21, 1999 and June 4, 1999.

Before the court is the defendants' motion to dismiss for failure to state a claim or, in the alternative, for failure to plead with particularity. The defendants argue that the Second Amended Consolidated Class Action Complaint (the "SAC") pleads neither the conduct nor the scienter necessary to establish securities fraud. However, upon review, I find that the SAC alleges these basic elements of securities fraud with sufficient particularity.

The SAC alleges that Providian engaged in a series of illegal or fraudulent business practices that artificially inflated the company's financial results and that the statements that reported Providian's results made no mention of these practices but instead attributed the results to Providian's "customer-focused approach." Drawing all inferences in the plaintiffs' favor, one may reasonably infer that Providian's statements were misleading or that the statements omitted information that was necessary to avoid their being misleading. Also, the SAC makes a number of allegations concerning scienter. First, it is alleged that Mehta and Petrini received various revenue and sales reports that notified them of Providian's dramatic performance in core areas of Providian's business. Second, Mehta and Petrini also received reports of Providian's extraordinarily high intake of late fee and overlimit fee revenues. From these reports, plaintiffs allege that Mehta and Petrini, both senior officers at Providian, knew or should have known about Providian's illegal or fraudulent business practices. Third, it is alleged that Mehta and Petrini played a direct role in creating the sales climate that allegedly led Providian's sales force to mislead customers and illicitly add products to their accounts without consent. The SAC, in essence, alleges that Providian's illegal or fraudulent practices permeated Providian's core business and were so pervasive and obvious that Mehta and Petrini must have known or at a minimum were reckless in not knowing. These allegations support a strong inference of knowledge or recklessness. Furthermore, Mehta and Petrini's knowledge or recklessness may be attributed to Providian as an entity. Given the sufficiency of these allegations, the defendants' motion will be denied.

I. Background

Providian's primary business, credit card lending, generates two types of revenue: interest and non-interest. Interest revenue comes from finance fees on outstanding credit card loans. SAC at ¶ 32. Non-interest revenue comes from a variety of other sources, including fees for late payments, returned checks, overlimit debits, cash advances, membership, and add-on services. Id. Providian's add-on services include programs for healthcare discounts, automobile and travel discounts, credit protection, and mortgage or rent assistance. Id. Providian also has various programs to induce consumers to transfer credit card balances from other creditors. Id. at ¶ 33. Presumably, the larger the customer pool the lender retains, the larger overall revenue or at least potentially realizable revenue.

The SAC refers to four of Providian's public statements: (1) the January 21, 1999 press release; (2) the Form 10-K filed on March 31, 1999; (3) the April 22, 1999 press release; and (4) the Form 10-Q filed on May 14, 1999. Mehta and Petrini reviewed and approved each of these statements. Id. at ¶¶ 49, 50, 54, 60. The statements describe Providian's financial performance, customer-base increases, earnings projections, or "customer-focused" approach.

(1) The January press release announced that 1998 fourth quarter net income was $94.9 million, and full year net income was $296.4 million, "a 55% increase over net income of $191.5 million in 1997." "Total managed revenue for the quarter . . . grew by nearly 82% over fourth quarter 1997, to $757.5 million, while year over year, total managed revenue increased to $2.4 billion. . . . [Interest revenue] increased over fourth quarter 1997 to $364.2 million. For all of 1998, [non-interest revenue] was $1 billion and represented 43% of total managed revenue." Moreover, "[a]ccount growth climbed at an accelerated pace, with over 1.9 million new account relationships established during the quarter." By the end of 1998, Providian managed 8 million accounts, a substantial increase over the number of accounts managed in 1997.

The release quotes Mehta forecasting Providian's future prospects: "Current trends in each of our businesses give me continued confidence in Providian's ability to achieve 50% earnings per share growth in 1999 and to increase our goal for long-term earnings per share growth to at least 25%." Mehta also states that "Providian's performance in the fourth quarter and results for all of 1998 were outstanding. . . . Our customer-focused engineering approach to consumer lending and our unwavering commitment to flawless execution of our business strategy enable Providian to generate above industry-average returns and to sustain our high growth rate." Id. at ¶¶ 41-49.

(2) The Form 10-K reports that for 1998, non-interest revenue from add-on services totaled $165.8 million, compared to $59.3 million the prior year. For 1998, non-interest revenue from late and overlimit fees totaled $176.0 million, an increase from the prior year's total of $80.9 million. Other categories of non-interest revenue also rose as a result of customer volume growth.

The form also describes Providian's customer-focused approach as a technique that involves the use of Providian's "databases and analytical techniques" to "develop[] targeting and credit models to identify potential customers. . . . After an account is opened, account performance is monitored and a variety of account management tools are used to build the customer relationship." Id. at ¶¶ 50-53.

(3) The April press release announced Providian's 1999 first quarter results. First quarter net income was "$113.5 million, an 102% increase over the first quarter of 1998." Total managed revenue was $851.1 million, an 88% increase over the first quarter of 1998. Non-interest revenue "grew by 157% over the first quarter of 1998 to $416.2 million, and represented 48.9% of total managed revenue[.]" "Growth in all fee revenue sources was outstanding, including strong add-on product revenue which was up 223% over the first quarter of 1998." Moreover, "Providian added over 1 million accounts during the quarter, bringing total customer relationships to 9 million."

The release again quotes Mehta forecasting Providian's future prospects: "[Providian's] growth initiatives, along with current trends in all of our businesses, give me comfort to raise our 1999 earnings guidance to $3.50 per share, or 72% over 1998, and to increase earnings guidance for 2000 to 35%, or $4.72 per share, over 1999." Mehta also states that "[the] customer-focused approach continues to enable Providian to deliver above average returns." Id. at ¶¶ 50-59.

(4) The Form 10-Q reports that for the first quarter of 1999 "credit product fee income was $341.8 million[,]" as compared to $96.4 million during the same period in 1998. "[M]anaged fee-based product revenue totaled $117 million[,]" as compared to $36.4 million during the same period in 1998. "Late and overlimit fees totaled $137.7 million[,]" as compared to $51.7 million for the same period in 1998. For the first quarter of 1999, Providian also experienced increases in other categories of non-interest income. The form attributes some of these revenue increases to customer-base growth. Id. at ¶¶ 60-61.

The SAC describes eight allegedly illegal or fraudulent business practices, most of which relate primarily to the ...

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