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William E. Underland and Mark Schaller, On Behalf of v. Dennis Alter

September 9, 2011


The opinion of the court was delivered by: Rufe, J.


In this action, Plaintiffs assert claims against the directors and officers of Advanta Corporation ("the Advanta Defendants") and their outside auditor, KPMG LLP, under the Securities Exchange Act of 1933. *fn1 Plaintiffs allege that the Advanta Defendants sold $500 million worth of notes using registration statements containing material misstatements and omissions in violation of the Act. They further allege that KPMG LLP certified the misstated financial records.

The Advanta Defendants and KPMG each move under Federal Rule of Civil Procedure 12(b)(6) to dismiss all counts of the Plaintiffs' Amended Complaint for failure to state a claim. After oral argument on this matter on August 15, 2011, and upon consideration of the Parties' papers, KPMG's motion is granted and the Advanta Defendants' motion is granted in part.


Named Plaintiffs bring this action on behalf of a putative class of individuals who purchased Advanta securities between June 24, 2007 and November 28, 2009. The Advanta Defendants *fn3 are directors and senior officers of Advanta who signed the allegedly untrue registration statement used to sell the securities. *fn4 Defendant KPMG LLP is an international accounting and auditing firm that reviewed the accuracy of and certified Advanta's financial statement. *fn5 Advanta Corporation is not a defendant in this action.


Prior to its collapse, Advanta was one of the largest issuers of credit cards to businesses in the United States. *fn6 It operated its business primarily through its wholly-owned subsidiary, Advanta Bank Corporation. *fn7 Advanta was a "monoline" (specialized) credit-card bank: it focused primarily on small business credit-card customers, and it did not have any other significant banking operations. *fn8 Its business strategy was considered "risky" because the loans it made were unsecured, revolving lines of credit, with credit lines greater than those for consumer credit cards. *fn9

Consequently, Advanta's credit rating was "below investment grade."

Advanta's primary source of funding was derived from the securitization *fn10 of its credit card receivables. Credit card securitization allows banks and other issuers of credit cards to convert their receivables into cash. To securitize its receivables, Advanta sold them to a wholly-owned special-purpose trust ("the Trust"). The Trust pooled the receivables together, packaged them, and sold them as RediReserve variable rate certificates and investment notes ("RediReserve Notes").

On August 18, 2006, Advanta filed a shelf registration statement *fn11 and prospectus with the Securities and Exchange Commission ("SEC"), which indicated its intent to offer $500 million worth of RediReserve notes. By the terms of the shelf registration, and pursuant to federal law, each of Advanta's subsequent annual reports amended the Registration Statement. *fn12

Advanta issued $350 million worth of notes on August 18, 2006; on February 9, 2009, it issued another $150 million of notes. *fn13 Advanta capped investment in the notes at $500,000. *fn14 The notes were not sold in traditional debt markets, but instead were marketed directly to investors through newspaper advertisements. *fn15 The notes paid varying rates depending on the amount of the initial investment and the duration of the note. *fn16 Advanta received cash upon the sale of the receivables to the Trust, but retained an interest in the receivables. *fn17 Advanta relied on the proceeds from the receivables' securitization as its primary source of funding. The RediReserve notes gave investors the right to a certain return on their investment; as customers paid their Advanta credit card payments, the Trust would make payouts to noteholders. Thus, noteholders were dependent upon Advanta's revenues for periodic interest payments and the eventual repayment of principal upon their note's maturity. *fn18
The RediReserve Notes were not insured or guaranteed by the FDIC, *fn19 and Advanta did not establish a "sinking fund" *fn20 as a precaution in the event that Advanta was unable to repay noteholders. *fn21 To protect investors, however, the RediReserve Notes contained an "early amortization clause," *fn22 which, once triggered, *fn23 required Advanta to immediately repay noteholders' principal. The RediReserve notes were designed to amortize early if the monthly excess spread fell to zero or below for three consecutive months.

Beginning in August 2007, due to serious economic disruptions, securitization market activity virtually halted, and the market for small issuers-like Advanta-collapsed. *fn24

Consequently, Advanta's securities sales significantly decreased. *fn25 Then, in March 2008, credit-card delinquencies and charge-offs began to rapidly increase. As more of Advanta's credit-card customers defaulted, profits generated by its securitized receivables dropped dramatically.

In June 2009, after the excess spread dropped to below zero for three consecutive months, the early amortization clause was triggered. Because the early amortization required Advanta to direct all funds from the securitization pool to repay principle due to noteholders, Advanta was obligated to fund its credit card customers from a different source. But since the securitization fund was the only source of funding for its primary business, once the early amortization occurred, Advanta was no longer able to fund its credit card customers. *fn26 Unable to fund its credit cards, and in the face of still-rising loan losses, Advanta cancelled all charging privileges for its cardholders. *fn27

A few months later, in November 2009, Advanta filed for Chapter 11 bankruptcy.


On June 24, 2010, Plaintiffs commenced this action in the Court of Common Pleas of Montgomery County, Pennsylvania. *fn28 Defendants timely removed the action to this Court; Plaintiffs did not move to remand. After the Court granted Plaintiffs' motion to appoint class counsel and lead plaintiffs, *fn29 Plaintiffs filed the pending amended complaint. *fn30

Plaintiffs claims arise from the 2006 Shelf Registration Statement and its Amendments. *fn31

According to Plaintiffs, those documents misrepresented Advanta as a "prudent company with a 'very strong' financial condition," when in fact Advanta was engaging in "unsafe and unsound banking practices" that ultimately led to its collapse. *fn32

Plaintiffs pinpoint three documents issued by the FDIC as proof that the registration statement and its amendments included material misstatements and omissions. *fn33 The first, a 2010 Material Loss Review, allegedly "makes clear that Advanta was engaged in numerous unsound and illegal activities that were misrepresented and not adequately disclosed in the Registration Statement." *fn34 The two other documents, FDIC cease and desist orders, allegedly corroborate the Material Loss Review. *fn35

In its Material Loss Review, the FDIC reviewed Advanta's business practices between December 2004 and December 2009 in order to determine, among other things, the cause of Advanta's failure. Based on the audit, the FDIC concluded that "Advanta failed due to insolvency brought on by the Board of Directors' and management's failure to implement risk management practices commensurate with the risks associated with its business model." *fn36 In particular, the FDIC faulted Advanta's board and management for failing to develop adequate contingency plans for responding to an early amortization event, and its failure to incorporate those plans into its capital adequacy model. *fn37
The FDIC also concluded that although a rapid increase in customer defaults was partially caused by economic conditions, they were also attributable to an "aggressive repricing campaign" that Advanta began in late 2007. During that campaign, Advanta repriced 68 percent of its credit card loan portfolio by increasing customer finance charges and raising interest rates. *fn38 The price hikes resulted in higher minimum payments for customers, and made it difficult for struggling customers to cure any delinquencies. The FDIC found that Advanta's aggressive repricing practices were illegal: *fn39 Advanta imposed the rate hikes on customers without disclosing the basis and reasons for the increase, the amount of the increase, or the customers' right to opt-out. *fn40 Nor did it notify its customers of the specific reasons for the adverse actions.

On June 30, 2009, two FDIC cease-and-desist orders took effect against Advanta, and were disclosed by Advanta in an 8-K filing with the SEC. *fn41 In the first order, the FDIC directed Advanta to cease and desist certain "unsafe and unsound" banking practices, including: "The Bank's Board of Directors and Management operating the Bank in a manner that causes the Bank's significant deterioration;" "operating with inadequate capital for the Bank's risk profile;" and "[o]perating in a manner that does not sustain satisfactory earnings performance to maintain sufficient capital in relation to the Bank's risk profile." *fn42 In the second cease and desist order, the FDIC alleged that Advanta had raised the interest rates on certain customer accounts and marketed its Cash Back Rewards program in violation of consumer protection laws. Based on those findings, the FDIC ordered Advanta to pay restitution to customers "substantially injured" by those practices.

Plaintiffs' amended complaint includes three counts: Count One alleges violations of § 11 of the 1933 Securities Act *fn43 against the Advanta Defendants and KPMG; and Counts Two and Three allege that the Advanta Defendants violated §§ 12(a)(2) and 15 of the 1933 Act.


In reviewing a Rule 12(b)(6) motion to dismiss for failure to state a claim upon which relief may be granted, the Court must accept a plaintiff's factual allegations as true and construe the complaint in the light most favorable to the plaintiff. *fn44 Courts are not, however, bound to accept as true legal conclusions couched as factual allegations, *fn45 or "accept as true unsupported conclusions and unwarranted inferences." *fn46 The Complaint must set forth "direct or inferential allegations [for] all the material elements necessary to sustain recovery under some viable legal theory." *fn47 And it must allege "enough facts to state a claim to relief that is plausible on its face." *fn48 "The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." *fn49



Sections 11, 12 and 15 of the Securities Act of 1933, on which Plaintiffs' claims are founded, protect investors by imposing liability on certain participants in a registered security offering when the publicly filed documents used during the offering contain material misstatements or omissions. *fn50 Sections 11 *fn51 and 12(a)(2) *fn52 allow purchasers to sue certain parties in a registered offering when materially false or misleading statements are included in registration statements and prospectuses. *fn53 Section 15, a form of derivative liability, imposes liability on one who "controls any person liable" under sections 11 or 12.

"Section 11 and 12(a)(2) are 'Securities Act siblings' with 'roughly parallel elements.'" *fn54 A

section 11 action can only be brought against the issuer, its directors or partners, and accountants who are named as having prepared or certified the registration statement. *fn55 For those parties, "[l]iability . . . is virtually absolute, even for innocent misstatements." *fn56 Thus, to state a prima facie case under section 11, Plaintiffs need only allege that they purchased securities pursuant to a registration statement that contained a material misstatement or omission. *fn57 Similarly, to state a claim under section 12(a)(2), plaintiffs need only allege that they purchased securities pursuant to a materially false or misleading "prospectus or oral communication." *fn58 Alternatively, plaintiffs may establish a prima facie violation of sections 11 or 12(a)(2) by alleging that "an omitted material fact was required to be included by the securities laws or that its absence rendered statements in the prospectus misleading." *fn59

Here, Plaintiffs properly alleged that they acquired securities pursuant to a registration statement, and that the Advanta Defendants and KPMG are among those liable under the Securities Act of 1933. *fn60 As such, the only issue presented by the pending motions to dismiss is whether plaintiffs have sufficiently alleged that the challenged registration statement, as amended, contained material misstatements or omissions.


A misstatement or omission is material "if there is a substantial likelihood that a reasonable shareholder would consider it important" in making an investment decision. *fn61 Thus, for a misrepresentation or omission to be material, "there must be a substantial likelihood that the disclosure of the omitted fact [or misrepresentation] would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." *fn62 "To be actionable, a statement or omission must have been misleading at the time it was made; liability cannot be imposed on the basis of subsequent events." *fn63

"Materiality is ordinarily an issue left to the factfinder and is therefore not typically a matter for Rule 12(b)(6) dismissal." *fn64 However, certain categories of "soft information" are "so obviously unimportant to an investor that reasonable minds cannot differ on the question of materiality," *fn65 and

"it is appropriate for the district court to rule that the allegations are inactionable as a matter of law." *fn66 Soft information includes "statements of subjective analysis or extrapolation, such as opinions, motives, and intentions . . . forward-looking statements, such as projections, estimates, and forecasts," *fn67 or "general statements of optimism [which] constitute no more than 'puffery' and are understood by reasonable investors as such." *fn68 The courts have adopted various doctrines to evaluate the materiality of misstated or omitted soft information, two of which are relevant to the Court's analysis.

Generally, an alleged misrepresentation or omission must concern an objective fact. *fn69 Under Virginia Bankshares v. Sandberg, *fn70 statements of reasons, opinions, or beliefs may be "factual" if they are "a []statement of the psychological fact of the speaker's belief in what he says." *fn71 In Virginia Bankshares, the Court explained that opinions contain two components: the opinion itself and the factual basis for the opinion. Assuming that the undergirding facts are neither false nor misleading, a statement of belief might be objectionable "solely as a misstatement of the psychological fact of the speaker's belief in what he says." *fn72 Thus, to allege a material misstatement of reason, opinion or belief, plaintiffs must allege either that the defendant did not actually believe her stated opinion or that she had no reasonable basis for her belief. "Defendants are not liable under the securities laws when their opinions, or those they reported, were honestly held when formed but simply turn out later to be inaccurate; nor are they liable only because they could have formed 'better' opinions." *fn73

A second doctrine useful to this Court's analysis is the "bespeaks caution" doctrine, under which cautionary language in a offering statement may negate the materiality of an otherwise misleading forward-looking statement. *fn74 The bespeaks caution doctrine is subject to limitations: First, not just any cautionary language will render accompanying forward-looking statements immaterial; to suffice, the language "must be substantive and tailored to the specific future projections, estimates or opinions" in the challenged communication. *fn75 Second, a blanket warning that an investment is risky is likely to be insufficient to ward off a securities fraud claim. *fn76 And finally, the bespeaks caution doctrine does not apply to facts: ...

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